Good day, ladies and gentlemen. And welcome to the Toro Company's Third Quarter Earnings Conference Call. My name is Ashley and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Heather Hille, Director of Investor Relations and External Communications for The Toro Company. Please proceed, Ms. Hille.

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

Thank you, Heather, and good morning to all of our listeners. This morning, we are pleased to announce record third quarter results. Net sales for the quarter increased 4.4% to $655.8 million. Third quarter net earnings per share grew 19.7% to $0.73, while adjusted earnings per share rose 17.2% to $0.68. Year-to-date net sales increased 3.1% with earnings of $2.14 per share and adjusted earnings of $2.35 per share. Our professional segment sales grew 3% for the quarter driven by demand across our professional portfolio most notably for our landscape contractor equipment. For the first nine months professional sales grew 6.6% as anticipated following the late start of spring, residential segment sales rebounded nicely for the quarter with an increase of 9.5%. Strong demand for our walk power mowers and zero turn riders along with improved weather conditions drove the third quarter growth. Residential sales were down 5.4% year-to-date as demand for our snow and turf products were negatively impacted by below average snowfall early in the season and the late arrival of spring. Overall, it was a solid quarter, exciting new products fueled continued momentum across our businesses. Our team performed well against a backdrop of inflationary pressures and supply challenges to deliver these record results. We continue to prudently manage expenditures, focus on productivity, invest in innovation and leverage operational efficiencies. We also implemented price increases across our businesses. Our teams dedication and consistent execution have us on track to deliver another record year. Following a brief commentary on our businesses through the first nine months of the fiscal year, Renee will discuss our financial and operating results in more detail. Our strong third quarter showing in the professional segment was led by our landscape contractor businesses. Demand for our zero turn riders including our new diesel powered…

Thank you, Rick, and good morning everyone. As we reported earlier this morning, net sales for the quarter were $655.8 million compared to $627.9 million for the same period a year ago. We also delivered net earnings of $79 million or $0.73 per share compared to $0.61 per share in the third quarter of fiscal 2017. Adjusted net earnings for the quarter were $73.5 million or $0.68 per share compared to $65.5 million or $0.58 per share and earnings per share increase of 17.2% over the comparable 2017 period. Year-to-date net sales were up 3.1% to $2.079 billion. We achieved net earnings of $232.9 million for the first nine months or $2.14 per share compared to $2.10 per share a year ago. Reported net earnings for the first nine months were slightly lower than $233.9 million reported for the comparable period in 2017 due to the one-time impact of tax reform. Adjusted net earnings for the first nine months increased by 21.8% to $255.9 million or $2.35 per share. This compares to adjusted net earnings of $215 million or $1.93 per share for the first nine months of 2017. Please see the table and information provided in the 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 were up 3% for the quarter to $482.5 million led by the demand for our landscape contractor equipment. Year-to-date professional sales were up 6.6% to $1.547 billion fueled by the demand in our landscape contractor golf, grounds, rental and specialty construction businesses. Professional earnings for the quarter totaled $97.7 million up slightly compared to last year. For the first nine months, professional segment earnings were $338.6 million up 7.6% compared to the same period. Third quarter residential sales…

