Toro Co (TTC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Toro Company first quarter earnings conference call. My name is Jean, I'll be your coordinator 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 and Chief Executive Officer of The Toro Company. Please proceed, Mr. Hoffman.

Thank you, Jean, and good morning, ladies and gentlemen. Thank you for joining us for our first quarter earnings conference call. Here with me this morning are Steve Wolfe, our Chief Financial Officer, Tom Larson, Treasurer, and John Wright, Director of Investor Relations.

Let's begin with our Safe Harbor policy. Please keep in mind that during the call we'll make certain forward-looking statements to assist you in understanding the Company's results. You are all aware of the inherent difficulties in making predictive statements, so the Safe Harbor portion of the Company's press release as well as SEC filings, details some of the important risk factors that may cause actual results to deliver from those -- differ from those in our predictions. Our press release was issued this morning by Business Wire and can also be found in the Investor Information section of our corporate website, thetorocompany.com.

Now, for those of you joining us from parts of the country that were hard hit with heavy snowfalls, especially last week, I trust you have had the chance to test the serious power of your Toro snow throwers. Out West, in Denver, the mountains of snow next to your driveways may seem like they're getting as high as the Rockies to the West. So, once again, Mother Nature has created a bit of havoc, but unfortunately for Toro it's too little too late. While we have seen a positive impact from recent snowfalls in some regions it's not enough to make up for the lack of snow through much of the first quarter in key markets. At this point, our efforts are around bringing down field inventories and setting ourselves up for a better start next fall.

So enough about the weather. Let's take a look at the consolidated results for the first quarter ended February 2, 2007. Most of you have already reviewed this morning's press release, so I want to expand on just a few of the highlights. Toro's net earnings for the quarter were a record $18.5 million, up more than 29% from last year. While earnings per diluted share rose 37.5% to $0.44. A number of factors played into these results including gross margin improvement, primarily caused by lower residential sales and a more favorable mix of professional products. In addition, we continued to benefit from cost reductions and Lean improvements began in our prior initiatives and that continue today in our new three-year growth and profitability initiative called GrowLean. You'll remember from our December conference call that the intent of GrowLean is to move Toro from strong to stronger by accelerating growth, which is our primary focus, and employing advanced Lean methods across the organization to compete more effectively in a global marketplace. This growth will come from strategies such as accelerating international sales, pursuing underserved markets, and continuing to invest greater amounts in innovation, branding, and strategic acquisitions all to deliver customer-valued solutions faster than ever before.

As you know we have continually ramped up our research and development investments, and I'm pleased to report they're paying off with an unprecedented lineup of new products. New products as a percent of sales are at their highest level since we first started measuring them several years ago. We're taking the next steps in fine-tuning enterprise systems like design for manufacture and assembly, to help drive future new product development. In addition, each division and function is identifying key process improvement opportunities using a very powerful Lean tool called Value Stream Mapping. This helps us assess and eliminate pinch points in our systems, both vertically within a division and horizontally across the entire organization. Thanks to six years of focusing on continuous improvement, we have tremendous momentum and commitment among our more than 5,000 worldwide employees, our most valuable asset. And we look forward to continuing to capture measurable gains in speed, cost, and quality that will drive our long-term financial performance, like sales growth.

So for the quarter, net sales were up and grew 2.6% to a record $379.1 million. As we have seen over the past several quarters, strong gains in worldwide professional markets helped offset lower residential sales. Our international business was up 10.5% with $5.8 million of this attributed to favorable currency exchange rates. We saw strong gains in golf maintenance equipment and irrigation systems, hayer mowers for municipal markets and micro irrigation agricultural products around the world. On the other hand we experienced a significant decline in worldwide sales of snow throwers caused by a lingering warm fall and lack of snow. In addition, shipments of Toro and Exmark riding mowers for the professional landscape contractors were somewhat weak. We talked last year that we noted a build-up in field inventory which has caused our channel partners to be more cautious and order closer to retail demands. Inventory levels are now in good shape, and we see signs that retail is improving. All in all, the fundamentals of this business remain sound and we're optimistic that the situation will improve, given the strength of our dual brands and the innovative products in our lineup. So that's the overall view for the first quarter.

