Toro Co (TTC) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Toro Company Third Quarter Earnings Conference Call. My name is Sheryl, and I will be your facilitator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Mr. Michael J. Hoffman, Chairman, President and CEO of the Toro Company. Please proceed Mr. Hoffman.

Thank you Sheryl, and good morning ladies and gentlemen. Thank you for joining us for our Third Quarter Earnings Conference Call. Joining me this morning are Steve Wolfe, our Chief Financial Officer, Tom Larson Treasurer and John Wright, Director of Investor Relations.

Before we begin, let me 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 the 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 News Wire and can also be found in the Investor Information Section of our corporate web site, www.thetorocompany.com.

Now let's begin with the highlights for our third quarter ended August 4, 2006. While market conditions have certainly changed over the past few months, creating greater challenges for the industry as a whole, I am pleased to report that the Toro Company once again delivered record net sales and net earnings to its shareholders.

The diversity of our portfolio, our ongoing focus on continuous improvement and the proactive steps we've taken throughout the year have put us in a favorable position to mitigate at least a portion of the negative impacts from external factors like weather and the overall economic challenges.

This morning's earning release shows net earnings for the third quarter were 40.3 million up 17% over the same period last year. Earnings per diluted share rose 23% to $0.91 compared to $0.74 in Fiscal 2005. For the nine months, we reported record net earnings of 124.7 million, an increase of 16%. While earnings per diluted share outperformed last year by 21% at $2.78 per share.

For the quarter and the year, I want to note that earnings per share benefited from a reduction in the weighted average number of shares outstanding resulting from our ongoing share repurchase program. Through the end of the third quarter, the company has repurchased nearly 2.2 million shares for approximately $97 million.

And because we continue to believe this strategy serves the interests of our shareholders, at the July meeting, the Toro Board of Directors authorized the purchase of up to three million additional shares of common stock.

Worldwide net sales for the third quarter also set a new record at 477.9 million versus 466.9 million in the third quarter of fiscal 2005. Year-to-date we achieved record net sales of $1,506.5 billion compared to $1,442.3 billion in the previous year.

And while revenue growth was not as robust as we anticipated strong contributions from our professional segment both here and abroad underscored the importance of our long-term strategy to shift Toro's portfolio increasingly toward these businesses.

The professional segment's performance helped offset a slight revenue decline in the Residential segment caused by soft retail sell through. Consumers remain cautious in their spending as they experienced rising interest rates and higher fuel prices along with weather extremes in many parts of the country.

Outside the US, international sales for the quarter once again outperformed the previous year. We continue to benefit from strong customer acceptance and brand recognition among golf course owners and large management companies who are breaking ground on new courses in Asia, Europe, South America and elsewhere. In our international residential segment, we showed a significant increase in the shipments of snow thrower products in anticipation of a good preseason resulting from last year's strong sell-through.

Now the market challenges we encountered in the third quarter impacted the whole industry. Despite these challenges, we are committed to our long-term improvement in business strategies and will stay the course in the final months of our [six-plus-eight] profitability and growth initiative. Our priority is to deliver ongoing organic growth and market share gains, and we'll do that through steadfast investments in new product development, brand building and strengthening customer relationships.

At the same time we'll capitalize on the momentum created over the past six years by continuing to employ lean methods to reduce costs and increase efficiencies, a journey where we are still in the early stages. That concludes an overview of our quarter and year-to-day results, now let's turn to the segments for closer analysis.

Toro's professional segment again led the way in the third quarter with a worldwide revenue gain of 5.7% over the previous year. Here in the US we experienced double-digit increases in shipments of golf maintenance equipment and irrigation systems as courses competed more aggressively for available rounds.

Toro's popular aeration equipment, rotary mowers and bunker rakes gave superintendents the right tools to achieve the pristine conditions necessary to attract discerning golfers.

In addition, our technology-leading irrigation systems are attracting new attention as smart water practices are becoming increasingly important. Toro is well positioned to offer a full compliment of smart controls, efficient sprinklers and drip irrigation products that save courses' money and help preserve this scarce resource.

In Europe Toro is helping the prestigious K Club prepare the course to carry on a long tradition of challenge and superb playability for September's Ryder Cup event. As you may know, we are the preferred supplier for the Ryder Cup and our employees and distributor partner have devoted a great deal of time helping the staff perfect this outstanding golf venue.

