Lindsay Corp (LNN) 2004 Q3 法說會逐字稿

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  • Operator

  • Good morning everyone 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 any assistance at any time during the conference, please press the star then zero on your push button phone. As a reminder this conference is being recorded today, Tuesday June 22, 2004. I would now like to turn the conference over to Ms. Diane Hettwer, please go ahead ma'am.

  • - Analyst Inquiries

  • 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 third quarter ended May 31, 2004. If you need a release please call the Financial Relations Board at 312-266-7800 and the assistant Karen [Troboult] will send you another copy. Joining us today from the management team of Lindsay Manufacturing we have Rick Parod, President and CEO, Bruce Karsk, EVP of Finance and CFO, 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 would 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 on its web site which can be viewed at www.lindsaymanufacturing.com. At this point then, I would like to turn the call over to Rick. Rick, you can go ahead.

  • - President and CEO

  • Good morning and thank you. Total revenues for the third quarter of fiscal 2004 grew 28% over the same period last year. Earnings per diluted share were 36 cents. Versus 41 cents for the same period last year. Reflecting a continuation of the adverse effects of soaring fuel costs. In recent weeks, fuel cost increases have slowed. Allowing our pricing to end users to mostly catch up. And at this time, we anticipate modest additional steel cost increases in the next couple of months and then leveling off.

  • Operating expenses for the quarter were approximately 800,000 higher than last year, due to increased insurance and legal costs. Our total backlog at the end of the quarter was 19.8 million. Which was the largest third quarter backlog in four years. In the domestic irrigation market, revenues rose 22% over the same quarter last year. During the quarter, steel costs continued to rise seen in the second quarter of fiscal 2004. And we passed through price increases of approximately 5% during the quarter, in addition to the increases initiated earlier in the year. To date, we've raised our net prices to dealers by over 15% in response to the significant increases in steel costs. Overall, the domestic irrigation market remains solid. While commodity prices have softened some from their highs earlier this year, prices for corn, soybeans, wheat, remain well above the price levels of this time last year. The strong commodity prices as well as dry weather in key markets have supported favorable selling conditions. Severe drought conditions recently described as the worst in 500 years have driven exceptional increases in the western states. To date domestic irrigation revenues are up with 13% over the same period last year, including the price increases implemented. Units shipped are also higher than last year.

  • Our domestic order backlog remains very strong, up more than 80% from the same period last year, driven primarily by market demand in the price increases implemented. Throughout the third quarter, we continue to experience a strong order flow reflecting the positive agricultural commodity price environment, as well as dealers and growers anticipating additional price increases. For farmers, conditions remain relatively favorable, given current commodity prices and low interest rates. Current cash prices for corn, beans and wheat are up 24%, 39% and 13% respectively. However, futures prices are lower anticipating a high '04 production level. While interest rates are beginning to move upward overall, rates are still favorable for financing equipment purchases. In view of the drought conditions, the heavy emphasis on water efficiency, utilization, is expected to continue to drive demands for irrigation equipment in the western region in the U.S.

  • In the international markets, including exports, we experienced an increase in revenues of 49% in the quarter over the same period of a year ago with approximately 10% of the revenue growth resulting from the currency exchange rate changes. Shipments from our operations in South America, South Africa, and Europe, while significantly higher, than the same period last year. Our operations in Brazil continue to benefit from strong demand, partially attributable to the rise in soybean prices, and they are now fully operational in their new facility. Orders for hose reels from our European operation also remain strong in anticipation of another dry summer in Western Europe. Higher corn prices have improved market demand for our operations in South Africa. Subsequent to the end of the quarter we announced the acquisition of Stettyn, a competitor in the pivot market in South Africa. Stettyn produces a line of pivots different in size and price from the Zimmatic machines offered by Lindsay Africa, which was established last fiscal year. We will continue to produce and sell both brands of irrigation equipment in the Sub-Sahara market. For the third quarter our export revenues were up from the same period last year demonstrating healthier exports to Mexico and the Austral-Asia market while exports to the Middle East remain low.

