Toro Co (TTC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Toro Company first quarter earnings conference call. I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Well, thank you, Jennifer, and thank you all for joining us this morning. Joining me this morning for our first quarter earnings call are Mike Hoffman, Chairman and Chief Executive Officer; Tom Larson, Vice President; and John Wright, Director of Investor Relations.

Let me 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. So, the Safe Harbor portion of the Company's earnings release - as well as SEC filings - detail some of the important risk factors that may cause actual results to differ from those in our predictions.

Our earnings release was issued this morning by Business Wire, and can also be found in the Investor Information section of our corporate website, thetorocompany.com.

With that, I would now like to turn the call over to Mike.

Thank you, Steve. Good morning to everyone.

As the results that we announced earlier today indicate, after a very difficult fiscal 2009, we are beginning to see some signs of improvement. Our first quarter is always a small quarter for us as we prepare for the selling season ahead. We are off to a reasonably good start and, like most companies, feel better about the business than we did a year ago. For the quarter, consolidated net sales were down just slightly. Our Residential business is up nearly double digits, and the decline in shipments within our Professional business is due to a further reduction in field inventory. In addition to these encouraging signs, we strengthened profitability due to a leaner cost structure put in place last year, and continued to achieve improved results in working capital and cash flow from operations. Steve will discuss each of these areas in greater detail later in the call.

But, first, let me begin with a few updates starting with the snow season, which has been a good one for both Toro and our channel partners to date. Major storms throughout large sections of the country, including the recent record-setting blizzards that dumped several feet of snow along the Mid Atlantic, spurred healthy demand for our extensive line of snowthrower products. We all saw the news coverage on these storms and others, many of which showed Toro products in action, which is a testament to our market share strength in the category. The persistent, heavy snowfall also kept landscape contractors busy plowing, and dealers selling and servicing units. In fact, many active buyers had difficulty finding product as dealers and key retailers quickly cleared out their inventory, which is why we extended production through January. Our flexible operating systems, dedicated dealer network and product strength are all key factors in our success this season. Additionally, customers clearly value the innovative features and performance of our strong snowthrower lineup.

Beyond snow, let me now touch on the health of our other markets. On the international front, Asia - particularly China and Korea - has shown potential for returning to a more normal buying pattern, with golf irrigation and commercial equipment orders increasing during the quarter. This indicates that course developers have been able to move forward on projects that were put on hold during the worst of the economic downturn. We are faring well with the opportunities, and believe we are holding or even gaining market share. In Australia, continued economic growth and favorable weather have also benefited our business. We also compete in the agricultural market with our water-saving micro irrigation products. Interest has grown in this category, as farmers and growers worldwide seek innovative ways to use water more efficiently, while increasing crop yields and quality. This continues to be a strong market for Toro. So while we are seeing some positive signs in our global markets overall, it is not yet clear whether the uptick is short-term due to pent-up demand or a true, sustainable recovery.

Let me now turn to recent tradeshows, and touch on some of the new products we are rolling out for the coming season, and the general reactions we have received from customers as they prepare for the year ahead. Just last week, we had the opportunity to meet with golf customers in San Diego at the Golf Industry Show, which is always an exciting event for us. Superintendents we spoke with are generally more hopeful than they were a year ago, when course revenues were under significant pressure. Many are now talking about improved operating budgets, with hopes of replacing older equipment and jumpstarting renovation projects postponed last year.

In the area of precision irrigation and water management, customers are very excited about our new state-of-the-art Lynx Control System for golf courses. This technology brings an increased level of integration with critical system components such as weather and pump stations, sprinklers and our Turf Guard wireless soil sensors into a single, intuitive interface to better manage the golf course. Another advancement in precision irrigation is our new golf sprinkler, that feature an integrated decoder to offer greater design flexibility.

On the equipment side, we introduced the Groundsmaster 4300 rotary mower, and this machine comes with the innovative SmartCool system that briefly reverses the cooling fan to blast off debris, resulting in greater productivity. And from the TY-CROP acquisition last fall, we unveiled the new Toro ProPass 200 and MH-400 material handler, to provide the ultimate in application versatility.

Moving to The Rental Show in Orlando, which took place last week also, many customers told us they expect this to be a stabilizing year within the rental industry, and expressed optimism that conditions will begin to slowly improve. To better position ourselves for future growth in the rental market, we established some new independent rental relationships, which add over 50 sales representatives to expand our coverage in the U.S. and Canada. In addition to providing sales support of Toro compact utility equipment, they will carry Toro's new dedicated walk-behind stump grinder; the first hydraulically driven, tracked unit available in the U.S., and a completely new category for us. This powerful new machine, that will begin shipping in the second half of 2010, provides customers with a piece of equipment that is quite different from the competition.

