Toro Co (TTC) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Toro Company fourth-quarter and year-end results conference call. My name is Shikwana and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) 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. Michael J. Hoffman, Chairman and CEO of The Toro Company. Please proceed, Mr. Hoffman.

Good morning, ladies and gentlemen. Thank you for joining us for our fourth-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 forward-looking statement policy. Please keep in mind that during the call we will make certain forward-looking statements, as of today, which are intended to assist you in understanding the Company's results. You're all aware of the inherent difficulties, risks, and uncertainties in making predictive statements. So 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.

Two press releases were issued this morning by Business Wire regarding the Company's fourth-quarter earnings and its acquisition of Turf Guard technology. Both of these can also be found in the investor information section of our corporate website, TheToroCompany.com. Here in Minneapolis, we have enjoyed some recent snow events with the storms over the weekend, several more inches that have continued to fall in the past couple of days. Of course, we always look forward to snowfall, especially in early December, which helps motivate buyers as we are seeing locally and across the Midwest.

Now, let's turn to our consolidated results for the fiscal year and the fourth quarter ended October 31, 2007. There were several accomplishments in this first year of our GrowLean initiative that I would like to highlight.

First, as we mentioned in previous calls, Toro offered more innovative new products in 2007 than any time in recent history. That helped us grow revenues even with the industry statistics reflecting market softness. As a result, our belief is we increased share in most of our markets.

Second, international revenue grew nearly double digits and now represents 29% of the total Company sales. This is consistent with our long-term strategy to strengthen our international presence both as a key growth driver and a means to diversify our portfolio.

Third, we turned in a record 7.6% after-tax return on sales against our GrowLean goal of 7% or more. Those of you who have followed our progress since we began this journey in 1999 know how far we have come, from a starting point of 2.7% to now 7.6% today.

Fourth, we started to put some focus on acquisitions, particularly new irrigation technologies to keep turf and crops healthy despite droughts and global water scarcity. In August, we acquired Rain Master irrigation systems, a market leader in central control systems for the landscape and commercial markets. Combined with the Turf Guard technology acquisition announced this morning, these moves support our long-term precision irrigation strategy. We will talk more about this later in the call.

Finally, continued strong cash flows from operations enabled us to return value to shareholders through stock repurchases and dividends. As we noted in the press release, our Board of Directors once again increased the quarterly dividend from $0.12 to $0.15 per common share.

With all of that said, I am pleased to report Toro once again delivered a double-digit improvement in earnings per share in fiscal 2007, up 16.8% to a record $3.40. Net earnings were $142.4 million, up 10.3% from the previous year. For the fourth quarter, net earnings were $6.5 million or $0.16 per share.

Much of this came from our ongoing journey towards a lean enterprise and the subsequent improvements in productivity and operational efficiency. Earlier this year, as a third focus area of our GrowLean initiative, we challenged our employees to reduce working capital to the teens or less than 20% of sales. This is for us a highly transformational and important initiative that we expect will start slowly and accelerate over the next few years.

For example, in fiscal 2007, we began to pilot a pull system to reduce inventory in our landscape contractor business. We will apply what we learn from this effort to other plants and products to broaden the impact from these important new approaches.

On the top line, industry forecasts predicting a contraction in 2007 proved accurate. Along with most of the industry, Toro's revenue growth for the fiscal year was dampened due to the economic uncertainty, a slowdown in the US housing market, rising fuel prices, and some regional weather challenges. However, again, we believe an unprecedented level of new products and our ability to leverage our strong brands helped us gain share nearly across the board.

For the fiscal year, net sales were a record $1.88 billion, an increase of 2.2%. That fell short of our GrowLean goal of 8% compounded over the three-year initiative. For the fourth quarter, net sales rose just slightly to $332.5 million.

Once again, worldwide professional segment sales led the way for revenue growth. The golf market was stronger outside the US, in countries where golf development is essential to economic growth. Also, the growing popularity of outdoor sports like soccer field demand for maintenance equipment and irrigation systems keeps sports fields and grounds playable and safe.

