The Toro Company (TTC)
Q4 2008 Earnings Call Transcript
December 9, 2008 11:00 a.m. ET

Executives

Michael Hoffman - Chairman of the Board, President, Chief Executive Officer
Stephen Wolfe - Chief Financial Officer, Vice President, Finance
Tom Larson - Treasurer
John Wright - Director, Investor Relations

Analysts

James Lucas - Janney Montgomery Scott
Jim Barrett - C.L. King & Associates
Jeff for Sam Darkatsh – Raymond James
Mark for Eric Bosshard – Cleveland Research Company
James Bank - Sidoti & Company

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Toro Company Fourth Quarter and Year End Results Conference Call. My name is Kannisha (ph) and I will be your coordinator for today. (Operator Instructions) At this time all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of today’s conference. If at any time during the call you require assistance please press * followed by 0 and a coordinator will be happy to assist you. 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. Michael J. Hoffman, Chairman and CEO of The Toro Company. Please proceed, Mr. Hoffman.

Michael Hoffman – Chief Executive Officer

Thank you, Kannisha and good morning ladies and gentlemen and thank you for joining us for our fourth quarter and year end earnings conference call. Here with me this morning, are Steve Wolfe our Chief Financial Officer; Tom Larson, Treasurer; and John Wright, our Director of Investor Relations. Here in the Twin Cities we woke up to a nice white blanket of snow today, a great opportunity for our customers and the Toro team to use our Snowthrowers and I can say they worked well. These are the most innovative Snowthrowers in the industry and they keep getting just better and better. With that 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. 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 web site, thetorocompany.com. Before we get to the results for our fourth quarter and fiscal year ended October 31, 2008, I would like to take a few minutes to reflect on the year. Looking back, these past 12 months were accentuated by difficult economic conditions, primarily here in the US that impacted many of our customers and our company. Professional landscapers and irrigation contractors struggled with the on going weakness in the housing sector. Consumers are squeezed in many directions and turned cautious in their spending and new golf course development in the US slowed to its lowest level in a decade while existing golf courses watched their budgets and delayed renovation projects. Still, there were some bright spots for the year.

Our overall International business remains strong due to healthy demand in both the professional and residential markets and while our financial results didn’t reach planned levels our internal disciplines enabled us to finish the year in a good position with reduced inventories both at Toro and in the field. Let me mention a few of the results for the fiscal year and fourth quarter and then Steve will provide some more details on our segment and operating results. For the fiscal year net sales were up slightly over the previous year at $1,878.2 million. As I mentioned, the improvement was a result of strong international sales in most professional and residential categories along with increased shipments for Snowthrowers in the US and Canada. These gains were offset by lower domestic demand for professionally installed residential and commercial irrigation products and walk power mowers.

For the fourth quarter, however, net sales were up 2.6% to $341.2 million on the strength of Snowthrowers and walk power mowers, due to strong fall demand. Net earnings for the year were $119.7 million or $3.10 per share, a decrease of 8.8% on a per share basis compared to last year. For the fourth quarter net earnings were break even. The earnings decline in both the fourth quarter and full year include the charges of $4.7 million or $0.08 per share, taken in the fourth quarter to account for workforce adjustments, while a significant impact on the earnings in the smaller fourth quarter, these actions will help better align the company’s cost structure going forward. As many of you know, because of our seasonal business the fourth quarter is historically a small revenue and earnings period for The Toro Company. It is when we conclude our fiscal year and position ourselves for next year’s primary selling season. On our last earnings call, we said the fourth quarter would be challenging and it was. However we delivered earnings per share for the year in the range we stated, including taking a workforce adjustment charge.

It is also important to note that we are not satisfied in our revenue growth for the year and worked hard to execute in areas we could control. As noted business author Marcus Child once said, “Business’s must control the controllables in times of change and challenge to steer through economic storms”. We are doing just that and accomplished several objectives in 2008 that I would like to highlight.

If you recall, back in 2004 we set out to grow the international business more than 30% of revenues. Through solid execution of our global growth objective and by taking advantage of opportunities outside the US to further diversify our portfolio, international sales increased by 12% for the year and now account for 32% of total sales. While currency had a favorable impact, we experienced strong demand from golf course construction and renovation projects in Asia, Eastern Europe, Africa, and the Middle East. At the same time overall growth rates for the micro-irrigation products remained healthy in Europe and Australia. Second, we continued to make progress on our Lean Initiative and improved our working capital position in 2008. Improvement in this area is certainly more challenging when growth slows. Nonetheless, our talented team here helped lower net inventories by 17.6% and reduced accounts receivable by 9.5% on flat sales. And, as a result of our heightened focus on asset management we generated a record $216 million in cash from operating activities. These results demonstrate that we are indeed serious about lowering our working capital as a percent of sales to free up cash for future investments and drive additional shareholder value.

Third, as we talk about our strong cash position, one of our ongoing priorities is to pursue strategic acquisitions to grow the company. In October we acquired a versatile line of deep tine aerators from Southern Green to strengthen Toro’s popular offering of pro core aeration equipment. The acquisition, albeit small, is strategic for the golf business as cultivation practices become increasingly important to the success of our customers. We anticipate significant share growth in this category as we leverage our strong brand and expanded distribution with the Southern Green Line of products. And lastly, we continued our commitment to market leadership through innovation in 2008 by launching a number of new and exciting products in both the residential and professional markets to better serve our customers. Steve will talk about these in a few minutes.

I am pleased to say that we once again exceeded our goal of having more than 35% of annual revenues attributable to new products, which we define as products introduced in the current and prior two years. Without these new products revenue growth for the year would have been even more difficult. I would also like to provide a quick update on our GrowLean initiative. We have now completed the second year of this program and unfortunately we fell short of achieving our fiscal 2008 revenue and profit after tax goals due to the deteriorating market conditions. Even with the markets trending down one key positive is our improved discipline on working capital, an area of measurable improvement this year and in the years ahead.

With that I will now turn it over to Steve to review our segment and operating results.

Stephen Wolfe – Chief Financial Officer