We also had a chance to visit with turf managers at the Sports Turf Managers Association Conference in January. The mood was relatively more upbeat than a year ago, when spending had come to a near standstill. Customers have begun to slowly adjust from the economic crunch, and now hope to move ahead with planned purchases in 2010. As for the show, overall attendance was solid, with great interest in our many new product innovations. This included Toro's first synthetic turf conditioner, which is designed to relieve compaction, and redistribute and level the infill, to improve the consistency and playability of synthetic turf. We also introduced our new rotary mowers and topdressers, which received the same positive reception that they did at the Golf Show.

Lastly, with a strong commitment to helping customers care for sports venues around the world, we were pleased to once again have our equipment on the world stage in helping prepare the field for the Super Bowl. This is a long-existing relationship that dates back more than 40 years to the original Super Bowl. And, like all of our relationships, we value the trust customers place in our people and products to meet their unique needs, deliver superior results, and provide unparalleled service. As our first President, John Samuel Clapper said so long ago, "You can replace anything, except the goodwill of your customers."

With that, let me turn the call over to Steve to review our financial results for the quarter.

Well, thank you, Mike, and let me start with a summary of our financial results as reported in this morning's earnings release.

Net sales for the quarter were down 2.6% from the previous year to $331.4 million. On the earnings front, we posted net income of $10.9 million dollars or $0.32 per share, compared to $0.18 per share last year. Net earnings for the first quarter last year were reduced by a pre-tax charge of $1.3 million dollars or $0.02 per share on an after-tax basis, to account for workforce adjustments.

Looking at our individual business segments, starting with professional, worldwide sales were down 7.2% to $212.8 million. Shipments were lower across most categories, as our channel partners focused on managing inventory levels. In fact, field inventories are significantly lower than last year, with retail signals suggesting that demand is starting to move in the right direction. On another positive note, orders for micro irrigation products were up in Latin America and Europe, along with golf irrigation systems in Asia and res/com irrigation products in Australia.

Net earnings in the Professional segment for the quarter were $25.8 million, down $4.3 million from the same period last year. The decline was the result of reduced sales volumes and lower gross margins, due to increased tooling expense from investments in new products.

Turning now to our residential business, worldwide sales were up 9.1% to $116.8 million. Sales were upbeat, mainly due to strong demand for Pope irrigation products in Australia and favorable currency rates. As Mike mentioned earlier, overall orders for snow products improved over last year, due to the introduction of a redesigned line of Toro snowthrowers that shipped in the first quarter, and heavy snowfalls.

Finally, net earnings in the residential segment for the quarter were $13.4 million, up $8.6 million from the same period last year. The increase was primarily driven by improved gross margins as a result of lower commodity costs, and a favorable mix of products.

Now to our key operating results, starting with gross margin. Margins for the quarter were up by 30 basis points to 35.1%. The improvement in gross margin was primarily attributable to lower commodity costs, currency tailwinds and the benefit of earlier cost reduction initiatives. These gains were somewhat offset by unfavorable mix due to lower sales of higher margin professional products. Going forward, we believe commodities will track lower than last year, which should benefit gross margin for 2010.

SG&A expenses for the quarter were favorable in both dollars and as a percent of net sales. SG&A declined by $8 million, or 7.6%, from last year's first quarter. As a percentage of net sales, SG&A was down to 29.2% compared to 30.7% in the same period last year. The decline resulted mainly from structural expense reductions put in place during fiscal 2009, which was somewhat offset by higher incentive costs. We are learning to do more with less and will continue our discipline in spending, while making prudent investments to fuel future growth. Interest expense was $4.2 million, down 2.6% from last year. Our effective tax rate for the quarter was 33.6%, compared to 33.7% last year; and looking ahead, we continue to expect our tax rate to be approximately 34% to 35% for the full year.

I would like to now turn to our balance sheet, where the focus we have applied to improving our working capital position continues to produce tangible results. When we announced this initiative back in early 2007, our 12-month average net working capital as a percentage of sales was almost 30%. Our peer group average was approximately

When we announced this initiative back in 2007 our 12-month average networking capital as a percent of sales was almost 30%. Our peer group average was approximately 19%, which led us to our goal of driving working capital down into the teens. You remember at the time, we said it would take at least four years to reach our initial goal, and that we would strive to make meaningful progress in all three elements of working capital - including accounts receivable, inventory and trade payables.