The need to become more efficient in water use drove demand for our micro-irrigation systems for landscapes and agricultural crops. Ongoing droughts in many areas of the world, combined with the agronomic benefits of drip irrigation, increased the adoption rate for this product family.

So looking back at a challenging and rewarding fiscal 2007, we were pleased to gains share and to lower field inventory in the face of significant headwinds. We did the right things, had the right strategies and the right products to help perform in a soft market.

Now let's take a closer look at our segment results. For fiscal 2007, worldwide net sales for the professional segment increased 3.7% to $1,270,500,000 and rose 2.7% for the fourth quarter. New golf course construction remained strong, particularly in Europe and Asia, while renovation projects continued here in the US.

We enjoyed strong customer acceptance of new products like the Reelmaster 5010 Series fairway mowers and the Synergy series irrigation sprinklers and controllers for golf courses and sports fields. At the same time, landscape professionals and irrigation contractors welcomed the new Dingo Diesel Compact Utility Loaders; and the acquisition of Rain Master along with currency effects also helped drive revenue gains in this segment.

On the other hand, efforts to reduce field inventory resulted in a modest decline in landscape contractor shipments. We were pleased to see retail in this market was up from last year as a result of several innovative new products. This also was a factor in reducing field inventory.

Earnings before taxes in the professional segment increased 11.6% for the year and 30.2% for the quarter. Product mix, selected price increases, favorable currency exchange rates, and ongoing cost reductions were the primary factors driving these gains.

In the residential segment, where new product innovation and strong brand awareness helped us gain share in a down market, revenue for the year was flat at $563.5 million, down 2% for the fourth quarter.

As we mentioned in our last call, we experienced strong retail demand for our new generation of high-performance Toro TimeCutter Zs available at dealers and the Home Depot. As homeowners continue to replace traditional lawn and garden tractors with Zs, we will continue to invest heavily and these exciting products that make mowing fun and fast. We are a leader in Zs today and are committed to being a leader in the future.

Another front-runner for 2007 was our new line of Toro Walk Power Mowers with the innovations and reliability that homeowners have come to trust in our brand. So while Zs and Walk Power Mowers were up, snowthrower product shipments were down significantly for the year due to lack of snowfall in key markets during the previous winter season.

For the fourth quarter, however, we saw nice gains over last year as customers predictably ordered closer to the season; and early results are very favorable for the new Power Clear Single Stage snowthrowers that we mentioned in the last call.

I can report to you that the Company's CEO and CFO personally used these new products over the last weekend to clear throw snow from their driveways. Both were very impressed with the innovation and performance of the Power Clear, and we're hearing the same from dealers and distributors across the US snowbelt. You can ask Steve more about this later.

Earnings before taxes in the residential segment for the year rose 22.7% to $41.8 million primarily due to lower levels of warranty and marketing expense.

That completes our segment review. Now let's move on to operations, where we turned in a number of improvements for the fiscal year.

Gross margin rose to 36.1% from 35% in fiscal 2006, thanks to a greater portion of higher-margin professional products, selected price increases, and productivity improvements driven by our ongoing Lean efforts. Somewhat offsetting these gains, however, were commodity costs that continued to rise during the year, particularly in resins and other petroleum-based products.

SG&A expenses as a percent of net sales were 24.2%, up 2/10 from 2006. Warranty expenses declined as a result of our continued focus on driving quality improvements. We have had a long-standing quality statement that reads, quote, each of us doing the right things right the first time to meet the needs of our customers. Close quote. Our employees are more committed to this today than ever before.

At the same time, in a difficult environment, we stayed the course and continued to increase investments in research, development, and engineering to position Toro for future growth. For now several consecutive years, our investment in research and development increased both in dollars and as a percent of sales. For fiscal 2007 this was up to 3.2% of sales or nearly $60 million.

Our effective tax rate for the year was 33.2%, up slightly from the 33% in fiscal 2006, primarily due to phased-out benefits from foreign export incentives.

Net inventory at the fiscal year-end was up 5.3% to $251.3 million due to lower than anticipated fourth-quarter shipments. Accounts receivable declined 4% to $283.1 million.

