Toro Co (TTC) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Toro second quarter earnings conference call. My name is Jerry, 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 the conference. (Operator Instructions) 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 Jerry. Good morning everyone, and thank you for joining us for our second quarter earnings conference call. Here with me this morning are Steve Wolfe, our Chief Financial Officer; Tom Larson, Vice President and Treasurer; and John Wright, Director of Investor Relations.

We begin with our customary 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, particularly in the current environment. 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. As you saw in this morning's release, we reported that net sales were down 21.7% to $499.9 million for our second quarter ended May 1, 2009. On the earnings front, we posted net income of $36.9 million for the quarter, or $1 per share compared to $1.60 per share in the same period last year.

For the first six months, net sales were down 19.6% to $840 million. In addition, net earnings for the first half $43.6 million, or $1.18 per share, down from $2.07 per share in the comparable fiscal 2008 period. The earnings decline includes a pretax charge of $2.1 million to account for work force adjustments, which equates to $0.04 per share on an after-tax basis.

Overall, we think this is solid performance in a very tough economic environment. Persistent problems in the global economy continue to suppress demand throughout the markets we serve. Although we are encouraged by recent forecasts from a number of economists that the recession in the United States appears to be losing steam, we realize our customers will feel its effects for sometime. Due to the seasonality of our business, it is unlikely Toro will experience any immediate benefit, as our fiscal second and third quarters comprise our primary selling season for the year.

As always, weather also influences our customers' buying behavior. If you recall, favorable conditions in the first quarter, particularly strong snowfall, helped drive sales. Although this spring's weather has not been ideal, generally conditions are improved over last year.

Our professional markets have proven to be hardest hit by the ramifications of the economic downturn. The recession has led to less travel and reduced demand at golf resorts, declining memberships hurting private courses, and fewer golf outings at daily fee facilities. This is putting course revenues under pressure and creating less appetite for new purchases as the irrigation and equipment replacement cycles stretch out. A similar story is playing out in the municipal market, where budgets are also under pressure and expenditures are being scrutinized to a greater degree.

Meanwhile, the economic uncertainty and its implications for further belt-tightening by their customers have caused landscape contractors to assume relatively conservative outlooks. Despite this concern, we have had success acquiring landscape contractor business fueled by new products and a renewed focus on promoting our fleet program through dealers to contractors. Sales in our international business fell across the board due to the soft global economy and unfavorable currency movements. Many countries experienced the onset of recessionary conditions later than the United States and will likely continue to feel the impact of the global downturn for sometime.

Fortunately, our domestic residential equipment sales are proving to be somewhat more encouraging than our other businesses in the current economic climate. While many consumers are holding back on big-ticket purchases, we are seeing favorable results within the lawn and garden category. Overall we are taking the appropriate actions to manage the health of our business through this period of reduced demand. To avoid building excess inventory, both at Toro and in the field, we have made tough decisions to keep production rates closely aligned with actual demand. We have announced larger than normal plant shutdowns, reduced shifts and temporary layoffs. Employees have responded well to our call to restrain spending, as we make the necessary adjustments to strengthen our financial position. We are going hard after every sale and believe we are not only holding, but gaining share in many product categories through our proven track record of out-innovating the competition.

While new products alone cannot fully counter a recession they clearly help us work through this difficult climate and position our businesses to grow as our markets recover. For example, as Steve will explain later, we are confident we are outperforming the market with a new broader line of Toro and Lawn-Boy walk power mowers. This includes the Toro brand with its innovative Bag-on-Demand feature and Personal Pace technology that is being highlighted in our newest television commercial now airing throughout the country.

We are also strengthening our strategically important leadership position in zero-turn riding mowers with an expanded lineup of new products that address the needs of the full spectrum of customers from homeowners to landscape contractors to municipalities. In particular, the reception remains strong for the new Toro Z Master G3 and Exmark Next Lazer Z landscape contractor mowers, while the new Toro stand-on mower, the GrandStand, is grabbing share at a fast rate and appears to be drawing new customers into the category. And lastly, industry-leading advancements in water conservation technology have our irrigation businesses poised to capture additional sales today and provide a growth opportunity with the eventual economic recovery.

Beyond product, we also benefit from strong trusted relationships with our customers around the world who value our brands, our people and service. It is for this very reason we have been successful in adding new business in a highly competitive environment. For example, we signed an exclusive agreement with Hilton Hotel Corporation to provide turf maintenance equipment to help maintain their golf properties. And just last week, we entered into an agreement with Trump Golf to provide them with equipment and irrigation systems. The important factor to consider is that we are doing the right things to manage through the current conditions. Our customers place great trust in our brands to help them keep their properties in top condition and we're grateful for their business. So all in, the Company is solidly profitable and performing well in a difficult environment. I'll now turn it over to Steve to review our segment and operating results.

