Toro Co (TTC) 2011 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 Regina, I will be your operator for 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). Today's event is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Kurt D. Svendsen, Managing Director of Corporate Communications and Investor Relations for the Toro company. Please proceed, Mr. Svendsen.

Thank you, Regina, good morning, everyone. Joining me this morning for our year-end earnings call are Mike Hoffman, Chairman and Chief Executive Officer; Renee Peterson, Chief Financial Officer; Tom Larson, Vice President and Treasurer; and Blake Grams, Vice President and Corporate Controller.

Let me now begin with our customary forward-looking statement policy. Please keep in mind during the call, we will make certain forward-looking statements which are intended to assist you in understanding the company's results. You are 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 will turn the call over to Mike.

Thanks, Kurt, and good morning. We are very pleased to report that in spite of challenging economic and weather conditions, we achieved record results in fiscal 2011. Our team's continued focus on valued relationships and industry-leading innovation helped us enter new product categories and grow our share position around the world. As we reported earlier this morning, net sales for the year grew 11.5% to a record $1.884 billion, surpassing the previous high watermark set in fiscal 2008. Our earnings per share grew 33%.

Improved global demand across all of our professional businesses played a key role in fueling our growth. Our professional segment delivered two-thirds of our total sales. And for the fourth quarter, net sales increased 9.1%, making it the seventh consecutive quarter of almost double-digit sales growth.

Earnings per share grew 60% for the quarter and last week our Board of Directors raised Toro's quarterly cash dividend to $0.22 per share from the previous quarterly dividend rate of $0.20 per share. Additionally, Toro repurchased about $130 million of company stock for the year. Renee, our new CFO, will discuss our financials in more detail later in the call.

Innovation remains a key component to our competitive advantage. In fact, new products, those we define as being introduced the current and previous two years, accounted for over 50% of total sales, marking the highest level in recent history. These new product offerings played a significant role in helping us increase market share by outgrowing the market.

We also continue to drive growth through investment in opportunities that extend our business in adjacent markets, which enables us to expand our offerings to existing customers. Earlier this year, we acquired unique lighting systems and lawn solutions. Both acquisitions are generating a high degree of interest with our customers and are driving incremental sales.

We recently had the opportunity to meet up with many of our valued channel partners and end customers at leading trade shows. In October, our Toro and Exmark brands enjoyed a very successful G.I.E. Expo in Louisville, where we unveiled a number of new products. One was the first of its kind, Toro TimeMaster 30-inch wide area mower, with its unique twin blade system. This product created a lot of excitement with our dealers. They admired the TimeMaster's innovative engineering, productivity and affordable price point and can't wait for it to begin shipping in January.

Our new line of turf renovation products from the Lawn Solutions acquisition was another big hit. Rental companies and landscapers are enthused that these new products will enable them to offer another profitable service to their customers.

We also introduced several new products at the Irrigation Association Trade Show in early November. Our new PrecisionSense solution was named winner of the Irrigation Association's New Product contest in the Golf category.

For those unfamiliar with this product, it measures and maps variability in soil moisture, salinity, compaction and turf health, to help golf courses more efficiently manage water and other resources.

Products like this continue to set us apart from competitors and showcase our leadership in turf management and precision irrigation.

Our new wireless precision soil sensor for the residential and commercial irrigation market was also very well received. Leveraging Toro's sensing technology used on golf courses, this product helps maximize irrigation efficiency by only irrigating when the soil needs moisture. It has the unique ability to automatically calibrate itself to any soil type.

We also unveiled a new pressure compensating feature on our highly popular Precision Series Spray Nozzles to further enhance its performance.

Last, I would like to congratulate Phil Burkhart, Vice President of our Irrigation business, who, at the show, was named President of the Irrigation Association, the leading organization for irrigation equipment and systems manufacturers, dealers, designers, consultants and contractors. I know Phil's leadership will advance the industry's pursuit of smarter, more precise and more efficient use of water.

Next I'd like to take a few minutes to discuss some additional market headlines. The golf industry reported that both rounds played and revenues were down slightly through October at US golf facilities, but that did not slow Toro sales momentum. Multi-course companies which are growing and adding new accounts along with courses that changed ownership and are now investing in renovation projects and new equipment, played a large role in our success. With support from our strong distribution channel, Toro has been successful in changing out many competitive fleets and taking share. Our Multi Pro Sprayer has been a strong performer with demand surpassing expectations. And we expect strong results in the coming year from our new line of both riding and walking greens mowers, which includes the industry's first lithium-ion battery-powered unit.

