Lindsay Corp (LNN) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Lindsay's Manufacturing Company first quarter 2005 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. (OPERATOR INSTRUCTIONS)As a reminder this conference is being recorded today, Wednesday, December 22, 2004. I would now like to turn the conference over to Ms. Diane Hettwer.

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 of 2005 ended November 30, 2004. If anyone has not received their release please call the financial relations board at 312-266-7800 and ask for (indiscernible) who will send you another copy.

Joining us today from the management team of Lindsay Manufacturing we have Rick Parod, President and Chief Executive Officer, Dave Downing, Vice President and Chief Financial Officer and Bruce Karsk, Executive Vice President of Finance and Treasurer. Management will provide an overview of the quarter and then we will 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. At this point then, I would like to turn the call over to Rick. Rick, you can go ahead.

Thank you. Good morning, thank you for joining us today. Revenues for the first quarter of fiscal 2005 rose 9 percent to $39.8 million, from $36.5 million for the same prior year quarter. Net earnings were $175,000 or 1 cent per diluted share compared with 1.1 million or 9 cents per diluted share in the prior year's first quarter. As you may be aware our first quarter is traditionally a low revenue quarter with our general selling season occurring during the second and third quarters. In the domestic irrigation market revenues declined 2 percent in the first quarter compared to the same period last year.

Excluding price increases implemented in mostly the second half of fiscal 2004, the unit decline in the first quarter was more than 20 percent. During fiscal 2004, we experienced an unprecedented rise in steel costs, which triggered us to raise prices by more than 20 percent and to change our order pricing policy. For the first half of fiscal 2004 and prior, orders placed with reasonable scheduled shipping dates were protected from price increases. In the midst of rapid steel cost rise in fiscal 2004, we changed the policy to protect scheduled orders for only 30 days. That change has modified our traditional order flow and resulted in a lower order backlog level when compared to historical levels.

During the fourth quarter of fiscal 2004, orders and shipments remained strong partially due to the dealer’s stock program in place and due in part to continued anticipation by dealers of rising steel costs. Dealers were to some extent prebuying and taking delivery to avoid price increases.

In addition to the prebuying experience in the fourth quarter of fiscal 2004, believe that other factors likely played a role in the softness experienced in domestic orders in the first quarter of fiscal 2005. The first one is that following the rapid rise in steel last year, the dealers and growers incorrectly anticipated that steel costs would decline soon and some have chosen to sit on the fence rather than order. To the contrary steel has continued to climb, however at a much slower pace allowing us to stay current with pricing.

The second is that agricultural commodity prices have declined from the same time last year creating some concern for growers even with higher projected net cash farm income. In addition, as stated earlier, domestic equipment prices have risen by more than 20 percent in the past year. So it's difficult to know what if any impact that has had on demand. We believe that the two most significant factors affecting demand in the first quarter were the early buying at the end of fiscal 2004, and customers incorrectly anticipating that steel costs would decline.

In the international market, including exports, we experienced an increase in revenue of 19 percent in the first quarter over the same period last year. Export shipments to Australia and New Zealand were significantly above the same period of last year. Exports to the Middle East increased, however remain at historically low levels. First quarter shipments from our operations in South America were below the same period last year due in part to the lower agricultural commodity prices. Shipments from our operations in Europe were up significantly reflecting the strength and pivot in hose reel sales.

International revenues now also include the first quarter revenues for Stettyn, the irrigation manufacturing company acquired in South Africa during the fourth quarter of fiscal 2004. Diversified manufacturing revenues were 4.4 million for the quarter and were up 72 percent from the same quarter of last year. Our team has been successful in cultivating new diversified manufacturing business, and our order backlog at the end of the first quarter of fiscal 2005 was up from this time last year.

Our efforts over the past several quarters to build the business in conjunction with adding proprietary product lines in diversified manufacturing are now paying off. While selling margins are generally lower than on our proprietary irrigation equipment diversified manufacturing revenues utilized and leveraged the same labor and physical resources improving our overall efficiency. Much of the new business added into (indiscernible) manufacturing is from industrial customers outside of our traditional agricultural equipment customer base. Offsetting the seasonality of our production activity. Diversified manufacturing continues to contribute to operating income and we remain optimistic about new opportunities for growth and expansion.