On a global basis, we continue to gain traction with our [site-works] system products which enjoyed strong revenue growth in the quarter. Worldwide shipments of maintenance products to landscape contractors were down slightly due a change in our marketing program that times shipments closer to retail. Year-to-date, however, we are still ahead of last year and will continue to monitor shipments to adjust field inventory as needed.

Third quarter operating earnings for the Professional segment rose 4.3% to 62.5 million. Profit improvements were derived from product mix, selected price increases and ongoing cost reduction efforts that offset rising commodity costs and a one-time warranty charge.

In our residential segment worldwide revenue declined 2.2% for the quarter in an environment of unfavorable weather conditions and economic uncertainty that contributed to a slow down in retail sell through in much of the industry.

On the upside shipments of Toro riding products including our new family of lawn tractors and the popular [time cutters ease] increased due to expanded retail placement and competitive pricing strategies. On the other hand, early season snow shipments were slower here in the US, while shipments of electric products such as trimmers and blowers and do-it-yourself irrigation products declined significantly.

We continued to address the impacts of external factors like economic conditions and weather, and will take the necessary steps to adjust production in field inventories.

Third quarter operating earnings for the Residential segment were 8.8 million down from 10.1 million last year, primarily due to lower volume, product mix and higher freight costs.

Now let's turn our attention to the operating results for the quarter. Gross margin for the fiscal 2006 third quarter was 35.6%, compared to 35% during the same period last year. This improvement was driven by a more favorable product mix towards our professional segment. In addition, we implemented selected priced increases that helped offset higher commodity and fuel costs.

SG&A expense as a percent of net sales also continued its favorable trend, to 22.7% from 23.2% in 2005. Much of this improvement resulted from lower self-insurance costs due to better claims experience, along with reductions in other administration expenses.

Engineering costs for the quarter were up nearly 10% over last year as we continued to invest in R&D and customer valued innovation for the future. Interest expense for the third quarter was down slightly to 4.7 million compared to 4.8 million last year due to lower levels of short-term debt, although interest expense for the nine months was up slightly as a result of rising interest rates.

Our effective tax rate for the quarter was 32.6%, compared to 31.9% in the same period last year. Assuming that Congress approves the R&D Tax Credit, which is factored into our guidance this fiscal year, we would expect that our net tax rate for 2006 will be approximately 32%.

Finally, our balance sheet continues to be in good shape with receivables and net inventory at reasonable levels, given the difficult environment mentioned earlier. Net receivables were 394 million, down slightly from the previous year. Net inventory totaled 255 million, up 8.5% over the last year due to lower than expected sales volumes. We continue to monitor this situation closely and will make the necessary adjustments to bring our inventory levels closer to the previous year's levels by the end of the fiscal year.

That concludes our review of operations. Now let's look ahead to the remainder of the year. This has been a challenging quarter for the Toro Company as we faced a number of external obstacles, while we are mindful of short-term performance and remain focused on our Fiscal 2006 commitments to shareholders. As we've said in the past, we see ourselves on a long-term journey to sustainable growth and profitability improvement. As we near the end of our three-year [six-plus-eight] initiative, we are determined to stay the course and deliver on our proven strategic priorities.

Toro has a rich portfolio of brands, a legacy of innovative products and some of the strongest relationships in the industry. But our real edge is found in our employees, many of whom have seen Toro through decades of change. They have a long history of overcoming obstacles by drawing on a deep, strong reservoir of passion for our customers and our mutual success. They know how to keep their eye on the ball and charge forward with purpose and energy. This team will continue to invest in product and service innovations that will drive our future revenue growth. At the same time, we'll take steps in our lean journey by instilling even greater discipline and efficiencies in our processes and systems throughout the enterprise.

Despite external factors we expect to reach another record year for Toro shareholders with Fiscal 2006 sales growth in the range of 3 to 5% and an increase in earnings per share of 15 to 17% over Fiscal 2005. We look forward to continuing Toro's strong track record of delivering sustainable shareholder value in the months and years ahead. So that concludes my prepared portion of the conference call, now let me pause so that Steve, Tom, John and I can respond to your questions. Sheryl?

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from the line of Jim Lucas, from Janney [Morgan] Scott. Please proceed.

