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Edited Transcript of TTC earnings conference call or presentation 23-May-19 3:00pm GMT

Q2 2019 Toro Co Earnings Call

BLOOMINGTON May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Toro Co earnings conference call or presentation Thursday, May 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heather M. Hille

The Toro Company - Director of IR & External Communications

* Renee J. Peterson

The Toro Company - VP, Treasurer & CFO

* Richard M. Olson

The Toro Company - Chairman, President & CEO

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Conference Call Participants

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* Joseph Logan Mondillo

Sidoti & Company, LLC - Research Analyst

* Joshua Kenneth Wilson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Kai Shun Chan

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

* Robert Samuel Aurand

Longbow Research LLC - Analyst

* Thomas Lloyd Hayes

Northcoast Research Partners, LLC - MD & Senior Research Analyst

* Thomas Mahoney

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to The Toro Company Second Quarter Earnings Conference Call. My name is Jonathan, and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Heather Hille, Director of Investor Relations and External Communications for The Toro Company. Please proceed, Ms. Hille.

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Heather M. Hille, The Toro Company - Director of IR & External Communications [2]

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Thank you, and 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. Given the significance of Charles Machine Works and the closure of this acquisition on April 1, 2019, we have revised our definition of non-GAAP financial measures to exclude the impact of onetime costs associated with acquisitions, including transaction and nonrecurring integration cost and onetime purchase accounting adjustments that are not operational in nature. This is in addition to the previously excluded impact of the excess tax deduction for share-based compensation. The company believes these measures may be useful in performing meaningful comparisons of past and present operating results to understand the performance of its ongoing operations and how management views the business.

Reconciliations of adjusted non-GAAP measures to reported GAAP financial measures are included in the schedule 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.

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Richard M. Olson, The Toro Company - Chairman, President & CEO [3]

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Thank you, Heather, and good morning to all of our listeners. We accomplished much during the second quarter from successfully closing our acquisition of Charles Machine Works ahead of schedule to achieving nearly double-digit sales growth in both our professional and residential segments despite significant headwinds.

Net sales for the quarter grew 9.9% to $962 million, with reported net earnings of $1.07 per share and adjusted net earnings of $1.17 per share. Professional segment sales grew 9.6% for the quarter driven by the acquisition of Charles Machine Works. Increased sales across our landscape contractors, snow and ice management, ag irrigation and the Toro-branded rental and construction product lines also contributed to our professional segment results for the quarter.

Our residential segment registered a 9.4% sales gain as a result of demand for both walk and riding mowers as well as personal blowers and portable power offerings. Importantly, international sales increases enhanced our results for both segments.

Following a brief commentary on the state of our businesses to date, Renee will discuss our financial and operating results in more detail.

First, our rental and specialty construction businesses delivered strong second quarter results driven by our successful close of the Charles Machine Works acquisition and strong dealer channel demand for our latest innovations, including the revolutionary Dingo TXL 2000 compact utility loader. Orders written in connection with the American Rental Association show in February were up versus last year. The Charles Machine Works-Toro integration process is going well and is further reinforcing the cultural alignment we cited as one of the reasons behind the decision to pursue this transformational acquisition. Our people share intense visceral commitments to innovation and customer service. The timely addition of Charles Machine Works made a strong contribution to our second quarter results.

Our landscape contractor businesses also achieved solid results for the quarter. Strong retail demand across product categories, including the state-of-the-art Staris stand-on series as well as our zero-turn riding and walk-behind professional mowers suggests contractors are bullish about the cutting season. Sales to large acreage owners also contributed to the business' second quarter results.

Late-season snowfall across the Midwest helped BOSS wrap up a successful winter on a high note with a final sales rush. Combined with the start of preseason shipments for next winter, this late-season activity helped deliver a particularly strong quarter for the professional snow and ice management business.

Weather has not been so kind to our golf and sports fields and grounds businesses. Cold, wet even snowy conditions delayed mowing operations and kept some golfers off the links. However, new products like the Groundsmaster 1200 and our latest electric walk and riding greensmowers are being well received by the market. We were honored to close out the quarter with the signing of an 11-year equipment and tournament support agreement with Hazeltine National Golf Club. Toro and our local Toro distributor, MTI Distributing, will have the opportunity to support Hazeltine's Superintendent Chris Tritabaugh and his team as they prepare the course to host several major events, including the 2019 KPMG Women's PGA Championship, the 2020 USGA Junior Amateur, the 2024 USGA Amateur and the 2028 Ryder Cup. Our relationship with Hazeltine began when the club opened in 1962.

Increased golf and ag irrigation sales for the quarter helped offset challenges faced by our other domestic irrigation offerings that were hampered by unfavorable weather. Our latest innovations continue to appeal to customers across our irrigation businesses.

