Lindsay Corp (LNN) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Lindsay Manufacturing Co. second-quarter results conference call. At this time all participants' lines have been placed in a listen only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone requires assistance on today's conference, please press the star followed by the zero and the operator will assist you. As a reminder, this conference is being recorded Tuesday, March 23rd, 2004. At this time, I'd like to turn the conference over to Diane Hettwer. 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 29, 2004. If anyone has not received the release, please call the financial relations board at 312-266-7800 and my assistant, Karen Drova, 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.

In conjunction with this call the Company has posted financial data which can be viewed 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 Parod. Rick, you can go ahead.

Thank you. Good morning and thank you for joining us today. Total revenues for the second-quarter fiscal 2004 grew 7 percent over the same period last year. Earnings per diluted share were 29 cents vs. 42 cents for the same period last year reflecting the adverse effect of soaring steel cost. In the domestic irrigation market revenues rose 3 percent over the same quarter last year while the domestic irrigation market remains relatively strong, aided by increases in most agricultural commodity prices.

Winter weather resulted in irrigation revenues below our expectations for the quarter.

Year-to-date domestic irrigation revenues rose 7 percent over the same period last year including price increases implemented to offset the rise in steel cost.

For orders delivered after December 1, 2003, we implemented a 3 percent price increase. Effective February 1, we implemented another 3 percent increase followed by additional increases implemented in March and April. In total, we've implemented price increases of approximately 10 percent since the start of the fiscal year.

Our domestic order backlog remains very strong -- up 75 percent from the same period last year, driven primarily by market demand. Throughout the quarter, we realized a strong order flow which we believe reflected the positive agricultural commodity prices as well as dealers and growers anticipating additional price increase.

Corn and wheat prices up approximately 25 percent and 10 percent, respectively, over the same period last year, along with the highest soybean prices in many years, have created in beneficial conditions for domestic farmers. Interest rates remain low and projected ending stocks for the major commodities for the '03 crop year before the next harvest continue to create favorable conditions for unit demand in our fiscal 2004 selling season.

Escalating steel cost on the other hand will continue pressure on selling margins and may affect the timing of equipment purchases for growers. In the international markets -- including exports -- we experienced an increase of revenues of 24 percent in the quarter over the same period a year ago with approximately 40 percent of the revenue growth resulting from currency exchange rate changes.

Shipments from our operations in South America and Europe were significantly higher than the same period last year, while shipments from our operations in South America -- or South Africa were below the second-quarter last year. Our operations in Brazil are currently benefiting from strong demand due to the rise in soybean prices and orders for our hose reels from our European operations rose significantly following last summer's destructive drought in parts of Europe.

During the past few weeks, our operations in Brazil completed their move into a new facility, more than doubling their production space available. The move was completed with minimal disruption to customers and will now have adequate space to support our growth plans for the foreseeable future.

In the South African markets, corn is one of the largest agricultural crops produced and for the first few months of fiscal 2004, corn prices lagged the previous year softening the irrigation equipment demand. In recent weeks we have also experienced an increase in demand in southern Africa.

For the second quarter, our export revenues were up from the same period last year, demonstrating healthier exports to Canada and Mexico while exports in the Middle East remain low.

Year-to-date international revenues, including exports, are up 14 percent over last year. Each of our foreign locations achieved double-digit revenue growth to date while export shipments have declined from last year with the decline all attributable to the Middle East region.

Diversified manufacturing revenues were 2.8 million for the quarter, equal to the same period last year. Year-to-date after a sluggish first quarter diversified manufacturing revenues lagged last year by 5 percent. We are continuing to find new diversified manufacturing business and began production on some new business during the second quarter. Our backlog for diversified manufacturing at the end of the quarter was higher than at the same period last year and we remain optimistic about the opportunities for additional revenues.

In most cases, diversified manufacturing revenues utilized and leveraged the same physical resources as those used for irrigation equipment. Those revenues further improve our overall efficiency and diversified manufacturing continues to contribute to operating income.