Finally, our cash flow for the year remains strong. We repurchased 3.3 million shares of common stock. We also used some of this cash flow to fund recent acquisitions including Rain Master in August and the Turf Guard technologies we just announced this morning in a separate press release. Both of these additions support a long-term strategy to strengthen our market position in the precision irrigation business.

While we don't expect significant revenue gains in the short term from the Turf Guard acquisition, we are excited about the long-range opportunities the technology brings to Toro. There are significant benefits for golf courses using Turf Guard's underground wireless monitoring systems. These systems measure soil moisture, salinity, and temperature, then transmit that data to a Web-based interface. Our customers can then use the data to analyze turf conditions and determine the most cost-effective and environmentally responsible irrigation methods to maintain healthy turf.

Now looking forward to 2008, we do expect the economic headwinds of the past year to continue. However, we have confidence in our people and our legacy of innovation. We will continue to roll out new products and focus on building even stronger relationships with our customers in the coming months.

In the coming year, we anticipate our net sales annual growth rate will be higher primarily due to new products and the growth of our international businesses. We also expect gross margin to improve slightly, while SG&A expense should increase slightly as we boost investments in engineering, marketing, and information systems.

Toro's tax rate for 2008 is expected to be 34.3%, which will have a negative impact of approximately $0.03 per share in the first quarter. Diluted shares outstanding will likely decline per the trend we have seen over the past several years. Therefore, we currently expect to deliver a 9% to 11% increase in net earnings per share on revenue growth of 3% to 5% for fiscal 2008.

For the first quarter, given our projected tax rate and the continuing trend for customers to take product closer to market, net earnings are expected to be $0.40 to $0.45 per share. That concludes a summary of fiscal 2007 and our outlook for 2008. So now, let's open it up for your questions.

(OPERATOR INSTRUCTIONS) Jim Lucas with Janney Montgomery Scott.

Thanks. Good morning, and I was glad I got out of Minneapolis on Tuesday.

Good morning, Jim.

Your products were definitely being used around town. A couple of questions here. Steve, first off, with international becoming a bigger percentage of revenue, why is the tax rate going up?

A couple things on the tax rate piece; and actually for the fourth quarter, it had a little bit of the opposite effect. When you look at the 47% last year, we had a valuation adjustment we had to make on a long-term tax asset that we were holding that we deemed to be uncollectible. So we had to write that off; and therefore our tax benefit went down. So the rate in the fourth quarter went up. So that was kind of an abnormal transaction, but we had to do that to get the full-year rate back to where it needed to be.

The lower rate this year had to do with currency and the fact that the currency had increased so much in our foreign countries that we had a higher percent of our income from the international side, where we have lower tax jurisdictions. So that is the reason that it is down for the fourth quarter of this year.

Then as we go into '08 you are back to the foreign investment credit phasing out and the domestic manufacturing credit phasing in. That is less beneficial to us than the old one, so this year we're going to have a higher tax rate for '08. So each one of those kind of has their own thing tied to it and what drove it.

Now from a tax planning perspective, are there going to be any opportunities throughout the year to potentially bring that down? Or are you pretty much locked into this tax rate?

We are probably locked for the year. But your point is the right one. We have got to be -- when you look at our tax rate, actually our state rates are pretty low. It is more on the federal side that you have opportunity.

We don't have a lot of international operations in manufacturing, as you know; so it makes it harder to manage that tax rate. But we have some done some things internationally to get to where we are, and we will continue to look at those over time to be able to manage that tax rate down as well as we can. It is getting harder, there is no doubt about it.

Right. Could you expand a little bit more on the inventory comments that you made in the prepared remarks about the inventory levels at the end of the year, and where you see that going forward?

Clearly, a lot of opportunities, but I guess maybe for focus more about where inventories ended at the end of the year. It seems like they might have been a little bit higher than what you had expected.

Well, you have really got think of two pieces when you're talking inventory. First is field. I think Mike mentioned, all things given, field inventory is in pretty good shape. Actually, very good shape as we go into F08. So, that would help explain why your receivables are down. You've got lower field, so you've got lower receivables.

