The Toro Company (TTC) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Toro Company Second Quarter Earnings Conference Call. My name is Sabrina and I'll 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 of the earnings release, including a reconciliation of non-GAAP financial measures, can be found in the Investor Information section of our corporate Web site, thetorocompany.com. On our call today are Rick Olson, Chairman and Chief Executive Officer and Renee Peterson, Vice President, Treasurer and Chief Financial Officer. We begin with our customary forward-looking statement policy, as well as information regarding non-GAAP measures. During this call, we will make forward-looking statements regarding our business and future financial and operating results. You all are aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our earnings release as well as our SEC filings detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. Our earnings release in this related call contains certain non-GAAP measures consisting of adjusted net earnings, diluted net earnings per share and effective tax rate as financial measures of our operating performance. The Company believes these measures may be useful in performing meaningful comparisons of past and present operating results to understand the performance of its ongoing operations, and how management views the business. Reconciliations of adjusted non-GAAP measures to reported GAAP financial measures are included in the schedule contained in our earnings release. Such non-GAAP measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with the GAAP measures presented in our earnings release in this related call. With that, I will now turn the call over to Rick.

Thank you, Heather, and good morning to all of our listeners. We are pleased to have delivered record sales and earnings for the second quarter despite challenges posed by spring’s late arrival. Net sales posted a modest increase to $875.3 million, while reported net earnings per share grew to $1.21 and adjusted earnings per share were $1.20. Professional products, most notably in our landscape contractor Golf and Grounds portfolio, drove our growth for the quarter as professional segment sales increased 8.1%. Our residential segment sales declined by 17.8% due primarily to an unusually cold April in key markets. Following a brief commentary on the states of our businesses to-date, Renee will discuss our financial and operating results in more detail. Our landscape contractor business led our solid professional segment performance based on demand for new zero-turn riders, including our diesel powered offerings featuring new 96 inch decks. Professionals value the superior productivity these units provide. We are also pleased by the contribution of the additional stand-on products from our recent L.T. Rich acquisition made in the quarter. The Golf and Grounds businesses contributed to the positive professional segment results due to increased channel and retail demand. Greens and Fairway products continue to drive Golf sales growth. Solid retail demand for vehicles and large rotary and reel mowers fueled continued momentum of our grounds offering. In addition, we won significant grounds equipment bids with two major cities during the quarter. Next, our specialty construction businesses, powering ahead as the strong economy and healthy construction activity have helped spark positive retail so far this year. The momentum in our core compact utility loaded category led by the TX 1000 continued in the quarter. We have also begun to ship our new Mortar Mixer. Solid growth in Ag irrigation and our new Perrot product offerings drove results within our irrigation businesses. Our Aqua-Traxx FlowControl Ag tape is capturing widespread acceptance and steady growth. In Golf, we continued to perform well in competitive bid wins for both replacements and new course projects. The residential and commercial contractor business performed well in certain regions, but slowed in others due to unfavorable weather condition. In lighting, we were pleased to announce that our SMRT Logic technology that allows users to control their irrigation, lighting and other landscape features through their mobile devices is now compatible with Google Assistance and Amazon Alexa. Moving to our residential business. The late spring delayed sales of our spring products during the quarter. However, the extended winter weather and snowfall did help clear dealer snow inventory. The warming trend that started at the end of April has driven positive retail momentum so far this month. We also were pleased to receive favorable ratings across our walk power mower and zero turn riding product lines in a leading consumer testing publication. The business results experienced domestically were reflected in many international markets as well. Our international sales faced a range of weather challenges. Fortunately, we continued to win a number of golf projects as well as ag, and other irrigation bids. Our grounds and landscape contractor businesses also achieved solid regionalized gains. Our ProLine H800 Direct Collect rotary mower, the TX 1000 compact utility loader and our professional zero turn riders with MyRIDE are a few of our innovative products that continued to gain ground across our international markets. I will now turn the call over to Renee for a more detailed discussion of our financial results.

