Toro Company Earnings Call Nuggets: Channel Inventories and Gross Margin Details

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

Channel Inventories

Sam Darkatsh – Raymond James: A few questions here, first all, you mentioned your own inventories where they were a little bit higher certainly on a year-on-year basis. Can you talk more about the channel inventories where you see them being a little bit more flush than perhaps you would like to see. And specifically where that is, whether it’s pro versus resi, or domestic versus international certain product lines, what have you?

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Michael J. Hoffman – Chairman and CEO: Sure, some of this is planned, some of it is impacted certainly by the recent weather. But first one would be the commercial products and the impact of Tier 4 and kind of the distributors pulling those things into their inventories and that’s been considered in our guidance as we look through the rest of the year and it’s certainly contemplated in as we talked about little softer in the second half. But as you know, we always do. We look at the year and deal with it that way. So that would be at the top of the list. The second would be the landscape contractor business, and they are still – landscape contractors, the business was ahead, if you will, until we hit the March-April skid, largely due to weather. But there’s still optimism, we have some really strong new products out there, and so the channel has a bit more inventory than it did last year, but what’s going on in May that’s quickly correcting, and we believe that will correct through the year as well. And then the last one, a bit of snow and walkers, but this is again through the end of April the velocity or momentum right now at retail for residential and for landscape too is very, very strong.

Sam Darkatsh – Raymond James: Two more very quick inventory questions and I have another follow-up then. So, do you still expect your own inventories by year end to be down on a year-on-year basis or have you revised that based on how the season is playing out?

Renee J. Peterson – VP, Finance and CFO: Yeah. Sam, we do expect that inventory will decline sharply in the second half and have incorporated that again into our sales guidance.

Sam Darkatsh – Raymond James: Sharply versus today, but year-on-year, would it be down also by the end of the fiscal year?

Renee J. Peterson – VP, Finance and CFO: Yes, Sam, it would be down year-over-year…

Sam Darkatsh – Raymond James: Next question. So John Deere in its comparable business twice now this year has taken their own industry expectations lower and it looks like only now you are starting to see it or at least recognize it publicly that that might suggest that perhaps your field inventories might be a little bit more flushed than theirs. As their dealers perhaps acted a little bit quicker to right size their inventories is that a fair assessment or is it just not really all that comparable to be looking at it in that respect.

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Michael J. Hoffman – Chairman and CEO: I think I would say it’s not that comparable and so obviously we’re focused on our business. The fact is that if ours were a little more plush it would actually think going the other way, but the bottom line is that, we don’t really know what’s going on there and the numbers are pretty limited and so our numbers are pretty clear.

Sam Darkatsh – Raymond James: Last question and then I’ll defer to others. Your residential business being down what 13%, looks like the walks and mowers at retail are down maybe mid-single digits in the industry. If that’s the case do you think you lost share or is there some mix issues, there. Can you help reconcile the delta between what you saw at residential versus perhaps what the industry was doing?

Michael J. Hoffman – Chairman and CEO: I don’t think we’re losing any share as we look at our business and our working with our channel partners in this case, (depot) and dealers. This was largely what happened in March and April compared to last year. The industry might be down a little bit that will really in many respects depend on what happens this summer, so it’s down to-date it was actually ahead in this down to-date, because of the March, April impact, but is coming back very strong in May and if the precipitation patterns continue, some forecasting to suggest they will, but we’re really careful on commenting on the weather, but if that does in fact happen, then we will have very strong comp come June, July, August when we comped against – where we will be comping against the drought last year. And the bottom line is, when there’s moisture in the ground and the grass is growing, it tends to use up the mowers, residential mowers, landscape mowers, even golf course mowers, somewhat more than when it’s very dry. It just makes the products work much harder. So I guess that’s one where we’ll say, we’ll see, but as you know, we’re very focused on the share and competing in the market, and at this point our lineup, our placement is good and sound and our price points are good and we think we’re okay there.

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Gross Margin Details

Mark Herbek – Cleveland Research: Renee, first question for you, just so that I understand the gross margin. You now expected to be up 60 or up 60 on top of 40 for 100 for the full year?