Gross profit was 6.6 million compared to 7.4 million for the comparable quarter last year due mostly to the lower domestic unit production and resulted in factory variances. During the first quarter of fiscal 2005, the Lindsay Nebraska factory produced fewer units in the same quarter than the same quarter last year reducing the base for allocation of overhead. In addition, the factory incurred higher expenses. And while we made progress catching up our pricing to the increased steel costs, gross selling margins remained slightly below those of last year. During the quarter, we did see steel increases slow down. However the increases in steel and other component elements continue. Now with our pricing policy and forecasting processes in place, we're confident that we have improved visibility of increases and have implemented processes that result in a faster response time.

We're now passing through increases as necessary. Additionally, we're taking actions to reduce factory overhead expenses relative to the lower volume levels. In the international market the majority of our locations have made good progress in improving their margins. While the international units margins remained below domestic margins, they have and are expected to continue to improve. Each unit has objectives and action plans for improving their selling margins by maintaining pricing disciplines and reducing costs. They do however face competitive pressures which they will respond to.

Total operating expenses were 400,000 higher in the first quarter resulting from increases in insurance, audit and tax preparation costs, and the incremental operating expenses from the acquisition, the addition of Stettyn, the irrigation equipment company acquired in South Africa in fiscal 2004. We did continue to leverage operating expenses over the previous year in the first quarter and we continue to expect leverage for the total fiscal year of 2005.

Lindsay's order backlog at November 30, 2004, was 13.2 million, as compared to 38.7 million November 30, 2003. Reduction in backlog is attributable to changes in our pricing policy and resulting order flow, steel cost reductions anticipated by dealers that did not occur, and lower commodity prices. Cash and marketable securities at November 30, 2004, were 43.6 million, compared with 56 million in November 30, 2003. Accounts receivable were 9.6 million higher than the same time last year, driven by higher revenues, the dealer’s stock program at the end of fiscal 2004, and the inclusion of Stettyn. More than 7 million of the accounts receivable related to the dealers stock program is due and expected to be collected at the end of December.

Inventories were higher by 4.5 million at the end of the first quarter, due to higher quantities of steel on hand, lower-than-expected first quarter shipments and the inclusion of Stettyn. We did not repurchase any company stock during the first quarter of fiscal 2005 and we have a remaining existing repurchase authorization of 1.2 million shares.

In summary, the first quarter of fiscal 2005 was disappointing in terms of the U.S. market demand and positive in terms of the improvement we achieved in our international businesses margins and in diversified manufacturing revenues. While we know that our order pricing policy and the uncertainty regarding steel prices have affected demand, it is difficult at this time to determine how much of is attributable to those conditions versus other market forces such as price elasticity and agricultural commodity prices. While many of the major commodity prices have declined, net cash farm income is projected to be high again this year creating favorable conditions for growers to invest in income-producing equipment such as irrigation.

In the international markets, demand remains relatively strong. We foresee the current conditions as favorable for exporting given the low value of the dollar, and our international business units are still relatively new with organic growth opportunities in their respective markets. We also continue to aggressively pursue synergistic acquisitions. Over the past few years we have investigated over 150 companies and through this process we have found only about 20 percent of the targets have an interest in selling. And as we proceeded through negotiations and discussions and further due diligence we found approximately 1 in 7 is acquirable at a price fixed rate significant value for our shareholders. While we continue to aggressively pursue acquisitions, we will continue to do so with value creation in mind.

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

Thank you sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Alex Paris.

Barrington Research. Good morning. I'm still trying to understand this pricing policy a little bit. The fact that you only protect the dealer for so long 30 days or what, how is that affecting him? Is he, say a farmer gives him an order for (technical difficulty) is just not placing the order or how is that affecting the sales I guess? I'm wondering if they are putting off placing them until maybe gambling on the prices coming down someplace, is there a chance of you having a big spurt during the higher season when they actually get close to the point where they actually have to take delivery if there are latent orders out there.