Thank you, Rick, and good morning, everyone. As we reported earlier this morning, net sales for the quarter were a record $875.3 million compared to $872.8 million for the same period a year ago. We also delivered record net earnings of $131.3 million or $1.21 per share compared to $1.08 per share in the second quarter of fiscal 2017. Adjusted net earnings for the quarter were $130.3 million or $1.20 per share compared to adjusted net earnings of $109.4 million or $0.98 per share in the comparable 2017 period, an increase of 22.4%. Year-to-date, net sales were up 2.5% to $1,423.5 million compared to net sales of $1,388.6 million a year ago. We achieved net earnings of $153.9 million or $1.41 per share for the first six months versus net earnings of $165.5 million or $1.48 in 2017. The decline in earnings for the first six months is due to the one-time impact of U.S. tax reform that we addressed last call. For the first six months, adjusted net earnings were $182.4 million or $1.68 per share compared to adjusted net earnings of $149.5 million or $1.34 per share in the comparable 2017 period, an increase of 25.4%. Please see our earnings release for a reconciliation of non-GAAP adjusted earnings and adjusted diluted earnings per share to the comparable GAAP measures. Professional segment sales were up 8.1% for the quarter to $660.4 million. Year-to-date professional sales were up 8.3% to $1,064 million. Professional segment earnings for the quarter totaled $165 million, up 10.7% from $149 million in the same period last year. The growth was due to increases across several businesses, but particularly from our landscape contractor Golf and Grounds equipment. For the first six months, professional segment earnings were $240.9 million, a 10.9% increase compared to the same period last year. Sales of our Golf, Ground and landscape contractor products were largely responsible for the growth. Second quarter residential segment sales decreased 17.8% to $212 million. The extent of the negative year-over-year comparison reflects the compounding effect of reduced demand caused by this year’s late spring versus the heightened demand generated last year by favorable early weather conditions. Year-to-date residential sales were down 11% to $354.6 million. Residential segment earnings in the quarter totaled $26.3 million, a decrease of 24.9% from $35 million last year. Year-to-date earnings declined 18.6% to $42 million. Below average snowfall early in the season and of course start to spring negatively impacted sales of our residential turf and snow thrower products year-to-date. Now to our key operating results. Gross margin grew by 80 basis points to 37% for the quarter and by 40 basis points to 37.1% year-to-date. Segment mix, favorable foreign currency and price realizations, partially offset by the inflationary environment, all of which impacted the results for the year. SG&A expense as a percent of sales decreased by 40 basis points for the quarter to 17.5% and by 50 basis points to 20.4% for the first six months. The improvement for both periods was partially due to prudent expense management and lower incentive expense, offset in part by increased investment in key strategic initiatives, including new product development. Operating earnings, as a percent of sales for the quarter, were 19.5%, an increase of 120 basis points and 16.7% year-to-date, an increase of 90 basis points. Interest expense increased slightly by 0.9% for the quarter, but decreased by 0.2% year-to-date. The reported tax rate for the second quarter was 22.4% compared to 23.9% last year. The adjusted tax rate for the second quarter was 23% compared to 30.9% last year. For the first six months, the recorded tax rate was 34.7%, up from 24.1% in the same period last year. The adjusted tax rate was 22.6%, down from 31.4% last year. As a reminder, the adjusted tax rate excludes the benefit of the excess tax deductions for share based compensation, as well as the one-time adjustments related to tax reform. The decrease in the reported tax rate for the second quarter was driven by the lower federal tax rate enacted with U.S. tax reform, partially offset by the lower tax benefit related to share based compensation. The increase in the reported tax rate for the first six months was driven by the one-time charges in the first quarter associated with U.S. tax reform, including the provisional re-measurement of deferred tax assets and liabilities, and the provisional calculation of the deemed repatriation tax, as well as the lower tax benefit related to share based compensation. The onetime charges and the lower tax benefit from share based compensation were partially offset by the benefit resulting from the reduction in federal corporate tax rate. The reduction in adjusted tax rates for the quarter and year-to-date were driven by the lower federal tax rated enacted with U.S. tax reform. The Company continues to estimate a full fiscal year adjusted 2018 effective income tax rate of about 23%. Turning to the balance sheet. Accounts receivable for the quarter totaled $329.6 million, an increase of 0.3% over the same period a year ago. Net inventories for the quarter increased 15.6% to $394.8 million. This increase was mainly due to higher levels of turf equivalent, resulting from the delayed start to spring. At the end of the quarter, the Company’s 12 month average net working capital, as a percent of sales, was 14% compared to 14.4% a year ago. During the second quarter, we repurchased approximately 1.1 million shares of stock under our board authorization, and there are about 3.1 million shares outstanding under our authorization. I will now return the call to Rick.