Thank you, Mike, and good morning to everyone. Starting with the professional segment, worldwide sales for the quarter were down 29.2% to $310.4 million. Overall weak economic conditions resulted in broad-based declines across most professional product categories. Part of the decline was the result of lower field inventory levels on a year-over-year basis. The shortfall was led by weak demand for golf maintenance equipment and irrigation systems for the reasons Mike mentioned earlier.

Looking at our professionally installed residential and commercial irrigation products, sales were dampened by continued weakness in commercial and new home construction. However, the eventual rebound in the housing market and proposed legislation mandating water conservation will boost demand for water-saving technologies, which bodes well for the prospects of selling our highly innovative irrigation systems. Our new precision series spray nozzles have started to ship and are already receiving rave reviews from customers who are now -- who have now started to witness firsthand the dramatic water savings these new spray nozzles can deliver.

Overall shipments of landscape contractor products were down, but the category benefited from previous efforts to reduce field inventory and a number of new products we've introduced into the channel. This includes the exciting new Toro GrandStand that's winning over customers with its smooth operator platform and versatility. At the same time, our new offering of next generation landscape zero-turn mowers is being well received by customers and providing a bright spot in an otherwise down category.

For the year to date, net sales in the professional segment were down 26.4% to $539.7 million. Additionally, earnings in the professional segment for the second quarter were $56.9 million, down 41.3% from the previous year. The decline was primarily due to higher manufacturing variances from production cuts, year-over-year increases in commodity costs, and unfavorable currency rates. For the first six months, professional segment earnings totaled $87 million, down 41.4% from the prior year period.

Turning now to the residential segment, worldwide sales for the quarter were down 4.7% to $183.6 million. Across most categories, sales slowed as the global recession continued to have adverse effects on consumer confidence and spending. Orders for riding products turned weaker, as consumers appear to be exercising greater caution in making larger purchases. While this trend impacts sales in the near term, we believe our new platform of Toro TITAN zero-turn mowers should put us in a solid position to grow sales as demand improves in this important category.

Somewhat offsetting the decline in our residential segment was a healthy increase in shipments for our new line of Toro and Lawn-Boy steel deck walk power mowers. Expanded placement of Lawn-Boy units at a key retailer resulted in greater market penetration and helped jump start retail activity early in the season. Our walk power mower lineup covers a broader range of price points than in years past, and the-- our channel partners have been actively promoting our innovative features to their customers.

Also impacting results for the quarter were lower international sales of residential products due to poor market conditions and unfavorable currency rates.

For the year to date, net sales in the residential segment were down 2.8% to $290.6 million. Meanwhile, earnings in the residential segment for the second quarter were $16.6 million, down 20.2% from the previous year. The decline was primarily driven by commodity costs, product mix, and exchange rates. For the first six months, residential segment earnings totaled $21.4 million, down 12.8% from the prior year.

Now to turn to our key operating results, starting with gross margin. Margins for the quarter decreased by 3.4 percentage points to 32.3%. The combination of commodity costs, lower production volumes, product mix, and the impact of currency all negatively impacted our gross margin. Year to date, margins have declined by 2.8 percentage points to 33.3%. While commodity costs have been higher than last year, we do expect them to begin comparing favorably in the second half of fiscal '09.

As for SG&A, expenses for the quarter were down $22.7 million from the prior year. That said, as a percent of net sales, SG&A increased to 20.5% compared to 19.6% in the second quarter last year. For the first six months, SG&A expenses were down $35.3 million, but increased as a percent of net sales to 24.6% compared to 23.2% last year. Actual expenses were down -- were lower as a result of work force adjustments and tightened spending, but not enough to keep pace with lower sales volumes. However, by taking expenses out of the system, we've been able to move our cost structure in the right direction. Most importantly, we believe we have done so while continuing to invest in innovation for the future and aggressively competing for our customers' business.

Interest expense was down $1 million for the quarter and $1.5 million year to date. The decrease was primarily the result of lower average short-term debt and reduced interest rates, reflecting our continued focus on working capital and conservative stance year to date on share repurchases. Our effective tax rate for the quarter was 34.2% compared to 35% in second quarter last year. The decline was primarily due to the reinstatement of the research and engineering tax credit. For the full fiscal year '09, we now expect our tax rate to be approximately 33.8%.

Moving now to the balance sheet, it appears the results of our working capital efforts have been significant. Accounts receivable for the quarter was down $139.4 million, or 25.5% from prior year period. To that end, we're currently not experiencing any significant collection problems, which is a positive signal during these difficult times. And while we have reduced production in plants to match lower demand, our efforts have also helped lower net inventories in the second quarter by nearly $50 million, or 18.7%.

