The Toro Company F4Q08 (Qtr End 11/30/08) Earnings Call Transcript

 |  About: Toro Company (TTC)
by: SA Transcripts


Good morning ladies and gentlemen and welcome to the Toro Company Fourth Quarter and Year End Results Conference Call. My name is [Kennisha] and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today’s conference Mr. Michael J. Hoffman, Chairman and CEO of The Toro Company.

Michael Hoffman

Good morning ladies and gentlemen and thank you for joining us for our fourth quarter and year end earnings conference call.

Here with me this morning are Steve Wolfe our Chief Financial Officer; Tom Larson, Treasurer;

John Wright, our Director of Investor Relations.

Here in the Twin Cities we woke up to a nice white blanket of snow today. This was a great opportunity for our customers and the Toro team to use our snow throwers and I can say they worked well. These are the most innovative snow throwers in the industry and they keep getting just better and better.

With that let’s begin with our forward-looking statement policy.

Please keep in mind that during the call we will make certain forward-looking statements which are intended to assist you in understanding the company’s results. You are all aware of the inherent difficulties, risks, and uncertainties in making predictive statements, so the Safe Harbor portion of the company’s earnings release, as well as SEC filings, detail some of the important risk factors that may cause actual results to differ from those in our predictions.

Our earnings release was issued this morning by Business Wire and can also be found in the investor information section of our corporate web site,

Before we get to the results for our fourth quarter and fiscal year ended October 31, 2008, I would like to take a few minutes to reflect on the year.

Looking back, these past 12 months were accentuated by difficult economic conditions, primarily here in the US that impacted many of our customers and our company. Professional landscapers and irrigation contractors struggled with the on going weakness in the housing sector. Consumers are squeezed in many directions and turned cautious in their spending and new golf course development in the US slowed to its lowest level in a decade while existing golf courses watched their budgets and delayed renovation projects. Still, there were some bright spots for the year.

Our overall International business remains strong due to healthy demand in both the professional and residential markets and while our financial results didn’t reach planned levels; our internal disciplines enabled us to finish the year in a good position with reduced inventories both at Toro and in the field.

Let me mention a few of the results for the fiscal year and fourth quarter and then Steve will provide some more details on our segment and operating results.

For the fiscal year net sales were up slightly over the previous year at $1,878,000,000.2 million. As I mentioned, the improvement was a result of strong international sales in most professional and residential categories along with increased shipments for snowthrowers in the US and Canada. These gains were offset by lower domestic demand for professionally installed residential and commercial irrigation products and walk power mowers.

For the fourth quarter, however, net sales were up 2.6% to $341.2 million on the strength from snowthrowers and walk power mowers, due to strong Fall demand.

Net earnings for the year were $119.7 million or $3.10 per share, a decrease of 8.8% on a per share basis compared to last year. For the fourth quarter net earnings were break even.

The earnings decline in both the fourth quarter and full year includes charges of $4.7 million or $0.08 per share, taken in the fourth quarter to account for workforce adjustments. While a significant impact on the earnings in the smaller fourth quarter, these actions will help better align the company’s cost structure going forward.

As many of you know, because of our seasonal business the fourth quarter is historically a small revenue and earnings period for The Toro Company: it is when we conclude our fiscal year and position ourselves for next year’s primary selling season.

On our last earnings call we said the fourth quarter would be challenging and it was, however we

Delivered earnings per share for the year in the range we stated, including taking a workforce adjustment charge.

It is also important to note that we are not satisfied in our revenue growth for the year and worked hard to execute in areas we could control. As noted business author Marcus Child once said, “Business’s must control the controllables in times of change and challenge to steer through economic storms”. We are doing just that and accomplished several objectives in 2008 that I would like to highlight.

If you recall, back in 2004 we set out to grow the international business more than 30% of revenues. Through solid execution of our global growth objective and by taking advantage of opportunities outside the US to further diversify our portfolio, international sales increased by 12% for the year and now account for 32% of total sales. While currency had a favorable impact, we experienced strong demand from golf course construction and renovation projects in Asia, Eastern Europe, Africa, and the Middle East. At the same time overall growth rates for the micro-irrigation products remained healthy in Europe and Australia.

