Toro Co (TTC) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Toro Company third quarter earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Tuesday, August 27th, 2002.

I would now like to turn the conference over to Ken Melrose, chairman and CEO. Please go ahead, sir.

Thank you, Donna, and good morning, ladies and gentlemen. Greetings from our Minneapolis headquarters. We thank you very much for calling in this morning. With me is Steve Wolfe, chief financial officer, and also Steve Keating, our director of investor relations. The three of us will be happy to answer questions at the conclusion of my brief remarks.

As usual, you should keep in mind that the - that during the call we'll make certain predictive statements in order to assist you in understanding our are results. You are all aware of the difficulties in making predictive statements in a highly seasonal and cyclical business. Our company's 10(k) details some of the important risk factors that may cause actual results to differ from those in our predictions.

Let me now highlight, give you the highlights for our quarter. I'm assuming you've seen the press release copy, which is somewhat self-explanatory of the various changes that have occurred to date. In that press release, we have again used the boxes that show the difference between quarters this year versus the quarter of the previous year with and without the various one-time charges that have occurred in both years. You can say in the third quarter for our earnings, our reported diluted earnings per share of $1.68 versus last year's $1.30 does not include the benefit that last year would have gained had we gone to the good will accounting standard a year go. So we have added 17 cents to last year's third quarter earnings so that it normal eyeses the comparison. So making that adjustment, you can see that our earnings for the quarter [Normalizing] from an oranges to oranges standpoint is up 13.3 percent. Similarly for nine months where we had many more adjustments, for example, the foreign sales corporation tax benefit, which helped us this year, then secondly adding the amortization charge or deducting that charge from last year's nine months of 50 cents. And then the two large one-time charges for this year that occurred in the first quarter affecting the accounting principal change, the dollar 90 and the restructuring changes primarily from two plant closings which we announced in the first quarter of 52 cents. There was also, as I mentioned in previous quarters a 3-cent uptick for last year due to the fact that we had over accrued for the Sardis, Mississippi plant closing that occurred a couple years ago. So normalizing all of that out, you'll see for the cumulative nine months earnings oranges to oranges comparison, we were up 11.3 percent. So this is gratifying to us to see the continuation of a double digit growth in earnings, but we're even more pleased to finally see some strong growth in revenues of 14 percent after a few quarters of flat sales. As we stated in the second quarter, our channel partners have been reducing their inventories to improve their own turn^over, and thus ordering for stock and closer to the marketplace demand. This has been reflected in the lower shipping rates from Toro than actual retail demand. Because retail has been so strong in most of our businesses, the field inventory is finally coming closer to our shipment, so that gap has been closing and customers have are now reordering at a much more normal pace. and our retail and our retail sales and shipments are much more aligned, which is where we want to be. We will, of course, continue to watch our inventories closely to ensure they're being managed to acceptable levels for the remainder of the year and we just will not allow inventories to grow significantly in the field. We talked about this many times, inventory management concept continues to be and probably increases intensity in its focus, a practice that we've engaged throughout the company for all of our product lines. Our retail division, looking at the segments now, it continues to growth both in revenues and earnings or recorded - recording increases very strong, 40 percent in revenues and 138 percent in earnings respectively. As throughout the year, the major reason for this growth is our new walk power mower line which we introduced in the fall. Overall, retail demand continues to be strong with unit sales significantly higher than last year. Home improvement category led by electric trimmers and do it yourself irrigation is also experiencing double digit growth in both shipments and retail. As we mentioned in the release, snow Toro volume is down significantly for the third quarter and will be for the year due to the low snow falls in most areas of the snow belt last year, both in the United States and in Canada. And I would say that goes for Europe as well, our three principal [inaudible] of our markets.

The professional divisions revenue increases of 6 percent in the quarter was again behind retail reflecting the sell through of our products in the system. the [inaudible] business was slightly higher than last year as a result of increased sales of golf irrigation products domestically and also of commercial equipment overseas. That business continues to be a focal point of new product development and we're seeing commensurate results this year in spite of the current economic uncertainty in that market. And the landscape contractor business had slightly higher sales than last year as customers now have finally worked through or most, I wouldn't say all, but most through - mostly their excess inventory and like in other of our segments are now reordering at a more normal level. Retail sales in the landscape contractor business continues to be strong with retail growth in the 15 percent range, and this is true both of the Toro brand as well as the X Mark brand. a mixed shift to slower margin residential products results in lower gross margins than last year plus our manufacturing variances are higher than we had expected because reducing production to adjust field inventories is - creates a negative variance in our indirect spending. So those two items contribute to a slightly lower margin in the residential product area. the relocation of our walk power mower manufacturing to Juarez, that's going to occur beginning next year. It will help our margins in the future. Our 5 by 5 initiatives, particularly in the purchase price various has offset some of these downward pressures. Our expenses for the quarter are in line with planned reflecting a percent of sales decrease of 2.1 percent and the decrease would have been even lower, except for some additional warranty accruals on certain products. Our interest expense is down significantly, that reflects our focus on inventory and receivable asset management and lower overall interest rates. Higher earnings and the benefits of our focus on asset management has really provided us with additional cash flow to pay down debt and repurchase stock. As we stated in our prerelease, press release, excuse me - excuse me, the prerelease. the press release, that was our prerelease. the third quarter has fueled our optimism for the year and supporting our year-end earnings revision to $4.8 5 to $4.90 per diluted share before all charges and tax benefits. and as we begin to look beyond fiscal 2002, we continue to raise our targets for the coming year. I would say the been fits from 5 by 5 will continue to improve our operating efficiencies and establishing an even stronger basic business platform. and our new products and programs to be launched in the fall will bolster our earnings momentum.

