Welcome to The Toro Company's First Quarter Earnings Conference Call. My name is Brian 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 The Toro Company. Please proceed, Ms. Hille.

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

Thank you, Heather. Good morning to all of our listeners. Fiscal 2017 is off to a good start with record sales and earnings for the first quarter. Strong broad-based demand for our professional businesses, including our landscape contractor, golf, BOSS, snow and ice management, specialty construction and micro irrigation products led the way helping deliver a sales growth of 9.7% for the professional segment. Residential sales were down 2.7% for the quarter due to the anticipated return to more traditional riding products' shipping patterns than we experienced in 2016 and offset positive snowthrower and walk power mower sales. While the first quarter is traditionally a small one, we're pleased to have delivered record results, including net sales of $515.8 million, an increase of 6.1% and net earnings of $45 million or $0.41 per share. Following a brief commentary on our businesses, Renee will discuss our financial and operating results in more detail. First, both our Toro and Exmark landscape contractor equipment lines experienced strong first quarter demand. Our new Toro TITAN HD and Exmark Radius zero-turn riders helped to generate solid bookings and early retail activity. Contractors and acreage owners value the power and performance that these new rider platforms deliver. With an eye on preparing for the approaching cutting season, contractors began purchasing earlier than normal in many areas. Along with the TITAN and Radius riders, stand-on products also retailed well in the first quarter. Next, favorable fall and early winter weather, healthy customer budget positions and innovative new product offerings fueled retail and channel demand for our golf and sports fields and grounds equipment in the quarter. Acceptance of our new GTX utility vehicles in our latest lightweight fairway mowers remains particularly strong. During the quarter, we were honored to ink significant long-term agreements with two premier golf…

Thank you, Rick and good morning, everyone. As we reported earlier this morning, net sales for the quarter were a record $515.8 million compared to $486.4 million for the same period a year ago. We delivered net earnings of $45 million or $0.41 per share compared to $0.35 in the first quarter of fiscal 2016. Professional segment sales grew 9.7% for the quarter to $371.8 million due to strong performances across many of our businesses. Professional segment earnings for the quarter totaled $68.2 million, an increase of 10.7% compared to $61.6 million a year ago. Our residential segment sales for the quarter decreased 2.7% to $140.4 million. As Rick discussed, solid snowthrower and walk power mower sales were offset by the anticipated decline in first quarter shipments of riding products. Residential earnings for the quarter totaled $16.6 million, down slightly from $16.7 million a year ago. Now to our key operating results. First quarter gross margin decreased by 10 basis points to 37.5% due primarily to unfavorable currency exchange rates and increased commodity costs. The decrease was somewhat offset by enhanced productivity and segment mix. SG&A as a percent of sales decreased 70 basis points for the quarter to 25.8%. The leveraging of expenses over higher sales volumes largely drove the improvement. Interest expense for the quarter finished up slightly. Our effective tax rate for the quarter was 24.5% compared to 26.9% last year. The rate change reflects a discrete tax benefit of approximately $4.9 million related to share-based compensation due to the early adoption of a new accounting standard. This was partially offset by last year's $2.3 million one-time benefit from the retroactive reenactment of the research credit. We now expect the tax rate for the total year to be about 28.5%. Turning to the balance sheet, accounts receivable for the first quarter totaled $183.9 million, down 3.4% from a year ago. First quarter trade payables increased 10% to $232.4 million. Net inventories for the quarter dropped 4.7% to $402.1 million. Our teams' inventory and expense management effort, along with our focus on productivity, resulted in solid progress toward our Destination Prime initiative goals. At the end of the quarter, the Company's 12-month average net working capital as a percent of sales was 15.1% compared to 16.4% a year ago. We're pleased to see our working capital moving back in the right direction. We repurchased over 1.2 million shares of common stock during the quarter and have approximately 6.5 million shares remaining in our repurchase authorization as of quarter-end. I will now return the call to Rick.