  • Year to date, international revenues including exports are up 26% over last year, and our order backlog at the end of the quarter was up more than 45% at the same time last year. Each of the international locations achieved double digit revenue growth over last year for the third quarter, and for year to date. Diversified manufacturing revenues were 3.5 million for the quarter and were up 18% from the same quarter last year. We are continuing to find new diversified manufacturing business, and began production of some new business during the third quarter, with additional new contracts expected in the fourth quarter of fiscal 2004. Year to date, after a sluggish first quarter, diversified manufacturing revenues now exceed the same period last year by 3%, with much of the increase attributable to price increases passed through to offset steel cost increases. Our backlog for diversified manufacturing at the end of the quarter was more than 55% higher than at the same period last year. And we remain optimistic about the opportunities for additional profitable revenues. Diversified manufacturing revenues utilized and leverage the same physical resources as those used for irrigation equipment, and those revenues further improve our overall efficiency. Diversified manufacturing continues to contribute to operating income.

  • Gross profit was 13 million compared to 12.5 million for the comparable quarter last year reflecting the higher volumes. Gross margins were 20.9% for the quarter versus 25.6% last year, with nearly all the change attributable to the rising steel costs. Current steel prices paid are more than double the prices paid during the same period last year. While our order inflow remains strong throughout the third quarter, we continue to lag in passing through the increases to our customers. As stated earlier, we've seen recent softening in steel increases and while we believe we may realize some additional steel increases during the next couple of months, margins are now beginning to normalize. Numerous changes are being implemented to reduce the potential impact of future increases in cost of key materials. We've invested in a multi-million dollar project to expand our manufacturing capacity in the U.S., by expanding our capacity, we will improve our overall through put and improve our ability to produce and ship product at the peak of our season and reduce our fixed price order backlog. In addition, we've made changes in our pricing policies with dealer, to allow us more flexibility in adjusting prices on orders not yet shipped when necessary.

  • Year to date gross margins are 21.3%, versus 24.4% in the comparable period last year. All of our operations continue to implement margin improvement actions, and we've seen the benefits of scale and efficiency improvements in our new international operations that we expected. However, those improvements have been partially offset by higher material costs. Total operating expenses were 800,000 higher in the third quarter resulting from higher corporate insurance costs and significantly higher expenses for legal and other professional services, associated with the new SEC Sarbanes-Oxley requirements. Operating expenses as a percentage of revenue improved to 11% from 12.4% in the same quarter last year. Year to date, operating expenses are 2.6 million above the same period last year and are currently 13.5% of revenues which is slightly better than last year. We continue to expect to see some leverage of total SG&A expenses during fiscal 2004. Lindsay's order backlog at May 31, 2004 improved significantly to 19.8 million compared with 12.2 million at May 31, 2003, and 12.6 million at may 31, 2002. Both irrigation and diversified backlogs are significantly higher.

  • Our balance sheet remains in excellent shape. Cash and marketable securities at May 31, 2004, were 57.2 million, compared with 54.2 million at May 31, 2003. Accounts receivable were 7.1 million higher than the third quarter last year. Resulting from the higher sales level. And inventories were higher by 1.7 million, primarily due to the higher steel costs. We did not repurchase any company stock during the third quarter or year to date for fiscal 2004. We have an existing repurchase authorization of 1.2 million shares.

  • In summary, revenues remain stronger in the third quarter. However, earnings were below our expectations established at the beginning of the fiscal year, due to the unanticipated rise in steel costs. As stated earlier, we have passed through numerous price increases to our customers but we were not able to pass through those increases fast enough to maintain margins similar to the prior year. Following two years of improved gross margins we're disappointed that gross margins for the full year of fiscal 2004 are now expected to be below 2003. At this time, we continue to believe that the equipment price increases we have implemented will not significantly affect demand and are likely to stick, at least for the near term. We plan to diligently maintain our pricing policy.

