Good day, ladies and gentlemen, and welcome to The Toro Company's first quarter earnings conference call. My name is Bridget, and I will 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 conference 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, Ms. 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 Rick Olson, Chairman and Chief Executive Officer, and Renee Peterson, Vice President, Treasurer, and Chief Financial Officer. We begin with our customary forward-looking statement policy, as well as information regarding non-GAAP measures. During this call, we will make forward-looking statements regarding our business and future financial and operating results. You all are aware of the inherent difficulties, risks, and uncertainties in making predictive statements. Our earnings release, as well as our SEC filings, 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 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. Fiscal 2018 is off to a good start with record sales for the first quarter. Strong, broad-based demand in our professional businesses, including our landscape contractor, golf, rental, and ag irrigation products, led the way, helping deliver sales growth of 8.6% for the professional segment. Residential sales were up 1.5% for the quarter due to higher shipments of riding products and walk power mowers that were somewhat offset by lower demand for snow throwers. While the first quarter is traditionally a smaller one, we are pleased to have delivered strong results, including record net sales of $548.2 million, an increase of 6.3%, and net earnings of $22.6 million, or $0.21 per share. These earnings results are lower than our reported 2017 net earnings due to the one-time charges associated with U.S. tax reform.
Adjusted 2018 first quarter net earnings were $52.1 million, or $0.48 per share, which includes a $0.06 benefit from the lower corporate tax rate and excludes a $0.03 benefit for the excess tax deduction for share-based compensation. Compared to adjusted net earnings of $40.1 million, or $0.37 per share in the comparable 2017 period, an increase of 29.7%. Please see the tables and information included in our earnings release for a reconciliation of non-GAAP adjusted net earnings and adjusted diluted earnings per share to the comparable GAAP measures. While earnings for the quarter were affected by upfront charges from the tax reform legislation, the reforms will reduce our overall tax rate and prove to be beneficial in the future. Following a brief commentary on our businesses, Renee will discuss our financial and operating results in more detail.
First, our landscape contractor equipment lines experienced solid first quarter demand for our Lazer and Titan HD zero-turn riders and heavy-duty walk power mowers. Demand for riders was particularly strong as the channel prepared for the spring. Next, our golf and sports fields and grounds businesses delivered solid results for the quarter, driven primarily by shipments of greens mowers and large reel mowers to meet golf demand. Customers value our EdgeSeries reels because they provide enhanced quality of cuts and reduced maintenance costs. Golf irrigation shipments were up slightly from the first quarter of 2017. Sales of our INFINITY sprinkler continue to grow. The vehicle business also enjoyed a good first quarter in the sports field and ground market, driven by interest in our new Workman GTX utility vehicles.
The GTX was part of a fleet of Toro products that, along with a crew of Toro employees, helped prepare U.S. Bank Stadium, home of the Minnesota Vikings, to host Super Bowl LII. Our HDX vehicles and SandPros, both equipped with our synthetic turf brush, along with Pro Force blowers, helped groom and dry the field. We are honored to have supported this and all of the preceding Super Bowls. Turning to our rental and construction business, shipments of the TX 1000 compact utility loader and the tracked mud buggy drove growth for the quarter, and we began shipping our new completely redesigned directional drill. We also were pleased to learn that our tracked mud buggy won the 2017 Innovative Product Award by a leading rental magazine, the Rental Equipment Register. Our irrigation businesses overall contributed nicely to the quarter. The agriculture line posted strong gains across markets.
Aqua-Traxx tape with flow control continues to attract growers. Early placements by our DIY channel were also ahead of last year. Positive overall irrigation sales were somewhat offset by lower shipments of Unique lighting products, largely due to the effects of channel consolidation. Like our other professional businesses, BOSS experienced favorable customer reactions to our latest snow and ice management solutions. HTX straight blade plows with the new downforce option performed particularly well. HTX V blade plows for half-ton trucks and DXT V blade plows continue to be highly valued by our commercial contractors. The late timing of significant snow events in certain key markets, most notably in the Midwest, decreased sales for the quarter. The low snowfall levels through December similarly softened demand for our residential snow throwers. However, strong shipments of lawn products, especially zero-turn riders, helped deliver growth for the quarter.