Early efforts focused on managing down our inventory, a natural extension of our Lean initiative, which was well underway in our plants. Average inventory has gone from $264 million in fiscal 2006 to $213 million in fiscal 2009 - a reduction of $51 million or 19%. At the end of the fiscal 2010 first quarter, our inventory was down $48 million or 20% percent from the same period last year.

Another important initiative focused on accounts receivable. We challenged ourselves to find innovative ways to support end-user demand with lower field inventory. Our average accounts receivable has gone from $376 million in fiscal 2006 to $274 million in 2009, a reduction of $102 million or 27%. The implementation of our Red Iron Acceptance joint venture strategy at the end of fiscal 2009 will further reduce Toro's capital needs to support our sales flow. At the end of the fiscal 2010 first quarter, our accounts receivable was down $131 million or 44% from the same period last year.

And the third leg of the working capital stool, which is trade payables, is now showing improvement. The implementation of a supply chain finance program in the latter half of 2009 has enabled us to lengthen our payables terms, while providing our suppliers with attractive cash flow and financing options. At the end of the fiscal 2010 first quarter, trade payables were up $20 million or 22% from the same period last year.

In all, our 12-month average net working capital as a percent of sales now stands at 24%. With the improvements we now have put in place, we anticipate reaching our goal of being in the teens sometime later this year. We feel especially good about achieving the goal, given the recent challenging economic environment that has dampened sales levels.

With that, that wraps up our first quarter results. I'll turn the call back over to Mike for some discussion on outlook.

Thanks, Steve.

Based on the actions we have taken to better position the company for recovery, coupled with early signs of improvement in the global economy, we believe we are on firmer ground today than a year ago. Now entering the primary selling season, we are launching a number of innovative new products to meet the unique needs of our customers and improve our market share position.

Earlier in the call we highlighted many new products being introduced to our golf, sports and rental customers this year. Let me talk about a couple of others. For landscapers, the new Exmark Vantage stand-on mower complements Toro's expanded lineup of popular GrandStand models. To help customers conserve valuable water resources, our award-winning Precision Series spray nozzles, and the recent introduction of Toro's new Precision Series rotating stream nozzles, help maintain optimal plant health with significantly less water. And, for homeowners, we will introduce the new eCycler cordless electric walk power mower. In addition, our key retail partner will carry the same number of Toro and Lawn-Boy walk power mowers as last year, while expanding placement of two new TimeCutter zero-turn riding models.

While there still remains a level of uncertainty as to how customers will spend, the general feeling is that budgets have loosened somewhat after many projects and capital equipment purchases were put on hold last year. Even so, we don't expect much growth in the season ahead, but will compete hard for every sale and stay focused on driving retail. That said, we acknowledge that our leaner cost structure will yield some additional profitability this year, and we now expect to deliver fiscal 2010 net earnings per share of about $2.15 on revenues comparable with fiscal 2009. For our fiscal 2010 second quarter, we expect to report net earnings per share of about $1.15.

Before closing, I'd like to briefly talk about our profitability initiative to which we alluded during our last call. After nine years of 5 by Five, 6 + 8 and Grow Lean, one of the questions we get from the investment community is, what will be our next initiative? Having just experienced one of the most economically challenging years in our history, we have decided to focus on a one-year initiative to begin the recovery, and return to profitability levels first achieved as a result of our 5 by Five initiative. We will leverage our lean and working capital accomplishments, and put even stronger focus on the customer, with a goal to achieve 5% profit after tax; what we are calling, 5 in One. This initiative will pave the way for a new multi-year initiative in 2011 that will ultimately take us to the 100th anniversary of The Toro Company in 2014.

Going forward, we will maintain strong discipline in managing the business and expect to further benefit from lessons learned through our previous company-wide initiatives. At the same time, we will continue to closely monitor Toro and field inventories, manage our cost structure, and invest in our future to deliver increased value to customers and shareholders alike.

This concludes our formal remarks. Now let's now open it up for your questions. Jennifer, back to you.

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

Hi, good morning all.

Good morning, Jim.