In golf irrigation, we had a number of key competitive take-aways during the season with our new Links Central Control System. It helped to drive conversions to Toro and increased adoption of our Turf Guard wireless soil sensors. Renovation activity was strong throughout the year. We expect further growth in this area from our extensive portfolio of new technologies that allow for easy conversion and greater precision.

Moving to the landscape contractor and grounds category, sales were up nicely in our contractor business. A number of factors contributed to this result, including increased contractor spending, better product availability, and new offerings in our core line of mowing products. However, some landscape professionals were hurt by regional drought issues, rising fuel prices and low-priced competitors.

Many contractors tell us that the increased competition and related price pressure have actually helped make their business stronger due to their focus on providing superior quality and customer support. These contractors are inclined to pay a bit more for products that are dependable, durable and have a lower total cost of ownership.

With the addition of the turf renovation products mentioned earlier, we are confident that our even more comprehensive product offerings will strengthen our Toro and Exmark brands with professional contractors.

The municipal side of our business was up for the year with government agencies continuing to buy large rotary mowers for increased productivity. This includes Toro's all-new Groundsmaster 360, which has built early momentum with many demos expected to materialize into sales next year.

Even though a majority of municipalities are still running deficits, our research suggests that a number continue to expand parks and green spaces. We have focused our efforts on serving these communities and have already gained sales as a result.

In addition, we have formed a partnership with the National Recreation and Park Association sponsoring their newly formed Green School. The school will help governmental agencies develop leaders in the park and recreation community around sustainability.

Another exciting development this year was the launch of Torogov.com to help provide greater visibility to Toro products among purchasing officials.

In the residential and commercial irrigation market, sales improved slightly for the year. We grew share in spite of a very competitive environment. Sales of our multi-award-winning Precision Series Spray Nozzles kept getting stronger due in part to an innovative marketing program.

Earlier this year in partnership with water districts in California, we introduced FreeSprinklerNozzles.com to help residents realize significant savings on their water bills. Over 120 cities are currently participating, and interest is growing in other states. Collectively, hundreds of thousands of these proprietary nozzles have been redeemed by customers with the potential to save more than 1 billion gallons of water over a five-year period.

Retail sales in our residential equipment business were positively impacted by heavy winter snow falls early in the year, but negatively influenced by an unusually late spring in key markets. Historic drought conditions in Texas, Louisiana and Oklahoma stifled sales in those markets. However, in other markets, our Toro TimeCutter with the innovative smart speed control feature and professional-grade Titan models, contributed to solid writing product sales growth as a shift from lawn tractors to residential zero-turn mowers continues.

This was especially true in our dealer channel that delivered share gains in this important product category. Shipments of snow products are up significantly in North America and Europe. Last year's great snow season left the channel relatively clean. Preseason sales have been exceptionally strong and we've been pressured to stay ahead of demand even though we started production earlier than normal. We are poised for a good snow season with a full line of electric single-stage and two-stage products, and we just launched a new advertising campaign in key snow markets.

Our micro irrigation business achieved double-digit growth, particularly in North America, Europe and central Asia. Growers are becoming more aware of this new efficient method of irrigating crops. We have great products led by our patented Aqua-Traxx tape and BlueLine product, along with other technologies on the horizon. We continue to invest in the business as demonstrated by the opening of our new manufacturing facility in Romania, which is now producing product.

The plant will support expansion into new markets. We are well positioned to increase share and become a supplier of choice for growers worldwide. So with that, I will now turn it over to Renee to review our financial results for the year.

Thanks, Mike. I would like to first say good morning to everyone on my first earning call at Toro. I have now been on the job for about three months after joining from Eaton, where I served as Vice President of Finance for the truck and automotive segments. It's been a busy three months, but everything I've heard about Toro prior to joining has been confirmed. I'm excited to be part of this great company, and I look forward to meeting with analysts and investors in the coming months.

Let me start with a summary of our financial results. As Mike mentioned earlier, net sales for the year increased 11.5% to a record $1.884 billion. On the earnings front, we delivered net income of $117.7 million or $3.70 per share compared to $2.79 per share last year.

For the fourth quarter, net sales were up 9.1% to $368.1 million, and we reported net earnings of $5 million or $0.16 per share.