Alex, I think there is a number of different pieces or scenarios to this, one is that dealers would place orders in the past and we would see this in that November December time period. Without necessarily a scheduled ship date in anticipation of orders that they were going to receive in say the December January time period direct from growers, they didn't necessarily have a name on that order yet. They replace those orders because they were and this would even go back to probably the October November time period as well, to price protect that order and be able to sell it to the customer when he did obtain the order to sell it. So what would happen is the order would get into our order flow, would get priced, he would call back a little bit later and get a scheduled ship date on it and at the same time it could be price protected.

They cannot do that now -- the way the process works is when they place that order they basically have to give it a scheduled ship date and it's only price protected for a 30 day time period. If that date moves out then the order is subject to repricing. So I think there is that piece of it where it didn't necessarily have a direct customer side to it. There are cases where they may have advance notice of a customer who is going to buy a machine, but the customer may be anticipating that steel prices might decline. So he could be sitting on the fence today, not ready to place his order yet.

So there are a number of different scenarios but I think the most prevalent one and the one that had the biggest impact towards the end of the fiscal year and the first quarter was the first one of dealers getting orders in the slot but not necessarily having it scheduled or even always having a customer defined for it.

Have they historically laid in inventories as they go into the season or they always just go through orders, match their orders to you with actual orders?

Historically, there is a (technical difficulty) program and to some extent they will put in some orders for inventory. Because they really cannot predict all of the orders that are going to come across the threshold and they need to be able to deliver in some pretty short timeframes at times. I would not call it impulse buy but sometimes that window is pretty short. So they generally will have some stock on hand.

Is this pricing program just to reduce the benefit of even carrying any inventories? Does that reduce their inventories whatever they might have been?

I think at the end of the fiscal year of 2004 they took on some inventory because they saw that steel prices had been climbing and were still climbing so they did -- we did have a stock program in place, they did take on some inventory. And I think at this point, since it's not really the peak of the season they are hesitant to lay in much more inventory in anticipation that steel prices might decline. What I think many of them have not seen is what we see is that steel prices are not really signaling a decline at this point; we have still seen some increases even though they have been relatively small.

But it sounds like you still cannot isolate this elasticity of demand whether you -- the 20 percent price increase just priced some people out of the market. You cannot confirm that yet? Can you from what you have said?

Not directly. Anecdotally from talking with dealers, the information that comes back from them is a combination of having some stock on hand because they did anticipate that steel prices would change. If the combination of -- there probably are some growers out there who are where there could be some element of sticker shock although that is not one of the most common ones we hear. I think the thirty-day window makes it more difficult for the growers or the dealers rather to place those orders right now unless they have a specific sale attached to it, they are not likely to do it because they don't want to take that risk. The other one is the change in commodity prices certainly slowed down the heat a little bit but I don't think that is at the top of the list in terms of their view of affecting demand.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS)A follow up from Alexander Paris.

Another question I have is the gross margin looks like it dropped to 16.5 from 20 percent a year ago, 20.1 percent. How much of that is the steel costs? That was not able to be fully passed through?

Without being able to specifically split it out for you which I really cannot do, what I can say is part of what I covered a minute ago is the actual gross selling margins were relatively close to the same gross selling margins of last year at this time in the first quarter. The biggest change in this first quarter to last first quarter affecting margins was in our factory variances. (technical difficulty) relating to the lower production levels and some higher spending. And that is the area that as we went through this first quarter, we obviously had forecast and projections and worked with the factory on with those projections. They were attempting to produce through certain production levels but that level is lower than the production level we had last year. So now we're taking some actions to reduce factory expenses as well.

You did also note in your release that the dealers are seeing -- was it stronger than usual quote activity or normal for this year?

I think in talking with the dealers they would say relatively normal quote activity, not and it does vary by region. It is not the same as last year and it really varies by region in terms of what is driving it. For example, equipped funding is still pretty strong so there is still a lot of equipped type projects going on. Dealers in many of the agricultural regions are still seeing some pretty strong demand; dealers in the drought areas still have some pretty strong demand. It does vary a bit by region, but they are still having pretty good quote activity.

Just one other question. Kind of an update on China. What is going on there?

