Good day, ladies and gentlemen and welcome to The Toro Company’s Second Quarter Earnings Call. My name is Kevin and I will be your conference operator 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, today’s conference is being recorded. I would now like to turn the presentation over to your host for today Ms. Heather Hille, Director of Investor Relations and External Communications for Toro Company. Please proceed, Ms. Hille.

Thank you and good morning. Our earnings release was issued this morning by BusinessWire and a copy can be found in the investor information section of our corporate website, thetorocompany.com. On our call today are Rick Olson, President and Chief Executive Officer; Renee Peterson, Vice President, Treasurer and Chief Financial Officer; and Tom Larson, Vice President and Corporate Controller. We begin with our customary forward-looking statement policy. During this call, we will make forward-looking statements regarding our business and future financial and operating results. You all are aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our earnings release as well as our SEC filings, detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. With that, I will now turn the call over to Rick.

Thank you, Heather, and good morning to all of our listeners. We’re pleased to deliver record second quarter sales and earnings results. Net sales increased 4.3% to $872.8 million, while net earnings per share grew to $1.8. Increased sales of our golf, rental, BOSS and landscape contractor equipment grow professional segment sales growth of 2.6% for the quarter. Our residential segment also achieved gains for the quarter due to demand for zero turn riders, lock power mowers and pulp product, leading to an increase of 8.4%. 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. We begin with our professional segment where our golf equipment business led the way in the quarter, driven by strong market interest in our recently launched innovations. Two notable examples are our latest series of lighter weight Reelmaster fairway mowers and our Greensmaster hybrid riding greensmowers. Project wins and demand for our new Workman GTX vehicle line in both the golf and sports field and ground markets also contributed to the quarter. The golf irrigation business had a more subdued quarter, excess rainfall and the late arrival of spring delayed installation projects. However, we are well positioned with a number of pending projects, and customers are enthused by the ongoing advancements in water saving technologies that our products offer, including the Lynx dash that we introduced early in the second quarter. Lynx dash, a comprehensive dashboard, is a standalone service that can be integrated into existing Lynx central control systems. It pulls in real-time weather information from third-party weather providers and delivers enhanced diagnostic information about the current site conditions. The enhanced information helps superintendents and grounds crews make better decision regarding their irrigation practices.…

Thank you, Rick, and good morning everyone. As we reported earlier this morning, net sales for the quarter were a record $872.8 million compared to $836.4 million for the same period in year ago. We also delivered net earnings of $120.5 million or $1.08 per share compared to $0.94 in the second quarter of fiscal 2016. Year-to-date net sales were up 5% to $1,039 million. We achieved net earnings of $165.5 million for the first six months or $1.48 per share compared to $1.29 per share a year ago. Unfavorable currency exchange rates negatively impacted sales for the quarter by approximately $3 million and by approximately $6.4 million for the year. Professional segment sales were up 2.6% for the quarter to $610.9 million. Year-to-date professional sales were up 5.2% to $982.7 million. Professional net earnings for the quarter totaled $149 million, up 5.2% from $141.6 million in the same period last year. The growth was due to increases across several businesses, but particularly from our golf equipment and rental offerings. For the first six months, professional segment earnings were $217.2 million, a 6.9% increase compared to the same period last year. Sales of our golf, landscape contractor, and rental and specialty construction products were largely responsible for the growth. Second quarter residential segment sales increased 8.4% to $258.1 million. The increase is primarily due to demand for zero-turn riders and walk power mowers driven by new product. Year-to-date, residential sales were up 4.2% to $398.5 million. Residential segment earnings in the quarter totaled $35 million, consistent with last year. Year-to-date earnings were $51.6 million essentially unchanged compared to the first six months of fiscal 2016. Increased spread cost associated with the timing of new product shipments and a specific product warranty expense negatively impacted earnings. Now, to our key operating…