[Jenny Morgan], I guess they changed the firm name on me. Good morning guys.

Good morning Jim.

I wanted to delve down in two issues, one in professional and one in residential and they could be somewhat inter-related. On the professional side, in your prepared remarks in the press release you talk about a slow down in domestic landscape contractor equipment. On the residential side, electric products and retail irrigation your lower price point products were slower than your walk power mowers which are a little higher price point. And one of the things that tends to be a stigma attached with Toro is the correlation with housing, if there is indeed one, and clearly, it seems to be consumer spending more of an impact, more so than housing.

I was wondering if you could talk about what you're seeing in the landscape contracting market in particular, the long-term outlook there? And secondly, on the residential side, with the softer sell through and the lower price point versus the walk power mowers, inventory in the field and your outlook going into next year?

Jim, this is Mike. Let me take at least the first crack at those two questions. The first one, around the landscapers, or that market. And again, as we've said in the past, those products are sold to more than just landscapers. But let's start with the landscape market itself. It has been a little slower this year. We think that the landscapers, while they're cutting every bit as much grass, have postponed some purchases. They faced additional expense in $3-a-gallon gas and that's probably put some pressure on their purchases. But what goes along with that only is the equipment gets used up because it's out there cutting 8, 10, 12 hours a day as long as it's light, five, six, seven, days a week. And so, they can postpone this in the short-term, not in the long-term.

The other thing that's going on is, we continue to invest in products that help make them more productive. So some of them over time will transition from gas-powered, Z-type mowers to diesel-powered Z-type mowers that operate somewhat more efficiently. So, while we've seen some impact in the last few months, we don't think that's a long-term impact and that's been where we've seen the most, if you will, the most softness in that segment or in that area. The fact is there is still many consumers who buy professional type products, that business has been okay, there are many grounds-type customers, municipalities, tax-supported type customers that are shifting to those kind of products and that business continues to be okay.

So we think that the situation with landscape contractors is more of a short-term tied to fuel prices and expense management that will not be a -- have a negative long-term impact. And yet, we recognize it's an issue, and we are trying to make sure, we're managing and managing our inventory flow through the channels, so we don't get in a position of having too much inventory and impacting 2007. We're trying to deal with those things this season. So that's the landscape contractor piece.

On the consumer side, again, I would once again say, keep reinforcing, that the largest part of our portfolio is professional products. We tend to get sometimes painted into the residential business. It's an important part of our business. It's the smaller part of our business. The bottom line is with housing there is existing housing slow-down, there is new housing slow-down, there is a soft -- the economy is soft, spending is soft. They all tie together and that -- when that happens it certainly hits our residential business more than our professional business.

We have demonstrated this in the past, particularly over the last six years. When that happens, we find a way to manage through it, absorb it, continue moving the company in the right direction. What will happen with the economy over the next several months or year is -- you guys are probably -- you have a better guess on that than we do, but we will -- the grass will continue to grow. And so lawnmowers will continue to be used, and some of those purchases may be delayed, but ultimately when the mower is used up they have to get a new one. And most of that business is a replacement business. It's not something that is tied to new housing. By and large, it's -- there's 5.5 to 6 million walk power mowers sold every year, that's been the case over the last couple of decades. Through ups and downs of economic changes, we manage through that.

Okay. And Mike, I can't let you off the hook, [six-plus-eight] coming to an end there. Anything that you can talk about at this point or even from a timing perspective, when we can expect to hear what's next?

Well, a fair question. You will hear what's next at our next call. Now the fact is that you or one other person asked that question at the last conference call. And as we said then, we think we will first tell our employees and we -- it is a work in progress. We have our -- we have at the senior level, our ideas are in place, we will start rolling those out to employees, to other stake holders like yourselves and you'll hear, again, about that in December.

Okay. Thank you.

Thank you Jim.

Representing Cleveland Research Company, Eric Bosshard, please proceed.

Good morning.

Good morning Eric.

A couple of questions. First of all, on the international side of the business. Can you give us some color on the relative growth of that versus the domestic piece of the business, where you're seeing strength or weakness there? And how you feel about the momentum there relative to what we're seeing domestically?