Moving to our residential business, the late season Midwest snow events drove increased retail demand for snowblowers in the quarter and helped clear field inventory levels to set up a promising preseason booking program.

Early spring sales events sparked a strong retail response during less than optimal spring conditions, boosting demand for our walk and riding mowers. Our walk power mower business further benefited from increased placements of our 30-inch TimeMaster and the successful April launch of an exciting new line of lithium-ion battery-powered walk power mowers, which will be discussed in more detail later in the call.

Solid demand for electric blowers and trimmers capped off residential's positive second quarter results. While results varied on a regional and business basis, total international sales increased nicely for the quarter despite unfavorable currency exchange rates and weather challenges. The addition of Charles Machine Works and the strong demand for golf, grounds and both golf and ag irrigation products drove growth in the professional segment. Residential sales improved based on demand for walk power mowers, most notably for the latest Hayter Harrier models.

I will now turn the call over to Renee for a more detailed discussion of our financial results.

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [4]

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Thank you, Rick, and good morning, everyone. As we reported earlier this morning, net sales for the quarter grew to $962 million compared to $875 million for the same period a year ago. We also delivered net earnings of $115.6 million or $1.07 per share compared to $1.21 in the second quarter of fiscal 2018.

As Heather mentioned, given the significance of Charles Machine Works and the closure of this acquisition on April 1, 2019, we have revised our definition of non-GAAP financial measures to exclude the impact of one-time costs associated with acquisitions, including transaction and non-recurring integration cost and one-time accounting adjustments that are not operational in nature. This is in addition to the previously excluded impact of the excess tax deduction for share-based compensation.

Adjusted net earnings for the quarter were $126 million or $1.17 per share compared to adjusted net earnings of $130.3 million or $1.20 per share in the comparable 2018 period, a decrease of 2.5%.

Year-to-date net sales were up 9.9% to $1,565,000,000. We achieved net earnings of $175.1 million or $1.62 per share. Adjusted net earnings for the first 6 months were $182.7 million or $1.69 per share compared to adjusted net earnings of $182.4 million or $1.68 per share in the comparable 2018 period, an increase of 0.6%.

Please see our earnings release for a reconciliation of financial measures calculated and reported in accordance with GAAP, as well as adjusted non-GAAP financial measures.

Professional segment sales were up 9.6% for the quarter to $723.5 million. Year-to-date, professional sales were up 10.8% to $1,178,500,000. These increases were driven by the addition of Charles Machine Works and the demand for our landscape contractor, snow and ice management, ag irrigation and Toro-branded rental and construction products.

Professional segment earnings for the quarter totaled $150.1 million, down 9% from $165 million in the same period last year. For the first 6 months, professional segment earnings were $238.1 million, a 1.2% decrease compared to the same period last year.

Earnings were negatively impacted by one-time purchase accounting related to Charles Machine Works, inflation and tariff-related costs and weather, which negatively impacted early retail demand and caused supply chain challenges. Pricing and productivity initiatives helped partially offset the decline.

Second quarter residential segment sales increased 9.4% to $232.1 million. Year-to-date residential sales were up 6.4% to $377.3 million. Demand for walk and riding mowers as well as snowblowers drove those gains.

Residential segment earnings in the quarter totaled $22 million, a decrease of 16.2% from a year ago. Year-to-date earnings declined 16.5% to $35 million. Unfavorable commodity costs, tariffs, product mix and higher freight contributed to the decline in earnings, which was partially offset by pricing and productivity actions.

Now to our key operating results. Gross margin declined 360 basis points to 33.4% for the quarter and by 280 basis points to 34.3% year-to-date. Adjusted gross margin decreased 260 basis points to 34.4% for the quarter and by 220 basis points to 34.9% year-to-date.

Unfavorable commodity costs, tariffs, product mix, freight, supplier challenges and production and shipping delays related to poor weather were responsible for the declines for both periods, which were partially offset by pricing and productivity improvements. We continue to expect to see gross margin improvement in each of our businesses in the second half of the year.

SG&A expense as a percent of sales increased by 160 basis points for the quarter to 19.1%, and by 60 basis points to 21% for the first 6 months. Acquisition integration and transaction costs were largely responsible for these increases.

Operating earnings as a percent of sales for the quarter were 14.3%, a decrease of 520 basis points, and 13.3% year-to-date, a decrease of 340 basis points. Adjusted operating earnings for the quarter decreased by 310 basis points to 16.4% and by 200 basis points to 14.7% for the first 6 months.

Interest expense increased by $2 million for the quarter and $1.9 million year-to-date due to additional debt related to the Charles Machine Works acquisition.

The reported tax rate for the second quarter was 15.8% compared to 22.4% last year. The adjusted tax rate for the second quarter was 19.9% compared to 23% last year. For the first 6 months, the reported tax rate was 15.5%, down from 34.7% in the same period last year. And the adjusted tax rate was 20.2%, down from 22.6% last year. With the addition of the Charles Machine Works acquisition, the company now expects a full fiscal year adjusted tax rate of about 20.5%.

