Toro Co (TTC) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Toro Company's first-quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference call over to Ken Melrose, Chairman and Chief Executive Officer for the Toro Company. Please proceed, sir.

Thank you, Jason. Good morning ladies and gentlemen, and greetings from our Minneapolis headquarters. I'm pleased to spend some time with you this morning on the call. I have with me this morning, to assist in the Q&A session, Steve Wolfe, our Chief Financial Officer; Tom Larson, our Assistant Treasurer; and Steve Keating, our Director of Investor Relations.

By the way, for those of you who don't know, Steve is retiring at the end of this month, and this is his final conference call. We are all very appreciative of Steve's 35 years of service to the Toro Company.

Also joining me are our two group Vice Presidents, Tim Ford and Mike Hoffman, who are in charge of all of our businesses.

Before we begin, I would like to review our Safe Harbor policy that is part of every call. As usual, I would ask you to keep in mind that during the call, we will 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 10-K details some of the important risk factors that may cause actual results to differ from those in our predictions.

Our press release was issued this morning by PR Newswire and can also be found in the investor information section of our corporate web site, torocompany.com.

Now, since our last conference call in December, you all are well aware of the heavy snows that certainly made headlines in the East, the upper Midwest and also in the plane (ph) states. Early season storms in our eastern markets reduced field inventories quickly, and despite reorders, many dealers are out of snowthrowers today, putting us in a very favorable starting gate for the next snowthrower season.

And, on a greener note, spring is just around the corner, happily. The Toro booth at the annual Golf Course Superintendents Association of America conference and show in San Diego just two weeks ago was, as usual, wall-to-wall with customers. And, I'm happy to say that, on the whole, they are very optimistic about this year's golf season. The same held true for our dealers. We sell residential lawn and garden equipment, as well as products for the landscape contractor. At a recent meeting with our top 100 dealers, the general mood was excitement for the spring season to begin. Their inventories were low, and they are already ordering the new products from Toro.

So, with that, please follow along with your copy of this morning's press release as I review the highlights for the first quarter ending January 30th, 2004.

As we compare this year to last, I would like to remind you of two major impacts for our first quarter of 2003. The first was the onetime gain of 8 cents per diluted share resulting from a legal settlement. The second was a preseason promotion in our mass merchant channel that was earlier than usual. And, that resulted in boosting shipments of Toro walk mowers in the first quarter last year.

I am pleased to report now that we are off to a great start for the new fiscal year. Net earnings for the first quarter reached a record level of $9.3 million, compared to $7 million for the same period last year. And, that was a record increase of 34 percent.

Earnings per diluted share were 36 cents for the quarter, compared to 27 cents last year. And that figure, as I said before, includes the onetime gain from a legal settlement.

Net earnings were better-than-expected, thanks, in part, to continued leveraging of improvements and productivity efficiency and asset utilization that were all begun during our successful five-by-five profitability initiative. Other benefits were from unexpected items, including the debt recovery. You'll also recall from our fourth-quarter conference call that we plan to invest more in our internal growth engine than we have in previous years. Engineering for new product development was one of the areas, but it occurred at a slower pace than was planned during the first quarter. We do expect to make up that ground later this year.

Net sales increased 6 percent over the same period last year to $313.6 million. Of that increase, 2 percent is attributed to the positive effects of the currency exchange.

Despite what is typically a slower seasonal period, the increased optimism on the part of our various customer groups in the distribution channel created a healthy demand across most markets for our enhanced product and services portfolio. Most notably, the sales increase came from strong early stocking orders for new landscape contractor products and increased snowthrower demand.

Now, let's look at the businesses and see how these results break down by segment. First, looking at the professional segment, as you can see from the press release, our first-quarter sales increased 7.4 percent to $207.7 million. The improvement came from increased irrigation sales and successful new product introductions in our two strong brands in landscape contractor equipment -- both Toro and Exmark.

International sales levels were boosted by positive foreign currency exchange rates, along with strong shipments in golf mowing equipment and, as in the domestic market, irrigation products.

