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Toro Co  (NYSE:TTC)
Q1 2019 Earnings Conference Call
Feb. 21, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and welcome to The Toro Company's First Quarter Earnings Conference Call. My name is James 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 toward 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.

Heather M. Hille -- Director of Investor Relations and External Communications

Thank you and good morning. Our earnings release was issued this morning by Business Wire and a copy of the earnings release including a reconciliation of non-GAAP financial measures can be found in the investor information section of our corporate website thetorocompany.com. On our call today are Rick Olson, Chairman and Chief Executive Officer; and Renee Peterson, Vice President Treasurer and Chief Financial Officer. We begin with our customary forward-looking statement policy as well as information regarding non-GAAP measures.

During this call, we will make forward-looking statements regarding our business and future financial and operating results. You all are aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our earnings release as well as our SEC filings detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements.

Our earnings release and this related call contain certain non-GAAP measures consisting of adjusted net earnings, diluted net earnings per share and effective tax rate as financial measures of our operating performance. The Company believes these measures may be useful in performing meaningful comparisons of past and present operating results to understand the performance of its ongoing operations and how management views the business. Reconciliations of adjusted non-GAAP measures to reported GAAP financial measures are included in the schedules contained in our earnings release. Such non-GAAP measures should not be considered superior to as a substitute for or as an alternative to and should be considered in conjunction with the GAAP measures presented in our earnings release and this related call.

With that I will now turn the call over to Rick.

Richard M. Olson -- Chairman and Chief Executive Officer

Thank you Heather. Good morning to all of our listeners. Fiscal 2019 is off to a good start with record first quarter sales. While the first quarter is traditionally a smaller one, we are pleased to have delivered strong results including record net sales of $603 million, an increase of 10% and net earnings of $59.5 million or $0.55 per share. Adjusted net earnings for the quarter were $55.2 million or $0.51 per share compared to adjusted net earnings of $52.1 million or $0.48 per share in the comparable 2018 period, an increase of 6.3%.

Our professional sales grew 12.7% due to strong demand for our landscape contractor, golf, sports fields and grounds and BOSS management snow and ice products. Residential sales were up 1.9% for the quarter due to higher shipments of snow throwers and walk power mowers. Sales increases in both segments also benefited from pricing actions that partially offset inflationary pressures. Following a brief commentary on our businesses, Renee will discuss our financial and operating results in more detail.

First our landscape contractor equipment alliance experienced solid first quarter retail and channel demand across our zero-turn riding offerings especially our Radius and Lazer models. Shipments of intermediate walk behind mowers also contributed to the strong quarter results. Next our golf and sports fields and grounds delivered solid results for the quarter, driven by channel demand as distributors prepared to fulfill their strong base of customer orders. Shipments of grounds master mowers and Workman utility vehicles led the way.

We were honored to send a crew and equipment to Atlanta's Mercedes Benz Stadium to once again help prepare the field for the Super Bowl. Our fleet of maintenance equipment, vehicles, Pro Force blowers and sensing technology enabled the field managers to address specific needs to optimize the playing surface for the big game. We also enjoyed very successful appearances of the recent STMA and the Golf Industry shows. We will highlight some of the exciting new products we unveiled during the shows later in the call.

Another strong first quarter performance was turned in by our BOSS team. New products including our Stainless Steel XT V-Plow, Exact Path drop spreader and the rear-mounted plow were particularly well received. The snow raider from the L.T. Rich acquisition also contributed to the positive results for the quarter. Innovation and the continuous improvement of BOSS products resonate with our customers.

Turning to our rental and construction business, shipments to construction equipment dealers were up for the quarter as their independent contractor customers, who enjoyed steady work last year invested in new equipment to update their fleet for the coming season. The release of the new TXL 2000 contributed to the positive results. However the rental business experienced a slowdown during the quarter as severe winter temperatures had a negative impact on equipment usage. Shipments were also affected by some customers deciding to take their large fleet orders in the second quarter instead of in the first as they have in the past. Following last week's announcement, the teams from Toro and Charles Machine Works' Ditch Witch organization were extremely busy during this week's American Rental Show. The prospects of our joining forces generated high levels of excitement in both companies' booths and throughout the conference center.