Next, accounts receivable for the quarter totaled $428.6 million, a 30% increase over the same period last year. Net inventories for the quarter increased 54.8% to $611.3 million. Trade payables increased 28.9% to $391.7 million. The Charles Machine Works acquisition was largely responsible for these increases. As we discussed when we announced our acquisition agreement, we did not repurchase any shares or stock during the quarter in favor of reducing our debt by over $200 million. There are about 7 million shares outstanding under our authorization.

I'll now return the call to Rick.

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Richard M. Olson, The Toro Company - Chairman, President & CEO [5]

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Thank you, Renee. While inflation, tariff-related costs and the weather continue to be a challenge, we are confident of delivering another good year. This confidence is founded on a number of factors. First, field inventories are in good shape to address customer needs. Assuming a return to more normal weather conditions, we are well positioned with strong portfolios of innovative products to capitalize on current demand and new growth opportunities across our businesses.

Second, we have taken steps to mitigate supply chain challenges throughout the enterprise by collaborating with suppliers to ensure consistent delivery of critical components. In addition, we will continue to optimize inventory levels and have made significant capital investments in our plants. These investments, which include a state-of-the-art paint system, new fiber optic lasers for fabrication purposes and new technology to streamline our parts sorting and packing process should increase capacity, reduce cost through enhanced productivity and provide an ergonomically improved work environment.

Third, the transformational addition of Charles Machine Works not only vastly expands our presence in the rental and construction businesses but is providing opportunities to capitalize on synergies across the enterprise. Our integration management office, comprised of leaders from the 2 formerly separate companies, is making great progress on the integration. Furthermore, we contracted with a leading consulting firm to assist with the process. Our goal is to ensure we remain a strong, dynamic organization, adept at anticipating potential obstacles yet agile enough to meet unpredictable challenges, so we can continue to win in the marketplace.

Thanks to the good work of our integration team, we believe we are on track to achieve the acquisition's specified run rate synergy target as well as improvements in working capital and other savings across the company. This acquisition is a catalyst for looking across the enterprise to drive productivity improvements and operational excellence.

Now let's review prospects for our various businesses. While construction rates are moderating, forecasts call for continued growth. Ongoing enhancements in communication technologies and the potential for increased infrastructure spending present encouraging news for our newly expanded rental and construction portfolio. All of our brands will continue to innovate and focus on supplying real solutions for our customers' needs. Our combined expertise and product portfolio will help strengthen our leadership position. As the independently developed electric Ditch Witch trencher and electric Toro compact utility loader concept units show, together we have a potential to revolutionize this important growth industry.

Next, the momentum our landscape contractor businesses built through the second quarter should continue into the third. Innovative advancements like the Staris that are designed to enhance productivity of contractor crews should continue to be in high demand as landscape contractor companies deal with labor shortages.

BOSS faces similar positive market conditions. Last season's snow falls helped get preseason orders off to a good start. The performance of our snow and ice management business is in line with expectations of continued year-over-year growth.

Turning to our golf and grounds equipment businesses. We expect retail to pick up as weather improves. Golf course revenues should benefit as rounds played recover enabling investments in new equipment. Municipal orders for grounds products should also pick up mid-summer in connection with new budget cycles. The golf irrigation pipeline of pending major golf course renovation and upgrade projects remain strong. The ongoing success of our innovative INFINITY sprinkler line and the launch of our next-generation Lynx 7.0 control system later this summer should help us gain share this year.

Although contractors face labor issues, we anticipate that our contractor irrigation and lighting businesses should benefit for more favorable weather as the season progresses. Our advancements in control systems that provide homeowners with cost-effective connectivity abilities should further bolster irrigation and lighting installations. Perhaps our most exciting recent introduction is a new line of 60-volt lithium-ion battery-powered walk mowers. We take our position as the leader in the walk power mower business seriously and want to make sure that we provide the best lithium-ion battery-powered offering. We call them the Toro Flex-Force Power Recyclers. While consumers often expect that buying a cordless product means compromising on features or power, with Toro buyers can expect the same performance that our gas-powered models deliver. These are powerful, fully-featured mowers built on the same 22-inch steel deck Recycler platform as our traditional line. They start with a push of a button and have plenty of power to deliver the high quality of cut our customers demand as well as powering our legendary Personal Pace self-propelled drive. Homeowners can recycle, bag or side-discharge clippings, and when the job is done, minimize the mower's garage footprint with the popular SmartStow feature. Additionally, these mowers are part of a complete family of 60-volt Flex-Force products that includes a blower, trimmer and coming this winter, 3 new 21-inch Power Clear snowblowers. Such innovation will help continue our walk mower momentum through the season. Favorable weather should promote rider sales as well.

