Good day ladies and gentlemen and welcome to the Toro Company's First Quarter Earnings Conference Call. My name is Bridget 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] And 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, Ms. 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 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 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 adjusted 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. Good morning to all of our listeners. Fiscal 2018 is off to a good start with record sales for the first quarter. Strong broad based demand in our professional businesses, including our landscape contractor, golf, rental, and aggregation products led the way helping deliver sales growth of 8.6% for the professional segment. Residential sales were up 1.5% for the quarter due to higher shipments of riding products and walk power mowers, but were somewhat offset by lower demand for snow thrower. While the first quarter is traditionally a smaller one, we are pleased to have delivered strong results, including record net sales of $548.2 million, an increase of 6.3% and net earnings of $22.6 million or $0.21 per share. These earnings results are lower than our reported 2017 net earnings due to the one-time charges associated with U.S. tax reform. Adjusted 2018 first quarter net earnings were $52.1 million or $0.48 per share, which includes a $0.06 benefit from the lower corporate tax rate and excludes a $0.03 benefit for the excess tax deductions for share-based compensation compared to adjusted net earnings of $40.1 million or $0.37 per share in the comparable 2017 period, an increase of 29.7%. Please see the tables and information included in our earnings release for a reconciliation of non-GAAP adjusted net earnings and adjusted diluted earnings per share to the comparable GAAP measures. While earnings for the quarter were affected by upfront charges from the tax reform legislation, the reforms will reduce our overall tax rate and prove to be beneficial in the future. Following a brief commentary on our businesses, Renee will discuss our financial and operating results in more detail. First, our landscape contractor equipment lines experienced solid first quarter demand for our Lazer and TITAN HD zero-turn riders and…

Thank you, Rick and good morning everyone. As Heather and Rick mentioned, we have included both GAAP reported and non-GAAP adjusted financial measures for net earnings, diluted net earnings per share, and Toro's effective tax rate. In view of tax reform, we recognize that this quarter is one of transition. Therefore, I would like to walk from our previous Q1 EPS guidance to our adjusted Q1 EPS actual result. Our previous Q1 EPS guidance was $0.42 to $0.44 per share, which included a $0.04 benefit related to excess tax deduction for share-based compensation at pretax reform rate. Excluding this $0.04 benefit, the operational earnings per share was $0.38 to $0.40. The actual Q1 excess tax deduction for share-based compensation came in consistent with that guidance, but resulted in a slightly lower net benefit of $0.03 due to the lower corporate tax rate from reform. As Rick mentioned earlier, if we start with our reported Q1 EPS of $0.21 and first add back $0.30 to the one-time charges related to tax reform and then subtract $0.03 for the benefit from share-based compensation, we achieved an adjusted Q1 EPS of $0.48 per share compared to an adjusted $0.37 in the comparable period. The adjusted Q1 EPS of $0.48 per share includes a $0.06 benefit due to the lower tax rate, which is not included -- was not included in our previous Q1 guidance. When this benefit is excluded, it brings us to an operational performance of $0.42 per share, which exceeded our previous Q1 operational performance guidance of $0.38 to $0.40 per share on a comparable basis. In other words, our Q1 performance exceeded the top end of our guidance by $0.02 per share. Going forward, we're providing adjusted measures that exclude the one-time charges associated with U.S. tax reform and also…

Thank you, Renee. Fiscal 2018 is off to a positive start, fueled by our strong first quarter operating performance. Our employees' commitments to the company's key priorities positions us well to maximize results for the year. These priorities focus on accelerating profitable growth, driving productivity and operational excellence, and empowering people. In light of the anticipated long-term benefits of tax reform, we will evaluate additional investment opportunities consistent with our disciplined capital allocation strategy. Our strategic priorities will remain unchanged. First, we will invest in research and development along with strategic acquisitions in order to drive profitable growth. Using the latest technologies will help us continue to provide customer valued innovations and services. A good example of this is our recent investment in GreenSight, a leading provider of agronomic drone services for golf courses. Second, we will work to improve processes, eliminate waste, reduce cost, and improve quality through continued investments in lean information technologies and automation. Third, we will strive to empower our greatest asset, our people, to be the best that they can be by investing in their developments and well-being. As we meet these strategic priorities, we will continue to return value to our shareholders. Let's take a look at the anticipated effects of these commitments, in particular, our drive to accelerate profitable growth by providing customer value through innovation and service on our business prospects for the year. Beginning with our landscape contractor business, our new products have generated early excitement and demand. Contractors are showing strong interest in our diesel zero-turn riders, featuring high-capacity decks and our 24 inch stand-on aerators. Our patented to the next-generation onboard more intelligent system that promote longer machine lives, increased productivity, and better fuel efficiency is attracting customers with its time and money saving benefits. Innovative and -- innovation…

