Toro Co (TTC) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Toro Company fourth quarter earnings conference call. My name is Jeri and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Steve Wolfe, Chief Financial Officer of the Toro Company. Please proceed, Mr. Wolfe.

Thank you, Jeri, and good morning to everyone. Joining me this morning for our year end 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 during our call, we'll make certain forward-looking statements which are intended to assist you in understanding the Company's results. We're all aware of the inherent difficulties, risks and uncertainties in making predictive statements. So our Safe Harbor portion of the Company's earnings release, as well as SEC filing's, details some of the important risk factors which may cause actual results to differ from those in our predictions. Our earnings release was issued this morning by Business Wire and can be found in the investor information section of our corporate Web site, thetorocompany.com.

I now would like to turn the call over to Mike.

Thank you, Steve, and good morning, everyone. When looking back over this past year, it was, without question, one of the most difficult economic environments in decades.

Moving through the year, our professional end markets were hardest hit by the recession, as customers deferred purchases in light of their business revenue declines. Despite the many market challenges, we were pleased to see our residential business perform better than expected. And as we closed the year and now begin fiscal 2010 and as others have said, the situation today seems less worse than a year ago. For Toro, we have begun to see gradual signs of stabilization in our markets. So while fiscal 2009 results were down significantly from the prior year, we are encouraged with how we executed against key priorities and what we achieved given the market realities we experienced.

Early last year we recognized it would be a difficult year and set three clear priorities -- one, ensure strong liquidity, two, focus on our customers and grow market share, and three, manage through the short-term challenges without materially impacting the long-term health of the organization. These priorities and our resulting actions helped maintain our competitiveness so as our markets recover, we can take advantage of our strong position. Steve will discuss our liquidity priority shortly, but let me take a minute to talk about the two I just mentioned.

First as we saw signals of market contraction we were determined to stay focused on the needs of our customers and seize the opportunity to gain market share. We always try to out innovate our competition, and this year was no exception. Once again, we surpassed our goal of having at least 35% of our total sales come from new products. In fact, this year, we had the highest level of new products in our recent history, topping 50% of total sales. Our products alone could not fully counter the recession. However our innovation truly made a difference in helping us take share in most of our markets.

Leading the way in the professional segment was our versatile line of Toro GrandStand mowers, providing entry into an entirely new category. This machine energized the channel during a time of uncertainty and provided landscapers with the flexibility and productivity that really benefited them this year. Another innovative product gaining traction in our irrigation business is our Precision Series spray nozzles. With growing worldwide sensitivity to managing water as a precious resource, this breakthrough technology represents a significant differentiator over the competition, by reducing water usage up to 30%.

In the residential segment, our redesigned line of Toro and completely new offering of Lawn-Boy steel deck walk power mowers at a broader range of price points resulted in significant share growth in the walk power mower category In riding products, dealer acceptance of our new platform of Toro TITAN zero-turn mowers was much improved over last year's lineup. Nearly twice as many dealers carried the all new TITAN in 2009 as the previous year models in 2008 This speaks volumes to the value of this product that it offers customers and our continued strength in this important category as the residential market transitions from traditional tractors to new generation zero-turn mowers.

Going forward, we expect this innovation momentum to continue in the marketplace as the products introduced in fiscal 2009 gain momentum, and we introduce even more new products in fiscal 2010. This impressive effort is born out of our choice to preserve our investments in new product development to fuel future innovations. While we needed to adjust R&D spending for the year due to contracting revenues, our spending as a percentage of sales for fiscal 2009 was up slightly to 3.5% of our revenues, marking the sixth consecutive year of increased investment as a percent of our total sales. Our customers appreciate and value how our innovation helps them deliver a better result more productively.

We recently had a chance to visit with a number of customers at key industry tradeshows where we unveiled an impressive lineup of new products for the coming season. The Green Industry and Equipment Expo occurred in October. And a big draw for landscapers was Exmark's introduction of the Vantage stand-on mower with its patented UltraCut deck. On the same note Toro is expanding its popular GrandStand line to include three new models so contractors have even more equipment options for mowing commercial acreages or residential properties. Together, we expect both brands to gain significant share in this new category.

For residential customers, we introduced the new environmentally friendly Toro E-Cycler cordless electric walk power mower to capitalize on this growing market segment This lightweight machine incorporates our innovative Recycler mulching technology and comes with a 20-inch deck and powerful 36 volt mowing system Other technologies providing environmental benefits included Toro's and Exmark's new propane-powered professional mowers.

Just last week, we were at the Irrigation Association Show in San Antonio, where we unveiled several new water-saving innovations, including Toro's new Precision Series rotating stream nozzles. This product features design elements that allow for lower precipitation rates and outstanding distribution uniformity. We also announced our new professional series of Intelli-Sense irrigation controllers that offer commercial customers the technology that automatically adjusts watering times based on real-time weather measurements.