Thank you, Renee. We are pleased to have delivered record results consistent with our commitments, even though net sales were tempered by unfavorable weather in April. Now that spring is underway, we are excited to take on the second half of the year. Despite expected commodity headwinds, we believe we are well positioned with strong portfolios of innovative products across our businesses to capitalize on current strong demand and new growth opportunities. First, our landscape contractor businesses should cease momentum behind our zero turn riding mowers continue and spread to other products in the lineup. Contractors are coupling to keep up in light of the current strong growing conditions. Our channel partners are poised with products and services to help keep contractors on the job and generating revenue. This is one reason we are so enthusiastic about our recently acquired line of L.T. Rich stand-on spreaders, sprayers, aerators, and snow and ice management equipment. The line complements and extends our professional stand on product portfolio and is designed to help contractors drive greater productivity and profitability. Market forecast for continued growth are good news for our rental and specialty construction business. We anticipate the positive retail momentum we saw a year-to-date to remain solid through the second half of fiscal 2018. Our state-of-the-art products like the TX 1000, our new Tracked Mud Buggy and mortar mixers are viewed by our rental and construction contractors as important tools to help them to increase productivity and optimize performance. Similarly, professional snow and ice management contractors know they can depend on innovative spreaders and mower to prepare for the snow season later this year. Our preseason orders for next winter were strong based on interest and solid demand for the new products we introduced at the 2018 National Truck Equipment Association show in March. Our new back drag plow and new drop spreader, both received great response from our customers. The outlook for our Golf and Grounds businesses is also optimistic. Current spring conditions are bringing players to golf courses and revenues to the clubs. Solid municipal and park bids are presenting prime opportunities for ground sales. The vehicle market remains healthy and our new Outcross and pull-behind rotary will hit the market later this year. Also, we are honored that Toro turf maintenance equipment and irrigation products are trusted by a majority of the top courses around the world to create exceptional plain conditions when preparing to host a major permit and for their members during the rest of the year. The list of courses counting on Toro as they prepared to host some of the most renowned events in golf during the third quarter include Wentworth in England, Shoal Creek in Alabama, Shinnecock Hills in New York, The Broadmoor in Colorado, the Old Course at St Andrews in Scotland and culminating with Carnoustie Golf Links in Scotland as they host the 147th open championship. We are honored to serve such premier golf venues. Our irrigation businesses anticipate solid opportunities ahead. As more favorable weather conditions increase days available for play, golf course revenues will continue to grow. Sales of our two-wire and smart satellite field control systems, our infinity sprinklers and self kits, are all growing nicely. We and our customers are also benefitting from our new relationship with Green Sight Agronomics. Green Sight is the leading provider of drone based remote turf craft sensing and analytics. This intelligence helps the detect turf issues before it become visible, enables clients to adjust treatment accordingly. Customers report realizing savings through more efficient utilization of water and chemicals. Next, in Ag irrigation, we are starting the second half of the year with a good bank of orders. Demand for our innovative flow control drift tape remains strong as does the overall prospects for Ag irrigation across the Americas. We are pleased to report that our Perrot professional irrigation products integration strategy is on track as planned. We are currently launching the product, turf products, in the U.S. through our value to our distributor network. Like several of our professional offerings, the more favorable weather has for spurred retail of residential spring products this month, which should continue as long as temperatures and rainfall cooperates. Sales of our industry leading line of top graded walk power mowers and zero turn riders should perform well. We are also preparing exciting new snow thrower introductions for later this year. Finally, our international businesses are well positioned to capitalize on both existing and emerging opportunities. Favorable economic conditions, numerous golf irrigation project wins, solid sales of our zero turn riders with MyRIDE, the TX-1000, the new ProLine H800 and continued demand for our additional golf ground and rental equipment offer a positive outlook for the year. In conclusion, one thing remains constant. It's our teams and channel partners resolve to address whatever opportunities or challenges arise. The goal of our new employee initiative, Vision 2020, drive even more focus on customers and support our key strategic priorities of accelerating profitable growth, driving productivity and operational excellence and empowering our people. These priorities are interconnected; growth creates opportunities to be more competitive through scale and leveraging and fixed costs; productivity helps us compete in a marketplace by funding customer value and innovation, offsetting costs, and making more efficient use of resources; finally, people make everything possible. The tagline for Vision 2020 reads, customer needs, my commitment, our future. These themes highlight our cultural belief that customers come first, that each of us is personally responsible for serving our customers and that when we do that, we secure our Company's future and advance the interests of all of our stakeholders. Our employees and channel partners are critical to our success. I want to thank them for their steadfast commitment and hard work. The Company is on track to deliver another record year. We are driven to fully capitalize on momentum generated by the rebound in residential retail in May and the ongoing strength of professional sales. Additionally, the depletion of snow thrower field inventories by late March and April snow falls has created promising conditions for preseason orders. In light of the delayed spring and expected commodity headwinds, the Company now expects revenue growth for fiscal 2018 to be about 4% with adjusted net earnings of about $2.66 to $2.71 per share. For the third quarter, the Company expects adjusted net earnings per share of about $0.64 to $0.67. These adjusted estimates exclude the one-time charges associated with U.S. tax reform and the benefits of the excess tax deduction for share based compensation. This concludes our formal remarks. And we will take questions at this time.