Well, international continues to be a larger part of the mix, the growing part of the mix. Now the fact is, it did slow down a bit this last quarter and most of that from the Europe Consumer business which has been a little bit soft. And probably is much related to weather there as economic conditions. We're managing through that. On the other side, the professional business, around the globe continues to be strong. The new golf business, particularly in Asia, continues to be strong, whether that's Korea or China, Japan, even golf courses now being built in Hanoi.

So I think all in ,we're looking for international to be a continuing growth driver for the company, for the rest of this year as well as we are moving into -- as well as when we move into F '07 and beyond.

Was the growth rate of the international business equal, above or below the corporate growth of the quarter?

Above.

Secondly, can you talk about -- you explained how inventories we're up 8.5 versus the 2.5 increase in sales and it sounded like you stated, and correct me if I'm wrong, that you want inventories to be flat or about close to flat year-over-year, at the end of the year. Can you talk about specifically -- first of all, tell me if that's correct? And then secondly, where specifically in what categories or channels is the inventory heavier than you would like or heavier than the sales growth of the business?

Yes, Eric, this is Steve. I'll take a crack at that. We were up 20 million or a little under that from period-to-period. And that's -- the two places that it's a little heavier than we would have liked is international and the landscape businesses, as we've talked about. And we have taken that into consideration as we put our fourth quarter plans together on what we're going to produce and our intention would be to work that down closer to last year's levels by the end of the year.

Some of that was created by just slower -- lower demand, lower sales and we will adjust production to try to get back to this year's -- prior year's level, by the end of the fiscal year.

I guess I understand the landscape business being off, but the international is there something going on over there that helps explain that a little bit better? I mean is that just consumer Europe and it was hot and they didn't buy a lot of mowers this summer, is that where you have the issue?

I think that's some of it, plus they had anticipated a little higher sales than they got so we probably built a little more inventory. But again, that's not anything to be alarmed about, it's not a big number and we think we can manage that fairly easily.

And then lastly Steve, while I have you, you've remained active in buying back stock, but you are down from what you spent through nine months last year. I know the Board just reloaded you on this repurchase. How important of a strategic or financial discipline is that and are you likely to catch up in 4Q and maintain the pace you had over the past two years in terms of share repurchase?

Well it's a strategic position we've taken in the last couple of years, or three years as we've talked about managing our cash, where we're generating some fairly significant cash flows. So yes, strategically it's something that we will continue to do. We bought back about 2 million shares, as Mike said, so far in the quarter.

We went into the year telling you that we would be at 1.8 million shares we had left on our authorization. We used all of that up, got an additional 3 million authorization as Mike said, and we've used a little over 300,000 of that. And our plan for '04 the rest of the Fiscal '04 -- quarter '04, we've probably got in that plan 3 to 500,000 shares that we'll buy for the rest of the year. And then we'll give you some more guidance on '07 as we get those numbers around at the next call.

Okay. And the 3 to 500 is total 4Q or in addition to the 300 that you've already acted on in 4Q?

Well the 300 is the amount that we're into out --.

New authorization?

New authorization, in the last quarter.

Okay.

So the 3 to 500 I'm talking about will be the number of shares we'll repurchase in the fourth quarter.

Okay, okay. Very good. Thank you.

Just too kind of add to that point when you asked what's the strategy, or is this a strategic priority? The fact is that as we've talked in the past, a higher priority when the opportunity is there and the time is right is to be spending that money on an appropriate acquisition and lacking those we will continue to use this strategy to return money to shareholders.

I would say that as things get softer in the economy that may create for we believe, for us, some buying opportunities on the company side as well for potential acquisitions and that's something that is I guess I would say, a higher priority than share buy backs.

Yes, and the other thing that I would add to that is that hopefully we can do both. If we find a huge acquisition it may impact the level of share repurchase we would do in the short-term. But if we find a couple of Hader-type acquisitions, if you will, we'll have enough ability to do that plus a fairly significant level of stock repurchase. So it's not one or the other, it could be depending on the size of the opportunity we like to look at it to say we can do both.

Do you think -- it's been five quarters I guess now since Hader, is the environment such that you're seeing For Sale signs pop up or phone calls being returned now that the acquisition response is improving in the market?

I wouldn't say markedly, it's not a huge difference, but we are getting some calls. Some names that have maybe been bantered around in the past as possible, they're starting to hit the market. A couple of those are really big consumer companies that we're probably not interested in for the reasons we've talked about, portfolio mix wise.