As I mentioned earlier, optimism at the recent Golf Course Superintendent show was more evident than last year. Customers were particularly enthusiastic about the revolutionary design of our new ProCore Aerator and its ability to aerate all 18 greens in a day. The standard has been two days, so the golf course benefits from an additional day of rounds per aeration cycle. Our new 835/855 sprinkler heads were also a major hit with their unique feature of giving the Superintendent the ability to adjust the spray around trees and bunkers, making it much more efficient.

The reported operating earnings for the professional segment were up only to 2.5 percent to $28.4 million compared to fiscal '03. It is important to know, however, that without the benefit of the legal settlement booked in the first quarter last year, comparative earnings would have recorded a 10.5 percent increase due to both improved gross margins and lower expense rates.

In the residential segment, first quarter sales were $97.9 million, up 3.4 percent compared to the same period in '03. As I mentioned earlier, heavy January snowfalls in key markets, particularly the East Coast, generated reorders of snowthrowers. The resulting lower field inventories will help position us well as we enter our first (ph) quarter this year. In fact, Steve and Tom, both experienced, painfully, firsthand, the power of an eastern snowstorm during their recent visit to New York in January.

Strong demand from distributors and dealers increased first-quarter sales of our Lawn-Boy branded walk power mowers, and the new line of Toro riding products. Toro-branded walk power mower shipments, on the other hand, were lower than those in the same period last year, due to the previously-mentioned preseason promotion program that occurred earlier than usual in 2003.

International residential sales were up sharply, 21 percent, compared to the first quarter of '03, because of two factors -- favorable foreign currency exchange effects and strong customer acceptance of our TimeCutter Z riding mowers, and our line of Power Macs two-stage snowthrowers.

First-quarter operating earnings for the residential segment were $8.4 million, down 3.7 percent compared to the same period last year, primarily due to the higher cost in new product tooling and a onetime cost for field modification on a new product.

Turning to our distribution segment, sales were up 5.7 percent to $19.7 million for the quarter. This is a quarter that is particularly difficult economically for our distributor partners, especially the three out of the four that we own who are not located in snow markets. Nonetheless, thanks in part to a successful profit improvement initiative at these company-owned distributorships, we contained our expected loss for the quarter to just to $2.2 million, an excellent improvement over the $3.4 million loss for the same period last year.

Now, let's move away from results in our primary segments so that I can give you a short review of our operations. Our gross margin for the first quarter was 35.9 percent. That compared with 35.7 percent last year. We continue to reap the benefits from prior profit improvement initiatives in the earlier transfer of some production to lower-cost plants.

SG&A expenses were significantly lower at 30.6 percent of net sales, compared to 32.6 percent in the same period last year. The decline, as a percentage of sales, was due to the previously-mentioned debt recovery and improved leveraging of expenses, again, driven by the five-by-five program.

Interest expense decreased 5.1 percent to $3.9 million, as earnings were used to retire debt and lower our average borrowing levels.

Other income declined significantly from the prior to the previously-mentioned onetime legal settlement.

Net inventories, at the end of the quarter, totaled $271.1 million. That is up slightly from 267.4 million at the end of the same period last year. We continue to manage our inventories downward, and in fact, without the currency impact, we would have recorded a decrease in inventories of $3.2 million over last year.

And finally, net receivables at the end of the quarter were $311.5 million. That is essentially the same as the receivables at the end of the period last year.

Those of you who follow us regularly know that Toro's first quarter is usually our smallest, and therefore, our most unpredictable. The bulk of our retail activity still lies ahead. However, as we reported on February 12th, our first-quarter results exceeded our expectations, and we are encouraged by the optimism throughout our distribution channels, as well as the balance growth we are already experiencing in most of our product categories.

Our golf customers are bullish on the innovation of our product lines, and plan to upgrade their maintenance fleets this season. And, the prospects in our residential channel look very strong as well. And, our employees are already engaged in new projects that will help us achieve our new long-term goals for after-tax profitability and sustainable revenue growth, as we have defined in our new six-plus-eight initiative.

As a result, we are raising our fiscal 2004 guidance, and we now expect to report an increase in earnings that will fall in the range of 14 to 18 percent against the $3.12 per diluted share we achieved in fiscal 2003. Moreover, given our previously-announced plans to increase investments in innovation technology in new products and brand development, we continue to expect our net sales growth in fiscal 2004 to be in the range of 7 to 9 percent. For our second quarter, we currently expect to report earnings of $1.80 to $1.90 per diluted share.

