Lindsay Corp (LNN) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Lindsay Manufacturing Company second quarter results teleconference. All participants are in a listen-only mode. Following the presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during today's conference, please press the star followed by the zero. As a reminder, this conference is being recorded, Tuesday March 25, 2003.

I would now like to turn the conference over to Ms. Diane Hetwer (ph). Please go ahead, ma'am.

Thank you. Good morning. I'd like to thank everyone for joining us today.

Earlier in the day, we sent a press release outlining the results for the second quarter ended February 28, 2003. If anyone has not received a release, please call the financial relations board at 312-266-7800 and my assistant Elyse Fishler (ph) will send you another copy.

Joining us today from the management team of Lindsay Manufacturing, we have Rich Parod, president and chief executive officer, Bruce Karsk, executive vice president of finance and chief financial officer, and Tom Costanza (ph), corporate controller.

Management will provide an overview of the quarter and then we'll open the call to your questions.

Before we begin, we want to remind everyone that this conference call may contain certain forward-looking statements that are subject to the Safe Harbor disclaimer in today's press release.

At this point, I'd like to turn the call over to Rick. Go ahead, Rick.

Thank you. Good morning and thank you for joining us.

We are pleased to report that revenues for the second fiscal quarter of 2003 increased 18% to 48.1 million from the same period last year. The significant revenue increase resulted from acquisitions and a start-up that occurred subsequent to the second quarter of fiscal 2002 and an increase in irrigation equipment orders over the same period of last year.

Second quarter operating income grew 20% to 6.5 million from 5.4 million in the second quarter of last year. Net earnings for the quarter were 5 million or 42 cents per diluted share compared with 4 million or 33 cents per diluted share for the second quarter last year. Total revenues for the first half of fiscal 2003 were 81.6 million, rising 18% over the first six months of the previous year. Irrigation equipment revenues rose to 76 million for the half, 23% higher than a year ago.

Diversified manufacturing revenues were 5.6 million or 24% less than the same period last year. Excluding revenues from acquisitions and start-ups that occurred during the last half of fiscal 2002, organic revenue growth was 6% for the first six months period. Excluding the cash value of certain life insurance policies included in other income, net earnings grew 20% to 6.1 million or 51 cents per diluted share for the first six months of fiscal 2003.

Domestic irrigation revenues rose 17% in the second quarter from the same period last year. Domestic dealers continue to report solid quote activity, however it continues to take longer to achieve purchase commitments. While agricultural commodity prices for corn, wheat, soybeans and cotton all remain higher than this time last year by more than 20%, the improvement has not resulted in the robust market confidence we expected.

We believe that concern about the effect of the war in Iraq and the economy in general is playing a significant role in deferring purchase commitments. Additionally, recent spikes in natural gas prices are increasing input costs for farmers. We believe these issues have somewhat softened the farmer's short-term perspective and willingness to invest in capital equipment, even with favorable interest rate levels.

Given these factors, at this time we expect the domestic market for irrigation equipment in the second half of fiscal 2003 to be comparable to the previous year. We do, however, expect to continue to realize growth throughout the year in the domestic market as we gain market share with our new products and services.

In the international market, we experienced an increase in irrigation equipment revenues of 58% during the second fiscal quarter over the same period last year. Revenues from our operations in Europe, South America, Africa, and exports from the U.S. all contributed to the growth over the previous year's level. Year to date, revenues in the international markets are up 59% over the previous year. Almost all of the increase in our international revenues came from the operations added over the past few years in Europe, South America and most recently in South Africa.

In February, we began production of irrigation equipment in our new start-up operation in South Africa as planned. To date, we have been successful in expanding our dealer network and re-establishing our presence in Brazil and South Africa.

We're pleased with the progress made by our teams in each of our international locations. Our export shipments also remain strong during the second fiscal quarter, also growing over the previous year for the quarter and year to date. During the quarter, we hired a seasoned irrigation sales manager in Australia to manage the enhancement of our dealer network and customer support in Australia and New Zealand, leading to expanding our market share in that region.

Now with the start of war in Iraq, we do expect export shipments to the Middle East which were less than 5% of our total revenues for the first half of fiscal 2003 to be somewhat affected during the second half of the year. Depending on the duration and geopolitical ramifications of the war, other international markets may also be impacted.

