Lindsay Corp (LNN) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Lindsay Manufacturing third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Following the formal presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded Monday, June 24th, of 2002.

I would now like to turn the conference over to Mark Mulefelt with FRB Weber Shandwick. Please go ahead

Good morning, everyone and thank you for joining us again for Lindsay Manufacturing's conference call to discuss third-quarter results. By now, everyone should have received a copy of the press release that was sent out this morning. If anyone needs a copy, you can call my assistant, Grace Blum, at 312-640-6691, and she will fax or e-mail you a copy immediately.

Today, from management, we have Rick Parod, president and chief executive officer, and Bruce Karsk, executive vice president and chief financial officer.

Before I turn the call over to Rick for his opening remarks, I need to remind everyone that certain statements that are made during this conference call that are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Lindsay Manufacturing believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, they can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in this morning's press release and from time to time in the company's filings with the SEC.

Additionally, we wanted to let people know that the information and statements made during the call are made as of the date of this call. Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements. Also, the contents of the call are the property of the company and any replay or transmission of the call may be done only with the consent of Lindsay Manufacturing.

With all that aside, I would now like to turn the call over to Rick Parod for his opening remarks.

Good morning. We're pleased to report that revenue for the third quarter of fiscal 2002 was 44.1 million, increasing 13% over the same period last year. The increase was in our core irrigation equipment which resulted in a favorable mix and higher margins for the quarter. Gross margins rose to 26.2% for the quarter versus 24.2% in the third quarter of last year.

The higher revenue and increase in gross margin resulted in net earnings of 4.7 million or 40 cents per share, as compared to 3.9 million or 33 cents per share in the same period last year.

For the third quarter, domestic irrigation revenues increased by 18% over the third quarter of last year. The higher revenues resulted from somewhat improved agricultural economic conditions, a continuation of irrigation projects with large farms and dry weather.

Irrigation equipment demand throughout the southern region, where cotton is a key crop, remains at the same level as last year. In the northwest region, where potato prices are 10 to 15% higher than last year, equipment demand remains up significantly. To date, domestic irrigation revenues in total have increased 19% over last year. This reflects stronger equipment sales, strong market acceptance of our GrowSmart advanced control, soil polymers, vertigation injection products and the expansion of our replacement parts business.

The addition of the complementary and ancillary products have added to our revenue stream, as well as aiding and differentiating our irrigation offering in the market. We are now offering the most integrated irrigation solution in our market sector.

Early in the third quarter, we acquired the assets of Irrigation Specialists, Inc., an irrigation dealership based in Paschal Washington. The dealership, with revenues of approximately 12 million annually, has been serving the orchard, turf, vineyard and general agricultural markets in that region for over 30 years. Irrigation Specialists is located in a key market in the northwest, where many large growers are customers of our advanced technology irrigation management systems. The acquisition provides us a base for serving those customers and for expansion in that important market.

The new business contributed revenues and profits in the quarter.

In the international markets, third-quarter revenues increased by approximately 40%, primarily from strong exports to the Middle East. Year-to-date, international revenues have increased by 25%. In addition to the Middle East, we continue to see strong demand in Latin America and the Australia/New Zealand market. We're also experiencing new order activity in South America which we will be able to serve through our new manufacturing and sales center in Brazil established early in the third quarter.

We began production of pivots in Brazil during the quarter and we're now increasing our market penetration through an expanded distribution base.

Demand also remains strong in South Africa. However, our exports to that market are down more than 30% due to a significant decline in the South African rand versus the U.S. dollar over the past couple years and to the cost of freight and duties to the region.

We plan to be in position to serve that market with locally-manufactured products during the first half of the next fiscal year.

In diversified manufacturing, we experienced a 49% drop in revenues in the third quarter as compared to the same quarter last year. As we previously stated, some of our customers in this segment are relying less on contracted manufacturing, partially in response to economic conditions and available capacity within their own operations. To date, diversified manufacturing revenues are down 35%. We continue to seek revenue opportunities in contract manufacturing and in proprietary products that will help us in achieving efficient utilization of our manufacturing resources.

Given the strengths currently seen in irrigation equipment, we do not expect the reduction in diversified manufacturing to significantly affect earnings.

As stated earlier, gross margins for the quarter were 26.2% versus 24.2 in the same period last year, reflecting a strong product mix and cost reduction initiatives started last fiscal year.