On the other hand, our in-house inventory is a little bit higher. It was up just a little bit based on lower sales and lower shipments. We expected to have somewhat higher shipments in fourth quarter. That didn't materialize, so we have the inventory here and we will use that in first quarter as we go into '08.

Was that broad-based, or were there one or two categories that stood out?

Pretty broad-based for the most part.

Okay.

Jim, this is Mike. It would be fair to say, all in as you go across our consumer residential and professional businesses, our net field inventories are down from last year. We're in as good as a shape I think as we have been at anytime in the recent past.

Okay. This was a very big new product year. Is this going to follow the normal Toro cycle, where we will see fewer new products introduced in '08 and really just build upon the momentum of the '07?

This is Mike. No, actually, you know our formula -- which is the current year and the prior two, so '05 will drop off, and this will be kind of the cumulative number of '06, '07, and the introductions in '08. That number will grow again in fiscal '08, our all-ion number.

I think last year we talked about it being at kind of an unprecedented level in the mid 40s; it is actually going to go up somewhat for '08. We will talk more about new products at the first quarter call, where more of them have been introduced to the market by then. We will have been through the golf show and the IA Show, some of the other main shows where we introduce our new products.

Okay. Finally, you had a business development director in place for a year. We have seen a couple of strategic technology acquisitions that have materialized the last couple of quarters. You know, I am interested in the term precision irrigation; I guess we will learn more about that going forward.

But when you look at the acquisition opportunities that are out there, this technology versus I guess what we would think of in terms of more traditional product-oriented deals, can you characterize the landscape out there? Should we continue to see more of these technology deals going forward?

Well, I think, as we have shared with you in the past, we will look at that, at the technology category and continue to look for opportunities there. That is a little less precise, if you will, because it is usually a business that hasn't been formed or doesn't necessarily have a long revenue history, if you will, like with Turf Guard, yet that could be very important technologies and ideas for the future.

So we will -- one of Pete Ramstad's roles in this area is to look at that arena. We will continue to look hard at the -- I guess I will say more core division extending kind of bolt-on acquisitions. We would characterize Rain Master that we purchased in August as a good example of that. Some of them will be larger, and we will continue to look at a number of those.

And then, there is the real large ones that just -- lower odds, but the potential for a few of them out there as well. So the bottom line is we try to keep all three of those, I will say, categories percolating with opportunities and ideas.

Okay, great. Thank you very much.

Eric Bosshard with Cleveland Research.

Good morning. A couple of pretty straightforward questions. First of all, your comments, Mike, in terms of margin, you talked about up gross margins and slightly higher SG&A. Can you talk about sort of what is being considered within that and if the expectation is that you would net out any degree of operating margin expansion in 2008?

Well, I think on the gross margin side, and Steve can comment to this as well, we have got on the one hand the ongoing efforts around Lean; and that is being pushed on the other side by the concerns and issues around commodities, whether that is plastic and resins or some of the things we are seeing with steel. All-in, we are still thinking we can make some improvements there.

On the SG&A side, and I know that there is -- SG&A isn't necessarily going to be linear in that we have taken 3 points out in three years; it is up a couple tenths since this year on somewhat softer sales. But within that category are the investment areas like engineering and R&D that we took up 1/10 this year; and we will continue to make additional investments as we move into '08 there.

Additionally, on the brands side, on the marketing side, with new products and things like that, that won't necessarily be linear either. As you introduce new products, you probably will spend somewhat more to launch those into the marketplace. So that is where we comment on the SG&A, it is not going to change dramatically one way or the other, but there may be some additional investments we put in place on the marketing side in fiscal '08.

Does that mean from a net standpoint operating margins are expected to be flat or up in 2008?

This is Steve, Eric. We would expect, based on all of that, depending obviously some of the issues that Mike mentioned, commodities being a major one, that we would be flat to up slightly. You are not going to see probably a half a point increase in operating margins or the size increases we have seen the last couple years. So I would tell you it would be flat to a slight improvement from that.

The difference versus prior years is the sales growth? Is that the difference?

Sales growth you just have -- if there is a year, going into a year where you have got more uncertainties than we have had the last few years, as some of those things -- whether it is SG&A or whether it is margin -- go the other way, it wouldn't take long to eat that up, the incremental that you're getting even out of the sales side of it.