Diversified manufacturing revenues were down 24% in the quarter and year to date from the same period of last year reflecting the contraction experienced in fiscal 2002 due to customers relying less on outsourced manufacturing. During the first fiscal quarter of this year, we hired a business manager to oversee and grow diversified manufacturing revenues. We're now experiencing a sizable increase in quote activity for new manufacturing projects, and we expect to realize new orders from some of those projects in the second half of the fiscal year.

Even with the improved quote activity, we expect fiscal 2003 diversified manufacturing revenues to be below fiscal 2002 levels.

Total gross profit for the second fiscal quarter rose to 12.3 million from 10.1 million in the second quarter of last year. Gross margins increased to 25.5% for the quarter versus 24.8% in the same period of last year. Higher volumes, product differentiation and maintaining tight cost controls and slightly improved steel costs contributed to the overall margin improvement.

Our emphasis on rigorous cost controls and on improving manufacturing efficiencies is expected to continue to yield benefits in all locations during fiscal 2003. Total operating expenses were 1.1 million higher in the quarter, resulting primarily from our acquisitions and start-up subsequent to the second quarter of last year.

Excluding the acquisitions and start-up in South Africa, operating expenses increased approximately 200,000 during the quarter. Year to date operating expenses are up 2.3 million over last year, with approximately 1.7 million of the increase attributable to the operations added subsequent to the second quarter of fiscal 2002.

Additional funds have also been expended in engineering and research for new product development.

Our total order backlog at February 28, 2003, grew to 20.4 million, compared with 17.4 million at February 28, 2002. The backlog for both domestic and international irrigation equipment is above the same period last year. The diversified manufacturing backlog is comparable to last year's level.

Our balance sheet remains in excellent shape. We now have approximately 41.2 million in cash and marketable securities compared with 41.9 million at the end of the second quarter of last year. We continue to have no long-term or short-term debt. Our accounts receivables are 5 million higher than last year, resulting from increased sales and acquisitions. Inventories are higher by 6.1 million with the increase primarily attributable to acquisitions, the start-up in South Africa and forward purchases of steel at favorable prices. The steel purchased will be consumed in the third quarter of fiscal 2003.

We did not repurchase any company stock during the fist half of fiscal year 2003, however, we have an outstanding share repurchase authorization of 1.2 million shares.

Looking forward, we believe we will continue to realize growth in our international equipment revenues during the second half of fiscal 2003. Our growth expectations have been somewhat dampened by current economic and geopolitical factors, which we believe will constrain market growth for the remainder of the fiscal year. However, we expect to continue to achieve real growth through our new products, expanded parks programs and services and our geographical expansion.

We also have an ongoing structured acquisition search process that has generated numerous candidates throughout the world and we will continue to pursue acquisitions that are congruent with our mission and that are accretive to earnings.

I would now like to open it up for questions.

Ladies and gentlemen, at this time, we will begin the question and answer session. If you would like to ask a question, please press the star followed by the one on your push button phone. If you would like to decline from the polling process, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection and your questions will be pulled in the order they are received. As a reminder, we do ask that you lift your handset before pressing the numbers if you're using speaker equipment.

The first question is from Alexander Parrish (ph). Please state your company name, followed by your question.

Barrington Research. Nice quarter.

Thank you.

Just a few questions on a bookkeeping question. The tax rate I think was like 25.8 in the first quarter of 30.3. Should we still be accruing at something close to a 31% rate or is it lower now?

In the 30.5% range, Alex. The first quarter was, you know, we had the insurance asset pickup in the first quarter that was non-taxable that significantly affected the rate there. But the run rate for the balance of the year will be in the 30.5 or so range.

Okay. In the sales you gave the percent changes but can you give the dollar sales for domestic international this year versus a year ago?

Fourth quarter?

Yes.

The domestic irrigation change in dollars is 5 million increase and the international change in dollars is 3.4 million.

Okay. And just the -- you mentioned excluding all the acquisitions and start-ups, just as a kind of review from what I could see that might be in there would be first of all South Africa including the incremental sales from that -- South America I mean.