Year-to-date gross margins are now 24% as compared to 23-and-a-half percent in the previous year. Cost reductions implemented continue to yield benefits. However, they will be partially offset by already-realized and anticipated steel price increases. Because of the significant increases we've seen in steel pricing in recent months, we found it necessary to implement a 3% price increase on irrigation products in early June. The increase implemented will effectively pass through the higher steel prices realized, preventing an impact on fourth-quarter margin.

At this time, we believe steel prices will peak sometime this fall, and if the market pricing will stick, we do not anticipate any further effect on margins.

Steel availability is also affecting some manufacturers. However, we do not anticipate any availability challenges during the next few months due to commitments we've already attained.

Operating expenses for the quarter were 1 million above the same quarter last year, reflecting higher selling expenses and expenses associated with the new businesses acquired.

Year-to-date, operating expenses are 200,000 below last year, and are 12.7% of revenues as compared to 13.6% of revenues last year, excluding the asset write-down recorded in fiscal 2001.

Our total order backlog, excluding the Irrigation Specialists dealership stood at 12.6 million at the end of May compared with 11.9 million last year. Our backlog is higher than last year, even with a 42% decrease in diversified products become log, demonstrating better market conditions and demand for our new products.

Our balance sheet remains in excellent shape. We now have 50.9 million in cash and marketable securities compared with 39.7 million at the end of the third quarter last year. Our accounts receivables are 2.4 million lower than last year due to earlier collections on our dealer stocking program.

Inventories are 4.6 million higher than the same time last year, reflecting the inventory balances of the new locations, including Irrigation Specialists.

We did not repurchase any company stock during the third quarter or to date through fiscal 2002. We have a remaining share repurchase authorization of 1.2 million shares. In terms of an outlook, we're pleased to see that the strategic initiatives we've implemented over the past 18 to 24 months to expand and differentiate our product offering are achieving success in the marketplace. The new products, such as the mini-pivot travelers, soil polymers, injection systems, have all added to revenues during the quarter. The additions have greatly expanded our technological offering and capabilities, setting us apart from others in the industry.

With manufacturing and sales operations in western Europe and South America, we're now well positioned to continue our geographical expansion. Now that we have a signed domestic farm bill, we've seen evidence that farmers are more willing to make capital investments in improving efficiencies. While that obstacle has been removed, commodity prices remain relatively slow and sluggish, adversely affecting the pace of investment and conversion from less- efficient irrigation methods. However, farmers are faced with having to make investments to improve efficiency and to protect their profitability.

Looking forward, even with the sluggish commodity prices, we believe that the demand for agricultural irrigation equipment is positive for the remainder of fiscal 2002, which leads us to continue to forecast 2002 revenues up 8% from fiscal 2001, excluding acquisitions in fiscal 2002, and we now forecast our full-year EPS to be between 88 and 90 cents per share.

I'd now like to open it up for questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed by the 1 on your push-button phone. If you would like to cancel your request for a question, please press the star followed by the 2. You will hear a three-tone prompt, acknowledging your selection. Your questions will be pulled in the order they are received and if you're using speaker equipment, please lift up your handset before pressing the numbers. One moment, please, for the first question.

The first question comes from Alexander Paris. Please state your company name followed by your company.

Barrington Research Associates. Good morning.

Good morning.

Just one question. On your guidance for fiscal 2002, your 8% revenue increase, I think if you - or if you work that through, that's implying a - roughly a $2 million sales decline from a year ago. Is that because you're - because of the environment, or what you see in the backlog, or what?

I'm not sure how you get to a sales decline, Alex. I think that what we're talking about is an 8% increase in revenues excluding the acquisitions made, for the full year.

All right. I think an 8% increase for the year from - from fiscal 2001 is about 136 million, and in nine months, you have 113 million. That comes to 23 million which would be, I think, unless there's been a restatement, a comparison against 25 million or so in the previous year.

Yeah. Alex, the - so I think what you've done is you're backing into fourth-quarter revenues only, without the acquisitions.

You know, we're simply confirming the full-year expected revenue increase without acquisition as somewhere around the 8% range.

Okay.

It is not meant to comment anything particular about the fourth-quarter revenues without acquisitions.

Okay. Well, my - I guess my error is putting in the - ignoring the 3 million or so in the third quarter, I guess.

All right. So anyway, you're not looking for a decline in fourth-quarter sales?

No.

