Toro Co (TTC) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the third quarter Toro earnings conference call. My name is Jen and I will be your coordinator for today.

At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Ken Melrose, Executive Chairman of the Board. Please proceed, sir.

Thank you, Jen, and good morning, ladies and gentlemen. I'm Ken Melrose, Executive Chair of The Toro Company and I'm pleased to welcome you to our third quarter earnings conference call.

Joining me on the call this morning from our headquarters here in Minneapolis is Mike Hoffman, President and Chief Executive Officer.

As you know, since I assumed the role of Executive Chair of the Board on March 15, Mike and I have collaborated to insure a smooth and seamless leadership transition. Together we will be walking you through a closer look at Toro's quarter and year-to-date results.

We have smaller group than usual with us today. Tom Larson, Assistant Treasurer and John Wright, our Director of Investor Relations are both here, but Steve Wolfe, our Chief Financial Officer had been called away due to some unexpected family circumstances.

So before we begin let's review our Safe Harbor policy. Please keep in mind that during the call we'll make certain predictive statements to assist you in understanding the Company's results.

You're all aware of the difficulties in making predictive statements in a highly seasonal and cyclical business. The Safe Harbor portion of the Company's press release, as well as SEC filings, detail 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, thetorocompany.com.

Now, I invite to you follow along as I provide an overview of Toro's consolidated results for the quarter and the nine-month period. Mike and I will subsequently walk you through the specifics of our segment and operations results along with an outlook for the year.

As we reported in our last conference call, Toro's continued its strong momentum in the second quarter and turned in another period of record growth and profitability. At that time we were hopeful that the cool, wet spring experienced in much of the country would be quickly replaced with more normal weather patterns in order to drive stronger retail buying.

But as we've learned over the years when it comes to weather, normal is a relative term. It's safe to say that those living in Illinois and adjacent states would say this summer's severe drought was anything but normal. And it has negatively impacted many industries including our own.

Despite these challenges, our long-term business strategy is to balance the portfolio, increase the proportion of our international business, and generate sustainable process and cost improvements through our six plus eight initiative, are all helping us become more resilient and better able to counteract the effects of weather than at any time in our history.

Today I'm pleased to report record net earnings of $34.4 million, or $0.74 per diluted share for the third quarter ended July 29, 2005. Another double-digit improvement in earnings per diluted share.

This compares to net earnings of $34.2 million, or $0.66 per diluted share for the comparable period last year. Net sales for the quarter were $466.9 million, an increase of 2.8% from 2004.

I also want to point out that last year's revenue for the quarter included two Toro-owned distributors that were both sold earlier in the year. Moreover, our year-to-date results offer additional evidence that our strategies are working to support the achievements of six plus eight dual goals of sustainable improvements in profitability as well as in revenue growth.

For the nine months ended July 29th Toro reported net earnings per diluted share of $2.29, an increase of 24.5% on a post-split basis over the same period in the previous year.

In large part credit must be given to our employees, all of whom are actively involved in project teams to identify process improvements and eliminate waste on the factory floors and in our offices. Their untiring efforts have enabled us to offset, at least to some degree, the rising commodity prices we've experienced for the past year.

Consolidated net sales for the nine months set new records rising by 9.6% to more than $1.4 billion. A major factor in this performance is the growing demand for Toro's Residential and Professional products in our international markets.

Global economic development is driving higher incomes and improving opportunities for individuals and businesses alike, encouraging us to build a stronger brand presence on all continents. This bodes well for our longstanding strategy to increase the relative contribution of international sales to overall revenue in order to further reduce the volatility to extreme weather in any one region of the world.

The February acquisition of Hayter Limited in the United Kingdom has accelerated our progress towards this goal and we'll continue to explore other prudent opportunities for expansion or strategic partnerships that will benefit our efforts both here and abroad.

Now you should hear about our segment results from Toro's President and Chief Executive Officer, Mike Hoffman.

Thank you, Ken, and good morning, everyone.

