The Toro Company (TTC) Q4 2007 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to The Toro Company Fourth Quarter and Year-End Results Conference Call. My name is Shaqwana, and I will 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. Michael J. Hoffman, Chairman and CEO of The Toro Company. Please proceed, Mr. Hoffman.

Thank you, Shaqwana. Good morning ladies and gentlemen, and thank you for joining us for our fourth quarter earnings conference call. Here with me this morning are; Steve Wolfe, our Chief Financial Officer; Tom Larson, 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 as of today, 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 press 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. Two press releases were issued this morning by Business Wire regarding the Company's fourth quarter earnings and its acquisition of Turf Guard Technology. Both of these can also be found in the Investor Information section of our corporate website thetorocompany.com. Here in Minneapolis, we've enjoyed some recent snow events with the storms over the weekend several more inches that have continued to follow in the past couple of days. Of course, we always look forward to snowfall, especially, in early December which helps motivate buyers as we are seeing locally and across the Midwest. Now let's turn to our consolidated results for the fiscal year and the fourth quarter ended October 31st, 2007. There were several accomplishments in this first year of our GrowLean initiative that I would like to highlight. First, as we mentioned in previous calls, Toro offered more innovative new products in 2007 than anytime in recent history. That helped us grow revenues even with the industry statistics reflecting market softness, as a result, our believe, is we increased share in most of our markets. Second, international revenue grew nearly double-digits and now represents 29% of total company sales. This is consistent with our long-term strategy to strengthen our international presence, both as a key growth driver and a means to diversify our portfolio. Third, we turned in a record 7.6% after-tax return on sales against our GrowLean goal of 7% or more. Those of you, who have followed our progress since we began this journey in 1999, know how far we have come from a starting point of 2.7% to now at 7.6% today. Fourth, we started to put some focus on acquisitions, particularly, new irrigation technologies to keep turf and crops healthy despite droughts and global water scarcity. In August, we acquired Rain Master Irrigation Systems, a market leader in central control systems for the landscape and commercial markets. Combined with the Turf Guard Technology acquisition announced this morning. These moves support our long-term precision irrigation strategy. We'll talk more about this later in the call. And finally, continued strong cash flows from operations enabled us to return value to shareholders through stock repurchases and dividends. As we noted in the press release, our Board of Directors, once again, increased the quarterly dividend from $0.12 to $0.15 per common share. With all of that said, I am pleased to report Toro once again delivered a double-digit improvement in earnings per share in fiscal 2007, up 16.8% to a record $3.40. Net earnings were a $142.4 million, up 10.3% from the previous year. For the fourth quarter, net earnings were $6.5 million or $0.16 per share. Much of this came from our ongoing journey towards a Lean enterprise and the subsequent improvements in productivity and operational efficiency. Earlier this year, as a third focus area of our GrowLean initiative, we challenged our employees to reduce working capital to the teens or less than 20% of sales. This is, for us, a highly transformational and important initiative that we expect will start slowly and accelerate over the next few years. For example, in fiscal 2007, we began to pilot our pull system to reduce inventory in our landscape contractor business. We will apply what we learned from this effort to other plans and products to broaden the impact from these important new approaches. On the top line, industry forecast predicting a contraction in 2007 proved accurate. Along with most of the industry, Toro's revenue growth for the fiscal year was dampened due to the economic uncertainty, a slowdown in the US housing market, rising fuel prices, and some regional weather challenges. However, again, we believe an unprecedented level of new products and our ability to leverage our strong brand helped us gain share, nearly, across the board. For the fiscal year, net sales were a record $1.88 billion, an increase of 2.2% that fell short of our GrowLean goal of 8% compounded over the three year initiative. For the fourth quarter, net sales rose just slightly to $332.5 million. Once again, worldwide Professional segment sales led the way for revenue growth. The golf market was stronger outside the US in countries where golf development is essential to economic growth. Also the growing popularity of outdoor sports like, soccer field demand for maintenance equipment and irrigation systems to keep sports fields and grounds playable and safe. And the need to become more efficient in water use drove the demand for our micro-irrigation systems for landscapes and agricultural crop. Ongoing draughts in many areas of the world combined with the economic benefits of drip irrigation increased the adoption rate for this product family. So, looking back at a challenging and rewarding fiscal 2007, we were pleased to gain share in the lower filed inventory in the face of significant headwinds. We did the right things, had the right strategies and the right products to outperform in a soft market. Now, let's take a closer look at our segment result. For fiscal 2007, worldwide net sales for the Professional segment increased 3.7% to $1,270.5 million and rose 2.7% for the fourth quarter. New golf course construction remain strong, particularly in Europe and Asia, while renovation projects continued here in the US. We enjoyed strong customer acceptance of new products like the Reelmaster 5010 Series fairway mowers and the Synergy Series irrigations sprinklers and controllers for golf courses and sports field. The same time, landscape professionals and irrigation contractors