In addition to our innovative products, we continued our focus on earning the trust of customers around the world to value our brands, people and services. Just last week, the European Golf Course Owners Association recognized Toro with their 2009 award for our contributions to the golf industry. We are grateful for this honor, and will further our committment to helping owners around the world improve the management and cost of their maintenance operations. Critical to our success in establishing new or expanded relationships is our strong collaboration with channel partners and key retailers. In November, Toro was on hand at The Home Depot's key vendor meeting, where we were named lawn and garden category "Supplier of the Year" Achieving this prestigious award as a result of several critical factors -- developing quality products, bringing forward innovative new offerings and providing expert supply chain management to react to the changing conditions and demand

Now let me comment on our third priority -- how we had to address short-term challenges without impairing the long-term health of our organization. As we saw sales dropping, we took the painful but necessary actions to reduce our workforce as well as lower overall spending and production -- but always with the long term in mind. As for actions to strengthen our long-term health, we continue to make solid progress in improving our operational effectiveness. What proved most important in managing it through the downturn, were previous enhancements to our value stream to improve efficiency, product line flexibility and speed to market. Also we continue to pursue in-sourcing activities to allow for higher utilization of plant assets and drive even greater gains in quality and cost.

To improve our manufacturing and logistics foot print, we announced the closing of our Simi Valley, California location that we acquired with our Rain Master acquisition back in 2007 and will be transferring all operations to our Riverside, California and Juarez, Mexico facilities. In addition, we will be relocating our current distribution facility in Baraboo, Wisconsin into a new one in Tomah, Wisconsin to create a more efficient logistics model. These two moves follow the decision mentioned in our third quarter call, to consolidate our Lincoln, Nebraska distribution facility into our Beatrice, Nebraska manufacturing location

And last, before I turn it over to Steve, I'd like to take a minute and recognize the hard work of Sandy Meurlot, who retired as Vice President of Operations in October. Sandy's most transformational contribution to the long-term health, growth and profitability of the enterprise was her recommendation that we embrace and aggressively pursue the principles of Lean manufacturing. Sandy was a catalyst behind this critical initiative and a tireless champion to make Lean a way of life here at Toro, I want to personally thank Sandy for her visionary leadership and all of her many contributions.

It also gives me great pleasure to welcome Judy Altmaier to our team. Joining Toro from Eaton Corporation, she brings a wealth of experience to her role as Vice President of Operations to help us achieve even greater efficiencies in the years ahead

Now I'll turn it back over to Steve to review our GrowLean and financial results for fiscal 2009.

Thank you, Mike, and let me start with a recap of our GrowLean initiative, where we made great progress, but unfortunately fell short of the revenue and profitability goals.

As you recall, our GrowLean targets were set in a very different economic environment than what we experienced this past year. Recognizing many factors remained out of our control, we worked hard to exceed in the areas we could control and make real progress in our goal to drive our working capital as a percent of sales down into the teens. Our inventory position is the best it's been in 10 years. When you look back two years, we've lowered our inventory by $75 million or 30%. And in the process have managed to significantly reduce field inventory as well.

On the receivables and payables front, we expect two key partnerships to launch in fiscal 2009 to help us reach our working capital goals in the upcoming year. First the formation of Red Iron Acceptance and the resulting sale of receivables has freed up over $90 million in cash to date to be redeployed for other strategic purposes. The second important partnership is a new trade payables program, which allows Toro to extend its terms with suppliers while offering them cost-effective financing options. Together we anticipate these efforts will help us reach our working capital goal in 2010 and strengthen our financial position to drive future growth and shareholder value.

One of the ways we've put some of this cash to work was through acquisitions. We announced last fall the asset purchase of Southern Green, and more recently acquired a versatile line of top dressers and material handling products from TY-CROP to complement our existing line of application and cultivation equipment. These acquisitions, while small, will expand our position in these important categories and broaden our offering to professional customers worldwide.

Moving now to a summary of our financial results, as reported in this morning's earnings release, net sales for fiscal 2009 were down 18.9% from the prior year to 1 billion, 523.4 million dollars. On the earnings front we posted net income of $62.8 million for the year or $1.73 per share compared to $3.10 per share last year. For the fourth quarter, net sales were down 15.4% to $288.6 million on a net loss of $532,000 or $0.02 per share. Looking at our segments, starting with professional, worldwide sales for the year were down 25.9% to $965.9 million. For the fourth quarter, net sales in the professional segment were down 21.8% to $165.3 million. Persistent recessionary conditions resulted in double digit declines across most of our markets as customers deferred purchases of turf maintenance equipment and precision irrigation systems.

