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. If at any time during the call you require assistance, please press star followed by zero, and a coordinator will be happy to assist you. 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. 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 Richard 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 and this related call contain 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 schedules 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 and this related call. With that, I will now turn the call over to Rick.
Thank you, Heather. 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 Segment 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 team's 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 offerings, fueled solid shipments and brisk retail through the quarter. Our stand-on mowers and 30-inch TurfMaster walk-behind also performed well at retail. Similarly, our worldwide golf and grounds businesses extended their positive run with strong contributions from our international partners. Large reels, greens mowers, and sprayers were in high demand. During the quarter, we also were pleased to unveil additions to our Workman GTX vehicle line, including new electronic fuel injection models and additional attachments. These introductions will help golf and grounds managers maximize performance and productivity. We were honored to support Shinnecock Hills as they successfully hosted the 2018 US Open. Our equipment helped them showcase their beautiful course to the tournament's large audience. Our golf irrigation offerings posted positive results for the quarter on the strength of increased course projects.
Ag irrigation made gains in North America for both the quarter and the year, although their quarter results were offset by lower demand elsewhere. The ongoing positive trends in construction helped drive another good quarter for our rental business based on demand across the product categories. The Dingo TX 1000 compact utility loader continues to sell well, as do our mixers, mud buggies, stump grinders, and trenchers. All have generated sales increases. BOSS snow and ice management product sales decreased for the quarter due to the timing of shipments of pre-season orders, but remained ahead for the first nine months as contractors continued to turn to BOSS for reliable products upon which their livelihoods depend. As noted, our residential business delivered the quarter's highest percentage sales gain at 9.5%. When spring finally arrived, sales of our walk power mowers and riders rebounded to register solid gains for the third quarter.
We also benefited from increased sales of our portable power products during the period. In June, we introduced our new PowerJet blower line that delivers the highest CFM or airflow of any blower in their class. Changing seasons, our residential snow products were down for both the quarter and the first nine months due to the timing of pre-season shipments and the below normal snowfall across the Midwest during the first quarter. However, we generated excitement for the winter ahead with the unveiling of the new heavy-duty Power Max snow thrower. This large 2-stage machine features our patented anti-clogging system that regulates snow intake to virtually eliminate clogging. The Power Max is designed to optimize productivity and help homeowners tackle winter's worst faster and easier than before.
Moving to our international businesses, we enjoyed a good quarter led by strong golf, grounds, and ag irrigation results in the professional segment, bolstered by increased sales of Pope and Hayter residential products. Other businesses delivered mixed results on a regionalized basis, and some efforts were impeded by adverse weather, most notably severe drought conditions in Europe and Australia. Our international team and channel partners won a number of large fleet deals and generated excitement across markets for our newest product introductions. Furthermore, we had the opportunity to proudly support the host of two major international sporting events that command the global stage. Our golf equipment helped prepare the course at historic Carnoustie Golf Links in Scotland for the 2018 Open Championship, and our turf and Perrot irrigation equipment were on duty at World Cup stadiums and training facilities across Russia.
In total, we are pleased with our third quarter results. As we head into the fall selling season, we are confident in our prospects for successfully closing out fiscal 2018 in record fashion. I will now turn the call over to Renee for a more detailed discussion of our financial results.
Thank you, Rick. 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. An 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 the $233.9 million reported for the comparable period in 2017 due to the one-time impacts 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 tables 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 increased 9.5% to $166.5 million due to the demand for our innovative new products, as well as improved weather conditions versus the late arrival of spring during the second quarter. Year-to-date residential sales decreased 5.4% to $521.2 million due to the effect of unfavorable weather conditions on demand for both our turf and snow products during the period. Earnings in the residential segment for the quarter totaled $16 million, a 40.9% increase from last year. Year-to-date earnings were $58 million, a decrease of 7.9% compared to the first nine months of fiscal 2017. Moving to our operating results.
Gross margin as a percent of sales for the quarter decreased 50 basis points to 35.6% due to unfavorable commodity and freight costs, supply challenges, and segment mix. The decline was partially offset by net price realization. Gross margin for the first nine months improved by 10 basis points to 36.6%. The improvement was driven by net price realization, favorable foreign currency, and the positive impact of segment mix, somewhat offset by increased commodities and freight costs along with supply challenges. We now expect gross margin as a percent of sales to be slightly lower for the year. SG&A as a percent of sales decreased by 70 basis points for the quarter to 21.4% and decreased by 50 basis points to 20.7% year-to-date. Prudent expense management and leveraging of costs over higher sales volume contributed to the improvement.
