The Toro Company (TTC) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Toro Company's first quarter earnings conference call. My name is Kaylee, I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the 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 Mike Hoffman, Chairman and Chief Executive Officer; Rick Olson, President and Chief Operating Officer; Renee Peterson, Vice President, Treasurer and Chief Financial Officer; and Tom Larson, Vice President and Corporate Controller. We begin with our customary forward-looking statement policy. During this call, we will make forward-looking statements regarding our business and future financial and operating results. You all are aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our earnings release as well as our SEC filings, detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statement. With that, I will now turn the call over to Mike.

Thank you, Heather and good morning, to all of our listeners. Fiscal 2016 is off to a good start, based on the strong retail and channel demand at both our residential and professional businesses, most notably for our riding, landscape contractor and specialty construction products. The heavy preseason demand for our residential snow throwers that we experienced late in fiscal 2015 tapered off early in the first quarter due to minimal snowfall. However, as the snow finally began to fall with some regularity in mid-January, demand rebounded leading to modest retail gains for the quarter. As we reported this morning, the Company delivered record sales and earnings for the quarter. For the record, results, these include net sales of $486 million, an increase of 2.6% and net earnings growth of almost 27% to $39.3 million or $0.70 per share. Additionally, our net sales would've increased by more than 5% if not for the impact of unfavourable currency exchange rates. These unfavourable rates primarily affected our professional segment, contributing to its overall flat sales performance for the quarter. Following a brief commentary on our businesses Renee will discuss our financial and operating results in more detail and Rick will share our outlook for the year. First, channel concerns over last year's supply and production challenges that created availability issues along with the current momentum of riding products retail and the anticipation of an early spring, all helped fuel strong first quarter shipments of our residential zero turn riding mowers to meet channel demand. The resulting increased sales for the period were somewhat offset by lower in-season snow thrower sales due to the unseasonably warm temperatures and below leverage snowfall through the first half of the quarter. Subsequent snow events generated a bump in retail that helped reduce field inventories to reasonable levels and set the stage for next fall's preseason. The positive outlook for spring also prompted increased sales of professional landscape contractor equipment during the quarter, including our stand-on and walk power mowers as well as our zero-turn riders. The business further benefited from continuing retail demand as a result of the weather-related extended mowing season. Next, our rental and specialty construction equipment business, capitalized on the continued retail and channel demand fuelled by the strength of the construction and fibre-optic markets. Our latest innovation and expanded product line-up are drawing customers to our brand, although The American Rental Show does not take place until next week, we are generating strong preshow orders from the sales program launched in December. Similarly, solid retail momentum carried our golf equipment business to a good close for the quarter. Ongoing growth in both golf rounds played and course revenues, along with warm fall and mild winter weather contributed to sound retail activity. This late season movement brought inventories to favourable levels, creating an opportune situation for our latest innovation that some of you saw last week in San Diego during the Golf Industry Show. We'll discuss the show and some of our new products later in the call. Positive trends in gold created a favourable environment for golf irrigation projects as well leading to strong demand for our irrigation solution. We continue to lead the industry with superior technologies that help course operators maintain healthy turf, while reducing water consumption as well as system maintenance cost. Like golf operations, ample budgets have enabled sports fields and grounds professionals to maintain their steady investment in equipment replacement and upgrade. Our successful efforts to pursue governmental contracts have positioned us to help these customers leverage their equipment investments with our latest productivity enhancing advancements. Just as the unseasonably warm early winter conditions impacted residential snow blower sales, our BOSS snow and ice management business experienced similar challenges. While the momentum we enjoyed last year slowed late in the first quarter, BOSS continued to lead with such favourably received innovations as our new customer value LED lighting package introduced in 2015. Late winter storms in the key markets got snow removal contactors and the rugged BOSS equipment back in action. Finally, while worldwide demand remains strong for many of our turf management products during the quarter, our international business results were somewhat offset by the unfavourable currency exchange rates mentioned earlier. Additionally, economic concerns and political issues in troubled regions also hampered sales. We did see positive momentum particularly for our residential and landscape contractor riding equipment along with micro irrigation products. I'll now turn the call over to Renee for a more detailed discussion of our financial results.

