The Toro Company (TTC) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Toro Company's Second Quarter earnings conference call. My name is Karen and 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. We were pleased to announce this morning that we delivered record sales and earnings results for the second quarter. Net sales increased 1.2% to $836.4 million and net earnings per share grew 15.2% to $1.89. Strong sales of our landscape contractor and golf products, along with positive momentum in our specialty construction business helped drive professional segment growth of 7.7% for the quarter. A cold snap late in the quarter interrupted favorable spring weather conditions and caused a slowdown of residential sales. The negative impact was further exacerbated by accelerated first quarter channel demand for riding products this year, fueled by our supply issues last year. This led to an 11% decline in residential sales in the quarter. Following a brief commentary on the state of our businesses through the first half of the fiscal year, Renee will discuss our financial and operating results in more detail and Rick will share our outlook now that we're a little over halfway through our year. We begin with our professional segment where our landscape contractor businesses led the way in the quarter, driven by strong market acceptance of recently launched new innovations. Contractors and acreage owners alike are being drawn to the productivity and comfort of our professional zero-turn riders equipped with our new suspension systems. Likewise, our new generation stand-on mowers are performing well due to the productivity and ease of use they provide. Similarly, the momentum we reported on our last call of our golf equipment business continued into the second quarter, fueled by strong retail demand. The warmer early spring weather got the golf industry off to an encouraging start. Golf rounds played are up year-to-date. The positive opening of the golf season was also good news for our second quarter golf irrigation sales. We continue to benefit from our leadership position and from courses increased investments in large renovation projects and new system installations. Like golf sales, sales of our sports fields and grounds equipment grew well in the quarter as the business has benefited from valuable government contracts at both the states and local level. Next, solid channel and retail demand continued to drive growth in our rental and specialty construction businesses. The American Rental Show in February, where customers actually place orders, was our most successful one yet. Our compact utility loaders, UltraMix motor mixers, and our walk trenchers are all gaining ground and helping us sign new accounts. Another example of the rental and specialty construction momentum is we recently began shipments to a promising new underground equipment customer, a large multi-state equipment rental organization. Moving to the agricultural market, favorable specialty crop pricing and the ever growing need for efficient irrigation and disease control helped our micro-irrigation business post strong second-quarter results in North America. Toro Aqua Traxx tape is the preferred choice of specialty crop growers. In spite of the moderate snowfall this past winter, shipments of our BOSS line of snow and ice management product were essentially flat for the quarter. However, the winter's overall mild conditions reduced the number of plowable snowstorms, which will likely slow pre-season demand later in the year. As Rick will cover in his outlook remarks, BOSS did unveil a number of new innovative products during the National Truck Equipment Show in March that will position our channel partners to capture additional share as we approach the next selling season. Turning to our residential equipment business. Although shipments of riders declined in the quarter due to the pull up to the first quarter, retail sales were up. Our walk power mowers also enjoyed strong early return results, led by two of our most recent innovations, our space-saving SmartStow Toro mower in the hard-charging Toro and Lawn-Boy all-wheel-drive models. Space-starved homeowners value the fact that SmartStow mowers take up less than 70% of the storage space of traditional mowers, which in a cramped garage makes a big difference. Customers with hilly landscapes are recognizing that Toro and our brand-new Lawn-Boy all-wheel-drive mowers help them power through their mowing challenges more quickly and with less effort. Our walk-power mower and handheld product lines once again received industry best performance and value ratings in the leading consumer magazine's 2016 power equipment review. Finally, sales of our - sales in our international business experienced mixed results and posted a modest gain for the quarter from increased sales of golf and grounds equipment, micro-irrigation, and other irrigation products. These gains were somewhat offset by unfavorable currency rates and weather challenges. I will now turn the call over to Renee for a more detailed discussion of our financial results.