Thank you, Renee. Today's fiscal 2018 has been another record year for Toro. Let's take a moment to review why we are confident that our businesses are well positioned to successfully close out the fourth quarter and the year. First, the momentum our landscape contractor businesses have achieved should carry through to years end. Overall field inventories are in good shape and forecast suggests we will receive ample precipitation levels in those markets that should help maintain more sales. And just in time for contractors fall cleanup business, our multi-force stand-on machines versatility has once again been enhanced with the recent release of our new turbine blower attachment. Such versatile equipment enables contractors to stretch their investment dollar, perform tasks more easily and increase productivity. Next our golf and grounds businesses are optimistic about the remainder of the year. Park and municipal bid activity remains consistent and mini-country clubs continue to generate solid revenue. Excitement is running high for our latest smart products including our revolutionary outcross turf utility vehicle that begins shipping this quarter. We are also experiencing strong demand for our GeoLink sprayers and anticipate capitalizing on the healthy vehicle market with our workmen GTX line. Our newgrounds master 1200 pull behind rotary for the outcross and other tractors will begin shipping this quarter as well. Ultimately as customers struggle to find labor, the productivity of our Outcross, Workman GTX and other products can help them increase the capacity of their crews and do more with less. The number of favorable industry forecasts bode well for the rental and specialty construction businesses. Overall, the outlook for construction remains strong as do prospects for increased residential improvement projects. The American Rental Association is projecting larger increases in revenue over the next several years. This coupled with the additional available…

[Operator Instructions] Our first question comes from Joe Mondillo of Sidoti & Company. Your line is open.

Hi everyone. Good morning.

Good morning.

Good morning.

So I wanted to start off with -- just the margin that you realized at the professional segment a little weaker than I anticipated. So, could you walk us through sort of the puts and takes regarding price cost, if there was any unfavorable mix, the timing of the BOSS shipments and any other factors that may have contributed to the margin?

Sure. So when we look at the pro margins in particular for Q3, we did see a greater impact from inflationary pressures, which we had anticipated for the year. In particular, from a commodity standpoint, I would say steel was probably the biggest one that we saw. And as we went through the year, like others we're seeing greater impact from freight as well with freight rates increasing. So we’re certainly taking action to try that from a freight standpoint to do as much as we can to minimize that and have been pretty successful in doing that, but still seeing some pressure related to that. We're trying to ship as efficiently as possible. Then, we have seen some impact of supplier challenges. I think it's just a sign of the good economy that some of our suppliers are having difficulty keeping up with demand. And so we've seen some disruptions just from a manufacturing standpoint able to produce all of the products but maybe not as efficiently as we would normally like to, and related particularly to snow with the late spring, we’ve seen just more of an interest in continuing with the turf products. We do have a strong book of pre-season orders, but we'll probably see a little more of that ship in Q4 than we did last year. Overall from -- an overall margin standpoint, we continue our focus on productivity, always doing what we can to offset cost increases. And we have implemented price increases across our businesses. As you can expect, not all of that is immediately realized. And so, as we go through the remainder of the year and into next year, we will see full realization related to that.

Okay, great. That's helpful. So that actually brings me to my next question. I wanted to ask sort of if we see material prices sort of level off from where they are here, but could you just walk us through sort of the trajectory of how price cost that headwind? What degree does it hit your P&L on a quarterly basis? Is the fourth quarter the worst quarter and then it becomes smaller in the first quarter just sort of walk us, how you are thinking about how that plays out over the next including the third quarter and over the next couple of quarters?

Yes. We would say that we probably would expect – there’s a couple of dynamics just that impact of commodity increases and other price increases that we would see more of an impact to that in Q4, it's a small quarter too. So that's why it tends to be a little bit more difficult because you don't get that leveraging of fixed costs over a smaller quarter. So I think it is important always with Toro step back and look at the year. We would expect going forward then into F'19 that we would see that more normalized. And our goal always is to maintain our gross margins by business, and then focus on productivity and leveraging fixed costs to improve our margins.

Okay. So probably by mid-year, it becomes sort of a neutral type of a thing do you think?

We are in the process of going through our detailed planning, it's a really dynamic environment, so it’s difficult to predict as we sit here today, but we will I think have a better appreciation for that one looking next year on the timing of that one when we meet in December. But we would certainly expect that it will improve as we go through the year.

Okay. Yes. I'm sure it's very complex.

It is changing, the reality.

Definitely. All right. Thanks a lot. I'll step back in queue.

Thank you.

Our next question comes from Sam Darkatsh of Raymond James. Your line is open.

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

Good morning, Sam.

