Good day, ladies and gentlemen and welcome to the Toro Company's Third Quarter Earnings Conference Call. My name is Taria and I will be your coordinator for today. [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 Toro Company. Please proceed, Ms. Hille.

Thank you and good morning. Our earnings release was issued this morning by Business Wire and a copy can be found in the Investor Information section of our corporate website, thetorocompany.com. On our call today are Mike Hoffman, Chairman and Chief Executive Officer; 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 Mike.

Thank you, Heather and good morning to all of our listeners. Before discussing our third quarter results, I want to comment on yesterday's announcement regarding the election of Rick Olson to the position of President and Chief Operating Officer of The Toro Company effective September 1st. As the release outlined, Rick has been with the company for over 29 years and has extensive leadership experience across many of our businesses and manufacturing operations, as well as a firm grounding in our cultural values. His experience, knowledge and character make him exceptionally well suited for his new responsibilities. Rick, along with our finance, legal and human resources functions, will continue to report to me. All of our businesses and global operations will now report to Rick. Some of you met Rick earlier this year in San Antonio during our investor meeting at the Golf Show and there will be opportunities for others to meet him in the near future. As you get to know him, I'm confident you'll be favorably impressed by Rick's competence, preparedness and demeanor. I'm honored to have the opportunity to continue to lead this great company and look forward to working closely with Rick and the rest of our team to move the company forward and achieve our Destination PRIME objectives. And now we turn to our third-quarter results for fiscal 2015. This morning, we are pleased to announce record third quarter sales and earnings. Net sales for the third quarter increased 7.4% to a record $610 million, while net earnings per share for the quarter rose 8% to a record $0.94. Year-to-date sales increased 8.6% with earnings of $3.13 per share. Our professional segment grew 9.7% for the quarter driven primarily by the demand for our BOSS snow and ice management products, as well as our…

Thank you, Mike. And good morning, everyone. As we reported earlier this morning, net sales for the quarter grew to $609.6 million compared to $567.5 million for the same period a year ago. We also delivered net earnings of $53.3 million or $0.94 per share compared to $0.87 in the third quarter of fiscal 2014. Year-to-date net sales were up 8.6% to $1.910 billion. Without the impact from currency, our sales would have been up by more than 10%. We achieved net earnings of $178 million for the first nine months or $3.13 per share compared to $2.82 per share a year ago. Professional segment sales were up 9.7% for the quarter to $422 million. As Mike discussed, the professional sales growth for the quarter was the result of demand across our snow and ice management, landscape contractor and rental and construction businesses, somewhat offset by currency exchange rates and weather headwinds for our non-golf irrigation businesses. Year-to-date, professional sales were up 8.8% to $1.315 billion. Professional net earnings for the quarter totaled $82.3 million, up 9.9% compared to last year. For the first nine months, professional segment earnings were $258.7 million, up 5.7% compared to the same period a year ago. Third-quarter residential segment sales were relatively flat with growth of 0.1% to $176 million. Increased sales of homeowner riding and walk power mowers were somewhat offset by lower shipments of snow throwers and the same currency and weather issues as our professional segment. Year-to-date presidential sales increased 8.4% to $578.6 million. Net earnings in the residential segment for the quarter totaled $20.6 million, a 10% increase from last year. Year-to-date earnings were $69.1 million, up 14% compared to the first nine months of fiscal 2014. Gross margin as a percent of sales for the third quarter decreased 10…