  • In addition to the higher steel costs, SG&A expenses have also ran higher than expected with much of the increase resulting from expenses incurred in meeting the new SEC and Sarbanes-Oxley requirements. However, we are continuing our initiative to tightly control expenses in all areas feasible to partially offset those costs. While margins are now normalizing and revenues continue to remain strong, we anticipate fiscal 2004 earnings per share will be slightly above the level achieved in fiscal 2002 which was 90 cents per share. Beyond 2004, we remain very optimistic about the opportunities for continued growth through the execution of our business strategies. I'll now open it up for questions.

  • Operator

  • Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press the star followed by the one on your push button phone. If you would like to decline from the polling process, please press the star, followed by the two. You will hear a three-tone prompt acknowledging your selection. And your questions will be polled in the order they are received. If are you using speaker equipment we do ask that you lift the handset before pressing the numbers. Our first question comes from Alexander Paris with Barrington Research Associates. Please go ahead.

  • - Analyst

  • Good morning.

  • - President and CEO

  • Good morning.

  • - Analyst

  • Very nice quarter at the top line, you know, except for the steel costs. Were the -- were you surprised at the top line growth? Was it better than you anticipated for the quarter?

  • - President and CEO

  • Well, I think that -- I don't know that I would call it surprised.

  • - Analyst

  • Say at the beginning of the quarter, is it higher than what you were looking at?

  • - President and CEO

  • I think the revenue came in slightly stronger, the demand kept up throughout the quarter, so we were pleased with that. And I think it's a combination of the commodity prices and still the drought conditions, dry conditions, so demand remained very strong. It was slightly better than what we expected in term of that demand.

  • - Analyst

  • What about -- what part of the sales, if any, came from acquisitions during the quarter, incremental sales?

  • - President and CEO

  • Nothing. Nothing.

  • - Analyst

  • Okay. The international was also very impressive, up 49%. Could you give us -- what is the actual dollar amount of international sales in the quarter?

  • - President and CEO

  • Yes, let's see, in fact it is in the slide deck --

  • - EVP of Finance and CFO

  • 36.4 million.

  • - President and CEO

  • No, that's --

  • - EVP of Finance and CFO

  • I'm sorry.

  • - President and CEO

  • 15 million.

  • - EVP of Finance and CFO

  • 15 million, yeah.

  • - Analyst

  • What is it?

  • - President and CEO

  • 15.

  • - Analyst

  • 15 million?

  • - President and CEO

  • Yeah.

  • - Analyst

  • And looking at this South Africa, now that you've-- the combined capacity there, just to give us an idea, if you were operating at full capacity, what kind of sales could you generate from Africa? Do you have any rough idea?

  • - President and CEO

  • You know, I don't think I could really answer it exactly that way, Alex, in terms of capacity. I think there is -- just to explain the Stettyn piece of it at this stage there are two different locations. One is our Lindsay South Africa which is in Capetown and Stettyn is in Bloemfontein, quite a ways away.

  • - Analyst

  • Right.

  • - President and CEO

  • And at this point we are going to continue with those two locations as is. There is a time in the future where we see that coming to one location. But that is when -- after a reasonable understanding and integration period of really understanding the product and markets and a number of other things. We don't want to rush to really try and combine this and create a, you know, maximum capacity at this stage.

  • - Analyst

  • Could you say that you doubled your capacity in South Africa with the acquisition?

  • - President and CEO

  • Yes, I would say that this acquisition probably more than doubled our manufacturing and revenue capacity.

  • - Analyst

  • Okay. And then Brazil, you've already said you just doubled that didn't you?

  • - President and CEO

  • Right.

  • - Analyst

  • And then in Europe, Europe was up, too. You said all the areas were up, right?

  • - President and CEO

  • That's correct. All double digit growth for the quarter and year to date.

  • - Analyst

  • Is the drought -- how is the drought in Europe? Is that as bad as our western drought?

  • - President and CEO

  • Well, last year was a very severe drought. And if you recall, the news last year, there were, you know, quite a few deaths from the, you know, hot conditions, and the dry conditions. And right now, they're anticipating an additional or continuation of that drought to some degree. So I don't think I would compare it to the western drought, which has been obviously a very deep and long-term drought. But it is -- it appears that it is going to be a multi-year drought.

