Toro Co (TTC) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Toro Corporation first quarter results conference call.

[Operator Instructions].

I would now like to turn the conference over to Ken Melrose, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you, Danielle (ph). Good morning, ladies and gentlemen. Greetings from our Minneapolis Headquarters and I'm pleased to spend some time with you this morning on the call.

With me this morning to assist in the Q&A is Mike Hoffman, President and Chief Operating Officer, Steve Wolfe, our Chief Financial Officer, Tom Larson, Assistant Treasurer and John Wright, Director of Investor Relations.

Today, we will discuss Toro's first quarter of 2005, as you know. But before we begin, I would like to review our Safe Harbor policy with you.

Please 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.

The Safe Harbor portion of the Company's press release as well as the SEC filings, detail some of the more important risk factors that could 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 website, thetorocompany.com.

Now on to the highlights for the first quarter ended January 28, 2005. Over the past few weeks as many of you have experienced firsthand, the East coast received more than its fair share of ice and snow, delaying air traffic and putting a definite damper on the inaugural parade in Washington. This good news is a late Christmas gift for Toro, however, as we got a nice late season boost in retail movement of snow throwers put us once again on a favorable inventory position for later this fiscal year.

The weather was also a factor for attendees at the 76th annual golf industry show earlier this month held in Orlando. Evening temperatures hovered around 30-degrees, but the mood inside the exhibit hall was anything but cool. Optimism was widespread in Toro's new booth as we welcomed golf course owners and superintendents alike who by the way were together for the first time in this joint venue.

Our presence on the show floor and crowds in our booth clearly reinforced Toro's industry leadership. I'm happy to say that most customers are looking forward to more rounds of play this season, which will positively impact our equipment in irrigation sales. The same optimism was prevalent at other industry trade shows we attended during the quarter. For landscape contractors and sports turf professionals, we are also bullish about their business and the outlook for this season.

Now let's move on to the details of our first quarter. I'm pleased to report that net earnings rose to a record $11.2 million from $9.3 million last year and earnings per diluted share rose to $0.47 from $0.36. As you know our first year of the 6 plus 8 profitability and growth initiative was a tremendous success and this momentum was carried forward into the first quarter of 2005.

We are continuing to reap the benefits from employing lean and no waste methods in our plants and offices. These savings in conjunction with a reduction in our warranty cost have reduced our SG&A expenses as a percentage of sales and helped defray the rising cost of commodities.

Strong sales growth we enjoyed in fiscal 04 also continued into what is typically our slowest seasonal period. Of course first quarter of 05, net sales increased 10.6% to $346.9 million, up from $313.6 million for the same period last year. These results were driven by a very strong sales increase in our professional segment.

Once again a major factor contributing to this performance was our international sales, which increased almost 19% in both consumer and professional products. This is even more evident than our long-term strategy to balance our portfolios geographically is working well and will continue to lessen our vulnerability to adverse and unpredictable weather here in the US.

Now before we turn to our businesses to see how these results break down by segment, I would like to note that we are no longer separately reporting sales and profitability of our distribution segments. Sale of two distributors within last year means results from this segment no longer meets the quantitative special for separate reporting. Instead we have incorporated results the of our two remaining Toro home distributors into the other segment.

First, leading the way for the quarter was our professional segment where sales across the product categories jumped 18.1% to $245.2 million. Both here and abroad, sales levels were boosted by positive economic conditions and strong retail in golf mowing equipment and landscape contractor products. We continue to enjoy excellent customer acceptance of our many new products and services that we’ve launched in the past few years.

As I mentioned earlier, optimism was prevalent at the recent golf industry show and customers came ready to buy. While new golf construction will remain relatively flat for 2005, plan renovations are up and superintendents are more focused on course conditions and beautification as they now compete to earn a greater share of rounds being played.

Toro answers these needs with innovative new solutions such as an aerator that gets 18 greens done in just a day and a new irrigation sprinkler that adjusts the spray up and down to minimize water usage in various landscapes, two examples of productivity and conservation.

But innovation for our professional customers extends beyond the golf arena into solutions such as our new line painter (ph) that helps sports field managers paint lines productively with faster clean up, and our popular zero turn radius mowers that are drastically improved productivity for landscape contractors. These innovative products are well received by professionals around the world and helped boost first quarter international sales 17.1% over the same period last year.

