Toro Co (TTC) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Toro Company third-quarter earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Tuesday, August 24, 2004. I would now like to turn the conference over to Mr. Ken Melrose, Chairman and Chief Executive Officer of the Toro Company. Please go ahead, sir.

Thank you, Maurice (ph), and good morning, ladies and gentlemen. Greetings from our Minneapolis headquarters and we welcome all of you to our third-quarter conference call. I have with me the usual gang to assist in the Q&A -- Steve Wolfe, our Chief Financial Officer; Tom Larson, our Assistant Treasurer; and our two Group Vice Presidents, Tim Ford and Mike Hoffman, who are the executives that run our operations.

Before we begin, as usual, I'd like to review our Safe Harbor policy. So keep in mind that during the call we will make certain predictive statements to assist you in understanding the Company's results. You are all aware of the difficulties in making predictive statements in a highly seasonal and cyclical business such as ours. So the Company -- our 10-K details some of the important risk factors that may cause actual results to differ from those in our predictions.

Our press release, as I hope you all have a copy of at the moment, was issued this morning by PR Newswire, but you can also find it in the Investor Information section of our corporate Website, .torocompany.com.

So it's hard to believe that summer is nearly over. Up here in the upper midwest, our summer has been shorter than usual this year, much like the summer on the East Coast, I suspect, with unusually wet and cool weather much of the months of May and June. But as is our nature, we make the best of it, even if the sun is not shining all the time.

And to that point, we have had another strong quarter at Toro. In June, when marked our 90th anniversary and celebrated our heritage of innovative products and services, which was topped off by a visit from our Minnesota's governor, Tim Pawlenty, who joined us for the occasion. Our robust sales increase in the third quarter in nearly all of our businesses reinforced the importance of Toro innovation and have kept us on track to deliver the best full-year financial performance in our 90-year history.

Now if you would please follow along with your copy of this morning's press release, I will review the highlights of the third quarter, which ended July 30, 2004. We reported a 26.5 percent increase in net earnings over the previous year, with a record $34.2 million for the quarter compared to 27 million for the same period last year. Earnings per diluted share were up 29 percent to $1.33, compared to $1.03 for the same quarter last year.

For the first nine months, net earnings were up 26 percent to 95.7 million, or $3.68 per diluted share. Last year at this time, we reported earnings of $2.92 per diluted share, which included an after-tax restructuring charge of 3 cents and a onetime gain of 8 cents per diluted share, resulting from legal settlements, and you probably will recall those two onetime charges.

Once again this quarter, we converted strong sales growth into even stronger earnings growth because of our continued focus on three areas -- first, overall operating effectiveness; two, productivity improvements through our lean manufacturing initiatives; and three, expense reductions through applying lean methods to our business processes. This proactive strategy has allowed us to protect year-to-date margins and meet our plans, despite the unexpected run-ups in the price of steel and other commodities, which you all are very well aware of. I also want to add that we continue to show sustainable improvements in asset and inventory managements, both here at Toro and in the field, in our channel partners.

Turning now to sales, I am pleased to report that the Company continued to generate healthy sales growth in most business categories in the quarter. We reported net sales of $454 million, up over 15 percent, 15.1 percent, from the same quarter last year. Year-to-date sales were 1.3 billion compared to almost $1.2 billion for the nine months last year, or an increase of almost 11 percent.

The strength and recognition of Toro brands across all markets and in many regions of the world certainly has served us well as consumers and professional customers increase their purchasing activity through the economic recoveries going on around the globe. Most notably, sales of our landscape contractor products and commercial equipment for golf courses and other public grounds, both here and abroad, drove a good portion of the sales increase.

Let us now turn to our businesses to see how these results break down by segment. Our professional equipment sales were $287.9 million, up 17.9 percent over the same quarter last year, and sales improved in nearly all product categories with another strong increase in shipment and retail sales for our Exmark and Toro commercial zero-turning-radius mowers for the landscape contractor market. This market is still growing at double-digit rate and our two brands continue to hold the number one and number two spots in the market.

Likewise, our sales to the golf market increased, even though the irrigation piece was down due to fewer new golf course openings, as well as delays in new course construction, a situation we have highlighted in previous conference calls. On the other hand, sales of our irrigation products for non-golf applications fell short of our expectations.