Are we including incremental sales?

Yeah. I'm just trying to summarize it. South America is your -- you know, you talked about X the start-up and acquisitions, your core growth was 5%.

Yes. That's correct, Alex. That would include South America.

That's South America. Are you still counting Europe as incremental sales?

No. That was prior to 2002.

Right. And South Africa, now that just started in fiscal 2003. So are you counting that? I guess you were doing something there before you started manufacturing?

We were really just exporting from here prior to that.

Okay. So that increment. Are you counting the distribution that you acquired in the Northwest --

Right. Irrigation specialists would also be included in the acquisition piece. Correct.

All right. While we're on international, is there anything new at all from Eastern Europe? You had that one test a while back, and are you doing business in Eastern Europe?

Yes, we are. We are doing business in Eastern Europe and we're doing it through our European business.

Okay.

In fact, they had fairly sizable sales of this past quarter to Romania through our European operation.

Okay. And just again in numbers, do you have the capital spending and depreciation for the six months versus a year ago?

Sure we do. Depreciation the first six months of this year is about 1.8 million, equal with last year. About 1.8.

Okay.

And the PP&E purchases or cap-ex purchases excluding acquisitions is 1.5 this year versus 1.1 last year for the first sixth months.

Okay. And your -- the outlook for the -- the Western drought, has that been changed any by the big snows in Colorado? I think up to that, I guess Colorado was still pretty dry.

Yes. I think from the things that I have seen and read, it's still dry. I don't believe that the snows at this point have really eliminated or relieved that drought condition. So I think in certain parts of our market we're going to continue to see drought in this next season.

Just one other quick question. You list in your activities growth or smart controls. What does that include? Is that the acquisition of the new control that you made a while -- a year or so ago or you break that out from -- or the real and the center pivot and then the growth smart controls?

Oh, the grow smart brand. Just as a explanation of that, we really created a brand about two years ago called grow smart where we pulled our irrigation controls into that brand. And we have since added in irrigation injection and soil moisture sensing that is integrated into our control panel to create this grow smart product line. And that allows us to sell it to others -- other -- and to go into other applications other than just our own.

That's the reason you break it out because you sell it independently as well as part of your systems?

Yes. And we do have -- we've had numerous applications where it has gone on to other equipment.

Okay, thank you very much.

You're welcome.

Ladies and gentlemen, if you have any an additional question, please press the star followed by the one on your push button phone.

The next question comes from Richard Henderson (ph). Please state your company name followed by the question.

Pershing (ph) LLC.

I thought it was a good quarter also. A quick couple questions. Rick, what is the outlook for the irrigation in the third quarter? Would revenues follow a seasonal pattern and be greater than the second quarter or with this wait and see attitude they'd be more comparable to the just completed quarter?

It would be more seasonal, Richard, and we would expect that revenues would be -- for the irrigation equipment -- would be a little bit higher in the third quarter than the second.

Okay. And on to the diversified products, revenues were I guess comparable to Q1. What would be the performance of operating profits?

We really don't split out operating profits for diversified manufacturing as a piece or business unit.

Can I ask you this, Rick? You know, since there's really two parts to that business, there's what you do contracting out for the Deeres and so forth, and then the other piece is in conjunction and support of your irrigation equipment. Which is more profitable?

The two primary parts are the contract manufacturing as you said that we do for others and then tubing sales, which is really very similar to tubing that we'd use in our own production of irrigation equipment. I think typically tubing would generate higher margins than what the contract manufacturing would. It's more of a by-product of our other manufacturing processes.

All right. And along those lines, you mentioned the steel which obviously would be the major component there. In buying forward and so forth, would it be fair to assume that on constant volume, constant mix Q3 profits would be higher than Q2 by having more favorable raw material costs?

I think that that should be -- we should see a little bit of favorable effect in Q3 from the forward purchase we did in steel, that is correct, there should be some effect.

Along -- just moving that a little further, what's your general sense of steel prices? Continuing to drift lower or obviously there's -- they're trying to increase prices, but there seems to be some resistance. What's your take on it?