Part of the decline was due to the lowering of field inventories on a year over year basis as our distributor partners acted aggressively to lean out inventory to be better positioned for the next selling season. While overall shipments were lower for the year, we continue to win new business and drive share gains in key categories through a strong product lineup and best in class customer care. Meanwhile net earnings for the professional segment for the year were $127.6 million compared to $233.4 million in fiscal 2008. The decline was largely due to lower revenues. For the fourth quarter, professional segment earnings totaled $1.2 million, down from $13.8 million from the same period last year.

Turning now to our residential business, worldwide sales for the year were down by 1.9% to $532.7 million. As Mike mentioned earlier, our residential segment proved more resilient than anticipated thanks in large part to innovative new products, expanded placement at dealers and key retailers and favorable weather patterns. For the fourth quarter, net sales for the residential segment declined 2.8% to $115.9 million. However, while our domestic business was up in the fourth quarter, our international residential business was down due to poor market conditions and unfavorable exchange rates.

Finally, net earnings in the residential segment for the year was $46.4 million, up nicely from $35.3 million in fiscal 2008. The increase was primarily driven by a slight improvement in gross margin and lower SG&A expenses. For the fourth quarter, residential segment earnings total $14.2 million, a solid improvement from last year's result of $7.3 million.

Now let me turn to our operating results, starting with gross margin. Despite aggressive efforts to control spending and improve operational efficiency, gross margin was down 1.3 percentage points to 33.5% for the year. Contributing to the decline were lower sales of higher-margin products, reduced plant utilization as we adjusted production to better match demand and rising input costs. For the fourth quarter, however, gross margin increased by four percentage points to 33.9% for the quarter, mainly due to favorable commodity pricing versus last year. While margins for the year were lower than we would have liked, we expect to benefit in fiscal 2010 from some easing in commodities, cost reduction initiatives and insourcing activities. As a result we expect these actions to drive modest gross margin improvement in the coming year.

Given the recessionary climate, we took decisive action to lower operating expense across the board. To properly align cost with our declining revenues, we reduced our overall workforce by roughly 15% from the previous year. This coupled with other measures resulted in a cost savings of about $15 million in 2009. As has been the case throughout the year, we have ratcheted back on discretionary spending without impeding our able to compete. As a result of these and other efforts, SG&A expenses for the year were down 12.9% or $58.5 million, but increased as a percent of net sales to 26% compared to 24.2% for the same period last year.

For the quarter, SG&A expenses were down 6.5% or $6.6 million, but increased as a percent of sales to 32.9%, compared to 29.7% the prior year. While SG&A expenses were down significantly in dollars for the year, it was not enough to keep pace with the decline in sales volume. The other expense line was up $4 million for the year, largely due to increased expenses for several legal matters and lower interest income. Interest expense declined by 9.1% for the year, mainly the result of lower average levels of outstanding debt and reduced interest rates. Our tax -- effective tax rate for the year was 34.4%, compared to 34% last year. The increase was due to valuation allowances relating to several foreign subsidiaries. Looking ahead we expect our tax rate for fiscal 2010 to be between 34% to 35% depending on whether and when the federal research and engineering tax credit, which is currently set to expire on December 31st, 2009, is extended in the coming year.

I will now turn to the balance sheet, where we achieved significant results this past year. We continue to find ways to reduce receivables and inventory. For the year, receivables were down 43.9% or $112.6 million. This includes the sale of receivables to Red Iron Acceptance in the fourth quarter. In adjusting output to match demand, we also reduced net inventories by $30.8 million or 14.9% for the year. At the same time, field inventories are lower versus last year and remain in great shape as we prepare for next year's selling season.

As I mentioned earlier we were especially pleased with our ability to generate cash in what has been a very difficult operating environment. In fact, we generated a record $251.5 million in cash from operating activities. This was the result of the Red Iron Acceptance joint venture strategy described earlier, a continued focus on asset management and contributions from earnings. Separately, seasonal short-term borrowing during our peak period was more than $100 million lower compared to the same time last year, and we maintain solid relationships with our credit line banks.

Combined, these actions enabled us to pursue the right opportunities to grow our business and return value to shareholders. For example, as we reported last week, our Board of Directors in a vote of confidence, raised our regular quarterly cash dividend by 20% to $0.18 per share. In fiscal 2009, we returned a total of $137 million to shareholders through share repurchase and dividend payments.

So that wraps up our results for the year. I'd now like to turn the call back to Mike for some discussion on our outlook.

Thank you, Steve. While we are not happy with the decline in our revenues and earnings for fiscal 2009, we are pleased with what was achieved given the very difficult economic environment. Now, as we begin fiscal 2010, we believe demand in our end markets is beginning to stabilize, but there remains real uncertainty as to the pace of recovery and how our customers will respond.