[Operator Instructions] Your first question comes from line of Tom Mahoney with Cleveland Research. Your line is now open.

Can you compare the 8% growth year-to-date in the Pro segment? Could you compare that to the market trend? And I guess where -- if the gap has widened, where are the drivers of that year-to-date relative to 2017?

Our professional segment includes a number of segments, so it's really the cancellation of a lot of different individual markets, but we have some markets that are growing very helpfully, so the construction market, the rental markets and particularly, the landscape contractor Z market would be key drivers of that. And then I would just say we talked about golf as not necessarily being a driver in terms of new golf, but the replacement market for both equipments. And irrigation continues to be very strong, and the confidence in the economy continues to drive demand for both irrigation systems and equipment. So those are the drivers and there are some faster growing parts of those businesses and the market themselves, and some that are not as fast but the combination is healthy in terms of growth.

Is there anything we should expect as you look into the back half of the year on sustaining the outperformance of those individual drivers?

I think, for the back half of the year, we would be back to our -- back on track for the professional segment. And we would expect the residential segment, as we have talked about in the prepared remarks, in May, to pickup at this point. So I think the professional segment probably would more normalize and the residential segment would be growing, making up for the late spring.

And then just a question on the inventory increase, I just wanted to make sure I heard correctly, probably more Pro driven than residential driven, and then just to clarify that. And then is that different than you’ve seen in years past when there've been weather disconnect?

So is your question related to our inventory or channel inventory…

Your inventory increase…

So our inventory is up, and it isn't significantly different than what we've seen in the past related to late spring. What we would expect to see is that that would normalize as we through Q3 as we get into the season. We just haven't seen the same velocity of reorders that we would have normally seen. When we compare the data to what we would see in a late spring situation, it's not at all unusual. And we would expect it to be similar to what we’ve seen in the past, and adjust as we go through the year as retail momentum continues.

Thank you. And the next question comes from the line of Mike Shlisky with Seaport Global. Your line is now open.

Just a quick one to start, those grounds bids that you won with those two big cities that you've mentioned. I was wondering if those orders shipped during this past quarter or are those shipments are still yet to come?

It's really a combination. So some of the products have shipped and some of the products have yet to ship, and they tend to be longer term contracts. So there will probably be a -- it's not necessarily one big package that gets delivered all in one delivery, but it would be spread out over a period of time, usually it rolls into across several periods, for municipality especially.

And then turning to residential business and the weather impacts. Is there any way you could quantify for us what may have been lost in the quarter due to weather? And any way to quantify, given as a percent of what you lost, what you think you might be able to get back in the second quarter? Just give us a sense as to what net-net just might have the pass through by here just as to the weather?

Mike, without being real specific there, we did look at history. And history suggests that where we have a pattern like this, you can -- I mean 2013, the weather patterns were somewhat similar. And we do see that we get back a lot of it if it’s with a shift in the timing of spring, but not necessarily all of it. So we're going to work hard to get back all of it. But history suggests that if you lose 30 days of retail sales period it’s tough to get it all back. But I will have to say May is off to a very, very good start and we are closing that gap rapidly.

And that's more specific to the residential segment, which was your question, in particular, because that segment is more responsive to the weather condition as the consumer -- people tend to buy, and more influenced by the weather that is occurring at that point in time.

Or to be more specific for April, shoveling your sidewalk here, I am likely to buy a lawnmower.

And then just squeezing one other one here about L.T. Rich. Can you give us a little bit more detail as to what that -- I know you have -- I'm curious as to what that product line builds in that you didn’t already have before, is it all of it? Or is it -- or is there anything that Rich did that Toro already did? And I am curious is there anything you need to do as far as synergies or integration to be up and running by the time, may be next winter rolls around? Or is it going to be operating on some standalone basis like you might have done with the BOSS or what have you?