welcome the new Dingo diesel compact utility loaders, and the acquisition of Rain Master along with currency effects also helped drive revenue gains in this segment. On the other hand, efforts to reduce field inventory resulted in a modest decline in landscape contractor shipment. We were pleased to see retail in this market was up from last year as a result of several innovative new products. This also was a factor in reducing field inventory. Earnings before taxes in the Professional segment increased 11.6% for the year and 30.2% for the quarter. Product mix, selected price increases, favorable currency exchange rates, and ongoing cost reductions were the primary factors driving these gains. In the Residential segment where new product innovation and strong brand awareness helped us gain share in a down market, revenue for the year was flat at $563.5 million down 2% for the fourth quarter. As we mentioned in our last call, we experienced strong retail demand for our new generation of high-performance Toro TimeCutter Zs available at dealers and The Home Depot. As homeowners continue to replace traditional lawn and garden tractors with Zs we will continue to invest heavily in these exciting products that make mowing fun and fast. We are a leader in Zs today and are committed to being a leader in the future. Another front-runner for 2007 was our new line of Toro walk power mowers with the innovations and reliability that homeowners have come to trust in our brand. So while Zs and walk power mowers were up snowthrower product shipments were down significantly for the year due to a lack of snowfall in key markets during the previous winter season. For the fourth quarter, however, we saw nice gains over last year as customers predictably ordered closer to the season. And early results are very favorable for the new Power Clear single-stage snowthrowers that we mentioned in the last call. I can report to you is that the Company's CEO and CFO personally use these new products over the last weekend to clear snow from their driveways. Both were very impressed with the innovation and performance of the Power Clear, and we are hearing the same from dealers and distributors across the US snow-belt. You can ask Steve more about this later. Earnings before taxes in the Residential segment for the year rose 22.7% to $41.8 million primarily due to lower levels of warranty and marketing expense. That completes our segmental review. Now let's move on to operations, where we turned in a number of improvements for the fiscal year. Gross margin rose to 36.1% from 35% in fiscal 2006. Thanks to our greater portion of our higher margin professional products, selected prices increases, and productivity improvements driven by our ongoing Lean efforts. Somewhat offsetting these gains, however, were commodity costs that continue to rise during the year, particularly, in resins and other petroleum-based products. SG&A expenses as a percent of net sales were 24.2% up two-tenths from 2006. Warranty expenses declined as a result of our continued focus on driving quality improvements. We've had a longstanding quality statement that reads each of us doing the right things right the first time to meet the needs of our customers. Our employees are more committed to this today than ever before. The same time in a difficult environment we stayed the course and continued to increase investments in research, development and engineering, to position Toro for future growth. For, now, several consecutive years, our investment in research and development increased both in dollars and as a percent of sales. For fiscal 2007 this was up to 3.2% of sales or nearly $60 million. Our effective tax rate for the year was 33.2% up slightly from the 33% in fiscal 2006, primarily due to phased out benefits from foreign export incentive. Net inventory at the fiscal year end was up 5.3% to $251.3 million due to lower than anticipated fourth quarter shipments. And accounts receivable declined 4% to $283.1 million. Finally, our cash flow for the year remained strong. We repurchased 3.3 million shares of common stock. We also used some of this cash flow to fund recent acquisitions including Rain Master in August and Turf Guard technologies... we just announced this morning in a separate press release. Both of these additions support a long-term strategy to strengthen our market position in the precision irrigation business. While we don't expect significant revenue gains in the short term from the Turf Guard acquisition, we are excited about the long range opportunities the technology brings to Toro. There are significant benefits for golf courses using Turf Guard's underground wireless monitoring systems. These systems measure soil moisture, salinity and temperature then transmit the data to a web-based interface. Our customers can then use the data to analyze turf conditions and determine the most cost effective and environmentally responsible irrigation methods to maintain healthy turf. Now looking forward to 2008, we do expect the economic headwinds of the past year to continue. However, we have confidence in our people and our legacy of innovation. We'll continue to rollout new products and focus on building even stronger relationships with our customers in the coming months. In the coming year, we anticipate our net sales annual growth rate will be higher, primarily due to new products and the growth of our international businesses. We also expect gross margin to improve slightly while SG&A expense should increase slightly as we boost investments in engineering, marketing and information systems. Toro's tax rate for 2008 is expected to be at 34.3% which will have a negative impact of approximately $0.03 per share in the first quarter. Diluted shares outstanding will likely decline, further trend we've seen over the past several years. Therefore, we currently expect to deliver a 9% to11% increase in net earnings per share and revenue growth of 3% to 5% for fiscal 2008. For the first quarter, given our projected tax rate and the continuing trend for customers to product closer to market, net earnings are expected to be $0.40 to $0.45 per share. That concludes the summary of fiscal 2007 and our outlook for 2008. So, now let's open it up for your questions. Shaqwana. Question And Answer

