Good day, ladies and gentlemen, and welcome to The Toro Company Third Quarter Earnings Conference Call. My name is Elisa [ph] 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 the 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, Director of Investor and Public Relations of The Toro Company. Please proceed, Mr. Svendsen.

Thank you Elisa and good morning everyone. Joining me this morning for our third quarter earnings call are Mike Hoffman, Chairman and Chief Executive Officer; Tom Larson, Vice President and Treasurer; and Blake Grams, Vice President and Corporate Controller. Let me now begin with our customary forward-looking statement policy. Please keep in mind, during the call we will make certain forward-looking statements, which are intended to assist you in understanding the company's results. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. So the Safe Harbor portion of the company's earnings release as well as SEC filings detail some of the important risk factors that may cause actual results to differ from those in our predictions. Our earnings release was issued this morning by Business Wire and can also be found in the Investor Information section of the corporate website, thetorocompany.com. With that, I will turn the call over to Mike.

Thanks Kurt, and good morning everyone. As you know Steve Wolfe, who served as Toro’s CFO for the past 14 years retired at the end of July after more than 25 years with the company. I’m sure Steve is listening today from his cabin in northern Minnesota. I speak for everyone at Toro in saying we have deep gratitude for Steve’s many contributions and steady leadership. Without question his financial stewardship played a significant role in putting the company in a great position for his successor now to help drive future growth and profitability. We are very excited to welcome Renee Peterson as Toro’s next Chief Financial Officer and Vice President of Finance. Renee joins us from Eaton Corporation, where she most recently served as Vice President of Finance and planning for the company’s largest standalone business Eaton’s $4 billion truck and automotive segments. Renee, a native of Minnesota, is a smart, genuine and focused individual, attributes that make her a great cultural fit here at Toro. She brings extensive experience in providing financial leadership for global businesses, along with a proven track record for championing innovative approaches in process improvements and cost controls. She is well prepared to help further our ongoing drive to expand our global reach and improve sales and profits as part of our destination 2014 initiative. Renee starts next Monday and looks forward to meeting with you in the months ahead. Turning to our results for the third quarter, net sales grew over 9% to $501 million, driven by balanced growth across both our professional and residential businesses, with currency having a positive impact of about 2 percentage points in the quarter. On the earnings front, we posted net income of $35.1 million or $1.11 per share compared to $1.01 per share last year, while…

Thank you. (Operator instructions) Your first question comes from the line of Mark Rupe from Longbow Research. Please proceed.

Hi guys. Mike, on the gross margin, you mentioned that obviously the rework expense was a big part of that, but could you walk through again the components of the decline? It looks like if the rework is all through the cost of goods, it looks like that's maybe 80 basis points to 90 basis points of the 170 basis points kind of, is that right?

I think 75% of the cost hit gross margin. The balance hit SG&A and warranties.

So that – is that behind you now I assume?

It is thankfully behind us.

Okay, and then as far as the outlook, as far the commodities, I know that, it’s pretty clear on the last call that commodities will be higher in the back half. How should we think about commodities and the higher freight going into, I guess the fourth quarter, and into the early next year on the flow?

Well, I think, relative to as we wrap up the year that’s reflected in our guidance. So, as we’ve said we will work to have our gross margins remain kind of flat through the rest of the year now. Much of that inventory has been built. As we think about commodities, and you know, commodities move in one direction, and then they move in another direction. As we think about commodities for 2012, that’s something we’re building our plans around right now looking at – as we said before we don’t price to cost, but we look at what’s going on in the industry, and so as we project commodities for 2012 that will be factored into our pricing strategy as always. So in the fourth quarter is when we start moving out with some of the 2012 pricing and setting the stage for next season’s spring business if you will.

Okay, and then on the Professional segment, you said golf was strong, but then you said that product mix was a little bit of issue on the margins, just trying to look at the two and where am I missing, some in golf typically higher margin or was it something else within golf or something else that brought the product mix being I guess more unfavorable?

Yes, within the Professional segment we have some things like factoring in the acquisition of Unique put some pressure on the margins. All-in golf as you know is one of the stronger, more profitable businesses, and so – but there's still some moment even within that area. But I would leave it at golf is very healthy.

Okay. Well, you called out Asia being – showing signs of slowing. I mean, how material in the big picture is that, that comment?