Thank you, Mike and good morning, everyone. As we reported earlier this morning, net sales for the quarter were $486.4 million, compared to $474.2 million for the same period a year ago. We delivered net earnings of $39.3 million or $0.70 per share compared to $0.54 in the first quarter of fiscal 2015. Professional segment sales were flat for the quarter at $338.8 million, primarily due to the impact of unfavourable currency exchange rate. Professional earnings for the quarter, totalled $61.6 million, an increase of 11%, compared to $55.7 million a year. Our residential segment sales for the quarter increased 7% to $144.3 million, due to stronger shipments of riding products, somewhat offset by decreased shipments of snow throwers and walk power mowers. Earnings from the residential segment for the quarter, totalled $16.7 million, up $3 million compared to last year. Now, to our key operating results. First quarter gross margin increased 200 basis points to 37.6%, about half of the increase was due to non-recurring items. Primarily the BOSS acquisition purchase accounting, which negatively impacted the first quarter of fiscal 2015. Our ongoing focus on productivity as well as lower commodity costs also contributed to the margin improvement. These gains were somewhat offset by unfavourable currency exchange rates. SG&A expense as a percent of sales, increased 30 basis points for the quarter to 26.5%. This increase was due to slightly higher expense across various categories, including advertising, warehousing and employee incentives. Interest expense for the quarter finished last compared to last year at $4.7 million. Our effective tax rate for the quarter was 26.9% compared to 26.3% last year. The benefit received from the retroactive re-enactment of the federal research and engineering tax credit for the calendar year 2015, was consistent with the prior year. We now expect the tax rate for the total year to be about 30.5%. Turning to the balance sheet, accounts receivable for the quarter totalled $190.3 million, down 7.3% compared to the first quarter of fiscal 2015. First quarter trade payables increased 8% to $211.2 million. Net inventories for the quarter were up 15.8% to $422 million. The growth was due to lower sales of BOSS and residential snow equipment along with planned levels of both residential and landscape contractor riders to meet anticipated early demand, which was influenced in part by last year's supply issue. As you know, continual improvement in working capital is one of our key goals of our Destination PRIME initiative. At the end of the first quarter, the Company's 12-month average net working capital as a percent of sales was 16.4%, compared to 15.5% a year ago. We recognize that we have much work to do to get our working capital moving back in the right direction. We repurchased over 377,000 shares of common stock during the quarter, and have approximately 4.8 million shares remaining in our repurchase authorization as of quarter end. I will now turn the call over to Rick for his comments regarding our outlook.

