Earnings Call: Q3 2018

Aug 23, 2018

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 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 Hilly, Director of Investor Relations and External Communications for The Toro Company. Please proceed, Ms. Hilly. Our earnings release was issued this morning by Business Wire and a copy of the earnings release, including a reconciliation of non GAAP measures can be found in the Investor Information section of our corporate website, sotorocompany.com. On our call today are Rick Olson, Chairman and 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 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 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, and good morning to all of our listeners. This morning, we are pleased to announce record 3rd quarter results. Net sales for the quarter increased 4.4 percent to $655,800,000 3rd quarter net earnings per share grew 19.7 percent to $0.73 while adjusted earnings per share rose 17.2 percent to $0.68 Year to date, net sales increased 3.1 percent 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 professional portfolio, most notably for our landscape contractor equipment. For the 1st 9 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 3rd quarter growth. Residential sales were down 5.4% year to date as demand for our snow and turf products were negatively impacted by the low 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 1st 9 months of the fiscal year, Renee will discuss our financial and operating results in more detail. Our strong Q3 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 inches Turf Master positive run with strong contributions from our international partners. Large reels, greensmowers 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 U. S. 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 TX1000 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 1st 9 months as contractors continue 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 Q3. 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 1st 9 months due to the timing of preseason shipments and the below normal snowfall across the Midwest during the Q1. However, we generated excitement for the winter ahead with the unveiling of the new heavy duty PowerMax Snow Thrower. This large 2 stage machine features our patented anti clogging system regulates snow intake to virtually eliminate clogging. The PowerMax 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 pulp and hater 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 excitements across markets for our newest product introductions. Furthermore, we had the opportunity to proudly support the host of 2 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 Parrot irrigation equipment were on duty at World Cup stadiums and training facilities across Russia. In total, we are pleased with our 3rd quarter results. As we head into the fall selling season, we are confident in our prospects 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, and good morning, everyone. As we reported earlier this morning, net sales for the quarter were $655,800,000 compared to $627,900,000 for the same period a year ago. We also delivered net earnings of $79,000,000 or $0.73 per share compared to $0.61 per share in the Q3 of fiscal 2017. Adjusted net earnings for the quarter were $73,500,000 or $0.68 per share compared to $65,500,000 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 percent to $2,079,000,000 We achieved net earnings of $232,900,000 for the 1st 9 months or $2.14 per share compared to $2.10 per share a year ago. Reported net earnings for the 1st 9 months were slightly lower than the $233,900,000 reported for the comparable period in 2017 due to the one time impacts of tax reform. Adjusted net earnings for the 1st 9 months increased by 21.8% to $255,900,000 or $2.35 per share. This compares to adjusted net earnings of $215,000,000 or $1.93 per share for the 1st 9 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 $482,500,000 led by the demand for our landscape contractor equipment. Year to date, professional sales were up 6.6 percent to $1,547,000,000 fueled by the demand in our landscape contractor, golf, grounds, rental and specialty construction businesses. Professional earnings for the quarter totaled $97,700,000 up slightly compared to last year. For the 1st 9 months, professional segment earnings were $338,600,000 up 7.6% compared to the same period. 3rd quarter residential sales increased 9.5 percent to $166,500,000 due to the demand for our innovative new products as well as improved weather conditions versus the late arrival of spring during the Q2. Year to date residential sales decreased 5.4 percent to $521,200,000 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 $16,000,000 a 40.9% increase from last year. Year to date earnings were $58,000,000 a decrease of 7.9% compared to the 1st 9 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 percent 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 1st 9 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 and A as a percent of sales decreased by 70 basis points for the quarter to 21.4 percent 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. However, while effectively lowering expenditures overall, we increased investment in key strategic initiatives, including higher engineering spend on new product development. 3rd 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 percent a year ago. Interest expense slightly lower by 1.6% for the quarter and by 0.7% year to date. The reported tax rate for the 3rd quarter was 15.3% compared to 22.6% last year. The adjusted tax rate for the quarter was 21.2% versus 25.9 percent for the Q3 of fiscal 2017. The 3rd 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 Q1 of percent a year ago and the adjusted tax rate was 22.2 percent, down from 29.8 percent 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 $219,500,000 down 1% from a year ago. Net inventories increased 4.4 percent for the quarter to $364,500,000 due to slightly elevated levels of work in process inventory. 