Thank you, Renee. Our first quarter performance successfully propelled fiscal 2017 out of the starting blocks. Channel partners and retail customers are expressing confidence about the season ahead. We're encouraged by prospects for achieving yet another year of profitable growth. As always, the timely arrival of spring is important. We're prepared to adjust to whatever weather comes our way in order to capitalize on demand for our latest innovations. Let's take a look at the prospects of our various businesses. Our strong landscape contractor equipment booking order position and the first quarter retail momentum behind our new lines of professional zero-turn riding and stand-on products point to a strong season ahead. Importantly, contractors are optimistic about demand for services that they provide. Our innovative products should fare well in this environment. Recent industry trends suggest continued opportunities for our golf business. While golf course supply correction will continue, annual golf rounds played are trending in the right direction. Industry research shows the public's interest in taking up the game is strong and the number of young golfers has rebounded. The exposure gained from such big stage events like the Olympics and the Ryder Cup, two events that we had the pleasure of supporting and the new cast of exciting young tour professionals are all contributing to golf's appeal. As some of you recently observed in Orlando during the Golf Industry Show, we unveiled several important innovations, including a new greens roller, the GreensPro 1260, the extension of our GeoLink technology to our smaller sprayer, the MultiPro 1750, important upgrades to our myTurf fleet management software and an all-new golf course irrigation controller, the Lynx Smart Satellite. These advancements enhance our leadership position in golf and many also contribute to our strong sports fields and grounds portfolio. Innovation is key to…

[Operator Instructions]. Our first question will come from the line of David MacGregor with Longbow Research. Please proceed.

You mentioned that there was earlier-than-normal buying and I'm just wondering to what extent you expect you made a pull forward from 2Q. In the event you said it and I missed it, I'm sorry, but what market segments would you have seen that early buy most pronounced?

The area I think you are probably referring to, the professional ZE products and so we have two things going there. We have new lines of ZEs coming out which generates a lot of interest and I think the secondary comment was there is general optimism about the market going forward which is causing landscape contractors to buy a little bit earlier than we would expect them to do.

Is there any way of looking at patterns to see if maybe you had pulled forward as a consequence of that or are you confident that that is not going to impact 2Q?

We don't believe that's the case. The bulk of the sales will continue on into the next quarter.

Okay. Just a follow-up question. Can you talk about your raw material headwinds, just quantify what that represented in terms of impact on first quarter gross margins and are you getting pricing where you need to offset this inflation?

Yes, when we looked at our gross margin for the quarter, a couple of things going on. We did see, David, an impact of FX within the quarter. It was fairly modest, less than 1% on a sales standpoint, but we see that negative impact within gross margin. As you noted, we did see some commodity increases as well. In particular, resins and steel is where we're seeing some upward pressure, not different than what we had anticipated when we put together our guidance. We're working hard with our productivity efforts to try to offset a piece of that. And segment mix did help us in the quarter with professional having more growth than residential. So those are the main factors that were impacting gross margin. We ended down about 10 basis points for the quarter. You may recall that our guidance for the total year for gross margin was similar. So again, fairly well in line with what we would've expected and not substantially different when we look out across the total year.

Okay, thanks. And then just last question, within landscape contractor, I know you've got a lot going on in that reporting segment, but is there any way you could rank the four subgroups on growth and provide a little more color if possible? It sounds like maybe irrigation and lighting was a little light on some weather patterns, but any help you can provide there?

The category in general would be one of the better growth categories for us, landscape contractor and leading that would be some of the things that we already talked about, for example, the BOSS product, the landscape contractor ZE products that we talked about in our earlier message. Also, just part of that, Siteworks, the Siteworks products, the specialty construction rental areas are very solid. So those are all positive.

Our next question will come from the line of Tom Mahoney with Cleveland Research. Please proceed.

With the good snow activity you guys saw in the first quarter, is there any change looking out towards the end of the year relative to the 3% to 4% revenue growth guidance you guys gave 90 days ago, anything to make you feel more optimistic relative to 90 days ago?

We did have a solid snow quarter. We would characterize I think the season as a good, but not necessarily a great season, so this is a small quarter. The season itself was somewhat up and down. It started slow in October and November. We had a good December, January was not as good, but we've had good late season snow, including a blizzard potentially that is going to hit here. What happens with the later season snow is it tends to -- it certainly clears out inventory in the channel in the field, so it does not necessarily result in immediate reorders, but it sets us up for a good booking season for the fall season.

Okay. And then on SG&A, leverage in the first quarter was strong and maybe a little bit ahead of what you are expecting for the year it seems. What of that is sustainable; what of that is 1Q-specific?