Thank you, Renee and happy anniversary. Renee celebrates her four year anniversary with Toro in a couple of days and she has been a terrific addition to our team. So to date, fiscal 2015 has been another good year for Toro. We are well positioned to close out the year with strong fourth quarter momentum. Our BOSS snow and ice management line is poised for strong retail activity in the fourth quarter as contractors have their new trucks equipped with plows and spreaders. The BOSS acquisition has delivered stronger and more immediate contributions than we originally planned. The combination of last winter's heavy snows had generated strong sales in 2014 and the robust preseason demand this year, along with the BOSS team's excellent execution, has clearly added real value. As such, we now expect the earnings-per-share benefit from BOSS to be about $0.20 for the year. Similarly, the outlook for our landscape contractor businesses in the fourth quarter is positive in light of Mother Nature's steady rainfall in most markets. Although the fourth quarter is typically a slower part of our turf maintenance equipment season, recent innovations like our comfort and productivity enhancing MyRIDE suspension system will generate new retail activity. We are also looking forward to unveiling additional innovations for 2016 in October during the Green Industry Expo in Louisville. Next, our rental and construction business is expected to grow as long as construction activity remains vibrant. As I mentioned, our new TX 1000 compact utility loader enjoyed a robust late third-quarter launch. Pent-up retail demand and a solid backorder position on the TX should boost fourth-quarter sales activity. Also, we were pleased to be awarded a national contract in late June from the National Joint Powers Alliance that covers our entire line of construction products, including compact utility…

Thank you. [Operator Instructions] And our first question comes from Sam Darkatsh of Raymond James. Your line is now open.

Morning, Sam.

Good morning.

Good morning, Mike, Renee, Tom and wherever you are out there, Rick, congratulations on the new post. A few questions, and many of these are of a housekeeping nature. First off, can you help us with what organic sales growth was both in the quarter and then expected for the year if you back out the effect of acquisitions?

Yes, I guess I'd say that, as we said, essentially BOSS was the professional growth that we achieved in the third quarter. And as we said at the beginning of the year, the combination of BOSS and when we started the year, the combination of BOSS and our organic business was the 8% to 10%. We've now moved that to 10% and about half of that is BOSS.

Half of the delta? I'm confused. I'm sorry, or half of the 10%?

5% of the total company growth for fiscal - within our 10% guidance. Half of that growth is BOSS. The other half is organic.

Got you. That's helpful. Thank you. And then the switch - the timing of the switch from the snow shipments from Q3 into Q4, could you give us a sense of magnitude of the impact of that?

Yes. Our residential business would have been up had snow comped the same. And the fact is this always moves around a little bit in that kind of July, August timeframe. One of the things that's influencing this year is the new SnowMaster line that's just going into production. So we just didn't have many of those produced as you compare that to the situation last year. We worked very hard to get enough snow out there as the channel demands, worked very hard to meet their needs. We also want to make sure that we are not shipping multiple shipments to our channel partners, whether that's people or dealers. And so needing to have the SnowMaster in production and have inventory of that so we can put that together with some of the existing models slowed those shipments somewhat. But, again, we would say look at the whole year and the demand is very solid and retail is off to a good start.

So to put words in your mouth, Mike, enough to call out, but not enough to be material kind of thing?

That's what we would say.

Okay. And then last question before I defer to others. Looking into 2016 based on input costs and expected pricing, based on FX and a whole bunch of mix items. What's your early read on gross margins year-on-year in 2016? And then following up on that, your early look at tax rate also since it's bounced around a little bit?

Sam, we're just beginning our planning process for F '16 and we will consider all of the items that you had listed looking at price, productivity, what's happening in commodities, mix within the segment. So at this point in time, we don't have specific guidance for next year. We will when we come back in December per normal course. We'll give you that outlook for F '16. And then as we look at the tax rate, we have revised our tax rate guidance for the year. We said it would be consistent with our year-to-date tax rate. So about 30.5% is what we would expect for this year. And we are seeing improved income in lower tax rate jurisdictions and we continue to look for tax planning projects that are of an ongoing nature, as well as short term opportunities to lower our tax rate.

Should we – I am sorry, Mike.