Gross profit was 11.6 million compared to 12.3 million for the comparable quarter of last year. Gross margins were 22.6 for the quarter vs. 25.5 percent last year with nearly all the change attributable to the high-speed rise in steel cost.

Current steel prices reflect an increase of approximately 50 percent over prices paid during the same period last year. At the end of the quarter, we anticipated that steel prices were likely to write some but like other manufacturers the pace and magnitude of the increases were not expected. While our order inflow remained strong in the first few months of the quarter we were not able to pass through the increases as rapidly as they were realized.

On March 1st, we initiated another increase in the form of a steel surcharge on all orders which we will adjust as necessary.

We also experienced some unfavorable mix impact in our European operations resulting from the significant increase in hose reel demand vs. pivots. In general, the hose reel market is more competitive than the pivot market resulting in lower selling margins.

Hose reel demand is typically earlier in the season then pivot demand so we do not expect that to be much of a factor for the remainder of fiscal 2004. For Lindsay, in total, year to date gross margins are 21.6 percent versus 23.7 percent in the first six months of last year. All of our operations continue to implement margin improvement actions.

Total operating expenses were 1.1 million, higher in the second-quarter, resulting from higher health and corporate insurance cost, full operation of the South African unit, and significantly higher expenses for legal and other professional services associated with the newly mandated SEC and Sarbanes-Oxley requirements.

Year-to-date operating expenses are 1.9 million above the first half of last year and are currently 15.3 percent of revenues compared with 14.2 percent for the comparable period. We continue to expect to see some leverage of total SG&A expenses during fiscal 2004 and we've implemented plans and actions to curtail discretionary expenses over the remainder of the fiscal year.

Lindsay's order backlog of February 29, 2004 improved significantly to 32.3 million, compared with 20.4 million at the end of February 28, 2003, and 17.4 million at the end of February 28, 2002. Both irrigation and diversified backlog are higher.

Our balance sheet remains in excellent shape. Cash and marketable securities at February 29, 2004 were 50.3 million compared with 41.2 million at February 28, 2003. Accounts receivable were 3.1 million higher than the second quarter year and inventories were half a million higher. The higher accounts receivable are primarily a result of incremental revenue while all locations have implemented inventory management plans that are expected to result in improved inventory turns for the year, inventories increased slightly, principally due to the higher steel cost.

We did not repurchase any Company stock during the second quarter or to date for fiscal 2004. We have an existing repurchase authorization of 1.3 million shares.

The second-quarter revenues and earnings were below our expectations established at the beginning of the fiscal year. We did not anticipate how fast or how high steel prices would climb during our peak selling period. We did expect to see some increase earlier in the fiscal year as we have in some past more typical years with steel prices falling back later in the year. What we've experienced in the past 80 days is not typical. As stated earlier, we've implemented numerous price increases to our customers but we've not been able to pass through the increases fast enough to maintain our margins. While those steel prices have eroded selling margins, SG&A expenses have also run higher in the first quarter as expected.

Much of the increase -- much of the increase has resulted from expenses incurred in meeting the new SEC and Sarbanes-Oxley requirements. However we're currently taking action to more tightly control expenses in all areas feasible to partially offset those cost.

The increased cost of metals has created challenge for us beyond what we expected a number of months ago. At this time we don't believe the equipment price increases we've implemented will significantly affect demand. However we are concerned about the continuing volatility of the steel market. Following two years of improved gross margins, we're disappointed that gross margins for the full fiscal year 2004 are now expected to be below 2003.

Earnings are now projected to be between the levels achieved in fiscal 2002 and 2003. However, we remain undaunted in implementing our actions to reduce manufacturing costs, differentiate our offering, add new products, and build our market position in all of the markets in which we participate.

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

[Operator Instructions].

Alexander Paris.

American Research Associates. Good morning. Just looking at sales. Although you've become more negative on earnings or less positive because of the steel you really didn't change your thinking from earlier in terms of sales growth. Now did you say that you did not think that your price increases would effect unit sales growth?

At this point we really haven't seen an affect on unit sales growth and at this point we don't expect that it will. What we really don't know is what will still happen with steel prices in the future. So I would hesitate to say that it will not effect it because we do plan to pass through increases that we receive. But at this stage we're pretty confident and feel pretty good that we've been able to hold.

