Toro Co (TTC) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Toro Company third quarter earnings conference call. My name is Jerry and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Steve Wolfe, Vice President and Chief Financial Officer of the Toro Company. Please proceed, Mr. Wolfe.

Well, thank you, Jerry, and good morning, everyone. Joining me this morning for our third quarter earnings conference call are Mike Hoffman, Chairman and Chief Executive 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 that are in our predictions. Our earnings release was issued this morning by business wire and can also be found in the investor section of the corporate website www.thetorocompany.com. With that opening, I'll now turn it over to Mike.

Thank you, Steve. Good morning, everyone. For Toro and the industry this has been a year marked by many challenges. As we near the end of our primary selling season, economic conditions have shown little sign of improvement and continue to significantly impact our top and bottom-line results. Now, despite these pressures we're executing soundly in areas such as spending control, inventory management and working capital improvement. Steve and I will shed further light on those in just a minute. But first let me share our overall results and then Steve will discuss our segment and operating performance.

As you saw in this morning's release, we reported that net sales were down 19.8% to $394.9 million for our third quarter. On the earnings front we posted net income of $19.8 million for the quarter or $0.54 per share compared to $0.99 per share in the same period last year. The earnings decline for the quarter includes several one-time charges for workforce adjustments, a valuation allowance for deferred tax assets and legal matters. Together these add up to $0.15 per share on an after-tax basis. For the first nine months, net sales were down 19.7% to $1.234.9 billion. In addition, net earnings for the first ninth months were $63.4 million or $1.73 per share, down from $3.06 per share in the comparable fiscal 2008 period.

When looking at our markets, the themes discussed earlier this year are still true today, that is the softness continues with limited near-term recovery. Like many companies, our sales have been impacted by the deferral of large capital equipment purchases, particularly in golf, along with new course construction and large renovation projects being delayed. This has resulted in a contracted market with increased competitive pressure. I am pleased to say we're effectively dealing with the many challenges we face and are actually holding or gaining share across our markets, a testament to our talented people, strong products and a great group of partners building solid end user customer relationships from depot to dealers to golf and grounds equipment and irrigation distributors around the world, they make a real difference.

Speaking of golf, I'm sure many of you watched the PGA championship last week that drew crowds of near 40,000 for practice rounds and the four-day tournament. That culminated with South Korean YE Yang coming from behind to win his first major and first by an Asian-born golfer, this will be good for golf in Asia and good for golf around the world. For us this tournament was especially rewarding because it took place here in Minnesota at Hazeltine National Golf Club where Toro is proud to be the official supplier of turf equipment and irrigation systems. As you might expect, golf course conditions are critical to the success of such events so a lot of credit goes to certified golf course superintendent Jim Nicol and his team who did a fabulous job preparing the course and dealing with the challenging conditions. I should also mention that Jim is a new user of Toro Turf Guard wireless soil sensors and is realizing the many benefits of this technology, including more accurately managing turf health and water usage. So on behalf of the entire Toro organization, we congratulate Jim and his team and look forward to helping them as they prepare Hazeltine National to host the 2016 Ryder Cup.

In contrast to the professional segment, our residential business has been relatively positive. We experienced a reasonable spring and benefited from several new product offerings at dealers in our primary mass retailer. What we're seeing is that mother nature has, to a certain extent, helped to offset the poor economy. Taking in to consideration the state of our markets and the many uncertainties, we've been working hard to manage through these tough times. Here are a few concrete examples.

We have achieved double digit growth in retail sales of walk power mowers with demand strengthening even in the third quarter. Overall for the company we've taken aggressive actions to reduce costs and adjust output to drive both Toro and field inventory lower. These measures have particularly impacted the production output at our plants producing professional equipment and irrigation products. We've taken a hard look at our manufacturing and warehousing operations and will be closing our Lincoln, Nebraska, distribution facility and integrating it into our Beatrice, Nebraska, manufacturing location. This action will provide a leaner, more efficient manufacturing and logistics model going forward.

We continue to closely analyze our SG&A spending and are working to take costs out of the system. This includes a full spectrum of measures from further reducing our workforce in line with sales to calling on all employees to find innovative ways to do more with less. The workforce action just mentioned involved the recent elimination of additional office and salaried positions to those announced in February.