[Operator Instructions] Our first question comes from the line of Mike Shlisky with Seaport Global. Your line is open.

Hey, good morning everybody.

Good morning.

Good morning.

So, I know you said, again, there's been growth of at least 4% or more. But does the first quarter growth of about 6% push a little bit further in excess of that 4% than you were initially thinking? The comps only get little bit getting easier from here in the second to fourth quarters.

Well, we are encouraged by what we see in the first quarter with the comments that we made earlier. I think the key thing is just that it's a small quarter and it's still early in the year. Much of our selling season is ahead of us. And I think we would like to get through the break of spring before we would be even more optimistic about the full year results. But we're encouraged so far and it's really just that fact that is -- that would be holding us back at this point.

Okay, great. And secondly, I was curious about to how the promotions are going to work seasonally this year. The timing of anything big, either at the retail level or at the professional level as compared to last year affect some of the wholesale selling timing from Q2 or Q3 here?

Yes, I think, one of the things, I think, we talked about last year was Toro Days and it -- moving between either the second and third quarter. And we don't -- something that we negotiate with our channel partners, so it's not -- and it's really not something that we want to make public for competitive reasons because that tends to attract other promotions that would happen at the same time. But we don't see any other major shifts, certainly that I'm aware of, that will be taking place so that's probably the only thing that comes to mind that can be a variable between -- especially between the two quarters.

Okay. And then finally, for me, I just wanted to get a bit more color on the margins you had in residential. I mean, you had a sales increase, but a pretty decent decline in your pretax profit margins. Can you give us color, can you kind of [Indiscernible], was there anything to do with higher commodity costs, anything to do with some discounting, et cetera, we should be aware of?

Yes, when we look at residential, it -- again, small quarter, so not necessarily indicative of the year. But we did see growth pretty much in line with our expectations, a little bit lower maybe because of less snow, that 1.5%, we always say its GDP type growth. So, may see some stronger sales in the remainder of the year. Overall, from enterprise standpoint, we went into the year expecting some modest increases in materials, and we are seeing that, Mike. In particular, we had comment on steel and resin, and we are seeing those increases kind of pull through at this point in line with what are expectations would be a lot to see, I know there is some discussion around tariffs and other changes that we haven't included in our forward-looking guidance. So, we did see some higher commodity cost. We'll work hard to offset those with our productivity and lean initiatives, as we always would. But we did see if some impact to that within quarter as well, some impacts of product mix as well.

Okay, fair enough. Thank you very much guys.

Thank you.

And our next question comes from the line of Sam Darkatsh with Raymond James. Your line is open.

Good morning. This is Josh Wilson filled in for Sam. Thanks for taking my questions and congratulations on the quarter.

Hi Josh, thank you.

A few housekeeping items first, what was the FX impact on sales in the quarter?

Very minimal in the quarter. About $3 million. So, very minimal impact, slightly favorable.

Got it. And then you said you're working down the residential snow inventory in the channel, does that mean you're happy with where it's at or is that it still needs some work?

Yes, we've seen the benefits of the later snow in the season. It tends not to generate as many reorders at this point in the year. But it is very effective at reducing the inventory that's in the field. And right now, we are very satisfied with the field-level inventory, especially, below prior year at this point. We went into the season in good shape on inventory and we're leaving the snow season in good shape with inventory. So, -- especially, if we get a few more events here, they will continue to clear field inventory and should set us up for a healthy position to be in for the preseason, the next season.

And then, can you remind us what your assumptions are in guidance for price and to what extent price and productivity are to offset commodity inflation?

