Toro Co (TTC) 2008 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 Kameesha, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) We will be facilitating a question and answer session towards the end of today's conference.

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.

Thank you, Kameesha, and good morning, ladies and gentlemen, and thank you for joining us for our fourth quarter and year end 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. Well, here in the Twin Cities, we woke up to a nice white blanket of snow today, a great opportunity for our customers and The Toro team to use our snowthrowers, and I can say, they worked well. These are the most innovative snowthrowers in the industry and they keep getting just better and better.

With that, let's begin with our forward-looking statement policy. Please keep in mind, that during the call we'll make certain forward-looking statements, 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 earnings release, as well as SEC filings, detail some of the important risk factors that may cause actual results to differ from those in our predictions. Our earnings release was issued this morning by Business Wire, and can also be found in the Investor Information section of our Corporate Website, thetorocompany.com.

Before we get to the results for our fourth quarter and fiscal year ended October 31, 2008, I would like to take a few minutes to reflect on the year. Looking back, these past 12 months were accentuated by difficult economic conditions, primarily here in the US, that impacted many of our customers and our Company. Professional landscapers and irrigation contractors struggled with the ongoing weakness in the housing sector. Consumers are squeezed from many directions and turned cautious in their spending, and new golf course development in the US slowed to its lowest level in a decade, while existing golf courses watched their budgets and delayed renovation projects. Still, there were some bright spots for the year. Our overall international business remains strong, due to healthy demand in both the professional and residential markets. While our financial results didn't reach planned levels, our internal disciplines enabled us to finish the year in a good position with reduced inventories, both at Toro and in the field.

Let me mention a few of the results for the fiscal year and fourth quarter, and then Steve will provide some more details on our segment and operating results. For the fiscal year, net sales were up slightly over the previous year at one billion, 878.2 million dollars. As I mentioned, the improvement was the result of strong international sales in most professional and residential categories, along with increased shipments for snowthrowers in the US and Canada. These gains were offset by lower domestic demand for professionally installed residential and commercial irrigation products and walk power mowers. For the fourth quarter, however, net sales were up 2.6% to $341.2 million on the strength from snowthrowers and walk power mowers due to strong fall demand. Net earnings for the year were $119.7 million, or $3.10 per share, a decrease of 8.8% on per share basis compared to last year. For the fourth quarter, net earnings were break even.

The earnings decline in both the fourth quarter and full year includes a charge of $4.7 million, or $0.08 per share, taken in the fourth quarter to account for work force adjustments. While a significant impact on the earnings in the smaller fourth quarter, these actions will help better align the Company's cost structure going forward. As many of you know, because of our seasonal business, the fourth quarter is historically a small revenue and earnings period for The Toro Company. It's when we conclude our fiscal year and position ourselves for next year's primary selling season. On our last earnings call, we said the fourth quarter would be challenging, and it was. However, we delivered earnings per share for the year in the range we stated, including taking a work force adjustment charge.

It's also important to note that we are not satisfied in our revenue growth for the year and worked hard to execute in areas we could control. As noted business author, Marcus Child, once said, "Businesses must control the controllables in times of change and challenge to steer through economic storms". We are doing just that, and accomplished several objectives in 2008 that I would like to highlight. If you recall back in 2004, we set out to grow the international business more than 30% of revenues. Through solid execution of our global growth objective and by taking advantage of opportunities outside the US to further diversify our portfolio, international sales increased by 12% for the year, and now account for 32% of total sales. While currency had a favorable impact, we experienced strong demand from golf course construction and renovation projects in Asia, eastern Europe, Africa and the Middle East. At the same time, overall growth rates for the micro irrigation products remained healthy in Europe and Australia.

Second, we continued to make progress on our Lean initiative and improved our working capital position in 2008. Improvement in this area is certainly more challenging when growth slows. Nonetheless, our talented team here helped lower net inventories by 17.6%, and reduce accounts receivable by 9.5% on flat sales. And as a result of our heightened focus on asset management, we generated a record $216 million in cash from operating activities. These results demonstrate that we are indeed serious about lowering our working capital as a percent of sales to free up cash for future investments and drive additional shareholder value.