Thank you, Renee. We believe we are well positioned with strong portfolios of innovative products across our businesses to capitalize on both existing demand and new growth opportunities in the second half of the year. The golf equipment business should enjoy continued momentum in the months ahead as interest remained high in products we launched in 2016. These include the Reelmasters, Greensmasters and Workman GTX units, I mentioned earlier in the call, along with the Greensmaster Flex Walk greensmower and the GeoLink GPS guidance system on our 300 gallon Multi Pro sprayer. Additional product launches this year are generating similar excitement. These include the GreensPro roller, a variety of accessories for the Workman GTX, a GeoLink system for our smaller sprayer and our myTurf software, our next generation of fleet management software for maximizing equipment uptime and lowering costs. While the correction of core supply versus demand will continue, a significant number of courses are investing in major renovations, which reflects continued optimism in the industry. These trends will likely present sales opportunities for our golf products. We are pleased to, once again, help a key customer prepare for a major championship as the U.S. Open comes to Wisconsin’s Erin Hills next month. Superintendent Zach ranking and his crew will be using Toro Turf maintenance and irrigation equipment to optimize playing conditions for the world’s best golfers. This is an important time for Erin Hills as it is their first opportunity to host a major championship. We are honored they are counting on Toro for such a monumental event. The outlook in the sports field and grounds market indicates modest municipal budget increases for the year. We believe we can leverage our portfolio of efficient products and services to appeal to their buyers who are looking to stretch budget and…

[Operator Instructions] Our first question comes from Sam Darkatsh with Raymond James.

And Tom congratulations on your retirement and best wishes for you and your next chapter. It was terrific working with you over the years. So couple of questions, first off a clarification, Renee that the 31% tax rate for the year excluding the items. Is that what we should think about for tax rate in the out years?

That would be the tax rate on an ongoing basis, assuming there is a zero impact from the coming change. This is, as we go into next year, we'll have to evaluate what type of impact we have in the future from this accounting change. So, we'll evaluate that as we next year and provide guidance for next year as well.

Okay. And then the tax rate, does the tax benefit from the new standards suggest that your operating results may have been fractionally softer than what you originally thought. Can you help with where specifically you might have seen variances internally in the quarter versus your original plan? I noticed residential margins were a little in the soft side and obviously irrigations that you called out, but if you could talk around where the primary variances were, if you could?

Yes, we did have a portion of tax benefit included in our original guidance. So, we step back, although the benefit was greater than we originally expected. We actually feel we’re right on our guidance for the quarter. Clearly, there were some impacts within the quarter for residential related to the impact of freight and warranty. And in particular and we can explain those, but the impact of the tax impact was greater, but that would really be why we exceeded guidance versus achieving our guidance. In particular, when we talk about residential, do you want to Rick maybe add to that?

Yes, we had a couple of specific items that affected the profits for residential specifically. And those were a warranty issue, which was related to an issue on a specific product. We investigated and understand what that issue was, the corrective action has been taken, but we did reserve for any impact of issue in our and as reflected in our financials. The second is related to freight, as we talked about in previous calls, we are very focused on making sure good supplier to our channel, with the timing of some of the prior introductions we chose to shift in a less than fully efficient way to make sure we got product in each of our locations that resulted in a freight premium. We are working diligently to make sure that we are not only good suppliers but then we also are efficient that's the way we have spent our freight dollars as well. So, those are couple of the significant items.

Do you have a ballpark quantification of the freight and warranty impacts? And are they ongoing in the near-term in 3Q or is it just a Q2 items?

Yes, we felt that they would be Q2 impact that we still need to address them within the quarter and we wouldn’t expect them to impact. And I would say it's really the variance and the profitability year-over-year in residential.

Oh, I see. So, the residential margins would have been flat out those items?

That’s correct.

Yes, on a revenue basis, yes.

Yes, last question, then I’ll defer to others. The share repurchase activity was a little bit less sequentially than it was in the first quarter. I know you don’t have a formulaic kind of thought thinking pattern around that, and sometimes it’s just noise or when you’re able to be in the market, but any commentary around that. Is it potentially setting up to make some M&A later in the year? What -- how should we look at the share repo?

Sam, this is Tom. Yes, we’ve got spent as you can see, just under $85 million year-to-date on share repurchases. I would take you back to what we said coming into the year and what we continue to say, we expect to spend at least as much amount or at least as much on share repurchases as we did the last year, which was $112 million. So we got off to a fast start on that in the first quarter. And I’d say through the first half we’re tracking very well and somewhat ahead of that pace. So I wouldn’t infer anything differently doing that changed our approach to that at all or anything.

Our next question comes from Jon Fisher with Dougherty and Company.

It sounds like when we look at the quarter that there are still some opportunities, things that you talked about earlier on the last quarter to kind of aid revenue performance for the rest of the year. It doesn’t sound like you’ve seen to pick up in California business from the wet winter there and it doesn’t sound like, at least based on your description of spring that there was an early spring. So I guess be interested in kind of the opportunities there, if you could flush out may be those two points as opportunities when we look out to the Q3?

