Briggs & Stratton's (BGG) CEO Todd Teske on Q4 2014 Results - Earnings Call Transcript

Aug.14.14 | About: Briggs & (BGG)

Briggs & Stratton (NYSE:BGG)

Q4 2014 Earnings Call

August 14, 2014 10:00 am ET

Executives

David J. Rodgers - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Todd J. Teske - Chairman, Chief Executive Officer, President and Member of Executive Committee

Analysts

Joshua Borstein - Longbow Research LLC

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Robert A. Kosowsky - Sidoti & Company, LLC

Joshua Wilson

Operator

Good day, ladies and gentlemen, and welcome to the Briggs & Stratton 2014 Quarterly Earnings Release. [Operator Instructions] As a reminder, today's conference is being recorded.

I'd now like to turn the conference over to your host for today, Mr. Dave Rodgers, Chief Financial Officer. Sir, you may begin.

David J. Rodgers

Good morning, and welcome to the Briggs & Stratton Fiscal 2014 Fourth Quarter and Year-end Earnings Conference Call. I'm Dave Rodgers. 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 we operate in, and 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 today's earnings release, as well as our filings with the SEC.

We will also make reference 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 after the completion of this call.

Now here's Todd.

Todd J. Teske

Thanks, Dave. Good morning, everyone, and thank you for joining us today. As we reported in this morning's earnings release, our fiscal 2014 fourth quarter consolidated net sales of $497 million increased by $20 million or 4% from the fourth fiscal quarter of 2013. We saw particular strength in the quarter in sales of engines for riding equipment and pressure washers, with our share increasing in these categories due in part to the new products we launched during the year and placement gains for our large engines used in riding products.

As you're all aware similar to last year, retail sales of outdoor power equipment started out slow with a cold and long spring season, and we've been working to catch up ever since. While we believe that industry shipments of walk mowers are modestly down compared with the season a year ago, we have seen positive signs in industry shipments of riding tractors and residential and commercial zero-turn products. Even as retail sales appear to be picking up a bit during May and June and into July, we believe that retailers are still working to get into positive comp territory on both walk and riding equipment and are cautious to place additional orders as they work down their inventory levels.

Our Products segment sales were also modestly higher in the quarter compared with last year. Slightly higher lawn and garden sales, led by the strength of zero-turn mowers and higher sales of pressure washers, were offset by lower sales of generators in the quarter. We are also pleased that international sales increased in the quarter by 9%, reflecting improved momentum from our efforts as we made -- we have made to increase our international distribution during the year.

Our fourth quarter net income, adjusted to exclude restructuring and impairment charges, was $14.6 million, an increase of approximately 36% from last year's $10.7 million. The increase was largely related to improved adjusted gross margins in both the Engines and Products businesses related to higher sales volumes and continued focus on manufacturing efficiency and higher production levels.

For the full 2014 fiscal year, our consolidated net sales were approximately $1.9 billion, which is essentially consistent with our net sales in the prior year. Our organic sales growth for fiscal 2014 was approximately 4% if you exclude an estimated $100 million in consolidated sales of engines and generators in the prior year related to storm activity and a full year of sales from our December 2012 acquisition of Branco in Brazil. A 4% increase is somewhat significant in a year where U.S. single-family housing has continued to grow slower than anticipated and U.S. retail sales of outdoor power equipment appear somewhat muted for the season after getting a late seasonal start.

Internationally, European customers continued to claw back from a major recession, the Australian market was flat following a 30% decline in the prior year and currency devaluations hit a number of emerging market economies. While an environment like this has been challenging, we are seeing continued improvement in our markets, and we are focusing on taking actions to grow profitably beyond the market.

For the fiscal year 2014, adjusted net income was $39 million, a decrease of $6 million from adjusted net income of $45 million in fiscal 2013. The adjusted diluted earnings per share was $0.82 compared to $0.93 in the prior year. As we have seen in prior quarters, the fiscal 2013 sales and income impacts of storms, including hurricanes Isaac and Sandy, included approximately $100 million to sales and an additional $0.20 per diluted share of earnings.

New product introduction -- or new product innovation, international channel development and acquisitions into adjacent product categories are as important to growing our businesses as they've ever been. We are extremely pleased with our new product introductions this year in the Engines and Products businesses. Without exception, each major product introduction launched to the market this year exceeded our expectations.