So the fact that you're passing through or hopefully passing through the steel cost so that the dollar value increase because of that would offset any unit -- reduction in unit sales. Is that what you're saying, yes, essentially?

What I'm saying is that we still expect to see revenue growth. There will be some growth in the revenue that's obviously going to come from the price increase effect but we still expect to see unit growth as well.

And your international is -- do you think -- is going to continue to offset any negative effects you see domestically. Brazil, for example, I would imagine the farmers are extremely sensitive to soybean prices there, aren't they?

Yes, they are.

And you didn't mention -- how much are soy bean prices from a year ago? Quite a bit, isn't it?

Quite a bit yes --

Probably about over 60 percent.

That's correct.

Very significant. In fact, I was just in Brazil last week and the farmers are pretty generally pretty optimistic. They have some other issues they're facing with some Asian rust on their crops but soybean prices as they are today are very attractive for farmers there and our sales and sales growth has been very good there.

Getting back to steel there are no derivatives around that you can use to hedge you know like steel scrap prices or anything like that. So you don't hedge, is that true?

We do not hedge. We have not found an effective way to do that and in prior years from time to time we've taken advantage of some opportunities to buy lower-cost steel for particular seasons of the year, but not actual hedging -- no.

In terms of your overall gross margin, you've been held back a little bit because of the start up -- lower start up margins in South Africa and Brazil and so forth. Are those margins now rising? Let's be specific -- were they up from a year ago or from a quarter ago? Your international margins?

Yes, in general, they are all improving. I think the one that's probably the flattest, comparably, is the European business. And that's because of a little different mix than what they saw a year ago. But, generally, yes -- all the businesses are making those improvements that we expected and we are seeing that.

And didn't you say in the past that ultimately you would expect the gross margins on the international business to be equal to domestic?

That's correct and we still do expect that.

Just one other thing on your cost, you said overall you are reducing your cost. Health-care -- have you done things like raising the co-pay or deductible or employee contributions and things like that that could help reduce the year-over-year increase in health-care costs?

Yes, we have, Alex. We have co-pays that we implemented a few years back and we have changed the deductibles and the co-pays as we go along.

Tim Coral (ph).

Value Holdings. You mentioned that inventories are only up slightly from a year ago. But I noticed that you went back and you restated your year ago inventories up 15 percent. Why did you restate your prior year inventories by $3 million?

That was related to a particular component that we were buying from a supplier who was placing it in our warehouse at the factory in Nebraska on a consignment type of relationship and agreement. In looking at the agreement more closely, we determined that there are some components of it that wouldn't allow us to account for it as a consignment so we restated it as a result of that. And since they have revised the agreement, so it is a true consignment and we account for it in consignment inventory.

All right.

For all new (MULTIPLE SPEAKERS) units coming in all units coming, yes, of that product of that component.

James Udell (ph).

Sidoti and Company. Rick, I was wondering if you could tell us the maximum capacity of your Brazilian plant?

I really wouldn't want to comment on that for competitive purposes, James. As I said we've more than doubled the physical capacity of that plant but there's more than one factor to it. One was the physical size and the capacity -- physical size of the facility itself plus the buildings around it and yard. And then there's the manufacturing capacity in terms of additional equipment. We've gone to the first step of that which is expanding the physical capacity but the next stage will be expanding manufacturing capability and capacity as well.

Okay so right now, you basically expanded the land and not all of -- any of your productive assets?

For the most part, that's true but that expansion of physical space and layout also expands our overall manufacturing capacity some but then there will be additional steps to expand it beyond. And just to put it into a little bit of perspective we've looked at our step into the Brazilian market as multiphased. And the first phase was a very small acquisition and a very small facility and now we're into a facility that really gives us opportunity for the foreseeable future to continue that expansion taking advantage of the entire South American market.

What was -- prior to your acquisition into the Brazilian market -- what was your export revenue coming -- going into Brazil?

Zero.

Zero. So you didn't have any Brazilian business whatsoever?