In addition to the inevitable uncertainties of the economic and geopolitical environment, our outlook assumes two things. First, it absorbs what we now expect in unplanned increases in steel and aluminum that are likely to occur this year. And second, it assumes the absence of widespread extremes in weather conditions that could adversely impact our revenues in the primary selling seasons that lie ahead.

Let me stop now so that we can move to answering any questions you may have. So, I will turn it back to you, Jason.

(OPERATOR INSTRUCTIONS). Jim Lucas, Janney Montgomery Scott.

Good morning, guys. I am starting to get used to this trend of you just coming in with better and better results.

Well, I hope that can continue.

A couple of questions. We start first, could you talk about -- you mentioned new acceptance, better acceptance of new Lawn-Boy products. And that is a brand that you have been looking to reinvigorate. Could you provide a little more color on what you are doing with the Lawn-Boy brand? And what kind of outlook you see this year and next?

Well, this year we introduced part of the line of walk mowers for Lawn-Boy. It is a new platform with a Honda engine on it. And, it has been very well-received with our dealers. So, we've got some renewed enthusiasm around the walk power mower line for Lawn-Boy. We've also been working with other accounts to begin to build a long-term program with some other accounts that I cannot name. But, we want to broaden our distribution of Lawn-Boy.

And, the third thing we're starting to do is build more product categories using the Lawn-Boy line. We've done some research against the Lawn-Boy brand to see what areas in lawn and garden that it fits. And it seems to fit very well in most lawn and garden categories. So, we think we have an opportunity to expand the brand beyond just walk power mowers. And, we've begun to invest in building them -- the whole brand category.

Okay. And, you referenced the cautious optimism expressed by your dealers and customers and the positive feedback at the Superintendent show this year. Is there anything more than just anecdotal evidence that you can provide that gives you this increased optimism for how the year is going to play out from a topline perspective?

Sure. Well, you'll recall that, if we just talked about golf for a minute that, because of weather, because of the economy, because of the threat of terrorism, the golf industry kind of shut down in one way or the other. And last year, in particular, all the rain that you experienced in the East Coast really reduced the rounds of play and the revenues golf courses were getting. So, the whole buying cycle for upgrade or new maintenance equipment got kind of postponed. And, we are starting to see these golf courses, and actually it is occurring more widespread than just the East Coast -- Superintendents are saying it is time to buy. We need to refreshen our fleet and get back on-track.

We also introduced new products, as we always do at the show. They seem to have very good appeal. And, it gives the Superintendent the opportunity to upgrade his or her fleet. So, we are seeing some renewed optimism in the area of golf course maintenance equipment, renovation in their irrigation systems, as well.

In the other areas like the landscape contractor business, the residential business, what we see today is a much better field inventory position. Most of the dealers in the North would also say that, because the snow business was so good, they have a better cash position; they have more opportunity to spend my money. So, they are going to be more aggressive this coming season, they say. And again, we have new products that we have introduced to those segments that occur in our dealer channel.

The same is generally true in Europe. Our inventories are in better shape. Again, their economies have been sluggish. The buying cycle has slowed down the last couple of years. And, at some point, you have got to keep your fleet running and your business going. And so there is a sense of renewed energy and optimism in those markets as well.

Okay. And, final question. As you look at the general tone improving, overall, have you made any changes -- either increase or decrease -- in terms of your planned expenditures, as you alluded to earlier about the increased engineering advertising product development?

Well, as you know, our six-plus-eight initiative, which is the next initiative after five-by-five, is focused more now on growth than on profit improvement, although we intend to improve that as well. But, the growth part, we think, needs to be cranked up. And so in order to do that, we have focused on building our core markets in a more aggressive way. And, that is, of course -- our formula has been more innovation, more customer care, strengthening the channel, looking at segments where marketshares, we think, can be improved. And so we are investing in that aspect of our whole growth opportunity.

We also think there's an opportunity to take the Toro experience more directly beyond our product lines. So, we are investing in that. And, as I kind of alluded to what I talked about in Europe, I think we have internationally some underserved markets that we can invest more in products that are indigenous to those countries or the section of the world that are not necessarily off the U.S. mainframe.