Our new 810cc commercial engine, Ready Start for ride and Quiet Power Technology or QPT engines were extremely well received by customers. In addition, our gas and electric versions of Powerflow + pressure washers were a hit with consumers. We believe that each of these products allowed us to increase our market share during fiscal 2014. We will continue to invest in new product innovation, focusing on user-driven problem solving with several new product introductions scheduled for fiscal 2015.

We are also just starting to see benefits from investments that we have made to strengthen and grow our international distribution in areas where we've been underrepresented in the past. Growing in these regions is slow and difficult work, but we are confident and determined that with the right products and outstanding sales and service teams, we can continue to grow our brands and our sales in these markets.

With respect to creating higher-growth and higher-margin opportunities through acquisitions, we announced earlier today that we reached an agreement to purchase Allmand Bros., Inc., a leading high-value and high-quality provider of towable light towers, industrial heaters and LED arrow boards. From its manufacturing plant in Holdrege, Nebraska, Allmand employs approximately 200 people and has annual sales of approximately $80 million. We have reached an agreement to purchase all of the outstanding shares of Allmand for $62 million, subject to working capital adjustments.

Getting into adjacent product categories such as these allows us to diversify our higher-margin commercial product portfolio and gain access to higher-growth industries and new distribution channels, including equipment rental. I have more to say about Allmand in a few minutes, but now I'd like to turn the call back over to Dave to provide you with some additional details on the quarter and our fiscal 2014 results. Dave?

David J. Rodgers

Thanks, Todd. Engines segment sales for the fourth quarter were $318 million, an increase of $19 million or 6% from the prior year. Units shipped in the quarter were higher by approximately 2% from last year. Sales also benefited from improved mix of larger engines sold due to improved placement of our large engines for rides; higher sales into Europe, which also benefited from favorable exchange rates compared to last year; and increased sales of higher-margin service parts. Unit shipments were partially offset by lower sales of small engines in the quarter as OEMs and retailers slowed orders in order to reduce inventories after a slow start to the season. For the full fiscal year, total engine units sold were approximately 8.1 million, an increase of about 1.3% from roughly 8 million units in fiscal 2013.

For the fourth quarter, Engines segment adjusted operating income was $22.2 million, excluding $477,000 of restructuring charges. The Engines adjusted operating earnings is an increase of $8.1 million from last year's fourth quarter adjusted operating income of $14.1 million. The adjusted gross margin rate for the Engines segment was 22.2%, an increase of approximately 340 basis points from an adjusted gross margin rate of 18.8% in the prior year. Adjusted gross margins improved 50 basis points on favorable net pricing and improved mix of products sold, driven partially by new product introductions. In addition, we benefited from 27% higher production of engines in the quarter, improving adjusted gross margins by 160 basis points. Lastly, adjusted engine margins benefited by 130 basis points due to reduced manufacturing costs and plant efficiencies compared to the prior year.

During fiscal 2014, we produced a total of 8.1 million engines, essentially unchanged from fiscal 2013. Engines segment engineering, selling and administrative expenses were $6 million higher than the prior year's fourth quarter related to increased international sales and marketing expenses, research and development costs, corporate development, legal expenses and compensation and benefits.

Within the Products segment, sales for the fourth quarter were $207 million, an increase of $4 million or 2% from $203 million last year. The increase was primarily related to increased shipments of U.S. residential and commercial zero-turn units and pressure washers, offset by lower shipments of generators and snow throwers. The Products segment had an adjusted loss from operations of $1.4 million in the fourth quarter compared with an adjusted loss of $900,000 last year.

Products segment fourth quarter adjusted gross margins as a percent of sales were 12.7%, essentially unchanged from a year ago. Adjusted gross margins improved 50 basis points on favorable net pricing and mix, driven partially by the new product introductions. Approximately 10 basis points of improvement was related to slightly higher production in the current year. Offsetting these margin improvements were negative currency impacts of 60 basis points primarily related to the Brazilian real and the Australian dollar, both of which devalued during the course of the year.