Correct.

Same with South Africa?

South Africa was probably close to 0 by the time that that start up took place. We did subsidize some shipments into that market in the previous year, trying to hold onto some dealers. What happened was the currency issue had changed to a degree where it was no longer possible for dealers to economically import U.S.-produced goods and compete in that market. So our market share had basically dropped to almost 0. And we were just holding onto some distribution so that move into South Africa gave us great growth opportunity.

Then a lion's share, then, of your export business in -- previous to these efforts -- were into the Middle East? Is that a good assumption to make?

That would be a fair assumption to make. We had strong exports into Australia, New Zealand and Mexico. But, periodically, the lion's share would have been Middle East.

And how much was that at certain points?

I think Bruce -- you could comment on the peak --

If you went back 10 or 15 years there could have been $40 to $50 million a year of exports into the middle East. More recently it would be over $5 million from time to time.

And we do see that coming back in some time and in fact, there's more activity there today than there was three months ago, but it's going to take a little time for that market to come back.

I just want to ask you one question about your impressive backlog number. It's up pretty dramatically year-over-year but do you think that's like almost a timing issue -- we're going into a very seasonally strong portion of your business -- of your year and I mean, is that backlog number a snapshot of that -- your quarter end and you know three days after your quarter ended, you began to ship that product into the market? I mean -- is basically the 32 million going to be recognized all in the third quarter?

I think, basically, that backlog will be recognized in the third quarter but I don't think it would be fair to characterize it as just a snapshot. Because our backlog was high at the end of the first quarter. Our backlog continued high through the second quarter. And order flow has actually been very good because demand has been very good. So we've seen strong demand in the market and the order of backlog has been retained at a pretty high-level.

[Operator Instructions].

Richard Henderson.

Pershing LLC. Rick, could you comment why or what areas the sales were disappointing in this quarter?

Yes, I think part of it was the Company store. You know, our shipments were down in the Company store a fair amount from what we expected and some of that was winter weather. What our store up in Washington was finding was that they couldn't get out and get deliveries into the market. So they expect that they will recover that and they'll see that later in this year but we were down in what I consider pretty sizable amounts for that Company store in Pascal, Washington so that was disappointing.

I think in a couple of areas -- outsourcing, I had hoped it would be stronger than what we saw but it was at least equal to the same period last year and we have seen some of the new projects that we were hoping to get. We're now in production on. I had hoped they would have come in a little sooner and we would have seen a little more of those going out in the second quarter but the timing of those didn't follow as I had hoped.

Second question on this, regards the surge in steel prices and your price increases. Now, with the backlog at the 32.3 million, is a lot of that price whereby your gross margin is going to take a hit and that's why you're guiding your earnings down, you know, between 2002 and 2003?

To some degree, that's true, Richard. What the situation is that this steel increases came at a tough time for us because it was during the peak of our selling period. And, typically, we are pricing orders as received from dealers and they know what that price is going to be at the time they place their orders and most of those machines are presold to growers. So they've also committed on pricing to the grower down the chain.

So for the most part that is true. That's typically how the process would work and pricing had been set. Now as we're setting the pricing and receiving these orders through the peak of our selling season, steel prices continue to decline.

Now on the pricing I noticed you went from price increases to surcharge. Kind of, strategically, if you kept the price increases and the price of steel fell, doesn't that give you the flexibility to kind of expand your margins provided demand continues strong and not have to either eliminate a surcharge or put on an increase?

Yes it does. And I think the way we looked at it was we already had implemented a number of price increases. There are also competitive and market factors that we faced obviously and we looked at the surcharge as being something palatable for the market in the short term and what our dealers understand is as the steel increases seem to stick more they will be rolled into price increases and no longer listed as we will call surcharges so it's very possible that more of that will become a different form of price increase and be more permanent.

But we're dealing with a pretty volatile situation over the past few months -- not knowing where this whole steel issue is going to go.

Right, you probably saw your competitor -- Valmont -- last week indicated and cut their expectations, but the interesting thing was that they cut the expectations on their lighting and traffic and utility type of business and indicated in their release that they expected revenues and earnings to increase in irrigation business.