Our irrigation and lighting business enjoyed similarly successful recession at both the Golf Show and Irrigation Association Show. Golf product sales remained strong during the quarter while other irrigation segments faced unfavorable weather conditions. Conversely weather had a favorable impact on our residential business. Recent snowfalls fueled strong demand for snow throwers. Our team effectively executed storm (ph) shipping strategies to capitalize on rapidly developing retail opportunities. Residential sales for the quarter were further bolstered by solid sales of our walk power mowers.

Finally the international business saw mixed results across businesses and region. Our international team benefited from strong demand for golf and grounds equipment in golf irrigation products in certain regions. Customer interest in our new Outcross, Groundsmaster 1200 and ProLine H800 remain high. However regional weather pattern and currency headwinds tempered our international business results.

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

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

Thank you Rick and good morning everyone. As we reported earlier this morning net sales for the quarter increased 10% to a record $603 million compared to $548.2 million for the same period a year ago. We delivered net earnings of $59.5 million or $0.55 per share compared to net earnings of $22.6 million or $0.21 per share in the first quarter of fiscal 2018, which was significantly impacted by tax reform. Adjusted first quarter net earnings were $55.2 million or $0.51 per share, which represents an increase of 6.3%.

This includes a $0.03 impact related to acquisition expenses for Charles Machine Works and a distributor partner. Please refer to the tables in our earnings release for a reconciliation of non-GAAP adjusted net earnings and adjusted diluted earnings per share to the comparable GAAP measures.

Professional segment sales grew 12.7% for the quarter to $455 million due to strong performances across many of our businesses. Professional segment earnings for the quarter totaled $88 million an increase of 15.9% compared to $75.9 million a year ago. Our residential segment sales for the quarter increased 1.9% to $145.2 million. Domestic residential sales grew 6.6%, which were offset by weather and currency-related decline of 10.7% in international sales. The overall positive results were driven primarily by increased retail demand for snow products and channel demand for walk power mowers. Residential earnings for the quarter totaled $13.1 million down 16.8% from $15.7 million last year. The decline was caused by negative commodity and tariff costs somewhat offset by strategic pricing and productivity actions.

Now to our key operating results. First quarter gross margin decreased by 150 basis points to 35.8% due to increased commodity costs, tariff-related expense and the expected negative impact of accounting for the acquisition of one of our distributor partners. The decrease was somewhat offset by pricing and productivity improvements. The Company continues to expect year-over-year gross margin improvement for fiscal 2019 primarily in the second half of the year. SG&A as a percent of sales decreased 90 basis points for the quarter to 24.2% due to the leveraging of expenses over higher sales volume despite acquisition-related expenses. Operating earnings as a percent of sales were 11.6% for the quarter a decrease of 60 basis points compared to 12.2% in the same period last year.

Interest expense for the quarter finished down slightly. The effective tax rate for the first quarter was 15% compared to 66% last year. The first quarter in fiscal 2018 was significantly affected by the one-time impact associated with tax reform. The adjusted tax rate for the quarter was 21.2% compared to the adjusted tax rate of 21.5% in the same period last year. For fiscal 2019, the Company continues to anticipate that its adjusted effective income tax rate will be about 21.5%.

Turning to the balance sheet, accounts receivable for the quarter totaled $225.5 million, up 13.5% from a year ago as a result of increased sales. Net inventories for the quarter were down 5.2% to $416.7 million. This decrease was mainly due to increased sales and inventory management initiatives. First quarter trade payables increased 5.6% to $281.5 million. At the end of the quarter, the Company's 12-month average net working capital as a percent of sales was 13.5% compared to 13.7% a year ago. We repurchased over a 359,000 shares of common stock during the quarter and have approximately 7 million shares remaining in our repurchase authorization as of quarter end. In anticipation of closing on the Charles Machine Works acquisition, we plan to curtail share repurchases for the remainder of fiscal 2019 as we focus on debt repayments in the near term.

I will now return the call to Rick.