Looking forward, we anticipate strong snowblower shipments this fall. Customers are enthused about our next-generation single-stage line. The battery-powered Flex-Force units joined 4 new residential and 2 new commercial gas-powered Power Clear models. They feature modern styling, large engine step-up models, high-capacity shoots, increased fuel capacity and enhanced ergonomic controls. Along with the new 2-stage models launched a year ago, these units should help extend our leadership as America's #1 snowblower brand.

On the international scene, we anticipate continued growth in golf from emerging markets and are tracking a large number of municipal tenders for grounds equipment. Moreover, we are preparing to launch several new products across businesses. During the second quarter, we will unveil a new 6-foot out-front rotary mower, a new riding greensmower and a 60-volt program in select markets.

Trade tensions, elections in the U.K. and Brexit all pose challenges that may impact results. Our international team stands ready to address these challenges and capitalize on both existing and emerging opportunities.

Before I close, I want to recognize our employees and channel partners who are essential to our success. I want to thank them for their steadfast commitment and hard work. I especially want to acknowledge the contributions of our new employees and valued dealers from Charles Machine Works. Their hard work is evident in the very positive impact they made on our second quarter results. While aware of potential risks related to the challenging trade environments and tariffs, fluctuations in currency, exchange rates, supply chain issues and weather, we believe the company is on track to deliver another good year. We will diligently work through any disruptions. With the addition of Charles Machine Works, we now expect revenue for fiscal 2019 to be about $3.2 billion with adjusted net earnings of about $2.90 to $3. For the third quarter, the company expects adjusted net earnings per share of about $0.70 to $0.75.

This concludes our formal remarks, and we will take questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Joe Mondillo from Sidoti & Company.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [2]

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I just was hoping to cover a couple basics on the acquisition in terms of some of the financials. So I was wondering if you can provide -- I'm not sure if I heard this, but the revenue contribution in the quarter itself? And then also what sort of normalized D&A you're looking for, for whether you want to give me the whole entire company or what? That would be great.

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Richard M. Olson, The Toro Company - Chairman, President & CEO [3]

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Yes. Thanks for the question. So we have now included Charles Machine Works in the professional segment, and they were a significant contributor to the segment. So far this year, if you look at the first half results, the professional segment is ahead, but in the second quarter, some of our businesses, the golf and grounds business and irrigation, were challenged by some of the weather impact and some of internal supply issues. So -- but other parts of the professional business like the landscape contractor, specialty construction and BOSS, all had fantastic quarters and are on track for the year. So overall, we feel good about the position of the professional business. Obviously, Charles Machine Works was a major contributor to that. Weather is affecting some of those segments, but we feel positive going forward.

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [4]

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And Joe, maybe I could address the question on D&A. In our Investor Relations presentation that was posted on our website this morning, we did include revised cash flow guidance and revised capital expenditure guidance. We didn't specifically address D&A, although it's embedded in the free cash flow guidance. We're still working through our provisional purchase accounting. There will be a little more detail on that when we publish the Q as well. And we're just very early on the acquisition, so we're still working through some of the details.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [5]

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Okay. So it's sort of difficult. So first quarter, you saw a growth in the professional segment of 13%. I know that wasn't sustainable rates. But just trying to hash out what kind of organic growth versus acquisition, I guess, because of competitive reasons, you don't want to divulge the revenue for CMW. Is that the case?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [6]

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That's fair to say, and I think I would just say, again, the underlying business, we mentioned the challenges in a couple of the underlying businesses and markets, but overall, pro, we feel good about the first half so far. We've had good results in many of the segments so far.

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [7]

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Yes. And I would just -- building upon that, I would just add that where we did see the challenges related to weather, we feel those are the same challenges that our competitors would have seen. And I think, Rick, you would say that market share remains solid.

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Richard M. Olson, The Toro Company - Chairman, President & CEO [8]

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There is no question with the new products that we've talked about in the past: the Staris from the landscape contractor side under the Exmark brand, the Outcross in the commercial area, the new TriFlex greensmowers and so forth. We feel fantastic about the product line that we have, the innovations. And any impact that would be there from weather is the same thing that our competitors are feeling. Our field inventory is in great shape even in the more challenged areas. Field inventory is at/or below what was last year. So we're in good position.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [9]

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Okay. Last nuance question for me, and I just have one more question that after that is the $20 million of sort of one-time type cost, did that all fall in the professional segment or was some of that in corporate costs?