With respect to our balance sheet, we ended fiscal 2014 with total cash on the balance sheet of approximately $195 million and net debt of $30 million. Our net debt decreased by $7 million due to strong cash flow from operations of $127 million. Net reductions in key working capital items, including receivables, inventories and accounts payable, contributed $28 million to operating cash flows as we continued to drive down the working capital requirements of the business.

Free cash flow for the year was $67 million. Capital expenditures of $60 million were above depreciation and amortization of $50 million as we accelerated certain equipment replacement projects in our engine plants. Our strong cash flow was used in part to increase share repurchases during the year to $43 million, an increase from $30 million in the prior year.

I should also note that even though we did not contribute to our defined benefit pension plan during the year, the funded status has improved from being underfunded last year by approximately $150 million to being underfunded at the end of fiscal 2014 by $127 million. While the assets in the plan continue to perform quite well, the discount rate used to value the liabilities actually decreased from last year by 60 basis points, which, in turn, increases the present value of the liabilities. Total average leverage and LTM EBITDA, as defined by our credit agreements, were $225 million and $121 million, respectively, resulting in a leverage ratio of 1.86x, which is well within our debt covenants and provides us with adequate liquidity moving forward.

That concludes what we wanted to say about the fourth quarter financial results. So I'll turn it back over to Todd for our thoughts on fiscal 2015.

Todd J. Teske

Before I get to our outlook for fiscal 2015, just a few thoughts on the past year. First, we are extremely pleased with the new product introductions we launched during the past year. I want to thank all of our employees who have been involved in these efforts. Everyone involved from innovation in R&D to production, marketing and sales did a great job in bringing these products to market. We are extremely excited about future versions of these products, as well as new innovations in the future, which will inspire customers to buy new equipment and improve margins along the way.

Second, due to the efforts of our team in fiscal 2014, we continued to have strong cash flows from operations and our balance sheet remained strong. As a result, the board approved a 4% dividend increase for our shareholders, reflecting our financial position, strong cash flows and a continued confidence in our long-term strategies. The board also approved an additional $50 million for repurchase of common shares of the company. These actions reflect our ongoing financial strength, a balanced approach to capital allocation and our commitment to increase shareholder value while still providing us with the flexibility to make strategic investments in the business.

Third, last month, we announced that we are taking additional actions to improve the profitability of our Products segment. These actions include simplifying our business by reducing the assortment of lower-priced Snapper residential SKUs sold at our dealers and consolidating the McDonough plant operations into existing facilities in New York and Wisconsin. Over the years, we've taken several steps to improve the operations and profitability of the McDonough, Georgia facility, and in the end, we weren't able to achieve the volumes and competitive costs that are required.

The Munnsville, New York facility will be a focused zero-turn radius mower facility and production of walk mowers, tractors and pressure washers will move to our Wauwatosa, Wisconsin facility. We don't believe these actions will have a significant impact on our Snapper dealers as we will continue to provide them with higher-volume and higher-margin products for their businesses. The transition is expected to be completed toward the end of fiscal 2015 with annual cost savings of $15 million to $20 million, of which we expect to realize $5 million to $7 million of these savings in fiscal 2015.

Lastly, fiscal 2014 was our first full fiscal year of ownership of Branco, a commercial-oriented equipment provider, and their results are in line with our expectations, with the exception of the Brazilian real devaluing during this past year. We remain well positioned to grow in the Brazilian and Latin American markets with Branco products.

As I mentioned earlier, we've reached an agreement to buy Allmand Bros., who are headquartered here in the U.S. Allmand has annual sales of approximately $80 million, which is comprised of towable light towers, industrial heaters and solar-powered LED arrow boards that you would typically see on roadways. Light towers and heaters are used in a variety of applications anywhere where it is dark or cold, including construction, road building, oil and gas and mining activities. Light towers are also used for large-scale special events and sporting activities.

Allmand fits with our strategy of focusing on higher-margin products, specifically commercial equipment and also provides access to the construction and rental channels, where we don't have a large presence today. While we have some typical closing items to complete, we expect to close the deal in the next 30 days or so.

Looking forward to fiscal 2015, we remain committed to creating shareholder value by executing on our strategy of growing the Engine business, focusing on higher-margin opportunities and growing our international business, especially in those emerging markets we have had not had a significant presence. In 2015, we will continue to deliver new and innovative products to our customers, execute on our restructuring actions to improve the profitability of our Products business and grow an already successful business in Allmand. We will focus on simplifying our business to take out costs and make us easier to do business with around the globe.