Thank you. [Operator Instructions] Your first question comes from the line of Jim Lucas with Janney Montgomery Scott. Please proceed.

Thanks. Good morning. And I am glad I got out Minneapolis on Tuesday.

Good morning, Jim.

Your products were definitely being used around town. Couple of questions here. Steve, first off, can you... with international becoming a bigger percentage of revenue, why is the tax rate going up?

Couple of things on the tax rate piece, and actually for the fourth quarter it had a little bit of the opposite effect. When you look at the 47% last year?

Right.

We had a valuation adjustment we had to make on a long-term tax asset that we were holding that we deemed to be uncollectible. So we had to write that off and therefore our tax benefit went down, so the rate in the fourth quarter went up. So that was kind of an abnormal transaction but that... we had to do that to get the full year rate back to where it needed to be. The lower rate this year has to do with the currency and the fact that the currency had increased so much in our foreign countries that we had a higher percent of our income from the international side, where we are... have lower tax jurisdictions. So that's the reason that it's down for the fourth quarter of this year. And then as we go into '08, you are back to the foreign investment credit phasing out and the manufacturing... domestic manufacturing credit phasing in, and that's less beneficial to us than the old one. So, this year we're going to have a higher tax rate for '08. So, each one of those kind of has their own thing tied to it, and in what drove it.

Now from a tax planning perspective, is there... are there going to be any opportunities throughout the year to potentially bring that down or is... are you pretty much locked into this tax rate?

We're probably locked for the year, but your point is the right one, we've got to be... when you look at our tax rate, our... actually our state rates are pretty low. It's more on the Federal side that you have opportunity. And we don't have a lot of international operations and manufacturing as you know.

Right.

So it makes it harder to manage that tax rate. But, we've done some things internationally to get to where we are, and we will continue to look at those over time to be able to manage that tax rate down as well as we can --

Okay.

It's getting harder. There is no doubt about it.

Right. And could you expand a little bit more on the inventory comment that you made in the prepared remarks, about the inventory levels at the end of the year, and where you see that going forward. I mean, clearly a lot of opportunities, but I guess maybe focused more about where inventories ended at the end of the year. It seems like they might have been a little bit higher than what you had expected?

Well, you really got to look... think at two pieces when you are talking inventory. First is field, and I think Mike mentioned all things given. Field inventory is in pretty good shape, actually very good shape, as we go into F08. So that would help explain why your receivables are down. Lower fields, so you got lower receivables. On the other hand, our in-house inventory is a little bit higher. It was up just a little bit, based on lower sales and lower shipments. We expected to have somewhat higher shipments in the fourth quarter that didn't materialize, so, we have the inventory here, and we'll use that in first quarter as we go into '08.

And was that broad based, or were there one or two categories that stood out?

Pretty broad based for the most part.

Okay.