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [10]

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Yes. So it would be split about 50% in the professional segment and about 50% in other. And just to give you a little more information on that, in particular, within the professional segment, you're going to see the impact of the inventory step-up, that part of the purchase accounting. Within the other segment, you would see more of the transaction-related expenses. And then integration expenses really, as in this case and also as we go forward, could be included in either one of those segments. Due to the enterprise-shaping impact of Charles Machine Works, some of those initiatives will be broader and impact the areas outside of Charles Machine Works. And those will be in the other section.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [11]

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Okay. And then I wanted to ask about sort of the guidance for the year, and then I'll pass it on to the next person. The annual guidance sort of suggests that the fourth quarter is going to be -- see some pretty nice year-over-year growth. And I'm just wondering, is that related to anything related to sort of CMW and maybe what they have in the backlog? Or what's sort of driving that thought process of strength there?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [12]

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Yes. If you look at -- if you reflect back on our comments for the full year previously, we did anticipate to -- we did anticipate getting the full benefits of our actions in response to the increased tariff and commodity costs situation that we're facing. So in the fourth quarter, we will see the full benefits of the actions that we took beginning last year and fully coming into place just as we speak. We do expect the second half to have improved margins. And the fourth quarter is really the quarter where we see all those benefits coming in. And then we're comping against a quarter last year that included much of the effect of the tariffs and the increased costs.

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [13]

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And I would just say, the profile, as we've commented in the past, for Charles Machine Works is a little bit different, and so it is going to change our quarterly profile as well. It isn't as seasonal as the Toro business and impacted by different factors. So that is a piece of also what we're seeing in Q4.

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Richard M. Olson, The Toro Company - Chairman, President & CEO [14]

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And maybe just to add on a couple of other factors. The fall is obviously when many of the golf irrigation projects take place, and even those that would have taken place earlier this year have been pushed out to that period. And then, we are expecting a very good snow season based on a number of factors: the new products that we have coming out that I mentioned in the earlier remarks, and then the fact that the inventory was pretty well cleared out in the field due to the late season -- late in the winter season snow events. So we're in good shape there to have a very solid beginning to the snow here.

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Operator [15]

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Our next question comes from the line of Sam Darkatsh from Raymond James.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [16]

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Yes. This is Josh filling in for Sam. So going back to Charles Machine Works, you said it's less seasonal than your other businesses. Should we just assume the sales in the quarter was roughly similar to 1 month average sales?

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [17]

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Yes. I mean, all things being equal, it's less seasonal. It's not exactly linear as we learn more and more about the company, but it is not going to be as weighted toward Q2 and Q3 as the legacy Toro business would be. And that was one of the factors that was really attractive to us when we looked at. The acquisition was helping us to balance out some of the natural seasonality that we have as a company.

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Richard M. Olson, The Toro Company - Chairman, President & CEO [18]

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So really, we've talked about previously that it was really tied to different market drivers, and we really have immediately seen the benefit of that. But it's not really tied to weather situations, for example, as opposed to the communications build-out, the infrastructure investments and so forth. So we're seeing the benefit of being tied to different drivers already in terms of stabilizing demand.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [19]

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Got it. And just to be extra clear on what assumptions are included in the guidance, can you talk about whether you're including the recent increases in the tariffs on Chinese goods and the reduction in steel tariffs?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [20]

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Yes. So at any given moment when we provide guidance looking forward, we look at all of those factors when we try to make our best judgments on what the impact for Toro will be. So we have factored in some of the reduction that we were starting to see in steel. In fact, we built that into our original plan for the year. So we do have that built in. And from a tariff standpoint, we have now, based on the knowledge that the List 3 is going to 25%, we have built that into our guidance for the year as well. So we're disappointed that the tariff did increase or that we don't have a better tariff situation, but we've now built in our best thinking about what that's going to be for the rest of the year, and that does include List 3 at 25%.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [21]

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What might the benefit be if those were to be removed?

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [22]

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We haven't specifically called out the impact of the tariffs, and in part because it's very difficult for us to segregate some of the tariffs -- direct tariffs from the tariff-related actions. And we talked about in the past steel is a great example of that. Most of the steel we're buying is not actually impacted by direct tariff, but yet, we saw steel prices change in our global economy because of the tariffs. So it's hard for us to segregate those 2, and therefore, we talked about it more in total.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [23]

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And the last one for me, you mentioned in the release some specific supplier-related issues in the golf and irrigation segment. Are those ongoing or have those been fully resolved?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [24]

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Yes. We're living both of the positives of strong economy and the negatives. And the negatives are that our suppliers our strained to keep up with demand across all of their customer base. So that -- we have the same kinds of issues that they have, which are labor, getting workers, et cetera. And what we particularly saw in the last quarter here is also weather was -- had an impact in our markets, but it also had an impact on our supply chain beginning in April. In the month of April, we don't usually expect to lose days of production due to needing to close plants essentially, and our suppliers saw that as well. So the answer to your question is we are managing those intensely, and we believe that we are on top of those, but they continue to be a challenge. So we don't expect the supplier challenges to completely go away anytime soon, but we believe we are managing those in a way that supports our business plan going forward.

