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Edited Transcript of BGG earnings conference call or presentation 21-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Briggs & Stratton Corp Earnings Call

WAUWATOSA Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Briggs & Stratton Corp earnings conference call or presentation Friday, April 21, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Alan Schwertfeger

Briggs & Stratton Corporation - CFO and SVP

* Todd J. Teske

Briggs & Stratton Corporation - Chairman, CEO and President

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Conference Call Participants

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* Thomas Lloyd Hayes

Northcoast Research Partners, LLC - MD and Senior Research Analyst

* Timothy Ronald Wojs

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, my name is Lisa, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the analyst earnings call. (Operator Instructions) At this time, I'd like to turn the conference over to Mr. Mark Schwertfeger, Chief Financial Officer. Sir, you may begin.

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Mark Alan Schwertfeger, Briggs & Stratton Corporation - CFO and SVP [2]

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Good morning, and welcome to the Briggs & Stratton Fiscal 2017 Third Quarter Earnings Conference Call. I'm Mark Schwertfeger, Chief Financial Officer; and joining me today is Todd Teske, our Chairman, President and Chief Executive Officer.

Today's presentation and our answers to your questions will include forward-looking statements. These statements are based on our current assessment of the markets in which we operate. Actual results could differ materially from any stated or implied projections due to changes in one or more of the factors as described in the safe harbor section of yesterday's earnings release as well as in our filings with the SEC.

We will also refer to certain non-GAAP financial measures during today's call. Additional information regarding these financial measures, including reconciliations to comparable U.S. GAAP measures, is available in our earnings release and in our SEC filings. This conference call will be made available on our website approximately 2 hours after the end of this call. A phone replay will also be available within a few hours of the completion of this call.

Now here's Todd.

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Todd J. Teske, Briggs & Stratton Corporation - Chairman, CEO and President [3]

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Good morning, everyone, and thank you for joining us today. Yesterday, we reported fiscal third quarter earnings of $0.83 per diluted share, up from adjusted earnings of $0.80 per diluted share a year ago. While third quarter consolidated net sales decreased 1% from last year's third quarter, higher gross profit margin driven by an improved products mix from robust sales to commercial customers and manufacturing efficiency improvements are strong evidence that our strategy to diversify our business into higher growth, more profitable segments is gaining traction. For the quarter, robust sales growth in products largely for commercial markets and commercial engines was offset by a decline in residential engines as anticipated. As we have discussed previously, we changed the sales terms for engine shipments made to overseas customers, resulting in the recognition of sales earlier this year. The change benefited net sales in the first half of the year, but reduced engine sales in the third quarter by approximately $10 million. Adjusting for the change in sales terms, consolidated net sales for this year's third quarter increased by approximately $3 million from last year. Total engine sales adjusted for the change in sales terms were down approximately $15 million or 3.6% in the third quarter. The decrease in sales reflects lower shipments to OEMs who are producing closer to the lawn and garden season. As we have discussed throughout this fiscal year, we anticipated this time compression to occur and we are well positioned with our domestic manufacturing to fulfill customer orders as demand picks up.

To date this year, the spring weather has been fairly normal, with ample ground moisture throughout the key lawn and garden regions. Although it is early, we remain optimistic that the upcoming season will reflect market growth in the U.S. of 1% to 4%. We have maintained our market-leading placement of engines in residential lawnmowers, and homeowners continue to discover the innovative new products we have launched into the market over the past several years. There is also data that shows signs of improvement in the housing market. Several national housing construction firms have observed an increased demand for entry-level houses in the U.S. Given the high correlation between housing sales and the mower market, we believe the increased housing demand is a positive sign that housing continues to head in the right direction for our business. We have also observed that weather patterns in Europe have been considerably better in the early spring months this year than they were a year ago. Thus, we are maintaining our sales guidance for fiscal 2017 in the range of $1.86 billion to $1.96 billion,(sic-see press release "$1.86 billion to $1.9 billion") which imply sales growth for the fourth quarter of 9% to 17% and growth for the fiscal year of 2.8% to 5%.

Over the past several years, we have diversified and invested in product development, channel development and infrastructure to support commercial growth, and we are building positive momentum associated with this strategic direction. In fact, on a trailing 12-month comparable basis through the -- our fiscal third quarter, we grew our commercial sales, which encompass commercial lawn and turf care, commercial job site and commercial engines by approximately 6%, and the opportunities for further growth remain bright. In the third quarter, sales of Ferris commercial mowers increased yet again, as product innovation focused on maximizing uptime and lowering the operating costs for our customers is creating a strong value proposition and attracting more professional lawn care specialists. Our new Vanguard Oil Guard system is now on out in the field being used by -- on Ferris mowers for the first time. Oil Guard is an industry first that continuously exchanges oil between the engine and a large remote oil reservoir. The system protects the oil from thermal breakdown, results in cooler running engines and extends oil change intervals to 500 hours or 5x longer than the current interval. This means fewer oil changes and higher productivity. The feedback we've received to date from the commercial cutters who depend on equipment uptime to earn a living has been very positive.

