Lindsay Corp (LNN) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Lindsay Manufacturing Co. first-quarter results conference call. (OPERATOR INSTRUCTIONS) As reminder, this conference is being recorded today Monday, December 22, 2003. I would now like to turn the conference over to Ms. Diane Hettwer from the financial relations board. Please go ahead, ma'am.

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 first quarter and year ended November 30, 2004. If anyone has not received the release, please call the financial relations board at 312-266-7800 and my assistant Karen Drovo (ph) 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 year-end and will 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.

In conjunction with this call the Company has posted a slide deck supplemental which is available on its website at www.lindsaymanufacturing.com under the financial section.

At this point then I'd like to turn the call over to Rick. Rick, you can go ahead.

Thank you for joining us today. We're pleased to report that while shipments were somewhat lower than we expected, revenues for the first quarter of fiscal 2004 grew 9 percent to 36.5 million compared to 33.5 million in the same period last year. Net earnings for the quarter were 100,000 below the same period last year and earnings per diluted share were 9 cents compared to 10 cents in the first quarter last year.

In the domestic irrigation market revenues rose 14 percent over the same quarter last year. Revenues remained strong in most of the Midwest and have resurged in the Northwest after a downturn last year.

During the quarter we announced a price increase of approximately three percent, to take effect in early December, to help in covering rising material costs, primarily steel. The announced increased had the effect of driving an immediate increase in order flow at the end of the quarter and resulted in an order backlog that was nearly triple the level of domestic orders at the end of the first quarter last year.

Stable corn and wheat prices, coupled with large increases in commodity prices for soybeans and cotton, have created beneficial conditions for domestic formers. Interest rates remain low; additional first-year depreciation is now available for capital investment. And stable land values also contribute to the favorable conditions. Overall, net cash farm income, including subsidies, is expected to be up more than 30 percent for the 2003 crop year. Projected ending stocks for the major commodities for the '03 crop year also create favorable conditions for our fiscal 2004 selling season.

In the international markets we experienced an increase in revenues of three percent over the same period a year ago. Our export revenues were lower than in the first quarter of last year due to the decline of sales in the Middle East region. Shipments from our operations in South America and South Africa were significantly higher than last year. Shipments from our operations in Europe were lower in the first quarter than in the same period last year, reflecting a change in product mix and timing. We have now built up a solid backlog of hose reel quarters in Europe in response to the severe drought last summer. The backlog will be shipped primarily throughout the second quarter.

Each of our teams in the international locations is focused on building their positions in their market, improving operational efficiency and improving customer service. All of the teams are executing on actions to improve selling margins, with the goal of achieving margins near the domestic level some time during the year. In South America and South Africa a large part of the improvement will come from improvements in manufacturing processes. In fact, our factory in Brazil will begin a process of relocating to a larger facility during the next few months before the peak of the season. The new facility, still within St. Paola Estate (ph) in Brazil will accommodate the planned expansion of the manufacturing processes and improvements in workflow. We're taking actions to ensure that this move does not result in any disruption to our dealers or other customers.

Diversified manufacturing revenues were 2.5 million for the quarter, down 10 percent from the same period last year. Revenues continue to be impacted by shifts to internal production from existing customers, and some shipments scheduled for delivery in the first quarter were shifted to the second quarter by a key customer.

We are continuing to find new diversified business. We remain optimistic about the projects we're currently pursuing and about the opportunities for additional revenues. In most cases diversified manufacturing revenues utilize at a (ph) leverage the same physical resources as those used for irrigation equipment. So those revenues further improve our overall efficiency.

Gross profit rose 7.4 million from 7 million on the higher volume. Gross margins were 20.1 percent for the quarter, as compared to 21 percent in the first quarter of last year. Steel price increases did impact our cost of goods sold somewhat in the quarter, but margins were more impacted by a less-favorable domestic product mix and a shift in revenue mix between domestic and international sales.

Revenues from our new foreign facilities, which currently have lower gross margins, comprised 14 percent of total sales for the quarter, compared with 11 percent of the sales in the first quarter last year. As stated earlier, all of our foreign operations are working on margin improvement actions and we've implemented a price increase in the domestic market.