Second, we continued to make progress on our Lean initiative and improved our working capital position in 2008. Improvement in this area is certainly more challenging when growth slows; nonetheless, our talented team here helped lower net inventories by 17.6% and reduced accounts receivable by 9.5% on flat sales. And, as a result of our heightened focus on asset management we generated a record $216 million in cash from operating activities. These results demonstrate that we are indeed serious about lowering our working capital as a percent of sales to free up cash for future investments and drive additional shareholder value.

Third, as we talk about our strong cash position, one of our ongoing priorities is to pursue strategic acquisitions to grow the company. In October we acquired a versatile line of deep tine aerators from Southern Green to strengthen Toro’s popular offering of pro core aeration equipment. The acquisition, albeit small, is strategic for the golf business as cultivation practices become increasingly important to the success of our customers. We anticipate significant share growth in this category as we leverage our strong brand and expanded distribution with the Southern Green Line of products.

Lastly, we continued our commitment to market leadership through innovation in 2008 by launching a number of new and exciting products in both the residential and professional markets to better serve our customers. Steve will talk about these in a few minutes.

I am pleased to say that we once again exceeded our goal of having more than 35% of annual revenues attributable to new products, which we define as products introduced in the current and prior two years. Without these new products revenue growth for the year would have been even more difficult.

I would also like to provide a quick update on our Grow Lean initiative. We have now completed the second year of this program and unfortunately we fell short of achieving our fiscal 2008 revenue and profit after tax goals due to the deteriorating market conditions. Even with the markets trending down one key positive is our improved discipline on working capital, an area of measurable improvement this year and in the years ahead.

With that I will now turn it over to Steve to review our segment and operating results.

Stephen Wolfe

Starting with the professional segment, worldwide sales for the year increased slightly over fiscal 2007 to $1,000,000, 283.1 million. While domestic professional sales experienced considerable pressure due to ongoing economic weakness, international demand remains strong across most professional categories.

Within the golf market international demand remained healthy for turf maintenance equipment and precision irrigation systems as new golf projects continued to break ground around the world.

In addition, our professional segment benefited from the successful launch of several innovative products. These include the 16-foot Toro Groundsmaster® 5900 series rotary mower, which delivers unmatched productivity and value; the Toro TRX walk-behind track trencher, which provides us an entry into an entirely new product category; and the Toro Workman MD series utility vehicles affording customers improved ride quality and comfort.

On another positive note, micro-irrigation continues to be an area of growth with strong sales in Europe and Australia along with healthy orders in North America for our new Aqua-Traxx PBX line of Premium Drip Tape.

We were also glad to see incremental sales from our recent acquisitions of Rain Master and Turf Guard. These gains were some what offset by significant declines in professionally installed residential and commercial irrigation systems largely due to poor weather conditions, along with a slight decline in landscape contractor equipment shipments as a result of shared efforts with our channel to reduce field inventory.

For the fourth quarter net sales in the professional segment were down 4.5% to $208.4 million. Net earnings in the professional segment for fiscal 2008 were $234.8 million down 7.6% from the previous year. The decline was largely due to rising raw material and freight costs and lower production volumes. For the fourth quarter professional segment earnings declined $12.1 million over the prior period to $14.6 million.

In the residential segment economic conditions hit domestic consumers particularly hard. Despite the difficult environment, worldwide sales for the year remained essentially flat with fiscal 2007 at $563.9 million. Most of the revenue growth came from our international business where all residential categories were up for the year. In particular, our Pope branded products saw a healthy increase in demand down under in Australia, while sales for riding products were up in both Canada and Australia.

Meanwhile, snow thrower shipments were up significantly across North America as a result of lower inventory levels and accelerated demand. As we know, in the snow business a good snowfall in the pre season tends to cause an increase in demand the following season. As a result, we have enjoyed strong early season customer purchases of our full line-up of Toro snow throwers, including the innovative Power Clear with the quick shoot control system to effortlessly change direction of the shoot and throw snow up to 35 feet.

And while domestic sales for Walk Power mowers were down for the year, but in line with the industry, we did experience a nice bounce in the fourth quarter due to strong late summer and fall demand. Combined with increased shipments for snow throwers and international sales growth, residential segment net sale for the fourth quarter were up significantly gaining 21.2% to $122.2 million.