Yes, we always price to market, not to cost, just a reminder regarding that. Typically, what we get at the enterprise level is between one and two points of realized price. We get more of that from the professional segment than we do from the residential segment. The residential segment tends to be a little more of a price point type of business, where we're trying to provide a product at the price point that's consistent with buyer's expectation.

And can you give us a little bit of color on what your exposure installation against might be as it relates to transportation costs, and I'm specifically thinking of availability or wage inflation in truckers?

Yes, we, as everyone does, are experiencing some changes in that overall market. We saw some of that in the past as well. So, we -- at this point in time, we're not seeing changes that are significantly different than what we have experienced and what we have included in our guidance.

We're certainly aware of the -- of that issue, and we certainly see it. But we've been managing through that at this point and we tend to have contracts in place that help us through some of those challenges.

Got it. Good luck with the next quarter.

Thank you.

Thank you.

Our next question comes from the line of Jon Fisher with Dougherty & Company. Your line is open.

Good morning. Thank you.

Good morning.

Hi.

Good quarter. Just explore a little bit more on the gross margin. You mentioned in the prepared comments and then in response to the first question, unfavorable product mix is one of the gross margin issues. And with the mix of professional and residential would have thought that would have been just net-net positive to the gross margin line. So, wondering if it was the underperformance of BOSS, if that's kind of what you're alluding to or if there's something else from a product mix standpoint that you can break out that was a drag on gross margins?

Really, Jon, what we're seeing that looking across the enterprise, and in particular, in the professional segment, that is our largest segment, as you are aware and also has a very broad offering of products. Although the margins are similar, they are all pro-type margins, there is variance from high to low within that professional segment. And what we saw are just the combined impact of the specific products sold primarily in professional. Just had a net impact on our gross margin. So, again, a good quarter and so relatively small quarter, overall, for both businesses, both residential and professional. So, it was mostly, again, commodities, the product mix within a segment. Some modest impacts from foreign currency, that actually was a positive and some impact of price.

Okay. And just want to make sure I understood correctly, BOSS in Q1 was down year-over-year because of the subpar winter weather, did I understand that correctly?

BOSS was down slightly for the quarter with the winter, that's correct.

Okay.

We're at -- but again, we're in good shape, we believe from our field inventory standpoint. And we've had strong emphasis on making assure we have the right product at the right time and that we're not in the over -- overly concerning inventory position at any point.

Yes and we do still expect growth to the total year from the BOSS standpoint as well.

Okay, sure. Thank you. And just when -- and I know you only like to work kind of one quarter at a time when you're looking out. But given the subpar winter weather, solid inventory levels, it sounds like an exiting winter. Do you -- what would you anticipate the overall impact to be on kind of the presell fall season, given the overall weather conditions this winter? Would you expect any immaterial drag or a negative performance?

Yes, I think if we just took the first half of the winter season, we would have been less positive about it. But the fact that we have had a number of winter events late in the season, it really has us more optimistic about the preseason for next year. That, first of all, clears out inventory, which is helpful to us. So, we don't have carryover inventory from the previous year. Then, secondly, just the memory of -- in consumers' minds of the previous winter plays a factor in the preseason for the following winter and for our dealers as well. So, they are going to be in a position having a late season snows where they're encouraged again to order for next year.

Okay. And then last question for me. Just given the strength overall of Q1, a lot of it was kind of early buying of spring product, both residential and professional. Just wondering, if this has been kind of normal buying performance or if there's a risk of maybe some pre-buy from sales fell into Q1 that may have normally, from a seasonal standpoint, fallen into Q2. What is kind of the risk of that potentially occurring?

I think we always say, we have to take multiple quarters together. It's hard to just isolate them, especially, because of the timing of spring or that falls with our quarters. But that said, there's also indications of pretty strong optimism within our channel at this point. And they look at the same things that we do, it's the economy is in good shape, our consumer confidence, I think, is at the highest level since the early 2000s, business confidence is strong and the factor is that we don't know about yet is the timing of spring. So, if that comes as planned, the expectations, I think, are pretty positive from our channel for the spring goods.

Okay. Thanks very much.

Thank you.

And our next question is from David Macgregor with Longbow Research. Your line is open.

Yes, good morning everyone and thanks for taking the question.

Good morning.