With these objectives in mind, we are projecting higher sales and net income in fiscal 2015. However, it is important to note that our comments here today on the fiscal outlook for 2015 do not include any impacts related to any acquisitions, including the pending Allmand acquisition or landed hurricane activity, which would benefit our sales and earnings due to higher sales of generators and engines used power -- engines used in those generators.

We are estimating fiscal 2015 net income to be in the range of approximately $50 million to $60 million or $1.07 to $1.27 per diluted share prior to the impact of any share repurchase activity and additional costs related to our announced restructuring programs. We are projecting net sales to be in the range of $1.88 billion to $1.94 billion for fiscal 2015. We estimate that the market for equipment -- for lawn equipment in the U.S. will increase next year in the range of 1% to 4%.

We're currently beginning discussions with all of our key customers regarding product lineups for the 2015 spring and summer selling season, and we should have a better idea of placement on our fiscal 2015 second quarter conference call. Our sales estimates for fiscal 2015 contemplating that we are reducing the number of lawn -- of lower-margin Snapper residential lawn and garden SKUs. The impact of these SKU reductions is to reduce sales by approximately $20 million to $25 million in fiscal 2015.

While we do not provide guidance with respect to our quarters, keep in mind that last year's fiscal -- first fiscal quarter benefited from strong late-season shipments of lawn and garden equipment. In addition, we believe that retailer inventories are higher than 1 year ago and thus, our engine sales volumes in our first fiscal quarter could be lower than the prior year as OEMs and retailers take action to reduce inventories prior to the fall and winter seasons.

Consolidated operating margins are forecasted to be in the range of 4.5% to 5.0%. However, as is typical, our production activity is lowest in our first fiscal quarter. The lower production levels reduces our absorption of fixed manufacturing costs, causing gross margins to be lower in the first quarter before rebounding in the following quarters as we have additional manufacturing throughput.

From a cash flow standpoint, cash flows are anticipated modestly higher than the operating cash flow in fiscal 2014. Improved earnings and additional cash generated from net working capital reductions of $20 million to $30 million primarily related to inventory reductions will contribute to cash flows from operations. We are not required to contribute to the pension plan in fiscal 2015. Lastly, we anticipate that capital expenditures in fiscal 2015 will be in the range of $60 million to $65 million as we continue to invest in new products and manufacturing efficiency projects in fiscal 2015.

That's the end of our prepared comments. Now we'd like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Josh Borstein of Longbow Research.

Joshua Borstein - Longbow Research LLC

Just one point of clarification to begin on the revenue guidance. That does or does not include the impact from the Allmand acquisition?

David J. Rodgers

It does not, Josh. We will -- we gave the annual sales for Allmand in our comments, which is about $80 million annually, but it is not currently included in our guidance for next year, pending the closing of the deal.

Joshua Borstein - Longbow Research LLC

Okay, great. And then just thinking on the guidance for a minute. You have EPS growing in a slower market assumption versus last year. Can you walk us through some of the puts and takes behind that?

David J. Rodgers

In terms of the top line or in terms of EPS?

Joshua Borstein - Longbow Research LLC

In terms of both just in the respect that you have EPS growing at a somewhat significant rate but your top line market assumptions are actually lower than what you've talked about last...

David J. Rodgers

Yes. One of the things that you have to keep in mind is that, going back to 2012, we announced the freezing of our defined benefit pension plan. So one of the key items that's included in the earnings for next year is the benefit of freezing that plan, and it's consistent with what we had previously talked about in the range of about $10 million to $15 million. I actually think it will be probably closer to the $14 million or $15 million number.

Joshua Borstein - Longbow Research LLC

Okay. And then do you have any expectations with respect to incremental margins, either by segment or on a consolidated basis, that you can talk about?