But a lot of that is you may have seen the article in the Wall Street Journal this week about acquisitions and the importance of developing those relationships over time. So that when things happen, whether it's an illness or a death or in this case maybe an economic downturn, and by the way we are seeing some of that with some of the smaller competitors for instance in the landscape business, we are seeing some of those companies that are struggling with the environment that they're in today.

And what you want to do is develop those relationships so that when they have to sell or they have to find financing they're going to pick up the phone and call Mike, or call Toro and say, "Let's sit down and talk." But those are tough to anticipate, you just need to be ready for them when the opportunities come.

Perfect, thank you.

Thank you Eric.

Representing Utendahl Capital Partners, Seaver Wang, please proceed.

Hello, just want to revisit the Residential sector. I was a little surprised to see that what kind of brought the whole segment down was really the electric products and retail irrigation, but that walk power mowers and ZTRs were actually up.

Can you give a little bit more detail on kind of the dynamics that occurred during the quarter and even maybe a breakout of the ratio between mowers and non-mowers in the segment?

Seaver, this is Mike. Some of the appliance products, the electric products are -- they're impulse decisions, they're easy to postpone. They represent a relatively smaller part of the Residential business. So I guess I would say that we think some of that we've had the placements and the shelf space, we think a good part of that is probably related to the economic conditions, maybe to some degree weathers played a part with retail irrigation. And then we also mentioned snow, domestic snow shipments were a little softer in the third quarter than they were last year. Again, we look at the season there and the flow of those products we expect a reasonable snow pre-season, maybe not as strong as the international snow pre-season.

So the blower business is one that the bulk of that is in front of us. Our shipments in, we're trying to move towards a closer to market supply with our largest retailer. That business will really take off in the August, September, October period as the leaves come down. But shipments to date have been a little softer.

Okay, but for irrigation, with the type of heat is it -- are we talking about mostly just the heads and the consumer buys the -- all the other parts by themselves or what's -- can you kind of just give a little more detail on the retail irrigation dynamics there? What makes a consumer buy versus not buy?

Again, it's a -- most of that flows through our primary retailer. We have solid shelf space and its SKU offering. The fact is that's probably been more impacted by the moisture, early moisture out in some of the key sunbelts, zones, so it's -- they drive the largest part of the business and the business is a replacement business. The DIY irrigation business is one head breaks and the customer goes in to the Home Depot and buys that head.

Some of it is new installs of a system, that's the smaller part of the business. And so when the sunbelts gets some extended moisture, which we had some of that this season, it slows down that business.

Okay. I just had a quick question on, you said there are some price increases in some selected machines or products. What was the average increase in price increases?

This is Steve. We I think gave you some guidance at the beginning of the year, 2 to 3% overall for the company, the bulk of that on the professional side, less on the Residential side and that's about where we came out.

Okay. All right thank you.

Our next question will comes from the line of James [Spink] with [Sidhoti] & Company. Please proceed.

Good morning. Quick question, Steve, you mentioned you plan on repurchasing 500,000 shares in the fourth quarter, did I hear that correctly?

Yes, roughly.

Okay. I guess kind of the funny thing is and if I heard it correctly you had purchased almost 2 million in the fourth quarter so plugging that back in it looks like you almost grew organically what consensus was looking for, that's not bad. And then when I look at the reiterated guidance of 15 to 17% growth and taking the top-end of that at 287, also with your top line guidance, I -- it almost suggests that you'd come in around $0.08 on the top-end for the fourth quarter. And then turning around and going back to 2001, 2002, that was the last time you saw those types of earnings. And I don't think the economy is really that bad. Is there something in the margins that we're not aware of or that you see which is leading you towards this type of guidance?

Well at this point in this year, we're looking at the year.

Okay.

Where are we going to end up? Fourth quarter is a small quarter as you know, in terms of earnings as well as top line. And we're focused on making sure we're not doing anything to the market, particularly in field inventory, that's going to have a major downer on '07.

Oh, I see, okay.

So as we look at that, we had talked earlier about inventory, we've got some inventory to burn off so we're going to produce less. But we're not going to go out and try to post a big number just to post a number and set up ourselves for issues in '07. So I'd encourage you to look at the year and where we're going to be. We're still going to be up significantly, the full season results are going to be very good even though the fourth maybe down a bit from where it's been historically.