Let me stop now and turn it to back to Donna to field any questions you may have. Donna?

Thank you.

Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your handset before entering your request.

One moment, please, for the first question.

Our first question comes from Aaron Raven Scott with Janey Montgomery Scott [phonetic]. Please go ahead.

Good morning, gentlemen.

Good morning.

In regards to the field inventories, you mentioned the snow throwers. Are there any other products lines that concern you at this point that could inhibit performance in the next 12 months?

There are none that are concerning like the snow product is. We'll go into next year, though, in pretty good shape for snow throwing inventories. the other product lines that have had more inventory in the field than we would like, rider tractors have been slightly more than we would like, plus it's not been a robust year in that category. We have tried very hard to balance those, those we in the year. That product line will be okay. And the other area is professional equipment where we have more shipping last fall because we thought last fall would be parallel to a year ago fall where the season was very strong and extended well into the fall. That turned out to be, obviously, an error because of all the things that happened last fall. So that has taken a little bit of time to work off, but again, they're not in concerning shape and they will not inhibit our business pace next year.

Okay. and moving on to the 5 by 5 initiative, I know that you're coming on your [inaudible] last five quarters now, what areas have made the biggest contributions and where are the largest opportunities going forward?

The biggest contributions for this quarter or this year?

For the next year, I guess you'd say, going forward.

We're steadily improving and regaining some position in the irrigation business, partly out of the marketplace and partly in our cost structure. So, we will continue to see significant improvement in our irrigation business next year, regardless of how the industry does, if it's a strong industry time. But if it's weak because of weather or economy, it still will be a strong improvement for that division. We think the landscape contractor business continues to grow, will continue to grow at a double digit pace. So that, we think, will be strong. We think Europe will be better than it has been the last two or three years, partly because the currency exchange rate is becoming more favorable to exports and we think the consumer business will continue to be strong. and all of this is being fueled by, again, as we have grown in the past by strong new product introductions in most of our business categories, so I think it's pretty balanced. We know the golf business will be weak because of the number of new golf course openings projected. It's down this year considerably from two years ago, and I think it's - I'm not sure it's down the bottom, but that's really the only market that's going to be weak for our industry next year, and we'll suffer along with everyone else from our business in new golf course market.

Okay. and where have you made your most gains in 5 by 5? It looks like you've made some great progress in inventories. How about your SG and A, where exactly are you attacking with that initiative?

Well, you're correct. Asset management and cost of goods sold have been the two biggest areas. and of course, next year we'll get the benefit from two manufacturing facility closings that have not been beneficial this year at all. But, for the SG and A, that's a long-term process, and probably is not the area where we see major chunks of savings, but it's a very pervasive initiative and we will save and we have saved 7-figure savings, but they're pieces of savings all over the company. It's not one big purchasing area of savings or getting our cash flow much stronger because of asset management. So, but that's more of a company-wide initiative to help change the cultures as well as get everyone involved in saving, saving money.

Okay. Thank you.

You're welcome.

Ladies and gentlemen, as a reminder, to register for a question, press the 1-4.

Our next question comes from Dick Henderson with Pershing. Please proceed.

Yes. Great quarter. Can you talk about the residential market? Why was the rider market weak?

Well, the rider market, we were weaker than the market. the market wasn't all that weak, but my statements were really referring to [inaudible] inventory situation. I think in our business we haven't been as strong, we're not as price competitive as we should be. It hasn't been a primary focus of our engineering effort. I would say that we're not going to focus all of our engineering and product development dollars across every single category, but it is an area where we have been reexamining for the last year to see what we need to do to regain some share. That's probably the business that we're - we have the lowest share and the weakest, certainly the private labeler manufacturers and John Deere of cadet are much stronger in those categories than we. So my remarks were really referring to we're not doing as well as we would like and it's just because our competitive position is weak.

Is that perhaps an opportunity that you can increase your penetration via acquisition? You guys have done admirable job of boosting cash flow and reducing debt, etc. Is there an opportunity to kind of strengthen product lines of the acquisitions?