Yeah, I tend to agree. There's resistance. Obviously it has drifted lower and we're happy to see that change take place. There's pressure to try and move it. We're not really making a projection in terms of which way we think it's going to go. I think that the steel has come down nicely. I think it's going to be difficult to see it move up at a very rapid rate. So I wouldn't expect that in the short term.

Right. Okay. And in the -- you mentioned the manager you hired to kind of ferret out new business. Is kind of what you're seeing out there potential opportunities higher or lower margin than your traditional contract business or similar?

I think the kind of activity that he's seen and we have been looking at and quoting to date is probably really ranging from, you know, similar kind of margins to higher margins, and it's what we're finding is there's -- you know, really a varied amount of activity. A lot of the types of projects we are looking at today are quite different than the ones we have done in the past and may have higher margin. But, you know, I would caution that we haven't received those jobs yet. So I wouldn't -- I wouldn't book those. But I think there's -- it's a pretty broad range generally between equal to or higher than what we have run in the past.

But I mean, it basically makes sense to secure even lower margin business, does it, in a sense of paying off the overhead on your capacity, either that or make a judgment and resize your organization?

It does.

I mean in the future. It wouldn't take place over the next year or so but when you look at something strategically you can say to yourself, hey, look, what am I going to keep in support? And since it's a seasonal business, you're kind of boxed in?

Yeah. I think the key, Richard, it's a small percentage of the sales when you look at it. We have very little costs associated with that part of the business. So it isn't that there's much scaling up or scaling down that would take place. Yes, it's true to some extent that any margin -- any incremental margin could be beneficial. The best use of resources is producing our proprietary markets and that would be the highest margin for us in total. We're not overly concerned with the decrease in the diversified at this time given the improvements and I should say the increased revenues we have had in the irrigation side. But the overall best margin opportunity or the best profit perspective for us is filling the factory with proprietary product.

All right. And on that response to the former question on the good mark, wouldn't you by separating the electronics controls from the basic kind of metal kind of give your competition the -- you know, put them on the same level as you? In other words, if you have the better mousetrap in terms of the technical controls that you have to buy the system or you don't get it, the benefits of it? Or are you kind of looking at strategically down the road and saying really we've got to kind of lessen the metal bending type parts of our business and get more into controls and more of -- you know, the technological aspects of irrigation or perhaps some related markets? Could you kind of put a little color?

Yeah, I would.

I think the color would be when you look at it from a customer perspective and you look at the pivots and its application, the technology, many cases, you know, a customer depending on the region that you go to will say, you know, a pivot is a pivot in that the metal structure part turns around and irrigates. And yet we found that we can differentiate our product in our total product offering with the grow smart brand and technology which we're offering which a very integrated solution. We found - and this really came about by visiting large growers and seeing what their needs were -- actually, growers all around the world -- to see what their needs were, and what they really wanted in terms of a solution for managing their field and managing irrigation application.

So our system with this grow smart technology can take care of that irrigation activity but also integrate in fertigation (ph) injection chemical applications, as well as soil moisture sensing. It differentiates us which really helps to move away from the pure price competition on a metal structure to metal structure basis but more on a total solution --total solution and application.

Okay. On the cap-ex you mentioned it was 1.5 million through the six-month period; you spent, you know, 2.2 last year. What kind is the general sense for this year and next year?

In the 3 to 3.5 range.

Okay. And while I have you there, Bruce, on a picky question, why did other incomes go up so much?

We've got some minority investments that impact a little bit from quarter to quarter and then in addition to that, we had some currency exchange gain as a result of -- that is in a current account and flows through the income statement as a result of one of our foreign operations.

Okay. And going forward, kind of any type of guidance?

Really not. I think if you look over a longer term we would expect that number to be a smaller number or a smaller impact over the full year.

Okay. Thanks very much.

Thank you.

Thank you.

Our next question is a follow-up question from Alexander Parrish. Please state your company name.

Barrington Research.

To make sure we got the second half of fiscal 2003, you expect your sales to be flat with a year ago or were you talking about the industry?

Oh, the flat part I was referring to the domestic market in total.

Okay.

Really saying that based upon some of the factors that we are seeing, and believe me there's a fair amount of uncertainty with the war impact and the economic impact, that we really don't see real growth in the market in the second half.