Late snowfalls did generate retail activity that is helping to reduce field inventories. Finally, the momentum the international business achieved last year continued across businesses and regions through the quarter. Increased demand for landscape contractor, golf, grounds, commercial irrigation, and specialty construction equipment, as well as the addition of Perrot, fueled strong professional business results. Our solid international residential growth for the quarter was largely driven by demand for zero-turn riders. Our international results were modestly enhanced by favorable exchange rates. 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 Heather and Rick mentioned, we have included both GAAP-reported and non-GAAP adjusted financial measures for net earnings, diluted net earnings per share, and Toro's effective tax rate. In view of tax reform, we recognize that this quarter is one of transition. Therefore, I would like to walk from our previous Q1 EPS guidance to our adjusted Q1 EPS actual results. Our previous Q1 EPS guidance was $0.42-$0.44 per share, which included a $0.04 benefit related to the excess tax deduction for share-based compensation at pre-tax reform rates. Excluding this $0.04 benefit, the operational earnings per share was $0.38-$0.40. The actual Q1 excess tax deduction for share-based compensation came in consistent with that guidance but resulted in a slightly lower net benefit of $0.03 due to the lower corporate tax rate from reform.
As Rick mentioned earlier, if we start with our reported Q1 EPS of $0.21 and first add back $0.30 for the one-time charges related to tax reform, and then subtract $0.03 for the benefit from share-based compensation, we achieved an adjusted Q1 EPS of $0.48 per share compared to an adjusted $0.37 in the comparable period. The adjusted Q1 EPS of $0.48 per share includes a $0.06 benefit due to the lower tax rate, which was not included in our previous Q1 guidance. When this benefit is excluded, it brings us to an operational performance of $0.42 per share, which exceeded our previous Q1 operational performance guidance of $0.38-$0.40 per share on a comparable basis. In other words, our Q1 performance exceeded the top end of our guidance by $0.02 per share.
Going forward, we are providing adjusted measures that exclude the one-time charges associated with U.S. tax reform and also exclude the benefit of the excess tax deduction for share-based compensation. We believe that excluding these items may be useful in performing more meaningful comparisons of past and present operating results and help the reviewer to understand the company's operating performance more clearly. Now that we've walked through the changes from our Q1 reported to adjusted EPS results, let's step back and walk through the Q1 financials in more detail. As reported this morning, net sales for the quarter increased 6.3% to a record $548.2 million, compared to $515.8 million for the same period a year ago. We delivered net earnings of $22.6 million, or $0.21 per share. Earnings for the quarter were lower than our 2017 reported net earnings of $45 million or $0.41 per share.
This decline is due to the one-time charges related to tax reform. Adjusted first quarter net earnings were $52.1 million or $0.48 per share, which represents an increase of 29.7%. Please refer to the tables in our 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 grew 8.6% for the quarter to $403.7 million due to strong performances across many of our businesses. Professional segment earnings for the quarter totaled $75.9 million, an increase of 11.4% compared to $68.2 million a year ago. Our residential segment sales for the quarter increased 1.5% to $142.5 million. These positive results were driven primarily by increased channel demand for riding products, but were somewhat offset by softer demand for snow products and related service parts.
Residential earnings for the quarter totaled $15.7 million, down 5.1% from $16.6 million last year. Now to our key operating results. First quarter gross margin decreased by 20 basis points to 37.3%, due primarily to increased commodity costs and unfavorable product mix within segments. The decrease was somewhat offset by favorable exchange rates. SG&A as a percent of sales decreased 70 basis points for the quarter to 25.1%. The leveraging of expenses over higher sales volume largely drove the improvement. Operating earnings as a percent of sales were 12.2% for the quarter, an improvement of 50 basis points compared to 11.7% in the same period last year. Interest expense for the quarter finished down slightly. The reported tax rate for the first quarter was 66% compared to 24.5% last year. The quarter was significantly impacted by tax reform.
