Toro Co (TTC) 2012 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 Yesenia, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of 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. Kurt Svendsen, Managing Director of Corporate Communications and Investor Relations for The Toro Company. Please proceed, Mr. Svendsen.

Thank you, and good morning. Joining me for our fourth-quarter 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 Controller.

We begin with our customary forward-looking statement policy. During this 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. 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 BusinessWire. A copy can be found in the investor information section of our corporate website, TheToroCompany.com. With that, I will now turn the call over to Mike.

Thank you, Kurt, and good morning to all our listeners. We welcome the improved weather conditions during the fourth quarter that eased the grip of summer's extreme drought, and helped drive stronger retail sales across most domestic markets. As we said during our last call, addressing higher than desired levels of field inventory was a prime consideration for the quarter, and we're pleased to report that field inventory is once again in good shape, as we now move into fiscal 2013. While we experienced favorable retail sales for the quarter, overall shipments were down, due to the reduced demand for snow products, following last year's mild winter. To put this in perspective, the drop in snow shipments cost us 2 to 3 points of growth for the year, and accounted for most of the decline in our fourth-quarter revenues.

The good news is that with the exception of snow, fiscal 2012 was a solid year. We once again delivered both record revenues and earnings per share. We achieved a 4% increase in net sales for the year, and 16% growth in earnings per share to $2.14, which includes the $0.07 for investments associated with the acquisitions that we have mentioned in previous calls. Renee will discuss our financial and operating results in more detail later in the call.

Turning to the results for our individual businesses, first, golf sales ended the year strong, with solid retail in September and October, as weather conditions improved and our fiscal 2013 pricing on Tier 4-compliant products was announced. Golf course owners enjoyed good cash flow this year, driven by increased play and revenues, and chose to use some of their gains to take advantage of our latest product introductions, as well as favorably-priced pre-Tier 4 product. Our tracking reports indicate we are maintaining our market leadership position, as we are still out-pacing our primary competitors by winning more of the available equipment deals. Our new walk and riding Greens Mowers are also helping propel sales. Superintendents, club managers, and owners have recognized that our new Greensmaster riding units deliver a clearly superior quality of cut. On the irrigation side of our golf business, we saw growth in our domestic markets for the quarter.

Renovation projects got off to an early start this past spring, and then settled into a steady flow through the course of the year. Our ability to help courses affordably upgrade their existing systems with our latest innovations has played a significant role in promoting growth. We anticipate these opportunities will continue, due to the high number of aging systems. Internationally, sales of golf irrigation products were down for the year. The slowdown in new course construction and economic issues in Europe continue to dampen sales.

Like golf, our landscape contractor businesses also enjoyed strong fourth-quarter retail activity across much of the country. The Southern and Eastern markets continued their positive late summer sales pattern, while improving moisture levels and strong fall programs helped boost sales in the Midwest. Demand was especially strong among larger acreage owners who buy professional-grade products. Our new turf management products, including our 30-inch Stand-On Aerator, which are used extensively in the late summer and early fall, also contributed to the good results. Professional grounds product sales performed well for the quarter, on the strength of their productivity. As we have mentioned in previous calls, tighter budgets have prompted municipalities to increase productivity by equipping their smaller staffs with our high-performance large rotaries.

In another key growth area, our rental and construction businesses, bolstered by incremental sales from acquisitions, mirrored the general trend for the quarter by rebounding, following a sluggish summer. Integration efforts related to our Stone Equipment and Astec Underground acquisitions are proceeding smoothly, and are on schedule. Moving to the home front, sales in our residential business were down for both the fourth quarter and the year, but as I mentioned earlier, the lack of demand for snow products is the primary culprit. Our residential lawn products retail improved for the quarter, as more normal moisture levels returned to the Midwest. The residential, commercial and do-it-yourself irrigation businesses had a challenging year, due to the economic housing and weather issues across the country. While we saw pockets of growth in areas like California and much of the Midwest, the gains were offset by sluggish results on the East Coast.