Operating earnings for the professional segment rose 36.6% to $38.9 million despite dramatic increases in steel and other commodity prices. Offsetting these costs were the effects of price actions taken on most of our professional products for the 2005 selling season as well as ongoing benefits from our lean manufacturing initiatives.

Now in the residential segment, sales for the first quarter were $95.9million, down 2.1% from the same period last year whereas late arrival on many parts of the country delayed the movement of snow throwers off retail floors and subsequently postponed January shipment for spring products such as riders and walk power mowers. In addition, the introduction of some key new products such as the premium mower lines for both Toro and Lawn-Boy and several riding tractor models were later than expected.

Earnings in the residential segment for the first quarter were $4.4 million, down 46.8% from the previous year. The decline resulted in part from the combination of lower sales and unlike in the professional segment, our decision to hold the line on pricing for the season on products having key retail prices. Higher transportation costs also affected this segment as they did in our professional segment.

And while we have not yet began to feel the impact of rising steel and other commodity prices during the first quarter of 04, our comparative results for this year do reflect the full extent of those increases. As we move further into the year, these quarterly comparisons will become more equalized.

International residential sales were up sharply at 23.5% over the first quarter of 2004 because of strong customer acceptance of the new power max two stage snow throwers the handy and versatile new power shovel plus and the new Pope (ph)(indiscernible) branded walk power mower line catching on quickly in Australia.

Now let's move away from our segment results and turn to a brief review of our operations. Gross margin for first quarter was 35.1% compared with 35.9% in 2004. As I mentioned earlier regarding the residential segment, one of the a key factors in this comparative decline is the impact of rising cost for steel and other commodities and impact we did not begin to feel until later in 2004. While we planned on margins being down for the quarter, we did offset much of this impact through the savings achieved in our lean and no waste efforts. Please note too that the gross margins for professional products as a whole were impacted only slightly as we were able to cover some of the commodity cost increases with our own price increases.

On another note, SG&A expense as a percent of sales declined as a result of leveraging the efficiency and productivity gains from our six plus eight initiative. In the first quarter of 05, SG&A was down -- or was 29.5% and that was down from 30.6% in the same period last year. Another factor in this reduction of the benefit from our improving product quality which resulted in lower warranty cost.

Our balance sheet continued to improve as a result of better asset management and utilization. Both net inventories and accounts receivable grew approximately 2% over last year against an increase in sales of 10% or 10.6% actually.

Turning now to our business outlook, many of you know that Toro's first quarter is usually our smallest and as a result tends to be more vulnerable to unpredictable weather patterns and other extreme factors. The bulk of our retail activity still lies ahead and the field inventory levels are where we want them to be. More importantly we are encouraged by the general optimism among our customers and the majority of world economists. This we believe will translate into a strong spring selling season.

In addition, three very positive things occurred after the formal close of our first quarter, I want to highlight. First Toro completed the acquisition of Hayter Limited, a leader in lawn and landscape equipment with a strong brand presence throughout the United Kingdom. The company is recognized for its market leading products for the ground and municipal markets, so we expect them to add approximately $35 million to our top line in fiscal 05. This acquisition aligns well with our international growth strategy and offers an excellent opportunity for Toro to build a much stronger engineering and manufacturing base in Europe. Hayter's culture is very similar to ours and we have already welcomed their 200 employees into the Toro family.

Second, we talked at length about the significant investment the company has made in revitalizing the Lawn-Boy Brand over the past couple of years. With the new lineup of distinctively different zero turning radius riding and walk power mowers, the new Lawn-Boy brand represents comfort, unique design and the transformation of yard care into a easier, more enjoyable experience.

I'm pleased to inform you that two models of Lawn-Boy walk mowers will now be sold through the home depot as well as our dealer channel beginning this spring. The most compelling reason for Lawn-Boy's placement at the home depot is that now we can appeal to two different yard care customer types that exist in the homeowner market. Toro and Lawn-Boy have two distinct customer profiles and we can affirm these more effectively when the product lines are on the same floors and consumers from each point of view can easily see the differences in the two brands. This is a long-awaited strategic decision that enables our company to place two strong, yet differentiated brands on the sales floor of the nation's number one home retail center. More information on this, will be coming to you in the next week or two.