Strong demand from the new golf course construction in the Asian region, which has been very bullish as opposed to the States, drove another double-digit gain in our international sales for the third quarter. Innovative products such as the ProCore Aerator, our walk-behind greens mower, and Workmen vehicles, including our new electric Workmen vehicle, have been meeting with tremendous customer acceptance and helped us drive the 16.4 percent increase in this segment. Operating earnings for the professional segment were $54 million, a 28.6 percent increase over last year. And that is primarily due to leveraged expenses and operating efficiencies, as well as, obviously, the nice sales increase.

In the residential segment, third-quarter sales rose nearly 12 percent to $144.2 million from the same period last year. Products with a strong period-over-period sales growth included snowthrowers and handheld electric products. I do want to note, however, that some of our snowthrower shipments were moved up from the fourth quarter due to the increased pace of demand by our retailers. Internationally, sales jumped 20.7 percent, benefiting from strong demand for these same products. Operating earnings in our residential segment for this quarter rose 33.5 percent to $17.6 million.

And then lastly, in our distribution segment, sales for the quarter were up 9.4 percent to $47.1 million, primarily due to the strong professional product sales and overall improved economic conditions. Earnings, however, remained flat with last year at $2.3 million as we focused more on increasing market share through these few distributors that we own.

Let's now move on to review the progress from our asset management and operating strategies part of the "6+8" initiative that we began at the start of this fiscal year. As I mentioned earlier, our gross margin for the third quarter was 36.2 percent, compared with 37.2 percent last year. This was not unexpected, and we discussed in our last conference call the potential impact of rising steel prices. In addition, the volatility of crude oil has impacted our transportation costs.

But the ongoing cost management and productivity improvements from 6+8 have continued to offset at least partially this unfavorable impact on gross margin. And this is a strong testament to the difference our employees are making in their efforts to streamline our processes and employ lean manufacturing processes throughout our manufacturing facilities.

We are also encouraged by another favorable quarter of reduced SG&A expense as a percent of sales coming in at 24.6 percent, which is down from the 25.8 percent in the same quarter last year. As you know, this has been a target for tighter management and improved leverage over the last few years, and 6+8 directly addresses this goal.

On the other hand, our engineering expenses for new product development and other growth investments have been picking up and are now tracking closer to our planned levels. Additionally, our incentive expenses are higher due to the improved financial performance of the Company, but these increases are more than offset by improved leveraging in areas such as warehousing, warranty and administrative expenses.

The balance sheet shows some key results of our improving asset and working capital management. We are carrying virtually no short-term debt at the moment, despite the repurchase of shares on the open market, which was authorized by our Board in late May. So far we have repurchased just over half of the planned 3 million shares and we plan to purchase the remainder of these shares over the next three to six months. Interest expense for the third quarter came in at $3.9 million. This is down from $4.2 million last year.

The most compelling improvement on the balance sheet, however, was our net inventory levels. Similar to the second quarter, inventories came down nearly 8 percent to $217.4 million. These results reflect a more focused management to ensure no buildup in both field and warehouse inventories as the season winds down. Despite the general industry optimism over the past several months, this approach will serve us well in light of recent news from the retailers indicating softer-than-expected demand for lawn and garden products.

In addition, accounts receivables were $381.3 million. That is up only 2.2 percent, significantly less than the consolidated net sales increase of 15 percent. This difference is a result of just solid collection efforts.

Let me turn now and conclude with our business outlook for the remainder of the year. Our strong performance during the first nine months of fiscal '04 combined with considerable momentum as we move to our final quarter sustains our optimism as we look towards the end of the year and beyond. Our employees are fully engaged in the activities of our 6+8 profitability and growth initiative, and we have only scratched the surface of realizing the benefits of lean manufacturing and no-waste business improvement efforts.

Of course, rising commodity prices, weather, and economic volatility always remain uncertainties that will continue to challenge all of us in the industry. However, we are confident in our ability to proactively and determinedly grow profits at a double-digit rate and manage our assets for maximum leverage. We expect to end the year with a solid balance sheet, a strong operating cash flow, and low inventories in the field, setting the Company up for a really strong fiscal '05.

For the remainder of this year, we will continue to make investments in innovative products, services and systems that create strong growth momentum in fiscal '05 and beyond. Investments in new product development and our brands, in water conservation and smart irrigation and new solutions for our international customers will all contribute towards our three-year 6+8 growth performance.