For the year, we repurchased approximately 2.3 million shares of company stock valued at about $130 million. This includes roughly 1.1 million shares in the fourth quarter at about $59 million. At year end, we had approximately 2 million shares on the remaining authorization.

As noted earlier, we increased our dividend last week. This increase, consistent with our past practice, aligns with our guideline to return approximately 20% to 30% of our three-year average earnings per share through dividends.

Now on to our segment results, starting with professional, where sales for the year grew 14.2% to $1,239.1 billion; for the quarter, sales increased 5.5% to $216.5 million. All professional businesses saw gains for the year, fueled by acceptance for new products, strong retail demand, and incremental sales from acquisitions.

Worldwide orders for golf equipment and irrigation systems were up nicely as a result of new golf development in emerging markets, and increased project activity in North America. Sales of micro irrigation products saw significant growth on a global basis, from additional production capacity and growing interest in our water-saving drip technologies. And we saw a nice boost in the rental category as customers replaced aging fleets, along with strong demand for our STX stump grinder product.

Net earnings in the professional segment for the year totaled $205 million, an increase of 18% over last year. The earnings improvement was mainly driven by the sales growth just mentioned, aided by the leveraging of fixed SG&A costs over a larger sales volume, and somewhat offset by higher commodity and freight expenses, which impacted gross margins. For the quarter, professional segment earnings were $17.1 million, down slightly from the same period last year.

Turning to the residential segment, sales for the year increased 5.8% to $623.9 million. For the quarter, sales improved 12.9% to $143.5 million. International sales were a big growth driver in the residential segment for both periods, led by strong shipments of snow product in Europe and increased demand for riding products, including growing adoption for innovative zero-turn riding mowers.

Outside Europe, sales of snow products were up significantly in North America, coming off last year's strong snow season, which depleted sales inventory, with benefit from expanded product placements. Shipment of riding products were also up for the year on solid customer response to our new line of zero-turn mowers. Impacting results for the year and quarter were lower quarters of walk power mowers, and electric blowers, mainly due to poor weather conditions.

Net earnings in the residential segment for the year totaled $54.4 million, down $3.5 million or 6.1% from last year. Residential earnings on an annual basis were impacted by higher freight and material expense, in addition to the walk power mower rework issue as reported in Q3. Without the rework issue, earnings would have been favorable for the year. For the quarter, residential segment earnings were $11.9 million, or up 35.4% from the prior-year period.

Turning next to our key operating results, gross margin for the year decreased 30 basis points to 33.8%, and for the quarter decreased 60 basis points to 32.3%. The margin decline in both periods was the result of higher than expected commodity costs and freight expense due to rising fuel prices. The rework issue mentioned earlier was also a negative drag on margins for the year at just under 20 basis points. Somewhat offsetting the decline was improved manufacturing variances on higher production volumes.

Looking ahead, we expect gross margins for fiscal 2012 to improve about 40 basis points with benefit from cost reduction efforts and price realization of about 2%. At the same time we anticipate some pressure from overall material costs that we expect to be higher than fiscal 2011.

SG&A expense further improved as a percent of sales, down 110 basis points for the year and 150 basis points for the quarter. The decline in both periods reflects the leveraging of fixed costs over higher sales volumes in addition to lower product liability expense from a favorable claims experience this year. We continued to see strong leverage throughout the year while increasing investments in marketing to build our brands and drive sales growth. Going forward, we expect SG&A to be similar to last year as a percent of sales.

Operating earnings increased 80 basis points for the year to 9.8% and improved 90 basis points for the quarter to 2.5%. The other income line was up slightly for the year, driven mostly by higher income from our investment in the red iron acceptance joint venture with TCF Inventory Finance. This venture, launched in the fall of 2009, has been successfully serving our North American dealers and distributors, providing a stable source of cost-effective inventory financing for our channel partners.

Interest expense was down slightly for the year due to lower average debt levels. And our effective tax rate for the year was down 130 basis points to 32.7%, mostly attributed to the retroactive reinstatement of the Federal Research and Engineering Tax Credit. For fiscal 2012, we expect our tax rate to be about 34% as our R&E credit is again due to expire with no legislative action expected in the near term.

Moving to the balance sheet, we managed accounts receivable quite well for the year, which is up $5.2 million or 3.7% on higher sales volumes. Currency accounted for approximately $2 million of the increase.