The increase was driven by the provisional remeasurement of deferred tax assets and liabilities and the provisional calculation of the deemed repatriation tax, which resulted in discrete tax charges of $20.5 million and $12.6 million, respectively. Please note that the remeasurement of our net deferred tax asset is a non-cash charge, and the deemed repatriation tax is payable over eight years. The unfavorable impact of these one-time charges was partially offset by the benefit resulting from the reduction in the federal corporate tax rate. The adjusted tax rate for the quarter was 21.5% compared to the adjusted tax rate of 32.7% in the same period last year. The adjusted tax rates exclude the one-time charges associated with U.S. tax reform and exclude the benefit of the excess tax deduction for share-based compensation.
The company currently estimates that its full fiscal year adjusted 2018 effective income tax rate will be about 23%. For fiscal 2019, the company currently estimates that its adjusted effective income tax rate will be about 21%-23%. The exclusion of the excess tax benefit for share-based compensation increases our adjusted effective tax rate by about three points for fiscal 2018 and 2019. Turning to the balance sheet. Accounts receivable for the quarter totaled $198.7 million, up 8.1% from a year ago, due largely to increased sales and foreign currency exchange rates. Net inventories for the quarter were up 9.3% to $439.3 million. This increase was mainly due to higher anticipated planned sales in several businesses and the impact of foreign currency exchange rates in the year-over-year comparison. First quarter trade payables increased 14.7% to $266.6 million.
At the end of the quarter, the company's 12-month average net working capital as a percent of sales was 13.8% compared to 15.1% a year ago. We are increasing our free cash flow guidance from $250 million to $280 million. The revised guidance incorporates the impact of tax reform, including the benefit of a lower tax rate, the non-cash reduction in our net deferred tax asset, and the installment payment timing of the deemed repatriation tax. Our dividend guideline remains unchanged at 30% to 40% of three-year average reported earnings per share. As such, we intend to increase our regular dividend in line with our reported EPS growth. We repurchased over 774,000 shares of common stock during the quarter and have approximately 4.2 million shares remaining in our repurchase authorization as of quarter end.
Before I turn the call back to Rick, I would like to walk from our prior fiscal 2018 full year EPS guidance to our adjusted fiscal 2018 EPS guidance. Our prior full year EPS guidance was $2.57 to $2.63, which included a $0.17 benefit for the excess tax deduction for share-based compensation at pre-tax reform rates. Our adjusted full year EPS guidance for fiscal 2018 now excludes the $0.17 benefit from the excess tax deduction for share-based compensation, and it includes a $0.27 benefit related to the post-tax reform lower corporate tax rate. Our adjusted guidance also excludes the $0.30 one-time charge associated with tax reform. This results in an adjusted fiscal 2018 EPS guidance of $2.67 to $2.73. In essence, our expected underlying operational performance for the year remains the same as our prior EPS guidance. I will now return the call to Rick.
Thank you, Renee. Fiscal 2018 is off to a positive start, fueled by our strong first quarter operating performance. Our employees' commitment to the company's key priorities positions us well to maximize results for the year. These priorities focus on accelerating profitable growth, driving productivity and operational excellence, and empowering people. In light of the anticipated long-term benefits of tax reform, we will evaluate additional investment opportunities consistent with our disciplined capital allocation strategy. Our strategic priorities will remain unchanged. First, we will invest in research and development, along with strategic acquisitions in order to drive profitable growth. Using the latest technologies will help us continue to provide customer valued innovations and services. A good example of this is our recent investment in GreenSight, the leading provider of agronomic drone services for golf courses.
Second, we will work to improve processes, eliminate waste, reduce cost, and improve quality through continued investments in lean information technologies and automation. Third, we will strive to empower our greatest asset, our people, to be the best that they can be by investing in their development and wellbeing. As we meet these strategic priorities, we will continue to return value to our shareholders. Let's take a look at the anticipated effects of these commitments, in particular, our drive to accelerate profitable growth by providing customer valued innovation and service on our business prospects for the year. Beginning with our landscape contractor business, our new products have generated early excitement and demand. Contractors are showing strong interest in our diesel zero-turn riders, featuring high capacity decks and our 24-inch stand-on aerators.