David J. Rodgers

Yes. In terms of the Products business, I mean, certainly, we do believe that the restructuring actions that we announced related to Snapper and McDonough will have an impact on the profitability, specifically the margins -- the gross margins in our Products business. So on an annual basis, when we complete the actions, it will be $15 million to $20 million. The savings for next year that will benefit the margins are in the range of about $5 million to $7 million. So we think that will help out. As well as, in both of our divisions, both Engines and Products, we are working to implement our standard cost reduction programs. So those are factored in to help us improve margins both in the Engines business and the Products business. Then lastly, the things that we work on each year. Todd spent some time talking this morning about new product innovation. And certainly, moving forward, 2 of the key goals or objectives with new product innovation is giving consumers a reason to go out and buy new equipment, but also increasing our gross margins moving forward. For the current year, the -- we did see positive sales impacts and margin impacts from the new product introductions. But you have to remember that we're still fairly early on in this journey, that as you look at where we had the placement of our new products for this year, it was only on a limited number of SKUs. And so we view this as a journey over the next couple of years or so, 2 to 3 years, where we can have more of an impact as we introduce new products, as well as new versions of the products that we already introduced. So those things are all without regard to improved volumes. And certainly, as we produce and manufacture more volume going through the plants, that can be helpful to us as well.

Joshua Borstein - Longbow Research LLC

Okay. And the $5 million to $7 million that you talked about in cost savings that you should realize this year, should we expect those to be more back-half loaded?

David J. Rodgers

It's probably even in the last quarter of the year where you'll see most of the benefit. The reason for that is that the McDonough facility will continue to manufacture through the third quarter -- or about through the third quarter. And so the fourth quarter is where you'll see the largest impact of those benefits.

Operator

Our next question comes from the line of Tim Wojs of Baird.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

I guess, my first question is just on the market growth, the reduction there from -- I think it's been 4% to 6% in the past couple of years, now it's 1% to 4%. Just maybe some color on why you guys are expecting a little bit of a slower market growth next year.

Todd J. Teske

Tim, this is Todd. So when you kind of look at the puts and the takes that have happened over the last 4 years -- or last few years, 4% to 6% seemed to feel about right in the past. We've gone a bit more conservative now, and the reason for it is the 4% to 6%, you look at last year, didn't really come to pass per se. I mean, the walk market's down modesty, as we've said. We've seen rides, including Zs, up a little bit. But at the end of the day, housing continues to be this interesting phenomena in terms of improvement that's been going on. So if you look at kind of what's been happening in the housing market, the high-end homes are selling really well. And high end -- higher-end homes will typically either have a riding lawn tractor or will have someone cut their lawns for them, which is in, obviously, commercial cutting equipment. We've seen pretty good strength, especially in ZTRs. We've seen good strength in that kind of the -- that part of the market. When you look at starter homes, starter homes are completely different than where they've been in the past. They're not really growing at all. And I'm not -- I'm talking both existing and new home sales. So when you look at it, it's harder for folks that are trying to get into that first home to get financing because of where now the requirements are by the banks and regulations and everything else. Oftentimes, that's where we'll see a lot of walk mower activity. And because of that, I think it looks like that the market's down now this year, down modestly is what we think it is. So rather than go out with a historical number for the sake of going out with a historical number, we've pulled back a bit and said until we start to see the overall housing market improve -- and I believe it will eventually improve, I just don't know when, because you see a lot of things with multifamily going well, which is generally commercial-type cutters, you see rents going up and eventually, people will make economic decisions that it's better for them to get into a house rather than pay high rents. I don't know when that's -- we don't know when that's going to turnaround. And so rather than come out with where we would have thought it would be historically, we decided to take a little bit more of a conservative route, you can argue whether it's conservative or not, but a lower estimate this year than we would have had in the last few years.

David J. Rodgers

Tim, this is Dave. I'd add just a couple of points to that. When you think about the housing peak and where we're at today, the new home market, okay, is still off close to about 60% to 70% from the peak. The existing home market, as far as sales, is still off somewhere in the 25% to 30% range from the peak. And so when we take a look at our best estimates for where the market is for walks and rides in the U.S., it's still down somewhere in the mid-20% range from the peak. And so we still continue to look at the data and know that we are correlated pretty highly to the home market. And so we just haven't seen the home market, as Todd explained, getting back to -- and we've never said that it's going back to the peak, but we still know that there's some pent-up demand in terms of housing moving forward in the U.S. The other thing I'd add is that's precisely the reason that we continue to move forward on our strategy of looking for other ways to grow the business. Whether it's in terms of the Engine business, for example, in growing our commercial Engine business, looking for additional ways to grow our horizontal business in emerging regions of the world or whether it's related to growing in higher-margin categories, like through the Allmand acquisition that we discussed this morning, we are determined to look for other areas of growth beyond what the U.S. lawn and garden market will provide.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay. That's really helpful. I appreciate that. And I guess, just kind of dovetailing on that question with Allmand, is there any way you guys could give us a little bit of color just around what the growth trends in that business have looked like over the last couple of years and maybe the margin [ph] profile?