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [25]

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Yes. And just building upon that, we have taken actions, as Rick said, and implemented processes that we believe will address those issues for the remainder of the year, in particular, around the inventory. We will selectively bring in some higher levels of critical components to help us manage. We're working closely, collaborating with our suppliers, but we'll also carry a little bit more finished goods, higher levels of our fast-turning finished goods to give us a little more flexibility in this dynamic time. At the end of the quarter, we actually -- if you would extract Charles Machine Works out of the inventory, we saw our inventory for the company less Charles Machine Works actually go down, and we actually had less finished goods and a little bit higher work in process than normal. So we think that going forward, there are some steps we can take to help us to better balance that.

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Operator [26]

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Our next question comes from the line of Tom Mahoney from Cleveland Research Company.

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Thomas Mahoney, [27]

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I wanted to ask about the organic revenue assumption inside of the new $3.2 billion revenue guidance. Is it fair to say that's unchanged in the 4%-plus range that you guys have talked about prior?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [28]

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I think that's, including Charles Machine Works, we would be back at that mid-single-digit sort of range for the company but with a larger base, obviously.

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [29]

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Yes. And more of that, again, being weighted toward pro versus residential, but no change in the fundamental.

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Thomas Mahoney, [30]

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Okay. Got that. And then the driver of less finished goods -- going back to inventory, the driver, what segments or lines were drivers of less finished goods and inventory year-over-year on a Toro organic basis?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [31]

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So primarily golf and grounds from a finished goods standpoints. We -- first of all, we're in good shape in the field, but internally, if we could have changed something, we would have probably had a little bit higher finished goods in some of our key bread-and-butter products and would have been able to convert some of the WIP to finished goods. So that's just what Renee had referred to is we have a little bit higher WIP than we would expect to have relative to finished goods, and we would have preferred to have a few more units available in some of our key bread-and-butter products.

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Thomas Mahoney, [32]

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Got it. And then just structurally on CMW, when you talk about the distribution network that, that business utilizes -- and we're all familiar with the distribution network and the strength that's in the pro segment that you guys utilize, can you just compare and contrast the CMW distribution network to the core Toro pro distribution network?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [33]

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I think this is one of those examples that the more we learn about Charles Machine Works and the more work that we do on the integration, the more pleased we are. I had a chance to visit one of our dealer -- one of our Ditch Witch dealers and had a chance to meet with a group of them, and I could not have been more impressed. We have now a terrific new channel in the construction market, very high-quality, very professional partners with Ditch Witch and the other brands that are part of Charles Machine Works. So it's been one of the very positive discoveries just how good that channel is. It's not something we were able to do as much deep due diligence into because for obvious reasons, visiting dealers was difficult. But now that we have a chance to do that, it has been very pleasing, what we've seen there.

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Operator [34]

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Our next question comes from the line of David MacGregor from Longbow Research.

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Robert Samuel Aurand, Longbow Research LLC - Analyst [35]

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Rob Aurand on for David MacGregor this morning. I wanted to ask you about residential profitability. You made the comment in the release that it's going to improve throughout the year. You have a competitor ramping up that lows. [ph] Can you talk about the extent that might impact your promotional cadence for the rest of the year?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [36]

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Yes. We feel good about the residential business, as we had talked about. The residential business was especially hit by the commodity and tariff situations, so that's been a challenge from a profitability standpoint over the last year. With regards to new or different competition or changes, we have great respect for the Craftsman brands and we know that they're in a new location. But at the same time, we've been competing with the Craftsman brand for a very long time, and obviously, their mass partner has been out there for some time, so there's -- in some respects, there's newness, but in other respects, it's not dissimilar to what we faced in the past. And I could just say, we are incredibly pleased to be with our partner in the mass area, The Home Depot, and feel that we have the right partner there. And that's been a key part of the success of taking our market share from low single-digits to leading market share in walk power mowers, for example, and we are pleased with our partnership today and looking forward to doing even more going forward. So we feel -- we understand what's going on and we feel good about our position.

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Robert Samuel Aurand, Longbow Research LLC - Analyst [37]

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Okay. And then with the $0.70 to $0.75 guidance you've given for the third quarter, can you quantify what accretion from CMW was in that?

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [38]

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Yes. When we gave the guidance for both the quarter and for the year, we really tried to look at this as a new combined enterprise. So we're not specifically breaking out the impact for Charles Machine Works but have included that in our guidance to the best of our ability.