Yes. When we look at Asia, which we talked about before, it's relatively – all-in, it's less than 5% of our revenues, still obviously very important, because a large part of that is golf, and the most headwind, if you will, we faced in Asia this year was a result of the Tsunami in Japan. Japan is a very large golf market, and certainly we have great relationships there especially with some of the larger multi-course accounts and they not surprisingly, they backed off purchases this year and we very much expect those to come back in 2012.

Perfect. Thanks guys. Good luck.

Thanks Mark.

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

Good morning everyone. This is Mark [ph] stepping in for Eric.

Hi Mark.

I guess, first question, can you just revisit inventory and can you give us – I think your previous expectation was, it would be worked down by the end of 2011. How do you sit today, how do you think inventory will look at the end of the year, and then I guess – go ahead and answer that question first?

Well, certainly, Mother Nature has not – plays a role, has not cooperated, since we talked on our last call in May to the degree we would have hoped. That's certainly a part of it. So we didn't work it off quite as fast as we would have liked. So it will be up, and I think, when we talk about inventory, we put this into kind of our working capital context, and as you've seen we worked very hard to drive our working capital down as a percent of sales when we look at this on an average basis, and like we talked with you, because of the nature of our business with a couple of big quarters and a couple of relatively smaller quarters, we tend to want to look at the year and want to look at the year from a working capital standpoint. So, all-in, and inventories plays a significant role in that, we ended last year on an average working capital of 13.9%. That will be up closer to 15%; still good and still very much in with how we talked about, how we’re going to manage working capital. So, it’s not – it didn’t work out quite as fast, particularly on the Residential side as we would have hoped, but it’s I would characterize not a – we don’t consider it a problem, because it feels a bit of an opportunity. Then, as I said on the remarks, field inventory, well, up a little bit, particularly because we shipped in snow, but riders are up a little bit, and it is mostly on the Residential side. All-in, field inventory is still in very good shape. So, we think, it’s manageable.

In terms of the third quarter, can you kind of give us a sense for maybe what played out better than expected and what played out worse than expected. I guess, sales, year-to-date are up 12%; you’re holding it 10% to 12%, which implies maybe a little pressure in the fourth quarter. Receivables were up. Can you just walk through how the quarter played out, did you see strength towards the end of the quarter, where was the strength, where was the weakness during the quarter versus kind of your expectations 90 days ago?

Yes, I think, we would sum it up that as we talked to you in May, the macro factors, if you will, weather was relatively worse, the economy was relatively worse than we would have expected or hoped, if you will, and so that puts some pressure on all the businesses, it puts more pressure on if you will, the Residential business because those decisions are made real-time as opposed to get over to the golf end of the business, and those are more planned purchases, if you will, in golf. So, golf held up better. There is some relatively more pressure on the landscape contractor side and the most pressure on the Residential side. So, now we have a bit of an offset on the Residential side because while the spring and summer weather was not particularly favorable, the strong snow season we had last year and the early demand we're seeing for snow this year that pulled up some of that product. So, that goes on the positive side of the ledger, but snow can't make up for the total of walk power mowers and riders. And as I said on the remarks, while shipments are down on riders, retail year-to-date is ahead of the pace of last year on riders. So, that's a plus.

In regard to 2012, I was hoping you could give a little bit of color on how you're thinking about next year. I think in 2010, and then here in 2011, you started off with pretty limited sales growth outlooks and have far exceeded the initial outlook. So, curious how you're thinking about 2012 from a sales and margin perspective. Any color you can give would be helpful.

Well, we won't provide a lot of color, Mark, but we'll certainly do that in much more depth when we have our next call in December. Now with that said, like others we're trying to anticipate to what degree the economic environment will improve or worsen. That certainly will influence our forecasting. We still have our Destination 2014 goals in place. So, while we'll certainly exceed our revenue goal this year, well exceed the $100 million, it'd be closer to $200 million. That $100 million is still in place, $100 million for 2012. On a year-over-year comp basis, snow, we’re going to be comping against a strong year, still relatively smaller part of our business. On the other hand, spring and summer products, particularly in the residential arena, should be easier to comp. The hope would certainly be that weather is not as much of a negative headwind as it was in 2011. So that should go on the positive side of the ledger. Some of the acquisitions that while smaller still will move us in the right direction as we move in 2012. Commodities, that’s something we are looking at closely and trying to – that will tie to some degree into the economic recovery. And so, if the recovery continues or strengthen, we know we’ll see some commodity pressures and we got to factor that in, we’re all guessing a bit at that. We have the Romania plant coming online. So, we are going to look unless we face a significant downturn in the economy and obviously, there are signs that could happen, but unless we really faced that we think we would look at 2012 favorably. Again, we’ll talk in more depth when we get on the call with you in December.