Two questions here, unrelated. First, Mike, just wanted to delve in a little bit more with regard to your commentary on the professional side of shipments, as customers are aligning their orders closer to the selling season. So it seems like you may have some conservatism baked into the second quarter guidance, which I know would be rare for Toro, but was wondering if you could flesh out a little bit more what exactly you are seeing there, in terms of customers specifically by end markets, as well as do you expect more of just ordering to demand versus restocking?

Well, let's start with -- maybe we'll start with the golf segment, and that business was most -- as we said before, was impacted the most in fiscal 2009. And I think the bottom line is our end user customers are more guarded, which causes our channel partners to be more guarded, which causes us to be more guarded. And what that means is, in the past our ability to kind of -- when things were on the trend line, right, before this recession, we were pretty confident in being able to predict the [superintendents'] behavior. In fact, they would in many cases tell us well in advance of what they were going to do. But they, today, are looking at their revenue stream, and whether that's membership or that's rounds played, you know, where there are daily fee courses, they are waiting closer to the -- to the need, which then causes the channel to be a little more uncertain which, you know, obviously causes us to not know quite as well as when things were more normal. So, you know, we were -- we were encouraged when we went to the Golf show and talked with some of them, yet that in itself is not enough. We have to see that -- kind of that behavior translate into orders from the end user to our distributors, and then back to us.

The landscaper has always been somewhat more -- making their decisions somewhat closer to market, and so the good news is they plowed a lot of snow, especially the northern ones; well I guess we have snow in 49 of the 50 states, so maybe they are plowing snow around the continental U.S., but as a result they have, you know, driven some additional revenue which we think will drive a behavior, but that hasn't happened yet. So, again, until that happens with our channel, you know, and it moves back to the -- you know, moves back -- moves back to us as a manufacturer.

And then on the consumer side is, you know, that is more of a -- a needs-based decision. And so Mother Nature has been good to us from a snow standpoint, but we need Spring to break, because that is the larger part of our business, and if it breaks in the right way that will drive a behavior, we think, with the consumer, as it did last year even in the recession, to get out and replace some of their walk power mowers or their riding products. So, you know, the overall theme is customers are being a little more cautious; not surprising, you know, until they are right on top of it.

And are you able to, as you've improved your own lead times and throughput, how does that impact how you are managing your inventories and your building for -- for the season?

Yes, that's a -- that's a good question. I think that the -- one of the concerns is if we see an uptick, will we be able to respond? And so I guess I would answer it this way. First, we've worked hard throughout all of the operations, and the team has done a very good job in increasing our flexibility and our ability to be responsive to change, and that's true from the consumer business all the way through the professional business.

Now with that said, there's some parts of the professional business that have components that are very long lead time, and in those cases we've taken some actions to put some of those components in a -- in a work in process position so we can, you know -- not build the finished goods, but have some of the components so that we can be more responsive.

One of the other questions we get is, you know, will the channel kind of ratchet back up their inventory, maybe not to the previous high but to higher than it is today. And here is the -- you know, as long as we are responsive and can get the product to them on a timely basis, that probably will not cause them to change much. Now if -- if the business moves up a lot, right, if we start getting into situations where there are product availability issues, then the behavior in the channel will be such that the pendulum will swing back the other way a bit and they will want to carry more product, and so it is a delicate balance and we're trying to manage through that. I think at this point in time, you know, we feel okay about our ability to respond to the market, even if there is a -- you know, say a significant uptick in demand.

Okay. That's very helpful color. And the second part, wanted to switch gears over to the irrigation side, with water management being a focus. We've seen some nice technology acquisitions on the control side, the moisture sensing side, you know, you specifically call out the micro business in the quarter as well as Pope in Australia. With regards to the micro piece of the business, you know, that is predominantly a North American business. Could you talk about international opportunities for that business, number one?

And, secondly, as you are looking at ways to grow your water management piece, you know, what are some of the areas that you are looking at that maybe you are not in today, or is it just complementing where you are, whether it is micro control, et cetera?

Well, I guess I'll start with the micro and say, you know, we have micro operations in North America, in California and Florida, to serve North America as well as that product gets shift down to South America to some degree. We also have a significant plant in Europe, in Rome, and a strong presence in micro irrigation in Europe, in the Middle East, as well as a smaller operation in Australia.