So, I think we have lots of ways to grow our business more robustly than we have in the past several years. And, of course, the economy is much more receptive to growth, too. So, that's going to be an added benefit.

Okay. Thank you.

Jeff Shriner (ph), MS (ph) Capital Management.

Good morning, gentlemen. I was wondering, in terms of the gross margin line, it was not that large of an increase, year-over-year. But sequentially, it was pretty significantly. Was that just due to the overall mix shift as more snowthrowers possibly came in through this quarter?

Well, again, it is a small quarter. There is not a lot of firm conclusions you can make from looking at our gross margin improvement. It wasn't a nice improvement. I think it will improve more than that. Our plan is to take greater advantage of five-by-five and then the continuing focus on plant effectiveness. We have a very strong lean manufacturing activity going. We have more sourcing opportunities to reduce costs. And so, I think as the year gets accelerated here, we are going to show more improvement.

Now, I say that in the face of what I mentioned in the press release, that we are being fit hit like most manufacturers with steel increases, and we are going to absorb those. We have in our projections now that I alluded to, accommodated what we expect. We do not know how this will play out throughout the rest of the year. But, we think we have pretty good oversight on that.

So, at any rate, we will -- I think the improvement that you see is more a function of just a small quarter. And, you don't see the full effect of some of the things we are doing and have continued to do after five-by-five.

Okay. And in the press release, you made a comment about current orders are approving based on the economy and Toro's enhancement to its products and services. Could you rationalize that in a way to say that -- would it be more orders improving because of economy? Or because of Toro's enhancements that they've made to the products?

Well, what you're asking me to do is separate the customers in our channels response to their optimism. And, I think their optimism has to do with the snow season, as I said, the economy, the effect of their inventory positions, their reaction to new products. So, I cannot quantitatively separate one from the other; I think their reflection is on all of these factors in a qualitative sense. So, I really cannot tell you how it is really dissected, quantitatively.

Okay. One last question, I didn't see anything in the last conference call when you started referencing the six-by-eight initiative. But what would the company be targeting? Or, if there is a target, at the end of the six-by-eight initiative for operating margins?

Well, let me explain quickly what six-plus-eight means. We are kind of enamored with math titles to some of our initiatives. Once you know what it means, it becomes very clear what our goals are. The six-plus refers to getting our profit after-tax percent up to 6 percent or more. And the eight number refers to achieving 8 percent growth in revenues over the three-year period. This initiative, like five-by-five, is a three-year initiative. So, it will conclude at the end of 2008 -- 2006. So, the goal here is to get our growth engine up going at the 8 percent per year rate. And, our challenge and goal is to get that up in '04, '05, and '06.

Okay. Thank you very much, sir.

Mike Durinsky (ph), Vinnick (ph) Asset Management.

Good morning, gentlemen. Can you discuss, I guess, the outlook on the sales side? Would the upside that we saw in the first quarter and with the emphasis that you talked about -- how the channels, particularly for snow, are lean and we should expect to see strong salethrough. Why did you not feel this comfortable raising the total revenue growth for the year? You had left it at the same 7 to 9 percent that you had been forecasting coming into the year.

Well, again, we are trying to be very cautious. And we always are at this point in the year, because we have no idea what the weather is going to be like. Our sales increase for the first quarter was not too much different than we had expected. It was a little better. And, we are just trying to the (technical difficulty). We are much more -- I guess we feel much more confident that once we get below the revenue line, we know how we are going to manage our costs and expenses. And, what we've got going on that -- when we are in control of what we are doing at our plants and what we are doing in our office space, and programming.

So, like I say, we have been growing at the 3, 4 or 5 percent for the last several years, and we are trying to get that up to 8 percent. I think we're going to be able to do that. I think it is going to take some of the things that we are getting glimpses of in the first quarter -- better landscape contractor business, better field inventories, which we intend to ensure we maintain over the cycle. And, yet, we've got inclement weather that is still out there waiting to be revealed. So, we are just not willing to, at this point, get too aggressive in how we might guide you on the top line.