No, we're not.

Okay. And the - your incremental business from the acquisitions of 3 million, looks like it was all from the dealer, from the new dealer acquisition and not much, if anything, from the Brazil?

That would be fair. We - we're not really splitting that out directly, but, yes, that would be a fair assumption.

And so you're running at a 3 million quarterly rate, which would be consistent with your 12 million rate. Is that going to follow the normal seasonal pattern? In other words, it will be less than that in the third quarter and then more or less following your own seasonal pattern?

Yes. We didn't own Irrigation Specialists for all of the third quarter.

Right.

And the seasonality at the dealership, obviously, is somewhat similar to the seasonality that we have in the balance of our core product. That is, it's - there's higher revenue there in the late winter and early spring, and then it slows down towards the end of summer and in the fall.

My recollection of looking at their sales in the past has been, it is less seasonally impacted than our business is because they're also serving other kinds of agricultural markets, like vineyards and orchards, with other types of products, and they're in a little more of a year-round market. So they will have less of a seasonal impact, from my recollection.

Okay. And just a kind of a broad question. Given that you've made a lot of really good changes, manufacturing in Brazil and manufacturing in France and a number of new products and more emphasis on parts growth, putting all that together, just compared to what your normal expected normalized growth rate - I think you used to talk about ranges of 5 to 10 percent, something like that. Has that changed at all? Would you now expect whatever it was before to have a kind of a higher secular growth rate expectations?

We've talked as the - as the industry having a growth rate in the, I think, 5 to say 8 percent. Certainly - and this is on a global basis.

Uh-huh.

As overall industry growth, we anticipate having a better growth rate than the industry. We would say that the industry also tends to cycle, and, you know, as you've seen, there's been a down cycle last year. So we're looking at an average overall growth rate. And I think what we're seeing right now is there's some much higher growth rates in some of the international markets than the domestic market. But we certainly, as a company, plan to track to a different growth rate than the industry growth rate. Those types of changes, yes.

Okay. Just one more for housekeeping. Could you give the depreciation and capital spending for the third quarter versus a year ago?

Yeah. The third-quarter depreciation - what I have, Alex, is that we're depreciating at about 900,000 per quarter.

Okay.

And last year, we were at about 800, $850,000 per quarter.

Uh-huh.

On depreciation.

The capital that we have, year-to-date - I don't have for the quarter alone, but year-to-date is 1.6 million. That would - would not include the acquisitions.

Right.

And full year last year - or excuse me. For the first three quarters last year, we were at 2.7. So we really, on internal projects, were at a rate a little below last year. We've recognized that we - we're underspending what we should there and expect to pick that up some in the next three and six - six months.

Okay. Thanks very much.

Thank you.

Thank you. The next question comes from Stephen Lewis. Please go ahead.

Good morning.

Good morning.

Let's just go through the acquisitions again here. You said it was not a full quarter for irrigation. What would have been a full quarter?

Well, I'm not sure what their last 30 days sales were, but we closed that at the end of March, or very early April, so we owned it for about two-thirds of the quarter.

And what were their sales in your fourth quarter last year?

I don't - we don't have that with us right now, so I can't recall that number.

How about Lindsay South America last year in what would be your fourth quarter?

Yeah. Lindsay South America is a brand-new operation. We had no sales in South America. In fact, I'd say probably little or nothing in the fourth quarter at all last year.

South America is a case where we really have to have locally-manufactured product in order to be able to compete in that market, so whatever we get there for the most part will be incremental over the previous year.

Okay. And there wasn't any Lindsay South America in the quarter just reported?

It was - we just started it up in the third quarter. We had - we just began production in end of May. Or in May. So very, very little.

What's the effect on the balance sheet of the startup there as far as inventories just for South America?

Right. We do have some inventory in South America. Roughly half a million or so. And we have about two million over at Irrigation Specialists also.

Okay. So of that - to go to 16.8 million, about 2-and-a-half is from the new operations?

A little over that, yes.

Okay. How about operating cash flow for nine months or the quarter?

We're finalizing the number on that. We'll - it will obviously be in our 10-Q. You know, the key items are that receivables are up some, and - excuse me. Receivables are roughly flat with a year ago, down 2-point - I'm looking here again. Excuse me.

Receivables being down 2.4.

2.4.

Yes. And inventory being up about 4.6 million. The other operating cash items really have not changed that much. Our short-term debt and payables simply does not change much.