So our micro irrigation business, while granted is still somewhat small and we have -- you know, intend to grow that, we have a -- a worldwide presence from making, you know, micro irrigation drip tape to hose and drip line and, you know, the sprinklers and emitters that go with those products. So it is a -- you know, it is a -- strategically a very important business to us, and we will continue to invest there. There are things we can do, you know, from a share standpoint within the space where we compete today, but there's also a number of opportunities, you know, adjacent to that, so very much a work-in-progress. But it -- it ties back to, you know, our discussion in the past on, you know, the strategic importance of putting water on more precisely versus, you know, versus flood irrigation, if you will.

And that same theme moves over to the turf and landscape side. Again, we -- we're -- we've been developing some new products while, you know, most of the water around the world is consumed in the ag market, there is still a significant portion that is consumed in turf irrigation, and it is important, and turf is huge crop, if you will, and important to the environment in terms of its, you know, photosynthesis process and, you know, capturing carbon and all that goes with that. So the bottom line is we just need to make sure the resources used to take care of turf are better leveraged.

And that's where we get into the new, you know, precision spray nozzles, for example. All across -- all around the world people are replacing the old spray nozzles on some of these heads, there are literally billions of them out there with these precision spray nozzles that put water on much more precisely. We're complementing that now with the rotating nozzles and control systems, and the bottom line is there is much more opportunity there to put water on more precisely, from the golf course to the lawn and landscape arena, all the way to the agricultural market. So maybe getting a little broad for you there but it's -- you know, precision irrigation is just a critical part of our -- kind of our future growth strategy.

Okay. Thank you very much.

Thanks, Jim.

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

Good morning, this is Mark in for Eric.

Hi, Mark.

In terms of sales, affirmed flat sales for 2010, I was hoping to get a little bit more color. Did the first quarter play out as you expected on the sales line? And then if you could talk briefly about how are you thinking about the headwinds and tailwinds within the business? I think last quarter you talked about some tailwinds within pro, and some headwinds within residential. Has your outlook changed by segment? And then just your general thoughts about affirming flat sales at this point?

I think, yes, we would look at the sales situation and say it's largely consistent with what we -- what we said in December, that, you know, golf -- we just came back from the Golf show, you know, flat to hopefully be a -- a slight tailwind. We don't know that yet. I mean, there's some -- there's some puts and takes there. We expect the municipal side of the professional business, the ground side, to be a headwind, because the tax-supported agencies are -- you know, budgets are struggling as a result of the, you know, poor tax revenues from 2009. So that will be a -- that will be a headwind. Golf flat, to maybe a slight tailwind. Landscape contractor, flat to a slight tailwind, we'll see.

And the consumer part of the business, which is a third of the business, is -- it -- it will be -- we have a lot of new products and, you know, good -- good positioning. With -- with that said, Mother Nature plays such a role there, and we had a favorable weather environment last year; whether it will be as favorable 2010, we'll see, but that has the potential of being a headwind. So I think largely consistent with what we talked about in December.

In terms of the landscape contractor, I think you mentioned you're not yet seeing the orders come through. Is it due to the fact that they are going to buy closer to the season, or do you think it is in part due to the fact that the snow season has been so strong as well?

Well, I think -- I think probably the former. You know, they are -- especially in the Snowbelt, they've been busy working. You know, there is a lot of snow on the ground around the U.S. They've not been, you know, necessarily going into the dealer yet and saying, you know, get -- get my lawn equipment ready. That will happen now over the next, you know, 60, 90 days. You know, part of this will -- they are out there booking, they -- -- their spring and summer business. That will play a role. We think that will be very solid. And so I -- you know, our expectation is that they will be moving into the dealers in, you know, late February, March, April time frame to place their orders.

And then real quick, in terms of your share gains in 2009, pretty much across the board, I know that you had mentioned some -- some slight concerns about what the competitive reaction would be in 2010. Any update on -- on what you are seeing from your competition, and how should we think about your share position in 2010 versus 2009?

Well, I guess to start with, we never -- we never start with a -- a plan of seeing our share erode. And it -- obviously it depends what -- what the competition does. But -- but to date I would say it's -- it's -- you know, competition continues to be good competition out there and our share position is, you know, across all of the -- you know, the major markets, golf, landscape contractor, consumer, continues to be in -- in good shape. We've not seen a -- you know, a -- enough seen to date, now we're just getting into this Spring, we've not seen a response from anyone that has caused us a major concern.

That is not to say that that couldn't happen, and if it does that is likely something we'd talk about on the next call but not -- you know, on the snow side our share is in good shape and, you know, going back into production and this -- as you know, the business is highly variable, gives us an opportunity to produce some share with the additional units we produced in January.

Thanks, guys.