We are, however, pleased to report that our latest water saving precision irrigation products continue to earn industry acclaim. Our XTRA SMART precision soil sensor, we launched earlier this year, received Handy Magazine's 2012 Innovation Award, and Editor's Choice Award from Popular Mechanics, and most recently, an Irrigation Association New Product Award at the 2012 irrigation show. These prestigious awards highlight the water and money-saving benefits these innovations offer.

Next, our recent entry into the professional lighting market has proven to be very promising. Our lighting business enjoyed good growth through the leveraging of our distribution channel, the success of our new LED drop-in lamp strategy, and the general growth trend in the industry. Similarly, our micro-irrigation business continued its strong performance. Growers and the world are investing in micro irrigation technology as they strive to increase yields and efficiencies. Looking forward, our new factory in Romania will provide additional capacity, and enable us to take advantage of market growth opportunities. I will now turn the call over to Renee to detail our financial and operating results. Renee?

Thank you, Mike, and good morning, everyone. Sales for fiscal 2012 grew to $1.9587 billion, compared to $1.884 billion for fiscal 2011. We achieved net earnings for the year of $129.5 million, or $2.14 per share. This compares to fiscal 2011 earnings of $117.7 million, or $1.85 per share. Net sales for the quarter were $339.3 million, compared to $368 million for the same period a year ago. We delivered net earnings of $251,000, and broke even on a per-share basis, compared to earning $0.08 in the fourth quarter of fiscal 2011.

For the year, we repurchased approximately 2.6 million shares of Company stock, at a cost of about $93 million. This includes roughly 600,000 shares in the fourth quarter, at about $25 million. At year-end, we had approximately 1.5 million shares remaining on our authorization. Our professional segment sales were up 7.3% to $1.33 billion for the year. This includes 5.6% growth for the quarter, to $229 million. Professional segment earnings were $232.1 million for the year, up 13.2%, compared to fiscal 2011. The professional segment net earnings for the quarter totaled $20.8 million, a 21.2% increase compared to last year.

Our residential segment sales for the year declined 2.6% to $607.4 million. The fourth quarter saw sales fall 29% from a year ago to $102 million, which is attributable to reduced shipments of snow throwers. For the year, residential segment net earnings were $57.9 million, up 6.4% from last year, when a pretax charge of nearly $5 million was taken to account for a Walk Power Mower rework issue, which reduced earnings. Residential net earnings for the quarter totaled $6.7 million, down 43.4% from last year, again, due to reduced demand for snow shipments.

Now, on to our key operating results. Gross margin for the year was up 60 basis points to 34.4%, as a result of both a price increase taken to offset material cost and the impact of a productivity initiative gaining traction. For the fourth quarter, gross margin improved 100 basis points to 33.3%. Product mix impacted both the quarter and the total year margin results. For the fourth quarter, a higher professional segment versus residential sales ratio helped improve margins. For the year, although margins were up, they were negatively impacted by product mix within the segment. We anticipate gross margin for fiscal year 2013 to improve by about 40 basis points.

SG&A expense as a percent of sales decreased by 10 basis points for the full year. Even with the incremental SG&A investments for the Stone and Astec acquisitions, we were able to improve by leveraging fixed expenses over a higher sales volume. SG&A increased by 230 basis points for the quarter, due to significantly lower shipment levels. For fiscal 2013, we expect SG&A to be flat to slightly higher as a percent of sales, due to increased engineering investments. Operating earnings as a percent of sales improved 70 basis points to 10.5% for the year, including a fourth-quarter decline of 130 basis points to 1.2%.

We anticipate that our Destination 2014 focus on productivity, as a means of achieving continual profit improvement, will positively affect our earnings this next year. Interest expense finished even for the year. Interest expense for the quarter was down 5.9% from the same period a year ago, to $4.1 million. Our effective tax rate for the year was 34%, compared to 32.7% last year, due to the expiration of the domestic research tax credit. We expect our effective tax rate for fiscal 2013 to be about 33.5%.

