Lindsay Corp (LNN) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Lindsay Manufacturing Company third quarter results conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press star followed by the 0. As a reminder this conference is being recorded today, Monday, June 23, 2003. I would now like to turn the conference over to Miss Diane Hetworth from FRB Weber Shanwick. Please go ahead, ma'am.

Thank you. Good morning, I would like to thank everyone for joining us today.

Earlier in the day, we sent a press release outlining the results for the third quarter ended May 31, 2003. If anyone has not received the release, please call the Financial Relations Board at 312-266-7800, and my assistant, Alise Fishler will send you another copy.

Joining us today from the management team of Lindsay Manufacturing, we have Rick Parod, President and Chief Executive Officer, Bruce Karsk, Executive Vice President of Finance and Chief Financial Officer, and Tom Costanza, Corporate Controller. Management will provide an overview of the quarter and then we'll open the call to your questions.

Before we begin, we'd like to remind all participants 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 then, I'd like to turn the call over to Rick. Go ahead, Rick.

Thank you. Good morning, thank you for joining us today.

We're pleased to report that revenues for the third fiscal quarter of 2003 increased 11% to $48.8 million from $44.1 million in the same period last year. The significant revenue increase resulted primarily from new operations and an increase in irrigation equipment shipment over the same period last year.

Irrigation equipment revenues rose by 10% to $45.8 million for the quarter. Diversified manufacturing revenues were $3 million as compared to $2.6 million in the same period last year, showing some improvements for the first time in almost two years.

Third quarter operating income was comparable to the same period last year despite the revenue growth, reflecting product mix differences and higher operating expense levels attributable to new operations and product initiatives. Net earnings for the quarter were $4.8 million or 41 cents per diluted share, compared with $4.7 million or 40 cents per diluted share for the third quarter last year.

Total revenues of the first nine months of fiscal 2003 were $130.4 million, rising 15% over the same prior year period. Excluding new revenues from new operations and startups, total organic revenue growth was 6% for the first nine months of fiscal 2003.

Excluding the cash value of life insurance policies included in other income, net earnings for the first nine months of fiscal 2003 grew 11% to $10.9 million or 91 cents per diluted share.

Domestic irrigation revenues rose in the third quarter from the same period last year primarily from last year's addition of the dealership in Washington state.

In addition, agricultural commodity prices for corn, soy beans and cotton all remain higher than at this time last year by more than 20% supporting solid shipments throughout most of the midwest. Conversely, a 15 to 20% decline in potato prices versus last year has adversely affected demand in parts of the U.S. and Canada.

The drought affected area that played a role in driving demand in much of the U.S. last spring and summer was diminished through April and May of this year. Existing commodity prices and low interest rates have created beneficial conditions for irrigation equipment purchases.

However, equipment purchases will also be influenced by weather conditions in the respective market. Given these mostly favorable conditions, we continue to expect to realize growth in the domestic market over the previous year.

In the international markets, we experienced only a slight increase in irrigation equipment revenues during the third fiscal quarter over the same period last year. It is significant to note that increased revenues from our operations in Europe, South America, and Africa offset a 50% decline in export revenues.

As we reported, the third quarter last year, we commented on a particular strength of our exports in the Middle East for that quarter. Comparatively, given the war in Iraq, we experienced a significant drop in exports to the middle east in the third quarter of this year.

While the new international operations made up the export revenue decline, the initial revenues from the startup of South Africa and South America locations remain at lower margins. We just began production of Zimmatic machines in South Africa of February of this year.

Significant progress continues on improving efficiency of all of our international operations by enhancing manufacturing processes and leveraging infrastructure costs through higher volumes. Progress will continue throughout the year to improve processes and expand revenues through our operations in South America, Africa, and Europe.

We expect to achieve margins near levels achieved in the domestic and export market through the international operations during fiscal 2004. Year-to-date revenues in the international markets are more than 30% higher than the previous year.

All of the increase in our international revenues came from our operations added over the past few years in Europe, South America, and most recently, South Africa. We have been successful in expanding our dealer network and re-establishing our presence in Brazil and South Africa, and we're pleased with the progress made by our teams in each of our international locations.