Total operating expenses were 800,000 in the first quarter, resulting from higher health insurance costs, full operation of the South African unit and investments in new product development. The Company also continues to invest in enhanced financial controls at all locations and expects further investments, in particular to support the Sarbanes-Oxley initiatives. We continue to expect to see leverage of total SG&A expenses during fiscal 2004.

Lindsay's order backlog at November 30, 2003 improved significantly to 38.7 million, compared with 21.9 million as of August 31, 2003 and 19.4 million at November 30, 2002.

Our balance sheet remains in excellent shape. Cash and marketable securities at November 30, 2003 were 56 million, compared to 46.5 million at November 30, 2002. Accounts receivable were 1.1 million higher than the first quarter last year and inventories were higher by 3 million. The higher inventories are a result of additional inventory added in our Nebraska facility to support peak-of-the-season sales projections, also the addition of inventory for our parts depot in Texas and a small inventory build in South America in preparation for the facility move. All locations have implemented inventory management plans that are expected to result in improved turns.

Overall, the first quarter revenues and earnings were below our expectations, principally due to timing issues. The backlog is excellent, market conditions remain relatively strong and we believe we have actions in place to improve margins, reduce inventories and leverage expenses.

In total, for fiscal 2004 we continue to anticipate double-digit growth in earnings on revenue growth of approximately 8 to 10 percent, excluding acquisitions. We anticipate further expansion in our U.S. operations and on the international front we expect to continue to grow sales through our new operations and to resume strong export sales. We continue to see the possibility of today's and future price increases in steel and natural gas as presenting challenges in fiscal 2004 selling season. We anticipate that steel prices rising during the year; however, at this time we believe we will be able to pass through the anticipated increase.

We continue to view the international market as our biggest opportunity to improve sales margins for the next fiscal year, and our teams around the world understand and support the challenge. We will continue to seek high margin export business in other regions, such as the Middle East, Mexico and Australia.

I would now like to open it up for any questions.

(OPERATOR INSTRUCTIONS) Alexander Paris.

Barrington Research. Good morning. You've mentioned the dollar sales for domestic irrigation and diversified products; could you tell me what it was for international in the quarter?

Yes, it is in the slide deck also. The international --

Alex, the international including export was 9.7 million in revenues during the first quarter.

How did that compare to last year?

Last year was 9.3. And the increase at the international locations masks some of the decline we saw in the export portion of that.

Okay, and the diversified products -- I was a little surprised to see outsourcing still affect the year-over-year comparisons, particularly with the improving climate. Is this a relatively new move of your customer from going to in-house? (multiple speakers) tail end of one?

This is the tail end of one. The other part of it that affected it was there was rescheduling of orders that took place right at the end of the quarter that shifted revenue that was expected in the quarter into the second quarter. So it is a combination of this continuation with the same customers and that reschedule.

Could you say roughly how much the push-out of shipments were from the first quarter to the second quarter?

I really can't comment on that part.

You've been talking about eventually the gross margins in South Africa and South America would approach or equal the consolidated margin or the domestic irrigation margin and the export margin, but what is your timing for that -- at some point during the year, at the end of the year -- that the margins would become equal?

What we have said at this point, Alex, is that during this year those margins would near the domestic margin level, and that's still our expectation. And it certainly varies by location, but that is our expectation for all of them.

Okay, the health-care costs; could you give us a feeling for a much that was? Was that in G&A because was up 16 percent? Was that in G&A?

That is all in G&A and Alex we can't break it down any further than that. But it was --

But in was in the G&A. That explains the jump in the G&A.

The explains part of it. The other items there, as we said, was having the African facility up and running all of the quarter as opposed to just starting last year and in addition to that some higher R&D expenditures during the quarter, which is in G&A also.

Speaking of the new products, are there any specific new products you can talk about yet for that increased budget you've been working on?

Not at this point, no.

What about the price increase; how much was that percentage wise?

About three percent.

Just one other question. Just going back to the diversified products, you've been also working on bringing in new business, so this quarter that just ended, was that the last quarter of this negative comparison from the in-house move?