Net earnings in the residential segment for fiscal 2008 were $33.9 million down 19.1% from the previous year. For the fourth quarter, residential segment earnings were up $5 million over the prior period to $6.5 million.

While challenges continue in our residential market we are determined to drive retail demand and profitably improve our share position in the coming year. Mike will talk a little more about this and our efforts later in the call.

Let’s turn now to the key operating results.

Gross margin decreased by 1.3% points in fiscal 2008 to 34.8% as a result of higher commodity and fuel costs and lower production volumes. For the fourth quarter gross margin declined 5% points to 29.9% due to increased commodity costs, a one time write off of tooling and product mix with our lower margin residential business up significantly in the quarter.

SG&A expense for fiscal 2008 was down slightly, by $400,000.00 and flat at 24.2% of net sales. For the fourth quarter our SG&A expense was down $4.6 million compared to the same period last year and decreased as a percent of net sales to 29.7% from 31.9%.

We continue to invest in engineering to grow our business for the long term and incurred costs associated with the workforce adjustment mentioned earlier. These increases were offset by a decline in incentive compensation expense.

Looking ahead, we believe the workforce adjustment and lower spending will help our SG&A expense in fiscal 2009 as we reduce our cost structure in response to the difficult market conditions.

Interest expense for the year was $19.3 million, down slightly compared to fiscal 2007. For the fourth quarter, interest expense totaled $4.4 million, up slightly from a comparable fiscal 2007 period.

Our effective tax rate for the year was 34% compared to 33.1% for fiscal 2007. While both years experienced retroactive extensions of the Federal Research and Engineering Tax Credit, the fiscal ’07 credit was more favorable to us than the fiscal ‘08. Looking ahead, the tax rate for fiscal ’09 is expected to remain unchanged at 34%.

On a positive note, our balance sheet is much improved our last year. I am pleased to report that accounts receivable declined $26.9 million or 9.5% at the end of fiscal 2008 and our inventories position is solid with inventories down $44.2 million or 17.6%. We made significant progress as a result of our continued focus on asset management.

Additionally, we are working closely with our channel partners to be more proactive and taking prudent steps to better align our purchases and manufacturing with customer demand. With overall field inventories in excellent shape we are positioned well as we head into fiscal 2009.

Finally, as Mike mentioned earlier, a heightened focus on asset management helped us generate a record $216 million in cash from operating activities, an increase of $32 million over the prior period. This achievement is a positive signal to our employees, our customers, and our shareholders alike that we are determined to run our business in a leaner yet more responsive manner in the years ahead.

I am also glad to report that heading into next year we have a strong liquidity position, as indicated by our year-end cash balance of nearly $100 million, along with committed bank lines in excess of $225 million.

Consistent with our emphasis on delivering value to shareholders, we returned $133 million to shareholders through dividend payments and share repurchases. During the year we took a more conservative approach to share repurchase given the uncertain economic and financial conditions. In addition, we are always looking at strategic acquisitions to grow our business and the current economic environment may provide additional opportunities to use our strong financial position. And, as announced last week, our board of directors declared a regular quarterly cash dividend of $0.15 per share.

That is all for our full year and fourth quarter results. I will turn it back to Mike.

Michael Hoffman

Thank you, Steve. Now let me direct my comments to our outlook for fiscal 2009.

We expect the market conditions we experienced in 2008 to continue in the coming year with many uncertainties and challenges. In particular, we anticipate softer retail demand as buying behavior becomes increasingly cautious, and the effect of currency that helped our international business in years past will likely hurt us in fiscal 2009.


In the area of gross margin, which has been under some pressure from commodities, we could see some relief later in the year if commodities continue to track downward. As always, we will work diligently to manage these costs in the year ahead.

As mentioned before, several efforts taken in fiscal 2008 will benefit us well going forward.

First, our cash position is strong, coupled with our committed credit facilities. We have a very solid footing at a time when financial markets remain tight.

Second, in close alignment with our channel partners, we are aggressively managing inventory levels.

Third, we have embraced an attitude of rigorous cost containment and are taking actions to reduce our cost structure. We are scrutinizing proposed expenditures, making wise long-term investments, and driving Lean initiatives that will yield cost savings and improved efficiencies.