That's certainly one way and that's what we did in 1987 in acquiring wheel horse and that's exactly what we did. and the way we improved our position. But over time we didn't keep the business as robust as perhaps we should have. So you're exactly right. That is certainly an opportunity and a way for us to get back into the business with a more credible share numbers. And bewe would not - we would look at developing products internally [We would not]. So the question is what kind of investment level do we want to make, and what are the acquisition options. and we have looked at some, but we're not at liberty to talk about the specifics of that. But I guess I would just summarily say I agree, that's something that we would and have looked at as a way to grow.

Right. It seems like your business is doing well. Your balance sheet is in good shape. And with only 13 million shares out and your stock has done terrific, it would seem the sensible thing is less opt buy back and if there are [On the buy back and if there are acquisitions out there that are favorable, have favorable prices, etc., enhance your positions, that seems the route to go.

Anyway, moving on to Juarez, what exactly does it mean, this change in your plant configuration in terms of just kind of roughly a percentage of your residential sales that would be affected by these movements to more efficient facilities? Could you put a little color on that?

I'm not sure what the number is as percent, but in effect we're moving a major piece of our walk power mower line and only walk power mowers to weares. So we also already make some components of our electrical outdoor appliances there, but virtually all of that product is made in El Paso. It's across the border sister plant. So what we're talking about here is the Toro brand, not lawn boy, but the Toro brand walk power mowers that we make for most of our customers, not all, because we have another segment that we - that will stay at least for next year in our plant in Minnesota. Again, I can't tell you, I just don't have the percent of that, of the whole consumer to residential division offhand.

Last question. In the landscape contractor market, you mentioned the buildup last year. But did I hear you right that kind of the sell through demand continues to be strong, and you would continue to see it that - progressing at double digit rates?

Yes, I think the retail will be strong. Over the last five years, the retail has been, oh, five years ago was more like 20 or 30 percent. It's come down and will slowly come down, I think. But it will be, we think, in the double digits. Next year may be the last year that it's double digit growth. I don't know. But we have a strong position. and what we're seeing is continued good growth. Our inventories are getting back in line and less catastrophic things happen in the fall again [and unless] we'll get into next year in a much better inventory position.

Thank you.

You're welcome.

To register for a question, please press the 1-4.

Aaron Raven Scott with Janey Montgomery Scott, please continue with your follow-up question.

Going back to the landscape business, how has the competitive landscape been? Have we seen increased competition, new competitors, anybody else making their way into this business?

Well, up until a few years ago, the major players were Walker, Scaggs and X-Mark. And the major homeowner brands like Toro and John Deere and Snapper weren't in the business appreciably. Since that time we acquired X-Mark, Scaggs continues to be strong, and Walker also, but Electrolux through Husqvarna [phonetic] has strengthened its lines. It's made some acquisitions. John Deere bought Great Dane a year ago and now has a full line. Snapper has a stronger commercial line. Aaron's has made through acquisitions - they're a credible presence in the market. So what you've seen is some consolidation through acquisition and the strong players are becoming much more predominant in the market. and so as I say, five years ago the competitive set would have been probably companies you haven't heard of, now all of the strong consumer people are making a play for - to participate in this growth.

Has Ingersoll-Rand may a move into this market? I heard they made a move. I wasn't sure if it was directly into your business.

What you may have heard, and I'm just going to guess, but there are their Bob cat division, their [inaudible] motor business, they have introduced a product in the sight works compact utility loader market where we compete and help pioneer, a small segment of the earth digging spectrum. It's at the very small end. So that's where we compete with Bob cat in a minuscule piece of ours, and even more minuscule of their business. But that's the only Ingersoll-Rand, other than some utility vehicles that they make through their club car division. But they've been doing that now for several years. So I don't know. If it isn't either of those two areas, then I don't know what you mean or are talking about.

Yeah. I think it must have been toward the sight works business. Lastly, as you begin your annual budgeting, do you see any areas where you may change your '03 incentive compensation model?

No, I don't think we'll make major changes. What we're trying to develop incentives that motivate more of the officers against corporate objectives and lesson their divisional objectives, and that's just a response to the need to detenuate [phonetic], if you will, this quarterly craze. We are trying to operate, again, more as a long term play and to diffuse some of the ups and downs of our business. But we'd like to operate more as a team from a corporate standpoint, and not - what happened last year is that there was such a focus on putting inventory out in the field to make numbers. Like we said, that hurt us going forward. So whatever we can do through incentives or just better management, we want to take some of that pressure off and do the right thing long term for the business out in the field.

Other than that, we don't see much of a change in how we'll incent our executives.

Okay. Thank you very much.

There are no further questions at this time. Please continue with your presentation.

Well, thank you all for joining us this morning. Like I say, we think the year is going to be good. We think next year will be better. And the things that we're trying to do, both internally and out in the marketplace, I think are showing some gratifying results and we'll continue to do that. I think that will just make our own revenue prospect stronger. We are working harder now at the top line as well as the bottom line, so we can return to stronger revenue growth numbers as well as double digit earnings. That will continue to be a very strong focus going forward.

So, thank you again, ladies and gentlemen. If you have further questions, don't hesitate to call us.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.