Given our situation as we ended the third quarter, we now expect to report fiscal 2004 net earnings per diluted share in the range of $3.82 to $3.90 for the year. That is 22 to 25 percent above last year, without considering any impact on earnings per share from our previously announced share repurchases activities. We are now projecting our sales increase to be between 9 and 10 percent.

So with that, let me stop now so that we can move to answering any questions you may have. And I'll turn it back to Maurice, who will host the Q&A session.

Thank you. (OPERATOR INSTRUCTIONS) Jim Lucas from Janney Montgomery Scott.

Good morning. First question. You alluded to the non-golf irrigation did not quite meet your expectations. Could you give us a little more color of what you are seeing there?

Sure. As you know, we have been -- our product line has been under fire a bit because of lingering quality problems over the last few years. And I think we have reported that on a few previous calls, where our irrigation business in the non-golf area was disappointing. And we have now got the product line in a very competitive state. The quality issues are behind us. And going into this year knowing that, we expected to, again, returning more quickly to a stronger or more leadership position.

It has taken a bit longer to convert the customers or bring them back than we expected, plus the unseasonable weather -- that is to say the wetness in areas of the country -- just slowed up the whole residential and commercial irrigation business. So you put those two things together, and we have missed what we expected to do for the year.

Okay. And as we look out to next year with the commodity headwinds that remain in place, how, as you are building out your plans for next year, will pricing power be an option for you? That is, will you be able to gain some pricing mixture to offset some of that commodity and should we expect to see some gross margin expansion next year?

Good question. We have planned for some continues steel increases in the fourth quarter and even more increases in the year '05. We think for the quarter, we have that pretty well covered, and we will still end up with a strong fourth quarter in spite of that. For '05, given that we think and are fairly confident that we will have more commodity in -- certainly, steel is the lion's share of it-- but there'll be resin because of petroleum and fuel costs because of petroleum. Those things will be higher than we would have anticipated. The way we are dealing with that, we are ratcheting up our lean manufacturing efforts, which successfully covered a great deal of that cost to this year. We think that will happen again next year.

But as you said at the last part of your question, we do feel like we will have some room for some price increases. It depends on the product category or business where we have more room, but we will take some prices up in '05. The net effect of all that, we believe our gross margins will increase or improve over '04, not substantially but slightly. We will continue to move our gross margins up to a higher level. At the same time, we will continue to move our SG&A as a percent of sales down in '05, just as we have done now here in '04. So again, whether it is manufacturing cost or administrative expenses, we will leverage what we think will be again a good revenue year in '05.

And final question, Ken, as we look to the balance sheet and cash flow, just scratching the surface with lean, a lot of early benefits, the share repurchase, you are on track. But if we look out to '05 and '06, there is going to be a lot more cash coming in. And you've talked about reinvesting in the brand, but could you talk about other potential uses for that cash down the road?

Sure. We have looked at several things. We have looked at our dividend policy. We have not decided what to do, but that may be a use of some cash. Although no matter what we do, it will be small. We will continue our repurchasing effort probably into next year, as I said in the earlier statements. We want to complete that. That is part of the plan.

But as you point out, our cash flow is very strong and it is generating a lot of positive cash, so we need to be more proactive and look more aggressively at some key acquisition candidates. We have a short list, but we have some -- we think some intriguing strategic plays. We have not been as proactive about that in the past. We have been fairly internally focused on 5-by-5, as you know, and 6+8, and try to get our business model or economic model much more robust, and I think we are certainly getting there. We still have some ways to go through '06, but at the same time, we need to build our portfolio through some alliances and acquisitions, as well as internal growth through new products and focusing on some of our underserved markets.

Okay, great. Thank you very much.

Sam Darkatsh from Raymond James.

Piggybacking on Jim's question there regarding selling price hikes, to the best of your visibility right now and including the lean initiatives that are still available to you next year, how much do you think you would have to raise selling prices in order to fully offset what you are seeing on the raw material inflation side or the purchased components inflation side?

Like I say, it's going to vary with our businesses. The professional side can take probably more of a price increase than our consumer side. Nonetheless, I think all of our divisions will participate to some extent. And the overall average for the Company may be in the 2 to 3 percent, when you average it all out. That would cover pretty much the inflation that is inherent in our business and all businesses, along with the increases -- to some extent, the steel and other commodities. Plus, when you put together with our productivity and lean efforts, that's why I feel really confident that we can still improve our gross margin overall -- as I say not a lot, because of steel, but certainly we will keep it going in the positive direction.