Todd J. Teske

Well, Tim, when you look at -- let me start with growth. When you look at kind of the different industries that they're in, we have a tendency to call this stuff kind of job site. And when you look at the different markets that they serve, those markets have been doing well. So when you look at oil and gas, for example, they sell light towers and heaters into that market. When you look at road construction, infrastructure projects, things like that, it's been pretty good. And so we estimate that the markets that they play in, that they serve are -- they grow at more than GDP, which you can argue GDP is pretty low. But at the end of the day, they do grow at better than GDP, which is what makes them attractive. At the same time, they do serve international markets. And many of us travel around the world, and we see all the different infrastructure projects that are getting done in various parts of the world. And so we believe that with many of the things we've done over the last several years leveraging off of the history of Briggs, of the international distribution and being able to serve diverse markets, we think that, that's an opportunity for us into the future as well. As far as the margins are concerned, I would tell you that the -- as I think we've been consistent telling people, when we look at acquisitions, we're not going to look at things that are low-single-digit operating margins. We're going to look at things that are high-single digit, approaching 10% or even above. And I would tell you that when you look at the margins that Allmand has had, it fits our profile in terms of how we look at acquisitions. So at some point -- next quarter, we'll come out and talk a little bit more about the margins. Remember, there's always costs that go on when you have -- when you acquire business and integrate it, onetime costs that kind of comes through. So you need to be mindful of that, as are we. But when you look at it, it fits the profile. The other thing that I'll mention is the Allmand acquisition strategically is very much in line with what we've been talking about in some of the other deals that we've done, similar to Branco, for example, where I think we've been consistent in talking about when we look at acquisitions, we look at market knowledge and product and we look at distribution channels. And that's -- and if both of those are strong, that makes a very good acquisition target for us, and that's exactly what Branco has. They have got some great, great products, and they have access to distribution that we don't have today. They also have a manufacturing facility. That wasn't a key driver in us looking at the deal -- in doing the deal. We think though that there's some things that Allmand can leverage off of that Briggs & Stratton has, and there are some things we might be able to bring to their manufacturing. But really, when you look at it, it had to do with products, market knowledge, and it had to do with distribution channels. And so that, coupled with the financial profile and then the growth opportunities, is really how we think about acquisitions, and it met our criteria.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay, okay. And then -- that's really helpful. And then, I guess, just 2 modeling questions. As I look at -- you talked about the fact that engines could be down a little bit year-over-year just based on higher inventory levels. So is it fair to assume that gross margins there might be a little lower year-over-year? And then, I guess, secondly, just on the pension expense. The $14 million that I think you talked about in the prior line of questioning, is that all incremental year-over-year? Or is there some that you had last year that's not entirely incremental?

David J. Rodgers

The $10 million to $15 million would be mostly incremental to fiscal 2014 on the pension. And with respect to margins, I would anticipate that the margins would be incrementally better in the quarter -- in our September quarter compared to last year. Last year, we basically had taken production down to levels that I don't anticipate for this year, as well as the continued improvements that we continue to make on efficiency in the plants.

Operator

Our next question comes from the line of Robert Kosowsky of Sidoti.

Robert A. Kosowsky - Sidoti & Company, LLC

Quick question on just how the season ended up playing out, Todd. I mean, last quarter, it seemed like you spoke to the fact that we could have a late spring, leading to an extended selling season and that could help out first half's. And I'm wondering why you don't think that's manifesting itself this year.