3rd quarter trade payables were $229,000,000 up 8.3% from a year ago. During the Q3, we repurchased approximately 584 000 shares of stock under our Board authorization and there are 2,500,000 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 Q4 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 forecast suggests we will receive ample precipitation levels in most 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 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 construction businesses. Overall, the outlook for construction remains strong as due to 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 preseason orders, the BOSS sales outlook is also optimistic. Economic conditions are positive and 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 tile and line of B box spreaders. BOSS contractors are ready for the snow to fly. Solid bookings and healthy field inventory suggests our residential businesses like BOSS is well are well positioned to meet snow thrower demand. Heightened channel excitement over the new heavy duty 2 stage PowerMax 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 2 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 to $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. For the 4th with the Q4 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 helped 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, and we will take questions at this time. Our first question comes from Joe Mondillo of Sidoti and 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 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, a greater impact from freight as well with freight rates, increasing. So we've certainly taken action to try to 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. But 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 product, 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 preseason 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'll 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 out from where they are here, could you just walk us through the sort of the trajectory of how price cost that headwind, what degree does it hit your P and L on a quarterly basis? Is Q4 the worst quarter and then it becomes smaller in the Q1? Just sort of walk us how you are thinking about how that plays out over the including the Q3 and over the next couple of quarters? Yes. 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, 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 as always with Toro step back and look at the year. We would expect going forward then into F 2019 that we would see that more normalized. And our goal always is to maintain our Okay. So probably by mid year it becomes sort of Okay. So probably by mid year, it becomes sort of a neutral type of a thing, do you think? Yes. 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 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 would improve as we go through the year. Yes, I'm sure it's very complex. Yes, 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, 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 the step up of it? And does it include residential? And are you concerned about any elasticity or placements as a result? Sure. I'll take that, Sam. So if you what we would typically say and is true for the last couple of years, 1% to 2% 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 the different businesses that we're in and the nature of each of those markets channel and so forth. But we would, based on the mid year increases, the range is about 1 point 5% to 3% on top of our normal annual increases. And then 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. 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 then 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 really in the Q4 and then really hitting their pace in 2019. 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 2 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? Yes. Regarding the commodity and freight costs, we have contracts typically for those types of expenses. So in some case, if we're experts at this point would say that steel is at the top of its range at this point. So 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. 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, 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. So there's a lot of things that we can do to offset the freight costs, but 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, there are some aforementioned complexities looking into fiscal 'nineteen. But 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. We as Renee mentioned, we work hard to improve our gross profits and we are remain committed to our vision 2020. So the implied improvements there are certainly that's what we're working to achieve. Our next question comes from Eric Bosshard of Cleveland Research. Your line is open. Good morning. Good morning. Good morning. 2 things. First of all, on SG and A, the SG and A leverage was better in the quarter on kind of okay sales growth. How are you managing SG and A? And is this level of improvement or this level of leverage sustainable? We always try to make prudent decisions about SG and A. As you know, we have really disciplined processes. And I think this quarter would just be another example of that. We continue to invest in our strategic initiatives. So we spent more in 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 if those are the right things to do, we'll do that. But otherwise, that is our focus. 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 and 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 and your market share opportunity. This is a year where think for the year you're expecting to get back to 4% growth and the original was around 4.5%. Is 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? We just love 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 still 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. So we still continue to see opportunity to grow organically and then through M and 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 of additional opportunities going forward. Our next question comes from Mike Schlosky of Seaport Global. Your line is open. Good morning, guys. Good morning, Mike. How are you? Good. Thanks. So I did hear your comments, Rick, that Golf did very well internationally, but does that suggest that it wasn't quite as strong domestically? So maybe share with us kind of the current trend 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. 