I recognize they're a larger steel buyer and so forth and they might have had some contracts and so forth. Is it your sense that there's a difference in mix pricing or is there anything that we should read into -- difference between them, their ability to increase earnings and yours going south?

You know I saw that, also. You know I -- to some degree I guess I have the same question, but I cannot answer in any way what is in their thinking, regarding their costs and their pricing and that type of thing. I understand your question. I have somewhat the same question myself, but as I said, what we see in the market is what's happening with steel and what impact it's had on us.

Right. Back -- remaining on the irrigation business is it your sense, Rick, that -- I guess -- some of these favorable depreciations rules expire at the end of the year? That this is going to create kind of a bubble in demand for irrigation equipment or actually any kind of equipment?

And I think what your question is will that pose some orders up ahead of the October, November, December time frame? Our dealers believe they saw some impact of that last year, where customers were -- before the end of the year -- getting some orders placed so that they could have the depreciation -- the -- take the additional expense or cost in their calendar year 2003. It is likely that that would occur to a greater degree this year if in the end those rules do expire and are not extended past 2004.

On the diversified products group, that group deals with a wide variety of customers. With the steel issue, your pricing flexibility is much better, isn't it?

Yes to some degree well yes I would say that --

Just generally.

Generally our pricing flexibility is pretty good there. We're also passing on increases there as well.

Do you see, Rick, a demand kind of strengthening broad-based in the manufacturing industrial side -- their markets?

For diversified?

Yes. Is it your sense that things are getting brighter from a broadening out the kind of the recovery in the manufacturing industrial markets as you would see from the industrial production reports and ISM's reports and so forth?

You know, based on the things that I've seen here I think that there's some improvement in industrial sector. What I would say that our diversified people on the diversified product part of the business would not necessarily be experiencing much improvement from a strengthening of the industrial sector. But what we have done in that diversified area is really expand the kind of customer base that we're going after. We've really expanded into a number of different areas and that's brought in new business for us and many new potential customers. So what we do in terms of diversified will probably not be as affected by a strengthening of the industrial sector as it will a change in our strategy overall.

Does that mean, Rick, that this new business you alluded to with a Fortune 500 company or the types of business that you're pursuing is outside the traditional Deeres and Cats?

Yes it is. Yes it is. And we are pursuing other kinds of business outside of that traditional agriculturally equipment segment and it doesn't mean that we don't love or appreciate that as well. It's just we're seeing a lot of other opportunities out there in other sectors and that's where our new business is coming from.

Giselle Dufont (ph).

Giselle Dufont from Gabeli. I have a couple of questions regarding your international operations. Could you talk a little bit about your efforts in China and your distribution network that you're building?

Yes. I can describe them a little bit. We are building a distribution network in China. We have currently some manufacturing capability in China through -- we will call it joint venture -- but through a relationship with another company. So that we are able to produce complete units except for the parts that we export and ship to there to be assembled, but generally we can build complete units in China. And at the same time we are expanding our distribution, or dealership network, in China. So that's a process that we're in at this time.

And do you have any indication, any sales, any numbers you can give us?

You know. I wouldn't break out China as a separate piece. We have made sales in China. We continue to make sales in China. And it's one of those markets that's a hard one to pin down in terms of where it's going to be in the next year, but we see us having a presence there and a need for presence as being essential for the long-term. Because we really do think it will be a substantial market over time. So we're not ready to break that out as a specific market segment at this stage but we are there and we're building our presence.

Okay when you did you enter China?

We've really have been selling into China for a few years. We started production in China probably in the last 60 days.

All right and what about Eastern Europe. Could you talk a little bit about what you see there and any thoughts you might have on the accession (ph) that's taking place May 1st and how that might expand your opportunities in Europe and in Eastern Europe, in particular?