Additionally, export shipments to regions other than the Middle East remain strong and are higher than the same quarter last year and year-to-date. Diversified manufacturing revenues were up 14% in the quarter reflecting progress from the changes made at the beginning of the year.

With new leadership and strengthened resources, quote activity and diversified manufacturing is at a higher level than we have seen in recent years. Year-to-date diversified manufacturing levels remain below last year. Aggressive efforts are continuing with successes to seek additional diversified manufacturing business to enhance manufacturing capacity utilization.

Total gross profit for the third fiscal quarter rose to $12.5 million from $11.6 million in the third quarter of last year. Gross margins were 25.6% for the quarter versus 26.2% in the same period last year, reflecting the change in the international revenue mix.

Year-to-date for fiscal 2003, gross margins were 24.4%, as compared to 24% for the same period last year. The slightly higher year-to-date margins, even with the international mix change, reflect our continued emphasis on cost controls and improving manufacturing efficiencies in all locations and in achieving modest price increases.

Total operating expenses were $1 million higher in the quarter resulting principally from the new operations added, investments in growth initiatives undertaken in our new operations, as well as in new product development. We're confident these investments will yield earnings growth in fiscal 2004 and beyond.

The company has also invested in enhanced financial controls at all locations and expects further investment in particular to support the Sarbanes-Oxley initiative.

Our total order backlog at May 31, 2003 stood at $12.2 million, compared with $12.6 million at May 31, 2002. The reduced backlog reflects the normal seasonal slowdown seen in our market.

Our balance sheet remains in excellent shape. We now have approximately $54.2 million in cash from marketable securities, compared with $50.9 million at the end of the third quarter last year. We continue to have no debt.

Our accounts receivables are $2.6 million higher than last year, and inventories are higher by $1.4 million with the increases primarily attributable to the new operations.

We have not repurchased any company stock during fiscal 2003. However, we have an outstanding share repurchase authorization for 1.2 million shares.

Looking forward, we believe we will continue to realize growth in our domestic and international irrigation equipment revenues through the remainder of fiscal 2003. We expect to continue to achieve real growth through our new products, expanded parts programs and services, and our geographical expansion.

While our offshore operations are relatively new and there is more work to do, we're very pleased with our progress in gaining market share and improving operational efficiency. Those operations have now established a regional base from which we can build in key markets, where we could not competitively compete by export.

We will continue to seek high margin export business in other regions such as the Middle East, Mexico, and Australia. In addition, our diversified manufacturing business is now showing signs of stabilization and potential growth. We also have an ongoing structured acquisition search process that has generated numerous candidates throughout the world. We will continue to pursue acquisitions that are congruent with our mission and that are accretive to earnings. I'd now like to open it up for any 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 star followed by the 1 on your push-button phone. If you would like to decline from the polling process, please press star followed by the two. You will hear a 3-tone prompt acknowledging your selection. Your question will be polled in the order they are received. If you're using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our first question. Our first question comes from Alexander Paris, please state your company name followed by your question.

Alexander Paris, Sr., CFA: Barrington Research. Good morning.

Good morning.

Alexander Paris, Sr., CFA: Your sales came in pretty much as expected didn't they, or at least they were on my target. I guess my questions are on the cost side, just starting with the gross margin. You would expect it to be up with the higher volume and you're saying the reason for the decline year-over-year is primarily, as far as the gross margin is concerned in the cost of establishing your overseas operations. Is that it?

Yes, Alex, I would probably really call it more looking at the change in the mix from having a high amount of export sales in the third quarter of previous year, which we talked about in that -- at that time.

Alexander Paris, Sr., CFA: Uh-huh.

Versus, now having high international sales coming out of these new operations and fairly new in the startup process, so, we're still in the process of improving their overall efficiency and bringing up their margin levels. So I think that's how I would really qualify this at this point.

Alexander Paris, Sr., CFA: Now you were saying that with time as they're brought, they're integrated, your overseas margin would equal your domestic, could you say what it is now the domestic gross margin in irrigation versus international?

I really wouldn't comment specifically on the margin number. I would say that our target from the international operations from startup has really been to achieve a level that is comparable to domestic or export business, and that was really the part of the goal from the very beginning.

Alexander Paris, Sr., CFA: So, if I wanted to see what your domestic gross margin is in irrigation, it would be comparable to what year?