Third, as we talk about our strong cash position, one of our ongoing priorities is to pursue strategic acquisitions to grow the company. In October, we acquired a versatile line of deep tine aerators from Southern Green to strengthen Toro's popular offering of ProCore aeration equipment. The acquisition, albeit small, is strategic for the golf business as cultivation practices become increasingly important to the success of our customers. We anticipate significant share growth in this category, as we leverage our strong brand and expanded distribution with the Southern Green line of products. And lastly, we continued our commitment to market leadership through innovation in 2008 by launching a number of new and exciting products, in both the residential and professional markets, to better serve our customers. Steve will talk about these in a few minutes.

I'm pleased to say we once again exceeded our goal of having more than 35% of annual revenues attributable to new products, which we define as products introduced in the current and prior two years. Without these new products, revenue growth for the year would have been even more difficult. I would also like to provide a quick update on our GrowLean initiative. We've now completed the second year of this program and unfortunately, we fell short of achieving our fiscal 2008 revenue and profit after-tax goals due to the deteriorating market conditions. Even with the markets trending down, one key positive is our improved discipline on working capital, an area of measurable improvement this year and in the years ahead. With that, I'll now turn it over to Steve to review our segment and operating results.

Well, thank you, Mike, and good morning to everyone. Starting with the professional segment, worldwide sales for the year increased slightly over fiscal 2007 to one billion, 283.1 million dollars. While domestic professional sales experienced considerable pressure due to ongoing economic weakness, international demand remains strong across most professional categories. Within the golf market, international demand remained healthy for turf maintenance equipment and precision irrigation systems, as new golf projects continued to break ground around the world. In addition, our professional segment benefited from the successful launch of several new innovative products. These include the 16 foot Toro Groundsmaster 5900 series rotary mower, which delivers unmatched productivity and value, the Toro TRX walk behind Track Trencher, which provides us an entry into an entirely new product category, and the Toro Workman MD series utility vehicles affording customers improved ride quality and comfort.

On another positive note, micro irrigation continues to be an area of growth with strong sales in Europe and Australia, along with healthy orders in North America, for our new Aqua-Traxx PBX line of premium drip tape. We were also glad to see incremental sales from our recent acquisitions of Rain Master and Turf Guard. These gains were somewhat offset by significant declines in professionally installed residential and commercial irrigation systems, largely due to poor market conditions, along with a slight decline in landscape contractor shipments as a result of shared efforts with our channel to reduce field inventory. For the fourth quarter, net sales in the professional segment were down 4.5% to $208.4 million. Net earnings in the professional segment for fiscal 2008 were $234.8 million, down 7.6% from the previous year. The decline was largely due to rising raw material and freight costs, and lower production volumes. For the fourth quarter, professional segment earnings declined $12.1 million over the prior period to $14.6 million.

In the residential segment, economic conditions hit domestic consumers particularly hard. Despite the difficult environment, worldwide sales for the year remained essentially flat with fiscal 2007 at $563.9 million. Most of the revenue growth came from our international business, where all residential categories were up for the year. In particular, our Pope branded products saw a healthy increase in demand down under in Australia, while sales for riding products were up in both Canada and Australia. Meanwhile, snowthrower shipments were up significantly across North America as a result of lower inventory levels and accelerated demand. As we know, in the snow business, a good snowfall in the preseason tends to cause an increase in demand the following season. As a result, we've enjoyed strong early season customer purchases of our full lineup of Toro snowthrowers, including the innovative Power Clear, with the quick chute control system to effortlessly change direction of the chute and throw snow up to 35 feet.

And while domestic sales for walk power mowers were down for the year, but in line with the industry, we did experience a nice bounce in the fourth quarter due to strong late summer and fall demand. Combined with increased shipments for snowthrowers and international sales growth, residential segment net sales for the fourth quarter were up significantly, gaining 21.2% to $122.2 million. Net earnings in the residential segment for fiscal 2008 were $33.9 million, down 19.1% from the previous year. For the fourth quarter, residential segment earnings were up $5 million over the prior period to $6.5 million. While challenges continue in our residential market, we are determined to drive retail demand and profitably improve our share position in the coming year. Mike will talk a little more about this, and our efforts, later in the call.