During the quarter, we also launched our new Allmand towable air compressors and towable generators, which are targeted at the commercial job site sector at this year's Rental Show. Although it is early, we are seeing strong interest in these products. It is also important to point out that in December, we launched a new line of 80 to 200 KW commercial standby generators.

As you can see, this year has been filled with new commercial product launches that are important to the execution of our strategy. Through the first 9 months of the fiscal year, sales are higher by approximately $5 million. After removing the favorable impact of the engine sales terms change, net sales were down less than 1% year-to-date. The decrease is due to lower engine sales due sequentially -- to sequentially later sales to this year compared to last year as well as lower snow thrower sales and production in the first part of the year. Offsetting the decrease are higher sales of portable generators following Hurricane Matthew and higher sales of commercial products previously noted.

Pretax earnings for the first 9 months of fiscal 2017 are $5.5 million higher than adjusted pretax earnings a year ago. Even after adjusting for the change in sales terms, pretax earnings are higher than last year due to increased sales of higher-margin products, manufacturing efficiency improvements and higher earnings from our joint ventures. I would also add that we achieved higher pretax income despite lower production volumes and higher costs from important investments such as new product innovation and our ERP upgrade. In fact, our fiscal 2017 year-to-date financial results include pretax expenses of approximately $8 million or $0.13 per diluted share related to the investment in our ERP upgrade. We are pleased with the progress we have made over the first 9 months of the year on the ERP upgrade project. Delivering a high-quality solution remains our number #1 goal to help simplify our business and make it easier for our customers and suppliers who do business with us. The project is on track, and we continue to project a go-live of the upgraded system later in the first half of 2018. After devoting the past several years to diversifying our product portfolio and optimizing our manufacturing footprint, our team is now able to dedicate more effort to driving ongoing operational excellence and growth. As is evident in the results, the team has executed well in improving product design and plant operations and making progress on our diversification into attractive commercial markets. And I would like to thank them for their hard work and dedication.

Now I'll turn it back over to Mark to walk through our segment financial results for the quarter.

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Mark Alan Schwertfeger, Briggs & Stratton Corporation - CFO and SVP [4]

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Thanks, Todd. Engine segment sales for the third quarter were $391 million, a decrease of $25 million or 5.9% from the third quarter of last year. Total engines shipped in the quarter were 2.73 million or approximately 8.8% lower than last year shipments in the quarter of 2.99 million units. As Todd noted, we implemented new sales terms for engines shipped to overseas customers at the start of fiscal 2017. This change, which helps simplify our business, resulted in earlier revenue recognition compared to the terms we used in previous years. The change in sales terms caused our reported engine shipments and net sales to be lower by approximately 100,000 units and $10 million respectively in the third quarter of fiscal 2017. Using comparable sales terms year-over-year, engine volumes shipped decreased by 5% or approximately 160,000 engines in the third quarter of fiscal 2017 compared with the third quarter of fiscal 2016. Lower sales are mainly due to engine customers producing closer to the season this year. Partially offsetting the decrease were higher sales of commercial engines.

Third quarter Engine segment income was $50.9 million, a decrease of $1.2 million from last year's segment income of $52.2 million. Engine segment margin in the quarter was 13%, an increase of 50 basis points from a segment margin of 12.5% in the prior year. Engines gross margin rates improved by 140 basis points to 25.3% from 23.9% in the prior year. The increase was largely due to favorable sales mix as well as manufacturing efficiency improvements. Favorable sales mix was driven by high sales of commercial engines as well as margin lift on new products. Manufacturing efficiency is the result of great work by our team in constantly looking for ways to improve our processes.

Engine production in the third quarter was slightly decreased by 1% from the prior year to approximately 2.19 million engines. ESG&A expanding in the Engine segment increased by approximately $700,000 compared with the prior year, primarily due to the investment in our ERP upgrade and higher pension costs.

On a fiscal year-to-date basis, the Engine's gross profit margin has improved to 23.7% from the adjusted gross profit margin rate last year of 22.9%. This improvement is primarily due to margin expansion on new products and higher commercial sales as well as manufacturing efficiency improvements. We have driven this profitability improvement despite the headwind off less engine production. So far this fiscal year, we have produced approximately 5.6 million units, which is 5% less than last year, in order to reduce our inventory from the end of fiscal 2016.