Few questions if I might. First with respect to the price increases themselves, could you give us a range of the amount of the price increases in percentage terms? What were the price increases that you instituted last year, trying to get a sense of this step up of it, and does it include residential and are you concerned about any elasticity or placement set as a result?

I will take that, Sam. So, if you -- what we would typically say is true for the last couple of years 1% to 2% of price realization is what has been typical. And it's a tough number to exactly pin down because of exactly what you mentioned because of different businesses that we're in and the nature of each of those markets and channels and so forth. But, we would -- based on the mid-year increases the range is about 1.5% to 3% on top of our normal annual increases. And then that's going to be subject of course to valuation as we go into '19 to see where the commodity prices and input costs are going and what what's happening in the marketplace.

So does that include residential Rick or is that mostly pro and then there's not much in residential coming in?

That would be inclusive of residential as well.

So that leads me to my next question then. You mentioned I think in the prepared remarks that you found the channel inventory status to be in good shape so that's good. The new product vitality expected percentage next year is that going to be at a level that would also support the higher pricing?

Yes. We've got -- I think we've listed quite a few of them, but we have a number of new products that will be introduced and start shipping beginning early in the fourth quarter, and then, really hitting their pace in '19. So our vitality index will be very healthy next year. Obviously available in the investor deck but that 35% threshold should not be a problem for us.

And then two more quick if I could. The commodity and freight costs some of it's obviously naturally going to float normally but how much of that is locked in versus how much of it is the treadmill that you would be facing potentially.

Yes. Regarding the commodity and freight costs, we have contracts typically for those types of expenses. So in some cases, if we're experts at this point, I would say the deal is at the top of the range at this point. So we're in shorter contract period at this point. Regarding freight there are some fundamental changes probably in the freight outlook, I would freight costs are going up fundamentally. So those are probably longer term freight costs. But on the flip side there are a lot of things that we can do to minimize those and offset them everything from the way that we ship based on programs more truckload. We're even going back and looking at the shipping density so we can change packaging and the approach to filling the trucks up as well as efficient planes and so forth. There's a lot of things that we can do to offset the freight costs. But apparent to us that freight costs are going up going forward and so there's a substantial change in the capacity that's out there.

Final question, Rick. I appreciate that at this stage here in August there are some aforementioned complexities looking into fiscal '19, but as you look at Vision 2020 which has an implication of mid 20s kind of incremental margins. Do you anticipate this fiscal year would still with all the moving parts around cost, still have kind of that mid 20s incremental margin that is inherent within the initiative.

No. As Renee mentioned, we work hard to improve our gross profit and the -- and we are remain committed to our Vision 2020. So the implied improvements there are certainly that's what we're working to achieve.

Great, helpful. Thank you, folks.

Thank you.

Our next question comes from Eric Bosshard of Cleveland Research. Your line is open.

Good morning.

Good morning.

Good morning.

Two things. First of all, on SG&A, the SG&A leverage was better in the quarter. Okay sales growth. How are you managing SG&A and is this level of improvement or this level of leverage sustainable?

So we always trying to make prudent decisions about SG&A. We have really disappointing processes and I think this quarter would just be another example of that. We continue to invest in our strategic initiatives, so we can set more new product development this quarter over last year and we'll continue to keep that focus. But I mean looking forward, we'll continue our focus on productivity and making wise decisions. And as you know sometimes there are investments that have more of a step change. And if those are the right things to do, we'll do that, but otherwise that is our focus on always improving in both gross margins as well as SG&A.

Okay. And then, secondly, in terms of sales growth, I understand this year the weather was different to start the year and coming out of last year, but as you look at sales growth over the next couple of years, curious how you all are thinking about it in terms of the underlying market growth opportunity in your market share opportunity, this is a year where I think you are expecting to get back to 4% growth in the original route was around 4.5%, are those the right numbers for the next couple of years? Is there a reason to believe that the numbers can be better than that? And why -- just a little bit of your thinking in that area?