Let's turn now to the key operating results. Gross margin decreased by 1.3 percentage points in fiscal 2008, to 34.8%, as a result of higher commodity and fuel costs and lower production volumes. For the fourth quarter, gross margin declined 5 percentage points to 29.9%, due to increased commodity costs, a one time write-off of tooling, and product mix with our lower margin residential business up significantly in the quarter. SG&A expense for fiscal 2008 was down slightly by $400,000, and flat at 24.2% of net sales. For the fourth quarter, our SG&A expense was down $4.6 million compared to the same period last year, and decreased as a percent of net sales to 29.7%, from 31.9%. We continued to invest in engineering to grow our business for the long-term, and incurred costs associated with the work force adjustment mentioned earlier. These increases were offset by a decline in incentive compensation expense. Looking ahead, we believe the work force adjustment and lower spending will help our SG&A expense in fiscal 2009 as we reduce our cost structure in response to the difficult market conditions.

Interest expense for the year was $19.3 million, down slightly compared to fiscal 2007. For the fourth quarter, interest expense totaled $4.4 million, up slightly from a comparable fiscal 2007 period. Our effective tax rate for the year was 34%, compared to 33.2% for fiscal 2007. While both years experienced retroactive extensions of the federal research and engineering tax credit, the fiscal '07 credit was more favorable to us than the fiscal '08. Looking ahead, the tax rate for fiscal '09 is expected to remain unchanged at 34%. On a positive note, our balance sheet is much improved over last year. I'm pleased to report that accounts receivable declined $26.9 million, or 9.5% at the end of fiscal 2008, and our inventory position is solid with inventories down $44.2 million, or 17.6%. We made significant progress as a result of our continued focus on asset management. Additionally, we're working closely with our channel partners to be more proactive and taking prudent steps to better align our purchases and manufacturing with customer demand. With overall field inventories in excellent shape, we're positioned well, as we head into fiscal 2009.

And finally, as Mike mentioned earlier, a heightened focus on asset management helped us generate a record $216 million in cash from operating activities, an increase of $32 million over the prior period. This achievement is a positive signal to our employees, our customers and our shareholders alike, that we are determined to run our business in a leaner, yet more responsive manner in the years ahead. I'm also glad to report that heading into the next year, we have a strong liquidity position as indicated by our year-end cash balance of nearly $100 million, along with committed bank lines in excess of $225 million. Consistent with our emphasis on delivering value to shareholders, we returned $133 million to shareholders through dividend payments and share repurchases. During the year, we took a more conservative approach to share repurchase given the uncertain economic and financial conditions. In addition, we're always looking at strategic acquisitions to grow our business, and the current economic environment may provide additional opportunities to use our strong financial position. And as announced last week, our Board of Directors declared a regularly quarterly cash dividend of $0.15 per share. That's all for our full year and fourth quarter results. I'll turn it back to Mike.

Thank you, Steve. Now let me direct my comments to our outlook for fiscal 2009. We expect the market conditions we experienced in 2008 to continue in the coming year with many uncertainties and challenges. In particular, we anticipate softer retail demand, as buying behavior becomes increasingly cautious, and the effect of currency that helped our international business in years past will likely hurt us in fiscal 2009. In the area of gross margin, which has been under some pressure from commodities, we could see some relief later in the year if commodities continue to track downward. As always, we'll work diligently to manage these costs in the year ahead.

As mentioned before, several efforts taken in fiscal 2008 will benefit us well, going forward. First, our cash position is strong, coupled with our committed credit facilities. We have a very solid footing at a time when financial markets remain tight. Second, in close alignment with our channel partners, we're aggressively managing inventory levels. Third, we have embraced an attitude of rigorous cost containment and are taking actions to reduce our cost structure. We're scrutinizing proposed expenditures, making wise long-term investments and driving Lean initiatives that will yield cost savings and improved efficiencies. In fiscal 2008, we conducted more than 200 Kaizens in our manufacturing plants, yielding savings of greater than $2 million, and we achieved more than $7 million in material savings through Lean efforts with our suppliers, and we will continue to look at the organization structure in light of these conditions.