In the Products segment, sales for the third quarter were $234 million, an increase of approximately $13 million or 6% from the prior year. We saw sales increases in the quarter related to higher sales of commercial products, including Ferris mowers, Billy Goat turf care equipment, and Allmand job site equipment. Third quarter Product segment income margin was 2.4%, an improvement of 190 basis points from last year's adjusted segment income of 0.5%. Last year's third quarter results included total pretax restructuring charges of $700,000 and pretax write-down of $8 million related to goodwill associated with the Allmand acquisition.

In the last year, we executed a number of steps to improve the Allmand job site business in the face of some difficult economic headwinds. These steps include our recent expansion of Allmand's product line to include towable generators and air compressors, which have been well received by the marketplace. The steps we've taken position our commercial job site business for growth, and we remain optimistic regarding increased end market demand for these products to help address the infrastructure improvement needs of the country. Products gross margins were 15% in the third quarter, an improvement of 230 basis points from last year's adjusted third quarter gross margins. The increase was largely due to favorable sales mix on higher sales of commercial products and improved manufacturing efficiency.

Last year, our plant in Wauwatosa, Wisconsin, initiated production of riding lawnmowers which led to some start-up inefficiencies. Through a lot of hard work, our team has managed to improve the productivity of this facility. Manufacturing throughput was lower overall in the third quarter, largely due to lower production of residential riding lawnmowers and pressure washers.

Product segment ESG&A expenses were higher than the prior year by $2.3 million. The increase was due to higher promotional expenses associated with the new product launches and our ERP upgrade. On a fiscal year-to-date basis, Products net sales increased by $19 million and segment income increased by $2.3 million versus adjusted segment income a year ago. Sales increased due to higher sales of generators following Hurricane Matthew and higher sales of commercial mowers offset by lower snow thrower sales earlier in the year. The profitability improvement relates primarily to sales mix, with a higher proportion of sales comprised of commercial equipment in fiscal 2017.

Cash flows from operations and our balance sheet both continue to be strong. Net debt at the end of the third quarter was $233 million, an increase of approximately $22 million from the third quarter of fiscal 2016. Cash used in operating activities year-to-date was $28 million, primarily related to seasonal receivable levels and inventory buildup. The major change between years is that we have increased accounts receivable at the end of the third quarter this year, largely due to the change in sales terms for international engine sales.

At the end of the third quarter of last year, accounts receivables would have been higher by approximately $14 million and inventory would have been lower by approximately $11 million had the new sales terms been in place. After adjusting for the sales terms change impact, inventory was fairly comparable between years as of the end of the third quarter. We continue to anticipate that inventory levels at the end of fiscal 2017 will be less than the end of fiscal 2016 if we endeavor to reduce overall working capital by approximately $10 million to $15 million.

Last 12-month cash provided by operating activities was $89 million. Year-to-date depreciation and amortization of $42 million was less than capital expenditures of approximately $49 million. Capital expenditures are higher in 2017 compared to 2016, largely due to our ERP upgrade project.

During the third quarter, we repurchased approximately $3 million or 129,000 shares of our outstanding common stock. So far in fiscal 2017, we've repurchased $18 million of outstanding shares to reduce shares outstanding by 916,000 shares. As of the end of the third quarter, we had approximately $32 million remaining on our share repurchase authorization, which runs through June 2018. As of the end of the quarter, we had approximately $62 million drawn on our $500 million revolving credit agreement for working capital requirements. Regarding debt covenants, last 12-month average funded debt and last 12-month EBITDA, as defined by our credit agreements, were $284 million and $161 million respectively, resulting in a modest leverage ratio of 1.77x, which is lower than our debt covenant of 3.5x.

That concludes our comments on the third quarter financial results. Let me now turn the call back to Todd to discuss our outlook for the remainder of our fiscal 2017.

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Todd J. Teske, Briggs & Stratton Corporation - Chairman, CEO and President [5]

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Thanks, Mark. Recently, we've begun to see signs that retail sales of lawn and garden equipment are beginning to increase. We estimate that channel inventory of residential mowers is modestly lower than it was a year ago due to more conservative ordering patterns following last year's lackluster spring selling season. We stand ready to support our customers with a quick response time provided by our US-based manufacturing footprint as the season breaks. We are encouraged by the improving traction and growth of our commercial product offerings. Commercial markets present an attractive opportunity for several reasons: first, we estimate that there is about a 4 million -- $4 billion addressable market opportunity, of which we are currently holding only a 10% share; second, we project these markets to grow at twice the U.S. GDP rate; third, the margins on commercial products tend to be higher than what we earn on residential products for greater earning power; and fourth, many of the commercial markets enable us to diversify the business for enhanced earnings stability.