Our patented next generation onboard mower intelligence system that promotes longer machine life, increased productivity, and better fuel efficiency is attracting customers with its time and money saving benefits. Innovation and productivity are also characteristics of the new golf and grounds products we promoted during the recent FTMA and golf industry shows. Attendees reported favorable budget positions, which supports our expectations for extending the business's solid sales. The revolutionary Outcross was a show favorite. Part tractor, part heavy duty vehicle, the Outcross is designed to replace multiple pieces of equipment and change and simplify the way turf managers complete critical tasks. Our latest myTurf Pro web-based asset management system represents another significant advancement in smart technology. The system connects and manages equipment, attachments, irrigation, and other turf maintenance assets, regardless of brand. It tracks fuel usage, operating hours, maintenance records, and all needs.
These systems also provide parts ordering recommendations based on users' inventory and maintenance requirements. Our irrigation team unveiled a number of smart solutions in the form of our new Lynx 6.0 central control system, the new Lynx smart modules, and new sensor input kits. These advancements optimize operators' ability to remotely control complex irrigation systems and enhance the precision of their irrigation system. Other important product launches include the new Workman GTX powered by an EFI engine and a Groundsmaster pull-behind rotary with a 12-foot cutting width that easily attaches to the Outcross or traditional tractors. We also showcased a new addition to our INFINITY Stealth Sprinkler series, the synthetic no bounce cover. Rounding out our show introduction is the INFINITY Razor system. The Razor addresses the inevitable sinking of sprinkler heads by raising them to grade in one-half inch increments.
This reduces the need for digging to manually raise heads on a regular basis. Positive economic trends should support ongoing construction and infrastructure spending, creating favorable conditions for our rental and construction product sales. Optimism permeated this week's American Rental Association show, as industry reports suggest that the fundamentals are in place for another successful season. This year's show was a memorable one for Toro as we celebrated the 20th anniversary of our Dingo compact utility loader, which has proven to be a consistently strong performer for the company. During the show, we displayed a larger and more powerful utility loader concept model. We also displayed our recently announced polyethylene drum option for our UltraMix mortar mixer line. These drums provide an extremely durable solution for mixing applications that is easy to transport and clean.
Our ag, residential, and commercial irrigation businesses anticipate solid opportunities in the season ahead. On the ag front, we continue to see increased demand for our flow control tape. In lighting, we have a new brass elements line and are introducing drop-in LED color-changing technology. In addition, we are extending our lighting control system into the SMRT Logic suite of connected products, which works with Amazon Alexa and Google Assistant. Our residential and commercial product line will use the same connectivity with our current EVOLUTION controller. Our BOSS snow and ice management team is preparing an impressive lineup of new products to be introduced in March at the National Truck Equipment Association trade show. Despite the season's challenging snow conditions, we continue to see growth for BOSS for the year based on customer acceptance of our innovative equipment.
The economy, truck sales, and retail activity at our dealers are all positive, offering encouraging signs for sales prospects for the year. BOSS field inventory is at appropriate levels for this point in the season. We are taking advantage of retail opportunities generated by late heavy snow in key markets to clear field inventories and set up next season's snow bookings. We expect our latest rider and walk power mower advancements to perform well at retail this spring. There are encouraging indicators of continued sales progress for our international business on a regional and market basis. Demand for golf and grounds equipment and irrigation solutions will likely lead the way. Overall, we believe we are poised to deliver another successful year for all stakeholders. We recognize that the unexpected could pose challenges to our plans, and we are prepared to take appropriate action.
As we embark on our new Vision 2020 employee initiative, I want to take this opportunity to thank our employees for their hard work that enabled us to achieve strong first quarter results. They, along with the support of our channel partners, are critical to helping us drive profitable growth and deliver another successful year. We are encouraged by the start of the year. Q1 is a small quarter. Most of our selling season is still ahead of us. We will see how the spring weather unfolds, but at this time, we have not changed our guidance from an underlying operating perspective. We continue to expect revenue growth to exceed 4% for fiscal 2018 and expect adjusted net earnings per share of about $2.67-$2.73. For the second quarter, we expect adjusted net earnings per share of about $1.17-$1.22. This concludes our formal remarks.