Renee J. Peterson – VP, Finance and CFO: The latter; 60 on top of 40 for a 100.

Mark Herbek – Cleveland Research: And then in terms of the sales, when you look at your second half implied sales growth, it looks like you’re expecting your sales growth to be stronger in the back half than it was in the first half, but throughout the call you talked about a little bit softer golf. Can you just help us reconcile why the second half sales growth will be better than the first half, given some of the more cautious pro comments that you had, specifically as it relates to golf?

Michael J. Hoffman – Chairman and CEO: Well, again our growth is all in, so it’s golf, it’s landscape contractors, it’s residential, and a significant part of that as we see the retail velocity going on right now, we’ll be hopefully picking that up, and so as we talk to the impact of mix on the second half as it moves more towards residential, which is going on right now. May shipments are up significantly in Residential, because last year we were shipping a lot of that product in March and April. And, so golf will moderate somewhat, but again that’s our shipments and we said inventory is a little higher out there, but golf retail has been and continues to be strong. And so, we put all those pieces together. Certainly, we have a very strong focus here on retail. What’s going on in the gold equipment, golf irrigation, landscape contractor – I mean all the way through portfolio, and so we’ve moderated ours a bit, but we expect some stronger retail in the second half across all these business, which will bring inventories nicely into line.

Mark Herbek – Cleveland Research: The one point cut to sales guidance, is that all due to consumer or some of that due to Pro as well?

Michael J. Hoffman – Chairman and CEO: I would guess largely Residential, even though we expect still some Residential catch up, and I don’t have I guess that detail out in front of me here.

Mark Herbek – Cleveland Research: Last question, non-U.S. strong quarter non-U.S., what’s driving that? I know you mentioned both Europe and Asia were positive. Is one region stronger than the other? Should we expect 5% to 10% growth in the back half in this market – in the non-U.S. market as well or just kind of walk me through your thoughts on the non-U.S. business from this point?

Michael J. Hoffman – Chairman and CEO: Well, if you look at our back half growth, I don’t think it’s going to be disproportionate to the rest of the Company if you will or the U.S. I guess I started with – when we started the year, we said, Europe was kind of muddling along, if you will, we didn’t expect a step-change up or down, okay. And so we’re on the relative positive side of that. It’s improving very slowly and that’s driving some retail. This slowed down a little bit because they’ve had some of the similar weather challenges, but that seems to be picking up a bit. Asia continues to be much about the recovery from the tsunami. That was not just a one year phenomenon. We are seeing some – that’s the largest market, Japan is the largest market for golf there. Some of the other markets are doing okay, but China remains kind of a work in progress, and I would say more if it is Japan. Australia, we’re in counter season for Australia, so they’ve got some I think heat and drought challenges, but all-in, we would not expect international to be a strong driver of sales just proportionate if you will in the second half…

Mark Herbek – Cleveland Research: Do you have an expectation for snow shipments in the fourth quarter given the strong sell-through towards the end of the year? Have you revised your expectations for snow?

Michael J. Hoffman – Chairman and CEO: Yeah. Snow will be up in the fourth quarter year-over-year, and as we’ve talked in the past, the snow business is really the tale of two seasons, the predictable preseason and the unpredictable in-season. So again, if we comp, if we look at the comp opportunity, last year’s predictable preseason was very low, because we are coming off of no snow and it was a very soft preseason. Now, the fact is that the snow that we received this last season kind of through ’12, late ’12 and early ’13 well, more of them came in ’13. So they came too late in many respects to drive as much retail as we would have liked in that season, but it sets the stage very nicely going into the ’13 preseason. So we would expect snow comparisons to be favorable, very favorable as we head into the fourth quarter and hopefully the first quarter.

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Mark Herbek – Cleveland Research: Is it fair to assume that the snow loading is going to be stronger than you would have expected 90 days ago?

Michael J. Hoffman – Chairman and CEO: Yes.

Mark Herbek – Cleveland Research: And that’s in your guidance as well?

Michael J. Hoffman – Chairman and CEO: It is, I mean because we’ve got most of that snow in last 90 days unfortunately, we have too much snow in March and April and even May. On a serious note it does help drive behavior as we head into next year’s September or the next season September October, November.

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