I'd like to take a few moments to share our segment performance for the third quarter and for the first nine months of fiscal 2005. Let me first echo Ken's statement that our employees have indeed stepped up to the challenges this year and demonstrated once again that we can count on them to take excellent care of our customers, to drive industry leading innovation, and to perform their jobs with greater efficiency and discipline.

With that said, let's start with our Professional segment where results continue to be strong. For the third quarter Toro reported a sales increase of 5.1% to 302.5 million, while unfavorable weather conditions, like the drought in Illinois that Ken mentioned, slowed retail movement in some regions, innovative new golf irrigation products drove sales growth both in the U.S. and abroad.

Additionally, international shipments were up for the quarter due to the expanded offering of Toro and Hayter products that are designed to meet the requirements of customers in different regions of the world. The international business also benefited from favorable currency exchange rates.

For nine months Professional segment sales were up more than 12% to 936.8 million, with increases posted in nearly every product category. Strong customer acceptance of new products for the golf market have enabled us to gain share during the year, particularly in the greens aerator, trim mower, and large rotary mower categories.

Third quarter operating earnings for the Profession segment rose just over 10% to 59.9 million compared to the previous year.

All year we continued to manage the impact from increased raw material costs by employing lean manufacturing practices and implementing selective price increases. While the rise in steel costs have slowed somewhat, increases in petroleum-based materials have become more of a factor and we will continue to proactively manage that potential impact on our business.

Year-to-date operating earnings for the segment were up nearly 19% to 183.4 million, reflecting our ability to offset higher commodity costs with selective price increases early in the selling season.

Now let's move from our Professional segment to our Residential segment where sales for the quarter rose 3% to 148.6 million.

Snow thrower product sales were up for the quarter due to strong early season demand as dealers and retailers replenished low inventory levels as a result of last winter's heavy snowfall and retail sell-through. On the other hand, as we cautioned last quarter, we experienced weather-related softness in domestic shipments of Toro and Lawn Boy walk power mowers and riding products.

More than offsetting this, however, were continued strong international sales of snow throwers and walk power mowers and the addition of Hayter's popular lawn mowers and ride-on tractors. Year-to-date net sales for the Residential segment rose 8.1% over the previous year to 472.2 million, primarily due to the Hayter acquisition and growing demand for walk power mowers, home solutions, and snow products by international customers.

And here in the U.S., despite a more challenging environment, shipments in retail activity for Toro and Lawn Boy walk power mowers are up slightly for the year.

Third quarter operating earnings for the Residential segment were 10.1 million, down 42.8% from the same period last year. As in our second quarter, rising steel, resin and other commodity costs unfavorably impacted our margins for the Residential products.

For the nine months operating earnings were 43.5 million, down 17.5% for the same period in 2004, again, due to higher commodity costs.

This concludes our review of the segment results. And while the combination of weather and rising commodity costs has presented some unique challenges, our ability to stay on track and deliver another quarter of record profitability speaks well for the systematic improvements we've made during our six plus eight initiative.

Now here's Ken to discuss our operations results.

Thanks, Mike.

As most of you know, Toro's competitive advantage lies not only in innovative products and loyal customer relationships but in the transformation of our business strategies and cultures that have occurred over the past five years through focused initiatives such as six plus eight we've instilled new disciplines and efficiencies in our processes and systems to drive sustainable, long-term growth and profitability.

Our ability to track favorably towards our goal during the first nine months of this fiscal year, despite the challenges of unpredictable weather, demonstrates the progress we've made in our unending journey towards continuous improvement in operations and asset management.

Let's take a look now at specifics for the third quarter of 2005. As we anticipated, gross margin was down to 35% versus 36.2% last year, a consequence of persistently higher prices for steel, the rising costs of other commodities such as petroleum-based products, and the Hayter acquisition.

As we've done in the past, we will anticipate and manage to these commodity changes as much as possible. Importantly, we continue to demonstrate sustainable annual improvements in the SG&A expense area.