Taking these factors into account, we expect fiscal 2010 net earnings to be about $2 per share on comparable revenues with fiscal 2009. For our seasonally smaller fiscal first quarter, we expect to report net earnings of about $0.18 to $0.20 per share. While it will not be an easy road, we remain confident due to the actions we have taken and to the fact that we stuck to our values. We proved we can manage through an extremely challenging time with solid execution against a clear set of priorities. I can assure you we are more disciplined and focused than ever before, and are motivated to pursue new growth opportunities.

Looking forward, we will focus on three key areas -- one, strengthening our core by increasing innovation and building brand leadership. We've seen firsthand the benefits of these investments in a challenging economy, and can expect even stronger results from our investments in innovation as our markets improve. Adding to the momentum generated from our 2009 product lineup, we have even more innovative offerings poised to launch in fiscal 2010 that will drive demand and compete for our customers' business. To that end, we look forward to the upcoming Rental Show in late January followed by the Golf Industry Show in February, where we'll introduce many of these exciting new products.

Our second area of focus is to find ways to grow our business beyond organic. With record cash flow from operations, we will look to grow through select acquisitions and other growth vehicles. Let me assure you that although we have the dedicated business development resources and the available cash to use, we will be thoughtful in our pursuit of acquisitions to be sure we are doing what's right for our business and our shareholders.

And, lastly, we will be focused on returning to previous levels of profitability. Employees are living the reality of doing more with less and implementing lean practices. While it is important that this remains a way of life, it is also necessary to find additional ways to enhance profitability. Rather than launching another major three-year initiative at this point, we are working to finalize a one-year initiative that will motivate our organization through fiscal 2010 and we'll discuss this program in greater detail on our next call.

As we look at our end markets, we remain encouraged by two trends that we expect will fuel growth in the years ahead. First, water management remains a critical concern as customers around the world intensify their focus on conserving water as they battle shortages and higher usage costs. For example, we recently converted a grower in the western United States who decided to switch over his entire 700-acre operation to Toro's Aqua-Traxx premium drip tape. This will allow him to save water, energy and labor costs, all while while increasing crop yields and quality. As this trend continues, you'll see more stories like this and the resulting benefits to our business. Second, international markets hold real promise as world economies begin to emerge from the recession into recovery. Providing positive long-term influence is the recent announcement in October regarding the inclusion of golf and rugby in the 2016 Olympic Games, which should bode well for our industry as countries prepare to compete in these turf based sports

In closing, at the heart of our continued success is our engaged and focused team of employees committed to caring for our customers and building long-term relationships based on integrity and trust. I'm pleased with what our people have accomplished under the most difficult of circumstances and am inspired by their strength and fortitude. With this solid foundation, we look to the future with confidence, eager to capitalize on the opportunities that lie ahead of us.

This concludes our formal remarks, so let's now open it up for your questions. Back to you Jeri.

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

Thanks. Good morning, guys.

Hey, Jim.

A couple of questions here. First, I guess, to go in reverse order here, you touched on capital allocation to a certain degree. Clearly, you've been very shareholder friendly, returning cash to shareholders and with the balance sheet in the position it's in, referring to acquisitions. You also mentioned other growth vehicles, which I don't recall that phrase being used in the past. Can you expand on that reference please?

Well, to put that in a broad context Jim, whether it's an acquisition or a joint venture or a partnership, there are any number of ways that we could find ways to work with others outside of our -- call it our organic internal growth machine here, which certainly hasn't been the case this last year, and so we just -- we just broaden the acquisition term. But certainly, as has been consistent with what we said in the past, acquisitions are at the top of our list to drive some additional growth. We will find a way to do them the right way. You can't necessarily force those to happen. It takes two people or two entities to agree.

So we continue to work on that, but that is strategically at the top of the list, and then, some of those other things I just mentioned could be bundled in with that, and then we get to returning it to -- returning to shareholders and third on the list is reducing debt. That's the last place we want to go.

And how would you characterize the M&A pipeline today versus six months ago?

I'd say it just continues. Things continue, discussions continue. There was a period -- a period 12, 24 months ago, when valuations seemed very, very high. While they may have come down some, there's still an expectation when you go through the trough year that things are going to come back, so sellers still want to get as much as they can. So we continue to work the process.

Okay. And switching gears, more of a question for Steve, with -- could you walk us through briefly with some of these new working [cashpital] initiatives? Red Iron, and on the payables, what is the financial statement impact of that, and from a cash flow perspective, where is that broken out on the cash flow statements?

A couple things -- what we're really doing is replacing TCC, so if you think about the TCC entries, first one was taking receivables off TCC's books and selling those receivables to Red Iron. So, that's just substituting cash for receivable on the balance sheet.