Okay. But you did say earlier that you did expect growth in the international sector?

We do expect growth in our international sector, and we do expect to grow in the domestic sector from the standpoint of continuing to take market share through new products and the processes and services.

Okay. The -- I think you mentioned your commodity prices probably at least the ones that are --you're most sensitive to were up 2% from a year ago. Isn't that kind of a small increase given the drought and given low carryover stocks and so forth?

No. That was 20%, Alex.

Twenty percent commodity prices are up oh, okay.

When you look at the major commodities of corn, soybean, wheat and cotton, in general they're up 20% or more. I may have not stated that clearly, but it's 20.

Okay. And the -- when you talked about expecting some perhaps some new orders in this second half of '03 in your contracting business, if you got those would they probably not ship -- start shipping until 2004? There's some kind of a start-up delay, right or no?

You know, it depends on the project and the timing of when it comes in. I think it would be fair to say we would expect some of those to be yet in 2003.

And if you get those, would they be from new people or some of the old ones coming back with an old contract or something different for you to work on?

Really could be -- I'm expecting it could be either or both.

Okay. And you had mentioned in an earlier conference call that you raised prices in your irrigation equipment area. Have they been holding?

In general, yes they have.

Okay. I can't read my writing. Thanks a lot.

Thanks, Alex.

Thank you.

Our next question comes from Steven Lewis (ph). Please state your company name followed by your question.

Lewis Capital Management. I was wondering if -- Lewis (ph) Capital Management. Can you give us the operating cash flow comparisons?

Yes. You know, as we looked at operating cash flow, we used 6 million in operations in first half of this year as compared to 4 million last year, 3.9 million last year.

Was that skewed in any way by changes in distribution or start-up -

Yeah, skewed by the start-ups more than anything else. As we mentioned earlier, the inventory requirements and receivables as a result of the start-ups is where most of the increase came from.

Do you think with the 3 to 3.5 million of capital expenditures you'll have any cash flow after that?

Yes. We will at the end of the year we absolutely will generate free cash flow, yes.

So it would have to be in the second half plus some to make up for first half?

Yeah. But that's typical because both the receivables and inventory burn off pretty well in the second half of the year.

Thank you.

Thank you.

Our next question comes from Jack Granahan (ph). State your company name followed by the question.

Yeah. Granahan Investment Management. I was wondering about gross margins A couple of items here in terms of the say the importance in the future of the product differentiation. Is that a positive or a federal government initiative in terms of the gross margin? Secondly, in terms of what I think was a greater emphasis to be placed on the parts business in the future and I think that's a higher margin. And then thirdly, is there potential for the gross margin in terms of even better utilization rates or are you talking about maybe having to build more capacity in the near term future if the irrigation sales continue to grow up?

Yes, Jack, the answer is the differentiation, the product differentiation is definitely favorable for margins. We think that it has had a favorable impact and will continue to have a favorable impact in a couple of different ways. One is we've added in some new products that have some better margins. So we're seeing some improvement in margins from that. Also, as I said earlier it allows us to differentiate and allows us not to talk about one piece of equipment, but on a completely different basis now. Yes, and the expansion of the parts business is also very favorable to margins.

So the more we can boost those part sales the more beneficial that is to our overall margins as well. There is still opportunity to improve margins from increased utilization of the factory also. And I would say from each of our factories not just the Lindsay, Nebraska, factory. So I would expect that as we continue to build revenues that we will see impacts in that utilization, that efficiency which will be beneficial to margin without adding capacity.

Okay. On that product differentiation thing, I was referring to was a greater increase of electronic stuff which I thought had had a kind of a drag on margins, but you're saying overall that's a positive. Rick, would you be able to quantify what you might be looking at say in the -- you know in a good year, couple years out on the gross margin side?

I really wouldn't quantify that at this time, Jack. I think if you look back and see margins historically, you know, where they have been for Lindsay give you an idea of what the volume impact can have on the operation. And then, you know, factor in incremental now from a slightly different product mix and our position in the international markets and it becomes even better.

Great. I think on the part side you had put a guy in charge of that last year. Is this -- is this the sort of emphasis that is a gradual type of thing? Is that what we should be looking for rather than a step up?