Let's take a closer look at our segment results. In our professional segment, world wide sales rose 7.3% for the quarter to $272.1 million. This was driven by several new products, including the Reelmaster 5010 series, a rugged, light-weight high-capacity workhorse that mows golf fairways and creates a beautiful after cut appearance. In addition, the new Groundsmaster 7200 series, with zero turn maneuverability, is taking off well. This innovative model converts quickly from a mower to a track snow removal machine, making it a versatile and economic value for grounds customers like cities, schools, and park districts. Last year, sales of precision irrigation systems for new and renovated golf course projects continue to be strong here and around the world.

Later today we're headed out to the golf industry show in Anaheim, California. Again this year we look forward to the opportunity to strengthen our customer and industry relationships as well as showcase some of our new products. Our golf show theme is "One great result". Whether it's breathtaking course conditions or a healthier bottom line, Toro helps customers do both better than anyone else. That's why premier venues around the world chose Toro as a partner in the first quarter, including Crown Golf in the United Kingdom, along with new courses in Dubai and other regions of the world. This year, visitors to the show will get a glimpse of our recent acquisition of Allen hover mowers. We view this as an opportunity to expand our product offering, and as a perfect complement to our hayer operation in the UK. These mowers command a premium price, and are sold throughout the world including by some Toro distributors. While anticipated revenues of approximately $2 million from the Allen acquisition are small, we are interested in the technology and the opportunities to build on this in the future. And last regarding the golf business, at the show we'll be honored to receive the 2006 Excellence In Achievement Award from The Boardroom magazine, the official publication for golf club board members and directors. Toro was selected for excellence in achievements, innovation, vision for future growth, and continued impact on private club operations.

Outside the golf arena, we're making strong inroads in global brand building in other professional markets like sports fields and grounds. We recently received an order from the Indian Cricket Association, who is purchasing matched sets of our most popular maintenance equipment to keep all of their fields in top playing condition. Like China, we look at India as an important market for future growth.

Moving to earnings, operating earnings for the professional segment rose 16.1% to $48.4 million. As I mentioned earlier, gross margin improved significantly, primarily due to product mix within the segment. In addition, we continued to benefit from cost reduction efforts and selected price increases. In the residential segment, worldwide sales were down 5.8% for the quarter with significant declines in gas powered and electric snow product shipments both here and abroad. On the other hand, our broad line up of walk-power mowers are shipping briskly, as distributors and dealers begin transitioning their show floors to spring products. The Toro recycler mowers, in particular, just keep getting better, with new easy to use bagging systems and an innovative wash-out port. In addition, the newly designed Timecutter Z zero turn mowers, four models for dealers and two at the Home Depot, are creating a lot of excitement. Timecutter Zs cut mowing time in half without sacrificing quality of cut, making Toro Z only -- Z owners the envy of the neighborhood.

For our international customers Toro just introduced a new 48 centimeter steel deck walk power mower. Much like the electric Eurocycle walk power mower we talked about last year, this is another product that is designed and built exclusively in Europe for Europeans. Already we have strong orders from distributors in France and Germany, Scandinavia who serve major retailers, dealers and others throughout the region. First quarter earnings for the residential segment were $4.4 million, down 15%. This was primarily due to the snow thrower sales decline. Now let's talk about the key operating results for the quarter.