Thank you, Renee and good morning, everyone. Our first quarter results have us off to a good start for the year and we are encouraged by the prospects for growth for the remainder of fiscal 2016. Our businesses are in the midst of introducing a number of exciting new products that either were recently introduced or will soon be unveiled at leading industry trade shows. The timely arrival of spring is important. There have been encouraging forecasts of an early spring, early start of spring, not only by Punxsutawney Phil, but the National Oceanic and Atmospheric Administration. As always, we are prepared to adjust to whatever weather comes our way in order to capitalize on demand for our latest innovation. We are confident that we are well positioned to take advantage of opportunities ahead in 2016. Let's take a few minutes to consider the prospects for each business. Our residential business is well-positioned with a strong preseason order base for the approaching mowing season. Demand is strong for our latest introductions, including our TimeCutter zero-turn riders featuring a new fabricated deck and our new SmartStow recycler walk power mower by Personal Pace. Late season snow falls that generated additional retail and modest reorders from dealers helped drive field inventory down to manageable levels, which will hopefully result in a solid preseason for next year. The all new crossover SnowMaster model, we launched this year is receiving favourable ratings from customers who purchased one. Like residential, our landscape contractor businesses have strong preseason booking orders in hand ready to ship in the weeks ahead. This is due to wide acceptance of our latest stand on zero turn riding equipment with such innovative features as our new advanced suspension system that promotes productivity, by allowing operators to mow in comfort. An early start to spring, along with continued growth in construction did also help our rental and specialty construction businesses, where we struck solid results for the year. Enjoyed a very successful Underground Construction Technology recently held in Atlanta, where we deepened relationships and developed important sales leads. We anticipate equally enthusiastic responses from our customers for new products we are launching at next week's rental show, also being held in Atlanta. Projections are for the rental market to remain strong throughout 2016. We're ready to respond with a strong portfolio of products to help our rental and construction customers take full advantage of their market strength. Those of you who joined us last week in San Diego for the Golf Industry Show, experienced first-hand the excitement permeating our customer packed booth. Golf course owners, superintendents and architects alike shared their optimism for the upcoming season. Courses are prepared to continue capital investment and architects are busy with new projects. Our latest innovations on display proved to be traffic stoppers received enthusiastic reception. Those wishing to stretch dollars without sacrificing performance were drawn to our new Greensmaster 3120, delivers all the performance and productivity one expects from a Toro riding mower at a lower price point. The latest addition to our industry-leading SnowMaster line of fairway mowers offer an ideal blend of manoeuvrability and performance. The unit's light weight design and impressive engine power make these new Reelmasters incredibly versatile and productive. Our newest golf irrigation offerings captured their share of attention in San Diego as well. For example, the STEALTH Kit for our acclaimed INFINITY sprinklers offers an innovative solution that improves playing condition. STEALTH's patent pending design enables below grade installation while promoting turf growth directly atop the sprinkler. Instead of greens surrounded by visible sprinkler heads, players can now enjoy a continuous seamless playing surface. This enhances course playability by eliminating possible [indiscernible] caused by balls ricocheting off the sprinkler head. Furthermore, the STEALTH kit does not interfere with INFINITY SMART ACCESS feature that allows easy access to all adjustments in other internal components, a win-win for golf courses and players alike. Our professional grounds business continues to benefit from our focus on working with state and local government agencies to supply their turf maintenance needs. We also continue to proudly serve all levels of sports facilities around the world. We were honoured to have the opportunity to help prepare the field at Levi's Stadium for Super Bowl XV as we have for every Super Bowl that this grand tradition began. We continue to provide turf management customers with highly productive equipment like our new WORKMAN GTX utility vehicle. A variety of optional attachments for the GTX allows operators to select from over 300 configurations to fit almost any application. Without a doubt, the GTX is one of the most versatile and cost-effective turf and grounds vehicle in its class, truly a multitasking marvel. Our team at BOSS is busy preparing for the National Truck Equipment Association show in March, when we will unveil new products to the trade. Superior innovation and customer care will enable BOSS to build on its market leadership position. An early start to spring and the strength of the construction market should also present opportunities for our residential and commercial irrigation and lighting businesses. If favourable spring weather conditions prevail, residential and commercial irrigation projects will likely pick up. Our international businesses will continue to encounter a variety of opportunities and special regional, economic and political challenges. All in, we believe, we will see demand for our turf maintenance equipment across businesses. For example, our hybrid fairway mower that we introduced last year has been as well received internationally as it has domestically. The productivity conscious as well as those operating on restricted budgets are turning to the value and versatility of our new LT Flail Mower that tackles both short and tall grass with ease. It is developing a following with landscape contractors as wells as gold and sports field managers. Our international team will continue to pursue sales growth where opportunities exist. I will now turn the call back to Mike for his concluding comments.

Thank you, Rick. So, overall, the stage is set for another successful year. We recognize that unfavourable shifts in the economy or weather could pose challenges to our plans. As always, we're prepared to respond to changing conditions and to manage those things within our control. I want to take this opportunity to thank our employees and channel partners around the globe for their dedication and hard work that enabled us to achieve strong first quarter results. I also want to thank them for all they will do to help us deliver another successful year. Our employees' commitment to our Destination PRIME initiative will ensure we remain focused on productivity, relationships and innovation to sustain our momentum driving profitable growth to build on our legacy of excellence. We continue to expect revenue growth of about 4% for fiscal 2016 and now expect net earnings of about $3.85 to $3.95 per share, up from $3.80 to $3.90. For the second quarter, we expect net earnings per share of about $1.75 to $1.80. This concludes our formal remarks. We'll take your questions at this time. Kaylee, back to you.

[Operator Instructions] Our first question comes from Sam Darkatsh with Raymond James. Your line is open.

Good morning, Mike, Renee, Rick, Heather, how are you?

Good morning, Sam.

Doing well.

A few questions. First off, I don't mean to put too fine a point to this, I recognize that we're not into the throes of the season yet, we're only one quarter in, but you beat your guidance in the quarter by $0.10, $0.12, but only raised the guidance for the year by $0.05, which suggests at least a little bit more of a mildly more sober look to the rest of the year. What's the reasoning behind that? Was there some pull forward into the first quarter? Are there inventories, maybe a little bit more flush than you would have thought? Just put a little bit of colour on that if you could?