Well, when you get to the year end August, you'll be comparing August to August. Receivables will be down from May and more comparable to August of last year or - or where will they be, you think?

They should be comparable to last year, up a little bit because of the new acquisitions.

They will - yeah, they will be up from the acquisitions. The Lindsay base numbers should be comparable to last year in August. I think that would be true.

Yes.

And the same thing on the inventory - but in this case, the inventories will be noticeably up from last year?

We would expect, because of the - because of the new businesses, new operations, that the inventories will be up, yes.

Okay. So if the depreciation is running 900,000 a quarter, the working capital increase will be - will be more than the depreciation, so you'll - you'll come out with operating cash flow for the year something like the earnings reported?

That would be a rough estimate, depending on what we do with capital spent in the fourth quarter, yes.

What is the outlook for capital expenditures for the full year and for next year?

We had an original budget in - in the - you know, in the 3-and-a-half to 4 million range for this year. Now, obviously we're running behind that on our - you know, the base business without acquisitions, and we're still setting the plan for next year.

Okay. And as far as the acquisition of Irrigation Specialists, do they have an earn-out as part of their acquisition cost?

They do not.

Okay. So what you've paid for them is the full - full price?

That is correct.

That is correct.

Okay. Thank you.

Thank you.

Thank you. The next question comes from Frederick Russell -

Ask her when the FERC is going to - when they're going to get the report on the FERC. Good morning. Sorry about that.

Good morning. How are you.

Good morning, Richard and Bruce. I'm encouraged by your report, and would like you to expand on why Lindsay would expect to exceed the industry's growth rate, if you could give some details on that, and if you could give some details on Lindsay's factory position in South America and what it is doing in South Africa. I think this would be very good news.

Yes. Well, let me take the why we would exceed the industry growth rate, and I would attribute that to our strategic initiatives and the things that we have been doing. I would say that at this point, we - we'd guess that we would currently exceed the industry growth rate.

Adding in the new products, differentiating our product offering, expanding our position globally, expanding our parts business as we have, all put us on a little different growth path than, let's say, the industry standard or industry norm would be.

We still see lots of opportunities in terms of additional expansion of the parts business - excuse me - additional global expansion which I'll come back to, because you've asked the question about South America, Brazil, and South Africa -

Uh-huh.

- and we see significant new opportunities yet in front of us in terms of adding additional products and possible - by either organic or acquisition, to add those to our line and expand our offerings.

Coming back to South America, the status of it is we're up and running in terms of producing Zimmatic pivots there. It's a fairly small operation that we acquired really just the assets of a - of a manufacturing operation there, so we're starting on a fairly small scale which I'm very comfortable with, because we have some building to do in terms of reestablishing our market position there.

Uh-huh.

One comment I'd make about our market position is, Lindsay had sold Zimmatic machines or our pivots down there for many years through a license agreement and we're really just going back into the market and reestablishing ourselves. So we're pretty confident in our ability to do that.

Uh-huh.

But it - and there's great market potential, but it's going to take just a little bit of time.

South Africa is another interesting case because as I talked about earlier, the - what's happened with the South African rand plus freight and duties to get to that market has made it very difficult for us and our sales have almost dropped off completely there.

We also see a significant opportunity in that market, so we plan to expand through local production there.

Whether it comes by way of acquisition or comes by way of us starting up our own operation has not been decided, but that is our next targeted location.

What - Richard, what kind of - what are some examples of some of the products that Lindsay might acquire and/or produce that would differentiate the product line, and how complementary would they be to the center-pivot irrigation system business?

Well, that's a good question. As we've looked at potential additions to our product line or to our business, we really start with an analysis of the core of our business, of what we really do well, which is the irrigation equipment, and to expand from there and look at all the things that could be complementary to it or that still stay within the water management piece of it.

So we're looking at whether it's, you know, valves or filtration or other types of controls that fit into intelligent water and plant nutrient management systems, there's a pretty wide range. Or other irrigation type products. And we haven't - we wouldn't exclude any of those and really look at all those as opportunities.

What - what did the farm bill do or not do for Lindsay and farmers? What kind of comments could you make on that, Richard?

Yes. You know, the comments that I would make, from what I've seen in the farm bill and what I've heard from people on the farm bill, is that it's provided a level of confidence in the sense that they don't see the floor dropping out in terms of support and subsidies. That overall, the farmers are relatively happy with it. I hear a lot of complaints outside the United States about the farm bill.

