The Toro Company (TTC)
Q1 2009 Earnings Call Transcript
February 19, 2009 11:00 a.m. ET

Executives

Michael J. Hoffman - Chairman and Chief Executive Officer
Stephen P. Wolfe - Vice President of Finance and Chief Financial Officer

Analysts

Eric Bosshard - Cleveland Research Company
James Lucas - Janney Montgomery Scott LLC
Sam Darkatsh - Raymond James
Mark Rupe - Longbow Research
Jim Barrett - C.L. King & Associates, Inc.
James Bank - Sidoti & Company

Presentation

Good day ladies and gentlemen and welcome to The Toro Company first quarter earning conference call. My name is Tanya and 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 this conference. (Operator Instructions) If at any time during the call you require assistance please press * followed by 0 and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today''s conference Mr. Michael J. Hoffman, Chairman and CEO of The Toro Company. Please proceed, Mr. Hoffman.

Michael J. Hoffman – Chief Executive Officer

Thank you Tanya and good morning everyone. We appreciate you joining us for our first quarter earning conference call. Here with me this morning are Steve Wolfe, our Chief Financial Officer; Tom Larson, Vice President and Treasurer; and John Wright Director of Investor Relations. Let''s begin with our forward-looking statement policy. Please keep in mind that 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, particularly in the current environment. So the Safe Harbor portion of the company''s earnings release, as well as SEC filings, detail some of the important risk factors that may cause actual results to differ from those 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. Before we get to the results for our first quarter ended January 30, 2009, I would like to update you on a few key items since we last spoke. As you are all acutely aware these are extraordinary times. In one way or another each of us has been affected by the challenges of today''s economic environment. Unfortunately the recessionary conditions have showed no signs of abating and have only intensified. In response to the deteriorating market conditions, we''ve taken a number of actions to deal with the new reality of the global recession. We have further aligned production schedules for reduced demand and are determined to lower inventory. We continue to scrutinize discretionary expenses and reduce spending. The freeze on all open positions that we initiated early last year remains in place and we completed a voluntary retirement program this past December.

Unfortunately just last week we were forced to take additional action to reduce our office and salaried work force by approximately a 100 employees. This was a very difficult decision, but one that became unavoidable given the harsh realities of the current business climate. Combined with previous measures, the company has reduced its overall work force by approximately 15% from the previous year when you include contractors, part time, and temporary employees. Beyond the reduction, we took additional actions that will affect all the remaining employees including the suspension of regularly scheduled salary increases, reduced officer salaries, changes in our vacation policy, and the addition for referral days all for the remainder of fiscal 2009. We know these steps are very painful, and yet they were necessary to keep Toro competitive through this difficult environment, so we can resume our chart record of solid financial performance when the world economy begins to improve.

In addition to aggressively managing cost, we remain committed to reducing our working capital needs and the resulting improvements to our balance sheet stand out as a positive factor for us in this very difficult business environment. Our inventory levels are much lower, receivables are down considerably, and we are about $60 million less than we did last year, in last year''s first quarter. Also our field inventory levels are down on a year-over-year basis. So while we are disappointed with our results for the quarter, we know we are not alone in dealing with the current challenges. We will continue to manage the business in line with this new reality and remain confident in the strength of our brands, our products, our people, and our channel partners to effectively compete for our customer''s business in the months ahead.

I''ll now turn it over to Steve to review our financial results for the first quarter. Steve.

Stephen P. Wolfe – Chief Financial Officer

Thanks Mike and good morning to everyone. For the quarter net sales were down 16.2% to $340.2 million. Worldwide sales declined across most professional categories due to the global recession that we are in. These declines were somewhat offset by stronger orders for snowthrower products and favorable preseason shipments for our redesigned lineup of Toro and Lawn-Boy Walk Power mowers. Net earnings for the quarter were $6.7 million or $0.18 per share, a decrease of 62% on a per share basis compared to the same period last year. The earnings decline included a pre-tax charge of $1.3 million or $0.02 per share on an after-tax basis to account for the workforce adjustments Mike talked about.

Let me turn now to our segment results. Starting with the professional segment, worldwide sales for the quarter were down 22.3% up to $229.4 million. Shipments declined across most professional product categories due to the challenging market conditions and customer’s reluctance to place orders in this time of economic uncertainty. Within the golf market, shipments of turf maintenance equipment and irrigation systems were down significantly as existing courses delayed purchases of new equipment and the number of renovation projects and new golf course under construction slowed considerably.

In addition, shipments of professionally installed residential and commercial irrigation products declined due to the ongoing pressure in housing and commercial construction. And finally sales for export and Toro products in the landscape contractor category were also down for the quarter. Partially offsetting the decline in shipments was strong, initial stocking orders for our new platform of zero turn mowers and our new stand-on mower that launches us into an entirely new product category. Net earnings in the professional segment for the quarter were $30.1 million down 41.5% from the comparable fiscal 2008 period. The decline was primarily due to the significant sales decrease, fixed SG&A expense spread over lower sales volumes and higher manufacturing variances.

In the residential segment, worldwide sales for the quarter were up less than 1% to $107 million. Despite the recessionary conditions, consumer’s appetite for snow products remained healthy. In fact worldwide demand for Toro snow throwers improved significantly over last year due to lower field inventory entering the season, a powerful product line up and strong early snowfall in Canada and key U.S. markets like the Mid-West and the North-East. We have sold out our inventory and field inventory in most locations is in good shape which bodes well for pre-season orders for the next snow season. Within the Lock Power Mower category, shipments of Lawn-Boy products were up as a result of expanded placement at the key retailer, while Toro products experienced increased orders from our dealer channel due to better product availability this year. Both brands of steel deck Lock Power Mowers were re-designed and re-positioned to cover a broader range of price points and deliver greater value to our customers. These gains were somewhat offset by delayed shipments of consumer value products as customer shifted orders closer to retail demand.

Also impacting our residential segment results for the quarter were lower international sales, primarily due to the effects of unfavorable currency. Net earnings in the residential segment for the first quarter were $4.8 million, up 26.8% from a comparable fiscal 2008 period. The improvement was primarily driven by lower SG&A expense due to reduced spending from marketing, warehousing, and engineering. Now let''s turn to key operating results. Starting with gross margin, gross margin decreased by 2 percentage points in the first quarter to 34.8%. The decline was primarily attributed to lower production volumes and efforts to reduce inventory levels, favorable product mix, and increased commodity cost. A portion of the decline was offset by a drop in freight expenses.

SG&A expenses for the quarter were down $12.6 million or 10.7%. However, as a percent of sales, SG&A expenses increased to 30.7% compared to 28.9% in the first quarter of last year. While actual expenses declined, it was not enough to keep pace with the reduction in sales volume for the quarter. Interest expense was down $500,000 for the quarter, the result of significantly lower short-term borrowing levels and reduced interest rates. And our effective tax rate for the quarter was 33.7% compared to 35.4% in the first quarter of last year. The decline was primarily due to the extension of the federal research and engineering tax credit. And for fiscal year 2009, we now expect our tax rate to remain at approximately 33.7%.