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. And just following up on that, on the Outcross product, you said it's going to start shipping in the very near term here. Could you give us a little bit more color? Could you share with us maybe how the orders been within your range of expectations? Anything you think you have to change once it gets out there as far as new features and size wise, etcetera? So far, we have a small number of products that are 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, 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. I 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 where the overall growth and reach of the box product group nationally? Or is it going to still be a regional product in the next 12 to 18 months? We have regional strength, but there is no intention to have only a regional focus. And we continue to grow our scope and strength in non traditionally strong parts of the country and parts of the world as well. So it's no intention to keep that regional, and 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. Yes. 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 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. So the transition between the Q2 and the Q3 lands at kind of a critical time in the spring. The transition in the 3rd Q4 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 1st part of the season. But it's been a very, very solid retail season. We've got the open order status is 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 and superintendents were just holding off ahead of the across shipment? No, I don't think so. I think the shipments across the board continue to be very strong going into the Q4. 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 the strength in there in that area of the business. I guess that business, I believe, had a price increase in early August. Just wondering to what extent did pre buy ahead of the increase contribute to the Q3 pro sales growth? Yes, I would not say that that's not a significant factor at this point. I would 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 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 the U. S. The new products were very well received and like the Titan HD and the Radius and continues to drive a lot of excitement. The new diesel, we talked about it as diesel, but what's particularly remarkable is new deck options that are larger. And so, for example, a 96 inches deck that if you just take the math is about 33% more productive just by width, but also reduces the turnaround time, etcetera. So people are seeing the productivity benefits. And then 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. 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 get more visible in this rapidly developing category? Is there a plan to be a fast follower here? And I guess I'm just wondering if you're losing the pioneering advance here being kind of a 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 point. And what's important for us is that we introduce a product that meets our expectations, 1st of all, but 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 and 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 professional 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. You noted the group is 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. Just what level of development in that category do you need to see to become more active? Yes. We are investing in those categories right now. So it's an area that is definitely interesting to us. Think again the key is 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. Thank you very much. Thank you. Thank you. And we have a follow-up question from Joe Mondillo of Sidoti and Company. Your line is open. Hello, Joe? Yes, sorry. Do you hear me now? Yes, we can now. Sorry, I think I was on mute. I wanted to I have a couple of 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 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 it 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're 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 the impact that we've seen with higher input costs from commodities, freight, etcetera. So we've had some challenges with suppliers with a 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. So it's the work that we've done has been very helpful and there's much more that we can do. So given just a 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 2019? Or is it sort of going to be a steady Eddie 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 a consistent supply of components, we've just seen tremendous benefits in the work that we've done with lean and improving our operations. 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. So 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 competitive landscape there at all? Yes. On the in the landscape area, the for the landscape contractor, it's always been a large field. So there are lots of competitors there with any group of of competitors. There are few major ones, but then we have lots of secondary competitors, if you will. And that fundamentally regarding your European footprint, regarding your European footprint with this drought that we're 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 at above average levels 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 3 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 the summer. I was actually more so talking about the channel inventory. 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 inventories, not your internal inventories? I was actually referring to our field inventory. So that's in good shape, which would include the channel. And we still have good retail momentum in many of our categories, even in Europe. Okay. Good to hear. Thanks a lot. 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 there's a lot of concerns right now about where we are in the cycle. 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 as kind of the canaries in the coal mine on the cycle? We would probably look at more macroeconomic things. So, tying to consumer confidence, those kinds of things, it 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. So really, we would just 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 the future. Can you be specific about 1 or 2 indicators that you kind of overweight or over index? The type the group of the 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? Well, 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. And then just second, you normally 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, kind of 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 Q4? We the price increases that we talked about as being incremental really are midyear 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. Hilli, 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 Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Everyone have a great day.