While effectively lowering expenditures overall, we increased investment in key strategic initiatives, including higher engineering spend on new product development. Third quarter operating earnings as a percent of sales were 14.2%, an improvement of 20 basis points from 14% in the same period last year. Operating earnings as a percent of sales improved 60 basis points year-to-date to 15.9%, compared to 15.3% a year ago. Interest expense was slightly lower by 1.6% for the quarter and by 0.7% year-to-date. The reported tax rate for the third quarter was 15.3%, compared to 22.6% last year. The adjusted tax rate for the quarter was 21.2% versus 25.9% for the third quarter of fiscal 2017. The third quarter adjusted tax rate excludes the benefit of the excess tax deduction for share-based compensation, as well as adjustments to the provisional tax items recorded in the first quarter of fiscal 2018.
For the first nine months, the reported tax rate was 29.2%, up from 23.6% a year ago, and the adjusted tax rate was 22.2%, down from 29.8% for the comparable period in 2017. The adjusted tax rates were positively impacted by the enactment of U.S. tax reform, as previously reported. For the reported rate, the unfavorable impact of one-time charges associated with the provisional remeasurement of deferred tax assets and liabilities and the provisional calculation of a deemed repatriation tax were mostly offset by the benefit resulting from the reduction in the federal corporate tax rate. The company continues to estimate that its full fiscal year adjusted 2018 effective income tax rate will be about 23%. Turning to the balance sheet. Our net working capital as a percent of sales stands at a 12-month rolling average of 14%, the same as a year ago.
Accounts receivable for the quarter totaled $219.5 million, down 1% from a year ago. Net inventories increased 4.4% for the quarter to $364.5 million due to slightly elevated levels of work in process inventory. Third quarter trade payables were $229 million, up 8.3% from a year ago. During the third quarter, we repurchased approximately 584,000 shares of stock under our board authorization, and there are 2.5 million shares remaining under our authorization. I will now turn the call back to Rick to discuss our outlook.
Thank you, Renee. To date, 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 year's end. Overall field inventories are in good shape, and forecasts suggest we will receive ample precipitation levels in most markets. That should help maintain mower sales. Just in time for contractors' fall cleanup business, our Multi-Force stand-on machine's 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, many 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 Workman GTX line. Our new Groundsmaster 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. A 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 cash related to tax reform, presents an opportunity for rental companies to invest in additional equipment for their rental fleets. Many large rental accounts are reporting increased appetites for doing so. Ongoing labor shortages mean productivity is a must, which fits perfectly with our focus on developing rental and specialty construction products that equip customers to increase productivity. Based on strong pre-season orders, the BOSS sales outlook is also optimistic. Economic conditions are positive, customer enthusiasm runs high for the latest BOSS advances, including the rear-mounted Drag Pro plow that enables operators to back up to buildings and garage doors and efficiently pull snow away from structures. Other customer favorites include our extendable plow and line of V-box spreaders. BOSS contractors are ready for the snow to fly.
Solid bookings and healthy field inventory suggests our residential businesses, like BOSS, are well-positioned to meet snow thrower demand. Heightened channel excitement over the new heavy-duty two-stage Power Max should help accelerate retail once the season hits. We also anticipate continued demand for our turf products through the fall. Finally, our international businesses are also experiencing broad market acceptance of our recent product introductions. The ProLine H800 direct-collect rotary mower, TITAN HD and MyRIDE-equipped zero-turn riders, and the newest Hayter mowers, and our new line of two-stage Toro snow throwers are all generating strong interest. Our international team is also focusing heavily on the launch of the new Outcross and Groundsmaster 1200. All said, we are well-positioned to close out the year in a positive way. The company continues to expect revenue growth for fiscal 2018 to be about 4%.