You know, I wouldn't say that. I really don't know the answer to that specifically. I would say that there's quite a bit of new business that we've been working on and we've got some success and in fact have brought in some new business. I'm not sure how that order flow matches for the next few quarters specifically. But I couldn't answer that directly.

So the customer who is moving in-house -- so that is not quite grandfathered yet in terms of the comparisons?

It is close to be grandfathered but not quite yet, that is correct.

And you have some new business coming in -- new customers, new contracts coming in during this fiscal year?

Yes we do and in different types of business than what we have worked on in the past, different types meaning not necessarily -- well, in fact not Ag equipment related.

Okay, thank you very much.

John Brott (ph).

Kansas City Capital. A couple of questions. Rick, you had mentioned that gross margins were off a little bit because of a domestic shift in revenue, in products. Can you be a little bit more specific on that? Where is the domestic shift?

One of the things we saw -- keeping in mind that this is a relatively small quarter for us in relation to the total year -- is it doesn't take much in terms of product mix to shift us a little bit. What we did see in the quarter were some smaller machines that -- and I don't mean the small pipeline, but I mean shorter-type machines -- and our average size of machine was not as big as it typically would be. It wouldn't take much of a shift to change that in a low quarter like this.

Secondly, in the past when there were expectations of a very strong irrigation system season you basically offered some incentives for dealers to take early orders. With the backlog being so high, is there a potential -- with everything else aligning itself, is there a potential that Lindsay might be caught a little bit short in terms of being able to meet that demand because I don't think you offered that dealer incentive this year, did you?

Yes, we had some dealer stock plan that took place early in the year. We did have some dealer stock units that took place. I think it was not substantial, but we did have dealers take some of that in. And then in addition, as you saw, we had the price increase (indiscernible) the backlog. To some extent this backlog gave us a little more visibility of that demand and gave us the opportunity to start on building that demand earlier, which is a good thing for us.

And I know this is going to be a very tough question to answer; I'm trying to gauge how strong the domestic irrigation business might be. You know, if you hadn't increased prices, what type of increase in the backlog might there have been relative to last year?

You know, I don't know that I could answer that. I could tell you that we did have a price increase that took place last year in mid-December -- effective mid-December. And the amount of orders that we saw this year that came in prior to the price increase versus last year was up very significantly.

Okay. Did everybody else in the industry follow along with the price increase?

I don't know the answer to that yet.

All right, thank you Rick.

James Gentile.

Good morning. Sidoti & Co. Basically I just wanted to ask you about your facility movement in Brazil. It seems to me just very recently you began these operations in the Brazilian and South African facilities and now you're moving to larger facilities. Is this going to prolong the margin compression on the international side, particularly in South America? Why are you moving to a larger facility there?

Good morning, James. Yes, we did -- this facility or this operation has been in existence about close to two years. And no, I don't see this as really doing that at all. I think it gives us opportunity. One of the things we were seeing is that we didn't have the capacity or the room there to even add in additional equipment to take more costs out. Also, from a material flow standpoint the factory is not as efficient as we would like. So what this does in moving it to this other facility is give us the expansion or the capability to add in additional equipment, more automation, but also to improve the flow. And it's really somewhat key to getting that margin improvement.

So are we going to see any onetime charge in the second quarter related to the closure of the older facility potentially?

No, we lease or rent that facility. We would not expect any onetime charge from closing it. We will have a little bit of incremental cost from the physical move itself, but we are planning it over a period where we can accomplish it without any significant disruption and cost.

Could you give us some insight as to the total dollar capacity of the Brazilian plant if it was operating at peak capacity?

I really can't at this point.

Is it a doubling of capacity from your prior --?

Yes, it is at least doubling that available capacity.

Great. I can't help but ask the question again. We did see a price increase effective in early December this year versus a little bit later on, and your backlog did almost touch $40 million for the first time in a while. How much of that were dealers rushing to save their customers three percent?

Well, I think it's hard to answer that in terms of -- you know, to some extent, a good share of it would be dealers trying to save that three percent, and that certainly drove some of the backlog. However, we would have had increase whether it was December 1st or December 15th or December 20th, as we did last year. And there is always some rush to save that (indiscernible) couple of points or whatever that increase is. I think the significant part this year is that the amount of orders that came in were substantially above last year's -- last year's increase took just a few weeks later.