Thank you, Mike. And good morning, everyone. As we reported earlier this morning, net sales for the quarter were a record $836.4 million, compared to $826.2 million for the same period a year ago. We also delivered net earnings of $105.7 million or $1.89 per share, compared to $1.64 in the second quarter of fiscal 2015. Year-to-date net sales were up 1.7% to $1.32 billion. We achieved net earnings of $144.9 million for the first six months or $2.58 per share, compared to $2.18 per share a year ago. Unfavorable currency exchange rates had a negative impact on sales results for both the quarter and year-to-date. Unfavorable currency exchange rates negatively impacted year-to-date sales by 180 basis points. Professional segment sales were up 7.7% for the quarter to $595.2 million, due largely to increased demand for landscape contractor, golf, and specialty construction products. Year-to-date professional sales were up 4.7% to $934 million, led by sales of landscape contractor and specialty construction equipment. Professional net earnings for the quarter totaled $141.6 million, up 17.2% from $120.8 million in the same period last year. For the first six months, professional segment earnings were $203.2 million, a 15.2% increase compared to the same period last year. Second quarter residential segment sales decreased 11.1% to $238.2 million. The decline is primarily due to lower channel demand for zero-turn riders, somewhat offset by increased demand for walk-power mowers, driven by new products. Year-to-date residential sales were down 5% to $382.5 million. Residential segment earnings in the quarter totaled $35 million, up 0.4% from last year. Year-to-date earnings were $51.7 million, a 6.5% increase compared to the first six months of fiscal 2015. Now to our key operating results. Second quarter gross margin was 36.2%, an increase of 210 basis points. Favorable commodity costs, increased productivity, and product mix favoring our professional segment all contributed to this improvement. Gross margin increased year-to-date by 200 basis points to 36.7% for the same reasons as the quarter, plus a one-time effect from the BOSS acquisition in fiscal 2015. We now anticipate an increase in gross margin for the year of about 100 basis points due to the impact from lower second half manufacturing volumes. SG&A expenses as a percent of sales increased by 40 basis points for the quarter to 17.7% and to 20.9% year-to-date from 20.6% a year ago. The change for the quarter and the year is related to slight increases across various categories, including warehousing and healthcare, along with the impact of lower sales volume. Operating earnings as a percent of sales for the quarter were 18.5%, an increase of 170 basis points, and 15.8% year-to-date, also an increase of 170 basis points. Interest expense remained flat for the quarter and was down slightly year-to-date. Our effective tax rate for the quarter was 31.5% compared to 31.1% a year ago. For the first six months, the tax rate increased to 30.3% compared to 30% for the same period in 2015. We now expect our tax rate for fiscal 2016 to be about 30%. Turning to the balance sheet, accounts receivable for the quarter totaled $329.8 million, a decrease of 6.2% over the same period a year ago, due largely to accounts moved to our Red Iron joint venture. Net inventories for the quarter increased 8.1% to $369 million. The increase was primarily due to efforts to ensure we were a better supplier of residential riding products than we were in 2015 and lower demand for residential snow throwers. At the end of the second quarter, the company's 12-month average net working capital as a percent of sales was 16.6% compared to 15.6% a year ago. We recognize the need to increase our efforts on those things within our control, including reducing inventory levels for the remainder of the year. Finally, on Tuesday the Board approved a regular quarterly dividend of $0.30 per share. This is the seventh consecutive year of annual dividend growth and the second quarter marks the company's 128th consecutive quarterly dividend declaration. I will now turn the call over to Rick for his comments regarding our outlook.