Todd J. Teske

Well, I think last year was a bit of an anomaly from the standpoint that I think there's a little bit -- there was pent-up demand in the market, and we did see good sell-through. I'm not going to tell you that we haven't seen reasonably good sell-through, it's just not quite as good as it might be on a year-over-year basis. So we still think that if you kind of go back on average and look at a 10-year period for the kind of the June, July, August, even September time frame, I think we'll be above average. I think we've seen it be above average. It's just when you look at it on a year-over-year basis, it's lower. I also -- the other thing that's important to recognize is that I -- we don't see -- we don't get full transparency of inventories at retail. We're just not allowed that by the retailers, unless we obviously sell them product. So when you look at the -- on the lawn and garden side, where we sell engines into the OEMs into that market, I think they carried more inventory on a year -- or some of the retailers carried more inventory. So on average, inventories were a little bit higher. That's why we're being cautious right now with regards to how that first quarter could shape up on a year-over-year basis, where there was production at OEMs that was going on into the June, July time frame. And now because of early season sell-in or mid-season sell-in, if you will, inventories are higher so they're pulling back on production. So I would tell you, Rob, when you kind of cut through it all, it's sell-through continues to be okay on an -- compared to what an average season would be -- but it's down year-over-year, which is why we're being really cautious with you guys on what the first quarter's going to look like it.

David J. Rodgers

The only thing I'd add to that, Rob, is that if you look at ZTRs and rides, they continue to lead walks and continue to sell quite well. So I agree with what Todd said, but just wanted to add that rides continue to do quite well.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay, that's helpful. And then I guess continuing on that thinking, is there a chance that you might have a weaker sell-in next year just given you had a slower season this year? And how aggressive are you thinking about the sell-in for 2015 or some of your assumptions for 2015 relative to the fact this was, I guess, maybe a little bit of a dour year?

Todd J. Teske

Yes. It's a little bit too early to tell, Rob. Because even though it is the middle of August, we still have some time to go in the selling season. And so our guidance contemplates a 1% to 4% increase in the season. So it kind of -- we'll see how it transpires. It's too early to tell though where inventories will ultimately end up because I can tell you our sense is, is that retail inventories are coming down. They're just -- as I said in the prepared remarks, they're just -- retailers are just cautious about reordering any more. And so I think they're -- I know they're trying to get their inventories down to normalized levels, and we'll find out, come in 1.5 months from now where things are at.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. So it's just a little bit too early to definitively say, I guess?

Todd J. Teske

It's too early to tell you what sell-in is going to be next year. All of -- on the other side of it, I'll tell you, we've got some really interesting innovation coming out that I know is going to -- where there's going to have to be some stock-up that's going to happen because it's going to be something that's new and different than what was in the market this year. But on a relative basis, it's going to be coming down to where inventories shake out at the end of September.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. And then as you look at working capital, it looks like you took out $120 million working capital over the past couple of years. Is there much more room to go on that? Or are we going to be looking for that to be a little bit more of a neutral source to cash flow from operations going forward?

David J. Rodgers

Well, it typically -- as you move forward, you continue to raise the bar on that. But the team's been pretty good at working down inventories. We have a number of initiatives internally to get better at our sales and operations planning process, which can go all the way through our supply chain and have a positive impact on reducing inventories. What we do think though for next year is that working capital can contribute somewhere around $20 million to $30 million to the operating cash flow for next year. The one thing I'd caution you on though, as we go throughout the year, though, Rob, is that we will probably in the, I'll call it, the second and third quarter build up a little bit of safety stock and inventory as we make that McDonough transition. So as we get to the end of the second quarter and into the third quarter, you may see working capital a little bit higher. But again, for the full year, I'd anticipate that we'll be somewhere around $20 million to $30 million of working capital takeout.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. And then also on Allmand, is this -- should we be looking at this as establishing of a platform from which to get bigger into the construction channel, generally speaking like, do have a top-down view that you want to be bigger into small construction equipment and this is a deal that is a sufficient platform to add other acquisitions onto?

Todd J. Teske

This -- we find, Rob, the kind of the -- again, I'll term it job site. We find the job site category to be attractive, and so we will continue to see what other opportunities present themselves. Recognize though that we're going to be really disciplined when it comes to doing acquisitions. We have a tendency to look at some of the multiples that are being paid in the industrial space today, and they're sometimes a little bit eye popping. And so we're going to be disciplined in what we do, but we do find the category to be attractive.