When you get to the income statement, there are a number of different places that falls. The TCC elimination, up above net sales, where we have the inner Company elimination, we don't have that anymore. So that actually has the impact of -- impacting margins slightly down, because you don't have that. You have the SG&A cost of TCC in the income statement. That will go away. You'll now get the profits off of the joint ventures that will go through other income.

So there are four or five different places that you find those, but the main ones are it brings sales down from the elimination you no longer have, and your SG&A goes away and gets replaced by the profits from the joint venture.

Okay. And on the cash flow statement?

Cash flow statement is in the operating cash statement at the top. It's in our operating cash flow.

Okay.

So it's a reduction of receivables and turns to cash. So you get the benefit of that through your operating cash flow.

Okay. Great. And, finally, regarding the 2010 assumptions, you've laid out the flat top line, $2 earnings. Could you give us a little more of a thought process of the flat top line, what you're expecting from anything with regards to whether product category as well as thoughts on professional versus residential in 2010 ?

This is Mike. And, to put this in the big picture, we as we said, we're very pleased with our residential business. While a smaller part of the portfolio, in 2009, it obviously from a revenue standpoint out performed the professional business and surprised us. I think part of that you would attribute -- we were very well competitively positioned -- good part of [shevolve] obviously of with our key retailers.

Mother nature played probably a stronger role there in fiscal 2009 than it being a factor against the professional business, and so all in it was an excellent performance by that team in that business. That will make that more challenging as we go into fiscal 2010. Can we count on mother nature? We hope she cooperates. We expect to have some snow coming through here later today and on across Wisconsin and hopefully into Chicago and Milwaukee. That would be a good thing. A small part of our business -- every sale is important. So we look at that business -- again, that's -- as I was going to say, if that comp is reasonable with last year, the flat is probably the right place to be.

On the professional side of the business, the same thing. Obviously where there was more contraction there this year, and that was -- that would be most heavily waited because of the economic things that are going on. So whether it was golf customers or landscape contractors, they reduced their spending. We're hopeful that that will start to come back. We're not building a lot of -- a big bounce there coming back in fiscal 2010, and so that -- that we've got neutral to could be a slight tail wind.

But it's offset somewhat by the municipal side of our business which is, I'll grant you is smaller. But that's likely to be somewhat of a headwind, because the municipal businesses tend to operate on the previous year's tax base, and so -- in 2009, the municipal business was okay, because the 2008 tax base was relatively better than it will be than now going into 2010. So that will be somewhat of a headwind for that part of -- for that market.

So all in, we sit here in December. As I said in our formal remarks, there's still some uncertainty. We're -- while we're hopeful things could be better, we're not expecting a significant bounce up or, by the same token, a significant -- a step down. Let's face it. We were sitting here in December of last year, and things turned out very, very different from where we started. So we'll see.

Okay. Great. Well, thank you for the color, and here's to a better 2010.

Thank you, Jim.

Thanks, 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.

Good morning.

Two questions here. First off, you talked about the field inventory drawdowns. Can you put a little meat on the bone and quantify the impact of those drawdowns this is year? And then, are you looking -- are you incorporating within your 2010 expectations a rebuild in channel inventories?

Yes. Well, we won't -- Sam, this is Mike. We won't get into specifically quantifying it. I will say that there was a significant drawdown across both segments, and so we are -- but the fact is revenue is obviously declined as well. But we are what we consider in very, very good shape going into fiscal 2010 on a field inventory basis, and we'll manage that carefully.

And, to your point, could there be some rebuilding? Well, some of that will depend on -- as working through the channel 10 users, there's -- trying to get a better sense of just how the market is going to -- is going to develop. So we have kept that, I would say relatively flat. There could be some potential there. But there again, that depends on if you start to see the inflection points and the markets start to move back in a positive way.

I think, more than anything else, what we're -- as we prepare for fiscal 2010 -- and this is the time of year that we prepare, trying to anticipate how things are going to play out -- more than anything, we're working on flexibility to make sure our operations can respond. And I think we are better today than we were a year ago or even five years ago -- much more so than five years ago, but even a year ago, across the enterprise, both in our residential and our professional businesses, to respond. That's always dependent on two degrees -- it's like a snow business. You have to be responsive on the basis of a hundred points. Well, you probably can't do that. But within the core spring and summer businesses, I think we're prepared to respond to changes in demand more so than we have in the past.

The second question, the $2 -- and I understand -- you're talking about or around $2, so there's some wiggle room either way, but I'm trying to understand how to get there. You do a $1.73, 2009. But if you X'd out some of the one-time items, like the workforce reductions and the tax valuation allowances, and the legal expenses and all that, you get the $2, essentially, maybe $1.95, $1.98, whatever. And you're talking about your gross margins being up in 2010 because of commodities. You're going to get a benefit from currency, and you have maybe as much as 10% fewer shares already from share repurchase already done in 2010.