Okay, absolutely. I would completely agree that even adding back some of the shares you've purchased organically you've grown considerably. I just thought that there might have been a margin issue, but you're very helpful talking about the inventory.

International, it seems as though it was about 23% of sales in this quarter, and I think you've mentioned in the past that you would like to get that up to about 30%. Do you think that's something that you would be able to do next year?

This is Mike, James. This is a -- the 30% is directional and if you look over the last several years, we've incremented it up steadily from 18 to 19 to 21 to 25 and we think we will continue to do that. I don't know that we'll get to 30% in the next year or two.

Okay, thank you.

It's still a strategic goal that we're directionally headed towards.

Right. And new products, could you tell us what new products represented in your total sales growth this quarter and what you're looking for the year?

We don't break it out by quarter. We have been talking for the Fiscal 2006 that new products will represent, as we define them, current year and trailing two will represent about 35% of our revenues. The fact is that's an increase over last year and as we do our planning for '07 and beyond we think that the future bodes well, we'll get into that in more detail in December, but its headed in the right direction.

Okay. And I guess the last question is sort of a broad question. You seem to be very upbeat about where your end markets are going in '07. Can I just chalk up this past third quarter with a 2.3 top lines sales growth as -- and maybe some of this will carry into the fourth quarter of this year, is sort of an anomaly. And then maybe we'll see more attractive growth next year?

I think it's fair to say we've been somewhat disappointed by the growth this year, particularly the Residential business and we've talked -- that's not as a result of, we believe, share loss which is really important. Its market conditions that we think over time will come back. Now if you can help us predict what the economy's going to look like in '07, and the type of landing they're talking about that will be helpful.

Will do.

We believe it will come back and again keep coming back to that the largest part of our business is professional, and while it is not immune to economic ups and downs, it is somewhat more resilient. And so we think as we look forward it will continue to improve.

Okay, sounds great. Thank you

Next question from Raymond James, Sam Darkatsh. Please proceed.

Good morning gentlemen, a couple of quick questions. I understand that it's probably too preliminary to make a full-fledged '07 expectations in terms of EPS and individual line items, but do you expect much of a change in pricing next year versus this year based on the fact that we have engine prices rising and much of material prices inflating? Do you expect that similar 2 to 3% range next year as you did this year, or would you expect to take it up a little bit higher perhaps?

Too soon to tell on that Sam, that's work in process if you will. And we don't always -- I think you heard us talk before, we don't always price to the increases we get, we price to the market. You can't overprice for the market and end up having a -- putting yourself in a situation where you're at a disadvantage competitively. So we'll price to what the market will bear. We'll look at all that in our '07 planning and figure out what we can do. Certainly we'll look at price, that's a piece of it, but just one piece of an overall planning process and we'll give you more detail on that when we have our December call and we finish the year and give you guidance for '07.

Got it. Second question: I guess we can do our own assumption as to what sales growth may look like next year, but what are you planning internally budget-wise on the administrative side and on the SG&A side? Whereas let's say if you were to grow sales I don't know, 5% next year what kind of leverage might we expect on the SG&A line with that kind of revenue growth?

Work in process, and we will again give you that information at the December -- we're just not ready to talk about that yet. We'll talk about it at the December call.

Okay. Are there any major projects or administrative cost outlays or initiative outlays that would make the SG&A leverage maybe less or more so in normal years? Is there anything outlining that you can think of?

Nothing to comment at this point.

Okay. Well then I'll make it easier on you then and I'll talk about the quarter that just ended. The Other Line, the Other segment, I know you include the interest income and the interest expense within the EBIT totals on that line, on a segment basis. If you were to parch those out, what were the major changes in the Other Line -- swing factors on a year-over-year basis because it was a bit -- that line was a bit different than where we were forecasting because it was a bit -- that line was a bit different than where we were forecasting?

Are you talking about the Other Line, in segment earnings not the Other Income line in the P&L?

Correct.

Now that -- there's -- there are a number of things that go through that account and there isn't anything really substantially different, structurally, in that. We just had a lot of items this year that ran to our favor, and its things like currency. We had a fairly significant currency gain this year where we had a currency loss last year.