And, finally, I would like to comment briefly on the third year of our Grow Lean initiative. While disappointed we won't make our revenue and profitability goals set three years ago, we are making good progress in driving our working capital to less than 20% of sales far into the teens. We added this significant initiative to the grow lean objectives in fiscal 2007 to improve working capital as a percent of sales by more than 10 percentage points and have continued to find ways to reduce inventory and receivables and to increase our payables. Additionally, just last week we announced the creation of Red Iron Acceptance under a new joint venture with TCF inventory finance to provide floor plan and open account financing along with a new trade payables program to offer financing to our supply chain partners. Both will have a positive impact on our working capital initiative. I'll now turn it back over to Steve to review our segment and operating results.

Thank you, Mike. Let's start by covering our segment results. In our core professional business, worldwide sales for the quarter were down 27.3% to $260.9 million. Without question, the length of the recession has dampened results across the board. For instance, in the golf market while actual rounds played are essentially flat year-over-year, course revenues and memberships are down. As a result, many customers have delayed equipment purchases with discussions about golf course renovations and irrigation system upgrades being put off as well. On a worldwide basis, new course construction in Asia is faring reasonably well with Europe and the Middle East still slow.

On a positive note, a recent independent tracking service suggests that we are increasing our share position in most product areas. Additionally, when asked what equipment superintendents plan to purchase in the near future they said Toro more than any other brand. Now while the pace of decline and the building construction market has somewhat stabilized, sales of professionally installed residential and commercial irrigation products remain relatively weak. As we discussed in recent quarters, this category has been and continues to be impacted by the ongoing recession. What's more, this trend has a -- continued to be -- has a negative impact on sales of compact utility loaders and trenchers.

In the landscape contractor category, shipments were down as landscapers limited purchases of new equipment. In spite of the professional markets contraction, we have actually been able to realize share gains through our commitment to new product innovation. In fact, new product acceptance has been very good for our new Toro GrandStand stand-on mower and next generation line of Toro and Exmark commercial zero turn mowers. Our investment in the water management business also continues. We're enjoying excellent success from our new Toro Precision Series spray nozzles and the micro irrigation market our new line of Toro Aqua-Traxx premium drip tape is gaining ground as agricultural growers intensify their focus on conserving water and improving crop fields. For the year-to-date net sales in the professional segment were down 26.7% to $800.6 million. Earnings in the professional segment for the third quarter were $39.4 million, down 44.6% from the previous year. The decline was mainly due to significantly lower sales and higher manufacturing variances from production cuts. For the first nine months, professional segment earnings totaled $126.4 million, down 42.4% from the previous year.

Now let me shift gears to the residential side where our worldwide sales for the quarter were actually up 1.2% to $126.2 million. As Mike alluded to, the story here has been relatively positive considering the many challenges our end customers are experiencing. What this tells us is our focus on innovation and the right product line are truly helping drive retail demand. Performance in the quarter was fueled by strong domestic shipments for our new lineup of steel deck walk power mowers due to additional product placement. This has enabled greater market penetration and provided a solid lift in a down economy.

Another area of retail strength has been riding products where our new platform of Toro Titan zero-turn mowers saw increased demand. With a focus on performance and productivity at an affordable price, we believe these machines are extremely appealing to today's value-driven customer. Great for large acreage owners, this new lineup has positioned us to better capture customers at attractive price points. Somewhat offsetting these gains were significant declines in snow thrower sales. As mentioned in the release, this was mainly due to timing of the introduction of a new line of Toro snow products which are expected to ship later in the year. Also impacting the results for the quarter were lower international sales on account of poor economic conditions and currency fluctuations.

For the year-to-date net sales in the residential segment declined 1.6% to $416.8 million. Meanwhile, earnings in the residential segment for the third quarter were $10.7 million, up nicely from the previous year. The increase was primarily driven by a reduction in SG&A spending and lower commodity costs. For the first nine months, residential segment earnings totaled $32.1 million up 15% from the prior year.

Now to our key operating results starting with gross margin. Margin for the quarter declined by 1.4 percentage points to 33.9%. This was the result of production cuts from lower sales volumes and unfavorable product mix due to proportionally higher residential sales. These negative impacts were somewhat offset by lower commodity costs. Year-to-date margins decreased 2.3 percentage points to 33.5%. SG&A expenses for the quarter were down $16.7 million but increased as a percent of sales to 23.9% compared to 22.5% in the same period last year.