As we mentioned during our last call, liquidity is paramount and our strong financial discipline has kept us on solid ground. At a time of year that is generally the peak point of our short-term borrowing season, we're in a more liquid position today than a year ago. Our short-term borrowing at quarter end was approximately $120 million lower than the same time last year, with nearly $200 million available against our committed credit facility.

Going forward, we'll continue to seek opportunities to wisely use our strong cash position, whether in the form of acquisitions or by returning value to shareholders through share repurchases and dividends. That said, on Tuesday, our board of directors once again declared a regularly quarterly dividend, cash dividend of $0.15 per share.

Before turning it back over to Mike, I would like to make a brief comment on the credit environment. For Toro, we're seeing no major credit capacity constraints and our banking relationships remain solid. However, our end user customers are still experiencing some challenges. In response to their needs, we have taken action to expand the number of financing options available to them and have started to see credit rates improve. That's all for the second quarter results. I'll turn it back over to Mike now for a discussion regarding our outlook.

Thank you, Steve. There's no question that this will continue to be a difficult year. While the recession is now beginning to show signs of stabilizing, challenges remain for both the economy overall and our end markets. And as leading economists suggest, the road to complete recovery may take some time.

However, we continue to hear some favorable news that gives us reason to be encouraged. We participated in the Beijing Golf Show in April, where the outlook remains quite positive and many golf course owners and architects talking about new projects. An entire golf industry is awaiting the October ruling on whether golf will become an Olympic sport. Should it be added, we are optimistic it could potentially initiate more new golf course construction around the world. At home, The National Golf Foundation reported that last year's decline in the number of rounds played has been reversed, netting a 3.4% increase in March and a 2.4% gain year-to-date. While some of this increase occurred at the cost of reduced green fees, concurrent studies found that core golfers are extremely passionate about the game and will likely fuel the game's recovery as the world emerges from the recession.

More near term, we're still in the middle of our primary selling season and our focus right now is to aggressively drive retail sales of our innovative products for the remainder of the year. Remember in, our industry, the grass keeps growing and needs to be cared for by the products we make. From irrigation systems to maintenance equipment. We do know that our products are being used by golf courses, landscape contractors, sports fields, municipalities, farmers and homeowners around the world, just as much as they always have, resulting in an ongoing opportunity for us.

In this environment we will focus on executing in three areas. First, we will continue our drive to generate cash from earnings and our working capital initiative, further strengthening our liquidity position. Per Steve's earlier comments, we will look at putting our cash to work for our shareholders in the areas ranging from acquisitions to share repurchases. Second, we will drive for market share gains. It's critical in times like these that we innovate both in products and service support to strengthen our value proposition. The product momentum has been significant to date, and we have a number of new products in the pipeline to fuel future growth. As further proof of our commitment to innovation, it's important to note that on a year-to-date basis, our R&D spending as a percent of sales is slightly higher that last year. And third, given the new reality in our markets, we'll balance the long-term health of our organization while managing through these short-term challenges. This requires careful choices to reduce our spending without impairing our ability to compete in the marketplace.

While market conditions are likely to remain tight, current signals give us reason to believe that the rate of decline in our businesses will slow in the back half of our fiscal year. In fact, we recently completed our Toro Days promotion and retail sales of residential products were up nicely compared to the same event last year. We also anticipate another good snow season with snowthrower shipments similar to last year.

That said, we now expect fiscal 2009 revenues to decline about 18% from fiscal 2008 and our net earnings to be approximately $1.60 to $1.80 per share. We acknowledge that certain things remain out of our control. Therefore, we are choosing to work hard in areas we can control, delivering innovation to our customers, carefully managing our spending, and reducing our working capital. When our markets improve, and they eventually will, we will be poised for future growth.

And lastly, as we have in the past, you will see us once again set goals to achieve higher levels of performance. In closing, we want to recognize our employees that are truly ones that put us at a competitive advantage. It's been a year of much adversity, but they have fought through it. They have stood strong and pushed forward and focused on the challenges of today and the opportunities of the future. I personally want to thank them for their dedication and commitment to serving our customers and all stakeholders. That concludes the formal portion of the Toro Company's fiscal 2009 second quarter results. Now let's open it up for questions. Jerry, back to you.

(Operator Instructions) And your first question comes from the line of Jim Lucas with Janney Montgomery Scott. Please proceed.

Thanks. Good morning, guys.

Good morning, Jim.

First question, I want to delve a little bit further into the commodity inflation you referenced to on the margin side. Just wanted to see from a raw material inventory standpoint, is this just the old inventory that you're working through at this point still? And what -- at what point could we expect that to subside?