Mike, we are very excited about L.T. Rich, and it is a perfect complement to our professional and especially landscape contractor line. The core product is our application products that landscape contractor would use to treat commercial and residential properties. They’re stand down products that would have a tank and bulk dry material application system on them, that’s the core there. The line also included a product called the snow raider, which is designed for snow landscape contractors to very efficiently clear sidewalk, which would be complementary to the larger plow equipment that we’ve got. So a contractor may have the contractor clear the driveway or the roads, or the property and they would also have the -- may have the contract to clear the sidewalk as well. And this is designed for high productivity clearing of snow, which is also a stand-on product as well. So they are a perfect fit for our line-up. We had an individual model of one of the spreader sprayers, but this really completes the line up with the industry leading products in that category. They’ve had a very close relationship with customers, so the products -- when you talk to a customer of L.T. Rich, they think that they designed the product themselves. They’ve very dialed-in to what the contractors are looking for. With regard to synergies, we have really a perfect set up there. It’s a very small plant and by -- the owner understood that that was probably not in the card, they had outgrown the facility that they had. And the product is a perfect fit for our existing plants. So we’re currently operating the plant in Indiana, but it’s a small plant and we have complete capabilities to the take the product line into our existing facilities and leverage the capabilities there, which will help to add hours to absorb fixed overhead for the rest of our products as well. So it’s actually a perfect fit.

Yes, and we’ll most likely be moving that, Mike, maybe year or next year after we get through the busy season. So we’ll be -- we're planning that integration and we will be moving that mid-year. But as Rick said, we’ll be able to take advantage of leveraging our fixed investment in the current facility.

The top priority, Mike, is to make sure that we don’t miss sales. We’re making sure that when we do complete the transition that we’ve got a bank of products to make sure we can bridge that gap and the orders at this point are exceeding our expectations.

So just a follow up on that. As far as the channel goes, the L.T. Rich channel as it exists today is already pretty [indiscernible] putting into -- meaning Toro channel as well?

There is a preexisting channel through landscape contractor supply company is the primary channel, but we’re looking at the best ways to optimize and get the product to our customers whatever that would be through our existing channels and continuation with the existing channel that L.T. Rich had.

Thank you. And the next question comes from Jon Fisher with Dougherty and Company. Your line is now open.

First topic margins, thank you for the breakdown of the gross margin drivers. Is it safe to assume the way you ordered them in your prepared comments, mix, FX, price, that was the relative contribution impact in the outperformance in gross margins?

Yes, that is correct.

And then on the SG&A front, I think I heard in your prepared comments about reduced incentive compensation. I mean, since you mentioned it, I guess it mattered. And I guess I’m surprised at this point in the year, there would be that type of impact on SG&A. Is that something that would repeat throughout the year? Or was it just specific to Q2 performance?

Yes, we always look at our accruals, Jon, at the end of every quarter and would make those adjustments based on our total year outlook. So as we were looking at our guidance, we would make that. It is -- when we’re adjusting, we’re really -- it's important to keep in mind, it’s not really -- we're not accruing to year-over-year performance, we’re accruing to our performance versus our plan. And we just make those adjustments on a routine basis. So we’ll adjust that as we go forward and as our estimate changes as well. So it’s something that we routinely do. So we called it out, because it was a driver to SG&A for the quarter.

And then just last on margins, I think the commentary coming into this fiscal year was slight improvement, gross margins year-over-year slight improvement, operating margins or SG&A as a percent of revenues year-over-year, six months in with the strong margin performance of this quarter. The way I’m interpreting the math, we’re ahead of pace for slight improvement. Are you still sticking to slight year-over-year improvement in margins? Or should we be willing to assume that margin performance is going to be better this year than just slight improvement?

For gross margin, what we are anticipating is a little bit different mix of products for the second half of the year. As Rick had commented, we’re expecting to continue to see the rebound in residential products given the late spring. So we would expect the residential segment to be stronger in the second half, which, from a margin perspective, is not as favorable as the mix that we had in the first half. We do expect that, just based on input cost timing and how that translates to our P&Ls, we would see more of an impact to commodities in the second half of the year, and FX probably a little less favorable in the second half of the year. We will see -- we have seen some realized pricing and we will continue to see realized pricing. But gross margin, we’re expecting from a total year standpoint, will probably be similar year-over-year, in part, because that second half gross margin will not likely be as strong as what we’re seeing in the first half, in part, because of the residential mix coming into play. SG&A, we do expect to see leverage on SG&A remaining for the year. And overall, as Rick mentioned in his comments, we do feel we're on track for another record year. So overall, we do think that we'll see overall improvement in our operating profit for the year.