Fourth, we are making measurable progress in reducing our working capital. While there is much work ahead of us, we expect continued improvement in accounts receivable, net inventories, and trade payables. These efforts will free up cash for other strategic purposes and drive long-term value for our shareholders. And lastly, with our strong investments in engineering, we expect to introduce a number of major product advancements in the coming year. We're excited about these new product innovations and, again, anticipate they will drive retail demand. Let me give you a couple of examples of what's new. In late October, we unveiled our new platform of next generation commercial Z mowers at the Green Industry Expo. This includes the Exmark next Lazer Z and the Toro Z Master G3. We also introduced the Toro GrandStand, a stand-on mower, and a whole new category for us. These products were under constant use by contractors in the outside demonstration area. As we mentioned on our last earnings call, it was uncertain whether these new products would ship in the fourth quarter of 2008 or the first quarter of 2009. We took the extra time to insure these products were ready, and I'm happy to report all three will ship in this first quarter.

Moving to precision irrigation, in November, we returned from the Irrigation Show in Anaheim, where both our Toro and Irritrol brands introduced several water saving irrigation technologies. For example, customers are anxiously awaiting the delivery of Toro's new Precision Series spray nozzles, which were awarded the 2008 New Product of the Year by the Irrigation Association. This product represents one of the most significant breakthroughs in novel technology in over 60 years because they feature a larger droplet size to irrigate more effectively while using 30% less water. These and other technologies will continue to advance our position as a leader in water management. And in February, we'll be at the Golf Industry Show in New Orleans, and we'll have more to report on our next call.

Moving to the residential segment, new products will also help retail demand. For example, we're introducing a new platform of Toro and Lawn-Boy steel deck walk power mowers, in two distinct price ranges, to compete on a broader pricing scale at our largest retail partner. We are also introducing a new platform of Toro Titan zero turn mowers to offer customers more features and build on our heritage of offering high quality products at competitive prices. All in, our product line is refreshed, deep and full, with more new products on the horizon.

As I mentioned, we expect the tough economic conditions we're all facing to continue well into 2009 and we, like everyone else, can't predict how deep, long or widespread this recession will be. Given the ongoing economic weakness and tight credit markets, our outlook for the year ahead is more uncertain, and the resulting impact on our business will be even more difficult to predict. Taking all these factors into account, we expect fiscal 2009 net earnings to be $2.50 to $2.70 per share on a revenue decline of approximately 5%, compared with fiscal 2008. For the fiscal first quarter, a seasonally smaller revenue period for us, we expect net earnings of $0.15 to $0.25 per share. As we closely manage our assets, along with our channel doing the same, shipments will move closer to the retail selling season, so as a result, our first quarter will get off to a slower start than in previous years.

While we know fiscal 2009 will be a challenging year, we have many reasons to remain positive. We have, as a company, weathered tough times before, and each time, emerged stronger and more resilient. We have a unique blend of innovative products, strong brands, and experienced and passionate employees. In times like these, the strong can get stronger, and our talented team of employees around the world will continue to fight through the adversity with determination and resolve. Personally, I am grateful for their focus and execution, which allowed us to achieve many operational improvements throughout the year, and I look forward to seeing them deliver even greater efficiencies in business improvements in the year ahead. That concludes the summary of The Toro Company's fiscal 2008 year end and fourth quarter results, and now, let's open it up for your questions. Kameesha?

(OPERATOR INSTRUCTIONS) And, your first question comes from the line of Jim Lucas from Janney Montgomery Scott. Please proceed.

Good morning, Jim.

Good morning, guys.

Good morning, Jim.

Couple of housekeeping questions before diving into the big picture. The FX benefit in the fourth quarter, could you help us out there, Steve?

It was, from a top line standpoint, I think about $1.7 million, we're use to giving you these in dollars, so a pickup in dollars for the fourth quarter of $1.7 million. It was high 20s for the full year, $28 million.

Okay. All right, and on the gross margin, you mentioned the tooling write-off. When you look at that gross margin contraction of 500 basis points, and you look at the major buckets of the tooling write-off, commodities, lower production volumes, without giving specifics of hard numbers, can you rank order what the biggest impact on the gross margin erosion was?