We continue to see a positive impact on gross margin from a higher portion of professional products in our sales mix. We're also leveraging the momentum from implementing Lean in our operations to achieve new levels of cost reductions and quality improvements. While some commodity costs like steel and copper remain high, others, like resin, have eased a bit. All of this resulted in gross margin of 36.9% for the quarter versus 35.7% last year. SG&A expense as a percent of net sales was 29.6%, a slight increase from last year. We made a higher contribution to our retirement plan, and warranty expense along with certain sales and marketing expenses rose for the quarter. Our effective tax rate was 28.2% for the quarter, compared to 33% for the same period last year. We were quite pleased to see the positive impact on our tax rate from the extension of the R&D tax credit, given our increased spending in this area. However, we continue to expect the full year effective tax rate to be at 33.5%. Accounts receivable at this point in time are up 14.1% to $357.2 million, but remain seasonally in alignment. Two primary factors drove the quarterly increase. First, the later timing of shipments during the quarter and, second, a higher mix of sales with longer payment terms, such as those to international customers. And finally, inventory levels as you can see from the tables were 4% higher at the end of the quarter.

As we mentioned during the introduction of GrowLean's initiative in last quarter's conference call, one of our focus areas in the years ahead is becoming more intentional about how we manage assets. Doing five by five and six plus eight, we achieved measurable gains in profit after taxes and percent of net sales. Now we have an opportunity to make significant strides in another area of emphasis, asset management. We'll begin with focusing on improving net working capital, which we define as accounts receivable plus inventory, minus trade payables, all divided by net sales. We set a challenging goal for the organization to carefully develop and implement strategies to drive average net working capital below 20% or as we have coined it, in the teens. Our intent is threefold. First, to ensure strong profitability of Toro products and services all the way through retail. Second, to minimize the amount of working capital in the supply chain. And third, to maintain or improve fill rates and service levels to end users. We are in this for the long haul and we evaluate all our strategies based on their impact throughout the value stream including the impact on suppliers and channel partners. We're just getting started, and we know it will take time. As always we'll keep you informed as we embark on this important component in our long-term continuous improvement efforts.

That's it for the first quarter which, as you know, is typically a small one and was again. We're still weeks away from the start of our peak selling season. But we're ready, as I said earlier, with more new products than any time in our recent history. Employees around the world have just begun to raise the bar and embrace the new goals for GrowLean. They are beginning to see how each of them positively impacts Toro's growth. By exceeding the expectations of internal and external customers, they are continuing to engage in product teams and collaborative efforts that will ease or eliminate some of the constraints in our enterprise processes, and they are searching for new opportunities to keep Toro a vital, growing, and profitable company. It's early in the year and our outlook as always assumes no widespread extremes in key economic and environmental factors. We are reaffirming a 10% to 12% increase in our fiscal 2007 net earnings per diluted share on a narrower revenue growth range of 5% to 6% due to the snow shortfall in the first quarter. The weather, or lack thereof, was a top line challenge in the quarter, but we remain confident that our proven strategies and increased Lean disciplines still have us positioned well for another solid year. So with that, let's open it up for your questions. Jean?

[OPERATOR INSTRUCTIONS] We'll take our first question of the day from Mr. Eric Bosshard of Cleveland Research.

Good morning, guys this is actually Mark stepping in for Eric.

Good morning, Mark.

First question, on the landscape contractor market. Can you talk about your expectations for the market to grow in '07 and how that would compare to what the market grew in '06 and '05?

Well, we saw specifically two-- to the landscape contractor business-- we saw some softness last year, and we saw that in retail, and again, when we talk about the landscape contractor products that we sell, many of those go to the contractors, but others go to, you know, municipalities on one side and home owners of the other. And so as we look forward to 2007, we expect to see the landscape contractor business come back and continue to grow -- I don't have a specific number for you, but I would say in the high single, low double-digit kind of numbers, and it will also be influenced by those markets on either side of it that I mentioned earlier.

Okay. Any comments on the landscape acquisition this morning? And any further comments on acquisition activity in that piece of the business going forward?

The landscape acquisition this morning?

Deere acquiring Lesco.