Net inventories were $28.6 million higher or 14.7% compared to last year. If you recall, in second quarter inventories were up $85 million due in large part to a late spring. But we were confident in our ability to return to more normal levels. We worked through some of that inventory in Q3 and continued to make measurable improvement in the fourth quarter. Much of the increased inventory at year-end reflects intentional work-in-process inventory in some pre-bought engines for production planning and pricing efficiencies. In addition, field inventories continued to be in excellent shape as we head into next year's selling season.

Trade payables were down $7.1 million or 5.7%. When you combine all three elements of working capital, accounts receivable, inventory and trade payables, our 12-month average net working capital as a percent of sales was up at fiscal year-end to 15%. With the success of reducing our working capital over 30% still fresh in our minds, we will continue our discipline on managing working capital and expect that this measure will improve in fiscal 2012.

I now will turn the call back over to Mike for some concluding comments.

Thank you, Renee. So it was a good year for Toro. I want to take a moment and thank all employees and channel partners for their continued commitment. Their hard work year long enabled us to perform exceptionally well against a backdrop of unfavorable weather, a slowing economy and a significant rework issue. We delivered record revenues, improved profitability, sustained a healthy balance sheet, and have the access to capital to grow our business.

As you may be aware, new Tier 4 emissions regulations are set to take effect January 1, 2013. This will impact all diesel powered equipment between 25 and 75 horsepower manufactured after that date, sold in the US and Canada. For Toro, this affects a subset of our products primarily commercial golf and grounds equipment. We will be ready for the new requirements which are expected to increase the price of our products. We anticipate that some customers may purchase products in categories covered by these new emission regulations in 2012 to beat the price increase. This could result in higher sales volumes of turf equipment this coming year.

While uncertainty remains in the global economy, we look forward to the year ahead with a sense of cautious optimism, pleased with the state of our business, encouraged by our investments and equipped with a number of new products that will drive demand.

For example, in golf, our new line of walk and riding greens mowers and the Multi Pro 5800 sprayer. In grounds, the new Workman diesel MDX utility vehicle. In the landscape contractor arena, our new line of turf renovation products under the Toro and Exmark brands, along with Toro's value-priced Z Master commercial zero-turn mower. In residential the new TimeMaster 30-inch walk power mower and a new line of lithium-ion string and hedge trimmers. And last, we'll provide a steady stream of new agricultural irrigation products coming from our new plant in Romania to better serve the ag market.

We expect fiscal 2012 net earnings to be about $4.15 per share on a revenue increase of approximately 5%. For our seasonally smaller first quarter, we expect to report about $0.58 per share. If you recall in the first quarter of fiscal 2011, we had a tax pickup mainly from the extension of the R&E tax credit that resulted in an EPS benefit in first quarter of last year of $0.04.

We enter the second year of Destination 2014 initiative and look to make further progress on our goals of achieving more than $100 million in incremental growth each of the next three years and raising operating earnings to above 12% by 2014. Once again we find ourselves at the threshold of reaching $2 billion in revenue. We are committed to eclipsing that mark during the Destination 2014 initiative. If we experience better economic and weather conditions, we believe we may have a shot at surpassing that $2 billion mark in 2012.

In pursuit of operational excellence, we enter the year with an increased focus on quality, cost and productivity. In what we anticipate will be an environment of increased commodities, we will leverage our fixed manufacturing cost and leaner organization to pursue expanded margins. While Toro adopted lean principles about a decade ago, there is still room to do better. With the leadership of Renee Peterson, we have a renewed focus on cost and productivity improvement.

Last, with the unfortunate quality problems in fiscal 2011, we were reminded of the impact these issues have on our customers, channel partners and margins. Therefore, we have implemented new changes inside the organization led by Judy Altmaier, Vice President of Operations and now Quality Management, to respond to the challenge. Again I am proud of our team and confident of our ability to drive further growth and profitability.

This concludes our formal remarks. We would now be happy to take your questions, and so Regina, back to you.

(Operator Instructions). Jim Lucas, Janney Capital.

Thanks, good morning all. Renee, I guess we'll put you on the spot on your first call here. Just, I would be interested in how the first few months, your impressions, any takeaways you could share with us of how you see Toro.

Okay, well, thank you, Jim. I made a very, I think, good decision to join Toro. As I mentioned in my remarks, I continue to be impressed with the company and learning a lot about the breadth of the product portfolio. Some of the things that I really respect related to Toro is a focus on innovation and also the discipline around managing our business from a working capital standpoint, and overall related to just the balance sheet in general.