  • - Analyst

  • And is there anything that you can say about Eastern Europe? Have you made any progress there? I know you did that sample study or whatever you want to call it, pilot plant, a couple of years ago. Is anything happening in Eastern Europe?

  • - President and CEO

  • Yes, you know, we continue to have revenues from Eastern Europe, our business in Europe has had quite a bit in the last couple of years, particularly from Romania, but in addition to that, we have a couple of sales people who have done work there recently, just in the last couple of month, made trips there, and are following some specific projects. So we see not only new opportunities, but it seems that there is a bit of an increased pace of opportunities arising in that region.

  • - Analyst

  • Okay. Just to finish it up then, on the international, could you give us an update on what is happening in China with your moving into that area, you mentioned last time?

  • - President and CEO

  • Yes, we developed a plan for China which started out as a fairly -- I think a conservative plan of initially buying some parts, and then producing some structural items, and setting up some distribution there, and that's progressing to the point where we can now provide complete structure from there. From that location. And we have a very small but the beginning of a distribution network set up there. And we see that continuing. In fact, we have an ongoing -- at least monthly meeting on -- specifically on China to continue to develop that opportunity in a pragmatic way.

  • - Analyst

  • Could you anticipate at some point in the future where you would be servicing Australia, New Zealand out of China because of lower costs?

  • - President and CEO

  • Yeah, think that is possible and in fact it could be very likely that we will do that. And certainly in that market, what we've seen is they seem to be very receptive to products from the region or from China, specifically where some areas, for example, the Middle East, are not as much so.

  • - Analyst

  • But you're doing it for a combination of lower costs and also to address the China market, though, too, right?

  • - President and CEO

  • Yes, and I would put the address the market first, and I think that, you know, we view that in order to be in that market, play a role in that market, a significant role long-term we need to have the presence there and that became the first priority and the cost reduction part is important, but the number one priority is to -- is to really have that presence in the market.

  • - Analyst

  • Well years ago, I'm sure they have the large community -- Communistic farms, I guess whatever you want to call them, so is the average size of the farm -- I know there is a lot of small ones in the backyards and so forth, but do they have large individual farms that may be going private? In terms of your market.

  • - President and CEO

  • Yes, you know, there is a real combination, there is obviously some small farms and there is some very large farms, also. And it varies by region. It is obviously a very big country. Vast in size. And some areas have very large farms, land and farm regions or areas, but maybe limited on water and there's others with plenty of water and also large farms so it really varies by region but yes there are some very large farms there.

  • - Analyst

  • Okay. Thank you very much.

  • - President and CEO

  • You're welcome. Thank you.

  • Operator

  • Thank you. Our next question comes from [James Shinteal] with Sidoti & Company. Please go ahead.

  • - Analyst

  • Good morning, gentlemen. I had a problem with the call-in number so I don't know how long the queue is going to be. Your diversified manufacturing business is up about 18%. Are the movements that you made kind of in the second half of last year going to be sustained? Are we going to see this $3.5 million revenue run rate quarterly now?

  • - President and CEO

  • Well, definitely, the moves will be sustained. I think what we found with the moves in terms of appointing a business manager, having a different type of sales approach, and approach in terms of structuring the business, as more of a complete business unit, was the right approach, but it took a little longer to really get the -- to get some of this new business in. What we're seeing is a flow of that new business now. It had a long gestation period to come to fruition.

  • - Analyst

  • Sure.

  • - President and CEO

  • But we're seeing that flow now. And it is an interesting flow of pretty diverse kind of business as well. So I wouldn't at this point peg a number and say it is going to be a 3.5 million consistently. I think that we have enough new still coming into the hopper that it -- we don't really know where it will be in the next year. But it is definitely on the right track and we're seeing the results from the work that was put into it.

  • - Analyst

  • So these are more shorter term projects then? Instead of longer term commitment -- manufacturing commitments from customers?