Hello Jim. This is Mike. It would be fair to say all in as you go across our consumer residential and professional businesses, our net field inventories are down from last year. We are in as a good shape, I think as we've been in anytime in recent past.

Okay. And this was a very big new product here, is this going to follow the normal Toro cycle where we will see fewer new products introduced in '08, and really just build upon the momentum of the '07?

This is Mike, and no, actually you know our formula, which is the current year and the prior too, so all five will drop off and this will be the kind of accumulative number of '06, '07, and the introductions in '08. And that number will grow again in fiscal '08... our all-in number. So, I think last year we talked about it being at kind of an unprecedented level in the mid 40s. It's actually going to go up somewhat for '08. And we'll talk more about new products at the first quarter call where more of them have been introduced to the market by then, we'll have been through the golf show and the IAA show, some of the other main shows where we introduced our new products.

Okay. And finally, you had a business development director in place for a year. We've seen a couple of strategic technology acquisitions that materialized the last couple of quarters, I am interested in the term 'precision irrigation,' I guess, we'll learn more about that going forward. But, when you look at the acquisition opportunities that are out there this technology versus, I guess, what we would think of in terms of more traditional product-oriented deals. Can you characterize the landscape out there and should we continue to see more of these technology deals going forward.

Well, I think as we have shared with you in the past we will look at the technology category and continue to look for opportunities there, that's a little less precise, if you will, because it's usually a business that hasn't been formed or doesn't necessarily have a long revenue history, if you will, like with Turf Guard. Yeah, I think that could be very important technologies and ideas for the future. So, we'll... Pete Ramstad, this is a roles in this areas to look at that arena. We will continue to look hard at the... I guess, I will say more core division-extending kind of bolt-on acquisitions. We would characterize Rain Master that we purchased in August, as an good example of that. Some of them will be in a larger. We'll continue to look at a number of those. And then there is the real large ones that are just lower odds, so the potential for a few of them out there as well. So, the bottom line as we try to keep all three of those, I'll say, categories percolating with opportunities and ideas.

Okay. Great. Thank you very much.

Thank you, Jim.

Your next question from the line of Eric Bosshard with Cleveland Research. Please proceed.

Good morning.

Good morning, Eric.

Good morning, Eric.

A couple of pretty straight forward questions. First of all your comments, Mike, in terms of margin; you talked about, up gross margins and slightly higher SG&A. Can you talk about sort of what is being considered within that, and if the expectation is that you would net out any degree of operating margin expansion in 2008?

Well, I think on the gross margin side, as Stephen commented this as well. We've got on the one hand the ongoing efforts around Lean and that's being pushed on the other side by the concerns and issues around commodities whether that's plastic and resins or some of the things we are seeing with steel. All-in we are still thinking we can make some improvements there. On the SG&A side. And I know that there is... SG&A isn't necessarily going to be a linear in that. We've taken three points out in three years; it's up a couple of tens this year on somewhat softer sales. But within that category are the investment areas like engineering and R&D that we took up a tenth this year, and we will continue to make additional investments as we move into '08 there. Additionally, on the brand side, on the marketing side with new products and things like that... that won't necessarily be linear either, as you introduce new products, you probably will spend somewhat more to launch those into the marketplace. So, that's what we comment on SG&A. It's not going to change dramatically one way or the other, but there maybe some additional investments we put in place on the marketing side in fiscal '08.

Does that mean from a net standpoint, operating margins are expected to be flat or up in 2008?

This is Steve, Eric. We would expect, based on all of that, depending, obviously, some of the issues that Mike mentioned, commodities being a major one, that we would be flat to up slightly. You are not going to see, probably, a half a point increase in operating margins or the size increases we've seen in the last couple of years. So, I would tell you it would be flat to a slight improvement from that.

And the difference versus prior years is the sales growth, is that the difference?

Sales growth you just have, if there is a year going into a year, where you've got more uncertainties than we've had in the last few years. There is some of those things whether it's SG&A, whether it's margin go the other way. It wouldn't take long to eat that up the incremental that you are getting even out of the sale side of it. So, we are watching those economic factors to see what happens, particularly, like I said commodities, everything you read about steel, is it they are going to go up significantly as we get into the next year, you know what's happened with oil prices that's they already up there which affect our risen pricing. So, it's just a lot of things that are maybe more iffy, if I can use that word, going into '08 than we've had in the last couple of years.