Turning to the balance sheet. Accounts receivable at the end of the year totaled $147 million, a slight drop compared to fiscal 2011. Net inventories were up 13% to $251 million. As we foreshadowed in our last call, the inventory growth was driven by anticipated customer demand related to the Tier 4 transition. Finally, trade receivables increased 5.7% to $124.8 million.

As you know, we continue to remain focused on inventory, accounts receivable, and trade payables management. At the end of the year, the Company's 12-month average net working capital as a percent of sales was slightly above last year's level, coming in at 15.2%. We ended the year with operating cash of $185.8 million, fueling an increase in free cash flow to a more normal level of about $140 million. While we expect inventory levels to be lower next year, our capital expenditures are projected to be about $60 million, slightly higher on additional investments to enhance our new product development capabilities, and increase capacity to support further micro irrigation growth. We expect next year's depreciation and amortization to be about $50 million. Free cash flow next year is expected to be similar to this year's level. I'll now turn the call back to Mike for his concluding comments.

Thank you, Renee. Just so we've got the record straight, trade payables increased 5.7%. So let that be reflected. Thank you.

Now to talk a little bit, fiscal 2012 results were certainly tempered by economic and weather forces beyond our control. Although we fell short of reaching the levels we had at times anticipated during the year, we're pleased with our overall performance. Along with our record revenues and earnings per share results, fiscal 2012 featured additional highlights including three acquisitions, increased dividends and continued stock repurchases. We look forward to another strong showing in fiscal 2013. While always cognizant there are no guarantees of favorable economic and weather conditions, we see many encouraging signs of business opportunities for the year ahead.

The National Golf Foundation reported earlier this month that 2012 experienced the largest single-year increase in golf rounds played since 2000, a national gain of more than 30 million rounds. As a result, golf course revenues improved. The National Golf Foundation's customer research shows that intent to purchase turf equipment by courses has risen steadily over the past 12 months, breaking out of the slump that started in late 2008. As the NGF findings state, this bodes well for our industry.

Tier 4 regulations will drive some early purchases of pre-Tier 4 products. We will have both pre-Tier 4 and Tier 4-compliant products available to meet our customer needs. On the golf irrigation side, increased rounds played and the financial health of courses should promote irrigation system upgrades and renovations in 2013. Additionally, while the drought and Hurricane Sandy affected the entire industry, recovery from both should generate additional renovation and replacement projects. Our landscape contractor businesses are also optimistic about fiscal 2013, based on improving business environment for contractors and continued new product sales momentum.

New products we introduced over the last two years, along with those unveiled at the recent GIA show, continued to be enthusiastically received by our contractor customers. Furthermore, contractors are reporting that in spite of the uncertain business climate they encountered the last 18 months, they are cautiously optimistic about 2013. Many of their customers who had cut back on their contracts to bare bones levels in response to the economic downturn, have begun to add back turf management and renovation services that are more profitable for our contractors. They have proven to be a resilient customer base, constantly adapting to offset lost business by diversifying the services they offer. We are well-positioned with an even broader line of equipment to help them succeed.

Our rental business will also continue to benefit from the recovery in the landscape contractor field. Contractors are purchasing and renting our products at levels exceeding pre-recession activity. The rental market is expected to continue to grow in 2013. Prospects for our residential business in 2013 are also encouraging. Although we do not count on their accuracy, and we've seen little evidence to date, long-range weather forecasting models predict normal snowfall levels across most key markets this winter. As normal snowfall returns, consumer demand will respond and fuel retail activity.

Field inventories of spring residential products are in good shape. As a result, we expect to see solid pre-season booking orders from our channel partners. We're also cautiously optimistic about the growth opportunities for residential irrigation. Positive movement in the housing market, along with the effects of last year's drought, have the potential to help spur sales of our award-winning Precision irrigation products. Our lighting business also stands to benefit from this housing improvement.

Finally, in the micro irrigation field, the row crop and permanent crop markets are expected to continue along their current path of double-digit growth. Toro intends to increase our participation in this growing market through investments around the world. A vital component of our long-term growth plans for all businesses is our foundational drive to innovate. Our commitment to product research and development has remained a constant, even during the most challenging times. Let's take a quick look at a few of the latest additions to our product portfolio.