Yes, in China, it's a slow process as we talked about in some of the earlier calls we have some manufacturing capability there. We are setting up warehousing capability. We are now in the process of expanding our distribution or dealer base in China. And we probably in the next couple of months will be hiring one or two direct people in China covering that region. And I think it is a case of developmental market in the sense that its going to take a number of years to develop but we want to be there with a strong identity and image which we have today, but we really are stepping up our pace in terms of building on that. That will potentially be a very, very big market.

At the outset, is it more aimed at setting up to manufacture or assemble there and export to other places like Australia and so forth with lower-costs or are you -- is the main notion to get ready to benefit from the China market itself?

The main driver is the China market itself. The secondary element is with efficient production and logistics in that region, we can distribute from there to other areas. But the primary driver is the China market.

I see and just one final thing, I have seen comments worth something like 160 million farmers have left the farms in China for the cities. I am wondering how that affects -- are the farmers going to get bigger or where they more likely to present the market for irrigation?

Yes, I think that is certainly my view is that the farms will get bigger and consolidate. We certainly -- some of our bigger customers in that region today are some of the more corporate type farmers. We believe there will be more of those larger production type farms. That really plays well into our product line and to our differentiation and into our mission in general. I think that ties very well with what we do and how we differentiate ourselves. But I think that customer base is a direct center of our target.

Does it look like this quarter -- this is obviously the lowest quarter of the year. It usually is right?

Usually its between this one and the fourth quarter (technical difficulty) depends on what happens with the dealer programs and things of that nature but they are both very low quarters.

But you don't have these dealer programs that you had in earlier years to get dealers to order, give them incentives to order earlier are you reinstating that now? Because of what is going on?

We're not reinstating that but one of the things that we did do and coming back to this order pricing policy, is what the policy says is that orders are subject to repricing if not (technical difficulty) for 30 days so that we don't allow that order to be sitting in the schedule as steel is going up and things of that nature. What we have done on a temporary basis is we have opened it up to dealers to say that orders placed and shipped by the end of February will be price protected. We can do that because we have enough steel and we're comfortable with our cost base to be able to open it up at that time or to that time frame and possibly longer.

Do you have some orders where they have got a shipment beyond 30 days but you don't put it into the backlog because of this policy?

No, I would say that the dealers are not placing the order if there are expecting a shipment beyond that 30 day time period.

All right. Thanks again.

Richard Henderson.

Pershing LLC. Question back on the domestic farmer. Rick, how long can the farmer wait before securing a position on your production schedule?

Generally, they are going to take delivery probably by say April. I think that April is probably April to May maybe is as long as he would wait. We do have in many cases though they will still take delivery in June and July, but I would say April May would be the logical time for the farmer to -- as long as you would want to wait to take delivery. We will really start to see things heat up now as this January, February March time period to get those machines out there in advance of that April May period so that there is time for installation and setup and all of the things that need to be done.

How much flexibility would you say that the farmer has and kind of tweaking his existing equipment? To kind of wait out this question mark on what happens to commodity prices commodity meaning steel prices?

There is a combination of things. There is an element of opportunity for tweaking which in this sense would probably boost our spares and replacement parts business. Generally, what we see if they are going to hold off on equipment purchases is an increase in the spares and parts aspect of it and the dealer will see it in terms of service. There will be some that do that. But then there is the machines that are going on to dry land or land that is either that doesn't have irrigation on it today where he really wants to protect his crop or his ability to produce income off that land. And (indiscernible) is not going to wait for necessarily he may time it based on is capital availability which frankly right now they should be sitting in pretty good shape with capital.

Then the other part is the conversion which is the conversion from other forms of irrigation to the more efficient pivot irrigation and that will vary in time but some of that is also now included in the equip program under the farm bill. There will be -- the conversion will still take place -- some dry land conversion will still take place. There may be in terms of whether he replaces the machine today he could take that option of stretching it out another year or two, but I would say also they are sitting in pretty good cash positions right now.

You mentioned that prices are on average 20, 20 percent or so higher. Does that close to an inflection point where the farmer just says, hey I might not need this stuff, the economic benefits doesn't warrant it? I realize in certain cases depending upon the land characteristics that it is -- you really have to have the equipment if you want to produce. But there is a lot of systems out there that might be marginal. Is that a problem, or is it really the fact that the farmer is looking at these commodity steel prices in particular and saying hey, the past cycle suggests that it is kind of boom bust. That is and they do not want to get caught in that squeezes.