The recent growth in our commercial portfolio continues a trend that began several years ago. Looking back over a longer period of time from fiscal 2012 through fiscal 2016, we grew commercial sales by $150 million. This equates to a compound annual growth rate of approximately 12.5%. We view our progress today as a good start to -- in executing against our strategy, and we will keep you appraised of the developments as we continue on the growth path.

Now with respect to our outlook for the remainder of our fiscal year, as you saw on yesterday's earnings release, our fiscal 2017 guidance on sales and earnings remains unchanged. As I mentioned earlier, we continue to estimate the U.S. market for lawn and garden equipment will improve 1% to 4% in the current season, and our engine placement is consistent with our discussion at the end of our second fiscal quarter. It is possible, however, that sales of lawn and garden products could shift to later in the season due to retail sales patterns, retailer reorders and OEM production schedules, causing some sales to shift to our fiscal 2018 rather than fiscal 2017. Still, we remain confident in our competitive position and our ability to serve our customers on a timely basis.

Just a couple of things to keep in mind as you look at our -- at the fourth quarter this year. First, as a reminder, regarding the new sales terms we implemented this year for engines shipped to overseas customers, we continue to estimate that the impact of this change is to negatively impact fourth quarter engine results by approximately $10 million of net sales compared to last year's fourth quarter. In addition, given our goal of reducing inventory by the end of our fiscal year, combined with our ability to quickly react to changes in seasonal engine demand, it is possible that engine production is not significantly higher in the fourth quarter compared to a year ago. Also as a reminder, we are anticipating higher ESG&A expenses in fiscal 2017 related to planned initiatives, including product innovation and the related promotional spending and other strategic priorities, including our ERP system upgrade. We have projected that ESG&A -- that the ESG&A increase would be sequentially higher in the latter portion of the year. Indeed, the increase in third quarter ESG&A accounted for approximately half of the $6 million increase in year-to-date spending. Lastly, we have updated our anticipated capital expenditures for the year to be approximately $80 million to $90 million compared to previous guidance of $70 million to $80 million. Our capital spending tends to be sequentially higher in the latter portion of our fiscal year as we wind down seasonal production and begin maintenance in our factories. As we have evaluated general needs for our plants and product development activities for the upcoming quarter, we concluded it was appropriate to increase overall investments to continue to drive manufacturing efficiencies and product innovation while also investing in the important initiatives of upgrading our ERP system. We expect that a substantial portion of our capital spending for the ERP upgrade will take place in fiscal 2017, with some residual spending remaining in fiscal 2018.

That concludes our prepared comments. Now we'd like to open it up for question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is going to come from the line of Tim Wojs.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Really nice job on the margins, I guess, the question I had there was just, if you can maybe drill down just a little bit deeper in terms of -- a little bit more granularity in terms of maybe what mix and what the efficiencies contributed to the gross margin improvement in both segments?

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Mark Alan Schwertfeger, Briggs & Stratton Corporation - CFO and SVP [3]

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We commented quite a bit on the sales mix from a perspective of the commercial products versus the residential products, and we can earn as high as 500 basis points higher on the commercial products relatively -- relative to a lot of our residential portfolio. So as Todd mentioned, with the 6% trailing 12-month increase in the commercial portfolio, it does help pretty nicely from a mix perspective. The other comment we made was relative to -- in the product segment, a year ago we were still completing some of the shifts in our footprint changes, particularly related to our facility up here in Milwaukee that was taking on some on the riding mower production for the first time, as was our plan, and we indeed executed. We've driven some efficiency improvements in year 2 of building riding tractors. And then, lastly, we continue to work in our businesses ever year to improve both product design as well as our processes in order to take out costs at a faster pace than inflationary pressures, and we've had a very nice year of that, which then continued on in the third quarter as well.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Okay. Does the -- just given maybe the start to some of the -- some of your OEMs and customers producing later to the season. Does some of that mix benefit maybe reverse a little bit in the fourth quarter as there's maybe a little bit more of a retail ramp than normal?

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Mark Alan Schwertfeger, Briggs & Stratton Corporation - CFO and SVP [5]

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You could see a little bit of that, perhaps where you would indeed expect to see a pretty high residential mix relative to what you saw in the previous 3 quarters, so I think that's fair, Tim. Overall though, I would bring you back to, on a full year basis, we anticipate seeing overall margin improvement compared to last year.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay. And then just -- Todd, maybe as you think about the fourth quarter, you gave some pretty nice goalposts there in terms of revenue growth. What's the -- what gets you to the low end versus the high end in terms of end market demand?

