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

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