I'm not sure I understood that question.

Alexander Paris, Sr., CFA: I was just trying to figure out how much margin improvement you would be expecting from bringing your -- the new international operations fully up to domestic margins. Is it a significant gap?

You know, it varies a bit by location. I think the way to look at it is when you look at our overall margins for business, we would expect that the international operations would be at that kind of a level and would not be diluted to margins in any way.

And I think that's really the way to think of it at this point because it will vary, I would say, Europe is at a little different stage, as compared to Brazil or to South Africa, but the plan is that they each get to that kind of comparable margin level and are dilutive of the overall margins in any way.

Alexander Paris, Sr., CFA: Okay, then looking at the operating side then, you've got sales were up 10.5%. You've got selling up 17.8% and general and administrative up 21.2% and engineering and research up 13.4%. Where is -- those are pretty good increases, given relative to the sales. Just looking at the G&A, was there any write-offs of premiums for the insurance policies or some special factors in the G&A?

No, there are not any special factors in any of the selling, the general administrative or the R&D. No charges. The majority of the increase is related to the new operations and product initiatives both in the U.S. and at the new operations.

Alexander Paris, Sr., CFA: All right, and those expenses hit both in the cost of goods sold and in the operating?

Well, no, the ones I'm talking about here in the operating expense is the SG&A expenses. Obviously in the cost of goods sold item, there are startup items also that we don't have those as efficient, units as efficient as we hope to get them, as we know we can get them, in fact.

Alexander Paris, Sr., CFA: Okay, the other income, the $246 million up from 17, was that almost all of the -- related to the insurance policies, the face value increase?

No, that's related we have some equity income from some equity ownership we have in two businesses. There is some current account, foreign exchange gain in that, plus the gain on the cash value of the life insurance policies for the quarter.

Alexander Paris, Sr., CFA: Okay. Going forward then, you mentioned that the tax rate was affected by these insurance policies. What is your go-forward tax rate assumption for the fourth quarter and next year?

The comment on the tax rate is primarily on the full-year tax rate because of the impact in the first quarter. The full-year target is in the 31% range, which would be roughly equal with last year.

Alexander Paris, Sr., CFA: And that's a good number to use going forward?

Fiscal year -- going forward for the balance of fiscal year '03, yes. For fiscal year '04, and we've not have done the full analysis on that, it would been in the 31 to 32% range. That would be our expectation at this point.

Alexander Paris, Sr., CFA: All right, just one other question. You're on a nine-month basis, you're net was up about 29.6%, I think, and your cash flow was down from $10 million down to $6 million, your operating cash flow. Is the difference there all of this spending involved with international?

No, certainly not. There is, you know, as we point out, we have had increases in both receivables and the inventory. In addition to that, there is no cash flow that comes out of the life insurance piece. The cash value of the life insurance.

Alexander Paris, Sr., CFA: Okay. Thank you very much.

Thank you.

Our next question comes from John Roth. Please state your company name followed by your question.

Good morning, this is Jon Braatz from Kansas City Capital. A lot of my questions were just answered. But I guess one question is, when you look at the government programs this year, I can't remember what it's called, the pick program -- or whatever it is.

Equip.

Equip, that's it. In the end did it have a positive or negative impact do you think? And will it have a positive or negative impact going forward, you know, next year?

John, my view is that the Equip program does have a positive impact going forward. It's a little hard to tell what kind of an impact it's had on the current fiscal year because I'd say that the amount of funding that has been provided under Equip has probably been quite a bit slower than what was expected, so there have been a lot of applications of funding, it tends to kind of trickle out. So I'm not sure it's had a significant impact. In fact, I would say it probably has not had much of an impact on '03, but I think it is a positive factor going forward in future years because it will create and support additional demand. But from an overall standpoint, I think it's positive.

Any sense when you look at the monies available, how significant of a positive impact are we talking, you know, on the average year of -- if irrigation sales are going to be up 10%, you know, there is going to be so much money available, it could take 20% or is it more incremental?

I think it's more incremental. It would be very difficult to put a, to put your finger on how much because there are so many other factors that effect that. But I would say that it's incremental, it's easy to see it as a positive influence because it is supporting conversion from less efficient irrigation methods to our kind of irrigation to more efficient means. It will support and fund that, which will make it a positive one.