Thank you, Renee. Going forward, we will continue to focus on creating innovative new products that deliver real distinctive value, forging strong, lasting customer relationships, and as Renee suggested, increasing our emphasis on execution. We believe we are well positioned to capitalize on both existing demand and new growth opportunities across the businesses in the second half of the year. Let's take a look at all the prospects for our complete business portfolio. We anticipate our landscape contractor business will continue its winning streak based on strong market acceptance and demand for our new zero-turn riding and stand-on mowers. The launch of our exciting new Multi-Force stand-on mower that we discussed in earlier calls occurs this month, bringing a unique level of versatility to the landscape contractors. The addition of the BOSS snow plow attachment empowers contractors to improve their return on equipment investment and enhances productivity by transforming their mower into a multi-season workhorse. This is a great example of synergies between our businesses that translates into increased value in contractor’s fleet. Our golf and grounds equipment business is similarly poised as recently launched innovations that some of you saw in February during the Golf Industry Show make their way to the field. These include our next generation of precision Flex Series walk greens mowers that offer all the proven benefits of earlier models, along with new ease-of-use and performance advancements. For budget conscious courses we also offer the new entry-priced Greensmaster 3120 that will help smaller clubs stretch their dollars and enhance their fleet. Furthermore, we have expanded our industry-leading line of lightweight, yet powerful, fairway mowers with the introduction of new Toro Reelmaster models featuring innovations that optimize the power needed to drive the units and traction system, maximizing efficiency and performance. These new Reelmasters are also noticeably quieter than typical fairway mowers. Next, our new line of gas and electric powered Workman GTX utility vehicles are the most versatile, practical, and comfortable vehicles in their class. We have a strong distributor order position for the GTX, backed by confirmed retail orders. Finally, our new EdgeSeries cutting units featured on our Greensmaster and Reelmaster mower lines hold their sharpness longer, providing a superior cut and less maintenance. These new products provide the performance, productivity, and value golf and grounds customers expect from a leader. We believe these latest innovations will help our golf and grounds equipment team perform favorably in the second half, even when compared to their very strong fall and summer results from a year ago. Golf irrigation should benefit from ongoing renovation and installation projects into the second half of the year. Our team and distributor partners are closely tracking new project opportunities. Next, rental and construction markets are expected to remain strong through the year and our rental and specialty construction businesses have a strong order base heading into the third quarter. Demand for the new TX 1000 compact utility loader should continue at its hardy pace, as more potential buyers are exposed to its innovative design. Innovation is also the key to momentum developing behind our micro-irrigation business, particularly in North America. The need for food and the efficient use of scarce water resources will only accelerate. Like other businesses, our micro-irrigation third quarter position remains solid. Our residential and commercial irrigation business mirrors the industry's overall performance. The general industry slowdown has contractors closely monitoring their purchases and inventory. The launch of our new Unique Lighting System 150 watt LED transformer was very successful and our innovative Light Logic wireless controller has generated considerable interest among outdoor lighting contractors. Similarly, the latest BOSS snow and ice management innovations have received - have been received very favorably - have received very positive feedback from customers to date. Limited snowfall kept snowfall operators out of action much of last winter and will likely delay some purchase decisions for the next season. However, eventually the snow will return and BOSS is well prepared with several exciting new products. The list of BOSS product innovations includes: a new V-plow for half-ton trucks, a new straight blade that can be extended from 8 to 10 feet, a 9 foot municipal grade plow, a UTV and small vehicle spreader, an ATV plow, and our industry-leading SL3 LED lights are now standard on all truck plows. So when winter returns, BOSS is ready to help customers handle the worst of the winter can deliver. Preliminary long range weather forecasts predict above average snowfall beginning in November in most significant snow markets. If these forecasts hold true, we should see solid sales early this winter. The outlook for our residential business for the year remains positive. We have experienced good retail activity year-to-date and anticipate positive results based on our strong walk-power lineup as well as the ongoing industry-wide growth for zero-turn riders. Customers have embraced the time-saving benefits these mowers deliver. Innovative features like SmartSpeed and the performance of our V-Twin engine have helped Toro succeed. Like BOSS, our residential snow business will likely experience sluggish pre-season demand this fall. Our leadership in the snow thrower industry and unsurpassed innovation will favorably position our retailers. As I mentioned, winter forecasts are positive. Finally, products across our international business, like our new flail mower, are creating strong demand. While we will face and deal with currency exchange rates and other regional challenges, our international team will aggressively pursue sales opportunities wherever they arise. I will now turn it back to Michael for his concluding comments.

Thank you, Rick. I never like to close a call without recognizing and thanking our employees and all of our channel partners for their steadfast commitment and hard work. We have a lot left to accomplish for the year. I know we can count on all members of our team to stay focused on our goals and enable us to exceed our end user customer’s needs, to drive share, and to deliver on our shareholders' expectations. In conclusion, we anticipate delivering another successful year. We are fully aware of the global challenges and the uncertain economic conditions and unpredictable weather patterns that may pose challenges to our plans. As always, we are prepared to respond. The company now expects revenue growth for fiscal 2016 to be flat to up 2% with an increase in net earnings of about $3.90 to $4 per share. For the third quarter, the company expects net earnings per share of about $0.95. This concludes our formal remarks and we'll take your questions at this time. So, Karen, back to you.