For the first nine months, SG&A expenses were down $52 million but increased as a percentage of sales to 24.4% compared to 23% last year. SG&A spending was down as a result of tighter cost controls, although not enough to keep up with lower sales volumes. The other expense line was up $3.7 million for the quarter mainly due to account for a several one-time expenses for legal matters. This was somewhat offset by higher foreign currency gains compared to a loss last year. Interest expense declined 4.7% for the quarter and 11.6% year-to-date. The decrease was primarily the result of lower average levels of outstanding debt and reduced interest rates. Our effective tax rate for the quarter was 36.6%, compared to 34.2% in the third quarter of last year. The increase was due to a valuation allowance and the fact that we're no longer benefiting from losses related to a foreign subsidiary. This was slightly offset by the reinstatement of the federal research and engineering tax credit. For the full fiscal year of 2009, we now expect our tax rate to be approximately 35.8%.

Moving now to the balance sheet. The results of our discipline and working capital have been significant. While earnings are down from the prior year, our ongoing efforts have resulted in continued strong cash flow from operations. Across the enterprise, accounts receivable were down $95.1 million or 26.1% for the third quarter. Given our commitment to our working capital goals, we have been able to further reduce inventory in the quarter by nearly $50 million, or 24.2% from last year's improvement. You may recall we -- last week we announced the formation of Red Iron Acceptance, a new joint venture that we've entered into with TCF Inventory Finance to provide financing for our distributor and dealer channel partners. This not only provides a long-term program for channel financing but also frees up substantial capital to be redeployed for more strategic purposes.

In the area of trade payables we recently initiated a supply chain finance program that will help us drive improvement in the third leg of our working capital stool. This supply chain finance program provided by Prime Revenue and the Wells Fargo trade bank, will allow us to lengthen our payable terms while providing attractive cash flow and financing options for our suppliers, a great win-win for both sides. So while we found the economic environment to be extremely challenging for our revenue and profitability element of our Grow Lean initiative, we are very much on track to achieve our goal of reducing working capital into the teens. The resulting cash flow benefits of these specific actions will enable us to continue to deploy capital for acquisitions as opportunities become available along with regular dividends and repurchases. During the third quarter we did repurchase 1.6 million shares for roughly $50 million. We now have 5.3 million shares remaining on our Board authorization. This wraps up our results for the third quarter. And let me turn it back to Mike for some discussion on our outlook.

Thank you, Steve. Well, I don't need to say too many more times these are difficult times and there remains a great deal of uncertainty on when things will get moving in the right direction. And that's exactly what we've been experiencing this year and is reflected in our guidance in this morning's release. We continue to expect fiscal 2009 revenues to decline about 18% from fiscal 2008. However, based on the one-time charges mentioned earlier, we now expect net earnings per share for fiscal 2009 to be approximately $1.53 to $1.63 for the year. We have learned this year that we need to be more flexible and disciplined as we make choices in such an uncertain world. Additionally, we must and will remain true to our commitment to innovation.

As you've seen earlier this year, and as Steve shared, we've introduced several new products across all of our businesses for the markets that we serve, from zero-turn mowers and the Toro GrandStand to our industry leading Precision Series spray nozzles to the soon to be released new line of Toro snow throwers. These products and many others are capturing the attention of our customers and we will continue to invest in innovation for the long-term viability and growth of Toro. Based on the public's desire for solutions to critical water management issues for more beautiful landscapes and expanded recreational venues, we face a future with many opportunities. For example, just last week both golf and rugby were selected by the executive board for the International Olympic committee for inclusion in the 2016 Olympic games. Final approval is in October of these turf-based sports as official Olympic events which would be good for the turf industry around the world as countries prepare to compete.

So in closing, our focus remains on the quarter ahead and finishing the fiscal year to properly position us for 2010. We expect little if any market recovery in the near term. All said, we're confident in the actions we've taken to navigate through these demanding times. However, we know there's still much work to be done and we'll take the lessons we learned this year and incorporate them in to our planning for the next fiscal year. With that, let's open it up for your questions. Back to you, Jerry.