You'll recall during our last conference call we indicated that this quarter's SG&A as a percent of sales would be less than it was in quarter two and as a percent of sales less than in the first six months. So for the third quarter SG&A was 23.3%, down from 24.6% a year ago, as a result of lower incentive compensation expenses and continued benefits from our lean and no waste efforts.

This decline is still consistent with our long-term strategy to improve the leveraging of these expenses.

Interest expense for the third quarter rose to 4.8 million compared to 3.9 million the previous year due to higher short-term borrowing costs because of our stock buy back program and the Hayter acquisition.

Also during the quarter, the full-year effective tax rate was reduced from 33.5% to 33% due to increased international tax credits coming from our growing foreign export sales and resulting from a key strategy I mentioned earlier.

Our balance sheet remains in good shape with net receivables totaling $399.9 million at the quarter end, up 4.9%. Inventories rose 8.2% to just over $235.1 million.

The increases in both of these items were due primarily to higher currency exchange rate and the assets that came with the Hayter acquisition.

That now concludes our look at operations, and I'll turn it back to Mike for some closing comments on Toro's outlook for the year.

Thanks again, Ken. And you're right, the cumulative changes to our culture in business processes from five consecutive years of focused initiatives have helped us to continue to improve Toro's profitability and growth.

Our strategies are solid and they have prepared us well not only to manage in the face of global extremes in weather and economic conditions, but also to preserve strong, sustainable profitability in the face of rising material costs. As Toro's new CEO, I fully intend to build on our momentum and pursue these proven strategies to move the organization to a position of even greater strength and effectiveness, which is no small task after Ken's many years of excellent leadership.

And he will agree that achieving record third quarter earnings per share, despite external challenges, is in large part attributable to the commitment and engagement of all of our employee's in Toro's long-term vision for growth and prudent expense management. It is gratifying to note that we've exceeded last year's record financial performance in an environment that was less than ideal by employing all the tools and disciplines acquired the first two years of our six plus eight journey.

We passed that test and we're prepared to do even more.

The last nine months have confirmed that we are on track for another strong year. While we've encountered some substantial headwinds in the areas of weather and commodity costs, we continue to deliver on our long-term six plus eight commitments.

Those commitments of 8% annual revenue growth, at least 6% profit after-tax as a percent of sales, and double-digit growth in earnings per share. Therefore, we expect earnings per diluted share for the fiscal year to exceed last year's level by 16 to 18% on a revised sales growth of 7 to 9%.

We will continue to expect consistent returns from our international growth initiatives and our ongoing six plus eight lean and no waste process improvement to help us achieve new records for 2005.

That concludes our prepared portion of the conference call. And now I would invite Ken, Tom, and John to join me in responding to your questions. Jen.

[OPERATOR INSTRUCTIONS] Your first question is from Jim Lucas with Janney Montgomery Scott.

Thanks. Good morning, guys.

Good morning, Jim.

A couple of questions. First, on a housekeeping number question, could you bring us up to date on what you completed under the buy back program in the first nine months and what is still left under the authorization?

Tom, you want to answer that?

Yes. Let's see. Let me pull that up here.

As you know, we've got the buy back program that's been in place fairly heavily over the last 18 months. We have been buying shares through the last quarter as well. We bought a total of 2.6 million in F '04 and that used about 169 million in cash. Actually, that was over 5 million in the post-split terms.

At year-end we had about 3.5 million remaining in authorized yet to use, and during the nine months of F '05 we've repurchased about 3.1 million shares and that uses about 125 million of cash at an average share price at just over $40.

Okay. And so you've got about 400,000 left that under authorization?

On the authorization from last fall and then we have the additional 2 million authorization from just last month.

Right. That was what I wanted to make sure I had all the ducks in a row there. Switching gear, field inventories. Could you give us a feel for where you stand because, you know, clearly this year was a little bit of a challenge, but one of the things I think you guys that we all agree have done a better job of is managing the field inventory, and as you look to next year, how are things looking at this point?