Thank you, Mark.

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

Good morning, Mike, Steve, how are you?

Good, Sam.

Good morning, Sam.

A couple of -- a few quick questions here. Number one, the dollar strengthening, Steve, I know you guys often have hedges in place, but can you give a sense of sensitivity of your earnings expectations with various moves of the dollar?

Sure, you saw the impact for the quarter, it was about a $10 million sales impact for the quarter. But as you pointed out we typically -- and this year was no different -- go out and start to hedge this early on. And the other thing that I will always remind you is that only about half of our international sales have exposure, because the other half are either sold in local dollars or we have places to use those dollars -- or we sell in US dollars. So it is not as big as the whole international business when you look at what you are hedging.

This year, we went out and we've probably got north of 50% of that hedged at the rates that we have in place today. And so if the dollar continues to strengthen, and that hurts -- you know, that hurts us as the dollar strengthens, we think we are covered to the point you won't see any significant hedging adjustments for the year. So we feel pretty good about our position right now.

So at -- what would the dollar have to do in order for there to be a somewhat meaningful impact to EPS, based on your current hedge?

Yes. That's -- pretty -- yes, it would have to be something dramatic. It's not a few ticks like we've seen here lately, although the Euro has gone up and down. Really what's happened, with what we've lost on the Euro we've made up on the Aussie dollar on some of this, because those two are working opposite, one in our favor and one against. So it would take a pretty good movement for us not to be able to cover that, and we've factored in the guidance that we've given you, the 215, on what we think the exposure is for the rest of the year.

Okay. Thank you. The second question, and you briefly touched on this but I know that the first quarter is largely out of season but you -- you surpassed your guidance. Where was the favorable variance versus your internal expectations? It sounds as though sales were basically in line, maybe a little bit better on snow, but maybe some puts and takes elsewhere. Where was the primary favorable variance?

Well, it really was margin and expenses, and when you look at it we got some benefits from commodities, which we expected. You know, we talked about that at the end of the fourth quarter, so we got some benefit there. We got some currently benefit and, you know, we've still got our finger on the spending control button here through the first quarter. Mike said that customers are being cautious on ordering, so we've not gone crazy on spending. So you look at the benefit we got out of margins, gross margins, and the spending discipline, that -- that really is the difference, those two items.

What types of things are you holding back on, on the expense control side?

Miscellaneous things. There's a whole number of things that we're holding onto. When I say "holding on," we're maybe spending slower than we might like, and once we get through -- get into the March time frame, April time frame, and have a better idea what the top line looks like, we can then turn some of that loose.

R&D and marketing as a percent of sales are roughly in line with historical trends?

Yes, we've not cut back dramatically there.

For example, engineering, Sam, is within a tenth of what its kind of run rate has been and so -- we've not --

We've not cut those items.

Okay. And then the last question I have before I will defer to others, what was the US residential versus international residential? You noted the strength was in certain elements of the international markets.

The international market was really Australia, the Pope Irrigation brand. U.S. was more snow.

Was the U.S. up, you know, mid-single I guess? I'm just guessing?

Yes. So the -- the number one factor was the Pope Irrigation, which is largely a DIY business in Australia. And so that was -- that was the first most -- you know, the significant change year-over-year, and the second was snow, and snow's pretty obvious.

Okay. Thank you much, gentlemen.

Thank you, Sam.

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

Hey guys, congratulations on the quarter. A couple of questions, on the retail segment, I know the margins in that segment for the last three quarters have been pretty strong. Is it just volume, or is there some other stuff going on there on with mix and things that has contributed to that strength over the last three quarters? And what should we expect kind of going forward?

Yes, you know, it's -- it's all of the above. Mix was favorable, so we had the -- you know, the good -- the DIY water business was a plus, snow was a plus. So we had favorable mix, as Steve has mentioned. You know, the gross margin has moved in the right direction, so that's a plus. And structurally on the SG&A side last year, we took some actions, you know, against that particular area, maybe -- maybe different than other areas of the Company, to say that we have to have an SG&A structure that will yield us a -- you know, you still have to find the right places to invest, but other places we just have to be more efficient, and we made some changes there structurally that is helping the SG&A as well. So it's -- it's all of above.

Okay. And then on the two new TimeCutters at your key retail partner, how significantly incremental is that? I do not know how many you have on the floor right now, I do not know if it is three or four on average? Is there any more color that you can provide on provides point as well?