Thank you. Second question. Talk about warranty costs. I think that's been a favorable variance for you this year. If you could help quantify that, and also talk about how sustainable those trends have been or can be going forward.

Well, our warranty has come down. I don't have the number right handy. I am looking at our financial brain trust for that. But we think it is a trend that will continue, because we still have areas where we can improve quality. I think that is just business as usual. We are always going to want to try to focus on improving quality and strengthening our new product development processes that are designed for manufacturing assembly, and our whole plant production processes. So all of that is going to improve warranty as a percent of sales and it will continue to come down.

Okay, third question. If my recollection holds, I think Home Depot represented about 13 percent of your total sales both last year and I think the year before. Any sense as to what that might be for this past year? Does it expand as a percent of sales or does it track with the overall sales growth?

It is tracking pretty well. We are having a good year with the Home Depot. They've done an outstanding job with their focus on not just lawn mowers, but all the Toro products. And so we are very pleased with how that business has gone this year. We think there's opportunity to continue to grow it. As I said and as you know, our whole business growth comparative is trying to get to 8 percent or more, which we will achieve certainly this year, and I think that will continue.

So we have, I think, a good growth outlook for virtually all of our businesses, whether the Home Depot -- and let's say that's 8, 9, 10 percent, which is what it's running currently, we would be happy with that kind of percent increase with Home Depot. We are not predicting at this moment what it will be, but because of this past year, we are optimistic that it will continue to have some nice growth here in '05.

Two more quick questions, if I could. You briefly mentioned it -- you're feeling that field inventories are in good shape or they will be in good shape by year-end. If you could throw a little color, because you did note a little bit of retail softness of late.

Yes, the color is -- well, our inventories are in good shape today. They will continue to be in good shape. As I noted, I think in a previous call, when our industry is having a good year, we as an industry tend to not turn off the spigot fast enough. And so historically, you could find that we as an industry end up with a little more inventory than we would like. We have been pretty prudent about ensuring that is not going to happen to us, and I think we are in pretty good shape.

Now I would say, contrary to what you had said, our shipment levels and our retail demand has continued to be pretty strong. We have not seen -- I know that some of the big retailers have indicated some softening in lawn and garden sales. We have not seen that appreciably. If you go to a market that's had poor weather, yes, but from an economic standpoint or a market or a country as a whole, I think we have strong innovation. That tends to keep you in the game longer than competitors that don't have as much excitement at retail. I think that is part of the secret of our success. And so as we continue to fuel the business categories with more innovation, I think we have more staying power as things get soft, and we are not seeing a lot of softness at the moment. So we are still cranking.

That is good to hear. Last question, real quick one. If my math holds with the calendar, there was an extra shipping day this quarter. What was the impact, if you could ascertain it, on sales and/or operating profits?

I do not think it is -- very little. I don't think it made much difference. I did not even realize we had an extra shipping day. We tend to look the month holistically and have a shipping plan to that, and if we -- and there is always a flurry at the end of the quarter to make our deliveries to meet demand. But I would say not appreciable.

Okay, thank you very much.

Daniel Ludvuls (ph) from UBS.

Based on my math, it looks like your EBIT missed -- your corporations (ph) missed by about 7 cents a share, but that you made it up with 3 cents in tax benefit, 3 cents in higher other income and 2 cents in the share count. My question is on the tax rate, what was the cause of it being so low and what should we use on a go-forward basis? And then in other income, what is within that number causing it to be higher?

Hi, Daniel. Steve, if you remember last year, we had a tax rate in the 32 range. And (indiscernible) was we started this year, we told you to use 33.5, because we thought our foreign-sourced income was going to be down as a percent of sales. As we've gotten into the year, we have had some benefit in the third quarter from some tax loss carryforwards in some of our foreign operations, and that is going to bring our overall number down to 33 percent for fiscal '04. So the pickup or the adjustment in the third quarter down to 32 was to adjust for the full year to 33, and that, as you pointed out, is a couple cents for the year.

Okay. And other income?

Other income is all sorts of different things through there. It is the credit company. It is the -- different things that we -- unusual items. We had a lawsuit pickup in the third quarter of last year in that number. So there are in number of ins and outs in that currency. But there was not anything unusual in that number this quarter that skewed it one way or the other.