Jim, this is Steve. Yes, if you remember, we really started to see the impact of commodities going up in the second half of last year, and we said, when we saw that at the end of the fiscal '08 year and as we went into '09, that would carry through the first half of '09 and then we would see that start to drop off in the back half of '09. And that's exactly what's happening. We have vendors out there that we've had commitments with at higher prices. They are working through that inventory. With their sales down, it's taken longer to do that than probably had been expected on the front end. So all of those combined to get that lump through the pig, as we say. And we think that's pretty well through now here at the end of six months and the back half of '09 we ought to see some better comps.

Okay, and so on that price inflation phenomenon, clearly pricing, recall what happened residentially a year ago, but on the professional side, are you seeing much pricing pressure either from a competitive standpoint or can you just comment on pricing in general on the professional side?

Jim, this is Mike. And just maybe a broad comment there. Certainly as markets contract, pricing pressure increases. And we've seen that across the board. With that said, I would say we haven't seen any, what I would characterize as irrational pricing by and large against our core markets and to this point in time, we compete in the marketplace I would say using price maybe as a last resort, but staying competitive and making sure we're driving the right, you know, the right wins in share.

Okay, and then two interrelated questions. The housekeeping is, what was the FX impact on sales and earnings in the quarter? And then to the extent, could you expand internationally what you're seeing? Is it pretty soft across the board? Just maybe talk in general what you're seeing around the globe?

Jim, I'll get the FX question and I'll let Mike answer the international piece. It was for the six months, about $24 million in sales reduction due to currency. The six months, roughly $12 million for the quarter. I'm sorry, for the quarter. $24 million for the six months.

Okay.

And regarding the broader international question, we see certainly softness in Europe, number of those markets went into the recession -- some close to the US, some that followed and that put a significant pressure there. And even the rate of growth in markets like Asia has been somewhat slower, but we're still encouraged by the Asian market and the continued golf development there. So overall, international has been a little softer when you factor in currency it, actually tracks relatively close to the US. And we think it may last a little bit longer, but we continue to focus on that, those markets and see them as good opportunities going forward.

Okay, and final question is big picture for you, Mike. I mean this year clearly,unprecedented times. As you're looking to 2010, given that your selling season for all intents and purposes is lasting for a few more months and the uncertainty that remains around the economy, what does it take to get earnings growth in 2010?

Well, that's a pretty straightforward formula. It starts with the top line and works to the bottom line, as you well know. So as we look at our markets, one of the things we will have to do as we think about '10 is to what degree do they recover, start to recover? Certainly no one thinks they are going to bounce back to pre-'09 levels in one year's time.

And so for us that will mean doing the things that this Company does well. Finding the right new products that are innovative, that will take a larger share of the markets that are out there, the size of the markets that are out there. And we have that working for us very well right now. In fact, our new product sales are at their highest levels, as we've talked about in the past. And that will continue to benefit us as we move into F '10.

Then the fact is we also recognize that we have to do things, strengthening our gross margin. Steve mentioned we will get the commodity costs dealt with, looking at our operations, as well as then moving down into SG&A. The fact is that when you look at the numbers, given these unprecedented times, that they don't match up favorably to F '08 or '07 and our goal is going to get them moving back in that direction.

All right. Well, it's noticeable what you guys have done on SG&A and working capital. So keep controlling the controllables.

Thank you, Jim.

And your next question comes from the line of Eric Bosshard with Cleveland Research Company. You may proceed.

Good morning.

Good morning, Eric.

Good morning.

Two things, the SG&A progress improved markedly from the first quarter however you look at it. Can you give us a little more color into what SG&A you have taken out of the business and if that rate of decline is sustainable and why it might be sustainable into the-- in through the balance of the year?

Yeah, Eric, it's -- we're actually pretty pleased with the progress that we've made there. When you look at -- we've cut $20 plus million for the quarter and I think $35 million over the six-month period of time, our SG&As are down. It's been -- this started back prior to the starting the fiscal year. We knew this was going to be a difficult year and we started watching head count, as we had attrition. We weren't replacing those head count. We were doing it very -- on a very focused basis. And that carried in as the market continued to weaken. As you know, we did some things on voluntary retirement. We did some work force readjustments. We added some furlough days. And all of that, I think we talked last call of being about a $16 million savings this year and we'll see that same thing ongoing. There's some onetimes in there this year, won't have next year, there are some things we don't get the full year benefit from till '10.