Richard M. Olson -- Chairman and Chief Executive Officer

Thank you Renee. We are enthused about our prospects for fiscal 2019 and beyond based on our strong first quarter performance, long-range strategic plan and our announced agreement to acquire Charles Machine Works. Beginning with our landscape contractor business, early indications suggest strong demand for our products among landscape contractors and large acreage owners. We expect our broad line of zero-turn riders to continue to generate strong demand. The recent snowfalls mean increased contractor revenues from plowing for investments in spring equipment.

The outlook is also very positive for the golf and sports fields and grounds businesses. R&A, the U.K. equivalent of USGA, recently released their 2019 Golf Around the World Report that identified over 500 new golf course construction projects around the world that are either were under way or in advance planning, which is nearly 30% more than the number of new courses opened in the last four years. Furthermore park and municipal bids remains active and our expanded sales resources are pursuing the full range of sports fields and grounds growth opportunities.

Positive attitudes were prevalent among our many visitors during the STMA Show in January and the Gulf Industry Show earlier this month. While customer interest in our Outcross and Groundsmaster 1200 introductions from a year ago remains high, we created more excitement with new introductions unveiled these past two months. These include the all-new Greensmaster 100 series of fixed head greens mowers equipped with several patent pending features, the eTriFlex, all-electric riding greens mower, new Groundsmaster out-front rotary mowers offering two engine and cutting width options and productivity and control of enhancements to our ProStripe walk behind mowers that deliver premium stripped finishes that are highly valued by professional venues.

Innovation and productivity are also keys to our BOSS snow and ice management business. Favorable weather conditions are expected to continue in the short term, which should help round out this already successful season and set the stage for a solid preseason booking program. Improvements made prior to the season on the snow raider were well received by contractors looking to expand their fleet capabilities. Continued refinements of snow raiders should help contractors increase productivity through more efficient means of clearing sidewalks.

Next positive economic trends should support ongoing construction and infrastructure spending, creating favorable conditions for our rental and construction business. Industry groups forecast continued growth in construction spending as evidenced in the 52,000 new construction jobs reported last month. The TXL 2000 compact utility loader has garnered a number of industry innovation awards, once again drew a lot of attention the American Rental Association Show that ended yesterday.

Among other innovations on display was our prototype of the eDingo, an electric compact utility loader is under development. The eDingo demonstrates our commitment to creating innovative solutions for our customers. Our irrigation team also unveiled exciting new innovations during the recent shows including the Lynx 7.0 Central Control system that provides significant enhancements in precision, speed and dependability. The 7.0's improved monetary and diagnostic save operators considerable time, while delivering unprecedented precision in controlling system runtimes and efficient water usage. The outlook for the business is encouraging as golf projects remain strong.

Moving to the residential segments. We are taking advantage of our retail opportunities generated by the recent snow in key markets and anticipate strong preseason bookings later this fall. We expect our latest rider and walk power mower advancements to perform well at retail this spring. If we enjoy a more normal arrival of spring compared to last year's late start, we anticipate residential sales will deliver a larger share of our second quarter revenues. There are also positive indicators for our international business on a regional end market basis. Demand for golf and grounds equipment and irrigation solutions will likely lead the way.

We are launching new irrigation controllers this quarter and our orders of current products are particularly strong. Other promising international product launches include the previously mentioned greens mowers the ProStripe, the GrandStand with rear discharge decks and a new line of Hayter Harrier mowers. We also expect the launch of these successful ProLine H800 and Outcross in additional regions. Market share gains are also anticipated in the zero turn category as the MyRIDE feature is setting us apart. Finally we are extremely excited about our planned acquisition of a Charles Machine Works. It should prove to be one of the most transformative events in our history due to its dramatic long-term expansion of our underground construction business. The people of Charles Machine Works enterprise and their commitment to innovation and exceptional customer care are key to the attractiveness of this acquisition and the significant growth potential it represents. We believe it will mark an important milestone in our Company's long legacy of excellence.

In conclusion we feel we are poised to deliver another successful year for all stakeholders. We recognize that the unexpected could pose challenges to our plans and are prepared to take appropriate actions. I want to thank our employees and channel partners for their hard work that enabled us to achieve strong first quarter results. Their ongoing support is critical to helping us drive profitable growth.