Thank you. [Operator Instructions] Our first question comes from the line of Eric Bosshard from Cleveland Research.

Couple things….

Morning, Eric.

Good morning.

Good morning.

First of all, in terms of the change in revenue, would love you just to be perhaps a bit more specific in what's different than how the world looked 90 days ago, specifically in terms of sell-through. I know there's some moving parts and inventories and the like. But where is sell-through different than what you had been experiencing or expected as you look out for the full year?

Yes, it's a good question, Eric. I think as we were kind of talking about the business in February, things had started to warm up. In some ways I think we were more hopeful that the stronger spring results would more than offset the snow headwinds. I think what has happened is the spring results have been okay, actually retail sales, as I've said, on riders and walkers are ahead, but not to the degree to make up for the snow headwinds. We've talked with you in the past that snow, even with the acquisition of BOSS, is roughly 10% of the company and that's the most variable piece of our business. And if we look back to F '15, we had a very, very strong snow business. If we look at F '16, we knew the pre-season was going to be good; there were questions around the in-season. As you know, the in-season didn't pan out anywhere near what we had hoped and, and as a result, next year's pre-season, right, so this fall - remember our year ends in October, so we won't - the in-season actually starts later - will be at best fair. So as we got to the end of the February time period, we started looking and then saying, okay, what is the field inventory like, since that time we have obviously taken the book of business with our channel partners. We've tried to project retail for the upcoming fall time period. And the net is the bulk of that decline from about 4% to zero to 2% and that's the range right now - is the result of snow. And the snow pre-season will be, at best, okay. We're still working hard on the spring and summer products to drive those results and as I say, the retail there is still sound, but we've got a lot of that business in front of us. And then the in-season snow piece will take place in fiscal '17; so that will start in November. The good news, as Rick commented, is that the weather prognosticators, the forecasters are saying good things about snow again, across some of our key markets, particularly in the Midwest and the Northeast. So it's mostly the snow headwind and we've talked in the past about that being variable. It is, but I think the point here is that the rest of the core businesses are actually in really good shape across our portfolio. They are doing what we expect them to do and we have been able to, I guess with some other things below the sales line, make up that snow headwind and still deliver more than we expected or guided to the last time. So the company is very healthy in that regard.

Just related to that, and then my other question, but I appreciate that it sounds like snow may get better as we move later in the year, but as you look at the weather impact now on residential, I'm curious how the sell-through there is behaving relative to what the initial expectations were. I know you commented sell-through is up, but could you just give a little bit more flavor for that?

Yes. So year-to-date on core businesses, like walkers and riders, retail is ahead, and that's always the question when you look at our - are we talking about our shipments or are we talking about retail? And we're a company that puts a strong focus on retail, and if you take care of that, everything else will, ultimately, take care of itself. And so retail is good through the middle of May, even with some of the more challenging weather conditions that we've faced you know, kind of through April and the first couple of weeks of May. And so, we got off to a really strong start and some of that went back as Mother Nature didn't cooperate, particularly in key selling markets. It has been - have had good moisture, but it has been relatively cooler. In fact, a major retailer, I was reading the paper this morning, talked about some of the challenges of the cool weather out in the Northeast. So March was beautiful; April, May not so much. But we have every reason to believe that our comps on the spring and summer products are in good shape and that will continue. We did get a little bit ahead of ourselves on some of the riding products that we've manufactured, and that's going to be the headwind on the manufacturing side in the second half, but retail-wise it's very healthy.

And then just one follow-on, which I think you've answered a little bit. But the inventory reductions that I think Rick talked about and Renee talked about for the back half, in what categories or what product areas are that, and is that driven by sales less than were expected or for some reason was there some issue within over shipping?

Yes, the biggest portion of inventory reduction as we look in the second half relates to riders. As we talked about, we were not the best supplier last year and so we intentionally brought in more inventory related to riders. And as Mike said, retail has been up for the year, but we will, as we go into the second half, focus on bringing down that inventory level. We recognize our goal is to provide improved fill rates for our customers, while we are reducing our inventory. And so we will focus on that in the second half. That will create a headwind for us on the gross margin side related to manufacturing variances. But we think it's the right thing to do as we close of the year and we go into next year.