  • - President and CEO

  • No, I wouldn't say that. In fact, one of the projects that we're -- we've been working on for quite a while and hasn't been completed yet in terms of a contract, is one that is a multi-year contract right up front, and we would hope it would be a very long-term project. It could be a, you know, a substantial one. And even the new business that we're seeing some of the revenue on today, they are not short-term projects. They are long-term projects.

  • - Analyst

  • Okay. And your SG&A expenses they're significantly higher year over year, obviously, given the moves that you're making in internationally. Are we expecting then some potentially one-time, if you will, expenses to not recur next year? As your international business -- as your international growth story starts to slow a little bit. Or are the new $2.8 million quarter in selling and 3.3 million in G&A, is that pretty much now a fixed number?

  • - President and CEO

  • James, I think a couple of significant things that have really added to the SG&A this year were higher insurance costs, and legal and other professional services associated with the SEC Sarbanes-Oxley. In fact, those were higher and more significant than the incremental costs associated with the new international operations.

  • - Analyst

  • Okay.

  • - President and CEO

  • So I think in really looking at it, yes, the international operations did add to a higher run rate and SG&A, but these other factors also did. And some of it would not be repeated in the sense that they may be one time. Certainly some of the SEC Sarbanes will be more one time. But there will be higher incremental ongoing costs associated with that as well.

  • - Analyst

  • How have you been able to kind of quantify how much that is costing you a quarter?

  • - EVP of Finance and CFO

  • We have an amount that we know that it is costing us per quarter. You know, the portion of it that repeats, and the portion that goes away isn't clearly budgeted out or defined yet. But we do -- we have -- we simply aren't -- really don't want to disclose that piece.

  • - Analyst

  • Fair enough. And what percentage of the -- your irrigation top line growth was caused by your higher prices to kind of offset the materials costs?

  • - President and CEO

  • I'm sorry, could you repeat that?

  • - Analyst

  • What piece of your growth on the irrigation side of the business in the May quarter consisted of just generally higher average selling price and not necessarily more systems? Is that not clear?

  • - President and CEO

  • Yeah, that is clear. I think the answer is, it's a few percent is and it is probably in that 2, 3, percent range on the domestic irrigation revenues is price impact from prices put into effect. Now the actual prices put into effect were significantly more. But obviously, some of that was price protected in our backlog as those orders came in.

  • - Analyst

  • Right. So then looking out into August and then potentially carrying forward into F '05, we're expecting higher average selling price?

  • - President and CEO

  • Correct.

  • - Analyst

  • By about 5%ish or more?

  • - President and CEO

  • I think you can expect higher than that in terms of average selling price.

  • - Analyst

  • Okay.

  • - President and CEO

  • We look at this next fiscal year, you know, we anticipate margins given whatever is going to happen with steel, we still don't know in the next couple of months but it really looks like it is starting to level off. We anticipate margins coming back to levels that were more comparable to the '03 year.

  • - Analyst

  • Okay.

  • - President and CEO

  • Versus where we are today.

  • - Analyst

  • Fantastic. Thank you. Good quarter.

  • - President and CEO

  • Thank you.

  • Operator

  • Thank you. Ladies and gentlemen, if you have an additional question, please press the star followed by the one. And if you are using speaker equipment, you will need to lift the handset before pressing the numbers. And our next question comes from [Matthew Stan] with TCW. Please go ahead.

  • - Analyst

  • Thank you. Good morning. I'm sorry I missed some of the call due to the dial-in number. I had a question about steel. Does Lindsay have a hedging program with steel? And could you go through a couple of the efforts that you enacted to mitigate the rise in steel prices? Thank you.

  • - President and CEO

  • Yes, good morning. We do not have a hedging program per se. And just to cover some of the actions in terms of what we saw that really impacted us or how steel impacted us there are a couple of different things that have been done. One is we're focused on improving our overall capacity, increasing our manufacturing capacity, and part of the reason for that is, as we looked at how our order flow comes in, our backlog builds up pretty significantly in the -- prior to the peak of our shipment season, and our peak shipment month, because we really can't ship everything, build and ship everything at the peak of the season, with our given capacity levels. So our backlog builds up and the pricing unfortunately is pretty well locked in at that time and our dealers have sold that product and have committed on pricing as well. And then we work through that production process and get those units shipped. So the more we can improve our capacity, increase our capacity, and really speed up the responsiveness, our time to market, the better off we will be from a pricing standpoint in terms of protecting against rising material costs. That's one action.

