Toro Co (TTC) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Toro Company first 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 one followed by the four on your telephone. As a remind, this conference is being recorded Tuesday, February 25, 2003. I would now like to turn the conference over to Mr. Ken Melrose, Chairman and CEO. Please go ahead, sir.

Thank you, Heather. Good morning ladies and gentlemen. Greetings from very cold Minneapolis. It's 8 degrees below this morning. So we hope you are in warmer climate. And we thank you for calling in this morning. With me is Steve Wolfe, our chief financial officer. Steve and I are out of the office at the moment. While Tom Larson, our assistant treasury and Steve Keating, director of investor relations are participating on the call from our headquarters office just a few miles away.

As usual, I would ask you to keep in mind that call, we'll make certain predictive statements to assist you in understanding the company's results. You're all aware of the difficulties in making predictive statements in a highly seasonal and cyclical business. Our company's 10K detailed some of the important risk factors that may cause actual results to differ from those in our predictions.

So let me now review the highlights for the quarter. Of course at this time of year, snow is on everyone's mind and many of you have felt firsthand the impact of the record breaking storms in the northeast over the last few months. In fact, on one of last week's David Letterman shows, David Letterman spent so much time talking about the northeastern and snowfall, that someone gave him the title of the "Toro Man of the Year' - which is a nice testimony tower brand strength.

While the northeast has had more of its share, other regions of the country certainly, the west and the upper midwest have been relatively dry. So we have balanced product inventories in the field by moving most of the inventory in our midwest channel to the east. And that will give us a much more balanced position as we go into next year's snowfall season. We did this, of course, to maintain low inventories across the entire snow belt. The results of this was we did not shift appreciably more snow product in the fourth quarter than we expected.

So now let's get to the press release. On top line we report net sales of $296 million compared to $277.9 million for the first quarter of fiscal 2002. That's an increase of 6.5 percent. We also reported net earns of 7 million dollars or 54 cents per diluted share compared against the loss of $29.7 million or $2.38 per share in '02.

Now, as you know, we incurred some fairly significant charges in the first quarter of '02. So I think it will be good just to take a minute to review again what we did last year and how it relates to 2003. Against a comparison of reported diluted earnings per share, a loss of $2.38 versus a gain of 54 cents in 2002 and 2003 respectively, we modified or adjusted 2002 first of all, by effecting the cumulative effect of change in the accounting principle and that was $1.97. And we also incurred a restructuring and other one-time expense of 53 cents per share in '02. If you delete those two large charges from the 2038 cent loss you come to a 12 cent earnings per share which on an adjusted diluted EPS for 2002. That 12 cents is a different comparison, of course, a more operating comparison to our 54 cents in 2003. 0 Now, in 2003, as we noted in the prerelease a couple of weeks ago that 54 cents included 16 cents from a patent infringement award. So you need to take into account that 16 cents as an abnormal one-time charge. A stronger than expected operating performance is attributable to higher sales growth in both the professional and resident segments. Also lower interest rates and an increase in gross margin which results from our continued focus on sustainable profit improvement initiatives.

Now, there are four key factors that were the major contributors to our performance this quarter. First of all, the plant utilization strength we referred to several times last year combined with the growing benefits from our 5 X 5 profitability improvement initiative were the main -- was the main factor of these four. Combined, they drove our gross margin to 35.7 percent compared with 34.3 percent last year. That's a 1.4 percentage point improvement in gross margin.

Second, our mower business is continuing to grow and is generating better than expected sales in our residential sales. Sales were boosted by the acceleration of some walk power mower shipments of to support an earlier than usual promotional program that began in February in all of our retailers.

Third, our interest expense declined 23 percent or $1.2 million compared with the same period last year resulting primarily from lower average short-term debt. A point in time comparison from February 1, 2002 to January 31, 2003 showed a decrease of $88.9 million of debt.

And fourth, as I mentioned before, the legal settlement in our favor of 16 cents a share.

Now let me break down the results by our segments. Let's go to professional first. A professional segment sales increased 10.1 percent to $193.4 million. With an operating profit up 46 percent to $27.8 million. Increased customer demand for new products as well as a better order position and lower field inventories all contributed to a very strong start for the year.