By order of impact, the largest by far would be commodities. That was the biggest piece, followed by the the tooling write-off that we talked about. That's about the same size as the mix issue, where we had more residential sales than professional sales, where the margins are not as great. So those are the three main things that covers the bulk of that.

Okay.

Commodities is the biggest. Tooling and mix would be about the same.

And with regards to commodities, we're all seeing a number of your major input costs coming down. How quickly is that read through for you? And, one of the issues that you had in '08 had to do with the residential business not necessarily being able to pass along price increases. Do you feel you have the product line reset enough to account for where commodity prices are today?

Yes, if you can tell me where they are going. I mean that's the issue, is where are commodity prices going. We told you in our third quarter call that we knew we were going to have heavier back-end commodity costs, and we did in the third quarter and we did in the fourth quarter. I think it was about $15 million incrementally more over the prior year in each of those quarters. So what happened is, we saw the increase in commodity costs. We lagged that in our costs. We got sawed on the back half of the year. We didn't get much benefit on the front, it wasn't benefit, but downside in the front part of the year. We got it all in the back side of the year. As those commodities now, hopefully, are starting to go the other way, and I'm particularly talking about steel, which was one of our main commodities, we will see the benefit of that lag too. We will probably see first and second quarter still have some commodities pressure, and if in fact the prices stay where they are at, we'll see some benefit of that in the third and the fourth quarters.

Okay. And, from a CapEx and D&A, where do you see that for '09?

Very similar to last year, upper 40s in both, 48, 49, both in CapEx and in depreciation and amortization.

And of that CapEx, how much of that is maintenance versus growth? Trying to just understand where you're investing the dollars today, and how much of that could be ratcheted down?

Yeah, a significant part of that is for new products, so I characterize that as growth driven. In fact, I would guess the majority of our CapEx spending is in that area.

Okay, and, the work that's been done on the balance sheets, very noticeable, clearly a lot of opportunities, especially on the payables side in particular, but when you look at the inventory receivables, you're generating a lot of cash still even in these uncertain times. When you look at, from a capital allocations standpoint, can you remind us how much you have left under the current share repurchase authorization, and when you're looking at acquisitions, you know, are they more of the Southern Green type acquisitions, or is there anything of particular size out there that's on the radar screen?

The share question is we still got over 2 million shares remaining on the 4 million authorization we got over May, I think. So we've got plenty of room there, Jim, in terms of share authorization.

Okay.

And Jim, regarding the, what are we looking at, very consistent with what we've said in the past. We look across kind of the full spectrum from large enterprise shaping acquisitions to the smaller, bolt-on ones, to technology plays. Not surprisingly, the division extending ones or the bolt-on ones, there tend to be more of them, like Southern Green, or last year with Rain Master. Last year, we did the technology one with Turf Guard, and we've got a team of people that are constantly looking at, again, kind of the full spectrum of possibilities.

Okay, and as you are rolling the plan together and you're setting the initial guidance to the outside world, sales down 5% and, if we just take the low end of that range and say $2.50, when you are looking at how uncertain it is out there, what would it take to have it be less than $2.50 next year?

Needless to say, I think one thing we will all agree on is it is uncertain, more uncertain than it's been any time in recent past when we've had a call like this time of the year. And so, one of the things we have to be doing is a lot of scenario planning, probably more heavily weighted to the down side. You know, as we looked at putting our guidance together and where we think we're going to end up, we know there's some serious headwinds on the overall demand and some softening in the international market. Currency, certainly, has been a contributor, not as much perhaps as you might think because of our hedging practice, which will also help us this year on the other side of that. Working for us, you know, we've got some price in place. We have more new products. Again this year, we will be, based on our plan, at a record level of new products across our residential and professional businesses, and that will help us. That will help bridge the softness, and we would hope that if the market's down 10, we can take some share and that will keep our revenues propped up.