  • Another one that we've taken is changing our pricing policy with dealers to give us more flexibility in that on orders that are received inhouse and priced, are that we have the flexibility to be able to modify the price, pending -- or in view of rising material costs. So for example, now on an order coming in, if it isn't shipped within say a 30-daytime period, we do have the opportunity to change that price, if needed, based on rising material costs. In addition to that, we've really tightened up internal pricing policies and procedures, to really ensure that we've got, you know, good control, good practices, in terms of maintaining our pricing discipline and policies that are in place. So there is quite a few actions. Another one that we're really planning on is when it appears to be the right time, we will maintain a level of inventory of steel for production purposes. This isn't the time, in fact I don't think we could lay in some volume or quantity of inventory on hand if we wanted to right now, because we haven't had that kind of steady flow of material. But at the right time, we will add some material and maybe maintain an inventory of say 30 days of steel that will also help, because that 30 day window of being able to have that supply on hand would give us 30 days of being able to pass through price increases.

  • - Analyst

  • Excellent. Thank you very much.

  • - President and CEO

  • Thank you.

  • Operator

  • Thank you. Our next question comes from [Boyd Bossen] within A.G. Edwards. Please go ahead.

  • - Analyst

  • Good morning. Can you give us any feel on the accelerated depreciation, how much of effect that has had with any of the purchase decisions? And then also, could you update us on the Washington dealership and the parts and accessories business?

  • - EVP of Finance and CFO

  • The accelerated depreciation, you know, we now it has some impact, and it expires this year, but the impact is -- we're not able to measure it in any way. It is brought up from time to time, by some of our dealers and customers, but we cannot make -- we don't have a way to measure that at all. And the second question, Boyd?

  • - Analyst

  • The update on the Washington, state of Washington, the dealership you have up there, and an update on the parts and accessories business.

  • - President and CEO

  • Yes, on the -- we're pleased with the Washington business, irrigation specialists, they've been doing a good job. Their season started out a little slow this year, due to some wet weather in the first and second quarter. But they're coming back and coming back pretty strong. So that business is operating really pretty well. It contributed a lot last year and it is doing well this year. In terms of the parts business, that, too, is doing pretty good. I think we have more opportunity in parts than what we have realized today. But our parts business is -- does continue to grow. We now have two parts depots that we did not have a couple of years ago. One in Texas and one in Idaho. And we are seeing increased volume as we've added in, and really structured it more, defined parts business, with a business manager and added those parts depot, we are seeing growth and I think we have significant opportunity to expand our parts business still in the international markets.

  • - Analyst

  • Would this be by some acquisitions or would you add more parts depots?

  • - EVP of Finance and CFO

  • Well, I think we would consider either, but I think through our existing businesses in the international markets, now that they're further along in maturity, and have really progressed over the last year, we're in a good position to really start focusing on expanding our parts business there. In many of those markets, particularly South Africa, Western Europe and then -- well and throughout south America, there are a lot of Zimmatic machines that were exported to those regions years ago over the years and others have really picked up that parts business so there is a significant parts opportunity there.

  • - Analyst

  • Okay. Thanks.

  • - EVP of Finance and CFO

  • Thank you.

  • Operator

  • Thank you. Our next question comes from [Dick Henderson], [Hershey] LCC. Please go ahead.

  • - Analyst

  • Yes, good morning. Quick question on the parts business, Rick. What, just roughly, what percentage of the irrigation revenues would parts now occupy?

  • - President and CEO

  • It is roughly in the 10% -- 10% range.

  • - Analyst

  • Okay. And what would you consider the potential there? I mean would the -- could you grow that business to 20% of revenues? I mean is that kind of potential?