Well, I'm just going to add another comment to the gross margin. We're literally in the heart of our planning right now and so all of those things will be considered. We always talk about price. We'll talk more explicitly about that on the next - on the December call. We're going to face some FX headwinds year-over-year; that's kind of the bad news. The good news is a good part of that business is products that are made here, that competitors are also made here. And so we will be looking at the pricing strategy to try to manage that. But it's a whole bunch of pieces, right. At the end of the day, it needs to - we need to keep working on gross margin if we're going to achieve our destination prime objectives and I think we've managed through this year pretty well given some of those challenges like the FX headwinds. And so we're going to continue to do that. But again we'll provide a lot more color on that in December.

I mean, I would think at a minimum you would be up 20 or 30 basis points year-on-year just from the absence of the BOSS purchase accounting now?

Well, there is that. So that certainly goes on the positive side of the ledger.

Okay. Very good. Thank you again this morning. Appreciate it.

Thank you, Sam.

Thank you, Sam.

Thank you. And our next question comes from Joe Mondillo of Sidoti & Company. Your line is now open.

Morning, Joe.

Hi. Good morning, guys.

Morning, Joe.

Good morning.

So I had a couple questions. First off, I'm not sure if I missed it in the prepared remarks. But related to the flat margin year-over-year that you saw at the professional segment, just wondering is that a mix issue, just given the fact that you saw 10% growth there. Just is that related to the BOSS acquisition bringing down the margin a little bit, plus a mix issue or what's going on there?

So the biggest impact within the quarter was related to FX. We saw about an $11 million impact, or about 2 points on sales growth at the company level and about half of that impacts our margin. We're going to see more of that FX impact in the pro segment versus the residential segment. So the biggest detractor, if you will, from our pro margins was FX within the quarter.

Okay. And then sort of same type question for the residential side. You saw flat sales, but you saw very healthy expansion in margins. Is that a mix issue or what's going on there as well?

Yes, a piece of it is the mix within residential, good solid performance, some help from overall commodities. I mean, there's a whole list of items. There's not the same impact of FX within residential as we saw within pro.

Residential is relatively smaller. I mean, pro is going to be over weighted to international and to Renee's point, that you're going to see more impact there.

Okay. And then I'm not sure if I totally understand the reasoning, sort of the explanation of why you saw flattish sales. Compared to last year, is your snow blower introductions later in the year compared to last year?

Yes. Well, as we said in the remarks, actually riders and walk power mowers were positive. It was offset by some what less snow thrower shipments. And we would always bring you back to our focus is on retail. You take care of retail, everything else takes care of itself. And so the fact is the rider retail and walk power mower retail is very good. It just didn't translate to our shipments. So those were up, but it was offset by snow being down.

Okay. So the orders were actually pretty positive, but it just hasn't translated into shipments yet?

That's the case. And then to a smaller degree, which we typically would ship earlier because you have to get it across the pond, Europe's snow thrower sales, as we said in the remarks, are going to be somewhat softer because they had a marginal or less snow last winter. So as we would always encourage you to do, yes, we understand it's the quarter, but look at the company on an annual basis, or look at the company year-to-date and the business is sound.

Okay. Overall, the guidance implies an acceleration on the top line in terms of growth in the fourth quarter. Is that a combination of - obviously, it sounds like residential is going to see an acceleration because of what we just talked about. And then also are you anticipating a pretty good acceleration at professional as well and is that because of BOSS sales accelerating on a seasonal basis or…

Yes, you've kind of asked and answered the question. So yes, it is - as we said, we see some snow shifting to the fourth quarter. That obviously will drive some additional residential snow in the business for us. BOSS has got good momentum and that will be strong in the fourth quarter. But additionally the, as said in the remarks, the spring and summer goods, the walkers and walk power mowers and riding mowers continue to move at retail very solidly. So we're still here in August and Mother Nature has provided good rainfall throughout the Midwest and the Northeast and retail continues to happen. And we knew that was going to be somewhat of a challenge when we started the year. Remember last year, 2014, we came off a pretty marginal spring and ended up having all in a pretty good summer. So we knew the comps this summer were going to be more challenging. The fact is this year we had a much better spring. It slowed a little in that early part of the third quarter in the June time period and that. But momentum has kind of built back and as the moisture has continued to be provided and kept the grass growing, it has kept the spring and summer goods moving at retail. So it's all of the above. It's that, its residential snow and its BOSS.