I would just add a comment that when we saw the spring playing out and we were somewhat positioned coming out of the winter month, we're very disciplined about our SG&A. The one thing we did not do was dial back our investments and our key initiatives. So R&D, as a percent of sales, picked up slightly and we make sure that we preserve that.

That's good to hear, you're still investing as you had planned coming into the year. Flowing through just to the adjusted earnings outlook for the rest of the year, there is a slight tick down versus what the guidance was last quarter. Can you talk about, is it just margins or are there a couple of other inputs into that reduced earning guidance for the rest of the year? I know it's slight but just wondering what management's thoughts were inputs were into taking that guidance down slightly.

It really is exactly what you're saying. It’s a little bit lower outlook from a sales standpoint and primarily related to the comments that Rick made earlier with the late spring, in particular, in residential hard to get all of that back. So we tried, as we look at the outlook, incorporate the fact that based on our past experience with the late spring, we get the majority but not all of that revenue back. And then a little bit lower margin based on commodity pressure that we're seeing again, taking price actions to offset that. But just based on the timing of some of the price actions, you don’t see all of that realized immediately.

We're seeing generally more inflationary environment. So there are specific factors that we've talked about, freight is one that we see increasing. There is a lot of discussion with regard to the tariffs and some significant variability and exactly where that's flowing given even news over this last weekend. But the general atmosphere is one of increased commodity cost. We work, first of all, hard to offset that with productivity just with all of our plant directors, plant leaders, last week for our quarterly lean conference, and we're making tremendous progress on that front, met with our sourcing team earlier this week and their initiatives around cost reduction, so that's our first step. But it is likely that we will be taking whole good pricing actions later this year. And we have increased pricing on service parts, which are more transactional type of business already this year. So combination of those two we're trying to offset the effects.

So all of that went into our guidance. But I mean as we look at where we're at in May…

The good news is we're off to a really terrific start in May from a retail standpoint for the residential business. And golf courses are having more rounds this month in May than they did last year at this time, if you think of a daily fee course. Last year, as we talked about a cold and wet May that affected the residential business last year, but it also affected ground play that golf courses. So both of those have turned positive, we haven't closed the gap yet or on a good path.

So we're trying to use the best information we have, Jon, when we’re looking at the guidance. But there are some things that could go either way at this point in the season.

Sure, I appreciate that. Like I said, it was the slight reduction. And just last question and this is follow-on to the first question on the professional segment. Rich, if we could just look out the next two to three years on the professional segment, just given how strong that segment has been performing, call it the last 18 months, the last two years. And given everything going on in the macro and how late in the cycle we potentially are. How do you see the sustainable long-term growth rate for the professional segment? Is it 6% to 8% type, which is roughly two times global GDP growth or should we expect, when we look out the next two to three years, to see a deceleration into something more along the lines of a 4% to 6% long-term sustainable growth rate for the professional segment, which would be more in line to slight outperformance with global GDP growth. And I'll sign off. Thank you.

I would say the biggest thing there is that there is a range of growth rates within the professional segment, but the professional segment is where it would be on the upper side of our growth rate. If we say the company is a mid single digit type of growth company, the professional segment would be on the upper side. So landscape contractors Z market is not coming to an end anytime soon. The residential -- the golf business, you've got an element of growth, especially internationally with new developments. But it's largely a replacement market at this point, so you have to look at where you are in the replacement cycle. And we think that that cycle still has a lot of legs, and ultimately becomes renewing overtime anyway. So our BOSS business has a lot of potential for growth, our Ag irrigation business is certainly on the upper end of that scale and has a lot of opportunity left if you look at penetration of precision irrigation versus other methods that are used today. Rental and specialty business, the construction business, those are all on the faster growing side of our growth rate.

Thank you. The next question comes from line of Sam Darkatsh with Raymond James. Your line is now open.

This is Josh filling in for Sam, and congratulation for the quarter. Couple of clean-up questions here. Could you give us a sense of what the impact of L.T. Rich is on the annual guidance?

Yes, the L.T. Rich acquisition was not material to us. So we didn't specifically disclose the dollar amount. But as Rick said, we are really excited about it, because it does help to round out the product portfolio. When we look at it for the impact on the overall guidance, it is incorporated into our guidance. It's basically breakeven for this year. It will be accretive next year. In particular, we talked about we're moving it to a Toro facility and that will help us from a cost standpoint to be able to leverage that cost. We would expect to see more of the purchase accounting impacts in Q3 as we work through that inventory and the inventory step up impact in the quarter.