Uh-huh.

In various countries, talking about, you know, taking some kind of, you know, retaliatory action or whatever. But from an internal standpoint, domestic standpoint, most of the comments have been very positive. In looking at it, it's creating a foundation or taking away a lot of the uncertainty or speculation that was there.

Well, keep up the good work. If we have more questions, when's a convenient time for us to call you and Bruce?

This afternoon would be fine, Frederick. Alternatively, early tomorrow morning. But those two times work, I believe.

Keep up the good work, Bruce and Richard.

Thank you.

Thank you. Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the 1. As a reminder, if you're on speaker equipment, you will need to lift your handset before pressing the numbers. One moment, please, for the next question.

And the next question is a follow-up from Alexander Paris. Please go ahead.

Yes. You mentioned the farm cycle, and of course there is a farm cycle, but could you give - do you have an idea just where we are? You're obviously still at the depressed part of the farm cycle, and we see a lot of cross-currents of droughts in the west and lots of rain in other places, and commodity prices jumping around.

Are commodity prices running for the farmer, on average, better than, say, a year ago, and would you expect them to continue rising, if so?

Well, that's a - that's a great question. I think on average, commodity prices are probably - you know, that's a very difficult one because it obviously varies by commodity. I'd say that on average, it's probably running slightly better - has been slightly better and year ago for the farmer. And it certainly has an impact, net cash - or farm income has an impact for the farmer.

In terms of where it's going to go is - is - at this point, is anybody's guess. I think the - you know, the global issues have a pretty significant impact in terms of global supply of, you know, soybeans or other commodities. Certainly they've played a major role in commodity pricing.

Weather is playing a significant role as well. As you said, you know, we've got a combination of drought, which I think is probably playing the biggest role at this point, versus heavy rains. I think the - the drought's probably a more significant effect at this stage. We've seen the drought as probably being a favorable impact on our business. We see things like water conservation as having a favorable effect on our business and as a favorable market driver.

Cash farm income is certainly a significant piece because it really determines whether or not they're able to make the investment in buying the equipment. If cash farm income jumped significantly, it would have a big impact for us.

As it is right now, it's probably not playing a major role because the farmer's not - from what our estimation would be - a lot worse off than, say, he was last year. In fact, I think he's probably better off, given where energy prices were last year.

I don't know if that answered your question, but -

Yeah. A couple of things. Speaking of global, I've read some things that China will be coming into the WTO soon and the implication is that they would be - become a much higher - bigger buyer in international markets of farm products.

Would you agree with that?

Farm products. You mean commodities.

Yes, uh-huh.

Boy, that's a - I guess, yes, but when? I don't know.

When are they scheduled to come in, do you happen to know that?

I don't know that. Do you recall?

It's probably going to take credit for them to be able to afford it. I don't - but we're - you know, I'm not sure when they're scheduled to be coming in also.

We do think they continue to strive to increase ag production in China also.

Speaking of the farm bill, it's good overall for confidence, but was there anything new in there in terms of direct incentives for investing in (inaudible) like credit or accelerating depreciation or anything like that.

You know, about the only thing that I saw that was probably new and impactful for us is the increase in conservation spending. And there - and I don't recall the numbers offhand, but there was a pretty significant increase in conservation. Some of it directly being paid top aid farmers in developing more efficient irrigation methods. And we think that that really could be a plus for us in the sense that our integrated systems, when integrated with things like moisture sensors certainly fit there in terms of, you know, really significantly reducing the amount of water use in irrigation.

So I think that that money that's gone into conservation could be a benefit for us, and that is, it's a new increase.

Looking - looking ahead at margins, just looking a little longer term, back at the better parts of the cycle, your gross margin was - got to 24 to 27% and your operating margin got to around 13 or so percent in '99 and 2000. And since then, you've done a lot of expanding overseas which should help margins and have invested in factory efficiency. Are those still good targets for - if you continue to see a positive cycle, or could you exceed those because of the changes?

Well, I think the - those types of targets should be achievable. Should be achievable again, because there's really nothing significant that I'm aware of that really would have changed that. I do think, you know, if the market came back to that extent, yes, we could see numbers like that again. Perhaps even better and perhaps more revenue opportunities, maybe even more so than the margin impact, because we can reach those - those markets where we've been blocked out.