But as we look into '10, we think those numbers are sustainable and it's -- the good part of that, we're doing that without slashing our engineering budget and our innovation budget. So when you see our six-month numbers and you look at the engineering, we're actually up slightly as a percent of sales on what we're spending on engineering. So we know we've got to watch expenses closely, only spend the things that are absolutely necessary to do. On the other hand, we've got to continue to put new products in the marketplace or we'll get behind pretty fast. So the fact that we were able to cut that much out, plus keep our engineering budgets in good shape, we're pretty pleased with.

And so the progress made in Q2 you think is sustainable. In 3Q we ought to be able to see this new level of- SG&A sustained- is that how it should be thought about?

Well, that's a work in process. We will continue to work on SG&A. We still are. And what we need to do for the balance of the year and to Jim's earlier question, what does '10 look like? The best we can see, what does '10 look like, and '09 a new bench park and what does your cost structure need to look like to meet that, that's still work in process. But the answer is, yes, we'll continue to look at where we can cut SG&A.

Secondly, on the sales line, which seems like it's gotten worse and worse, quarter to quarter similar to what we've seen with the economy and employment and et cetera. As you look at your customers and as you look through right now we're in the midst of the season, can you just talk a little bit about what the sentiment is there in terms of investing money this season? And then also you've been around this business for a while. As they look at 2010 and budgeting decisions they will make for that, how does it feel in terms of them having a reversal of thinking of wanting to put money back into their businesses?

Well, Eric, let me start, trying to answer that question with the, the--as we look at our various markets, right, and we've talked about this in the past, the economy plays a role, mother nature plays a role, and some customers react to an immediate need, like a consumer. Some customers are making significant capital purchases, may delay those purchases. I mean the bottom line is the grass continues to grow and over time those customers are going to have to make those decisions, even the ones that delay the capital purchases.

If you look at the full spectrum, the golf business has been under the most pressure. Whether that is delaying the capital purchases of equipment or delaying projects where they might replace an irrigation system or part of it, and we think that is only going to last so long and those customers are going to be back and needing to replace that equipment. Their downtime goes up. Their cost of maintaining that extended product cycle goes up. So that's under some pressure. We've talked about that.

We think as we get through this year, actually that's one of the factors that we think some of those customers will be coming back. A number of those courses budgets were approved. They were just delayed. So we hope that as the economic environment improves, there will be a release of some of those funds. Still, under the most pressure, going to the middle bucket, the landscape contractor arena, as I talked in the earlier remarks, there's been some delays there, too. But in that arena, the equipment again is used heavily and downtime is such a significant issue for those contractors that as they get into the heart of the season, especially if mother nature cooperates and she has somewhat better this year, starts putting real pressure on that downtime and we'll see I think some positive movement there.

And then the consumer is certainly to some degree a discretionary purchase, especially for the larger ticket items, but as you get into walk power mowers, we've had very good results. To date, actually comped over last year, in this clearly much worse economic environment. And that's been certainly influenced by mother nature.

So all in, when you put those together, that's what brings us to our thinking, that for the year we're going to be down about 18%. Can be influenced by weather. Can be influenced by the economy moving more strongly one way or another. I think you understand all that.

Is there -- I guess the only -- the last question I would want to ask related to this, this will be the fourth consecutive year flat or down revenues in the US. And I'm wondering if there's anything structurally that has changed, if it's leases or if it's useful life of machines that has resulted in--what seems like is an extension of the replacement cycle. Is there anything that you look at that's structurally has had the influence it's had? Obviously you've got the economic issue this year, but they are not replacing equipment this year and the grass continues to grow. Is there anything you would look at that's structural that may be contributing to this?

I don't think so. Whether equipment lifecycles will be extended out, it depends. You have to look at all the factors, to what degree did weather play a part early, and is playing a more favorable part now and to what degree did the economy play a part early and playing a less favorable part now. When you aggregate all of those, it looks flat for maybe very different reasons. The other thing that is important to note is that field inventory continues to come down and so if that had been held at the same levels, then our sales, our sales, our shipments would look substantially different.

So when you look at all the factors, I think what we would say is don't see a structural change, whether that's from golf courses to all the way to the consumer on the other end. Our challenge is to keep coming up with the innovative equipment and systems that make it more compelling for our customers to choose Toro over someone else.

Great, thank you.

Thank you, Eric.

And your next question comes from the line of Mark Rupe with Longbow Research. You may proceed.

Hi, guys. Following up on Eric's question with the top line, for the professional segment, it seems like things are gotten a couple worse for the last couple of quarters and the outlook, at least in the next couple of quarters -- the comparisons get a little bit more difficult. Just curious, is there any seasonality with the, within the golf segment or within that segment in general that leads to you believe that that may improve in the second half relative to the first half?