Fair enough. And then secondly, Mike, you have a 8% revenue growth target, I think, over your three year GrowLean. You are year into it and walking into the next year with revenue growth that's at... at roughly half of that level. Can you just talk about how you think about that 8% revenue growth in light of what you achieved in '07 and guided to in '08, sort of how we ought to be thinking about the performance relative to the target?

Well, the goal certainly has gotten much more difficult as a result of F07's results, and it is three-year compounded and when you think about the last time we did this in the six plus eight initiative our... was F04 or '05 and '06; we had 8%, we started off the first year at 10. So it's... we are kind of on the other... the other end of the continuum here and we've got some ground to make up. Now, this is always the challenge between guidance and goals. The internal goal for the organization is to continue to look at... figure out how we can get there as we move through F08 and F09. One of the things we have said to you is a part of that will come from acquisitions that might be in the neighborhood of 2% to 3%. I mean, we've guided today in the 3% to 5% not impossible to think that that if some of that played out, we could get close to the goal in '08, but we're behind just because of what happened in '07. So, we recognize, we've got some work to do to make that compounded goal happen. It is still an internal goal for the organization.

And I guess lastly, just to refine that. Are you seeing the end market grow materially different, and I guess if you look through the cycles, is there anything that you see in the end market in terms of the growth profile of the end market that you feel is any different than you would have thought a year or two ago?

Well. As we look at F07, I think a number of the end markets were actually down. And now let's be clear there are number of our end markets that historically have been flat for decades, so if you want to talk about walk power mowers there's... essentially there's no market growth, therefore, I mean if you drew a regression line through two decades of shipments, it would look pretty horizontal. So you have to look at each of the end markets. Internationally, we continue to see some market growth within the... some of the product categories like Zs, while the market may not be growing the substitution factor is going on there which for us then becomes a growth market for Z product categories. So, it really... I am not sure I could sum it all up. We certainly understand that what happened in '07 with some softness in overall end markets. We'll likely face some of that in '08 and so for us to accomplish our goals it will require us to take market share with the right innovative new products, building stronger relationships with customers. All the things that I think this organization does well.

Perfect. Thank you.

Your next question comes from the line of Seaver Wang with Utendahl Capital Partners. Please proceed.

Hi. Good morning. Just wondering if I could some color, more color on certain segments, for instance, international, what particular regions or countries and within those countries, is it mostly professional that's doing well? And then again, I guess the state of the landscape contractor market in the US?

Okay. Good morning, Seaver. This is Mike. Internationally we talked about the golf business is strong. Particularly in Asia, countries like China and Korea and the like and Eastern Europe, but there are other pockets around the rest of the world, where that is also true. So, overall the expansion of golf is healthy, and that's very important business for Toro in both irrigation and equipment side and we have a strong international presence there. There is a residential piece to the international business. It was impacted as well this last year with snow in Europe. The good news is there is some snowfall in Europe as we speak. We have got actually, one of our marketing people, Head of Marketing over there that's back in town as we speak and he's shared that they are seeing good snowfalls. But it goes beyond that. Europe suffered from a drought a couple of years ago, and they've come back from that and so. The UK which is an important consumer market with Hayter, bounced back this last year, and we will have even more presence with Hayter products in the UK market. That's the largest residential market, this next year. So, all-in we believe international is going to continue to be a growth driver for us, the largest part of the... from a business standpoint of the company. Today as we look at the different divisions. The landscape contractor question, we would look at the business this year and say, retail... the retail sales were up. So that was encouraging in a kind of economic environment we were in. The... now they weren't strongly up but they were up over the prior year. You couple that with our focus on taking some inventory down and it's positioned us nicely going into F08. The other good thing that's happening now with some of the recent snowfalls is for the Northern landscape contractors, most of those folks felt snow in the winter, and this helps them generate some revenues and give... provide those revenues for purchasing more products in the spring. So, we are... we think the landscape contractor business is in pretty good shape from a market standpoint, and Toro with our brands, the Toro brand and the Exmark brand are well positioned to advantage of that in fiscal '08.