Apologize not having those price points here. Maybe John has that, that he can pull out. So it is an expanded line. And this varies -- this will vary by store. So it's -- you know, there will be some stores -- not surprisingly, they put these in their riding market stores, and so in some cases there will be none on the floor and in some cases there will be one on the floor up to, I believe, three on the floor and, you know, in the markets that are strong rider markets. And so our positioning will be positive year-over-year by comparison.

Now, again the -- you know, the -- the $64,000 question is, you know, what kind of customer demand will we have against that consumer business? And we hope to have another year like we did in 2009 relative to -- to Mother Nature, and if the economy is a little better, you know, that could turn the other way, but at this point in time it is too early to call.

Okay. And then just lastly, on the new Stump grinder for the rental channel, obviously that is incremental to new -- it sounds like a new product area for you within that channel. I mean how significant or incremental should we think about that as being a contributor to the performance of the segment?

Relatively small but strategic nonetheless and, as you know, the rental channel is not a channel that we've had a real strong presence in. We've -- we've been growing that position with our -- our site work systems, compact utility loaders, and by broadening the portfolio to include products our walk behind trencher a couple of years ago and now with the walk behind Stump grinder, you become more important to the rental outlets. And so -- and so while that, the sales from this particular product will not be huge, they will -- they will influence sales of other products as well. And so Toro wants to have a more commanding position within the -- within the rental space. This will help us get that.

Okay. Should I assume, though, that kind of the fill-in is like one-time in nature, or will it be kind of blended through a couple of quarters?

Yes, so it is the second half of the year, and it is small, it's a fill-in.

Okay. Thank you, guys. Good luck.

Thanks, Mark.

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

Good morning, everyone.

Hi, Jim.

Hi. The only question I have is for you, Steve. Can you talk about your capital expenditures? You know, where are you investing your money currently? And should we see any change, any major changes in that number as we look forward?

We hope so. We'd like to see that cash number on our balance sheet go down. We've got plenty of cash as we sit here. That really hasn't changed. We are investing our money in -- obviously in growing the -- first of all, liquidity, as we told you all along, and I think we're over that hump at least for the short term. But growing the top line, how do we get the Company back on track and on a growth mode? Acquisitions are still high on -- you know, high on our list. We're active in the acquisition market. We're hoping to be able to find something that can move the cash number down in acquisitions. And then obviously return to shareholders, we're always looking at what we ought to be doing on share repurchase or any kind of a dividend payment.

Okay. On capital expenditures specifically, is there -- should we expect that that will continue to track more or less in line with depreciation going forward?

Yes. It's in that 40 to 45, maybe a little higher than that, range.

Right.

The one thing that I would add to that, Jim, is there's -- you know, certain businesses we're looking at some level of expansion, like in micro irrigation. And so we'll -- we'll spend somewhat more there than, you know -- you might see a bit of an uptick in capital.

Because of that?

Because of that.

Okay, well, thank you both.

Thank you.

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

Hi, good morning.

Good morning, James.

Joining the call slightly late, so I do apologize if these questions have been asked. Just looking at your second quarter guidance, and not trying to overdo it, I understand it's just going to be one quarter, it seems as though it's a little bit light, if you want to take a look at what you guys did in terms of leverage to your SG&A from the first quarter. So I was wondering if you could help me understand that a little bit more?

Well, we've guided to about $1.15.

Right.

And that's up from $1.00 the prior year. And so we do expect on -- and that's on comparable sales, we have not changed our top line number. So you plug those into the formula, that means you are getting some leverage because you are earning more at the same -- on the sales level.

Okay. I think I had here -- because it was a terrific improvement year-over-year in the SG&A leverage from the January quarter, almost 200 basis points, about 190 basis points. I guess my model might be a little bit to yours, Steve, because I'm only showing about a 20 basis point improvement to get to that $1.15, so I didn't know if there was something else in the SG&A line? I know it is a bigger quarter for you guys, you need to spend a little bit more money, but I just didn't know if there is something else in that line, why we'd only be looking at $1.15?

Well, that's a pretty good increase from $1.00 on the same revenue number. That's the way you have to look at it.

Okay, right.

Some of that can be timing, you know, back and forth, first quarter versus second quarter. But there's -- when you take a look at it, there's some fairly good leveraging going from that type of dollar -- EPS increase on flat sales.

