Toro Company Earnings Call Insights: Mower Business Outlook and Tier 4 Impact

Toro Company (NYSE:TTC) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Mower Business Outlook

Mark Herbek – Cleveland Research: As it relates to August to-date in the mower business, can you talk a bit about what you’re seeing first 20 days of August is the growth in the mower business continuing, and then also what you think that means for field inventory in the mover business as we exit the season?

Michael J. Hoffman – Chairman and CEO: Well, again as we’ve said, field inventories kind of across the portfolio are in good shape, and that was a really key objective is the last quarter. So, a lot of focus there, lot of good execution, so the impact on our sales is somewhat. And so, the last few weeks I would say that the retail momentum has continued to be positive, maybe not quite as strong as it was, but it’s up over the prior year. And so this will somewhat depend on just what kind of growth we get in the August, September, October time period. But I’d say we’re relatively positive about that, and early indications are that’s holding up.

Mark Herbek – Cleveland Research: Your expectation field inventory finished the season down year-over-year?

Michael J. Hoffman – Chairman and CEO: Yeah.

Mark Herbek – Cleveland Research: I know you talk about it being reduced.

Michael J. Hoffman – Chairman and CEO: We want both our Toro inventory and our goal would be for the same for the field.

Mark Herbek – Cleveland Research: Next question in terms of favorable commodity trends, can you talk about what that means for 2014 production. I guess Renee, is it your expectation that cost will be down versus 2013? And also then a follow-up question on that, what do you now expect your gross margin expansion to be for 2013?

Renee J. Peterson – VP, Finance and CFO: When we look at commodity trends, I mean for the remainder of the year, we’re expecting commodities to stay pretty much where they are at. They have been favorable year-to-date and have benefited us from a gross margin standpoint. Looking forward, we are still going through our planning process, and it’s early to predict what the commodity trends will be for next year. When we look at our gross margin from a total year’s standpoint, mark, we are expecting a gross margin to be up about 100 basis points year-over-year for the overall business, so, good improvement on our gross margins to-date.

Mark Herbek – Cleveland Research: Last question just on a tier 4 versus pre-tier 4, how long do you expect pre-Tier 4 inventory to be available in 2014?

Michael J. Hoffman – Chairman and CEO: There will be some mix of pre-Tier 4 inventory available ongoing through 2014. We will have both, products, or both models available. But it will be –at the end of the day, it will be limited and so what you are seeing is some of that take place in the marketplace and there are certain customers that are going to want Tier 4 compliant products that are received as relatively greener and they maybe more of some of the governmental customers if you will. But there will be a mix through a good part of 2014.

Tier 4 Impact

Sam Darkatsh – Raymond James: Couple of questions if I might. First of could you help quantify what you think the Tier 4 impact was on Q3 sales and margins? I have noticed that the professional operating margin for the whole quarter was about as low as it’s been in 10 years outside of 2009. I’m guessing that the majority of that is the Tier 4, but if you can help quantify that for a little meat on the bone that would be helpful?

Michael J. Hoffman – Chairman and CEO: Well you have answered the question. The majority of that is Tier 4. So, what we would ask you to do as we’ve done in the past, you really have to look at the year-to-date margin for pro to get a better read of that and that will, kind of, normalize going forward…

Sam Darkatsh – Raymond James: From a margin standpoint, yes, but from the sales standpoint, Mike. Can you help us in the quarter as to what it might have affected the pro-business?

Michael J. Hoffman – Chairman and CEO: Say that again, Sam?

Sam Darkatsh – Raymond James: From a sales standpoint in the quarter, what – you’ve noted that as being a negative impact on the top line and pro. So, just trying to get a sense of, if you could quantify that?

Michael J. Hoffman – Chairman and CEO: Yes. We didn’t quantify it. It is the combination of what we shipped out in the first quarter, I mean think about that and maybe we will come back again on a year-to-date basis and field inventory ties into that is now relatively normalized. Pro is or commercial is up somewhat and so looking at the third quarter standalone, it will really be misleading.

Sam Darkatsh – Raymond James: Next question, the international business up 4% was a pleasant surprise, knowing that weather in Europe is still weak and Australia is obviously going through some macro issues. You went through some of the drivers quickly, Mike, but if you could help explain some of the – what you are seeing in the international markets that’s real favorable for you right now?

Michael J. Hoffman – Chairman and CEO: Yes. It is so many pieces, right. So, we talked about what kind of, stands out for us is in Australia the (pulp) business, which is a water related business was strong for us in the quarter. The EMEA was strong in the micro irrigation business. Commercial is doing okay and Europe is the biggest market outside the U.S. and we are doing solidly there. But you know the nature of the international business is just a lot of pieces and so it’s not like one or two things to make all the difference…

Sam Darkatsh – Raymond James: Last question and it’s a housekeeping question, Renee. Did I hear you right that the tax rate for the year was expected to be about 31.5%?

Renee J. Peterson – VP, Finance and CFO: That’s correct.

Sam Darkatsh – Raymond James: Help me how to get there. I think at least by my math, it’s 31% year-to-date and you are not expecting to be all that profitable in Q4. So, how do we get to 31.5%, if it’s 31% for the year so far?

Renee J. Peterson – VP, Finance and CFO: Really, Sam what we’re doing is looking at our forecast for Q4 and our profitability by region, and trueing up our tax rate. And we’re anticipating about 31.5% for the year.

Sam Darkatsh – Raymond James: It’s the out years, how should we look at it?

Renee J. Peterson – VP, Finance and CFO: Well part of it – for this year, the biggest driver to our improvement in the tax rate is retroactive reinstatement of the R&E credit, the research and engineering credit. So, part of that is dependent on if congress decides to extend that into the future, you know that would be a positive impact for us. Otherwise, we would anticipate that our tax rate would increase without that R&E credit.

Sam Darkatsh – Raymond James: Back to that 33% to 34% range or so?

Renee J. Peterson – VP, Finance and CFO: I would anticipate that, yes.

A Closer Look: Toro Company Earnings Cheat Sheet>>