The final positive news that I want to highlight this morning is today's announcement that the Board of Directors has elected Mike Hoffman to the position of Chief Executive Officer effective March 15, 2005, the day of our annual shareholder's meeting. You will recall that as a part of our long-term succession plan, Mike was elected President and Chief Operating Officer this past October and assumed responsibility for all of our businesses at that time. Effective March 15, I will transition to the role of Executive Chairman for the Toro Board of Directors and I will remain an employee of the company to assist in this leadership transition.

Mike is a 27-year veteran of our organization and has made significant contributions in the areas of business strategy, customer relationships as well as corporate culture and values. Mike is a strong and effective leader and I'm confident in his ability to continue Toro's proven strategies and sustain its strong performance. I couldn't be more pleased with the Board's decision and I look forward to my continued partnership with Mike.

With all that good news and noting that our main selling season is yet to begin, we are reaffirming our earnings outlook for fiscal 05 and expect net earnings per diluted share to grow 12-15% with no material effect from the Hayter acquisition. On the other hand because of the acquisition, we are raising our outlook for sales growth to between 9 and 11% for the year. For the 2nd quarter, we currently expect to report net earnings per diluted share in a range of $2.30 to $2.40.

In addition to the inevitable uncertainties of the economic and geopolitical environments, our outlook assumes two things. First, it assumes no price release for steel and other commodities throughout the year. Second, it assumes the absence of widespread extremes and weather condition in fact that obviously adversely impact our revenues in the primary selling seasons that lie ahead.

Let me stop now so that we can move to answering your questions. Danielle, I will turn it back to you.

Thank you.

[Operator Instructions]

Our first question comes from the line of John Price (ph), Raymond James Associates. Please proceed with your question.

Good morning. Can you hear me Okay?

I can hear you fine.

Great. I just have a couple of questions this morning. Sam is actually on the road traveling, which is why I'm speaking instead this morning. Would you go over the cost structure of your Hayter acquisition as it relates to the rest of the company?

When you say cost structure, what do you mean?

Maybe give us a sense of like a gross margin or SG&A percentage of sales or that type of thing. An idea of how the costs break out for that business.

I would say this. It's certainly relatively small being that it's a $35 million revenue acquisition. It's SG&A and expense structure looks as a percent basis looks very much like ours. It's not materially different and even if it was, that wouldn't be material because of its size.

Okay. As far as your international businesses, would there be a currency impact in this quarter?

Yes. About well over 1% improvement in sales because of the currency impact. That by the way is offset almost equally by the taking out of the two distributors in last year, and so that comparison for the 1st quarter of last year kind of equalizes itself.

Okay. And I believe on the last conference call you all talked about expecting $20 million of steel inflation in 2005 and you were going to offset that by approximately $10 million of lean and other savings. Is that still your expectation?

We actually expect and plan for a little more than $20 million in steel price alone for the year.

Okay.

On the other hand, in terms of how we will cover that, and of course I should say we’ll have other cost increases too. Not of that magnitude, but they are material to us. But the lean and cost improvement in the volume piece will certainly accommodate perhaps half of that pricing in the commercial area, the professional area will cover a great bit of that too. As I said earlier, we elected not to be very aggressive with price increases in the residential side because we wanted to be more than competitive. And we felt that our business plan and the way things were shaping up could handle that for 05.

So we expected to take a margin in residential – we thought that would be okay over all. It's turning out to be that way, but as we get further in the year, actually our residential margins ought to improve. But I would say on the whole in the professional side, we have done a very good job between pricing increases and the lean and sourcing improvements to cover not all, but most in the residential, it's going along as planned. We didn't plan to cover all of it and we won't for the year, but we will do better in the next quarters in residential than what you are seeing now.

Okay. Thank you, gentlemen. I will let others ask questions.

[Operator Instructions]

Our next question comes from the line of Jim Lucas, Janney Montgomery Scott. Please proceed with your question.

Ken, first off, congrats on a very successful run here.

Thank you.

Not that you are completely going away by any means.

I appreciate being congratulated for my new promotion.