As Mike mentioned, one of the things that we will be focused on -- and my past experience hopefully will help us with this -- is related to just more of a renewed focus on cost and productivity. So that's one of the areas that I will be leading an effort as we go forward to have more of a disciplined approach around that area.

Okay, thanks. And on that front, working capital has seen some very nice improvement the last couple of years. And if you look, 2010 was an exceptionally strong cash flow year.

Cash flow 2011 -- I guess if we balance the two, would be more reflective of what the cash generating power of Toro is. But if you look at what some might say was sub-par free cash generation in 2011, how should we think about the cash-generating capabilities of Toro going forward?

Hi, Jim. This is Tom. I'll address that. We knew that cash flow would be down a little bit this year. And where we came in at year end was a little bit below our expectations, primarily due to a couple things.

Really trade payables were lower at year end, and that was more or less a timing issue just related to the timing of production. Our average payables throughout the year were actually up substantially, so we look for that to basically turn around next year.

And then also the accrued liabilities came in a bit lower than we thought. Instead of accrual, it was a bit lower and we had resolution of some product liability claims and better experience in product liabilities, so that brought that down as well. So those items actually brought it down.

As we look forward to next year, on the upside, you see earnings being up; CapEx actually being down as we got the bulk of Romania investment behind us.

And then we look in the working capital section there to have a slight positive -- just a turnaround of the payables, as we said, a bit of improvement in inventory as well. So we think that free cash flow should be back up above the $100 million mark, probably up towards a more traditional $140 million-plus range.

Okay. That's helpful. And on the housekeeping side, what are your initial plans for CapEx and D&A for 2012?

Hi, Jim. This is Blake Grams. As we look at our CapEx number for next year, we think the CapEx will be around $45 million next year. And depreciation and amortization should be in the same range, so --.

Okay. That's helpful. And then, other housekeeping question, FX for the top line for the quarter overall and by segment?

Let's see. We'll grab that for you. Just a second.

This is Kurt. FX for the year was -- Jim, this is Kurt. FX for the year was just over 1 point of the 11.5. And then for the quarter, it was about 0.5 a point.

All right. And will be roughly the same for both segments?

Yes. We don't --

We don't really break that out.

All right. And then one other follow-up on -- when you were talking about potential material inflation in 2012, I mean commodity prices have obviously been all over the place. Does it have more to do with the timing of the component purchases? Just a little shocked with the pullback in commodity prices that you're actually looking for material inflation in your '12 budget.

Consistent with what we saw in 2011, our commodity prices tend to lag a little bit just based on the purchases, as you had noted. So we do anticipate, based on our purchasing decisions, that we'll see some of that continue on in 2012 and then moderate going forward.

Okay, great. Thank you.

Just a clarification on the quarter, it was closer to 1.5 points, not 0.5 point.

1.5 points. Thank you.

Sam Darkatsh, Raymond James.

Good morning, Mike, Renee. Now that Jim has established the fact that we can all ask eight or nine questions, I'll do the same. So first, Renee, why in 2012 will SG&A not leverage given your prospective sales growth?

Well we are continuing to look at increased investments in marketing, really focused on leveraging our brand. And that is one area, as well as in engineering. We'll continue our strong focus on organic growth, and that will require continued investment around engineering. So those are the two main areas that we would invest in as we go forward.

But it doesn't sound like a continuation of prior -- you had some really nice leverage in 2011, and then all of a sudden it seems like -- are you stepping it up fairly dramatically? Or -- and where is it? Is it more in engineering? Is it more marketing? I'm trying to get a sense of why that would be occurring this year and not in '11 as much.

Well I think both of those areas will continue to increase from a dollar standpoint, not necessarily increasing the rate substantially. But they will be focus areas, where, again, given our new product development efforts, we'll continue to invest in a steady state in those areas. And as I said, related to marketing, the importance of the Toro brand is significant, and so we will continue those investments.

So when you say similar, then, are you seeing similar in dollars or similar in percent of sales?

Similar in percent of sales.

Okay. Second question, when you're talking about your 5% sales growth expectation for the year, can you talk about how that might be broken down pro versus residential, and specifically what you believe the favorable impact might be of the pre-buy in the field ahead of the 2013 new emissions standards?

Hi, Sam. This is Mike. We would look to the professional side of the business growing somewhat more than the 5%, and obviously residential not quite as much, just as we look kind of across the whole portfolio.