Second question on margins, incremental margins, your sales were up 15 percent year-over-year but your operating margin was down 10 basis points. So it looks like there was no operating average in the business model. And if you look at incremental margins in the first quarter were 39 percent, second quarter 32 percent, and this quarter have declined to 10 percent. What is going on? Is it production cuts at the factories? Is it pricing? Is it raw materials? And do you expect the incremental margin to expand (ph) going forward?

Your gross margins through the nine months are still up from last year, and the SG&As are down from last year. So when you look the two of those, you're getting some leverage on SG&A and you're still leveraging your gross margins. So the third quarter got impacted margin-wise, as Ken said, by commodity prices. There will be some of that yet in the fourth quarter, so your fourth-quarter margins will be less probably in the 35, upper 35s.

And for the year, we expect to end up somewhere in the 36 percent range, so that will have some impact. But we will still improve margins for the year, albeit not the -- I had given you guidance for 3/4 to a 0.5 percent margin increase. We think that is going to be a couple tenths now. And then the SG&A, we will still get some additional leverage through that, so your operating earnings for the year will be leveraged.

Okay, a lot of your competitors have seen a slowdown in real-time and payment markets that you serve, and yet it sounds like you are only commenting on the retail activity. As you went through the quarter, did you see a slowdown late in the quarter, and do you have any indication in August of what you are seeing and whether you would have to cut production to take down inventories?

We didn't see any significant slowdowns, and at this point, we are not planning any production cuts because our inventory is still in pretty good shape. And we think will meet our fourth-quarter sales number that we have in our manufacturing projection.

I would just add that the business continues to be good. And we are -- we have not made any adjustments because of a perceived or expected slowdown in retail demand. And since we are playing it closer to retail now, because of some of the comments I made earlier, we are pretty much in lockstep against our shipping and production plan.

That is helpful, thanks. One last thing, on the guidance for the year as it stands, if you take the first nine months and just subtract it off your annual guidance that you're giving, it seems that you're implying only 13 to 21 cents for the fourth quarter. The street’s was at 27 cents, so it's 37 percent below consensus. I know that may be the sell side maybe got a little ahead of themselves, but is there any reason for why the year-over-year increase would be so low?

Is there anything at work that you didn't mention in the press release that you're not saying hear that we should be aware of to cause, I guess, that little of an EBIT increase or profit increase on the top line that you expect (ph)?

There are two things that I have said, either in the call here or in the release, is that we did pull a few of our snowthrower shipments that we had planned in the fourth quarter into the third. That is a few pennies. And we may have expected or made a little more conservative approach to steel. My hope is that we will not incur as much steel cost in the fourth quarter as we are prepared for. But keep in mind the fourth quarter, we did 21 cents last year. It is a small quarter. It can vary. The percentage varies a lot with just a handful of cents.

And I think you have to keep in mind that this is a year-to-year business, and how we manage the quarters back and forth sometimes are a little different from plan. And we are still going to have an outstanding year and break all of our goals. And I'm hopeful that we will do better in the fourth quarter, but right now we are prepared to have a slight increase, hopefully, for the quarter, and we may do better. But it is a small quarter, so it is not going to be terribly material to the year.

Okay, I understand. Thank you.

Rob Schwartz from GL (ph) Advisers.

Congratulations on another great quarter. Just to continue with the last question. Just to continue with that line of questioning -- the implied sales for the quarter is, it seems to me we're looking at low single digits when you're up (ph) 15 percent this quarter. But at the same time, it seems like you are very optimistic about most categories. Besides the timing differences and shifts from Q3 to Q4, just looking at the top line here, not margin trends, can you talk a little bit about the different categories and expectations and August trends to date and how we are coming up with a low-single-digit sales growth expectation for the fourth quarter?

Fourth quarter -- now keep in mind that is typically a big snowthrower quarter. And I think we have got a lot of growth -- we did get a lot of growth quarter-over-quarter growth in third quarter. So that will take some all of the fourth-quarter growth down just because -- well, you know what happened with the snowfall last year, so we knew it was going to be a strong early start with the retailers wanting product early, and they wanted it earlier than we thought. So, that is just a shift. The business is very good. But again, you have the law of small numbers. You take some product out of the fourth quarter to meet this increased demand, and your denominator is small, so it really makes a percent change.