Yes. We have no reason to back off of those numbers at this point as we've talked about mid-single digit growth perspective going forward that's where we would remain. We're working to continue to improve that. We think our markets have opportunity to continue to grow for us to continue to grow our share and for the market growth itself in areas like specialty construction, the landscape contractor business those types of areas we see lots of opportunities. And even in areas like golf that we talk about as being a low single-digit type of growth area we've seen some strong growth there with golf course renovations and equipment replacement. We still continue to see opportunity to grow organically, and then, through M&A that continues to be a focus for us. We've had some really excellent small acquisitions and we've got a good pipeline at this point with additional opportunities going forward.

It's helpful. Thank you.

Our next question comes from Mike Shlisky of Seaport Global. Your line is open.

Good morning, guys.

Good morning, Mike. How are you?

Good, thanks. So I did hear comments Rick that golf did very well internationally but as of yesterday it wasn't quite as strong domestically. Let me share with us -- kind of the current you are seeing kind of in your U.S. core golf business?

Really that the U.S. core business remains strong based on the anticipation of the summer. There was an early emphasis on products that shipped early in the spring. The April effect that hit the residential business also affects some rounds early in the spring. So if you adjust for weather the rounds played are in good shape. And fundamentally, our customers -- our golf customers with a little bit of economic confidence are investing in their courses and buying equipment. So we feel very strongly and we expect good growth for the year.

Okay. Just following up on that on the Outcross product, you should have started shipping in the very near term here. Can you give us a little bit more color, can you share with us maybe -- the orders been within your range [registrations] [ph], anything you think I have to change once you gets after off as far as new features and size wise et cetera?

So far we have a small number of products that are out. In fact, many of them have gone for demo purposes at this point and it's been right on target. The interesting thing is, it's a new category. So it's something that once you have a chance to try it on your course or your facility, it's a very easy case to make and much of the target has been for golf that we've talked about where we've already had some great response from sports field customers as well including some from primarily venues in Europe.

Got it. Also want to ask about your snow business and the box plow in particular that you had mentioned. I think that some of the trade shows out there, but in chatting with some of the dealers and other folks in the industry, it seems that the BOSS plows a pretty called regional product. I was kind of curious to see if you had a plan to expand kind of where -- the overall growth and reach of the BOSS group nationally or is it going to still be a pretty regional product in the next 12 to 18 months?

We have regional strength, but there is no intention to have only a regional focus. So we continue to grow our scope and strength in non-traditionally strong parts of the country and parts of the world as well. So no intention to keep that regional and we continue to see growth across the regions.

Okay. I'll pass it along.

Our next question comes from David Macgregor of Longbow Research. Your line is open.

Yes. Good morning everyone. Just to follow-up on the golf questions I guess, it sounds like maybe there was some pull forward into 2Q away from 3Q and that may have contributed some of the weakness this quarter, is that what -- is that we should take here?

I would just say we often times talk about looking over a couple of quarters, so the transition between the second quarter and third quarter lands in kind of a critical time in the spring, the transition in the third and fourth quarter is another critical point. So we just need to look across several quarters. If you recall going into the spring, with everything being very positive from an economic standpoint and new products and so forth there was anticipation for a great summer and it has been a great summer. But April kind of tapped the brakes a little bit going into the first part of the season, it's been a very, very solid retail season. We've got the open orders status; it's very positive going forward. So we remain very confident.

Do you think that with the Outcross intending to ship this quarter, do you think that some of these course operators, the superintendents were just holding off ahead of the Outcross shipment?

No. I don't think so. I think the shipments across the board continue to be very strong and going into the fourth quarter. And the Outcross is not necessarily changing people's budgeting plans. It's another opportunity for them.

Okay. Next question is just on the landscape contractor business, you talked about strength in that area of the business. I guess that business I believe had a price increase in early August. I'm just wondering to what extent did pre-buy ahead of the increase contribute to the third quarter pro sales growth?