Great quarter in the pro-business. Good SG&A leverage. A lot of successes this quarter, but I want to talk about the residential business and residential up 1.5%, segment earnings down 5.1%, there's really been no growth in this business for the past two years, in the revenues already, as I realize it's a seasonal business, fourth -- first quarter reflect some seasonal pattern here. You talked about the strong International residential, which implies maybe domestic residential may have been negative. I guess, looking at the residential business, five of the last eight quarters have been negative growth now. So, I guess the question is just how do you reinvigorate the residential business, and in particular, the domestic residential business. And I guess in light of the lack in growth over the past couple of years, would you be willing to maybe give us a little more transparency into that business and help us understand what's working and what's not?

Sure. We feel very strongly and very positive about our residential business. We have great position with regard to our product lineup. We have strong market share in each of the key markets. We have the best channel partners and our dealers and our mass -- primary mass partners. So, we -- relative to our competition, we feel very strongly that we're in very good position. But the market has a number of forces. The snow is a major factor in the overall performance of the business. The summer time and spring time weather is a factor. This year, we have to put and then take the negative with snow, the positive was optimism about the spring that somewhat offset each other. So, this -- it's a business that makes money, it's a business that we have said is not going to be on the high end growth portion of our spectrum. So, their GDP roughly growth, but we're -- we still very strongly and positive about our residential business and its fit with the rest of our businesses.

Yes. And I would just add there, a number of synergies that we see from an operational standpoint related to residential. There we get economies of scale and with some shared production facility, often technologies are leveraged across the various segments as well. And as Rick said, it is profitable and more than covers its cost of capital.

Okay. I appreciate that color. I guess it does raise questions about whether you're able to get paid for innovation in that category and may be less of a case. I guess what are you assuming--

I think in that case you have to look also relative to our competition so we have had some very significant innovations in the market. So, you look at Personal Pace, you look at the PoweReverse products that we have introduced that are really the standards, especially, Personal Pace standard with -- in the industry. We've gone from without being too precise about it, low single-digit market share and walk power mowers to the leading market share and walk power mowers for the last number of years. So, the key is to look at the rest of the market to draw any conclusions there. We're gaining nice share.

Okay, that's helpful. I guess what are you assuming for growth in the second quarter guide of $1.17 to $1.22 given your residential compares the toughest for the past two years?

Yes, we don't specifically break out the revenues portion related to a quarter-by-quarter we -- because there is movement that happens based on the weather and other variables between the quarters. So, again, revenue guidance for the full year is to exceed the 4%, but not a specific number for Q2.

Okay. Last question for me, it's just on steel. We've had a lot of political development in this market for the last few weeks. Are you fully hedged for 2018? In other words do your procurement contracts with the mills protect you against any price variance at this point than the real risk just becomes on the rollover into 2019 or is the risk to your steel costing in 2018? Thanks.

Yes, we have contracts that are staggered throughout the year related to -- and this is true for steel and other commodities as well. So, we don't have everything locked in from an entire year's standpoint. However, keep in mind as well that we tend to be more of in a similar product versus a peer manufacturer. So, we do by some raw steel, but not as large of an amount. So, often, we're buying that part, and we again, have agreements in place for some period of time related to those parts. We tend to see changes occur a little bit on the lag from that perspective and that's true when prices go up or go down. We tend to see a lag in that because of our more than manufacturing approach.

Thanks very much Renee.

You're welcome.

Thank you.

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

Hi everyone. Good morning. Just wanted to clarify really quick, I missed the beginning, just the guidance, the raise was about $0.10. You'd be relative to your first quarter guidance by about $0.05. So, net-net, you sort of raised the guidance by $0.05. Was that all based on -- how much was that based on taxes and how much of that was based on organic business related?

Yes, what we have are actually two items that you should consider. There is a piece for the tax benefit and then we're also adjusting out on an ongoing basis the excess deduction for share-based compensation. So, if -- and we did try to detail this also, hopefully, in the transcript as well to see as a reference that should be available so you should think about we took out $0.17 for the excess share-based compensation and then added $0.27 related to taxes. So, that accounts for that net change of $0.10. Really we're leaving underlying performance the same and it relates to the fact that Q1 is a smaller quarter, we're really encouraged. We do feel we had a strong start to the year, but we want to see how the rest of the year develops, and in particular, the timing of spring.