One of you asked about international currency as a kind of headwind to the international business. Had we not had currency impact our international business for the year would have been up another couple points, 15% versus the 13 that we showed.

So currency is a big part of that, it went favorable. And then we had four or five other items that ran through the SG&A line that run through that segment line that ran favorable. Mike talked about health care and that was a matter of our self-insured health plan experience being favorable to where we had accrued. That's something that we look at every quarter and say "What's the experience look like? Do we need more? Do we need less?'." That happened to work in our favor this quarter. Sometimes it works the other way.

We did an actuarial analysis on part of our product liability insurance with our self-insured company called Raffles, and that actuarial result said we were over-accrued in that account. So we had some pick-up there. And then we just had a number of miscellaneous items that ended up on the positive side of the ledger. So that account is down lower than it's been the last couple of years and was just one of those periods when we had a lot of things that went positive instead of negative.

Toro Credit per say was basically unchanged?

Toro Credit now is in the Other Income line in the P&L

Right, that's right.

And that was pretty much consistent with prior years. When you look at the Other Income line, while we're talking about that, there's a lot of things that run through that, it's the credit company, it's the service charges, the interest income, origination fees we have with our financing source, gains on investments, losses on investments. But the biggies there again were, for the quarter, was the currency piece that I talked about, that we had very favorable currency so that showed a big variation from the prior year because of the pick-up.

For the year-to-date number, again it was primarily currency and we had a legal settlement earlier in the year that runs through that account. So this is one where four or five of those items are pretty consistent year-to-year. We have a couple legal settlements and currency that just swing depending on where those things go, so that can be a big up and down from period-to-period.

Thanks so much. Appreciate it.

Our next question comes from the line of Beth Lilly with Whitland Partners. Please proceed.

Good morning

Morning Beth.

I wanted to talk a little bit about Lawn-Boy. I got on the call about five minutes late and Mike, I don't know if you spoke about that on the Residential side, but I know you were working on re-launching some products. Can you talk a little bit more about what you're seeing with the Lawn-Boy brand and any kind of penetration in the market place?

Well I'll just comment to say that the Lawn-Boy team has done a terrific job in creating some new products, new walk power mowers for the Home Depot and our dealers as well. In fact we've got as we speak, all of our distributors and sales managers in the building from around the country, and this morning's session was specifically on Lawn-Boy and some of the things they're working on.

From a retail standpoint, we have Lawn-Boy at the Home Depot and dealers, and I would say Lawn-Boy's share is up over what is was last year even in a -- it's up significantly, even in a down market. That's a -- for us that brand strategy is a continuing work in progress and we'll be able to tell you more, but I think we'll finish '06 with the brand and walk power mowers relatively strong.

Okay. And then, just to follow on with the question Jim Lucas asked, so is it fair to say that at the end of '06 you'll be rolling out -- you'll be committing to a new plan, something beyond [six-plus-eight]?

We will be communicating something beyond [six-plus-eight]. To reinforce that, whether it's five-by-five or [six-plus-eight], or what comes next, these are for internal -- they're for our organization. Certainly other stakeholders like to hear about what they are, and how they're driving us, but they are -- they serve -- the primary purpose is to make sure we have clear goals within the organization that the team is driving towards. And that's served us pretty well through the last six years with the prior two initiatives. We will continue with that approach looking forward.

Right. So it'll be rolled out internally and then announced to the investment community on the next call. Is that correct?

That is correct Beth.

Okay. Great. Wonderful thank you.

Thank you Beth

Next question is a follow-up from the line of Seaver Wang from Uttendahl Capital Partners. Please proceed.

I have a couple more really quick questions. Can you -- have you quantified how much you've saved from lean year-to-date, and maybe what you expect for the year, and maybe even '07 what can be expected? And then the second question was just a quick comment -- or your comments on -- Home Depot kind of said in their release that they called the kind of the outdoor products segment a shrinking segment. Is that because people are kind of reverting to the contractors and not doing it themselves anymore? So, the first question on lean savings --?