Sure. First of all, I guess, on the spring in general, we had an early start in a lot of parts of our markets, but it’s been more variable since then. So, here in Minnesota for example, the last several weeks have been in the 40s at times and quite wet. So, it’s been a little bit more varied. And the key points is good portion of that season is still ahead of us. So I think the indications right now from a weather standpoint are actually turning more favorable, certainly with a lot of moisture in the ground that bodes well as it starts to warm up. Specifically to the West Coast and California specifically, it’s really -- there is two elements to that, and it’s really, first of all, the longer-term piece the drought. There has been a significant drought relief with a much higher snowpack and a lot of rains throughout the rainy season in California. That will help us from a standpoint of reducing drought-induced restrictions on watering and irrigation. That will also bring fields back into play for micro irrigation business, so more acreage coming into play that had been fallowed in many cases for as much as two or three years. So, that’s the positive from us. The negative is that has -- it has been a very wet spring on the West Coast, so that is one of our largest irrigation markets for both for res comp and obviously micro irrigation as well. And a number of those projects have been delayed, so as it starts to dry out, there is adequate moisture in the ground. We believe that we’ll gain back a lot of those projects and that ultimately thus create some opportunities for the micro irrigation business over the longer term.

And on the pricing just given how strong revenues have been through the first six months and listening to you talk about the opportunities for the rest of this year. The demand environment just looks and is based on my checks really strong. Are you still in the 1% to 2% pricing environment? Or is demand strong enough that you're actually able to get more pricing then in the 1% to 2% range?

We really -- first of all just to clarify we price -- we do price to the market, so the types of things that we’re talking about are in play. And we've variation across our businesses, we tend to get more price in areas where there's more engineered content and it's more of the professional products that can see the return on investment for those innovations. But that being said we're in the 1% to 2% range that we previously talked about but there's variation obviously across our product line.

And just final question and then I'll drop off, just that it sounds like the international business during the quarter was overall fairly attractive to the extent you can add some details of that or quantify growth or percent of revenues from international would be appreciated?

Sure, I would say international and general, the year-to-date has been more positive and general outlook I think the macro environment for international business is better. I just reviewed GDP growth for a number of our key markets and that's ticking up to be a little bit more positive. We did also gain from the addition of our Perrot line, which is really going as expected. It's not exceeding our expectations so far, that has added some revenue, and that really has complemented our irrigation lineup worldwide; again we've got leading market share in Europe particularly for sports fields and grounds and that's been a great complement to our business; so overall we feel good about the international business; that's been several years of challenging economic environment but some signs that that getting a little bit better.

Our next question comes from Mike Shlisky with Seaport Global.

I just wanted to just touch on some of your snow business particularly the part that covers residential. I was just kind of wondering -- I saw there was some pretty big storms across U.S. in mid to late March, and I was curious if you can tell us, if that helps to clear out some of the inventories at some of your retail partners going into the spring?

Overall, the snow season we would call a good but not a great season. The season started a little bit slow, had a very solid December and then the remainder of the season was quite variable especially by region. So, it’s neither been a good not necessarily a great snow year and the storms in the later part of the season did help us. They were fairly regional. I think the Stella was the last big storm, but what it did do, Mike, as it did help us clear out some inventory in that we feel like we’re in good conditions from a field inventory standpoint, which should set us up for a decent sell in the preseason of this fall.

Okay. And then just on BOSS quickly, follow-up on that and that part of it. It's now the end of May and we now in the midst of the early order season for next period for next season. And can you just tell us if so, how that's gone so far?

So far, it's a little bit early for the BOSS business, but so far indications are good for BOSS in spite of not outstanding winters, we've done very well with the new products so the extendable pause. The pause of lighter weight, pick-up trucks have all been very popular. And this is just keep in mind, it's maybe a little bit less directly tie to the weather condition because there is a capital purchase for the contractors, but ties to things like new truck sales as well and these are planned purchases. Overtime, there is a change in revenue for the contractors that could affect, but it’s less immediately reactive to the conditions than for example the snow businesses. But BOSS is tracking well, we're ahead of where we're last year and the outlook especially with the new product that we have slated for example the down pressure with on our straight bladed plows as well that includes the system that provides down pressure, but it also allows the valve to follow, and a number of the other innovations that we've talked about in the prepared remarks. So, we feel positive about BOSS going forward definitely.

Okay. Thanks, and then just turning to both micro and golf irrigation. Just wanted to ask, it sounds like both were kind of impacted by the weather during the quarter. Is that some of your deliveries and sales may have been pushed out in the third quarter? Or did you miss the installations season with golf course is up and up and running at this point and some of the plant crops are already in the ground by now?