Our inventory position in the field is in very good shape, the best shape it's been in a number of years in the past. That will help us as well. And then the last, kind of the wild card, always is in this business, is mother nature. And as you know, we came off a spring last year that we wouldn't characterize as being a good one. And while we're not going to count on extraordinarily good weather to drive our business, reasonable weather can drive our business. I'll give you an example. As we went through the fall period with walk power mowers, which is kind of a consumer demand business, our comps year-over-year from the late summer/fall versus last year, were up in clearly a much worse economic environment. Well, the reason why was because mother nature cooperated a bit more and kept the grass growing, and people were replacing their product more frequently. Not everyone, but many of them. So if the weather is even, what I'll call normal, as we head into the spring, that could help us comp more favorably. So, Jim, there's lots of puts and takes, but we understand the point of, it depends on how deep and how long this recessionary environment lasts.

Well, thanks. Understanding of the thought process is very helpful, and enjoy the snow.

Thank you.

And, your next question comes from the line of Jim Barrett from CL King & Associates. Please proceed.

Hi, Jim.

Good morning, everyone.

Good morning.

Mike, could you discuss, in general terms, what the impact of the credit crisis has been on your distributors securing credit, your dealers securing credit, the commercial landscaper also having availability to credit?

Well, I could do that, Jim, but I could even do it better if I turned the question over to Steve.

All right.

That's a good question, and obviously seeing a lot of that in the paper, Jim, these days on what's going on. So let me start with where Toro is as a Company, because I think it's important, even for our dealers and our distributors, that their banks know that they are dealing with a Company that's going to be around. And as I mentioned in my formal remarks, we ended the year, obviously our seasonal down period, with $100 million in the bank and we've got a group of six banks that we feel very good about, ones we're not reading negatively about in the paper. So, we think from a Toro standpoint, we've got a very good liquidity position, and that's going to serve us well when we go forward.

When you go to the next step, which would be Toro distributors, there are a couple of ways they get financing. One is through our own credit company where we do our floor planning. We control that. Obviously, as long as we can get funded, that is not an issue. They also will have bank lines of their own that they do independently. That is a bigger issue, and we've been in touch with our distributors at a meeting we had a few weeks ago, telling them to stay in touch with your banks, make sure you have backup banks, and we've not seen any major issues with any of our distributors in terms of those banking relationships.

Maybe the place where we've seen the biggest change or tightening is in the retail end of things, where that's farmed out through a third party. We don't do that ourselves. And they have certainly, like I think most retail financing companies out there today, have tightened their credit spectrum. They have been in and told us that that is going to loosen back up after the first of the year. This obviously again, we're not in the season so it's not as big a deal, but we think that's going to correct itself and we'll work our way through that as we get into the selling season. The other piece is the third party floor plan piece, and that's for our dealers and some of our distributors, and we've not seen a significant change in ability to get things financed there. So overall, I would say there's certainly been a degree of tightening that you've read in the marketplace. We don't see, at this point, that it's anything that's going to have a significant effect on our business going forward.

Okay, good. And Steve, when I look at your international sales, I know you have some international manufacturing operations, but what percentage of your product, whether it be professional or residential, is exported from the US, and what do you envision, if the dollar stays where it currently is, what impact is that likely to have next year, or this year?

Yes, you know, we're predominantly an exporter. When you look at our business overall, the bulk of that is exported. So when we look at, I guess just to go onto the dollar piece of it for a minute, when you think about it, if 32% of our business this year ended up international, kind of as a benchmark, only about half of that is billed in non-US denominated currencies. So, half of it is Euro and Australian dollar, and the other currencies that we're involved in. And, we have some businesses that use some of those dollars, so you don't need to convert all of those dollars back. So when you do your exchange piece of it, we always at the beginning of the year, just like we did before fiscal '09, do some hedging of that currency prior to getting into the year, and '08 was a good example. As the dollar continued to weaken, that helped us overall, but we had put some hedges in place earlier on before it weakened all the way, which ended up hurting us in '08. We'll get just that opposite effect in '09.

So the point is, by looking at the spot rate and looking at where things are today versus where they were yesterday, last year is not a good indication of what's going to happen to the dollar because we've hedged in between there and taken some of that risk away. So, that's kind of a long winded answer to your question, but we're constantly looking at that. Hedging, we'll get hedged up to 75% or 80% as we get into the year, but those hedges we put on early in the year either may benefit us or may hurt us, depending on if the dollar strengthens or weakens.