So we're watching those economic sectors to see what happens. Particularly, like I said, commodities. Everything you read about steel is that they are going to go up significantly as we get into the next year. You know what has happened with oil prices; they are already up there, which affect our resin pricing. So just a lot of things that are maybe more iffy, if I can use that word, going into '08 than we have had the last couple years.

Fair enough. Then secondly, Mike, you have an 8% revenue growth target, I think, over your three-year GrowLean. You are a year into it and walking into the next year with revenue growth that is set at roughly half of that level.

Can you just talk about how you think about that 8% of revenue growth in light of what you achieved in '07 and guided to in '08? Sort of how we ought to be thinking about the performance relative to the target.

Well, the goal certainly has gotten much more difficult as a result of F07's results. It is a three-year compounded. When you think about the last time we did this, in the 6+8 initiative, it was F04, '05, and '06. We had 8%; we started off the first year at 10%.

So, we're kind of on the other end of the continuum here, and we have got some ground to make up. This is always the challenge between guidance and goals.

But the internal goal for the organization is to continue to look at -- figure out how we can get there as we move through F08 and F09.

One of the things we have said to you is a part of that will come from acquisitions. That might be in the neighborhood of 2% to 3%. We have guided today in 3% to 5%; it is not impossible to think that if some of that played out we could get close to the goal in '08. But we are behind just because of what happened in '07.

So, we recognize we have got some work to do to make that compounded goal happen. It is still an internal goal for the organization.

I guess lastly, just to refine that, are you see the end market grow materially different? I guess if you look through the cycle, is there anything you see in the end market in terms of the growth profile of the end market that you feel is any different than you would have thought a year or two ago?

As we look at F07, I think a number of the end markets were actually down. Let's be clear, there are a number of our end markets that historically have been flat for decades. So if you want to talk about walk power mowers, there has essentially been no market growth there for -- I mean, if you drew a regression line through two decades of shipments, it would look pretty horizontal.

So you have to look at each of the end markets. Internationally, we continue to see some market growth within some of the product categories. Like Zs, while the market may not be growing, the substitution factor is going on there, which for us then becomes a growth market for Z product categories.

So, really I am not sure I could sum it all up. We certainly understand that what happened in '07 with some softness in overall end markets we will likely fact some of that in '08. So for us to accomplish our goal, it will require us to take market share with the right, innovative new products, building stronger relationships with customers, all the things that I think this organization does well.

Perfect, thank you.

Seaver Wang with Utendahl Capital Partners.

Good morning. Just wondering if I could get some color, more color on certain segments. For instance international, what particular regions or countries, and within those countries, is it mostly professional that is doing well?

Then, again, I guess, the state of the landscape contractor market in the US.

Okay. Good morning, Seaver, this is Mike. Internationally, we talked about the golf business is strong particularly in Asia, countries like China and Korea and the like, and Eastern Europe. But there are other pockets around the rest of the world where that is also true.

So overall, the expansion of golf is healthy and that is a very important business for Toro in both the irrigation and equipment side. And we have a strong international presence there.

We talked -- there is a residential piece to the international business. It was impacted as well this last year with snow in Europe. The good news is there is some snowfall in Europe as we speak. We have had actually one of our marketing people, head of marketing, over there that is back in town as we speak, and he has shared that they are seeing good snowfalls.

But it goes beyond that. Europe suffered from a drought a couple years ago, and they have come back from that. So the UK, which is an important consumer market with Hayter, bounced back this last year; and we will have even more presence with Hayter products in the UK market -- that is the largest residential market -- this next year.

So all-in, we believe international is going to continue to be a growth driver for us. It's the largest part of the -- from a business standpoint of the Company today as we look at the different divisions.

The landscape contractor question, we would look at the business this year and say the retail sales were up. So that was encouraging in a kind of economic environment we were in. Now they were not strongly up; but they were up over the prior year.

You couple that with our focus on taking some inventory down and it has positioned us nicely going into F08. The other good thing that is happening now with some of the recent snowfalls is for the northern landscape contractors. Most of those folks plow snow in the winter, and this helps them generate some revenues and provides those revenues for purchasing more products in the spring.