Assuming the acquisition of Charles Machine Works closes in the third quarter, we expect adjusted earnings per share of $1.15 to $1. 20 for the second quarter. This includes an estimated $0.07 for the impact of acquisition-related expenses and share repurchase curtailment. These items are in addition to the $0.03 of acquisition expense incurred in the first quarter. This results in an adjusted earnings per share estimate of $1.66 to $1.71 for the first six months, which equates to operational performance of $1.76 to $1.81, excluding acquisition-related expense impacts. We expect our -- we expect to update our guidance at/or after the closing of the acquisition.

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

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Tim Wojs with Baird. , your line is now open.

Timothy Ronald Wojs -- Baird -- Analyst

Hi everybody good morning.

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

Good morning.

Richard M. Olson -- Chairman and Chief Executive Officer

Good morning.

Timothy Ronald Wojs -- Baird -- Analyst

So I had a couple of questions on professional. I guess maybe the first was -- did -- was pricing able to offset cost inflation in that segment in the quarter? I'm just trying to maybe decipher the price cost relative to maybe the mix impact that you might have saw in the first quarter?

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

Yes what we saw is much stronger price than we had seen in the fourth quarter, but the combination of price and productivity for professional and this will be true for the enterprise as well did not totally offset what we saw from a cost standpoint for the quarter. We continue to believe that gross margins will improve for the year -- year-over-year but we're expecting to see more of that improvement in the second half and that really relates to just when commodities moved last year in reaction to the tariffs and other inflationary pressures and then the realization of price from a total year standpoint.

Timothy Ronald Wojs -- Baird -- Analyst

Okay. And is there any sense or if there is any sort of like prebuy or anything ahead of any price increases that you guys interpolated in professional?

Richard M. Olson -- Chairman and Chief Executive Officer

No. I mean as we've talked about many times we have to look across the quarters so the mix changes a little bit between the first and the second quarter between residential and commercial, but nothing that would be along those lines. We feel good about our field inventory, residential field inventory is actually down year-over-year and we feel good about first half of the year in total.

Timothy Ronald Wojs -- Baird -- Analyst

Okay great. And then just on the buyback. I mean any just added color on what you mean by curtailment? So will you just not buyback stock or would just buyback a lower amount?

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

Yes. I mean we will focus on paying down debt, assuming we go forward and we close in a timely basis on the Charles Machine Works acquisition, which is our intent. So we'll focus on paying down that debt so would be a lower amount for the year.

Timothy Ronald Wojs -- Baird -- Analyst

Okay. I'll hop back in queue. Good luck on Q2.

Richard M. Olson -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Sam Darkatsh with Raymond James, your line is now open.

Samuel Darkatsh -- Raymond James -- Analyst

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

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

Fine.

Heather M. Hille -- Director of Investor Relations and External Communications

Fine.

Richard M. Olson -- Chairman and Chief Executive Officer

Good morning Sam.

Samuel Darkatsh -- Raymond James -- Analyst

Just got a few housekeeping questions and then maybe a follow-up. So the three -- in the quarter just reported the $0.03 of deal-related costs, I'm guessing that was shown on the P&L within the other line. Is that accurate Renee or did that show up in one of the operating segments?

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

No it would have all been in other. It's on a couple of different P&L lines, but all within other.

Samuel Darkatsh -- Raymond James -- Analyst

And I'm guessing that continues in Q2 with the $0.07 at least of other portion that constitutes deal-related costs?

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

Yes it would.

Samuel Darkatsh -- Raymond James -- Analyst

Okay. Second question I know you didn't update guidance because I'm guessing there's a whole lot of moving parts around deal-related costs and the timing of closing and share repurchase curtailment and all that, but from an operating standpoint would there be any reason for us to think that guidance for the year has been changed from where you were two, three months ago Rick?

Richard M. Olson -- Chairman and Chief Executive Officer

There is no change in our underlying operating expectations for the year. And you're right, there are some complications that you have to do a little map on, but fundamentally if you take those away, the year is playing out as planned and we feel good about the year. So, we would reiterate our underlying operational performance.