  • - President and CEO

  • Certainly it feels at 15% is reasonable and achievable and I'm not sure about 20. But I think somewhere in that, you know, 15-plus or minus a bit is probably a little more realistic. But I think there is still a lot of opportunity. And I don't know the answer fully until we get a little better, stronger position in some of the international markets.

  • - Analyst

  • Okay. What was the influence of mix thus far this year? Are more people going to the more sophisticated systems? You know, which would be part of your strategy? Is that kind of panning out?

  • - President and CEO

  • Well the strategy is panning out. I think that we are seeing a good customer base going for the more sophisticated integrated systems and we are also making some good progress with what we would call the key or corporate accounts. So we continue to pick up business there and continue to strengthen our position there. But I think we've seen some other things in terms of mix this year. And we do see some shifts from time to time I think in some respects our mix this year were for some smaller machines than what we have seen in the previous year, and some of that has to do with the regions and markets in which we see the sales growth. So we are seeing progress from the strategy standpoint. But we will still from time to time see other impacts on our margins or sales on a mixed basis due to the size of machine, or the specific markets being sold in.

  • - Analyst

  • Is that -- the business, in the mideast, just broadly speaking, is that at a low point? Is it still headed south? Or you can't really tell?

  • - President and CEO

  • Well, I would describe it as a low point. In the sense that there really isn't much activity there in terms of new machines going in presently. There's parts business and some replacement things. But I think it really is at a low point. I would expect it to improve. Now, you know, how soon? I don't think any of us really knows that yet.

  • - Analyst

  • Just rough, Rick, where would you say the business is compared to say, you know, five years ago? Or three years ago? Just kind of reference point, if it was 100 back then, is it 50, 75, I mean what kind of upside would there be if we had some more normal conditions there?

  • - President and CEO

  • Right now, I would say I would put it at about 25%.

  • - Analyst

  • Okay. A question on the strategy to mitigate the raw material price increases. The increase in capacity domestically, kind of rough, what would it be percentage wise, and how much is it going to cost? Maybe Bruce can chime in and give us the capex expenditures for this year, next year, and the depreciation and amortization for this year and next year.

  • - President and CEO

  • Yeah, I think the -- in terms of the amount of work that's being done, the current project they're working on that I refer to is about a $3 million capex project in terms of expansion of capacity. I think it expands our capacity in the peak period, peak months, probably in the range of 15 to 20%, probably in that 15% level. Which may not sound like a lot but in those peak months is, plus it alleviates a bottleneck that is very difficult to get around in some ways. So in this case it could -- it gives us more flexibility to pre-build, even prior to the beginning of the season, and then gives us even more capacity in those peak months. But somewhere in that range. Now, that is the first project. But I would also add that we are continuing to look for and work on additional projects to expand that capacity in the U.S. operations.

  • - Analyst

  • Okay. And --

  • - EVP of Finance and CFO

  • On the capital expenditures, for the full year, we would anticipate that full year '04, that they will be in the 4 to 4.5 million range. They're 3.3 million through the end of the third quarter. And the depreciation will be somewhere in the full-year, somewhere in the 3.2 million range.

  • - Analyst

  • All right. How about '05, Bruce?

  • - EVP of Finance and CFO

  • '05 depreciation will move up a little bit. It will be closer to 3.5 million range. And the capital expenditures, we're still doing the budgeting for '05, but we would expect them to be similar to the '04 level.

  • - Analyst

  • And Rick, back on the capacity addition, you obviously, that would give you more room to expand your diversified products business, and you sound optimistic there. So I guess you would -- you would leverage it both ways, in terms of getting the smoother flow in your -- in the irrigation business, and also if you could fill the plant to leverage the fixed assets via the diversified products, is that right?

  • - President and CEO

  • Generally speaking, that is correct and anything we do in terms of expanding capacity is leverageable across both pieces.

  • - Analyst

  • Okay. Thanks very much.

  • - President and CEO

  • Thank you.

  • Operator

  • Thank you. Our next question is a follow-up question from Alexander Paris. Please go ahead.

  • - Analyst

  • Just going back to steel prices, you mentioned-- the price increases you talked about 15%. Is that the 3%, December the 3%, February and then a new 5% and then the difference being the surcharge?