Yeah Sam, it is early in the year and as you said kind of a small quarter. So, we look at it really more from a total year perspective. We started off with snow being close to okay, but there's still a lot of the year still ahead of us. We're continuing to look at sales growth being about 4%. I'm recognizing that we'll continue to have some impact from FX or growth is greater than that and we're looking to have good earnings growth as well.

Second question. Was there any change Renee to your expectations for gross margin improvement of 50 basis points year on year for fiscal '16? I notice that, on an organic basis, the first quarter gross margin was up about twice that amount and I was just trying to get a sense of why, as the quarter would progress, the year on year organic change in gross margin might moderate.

Yeah, no. Good question. I'd look first at the quarter and then I'll respond from a total year standpoint. So, if we look at the quarter, about half of the gross margin improvement was related to onetime items, the most significant of which is the BOSS purchase accounting, which impacted us last year and doesn't repeat this year, but we are seeing good improvement. We continue to focus on productivity and driving down our costs. Commodities have been favourable. We recognize some price within the quarter, but had a fairly significant offset from FX. So, as we look for the total year, we continue to think that the gross margin improvement will be about 50 basis points. Keep in mind when commodities change, we tend to see that, somewhat of a lag effect. We're more of an assembler of product versus the pure manufacturer, and as we look throughout the remainder of the year, although we expect to see some positive trends, we're also bringing down our inventory as we go through the year and so that has some impact on our manufacturing efficiencies.

A couple more questions if I could. Mike, how do you feel about the 13% working capital goal for fiscal '17 as it stands right now?

So, to be clear, it's a goal, right? It's not a guidance, but we are committed to trying to make that happen, and the fact is, we lost a little ground and we recognize that, when we launched the initiative, interestingly, when we launched the working capital initiative the last time in 2007 the same thing happened, and so, the fact, our first year, it actually crept up, but we believe we have a path to drive towards that number while making sure we are in fact a good supplier, right? So, it is dealing with inventory that is not as productive as it should be, it is dealing with receivables to some degree and payables, but most of the heavy lifting will be in the inventory side. We have teams to focus on that. So, we know we have not performed as well there to date with this initiative, but we have every reason to think we can get to our goals.

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

Well, I guess I would start, the first comment on BOSS and this is not always the case with acquisition, but a year later, we feel as good or better about it than we did when we did it and so that's an important proof point if you will, and you're right, BOSS has different geographies, has different positions, although they have some strength out in the Northeast, more in, if you will, the mid-Atlantic and that's obviously where the snow really hit hard. So, we think that will help both, as we kind of wrap up this season, this snow season as well as set the stage for the next snow season. So, the BOSS business is very much on track. As we've talked snow's variable and putting BOSS in our residential snow together, the Company still has a small exposure versus the whole portfolio, but they just have more variability there. The late season snow has certainly helped set the stage for both BOSS and/or for the residential snow over this coming preseason. The other thing is that BOSS is an innovator like Toro is and that's what made this partnership and this fit work so well. The big show for that industry will be coming up in Indianapolis next month and BOSS will again be introducing new innovative products. They have that culture there. We have that culture here. It's working really well. So, we recognize that we have very, very strong return on invested capital and tough to find deals that actually pull that up, so we think overall, BOSS has been just a terrific addition to the portfolio.

Thank you, Mike. Terrific performance in the quarter.

Thanks Sam.

Our next question comes from the line of Eric Bosshard with Cleveland Research Company. Your line is open.

Good morning.

Good morning, Eric.

A couple of things. First of all, Renee the incremental $0.05 to the guidance for the year. What's different that contributed to that delta to the original expectations?

Eric, the biggest change is the re-enactment of the research and engineering tax credit. The retroactive re-enactment and that yielded a benefit in the quarter and then going forward, it is supposedly implemented on an ongoing basis and so we see a little bit of additional pickup as well for the remainder of the year.