Yes, when we look forward to SG&A for the year, our guidance is unchanged. We would expect it to be a slight improvement over fiscal 2016. We did see with stronger sales growth leveraging of costs over that fixed cost base. So we don't know that that -- at this point, we don't anticipate that that will carry forward from a total year at the same rate and we still expect SG&A leverage to be a slight improvement year-over-year.

Our next question will come from the line of Mike Shlisky with Seaport Global. Please proceed.

I wanted to touch first on the drought in California. I know you mentioned there were some impacts there, but I'm just kind of curious on the landscape side, are there opportunities for expansion in the your turf care business with grass starting to grow again in California? It's a pretty big state. And to your knowledge, has there been a change in the grass varieties planted there given what's been going on drought-wise until now?

Right. First, on the drought, we do see a relief in what has been a very long drought period. That has a number of positives for us. First of all, just the direct one which would be grass growing and needing to be mowed obviously, but also benefits in the micro irrigation business potentially as some fields that had been taken out of production come back into production. So can you expand the question about landscape specifically? What was that?

Well, I was just kind of curious if the people who work in that business out in California who haven't seen much business recently might be seeing more business this year and looking to increase their CapEx. Just looking for your regional outlook for the Western part of the U.S. for your zero-turn or other landscape equipment sales.

Right. Just based on the relief from the drought, we would expect that was probably the case with landscape contractors.

Okay. Got it. Jumping around quickly, our checks, they do show that there are some new companies trying to push into zero-turn mowers this year for the professional users. Do you think there is enough industry growth to go around for everyone and do you happen to know if anyone in the industry is exiting zero-turns in the sector this year?

I'm not aware of people exiting that market. This is a market that has had a lot of competitors for a long time. I was part of the Exmark business for three years and there are dozens of suppliers in this area, but there are lead companies as well and we enjoy a very strong position there and we would expect that to continue to be the case. There has always been some churn of competitors coming into and out of the market and that seems to be the nature of the market.

Okay. Got it. And then on the Rental Show piece, can you just give us a few more details on what you've got planned as far as products at the Rental Show and if you can't go that far, I know it's not until next week, but can you tell us about what products in that channel have been doing well recently?

Well, we have a lot of crossover from our specialty construction business into the rental business as well, so you would see our compact utility loaders to be a key part of the product offerings there. But also we have some new offerings this year, the brush cutter specifically, the tracked mud buggy. So there's a lot of interest in both of those products. And I think as we have talked about before, this show is now a bigger event for us. Just several years ago, reflecting our growth in this area, we had a small booth and a small presence. I'm looking forward to going to the show for the first time this year on Monday and my understanding is we have a much greater presence there and reflects our growth in this area. So there is a lot of excitement from our team and I know from our channel as well about the Rental Show.

Tom Hayes, Northcoast Research.

Most of my questions have been answered, but I just wanted to circle back, Renee. I just wanted to make sure I heard you right that despite the commodity cost increases you're seeing, you are still expecting relatively stable gross margin through this year?

Yes, that is our guidance. So we expect very similar gross margins year-over-year, including the commodity increases.

Okay. And then just maybe any thoughts, maybe, Rick, you could provide on any changes maybe you've seen in the M&A environment going forward this year or since last year?

I wouldn't say any changes on the environment. We continue to have a focused effort on identifying opportunities that tend to be private companies and tend to be based on longer-term relationships that are developed in the process. We have talked about before our interest -- some of our interests are with professional, with water and international and so we continue -- I can't say that there has been a change in the environment -- but we continue to be interested in finding good opportunities going forward.

And we're excited about the Parrot acquisition that we closed on in Q1 as well. It's a good example of the type of M&A that we would be interested in.

That's a great point, Renee. Parrot continues to look very positive for us and we're well along in the integration process and my understanding is their outlook for the year looks strong as well.

Our next question will come from the line of Sam Darkatsh with Raymond James. Please proceed.

This is Josh filling in for Sam. Thanks for taking my questions. I wanted to get into the pro incremental margins a little more. I was wondering if you could talk through some of the puts and takes of what maybe held back margins from expanding a little more in the quarter.