We now expect earnings per share of about $2.66-$2.69 for the year. Our guidance now reflects the net near-term impact of recently announced and enacted trade policy changes, tariffs, and related inflationary pressures on our input costs. At the time of our last call, trade policies impacting us had not materially changed or been enacted, so these factors were not included in our guidance at that time. With the fourth quarter underway, our final drive to deliver another record year has begun. While focused on our strategic priorities, we remain prepared to flexibly respond to market conditions. As we prepare to wrap up the year, I thank our employees, distributors, and channel partners around the world for their commitment and hard work that help make our strong performance possible. Together, we will finish the year strong and set the stage for a successful 2019. Thank you.
This concludes our formal remarks. We will take questions at this time.
Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please press the pound key. Our first question comes from Joseph Mondillo of Sidoti & Company. Your line is open.
Hi, everyone. Good morning.
Good morning.
Good morning.
I wanted to start off with just the margin that you realized at the professional segment, a little weaker than I anticipated. 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. 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. As we went through the year, like others, we're seeing a greater impact from freight as well, with freight rates increasing. We're certainly taking action to try to, from a freight standpoint, 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. 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.
We've seen some disruptions just from a manufacturing standpoint, able to produce all of the product, but maybe not as efficiently as we would normally like to. 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. From an overall margin standpoint, we continue our focus on productivity, always doing what we can to offset cost increases. We have implemented price increases across our businesses. As you can expect, not all of that is immediately realized. As we go through the remainder of the year and into next year, we'll see full realization related to that.
Okay, great. That's helpful. That actually brings me to my next question that I wanted to ask. If we see material prices level out from where they are here, could you just walk us through the trajectory of how price costs, 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 walk us how you are thinking about how that plays out including the third quarter and over the next couple of quarters.
Yeah. We would say that we probably would expect. There's a couple of dynamics, just the impact of commodity increases and other price increases, that we would see more of an impact of that in Q4. It's a small quarter too, 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. I think it is important to always, with Toro, step back and look at the year. We would expect going forward into F19 that we would see that more normalized, our goal always is to maintain our growth margins by business and then focus on productivity and leveraging fixed costs to improve our margins.
Okay. Probably by mid-year, it becomes sort of a neutral type of a thing, do you think?
Yeah. 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. We will, I think, have a better appreciation for that when looking next year on the timing of that one when we meet in December. We would certainly expect that it will improve as we go through the year.
Okay. Yeah. I'm sure it's very complex. All right.
Yeah. It's changing, is 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.
Good morning, Sam.
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? Try to get a sense of the step-up of it. Does it include residential, and are you concerned about any elasticity or placements as a result?
Sure. I'll take that, Sam. What we would typically say, and is true for the last couple of years, 1%-2% price realization is what has been typical. It's a tough number to exactly pin down because of exactly what you mentioned, because of the different businesses that we're in and the nature of each of those markets and channel and so forth. Based on the mid-year increases, the range is about 1.5%-3% on top of our normal annual increases. That's going to be subject, of course, to evaluation as we go into 2019 to see where the commodity prices and input costs are going and what's happening in the marketplace.
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.
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 % next year, is that going to be at a level that would also support the higher pricing?
Yes. 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 really in the fourth quarter and then really hitting their pace in 2019. Our vitality index will be very healthy next year. It's obviously available in the investor deck, but that 35% threshold should not be a problem for us.
Two more quickies, 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?
Yeah. Regarding the commodity and freight costs, we have contracts typically for those types of expenses. If we're experts at this point, I would say that steel is at the top of its range at this point, we're in shorter contract periods at this point. Regarding freight, there are some fundamental changes probably in the freight outlook that would say freight costs are going up fundamentally. Those are probably longer-term freight costs. 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, or 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 lanes and so forth.
There's a lot of things that we can do to offset the freight costs, it is apparent to us that freight costs are going up going forward until there's a substantial change in the capacity that's out there.
Final question, Rick. I appreciate that at this stage here in August, that there are some aforementioned complexities looking into fiscal 2019. As you look at Vision 2020, which has an implication of mid-20s kind of incremental margins, do you anticipate that fiscal year 2019 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 we remain committed to our Vision 2020. The implied improvements there are certainly, that's what we're working to achieve.
Very 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 on kind of okay sales growth. How are you managing SG&A, and is this level of improvement or this level of leverage sustainable?