It is. I can give you an example. Yes, we did put a person into that position. I think -- I believe it was last year. It seems longer ago now, but since that time we have expanded our product offering, expanded our parts program in general to our dealers. We opened up a part depot up in Idaho and we're in the process of opening up another parts depot now in Texas to be able to serve our dealers faster with part service in general. So, yes it is a gradual kind of thing. Even to the point where I expect us to see -- I expect to see a continued growth and emphasis on partly the international markets as well.

All right. Thanks.

You're welcome.

Thank you. Ladies and gentlemen, if you have an additional question, please press the star followed by a one.

Our next question comes from Leon Cummings (ph). Please state your company name followed by your question.

Nathan and Lewis Securities. My question deals with anticipated growth in the developing areas notably Eastern Europe, South Africa and South America. In particular Brazil, could you comment on your outlook for -- could you comment on your outlook for growth in those areas?

Yeah. I will attempt to add a little bit of color to that, Leon. In fact, I was just in South Africa this past week and this market has been growing pretty solid over the last couple of years. Growers in general in South Africa and the farmers in general have been making very good profit and have had quite a bit of cash available for purchasing equipment. They have been buying pretty heavily. I think that softened just a little bit in recent months. However, the South African market still quite strong and growers are still bullish in general. We're now in a good position with a factory down there to not just provide product, but also local support to be able to grow with that market.

And I could say similar things regarding -- regarding Brazil. I think Brazil has very large potential, and is a market that's probably growing fairly steadily and I couldn't guess the percentage at this time. But pretty steady growth year over year from an irrigation perspective. And if you looked at some of the data in the last, you know, six months or so and noted that Brazil has passed the United States in soybean production for the first time, they've really moved along quite well over the last few years from an agricultural standpoint and we expect to continue to see that growth. We're also in a good position there now similar to South Africa with generally a relatively small basis to start from. But to yet serve that market from a production standpoint and a service standpoint and be able to grow with that market and expand capacity as needed.

Eastern Europe is one that at this point primarily what we're seeing is a lot of project oriented business, government funded financed projects. Some of the cases world bank money. But the specific projects that will pop up from time to time in one market or another, which we also track and work as well and we think that will continue before it becomes a little more developed in ongoing and stable in terms of a real executive growth market. I hope that adds a little bit to -- fills in what you were looking for.

Could you quantify that a little bit in terms of future projections on revenue and income? Impact from the areas that you just referenced, in particular Brazil and South Africa.

Yeah. I really could not at this time really project what that growth is going to be from a financial perspective or revenue perspective at this time.

What has it been over the last few years?

Well, I think the -- if you look at Brazil and South Africa and really Europe, for us, they were very, very little pieces in the past few years because we were not -- we didn't have local manufacturing. And as the dollar was strong, we were in a very disadvantaged position to try and export to those markets. So whatever today in terms of revenues from those markets is almost all incremental.

Well, could you sort of project based on efforts of your competition in those areas?

Not at -- no, I don't think I can project that at this time.

Okay. Thank you.

Thank you. Ladies and gentlemen, we have no further questions. You may continue.

Thank you. Our strategic initiatives of international expansion, product line expansion, parts programs and depots and the addition of system components are all generating growth for Lindsay Manufacturing. Our initiatives to differentiate our product offering, improve product costs and control expenses are also contributing to improved selling margins and profitability.

The long-term drivers for our business remain very strong. Though through weak to robust agricultural cycles, the drive to improve farm productivity and water efficiency will continue globally, the improvements made in the past few years in our product offering, expanded manufacturing efficiency and capacity, and our global market position will benefit Lindsey Manufacturing Company and our shareholders even more as agricultural cycle strengthens.

In addition, we continue to seek business extensions through acquisitions that are congruent with our mission and provide access to new markets and that build value for our shareholders.

We thank you for your questions and participation in this call.

Ladies and gentlemen this concludes the Lindsey Manufacturing Company second quarter results teleconference. If you would like to listen to the replay of today's conference please dial 800-405-2236, or you may dial 303-590-3000, followed by the pass code of 530175 followed by the pound sign.

Thank you for participating in today's conference.