The other thing I would just comment on is you can look at the addition of specific product line related to L.T. Rich. But much like our Perrot acquisition last year, it increases our critical mass in key markets. So we become a bigger deal in the case of Perrot and the Sports Fields and Grounds business. So major sports venues, they have very high market share in that area for irrigation. That complements and contributes to the equipment that we sell there, the complementary irrigation equipment. So you can look at the individual lines, which will be accretive to our business but it also adds to our critical mass and was really key growth categories as well.

And then you mentioned some headwinds from freight inflation. Could you talk a little more about what types of exposures you have there, and what you might do in response? Is it more on availability or cost for both?

Freight is something that I think any people that any parties that ship product freight increases are something that we’re all experiencing right now. The effect for us was a little bit muted in the first half, because we had some freight inefficiencies last year. So the year-over-year impact was not as great for us. We had new landscape contractor deals that were going out to the market and we chose to ship those out to dealers in less than truckload quantities, et cetera. So year-over-year, we see the rates going up but the actual amount didn't affect as much in the first half. In terms of what we're doing about it, it’s probably contains and what I just said. We're working to be very efficient about how we ship, making sure that we're shipping truckload quantities and using lanes that are most efficient. But it is a challenge that we're all facing right now.

Thank you. And the next question comes from the line of Joe Mondillo with Sidoti and Company. Your line is now open.

I wanted to ask, you mentioned it a couple times, one of the driving factors to the professional segment growth that you saw within the quarter was within golf. Just wondering, can we take that as that golf is accelerating in growth above and beyond that low single-digit growth rates at this point?

I think we wouldn't change what we would project there in terms of low single digits. But we've done especially well the last several years, and this year is off to a very good start. It's driven for us, there is this replacement cycle that I talked about, but it's also driven by innovations that we introduced to the market. So just to give an example, later this year when it's introduced, our new product called the Outcross, is a tractor but it's a tractor that's designed specifically for turf applications. And it’s a smart product that addresses the top challenge of golf courses right now, which is labor availability and availability of skilled labor. So it vastly simplifies some of the most complex tasks. So the point there's a replacement cycle that we're in a good point in that cycle. And we can accelerate the growth through the introduction of innovations that our customers value. So we try to beat those numbers in that way. But I would still stick with that number if you’re looking forward.

And then just on the landscaping side of the business. The last several years, we’ve seen that market grow very exceptionally, I think, high single-digits most likely maybe even higher than that. Just wondering where you -- do you think that’s sustainable at this point? Could you talk about average age of equipment out there? And just where are you -- if you think that’s sustainable just given the rates that we’ve seen consistently over the last several years?

Yes there’re, like my comments about golf, there are a lot of factors there. So the market does continue to grow, but we also continue to take share in that market as well. And by introducing and entering categories that we’re not in that adds to our overall math. And this year, as a good example, with our new diesel platform on both the Toro and the Exmark side, has substantially more productivity. And like the clever thing about the product is that it has 96 inch deck versus typically the largest would be 72. But the wings flip up, so that it fits on a traditional landscape contractor’s trailer. So they don’t have to buy new trailers or other infrastructure to be able to use the product, but they can realize minimally 30% productivity, and the reports that we’re getting are much higher than that. So that’s really where we focus is providing products and innovations that customers value, and therefore taking a bigger piece of the growing market.

Is there any way that you can track average age of equipment out there, given all the competition that you’re seeing, everyone introducing new innovative products and the market has been growing so strong. I would imagine, if I had to guess, the average age of equipment is trending downward over the last several years. Just wondering if that’s going to be a factor and may be slower growth at some point in time?

We have that information with our businesses I don’t have access to that information right in front of me. But I don’t necessarily have any reason to believe that age of equipment has changed, or that that would be a significant change in terms of the driver. In fact, some of the larger landscape contractor companies are in routine changeover mode. So every -- it can be every two to three or four years depending on the plan. But they’re rolling over the equipment and that equipment then goes to the secondary market. So we don’t see necessarily any changes in that -- in the age of equipment that’s driving something different. And we do have the specific information, but I don’t have access to it.

And then on the same topic. This year, I am just wondering if you’ve heard, whether anecdotally your actual data that the lower tax rate, accelerated depreciation benefits, is pulling forward or at least driving some of the positive performance that you’ve seen.

Joe, we have not heard that as a major driver to advance purchases. It’s because most people -- well we’re hearing most people are buying the product, because they need the product more from a replacement perspective. So we’re not hearing that as being a driver. We are sensitive to that and trying to determine if that is. But at this point in time, that hasn’t been something that we’re hearing from our customers.