Sure. Well, when we looked at our professional margins, all in all, we thought it was good performance. It's a small quarter and there were some product and mix impacts, but pretty much in line with what our expectations were. As we talked about some of the same factors that we discussed for the total level, gross margins would be the same factors that are impacting professional. So some pressure on commodities, in particular steel and resins. Some impact of FX within gross margin as well and then working hard to offset as much as we can of that with our productivity effort. But I think, all in all, it was in line with what we were expecting for the quarter.

And could you give us an update on your CapEx and D&A expectations for the year?

So we did not change our guidance on either CapEx or D&A. We continue to expect capital expenditures of about $65 million for the year and depreciation and amortization of a similar amount, about $65 million.

And last one from me. I know there's a lot of moving parts still, but could you talk through some of the positives and negatives you might see if the U.S. does go to a border-adjusted tax?

Josh, you called out there are a lot of moving parts right now and first off, we're monitoring each of those potential implications and have scenarios that we look at in each of those. At this point, it is difficult to comment on the impact. There are positives and negatives potentially in the mix with regard to tax policy that we would obviously favor a more beneficial corporate tax, along with the kinds of tariffs that you are alluding to. So at this point, we're in a monitoring state and we'll look forward to seeing how that rolls out over the next year.

Yes, we do produce -- just in general we produce most of our products in the U.S. and we source most of our components in the U.S. as well. And our revenue, as you know, is more biased towards the U.S., as well as our profit.

Our next question will come from the line of Joe Mondillo with Sidoti & Company. Please proceed.

Just wanted to ask about your corporate costs outside of the segment levels. It seems like they continue to actually decline while seeing the positive revenue growth. So just wondering what's going on there and do you anticipate that you are going to continue to bring down those kind of costs even with revenue growing? Just some outlook there would be helpful.

Yes, I would say that we continue to be prudent in our spending, but we want to make sure that we're supporting the overall growth of the Company. It is a small quarter and we had a little bit higher sales growth rate versus what we expect for the total year. So you do see that impact and when we start in the beginning of the year, we also have a lot of the year ahead of us. So we will tend to be a little more prudent in our spending early in the year until we see what type of a year -- how it progresses.

Okay. The residential segment saw a pretty weak quarter on a margin perspective in the back half of last year. Could you remind us what the headwinds were related to that? And historically, they were quite lower than what you have seen in past second half of the year periods. Just wondering is that an easy comp that you are anticipating going into the back half of this year? Should we anticipate margins to bounce back to what we saw in the past couple years or do you think the margins that you saw in the back half of last year is sort of what you are thinking going into this back half of this year?

No, good question, Joe. As we look at this year over last year, some of the factors that I think will yield improved margins year-over-year for us in the second half of the year are really, last year, we were reducing our inventory levels so that always creates a little bit of a challenge from a manufacturing standpoint. This year, we would expect to have a bit stronger preseason from a snow standpoint, as Rick talked about. We're probably better positioned. A little less of an FX drag year-over-year as well; however, offsetting a portion of that would be we're seeing higher commodity costs. So all in all, we would expect to see some improvement in residential margins in the second half that we built into our guidance.

Okay. And regarding the pricing situation at the professional segment, do you anticipate raising price to deal with these raw material headwinds? If so, have you done that already or are you anticipating to do that in the next couple months?

Yes, first of all, we price to the market and in this case, we typically talk about 1% to 2% realized price benefit and that's roughly where we would be for this year as well. And pricing is built into our plan for the year.

I thought the residential was pretty much 100% priced to market, but you do tend to get some pricing on professional. Correct me if I am wrong there. And also when do you usually, on a seasonal perspective, usually implement your pricing increases at professional segment?

So you are correct that when we look at pricing, we get more of that pricing out of the pro side than we do out of the residential which tends to be more of a price point type of business. The 1% to 2% that Rick was talking about is across the entire enterprise, so more of that is going to come out of the pro side than the residential side. Our pricing we usually implement going into the season from a timing perspective and commodities are on track with what we had anticipated. So as Rick said, our pricing is pretty much in line with what we had anticipated as well and most of that pricing we've already implemented. That being said, if there were dramatic shifts in either FX or commodities, there have been times we've had to go back and make adjustments, but that hasn't happened and we're kind of on track with what we had expected.