So, just to clarify, if you net -- if you exclude all the tax related stuff you came in at $0.48, right and your guidance was $0.42 to $0.44, so you take the midpoint and that was a $0.05 be relative to your first quarter guidance?

No, actually what you would need to do, Joe, is to -- we pulled out because we're pulling out that excess deduction for share-based compensation. We did that through the quarter, as well that's in the $0.48. You would need to -- originally, when we gave guidance, the original guidance of $0.42 to $0.44 that included $0.04 for the excess deduction for share-based compensation. So, you have to pull that out and compare it.

Okay. So, the guidance was -- it's sort of not apples-to-apples?

Yes, because we're making that change so we try to clarify that. We beat by $0.02 on the high end of our guidance, is how you should think about it. $0.02 if you took the high end of $0.42 to $0.44.

Okay. And then in terms of what you've sort of guided to your historical tax rates for the rest of the year, that's sort of in line with what you've been running at so the tax reform doesn't help too much?

No, it is. Actually, our tax rate is favorable. Again, you have to, I think, pull out that excess deduction. That causes an increase to the underlying tax rate on an adjusted basis of about three points. That would actually make the tax rate go up and then we've incorporated the benefit of tax reform. So, we are seeing an underlying benefit from corporate taxes on an ongoing basis.

Okay. And then I just wanted to ask relative to the tax reform and more sort of towards what your customers, just wondering if you had any seen in your financials at all yet or anecdotally, have you heard anything? I imagine, especially, in your professional business that that's going to free-up a lot of cash and I would think you'd get a bump in your business, especially, at the professional side of the business. So, I'm just wondering if you sort of noticed anything or anecdotally heard anything that's sort of started the benefit and we've seen that trend to start as we head into the spring season.

Yes, my comments would be anecdotal, but they would be positive. So, every and -- each of those small businesses are different and will be affected in different ways with the tax reform. But in general -- generalizations and talking with people at those -- the shows, there is a sense that they will be positively affected by the tax changes. And you can go by -- logically, that puts more resources available for other purposes, for example, buying equipment to capital equipment. But those are -- that's my -- I have strung that together myself based on conversations. We haven't necessarily seen that, but we can point to in our financials.

Okay. And this may be related to that as well, sort of, but in terms of inventories, up almost 10%, I think, year-over-year. It was -- you address this on the last call and sort of stated that you're positioning yourselves to take advantage of the upcoming year. Just wondering if your confidence level of where the inventory's at remains sort of the same or is it increased relative to what you saw on the first quarter. And what kind of visibility do you have at this point in time? Do you have more visibility at this point in time compared to when we last spoke on the last call?

So, this would be the normal time where inventory would start to build in anticipation of the largest portion of our year in the second quarter and beyond. So, it is a time when we would normally build and most of the inventory that make up the inventory is more on the professional side than it is on the residential side. So, yes, because of the wider snow season, there's a small component of that, that is snow, but most of it really is forward-looking inventory that's a good inventory, good products and would be available for our summer products and specially the professional products.

Yes and what I would add to that is, it is really is -- in line with our expectations, when we look at last year, we did have some really successful new products that we were able to meet that customer demand that our customers would have actually like to -- especially some of the dealers have more products earlier. So, we're seeing some of that with I think the channel pull that we talked about as well as we want to be a better supplier. So, we're also anticipating that going into the year and being ready to meet that demand as it materializes as well.

Okay. And just last question for me. I'm just wondering percent of sales or percent of products sort of ballpark, what percent of your product offering would you say your customers benefit from the 100% accelerated depreciation just roughly?

What is -- if that is U.S. only, I guess to start with, so that would take the international piece out. And then it still would be -- I don't know an exact percentage, to tell you the truth. I would say it's going to be U.S.-based. Keep in mind, it did go from, generally from 50% to 100%, so there has been a benefit, I think the bonus deduction for some period in time. So, I don't know an exact amount, but a U.S. piece would be roughly be 75%, so it would be some subset of that.

You could -- without thinking about this too much you could probably go towards professional and residential, takeout the international and that would probably go towards -- it's going to be more on the professional side I guess.

Agree. Agree with that.

Okay. Okay, all right. Thanks.

You're welcome.

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

Thank you, Bridget. 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.