Well, just the earlier comment I made that to whatever degree budgets that have been put in place get released could have an impact. We're not counting on a lot of that in the second half, but that could have an impact. And then in terms of the, how things are comping, certainly the golf business was more of those as we started the new fiscal year, or the new calendar year. On the other hand, if you go to our irrigation business, that business started seeing its -- the real pressure in the residential commercial side, the back half of 2008. So in some ways, as we look at comping against that, it's actually more favorable as we move into the back half of 2009.

Okay, and just as it relates to golf courses, I mean on the budget releases, is there a date in mean on the budget releases, is there a date in mind where you'll look at and say, okay, this has happened that some of the orders have come back or it's too late in the season? Is there a date that golf courses basically make or break some purchase decisions?

There is -- there really isn't. We just take that, you know, week by week, month by month. Northern markets are very different from southern markets. So as you get through more significant part of the season in the Northern markets, they are going to be a little less inclined to pull that upwards. In the Southern markets, they are heading into the winter season where they are going to be cutting heavily. No, I don't think we have a specific date for you.

Okay. And then just lastly, on the financing, I know you added some financing partners during the quarter. How significant was that, do you think, and maybe loosening up some orders? And do you think that could continue to have a positive impact in the second half?

Yes, this is Steve. It has -- it's always good when you have choice, particularly in an environment today when things are as tight. So that is going to help. Retail finance for our buyers is very important in this business, and as the credit markets start to loosen up here a little bit, we think that will be not quite as big of a challenge in the back half as it was in the first half.

All right. Thank you.

Thank you, Mark.

And your next question comes from the line of James Bank with Sidoti & Company. You may proceed.

Hi, good morning.

Good morning, James.

Good morning.

I was just wondering if I could get a bit of a macro picture on the credit environment and what the impact has been, or if there is one, with your professional buyers. Are they able to get the financing needed to get these larger ticket items?

Sure. It kind of ties on to the prior question. There's no doubt our professional customers need financing, or a good share of them need financing. So as we went into this recession and the credit markets really tightened up, that was an issue for a few months. As I said earlier, we've gone out and added some additional people, whether it's the golf leasing side of the business or our landscape contractor or the end consumer, now have more than one place to go in terms of getting financing. So that's given us some benefit, other places to shop, rates are starting to loosen up. They are not anywhere near where they were and they probably aren't going to be in the short-term, but we do see that, the trend at least improving over the back half of the year.

Okay, and sticking with the professional segment, this is a downturn you guys haven't seen since the early '90s. So a bit of a history question. Back then I understand you were heavily weighted toward the residential side of the business. But how long -- if I could maybe get a range of how long sometimes these professional guys just disappear and then even if anyone's able to even dial it back further to the early '80s, in that recession, maybe how long these guys had disappeared.

Hi, James. This is Mike. And I think as we've gone back and, you know, done some comparisons against the earlier recessions, the fact is that the, the early '90s recession was minor in some ways by comparison to this one. It certainly impacted the consumer more, but our professional business was better. You really have to get back to the early '80s and the fact is that in the early '80s, you know, the professional side of our business was extremely small and the Company was, was, because of that, residential business issue, The Toro Company had literally in 1981 and '82 because of the snow products we made, we were in, at that point, a liquidity crisis, if you will. It was -- the Company was in deep trouble.

And that's certainly not the case today. But we weren't maybe as focused on the professional side of the business. The bottom line is that it's a very different world today. We don't think these professional customers are going to go away. Golf courses are still going to need to be maintained. They are maintained at high standards. We don't think that's going to change appreciably. Landscape contractors, that business is a large business for us today, didn't exist for us largely back then. And again, in that space, while there may be a few homeowners that choose to cut their own lawns in this difficult environment, it's not that significant and we are very close to our large -- large landscape contractors. Their business is solid. As I said earlier, they can't run that equipment too long because then they start getting into downtime issues and when you have to cut eight, 10 hours a day and you're down for X number of hours or days, that puts a real pressure on them. They don't have a lot of backup equipment sitting there to help them.

So it's not particularly good I guess comparison, we certainly are in a different environment this year, but we think, we think that the need for our products with our, you know, key customers from golf courses, landscape contractors to homeowners is going to continue and it's not going to -- we're not going to see the kind of pressure we saw back then.

Okay, fair enough. And then now moving to the residential piece, seems like there's some battery powered and electric lawn mowers now entering the marketplace and some retail guys are opening up some shelf space for that. I was just wondering if you could give us the size of that market right now, even some guesstimates of the growth rate in that place. And understanding you guys are such great innovators, would we maybe see a battery-powered Toro walk-behind, maybe through a licensing agreement or otherwise, but I was just wondering if you could touch on this market?