Was last year's increase three percent also?

It was about two.

Now, is the extra percentage point going to cover the increase in steel costs as a result of the tariffs being lifted?

Yes. There was some speculation I think from the steel standpoint on whether or not prices would go down with the tariffs lifted, but what we're seeing is that the demand for steel is still very high and part of it is I think attributable to the low dollar in comparison to other currencies. So the demand is still very high and we think that the increases that have been put in place are probably going to stick. We may see some more increases and I think we are fine at this point. If we do see more increases we believe we can pass those through as well.

Did you pre-buy a significant portion of ear materials in anticipation of this?

We pre-bought last year steel in anticipation of increases. And we typically do pre-buy some steel when we see pricing go up as much as we can.

Could you give I guess year-over-year on the diversified manufacturing side? And this has pretty interesting impact on your total company profitability, although it's a pretty small portion of the business. And I was wondering are we going to see overall year-over-year from F03 to F04 a decline in diversified manufacturing business? Or is this new business that you've referred to over the past couple of quarters that hasn't really hit your books going to create at least a flat comparison from 03?

The new business has not totally hit our books yet as far as revenue coming in from that and we expect revenues to come in during the year which will result in us being better than flat on revenues from the diversified manufacturing. But we do need to continue to get those orders and the order flow really needs to turn into revenue.

What we have seen is that some of this work takes a little longer to get from an order to revenue, and that period is taking us longer than we had anticipated. But we are quoting and getting good feedback on some very good additional work for us.

Great, thanks.

Frederick Russell (ph).

Frederick E. Russell, Investment Management Company. Good morning everyone. Would you give us some amplification on Lindsay's international position? How many square feet does Lindsay have leased and/or owned abroad versus square feet for capacity in the United States in Lindsay? And in Brazil and South African who are the major competitors and what trends do you see? And are you likely to in the next 12 to 18 months purchase any more facilities and/or lease them?

That's a comprehensive question, but what let me do my best to --

We know that you're going to give a comprehensive answer.

Absolutely. Yes, I will do my best. All of our facilities outside of the United States -- I was going to say all are leased. That's not the case. In Europe we own a facility. The other two are leased facilities and in both cases we lease fairly small facilities upfront, knowing that we were going to have a time that we would outgrow them. We were expecting that that would probably be in the range of two to five years. In the case of Brazil, we've already hit that point where it's time to move. In the case of South Africa, I think we are a ways away because we obviously just got started up there. So we're dealing with relatively small facilities. And I don't know the square footage off the top, but they are relatively small.

Also, the kind of manufacturing processes that we do in each of these locations varies somewhat, and we've kept them scaled to the point where they start out as facilities that bring in things like produced tubing outside and we're doing galvanizing outside and we are performing operations inside like welding and subassemblies and things like that. And as the opportunity expands and the financial characteristics warrant it, we would probably expand those operations to do more in-house, which means larger facilities as well. So I think from that standpoint these facilities should be expected to grow pragmatically as the need and the financials are justified.

In terms of a competitive situation, we have one global competitor that we meet in most markets and that's Valmont (ph) who we will also see as a primary competitor in South America and in South Africa. And then in each case there are local competitors there, usually quite a bit smaller in size. And there may be one primary competitor in Brazil of significance and another one in South Africa of significance. So it's a little different competitive set. And I think what we have seen is that we've made some very good market-share gains in our international operations, usually from the local competitors initially.

Do think that those market-share gains, Rick, will continue at the expense of local competition?

We believe that we will continue to gain market share. We have aggressive plans, we've got good people on the ground and we've been successful in gaining market share and we expect that to continue.

Not from Valmont (ph), but from the local competition?

It's hard to say. We're not really targeting any competitor or not targeting any competitor; we're targeting really meeting customer needs. I would say that stays the primary focus. We're not targeting any specific competitor. So it will come maybe from -- it could come from any of them, but we are targeting it from a ground-level need.