Okay. And the only other question is more of a macro question. You know, looking at your Professional group, it's still holding up quite well, if we look at the State budget backdrop. I guess I was wondering if you could help me understand that, too, a little bit more? Because everything I'm reading is States are falling apart here, there, and there, and municipalities are dying; I didn't think Toro was really in line for any Federal stimulus, so I'm just wondering how your Professional group is holding up as well as it is?

Yes, that's -- we talked about that a little bit earlier, in that we expect that to be somewhat of a headwind. Now, to be clear, that's a relatively smaller part of the Professional business, and so last year, in 2009, we saw the -- you know, a significant fall-off in golf, which had a more material impact than what was a -- you know, I say a relative good grounds business with the municipalities. So they'll flip over this year. So that -- that base, that grounds municipal base is, you know, a smaller part of the Professional portfolio. So we know it will be a headwind.

And the other thing I would say is while you are right, they are under pressure due to the -- the tax base and low tax revenues as a result of 2009, some of this is still budgeted spending and -- and -- so we tend not to see it just stop, right? So they'll -- they'll go through -- they'll be going through their budgets, and maybe instead of buying six out-front mowers they will buy four. And so it is not as though we -- we'll -- we'll see, you know, a complete fall-off. But, you know, we've fact -- kind of factored that into our outlook for -- for 2010.

Okay. All right. Thank you. That -- that's all I had.

Thanks, James.

(Operator Instructions). Your next question comes from the line of Seaver Wang from HFP Capital Markets.

Hi, Seaver.

Good morning.

Hi, good morning. A few questions. First, Steve, do you think that you guys are going to continue to experience some tailwinds with raw material prices? And how long will that last, if that is true?

Yes, we should -- you know, if you go back to last year, you know, the first half we saw big increases, carry-over. Last half wasn't quite as much, and as we went into the first quarter here, we're still seeing some benefit of that. You know, a lot depends on what happens to steel. It's the same old culprits, we talk about steel and resins, hydraulics, things like that, what happens to those prices as we go forward. But we do think for the year, based on what we see today, that should be a tailwind, not the headwind that it was the first part of last year.

Okay. And then in -- for the guidance, I'm assuming that share repurchases are not baked into those numbers, or are they?

What -- what we plan on purchasing, or have purchased are baked into that guidance, and they are not big numbers, as you can see. So we've chosen to keep -- kind of keep our options open here, in terms of what to do in that area. So we will give you more as time goes on, but there's not a lot of share repurchase baked into that number.

Okay. And then historically, second half of the year is when you do more heavy repurchases, but you do have quite a bit of cash on hand now. Will that be more of a smooth -- assuming that you find the shares attractive, that you would be more willing to buy in the first half of the year?

Yes, that just depends on what develops with some of the other activities that we have going on. But for now, like I said, we've got baked in what we think we'll do for the near term into the guidance, and it is not a very big number.

Okay. And then just last of all, the 5 in One, that is 2010, 5% after-tax margin, debt margin?

That's correct.

That's the goal?

Yes.

Okay. All right. Thank you.

Thank you, Seaver.

And your next question is a follow-up question from Eric Bosshard from Cleveland Research. Please proceed.

Hi, guys, just one quick follow-up. Can you give us a sense on what the channel feedback has been on financing year-over-year? Is it loosening? Is it as tight as it was a year ago? Just your general thoughts on financing, thanks.

Yes, you know, financing is still -- is -- let me say it's stabilized. We went through a period last year through the credit crisis when all of the markets, all the banks, all the -- our suppliers were, you know, trying to figure out what was going to happen, so it was pretty difficult. That has stabilized a bit. I guess I would characterize the end of things. We have [fighters] in that area, and that is -- that is more stable than it has been in the past.

The floor plan side with Red Iron, we now control a good share of that, so we're not dependent upon a third party. So that, we think, is in good shape.

And then the other piece is retail, kind of the landscape and consumer retail type of products, and we have two providers of that financing for us today, and that seems to be working well. So it's not anywhere back to where it was a couple of years ago, but it's in much better condition than it was a year ago. Having said that, I think that 2010 still will be difficult for financing, but not as difficult as it was last year.

Thank you.

Thank you, Mark.

There are no more questions at this time. I will now turn the call over to Mr. Mike Hoffman, Chairman and CEO, for closing remarks.

Well, thank you, Jennifer. And we would thank all of you who listened in and participated for your interest and your questions. As always, we appreciate your confidence and trust. And we will look forward to talking to you again in May, hopefully as the season is well underway, and be prepared to discuss our second quarter results.

So thank you. Have a great day.

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