In fiscal 2008 we conducted more than 200 [kisanes] in our manufacturing plants, yielding savings of greater than $2 million and we achieved more than $7 million in material savings through Lean efforts with our suppliers and we will continue to look at the organization structure in light of these conditions.

Fourth, we are making measurable progress in reducing our working capital. While there is much work ahead of us, we expect continue improvement in accounts receivable, net inventories, and trade payables. These efforts will free up cash for other strategic purposes and drive long-term value for our shareholders.

Lastly, with our strong investments in engineering we expect to introduce a number of major product advancements in the coming year. We are excited about these new product innovations and again anticipate they will drive retail demand.

Let me give you a couple of examples of what’s new.

In late October we unveiled our new platform on next generations commercial Z-mowers at the

Green Industry Expo. This includes the X-Mark Next Lazer Z and the Toro Z Master G3. We also introduced the Toro GrandStand, a stand on mower and a whole new category for us. These products were under constant use by contractors in the outside demonstration area. As we mentioned on our last earnings call, it was uncertain whether these new products would ship in the fourth quarter of 2008 or the first quarter of 2009. We took the extra time to ensure these products were ready and I am happy to report all three will ship in this first quarter.

Now I am going to move onto precision irrigation. In November we returned from the irrigation show in Anaheim where both our Toro and Irritrol brands introduced several water saving irrigation technologies. For example, if customers are anxiously awaiting the delivery of Toro’s new Precision series spray nozzles which were awarded the 2008 New Product of the Year by the Irrigation Association. This product represents one of the most significant break throughs in nozzle technology in over 60 years, because they feature a larger droplet size to irrigate more effectively while using 30% less water. These and other technologies will continue to advance our position as a leader in water management.

In February we will be at the Gold Industry show in New Orleans and will have more of a report on our next call.

Moving to the residential segment, new products will also help retail demand. For example, we are introducing a new platform of Toro and Lawn Boy’s steel deck walk power mowers in two distinct price ranges to compete on a broader pricing scale at our largest retail partner. We are also introducing new platform of Toro Titan zero turn mowers to offer customers more features and build on our heritage of offering high quality products at competitive prices. All in, our product line is refreshed, deep and full with more new products on the horizon.

As I mentioned, we expect the tough economic conditions we are all facing to continue well into 2009 and we, like everyone else, can’t predict how deep, long, or widespread this recession will be. Given the on going economic weakness and tight credit markets our outlook for the year ahead is more uncertain and the resulting impact on our business will be even more difficult to predict. Taking all of these factors into account we expect fiscal 2009 net earnings to be $2.50 to $2.70 per share on a revenue decline of approximately 5% compared with fiscal 2008.

For the fiscal first quarter, a seasonally smaller revenue period for us, we expect net earnings of $0.15 to $0.25 per share.

As we closely manage our assets, along with our channel doing the same, shipments will move closer to the retail selling season, so as a result our first quarter will get off to a slower start than previous years.

While we know fiscal 2009 will be a challenging year, we have many reasons to remain positive. We have, as a company, weathered tough times before and each time emerged stronger and more resilient. We have a unique blend of innovative products, strong brands, and experienced and passionate employees. In times like these the strong can get stronger and our talented team of employees around the world will continue to fight through the adversity with determination and resolve. Personally I am grateful for their focus and execution which allowed us to achieve many operational improvements through out the year and I look forward to seeing them deliver even greater efficiencies in business improvements in the year ahead.

That concludes the summary of The Toro Company’s fiscal 2008 year-end and fourth quarter results and now we will open it up for your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Jim Lucas from Janney Montgomery Scott.

Jim Lucas - Janney Montgomery Scott

I have a couple of house keeping questions before I dive into the big picture. The FX benefit in the fourth quarter, could you help us out there Steve?

Stephen Wolfe

From a top line standpoint, I think it was about one million seven. We are used to giving you these in dollars, so a pick up in dollars for the quarter of a million seven, it was high 20’s for the full year, $28 million.

Jim Lucas - Janney Montgomery Scott

On the gross margin you mentioned the tooling write off. When you look at that gross margin contraction of 500 basis points and you look at the major buckets of the tooling write off, commodities, lower production volumes, without giving specifics of hard numbers can you rank order what the biggest impact on the gross margin erosion was?