And in terms of plans to purchase additional facilities, we don't have any plans to purchase facilities at all in any of our off-site locations. We will lease as needed. And as I said, I think we've covered Brazil. South Africa is still a ways away in terms of having to expand. But I do see that time being there and it could be some time in the next two to three years.

Do you see any secular developments that could accelerate the need for Lindsay's equipment around the world beyond the United States?

Well, I think certainly the driving need for water usage efficiency is a strong one. In some cases water regulations will drive it; in some cases water availability will drive it. But there's no doubt that that water resource issue is becoming more and more precious and it's becoming more and more well-known. And you can look at the latest U.N. report on water and see what level of importance it should be for us. So I think that there will be a very strong, driving need for continued irrigation efficiency and water use efficiency.

Keep up the good work.

Boyd Poston.

A.G. Edwards Asset Management. I wonder on the international, could you give us a rough idea of the number of pivots, if you don't want to do it by each of the three sites -- like in total, your capacity would be after you get Brazil to a larger facility -- how much you could produce out of those three plants?

You know, I don't have the numbers available off hand. I'm not sure that I could give that at this stage. I really can't at this point.

The size of the international markets this upcoming year, what would you estimate it to be in terms of new pivots that will be sold?

It certainly varies by region. We look at it in terms of each of the regions, and I think that in total international -- in dollars it would probably be something in the range of $60 million off of kind of a normal total outside the U.S. volume demand.

The domestic market this year, what would you project it to be questioned wide-range?

We're going to do a quick calculation on that here. Sorry for the delay on this, but that's not a number we have right off the top. I'd don't think we should estimate that off the top because that's an important question and we don't have number available.

What is your goal for the SG&A as a percentage of sales? That's been rising in certain recent periods. Where do you think that could eventually settle in at?

Last year for the full year we were at 14.3 percent and we are committed to be under 14 percent this year as a percentage of revenue.

Longer-term how much better could you do?

That depends on the mix of business. And the SG&A, in some cases some parts of that business have higher SG&A costs than others. As we look out over the next couple of years, saying something in the 14 percent range makes sense to us.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Richard Henderson.

Yes, Pershing LLC. Good morning, guys. Rick, could you comment -- the backlog obviously expanded; could you comment on the mix of the backlog? Has it hurt this quarter's earnings?

Yes, the comment that I would make on that, Richard, is that in looking at our backlog the margins on the backlog today we have on the books is better than the margins we saw in the first quarter.

On that subject, once you start producing these orders where would your utilization rate go kind of approximate?

You know, I don't know the answer off the top. But I would say an approximate range is -- at the peak of the season we're going to be in the Nebraska facilitate at a pretty high level of utilization. We will probably be in 85 to 90 percent range in the peak of our season.

So if current conditions kind of unfold there is going to be an incentive if these people want equipment to continue the ordering?

Yes, absolutely. There will be an incentive for them to get orders in and to get those scheduled.

Right, because I recall that in recent conference calls everyone was kind on the fence -- your dealers -- should we or should we not? The inquiry rates were high and I guess the three percent price increase plus what they were reading in the papers about additional steel increases, especially with the dismantling of the tariffs kind of knocked them off the fence.

I think so. Many of our dealers did get some floor stock units in. Some of those who sat on the fence and didn't get those orders are probably right now wishing that they had taken a few more units in earlier, because they know that we're going to be pretty busy during the peak of the season.

Just a quick question on the international -- and I realize there's a lot of dynamics going on. DO you guys have an idea, forgetting about market share gains or being an additional competitor to expand the market and so forth of new products, but what is the inherent growth rate of the Brazilian market, you know, recognizing that it fluctuates? But if you could peg a number or a rough number on what you think that the inherent growth rate of South African and Brazil would be?

I think the way we've looked at it more is, in terms of what we've talked about in the past is more as a group -- looking at the international markets in terms of their current growth rates in total. And it's certainly a double-digit number; it's probably in the 10 to of 15 percent growth level. And it certainly varies by region and it varies by season.

You know, a couple years ago we saw factors that really I think slowed down the Brazil market for a little while, but it's been pretty hot again. South Africa is slower this year than it was last year, and whether it's a combination of what's happened with the rand and the dollar and I think other market conditions as well. So it varies in total but in total I would place it in that 10 to 15 percent range overall.