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

Sure. So, when we look at the snow business, we look season to season and that's broken into two parts, to what degree are you going to enjoy a good preseason, to what degree are you going to enjoy a good in-season. So, as we went into this fiscal year, we knew we were going to enjoy a good preseason and that did play out kind of per our expectations. We didn't know what the in-season would bring and as you know, in the December, early January time period, not much happened. The fact is that it was still going to be a solid snow season for us in the '15, '16 season. This was as much about setting the stage for next year's preseason if that makes sense and so these late snowfalls have helped move products that retail. So, our retail's comping well versus last year on a season to date. So, that's good and then importantly, we will count on a solid preseason next year that we believe will comp well versus the preseason we experienced this year. Now, it wasn't quite as strong as we had hoped and that's one of the reasons some of our inventory is down that Renee talked about, so we'll carry a little bit of that. That's just the way we have to deal with a more variable business. So, bottom line is, for fiscal 2016, we've had a good snow season to date and we'll expect a good preseason this fall.

So, just to make sure, the preseason was up and the in-season is also up year over year. In-season sales are also up. Was that? Did I hear that --?

No, as I said, all in, retail is comping at equal to last year. So not up, but remember, last year was particularly good. So, we're just having to deal with some of that variability.

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

Well, there are a number of factors, but it's certainly -- it's not just the timing of shipments. We do believe that there's strength in that market. There certainly was some reaction from a channel to the shortages we had last year and first quarter due to some of those supply issues that we had, but beyond that, there's good momentum from last year. It was an extended mowing season last year and, the number varies by the country and this year, the [indiscernible] good early spring. So, we think that there is good substance for growth in that area.

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

Well, I think when -- you get potentially an extended season, so it's not like you sustain the peak to a much longer period, but to some degree, and there's nothing worse in our business than kind of a false start to spring and then get a late cold spring. Remember our peak demand is in the March, April, May time period, March, April, May, June in the residential side, and so if you want to -- we've had -- get into the weather here too deeply, but in 2013 and 2014, we had what I'll call poor springs. They were late. They were cold. Last year, we had versus those, a better spring. So, it was earlier and warmer, but I would characterize that as somewhat more normal. You're seeing -- again, this is always the weather predictions, but you're seeing some people are looking at or some of the forecasters looking at this spring, contrasted more to 2012 and if you look back at 2012, it was a very early spring and Punxsutawney Phil was not seeing his shadow, and the fact is it got warm early and it was moist and we had a very robust early demand and that also plays a role into some of this inventory that we have. We want to be a very good supplier, especially as a result of last year. So we do have some additional inventory and we're anticipating that that when you get into that spring period, it is much about, not only what's on the shelf, it's how fast you're replenishing what's on the shelf. Gives you a lot of velocity and a lot of turn and so, we'll see, but we're hopeful and optimistic that we're going to see that.

Okay, wonderful. Thank you.

Thank you, Eric.

Our next question comes from the line of Joe Mondillo with Sidoti & Company. Your line is open.

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

It'll start shortly. So, the fact is, the shells are stocked in anticipation, I'm talking particularly the residential business right now and the velocity of those turning over being replenished will start to increase. Now, remember, a couple of years ago, it was snowing in May and for that velocity was not very fast. It was late and that maxed off some of the seasonal peak. We believe that we could see that being -- last year, it was in April, we believe, we could actually see some of that start in March. So it, Joe, is right around the corner, and we just need to be -- we want to be a good supplier to our customers. We need to be ready to deal with those orders as they say, as that retail velocity picks up.

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

Well, Joe, it was really pretty similar across both of the segments and it was driven by gross margin, as you saw at the Company level. So, if you look at it, it's really the items that we were talking about earlier, about half of that gross margin improvement was one time, a nonrecurring item, the biggest of which was the BOSS purchase accounting, which is an impact on last year that doesn't carry forward, but overall, the remaining half of the improvement. It really was our focus on cost reduction, productivity, favourable commodities, price and then somewhat offset by unfavourable currency, but neither one of those were necessarily the only driver. It's really the sum of those that made up the other half of that improvement, and again pretty good improvement across both of the segments. Now, we don't expect the same kind of gross margin to hold for the year. As I mentioned earlier, we're expecting about 50 basis points of improvement in gross margin from an overall standpoint for the year and we expect SG&A to be slightly better for the year.

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

Right.

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

Yeah, within the residential area we do not get the same level of price. We've talked about more of our prices in the pro side versus the residential side. So, we focus a lot more on cost reduction. Commodities are more impactful. Certainly there can be mix within, you know, the segment as well. Those would all be factors as well, with the sales growth, certainly that volume helps additionally.