Well overall, we see Eastern Europe as having some excellent potential. There's a lot of agricultural land. A lot of irrigation equipment requirements. And in fact, there's a lot of irrigation equipment there as well. We are serving that out of our European operation and what we're seeing, presently, is -- we saw this last year and I think we will see it beginning this year is a larger percentage of our European sales will be in the Eastern European market. So we think that's a good opportunity for us, long-term. We've strengthened our selling capability, basically added salesperson there a year ago. And we will continue to strengthen our position in that market as well. We also see big potential in the old Russia Soviet countries and there's growing opportunities there and their financial situation is certain improving.

And the former Soviet Union countries are also served out of the European office?

Yes they are.

From the same person that serves as the Eastern European?

Correct. At this point that is the way we are serving that market.

Okay and could you maybe give a percentage for all of Europe, what is Western Europe and what's Eastern Europe and if it's you (ph)?

I really cannot break that out at this point. I would not want to for competitive purposes.

And a question about the operations in South Africa. Do you have any plans or thoughts about expanding into sub-Saharan Africa?

Yes. We do sell into the whole sub-Sahara Africa region and out of our South African facility so that facility is really there to serve all of the sub-Sahara region.

Okay and one last question. I wonder if you could talk a little bit about maybe some new technology or new products that you see? We hear a lot about precision farming and fertigation with the fertilizer through the irrigation systems and GPS controls and things like that. Are you currently using any or thinking about using any?

Well, we do. We have I think a very superb line, in terms from a technology offering, because we do have sophisticated irrigation control system and telemetry control panels and desktop operating systems that really allows the grower to integrate in fertigation injection, fertigation chemigation injection systems and soil and moisture sensing as well as the irrigation management part of it. So from one desktop, the grower can manage his irrigation, his fertigation injection and soil -- and look at his soil moisture content in his crop and his field. So it's a pretty sophisticated system. Now we do look at other technologies, for example, GPS and how that plays into it as well and have active projects in a number of those areas. But I think we have a pretty advanced offering in total for the -- from a technology standpoint in our line.

Are you finding that, for example in Brazil, is it technology sort of making a difference? Is it a comparative advantage there or is that more in the developed markets where that's more appreciated?

At this stage I would say it's more in the developed markets and part of it may be the market and part of it is our level of participation as well and by that what I mean is, in Brazil, we are achieving tremendous success in selling our equipment and some very big machines as well. We're not selling a lot of the integrated systems there yet. Part of it is because our business is fairly new and we haven't evolved to moving some of that technology in there but really that market isn't at that place and at that point yet. We are seeing it in the more developed markets.

OK and one last question about your customers in that area? Are you seeing any trends toward consolidation of the farms from going more towards co-op or corporate structures?

In what particular region?

In Brazil, mainly, and Argentina I guess -- South America, in general.

I'd say that there are a lot of very large farms, large corporate type farms there. Very substantial growers there. And we also see a lot of the U.S. corporate growers have substantial holdings in Brazil and are farming a lot of land there. So while some of them in fact -- I would say that in some cases -- our customers in U.S. -- maybe the same customer in South America and in South Africa and possibly other areas as well.

Alexander Paris.

Barrington Research. I have a number of questions on foreign but that previous caller just asked most of them. Just to summarize I am interested that you have really accelerated in China lately and I imagine Australia and in that area is a good potential, too. Would you be more likely to -- if you expanded X manufacturing in that region to more likely put it into China where the costs are lower and service Australia and New Zealand out of there or is that Australia New Zealand, potentially, a big enough area, region to have manufacturing in there eventually?

Alex, at this point I'd think I'd say we would serve it from production in China. The Australian/New Zealand market has been an excellent market, good agricultural market and it's been a large export market for us in total. But it's not large enough at this stage that would probably warrant us setting up production there. We would serve it out of China or continue to export from the U.S.

And just looking at Eastern Europe. Given in that's growing as a portion of your business and again there's probably lower-cost there, would that be big enough potential to start manufacturing some place in Eastern Europe? Or switching from Western Europe to Eastern Europe?

That's definitely a possibility. Right now, our focus with each of our foreign operations in general has to stay -- has been to stay with some level of flexibility and we've definitely done that in our western European operation in terms of keeping it fairly small in size and keeping some flexibility. So it's possible. But at this stage I don't believe that market warrants moving our operations to it yet.