So we think the landscape contractor business is in pretty good shape from a market standpoint. Toro with our brands, the Toro brand and the Exmark brand, are well positioned to take advantage of that in fiscal '08.

Okay, then a quick question for Steve. The inventory was up slightly. Is that due to raw material prices or what are the components there?

No, that was just the fact that our fourth-quarter sales were lower than we had originally planned. So it is nothing to do with the pricing or anything. It is just less sales. We have got more year end, but the field is lower as I mentioned earlier.

Okay, thank you.

Sam Darkatsh with Raymond James.

Good morning, Mike. Good morning, Steve. How are you? Just three quick questions. First off, a housekeeping question. Your other segment, which if I recall correctly I think that includes overhead, then interest income and interest expense, and then also like a floor planning for your dealers. I think it looks like the floor planning is becoming pretty variable right now. I am trying to get a sense of how we should look at that with the changes in receivables from what you're taking inventory out of the channel. How should we look at modeling that other segment going forward?

First of all, you are talking about the other profit or cost center in the -- not on the front page earnings?

Not on the consolidated P&L but on the segment P&L, yes.

So, this is kind of the discussion you and I had last year on this topic. When you look at what has happened with that segment, '06 was a very unusual year. We probably had a handful of things that ended up going our way very positively, so it drove that comparison to this year, which we have been kind of talking about all year long, to be very difficult.

Last year, that whole segment was in the $60 million range, if I remember right, or $69 million range. This year it is back up to $82 million; and it was $87 million, I think, if you look at F05. So, now, as we are closing this year out, those expenses are getting more normalized to what they were in '05. So you ought to be using '05 and '07 as your benchmark, not '06. That is kind of an unusual year.

But is there any change, based on what you are doing with the dealer inventories, how we should look at the cost center of that line?

Yes, to go to the credit company, I think is what your question was -- on the revenue that we have coming in from the credit company?

Right.

First of all, the bulk of the credit company's revenue is intercompany. So that gets eliminated.

What you really end up with is what third parties pay. So we should see that probably going down, because we are managing our field inventory better. So the better we manage field to lower levels and to a lower average for the year, that number ought to go down.

Now, I think that number probably for the year is in the $3 million range or $4 million range, net of intercompany. So it is not a very big number. So even if it goes down 25%, 30%, it is not going to have a major impact on the P&L.

Got you. Thanks for clearing that up for me. Second question. I guess this would be, you are not modeling for -- you are not having us model for a whole heck of a lot of operating leverage, because you're going to get maybe 4% or 5% earnings growth from lower share count and maybe 3% to 5% growth from top line. So there is really no -- by definition there you're not guiding for a whole lot of operating leverage.

If you were to beat the numbers next year, your guidance, would it be coming from expansion of operating margins? Or would it be coming from better than expected top line, in your view, Mike?

Well, that is a good question, and it could comes from both or both could be under pressure. I am not sure how one would answer that. We'd like -- it gets back to as I mentioned the difference between goals and guidance.

We still have internal goals around our GrowLean initiative. We think in this environment 3% to 5% is going to be challenging. Could it be higher than that? You would have to tell me what the economic environment is going to be like as we go through fiscal '08.

Then Steve can comment to the margins.

That is just awfully hard to -- there is a million answers to that, Sam; probably none of them are wrong, depending on what happens to the factors that go into bottom line, plus or minus. So it is a hard thing to really put your finger on.

I mean, I would think that it would be the margin -- margins might expand more than you're guiding for, only because you're going to get some pricing; you're going to have the mix of professional go in your favor; you're going to have new products.

You had a real nice gross margin expansion this year, and I would suspect that that might be more likely. I just wanted to get a sense from you guys if I was looking at that correctly, all else equal, if you were betting that.

A couple things on margin that kind of makes that a bit of a crystal ball is you're going to have -- we are going to have overall inflation on margin. We are talking with vendors all the time about surcharge are price increases. How much of that can we put off and avoid?

Commodities is a huge unknown. What is going to happen with all of that?