Jim, this is Mike. I would sum is it up to say worldwide we think our field inventories are in good shape. As we break it into the pieces, the one area that has maybe a bit higher field inventory than we would like is in the area of our landscape contractor business, but we fully expect that to be resolved by the end of the fourth quarter.

And so in spite of the challenging environmental circumstances this season, we've kept field inventories pretty well balanced.

Okay. And then switching gears to SG&A, this had been a point of contention with some out there, that if you look the last couple of quarters, just, you know, obviously there's a lot of variability in there, you guys have done a very good job in terms of implementing the no waste initiatives, but could you expand a little bit more on what you were able to do in the third quarter specifically to keep the SG&A under such tight control?

And then just kind of looking longer term, as you are doing any type of long-term financial planning, what do you think is a normalized level as a percent of sales that SG&A should run at given the number of investment initiatives you have in new markets, new products, marketing, et cetera?

Well, this is Mike again.

We believe there's continued opportunity for improvement in SG&A. And when you say what's a normalized level, I don't know if we know what that is yet, we know that with the continued focus in the six plus eight initiative we have in place that we will continue to reduce SG&A.

Now, as we've talked, a significant part of that was incentive expense this time, and we've set some tougher plans, but we think there are a lot of other areas that will, in the no waste side of our six plus eight initiative that will help us yield improvements in SG&A and drive savings that can be taken to the bottom line or it can be redeployed in areas where we are spending more money, and that is the areas of engineering and/or marketing.

Okay.

Jim, just a P.S. on that, we've talked for two or three years about trying to ratchet up our new product investment and it always kind of looks funny to see our SG&A maybe come down more slowly than we would like, and that's because of accelerated investments not only in new product development, as we try to target towards a hire percent of our total revenues coming from new products as we've talked about before, but also in other areas of technology like information systems, we have accelerated our investment there.

So that's why we need to continuously do six plus eight kinds of things, because we want to have a constant pressure on our expenses coming down to help offset the investments we're going to make for the long-term health of the Company.

And that's what I was trying to get to, is the timing of those investments. One of the things that is hard for us as outsiders to gauge is the R&D side from a new product, marketing programs, as you begin to expand into new markets such as renewed focus on the government sector. Just trying to get a feel for, you know, how much of those savings that you're getting from initiatives like six is plus eight are you letting go to the bottom line versus on the reinvestment side?

Well, again, our spending and engineering is up. So that's a signal that we are, we understand the importance of that and if you look at our new product sales as a percent our total as we measure it, we've talked in the past, the trend is up. So we continue to invest there as well as the other areas that Ken mentioned.

Okay. Thanks.

Your next question is from Seaver Wang with Utendahl Capital Partners.

Good morning, guys. Just had a question actually somewhat related to what Jim was talking about, about R&D. You're basically in your third year of the Toro line at Home Depot, and you had mentioned in the past that you'd like to get most of your products, I guess categorized as new products, something introduced within three years. So what are the plans to kind of, I guess, re-engineer or redesign any kind of those Toro branded lines in Home Depot?

Seaver, this is Mike.

That's a constant work in progress for us with the Home Depot as well as our dealers. The fact is, over the, I think it's actually now our fourth year with the walk power mowers at Depot, and our share of walk power mowers has more than tripled over that time period and continues to grow. And we are constantly working with the product line.

Last year for example, we introduced the Lawn Boy line and expanded walk power mower presence at the Home Depot. But as well as the Toro models are being worked on in collaboration with Depot and also our dealers to make sure we have the right offering there, as a retailer, an account like Depot does not want to change out a whole line any one year because that results in a lot of disruption.

So it's more of a year-over-year over year process to keep bringing the kind of features they need, keep winning awards, if you will, on people that rate these products and rate them, our products highly as compared to some of the others.

Okay. Thank you.

Your next question comes from Sam Darkatsh with Raymond James.

Good morning, Ken. Good morning, Mike.

If I could get you to, I noticed that you didn't give a look into next year, and if we could look at it just broadly from 30,000 feet, I'm guessing that you are baking in some SG&A leverage as you mentioned earlier to Jim's question. Do you expect maybe half a point or a point or so?