Some of the action we've taken, like in South America, is a market where we've just been cut out of there completely, so it wouldn't even matter that much what price or what margin we went in at. We couldn't do it because it required local manufacturing in order to get government funding for the farmer in order to make his purchase.

So, yes, I think the other locations can have an impact on margins going forward, and, yes, I think the - those kinds of numbers are achievable in a good strong boom cycle. That would be my view of this.

Just one final question. Can you break out the dollar sales in the third quarter between the domestic and the international irrigation?

Yes, we can. In fact, I think the domestic is broken out - one moment. Bruce, do you have those?

Yes. For the quarter, domestic including - there's a small amount of other revenue in here - is 31.6 million this year.

And the international was the difference between that and 41.8 million?

That is correct.

Right. And international, was that up from a year ago?

International -

Yes, it is.

- is up from a year ago, yes.

The international in the third quarter, revenues were up about 40%. To date, it's up about 25%.

Okay. All right. Thank you very much.

You're welcome.

Thank you. The next question comes from Dick Henderson. Please state your company name followed by your question.

Yes. Pershing. Good morning.

Good morning, Dick.

Good morning.

A couple of questions. On the diversified products group, first of all, was it profitable in the quarter?

Yes, it was.

Okay. Second question, you mentioned that the revenues were down, a combination of the economy and changes in strategy by your key customers.

How much is - can you kind of give an idea how much would be reflective of the economy and how much you think is reflective of the - the customers?

You know, that's difficult because I think they - they work together, in the sense that when I look at the - the economy piece, I'd say that it's caused many of those customers - the downturn in the economy for those customers caused them to look at outsourced manufacturing versus producing in-house.

So they wanted to keep their workers and facilities, so it's not really - it's not as kind of detrimental as it would seem on the surface, so if you did get the economy coming back, you should get increased business. Would that be fair?

Well, I think it - the other part of this that's important is that in many cases - in fact, in most cases what we're - we are producing in our contract manufacturing is a complete product or relatively complete product, which means we're going to kind of be in the - we're going to go where that product goes. So when the customer makes a decision to do that inside, they probably will not put that product back out again.

But, you know, you can never really speculate on that.

What you may end up with is, as the economy picks back up and they look at outsourcing, any customer looks at outsourcing, or contract manufacturing as a good alternative, we could be picking up new products, new, you know, subassemblies or whatever, to produce at that time. But it's not likely we would see the same things come back.

Uh-huh. On - along those lines, you guys have been looking at this now for a while. Is your level of enthusiasm kind of going up or going down, and if you could X out the economy - in other words, you're looking and saying, you know, on the one hand there are manufacturers - everybody's got cost pressures, you should be doing what you should do best and you guys obviously have a lot of expertise in bending metal. Is - how would your - your potential opportunities, again Xing out the economy, kind of looking at it longer term? Are there the opportunities to - to kind of fill the plant?

Yeah, that's a good question. I think that, you know, there are opportunities. You know, right now, if we had a choice - and this is where we've been for quite a while, in terms of this position, is that they would prefer that that capacity be used in producing proprietary products.

The proprietary products typically have higher margins for us, but it also leaves us in a stronger position in determination of things like, you know, product life cycles and things of that nature. That doesn't mean, however, that we're not happy with the diversified manufacturing part of the business. We are. We have some very good and important customers there that we want to continue to support, and we would - and if we could find more diversified manufacturing business that was counter-seasonal to our irrigation product, we would probably gladly take that on, as long as it didn't cause any capacity issues in our proprietary products.

And it's that balance that's a little bit difficult to attain. Given the location of our factory, it's hard to find those - necessarily those contract manufacturing products or projects that are easy to pull in, and we would prefer that we have more counter-seasonal projects than ones that are running in the same cycle as our equipment.

Okay. On the international front, you know, if we dropped back, you guys were hurt by the strong dollar in years past, or up until very recently. And you made the Peru acquisition and now you've got Brazil and you're talking about South Africa. Recognizing that just because we read the dollar is weakening, it doesn't necessarily mean it's weakening on currencies and buying Peru. What's your take on this drop in the dollar? Is that going to help you?

You know the - yeah, I think the drop in the dollar will help us. I don't think it's going to really make a lot of difference at this point.

One of the things that we look at in terms of making these investments in these other facilities outside the United States is we prefer to keep the scale relatively small, the capital investment has been relatively small, and we do think that there's a time when, you know, the shift in the dollar could cause it to be more advantageous to produce, you know, in one location versus another, whether it's the United States versus western Europe or whatever that is.