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

Thanks, good morning, guys.

Good morning, Jim.

Jim.

A couple of questions, Steve, first on that $0.15 you alluded to three different buckets that that fell within. Was that fairly evenly distributed or can you give us some more color of where exactly that hit in the quarter?

Yes. We don't break that out, Jim. It's -- when you've got litigation and all those types of things involved in that, we just say it's $0.15 in total and don't break down the pieces.

All right. But I guess I'm just trying to figure out in terms of the head count reduction and the tax piece, was that -- would those two combined -- somewhat comparable or -- ?

You find -- when you look at the consolidated P&L --

Yes.

-- you find these expenses in three different categories.

Right.

Restructuring ends up running through SG&A. The legal matters end up running through the other expense and income line and the tax allocation ends up running through the tax line so you've got them split through three different pieces in the P&L.

Okay. All right. Yes, I'll -- yes. No other way to ask that one. Okay. And then we -- with these two new events from a working capital management standpoint, the formation of Red Iron where a lot of companies seem to be stepping away from third party financing it's a -- somewhat unique to hear of someone moving toward it, was wondering how this came about but even more so was wondering if you could give us a little bit more color on this new payable solution that you've come up with?

Hi, Jim. This is Mike. Let me make a -- just a comment first on the -- how this came about and then turn it over to -- to Steve to maybe add some color and talk about the payable side. The fact is that you go back to literally when we were completing our six plus eight initiative one of the things that came out of that was we headed into the Grow Lean initiative, was the third leg on the stool and really looking at our working capital and as we looked at Toro versus our peer set, it wasn't particularly attractive and certainly one of those elements is your receivables. And so it's a credit to Steve and Tom Larson but they took a hard look at that and said, well, some of our receivables are being sold to a third party, some of them are on our books and maybe there is a better solution. I think this solution that they found was an excellent one that keeps us directly involved in the JV context but leverages a third party who has a significantly lower cost of capital. And so, as Steve said earlier, it very much is a win-win and it is going to move our working capital in the right direction. And so I'll let Steve add some comments.

The only other thing I would add to that is you said you are not seeing people going towards financing. Just understand these receivables will go off our book -- books and will be on the joint venture's books. So it's not adding additional financing assets on our books. In fact, it is going the other way. It is taking advantage of the ones we do have on our books and putting them into a joint venture where we share with the value of that. So on the trade payable side, Jim, was -- you've heard us talk in terms of working capital about receivables and inventory, and as you look at our books we've done a relatively good job in both of those areas in terms of getting our effort towards working capital in the teens. And we've said probably the best -- biggest opportunity moving forward is now payables. So Tom and his team have been working on this with Prime Revenue and Wells Fargo and what it basically does is allows them to get hooked up electronically on their receivables from Toro. We're able to go lengthen our payables terms to those suppliers and they can get their cash up front if they choose to do so at a very attractive rate, basically at a Toro-type borrowing rate. So we get our longer terms, helps our working capital, they're able to get their cash up front if need be at a Toro-type of a rate. So it's good for both of us.

All right. Very unique solution no doubt. And so as we turn the focus here still on the balance sheet, I mean clearly you guys have done a good job making a positive out of a negative in this environment with the cash you're generating and balance sheet in good shape, about to get even stronger with that additional cash you're about to receive on the receivables side. So where, from a capital allocation standpoint, I mean you've been consistently buying back stock. You've talked about acquisitions for some time but there has not been a lot that we've seen in terms of the fruits of the labor. So could you talk a little bit about your acquisition strategy here going forward?

Jim, this is Mike, and I -- I'll make a couple of comments. We still have a good appetite for acquisitions and I would say that there has been a lot of labor, as you say. We just haven't necessarily seen the fruits. And as you know with acquisitions you don't have total control over something like that. It takes two. So we continue to work the process. It is still at the top of our list from a strategy standpoint of where we would want to deploy that capital. And we will, again, we will just continue to work it and look for the right opportunities to help fuel our future growth.

And -- and as you look at the pipeline you're building, is it more domestic than international or would you be focused more on the international side?