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

We continue to watch that, and try to understand what's going on and as we've talked in the past, if we could -- if we were to pick a driver of our business, all in, across the portfolio, we would take consumer confidence as the number one factor, right, consumer confidence in terms of buying residential durables, consumer confidence in whether you outsource your lawn maintenance to a landscape contractor, consumer confidence if they're outsourcing to a landscape contractor and going out and playing golf. So, the fact is that it touches all of our businesses. That's sound today, but we all know there's some level of uncertainty out there and we're being mindful of that, if there was a step change to the negative, we can go back and have -- start leaning back on our business as well as every other business and so, we're trying to again stay flexible, stay nimble and expecting it, 75% of our revenues are in the U.S. to kind of sustain at this point, but we're being very mindful that it could change.

All right. Then, I just have one last question, sort of regarding currency and tax rate. In terms of the currency, Renee, I believe you said earlier in the prepared remarks that you anticipate that currency could potentially continue to be a headwind. The dollar seems to be stabilizing somewhat. At one point in time, is it within the second quarter that we start to see that become less of a headwind and also just in regard to currency, has your international business -- what kind of volume declines are you seeing there and are you seeing effects not only on the translation but, on the actual demand side of things, given the competitive disadvantage with your international competitors? Then lastly, in terms of what you're baking in for a tax rate for the year.

Okay. So, first starting off, with the question around FX. So, within the quarter, we talked about that, it was almost 3 points of sales growth for us. So, fairly significant. Consistent with the past, about half of that Joe, hits our P&L, so we see that type of an impact. We do consistently hedge our exposure, but year over year, when you're hedging, you're hedging at the current rates versus the rates that were in effect a year ago. We do expect to see that FX moderate. It's probably more in the second half of the year that we'll see that, just based on the timing of when exchange rates change and our hedge is rolled off last year. For the year, it's probably in the ballpark of 2 points of sales growth and again, we would expect about half of that to impact our P&L.

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

Okay, thank you. Then just expectations on the tax pay for the year?

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

Okay great. Thank you.

Our next question comes from the line of Jim Barrett with C.L. King. Your line is open.

Good morning, everyone.

Good morning.

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

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

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

Yeah, that's one of those, it depends questions and so, we have to look across the portfolio of products. Some engines are easier to change, like on some of the residential products versus that are engineered in landscape and the larger commercial products. So, it certainly is a factor and I think the stage is set, largely for fiscal 2016, but this is more to your point, looking out in 2017 and beyond and I guess, we'll see.

And Mike, one question for you, can you talk specifically for the spring line up? How your line reviews went with your major retail customers and did you increase the product offering, or has it remained the same or has a decline in terms of the number of different products you have available at retail.

Good question, and so that's something we're always working on particularly with our largest retailer. I will say, we're in a very good position on a year-over-year basis. There's always some puts and takes on the line-up, but we have a really solid mower line-up with both the Toro and the Lawn-Boy brands. We have some new products in that space which are exciting and then we have a slightly different model line-up on the riders, I guess I would say that well all in, we're going to comp from a fell in standpoint and we had a similar position, this will be much about the retail velocity that happens there, but I think bottom line is we're encouraged by that and we know we have to kind of earn that business every day. We had the SnowMaster on the winter product side that was an addition this last year that certainly has -- less robust snow season, the SnowMaster has been a new model, and garners some good attention and customer response there and obviously, we'll be setting the stage now with those products for the coming preseason in the fall of 2016. So a solid line-up. Very good shape going into the spring of 2016.

Okay, thank you both very much. I appreciate it.

[Operator Instructions] Our next question comes from the line of David MacGregor with Longbow Research. Your line is open.

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

I apologize. I don't have that number here. Let's start with BOSS has a pretty comprehensive dealer base throughout North America. One of the things we're looking at as we've talked in the past is the growth, particularly in developed markets like, internationally like, Europe, although Europe is very marginal, no season this year. So, that will slow that a bit, and so, there's not a material change in the number of BOSS pillars as a result of buying that business and to be clear, as we said last year, we wouldn't want to do that because BOSS has a very solid position. It's only a case where we're looking to market today, we'll recruit them there, can we leverage some of the Toro relationships with the BOSS business and we've done that in a couple of cases in North America, but not by any means a step change versus a year ago.