Sure. I guess I would start with, this Company has long been about innovation, innovation that has value for our customers and so we certainly understand the alternative fuel source questions that come up with customers, and we have this center for advance turf technology, our CAT group, that I would say on of the three primary legs on their stool, areas of focus is fuels, alternative fuels, whether that's battery power or hybrid power or fuel cell power, you name it. So there's a lot of work going on there and the Toro Company today has electric products, whether that's electric blowers or electric snowthrowers, some battery products, not a lot of them. In fact, you can go back in our history and we used to have a battery walk power mower back in the '60s and '70s called the Carefree Electric.

One of the things the team looks at very closely is what does the customer want and what is the customer's expectation in terms of duty cycle? So for example, there's a lot of battery trimmers out there. We have one. Its duty cycle tends to be on and off, does a little trimming and then it's off for a little bit, does a little trimming, when you get into a walk power mower, its duty cycle is very high. So the need for the amount of energy you have to carry goes up. The bottom line is, as our customers demand more of those kind of products, alternative fuel kind of products, like battery power or the others I mentioned, we will be there for them with Toro products and as well as our other brands.

Okay, great. Thank you.

Thank you, James.

And your next question comes from the line of Sam Darkatsh with Raymond James & Associates please go ahead.

This is actually Jeff calling in for Sam.

Good morning, Jeff.

Good morning. First question you gave us the sales impact of currency, can you help us understand how that impacted EBIT?

We don't usually get to take it down to EBIT. We've kept it at the top line, but we tend to, I think as you know, we tend to try and hedge at the beginning of the year our plan for the year and we do that, depending on which way we think the currencies are going and that's transactions that we're hedging primarily. We don't hedge the translation. So it's a little harder to give you an EBIT number on the impact, but we can give you the top line. Couple points on the top line.

Okay. Okay. Second question, also housekeeping, did you track the Q2 benefit of the small restructuring that you did in the first half? And what was that benefit?

Well, that's the, that's the amounts I talked about earlier, the $16 million amounts for the year. So, yes, we did track it through the year and that's -- we had some of the cost of that was in the -- was in last year's fourth quarter and some of the cost of that was in the first quarter of this year.

Okay, and that included the restructuring benefits, but also takedown of discretionary spend and other spending, is that right?

No. This was just the four or five things I mentioned earlier specific in terms of payroll and work force adjustments and that kind of thing. Spend would be on top of that.

Okay, great. All right, then. Next question, on the residential side, and I know you've said field inventories came down, which isn't surprising, given the negative sales growth. But I guess on the residential side, does that imply that POS at residential is running in line with where your sales growth is?

Well, the fact is, as I commented earlier, we -- our retail is, all in -- I guess I won't say all-in favorable to last year, but it is still in some ways better than we expected and, as I mentioned, we think that in certain categories, large categories like walk power mowers, we have taken market share and so-- we just finished up a promotion with our dealers and our -- and Home Depot that was very successful. We comped very well versus the prior year. So actually in that case, in that particular case at this point in time, better than our revenues show through the quarter.

So that comment is that the residential comped positively year to date, I think you said, but was that only for certain categories or was that to say that POS is up year to date?

I said comped positively in walk power mowers and comped -- then all in for the week it comped positively across other categories, but the bottom line is that we are, the residential arena, the retail demand has been actually relatively favorable and our inventories are in good shape. For us, that's very much a positive.

Okay. Next question, late in the quarter, but really especially in early May, it seemed like weather turned really positive. Wonder if you could give us some early Q3 commentary on whether you've seen any benefit there at point of sale.

Well, only in that what I've just mentioned. The Toro promotion that just completed was obviously this month, the Toro days, and as I said earlier, we did comp positively year-over-year compared to last year. Now, how that continues on through June and July, we'll see. I mean I think what we would -- if you summed up the mother nature picture, it was okay through-- was good in the winter months with snow. It was okay at best through the end of the second quarter, end of April. It's been relatively better in May, all in.

I think part of that has been more about moisture than temperature. We live here in Minnesota and it's been -- other than the last couple of of days, it's been relatively cold through the spring. But across the country, we would say it is relatively more positive in May, if that continues, that will help us certainly in the quarter and the year.

Okay, and then just last question, sort of a competitive update in the golf business, obviously for a while now there have been rumors that maybe some of your big competitors in golf there are pretty weak and was wondering if anything has changed along those lines.

The only thing I would say, within the golf market, we're very focused on retail doing what we need to do. Toro's got a very strong share of the equipment business and the irrigation business and I would just say to you that while it's a very competitive market, our position is solid and holding and we'll keep doing what we need to do to make that happen.

Okay, thank you.

And your next question comes from the line of Jim Barrett with CL King & Associates. You may proceed.

Good morning, everyone.