A couple of questions. First, if we could talk a little bit on the distribution expansion, you know, the "New York Times" had a good article talking about your success with Home Depot. Clearly you are looking -- you talked about lawn boy getting some acceptance at Depot, but can you talk about other possible retail expansions that compliments the dealer base?

Well, we do have and you are talking about the United States as well as Europe, I presume.

Correct.

Because those in Australia, by the way, we have very broad distribution and the Pope (ph) brand allows us to get into the mass merchant environment in Australia and New Zealand, which is a nice market add to us.

In both Europe and the United States, we do think it would be important for us long-term to add some breadth to our big box retail expansion and we certainly favor the Home Depot. They have been awfully good to us and done what they said they would do and they really push our brand and we were delighted to listen to their arguments as to why Lawn Boy made really good sense in their stores as opposed to others.

But nonetheless in both Europe where we have some opportunities that the international position is working on and will be part of their intensified growth strategy, as well as the United States very selectively, very carefully and again in ways that don't infringe on our relationship with Home Depot, we will consider ways to expand that. But we have to be careful about that and look at it for the long-term basis. We have got some ideas and we are not at liberty to share those with you now. But they are in the formative stages and could come to fruition, but again as I say it's fairly tricky and we have a very good relationship with our dealers as you saw in the "New York Times" article. They have a terrific relationship with Home Depot. So those two accounts -- groups are the most favored nations, if you will. Strategically we know long-term it makes sense to continue to look at ways to expand. Distribution is one way, but there others as well. We are considering options there.

Okay. In your prepared remarks on the residential side, you talked about a few products on the residential side being late introductions. Could you talk about what happened there?

We -- it was I think a situation that -- where we continue to migrate some of the more cost-intensive assembly products for the residential side down to Juarez. We introduced a new cast of a premium Toro mower this year and we are having some of that in Juarez and we are also building some of the new the Lawn-Boy products down there.

We didn't have as good of exchange between engineering and manufacturing by doing that so we got off to a late start. We had to do some rework and in effect kind of lost January's sales. It's all being corrected. We haven't lost any orders from it, but it did shift some sales from the first quarter to the second quarter. So that was part of it. That was causing some late introductions of new products.

New products are more difficult to start with from the beginning of the season just because its new to everyone. We are still learning how to produce in the bordered plants and it's been good for us, but it still continues to be a learning experience.

Okay. If we look at the cash flow usage, one of the things that I have come from 5 by 5, now 6 plus 8, clearly the sales and earnings have what a lot of people paid attention to -- but your cash flow has become a lot more consistent and predictable and -- up till now the share repurchases has been a big use of that cash and Hayter first acquisition you have done in a while. Can you talk about the principal uses of the cash flow and what you see from a share buy back as well.

This is Steve. We would love to. We are fortunate to have that cash flow and we will continue to use it in several different places. One, we would like to find more acquisitions, Hayter hopefully is just the start. We are fairly conservative on our acquisitions and we look for smart acquisitions and not just acquisitions to make because you have cash. Hopefully we will find some more acquisitions.

Stock buyback we will continue to analyze stock buy back as a secondary usage of cash and then debt certainly is our seasonal, we use that cash during the season to pay down doubt at the end of the season. So its really those three areas we will continue to use cash flow.

It sounds where you are leaning little bit more on the acquisition side now, are you seeing more properties that are in that smart range as you allude to?

I wouldn't say we are leaning any more. We have always lean towards acquisitions. We just haven't been able to find -

Is the market leaning your way more I should say.

There is certainly more activity in the industry today than there has been for quite sometime with all the things going on. So, yes there are opportunities out there, but again, we will look at those carefully and make sure they are good acquisitions.

Okay. Thanks a lot.

[Operator Instructions].

Mr. Melrose, I am not showing any further questions at this time. I will turn call over back to you.

Thank you very much. Let me just close by once again thanking all of you for joining us today and for your thoughtful questions.

We certainly appreciate your attention and ongoing support as we enter our key selling period in what appears to be an atmosphere of very strong business optimism.

We are excited internally about the leadership transition and as I said before, I'm particularly delighted and excited for both Mike and the entire Toro family.

So, we look forward to spending time with you again at the end of our second and I presume our biggest quarter of the year. So until then, we bid you fond adieu and look forward to teeing up again with you in three months.