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Robert Samuel Aurand, Longbow Research LLC - Analyst [39]

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Okay. I guess, just last for me. On some of these new products coming out, the Greenmaster 1000 (sic) [Greensmaster 1000] coming out this spring and the TriFlex this summer, can you give any kind of initial commentary around what you're hearing from customers, how preorders are trending for those new products?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [40]

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Yes. The response for those lithium-ion -- fully lithium-ion products has been fantastic. And I can just say from a personal standpoint, I had a chance to mow a green, for example, with our new TriFlex and I have some baseline of experience, I will say. If I were buying a product that I were going to operate, that's the one that I would get. There are lots of reasons why people are interested in the fully lithium-ion products. Less emission, but it's also operator experience so less noise, which has a lot of benefits and less noise, for example, in the context of a residential development that might be surrounding the golf course, so which means more productivity for the golf course. They can get started earlier in the morning. So there is great demand and interest. And I can just say that they will be very pleased with the results and being able to mow 18-plus greens with a single charge, just -- it's going to be a great experience for the people -- for the operators in the golf courses.

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [41]

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In particular, we're also excited about the 60-volts within residential.

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Richard M. Olson, The Toro Company - Chairman, President & CEO [42]

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60-volts also, and this is one of those areas we talked about the leverage between our commercial business and residential. The expertise that we're developing in both areas back and forth have been helpful. And our 60-volt line for the residential walk power mower is -- it's only been out there for a short time, so there are only a handful of reviews. The reviews publicly have been very positive. And once again, I can say in my personal experience is it's a great product. It's not one that compromises, and just to be able to have an electric, it's really looking at the whole product, including what people really love about it is it's got our Personal Pace drive system, which is preferred in the marketplace and has been a key differentiator for us for a long time.

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Operator [43]

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Our next question comes from the line of Josh Chan from Baird.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [44]

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I just wanted to ask about the -- from a top line perspective, in terms of weather, would you say that, that impacted all of your businesses, including the ones that grew? Or was it sort of more isolated, I guess? And then, I guess as a follow-on to that, when you say that your guidance assumes normal weather, do you assume that you also kind of capture that lost revenue in the back half of the year? Or is it more normal in the second half, I suppose?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [45]

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Yes. So the weather affected our businesses to varying degrees, in some cases positively and in some cases negatively, obviously. So for example, the snow season that we ended up with was a big driver of our BOSS professional snow and ice management business and helped us return to a more normal snow year for the residential snowblower business. And looking forward then, some of the more challenged ones would be coming out to buy a mower in the spring as a residential customer or looking at replacing equipment from a golf and grounds standpoint. Some of those were more challenged by that. But we assume going forward is that we take our best estimate of what's happened so far and then project that for the year. Now if you look out the window where you are, at least where we are, we see cold and rainy, so that's not a good thing looking forward. But as we look to the forecast here, it looks like a couple of days of sun for the Memorial Day. So we think our best shot looking forward, we assume a return to more normal weather. Real time, at this moment, you look out the window, it's raining, and it's 50 degrees. So those are just all the factors. We do our best to incorporate what we think will be normal weather going forward.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [46]

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All right. Yes, that makes sense. Hopefully, it will get warmer a bit for you guys there. And then on the -- just the definition of adjusted EPS. In addition to some of the onetime items, there's like an ongoing intangible asset amortization that usually comes with these deals. Does that ongoing piece of amortization get included? Or is it excluded too from EPS?

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [47]

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Yes. No, we would consider that to be more operational or ongoing, so we would not exclude that in our non-GAAP measures. So it would be included in both the GAAP and then not excluded from a non-GAAP standpoint.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [48]

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All right. That sounds good. And then I guess my last question is, is there any comment you can make about gross margin? I recognize, Renee, that you said that gross margins in the businesses should be up in the second half, but I realized that Charles Machine Works probably impacts that calculus as you kind of play with them the consolidated level. So any type of guidance update on the full year, I guess, adjusted gross margin?

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [49]

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Yes. As we've talked about across the enterprise, we do expect, as you said, gross margin will improve in the second half across all businesses. However, you're correct that Charles Machine Works would be dilutive overall. And so that will be included, mainly from a mix standpoint is how I would think about that impacting. It is included in our guidance both for Q3 as well as Q4. And we think that in Q3 is really going to be the turning point where we start to see the improvement accelerating into Q4, but the mix impact from Charles Machine Works would be dilutive.

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Operator [50]

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Our next question comes from the line of Tom Hayes from Northcoast Research.

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Thomas Lloyd Hayes, Northcoast Research Partners, LLC - MD & Senior Research Analyst [51]

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Rick, I was just wondering, I did see the new 60-volt mower in one of the -- in Home Depot in the last couple of weeks. I'm just wondering, does that displace a gas one that you currently have kind of slotted in that slot? Or is this just kind of an opening of a new category?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [52]

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It's -- precisely, I would have to check with our team to know exactly how that fit in with the lineup. I do not believe that it displaced the gas model at this point. I can't say that with 100% confidence, but I do not believe so. It was definitely incremental to our model lineup in math.