Yes. I would not say that's not a significant factor at this point, not a factor.

Can you talk about cadence within the quarter within pro, I'm sure you saw a good May just given the weather pattern push but how did that flow into June and July?

It was actually -- it was a fantastic May -- at the last earnings call, we had just kind of entered into the period that was a real frenzy in May. But the entire summer overall has been very positive at least in North America with temperatures that were above normal and also above normal precipitation on average across all. The new products were very well received. And like the Titan HD and the Radius that continues to drive a lot of excitement. The new diesel that we talk about as diesel, but what's particularly remarkable is new deck options are larger. And so for example, a 96-inch deck that if you just take the math is about 33% more productive just by with, but also reduces the turnaround time et cetera. So people are seeing the productivity benefits. And then, the last feature of that product is that the end of the deck tip up, so that a landscape contractor can put it on their conventional trailer where they used to pull a narrower product. So it's just a really great combination that the market is responding to.

Good. Last question for me, I ask you about this from time to time, but just the whole area of battery powered residential mowers and I guess my question is -- when do you more visible in this rapidly developing category? Is there a plan to be a fast follower here? I guess I'm just wondering if you're losing the pioneering advantage here of being kind of the brand that consumer associated with the best in the new class and just kind of your whole thoughts around Toro and battery powered would be helpful?

Sure. We understand it is a growing part of the market still very small at this point. And what's important for us is that we introduced a product that meets our expectations. First of all with that we know that our customers will be pleased with adoption of battery powered products in Europe has been stronger than U.S. and there are fundamentally some reasons for that smaller lots in yards and so forth. But, we believe it will continue to be a factor, we obviously have a lot of activities going on in different technology areas. And for the pro side, the hybrids that we've introduced with our threshold products have been extremely well-received and really solve the energy problem that's inherent with batteries. So we continue to feel that alternative energy sources are a major factor going forward and we have a lot of activity going on in those areas.

The two groups is -- the category is still small. At what point does it become maybe a higher priority for you and the category are already starting to segment. People are developing good better best offerings at retail. Just what level of development in that category do you need to see to become more act?

We are investing in those categories right now. So it's a area that is definitely interesting to us I think again the key is though that the right products which is the approach that we took with the commercial side and when we introduced products they have done extraordinarily well in the marketplace. So that will continue to be our approach, is making sure we've got the right product before we introduce something that we're not pleased with.

Sure. Okay. Thanks very much.

Thank you.

And we have a follow-up question from Joe Mondillo of Sidoti & Company. Your line is open.

Hello Joe.

Yes, sorry. Do you hear me now?

Yes, we can now.

I think I was on mute. I wanted to have a couple of questions. Wanted to ask you first off about sort of the productivity improvement projects that you have underway. I know you've talked about over the last couple of quarters that going forward, we should anticipate maybe some larger benefits given what you're doing and such. Have we started to see some of those larger benefits, or is that still sort of -- when do we sort of see a pickup of benefits from productivity improvement projects that you're doing.

Yes. I'm happy to talk about that. We were already seeing the benefits and we initiated and increased our investment in those areas some time ago and for good reason. And thankfully so because it's really helped us offset much of impact that we've seen with higher input costs from commodities, freight, et cetera. So we've had some challenges with suppliers with the consistent flow of components to our plants. But the fact that we had already done work to improve the plants especially and using lean as a tool have been extremely helpful and it helped us off a lot of what we would have otherwise had to pass on either as price increases or taken our margins. So the work that we've done is been very helpful. There's much more that we can do so given.

So given just a follow-up on, given the backlog of things that you've got going on projects that you foresee. Do you see the magnitude of benefits increasing in fiscal '19 or it's sort of going to be a study where you continue to see some of these benefits that you've already started to see here?

