Earnings call discussions by a company’s CEO offers insight into their (management’s) view of what the future may look like for the company they lead. The knowledge and understanding you gain makes this well worth the time it takes to read. “OPE-In-The-Know”
Michael J. Hoffman, Toro CEO
February 23 -- As reported in this morning’s first quarter earnings release, we achieved a solid start to the year based on strong showings in both our professional and residential businesses. Net sales for the quarter increased 10.6% while earnings per share increased 22.6%.
Since our last earnings call in December, we announced two acquisitions that will enable us to increase our presence within the golf market and expand into a promising new business. The first announced on December 9th involved a greens roller product line from Graden USA. The practice of rolling greens provides a smooth finish to the grass, thus enhancing the quality and playability of the putting surface, as well as helping to improve the health of the greens.
This acquisition fills an important gap in our golf line and bolsters our leadership in greens maintenance, a position we established back in 1924 with the introduction of our first greens mower. The new lines rollout has been well-received by our distributors and golf course customers.
The second acquisition announced on February 10th included the utility and underground product assets of Astec Industries. This acquisition allows us to offer a new range of Toro products to both current and new customers, and to enter a new category closely aligned to our existing businesses.
The products acquired include horizontal directional drills, trenchers and vibratory plows. The line covers a functional gamut from creating trenches for new residential and professional irrigation systems to installing, repairing or replacing utility lines while minimizing the collateral impact by going underneath landscapes or structures. Potential customers include landscape and irrigation contractors, municipalities, as well as telecommunications and utility companies.
The Astec Products are particularly exciting given the synergy with our site work systems products and an addressable market for horizontal drills and trenches of about $500 million. As a company, we tend to enjoy significant market share in most of our businesses. Just because we have those types of market shares in the turf and irrigation arena, it doesn’t guarantee that we can do it in the ground engaging space.
But if we can execute successfully – and we intend to – this opportunity holds potential market and share growth well in to the future. It will take successful product innovation to take share away from existing competitors, but we have recent examples of where we have done just that.
For both F12 and F13, we anticipate a combined effect from these acquisitions of less than 1% of revenues due to manufacturing transitions and tier-four constraints, and the potential integration and development cost of $0.10 to $0.15 against EPS. However, we believe these additions will be very meaningful in the long run. The integration and development clause include investment and bringing the line into compliance with tier-four emission standards, channel development, product enhancements, and modifications to our manufacturing and testing facilities to accommodate some of the products that are larger than our traditional offerings.
Returning to our existing business, the first quarter offered encouraging signs across both our professional and residential segments. Golfers took advantage of the mild winter leading to an increase in the number of rounds played in November and December according to the National Golf Foundation. While the foundation have not yet reported numbers for January, in December, rounds played increased by more than 30%.
Distributors report excellent preseason activity as golf courses continue replacing aging equipment. Golf equipment retail is even ahead of last year’s strong activities. Momentum is being generated around a host of new mowing and maintenance products we unveiled in 2011, enabling us to continue to extend our market share lead.
The landscape contractor segment capitalized on the unseasonably warm weather and much needed rain in certain drought-stricken sections of the South and Southwest, where contractors have seen their loan and maintenance reawakened. Both The Toro and Exmark landscape contractor businesses are seeing healthy shipments and early retail activity as contractors are beginning to replace worn out equipment with innovative products recently launched by both brands.
Example of these new introductions include Toro’s 2000 Series commercial zero turn riding equipment for both acreage owners and contractors and Exmark’s turf management line featuring both Walk-Behind and Stand On Aerators, Turf Rakes and Slicer/Seeders. It’s worth noting that while snowbelt contractors often spent winter months plowing snow, some weathered the winter well due to the contracts they hold that pay for the season and not by actual plowing activity, resulting in lower cost and more profits this year because of the lower snowfall.
Impervious to weather conditions, Indianapolis’ beautiful Lucas Field triumphantly hosted Super Bowl 46. The Toro sports fields and grounds team once again proudly contributed to the event success, by helping prepare the field of play. While Lucas Field sports artificial turf, Toro work with utility vehicles, ProForce blowers and key personnel were on duty hauling equipment and staff and preparing the playing surface.
While perhaps not as glamorous as the Super Bowl experience, the sports field and grounds business is also finding alternate paths to success, by meeting the needs of local government agencies. Municipalities still feeling the effects of shrinking budgets are taking reliable solutions to increase the productivity of their reduced workforces.
Toro’s industry-leading large rotary mowing equipment has presented a timely solution for local authorities and sparked sales for this growth category. In some cases, municipalities are in stronger buying positions than a year ago since reduced snow removal expenses free up funds that some will use for new spring equipment purchases.
Although many homeowners have yet to fire up their snow (inaudible) this winter, our residential business posted first quarter gains. While early in the season, spring retail is off to a good start. Consumers’ and retailers’ enthusiastic acceptance of our cutting-edge zero turn riding products and walk power mowers generated early demand for shipment of spring goods to dealers and the Home Depot alike.
Our residential business also benefited from stronger demand for our Pope branded products in Australia, where weather was a major problem for the first quarter last year. As you might imagine, winter’s failure to make a meaningful appearance so far this year in much of the snowbelt came to what had been a promising start. Heavy snowfalls last year along with an early Eastern blizzard this winter fueled heavy snow Toro shipments and retailed through November.
However, once the moderate temperature trend set in, retail demand in shipments of both whole goods and parts subsided. Barring winter suddenly returning with intense vengeance, inventory in both field and Toro warehouses will likely be somewhat heavier at season end. Consequently, third and fourth quarter preseason snow shipments are expected to be somewhat less than last year.
As you know, due to its potential volatility, we managed the snow business to prevent the type of costly scenarios we experienced in the early 80s. While we admittedly would have preferred more typical seasonal weather conditions, our current position is readily manageable. In a business related to market served by our newly acquired Astec products, our site work system sales were up for the quarter as a result of strong demand from rental companies that are benefitting from improved construction environment.
As we witnessed during the rental tradeshow earlier this month, rental companies have a very optimistic outlook as they prepare to replace aging equipment. During the show, we unveiled our new STX-38 dedicated stump grinder. Rental professionals, contractors and arborists have asked for a machine that provides greater productivity to tackle larger tree stumps. This latest addition to our tree care equipment line answers their call with more horsepower, easy controls and faster transport speeds.
The STX-38 is planned to be produced and shipped in the second half of the year. In addition to the robust purchases by rental firms, our position in the business was recently affirmed by our being named the 2011 Lawn and Garden Supplier by the rental team of the True Value Company.
I have a few comments regarding our micro-irrigation results. Superior product, increased capacity and timely delivery helped us capture new sales and additional market share as growers continue to adopt more efficient means of irrigating their crops and conserving precious water resources. Speaking of capturing new sales and market share on January 30th, the first shipment of Toro Aqua-Traxx cape rolled out of our new plant in Romania to serve the Eastern European market.
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