Stephen Wolfe

By order of impact, the largest by far would be commodities. That was the biggest piece. Followed by the tooling write off that we talked about and then that’s about the same size as the mix issue where we had more residential sales than professional sales where the margins are not as great. So those are the three main things that covers the bulk of that. Commodities would be the biggest, tooling and mix would be about the same.

Jim Lucas - Janney Montgomery Scott

With regards to commodities, you know we are all seeing a number of your major input costs coming down. How quickly is that read through for you? One of the issues that you had in ’08 had to do with the residential business not necessarily being able to pass along price increases. Do you feel you had the product line reset enough to account for where commodity prices are today?

Stephen Wolfe

Yes if you can tell me where they are going. I mean the issue is where our commodity price is going. We told you at our third quarter call that we knew we were going to have heavier back end commodity costs and we did in the third quarter and we did in the fourth quarter. I think it was about $15 million incrementally more over the prior year in each of those quarters.

What happened is that we saw the increase in commodity costs and we lagged that in our costs. We saw it on the back half of the year. We didn’t get much down side in the front part of the year; we got it all in the backside of the year. As those commodities now are hopefully starting to go the other way, I am particularly talking about steel which is one of our main commodities; we will see the benefit of that lag too. We will probably see first in the second quarter still have some commodities pressure and if in fact the prices stay where they are at we will see some benefit of that in the third and the fourth quarters.

Jim Lucas - Janney Montgomery Scott

From a CapEx and D&A, where do you see that for ’09?

Stephen Wolfe

Very similar to last year which would be upper 40’s in both 48, 49, both in CapEx and in deprecation and amortization.

Jim Lucas - Janney Montgomery Scott

Of that CapEx how much of that is maintenance versus growth? I am trying to just understand where you are investing the dollars today and how much of that could be ratcheted down.

Michael Hoffman

A significant part of that is for new products, so I characterize that as growth driven. In fact I would guess the majority of our CapEx spending is in that area.

Jim Lucas - Janney Montgomery Scott

The work that’s been done on the balance sheets is very noticeable. There is clearly a lot of opportunity, especially on the payables side in particular, but when you look at the inventory receivables you are generating a lot of cash still even in these uncertain times. When you look at it from a capital allocations standpoint can you remind us how much you have left under the current share repurchase authorization? And when you are looking at acquisitions are they more of the Southern Green type acquisitions or is there anything of particular size out there that is on the radar screen?

Stephen Wolfe

The share question is we have still got over two million shares remaining on the four million authorization we got, it was in May, I think. So, we have still got plenty of room there in terms of share authorization.

Michael Hoffman

Jim, regarding what are we looking at, very consistent with what we have said in the past, we look across the full spectrum from large enterprise shaping acquisitions to the smaller bolt on ones to technology plays. Not surprisingly the division extending ones, or the bolt on ones, there tend to be more of them like Southern Green or last year with Rain Master(NYSE:R). Last year we did the technology one with Turf Guard (NYSE:TM) and we have got a team of people that are constantly looking at, again, the full spectrum of possibilities.

Jim Lucas - Janney Montgomery Scott

As you were kind of rolling the plan together and you are setting the initial guidance to the outside world, sales down 5% and if we just take the low end of that range and say 250, when you are looking at how uncertain it is out there what would it take to have it be less than 250 next year?

Michael Hoffman

Needless to say, I think one thing we will all agree on is that it is uncertain, more uncertain than it has been at any time in the recent past at this time of the year and so one of the things we have to be doing is a lot of scenario planning. Probably more heavily weighted to the downside.

As we looked at putting our guidance together and where we think we are going to end up, we know there are some serious headwinds on the overall demand and some softening in the international market currency certainly has been a contributor. Not as much, perhaps, as you might think, because of our hedging practice which will also help us this year on the other side of that.

Working for us we have got some price in place. We have more new products. Again, this year we will be, based on our plan, at a record level of new products across our residential and professional businesses and that will help us. That will help bridge the softness and we would hope that the markets down ten, we can take some share and that will keep our revenues propped up.

Our inventory position in the field is in very good shape, the best shape it has been in a number of years in the past. That will help us as well. Then the last kind of wildcard always is in this business it is mother nature.