My prediction would be that we could steadily -- we can be steady but we can steadily improve the productivity opportunities or productivity results over time. As I mentioned the supply disruptions when we have had consistent supply of components. We've just seen tremendous benefit in the work that we've done with clean and improving our

Great. I'm sorry.

I was just going to mention the other side would be technology -- the technology that we're excited about for our product in many cases hold true and our finance as well. So there are great opportunities for us to invest in projects that have a great return and improve our productivity as well.

Okay good. Also wanted to ask you on the landscaping part of your business could you talk about competition. Are you seeing any change in the competitive landscape there at all?

Yes. And in the landscape area -- for the landscape contractor it's always been a large field. So there are a lot of competitors there with any group of competitors. There are few major ones but then we have lots of secondary competitors if you will and that that fundamentally hasn't really changed. There's been a few that have gone and few more that have come in.

Okay. And then, lastly, regarding your European footprint with this drought that we are seeing. At this point in time and I know it's probably early, but what kind of risk do you see inventories ending the year above average levels and sort of affecting the spring season next year.

Yes. We're actually in great shape in inventories really across the company. So that's not a concern. I would point out just speaking recently with some of our channel partners from Scandinavia and Northern Europe they did have an excellent winter. So that was after three years roughly a kind of lower snowfall. We didn't have a good winter in parts of Europe so that helped us offset some of the effect of the drought during the middle of summer.

I was actually more so talking about the channel inventories so if the market ends up with above average inventories, do you see that as a risk, and if so that would I would think it would probably translate into maybe a tougher spring, but just wondering your thoughts about the channel inventory is not your internal inventories?

I was actually referring to our field inventory, so that's in good shape, which would include channel and we still have good retail momentum on many of our categories even in Europe.

Okay. Good to hear. All right. Thanks a lot. I appreciate it.

All right. Thank you.

And we have a question from the line of David Macgregor from Longbow Research. Your line is open.

Yes. Thanks for taking the follow-up. Rick, I guess I wanted to draw from your experience -- your years of experience in this business. And I know a lot of concerns right now about where we are in the cycle. I'm just -- from your experience with past business cycles, what are the early cyclical indicators that you would first see in a slowdown, I presume it would be in the residential business, but maybe I'm wrong about that, it might be retail inventories I don't know but what do you watch is kind of the canaries in the coal mine cycle.

We would probably look at more macro economic things. So tying to consumer confidence those kinds of things that will be more broad economic indicators versus any particular part of our business. If you remember during the last recession, the consumer business actually held up very well. And historically, we would say that the professional businesses would be more constant through those periods. So really we would just look at the overall macro indicators if we're looking for something like that. Right now, our businesses continue to look very strong and our customers are very optimistic about the future.

Can you be specific about one or two indicators, if you kind overweight or over index?

The group of indicators would be well as I mentioned consumer confidence, business confidence, construction, housing starts those kinds of things.

Okay. And then nothing on kind of a bottom up basis nothing kind of intrinsic within the business that's on the dashboard?

Oh, we always look at what the business is seeing as far as forward demand and things such as that if there are any substantial changes. What they're hearing from the field. What we're seeing, we're very connected through our distribution. So, absolutely David, we would be looking at those type of things as well.

Okay. In terms of second, you normally -- your seeking price initiatives and you talked about that all right. But, I know you normally see pricing at the end of the year kind of October this year. You guys just given the increase this summer, it likely, it will pursue the regulator calendar increase this year, coming in at the end of fourth quarter.

The price increases that we talked has been incremental, really are mid-year price increases so we will be going through our normal pricing points as we go into the next year.

Great. Okay. Thanks very much and good luck.

Thank you.

Thank you.

This concludes the question-and-answer session. Ms. Hille, please proceed to 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 and to provide our outlook for fiscal 2019. Thank you.

Thank you for your participation in today's conference. This concludes the presentation you may now disconnect. Everyone have a great day.