Well, we've said that as we look at our portfolio changing that we would probably lean more towards a professional acquisition than a residential acquisition, we would lean towards an international acquisition probably more so than domestic but that is one of those things it depends on what the acquisition is and what the opportunity is. And so in a perfect world if there was a significant international, professional opportunity, we would have -- we certainly would have a lot of appetite for that. And we've got people now dedicated to the process which wasn't true a couple of years ago. So that -- that helps making sure we keep those ideas and opportunities percolating but, again, as I said earlier, it comes back to it takes two on the acquisition side.

And how many people do you have dedicated today, just to follow up on that comment?

Well, we have -- I guess I'd say we went from 0 to 2-1/2.

Okay.

And the -- actually, we -- that's dedicated. And certainly we -- we pull the division people into this. We pull Steve and myself into this. But we do have a business development area now that is working it.

Okay. Great. Thank you very much.

Thank you, Jim.

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

Good morning, Mike, Steve. How are you?

Good morning, Sam.

Excellent. A couple of questions here. First off, I know you haven't gone through your formal planning meetings as of yet as it relates to looking ahead into fiscal year 2010 but can you give us a sense directionally at least of what input costs look like, pricing and restructuring savings at least directionally so we can start to plug that into our assumptions?

Yes. And -- and we will give you more detail, as we always do at the December call, Sam, but we're -- a couple of things that I would say, the big wildcard continues to be what's the topline going to look like and when is the market going it recover and how much of that had we see in F-2010. That is very much a work in progress trying to figure out what that is going to be and what type of a number we're going to plan against. Now having said that, we know some things that we've done we can plan on for F-2010 and a lot of that is our cost structure reduction that we've been working on now for the last six to nine months ever since this financial meltdown and economic meltdown started. And we talked to you, I think at the last conference about the things we had done in terms of early retirement reductions, things like that, pay reductions, freezing salaries, vacation schedule, and we told you that's about -- was going to be about a $15 million savings in 2009. As we now project that forward along with the other items that the Mike talked about that we did in the last couple of weeks, we're probably talking a $20 million number. So that's -- will give you some idea at least of what we're baking in at this point.

The other big pieces are commodities, what happened to commodity costs. We're seeing some -- some recovery, obviously, from where we were the last -- the first half of this year. So we're -- we're looking at steel, we're looking at resins, the things that impact us to a great degree, and we're seeing some benefit but you're also reading in the marketplace where those things are going to start going up again. Those are kind of still up in the air but things that we're looking at this point.

And, Sam, let me -- let me add to Steve's comments, you asked about pricing and certainly as the markets have contracted this year that has put more pressure on pricing and so as we look to F-2010 I guess I'd say we will be cautious on pricing and some of that will be correlated with what we expect to happen in each individual market. We hope to see these markets at some point some time start to grow but I think growth expectations for F-2010 will be, we'll see and we'll discuss that more in December. General market growth, we're not expecting a major bounce. Now with that said, as always, pricing is also related to innovation and where we can bring real increased value with some of the new products, that certainly gives us a chance to enhance our margins more than any other way.

When you're saying pricing you'll be cautious, does that mean to say that you think that there might be price degradation next year even if slight?

I think I would say as we looked at what happened this year, and this year has certainly been under more pressure than we've seen at any time in decades, the pricing has held up okay. I mean, there's certainly been some pressure there but as we look to F-2010, I think hopefully less so. So I think that has stabilized and hopefully can start moving back in the right direction.

And then, when you are saying, Steve, the restructuring savings and/or discretionary spending pullbacks of the $20 million, is that -- what part of the $20 million is incremental to 2009 and what part of the $20 million will be recognized in 2009? I'm just trying to get a sense of what -- what's to come next year.

Well, the incremental ten over nine is probably in the $4 million to $5 million range. We said 15 for 2009 and we think the next -- the additional five will be incremental.

And that's structural or is that a pare back of discretionary spending that night return should business improve?

No, it's -- we will do our best to make sure it doesn't return. That will be the leverage point when the top line starts to grow again, if we've got that cost level at the right level, that's when you see the benefit so we're -- our job will be to make sure that that doesn't come back.

And the input costs, if they remain flat from where they are right now, do you anticipate deflation in 2010?

We don't anticipate that at this point.