Okay. And just kind of, I guess, along with that, with the interest that you are seeing on the new products. And, essentially, I guess, at the golf show you were at, it sounds like there was a lot of good reception there. Are there opportunities to essentially continue to defer the planned SG&A spending that you talked about? It seems like you were able to do it in the first quarter and still have strong sales. Do you think that is something that might not be necessary to continue that level and still achieve the revenue targets that you're looking at?

Not on a sustainable level. We did not defer it; it just happened that we could not ramp up some engineering projects as fast as we would like. They are being ramp up. Those savings are not savings that we'll get for the year. As I said, we will catch-up in engineering. We will strengthen some in the IS area, some investments where we want to be more robust in our information systems and some of our communication technologies with our channel partners.

So, whatever we saved there, which contributed to the 30.6 percent versus 32.6 percent SG&A comparison, we wanted to spend that money because we want to get a head start and have more investment in new products and innovation and technology. So, we think we are going to need to ramp up in some of these key growth areas if we are going to achieve the 8 percent or better of a sustainable level for the next three years.

Okay. And then finally, can you talk a little bit more about what you are seeing with the steel costs? I mean, I guess, I wasn't quite sure what you are saying when you just said you're absorbing those expected increases this year. And then what is next year looking like in terms of what kind of actions you guys are taking to try to mitigate?

Well, we are predicting that we are going to have a fairly sizable variance in steel prices and a little bit in aluminum as well. That was not expected. We buy raw steel, we buy secondary steel. Some of those steel prices have gone up 10 percent, some have gone up 30 percent. The components and engines that we buy have a lot of steel in them. They are being reflected in increased costs. So, what we try to do -- and we have some steel contracts; they are as lengthy or as robust as the auto industry that you would see. So we have some contracts that we started the year that have not affected us yet, but we know, as we get into our season and the purchase cycle is continuing to ramp up, we are going to be socked with some pretty aggressive steel price increases.

So, what I have said is that our operations people have tried to estimate that throughout the major part of our buying cycle -- have negotiated as well as we can with the manufactures and distributors of steel, and have come up with a range of increased costs. We have taken that and we put that in our projection, and that has attenuated in a relatively significant way, our outlook. But, the guidance I am giving you accounts for that. We did not have that steel unexpected expense or prospect or outlook, on the bottom line would be better. But, we have kind of put it all into a single guidance range. And, we don't really know what is going to happen with steel once we get past this round of planned purchasing. If they may continue to go up, that would affect maybe our fourth quarter. They would certainly affect our next year. But again, we've got -- we're just ramping up and lean manufacturing at the same time. So, we are taking our operating expense and our manufacturing and warehouse facilities up a notch from five- by-five. And that will -- just like five-by-five will grow in its delivery of better margins.

So, again, we will be able to offset some more steel increases, we think, as long as they are not onerous with improved lean manufacturing in the coming years.

Okay, actually, if I can just ask one last one. Tom, going into the year, you were looking for the first quarter at, you know, roughly 300 million in revenues. Can you break out that additional 15 million or so into different buckets as to what the contribution was from each area?

The 300 million -- (multiple speakers) ?

No, just the extra 15 upside. How does that break out into the different categories of where the upside came from? From about -- you know, the expectation was going to be about 300 or so in the quarter.

Let me ask our CFO, Steve?

We don't break all that out, but let me give you some general information. It is coming from snow, as Ken talked about, with the experience that we saw on the East Coast in some of those storms and even the Midwest. Strong interest in the landscape contractor business, and as you mentioned, to some extent, some of their purchases tie to snow. A lot of them do snow work in the winter, and that creates dollars for them. And then, Rescom (ph) irrigation was up -- was a piece of that. So, between the three of those, that accounted for the majority (multiple speakers)

And there's a possible ballpark at like a third, a third, and a third or something along those lines?

We don't break that out.

Okay. Thank you.

Andrew Mathis (ph), Mathis Capital.

A couple of housekeeping questions. You mentioned the debt recovery several times. I was wondering if you could quantify that for us?

A couple, 3 cents.

Three cents. How about the engineering that you did not do, had you done that, roughly?

About 3 cents.