So when you look at all those and you say, okay, is that going to give you positive or negative margins to any extent? It is pretty hard to tell. You have got to really look at each one of those and it depends on where they go over time.

You would suspect that pricing would largely, if not entirely, offset that?

You will get some pricing. On the other hand, if our residential business comes back and performs as a greater percent of the portfolio for next year, that puts pressure on the other way. Because the margins are not as high on the residential side of the business. So again you've got five or six major factors that go into that.

Okay, last question. As you are looking at your budgets, Steve, are you suspecting that free cash flow is going to exceed earnings per share next year because of the working capital source of cash? Or is it not going to? Or does that working capital source happen more in F09?

Probably the latter. We would expect the free working capital to be -- free cash flow to be right in the same area as we had this year. I think we were $140 million this year; and you can expect that same type of number next year.

Okay, so $140-ish million in free cash flow in '08 and then, by definition then, it would be a marked jump higher in free cash flow in '09. Is that how we should look at it?

You need to give us --.

By your working capital goal of $150 million and some odd million plus coming out of working capital, that would be a whole year's worth of free cash flow alone. So I am just trying to get a sense of when that free cash flow is likely to be recognized.

You are not going to see it all in '09. I can guarantee you that. We should get a piece of it. What we have kind of been talking about internally is we will get to that goal, and that was the 180 that you talked about, by '10 at the soonest.

So that is a journey. That is a big project. We did some pilots, as you know, with a distributor; and we are starting to do some things down in one of our plants to figure all of that out. But we have got a ways to go before we get to $180 million out of working capital.

Got you. Thanks much.

(OPERATOR INSTRUCTIONS) James Bank with Sidoti & Company.

Hi, good morning. Beginning with residential sales, it seems as though in the fourth quarter it has been down now for the third year in a row; but your earnings for that segment I believe have been up [two] years in a row.

Can I attribute all f that to this GrowLean initiative or your ongoing Lean initiatives, let's say?

The sales for the year has been -- really snow is a lot of that. But what has happened is on the earnings side, their SG&As were actually done a bit. They had a little improvement in margin this year, not a lot. But their SG&As were down this year, and that is what drove the increase in earnings for the most part.

So that is more attributable to the sales actually being down, so G&A is down. Or is that -- is any of this having to do with the GrowLean initiative?

Not much with the GrowLean initiative. The other factor that goes into that is -- if you remember last year at this time, we had a duty issue in the fourth quarter that we had to book; and that was all on the consumer side of the -- residential side of the business. So that makes your '06 margin look abnormally low, and it makes the comparison really look better than it is.

Okay, good. Thank you. Getting a little bit deeper into your field inventory, can we speak more granularly about these snowthrowers? What is the field inventory for the snowthrowers looking like?

Day by day -- day by day, better and better. It's not -- the reality is, if the snow events continue at all, inventories are going to be very, very scarce. As you know, we manage that business carefully and don't fill the warehouse up with an excessive amount of, call it opportunity inventory. So we would expect snow inventories to be in very good shape.

Okay, great. You also mentioned, due to lower than anticipated shipments in the fourth quarter, what actually was that product or products?

That was pretty much across the board. Nothing unusual in any. Probably some of the landscape products, but pretty much across the board.

Okay. Let's see. You spoke about your European operation and I believe Hayter as well; and it seems like your outlook was positive. The only thing I would like to ask is that London lowered the rate this morning, suggesting slower growth coming forward.

Are you guys seeing any growth at all? Or excuse me, any slowing in your growth there? Or you still seeing excellent opportunity in that region?

We're at a time of the year where we are not -- retail is very slow as we head now into the -- towards the spring and getting set. So we really can't answer that question well.

Anticipated -- we had anticipated growth partially due to some new products that are being brought out in the UK and with Hayter, as well as broader distribution. So it may be as much about share gains there as it was here this last year.

Okay. Do you all or can you split your Asia and your Europe sales for me?

This is Steve. If you look at the international business in its entirety, that segment of our business, Europe is about 50% of our international sales. Canada and Latin America is 20%. Australia would be 20%, and Asia would be the balance.