Okay. Last question, your cash balance was high based on historical seasonal trends. And it doesn't sound like you would have received the cash benefit yet from the Red Iron JV, I -- I don't think. Why would it be higher? Is this a -- a new level that we should be focusing on or how should we look at the cash balance on the balance sheet?

You're right. The Red Iron amounts are not in there. What that is two things, one, asset management which we've been talking about all along, lowering our receivables and inventory levels and the other piece is the level of stock repurchase that we've done this year versus last year, so the two together results in higher cash at the end of the quarter.

Should we then assume a much higher than prior seasonal trends in terms of cash as a percent of sales on the balance sheet or is it just kind of an anomalous calendar thing?

Not if our acquisition guys do their job, we won't have that cash so the answer is no. We're not trying to set a new high mark for cash. We want to put cash to work and get a better return on it than sitting in the bank today at 1%.

Okay. Thank you much.

Thank you, Sam.

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

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

Hey, Mark.

Real quick, foreign currency within quarter, how much of an impact?

It was about five points on the international piece.

Benefit?

No. Lowered sales by about 5%.

Okay. Okay. And then next on the -- in the professional segment, less -- a little bit of an improvement or less worse this quarter versus the second quarter comparison was significantly more difficult. Can you talk about specifically where were the better trends? You're not talking about things getting better but it looks like things did improve slightly in the quarter. Any particular areas of improvement, US, non-US, that we should know about?

Mark, I -- I guess I'd say there's not -- I think our landscape business has been, with some of the new products like the GrandStand has been -- and the new mid-mountain Z's, has been slightly better but all-in there's not a dramatic difference between golf equipment and irrigation. Inventories have been run down and we're hopeful. Steve and I were talking with one of our distributors earlier this week and they're starting to get some signs that things may start to turn but at this point we're headed into the low part of the season. So that's more commentary and not something that we can forecast off of very easily.

In terms of the non-US business, similar improvement quarter-to-quarter despite the FX headwind. Is there anything that you see outside the US that has you encouraged? I know you mentioned Asia is holding up okay, is your European golf business or European landscape contractor business improving?

No. I mean, actually the international picture looks similar in the quarter, as it does year-to-date. And, as you know, some of those markets went into the recession, world recession, if you will, later. I mean, Asia didn't necessarily go into a recession, it just went into a -- still growing but maybe not quite as high rates. So there may be, I would say, maybe particularly in Europe, Spain and the UK have been more challenged versus some of the other countries there, so they were more first in. Spain was tied to-- obviously like here, was tied to housing in the UK to some degree, to -- so what -- it is really the same story, that capital equipment being stretched out, can only stretch it so far. And so that does provide some encouragement as we look towards next year and starting to see some recovery.

You mentioned I think in the release, inventory levels at a decade low. Can you talk about specifically inventory levels in the channel, specifically on the pro side of the business? Just trying to get a sense for what we should think shipments are going to look like to start the season in 2010, how clean is the inventory out there, if you could give us some directional color that would be great?

Yes. I would say both on the residential side and the pro side field inventories are down significantly year-over-year. They're down double digits in both categories. So whether people are operating leaner and not -- but that puts some pressure on us as things start to turn, how flexible we need -- are going to need to be to respond to hopefully an uptick in demand. But they're at -- I don't have a good comparison, I know we -- we said Toro our inventories are at a decade-low level and I would say that the field inventories are at a several year low level so that's a good signal, again, as demand starts to improve, that we'll -- that we'll see that move quickly back through the need to produce more.

Thanks, guys.

Thank you, Mark.

Thank you.

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

Hi, good morning.

Good morning, James.

Good morning, James.

Steve, just a quick follow-up to a question that Sam had, I didn't quite catch it in regard to the lean initiatives that you guys have in place and how the SG&A should look as we look forward. Is this something that we could assume could stay flat as a percentage of sales or do you think there's still room for this to come down even though if one would want to expect volume to increase on the out year?

Well, it depends on what time period you're talking about here. For year end the cash is kind of set, or the dye is kind of set. There's not a whole will the more that we can do for year end. That will be the challenge for F-2010. How do we start getting SG&As back down again? And, quite frankly, leveraging SG&A you can cut so much to leverage. You really need to start growing again and getting the top line growing, so we've got more volume that we're spreading those costs across. So the goal as it had been through five by five and six plus eight to reduce SG&A expenses is still there, and we're still working on that. It gets much more difficult when the topline is going down rather than going up.