The pre-buy part of the larger products, that's one of those -- it's not -- where the customer may make a decision to pre-buy say, for example, a Fairway mower or a large rotary -- it's not all incremental because one of the things they may not do is then buy some other capital products that wouldn't have the kind of engines and the regulations associated with those in 2013. So it's -- we expect that has -- to be a bit of a tailwind but not dramatic, just because customers will probably not double up their capital purchases; they'll ship some products around.

What percentage of your professional business is potentially impacted by the emission standards?

You know, less than 10%.

Okay.

Between 5% and 10, but it's an important part. As you know, golf is a really important part of the portfolio, as well as the large grounds products, and so it's meaningful.

Two more quickies and I'll defer to others. What are you seeing in Europe, would be my one question. And secondly, how are you looking at share repurchase versus the acquisition pipeline for 2012? What should we anticipate for your cash flow usage?

So I'll answer the first one. Obviously we've got our eyes on Europe like well maybe the rest of the world. And to date, things have been okay. Business has been sound, as you saw in the results. The snow business there, the preseason, because of the strong season they had -- snow season they had last year -- has been relatively robust.

Now what happens going forward with the whole -- the debt issues, we'll see. I mean could -- we will follow, obviously, some of that, but so far, we are not expecting a lot of change there. But what we are expecting to see some relatively more significant growth is in the micro-irrigation business with expansion into Romania and all that goes with that.

And, Sam, this is Tom. Regarding share repurchase expectations, we did $130 million this year. We would expect next year it would be somewhat less than that. And then from I guess I characterized it as a share impact, you probably see a share impact roughly similar to this year just because we did a lot of our share repurchases in F'11 in the back half. And we would anticipate a bit more balanced approach in F'12. But our priorities around cash remain the same. And if we were to be successful with any significant acquisitions, then that would pare back our share repurchases.

Tom, I'm guessing, though, your guidance excludes the share repurchase to come, though. Is that correct?

No; it anticipates some level of share repurchases in the guidance. Just as I said, a bit less and a bit more balance throughout the year.

So what share count should we peg -- I promise my last question. What share count should we peg for 2012 then?

Well you saw a reduction of about 1.7 million in the average dilutive outstanding in this year. And I would say about the same amount for next year.

Thank you.

Thank you, Sam.

Mark Herbek, Cleveland Research.

Good morning, everyone. On the pro side of the business, real strong growth in the first half, still good growth in the second half but a little bit slower than prior trend.

Can you kind of talk about the pro piece of the business, what you're seeing within the US and what you're seeing outside the US? I think you mentioned during the conference call that the consumer sales outside the US were very strong in the quarter, which would imply that the pro business has slowed quite a bit outside the US. I'm just curious what you're seeing in the pro business from 20% growth earlier in the year to more like mid single-digit growth in the back half.

Yes. I guess the first point would be that we continued probably earlier in the year with some of the recovery, if you will, from what happened as a result of '09.

Now as we -- so that was more in the early year. We're probably getting closer to a more steady-state environment, although going to be influenced by the Tier 4 earlier discussion.

Asia, important part of our pro and golf business. We dealt with the impact of the tsunami earlier in the year, and actually held up fairly well. But there was a little slowing of golf in -- kind throughout Asia particularly, China. We don't think that's a prediction of a longer-term slowing but rather more of a (technical difficulty) Europe is sound.

And so on the landscape contractor side, weather was a bit more of a headwind if you will as we went through the spring, summer months, not surprisingly with the really cold spring. And you could see this even on the golf side, where, if you look at rounds played, as I mentioned earlier, being down somewhat, particularly down in the Northern markets where it was so cold and wet for so long, that impacted the year.

And as the year extended out on the landscape contractor side with the significant drought down throughout Texas and Oklahoma and Louisiana, that was a headwind. That's a fairly large market. So as we commented, if mother nature is relatively better next year, that should be a positive. That remains, obviously, uncertain at this point.

The 5% sales growth forecast for 2012, I guess that compares to 11% to 12% the prior two years. What's changed? Is it that the pro business is going to grow slower, particularly outside the US? Or what has changed to forecast 5% growth versus the 11% to 12% that we've seen over the past couple of years?

Well we'd love to sustain the kind of growth rates we've seen the last couple of years, Mark. The reality is that the professional business contracted 26% in '09. And so a significant part of what's happened in '10 and '11 has been that what I'll call kind of structural recovery.