And then on gross margin, do you expect leverage there or will it be more of a situation where you're looking to maintain gross margins?

Sam, this is Tom.

And you're right, we haven't given any specific outlook on next year, but I would say just from a top line basis we continue to be focused on the long-term goals of six plus eight, which is 8% top line growth and to continue to take that six plus percent into the higher six plus percent column and produce double-digit earnings, so it's all within the context of that.

And what we've said this year is that our SG&A will be at least one percentage point better as a percent of sales, and our gross margins will be down one percentage point roughly, and I would say those trends going into next year, we don't think we're done improving SG&A, that will be higher. We haven't put a specific number on it for next year.

Gross margin is very dependent on commodity costs, what happens with those. We've got our lean manufacturing initiative going on that's producing savings and other cost improvements. You just haven't seen many of those because they've been covered up by the commodity price increases.

If we see a flattening in steel and resins for next year, if we have both of those you'll start seeing those gross margins improve again going back in the direction we like. We foresee improvement in both of those percentages next year, and we'll give you better color on the amounts of that at the end of next quarter.

Thank you. The second question I would have, could you help break out, and if you mentioned this on the call, I apologize, could you break out in this quarter the impacts of pricing and currency and acquired sales across the whole Company in terms of the contribution to sales growth?

Let's see. In terms of pricing, we don't have a specific number for that, but as we've talked about in the past, we were able to get price increases on our Professional side this year. And I don't have any quarterly breakout, but we're anywhere from 2 to 5% on the Professional side, and averages out less than 1% on the Residential side, and so that averages out for the year, you know, somewhere in the 2 to 2.5% range in there.

And, let's see, as far as currency, if you look at our sales for the full-year, we've got our 9.6% sales growth. If you knock Hayter out of there year-to-date we're at about 7.4%, and if you knock currency out of there, we're, both Hayter and currency, we're down to about 6.3% sales growth for the nine months.

So if you were to back Hayter out and you were to back FX and pricing out, units were down in the quarter, looks like, by the math?

Well, it's hard to talk in units because you're talking about things like irrigation heads compared to large mowers.

Right. But the inference would be all else the same with the mix, if pricing, FX, and the acquired business were taken out, would it be a negative change on a year-over-year basis in the quarter?

Well with just those elements it would be, however, the other thing to factor in there is, a year ago we had four company-owned distributors. We sold two of those in the fourth quarter last year. So if you kind of balance it back out there and added, or really took those distributors out of last year, you net all of those items together, then we're up about 7.4% for the nine months.

For the nine months. I gotcha.

Talk about pricing next year both in terms of what you'd like to get back from a material, or an input cost inflation standpoint and then also in terms of competitive pressures, we saw Deere have some, reports some issues in a lot of the areas that you compete against them. What are you thinking about for pricing, and what are you seeing from a competitive standpoint?

Sam, this is Mike.

We're in the process of looking hard at that right now, and as we've talked in the past, we've had more flexibility on the Professional side of the business, and as we get our hands around, you know, projecting what the costs are going to impact the business in '06, then we'll be making those pricing decisions, also keeping competition in mind.

As we've talked, the Residential area has been more difficult, and we've, I guess it's fair to say we know we need to make up some more ground there in 2006, and so likely we will be more aggressive with, need to be more aggressive with Residential pricing.

There's alternative ways of improving margins besides just price increases, Sam, and we're looking at model mix, trying to introduce some new products into the line that may have better margins, maybe replace a model or two that have poorer margins as a result of all these cost increases with something that's more robust at the bottom line. So it's not just a matter of increasing prices model for model.

Okay. Last question, if I may. I don't know if this is for Tom or Mike, but could you help with the Toro credit, the Toro finance side of the business, help us with what the quantification of the positive or negative impact was on the year-over-year basis for the quarter?

Let's see. Toro credit, I don't have a specific break out there. I think you're getting at the other segment.