We always try to make prudent decisions about SG&A. As you know, we have really disciplined processes. I think this quarter would just be another example of that. We continue to invest in our strategic initiatives. We spent more on new product development this quarter over last year, and we'll continue to keep that focus. Looking forward, we'll continue our focus on productivity and making wise decisions. 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. Otherwise, that is our focus then, always improving in both gross margins as well as SG&A.
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. 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 and your market share opportunity. This is a year where I think for the year, you're expecting to get back to 4% growth, and the original was around four and a half. 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? I would just love a little bit of your thinking in that area.
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 still see lots of opportunities. 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. We've got a good pipeline at this point of additional opportunities going forward.
Okay, thank you.
Our next question comes from Michael Shlisky of Seaport Global. Your line is open.
Good morning, guys.
Good morning.
Good morning, Mike. How are you?
Good, thanks. I did hear your comments, Rick, that golf did very well internationally, but does that suggest that it wasn't quite as strong domestically? Maybe share with us, Mike, kind of the current trends you're seeing kind of in your U.S. core golf business.
Really, 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 effects that hit the residential business also affect some rounds early in the spring. If you adjust for weather, the rounds played are in good shape. Fundamentally, our golf customers, with a little bit of economic confidence, are investing in their courses and buying equipment. We feel very strongly, and we expect good growth for the year.
Okay, just following up on that, on the Outcross product, you said it's going to start shipping in the very near term here. Can you maybe give us a little bit more color? Could you share with us maybe, have the orders been within your range expectations? Anything you think you might have to change once it gets out there 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, 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. Much of the target has been for golf, that we've talked about, but we've already had some great response from sports field customers as well, including some of the Premier League venues in Europe.
Got it. Also want to ask about your snow business and the box plow in particular that you had mentioned. I've seen that at some of the trade shows out there, but in chatting with some of the dealers and other folks in the industry, it seems like the box plow is a pretty, call it, regional product. I was kind of curious to see if you had a plan to expand kind of the overall growth and reach of the box plow group nationally, or is it going to still be a pretty regional product in the next 12-18 months?
We have regional strength, there's no intention to have only a regional focus. We continue to grow our scope and strength in non-traditionally strong parts of the country and parts of the world as well. It's no intention to keep that regional, we continue to see growth across the regions.
Okay, thanks. I'll pass it along.
Our next question comes from David MacGregor of Longbow Research. Your line is open.
Yeah. Good morning, everyone.
Good morning.
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 to some of the weakness this quarter. Is that what we should take here?
I would just say we oftentimes talk about looking over a couple of quarters. The transition between the second quarter and the third quarter lands at kind of a critical time in the spring. The transition in the third and fourth quarter is another critical point. 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. April kind of tapped the brakes a little bit, going into the first part of the season. It's been a very solid retail season. We've got the open order status is very positive going forward. 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 and superintendents were just holding off ahead of the Outcross shipment?
No, I don't think so. I think the shipments of the Outcross continue to be very strong going into the fourth quarter. The Outcross is not necessarily changing people's budgeting plans.
Right.
It's another opportunity for them.
Okay. Next question is just on the landscape contractor business. You talked about the 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?
Yeah, 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 a fantastic May. At the last earnings call, we had just kind of entered into the period that was a real frenzy in May. 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 the U.S. The new products were very well received, like the TITAN HD and the Radius.
It continues to drive a lot of excitement. The new diesel, we talk about it as diesel, but what's particularly remarkable is new deck options that are larger. For example, a 96-inch deck that if you just take the math, is about 33% more productive just by width, but also reduces the turnaround time, et cetera. People are seeing the productivity benefits. The last feature of that product is that the ends 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. It's just a really great combination that the market is responding to.
Good. Last question from me. I ask you about this from time to time, but just the whole area of battery-powered residential mowers. I guess my question is, when do you get 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 consumers associate 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. It's still very small at this point. What's important for us is that we introduce a product that meets our expectations, first of all, but that we know that our customers will be pleased with. Adoption of battery-powered products in Europe has been stronger than U.S., there are fundamentally some reasons for that, smaller lots and yards and so forth. We believe it will continue to be a factor. We obviously have a lot of activities going on in different technology areas. For the pro side, the hybrids that we've introduced with our professional products have been extremely well-received and really solve the energy problem that's inherent with batteries.