Good morning, Jim.

My questions are for Steve. Steve, could you talk about your, first of all, your inventories. They are down $50 million currently year-over-year. Is that a reasonable expectation for the full year when we look forward?

Yes, that's a reason -- lot depends obviously on what retail does, but that's a good number and what we end up doing, but that's a good number range for Toro for our year end. And we would hope that we would -- depending on what again what happens with those other items it, could be somewhere in the range of half that number if we decide to do some different things there. But it's-- the 50 million is probably the high point for the year and as we go towards year he said, it will be somewhat less than that.

It could be half that?

Could be, yes.

Okay, and then on a related point, Steve, when I look at your accounts receivables, should they by year end track approximately, decline approximately in line with sales?

No receivables track pretty much with volume, so depending on what happens with sales,if our sales are down 18%, then you would expect your receivables to be down also.

Okay.

So that tracks -- receivables, as you look at receivables, it tracks down a little better than sales have been down because our collections have been good and we've not had a big issue in terms of past dues. A lot also depends on the mix of what went out. The terms are different, depending on which business it is, whether it's finance on our books, whether it goes on the GE's books, but a good rule of thumb is watch what your sales do and as long as your past dues don't vary a lot, they should -- within a spectrum, they ought to move about the same.

And the capital expenditures, you're halfway through the year. What is your current outlook for the year on that?

No change. $40 million I think was the number we gave you at the beginning of the year for CapEx.

Right.

And the depreciation will be $40 million to $45 million.

Okay, and then finally, Steve, when I look at your -- you'll obviously end the year with a good balance sheet. Could you update us -- is there any prospects of retiring the senior notes and debentures, or is that of interest? Are they callable? Can you give us some thoughts on that?

Yes, we've -- I would say that's on the list, Jim. It's at the bottom of the list. Those -- we worked hard to get 30-year notes out there to have a good stable capital base and what we're going through now, we're pretty glad that that's out there. As we continue to improve our financial situation and our cash position, that would be one of the items on the list. But we would certainly prefer to put it into acquisitions, put it into share repurchase, put it into dividends. Buying back long-term debt would be towards the bottom.

Interesting. Okay. Well, thank you very much.

You're welcome.

Thank you.

And your next question comes from the line of Seaver Wang with Utendahl Capital Partners . You

Hi, good morning.

Good morning, Seaver.

Good morning.

Just a question on market share, particularly in residential. You've made a lot of in roads there to market dynamics. Can you give us kind of the update what's going on there, how far you're willing to go to maybe change the ratio of between professional and residential.

Seaver, this is Mike. Our strategy overtime has been to have professional be a larger part, significantly larger part of the portfolio and up until this last year, it has been -- it has been over the last decade plus more resilient to the, the economic upturns and downturns. Now, we've not seen anything like the one we're in for the last 30 years. And so as a result now we see actually the residential business performing somewhat better on a, at least on a revenue basis versus the professional side. I think that's more this point in time. I don't think that changes our, kind of our long-term strategy of saying we're going try to shift the portfolio back strongly towards residential. I don't think that will happen. We do expect the professional markets to improve as we get through this period in '09. And so I would guess we would be back to maybe a similar mix.

That's not to say we don't value the residential business. We do. It does a lot for the Toro and the Toro brand and our other brands. And so we'll keep focusing on that business to drive its relative level of performance up to get it back to some of the results we were generating in the middle of the decade. So that is very much a focus, but I don't think we ultimately changed the portfolio dramatically.

Okay, but given market dynamics and opportunities that arise--I mean would you be willing to go 50/50 at what point just because an opportunity arises where you could take a large market share and you know you could be profitable in that business?

Yeah, and we're -- it's fair to say we're always trying to earn market share. I think the best way to maybe answer that question, as Steve mentioned and as we've said, acquisitions are at the top of our list, finding the right acquisitions, doing it carefully, is at the top of our list in terms of investments and using our cash. And today we would still prioritize a professional acquisition opportunity over a residential one. So I think that maybe in a way answers your question, that that's still the priority for the Company.

Within the residential segment, the degree we can continue to earn market share, as we have in the walk power mower category over the last several years, we will do that. To the degree we can take advantage of the trend and the shift from steering wheel tractor mowers to Z Mowers, which is the category that we compete in, we will continue to take advantage of that opportunity.

Okay, thanks.

Thank you, Steve.

And this does conclude the question and answer portion of your conference. I will now turn the conference over to management for closing remarks. You may proceed.

Thank you, Jerry. And thank you, all, once again for your questions and interest in the Toro Company. We appreciate your confidence and trust and look forward to talking to you again in late August to discuss our third quarter results. Thank you, and have a great day.

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