Samuel Darkatsh -- Raymond James -- Analyst

And then my final question before I'll defer and this is the perfunctory question that we all have to ask I guess for all companies and that's tariffs. So if the 25% tariffs do go in March 1st. is that a negative to your guidance? And if they are pushed out or do not occur, is that a positive to your guidance? How much of it is reflected in your formal expectations that are given to us? And how should we think about our models as things are pretty fluid right now?

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

Yes, we have assumed that there'll be some of that included, but not the full amount. So we're not expecting a step change necessarily in tariffs. Another thing that we have included in our guidance going forward and is forecast and we're starting to see it is the kind of the decline in some of the base commodity cost as well. Steel is off of its peak as forecasted and as we expected. So, we are seeing that come down and have included that as well in our guidance.

Samuel Darkatsh -- Raymond James -- Analyst

So to rephrase or at least to make sure I'll understand it, if the 25% tariffs do go in that would be an incremental negative at least until you were to offset those from various positions is that right?

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

Yes. The tariffs are actually not that impactful the tariffs themselves to us. What we've stated before and continue to see is some of the inflation we're seeing I think is tariff related but it's not necessarily the tariffs themselves. So, not a lot of the products that we're purchasing are we seeing a direct tariff on. We are seeing commodities go up related to it, but the tariffs themselves are fairly modest impact to us.

Samuel Darkatsh -- Raymond James -- Analyst

Got it. Thank you very much. I appreciate it.

Richard M. Olson -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of David McGregor with Longbow Research.

Robert Aurand -- Longbow Research -- Analyst

This is Rob Aurand for David today. I was hoping on digging up some of the new products you announced the new all-electric greens mower. There's obviously a lot of interest around electronics. How could we see that trickle down to other parts of your business?

Richard M. Olson -- Chairman and Chief Executive Officer

As we talked about in the past, we've had an emphasis in technology on alternative energy opportunities, certainly the lithium ion technology is leading, but also hybrid opportunities in our golf business. We've talked about it in the past, we mentioned briefly in the prepared remarks the eDingo that would be an example of that and surprising amount of experience or excuse me interest in that. So alternative energy, smart and connected products the Outcross is a great example of that, the combination of turf tractor and utility vehicle that has a lot of the intelligence that is needed to operate goes into the machine and requires much less training from an operator standpoint.

(inaudible) has been autonomous, which we really see as part of the future as well. We see all of those as leverageable across our entire business. So the complexity of delivering an all-electric greens mower, TriFlex right on greensmowers that is usable across an entire golf course is a very significant feat to be able to do that. Does that cause a benefit for us as we look at residential applications? Of course it does. So we really see the opportunity we talk about trickle down, but some cases it's a trickle up, but in all cases it's the leverage across our whole business and we're working to do a better job of leveraging across our businesses.

Robert Aurand -- Longbow Research -- Analyst

Okay. And just on the Outcross, is there any numbers you can share on that? I mean is that from what you're talking to people, worked into the people's budgets here early in the year? Are you still expecting that to be more demos early and not really show up till the end of the year?

Richard M. Olson -- Chairman and Chief Executive Officer

We're starting to see the sales. It's a large ticket item. So, the process -- the sales process takes a while, but I'll say actually it's ahead of our expectations for a large machine like that and we're just seeing surprising responses from areas that we really hadn't thought about as target customers necessarily. Sports fields in particular has been interested, but the golf sweet spot is -- looks like it was a great hit on target there.

Robert Aurand -- Longbow Research -- Analyst

All right. Thank you very much.

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

Thank you.

Operator

Thank you. I show no further questions in queue. So I will now turn back over to Ms. Hille for closing remarks.

Heather M. Hille -- Director of Investor Relations and External Communications

Thank you James. Thank you for your questions and interest in Toro. We look forward to talking with you again in May to discuss our second quarter results. Have a great day.

Operator

Ladies and gentlemen thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Everyone have a wonderful day.

Duration: 30 minutes

Call participants:

Heather M. Hille -- Director of Investor Relations and External Communications

Richard M. Olson -- Chairman and Chief Executive Officer

Renee J. Peterson -- Vice President, Treasurer and Chief Financial Officer

Timothy Ronald Wojs -- Baird -- Analyst

Samuel Darkatsh -- Raymond James -- Analyst

Robert Aurand -- Longbow Research -- Analyst

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