We will take questions at this time.
Ladies and gentlemen, if you have a question at this time, please press star and the number 1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press the pound key. Our first question comes from the line of Mike Shlisky with Seaport Global. Your line is open.
Good morning, everybody.
Good morning.
I know you said, again, that you're going to have growth of at least 4% or more, but does the first quarter growth of about 6% push you a little bit further in excess of that 4% that you were initially thinking? The comps only get a little bit easier from here in the second to fourth quarters.
We are encouraged by what we see in the first quarter with the comments that we made earlier. I think the key thing is just that it's a small quarter, and it's still early in the year. Much of our selling season is ahead of us. I think we'd like to get through the break of spring before we would be even more optimistic about the full-year results. We're encouraged so far, and it's really just that fact that would be holding us back at this point.
Okay, great. Secondly, I was curious if there anything to how the promotions are going to work seasonally this year, the timing of anything big, either at the retail level or at the professional level as compared to last year? Could that affect some of the wholesale sell-in timing from Q2 or Q3 here?
Yeah, one of the things I think we talked about last year was Toro Days, and it moving between either the second and third quarter. It's something that we negotiate with our channel partners, and it's really not something that we want to make public for competitive reasons, because that tends to attract other promotions that would happen at the same time. We don't see any other major shifts, certainly that I'm aware of, that would be taking place. That's probably the only thing that comes to mind that can be a variable, especially between the two quarters.
Okay. Finally from me, I just want to get a bit more color on the margins you had in residential. You had a sales increase, but a pretty decent decline in your pre-tax profit margins. Can you give us color? Can you kind of bucket it? Was there anything to do with higher commodity costs? Anything to do with some discounting, et cetera, we should be aware of? Thanks.
Yeah. When we look at residential, it's again, small quarter, so not necessarily indicative of the year. We did see growth pretty much in line with our expectations. A little bit lower, maybe because of less snow. That 1.5%, we always say it's GDP type growth, so may see some stronger sales in the remainder of the year. Overall, from an enterprise standpoint, we went into the year expecting some modest increases in materials. We are seeing that, Mike. In particular, we had commented on steel and resin. We are seeing those increases kind of pull through at this point in line with what our expectations would be. We'll have to see. I know there's some discussion around tariffs and other changes that we haven't included in our forward-looking guidance. We did see some higher commodity costs.
We'll work hard to offset those with our productivity and lean initiatives as we always would. We did see some impact of that within the quarter as well as some impact of product mix as well.
Okay, fair enough. Thank you very much, guys.
Thank you.
Thank you.
Our next question comes from the line of Sam Darkatsh with Raymond James. Your line is open.
Good morning. This is Josh Wilson filling in for Sam. Thanks for taking my questions and congratulations on the quarter.
Hi, Josh. Thank you.
A few housekeeping items first. What was the FX impact on sales in the quarter?
Very minimal in the quarter. About $3 million. Very minimal impact, slightly favorable.
Got it. Then you said you're working down the residential snow inventory in the channel. Does that mean you're happy with where it's at or that it still needs some work?
Yeah. We've seen the benefits of the later snow in the season. It tends not to generate as many reorders at this point in the year, but it is very effective at reducing the inventory that's in the field. Right now, we are very satisfied with the field level inventory. It's actually below prior year at this point. We went into the season in good shape on inventory, and we're leaving the snow season in good shape with inventory. Especially if we get a few more events here, they will continue to clear field inventory and should set us up for a healthy position to be in for the preseason of next season.
Then can you remind us what your assumptions are in guidance for price and to what extent price and productivity are to offset commodity inflation?
Yeah. We always price to market, not to cost. Just a reminder regarding that. Typically, what we get at the enterprise level is between one and two points of realized price. We get more of that from the professional segment than we do from the residential segment. The residential segment tends to be a little more of a price point type of business, where we're trying to provide a product at the price point that's consistent with buyers' expectations.
Can you give us a little bit of color on what your exposure insulation against might be as it relates to transportation costs? I'm specifically thinking of availability or wage inflation in truckers.