As you know we came off of a spring last year that we wouldn’t characterize as being a good one and while we are not going to count on extraordinarily good weather to drive our business, reasonable weather can drive our business. An example of this would be as we went through the fall period with Lock Power mowers, which is kind of a consumer demand business, our comps year-over-year from the late summer/fall versus last year were up in clearly a much worse economic environment. The reason why was because mother nature cooperated a bit more and kept the grass growing and people were replacing their product more frequently. Not everyone, but many of them. If the weather is even what I will call normal as we head into the spring, that could help us comp more favorably.

So there are a lot of puts and takes, but we understand the point. It depends on how deep and how long this recessionary environment lasts.

Jim Lucas - Janney Montgomery Scott

Thank you. Understanding the thought process is very helpful and enjoy the snow.


Your next question comes from Jim Barrett from C.L. King & Associates, Inc.

Jim Barrett - C.L. King & Associates, Inc.

Mike, could you discuss in general terms what the impact of the credit crisis has been on your distributors securing credit, your dealers securing credit, the commercial landscaper also having availability of credit?

Michael Hoffman

Well I could do that, Jim, but I could even do it better if I turn the question over to Steve.

Stephen Wolfe

That is a good question and we are obviously seeing a lot of that in the paper these days on what’s going on.

Let me start with where Toro is as a company, because I think it is important even for our dealers and our distributors that their banks know that they are dealing with a company that is going to be around.

As I mentioned in my formal remarks, we ended the year, obviously our seasonal down period, with $100 million in the bank and we have got a group of six banks that we feel very good about. Ones we are not reading negatively about in the paper. We think from a Toro standpoint we have got a very good liquidity position and that is going to serve us well as we go forward.

When you go to the next step, which it would be Toro distributors, there are a couple of ways they get financing. One is through our own credit company where we do our floor planning; we control that. Obviously, as long as we can get funded that is not an issue. They also have bank lines of their own that they do independently. That is a bigger issue and we have been in touch with our distributors at a meeting that we had a few weeks ago telling them to stay in touch with your banks, make sure you have back up banks. We have not seen any major issues with any of our distributors in terms of those banking relationships.

Maybe the place where we have seen the biggest change or tightening is in the retail end of things where that is farmed out through a third party; we don’t do that ourselves. They have certainly, like I think most retail financing companies out there today, have tightened their credit spectrum. They have been in and told us that that is going to loosen back up after the first of the year. This obviously, again we are not in the season so it is not as big a deal, but we think that’s going to correct itself and we will work our way through that as we get into the selling season.

The other piece is the third party floor plan piece and that is where our dealers and some of our distributors and we have not seen a significant change in ability to get things financed there. Overall I would say there has certainly been a degree of tightening, that you have read, in the marketplace. We don’t see at this point that it’s anything that is going to have a significant effect on our business going forward.

Jim Barrett - C.L. King & Associates, Inc.

Steve, when I look at your international sales, I know you have some international manufacturing operations; but what percentage of your product, whether it be professional or residential, is exported from the US and what do you envision, if the dollar stays where it currently is, what impact is that likely to have next year or this year?

Stephen Wolfe

We are predominantly an exporter. When you look at our business overall the bulk of that is exported. When we look at, I guess just to go into the dollar piece of it for a minute, when you think about it 32% of our business this year ended up international, kind of as a benchmark. Only about half of that is billed in non-US denominated currencies, so half of it is euro and Australian dollar and the other currencies that we are involved in, and we have some businesses that use some of those dollars, so you don’t need to convert all of those dollars back.

When you do your exchange piece of it we always at the beginning of the year, just like we did before fiscal ’09, do some hedging of that currency prior to the getting into the year and ’08 was a good example. As the dollar continued to weaken that helped us overall, but we had put some hedges in place earlier on before it weakened all the way which ended up hurting us in ’08. We will get just that opposite effect in ’09.

The point is by looking at the spot rate and looking at where things are today versus where they were yesterday last year is not a good indication of what’s going to happen to the dollar, because we have hedged in between there and taken some of that risk away.

That is kind of a long-winded answer to your question, but we are constantly looking at that hedging. We will get hedged up to 75% or 80% as we get into the year, but those hedges we put on early in the year either may benefit us or may hurt us, depending on if the dollar strengthens or weakens.