So I'm curious, with the flat sales, why would it only be $2? It would seem the math would suggest it would be a number considerably higher than that.

Sam this is Steve. Just a couple things. First of all, the currency will probably be a slight headwind this year, not a tailwind. And, we go out and hedge our plan so that we don't have any big surprises. That may mean some years we hedge early and we get a benefit. That may mean some years we hedge early and don't get a benefit. Part of what we're seeing this year is we hedged earlier and the dollar has continued to work in our favor, but we won't get all that impact.

So when we look at our top line, currency probably is a slight headwind. You look at Red Iron, I mentioned -- that's going to have a negative impact on the top line. We're going to get a little price, but not much. This is not going to be a year for price increases, and so you're going to get very little price. So the top line is really going to end up in the margin line based on where the commodities go.

And, steel probably is the biggest one -- it's our biggest dollar amount, and we're seeing that up and down, copper is way up. So when you add them all up, it takes us to close to that comparable number to this year, or a slight bit over.

But you said that gross margins would be up on a year-on year basis.

Slightly, yes. There will a slight improvement in gross margin. SG&As will be flat. We think your point about the dollars that we've taken out, that's true, although you've got a lot of things that come back in the second year -- things like the furlough days and those types of things are one-time. You also have your incentives end up going back into the plan that you didn't have the prior year. You have your health care increases. There are a lot of things that go in that put pressure back up on the SG&A. But what we think is the number will be similar to what we had in fiscal '09.

How much of the discretionary spending cutbacks that you have in 2009 do you anticipate returning in 2010? In terms of be it bonus or other discretionary type cutbacks ?

Well, I guess on the workforce or the restructuring side -- I'm not sure I'm answering your question, we said -- I think we said this on the last call, that we'll realize about $15 million roughly in '09, and it will be about $20 million in 2010. So that's an incremental of about $5 million. But then to your point there, not surprisingly, there were no -- or very little incentive paid in fiscal '09, and that will be back in the plan in 2010. So I don't know if that got to your question, Sam, but --

Well, the question would be, do you actually -- how much of $5 million will you actually recognize or realize due to the return of some of the prior discretionary spending?

Looking at total SG&A dollars, it would be roughly the same.

Okay. So the $5 million gets eaten up by the return then?

Basically.

Okay. And then free cash flow, 2010, similar to net income, or just trying to get a sense. There's some moving parts on your working capital lines. How should we look at that free cash flow versus net income next year?

Keep in mind, as I mentioned in my opening comments, we had a huge operating cash flow and free cash flow this year, but a lot of that came from Red Iron and the inventory and receivables reductions that we had. So that will be tough to match. But in terms of close to net income that's a good way to look at it.

Okay. Thank you. I have other questions. I'll ask them offline. Thanks very much.

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

Good morning, guys. This is [Mark Stefan] in for Eric. Getting back to the top line, can you give us your thoughts on what you're seeing domestically versus what you're seeing outside the US? And then in terms of your flat 2010 sales guidance, what would that have look like maybe 90 days ago? Do you have a little bit more clarity today than what you saw 90 days ago on the sales line?

Well, I guess I'd start, Mark, with, every day we get closer to the market -- our key selling season -- we always have a little more charity. Yes. With that said, sitting here in December -- I'll contrast it to last year, sitting here in December -- things changed dramatically as we went into the season. I think we have a better sense for it this year, and that's obviously factored into our guidance, and so I think, from a -- as we talk with people in the golf market or the municipal markets, your grounds markets, landscape markets, there's still some caution there. There's -- one day you feel a little more encouraged about the economy is moving along -- hopefully they'll start to see that inflection move more positively, and then we hit a little bit of a setback.

We're not anticipating any kind of a step change down -- that second step on the recession in our outlook for 2010. So I think, on the professional markets it's -- inventories are in great shape, customers are still somewhat cautious. We'll get a much better sense for that as we enter into the new calendar year.

Your US versus non-US outlook are you --

Yes. That was probably as much the US, but you're seeing -- you're seeing some of the same thing internationally. Some of those countries lagged the US in terms of going into the recession, but you're also seeing them come out. So while a Spain or the UK, which are important golf markets, went into the recession versus some of the other countries in Europe, for example earlier. Steve and I were over in the UK this last fall, and they're starting to see signals that they are coming out of the recession not at a full recovery yet, but, they're -- believe again, moving, stabilizing, starting to move in the right direction.

So the good news for us along the way is that customers continue to use equipment across the professional and residential businesses, and so it was a relatively good year for making the equipment work and cut grass and use the cultivation equipment and even the snow equipment. So it's still being used up. And, while we don't necessarily see all of that convert to new sales that's good for parts sales, and ultimately we believe that will drive new sales.