And so we get back to more normalized growth rates, we're going to look for ways to grow beyond that, both organically and with potential acquisitions, but that gets back to our strategic goals around Destination 2014. So if you look at the $100 million organic growth that we want to drive each of the next three years, now having -- that was the goal in 2011; we actually did $194 million, so well beyond that. But, again, some of that was part of the recovery. That $100 million of growth gets us between 5% and 6% overall enterprise growth. So we'll look for ways to grow beyond that, but that's very consistent with the initiative.

And does the 5% growth forecast -- does that include your estimate for Tier 4 pull forward, or is there no impact in that 5% from Tier 4?

It does anticipate some of the Tier 4. That is -- that's evolving, so we've got to really get a better sense as we move forward just to what degree will customers substitute? If customers substitute, then there won't be a significant impact. If they increase their capital purchases then that could be an accelerator. So we'll get a better sense for that as we move through the year.

The other thing is, my guess is that a larger part of that -- because remember our fiscal year starts November 1 -- a larger part of that will -- may fall into November/December time frame, which is a 2013 number, not a 2012 number.

And so the 5% growth would include your best guess for Tier 4, as well as any benefit that you're expecting from the lawn solutions and unique lighting acquisitions?

Yes. Through the -- like I say, through the fiscal year. Again, we could get some benefit from the Tier 4 in the November/December time period next year as well.

And then just last question on the snow side, any snow benefits to arrive in the first quarter? Have you gone back into production? You talked about significant increases in the US market. Is that benefit going to continue for you in the first quarter or are you done for the season?

So if you could just tell us where it will snow and how much, we will be able to better answer that question.

In all seriousness, the preseason is due to the prior season, the strong snowfalls you've had, and that's been very good. Those sales -- many of those retail sales took place in September, October and November. And so the channel is relatively healthy. And we did add some production because the preseason was so strong.

With that said, that inventory now is in the channel or here at Toro, and we are at that point in December where we really need events to start driving the increased retail. And so if we get some snowfalls through the Midwest and the Northeast particularly, then we could see an uptick. If we don't, then it will probably slow down significantly.

Great. Thank you.

Robert Kosowsky, Sidoti & Co.

Good morning, everyone. yes, just a quick clarification -- Renee, did you say the gross margin is going to be up 40 basis points expected next year? And I just wanted to confirm that 20 basis points of that should be rework rolling off because that was a negative headwind this past year?

Yes, Rob, that is correct.

Okay. So 20 basis points of basic pricing and cost cuts.

Yes, net of all of the changes. I mean there's many components that go into that, but, yes, you are correct.

Okay. And then as you look at the pricing strategy, do you expect to see more -- are you more aggressive on the professional side or parts of the professional side or residential side into next year? Any more color on that? I know some of that is kind of sensitive information.

And then also I'm just kind of trying to triangulate too because we did see some marginal weakness on the professional side in the back half of this year, and I am wondering if you're going to be targeting that to get the margins back up there.

Well let me comment first to the pricing, and pretty consistent with our conversations in the past, we have more degrees of control, if you will, or influence on the pro side, and so the pricing there will be probably a little more, I won't say aggressive, but we talk about kind of a 2% approximate price realization. A little more of that will come from pro.

The residential side, there's certainly some in there. That arena is more about introducing new products and kind of reinventing yourselves versus when you have a product at a $299 price point, you really don't want it at a $309 price point. And so that influences the pricing decisions on the residential side. So they are kind of two different animals, but all in, I think we're using about the 2%.

And then just as you look to get to the 12% operating margin goals, is there any -- can you give us any more color on how you're going to get the gross margins higher to be able to get to that 12% operating margin? Or is it just going to be volume going through and leveraging the plants a little bit better?

Well, certainly, there will be an impact from leveraging on volume, but we'll also continue to look for ways to improve our cost structure. So we are focused on -- as I spoke about earlier, renewing our focus on cost reduction and productivity, we'll look for those opportunities as well and continuing to enhance our mix over time.

I think I would add to that, Rob, that Renee is right. We are cranking up our focus and effort around productivity and cost savings.

And maybe not dissimilar to the working capital, remember we announced the working capital in February of 2007 and didn't make much progress in '07 and '08. It just takes a while to build some momentum towards that effort. So we're going to be putting more energy towards it. It will probably have somewhat less of an impact on 2012 but likely more impact in '13 and '14.