But there are so many other variables that are really hard to factor in to effect in any one year, as well as the administration of it in terms of how that is handled. It could be slower or faster, depending on how they work out the administration.

One final question, as we sort of look out toward the next year in, terms of the SG&A costs and the SG&A costs, would you expect as these international operations are sort of anniversaried, so to speak, that we're going to have more of a level-type of a margin expense ratio, if you want to call it that, or maybe even some improvement as we look forward to next year?

I would expect to see improvement certainly from a margin standpoint from the international operations next year. I would also expect that we would see more leveraging of the operating expense levels that we have.

Obviously if you look at say a startup type business, you're going to have some infrastructure, operating infrastructure type costs that don't really get fully leveraged until that business is up to speed. And we certainly have some of that taking place, but the other side of it is that is incremental business for us today because we did enter into those markets, really, to because we couldn't effectively compete from an export standpoint, so that is incremental, and I would expect to see that leveraged further and better during the next year.

Thank you.

Our next question comes from James Gentile. Please state your company name followed by your question.

James Gentile at Sidoti & Company. You mentioned an organized structured acquisition search. Could you give us more details as to what you guys would be considering in the use of your $55 million in cash?

Sure, James. Really what we have looked at in terms of organized process is, things that are congruent with our mission, that's what I stated.

Right.

The two factors, congruent to the mission and accretive to earnings. Congruent with the mission means really centered around our core business of water and irrigation. So that includes things like other types of irrigation businesses, which could be drip or other methods, it could be pumps, filtration, things that could be leveraged through either our distribution or manufacturing network, our distribution network or manufacturing processes. So I would say the leverage is an important piece of it, but certainly staying to the core of our mission.

Great. And, you know, obviously the expenses were the problem in the quarter, but I'm going to reiterate Alexander's question before and ask, you know, what is the differential in terms of margin from -- on the gross margin for the international versus the domestic side of things? I think that that really needs to be addressed for us to understand the improvement going forward in the EPS leverage.

You know, in our view, the current gross margin on the international units are, you know, probably something in the range of 2/3 of what we would like to see them be.

Okay.

And we have some improvement to make there. We anticipate that they can be and should be similar to the margins that we have in the domestic market.

Okay. Is it fair to say that in fiscal 2001 you had pretty much a domestic and export scenario driving your revenue and you generated a gross margin of 22%? So, I mean, I don't know if that's -- because that was a pretty poor year in terms of, you know, the cyclical crop cycle scenario.

Right.

So maybe 24% expectation would be a clear picture of your domestic gross margin?

With everything in --

That's a margin level that you achieved on the gross side in fiscal 2000.

You know, I understand your question.

Right.

We have difficulty in trying to nail down that number for you.

Okay.

For a number of reasons, but, we would be disappointed if it did not come very close to the kinds of margins we're getting on a total basis in our business today.

Okay. And how much revenue -- how much in total dollar revenue was international business in the May quarter and in the first nine months?

, total dollar -- The question again, I'm sorry, James?

How much of the $48 million was international in the May quarter and then if you have in the first nine months?

I don't believe we have disclosed that information in the release, James.

Okay.

And cannot at this point.

Okay. Just looking out into beyond fiscal 2004 and understanding the cyclical characteristics of your business, is it fair to assume that we, you know, given the historical operating results that we have seen in past strong crop cycles that beyond fiscal 2004, we would be able to potentially see a negative comparison from, say, fiscal 2005 from fiscal 2004?

Could you explain that? I'm not really sure I under -- I don't understand your question.

Fair enough. I'm sorry.

Yes.

Given the cyclical characteristics of your business.

Yes.

We have seen $160 million, you know, give or take for this fiscal year, that's clearly a peak over the last four years, you've reached this level in fiscal '98, which was a peak year for you all. Potentially given, you know, triangulating the performance and if crop prices remain pretty stable, your fiscal '04 could potentially be the peak year, similar to 1998 and beyond that, is it fair to assume a decline in top-line?

Okay, I understand your question better now.

Okay.

I think the answer is no. I would not say that that would be fair. I think the composition of the business today is quite a bit different than it was at the time it peaked in, say '98. Now, we have a little different international composition.

Okay.