We're poised to capitalize on any favorable swings in snowfall with our industry-leading single stage line-up and some exciting new snow products. We just launched a line of compact two-stage snow throwers featuring three all new models, with retail price points below $1,000. This is a prime sales segment of the snow business, where we have under-performed in the past. These new models provide an opening for extending our leadership position in snow. We also unveiled an all-new electric snow thrower at a very attractive price point. We believe these new products round out our line, making it the strongest, furthest-reaching offering since we originally entered the business over 60 years ago in the early 1950s.

We're also enthused by a significant national retail placement of a number of our new lithium-ion battery-powered hand-held products next spring, including both hedge and string trimmers. Our rental and construction products team is anxious to begin shipment of the new STX-38 stump grinder, and our new products from the Stone acquisition will be formally launched under the Toro brand during the rental show this February. Turning to golf, we are particularly excited that our new lightweight Reelmaster fairway mower, the lightest fairway mower in the business, will be hitting the market in 2013. With engine ratings under 25 horsepower, this new mower provides an attractive alternative to Tier 4 product. We recently introduced a number of new contractor products, including our latest series of Stand-On mowers, a new rotary broom, and exciting new commercial mowers. Building on the success of our residential Timemaster 30-inch walk-behind we launched this past spring, we are introducing two commercial versions of this mower for our Toro and Exmark landscape contractors. These new models offer highly-maneuverable wide area machines at very attractive price points, that we believe represent a real competitive advantage.

In summary, we remain steadfast in our focus on innovation, quality, cost, productivity, gross margin expansion, and SG&A improvement, to help deliver operating earnings improvement to 12% or above, in accordance with the goals of our Destination 2014 initiative. The Company expects revenue growth of about 4% to 5% for fiscal 2013, and net earnings of about $2.35 to $2.40 per share. For the first quarter, the Company expects to report net earnings between $0.40 and $0.45 per share, positively impacted by the anticipated accelerated purchases of diesel products, in response to the Tier 4 price change. Thanks to the dedication of our employees and channel partners, we look forward to continued growth and success for the coming year. Research shows that in spite of shifts in demographics and retail models, customers still expect high levels of service and support. Our employees and channel partners take pride in our shared legacy of striving to exceed customer expectations. These factors bode well for our opportunities to succeed. This concludes our formal remarks. We'll now take questions at this time.

(Operator Instructions).

The first question comes from the line of Sam Darkatsh from Raymond James. Please proceed.

Couple questions, if I might. First off, could you help quantify your expectations for the first-quarter impact of the Tier 4 pre-buy, what the impact might be of that on either a sales or an EPS basis?

I guess I'd start by saying it's somewhat quantified in our guidance, right? And so this is as much a bit of a pull-ahead as a change for the year. You've got to remember, the Tier 4 -- it's a factor certainly, but those products represent less than 10% of the Company's portfolio. So there will be some increased shipment there, which is why you see our EPS is up somewhat in the first quarter, but again, that's reflected overall in the years' number.

Okay. So my second question would be looking at the incremental margins next year in 2013, look light compared to where Toro normally comes in. Now, that surprised me a little bit, to the extent where I'm figuring you're getting price next year, and I'm also figuring that your input costs are fairly benign. Now, I know you talked about higher R&E costs. Does the higher R&E cost account for the entirety of the differential between normal incremental margins, and what you're looking to hit next year? It seems light.

Sam, let's maybe look at the pieces, hopefully that will help to answer your question. If we look at next year from a gross margin standpoint, we do expect to see improvement in our gross margin rate, about 40 basis points, and it's really driven by some of the same factors that we saw this year. Price will be a factor. This year, we recognized about 2% realized price. We do expect some increase in commodities year over year. We'll work very hard on our material cost reduction efforts, as well.

We do see some traction around our productivity efforts, and in seeing that pass through. But as we look into fiscal 2013, commodities are volatile. That's the area that we have some uncertainty related to. We'll see as the year progresses what happens from a commodity standpoint. When we look at SG&A as a rate to sales, we expect that to be pretty much flat to up slightly year over year, and that's where you're seeing the impact of that increased investment in engineering.