Jim Barrett - C.L. King & Associates, Inc.

Just to clarify, you are selling the products in the local currency and your hedges hopefully offset the volatility of the dollar, is that essentially what you are saying?

Stephen Wolfe

You don’t offset at all, but it gives you some offset. What I said was half of our international business is in local currency and what I was saying was we do have some costs, some people costs that we incur that we can use, for instance the euros. That is a built in hedge against the conversions.


Your next question comes from Sam Darkatsh from Raymond James.

Jeff – Raymond James

This is actually Jeff calling for Sam. My first question and I apologize if you already gave this, but what was the impact of the tooling write down in the quarter?

Stephen Wolfe

We didn’t quantify the dollars. What we said was that the biggest impact on the quarter was commodities and that was probably twice the amount of the tooling write off.

Jeff – Raymond James

Next question and I’m sorry to pile on the currency topic, but I think it could have a pretty big impact this year. Can you give us the EBIT impact of currency for fiscal 2008?

Stephen Wolfe

No I can’t.

Jeff – Raymond James

Okay, because that would help us kind of back into what your effective hedges were.

Stephen Wolfe

Yes, we don’t have that information with us.

Jeff – Raymond James

All right then, moving on. Your guidance, you are assuming the down 5% in terms of sales. Can you break price out of that and talk about your expected relationship in ’09 between realized pricing and raw materials, assuming materials stay where they are at now?

Michael Hoffman

Yes, kind of in broad strokes if you will, the unit decline is largely that, the price slightly more than offsets currency. So when we said about five, the fact is we are not trying to be precise and say five, it could be a couple points either side of that as the season starts to unfold, but we do expect a real unit decline across the business.

Jeff – Raymond James

Okay and is that your forecast for the industry or are you assuming some market share gains in there?

Michael Hoffman

Well there are a lot of different industries within that and again, as I commented earlier, much of the consumer side of it will depend on Mother Nature, that could be 5% to 10 % down, but we would expect to take some share there with our new offering. I don’t think there is a category that we are looking at that we wouldn’t expect to hold or improve our share position.

Jeff – Raymond James

Next question, in terms of margin next year can you talk about where, aside from leverage on any volume movements or anything like that, can you talk about the savings you expect to see either from the workforce rationalization you just announced or additional Lean savings? I know you’ve talked about Lean in terms of working capital rationalization, but is there anything left there in terms of additional margin impact for T&L?

Stephen Wolfe

As time goes on that gets tougher and tougher, but that is obviously an area that with our Grow Lean initiatives we will still be focusing on. The last few years told you we have gotten somewhere in the area of $7-$8 million out of our Grow Lean initiatives. We would be looking to try and do that same thing again next year, along with the Head Count initiative that we have taken; so you put the two of those together and you should get upwards of the $10 million range or something in that area, depending on what happens to commodities. There are a lot of ifs in that. It is what can you control and what you can’t control. We can’t control the commodity costs; we can’t control the currency impact, but all things equal we would look for savings in those areas.


Your next question comes from Eric Bosshard - Cleveland Research Company.

Mark – Cleveland Research Company

Good morning, this is Mark stepping in for Eric. First, in terms of the professional segment there is a lot of pressure on profits here in the fourth quarter, can you explain away the big profit shortfall was it the tooling? Then how should we think about profits in the professional segment going forward and maybe in addition to that what are you seeing on the pricing side from some of your peers within the professional end markets?

Michael Hoffman

Well I would sum it up to two things and that would be certainly the commodity pressure we talked about and then mix within the segment was a factor as well and so that can maybe paint a picture that it is more of an issue than it is.

Mark – Cleveland Research Company

Then that explains the big shortfall within 4Q in professional in both commodity and mix?

Stephen Wolfe

In the professional side it was commodities and freight and material costs, the things that we have talked about all along, coupled with the fact it’s a small quarter. It is either our smallest or our smallest quarter.

Mark – Cleveland Research Company

Are you seeing anything different from your peers in the professional segment given the continued difficult end market environments, anything to suggest more aggressive peers which could be playing into the shrinking profits?