Golf and grounds products including rotary mowers and vehicles were particularly strong contributors. In our residential and commercial irrigation piece, sales were strong for new sprinkler heads and controllers. Our X mark branded landscaper products we benefited from lower field inventories and a sales boost provided by a new line of heavy duty wide area walk behind mowers and new productivity enhancements to the Laser Z riding mowers.

Once again, we were pleased with the traffic levels and the optimism, albeit guarded expressed by customers at our booth at the Golf Course Superintendents Association of America Conference and Show in Atlanta earlier this month. We saw more serious buying activity this year and were encouraged by customer acceptance of the new products we showed for the first time including a new large out front rotary riding mower and a new mid duty utility vehicle and a new greens airrater, plus in irrigation, we introduced an enhanced site pro software package for our controllers and a new golf course sprinkler. That rather sums up for the professional segment.

Moving on to residential. Our residential sales for the quarter increased 2.7 percent to $94.7 million while our operating profit increased 12 percent to $8.7 million. As I mentioned earlier, shipments of our Toro branded walk power mowers led the way in the first quarter as well as a stock order from dealers for our new time cutter Z zero turning radius mowers - which is brings the turn on a dime technology and convenience to home owners.

Market trends indicate the growing popularity of Z type products will grow faster than traditional lawn and garden tractors. Sales gains from these mower lines were somewhat offset by lower sales of home solution products and lawn boy walk power mowers.

Our third segment for distribution moving to that shows that the sales in our distribution segment for the first quarter declined 23 percent primarily as a result of a December 31 sale of our Texas based distributor to two Toro managers. As you will recall, we purchased the financially struggling distributorship in 1996 with a goal of reinstating profitability and establishing it as a model of efficiency. I'm happy to say that this was a accomplished. It's now a healthy profitable enterprise and we're confident that this will be sustained under its new leadership. In addition, we signed a letter of intent to purchase the assets of a southeastern U.S. distributor which we expect to complete in the second quarter. Now it's important to note that this acquisition is not part of our I-35 distributor strategy.

Along with making significant operational sales improvements during our first quarter, we also realigned our key leadership structure putting into practice one of our core values to provide development and growth opportunities not only for leaders, but for all employees.

I'm pleased to tell you that we have recently appointed two strong individuals, Mike Hoffman and Tim Ford to take on broader leadership roles as group vice presidents. As a result of this realignment and upcoming departure of Bill Hughes () who has been leading our irrigation business, we were also able to provide new leadership and new learning opportunities for several other members of our management team. The key point here is that all positions were filled with talented internal candidates reaffirming our commitment to leadership development.

Let me now turn to the outlook for the rest of the year. We all know that there's considerable uncertainty and volatility in the economic and geo political outlook. The good news for Toro is that our five by five margin improvement and cost containment initiatives should continue to provide benefits for the company throughout the entire 2003 and beyond. All in all, we expect the impact on earnings of our own ongoing profit and asset management improvements will continue as volumes increase during our seasonally strongest quarters.

Therefore, based on our first quarter performance and expectations of sustainability going forward, Toro is adjusting its guidance for fiscal 2003 sales and earnings upward. We expect net earnings of $5.65 to $5.75 excluding the 16 cents per diluted share benefit from the legal settlement recorded in the first quarter. For our fiscal second quarter, we currently anticipate earnings per share -- per diluted share to be above the $3.00 mark. So thank you for your attention here and now we will answer any questions that you may have and I'll turn it back to you, Heather.

++q-and-a.

Thank you. Ladies and gentlemen if you would like to register a question, please press the one followed by the four 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 one followed by the three. If you're using a speaker phone, please lift your handset before entering your request. Our first question comes from the line of Jim Lucas () with Janney Montgomery Scott. Please proceed with your question.

Thanks a lot. Good morning.

Good morning.

Jim, this is getting to about nice trend of just keep raising expectations. That definitely beats the alternative.

It sure does.

Question I have is if we look out to the end of the year, obviously one of the benefits of 5 X 5 has been the asset utilization particularly on the inventory side both from a Toro perspective and in the field. And as you continue to keep the balance sheet the debt levels continue to come down and you're generating more cash, what are your plans with this increased cash flow whether it's for '03 or looking out all over the next two or three years?

Just to be clear. You're asking what is our intention to use this improving cash position?

Yes.