Okay. Thanks guys.

Thank you Mark.

Your next question comes from the line of Jim Lucas from Janney and Capital. Please proceed.

Hello, this is Mike Wherley filling in for Jim this morning. How are you guys doing?

Good morning Mike.

First off, I’m just curious what you guys are hearing from your Professional end markets, both the dealers and end users. You've had a nice rebound this year, but, just sort of wondering what you’re hearing from them right now.

Well, as I said earlier, Mike, the golf market, I’ll say the worldwide golf market remains very solid, it’s not slowed down and now whether that – again, as we talked just a minute ago about the economic environment whether that changes, we’ll be watching that closely, domestically and around the world. So, I think golf remains relatively positive, and one of the things that we’ve talked with you about in the past is when we hit ‘09 golf was the most impacted, which was very unusual historically in economic downturns, and our hope is maybe we could, if things slow down a bit, golf still remains solid, but something we’re watching closely. Certainly, the landscape contractor, as I said, retail-wise, we’re ahead year-to-date over last year, so that’s a plus. There is always a little bit of a concern there. Fuel prices impact particularly that business more. Now they’re softening and so that hopefully will remain positive and will comp well versus last year and set ourselves up nice for 2012. In the residential business, it had the most variability, and again, we’re heading into the snow season, that should be a positive given what happened last year spring and summer for residential next year. That will be a forecast or a guess around again, around those two macro factors being, Mother Nature, that should comp positive and a bit of the economic environment. There will be as we head into preparing for that, we’ll be out to industry shows now over the next 90 days, we’ll learn a lot, we’ll be launching new products, and, again, we’ll have a better sense and talk with you in more depth about that in December.

Okay, on the micro irrigation front, if the Romania plant can be fully operational in September or when would that happen?

Well, it’s a staged startup and so these are extrusion lines, very sophisticated extrusion lines that are put in. So it will start producing product in September, but lines will continue to be added probably over the next 12-plus months. So, it will – to be – I don’t know what fully utilized is, but it will have some – we built the plant with some room for expansion, but it will be significantly utilized as we move into 2012.

And do you see that the near-term impact of that plant as growing those sales or just sort of taking what was being produced in Italy or something else?

Yes, both. We’ve added lines over the last couple of years in the US here and down in one of our Southern plants and shipped a lot of that product all the way to Europe and to Eastern Europe, and so now we’ll be able to produce that product in-market, which is a plus and free up then that capacity in the US for the US, Mexico, South American markets. But, it should accomplish both for us.

Okay, and then just last, I was just wondering what you can tell us about the freight cost, was that an unexpected thing or was that worst than last quarter as far as the impact on margins?

Mike, this is Blake Grams, so I’ll talk to that. So, we had a kind of double-whammy on the freight, so obviously with diesel prices increasing during the year, that’s obviously hit us worse in the back half of the year. And then also as we export products overseas, this cost of shipping those products overseas has also seen a very significant increase over this year as the export economy has continued to grow in the US and imports coming in and such. Then obviously, with the rework issue we had, we had moving a lot of products multiple times, unfortunately, which also caused some freight challenges with us. So, with the moderation of gas and diesel prices as of late, we hope we’ll see a little bit of positive impact as we go forward, but it was definitely a real challenge for us, and probably little bit worse than we expected as we came into the year.

Okay. That helped a lot. Thanks a lot guys.

Thank you Michael.

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

Good morning gentlemen. This is Josh [ph] filling in for Sam. How are you?

Good morning Josh. Well, thank you.

Good, a couple of questions, first kind of around 2012, do you have any sense of what inventory strategies might be at the dealers and the retailers in the coming season?

When you say inventory strategies, as we have discussed, we think field inventory is in good shape, right. It's up a bit with snow but that's moving as we speak. And our focus, as we've talked many times, focus is on retail. If you take care of retail everything else takes care of itself. So, we wouldn't expect to see dealers on the Residential side or the Professional side try to drive a material change in their inventory levels. I mean, not sure they can; that was certainly an issue that we worked on as we put this working capital initiative in place through 2009, 2010. Now, it goes much farther, we won't have the inventory there to support the sales. So, no, we’re in good shape there and we wouldn’t expect to see any significant change there.