Oh, yesterday, okay. Well, obviously we've just learned about it as well, and, you know, as we-- as we look at this, we know a lot about Lesco. We have worked with them in the past. For us it's really a question about what business you are in and Lesco is primarily in the distribution business, which John Deere is to some extend with their John Deere landscapes side of the business. So while we're really focused on being a manufacturer, they have done some of both, and the fact is that John Deere Landscapes is a customer of ours. They sell our Toro and Irritrol irrigation products. So, this is one that is just, you know, just unfolding, and we'll have to see what develops. We'll study things and act accordingly.

Can you talk real quick on pricing, both professional and residential, what you were able to achieve here in '07, and then also was that enough to offset your cost increases in '07?

Overall we expect to be in the 1% to 2% range. And some of that will depend on what happens on the cost side. As I mentioned earlier, we have seen some softening or reductions, if you, will in resin, whether that will continue throughout the year, we don't know. But we think-- we think the combination of where we see the commodity markets, our ongoing efforts around Lean and the prices we have taken that we'll be in good shape.

So I should think of 1% to 2%, is that what you were expecting, and is that across the board then?

Well, that's kind of all-in. Again, we tend to get more price on the professional side of our business, and somewhat less on the residential side of our business.

All right. Thank you.

Thank you, Mark.

We'll take our next question from Jim Lucas of Janney.

Thanks. Good morning, guys.

Good morning, Jim. Steve, first question for you. Tax rate, you benefit from the credits in the first quarter, yet you are still expecting a 33.5% rate for the full year? Is that conservativism baked in, or is there something that I'm missing there?

No, that's-- we got the benefit of the reinstatement of the tax, as you mentioned, retroactively through last year, but then the foreign source credit taxes are phasing out, as you know, which is a separate item.

Okay.

And the phase out, we get less of an advantage on the phase in than on the phase out, so when you balance all of that out, we think for the year it's, you should use 35.5% for the full year-- I'm sorry 33.5.

33.5, Okay. And Mike, you mentioned new product as a percent of sales, a vitality index, the highest it has been since you began measuring it. Where-- what is that number today?

The number is in the 40s, and right in kind of the mid-40s. And if you remember we talked about this last year. You know, '05 was -- go back to '05 was a period where we actually slipped in to the, say, the high 20s. We were kind of at our goal. Our stated goal is to have 35% of our revenues coming from new products, that we again, define as current and prior two years introductions. And so last year while we started a little bit above our goal, as you know our revenues fell off somewhat during the year and so we ended up just slightly below it. This year, we're-- you know, we're 10 points higher than that, which will speak to the number of new products that all of the businesses are introducing, whether that's, you know, on the golf side, or the grounds side, the landscaper side, the residential-- if you walk in to Home Depot you'll see a whole new line up of walk power mowers with interesting new features, wash out ports and much better bagging system. You'll see brand new from the grand up zero turn mowers at Depot and at our dealers, so we're just really excited about the number of new products that we've brought to the market this year. And the momentum that was building from the ones other the last couple of years.

Okay. And on the gross margin front, I mean, you had to be pleased with what you saw in the first quarter. It's nice to see mix actually benefit somebody for a change. As you look-- as we're entering the important residential sell-in period, what is the likelihood of gross margin expansion continuing this year? Obviously not to the degree we saw in the first quarter, but can you talk about sustainability of gross margin expansion?

Yes, Jim, this is Steve. The-- you are right on-- on the-- the quarter gross margin was up for a couple of reasons. Mix was a big piece of that. We had obviously a greater percentage of our sales were at professional where the margins are higher. And even within the professional segment we had a shift or a higher mix towards the higher margin product. So all of that gave us a little better for the quarter, along with the international, and the currency impacted the international business, and cost reduction, so we had quite a few things go in to the benefit for the first quarter. And commodities, Mike talked on -- touched on just a little. Actually is still working against us. There are some things improving, resins, but when you net them out, we are still spending more money year-over-year on commodities than we did the prior year. So as we look at the rest of the year, we don't think we'll hold that 1.2% that you saw first quarter. We do expect some benefit. So when you think about that, I would think of it flat to maybe 50 basis points up for the full year as we bring the consumer residential business comes back up, and those margins are a little shorter. So as you look out to the year think somewhere in the flat to 50% improvement on margins.