Just one other question particularly since your cash is going up. You talked about a new technology products but is there any kind of lower tech product area that you do not have in your distribution channel now that you could add? Like you added the hose technology? Or product line with your European acquisition? Is there some significant product that is what you're already -- with the manufacturing skills that you already have that you could add with an acquisition?

Sure. You know there's really a number of different areas we go in terms of acquisitions. And our acquisition candidate list and potential area list is really pretty long, pretty extensive. But it would include things like low volume or drip irrigation filtration systems, used in irrigation or other kinds of water. Valves and other types of control. There's also -- what we see receive from time to time -- there's some interesting technologies that pop-up that could be nice little add-ons but the sizable ones are probably more in those kinds of hardware areas, of the low volume dripper irrigation and filtration and things of that nature.

And California. They're always talking about water shortages there but any significant moves or developments in California that could change things there, in terms of just conservation?

Nothing, Alex, that I've seen that's really significant. You know, we're in that market. We do think that that's an important market as well to be in for the long-term, but we've never seen really rapid change or growth take place there. But we are in that market and we will continue to see some growth over time. But nothing significant in terms of change.

[Operator Instructions].

Stephen Bramlett (ph).

, Meteornomics. My question regards sales projections. I'm curious, Rick, if they're based on a normal climatology in North America or if you're factoring a boost in sales -- basis sort of the continuation of drought that we had in the West and the Midwest over the last few years?

I think I would characterize it more as a normal climatology than just a continuation of drought. However, in our case, a significant amount of our demand has taken place in the sense that we're in the peak of our selling period and we're seeing this order flow and a lot of it will track with what's happened in previous years in terms of the growers' experience. So for example if there was -- the drought last year -- that affected their crop or their ability to grow, that will (ph) encourage them to buy and change their irrigation or install irrigation this year so while we don't really forecast on the basis of looking at an abnormal climatology or necessarily forecasting droughts, what we do see is the impact or implications of previous droughts in last year's climate in general.

Mark Cooper.

Pequot Capital. Rick, the question I have is regarding the customer reaction to you imposing still (ph) charges. Can you talk about how they reacted over the last few weeks and your expectations on your ability to collect them going forward?

Yes. Surprisingly or maybe not surprisingly, I've been a little surprised they've reacted fairly positive. Dealers have not been real surprised, they're pretty aware of what's happening in the market in terms of steel pricing and what's happening in other industries. In fact, from our dealer standpoint they're not just seeing it from our commitment they're seeing it from other things they buy as well. So their reaction to it has been pretty -- overall, pretty favorable and pretty positive -- and I think the grower is understanding it and, fortunately, the grower is currently facing some pretty favorable conditions with commodity prices and low interest rates and things of that nature. So, overall, I would say we have not really seen any effect on demand. The going forward part is the part that we really don't know because it comes back to the volatility of the steel market going forward. We really don't know where the steel prices will lead. At this stage, we feel pretty comfortable with the impact to date in terms of minimal impact on demand.

Okay thank you and then one last question. Can you comment on the availability of steel today I mean to date? And kind of how much do you worry about the supply chain going forward and to get what you need to manufacture?

We do worry about it, we do talk about it as well as the pricing although our manufacturing people at this stage feel pretty confident and comfortable that they will have the supply to meet our projections and our forecast. So at this stage they feel pretty comfortable with that.

Thank you.

[Operator Instructions].

Gentlemen, at this time, we appear to have no further audio questions. Please continue with any further statements.

Our strategic initiatives are international expansion, product line expansion, parts programs and depots and the addition of integrated system components are all generating growth for Lindsay Manufacturing. While we're disappointed with the current effect of cost increases for metals on our margins in profitability, our ongoing initiatives to differentiate our product offering, improve product cost and control expenses will continue unabated. The global long-term market drivers for our business remain very strong. In addition to the overall business enhancements that have taken place we continue to have an ongoing structured acquisition 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, financial flexibility to create shareholder value by pursuing a balance of accretive acquisitions, organic growth opportunities, share repurchase, and dividend payments.

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