Yes, really for the most part we would say, it's a timing type of thing more than anything else. So, we the trend that have been driving more golf irrigation installations continue. The willingness of golf course to end up and although the new technologies that are helping to move out a bit faster. So, that doesn’t change and we're still really we believe in the early stages of the replacement cycle for a large golf courses that were built during the June time, let's say as the 90s, if you consider maybe a 15 to 20 year lifespan for those systems. So, we don't believe that projects have been lost. We believe that is a timing thing at this point.

Our next question comes from Tom Mahoney with Cleveland Research.

My question comes on the outperformance you guys were seeing in golf this year relative to last year. How much of that you account for your better end market demand in that part of the business? And how much of that is the share gains from new products that you guys have seen?

Well, first of all, we do believe that the outlook for golf continues to look a little bit more favorable. So, I had a chance to travel and visit a lot of customers in one of our key markets several weeks ago. And I would say from my own perspective and talking with them, certainly much more optimistic about the game itself and the industry related to golf. So, really anecdotally in this case, relating waiting less for memberships and revenues being up and play being up. So fundamentally, we continue to believe that those -- that the outlook for golf looks more positive. And then -- but on top of that, we do believe that our new products provide a substantial benefit to us from the marketplace, and we would believe that we are taking share in the case. So, the products for example just to give one example, the Triplex greensmower is actually a ride on three cutting units greensmower, but it operates like the walk greensmower that traditionally has been the highest end type of mowing that you can do. So, as the superintendents are challenged with labor availability and management that’s a product, for example, that gives you the results of a walk type of mower, but it has the productivity of a riding mower. So, that’s really kind of a sweets spot. So, we do think that, that helps us take share as well.

Great. And then my follow-up is just on the revenue guidance increase. To what extent does the 100 basis point increase reflect upside year-to-date versus more favorable expectation for the rest of the year? And then just on top of that, is there anything we should be thinking about from a flow through bottom line perspective in the remainder of the year?

I think as far as revenue goes, it really reflects both. So, it reflects the performance so far year-to-date a growth of 5%. But also we expect the latter part of the year to be positive as well. As I have said earlier, a good portion of the growing season -- or excuse me, the peak season was still in front of us here but we continue to feel good about the remainder of the year.

Our next question comes from David MacGregor with Longbow Research.

I guess, first question, I wanted to ask is on golf. I know there was a lot of talk within the channels of lead time extensions earlier in the quarter, not just Toro, but for some of your competitors as well. Was this the earlier-than-normal start to warm weather to late new product introduction availability or something else? And do you feel you caught up by the end of the quarter? If not, does that suggest an incremental source of growth in 3Q from the delay fulfillment?

As I mentioned the underlying drivers of the golf business are looking more positive, so the macro environment for golf is good. We have worked closely with our channel partners to make sure that we don’t lose any opportunities as a result of a little bit higher demand maybe than we originally projected. So at this point, we believe we are -- we have plans in place to make sure we cover the demand through the period. We also, in our case, one a bit of a challenge for us was the alignment of several large packages that happened early in the year. So those are timing is never quite certain, and we had several significant wins early in the season that requires delivery on a very short notice. So that was a specific factor for us, but we are working very closely between the business and our operations team to make sure that we don't lose any opportunities.

I guess there've been some previous questions on irrigation and I guess we’ve heard as well, there is a good second half coming in irrigation. I guess the question is, if you get an upturn in irrigation spending, does that cut into the turf equipment sales, as the clubs that with finite CapEx budget?

Yes, really for the most part, similar to the comments about contractors, these are planned budgets. So, this is already part of their long-term plan and so I would not say that there's a trade off there. They've got a long-term plan. Irrigation system needs to be replaced and also need to replace their equipment on a regular basis.

Last question from me was on landscape contractor and I guess given that the fellow that clears my snow is also the fellow that cuts my grass. Are you seeing any signs of the slower snow removal season as past winter cut into the contractors earnings and hence his ability to purchase new mowing equipment?

We're not necessarily seeing that especially with the larger -- with the larger snow contractors. They tend to structure their agreements with their customers, so that they have some set annual contract as well as -- per plough type of arrangements. So, we're not necessarily seeing that and again we had a decent snow year this last year especially in the markets where we're particularly strong.

Our next question comes from Joe Mondillo with Sidoti & Company.