We're participating in different markets than we were with operating entities now, so I -- that mix is not the same today. We also have that dealer business that is in there as well, so the composition of the business is quite a bit different. I think there's a much different kind of balance that we get from a global perspective than what that was at that time.

Okay. Over the last couple of quarters, you have disclosed more or less your international revenue to the tune of about maybe $5 million a quarter, correct me if I'm wrong, that you know, that international irrigation revenue would be about 10 to 15% of total revenue. Do you expect that to continue on a more accelerated growth trajectory as you capture more market share?

That's what we commented in the past and it will be in that range depending on the characteristics and what's happening in the particular order in the international market.

One more question and I'll let you guys off the hook. How you have seen pricing relative to Valmont in the irrigation segment?

Pricing in general has been pretty stable. We haven't seen any real heated price competition relative to any competitor. Pricing in general is holding fairly well.

Excellent. Well, thanks.

James, I want to come back to your gross margin question. Really, to reiterate one thing. We have said in our corporate goals that we anticipate gross margins. Our goal is for gross margins to be in the 23 to 27% range, and we continue to be confident on that number, and that continues to be the goal that we have out in front of us.

Great, then let me just build on that. To achieve the high-end of that range at 27% gross margin, seems like you guys have to -- what precisely needs to be done to achieve that level? What -- where is -- where -- where are the improvements to be made?

Well, I think the improvements made both in our domestic businesses and the international businesses. We have more opportunities in the international business.

Right.

As we've discussed here in this call and in our release.

Not head count or anything, I guess, easy like that. We're looking more at operational process, oriented?

That is correct.

Okay. Thank you.

The kinds of things, James, that we're looking at from an operational process standpoint, that we're looking in all of our operations and will take in particular all the new international ones now, include procurement of materials, negotiating better buying in some cases, it includes just plain -- as volume increases, costs improve, it improves manufacturing process changes that are taking place in terms of, in some cases, it could be automating a process versus manual process. But all of those are being addressed in each of the locations.

Excellent.

Thank you.

Thanks.

Our next question comes from Jay Stelerhyde. Please state your company name followed by your question.

This is actually Fred Russell. Good morning.

Good morning, Fred.

Good morning. International opportunities, the gentlemen before me asked several questions pertaining to international opportunity and you responded, Bruce, and Rick by indicating that those opportunities, I believe, if I heard you correct, are greater than they are domestically. Is this because there is less competition? Internationally? Or is this because the international market is much less developed than it is domestically, or are there other factors that lead to superior growth for exports?

I think there is two primary factors to answer that question, Fred. One is that, in some of the international markets that we're participating in today, the current growth rate in terms of adding in new equipment, converting dry land primarily, more so than, you know, conversion from flood, is at a pretty high growth rate. So that growth rate is probably higher than what you would see in a lot of domestic markets. That's one factor.

The other is for Lindsey, you know, we have entered into these markets where we weren't in those before, and we trying to reach them by exporting without being as effective as we could be, and we're now in those markets, so we would expect higher growth rates in the international markets.

What are the markets that you that you reference as, Rick, as superior international growth markets, which countries are these?

Right now I would say South Africa, Brazil, I think we will see in the not to distant future, the resurgence in a sense in Argentina, so I think South America will be a good strong growth market, but certainly South Africa and other southern Sub Sahara countries as well as Australia and New Zealand.

Thank you. Several questions asked by previous callers on, trying to -- I imagine, trying to figure out what the margins and operating income would have been if there hadn't been a significant expenditure toward international presence compared to the previous year. How much would you say was spent for future, for international presence, factories abroad, et cetera? This quarter versus the previous comparable quarter last year?

It's not all international presence because it's also the fact that we have the store out in Washington state, so it's a combination of a number of things.

Uh-huh.

We would estimate that about 50% of the incremental expenditures are as a result of new operations or growth initiatives out in new operations.

Thank you. Thank you very much. That's all I have. Thank you.

You're welcome.

Our next question comes from Alexander Paris. Please go ahead with your question.

Alexander Paris, Sr., CFA: Going back to the outsource business, the upturn you said was due to things you did early in the year. Is that new business or growth from existing outsource contracts?

I think most of this, Alex, would be new business. Nothing -- not real major contracts, but new business, so we are seeing some incremental projects coming in.