I'd add to that, Eric, that to your question, field inventory is in good shape. It's a little bit higher, but the combination of that coupled with the riders that we have made here, will go across the portfolio. We're going to work very systematically to make sure that's healthy or healthier at year end as we set the stage for the next season. So our focus will be on driving retail, managing the production levels. But there's going to be some, as Renee said, some headwind on the manufacturing reduction in the second half.

Okay. That's very clear. Thank you.

Thank you, Eric.

Thank you. And our next question comes from the line Jim Barrett from CL King & Associates.

Good morning, everyone.

Good morning.

Rick, you may have mentioned this; the company certainly featured the work utility vehicle at the golf show. Would you mind giving us an update on how that is performing versus plan and how it's being received by customers?

Yes, I'm sure you got a sense at the golf show for the level of excitement for that product with the market. I am pleased to say that we are now shipping the product and the projections for the year are well above our expectations so far. So that's still early in the process, but very positive results so far.

I see, good. And Michael, on the - in terms of residential irrigation, with housing starts picking up, I assume it's very skewed toward the Sun Belt. But can you sort of give us your outlook on that business and how we should think about it? Assuming the new housing cycle continues, what metrics are best leading indicators of the health of the business?

Yes, good question. I think it is the one business we probably would bundle it, new home construction and commercial construction, as we talk about the residential, commercial irrigation part of the business. So that is more tied to those starts and that is, you are right; that's a strong positive. And so when we look at that business, now it's just a piece of the landscaping grounds portfolio. But when we look at that business you take the growth of housing and improvement in commercial construction, add to that the innovation that team and our Riverside team has been driving and are taking some share. And that's why we look at that business saying we expect that to be an upper single digit driver of growth for us. And it is performing well, looking forward kind of strategically for a number of years, assuming we don't head into a downturn. And so that’s tracking well. Now short term you can get into some ups and downs and so - when we get a lot of wet weather, it slows down the installation of some of those. But we want you to look at this over the full fiscal year, healthy business moving in the right direction and the market forces are positive.

Good. And you may have answered this already, but the reduced channel demand for zero-turn mowers, is that a function of the cold snap we had? Are there other competitive factors at work? Has the product maxed out in terms of penetration? I'm just trying to understand that more clearly?

Yes, the product is by no means, maxed out in penetration and the continued shift between traditional lawn tractors and zero-turn riders with sticks continues, and so that will continue to be a growth driver for us. As I said earlier, retail sales of those residential riders for us, or the zero-turn riders, are actually tracking nicely ahead of last year, and we worked really hard to sustain that. Now as things flow in and out, to the channel that could be much - some of that got pulled forward into the first half, as was talked about earlier. And then we have seen a little bit of a slowdown because it's been cool and that's eventually going to warm up and we think that retail will continue and we will comp nicely. We're counting on that, against last year's results. So healthy business moving in the right direction.

Okay. Thank you both.

Thank you.

Thank you. And our next question comes from the line of Sam Darkatsh from Raymond James.

Good morning, this is Josh Wilson filling in for Sam. Thanks for taking my questions.

Morning, Josh.

To give us a better feel since weather was more choppy, could you talk about what organic growth was in each month of the quarter and also in May?

I don't know that we are going to give a lot of precision around that. I think what we will say is that when we were going through the month of March, and we're talking particularly residential here, right, it’s going to be more impacted near term by Mother Nature. We were - retail was very robust. We headed into April and things got cooler. We had snowfalls in some of our markets that shouldn't be getting snow in April and even as recently as May, and so that slowed things down. But we just finished up Toro Days in partnership with our dealers and The Home Depot and a large retailer and those were very sound. And it's still been, at best, still just okay, warmth-wise, across the nation. So we're counting on things heating up as summer gets here. The predictions are for good moisture, and if we get good moisture and good temperatures, then that will drive our business well. But we are in good shape as we sit here today year-to-date. That's really important as we talk about retail sales.

Got it. And speaking of Home Depot, I think they said their outdoor power business was up double-digits. Could you talk about your share a little bit? Again, I understand there is some difference in the inventories?