Michael Hoffman

Well it’s a small group of competitors. We talk about the golf market; it’s the same group that we see all the time. Everybody’s very competitive prior to this economic turn down and now with the conditions we are in everybody’s scrapping for every deal like we always have. I would say from time to time you are going to win won and you are going to lose one. Maybe you wished you hadn’t, but you are going to get one on the other side that you hadn’t expected; so I don’t think there is anything dramatically different other than the competitive level will continue to be at a high level just because everyone is looking for every deal they can possibly get.

Mark – Cleveland Research Company

Can you break out how much of your sales in 2008 were contributed through price? I know you kind of commented 2009 you expect price to offset currency, but can you talk about how that broke itself out in 2008?

Stephen Wolfe

It’s roughly two to three we would say.

Mark – Cleveland Research Company

Three points of price in the flat sales?

Michael Hoffman


Mark – Cleveland Research Company

My last question is, the 1Q guidance down 60%, how should we be thinking about that specifically? 1Q down 60%, but the full year down closer to 15% to 20%. Is this a reflection at all in what you are seeing in terms of pre-buy? Obviously I appreciate it is a small quarter, but you did mention a lot of the new products will be shipping in the first quarter; so if you can kind of walk me through some additional color on why the 1Q guidance is incrementally soft versus the rest of the year?

Stephen Wolfe

I would start with; first of all remember last years first quarter was big. It was 7% increase, so you have got a comp that’s higher. The other piece of this is that we do think there will be some top line pressure in the first quarter, just as people have gotten more cautious in terms of how much inventory they will hold and how much inventory that they want to take until they get closer to the season. Some of this is all producing and selling closer to retail. We just think there is going to be a more conservative point of view from the customers; so we have taken the position that we are going to start with a lower number in the first quarter.

Michael Hoffman

You would add to that, Mark that we are going to work very hard to get the commodity situation turned around, but that is going to be there in the short-term to some degree.


Your next question comes from James Bank from Sidoti & Company.

James Bank - Sidoti & Company

There has been a lot covered and I am sorry if these questions have already been asked or covered in your prepared remarks. Depreciation, amortization, why was it so high in the fourth quarter?

Stephen Wolfe

The numbers that I gave you for depreciation and amortization were for the full year.

James Bank - Sidoti & Company

That means it was $16 million in the fourth quarter, just considerably more than the past three quarters in the year, then also year-over-year.

Stephen Wolfe

Yes, it was the tooling write off.

James Bank - Sidoti & Company

In the first quarter guidance I am just a little bit confused. I guess and maybe I don’t fully understand the selling and the re-order. With the success you are seeing with your snow thrower sales right now, we’re seeing sort of a pull into the fourth quarter and that might affect the first quarter, because I guess with the back drop that you had given I would have suggested a little bit more of a better first quarter heading into next year. What am I missing?

Michael Hoffman

Well again, the year-over-year we had a very strong first quarter with snow last year; so we have actually pulled some of that into the fourth quarter of 2008 and now we are into the season for 2009, if you will, and we are starting to see some snowfall. Whether it will be as good as last year remains a question. Supplies will be somewhat limited there, but just to comp that part against last year is a relatively bigger number.

Then we just are looking at, the larger part of that is spring goods and how that will flow into the channel. We said we will manage that a little closer in partnership with the channel. Then last, there will be some commodity pressure on gross margin in the first quarter before we can kind of recover and get that back.

James Bank - Sidoti & Company

Right and now I don’t think anyone asked this. As we enter Grow Leans final year in 2009 any thoughts on a successor?

Michael Hoffman

We are very focused on finishing up Grow Lean in a positive way. It has been a very difficult two years. Some good things happened, but there were lots of external challenges, to say the least and so we will talk more about a successor down the line with you.

Thank you for the question. You are the first one that’s asked that.

James Bank - Sidoti & Company

Oh good, but we would be able to assume another potential three-year program than, whatever it might be?

Michael Hoffman

We will be talking about that and figure out how to best motivate the organization to driving results and more shareholder value.


At this time there are no questions in queue. Mr. Michael Hoffman, please proceed with closing remarks.

Michael Hoffman

Thank you, all of you, for your questions and your interest in The Toro Company. We do appreciate your confidence and trust and we look forward to talking with you again in late February as we discuss our first quarter results.

Thank you and have a great day.

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