Okay, and then looking at your product portfolio, where do see your vitality index into the coming year?

Vitality index – oh, you are talking about the new products?

As a percent of sales?

As a percent of sales. Well, it probably won’t be quite at the level 2011 – and, again, remember this is a three year run rate, it will still be very strong. Our goal has long been to be over 35% on a three-year average, and we’ll be well above that in 2012, some place probably in the, I guess at this point, a little bit mid-40s.

Okay, and then, a bit of housekeeping, just to clarify the reiterated guidance of $3.60, does that include or exclude the $0.09 item this quarter from the rework?

It includes the cost.

It does include it, okay. Thank you very much.

Thank you Josh.

Your next question comes from the line of Robert Kosowsky from Sidoti & Company. Please proceed.

Hi, good morning Mike. How are you doing?

Good morning Rob.

Just quick question, do you have an estimate for what you think the retail lawn and garden market was down in the quarter or kind of what it’s going to be trending towards declining for the year?

I apologize, I don’t, but we can get back to you on that. Certainly we’ve – snow, we think will be as I said, will be a positive. We heard some discussion that it will be in that neighborhood of 10%. As I mentioned earlier that riders for us all-in are comping positive, walkers are obviously comping negative, and that’s I think a sign, a bit more of the riders being a bit more of a planned purchase, and walkers being maybe a little more influenced by what’s going on weather-wise. And we see that, we look at this data by kind of usually [ph] US but across the US by region, and areas that have had more problematic weather comped negatively. A good example, the Midwest comped very poorly through the spring period, not surprisingly, right now down in Texas, which is enduring a really painful drought. We’re not comping there right now. So all-in, walkers will probably be under the most pressure if you will.

Okay thanks. That is helpful. And then I noticed in like the segment breakdown, it looks like other income was $5 million favorable comparison versus last year, like $16.7 million versus $21.4 million, and I was just wondering what the drivers were in that line item and why it was down?

Hi Rob, this is Blake, I’ll answer that question for you. So, as we looked at last year at this time, obviously our sales [ph] were accelerating at that time, so, the incentive expense was kind of little bit more back-loaded last year as we continued to do much better than we expected. This year, we’re not doing as well compared to our plan levels, so the levels of those payouts will be lower and kind of trending the other way kind of the back half of the year. So, the biggest portion of that was the incentive expense is lower than it was a year ago, and a good chunk of that expense is recorded in the other segment. A couple of things were kind of in there. We had some one-time items for product liability last year, which didn’t repeat itself this year plus our distribution profitability is recorded in that line and this year we have one more distribution company that we own and both of our two companies are doing better than they were last year. And also our Red Iron investment is in that line, and as it gets into the second year of operations full level of profitability compared to kind of startup mode last year that business is also doing better than last year. So, all those items kind of led to a lesser loss in the quarter as it was last year.

Okay. Lots of puts and takes?

Yes, exactly.

And then, I was also wondering, what was acquisition revenue in the Professional segment?

You know, acquisition revenue is less than 1%. It’s a small part this year. Obviously, we expect that to be a little more of an accelerator next year.

Okay, and then a couple of quick questions. You mentioned you picked up snow placement for next year with big boxes, was there a one particular big box, was there a particular pipeline fill that was going on in this quarter that maybe kind of inflated the revenue because of that?

Well, not because of that. I would say we have certainly shipped year – as we mentioned, we shipped year-over-year snow a little earlier, that’s driven as much by field inventories were very depleted, and while we’re still in August, people are buying snow throwers as we speak as we talk to dealers and we talk to depot and so. If they’re going to be buying snow throwers, we need to be there so that did pull the shipments forward a bit.

Okay, and then as far as the product rework expense, what exactly was the issue and did it affect Toro brand or different brand, and then is there any risk for like products, like warranty claims coming down the road?

Yes, it’s a good question. We think we factored all the expense in that we will face. It was a disappointing issue, it was a case where we made an engineering change to improve the product, and these things happen sometimes, not very often to this magnitude that for whatever reason we missed catching an unintended consequence. So, as I said earlier, it’s not a safety issue, it was a fairly easy fix, but because of the quantity of replacing a couple of screws, because of the quantity of the mowers involved in bringing them back, as Blake talked about the freight expense and everything else, it just turned out to be a very expensive rework. We were very appreciative with our partners, depot and dealers that helped get us through it, but at the end of the day, it certainly is one of those things where you're building equity, brand equity, or you are borrowing it. We probably borrowed some, but most of the product was fixed long before customers saw it. So, we're dealing with those units that did get sold. That was very much the smaller part of the quantity if you will. I don't think it will have any significant brand impact. It’s just an expensive lesson.