Yeah. We, as everyone does, are experiencing some changes in that overall market. We saw some of that in the past as well. At this point in time, we're not seeing changes that are significantly different than what we have experienced and what we have included in our guidance.
We are certainly aware of that issue, we certainly see it. We've been managing through that at this point, we tend to have contracts in place that help us through some of those challenges.
Got it. Good luck with the next quarter.
Thank you.
Thank you.
Our next question comes from the line of John Fisher with Dougherty & Company. Your line is open.
Good morning. Thank you.
Good morning.
Good quarter. Just to explore a little bit more on the gross margin. You mentioned in the prepared comments and then in response to the first question, unfavorable product mix is one of the gross margin issues. With the mix of professional and residential, would've thought that would've been just net positive to the gross margin line. Wondering if it was the underperformance of BOSS, if that's.
kind of what you're alluding to, or if there's something else from a product mix standpoint that you can break out that was a drag on gross margins?
Okay, really, John, where we are seeing that looking across the enterprise, and in particular in the professional segment, that is our largest segment, as you are aware, and also has a very broad offering of products. Although the margins are similar, they are all pro-type margins. There is variance from high to low within that professional segment. What we saw are just the combined impact of the specific products sold primarily in professional. Just had a net impact on our gross margin. Still, again, a good quarter, and still relatively small quarter, overall for both businesses, both residential and professional. It was mostly, again, commodities, the product mix within a segment, some modest impact from foreign currency that actually was a positive and some impact to price.
Okay, just wanna make sure I understood correctly. BOSS in Q1 was down year-over-year because of the subpar winter weather? Did I understand that correctly?
BOSS was down slightly for the quarter with the winter, that is correct.
Okay.
Again, we are in good shape, we believe, from a field inventory standpoint, and we have had strong emphasis on making sure we have the right product at the right time and that we are not in an overly concerning inventory position at any point.
Yeah, we do still expect growth for the total year from a BOSS standpoint as well.
Okay, sure. Thank you. I know you only like to work one quarter at a time when you're looking out, but given the subpar winter weather, solid inventory levels, it sounds like, and exiting winter, what would you anticipate the overall impact to be on kind of the pre-sale fall season, given the overall weather conditions this winter? Would you expect any material drag or negative performance?
Yeah, I think if we just took the first half of the winter season, we would've been less positive about it. The fact that we have had a number of winter events late in the season, it really has us more optimistic about the preseason for next year. That, first of all, clears out inventory, which is helpful to us so we don't have carryover inventory from the previous year. Secondly, just the memory in consumers' minds of the previous winter plays a factor in the preseason for the following winter, and for our dealers as well. They're gonna be in a position having the late season snows where they're encouraged again to order for next year.
Okay, last question for me. Given the strength overall of Q1, a lot of it was kind of early buying of spring product, both residential and professional. Just wondering if this has been kind of normal buying performance or if there's risk of maybe some pre-buy, some sales fell into Q1 that may have normally, from a seasonal standpoint, fallen into Q2. What is kind of the risk of that potentially occurring?
I think we always say we have to take multiple quarters together. It's hard to just isolate them, especially because of the timing of spring, where that falls with our quarters. That said, there's also indications of pretty strong optimism within our channel at this point, and they look at the same things that we do. The economy is in good shape. Consumer confidence, I think, is at the highest level since the early 2000s. Business confidence is strong and the factor that we don't know about yet is the timing of spring. If that comes as planned, the expectations, I think, are pretty positive from our channel for the spring goods.
Okay, thank you very much.
Thank you.
Our next question is from David MacGregor with Longbow Research. Your line is open.
Yes, good morning, everyone, thanks for taking the question.
Morning.
Great quarter in the pro business, good SG&A leverage. A lot of successes this quarter, I wanted to talk about the residential business. Residential up 1.5%, segment earnings down 5.1%. There's really been no growth in this business for the past two years in either revenues or earnings, I realize it's a seasonal business, and our first quarter reflects some seasonal pattern here. You talked about the strong international residential, which implies maybe domestic residential may have been negative. I guess, looking at the residential business, five of the last eight quarters have been negative growth now. I guess the question is just how do you reinvigorate the residential business, and in particular, the domestic residential business?