We continue to feel that alternative energy sources are a major factor going forward, we have a lot of activity going on in those areas.
You note that the category is still small. At what point does it become maybe a higher priority for you? I mean, the category is already starting to segment. People are developing good, better, best offerings at retail, and just what level of development in that category do you need to see to become more active?
Yeah, we are investing in those categories right now. It's an area that is definitely interesting to us. I think, again, the key is that it's the right products, which is the approach that we took with the commercial side. When we introduce products, they have done extraordinarily well in the marketplace. 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. Thank you very much.
Thank you.
Thank you.
We have a follow-up question from Joseph Mondillo of Sidoti & Company. Your line is open.
Hello, Joe?
Yeah, sorry. Do you hear me now?
Okay.
Joe?
Yeah, we can now.
Sorry, I think I was on mute. I have a two follow-up 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 two 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 it still When do we sort of see a pick-up of benefits from productivity improvement projects that you're doing?
Yeah, I'm happy to talk about that. We're already seeing the benefits. We initiated and increased our investment in those areas some time ago, for good reason, and thankfully so. It's really helped us offset much of the impact that we've seen with higher input costs from commodities, freights, et cetera. 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 using Lean as a tool, have been extremely helpful and have helped us offset a lot of what we would have otherwise had to pass on either as price increases or take in our margins. The work that we've done has been very helpful, and there's much more that we can do.
Just to follow up on that, given the backlog of things that you got going on, projects that you foresee, do you see the magnitude of benefits increasing in, say, in fiscal '19, or is it sort of gonna be a steady eddy where you continue to see some of these benefits that you've already started to see here?
My prediction would be that 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 a consistent supply of components, we've just seen tremendous benefits in the work that we've done with Lean and improving our operations.
Okay, great.
Go ahead.
I'm sorry.
I was just going to mention the other side would be technology. The technologies that we're excited about for our products, in many cases, hold true in our plants as well. There are great opportunities for us to invest in projects that have a great return that 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?
Yeah. In the landscape area, for the landscape contractor, it's always been a large field, there are lots of competitors. With any group of competitors, there are a few major ones, we have lots of secondary competitors, if you will. That fundamentally hasn't really changed. There's been a few that have gone and a few more that have come in.
Okay. Lastly, regarding your European footprint, with this drought that we're seeing at this point in time, I know it's probably early, what kind of risk do you see inventories ending the year at above average levels and sort of affecting the spring season next year?
Yeah. We're actually in great shape in inventories really across the company, that's not a concern. I would point out, just speaking recently with some of our channel partners from Scandinavia, Northern Europe, they did have an excellent winter. That was after three years, roughly, of kind of lower snowfall. We did 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. If the market ends up with above average inventories, do you see that as a risk? If so, I would think it would probably translate into maybe a tougher spring. Just wondering your thoughts about the channel inventories, not your internal inventories.
I was actually referring to our field inventory. That's in good shape, which would include the channel.
Okay.
We still have good retail momentum in many of our categories, even in Europe.
Okay. Good to hear. All right. Thanks a lot. Appreciate it.
All right. Thank you.
We have a question from the line of David MacGregor from Longbow Research. Your line is open.
Yeah. Thanks for taking the follow-up. Rick, I guess I wanted to draw from your years of experience in this business, and I know there's a lot of concerns right now about where we are in the cycle. 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. What do you watch as kind of the canaries in the coal mine on the cycle?
We would probably look at more macroeconomic things, tying to consumer confidence, those kinds of things that would 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.
Yeah.
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 that you kind of overweight or over-index?
The group of indicators would be, as I mentioned, consumer confidence, business confidence.
construction, housing starts, those kinds of things.
Okay. Nothing on a bottom-up basis, nothing intrinsic within the business that's on the dashboard?
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. Absolutely, David, we would be looking at those type of things as well.
Okay. Just second, you're seeking price initiatives, and you've talked about that already, but I know you normally seek pricing at the end of the year, October each year. I guess just given the increases this summer, is it likely you'll pursue the regular calendar increase this year come the end of the fourth quarter?
The price increases that we talked about as being incremental really are mid-year price increases, so we'll be going through a normal pricing process as we go into the next year.
Right. 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.