Okay. Let's see. Now what percentage -- I don't know if you disclosed this, but what percentage of the receivables was on your books that is now probably going to leave to go to this third party financing?

It's -- if you look at our receivable numbers today, roughly $90 million of that will go into the JV. Remember, the JV will have two pieces, it will have the receivables that are on our books, basically TCC and open accounts that we're focusing on our books today will go into the venture as well as what's -- the new purchase that today are going through a third party financing source will start going through the JV so that will not move in total. The only thing it affects our balance sheet is the $90 million and $95 million that I mentioned.

Okay. And the way it works there is no offset liabilities so in effect you're just getting an infusion of roughly $2.50 in cash per share?

That's correct. I didn't do the math on the per share but we're getting $95 million and the liability goes into the JV. Now there's some ownership sharing there, so you have liability to the extent that you have equity ownership but you don't have the dollar for dollar receivable on your books like we do now.

Alright. Now just back to the end markets. In the past, I know you guys have been involved in there for quite a while. In the past how long have these replacement cycles extended for? What's the record I guess we should say?

I wish we had a good answer for you on that, James. You can talk about this, this economic environment we haven't seen it for 30 years, maybe somewhat worse than back then. And back then the professional side of our business was very, very small. And think back what the Toro company, what they were going through in the early '80s, we were literally working through a survival issue, some of it our own doing for building too many snow throwers and then the economic environment. So we don't have good history to know how long that might take. I wish we did but the fact is we don't. And so we're just listening closely to our channel partners and talking with end users to try to get an idea of when they're going to start to change their behavior.

Okay. Now I guess getting a little bit more in detail, we all know how bad state budgets are, projected to probably get worse next year. And I think we're all aware of the commercial property market and where that's headed. Does this have any type of an impact on your professional business next year?

We think -- certainly your first point is a good one. We think the state issues, budget issues will have an impact. That will be somewhat of a headwind for us in fiscal 2010. Again, we hope to see golf start to come back. Golf was earlier in, if you will, the state budgets tend to be more of a lagging issue. And so there -- you're right, there will be some pressure on that next year. That's a smaller part of the commercial portfolio. But there will be some pressure there so we'll have to work hard as we did this year to make sure we take share in a potentially contracting market.

But I guess historically what is going on with the commercial property markets, has this been something that historically impacts you guys or is it maybe a little bit of noise?

Yes, relative to the commercial property markets, I won't say noise, but it impacts our residential commercial irrigation piece of business more than anything else but that's -- when you talk about commercial irrigation, if you will, commercial properties being built, that has been shut down for a while now so year-over-year we don't expect to see any real impact there.

Okay. And moving quickly to other revenue, with the distribution consolidation, does that impact that top line at all?

Oh, yes, this is Steve. Yes, it does. As we go direct our distributors end up working as reps and that no longer goes through the sales line. So, yes, that will have an impact.

Okay. So for the other revenue assumptions I just -- for modeling purpose going forward we should probably just, I guess, drop it and then keep it flat, something?

Yes.

Okay. And then last question is your D&A in the quarter, seemed a bit light for where you were for the rest of the year and I was just wondering if there was something behind that?

No, nothing unusual. We may be down a little bit just because last year our CapEx was in the high 40s and we had a lot of projects and things going on last year. We won't be quite that high, but nothing unusual going on there.

Okay, all right, great. And your CapEx for the year is about 40?

Yes, low 40s.

Okay, great, thank you. That's all I have.

Thanks, James.

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

Good morning, everyone.

Hi, Jim.

Hi, Jim.

Steve, could you start off by talking a little bit about Red Iron? Will your distributors and selected dealers, will they get more access to credit with Red Iron than they are currently getting, if, for example, they go through a third party? I'm just trying to understand from their standpoint how it benefits them specifically.

Yes. We would hope so. You're going to have a closer relationship with them, for one, the ones that aren't on your books today. So you're going to have a closer relationship. The real key probably to the dealer is he's going to have a dedicated line where with our third party supplier they may be sharing part of that line today with other manufacturers. So the fact that we're just financing Toro and Toro branded products through the joint venture, they're going to have a line that's dedicated to them just for that product and that should give them more credit overall.