Within "other," if you back out the dealer distributor part of it, if you, could you give us a little bit of color as to some of the puts and takes with that line?

Well, some of them, in terms of the Toro credit piece, I don't have the numbers in front of me, but it was fairly flat with last year. So not a big push one way or the other.

If you look at the "other" segment, I think in terms of the difference from year-to-year that was mainly the incentives where we talked about incentives were down this year compared to last year. That's the biggest difference in the "other" category.

And so how should we look at that on a go-forward basis? Are the incentives right now pretty much normalized or was this more of a strategic thing for this year?

Pretty much normalized here. I mean last year, if you recall, was just, not only for us but for the industry, was an extremely robust year and we raised our estimates for the year several times during the year and so that drove up the incentive expense. So last year was a terrific year. We'd love to have another one, but that was a little more unusual in terms of that.

This was a little more normal year. Plus, if you remember, with the incentive expense, part of that is the fact that we ramped up several times last year in raising the full-year. The other part was you've got FAS 123 in there that treats an incentive cost a bit differently this year, whereas last year a lot of that was driven by the rapid run-up in our stock price that increased the incentive expense last year, so that's kind of an unusual item.

Gotcha. Thank you very much, gentlemen.

Thank you Sam.

As a reminder, ladies and gentlemen, it is star one if you would like to ask a question. Gentlemen, your next question comes from Jim Lucas with Janney Montgomery Scott.

Thanks.

Can we talk a little bit about growth going forward? A couple things. One, you talked about the new products on the golf irrigation, and it seems as if after a few down years that golf is finally starting to come back. Could you just give us a feel for what you're seeing on both the equipment and irrigation side?

And second, could you give us an update on some of the underserved markets that you've been targeting to pick up some market share to help get that above-average growth?

Jim, it's Ken here.

We are enjoying a much better golf year. We have introduced some much more sophisticated environmentally oriented products in the irrigation area. They're just getting some traction.

In the golf area we're taking a new view of how technology can be introduced in the irrigation products, and you'll see over the next several years a stream of technology-based products that I think will really be of great benefit to the golf market. Our share in the commercial area for golf has also taken a nice hike this year, and I think that will continue as we drive more productivity in general solutions content into the product line.

The Professional side, I think, is well positioned for share improvement through new products and services over the next few years, and we also have a couple of markets that are, that we talked about in the last year or so that are underserved in the commercial area, both irrigation and the equipment side, and we're going to see some, I think some nice growth as we fill out a more robust product line in both of those areas.

Jim, this is Mike.

Just to add on to that, while we work really hard to keep the portfolio balanced, if you will, as we've shared in the past, there are some additional opportunities in the Residential area as well. And an example is how we've more than tripled our walk power mower market share over the last few years and there are a number of other categories where that opportunity is there for us including DIY irrigation, riding products, we are the leader in Zs today, but that's a market that's going to, that we think is going to over time dramatically grow as it becomes the primary way of cutting versus the existing tractor model.

Okay. And finally, on the irrigation, I mean, there's been some talk over the last couple of weeks about the drought conditions in the Midwest. If you look back historically in years following droughts, do you tend to see an increase in demand for your irrigation products on Residential and/or commercial side?

It's kind of a Catch-22, Jim, because a little bit of drought is really good for the business, a lot of drought is not, because it creates watering bans, and municipalities will shut down watering on turf grasses, both residentially and it gets to a point where they won't even water commercial grounds.

But typically, if you look at it over the long run, you'll see droughts do create a latent demand in irrigation products by both homeowners as well as commercial users. So we will get a boost, but as long as it's really, really dry, actually retards our growth. But we think that works itself out, and general, it does spur demand over the long run.

Jim, this is Mike. Just to maybe add a little anecdotal piece to that.

I was talking with a customer in Illinois this last week, and you know, they've got a 30-year-old irrigation system. Well, as long as mother nature is kind of helping along the way, they've managed with that. They were tested so severely this year that it will lead to a new system being put in.