So by my math, it looks like your engineering costs might be up, what, $10 million to $15 million or so is my guess. Assuming I'm in the ballpark, are you looking at a really big 2014 and 2015 new product lineup? That seems really out-sized from a normal range.

I think you wouldn't necessarily attribute all of it to engineering. We certainly have had a long-standing and a strategy of keeping our engineering investment at a solid level. That will continue. It will be up somewhat in fiscal 2013. I think, Sam, this is early in the fiscal year. There's lots of uncertainty out there. We're guiding to this at this point.

Things going on in macro markets that could influence these things to Renee's point on commodities, if the economy heats up a bit. If it goes the other way, then obviously we've got some headwinds. So, it's probably as precise as we can be at this point. We are driving towards the Destination 2014 goal of 12%. We closed this year out at 10.5%. We know that's 1.5 points when all is said and done. It means, ultimately, we'll have to drive incremental margins.

Thank you much.

The next question comes from the line of Robert Kosowsky from Sidoti. Please proceed.

Renee, I was wondering maybe in the quarter, you could help bridge the margin expansion that you saw, maybe put it into buckets between product mix, under-absorption of fixed costs that you might have seen in the residential market, and some core productivity improvements?

Really the drivers are the same from a total year perspective, Rob, with the exception of product mix. As we had stated earlier, when we look at the -- although the pro residential mix was favorable overall for the year, within the year, it was really offset with unfavorable product mix within the segments. When we look just at the quarter, that improvement that we saw, the 100 basis points, a bigger factor is the professional residential mix than it is from a total year standpoint. That's the biggest difference. We continue to see, overall, as I said earlier, price realization offset with slightly higher commodities, and the impact of our productivity initiatives being the drivers.

Okay. As far as order of magnitude within the quarter, it was, product mix was the major driver for the margin expansion, then the other initiatives after that?

Product mix would be a driver that's different versus the total year.

Okay. And then also, I'm just trying to square away your revenue growth forecast, because it only looks like you're looking for maybe $80 million to $100 million of revenue growth. We just had a pretty substantial draw down in snowblower sales that might reverse a little bit into next year. I'm wondering why the conservative revenue outlook, given some of the other positive things that you mentioned, Mike.

As we start the year off, look back at last year. This is a good example. We started last year not in a materially different position, and we were at about 5%, and then things heated up and we went from 5% to 6% to 7%, and then the next quarter went to 7% to 8%, then because of the -- obviously with the summer conditions, that ended up back at 4% to 5%. There is a fair amount of uncertainty out there. You all are reading about it, whether that's Europe, whether that's issues going on in the US economic environment.

We're certainly hopeful snow will be better. We haven't seen any snow yet. We're certainly counting on some of it, even in the 4% to 5% guidance. So it's that time of the year that we're just trying to get a better look at how our markets are going to react, and so far, things are trending okay, but as always, we'll know more tomorrow.

Thank you very much.

Thank you.

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

Mike, one of your competitors indicated the North American market would grow at a mid single-digit rate in 2013. Is that broadly your view as well?

Yes, I think that's largely reflected in the guidance, we're almost 70% US, if you will, and so if we're growing at 4% to 5%, we certainly don't see Europe as a growth market this next year. That's the next largest part of the portfolio, and then you move off to Australia, which is sound, and Asia which is a bit -- we had some pick-up in Japan this last year, but China continues to be a bit soft. So, certainly in the domestic context, that's about where we are.

Okay. And could you give us, internationally, can you separate the performance this past year between Europe and the rest of the world in terms of growth or lack thereof?

Yes. That's reflected in the numbers we talked about. Europe was under the most pressure, and so we saw a decline there. That's the largest part of the international portfolio.

Right.

Australia was solid year over year, similar results. Asia, a small part of the portfolio, it was less than 5%, but it was -- Japan's recovery from the tsunami helped, but China continues to remain a bit soft on new golf development. We still believe that's going to be okay in the long run. We're getting signals in that regard, but that's just moved a little slower than expected.