In terms of end market financing or approval rates, what do you see in there today versus what you were seeing six months ago and a year ago at this time?

Yes. This is Steve. Well, it's, I would say, stabilized. We went through a period there where rates were going up, approval rates were going down. There was uncertainty in the marketplace with what was going on with the financial markets.

One of the things we've done is we've reacted to go out and get additional providers of those services, for instance, in our leasing business. We went out and got three additional providers. So we now have four sources for our people to choose from. We have two retail choices for our people to choose from, and we now have Red Iron Acceptance in the fold.

So I wouldn't say things have loosened considerably. I think the approval rate scenario is still is one of caution, and that's probably not all bad. But people, it's not a matter of not being able to get financing. It's more expensive. Some people can't get financing on the lower end, as you heard me talk about before -- their marginal of credit. But I would say it's stabilize, and today it's okay.

And, Mark, I was going to add a comment to that, and maybe what we've seen more of -- well, the good news is, by and large, our customers are still there. They haven't gone out of business. But the fact is, the same pressure we felt because of the recession, our customers have felt as well, and for some of them, that has marginalized their financial situation. And so it is less about -- there are good resources available to provide credit today -- I think whether that's for the end users. But to the degree the customer's financial situation has been marginalized may play a little bigger part. That's not the bulk of the customers, but those at the margin.

The fourth quarter inventory number higher than 3Q -- anything abnormal in that number, or what was the driver to the $15 million increase in inventory sequentially? Is it simply you underproduced in 3Q with the downtime?

No. It's just a seasonal pattern, build pattern.

But nothing significant.

Great. Thanks, guys.

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

Good morning, everyone. Steve, I think this is a question for you. When I look at your balance sheet, the Company's debt levels, your outlook for earnings, the current industry outlook, what minimum level of cash is the Company comfortable with -- operating with -- on a going forward basis over the next year or two?

We're -- hopefully we have to make that decision because we have so many places to spend it. But, we look at -- it's not just cash. It's cash and what availability do you have on your borrowing arrangements. And we have significant revolvers in place. One thing I didn't mention when the financing question came up was we still have very strong relationships for Toro's financing through our bank group if we need it. We're fortunate we didn't need it much last year, and based on the projections we may not need a whole lot this year. But as long as we have borrowing capability. In a perfect world you'd like to pay your bank debt down and have no cash at the end of the year, but still have availability under your bank revolver. So we have plenty of capacity when it comes to cash and the able to borrow.

Okay, good. Mike, one last question for you. You may have touched upon it. But when I look out over 2010 and 2011, is there going to be a marked difference in the growth rate of your golf business versus your commercial landscaping business versus your municipal business?

Well, we've talked about the recovery, so it depends on where you are on the recovery line. But if you just look at the markets in general, we've -- I know we've said this in the past -- the domestic golf -- the market itself is going to be relatively little growth. In fact, it may be relatively flat if not a slight contraction. Of course, that then begs the question of what we do within that market and how we drive our share position.

Right.

But I'll offset that with golf on a worldwide basis, when you include the domestic market is still favorable, because there's going to need to be golf courses developed. Again, we've talked to 16,000, give or take, and there's 16,000 in the rest of the world, and so while you won't necessarily extrapolate on the US basis, the fact is there are going to need to be thousands more built over time around the world and we'll participate in that growth. So we think that's all in for worldwide golf is still a positive. It's not going to be double digit growth, but it's both our share position and the prospects for it continued growth in golf.

The landscape contractor, the trend that's taken place over a number of years to outsourcing that will continue. But again this isn't what we've characterized as a double-digit growth market. We're talking domestically now. One of the things that will happen is, as markets are developed outside of the US, as they mature and they develop the middle class, that will create more opportunities for us -- both on the landscaping side as well as, to some degree, the residential side. So -- and then the last one is, the municipal business and long-term that's a GDP-like number. Short-term, we'll have the pressure against the tax base that I mentioned earlier.

Well, that's very helpful. Thank you.

And your next question comes from the line of Seaver Wang with HFP Capital Markets. Please proceed.

Steve, this question is for you. You mentioned that inventories are probably in the best shape in 10 years, field inventory is also in very good shape. Assuming that -- well, I assume that when demand comes back -- would you expect restocking of inventory in the field, and is that going to be slower, gradual or are you going to see a pop?

Well, I think a couple of things have happened here over the last couple of years. One, our customer base has gotten a little more conservative in terms of how much inventory that they are willing to take on, and that's not all bad. That means the system -- that means we have to watch our inventory, make sure we can deliver when things do take off again. But the later we can get the channel in terms of inventory and still be able to meet the demand, the better off we all are. So I don't see a big pop. I do see, as business picks up and sales pick up, we're going to have to have seasonally higher inventories to be able to hit those numbers, but not any big ramp-up here in the next couple of years.