Okay, thank you. Back into that. The electric products slowed down in the past fourth quarter, and I think maybe even in the third; correct me if I am wrong. Is this having to do more with the leaf blowers and the recall you had with the leaf blowers earlier in the year?

No, it is more to do with electric trimmers. Actually leaf blowers we're in a very good position on, and sales are up with leaf blowers. Now, that will slow down quickly with the snow events; but we have had a good leaf blower season.

Okay, terrific. The other income line, $3.2 million, I believe I was looking for something more along the line of $1.5 million. I think earlier in the year you actually guided towards a total of $4 million for the year in other income on your just over $9 million. What actually was baked into that number in the fourth quarter, in the $3.2 million?

That is primarily interest income on -- remember when we did our bond deal? We borrowed $50 million more than we needed to pay off the bonds that were coming due. So we had excess cash, so it is that. That is the primary reason that it is up.

Okay.

Exchange, I think, probably played a little bit in that, too.

Okay, what actually was your foreign exchange in the quarter?

For the quarter, currency added about $5 million in the fourth quarter; and I think it was $24 million for the year.

Okay.

In sales now, not profit. I am talking about sales.

Okay. What was your OpEx, your options expense just for '07? Fiscal '07?

Hang on there, I have got to look that up. $7 million.

Terrific. I believe that is all I have. Thank you very much.

Eric Bosshard with Cleveland Research.

I had one question and that was a year ago you had this call and you guided to earnings in 2007 to grow -- I think a similar amount, around 10%; and the earnings ended up growing 17%.

You commented that 9% to 11%, very difficult environment. You kind of intimated you didn't think you could do much better than that. I am guessing -- how do you contrast how you feel now versus what you just accomplished in 2007, which was a similar difficult year on the top line, and you achieved that growth? What is different about the '08 than '07?

Well, I would say one of the things is I don't -- a significant part of that came from the margin expansion; and I am not sure we would see that happening in '08. In fact, I think we pretty much said that there is tension among all these goals that we have got out there.

As we talk about GrowLean we have got an 8% revenue goal; and we are behind the curve on that one now. We have talked about a 7-plus-% profitability goal; and we have made obviously some significant improvement on in F07. Then this whole working capital initiative.

And there is tension with these, among all three of these. As we work on the working capital, one of the challenges may be that we have to pull some inventory down externally. If we do that, obviously, there is a revenue impact, and that comes back and puts pressure on the revenue goal.

So, we would look and say the growth goal -- particularly the growth goal and the working capital goal are the more -- call them more transformational goals. The profitability is more of a kind of continuous improvement, although we saw significant improvement on that in '07.

I am not sure that we want to count on that in '08, so there is a lot of unknowns out there. We think in this environment that we're going into -- the macro factors we talked about, obviously weather plays a role in that with our business as well -- we think the guidance of 3% to 5% on the top line and 9% to 11% on the bottom line is prudent.

And that, Eric, we have talked about bits and pieces of this in between the two numbers Mike just gave you. When you look at margins, because of some of the things we talked about, flat to slight improvement. SG&A flat to maybe a little deleveraging, and part of what you've got to think about with SG&A is we had a down sales year, and a lot of your SG&A ends up fixed. You're not going to cut into kind of the meat because you have one down sales year, and then not have what you need when you get the revenues growing out in future years. So that is why we are a little more pessimistic about maybe on SG&A.

Then you look at the other income side. That is going to be somewhere in the 5 to $7 million range. Tax rate we gave you in the release. So you kind of go through that and run your model, and you can see where the EPS ends up coming out.

Fair enough. Thank you.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Hoffman for closing remarks.

Thank you. Once again, thank you, ladies and gentlemen, for your thoughtful questions. As we watch the snow continue to fall here in Minneapolis and across the country -- and across the world, for that matter -- we remain confident in the future of Toro as a vibrant and competitive organization.

We believe our employees are armed with the tools and knowledge to make significant changes for the better in our business practices. Our eyes are on the future as we take the next important steps in our GrowLean journey.

So we will look forward to talking to you again in March for our first quarter, to share with you our first-quarter results. Thank you. Have a great day and on behalf of the Toro team, happy holidays to all of you. Goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.