I guess in light of the lack of growth over the past couple of years, would you be willing to maybe give us a little more transparency into that business and help us understand what's working and what's not?
Sure. We feel very strongly and very positive about our residential business. We have a great position with regard to our product lineup. We have strong market share in each of the key markets. We have the best channel partners in our dealers and our primary mass partners. Relative to our competition, we feel very strongly that we're in very good position. The market has a number of forces. The snow is a major factor in the overall performance of the business. The summertime and springtime weather is a factor. This year, we had the put and the take. The negative was snow. The positive was optimism about the spring. That somewhat offset each other. It's a business that makes money. It's a business that we have said, is not going to be on the high-end growth portion of our spectrum. Their GDP, roughly growth.
We still feel very strongly and positive about our residential business and its fit with the rest of our businesses.
Yeah, I would just add, there are a number of synergies that we see from an operational standpoint related to residential. We get economies of scale with some shared production facility. Often, technologies are leveraged across the various segments as well. As Rick said, it is profitable and more than covers its cost of capital.
Okay. I appreciate that color. I guess it does raise questions about whether you're able to get paid for innovation in that category and maybe that's less the case. I guess, what are you assuming?
No, I think in that case.
Sorry, go ahead.
You really have to look also relative to our competition. We have had some very significant innovations in the market. You look at Personal Pace, you look at the Power Reverse products that we've introduced that are really the standards, especially Personal Pace standard in the industry. We've gone from, without being too precise about it, low single-digit market share in walk power mowers to the leading market share in walk power mowers for the last number of years. I think you have to look at the rest of the market to draw any conclusions there. We're gaining.
Okay
share.
That's helpful. I guess, what are you assuming for growth in your second quarter guide of 117-122, given your kind of residential compare is the toughest for the past 2 years?
Yeah. We don't specifically break out the revenue portion related to a quarter-by-quarter. There is movement that happens based on the weather and other variables between the quarters. Again, revenue guidance for the full year is to exceed the 4%, but not a specific number for Q2.
Okay. Last question from me is just on steel. We've had a lot of political developments in this market over the last few weeks. Are you fully hedged for 2018? In other words, do your procurement contracts with the mills protect you against any price variance at this point, and then the real risk just becomes on the rollover into 2019? Or is there risk to your steel costing in 2018?
Yeah. We have contracts that are staggered throughout the year related to, and this is true for steel and other commodities as well. We don't have everything locked in from an entire year standpoint. However, keep in mind as well that we tend to be more of an assembler product versus a pure manufacturer. We do buy some raw steel, but not as large of an amount. Often, we're buying that part, and we, again, have agreements in place for some period of time related to those parts. We tend to see changes occur a little bit on a lag from that perspective, and that's true when prices go up or go down. We tend to see a lag in that because of more of our manufacturing approach.
Great. Thanks very much, Renee.
You're welcome.
Thank you.
Thank you. Our next question is from Joe Mondello with Dougherty & Company. Your line is open.
Hi, everyone. Good morning.
Joe.
Just wanted to clarify really quick, I missed the beginning. Just the guidance, the raise was about $0.10. You beat relative to your first quarter guidance by about $0.05. Net-net, you sort of raised the guidance by $0.05. How much was that based on taxes, and how much was that based on organic business related?
Yeah. What we have are actually two items that you should consider. There's a piece for the tax benefit. We're also adjusting out on an ongoing basis the excess deduction for share-based compensation. We did try to detail this out. Hopefully, in the transcript as well, just so you know as a reference, that should be available. You should think about, we took out $0.17 for the excess share-based compensation and added $0.27 related to taxes. That accounts for that net change of $0.10. Really, we're leaving the underlying performance the same, and it relates to the fact that Q1 is a smaller quarter. We're really encouraged. We do feel we had a strong start to the year. We want to see how the rest of the year develops and in particular, the timing of spring.
Just to clarify, if you exclude all the tax-related stuff, you came in at $0.48, right? Your guidance was $0.42 to $0.44. You take the midpoint, that was a $0.05 beat relative to your first quarter guidance?