Okay. Well you know, Jim, we have an ongoing policy to buy back shares to cover stock options and other stock use. So a piece of that would go there. We could have an opportunity to retire a piece of our long-term debt in the next couple of years. And we have some acquisition candidates albeit small candidates that we're looking at and I know this probably sounds like the same I gave you last year on the acquisition front, but I think we have some small opportunities that would benefit our business considerably. So those are the three uses of whatever excess cash we have at the moment.

Second question is relating to you've done a good job on the field inventory and your traditional dealer network, but as you are beginning to grow in more in the consumer channel and we've seen, for instance, with the walk power mowers this year, the early promotional program, can you give us a little flavor of how you're balancing the inventories, making sure you're working with key retailers to make sure there isn't an excess inventory build in that channel?

Sure. While one of the benefits of the large retailers to whom we sell is they're very tenacious on their own inventory. So they watch their inventory pretty carefully. And they have the systems and the information flow that allows them to really look hard at their inventories at the store level. So they're a built in monitoring effect for us as well as we tried very hard to be pretty stringent. We're not perfect. And it does get out of hand every now and then on certain businesses. But that is a very strong war cry amongst all of our managers to have better information on what's in the field, manage it very carefully against historical patterns and balance inventory like we've done in the snow thrower business this year where we can. So we're getting better each year at managing our inventories in the field and I'd say the big retailers actually help us doing that.

Okay. And you answered in part my next question. But if you look at the success that you've had with the 5 X 5 program and talk about how it's becoming engrained in the culture, could you talk about the two or three areas that you think you've excelled more in and on the other side of the talk about are there still a couple of areas where you still see significant opportunity?

Sure. The areas that we've done perhaps the best and you mentioned one asset management, we have a much more strategic protocol in our relationships with our vendors. We've reduced the number of vendors, we've worked in partnership with vendors. In ways that manage quality delivery and just the relationship better. That's help guide down cost of materials. And the second aspects of operations is as you know, we've closed two or three plants now in the last year or so. And that's helped drive our margins up as well. The -- I always wanted to say that what 5 X 5 has done with our office people particularly is drive a change initiative for all the employees and teams or as individuals to drive more change and processes and determine how they do their jobs better and more efficiently and I think that's worked very well. Now if I were to say where do we have some more opportunity or where can we do a better job? I would say in our SG&A, we still have a fairly large percent to sales in SG&A. Now I know we report SG&A differently than some of our peer companies, but we still think it's higher than it should be. And it's getting more of a focus.

And what kind of opportunities exist because as you said that is kind of an all encompassing category?

Well, we have an initiative going on that today that is revising our new product development process. That will entail our reducing numbers of models, it will entail reducing the number of parts, it will focus more on platform engineering, and it will make that process more streamlined, quicker to market, but most of all, more productive engineering process. We will be getting some benefits from our enterprise-wide information systems. We will develop better interconnectivity with our customers like distributors and dealers. I would say we might find that as we get better at developing new products, we may actually increase our spending towards new products and our spending towards the marketing those new products. And that's what typically happens at Toro, we take those kind of savings and we increase our investment in our future. So that's harder to identify when you look at it on a macroscopic basis.

Final house keeping question. Your cap-ex and D&A expectations for the year?

It's Steve. I think we had told you originally we had planned cap-ex in the 60-plus range because of all the plant work we were in the process with and that's what we budgeted, but I think by the time we get to the end of the year we'll be more in the 45 to 50 million range as a better estimate. And on the other side the depreciation side in the 30 million dollar range.

Okay. Great. Thank you very much.

Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four at this time. Our next question comes from the line of Richard Henderson with Pershing LLC. Please go ahead.

Good morning. Terrific quarter. High several questions. First, Ken, on the gross margin, you guys have done a terrific job as you mentioned with increased plant utilization benefits your 5 X 5 program, et cetera. In any event, what are the chances that you continue to leverage that in the second and third quarters?

I think the opportunity is pretty good because we're --we'll continue to get the benefits of plant rationalization all through the year. Not all of it is sustainable. One of the things when we drilled down and looked at our product mix, it was a more favorable product mix in the first quarter than we had expected. I didn't know if that will continue, but we what will continue is the fundamental cost of buying and manufacturing these products versus last year. As long as our planned sales levels hold up, which who knows, but I, I'm guessing if the first quarter is any indication that we'll have growth this year, then I would expect it to hold up by and large.