Okay. And then, again, with the demand. With so many new product introductions, you mentioned -- or Mike mentioned, 50% of sales introduced probably in the last three years, and a much greater penetration in the residential area. Is it reasonable to assume that when demand comes back, it will come back -- or sales will grow possibly faster as a percentage than other recoveries -- just because you have a lot more penetration -- but a lot of the penetration was during a dark down market?

Seaver, this is Mike. Certainly that's always our goal, right? So it's to what degree our markets growing. To what degree are we growing within those markets from a share standpoint. And you're right. We have a broad array of new products, and that has certainly helped us this last year. I think, without those products, our revenues would have contracted even more.

So we hope that is to your point. We hope that's the case. And, as the markets do recover, that we can take advantage of that, and that can be -- that could be an accelerator, but that's the $64,000 question -- both to what degree will the markets start to move in a more favorable direction, one, and then how will we perform within those markets. So we are comfortable, or we think we have a good position to -- comfortable is probably not the right word -- we have a good position to take advantage of that when and if that happens.

Okay. Thank you.

Thank you Seaver.

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

Oh hi, Steve.

Good morning.

How are you? In regard to the Red Iron initial passing, do you think you'll still be able to manage your day sales outstanding here in the mid 30 range going forward ?

It will definitely be dropping from the prior year, because you've carved out roughly -- by the way, this is Tom. Essentially what we'll have is on an average basis, we'll have in the neighborhood of $100 million plus on average that will be out of our receivables. I think that's the way that you look at the impact of that -- of what is moving the -- not beyond our balance sheet, that will be over on Red Iron. So you can look at it that way.

Okay. And reserve corresponding comprehensive loss and shareholders equity in the quarter?

No. That's just -- for the year, if you look at for the full fiscal year, equity is down, because we spent more money buying shares back than we made.

Okay. And how many more -- what's left in the share repurchase program?

4 million shares.

This is a question for Mike. The size of the drip-ag irrigation market, what is that?

Yes. I think roughly 4% of our revenues.

But what size --

Focused on, of course, strategic growth.

Right, but the overall size of that market?

Oh, the overall size of that market? I guess we'd say it's well north of $1 billion.

And what actually -- what types --

And the potential to grow is even more so.

And what types of farmers are you going after? Which field crops?

Well anyone that uses our products, and so when you think about ag irrigation, and that ag irrigation as we've used in the past uses the largest amount of freshwater that's consumed in that 70% plus range, and so the largest part of the ag water is used by flood irrigation followed by center pivot products followed by micro irrigation or drip products, which is where we're playing today. And so those drip products have been used more in the specialized crops -- strawberries, onions, not your large-volume row crops yet -- although there's work being done on that, as some of that relates to commodity prices and when the commodity prices go up, as they did for a period of time a couple of years ago, that becomes more interesting, because you actually can now control the yield. So more specialized today, but moving towards just a larger part part of the overall ag environment, not surprisingly, because we have to manage water more carefully now and well into the future.

Is there an acreage limitation with the drip irrigation?

No. Not an acreage. Again, going back to what I said just a minute ago, you can use -- there are people who have tried and, in some cases, have been successful using drip tape in raising corn. Well, those are large acreage crops. Those aren't what I would characterize as specialty crops. But, it helps when corn has a price of $4 or $5 a bushel versus $2 or $3. It makes the economic proposition much more attractive.

Right. Would you say the drip irrigation is more efficient than the center pivot irrigation?

Yes.

Right now.

More importantly than me saying it, the colleges, and the academics would say it.

Okay. Okay. Great. I believe that was. My other questions have been answered. Thank you very much.

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

This is [Andy Whitehead] for Mark. Just one question for you. On the third quarter call, I believe you mentioned a delay in the launch of a new line of snow products from the third quarter until later in the year. I was hoping you can give us an idea of what impact that had on this quarter's results?

I guess I would say not material. It is a line of -- or a new model -- the Power Clear 180, which is our lightest weight gas powered product. It started shipping in November, and they're out there now at our dealers and key retailers. So it's going to be a nice product. We're not talking about something that's going to significantly move the needle.

Okay. Great. I appreciate it. Thanks, guys.

Thanks.

And there are no additional questions at this time. I would now like to the turn the presence over to Mr. Michael J. Hoffman for closing remarks. Sir, you may proceed.

Thank you, Jeri, and once again thank you for your questions and interest in the Toro Company. To our listeners, we wish you a safe and happy holiday season, and we will look forward to talking with you again in February to discuss our first quarter results. Thanks, and have a great day.

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