The fact is to get to the Destination 2014 goals, we are going to have to improve our gross margin, and we'll do that through innovation, look at that through mix, any number of ways. And even to Sam's earlier point, we are going to have to improve our SG&A. We show it flattening a little bit in 2012, and I would say that while -- well that said, 24% is our best -- has -- in recent times the best we've achieved on SG&A; matched it once prior back in I think '07. And so we want to try to balance that.

And engineering as a percent of sales is down a little bit; its' still above 3%, but it was a little higher a year or so ago, so we've got to manage that as well, as we look at some of the impacts of the additional investment in Tier 4 and beyond. So it's not going to be one thing; it's going to be many things. And that gets back to the discussion around productivity. We have to push that throughout the enterprise.

Okay. That's helpful. As far as the Romanian plant (technical difficulty) this past year?

Hi, Rob. This is Blake. There is a slight negative impact on -- for Romania this year.

Okay. I was just -- it was very modest or immaterial?

Very mod -- immaterial.

And then also, just wondering if you can talk about I guess the ramp up of it, the current capacity utilization, if you can give that out versus what you want to see a year or two down the road, and how the profitability of the plant is turning, and just kind of let us know how that's going.

Well I would say we didn't close plants as a result of what the downturn in '09. And so as we have talked in the past, we would say we saw our utilization fall from in the mid 80's, whatever, to down into the lower 60's.

Now -- and we've also said against the core business, putting micro irrigation in Romania aside that believe we can leverage our plants through the Destination 2014 initiative, this incremental $100 million in growth each year, without necessarily building a lot of new brick-and-mortar for equipment. And that continues to be our belief, and where exactly we are on utilization, I'm not sure, but I would say we're probably back a little -- the high 70's, low 80's with some room to do more. Part of that is with the continued focus on lean, we can find ways to put more throughput through an existing plant.

Okay, yes. I was just kind of curious about the Romanian plant in particular as well and how the capacity utilization is looking there and the profitability of that.

Yes, that's going to be -- the only other thing I would say at this point is that's just going to be a steady ramp up. So the plant will be filled with a number of extrusion lines and products as well as molding products. And it's a stepped build over a couple -- you know a year and a half.

Okay. Thank you very much, and good luck with this year.

Jim Barrett, CL King & Associates.

Good morning, everyone. Mike, your key competitor in golf recently indicated that its turf and utility products would be up slightly in North America. Would you concur with that market outlook, as your 5% growth I assume is skewed overseas? Or do you see somewhat better than slight growth in North America?

Yes, I guess -- I'm not sure that was North America or that was all-in, in the turf arena, that statement. But I think it also depends on how you define up slightly. So as we talked earlier, for the company all-in, we are guiding at this point to a 5% increase. Pro is a little stronger than that, and some of that is the things we've talked about, even a little bit of the Tier 4 implications. So I can't speak to what they are doing or how they are defining that, but only can do what we do.

Understood. And to get back to the Tier 4 regulations, 5%, 10% of your sales might be affected. How much of a price increase will the new regulations require? Can you give us any focus on that?

Yes, it's I don't -- I don't have that precisely, but I'm going to say it's probably between 10% and 15% on the product, so it's material. It's a meaningful number. These are expensive products to begin with.

Right. Okay. And then finally, Japanese golf -- is -- any thoughts on how that market is recovering as we look into 2012?

Yes. I think there is very much -- it settled down and the -- you know we would expect that the Japanese market itself, which is a large golf market and we have a strong position there, to come back in 2012.

With that said, as I talked earlier, there may be a little more -- there may be a little softness in China. That's, we believe, more near term. And, again, we talked about China; there is 500 courses for 1.3 billion people. In the US, there's 16,000 for 300 million people. So as I've said before we won't do the extrapolation madness, however, it's fair to say that there will be more new golf courses -- there will be more golf courses in China over time, steadily.

Okay. Well, thank you very much.

Ladies and gentlemen, this does conclude the question-and-answer portion of today's event. I'd like to turn the call back over the Mike Hoffman for some closing remarks.

Thank you, Regina, and thank you all for your questions and ongoing interest in Toro. We wish everyone a safe holiday season and very much look forward to talking with you again in February to discuss our first-quarter results. Have a great day.

Ladies and gentlemen, this does conclude the presentation today, and you may now disconnect. Have a great day.