Okay. And then a quick question for Steve. The inventory was up slightly. Just is that due to raw material prices or what are the components there?

No, that was just the fact that our fourth quarter sales were lower than we had originally planned. So, it's nothing to do with the pricing or anything. It's just a less sales, so we've got more year ends. But the field is lower as I mentioned earlier.

Okay. Thank you.

Thank you, Seaver.

Your next question comes from the line of Sam Darkatsh with Raymond James. Please proceed.

Good morning, Mike; good morning, Steve. How are you?

Good morning Sam.

Good, Sam.

Good.

Just a three quick questions. First off a housekeeping question, your other segment which as I... if I recall correctly. I think that includes overheads and interest income and interest expense and then also a... like a floor planning for your dealers? It... I think it look like the floor planning is becoming pretty variable right now. And I am trying to get a sense of how we should look at that with the changes in receivables from what you're taking your inventory out of the channel. How should we look at modeling that other segment going forward?

Yeah. This is... first of all, you are talking about the other cost center in the... not on the front page earnings and --

Not on the consolidated P&L, but on the segment P&L. Yeah.

So, this kind of discussion you and I had last year on this topic. When you look at what happened with that segment, '06 was a very unusual year. We probably had a handful of things that ended up going our way very positively. So, it drove that comparison to this year, which we have been kind of talking about all year long to be very difficult. Last year that was in... that whole segment was in the $60 million range, if I remember right, or $69 million range. In this year, it's back up to $82 million and it was $87 million, I think, if you look at F05. So, now as we are closing this next year out, those expenses are getting more normalized to what they were in '05. So, you ought to be using '05 and '07 as your benchmark, not '06. That's kind of an unusual year.

But is there any change based on what you are doing with the dealer inventories. How we should look at the cost center of that line?

Yeah. Now when you... so to go to the credit company, I think is what your question was on the revenue that we have coming in from the credit company.

Right.

First of all, the bulk of the credit company's revenue is in our company. So that gets eliminated. What you really end up with is what third parties pay. So, we should see that probably going down, because we are managing our field inventory better. So, the better we manage field to lower levels and to a lower average for the year that number ought to go down. Now, I think that number probably for the year is in the $3 million range or $4 million range net of inter company. So, it's not a very big number. So, even if it goes down 25%, 30%, it's not going to have a major impact on the P&L.

Got you. Thanks for clearing that up for me. Second question, I guess, this would be... you're not modeling for, you are not having us model for a whole heck of a lot of operating leverage, I mean because you're going to get maybe 4% or 5% earnings growth from lower share count, and maybe 3% to 5% growth from top line. So, there is really no, by definition, that you're not getting a whole... you are not guiding for a whole lot of operating leverage. If you were to beat the numbers next year, your guidance, would it be coming from expansion of operating margins or would it be coming from better than expected top line, in your view, Mike?

Well, that's a good question, and it could come from both or both could be under pressure. I am not sure how one would answer that. We like... in fact, as I mentioned [ph] difference between goals and guidance, and the... we still have internal goals around our GrowLean initiative. We think in this environment 3% to 5% is going to be challenging. And could it be higher than that? You'll have to tell me what the economic environment is going to be like as we go through fiscal '08. Then Steve comment to the margin.

Yeah, that's just awfully hard... there is a million answers to that, Sam, probably none of them wrong depending on what happens to the factors that go in the bottom line plus or minus, so it's a hard thing to really put your finger on.

I mean, I would think there will be the margin expand... margins might expand more than your... than you're guiding for only because you're going to get some pricing you're going to have the mix of professional go in your favor, you are going to have new products and you had a real nice gross margin expansion this year, and I would suspect that that might be more likely... I just wanted to get a sense from you guys if I was looking at that correctly oil sequel [ph] if you were betting, if you were betting that?

Couple of things on margins that kind of makes that a bit of a crystal ball as you're... you are going to have... we are going to have overall inflation on margins. We are talking with vendors all the time about fuel charges and price increases. How much of that can we put off and avoid commodities is a huge unknown. What's going to happen with all of that. So, when you look at all... you look at all of those and you say okay, is that going to give you positive or negative margins to any extent, pretty hard to tell. So you got to really look at each one of those and it depends on where they go over time.