But at this point, it makes sense to do it.

The other factor that comes into play for us is that a very significant part of our cost is in freight and duties and getting the product to those regions, so by moving that product and producing it there, we eliminate those costs.

So it's a combination of the dollar effect plus that freight and duty piece.

And sort of a third piece of that which doesn't really impact so much our cost of the product there, but is in the degree of customer service that we can give, and we lose 30 days or so of time having product on the water when we have to ship it here from the U.S. as opposed to being able to deliver it from a factory that's closer to the customer in those areas.

Right. Just roughly, what would freight and duties total, as a percent of the selling price?

Between 15 and 25%, and it really depends on the location, but it is in that range.

But it's a big number?

Yes, it is.

Yeah. Last question. You guys got a superb balance sheet, good cash flow, et cetera. Acquisitions. It's, you know, kind of a new heightened strategy since you've come on board, Rick, and recognizing that kind of the acquisitions that you would be making are, you know, kind of family - you know them, the investment bankers don't know them, and you've got your list that - on companies that you'd like to marry and it's just a question of, kind of, if the other person wants to say "I do."

That list, is - is there a lot of opportunities there, Rick? I mean, you know, in that you can build this business where you can kind of go into more value-added, higher profit margin type business? Could you just put a little color on, as you go scouting around, what you - the opportunities?

Yeah. I think the - boy, that's a tough question. That's a real deep one, but let me just comment on a piece of it.

First of all, is there a list and is there enough on the list to - you know, to work and be comfortable with. And I think the answer is yes.

I do see a lot of opportunities.

Even when I look at, you know, what our mission is and I'm, you know, pretty firm on sticking with - with Lindsay's mission and what we do. I think that there's really a good amount of opportunity for us to work with.

Now, will they - do they result in higher margins, you know, or do they - are they, you know, better margin opportunities? I can't really say, as we're working through this list. I think some yes, some no.

You know, I like the - the pieces we've done to date, which help us differentiate our product line, hopefully help us in protecting our margins through that differentiation. I think the pieces that give us an expansion on a global basis and a geographical expansion have been very, very helpful as well.

We look at other products. There may be cases where they really may not have the same margin level or, you know, could be higher, could be lower, but they create good shareholder value by making that acquisition, either are synergistic or are, you know, good use of cash and really create some good value.

So I think it's a lot of different possibilities that come from this, and we're really looking at it in terms of staying with our mission of intelligent water, plant nutrient management system. So I guess the easy answer is yes, there's a lot of opportunity. What do they do in terms of margins? It really depends, but, you know, we'll see how that plays out as we go along.

Okay. Thank you.

Thank you. The next question comes from Andrew Nelson. Please state your company, followed by your question.

Good morning. I'm with Andrew R. Nelson and associates.

I was just - I have two questions and one comment.

I think China joined the WTO in December of last year, just so you guys know.

Anyway, is - the first question is: How do you see the stability of the market in Brazil with what's going on down there with the currency and Argentina, et cetera?

Yeah. Well, good morning, Andrew. I think good question. Thanks for that information on China. I guess it's not something that, you know, we've been tracking in terms of WTO. We do track some other things in China, but . . .

Brazil. The - you know, the Brazilian economy last year was probably more affected by things like a, you know, power shortages, energy crisis than they had, than they were Argentina. I think there is some ripple effect in terms of Argentina on Brazil. At this point, it does not appear to be severe. I think there are political things that are going on in terms of elections, you know, that could have some implications for Brazil and there are strikes in Brazil and all kinds of things.

Now, all that said, the Brazilian economy for farmers tends to be pretty good right now and the market is fairly significant for our product in terms of size. We don't really see that changing. We look at it and say, even, with a lot of the stability and activity taking place, or the political instability and things taking place, it really could be a flat to growing market in those conditions. We think it will continue to be a good growth market.

That's good.

Then I have - wanted to ask you: You threw up a phrase, "soil polymers," and I guess probably everybody else is aware of what they are. I have heard them used, polymers used with seed to control the germination of the seed so they can plant them earlier. Is soil polymers - is that a - something that you could just describe briefly?

Yes. Briefly is how best I could describe it and not technically. You know, soil polymers, it's a polymer/resin type material that is added to the soil. In our case - by the way, this is - we offer this product as an exclusive marketing agreement with another company who produces this. We don't own this product or product line.