I think, back to Ken's point, we get kind of a residual effect going forward into 2006 and beyond as a number of those courses that are using old systems cannot manage in this kind of environment, they'll look at putting in a state-of-the-art system.

And we are, one of the reasons why we're investing so heavily in water conservation and to bring some technologies into the watering applications of our systems is the more water becomes shorter, more expensive, the volatility in weather creates a much stronger demand for smart systems, and we're, as you know, we've introduced some neat products that are smarter that are dictated more by the moisture in the ground and in the air, and it is the human operator and we're, that's a good long-term play for our irrigation business, because technological obsolescence will be a more important driver of changing out an existing system that still works fine, it just isn't conserving enough water.

Okay. Thank you.

Your next question is from Tom Sustane with Lucrum.

Can you help me out with currency in the quarter both on impact on revenues and profits, or EPS?

Tom, this is Tom Larson. As I mentioned in terms of sales, I think you were saying for the quarter?

Yes.

Let's see. The currency impact on sales was about, a little less than 1%. So it was favorable, a little less than a percent, again, for the quarter.

In terms of profit impact, you know, we go into the year, our philosophy is to protect the plan, and we hedge a large share of that, so in terms of profit impact, it doesn't necessarily bring much to the bottom line. We've hedged that out, so if it goes against us, we don't get a lot of impact to the bottom line in the current year. Of course, as currency changes from one year to the next that's more where would you get an impact.

Is there any way to quantify, in the last caller's questions about growth on the golf irrigation side, is there any way to quantify how many of these golf courses have to upgrade over the next three years?

That's difficult. There's, we look at the new golf courses in planning and are able to track that number fairly closely.

Redos of irrigation systems is a project business, and we have people in the field and distributors who are close to that. It tends to, you know, not have large swings up or down year-over-year, but we would expect, as I said earlier, a bit of a boost this next year because of the drought.

And then on the new golf side, what's the pipeline look like? Is it accelerating from here or is it decelerating?

If it's growing it's growing mildly. But, as I say, the new golf course rate is down in the 100, 120 a year, which is, domestically, which is, that's relatively low. That's as low as it's been for 10, 15 years.

More to your point is in areas like California, Florida, the mountain states where they've gone through a pretty severe droughts or water shortages, or where that's a hot button from the tax revenue kinds of customers standpoint, then you see more of a demand percolating up to change out old systems, systems that don't allow water running in the streets, systems that have moisture shut-off rain switch shut-off capabilities, and as golf courses get into that fray, they will be impacted similarly, not only with better irrigation systems but different kinds of water that are less potable, and as we see that, again, Toro is well positioned to take advantage of those kinds of demands in the marketplace.

So all else being equal is your new golf course consuming more Toro irrigation products today than they were five years ago on a new build?

No, I guess I don't --

No, the new golf course building probably peaked five years ago, and it's flattened out now. We're looking at the domestic market. When you add international, then we're starting to see stronger growth. We have a strong presence internationally. Whether that's China or eastern Europe, but domestic, I'm sorry.

Do you mean per golf course?

Yeah, I meant per golf course. Are they consuming, you know, because more technology is being introduced by Toro, are you seeing per golf course more dollars spent?

There are more dollars spent per system because the technological content, which is coming more from Toro than the other pieces, the other pieces are kind of the commodity kinds of products, the pipe and fittings, then there's a high labor content which is fairly stable, so you're right, the Toro content is growing and it's a bigger piece of the whole job.

Would you quantify it?

Well, I couldn't quantify it.

Okay. And then what's Home Depot saying these days because what they're saying to us might be different than what they're saying to you.

Well, I'm not sure of that.

I'm not sure I understand what you mean.

Well it sounds like Home Depot and the other big box retailers are saying there's going to be, there's a push towards less U.S.-branded products within the store and more international-branded products. Are they saying the same thing to you guys?

Well, they are not, and I think, you know, our relationship with the Home Depot is very strong, and they have, throughout their organization, a lot of support for the Toro brand and the Lawn Boy brand and our sales with the Home Depot continue to grow strongly.