Okay. And then justly and I'll hop back in queue. Just wondering in terms of the irrigation at the golf sector, what do the growth rates look like or maybe if you don't want to quantify them just directionally the growth rates at irrigation on the golf level this year compared to the past couple years? Are you starting to see an acceleration as we get to that sort of 15, 20 year anniversary from when we started to see a huge build-up of construction of golf courses at the turn of the century?

Yes, I would say it's still - it's not a high growth rate. It's still a relatively low growth rate and it's not something that's pulling our average up, if you will. But it's healthy and as you said, we will continue to see good domestic replacement business for systems that were put in 15 or 20 years ago. And then most of that business will be redo's if you will, replacement systems, whereas internationally we will continue to see new golf courses be developed around the world and most of those will be new. So we're in a very good position. We have very strong share and it's a healthy business, but again it's not a double-digit kind of business.

Okay. Okay, great. Thank you.

Thanks, Joe.

Thanks, Joe.

Thank you. [Operator Instructions] Our next question comes from Jim Barrett of C.L. King & Associates. Your line is now open.

Good morning, everyone.

Morning, Jim.

Morning.

Mike, a question for you on BOSS. Is the - can you tell us to what degree the company has been successful in expanding distribution to your own distributors post-acquisition?

Yes. So just to be clear, if we go back to that earlier discussion, it was not our intent at the time to go after any significant distribution change. Let's start with BOSS. It's a very strong brand and has some excellent distribution in place. So when we put this together, the thought was we have very good relationship with a lot of the people that use these products, I'm talking end-users, whether that's landscape contractors or municipalities, and that we would work hard to help BOSS accelerate with those customers, the opportunity to replace their existing plows with BOSS plows. And that strategy is working. So BOSS has very, very strong share more weighted to the Midwest, other parts of North America. There are opportunities to accelerate that share. So in fact, I can tell you a couple weeks ago I was up in Iron Mountain with the BOSS 30th anniversary distributor channel partner meeting. It was a wonderful event and they have some terrific distributor partners around the country. So there will be some opportunity there, but that's not the primary strategy of growing the BOSS business, if you will.

I see. And has the accretion surprise as it relates to BOSS, is that more a function of sales growth being above expectations or margin, purchase accounting aside being higher than you thought or a combination?

At the end of the day, it's clearly a combination and as we've revised our guidance on revenues, it's been pretty consistent in the kin of 8% to 10% range and now we're about 10%, right?

Right.

Clearly BOSS is playing a role in that and as we said in answering Sam's question, about half of that 10% is BOSS and about half the 10% is organic. So when we originally started with that, when we put that plan together, we didn't know what kind of a winter we were going to have and last winter was pretty strong. So it's led to good retail, good channel demand. BOSS has come out with some new products. It's all in a very healthy situation.

Okay. And then, finally, can you give us an update on the Reelmaster 5010 hybrid? How is that looking as we look into next spring?

Yes, it's been well accepted in some ways maybe a little surprisingly well accepted in that you're kind of going out with some new technology and sometimes customers will want to wait. But those customers that have purchased the product are very happy and we think that should do nothing but accelerate and create opportunities to bring that kind of technology, that true hybrid technology, when we say true hybrid, it's where the energy is shifting between the two sources of energy and the various drive systems that drive either the traction or the reel system. Customers like it, its on track.

Terrific. Well, thank you very much.

Thanks very much Jim.

Thank you.

Thank you. This concludes the question-and-answer session. I will now turn the call over to Ms. Hille for any closing remarks.

Thank you for your questions and interest in The Toro Company. We look forward to talking with you again in December to discuss our results for the fiscal year. Thank you.