The important consideration there is what we're doing on our part of the business prior to really having the facilitate there locally and trying to manage the sale and marketing of the equipment from the US. You know, we really weren't fully in the market as well as we could have been. And we've gained a good profile -- regained some good profile -- and are closer to the marketplace with the local operations there. And so for our dealers and our dealers' customers that makes us a more serious contender for their business.

Kind of a question on Europe. You mentioned that the business was a bit disappointing, but then again it was primarily due to a shift and you do have the orders in-house. That operation there basically is kind of a self-sufficient one, right, so that as you generate profits commencing in this current quarter you get not only the benefit from the operating leverage on increased demand, but also the translation vis-a-vis the rise of the euro versus the dollar?

Yes, and we saw foreign currency translation gain both from Europe and from South Africa on the current accounts we have in those two countries. And it shows through on the other cumulative shareholder equity that come through also, which increased about 600,000 from the beginning of the year. But all that came as a result of the strengthening of those foreign currencies against the dollar.

Right, and you're going to get an added boost this quarter?

We will get some again in the second quarter, that's correct.

A quick question on the Mid East; any sense of where you are in the cycle? Is there any ray of hope? Or is it just so clouded at this particular time you really don't want to comment?

You know, there's certainly rays of hope. We still have order activity in The Middle East. We don't have the level that we had previously, by any means. We do think that that will open back up again. We also know that there's money in the government's reconstruction commitments and funds that will be earmarked towards irrigation and potentially to our kind of equipment. We don't know specifically what it would be or specifically what irrigation equipment at this point, but for the reconstruction of Iraq we know that there may be opportunities there in the future as well. So we are optimistic about what's going to happen there, but not really certain on the timing.

A question on the diversified products; I realize there's been a lot of changes and so forth. Just kind of rough -- fair to say that you are kind of at breakeven or lost a bit in this current quarter? Or, I should say the last -- this quarter that is being reported?

It would be better than -- you mean for contribution to (multiple speakers) --?

For operating profit, just to get a rough idea, it is just a touch profitable?

The SG&A expense we have associated with that product line is pretty low, so it was profitable, yes.

One last one, Bruce, on the engineering expenses -- I saw that increased kind of guidance -- where it is going? It was at 760,000, up from fourth-quarter and up over every quarter last year; does that kind of keep nudging up, does it level out? Just rough.

I think the rough guidance on it would be that it doesn't keep nudging up. We do have some real specific projects that were in place and some expenses came in the quarter from a timing-wise -- some expected and some not -- but hit in that quarter, which caused it to be relatively high. I think the real way to look at it is total SG&A being leveraged for the year over last year.

No, I was asking about the engineering.

Yes, but that's a piece of the--

Oh, okay. You are lumping it all in?

That is correct.

And that would be in answer to a prior question on in terms of like keeping it around that 14 percent --?

That's correct.

(OPERATOR INSTRUCTIONS) At this time there are no additional questions. Please continue with your concluding comments.

Thank you. Our strategic initiatives of international expansion, product line expansion, parts programs and depots and the integration of system components are all generating growth for Lindsay Manufacturing. Our ongoing initiatives to differentiate our product offerings, improve product costs and control expenses will also contribute to improved selling margins and profitability. The global long-term drivers for our business remain very strong. Through the ups and downs of agricultural cycles, the drive to improve farm productivity, water efficiency will continue globally given world population growth and scarce water resources. In addition to the overall business enhancements that have taken place, we continue to have an ongoing structured acquisitions search process that will generate additional growth opportunities throughout the world. Our mission remains to be the worldwide leader in providing intelligent water and plant-nutrient management systems. We have strong cash flow and financial flexibility to create shareholder value by pursuing a balance of accretive acquisitions, organic growth opportunities, share repurchase and dividend payments.

We thank you for your questions and participation in this call and we wish you all a very happy holidays. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes today's Lindsay Manufacturing Co. first-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 No. 562722. (Operator repeats numbers) We thank you for participating; you may now disconnect.