Okay. Thank you very much.

Thank you.

Your next question is a follow-up question from Seaver Wang.

Hi. I just want to get back to commodity costs again. It looks like, at least from some of my information that steel has come down a little bit. Are you seeing that in the marketplace and from where you buy steel and is there any kind of benefit there that might offset the petroleum prices?

Well, we're seeing some change, favorable change in raw steel, and we're seeing some continued pressure on what we call specialty steel to get put into some of the other components we buy. That's probably netting out about even today.

Okay. So the amount of input from specialty steel and, I guess, is it scrap steel that you usually buy from?

When I say raw steel, we're talking bars and plates and such as hydraulic components, if you will.

Okay.

It may take awhile for the specialty steel to kind of follow the raw steel change improvement.

So at present it's kind of a push right now.

Right.

And then there's obviously the resin prices.

[Inaudible] experience today is in resins and that affects irrigation and a lot of the plastic parts for our equipment, and, of course, it raises fuel prices as well.

Okay. Thank you.

Thank you.

Your next question comes from Tom Spratt with T. Rowe Price.

Good morning. I was hoping to get your thoughts specifically on the domestic Residential inventory levels in the channel.

They're in good shape.

In good shape.

Yeah.

Great. Thanks.

Okay. Short answer. Thank you.

Thanks.

One of the things that, when we saw the weather issue in the second quarter, we took some pretty aggressive steps to modify our production schedules and I think one of our pieces of good news going forward in all of this weather issue is, as Mike said earlier, inventories not only in our barn but out in the field are in good shape, and I think that bodes well for not only for the fourth quarter, which is not a big quarter, but more importantly as we go into fiscal '06.

We will not have an inventory overhang either at Toro or with our customers so that will not be an obstacle to get through for next year.

Gentlemen, your next question comes from Dick Henderson with Pershing.

Good morning. Ken, could you shed some light on your thoughts on the effect of rising interest rates on product demand especially in the Professional market next year?

Well, Dick, I don't think it's materially impactful on our business, unless you're talking about big commercial users that have to finance the purchase. What we find in higher interest rate scenarios, it makes financing things like new golf courses more difficult or big projects, and that puts things on a delayed basis and so we get affected that way.

The homeowner typically is not affected terribly. Credit is very easy for him or her, and a lot of our products are purchased for cash.

So, you know, my opinion is it's not a big issue until we, until it really puts a dampening on major outdoor products that just get put on hold. We went through this years ago when interest rates were much higher, and we saw a lot of delays in projects, and that, some we caught up, some never came back.

But even on the Professional side, given the extraordinary low interest rates we've had in recent years, there wasn't a kind of inducement for the professional landscapers to upgrade products, so if you had, if push came to shove in terms of rising interest rates and second, rising energy costs on everyone, you know, pinching the pocketbooks, that wouldn't have an effect?

I'd just say it's fairly mild. In many cases these increased costs get passed on because most of our commercial customers are resellers and not end users. It's just not a big piece of the pie for us.

Okay. Thanks.

Thank you, Dick.

Gentlemen, you have no further questions at this time. Please proceed to your closing remarks.

Thank you, Jen.

Once again, thank you, ladies and gentlemen, for joining us today and for your thoughtful questions. And before we end the call this morning, Ken would like to share a few final comments.

I just wanted to add that, you know, it's been almost six months since I stepped down as CEO, and since that time, now Toro has completed quarters two and three, the biggest two quarters in our year by far.

Quarters of earnings per share, by the way, ahead of last year's by 24%. And, of course, because of this, our year will end strong at the end of October.

Under new leadership Toro has worked very hard. I've been terribly impressed with leadership and the whole organization to overcome every challenge, particularly in the weather area, in order to protect our shareholders' interest and preserve the value for you and your client.

Now, Jim Lucas has said that this quarter would be a good test for Toro, and I think we passed it with flying colors.

So finally, let me also thank you for your attention, and we look forward to sharing our fourth quarter and fiscal year end results with you in December.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.