You would suspect the pricing would largely, if not entirely, offset that?

Well, you'll get some pricing. On that other hand if our residential business comes back and performs as a greater percent of the portfolio for next year that puts some pressure on the other way, because the margins are not as high on the residential side of the business. So, again you've got five or six major factors that go into that.

Okay. Last question. As you are looking at your budget, Steve, are you suspecting that free cash flow is going to exceed our earnings per share next year because of the working capital source of cash or is it not going to, does that working capital source happen more in F09?

Probably the latter. And we would expect the free working capital to be... free cash flow to be right in the same area as we have this year, I think we were $140 million this year, and you can expect that same type of number next year.

So, okay. So 140ish in free cash flow in '08, and then it would by definition then it would be a very market jump higher in free cash flow in '09, is that how we should look at it?

You need to give us some --

I mean by your working capital goal, 150 some odd million plus coming out of working capital that would be a whole year's worth of free cash flow alone. So I am just trying to get a sense of when that... when that free cash flow is likely to be recognized?

You are not going to see it all in '09. I can guarantee you that. We should get a piece of it what we've kind of been talking about internally is we would get to that goal, and that was the $180 million that you talked about, by '10 at the soonest. So that is a journey, that's a big project, and we did some pilots, as you know with the distributor, and we are starting to do some things down in more of our plants to figure all of that out, but that, we've got the ways to go before we get to $180 million out of working capital.

Got you. Thanks much.

[Operator Instructions] Your next question comes from the line of James Bank with Sidoti and Company. Please proceed.

Hi, good morning.

Good morning, James.

Good morning.

Beginning with residential sales. Seems as though in the fourth quarter, it's been down now for the third year in a row, but your earnings for that segment, I believe, have been up two years in a row. Can I attribute all that to this GrowLean Initiative, or your ongoing Lean Initiatives let's say?

Sales for the year has been really... as snow is a lot of that, but what's happened is on the earnings side is, their SG&As were actually down a bit. They had a little improvement in margin this year not a lot, but their SG&As were down this year and that's what drove the increase in earnings for the most part.

So, that's more attributable to the sales actually being down so G&A is down or is that, or is any of this having to do with the GrowLean initiative?

Not much with the GrowLean initiative.

Okay.

The other factor that goes into that is, if you remember last year at this time, we had a duty issue in the fourth quarter that we had to book and that was all on the consumer side of... residential side of the business. So that makes your '06 margins look abnormally low, and it makes the comparison really look better than it is.

Okay, good. Thank you. Getting a little bit deeper into your field inventory, can we speak more granularly about the snowthrowers? What is the field inventory for the snowthrowers looking like?

Day-by-day better-and-better.

Right.

It's not... the reality is, if the snow events continue at all, inventories are going to be very, very scarce. And as you know we manage that business carefully, and don't fill the warehouse up with an excessive amount of, call it, opportunity inventory. So, we would expect snow inventories to be in very good shape.

Okay. Great. You also mentioned due to lower than anticipated shipments in the fourth quarter, what actually was that product or products?

That was pretty much across the board, nothing unusual in any... probably some of the landscape products, but pretty much across the board.

Okay. Let's see, you know you spoke about your European operation and I believe Hayter as well. And it seems like your outlook was positive. The only thing I would like to ask is that London lowered the rate this morning, suggesting slower growth coming forward. Are you guys seeing any growth at all, or excuse me, any slowing in your growth there, or you still see excellent opportunity in that region?

Yeah. We're at a time of the year where we're not... retail is very slow, as we head now into the... towards spring and getting set. So, we really can't answer that question well. Anticipated... we have anticipated growth partially due to some new products that are being brought out in the UK and with Hayter as well as the broader distribution. So, it may be as much about share of gains there, as it was here this last year.

Okay. Can you all or can you split your Asia and your Europe sales for me?

This is Steve. If you look at the international business in its entirety, that segment of our business, the Europe is about 50% of our international sales.

Okay.

Canada and Latin America is 20%, Australia would be 20% and Asia would be the balance.

Okay. Thank you. That's how I came to that. And the electric product slowdown in the past fourth quarter, and I think, maybe even the third, correct me if I'm wrong. Is this having to do more with the leaf blowers and the recall you have with the leaf blowers earlier in the year?