What you would need to do, Joe, is to, because we're pulling out that excess deduction for share-based compensation, we did that for the quarter as well. That's in the $0.48. Originally, when we gave guidance, the original guidance of $0.42 to $0.44, that included $0.04 for the excess deduction for share-based compensation. You have to pull that out and compare it to-
Oh, okay. The guidance was, it's sort of not apples to apples-
Yeah.
If you will.
We did, yep.
Okay.
Because of we're making that change.
Okay. I understand.
to clarify that. We beat by $0.02, on the high end of our guidance, is how you should think about it. $0.02 if you took the high end of $0.42-$0.44.
Okay. Then in terms of what you have sort of guided to or your historical tax rates for the rest of the year, that's sort of in line with what you've been running at, so the tax reform doesn't help too much?
No. Actually, our tax rate is favorable. Again, you have to, I think, pull out that excess deduction. That causes an increase to the underlying tax rate on an adjusted basis of about three points. That would actually make the tax rate go up. Then we've incorporated the benefit of tax reform. We are seeing an underlying-
I see
benefit from corporate taxes on an ongoing basis.
Okay. I just wanted to ask, relative to the tax reform and more so towards your customers, just wondering if you had any seen it in your financials at all yet, or anecdotally, have you heard anything? I imagine, especially in your professional business, that's going to free up a lot of cash and I would think you'd get a bump in your business, especially at the professional side of the business. Just wondering if you've sort of noticed anything or anecdotally heard anything that's sort of started to benefit and we've seen that trend to start as we head into the spring season.
Yeah, my comments would be anecdotal, but they would be positive. Every and each of those small businesses are different and would be affected in different ways, with the tax reform. In general, generalizations and talking with people at the shows, there is, a sense that they will be positively affected by the tax changes. You can go by logically that puts more resources available for other purposes. For example, buying equipment or capital equipment. I've strung that together myself based on conversations. We haven't necessarily seen that we can point to in our financials.
Okay. This may be related to that as well, sort of, in terms of the inventories up almost 10%, I think, year-over-year. You addressed this on the last call and sort of stated that you're positioning yourselves to take advantage of the upcoming year. Just wondering if your confidence level of where the inventory's at, remains sort of the same, or is it increased relative to what you saw in the first quarter? What kind of visibility do you have at this point in time? Do you have more visibility at this point in time compared to when we last spoke on the last call?
This would be the normal time where our inventory would start to build in anticipation of the largest portion of our year in the second quarter and beyond. It is the time when it would normally build, and most of the inventory that, the makeup of the inventory is more on the professional side than it is on the residential side. Yes, because of the lighter snow season, there's a small component of that that is snow, but most of it really is forward-looking inventory. That's good inventory, good product, and would be available for our summer products and especially the professional products.
What I would add to that is it really is in line with our expectations. When we look at last year, we did have some really successful new products that we were able to meet that customer demand, but our customers would've actually liked, especially some of the dealers, to have more product earlier. We're seeing some of that with, I think, the channel pull that we talked about, as well as we wanna be a better supplier. We are also anticipating that going into the year and being ready to meet that demand as it materializes as well.
Okay, just last question from me. I'm just wondering, % of sales or sort of % of products, sort of ballpark, what % of your product offering would you say your customers benefit from the 100% accelerated depreciation, just roughly?
Well, that is U.S. only, I guess to start with. That would take the international piece out, and then I don't know an exact percentage, to tell you the truth. I would say it's gonna be U.S.-based. Keep in mind it did go from generally from 50% to 100%, there has been a benefit, I think it's the bonus deduction, for some period in time. I don't know an exact amount, but our U.S. piece would be roughly 75%, so it would be some subset of that.
You could, without thinking about this too much, you could probably go towards professional and residential.
Yeah.
Take out international.
Yeah
I would probably go towards it's gonna be more on the professional side, I would say.
Agree. Agree with that.
Okay. All right. Thanks.
You're welcome.
This concludes the question and answer session. Ms. Hille, please proceed to closing remarks.
Thank you, Bridget. Thank you for your questions and interest in Toro. We look forward to talking with you again in May to discuss our second quarter. Have a great day.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.