But our product is a sack that has the polymer in it that attaches to a pivot, and as the pivot goes around and is irrigating, water hits this sack and releases these polymers into the soil.

The soil - or the polymer going into the soil, in a sense, makes the soil slippery in a different kind of way. It makes the water go through the topsoil relatively quickly, so that what you don't get is water standing, and then erosion of the pivot track which creates the deep ruts, and it can create, you know, runoff into streams and rivers and places where you don't want it to occur.

So what it does, in a sense, is cause the soil to stay pretty much intact, without - without standing water there eroding - eroding the track or the soil on the top surface.

Polymers have been around for a long time. For us, you know, this track sack or this - what we're marketing through our dealers is a very effective product. I don't know if that helps you from a technical standpoint. That's probably as technical as I can get with it.

Okay. That's - that's technical enough for me.

Okay.

Anyway, appreciate your comments, and we'll look forward to your next conference call.

Thank you.

Thank you.

Thank you. The next question is a follow-up from Stephen Lewis. Please go ahead.

What is the difference in operating margins between international and U.S.?

The international margins have a tendency to be lower than the domestic margins on the proprietary product, and in some cases where we're - we're still starting the international manufacturing operations, or if we're subsidizing that to a certain extent, until we get our operations there up fully running smoothly, the - in - our competitors there in several of these international markets have been there for a little while so we're starting out in a little bit of a bad position. But certainly have room for improvement there, and that's what we're attempting to do.

Is it reasonable to expect that international margins will increase with the activities in - and the startup costs in Brazil and South Africa?

That is our expectation over time, yes.

Would that be as early as next year?

I think we should - we should probably not see a significant increase in margins during the next year. And the reason for that is, we are reestablishing our market position in those markets, which means that we're doing some subsidizing to get back in.

In both cases, for the most part, we were almost completely out of the western, you know, European market and out of the - we were out of the South African - or the South American market.

We also have the same challenges, as I talked about earlier, in South Africa.

So I think in the - and I couldn't say for how long, how many quarters at this point, but for a while, I wouldn't expect to see a margin benefit from this other than to get back into those markets and start increasing revenues.

Okay. So if I heard Andrew Paris correctly, he assumed there was a higher margin in - abroad next year, and you'd like to amend that assumption?

I'm not sure I heard that. I think we can improve somewhat where we are this year, but we're not going to see margins in the international market be the same as they are in the domestic market by the end of next year. We have - we have some work to accomplish there yet, and we need to execute on what we've put in place.

I thought -

I don't know if that means amend his comment or not. We've - you know, in some cases, we've had some pretty low international transactions, margin transactions going on, and in some of the markets, in the middle eastern market, that market has continued to be pretty reasonable for us.

Okay. So you think that international margins can be up next year from this year?

I - you know, they can be up slightly. They cannot - they will not be equal to the domestic, but it will be this is the CEO -

You know, as I think Rick said, it will be a year or two before we see them approaching the full U.S. margin because of our need to invest in a certain point in those markets or to a certain degree in those markets to bring back and to earn that business back that we've given up over the last couple years.

Thank you. You've been very helpful.

Thank you.

Thank you. Gentlemen, there are no further questions at this time. Please continue with any further comments.

Thank you. In closing, we're pleased with our financial performance for the quarter, primarily because we can see the successes achieved with our growth and cost reduction initiatives. We will continue to take action to further differentiate our products and strengthen our market position around the world, including providing locally-manufactured products when prudent. We expect to see continued emphasis on improving farm productivity through the installation of efficient and intelligent irrigation and field management systems, and there will be a continued regulation - there will be continued regulation and pressure on efficiently using our precious water resources. Lindsay Manufacturing is in an unique position to provide solutions to those needs. We will continue to seek additional business extensions through acquisitions that are congruent with our miss and provide access to new markets. I'd like to thank you for your questions and participation in the call.

Thank you, sir. Ladies and gentlemen, this concludes the Lindsay Manufacturing third-quarter earnings conference call F you'd like to listen to a replay of today's conference please dial 1-800-405-2236, or 303-590-3000. Your access code is 479588. Once again, your dial-in numbers are 1-800-405-2236 and 303-590-3000, with access code 479558. The replay will be available for one week. We thank you for your participation. You may now disconnect.