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Thomas Lloyd Hayes, Northcoast Research Partners, LLC - MD & Senior Research Analyst [53]

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Okay. Great. And then just, Renee, I think you kind of booked around $20 million in acquisition-related costs in the quarter. Could you just kind of give us some kind of scope or scale on the expected acquisition costs for the balance of the year?

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [54]

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Yes. As we look forward, we still -- it's very early in the acquisition, 45 days or so. We certainly had some of the more significant ones recognized in the quarter with the transaction-related expenses so the majority of all of those expenses are behind us. We'll see more from a purchase inventory step-up purchase accounting standpoint. We'll see that continue for the next couple of quarters as we work through that inventory level. And then we will have ongoing integration expenses. So I don't have a specific amount to share with you as it is somewhat fluid as we work through the integration. But certainly, some of the largest transaction-related expenses are behind us.

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Thomas Lloyd Hayes, Northcoast Research Partners, LLC - MD & Senior Research Analyst [55]

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Great. And just finally, Rick, you sound fairly positive on the outlook for the snow season coming up. Just want to confirm that and make sure most of that is driven through the inventory channels probably got reduced by the late storms here.

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Richard M. Olson, The Toro Company - Chairman, President & CEO [56]

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Yes, exactly. There were some regional variation in that. So the Midwest had a much stronger snow year last year or much more snow, so inventories are bare-bones from a field inventory standpoint. The East Coast was not as heavy of winter but had some events. So on average, our field inventories are in very good condition in those markets for both single and 2-stage, especially so in the Midwest, but we also feel on average, we're in good shape.

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Operator [57]

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And our final question today is a follow-up from the line of Joe Mondillo from Sidoti & Company.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [58]

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Just first off, curious on the synergies with CMW. I know it's still early in this acquisition, but any change of sort of thoughts on how much and the timing and how that plays out over the next 3 years?

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Richard M. Olson, The Toro Company - Chairman, President & CEO [59]

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Yes. I would just say, as Renee mentioned, we're 45 days in, but we are on track with the run rate -- achieving the run rate for the $30 million that we talked about, and we feel very positive about the opportunities that we see and perhaps to go beyond that at some point here, especially as we look at the overall enterprise, not just specifically the intersection of our 2 companies. So we feel very positive about the work that the team has done so far with the assistance that we've had from the outside. That's really helped us start to execute very rapidly, and we feel good about our commitment, and we believe, as you look across the whole company, that there are opportunities to do more as a company.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [60]

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Okay. And then, Renee, I thought -- correct me if I'm wrong. I thought you said that the full year tax rate would be 20.5%. If that's correct, I think that assumes 26% in the back half of the year?

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [61]

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Yes. Often, our tax rate can move around from quarter-to-quarter where we're trying to give you the best total year tax rate, but part of it depends on also discrete items as well. So that may be the case. If you look historically, our Q4 tax rate can also -- in particular, the one that we see the most change as we close out the year. Smaller quarter and -- smaller items have a bigger change on the tax rate if they're discrete items.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [62]

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Okay. I think we were thinking sort of low-20s for the year initially. Obviously, with the acquisition and everything, it's changing things up. But could you just tell me, would CMW sort of weight the average rate up or down relative to past expectations?

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [63]

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Yes. We did revise our total year tax rate to be slightly favorable from what we have told you before. That includes the addition of CMW, so looking at their footprint and their -- where they're earning their taxable income, as well as there has been some additional guidance that has been given after tax reform, in particular for some of the international areas. So both of those are impacting and improving our tax rate from a total year standpoint.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [64]

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Okay. And then just lastly, on the debt. Could you just walk me through what that debt is made up of now and at what rates?

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Renee J. Peterson, The Toro Company - VP, Treasurer & CFO [65]

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Yes. So we have published, when we assigned our credit agreements, information related to that. We had 2 term loans that we had for $200 million and $300 million each, both 3- and 5-year term loans, and they were at a LIBOR plus type of rate. And then we entered into a private placement for $200 million. It's split into 2 tranches, $100 million that is a 10-year and $100 million that's a 12-year. And those are on a fixed-rate basis. But specific interest rates are detailed out in our filings that we had. But we felt really good about the ability to secure both the fixed rate as well as the term loans at very attractive rates. I had also mentioned that one of our priorities has been then to try to pay down that debt, although we're still within our targeted debt-to-EBITDA range of 1 to 2, we were in the higher end. And because of the good cash flow that we had and the focus on that versus share repurchases, we had paid down about $200 million to date, and we do think that Charles Machine Works will contribute to our cash flow for the year. So we'll continue to prioritize debt repayment in the short term but continue to look for growth opportunities as well.

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Operator [66]

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This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Heather Hille for any further remarks.

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Heather M. Hille, The Toro Company - Director of IR & External Communications [67]

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Thank you for your question and interest in Toro. We will talk with you again in August to discuss our third quarter results. Thank you and have a good day.

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Operator [68]

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Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.