The other businesses are winding down. And again, we are going to be pretty conservative on shipping to the field, if we think there is a chance that some market may have a little more inventory. So we are willing to subordinate the fourth quarter a little bit and we have got a good year going. We want '05 to be another good year. So we may be conservative, but I think, like you say, the way the numbers look, it is a single-digit instead of a double-digit growth for the quarter. But I contend that it is not really indicating a trend or a reduction of demand. It is the nature of the quarter and the business and making sure we're set up for a good '05.

Great. Can you try to quantify the percentage sales growth that was pulled from the fourth quarter into the third quarter, and then maybe help us understand if going into '05 if we should take this trend with the pulled growth from the fourth quarter to the third quarter as a trend going forward? Or is this sort of, as you said you are finishing up this year and --?

You're talking about snowthrowers?

I'm just talking about sales growth of the business as a whole.

The only thing we pulled forward is snowthrowers, and like I said, it made a few cents difference -- 2, 3, 4 cents, something like that. I'm not sure exactly what the number is. But we consciously wanted to make sure that the dealers had product on the floor because they are starting to retail snowthrowers now in some of the heavily snow (indiscernible) markets.

As far as a trend, that is not a trend. It just is a phenomenon in terms of what kind of snowfall and inventory position the previous season's experience is, so we do not plan consciously to do that. We pretty much try to -- we would actually prefer snowthrowers to be shipped closer to market, which would mean the fourth quarter. Historically, we have tended to ship very little in the third quarter, but when you get a couple of years like we have had, particularly in the East Coast, back-to-back, then there is a euphoria in the business that changes the historical trends.

Okay. So if I'm reading you correctly, aside from this shift and slight deceleration in the golf business, you are excited about the sales trends in your other businesses going forward.

Right. The golf business in equipment has been very strong. The golf business in irrigation has been sluggish, as we have indicated the reasons why. But when you say golf business and you're talking about not coming up to last year, we're just talking about irrigation. When you look at the jobs, we have actually improved our market share because we can track pretty much all of the jobs. In the first half of the calendar year, we were getting probably over 60 percent of the jobs. So we are only suffering as the whole industry is in the decline of golf openings. I am guessing that this year is pretty much bottoming out, but I thought that last year and I was wrong.

Last question. Could you tell us the average share repurchase price for the quarter?

It was about 64, 65.

64 to $65.

Exactly how many shares? (multiple speakers)

(multiple speakers) 1.58 million. Just under 1.6 million.

Did you hear that? 1.5 to 1.6 million.

Great, thanks. Again, congratulations on a great quarter.

Joel Havard, BB&T Capital Markets.

Good morning, gentlemen. First question has to do with the lean manufacturing conversion. Could you give us a sense of how far along you are in the aggregate, by segment, by total line count, whenever metric is good for you?

How we are coming along with lean manufacturing?

Yes, Sir.

Okay, I don't know if I can answer it the way you have suggested. We started it last year, and if you -- when you think about it, that means announcing it, getting people aware of it, then having a consultant coming in and doing some training. And all of a sudden, you are four months into the year and have nothing to show for it other than you have spent some money for consulting costs. So then you start activities slowly to make sure that you can get very good engagement by the employees and that they are not overly concerned that they're going to lose their job and some of the negative symptoms, so to speak, or outcroppings of typical lean activities. So that takes some time. And we're fully cranking now, but for the year, we have not got the full benefit of what would be annualized, which we will get next year, and then we will be doing additional lean activities. So when I say we're scratching the surface, I am not sure if that is a good metaphor but --

I understand we have other companies that are going through this sort of transition themselves. And in one particular case with which I am very familiar, they have roughly, call it, 10 production lines in a plant. They did the experimentation, the first implementation of one, worked some bugs out, and now they are working on the second and third. Smaller company, a very finite number of lines. I thought in your case, a bigger business, you might able to describe a percent of the way, or as my associate says, what inning you are in as far as that conversion goes.

I do not think -- we don't have the right people in the room, our head of manufacturing and operations, who has really been the lead generator of our lean initiative.

Okay. Well, I will save that question. I've got a couple follow-ups on lean. Maybe I can follow up with you separately.

We will delve into that, and if you call Steve Wolfe or Tom Larson later, we may have a quantifiable way of --

Good. Second question, then. As you start to think about turning the spigot a little bit on R&D, should we think of it as proportional after-the-sales pro versus residential, or is there a likelihood that one segment or the other will get more of the focus over the next year or two? I imagine there is a pretty good lead time between R&D dollars and new products.