Alexander Paris, Sr., CFA: And when you were talking about higher, high quotation activity, was that in this area or in the irrigation?

That was in the diversified manufacturing in this area.

Alexander Paris, Sr., CFA: Okay. And one other thing, I don't know if you saw, I think it was in the Wall Street Journal a week or so ago, there was an extremely bullish article on the farm sector talking about 53% increase in farm income and rising commodity prices and so forth. And then of course you've got the uncertainty of the Iraq war out of the way. Do your distributors report a significant enthusiasm or a new enthusiasm among farmers in, you know, consistent with this very bullish article they're talking about? Consistent with 50% increase in farm income, at least?

I think our distributors and dealers would support that commodity prices are stronger, that the farmer is more optimistic than what they were, say a year ago in terms of many of the conditions, you know, of whether or not they're as bullish as the article is, I couldn't judge. But I'd say that our dealers are pretty optimistic about the future. You know, it certainly depends a little bit on the specific area, for example, the guys in the potato regions would be a little less optimistic, of course, but I would say in general, dealers are pretty optimistic, pretty upbeat.

Alexander Paris, Sr., CFA: So, looking forward, you said you're looking for continued growth for the rest of the year, looking into the fourth quarter, you've got what looks like improving psychology among farmers, but was -- looking at the fourth quarter a year ago, you had a really big spurt in sales, 28%. Is this a very difficult comparison this year against that?

In our view, it's not a particularly difficult comparison, you know, the third quarter comparison we felt was more difficult, yes.

Alexander Paris, Sr., CFA: So, you can show growth over that is what you're saying?

We believe we can, yes.

Alexander Paris, Sr., CFA: Right. And it should go into 2004, somebody was asking about going to the, to the peak. Looking at your growth assumptions, I think longer-term, don't you usually talk about 5 to 7% long-term growth assumption top-line? Is that right?

Yes, we have talked about that in the past going forward.

Alexander Paris, Sr., CFA: Okay. Given that you're in a upturn in the farm cycle then, if that's the long-term average, you would expect when things are -- everything's in sync that you should be doing better than that?

We would expect that if everything were in sync, we would do better than that. If we had the domestic market at that kind of rate and the international growth opportunities that we have in front of us, and we didn't see the, you know, the kind of situation we saw from the export standpoint in this quarter, versus the previous year, so to think there is a lot of, you know, favorable upside or upside potential there from that kind of a growth rate, yes.

Alexander Paris, Sr., CFA: Yeah, but domestic as I mentioned, with rising farm income and the much higher spending on the government program, so you've got that potential at least domestically, and international, you may have trouble with the earnings and margins, but you essentially have going, looking in the next year, you've got your three new areas that should be adding incremental growth, wouldn't you say?

Yes, we do expect that the new areas will add incremental growth. We expect that there's a good growth opportunity in all of those, and we expect at this point that there is growth opportunity in the domestic market as well.

Alexander Paris, Sr., CFA: Is there just one final in international, I know the Middle East is very volatile. I think a number of years ago you had a huge gain and they turned around the next year, and we're zippo, I think. Is there -- because of the downturn here presumably related to the political uncertainties, is there any kind of a rebound potential from that or is that just pretty much steady growth?

I believe that there is a rebound potential. It's a little hard to swat when that will occur. I think there are a number of factors that influence it. Certainly, you know, parts of the Middle East, you know, Saudi Arabia or whatever, you know, right now everything had been affected to some degree. But Saudi Arabia and some other markets may rebound quicker in terms of incremental parts sales and things of that nature. But right now, that entire market has been affected for the last few months. Okay, thanks very much.

Alexander Paris, Sr., CFA: Thank you.

You're welcome.

Ladies and gentlemen, if there are any additional questions, please press star followed by the 1 at this time. As a reminder, if you're using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our next question. Our next question comes from Richard Henderson. Please state your company name followed by your question.

Yes, Pershing LLC. Good morning.

Morning.

I would like to touch back on the Mideast, Rick, so the general jist is you have seen no improvement?

I think that it would be true -- well, certainly in the third quarter we didn't see.

Right, I mean as we speak.