Okay.

Basis points, yes.

And final question, you mentioned a small acquisition in the quarter. Could you give a little color on that as well as discuss capital allocation going forward this year, what you are seeing in the M&A environment and how you are weighing that versus share repurchase programs?

Well, let me comment -- this is Mike, Jim. Let me comment first on the Allen acquisition. We purchased the assets of Allen, and again, that's about $1 million as you can see on the statement. The-- they make kind of a product's called the hover mower, and it's used on a lot of golf courses and some other markets, and so it was UK-- United Kingdom product, and it was just an opportunity to put that together with the Hayter, and we'll-- we'll also look at the opportunity to kind of leverage that technology elsewhere. So that product will be actually displayed at the upcoming golf show later this week for those of you who are there, you can have a chance to see it. It will be in a separate booth, still in the Allen booth as we work through the integration. And then, to your larger question, where are we at with M&A, well as we talked last time, we have hired someone. He has now been on board for two or three months. I'm asking him what our status is every day. On a serious note, Pete Ramstad is engaging as we're working hard on our M&A process, to make sure we have got things moving right and looking at the right opportunities, and I just can't say any more about it than that, other than we are being much more intentional about pursuing it. We are certainly in a position to make some acquisitions financially.

Okay. Well look forward--

You asked about share repurchase and capital structure. Certainly, if the acquisitions are the size of Allen, we can do a lot of share repurchase, not many dollars. And our hope is that the size, obviously, is bigger than that. I mentioned a couple of times on the call, our preference would be able to do share repurchase and make acquisitions both, not one or the other. We have continued to purchase through the first quarter. We bought about 630,000 shares in the first quarter. That leaves us about 850 on our authorization from last summer, and we will use that up, continue to buy that back through the summer months, as long as we don't come up with a major acquisition in the process, and we're also working on our bond that comes due in June, and we talked a little bit at the last call about replacing that. That was a 10-year bond, replacing that with additional debt or similar-type debt as that comes due, and we are working on that as we speak, and will be doing an additional debt offering of equal or maybe slightly greater than that amount to help us with our leverage on our balance sheet. So all of those plans moving forward nicely at this point.

Okay. Great. Well, look forward to seeing you in a couple of days.

Thank you, Jim.

[OPERATOR INSTRUCTIONS.] We'll take our next question from James Bank of Sidoti & Company.

Good morning, James. Hi. Good morning, everyone. Good morning.

A quick clarification before I begin. The 40% of revenue, was that 40% of growth coming from new products or 40% of revenue overall as new products.

Yes. Again, the definition is-- when we look at-- at new product revenue as a part of the total, it is products we introduced this year and prior two. So the answer to your question is yes. 40-plus percent of the revenues are products we have introduced in either F'06, F'07, or F'05.

Oh, I see. okay. Now, international sales, what, seems like that's doing considerably well for you all. What percentage of your sales are international now at this point, would you say?

Well, we ended F'06 at 27%. And again, that's been, we have been very intentional about driving that up from the high teens over the last few years to 25% in '05 to 27% in '06. You can't necessarily extrapolate out of the first quarter, if you were to-- our first quarter last year, international represented 32% of revenues at 32.5%, and this year it represents 35%. So, it continues to be a growth driver, one we are very focused on, and as I mentioned earlier, we-- you know, we're doing more, it's, some of it is products like golf products around the world. Other parts of it include, you know designing products specifically for international customers. So the new 48-centimeter steel deck walk power mower in Europe is for Europeans. It was designed, it is being manufactured over there. So there are many pieces to the international business. So that, you know, there are many pieces to the international business. It's got a large portfolio. It's a good business for us, and we're very focused on it.