No, it's more to do with electric trimmers, actually leaf blowers were in a very good position and sales are up with leaf blowers. Now that will slow down quickly with the snow event, but we've had a good leaf blower season.

Okay. Terrific. And the other income line, $2.2 million. I was looking for something more along the line of $1.5 million. I think earlier in the year you actually guided towards a total $4 million for year in other income, and you are just over $9 million. What actually was baked into that number in the fourth quarter, in the $3.2 million?

That is primarily interest income, remember when we did our bond deal, we borrowed $50 million more than we needed to payoff; the bond were coming due.

Okay.

So, we had excess cash. So it's that. That's the primary reason that it's up.

Okay.

Exchange, I think, probably played a little bit in that too.

Okay. What actually was your foreign exchange in the quarter?

For the quarter, currency added about $5 million in the fourth quarter and I think it was $24 million in the... for the year.

Okay.

In sales now, I'm talking... not about profit, I'm talking about sales.

Okay and what was your OpEx? Your options expense just for '07, fiscal '07?

Hang on there. I've got to look that up... $7 million.

Terrific. I believe that's all I have.

Thank you, James.

Thank you very much.

Thank you.

You have a follow-up question from the line of Eric Bosshard with Cleveland Research. Please proceed.

I had one question and that was, a year ago you had this call on your guidance to earnings in 2007 to grow. I think a similar amount around 10% and the earnings ended up growing 17%. You commented that 9% to 11%, very difficult environment and you kind of estimate that you didn't think you could do much better than that? I am guessing how do you contrast, how you feel now, versus what you just accomplished in 2007 or which was a similar and difficult year on the top line and you achieved that growth. What's different about '07, or excuse me, the '08 than '07?

Well, I would say one of the things is that I don't... significant part that came from the margin expansion, and I am not sure we would see that happening in '08. I think we pretty much said that... there is tension among all these goals that we have got out there. As we got about GrowLean, we have got a 8% revenue goal and we are behind the curve on that now and we have talked 7% plus profitability goal and we made, obviously, some significant improvement on that in F07, but that. And then this whole working capital initiative and there is tension with these, among all three of these. As we work on the working capital, one of the challenges may be that we have to pull some inventory down externally. And if we do that, obviously, there is a revenue impact and that comes back and puts pressure on the revenue goal. So, we would look and say the growth goal. Particularly the growth goal and the working capital goal are the more, call them, more transformational goals. The profitability is more of a kind of continuous improvement, although we saw significant improvement on that in '07. I am not sure that we want to count on that in '08, so there is a lot of unknowns out there, we think in this environment that we're going into. The macro factors we talked about. Obviously, weather plays a role in that with our business as well. We think the guidance of 3 to 5 on the top-line and 9 to 11 on the bottom line is prudent.

And that, Eric, as we talked about, bits and pieces of this in between the two numbers Mike just gave you, when you look at margins because of some of things we talked about flat to slight improvement; SG&A, flat to be maybe a little de-leveraging. And a part of what you got to think about with SG&A is we had a down sales year. And a lot of your SG&A ends up fixed. You are not going to cut in the kind of the meat, because you have one-down sales year and then not have what you need when you get the revenues growing out in future years. So that's why we are little more pessimistic about, maybe on SG&A. And then you look at the other income side, that's going to be somewhere in the $5 million to $7 million range. Tax rate we gave you in the release. So you kind of go through that and run your model, and you can see where that EPS ends up coming off.

Fair enough. Thank you.

Thanks, Eric.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Hoffman for closing remarks.

Thank you, Shaqwana. And once again, thank you ladies and gentlemen for your, well for questions. As we watched the snow continue to fall here in Minneapolis, and across the country, and across the world for that matter, we remain confident in the future of Toro as a vibrant and competitive organization. We believe our employees are armed with the tools and knowledge to make significant changes for the better in our business practices. And our eyes are on the future as we take the next important steps in our GrowLean journey. So, we will look forward to talking to you again in March, for our first quarter... to share with you our first quarter results. Thank you. Have a great day, and on behalf of the Toro team, happy holidays to all of you. Good bye.

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