I'll tackle the first one. I'll let Mike talk about the Home Depot issue. We --- as you know we -- our lean efforts, we've been applying against commodities pressures pretty much the last couple of years. We've continued to see the increases everyone has in steel, we've seen that again this year, maybe not as dramatic as last year. Resins are going up although not quite as high as we had thought. And then all these other things that you're hearing about aluminum and copper and liner board. So when we look at the year, we've got another significant commodities variation to last year. We're going to be up somewhere in the 13, 14, 15 million dollar range over where we were last year.

And we think through lean, although you're not seeing a whole lot of it because it gets covered up by the commodities pressure, lean is covering probably 3/4 of that. So a lot of good initiatives going there. It's one of our core strategies as we go forward to make the whole organization lean not just the manufacturing but into the office as well. And we think we've got a good start on that. Now, if you talk to Sandy [Merlot] which many of you have, who is our VP of that area she would tell you "Yes we have some good momentum, and we've got a good start and we're saving some money." But to put it in the baseball vernacular she says we're in the second inning.

So we've still got a long way to go and will be looking at lean to be a big part of our savings and our profit increases not only in '07, but beyond there. So we feel pretty good about that and we'd feel even better if we could get the commodity pressure to back off a bit and we'd see a lot of that drop to the bottom line.

Okay.

And Seaver this is Mike. Let me comment on your question about the Home Depot comment. I don't know exactly what that was, but the bottom line I think is that as I mentioned earlier, to use walk power mowers as an example, that over many, many years if you drew a regression line through it would look virtually flat. And so while there may be some softness this year because of the economic environment and so on, we believe we're very much one of the power brands at the Home Depot in the outdoor power area, and as they commented in their quality belief they've, over a 12- month trailing basis, they've increased their share.

And I would say we're very much part of that. And so the combination of strength of our brand expanded offering in the Home Depot this year, and with some new products, that we think our share position is improving there with the Home Depot when you tie it back to the market.

But the shrinking that they're referring to, do you think is more about temporary aspects of temporary results or --? I really couldn't discern if what they were saying was kind of a long-term trend. Now I know that, as you just said, that basically the number of machines out there stays relatively flat over a 10 to 20-year time frame. So -- ?

Yeah I don't know how they stated it. I've got to believe that's more temporary. The fact is their share continues to grow and the partnership between the Home Depot and Toro I think has served both companies very well.

Alright thanks.

Next question comes from the line of [Tom Visinck] from [Lutheran Capital]. Please proceed.

Morning guys. Could you help me out on the Other Income before [Forax] translation, and how it impacted net sales gross profit contribution in the quarter?

I'm sorry we can't hear you. Can you speak up?

Can you help me understand the [Forax] impact in the quarter on net sales gross profit contribution? And then EPS? You lost me on the Other Income line.

If you look on the P&L that is attached to your earnings release?

Yes.

You'll see another income line. Right under interest --.

Oh I understand that. So there's no [Forax] impact in the revenues or the gross profit dollar contribution?

This is Tom Larson. As far as on sales?

Yes, is there a [Forax] impact on sales?

Yes, it's for the quarter, with the overall increase in sales of 2.3% without foreign exchange impact that would have been 2.5%. Then on the year-to-date basis the 4.5% increase would have been 5%.

Four and a half --.

So a half percent for the year.

And then on the gross profit contribution? Was there any impact on gross profit dollars?

A portion of that would have impacted gross margin not to that same level, as we have some hedging there so we don't get the whole thing falling to the bottom line. But it does impact the sales level. So there is some impact from that, but not to that same degree.

Okay then, can you then tell me what [Forax] runs through the Other Income line if you're telling me it already impacted the revenue line?

Well yeah, there's two pieces in the Other Income line. You would have the un-hedged portion that we have there and that's where we got the favorability. We don't hedge 100% so on our transactions we would have some gain on the other income line there, as well as then our hedging of our balance sheet.

Okay. And then the major currencies that you're exposed to?

That'd be Euro, the Aussie Dollar those would be the big ones on the sales side. A little bit in the Pound, and then on the supply side would be a little bit from the Mexican Peso.

Okay, thank you.

There appears to be no further questions at this time. I would now like to turn the call over to management for any final remarks.

Thank you Sheryl, and once again thank you ladies and gentlemen for your thoughtful questions. We look forward to visiting with you in December to discuss the results of our fourth quarter and Fiscal year end, and then to share some details on our next three-year growth and profitability initiative. Thank you and have a great day.

Thank you for your attendance in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.