Okay. I'm not sure if you mentioned this in your prepared remarks, but could you tell us what the organic revenue growth was at professional and was there any acquisition-related costs with the Regnerbau deal?

Yes, the Parrot acquisition overall is not significant and did not have an impact of organic growth within the quarter just based on the timing of closing it and the acquisition-related costs were minimal.

Our next question will come from the line of Jon Fisher with Dougherty & Company. Please proceed.

Just a follow-up on the pricing question just for clarification. So I think you guided for pricing either to be 1% to 1.5% this year or 1% to 2% for this year. So the good winter quarter that you had was not significant enough that would have allowed you to be ahead of that pace from a pricing standpoint for this year?

That's correct. And we would describe the snow season as good, not necessarily terrific.

Okay, okay. And then the main question was, you also talked in terms of this year when you were making your outlook comments on the Q4 call that you thought professional growth would be -- there would be balanced growth between professional and residential. Given the strong Q1 for professional, I guess I am curious why -- what would be the cause of meaningful deceleration in professional growth over the course of the rest of the year that would bring its performance more in line with or balanced with what residential will be for this year?

I think it's primarily a year-over-year question and so overall this year we would expect a more balanced sales picture than we did -- or revenue picture than we did last year.

I would just add Q1 for us is a small quarter. We anticipated the shift in residential. So from a total year standpoint, it really hasn't changed our outlook on either professional or residential and that's why our sales guidance remains at the 3% to 4%.

Our next question will come from the line of Jim Barrett with CL King & Associates. Please proceed.

Rick, a question for you on zero-turn mowers. Are they still gaining penetration with landscapers or are they now more of a replacement market?

It's really both. There is a growing replacement market as the installed base, if you will, grows larger, but there continues to be good growth in zero-turn as a solution relative to conventional products as well. Certainly see that continued trend on the homeowners side as well.

Understand on the homeowners side. So it sounds like the penetration is still progressing on the professional side as well?

Yes. Certainly more established on the professional side as the core products, so replacement would be a bigger portion there, but also the usage profile is much higher so replacement cycles are higher on the professional side.

Understood. And Renee, this may be a question for you. Your share repurchase certainly year-over-year accelerated in the quarter. Was there a reason for that? Should we change our expectations based upon Q1? What level of share repurchase the Company plans to complete this year?

So our capital allocation methodology really has remained extremely constant over a number of years, so we continue to look first, Jim, to investing internally on innovation, making our production facilities more efficient, then we look next for profitable growth through strategic M&A, dividends and then share repurchases. And we came into the year in a really solid position from a cash standpoint and looking across the board, we really have done all of those things. We continue to invest in innovation. Rick talked about a number of our new product introductions that we're pretty excited about. We completed the Parrot acquisition. We have increased our dividend consistently over the last decade or more and we did do a little bit more around share repurchases. Our guidance is unchanged. Our guidance for share repurchases is at least as much as we did last year and I think that's still the best outlook that we had. But we came into the year with a strong cash position.

Our next question will come from the line of David MacGregor with Longbow Research. Please proceed.

Thanks for taking the follow-ups. A couple things just quickly. Home Depot called out DIY strength in outdoor power equipment. Can you just talk about your balance of trade performance in the home centers? And then, Renee, on working capital, is the growth in your days payable outstandings simply higher raw material costs or maybe growth in the international business or has something changed in your procurement terms?

Can you repeat the Home Depot question? I'm not sure if I understood what you were asking there.

Well, they called out DIY strength in outdoor power equipment. I'm just wondering if you could talk about your balance of trade performance, your marketshare in the home centers.

Marketshare, we actually are very positive about our marketshare. We believe that we're continuing to make improvements year-over-year. So we feel very positive about our position, particularly with The Home Depot.

And your second question, David, about our change in DPO. Really what we continue to focus on across all of our segments in working capital is continued improvement. There certainly is some small element of increased purchases as we go into the season. We're expecting growth, but we continue to work with our supply base on certainly cost reduction, as well as terms. So no significant shift as far as geography, just continuing to work with our supply partners.

Thank you. There are no further questions at this time. So now it is my pleasure to hand the conference back over to Heather Hille, Director of Investor Relations and External Communications for the Toro Company, for closing comments or remarks. Ma'am.

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

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.