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Todd J. Teske, Briggs & Stratton Corporation - Chairman, CEO and President [7]

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Well, the low end, Tim, would contemplate a U.S. market -- I'll talk residential first, a U.S. market of 1% to 4%. So the low end, we would obviously consider 1% up. In Europe, we anticipate the low end to be kind of flattish, if you will, the high end would be slightly up on the residential side. And then on the commercial side, we continue to see some pretty good sell-through in the commercial market along the way. So Q4, as you point out, will be a little bit heavier mixed, we think, to residential, and so the goalpost, if you will, really contemplate that market being where it is. Again, I'll reiterate, and we've seen this often, not all the time, but on occasion, I should say, probably a better way to characterize it. We've seen where the -- we've got seasonal estimates that are out there. Sometimes, it can go past the end of our fiscal year, like we saw a year ago. But ultimately, that's what the guidepost would kind of show, 1% to 4% in the U.S. and kind of flattish in Europe and up slightly on the top end in Europe as well.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [8]

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Okay. And then, just to make sure I've got it right. So on the SG&A investments in the (inaudible), is the message that the SG&A investments that happen in the third quarter will essentially be the same level in the fourth quarter?

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Mark Alan Schwertfeger, Briggs & Stratton Corporation - CFO and SVP [9]

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Yes, sequentially, we think that ESG&A will be heavier in the back half than the front half. The other thing that Todd mentioned was what our investment in the ERP upgrade spend in the P&L in total. And I'd tell you that that's up roughly about $4 million year-over-over and our guidance was to be up roughly $7 million to $9 million in total. So hopefully, that also angles you in on the fact that a little bit heavier spending there in the fourth quarter, as you would expect, as you start to get closer and closer to the conclusion of the program.

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Operator [10]

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Our next question comes from the line of Tom Hayes.

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Thomas Lloyd Hayes, Northcoast Research Partners, LLC - MD and Senior Research Analyst [11]

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Todd, wondering if I can kind of dig in a little bit maybe on the commercial product side. You had mentioned you're getting some good traction there. I just want to get up to speed up on, what's the timing from product design to kind of getting your products spec-ed into those products and then out to the market? Just trying to understand the product lifecycle.

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Mark Alan Schwertfeger, Briggs & Stratton Corporation - CFO and SVP [12]

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Yes, I think it'll vary depending on the product portfolio and the -- also some of that with the maturity of our business in those areas. For the commercial turf area, where we served in those markets for some time, we've got some newer products hitting the market this year, probably the most notable being the Oil Guard. And so that's hitting the market, and that's something that we've been working on over the last couple years. The other comment I'd make is related to our job site business with our towable generators as well as towable air compressors. We were able to bring that to market fairly quickly. We first bought Allmand in the beginning of our fiscal 2015. Those products hadn't been contemplated previously, and so that's an example where, in a couple of years, we got that program up and running relatively quickly.

On the engine side, sometimes the tail will be slightly longer regarding the overall development of the product as there is just a little bit more engineering work and design that must go into those items.

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Operator [13]

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Our next question comes from Jeffrey Matthews.

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Unidentified Analyst [14]

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I'm wondering what -- if anything you're seeing in terms of tightness in labor, increases in labor costs in the U.S.? And also, does the current administration's potential actions with steel tariffs likely have an impact on you?

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Todd J. Teske, Briggs & Stratton Corporation - Chairman, CEO and President [15]

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With regards to labor cost, we don't see significant inflation in labor cost and upward pressure on wages. One thing that, obviously, there exists throughout the U.S economy and, in some cases, around the world is a skills gap, where it's always a challenge as we go and put more automation into our factories to make sure that we have the right people with the right skills. And so we do see tighter labor markets with regards to skilled labor, but we are able to recruit and develop people and we have a fairly robust -- we have very robust development programs to make sure that we have the right labor at the right time in the right place.

With regards to steel tariffs, it's just way too early with regards to what that's going to mean. I know that the administration has spoken of it here recently, but it's difficult to understand without more specifics in terms of exactly what's going to happen. And so it's something we certainly keep an eye on, but it's very difficult at this point to determine what, if any, kind of impact it will have.

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Operator [16]

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(Operator Instructions) Currently, there are no further questions from the audience.

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Mark Alan Schwertfeger, Briggs & Stratton Corporation - CFO and SVP [17]

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Well, thank you for joining us on today's call. Our next quarterly earnings conference call for our fourth fiscal quarter will be held in August. Have a great day.

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Operator [18]

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This does conclude today's conference call. You may now disconnect.