So, just to clarify, you are selling the products in the local currency, and your hedges hopefully offset the volatility of the dollar, is that essentially what you're saying?

You don't offset it all, but it gives you some offset.

Right.

What I said was, we've got half of our international business is in local currency. What I was saying is we do have some costs, some people costs that we incur that we can use. For instance, the Euros, that's a built-in hedge against the conversions.

Right. Well, thank you very much.

And, your next question comes from the line of Sam Darkatsh from Raymond James. Please proceed.

Good morning, this is actually Jeff, calling for Sam.

How are you doing Jeff?

Doing good. First question, and I apologize if you already gave this, but what was the impact of the tooling write-down in the quarter?

We didn't quantify the dollars. We said the biggest impact on the quarter was commodities, and that was twice the amount of the tooling write-off.

Okay, great. Next question, and I'm sorry to pile on the currency topic, but I think obviously it could have a pretty big impact this year. Can you give us the EBIT impact of currency for fiscal 2008?

No, I can't.

Okay, because that would help us kind of back into what your effective hedges were and that kind of thing.

Yes, we don't have that information with us.

Okay. All right then, moving on. Your guidance, you're assuming the down 5% in terms of sales. Can you break price out of that, and talk about your expected relationship in '09 between realized pricing and raw materials, assuming materials stay where they are at now?

Yes, Jeff, this is Mike. Kind of in broad strokes, if you will, the unit decline is largely that price slightly more than offsets currency, so when we said about 5%, fact is we're not trying to be precise and say 5%. It could be a couple points either side of that, as the season starts to unfold. But, we do expect a real unit decline across the business.

Okay, and is that your forecast for the industry, or are you assuming some market share gains in there?

Well, there's lots of different industries within that and, again, as I commented earlier, much of the consumer side of it will depend on mother nature. That could be 5% to 10% down, but we would expect to take some share there with our new offering. I don't think there is a category that we are looking at that we wouldn't expect to hold or improve our share position.

Okay. Next question, in terms of margin next year, can you talk about where, aside from the leverage on any volume movements or anything like that, can you talk about the savings you expect to see, either from the work force rationalization you just announced or additional Lean savings? I know you've talked about Lean in terms of working capital rationalization, but is there anything left there in terms of additional margin impact to the P&L?

This is Steve. Yes,that gets to be, as time goes on, that gets tougher and tougher, but that's obviously an area with our GrowLean initiatives, we'll still be focusing on. And we've, the last few years, told you we've gotten somewhere in the area of $7 million, $8 million out of our GrowLean initiatives. We would be looking to try and do that same thing again next year, along with the head count initiative that we've taken. So, you put the two of those together, you should get upwards of the $10 million range, something in that area, depending on what happens to commodities. Lot of ifs in that. It's what can you control and what can't you control. We can't control the commodity costs. We can't control the currency impact, but all things equal, we would look for savings in those areas.

Great. Thanks a lot for the help. This is very helpful.

Thank you.

Thank you.

And, your next question comes from the line of Eric Bosshard from Cleveland Research Company. Please proceed.

Good morning. This is Mark stepping in for Eric.

Good morning, Mark.

First, in terms of the professional segment, a lot of pressure on profits here in the fourth quarter. Can you explain away the big profit shortfall, was it the tooling? And then, how should we think about profits in the professional segment going forward, and in addition to that, what are you seeing on the pricing side from some of your peers within the professional end markets?

Well, I would sum it up to two things, Mark, and that would be certainly the commodity pressure we talked about, and then mix within the segment was a factor as well, and so that can maybe paint a picture that it's more of an issue than it is.

Okay, and then that explains the big shortfall within 4Q in professional, both commodity and mix?

In the professional side, it was commodities and freight and material costs, the things that we've talked about all along, coupled with the fact it's a small quarter. It's our smallest, either smallest or second smallest, quarter.

Are you seeing anything different from your peers in the professional segment, given the continued difficult end market environments, anything to suggest more aggressive peers, which could be playing into the shrinking profits?