My first question regarding SG&A seems like SG&A was up, it was up more than I was expecting, and particularly it looks like the corporate cost outside of the segment cost were up quite substantially about 15% actually it looks like by my calculation. Just wondering what is going on there? And then also in related to that, it looks like the corporate costs were up 25% in the second quarter of last year, so is there anything seasonally that's changing regarding the second quarter and SG&A costs?

Yes, I think again within corporate would be -- it's really a timing adjustment more than anything year-over-year and it relates to incentive costs in particular some of our sales incentive costs that are up. We're doing substantially better if you look at our year-to-date sales performance, this year versus last year, and that we record those, many of those incentive costs in our other segments. And those are better -- we've better performance being at 5% and I think last year we were over 1% or something like that about 1.7% sales year-to-date. So it's a primary driver within corporate is incentive, if you look more broadly at SG&A across the enterprise, then warranty would also come into play and we talked about warranty within residential. I think your question is in corporate. When we look throughout the year, we'll continue to look just ways to leverage SG&A as we grow. We'll continue to invest in growth in new products from an R&D perspective, but we recognize that one of our goals is to look at ways of leveraging SG&A as well.

Okay and then, in regard to the revenue guidance, the 3% to -- the 4.5%, which is up from 3% to 4%, is that largely organic growth, and if so, where it exactly that coming from? I know you're going to have a pretty easy comp I believe at the residential segment on the back half.

Yes, I'll just answer the latter portion, but just to the 3% to 4% included Perrot, the current acquisition and it's not a material number. So, the change from 3% to 4% to 4.5% is not driven by Perrot. Perrot would have been in the original base line, so it's not the driver in the change and if you want to talk to maybe the drivers of the change.

So, ultimately it's organic growth as where it’s coming from and particularly you included Perrot at this point. And the answer to where it's coming from, it's really broad based. but it's quite balanced across that we see opportunities to grow in all of our businesses for the second half of the year. So, we obviously got some very strong areas with new products like landscape contractor and some really exciting products in the residential as well. But the golf business and sports fielding grounds business also has a lot of opportunity, so it's pretty balanced.

Okay. So, broad based. Is there anything openly eye opening to you regarding the market itself that sort of driving that. I mean it feels like maybe the economy wants to start to accelerate not sure for necessarily seeing it, but is there guarantee you that sort of is driving the overall business demand or is do you kind a towards mostly your R&D in the product innovations that you in particular coming out with?

It's really all of those things. So, we, where we have new products, which is really a key focus for us, on the innovation side, we believe that give us adequately competitive advantage that we would grow in spite the macro conditions. But there is no prefect kind of macro indicator, but we talk about consumer confidence is one, that tie, tend to tied new housing starts, but I know the monthly numbers for those have fluctuated a little bit for the last couple of months. But in general, they're at fairly historically higher than typical levels. So, those are the general economic outlook and the sense is that we believe helping in general.

Okay. And then just last one from me. I was wondering if you could comment on the competition that you're seeing relative to the last 5 to 10 years. How is that sort of playing out in both of the businesses?

Yes, competition it's really hard to talk about in general because it's very specific to the markets, but you can imagine in some of the residential spaces especially entry level products those tend to be very competitive. And some of our markets where there are a lot of competitors, which also tend to be in the residential, some extend landscape contractors there continues to be a competition. The professional businesses are probably being more stable from a competitive standpoint. They tend to be the same competitors that have been there in the key markets. So, I would say no major competitive shifts at this point.

Our next question comes from David MacGregor with Longbow Research.

Yes, thanks for taking the follow-up. I wanted to just go back to golf irrigation for a moment and people we’ve spoken with in the industry have indicated the installation labor is very tight right now, and this is having inflationary impact on golf irrigation projects. And I guess, if this were true, I could see where clubs might elect to accelerate their project timing plans to avoid higher costs next year or the following year. Are you seeing any evidence of this?

I have not -- I don’t have knowledge specifically of that being a driver that people accelerating projects to beat higher labor costs. But one of the things that we do talk about with some of our products like the INFINITY sprinkler is there are significant labor savings opportunities from an ongoing maintenance standpoint. I know that’s one of the things, that’s attractive and it’s a completely top serviceable head. So, instead of sending a crew out that has to dig up a section to remove the head and put it all back down again, this is a Phillips screwdriver to take the cap off and repair it. So, I know that those types of features have been especially attractive to golf courses, and I would assume that’s because labor has become more of a challenge.

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

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