Yes. They are a good partner, as our dealers are good partners, and we have a good line up there. Now we have kind of a strengthened position with walk-power mowers there this year. On the other hand, we lost a couple of units that didn't perform as well as they hoped or we hoped last year. And one of the things that we work very collaboratively on is the SKU we're putting in there a high-performance SKU, if it is, we'll sustain it. If it's not, it's not doing particularly what they want and or what we want. And so, all-in, I think our growth there is sound and we're working very well with them as a big retailer, as well as our dealers.

If I could sneak in a two part one on inventory, what's - can you refresh what your target is for the end of the year? And then as it relates to the service levels and the fill rates, should we expect first half inventory to always be a little bit more elevated relative to what it was historically or are there other plans to improve fill rates at lower inventory levels as we look into the coming years?

Okay. I'll start with the second question first. We're not anticipating having higher inventory levels in the first half on a regular basis. We did err on the side of having higher inventory levels going into this year. And we talked about it previously as well, because we thought it was important to ensure that we were ready for the season that we could supply our partners in the way that they would expect from us. We know and are working very diligently on ways to become more flexible, more nimble to be able to improve our fill rate and to lower our inventory levels. So we know we need to do both, it's power of and. As far as year end, we do anticipate bringing down our year end inventory level to a level below last year. Consistent, we haven't changed our free cash flow forecast. We're still looking at the same, it’s about $200 million. And so, consistent with that, we are looking at reducing our inventory levels as we go through the second half of the year. And as we talked about earlier, that does create then that headwind for us on gross margin as we layer in those lower production levels for the remainder of the second half.

Thank you so much. Good luck with the rest of the year.

Thank you, Josh.

Thank you, Josh.

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

Hey, good morning everyone. This is Conor Sweeney on for David MacGregor this morning.

Morning, Conor.

Morning. Just a follow-up on the gross margin, Renee. You guys saw over 200 basis points of improvement here in Q2. Is there anyway you can maybe break out the put and takes of that? And then as a follow-up, your full year gross margin improvement, what are your assumptions behind it? Thank you.

Okay. So when we look at year-to-date gross margin, I mean, some of the things that benefited us were certainly commodities similar to what you are seeing across the board. We saw favorable commodities. We did have in the first half productivity related to running our plants very efficiently, and our ongoing focus on cost reductions. We did capture some price as we look at it. And then when we look at the other side of the equation, we would have - and I should remember the BOSS purchase accounting also was a benefit for us because it happened the prior year, the prior year in Q1 of 2015. So that would be a benefit for us. The headwind working against us would be FX. So we saw more FX in the first half of the year than we will see in the second half of the year. And then as we look throughout the total year, what we would say is again pretty much the same factors for the total year, other than the fact that we would have less manufacturing volume in the second half of the year.

Is there any way you could maybe quantify the magnitude of which one would be the biggest benefit, the least benefit in that order?

I think commodities and productivity probably are the more significant. Product mix, which I didn't mention earlier, also certainly in the first half of the year where we had residential sales down 5%, professional up 5%, would be a benefit for us. And then the other one is probably pretty much offset, price and FX pretty much offset each other. BOSS purchase accounting is fairly - less significant for the total year.

Okay, thank you. Then as a quick add-on, if you revise guidance, what are your assumptions for FX and we assume that second-half comps get easier and there should be relief?

Yes, we spoke about that FX year-to-date had been about 180 basis points. As we look at the second half of the year, you're correct, Conor, it's going to ramp down from a year-over-year comparison perspective. We would have built in -assuming that FX rates stay the same, about 1.5 points of impact from a sales perspective. And consistent with what we said in the past, roughly about half of that winds up hitting our bottom line, most of that in the gross margin area.

Okay. Thank you, guys. Appreciate it.

Thank you, Conor.

Thank you. And our next question comes from the line of Joe Mondillo from Sidoti & Company.

Hi, everyone. I jumped on a little late, so I apologize if I asked anything that’s already been covered, trying to focus on things that may not been covered. But in terms of the BOSS business, in the off-season, have you guys been - just wondering, I know you had plans expanding into the Northeast and taking share in certain regions. Have you been doing certain initiatives to try to expand and take share in different geographic regions?