Also on the balance sheet I noticed the goodwill and other assets increased by about 7 million from last quarter. I was wondering what that was from?

That is a combination of things. One is a couple of accounts that we reclassified from receivables to notes, reclassed. And, part with an investment we made in a company that is in the evapo (ph) transporation (ph) business. It's a combination of those two things.

Okay, and back to the debt recovery. I noticed that the reserve went down appreciably at the end of last year for receivables. So, I'm wondering where the debt recovery came from?

Well, you've got to look back a couple of years. In '02, is when we had reserved for this account that we ended up collecting.

Okay.

Remember, we walked through this. Once we know we have a problem, we set up -- take a charge to our P&L and set up a reserve for it. And, we would have done that in '02 for these accounts. Once we determine, for sure, what the loss is going to be, then we will write off the reserve and write off the account against it. So, what ended up happening in this case is the charge we took to cover it, was taken, for the most part, in FY '02. And then we ended up writing off the account in the reserve, writing the reserve down in '03 when we knew exactly what we were going to lose. So, you've got to look over the time periods and what the buckets are. And in this case, your expense went up in '02. That drove the reserve up in '02, and when you wrote it all off in '02 -- or '03 -- it drove the reserve down.

Okay. Thank you.

Chris Harrington (ph), Sigma (ph).

A follow-on to that question that was just asked. Just going in the press release, the mention of positive impact on expected items. Would that be -- outside of the recovery, can you maybe comment on some of the other unexpected items (multiple speakers)?

They were really insignificant. The bulk of it was the debt recovery.

Okay. Thank you.

Jim Lucas, Janney Montgomery Scott.

A housekeeping questions -- on the tax rate in the first quarter of 33.5 percent, where do you see the tax rate going for the full year, Steve?

We are planning at that same level, Jim. In the meantime, we're looking as some things to try and get that down. The big issue there is our percent of foreign income versus total income -- is reducing. So, your tax rate ends up going up as a result of that, because you get favorable tax treatment for your foreign income. So, for your planning purposes, you ought to stay at 33.5. And we will keep you posted as we find some ways to try and lower that as the year goes on.

Okay, and Ken, I can't let a conference call go by without talking about the strong balance sheet. And, if there is any update on planned uses, including has there been any thought given to the dividend?

Well, we continue to have a dialogue with the Board, especially since President Bush has made a concession on the taxing of dividends. We are looking at that. We have not made a recommendation to the Board yet. Steve and Tom are doing some benchmarking with some light companies. But, I would say just hold tight, and we will have, perhaps, better information on that in the next -- maybe the next call.

And, can you talk a little bit about the acquisition pipeline? If things are status quo? Or, if you seen any changes there, meaningfully, one way or the other?

It is pretty much status quo, Jim. We continue to be on the lookout, and we are right to do an acquisition or two from a cash position. We certainly could do that fairly easily. We would love to do a couple of bolt-on transactions that strengthen our product lines, our basic business. We also are on the lookout for some technologies like we did with R&D last year, and more recently, our involvement with HydroPoint (ph), which Steve mentioned when he referred to the evapo transporation rate as a method of running irrigation controllers. But, we don't have anything that we are about to launch into.

Okay. And finally, Mr. Keating, congratulations and best of luck.

Thank you very much, Mr. Lucas. It's been a real pleasure.

Same here.

Richard Henderson, Pershing LLC.

Yes, good morning. Great quarter. Ken, a question on the gross margin. You had mentioned that you would expect that margin to trend higher, going forward. One of the factors being leveraging off your five-by-five initiative. Could you speak in looking at that improvement, what you see as mix influence? And also, could you comment on your pricing flexibility?

Well, let me take the last part first. We have virtually no pricing flexibility. We certainly do not in the residential segment, and it is very difficult in the professional side. Our competitors are very keen on pricing, as a piece of their competitive warfare. A lot of our businesses in the professional side get done on bid basis, so it is tough. We have to continue to reduce our cost if we're going to improve our margins.

Our assumption is that we do not have much license, if at all, to raise prices. Now, it will be interesting to see how the steel situation changes that. I noticed a lot of companies are saying they can't do much about the steel situation from their customers' standpoint today. But, all of it be -- hit hard by the end of the year. Like I say, stay tuned to see what the companies do for the coming year.