Okay. And on the SG&A ratio, you say it deteriorated. Would we kind of look for that to continue to slide a little bit over the next several quarters? Versus last year?

Richard, hi, it's Steve Wolfe. The reason that deteriorated a little is keep some mind first quarter is our smallest revenue quarter. So you get, you don't get much lever A that should not slide as we go into the year and we should get probably back into the range of where we were last year. So that's kind of a first quarter phenomena when you've got a smaller quarter, but we wouldn't expect that to slide as we go into the year.

Steve, as long as I have you there, I was a little curious, if you looked at your debt levels at Q4 versus this quarter debt is higher and interest expense is down from the fourth quarter. Why is that?

Say that again, from Q4?

Yeah, from Q4 your interest expense was 4.52 million in the first quarter it was 4.09. Yet, your debt level moved higher in the first quarter from the fourth quarter. I was wondering why.

I guess I don't have that info in front of me. Why don't you give me a call and we'll work through that.

Okay. Question on the, Ken, on your buy/make mix in terms of, you know, products. What roughly is that? In terms of components for your products, how much do you actually manufacture yourself and how much do you truly buy from others?

Well, I don't know the answer to that quantitatively. We buy all of our engines.

Right.

As you know. And we engines can be 50 percent of the cost of a product. But most other components we make. We make our own dyes, we do our own injection molding. And we bend steel and make blades and so, of course, so by and large the other components are is not totally 100 percent but we have our own parts fabrication plant. We sometimes outsource when we're at peak periods, but for the most part, we will make our non-engine components. We do source materials and parts from other places in the United States as well as Mexico and the Pacific Rim. Now in the case of our irrigation business, which is our only business which doesn't use engines, we make virtually everything there because we --it's virtually all plastic. And we'll even make our PC boards, although we outsource some of them. So, that's a qualitative answer, I can't give you a quantitative answer at this time.

No, that's fine. You guys have done a terrific job of resizing and restructuring and so forth, as you mentioned, you went to Mexico and Pacific Rim. What's your experience, you know with you know with China's and do you do sourcing in Eastern Europe?

We don't source in eastern Europe. It's something that we've looked at over the last few years. And we have considered a stronger European manufacturing and distribution strategy and we've made some moves to reduce the cost basis there. But we're probably at this point more interested in looking at China and some of the Pacific rim countries to do some sourcing. We do source some products from China and Taiwan. And we're looking at that to see if we ought to be doing more of that.

Okay. Question on cash flow. You mentioned in response to a prior question that you kind of have a continuing buy-back to cover options. Is there a rough number of shares that you would be in the market to buy, you know, on annual basis to cover just rough?

Probably we would buy back 300,000 shares to cover options.

Okay. And I think on the last call, Steve, in response to a question on working capital that with the increase in sales that you guys were projecting and I think it was something in the order of five to seven percent for this year, that you would kind of be able to keep your net of your change in inventories receivable receivables and payables at kind of roughly zero? Is that correct, Steve?

I think we said that our operating funds and our free cash flow that's what you're talking about?

Yes, I just want those primary working capital type of things in that kind of scenario, five to seven percent sales growth. If you can kind of net it out to you know, just a slight plus or minus.

Yes, that's correct.

Okay. Very good. Last question, any guess on the tax rate for '04?

No, I don't know at this point, but just use what we have now. Just use that for now.

All righty. Very good. Thanks again.

You bet.

))Operator: Ladies and gentlemen, as a reminder to register for a question, please press the one followed by the four. Yes, I am showing no further questions. Please continue.

Okay. Well, this has been a good call. We appreciate your spending the time with us this morning. Just to repeat, we're more bullish than we were when the year began, obviously we've had a much better quarter than we thought. As I said, some of that is going to carry through the year. We also are in a very good position for our fourth quarter snow thrower business due to the fact that all the snow fall has pretty much cleaned out the snow inventory for us and for everybody else for that matter. So we're optimistic, but we also worry like everyone else if we go to war what will that do to impact you're business and particularly if the war period is at the height of our spring season, spring selling season. We have no idea as no one does, I guess, to what a does to buying behavior. But war or not, we know the grass will keep growing if we have normal whether patterns and we are therefore guardedly optimistic for the year. So again thank you for laying in here for us this morning and we'll look forward to talking to you again in three months.

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