And then just last question for me. I’m just wondering if you could remind me when the typical BOSS preseason buy is?

They are right now going through their ordering process. And some orders have actually already shipped from a preseason perspective and then Q3 is the other part of their preseason…

I think it’s probably in July timeframe.

Yes.

Thank you. The next question comes from the line David Macgregor with Longbow Research. Your line is now open.

Can we just start by talking about the 4% sales guidance for the year? How much of that is FX?

Year-to-date, FX has been right about a point. We do anticipate, as we go through the second half of the year, I mean, assuming FX rates remain the same, which I don’t know what they will do, that will moderate. So we don’t expect to see the same benefit, because of just where FX rates were last year. So year-to-date, it will be less than that for the year.

For the full year. So you’re about 100 bps to the revenue number on year-to-date and you’re expecting that to moderate as the year goes on. Renee, is there any way you can quantify that at the EBITDA line?

Well, what our experience has been is roughly about half of FX impacts the EBITDA line.

And then secondly just a couple model questions here, just on the raw material question and really with regard to price versus cost. Does that sequentially become a little more gross margin pressure for you here in the second quarter? And you talked a little bit about your margin expectations for the balance of the year, and you expect -- for us to maybe become a little more of a headwind in the second half. But you also expect some pricing. You also -- it's a complicate calculus, but you also expect some productivity. It sounds like you need the productivity to supplement the price to fully offset the cost inflation. So I guess the question is how do you pick up incremental productivity in the second half, is this a major volume lift that you’re expecting? Or have you got any discrete initiatives underway that are going to drive a big productivity step up? Help me to understand how that models out.

Maybe starting with the commodity pressures and input timing. We do expect that that will be more of an impact in the second half of the year, and part of it is our model as we’re not buying a lot of commodities, we’re more buying parts. And so when commodities change, usually it takes some time for that to translate to us. And then there is also the impact of when you buy versus when it actually hits your P&L goes through inventory. So I mean that is factored into our guidance, as well as then the segment mix which we talked about earlier in the call with residential being higher, that would also put pressure in gross margin. We do expect -- we've taken some price, we do expect to take more price. But when we have a pricing action, because of the fact that we have some orders already taken, there is some agreements in place, not all of that price immediately translates into price within that period. So we will get that price in the future, but not all of it effective in the exact period that we would announce that price. So that also is -- there is somewhat of lag that occurs there. And as far as productivity, we're always focused on productivity. So at any point in time we have a number of productivity initiatives underway, and some of those will generate favorable impact for us in the second half based on activities that are underway at any point in time. We've also continued to invest in several key initiatives around lean and integrated business planning that are ongoing projects for us that are not something that we're just starting but we're continuing to see results.

And the expectations for the productivity improvements are built into our guidance.

Yes.

Are you at all concerned about price elasticity as you raise prices on the residential side?

Well, we have always said, and that's a great question, because we will get more of our price from the Pro side versus the residential side. In the residential side, it is more of -- there are certain price points. So there what we need to do is be able to get the product at the right price point and also continue to focus on innovation, because again if we can introduce a product that is different that offers a features that is different, meet the customer needs, we have an ability to get a better margin in that situation. But there is limited ability to just simply raise price in that environment. And we have to focus more productivity in that particular area. And so that group does focus more of their efforts on cost reduction, improving quality, reducing warranty as well.

And the integration comments are true in both areas it's harder to get price on the residential side from a competitive standpoint. But where we do have things like the myRIDE that we talked about, or the PowerReverse or our long time personal pace, it does distinguish from other competitors. And we work on that both on the professional and the residential side.

And then, Rick, can you just talk about how share growth might have contributed to the 8% professional segment growth?

Share growth, it is a factor in all -- I'm thinking mentally through the category. I would say it is a factor in all the categories but it tends to be single point for the movement at one time, it's not a dramatic shift. It is the factor in all of our market categories.

I guess, as we thought our dealer checks, there has been a lot of talk about one of your competitors is having trouble integrating a business. And that there is maybe a little bit of a share gain opportunity that's been realized by Toro as a consequence. And so I guess I am just trying to get my arms around -- I guess the magnitude of that opportunity right now, how it's impacting your business and just how much longer you think you’d be able to benefit from that?

I am not sure specifically which they are talking about. But in terms of integrating, we’ve been, for example in the golf market, we've been on a steady improvement. I am sure it’s not -- in the tune a point or two per year for some time.

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