Yes. So I would say that the BOSS acquisition, it's sound. We still feel very, very good about it. As I said previously, probably better about it today than when we did it. We are dealing with some of the variability there. I think that BOSS is working systematically across all their geography to drive share. As Rick commented, we went to the truck show in March and had many new products, exciting new products. And BOSS is an innovator. They are coming up with new ways to serve customers, to help customers drive productivity, create safer environments like these new SL3 lights. Much of this plowing is done at night and they have come up with a great lighting system that really is almost transformational from the old technology lights to the new. So they are doing a lot of things right. We continue to work on the channel, kind of to your comment on the channel part of it, in different geographies, probably more opportunity in the Northeast. Although, as we commented earlier, that the Northeast had a terrific snow season and '14, '15, you know, '15, ,16 not as much, that’s some of the snows in Boston came in April, which is not when we want them. And so we will look forward to that, that fall pre-season and working with our respective channel partners to drive more opportunity there, if you will, you know, competitions is going to work hard at that as well. But – we're on strategy, BOSS is in, like I say really good shape, its terrific to have it is as part of the portfolio.

Okay. And then in regarding to the balance sheet, I think that the debt to EBITDA is around 0.5 times roughly. What's your thinking or what is your view of the pipeline of acquisitions? I know you have the share repurchases and the dividend. But it seems like you still have a lot of room on the balance sheet. So I'm just wondering what your thoughts are regarding that?

Nothing is changed there Joe, we continue to have capacity, both in financial capacity and people capacity. We [Technical Difficulty] across the portfolio and so could we create somewhat more leverage, if we found the right opportunity or large opportunity, the answer is of course, we could, that’s been consistent, kind of through the years. You asked what the pipeline is like, it isn’t like there is step change in that, and so there are some fewer larger deals and more medium size deals. And as we've shared many, many times, most of the deals we're going to look, end up looking at will be private companies, given our relative size. And until mom or dad is ready to sell its hard to cause that to happen. We just hope that when it does happen we could have a relationship with them and move the deal forward, like the BOSS deal, as opposed to an option, an option is for us always more challenging and, we'll look at them, but it’s a question you know, value creation, can we find the right formula to do that where one and one is equal to something more than two. So not a lot has changed from past, our financial position, our ability to do that, as well as – kind of to your question, the pipeline of deals, we'll keep looking.

All right. And then just my last question. Regarding your international business, it looks like, excluding currency, I think international revenue was actually up in the quarter. Is that right?

That is correct.

Okay. I was just wondering, it seemed like Europe saw some really below average temperatures in, I think it was March and April. It seems like they've seen a late spring. So just wondering where you have been seeing the demand. Did that poor weather - was that unfavorable at all for any of your international business. Just thoughts on what's driving that international demand?

Yes, so that’s - obviously that’s the overall international picture, and yes, Europe has not had terrific weather by any means. What you have to remember is, our residential business in Europe is a relatively small part of the portfolio. So when you think about the Toro Company we're 70 pro, 30 residential, you know, approximately and when we get to the European or get to the international environment, it’s even more weighted to professional, right. And so around the world we're more professional weighted and that business around the world is sound. So yes, we did have some headwind as result of the European weather, but that doesn’t move the needle as much as the pro business.

And so considering the growth that you saw there, is that market improving at all or is it just sort of maybe sort of stabilizing or how do you characterize just that overall end-market?

Yes, their end markets as you say. So for example golf around the world is sound, that we see certain markets where golf is – new course are being developed which involve new irrigation systems, large packages of equipment and that’s a significant part of the professional portfolio, as well as some of the other businesses in the commercial grounds and other irrigation business, micro-irrigation outside the US is very important business for us and growing. So it’s a number of pieces, the residential part of the international business is like I say, it was a bit of headwind, its just not as larger part of the portfolio as some others. And when you look at that you also have to add in Canada, right. So Canada has had some pretty challenging exchange rates that have made that a bit more of a headwind. So all in international is healthy and is something that you know, really important to our long-term growth.

Okay, great. Thanks for taking my questions.

Thank you.

Thank you, Joe.

Thank you. [Operator Instructions] And that concludes our question-and-answer session for today. I would like to turn the conference back over to Heather Hille, for any closing remarks.

Thank you for your questions and interest in Toro. We look talking to you again in August to discuss our third quarter results. Thank you and have a good day.

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