But if a distributor has a certain level of credit quality, I would assume that Red Iron will have the same standards as a third party? Or am I -- ?

Yes, I would help so, exactly.

All right.

We did this, one, to kind of have a proprietary product here, if you will, that we have input on in how we run it. On the other hand, you've got to have your standard underwriting guidelines so that when you turn into economic downturns you don't end up with a big problem through the joint venture, so there probably will be, and it's fair to say, you may have more formal underwriting guidelines under this new arrangement than we had when it was just within the Toro Company and not that there was any issue with that, we've never had any major bad debt issues, you will have a more formal underwriting process because you're -- you've got a partner in this joint venture, but we don't see that as an obstacle. We think that the fact that you've got a proprietary product will be an advantage.

I see, okay. And then the legal charges in the quarter, do they refer to the legal matters summarized in the second quarter of 10Q? I assume there's nothing beyond that? Is that --?

Some of those are, Jim, and some aren't. We've got a mixture in there.

Okay. And then finally, Mike, could you talk a little bit about the used equipment market? How much of a concern is that, how much share, whether it be in golf or the commercial landscape segment, has that gained in this downturn?

Certainly. The -- not surprisingly the demand for used equipment is up. Now, I should take a step back and say this industry, particularly the golf industry, has been starting to mature a bit in the used equipment. If you want to take a step back, it wasn't that long ago it looked more like the auto industry 20 years ago when you could buy a new or very well-used car and today you can get a car that's one-year lease, two-year lease, three-year lease and so it's created more levels of product. And that's happening in our -- not to that degree perhaps, but that's happening in our industry as well. And so as these courses, I'll use golf as an example, as these courses by fleets and keep them, especially the A-courses keep them for three, four years and then roll those out and historically they might have kept them for eight or ten years and then there wouldn't be much left, that's creating a secondary market. Now the fact is that's good for the brand all in because ultimately these assets have to get used up. The key is making sure that Toro is, from a brand standpoint, winning relatively better than competition. And one of the good things that we do know from the -- kind of studying and getting to know the used equipment market better, partnership with our distributors, is that Toro products, particularly in the golf market, hold up better and retain their value better. And so that creates an additional profit opportunity for our channel. So the -- there was no -- as these -- as this fleet mentality started to build over the last few years, there was always going to be a need to use up those assets and that's happening. And certainly the downturn has created even more of an opportunity there. But we see that in partnership with our distributors as just that, as an opportunity, not an issue.

Okay. Okay. Well, thank you very much.

Thank you, Jim.

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

Hi, Mark.

Hi, guys, just following up on the equipment replacement cycle commentary. I know it's difficult it look back on it but just go -- it's very different from the residential side but on the professional side is there anything that you can point to that says it's got to have to snap back at some point in time because of usage or anything like that and then just secondly any kind of commentary you can point to on how much of your business is parts related or reoccurring?

Well, on the -- the first question we continue to talk to our channel partners and distributors and end users and so a lot of these, using golf again as an example, a lot of these courses had their budgets approved but then just put in a holding pattern and as the golf course becomes more confident that they're not going to see more attrition members and budgets start to -- some members come back and strengthen, then we think more budgets will be released. There isn't a hard throw the switch and now they absolutely have to go out and buy the new equipment. So I -- we don't have a really a black and white answer for you there, Mark. But, again, we listen to these customers get very close to them and so there are signals, signs that their budgets, their capital budgets will be put back in place and they will start to spend some money. So we think that's a positive.

On the parts side, we don't break that out. I think we have said, not surprisingly, like the commentary, the discussion we just had on used equipment, we've seen parts do relatively better than new whole goods as some customers extended -- working to extend their life cycles and certainly that's good business for us. Not enough to make up for the whole goods contraction. So I guess that would probably sum it up.

Alright. Thanks for the commentary.

Thank you Mark.

And this concludes the question-and-answer session of today's conference. Sir, please proceed with closing remarks.

Well, thank you, ladies and gentlemen, for taking the time to be part of our call today. We'll look forward to working through the fourth quarter and meeting with you in December to report on our fourth quarter results. Thank you and have a great day.

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Good day.