As far as our mix is concerned, we don't see any appreciable shift in mix. It is more of an overall getting our cost down through our plants; strengthening our strategic sourcing efforts; working harder our opportunities in our lower-cost plants; and looking more to Asia for sourcing.

So, we are doing a lot of things that we think will have gradual, small but steady, improvements in gross margins. And, like I say, I think it could get a little better than what you've seen in the first quarter throughout the year. But, that is notwithstanding the major impact of the steel increase.

Right. On the initiatives on the six-plus-eight program. You had mentioned, I think, in the last conference call that the expected incremental expenditures would be between 10 and 15 million. You mentioned the first quarter you get really did not have a chance to do it. What kind of guidance would you give for this year and next year, just rough?

Well, I would say we will -- we probably will not spend in that range this year for two reasons. One, it's just taking us longer to get some of these new initiatives traction. We have to hire people, we have to start some projects. And, as you see in the first quarter, we did not get much leg on that. I think that will continue throughout the year. So we will end the year spending less than what we wanted, but we will try to spend as much as we can. But I am guessing it will be less than $10 million. And, we have also slowed it down a little bit due to the steel situation. We are trying to be a little more prudent and focus on the top-priority initiatives.

For '05, it is hard to say. But, the intent is to continue -- I'm going to just say a 10 million, 8 million, 11-million-dollar initiative to try and strengthen our growth engine.

All right. Ken, not getting too picky, but if you took your sales -- your yearly sales last year -- and multiplied it by 8, which is your growth objective, and added a 6 percent margin, you would come up with earnings of about 372, which is not really far from the high end of your guidance for this year.

Right. And I think the first half of that is more in line with our thinking that the six-plus, or the 6 percent or better, is a three-year goal. So, our goal in '04 is not 6 percent after-tax profitability. It's better than five-by-five -- excuse me 5.5 -- which we achieved in '03. But, we think that, because lean is just getting started, that it will be slight, but it will not be at or near 6 percent.

Right, so that you would normally, depending upon the economy, weather and so forth, but you know, the point simply is that if you can run the machine through with the drive of sales growth, and since you are not looking for price, it's (indiscernible) a real growth, you still feel that you can leverage off your prior five-by-five initiative and that would, hopefully, enhance the mix through your technological changes and so forth. Like that aerator for the golf that you had mentioned, sounds like a wonder machine. You would be able to leverage that into double, low-double-digits earnings type growth, everything else being equal

I think we are going to repeat what we did three years ago. It kind of goes like this -- the first year of a new improvement program -- a cost improvement, a margin improvement, whatever -- that focused heavily on doing projects and programs to drive our cost down. The first year, we got a little bit of benefit, and the third year we got a lot of benefit. If you track our profitability from, say, 2000 through 2003, you see it really ramping up in the last year. That is going to happen again.

We just started a lean manufacturing in the last several months. We are investing about as much as we're going to get from it. Maybe we will do a little better, but, net-net, we're making the kinds of investments we made in '01 in five-by-five in the manufacturing environment. We are doing the same with lean. We will not get a lot of benefit in '04; we will get much more benefit in '05; and then in '06, it will be running on both barrels.

So, we think the same ramp-up will occur due to strategic sourcing and lean manufacturing and our no-waste initiative. They take early investment and they are slow to get going. You're having 5,000 employees to get totally embraced in it, and that does not happen quickly. But, when it does happen, and when it happens together, you get a powerful multiple near the end of the program. And that is going to happen again.

Okay. Thanks. Keep up the good work.

(OPERATOR INSTRUCTIONS). At this time, Mr. Melrose, there are no further questions. I will turn the conference call back to you. Please continue with your presentation or closing remarks.

Okay. Thank you, Jason. And once again, thank all of you ladies and gentlemen for joining us again. Your questions are very thoughtful, and we appreciate your attention and ongoing support. As we enter our key selling period, I think it appears to be a very strong, optimistic outlook. And, we're hoping the economy continues its gradual steady improvement. I think it will, and if the weather behaves this spring and summer, we will be in good shape at the end of the year. So, thanks again for your attention, and we look forward to speaking with you in three months.

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