Operator

[Operator Instructions] Our next question comes from the line of Sam Darkatsh of Raymond James.

Joshua Wilson

This is Josh filling in for Sam. Just a quick point of: Clarification on Allmand. The margin profile of high single to 10%, is that inclusive or exclusive of any of the manufacturing synergies you talked about?

Todd J. Teske

That's excluding. That's basically what they're doing today.

Joshua Wilson

Okay. And then as it relates to the engine inventories in the channel, can you give us any sense of maybe what the year-on-year change is? Or how many weeks of inventory are built up right now?

David J. Rodgers

Unfortunately, Josh, as Todd said before, we don't get specific inventory reporting from the retailers, as well as the OEMs on that. We get channel checks and commentary from the retailers, as well as the OEMs. But we can tell you that we think it's a little bit higher than last year. I'd call it moderately higher than last year as of the end of June. And they have seen it come down here during the month of July and so far in August, best we can tell. But beyond that, I can't give you a pinpoint estimate on that.

Joshua Wilson

Okay. And then the new products you mentioned coming in fiscal '15, do you have a sense of at what point in the fiscal year those would be coming out?

David J. Rodgers

Well, most of those would be introduced during the third fiscal quarter as store sets take place for the, I'll call it, the 2015 lawn and garden season.

Operator

Our next question comes from Josh Borstein of Longbow Research.

Joshua Borstein - Longbow Research LLC

Just a follow-up on Allmand acquisition. Are these -- the products that they have, are those engines that currently use Briggs? Or is there an opportunity there to refit those products with Briggs engines?

Todd J. Teske

Josh, the engines they use are generally diesel engines. And so no, they're not Briggs engines. I'll tell you that we'll look for opportunities, but we didn't predicate the deal on getting a whole bunch of engine business. So we'll look for opportunities. But no, today, those are primarily diesel or they -- some of them do run on some gaseous fuels as well.

Joshua Borstein - Longbow Research LLC

Okay, great. And then just on the guidance, where is the most improvement expected to come from in terms of margins? Is it more gross or EBIT margin?

David J. Rodgers

I'd tell you it's more in gross margins, Josh. In fact, it's in gross margins for both the Engines and the Products business. Having said that, as Todd said, a key theme that we are focused on internally is simplification of our business. And that means not only simplifying our business internally, but simplifying it for our customers, and we believe that, that can also have a positive impact on being more efficient with our use of SG&A.

Operator

Our next question comes from the line of Robert Kosowsky of Sidoti.

Robert A. Kosowsky - Sidoti & Company, LLC

Two quick questions. First off is if you look at the implied operating income growth that you see last year versus this year in midpoint of guidance, it looks about $30 million. And you've highlighted $10 million to $15 million of pension benefit and $6 million or so of the cost cuts. And I'm wondering are there any major negatives to keep in mind that you're worried about going into this year, whether on the commodity side or just anything else?

David J. Rodgers

No. I think, first on the cost cuts, Rob, there's typically more than that. In the Engines business, we'll target anywhere in the area of, I'll call it, $12 million or $13 million. In the Products business, it's about $6 million. Of course, those cost cuts go a long way to offsetting some inflationary pressures. But we typically do see a bit of incremental margin along the way. Moving forward, we do see that, in the last couple of months here, we have seen aluminum moving higher. And so we've certainly been aware of that and consider that as we go out with pricing for the year. But again, we will typically try to hedge some of those things as well to take out some of the volatility of that. Other commodities, we don't see major changes in moving forward.

Robert A. Kosowsky - Sidoti & Company, LLC

Okay. And then secondly, do you expect Power Products to be profitable this year at the operating income [ph] line?

David J. Rodgers

Yes. I think if you take into consideration the benefits from the restructuring programs and the moving of the McDonough manufacturing to both Munnsville and Milwaukee, we would expect it to be in the making money category next year.

Todd J. Teske

Excluding the restructuring charges.

David J. Rodgers

Right.

Operator

And I'm showing no further questions in queue. I'd like to turn the conference back over to management for any closing remarks.

David J. Rodgers

Great. Thank you, everybody, for joining us today. We'll look forward to speaking with you again in October after the end of our first fiscal quarter of 2015. Thank you, and have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.

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