Okay, was it the Toro brand or can be…

I am sorry. Yes, only it was the Toro rear wheel drive mowers only.

Okay, and then finally, I think you mentioned some new electric mowers maybe in the landscaper side to lower fuel costs. Can you kind of maybe just talk about longer-term, where you see electric mowers going, and kind of maybe on the retail side as well?

Let me be clear. That’s not an electric mower. It's an electronic fuel injection system that is on the engine that allows the unit to leverage its fuel use far more. So it's still a gas powered product. But to your question on electrics, we continue to invest in alternative fuel strategies. So, for example, we're right around the corner for starting production on the first lithium-ion battery-powered walk greens mower. So, whether it's the golf arena, or the landscape contractor business, or the consumer business, you will see more and more alternative fuel, and a number of those will be battery-powered kind of products in the market from Toro in the future.

Okay, thanks. And good luck with the conversations with customers in the next 90 days.

Thank you Rob.

Your next question comes from the line of Jim Barrett with CL King & Associates. Please proceed.

Hi, good morning everyone.

Good morning Jim.

Mike, could the Asian demand, I heard your comments as it related to Japan, but I believe you indicated Chinese and Korean markets were moderating, is that temporary in nature or do you see that the start of a more secular trend in those two markets?

Well, here’s how I would answer that. There certainly has, and this is not the first time it’s happened in China where golf growth was building some momentum and then in different times the Chinese government gets involved and may slow things down. But we started from the position that there are approximately 500 golf courses in China for 1.3 billion people and there are 16,000 in the US for 300 million people, and so while we want to do the extrapolation madness, I think that would extrapolate to 69,000. It’s fair to say that long into the future there will be likely golf growth in China. As well as some of the other parts of Asia, Korea is a solid golf market we expect that to continue for the next few years. I was talking with some of our international folks just earlier and even in some other parts of Southeast Asia, Thailand and Vietnam we continue to see some positive signs. So Asia golf will continue to be a growth driver for us we believe, and then as I said Japan will recover next year and that’s significant as there is, I don’t have the number here in front of me, but there is 2,000 or 3,000 golf courses in Japan, and they really did not surprisingly, because of the tsunami they did pullback and we would expect that recovery and they continue to cut the golf courses, so we expect that recovery in 2012.

Okay good. And when we look at the golf market overall I know one of your two competitors highlighted earlier in the year higher volumes in their golf business, aside from your sheer performance in golf can you give us an update on the competitive dynamics within the golf category or is that pretty much remain the status quo?

I think it is – well, it’s obviously very competitive with the – there are two – there are three significant players on the equipment side and two, if you will in the irrigation side and something we watch very closely. So I guess, I would just sum it up by saying the market is improving, if you will from, I know it’s low in 2009 and our share is improving with that, may be to, even a slightly more favorable position. So we feel very good about our current share positions, something that we’re very focused on. Winning in that arena is all about product innovation, giving the customers better solutions and then being, being very committed to the aftermarket service. We have a wonderful set of distributors here in the US and around the world that also give us, we believe competitive advantage.

Okay, and last and least, the rework issue here in the US did that result in any out of stocks at retail or any impact on revenues in the quarter?

Well, that certainly already been, to whatever degree it was, it’s there. It’s hard to measure that. This was, as I said, these were the rear wheel drive products. At the same time, we still have front wheel drive products on the floor and Lawn-Boy products on the floor at depot. Did it have – did the customer choose not to buy a Toro, buy something else as a result. We handled this – the team handled this very fast, very aggressively, and so while at the end of the day, it didn’t help, we don’t think it had any material impact on retail.

Okay. Thank you very much.

Thank you Jim.

At this time, we have no further questions in the queue. This does conclude the question-and-answer portion of the call. I would like to turn the call back over to Mr. Svendsen for closing remarks.

Well, I’ll close Elisa, and thank you, and we thank all of our folks for listening and for your questions, as well as your interest in Toro. So we look forward to talking with you again in December, and we’ll discuss with you our year-end results and our outlook for 2012. Thanks very much. Have a great day.

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