We're seeing some improvement in terms of some quote activity and some potential, but what we haven't really seen is an improvement yet in terms of hard orders, and I think that's the key. Because we saw -- we continue to have some quote activity even during the Iraq war, but it really -- we have got to see this settled down and turned into hard firm orders, and we haven't really seen much of an improvement in that at this time.

Right. Okay. On that diversified products groups, it's good to see improvement there. Was the -- the sales were up versus the second quarter, were the operating profits up?

We really don't look at a operating profit level for that piece of the business in general. We look at it more in terms of revenue and contribution to the operations in total.

All right. But was whatever you were going to show on that segment income up or down?

I would say that it was comparable to the revenue increase. We did see, you know, good contribution from the increase in revenue.

Okay, and that's the fourth quarter's a seasonally slower one in that business, isn't it generally?

There's part of it that picks up a little bit, which would be the large diameter round tubing for the grain handling equipment, and that will pick up some, typically in the fourth quarter, and we -- in the latter part of the third quarter, and we have seen some pickup there. That is the higher gross margin part of that business.

So the fourth quarter, Bruce is going to -- everything else being equal would be higher than the third quarter?

We anticipate that that will continue to improve. We think that we have hopefully turned a bit of a corner there, yes.

Let me ask you on your main raw materials, steel. Now steel prices have come down, they've stabilized and there's thought in the market that the next direction is north. Do you have a pricing flexibility to -- if that were to occur, to, you know, maintain margins?

Yes, we believe we do. We did, as steel went up last year, we were able to increase on them, we would anticipate that we'd have that flexibility again

Let's take a look at, I guess, the order backlog that we have. Typically the order backlog that we have, our curing is somewhere between 30 and 60 days of orders, so it's not as if we have six months worth of firmly priced committed orders out there that we have to cost protect steel on.

Okay. On that discussion on other income, you said that that was kind of, you know, three main parts, some equity and a couple of businesses and foreign exchange and, you know, the cash surrender value on the adjustment. So I would imagine the foreign exchange was positive, you know, cash surrender value was positive. So that would lead me to believe that whatever these two businesses are, you're losing money, is that fair?

No, that's not the case. In -- on those businesses, you can't look at them in a quarter only. You really have to look at the full year, but they contributed for the quarter also.

Okay. And, let me ask you questions, on the -- your focus on part sales, have they been meeting your expectations? Progress there, the penetration, so forth?

Yes. They are meeting our expectations, we're making good progress. In fact, we have opened up two parts depots now, so we're making the good progress in that area, and we expect to continue to see that.

Okay. Last one. On some of the factors that hurt your earnings, these investments in new products and startups and so forth and, I would imagine that going forward you're going to continue to focus on similar type activities so these costs are always going to be with us. The question is, if you had a look, fiscal '04 versus '03, would the kind of rough expenditure be higher or lower, or the same?

I think that if you look at the '04 versus '03, and you know, any particular quarter, it gets a little difficult with the new operations added in. However, a portion of the expenditures, we'll use '03 this quarter, in fact, as an example. A portion of that was attributable to the new operations, which will be with us, and a portion of that was probably more project specific, things like new products or investments in other areas, of which not all of that would necessarily be there.

So I think directionally, you could see much better leverage off of the expense base from increased revenue and margins out of those newer operations and expenditures probably in the range of where they are.

Okay. Very good. Thanks.

Thank you.

Ladies and gentlemen, once again, if there are any additional questions, please press star followed by the one at this time. If you're using speaker equipment, you will need to lift the handset before pressing the numbers. At this time, there are no additional questions, please continue.

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

The long-term drivers for our business remain very strong. Through the ups and downs of the agricultural cycle, the drive to improve farm productivity and water efficiency will continue globally, given world population growth and scarce water resources.

The improvements made in the past few years in our product offering, expanded manufacturing efficiency and capacity, and our global market position will benefit Lindsay Manufacturing and our shareholders even more as agricultural cycle strengthens. In addition, we continue to seek business extensions through acquisitions congruent with our mission and that provide access to new markets and that build value for our shareholders.

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

Thank you, sir. Ladies and gentlemen, this concludes today's Lindsay Manufacturing Company third quarter results conference. If you would like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 followed by access number 541596. Once again, if you would like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 followed by access number 541 -- pardon me, 541596. We thank you for participating. You may now disconnect.