It's a small group of competitors. If you talk about the golf market, it's the same group that we see all the time. Everybody's very competitive prior to this economic turn down, and now with the conditions we're in, everybody is scrapping for every deal, like we always have. So I would say, from time to time, you're going to win one, you're going to lose one maybe you wished you hadn't, but you're going to get one on the other side that you hadn't expected. So, I don't think there's anything dramatically different other than the competitive level will continue to be at a high level just because everyone's looking for every deal they can possibly get.

Can you break out how much of your sales in 2008 was contributed through price? I know you kind of commented 2009 you expect price to offset currency, but can you talk about how that broke itself out in 2008?

It's roughly 2% to 3% we would say percent.

2% to 3% of price in the flat sales?

Yes.

Okay, last question. The 1Q guidance down 60%, how should we be thinking about that specifically, 1Q down 60%, but the full year down closer to 15% to 20%? Is this a reflection at all in what you're seeing in terms of pre-buy? Obviously appreciate it's a small quarter, but you did mention a lot of the new products will be shipping in the first quarter. So, if you can kind of walk me through or add some additional color on why the 1Q guidance is incrementally soft versus the rest of the year?

I would start with, first of all, remember last year's first quarter was big. It was 7% increase. So, you got a comp that's higher. The other piece of this is that we do think there will be some top line pressure in the first quarter, just as people have gotten more cautious in terms of how much inventory they'll hold and how much inventory they want to take until they get closer to the season, and some of this is all producing and selling closer to retail. We just think there's going to be a more conservative point of view from the customer. So, we've taken the position that we're going to start with the lower number in the first quarter.

And you would add to that, Mark, that we're going to work very hard to get the commodity situation turned around, but that's going to be there in the short-term to some degree.

Got it. Thanks, guys.

And, your next question comes from the line of James Bank from Sidoti & Company. Please proceed.

Good morning.

Good morning, Jim. Good morning.

A lot was covered. I'm sorry if these were asked or presented in your prepared remarks. The depreciation and amortization, why was it so high in the fourth quarter?

Fourth quarter?

Yes.

The numbers that I gave you for depreciation and amortization were for the full year.

That means it was $16 million in the fourth quarter, just considerably more than the past three quarters in the year and then also year-over-year?

Yes, it was the tooling write-off.

Ok. On the first quarter guidance, I'm just a little bit confused. I guess maybe I don't fully understand the sell-in and the reorder. I guess the success you're seeing with your snowthrower sales right now, we're seeing sort of a pull into the fourth quarter and might affect the first quarter? Because I guess with the backdrop that you had given, I would have suggested a little bit more of a better first quarter heading into next year. What am I missing?

Well, again, the year-over-year, Jim, we had a very strong first quarter with snow last year, which actually pulled some of that into the fourth quarter of 2008. Now we're into the season for 2009, if you will, and we're starting to see some snowfall, whether it will be as good as last year remains a question. Supplies will be somewhat limited there, but just to comp that part against last year, is a relatively bigger number. And then, the larger part of that is spring goods and how that will flow into the channel. We said we'll manage that a little closer in partnership with the channel. And then last, there will be some commodity pressure on gross margin in the first quarter before we can kind of recover and get that back.

Right, okay. And now, I don't think anyone asked us. As we enter GrowLean's final year in 2009, any thoughts on a successor?

We're very focused on finishing up GrowLean in a positive way. It's been a very difficult two years. Some good things happened, but lots of external challenges, to say the least, and so, we'll talk more about a successor down the line with you.

Okay.

Thank you for the question. You're the first one that's asked that.

Oh, good. But, we would be able to assume another potential three-year program then? Whatever it might be?

We will be talking about that, figuring out how to best motivate the organization to driving results and more shareholder value.

All right, terrific. Thank you.

Thanks, James.

(OPERATOR INSTRUCTIONS) At this time, there are no questions in queue. Mr. Michael Hoffman, please proceed with closing remarks.

Well, thank you Kameesha, and thank you, all of you, for your questions and your interest in The Toro Company. We do appreciate your confidence and trust, and look forward to talking with you again in late February as we discuss our first quarter results. Thank you. Have a great day.

Thank for your participation in today's conference. (OPERATOR INSTRUCTIONS)