Okay. Terrific. Let me just begin and then I'll back in to the other income and other revenue line. But I'm just looking at your guidance and obviously you look it down 1% from the high end of it, and you had mentioned it was coming from a weaker snow-throwing season. You know, correct me I'm wrong, I thought that was more of a smaller part to your business, maybe 5% or so, and I guess I'm a little curious why it moved the needle that much. And if there's just weakness coming from other areas, another analyst asked about landscape contracting equipment but you suggested that maybe the back of half of this year that would return. So where else might this weakness might be coming from that you sort of revised your top line guidance lower, and sort of offered modest, if you will, bottom line growth, given the fact you reaffirmed it after you kind of blew out your own guidance in the first quarter, as well as what the Street was looking for?

Well, James, the fact is that it is really about snow, and if you think about where we're at today versus the -- the revenue side where we were in December, the only known is the snow season is behind us, and effectively we lost a point. So you can do the math, but the-- you know, that-- if the snow business-- yes, it is a small part if it goes from being 5% to 4%, that's a point. And so we just thought it was prudent, to, you know, if you will take it off the top. We're still, we're still committed to our growth goal. We've said, the one known we have now a quarter later is about a point of total company revenues is lost snow, and so we said we're going to pull it. We're going to pull the 5 to 7 down to 5 to 6, hopefully that's at the heart of it.

Okay. All right. Thank you. Now, the other part is, year-over-year other incomes, the $1.4 million, I believe over last year-- was last year $800,000, actually almost $2 million more. What was that stemming from?

This is Steve. That was two things, exchange rates, you know. We got very favorable-- particularly the Euro for this time period. And then interest income on our investments. So the two of those made up that full amount. And that, you know, those are up and down from time to time, depending on--

Right.

-- there's also a litigation line in that, where from time to time we may have big pickup, or in that section. We didn't have any this particular quarter. But that will go-- think about that, probably in that $2 to $3 million range on an ongoing basis. But that just depends on what what happens with exchange, and what what happens with litigation pickups.

Right. Should we maybe be looking at $7 to $8 million, then, by the end of the year.

No, that's, I would say half of that, maybe $4 to $5 versus $7 to $8.

Okay. And the other revenue line. Obviously that has been coming down. I understand you are changing your reporting with that with the distribution. Could you just kind of help me? What should I be looking at that going forward.

Couple of things effected that. That's really our company-owned distributor sales.

Right.

And there are some other things in there, eliminations too. But for this particular quarter, we had fewer large golf packages, when we compare that to the same quarter last year. And then the other factor is the one you alluded to, we went direct in part of that market. So it takes that, those sales dollars, out of that classification. So when you put the two together it was down about 2.7 for the quarter.

Okay. But what should we maybe be looking at for the year, then? Flat?

I would look at that to grow flat, or consistent with the company's overall growth or maybe slightly less because of some of these things we're reclassifying.

Okay. All right. That's helpful. Oh, and lastly share buybacks, did you mention how many actual shares?

For the quarter 600-- roughly 630,000, and that leaves us with 850,000 on the 1.4 million that we had going in to the fiscal year.

Okay. Terrific. Okay. Thank you. That's all I have.

Thank you, James.

[OPERATOR INSTRUCTIONS] At this time, I'm showing no questions, I'll turn the call back over to the presenters for closing remarks.

Thank you, Jean. And once again, thank you, ladies and gentlemen, for your thoughtful questions. I would remind you as we said the first quarter is small as we head in to the height of the selling season we are positive about the outlook and we'll approach it thoughtfully and make sure we're doing the right things. For those of you who will attend the golf show, we look forward to sharing more about Toro's leadership in this market later this week. Otherwise we'll talk with all of the rest of you again in May, and review the results of our second quarter. Thank you. Have a great day.