  • - President and CEO

  • I think that is correct. Yeah, that is about right, yes.

  • - Analyst

  • Now, you may not expect it but what happened to steel prices dropped sharply and surprised you because of China or something like that? Would you be able to keep these price increases say long enough at least until you brought your costs in line and then they would -- some at least would maybe dissipate as your dealer say, hey, well, steel prices are back down how about, you know, changing this, reducing the prices a little bit. Or do you think they could hold even if steel prices backed off for a while?

  • - President and CEO

  • I think that -- you know I believe at this point that these prices will stick for the short term. I don't know how long. Our intention would be to maintain our pricing discipline and to hold these as long as we can.

  • - Analyst

  • So some of the price increases would have come even without the steel costs, is that right?

  • - President and CEO

  • It would have, yes.

  • - Analyst

  • Okay.

  • - President and CEO

  • I think that this created a situation of moving up equipment prices that -- to some degree, hadn't moved much in recent year, and maybe needed to move up anyway. So we will maintain the discipline as much as we possibly can. And obviously it depends a lot on the competitive environment.

  • - Analyst

  • Early in the conference call I couldn't get it all, but you mentioned three key commodities, corn I think up 24% year over year and then two other one, beans maybe and one was up 29% I think and up --

  • - President and CEO

  • Yeah I mentioned corn, beans, and wheat. And the percentages that I referred to were -- if I can find those. 24% for corn, 39% for beans, and 13% for wheat.

  • - Analyst

  • Okay. Good. Thank you just one other thing. In the other income and expense area, you went from a year ago 246,000 income to 53,000 expense this year. What was that change, is that currency or what?

  • - EVP of Finance and CFO

  • We had some currency gain in the -- almost all of last year's, fiscal '03, was currency gain.

  • - Analyst

  • Okay.

  • - EVP of Finance and CFO

  • And we had a slight currency loss this year in the quarter.

  • - Analyst

  • Okay, And just one other thing. Oh, in the -- the operating expenses, the biggest -- generally, you did pretty much, general expenses -- or operating expenses went up less than half of sales. The one that went up the most, general and administrative, up 19%, will that stabilize at that higher level or is that where you put the insurance and the Sarbanes expenses?

  • - EVP of Finance and CFO

  • That is where most of the insurance and all of the Sarbanes related expenses reside, yes.

  • - Analyst

  • Okay. And I think that's it. The tax rate is going to stay roughly the same at, what, 32%?

  • - EVP of Finance and CFO

  • We should stay in that 32, slightly, 33% range would be our expectation.

  • - Analyst

  • For the 2005, also?

  • - EVP of Finance and CFO

  • Yes.

  • - Analyst

  • Okay. Thank you very much.

  • - EVP of Finance and CFO

  • Thank you.

  • Operator

  • Thank you. Ladies and gentlemen, if you have an additional question, please press the star followed by the one. Gentlemen, at this time we have no further questions.

  • - President and CEO

  • Okay. For our business, the global long-term drivers of water conservation and improving farm efficiency remain very positive. While we're disappointed with the short-term effect of cost increases for metals on our margins and our profitability, our ongoing initiatives differentiate our product offerings, improve product costs and control expenses will continue to enhance Lindsay Manufacturing's profitability. Our strategic initiatives of international expansion, product line expansion, parts programs and depot, and the addition of integrated system components are all generating growth for Lindsay. 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 world-wide leader in providing intelligent water and plant nutrient management systems, we have strong cash flow, and financial flexibility to create shareholder value, by presuming a balance of accretive acquisitions, organic growth opportunities, share repurchase, and dividend payments. We would like to thank you you for your questions and participation in this call. Thank you.

  • Operator

  • Thank you. Ladies and gentlemen, this concludes the Lindsay Manufacturing Company third quarter results conference call. If you would like to listen to the replay of today's conference, please dial 303-550-3000 or 1-800-405-2236, and you will need to enter the access code of 11001195 pound. And thank you for participating in today's conference. At this time you may now disconnect.