Is it within the plan just pursue those regions? I mean, the question earlier about the Northeast and trying to penetrate that more fully. Do those regions represent opportunities for you to build up your network and if so what might that represent in terms of growth over the course of the next year or two?

Yeah, we clearly expect to grow the BOSS market share that is lower versus ones where we have very strong position and the upper Northeast, we have a good position in the mid-Atlantic area if you will, but less so, there's other brands that's somewhat stronger in the upper Northeast, and we will be working on that, but that's a question, to what degree is the channel and the dealers there, what degree is it just to, the customer awareness and as we've talked about many of those landscapers just have less understanding of the BOSS brand and business, because they've used someone else's, but they have a great understanding of the Toro Exmark brands and we will be continuing to work with those end users as well as the municipalities to accelerate the BOSS business in those markets. We're making some progress. All in, we feel very positive about that.

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

I'll let Rick weigh in here, but this was my 39th consecutive golf tour, and I've got to say that, as I stood there before, as it was winding down and I was leaving, like, we wouldn't want to be anyone else and those who, went to the show [indiscernible] hopefully saw that. We were a leader at innovation at the show. We were leaders in customer relationships at the show. It was pretty special and we don't take that for granted. We know we have to continue to earn that, but I don't think anyone introduced more new products at the show than Toro, whether that's on the commercial side, equipment side or on the irrigation side. So, Rick you can maybe comment.

Certainly, the interest in our products, the new products, I had a chance to have a lot of conversations within our booth about the GTX and the new Reelmaster, the new Greensmaster and so tremendous response to the new products. That was exciting for us and I think in the general perspective of the industry and the market, it's an overused phrase, cautiously optimistic about the year ahead. I spoke to a golf course architect who is actually turning away business and that's the first kind of conversation I've had like that in some time.

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

I think I'd say that, right, how do you extrapolate from that. I think we would just take the help of the golf industry and again, we look at the golf industry globally get sound, right and so the predictions of on again we look at golf industry globally is sound right and so the predictions of [indiscernible] were a little premature, but in the golf industry the leaders within that space, have a lot of very good point data that more new golfers came in 2015 than last in the number of years. Golf revenues and rounds are positive, certainly influenced by Mother Nature. When we talk about these architects and that business, we're not suggesting there's all kinds of new golf courses being built in the U.S. There are not, or in well developed markets like the U.K., but many of those are going -- those architects are busy because they're going back in, in kind of a refurbishment new irrigation system, re-landscape if you, and then outside those well developed markets, we are seeing new golf growth in the whether that's Southeast Asia or South America or Eastern Europe, different markets like that, that continues. So, put it all together, we say, gold, if our goal is by mid-single digit growth golf, not going to pull the average up, but it's still positive, still adding to the portfolio in a very positive way.

Okay, last couple of questions, just on construction equipment, I realized the show's upcoming, and you'll know a lot more after that, but just how is rental spending comparing on a year over year basis for your right now?

So, rental, very positive industry. The industry was up last year, high single, low double digits and I think the expectation is that will continue through 2016 and then, coupled with that, we brought it a number of new products out we just introduced late last year, the TX 1002 to great customer reviews and acceptance and demand and so while a small part of the portfolio, a lot to be encouraged about as mentioned in the earlier remarks, we've got -- we get the rental industry, places there are orders, many of them have to ask at the show sometimes, earlier, we haven't been to the show yet, but the early demand has been very positive. We would expect that to continue when we get to the show. So, a lot to look forward to there.

Exciting area of growth. Last question, just on the M&A. I just wondered if you could talk about what's changing in your conversations with potential sellers and I guess, the extent to which you're seeing valuation expectations?

Well, we continue to have those conversations, that is -- we try to be systematic around that pretty consistent theme, most of them or many of them are going to be private deals, till mom or dad is ready to sell, it's very difficult to make it actionable, preference is not have a go to option and so haven't seen the places we're in today or slightly adjacent. We haven't seen a lot of deals, but we continue to cast a wide net there and if we find one, that is good for them and good for us, like the BOSS acquisition was. Then we'll try to access that.

Do you think valuation expectations are easy here just given what's happening in the public market?

Yeah, I don't have a good answer for that. Often times, eye of the beholder there.

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

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