You're talking one year to two years from the start to getting the product in the field, and when it seasonal, there is a certain time when you can start to ship and if you miss it, you miss the year. We have charged all of our divisions to get their spending up such that 35 to 40 percent of their revenues going forward will be comprised of products that we define as new products. And that definition is anything that you are shipping brand-new this year or is a carryover new product from the last year or two. That is our definition of a new product.

So we want 35 to 40 percent of the consumer revenues to be new products, and the golf equipment group, same thing. And it will vary from year to year. You might think that the professional side would get disproportionate higher share of engineering and new product and R&D effort. That may be true, because it is more expensive or complex, and there it is typically more technology that can be developed and executed in some of the professional product lines.

Right, and it is a better return business, I guess.

Absolutely.

Last question for me. Do you have a sense of where you are comfortable on a repurchase price, where you see it still accretive? Is there a bogey out there you are comfortable talking about? We have our ideas, but wonder if you have.

I would say high 60s.

Okay. And are you thinking cash flow only or would you be willing to use a little debt to do that, too?

Cash flow only.

Okay, great. Good luck.

Richard Turner (ph) from Mirror (ph) Global.

Most of my questions have been answered, but a few more sort of bigger topic questions. One on the currency side. I didn't see in the release anything on currency. Could you talk a little bit about that, with so many sales oversees? And then I'll follow up with the other question.

This is Steve. Currency for the quarter was very small, about 0.5 percent on sales; and for the year, nine months, a little over a percent. So it is not a huge number. And on the bottom line, as we have told you in past calls, we hedge the majority of that, so there is very little impact on the bottom line.

When are those hedges struck? Do they go out all of next year?

It varies. We have some that go into next year. The bulk of them are for this year, but we're looking at '05 as well, so we're starting to hedge all of that.

Next question. It's sort of interrelated, I guess. But on the engine side, are you seeing any new developments in terms of the engine manufacturers, any new entrants?

No. We are watching what the Chinese do, of course, and there is activity there. But we don't see anyone making a move to bring a Chinese engine into the market. We think that is going to happen. We think there is still a lot of development and development work or design work to be done. And it is going to be maybe a slower process than maybe the experience of some of the other products or components that have come over.

But we are watching it closely. We are talking to companies. Maybe we would participate, maybe we wouldn't, but we've got our eye on it, and we will see. But I don't see anything in, say, '05 that is going to change the tapestry of engine manufacturing for both here and Europe, for that matter.

My interest is just peaked with your exposure to Home Depot, and one of Home Depot's larger Chinese-based suppliers talking about entering into the engines market, and also with Home Depot's Nardelli's program for house brands. Do you see any involvement for you in terms of getting involved with maybe one of their proprietary brands at Home Depot?

It is possible. It has been loosely discussed over the last couple of years. We are so focused and Home Depot is so focused for us on the Toro brand that they look at Toro, as they do Honda and John Deere and Echo and some of the other strong brands that they carry in the lawn and garden area, as very special, and they put a lot of focus on those brands. I think they'll continue to do that. Whether or not that drive us to a Chinese engine -- again, I don't think -- if it happens, it is not going to happen in the immediate future.

Can you just quantify or give me an idea of how difficult it would be to integrate with a Chinese engine?

It would not be -- if the design is good and the quality and all of the testing that has to go on, it would not be difficult all. It is not a difficult thing if it meets the specs, the requirements that the lawn mower or the riding mower require, it is not going to be a difficult thing to engineer.

So it's not a spring '05?

Right, it's not a spring '05.

Thank you very much, gentlemen.

A follow-up from Jim Lucas from Janney Montgomery Scott.

The question was answered, thank you.

At the present moment, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Okay, thank you, Maurice. And once again, let me thank all of you ladies and gentlemen for joining us today and certainly for your interest and thoughtful and thorough questions.

As I said earlier, we continue to be pleased with our financial performance. We appreciate your ongoing support, and as we have tried to emphasize, the momentum of the third quarter, I think, is going to carry into the fourth quarter, maybe unlike what you're hearing from others. And I think that will just propel us to a strong '05.

I think we have the things that are most concerning to you all and also to us, as we look at our cost and expense and revenue structures and outlook, I think they are in good hands with our management and employee teams. So again, thank you, and we look forward to speaking with 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.