Again, we talk about a significant part of our growth outside the US will come from golf development, will come from micro irrigation. Those businesses, those markets will continue to grow. Golf slowed down a little bit, understandably, but long-term, there has to be more courses built. As we've said in the past, there's 16,000 courses here in the US and there's 16,000 for the rest of the world. There will be many more for the rest of the world, over time. We certainly do count on that, and as I mentioned, micro irrigation will continue to grow. But back to the starting point, it's mostly about Europe and as we look to Europe, we don't see that -- we're not looking for necessarily a step change either way, as we look to fiscal 2013.

That's helpful. And certainly domestically, as end markets improve and recover, are you seeing your acquisition pipeline grow, interest of sellers, is that improving or staying the same?

Yes, I don't know that -- it probably hasn't changed materially. We continue to work it, as we said in previous calls. So many of these deals are private deals, and so even though things are improving, whether the current owners of those businesses, moms or dads, or whoever's running the businesses are ready to sell, it's not necessarily tied to an improving economy, or even going the other way. It's usually something else happens in the business that causes that light to change. We continue to work it, and last year, we ended up, as we mentioned doing three acquisitions that will add to the portfolio nicely, as we look to the future and we'll continue to work that.

Okay. Good. One last question. Renee, can you explain the trends in other expenses, they were up 11% for the year, what should be the longer-term trend in that line item?

Hey, Jim, this is Blake Grams, so if you look at the other segment, it is up this year. Kind of the same trend we've seen for the whole year. There are multiple reasons why the other segment is higher this year. Health insurance costs are higher this year. FX is a little bit more of a hit this year, inflation and those sort of things. It's a magnitude of multiple different things that we've seen throughout the year, that translated into the fourth quarter, so --

Okay. Well, thank you all very much.

(Operator Instructions)

The next question comes from the line of Josh Borstein with Longbow Research. Please proceed.

This is Josh Borstein in for David MacGregor, thanks for taking my calls here. A little bit more on T4, if possible. You noted that you're going to see some pull-forward here in the first quarter. Did you see any in the fourth quarter, as well?

Not significantly. The fourth quarter is just very much about the softness in snow and so that's the dominant factor for that. Maybe a little bit at the margin, but the fact is, most of that Tier 4 stuff will take place now as we move into the end of the calendar year, and early into 2013.

And what kind of price increases should we expect on those new T4-compliant equipment?

That varies by what they did with the products, but they are significant price changes. They could be in the mid to high single digits. They could be 15%-plus on certain products. And some of those will be -- it will be a matter of working through the remaining pre-Tier 4 inventory and then moving into the new products. Just to be clear, while the Tier 4 regulation is driving -- it's against a regulatory standard we have to meet, we're also looking at when we do that, can we add some value, some customer benefits that will make the products do things better, more productively for our customers. And we are finding ways to do that. So it's not totally attributable to just the Tier 4 impact.

Okay. And then you had mentioned, you built up some inventory ahead of the transition here. How many months' supply of pre-Tier 4 do you think you have right now?

I don't know that we have that number. You looked and said what we carried over, over and above all-in, the total Company, $20 million-some, which part of that is attributable to Tier 4.

Josh, we also had some impact year over year in inventory related to acquisitions.

Right. That would be the second part of it. We're talking about the incremental there. The Tier 4, to what degree pre-Tier 4 inventory, to what degree new products, is going to continue to play out in the market.

Okay. Great. And then just one last one from me. The revenue guidance for this coming year, 4% to 5%, what does that imply for the pro and residential segments?

We don't break that out. We expect both of them to grow in fiscal 2013. We're counting on some snow recovery, which certainly will aid the residential side of the business. And growth on the professional side, growth in golf, growth in the landscape contractor, so we're expecting growth in both categories.

Okay. Thanks for taking my questions.

Ladies and gentlemen, I will now turn the call over to Mr. Mike Hoffman for closing remarks.

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

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