What would happen, Rick, as we move into 2005 and kind of the big global economies of China and so forth continue to expand and eat up and create demand for commodities. What do you think the farmer is going to do when it is kind of ingrained in their mind that hey maybe this high era of high commodity prices is probably going to last for a number of years. Do they reach a point where you get into May, June, and they say hey they might make a decision where they say look, commodity prices are going to remain high. The crops I cannot really put the equipment to use over the next several months so I might as well wait until next year? Or do you think that they would go ahead and that instead of having a seasonally weak fourth quarter, you could possibly have a strong fourth and first quarter next year?

It is a really difficult one to answer with one specific answer, so let me just kind of hit a couple different points here. I think there is a number of different drivers that are going to drive what the farmer is looking at, what he's going to do. First of all, for many of them that will be looking at putting in a machine there will still be an attractive return on investment for them. In terms of their crop. It can be crop specific and it can be region specific. If they are in a drought area, putting in the machine is probably essential for ensuring that they are going to have an income-producing crop in the next year. It could be essential.

It could be that they are looking at it in terms of protection, protecting their ability to produce income because they don't necessarily know if its going to be a dry year or a wet year but they are certainly going to protect themselves so they will look at still taking action and protection. The one thing that is really kind of unique about this equipment versus let's say some other agricultural equipment that we could look at is the continual pressure to conserve water is not going to go away. That will be there and we see it in specific regions where it can either been directed by law or could be just by need in order to produce, they have to continually conserve water. That driver will continue.

The other one that I think will continue in terms of the bigger picture of what you are talking about is the global need to continue to improve efficiency and reduce overall input costs. So I think that will also continue and as many of the better farmers say, they will find a way to improve efficiency and continue to automate to make money no matter what commodity prices are. Because they may be higher today and lower tomorrow, but they have got to continue to improve that efficiency in order to improve their profitability or protect their profitability. But I think the driver for the equipment will continue. Farmers are going to make these decisions sometimes based on the shorter term needs of a season, for example it could be lower commodity prices or weather conditions but the global driver long-term is there. Many of them are going to make that decision somewhat irregardless of what the short-term picture is. I don't know if that answers your question.

Right. You did touch on it but more specific in terms of would the farmer go counter to normal buying patterns and if there was the change in mind that the prices really were not going down and that he was going to kind of in a newer era so to speak. Would it makes sense for them to order so that you would have more strength in your seasonally weak period, or is it because of the economics of what is happening is the farmer would just say I will order next year?

I think you are talking about more of the seasonality?

Yes. If we keep moving along as we are moving now with your order pattern, obviously your results are going to suffer. However, the need for the equipment is going to continue to increase. My question is, if the farmer does change their mind, whether its in April, May, June, would they place orders so that you would be producing let's more in your fourth quarter then you do in your third which you normally would not?

That is possible. There are a number of other factors that could affect that including dealer stock programs and what they anticipate will happen with steel and commodity prices. Steel prices and agricultural commodity prices. So yes there are a number of factors that could change that normal buying pattern just as they have todate in the first part of this year.

Right. Okay, thanks.

Management there are no further questions at this time. Please continue.

For our business, the global long-term drivers of water conservation in improving farm efficiency remain very positive. We're disappointed with the first quarter's order flow and the impact the lower volumes had on earnings. We believe we're taking the appropriate actions to react to the market conditions and at the same time we will continue to execute our strategy to grow organically and to differentiate our offering. In addition to the overall business enhancements that have taken place we continue to have an ongoing structured acquisition process that will generate additional growth opportunities throughout the world.

We have strong cash flow and financial flexibility to create shareholder value by pursuing the talents of organic growth opportunities, accretive acquisitions, share repurchase, and dividend payments. We thank you for your questions and participation in this call. We would also like to wish you all happy holidays.

Thank you sir. Ladies and gentlemen this concludes the Lindsay Manufacturing Company first quarter 2005 conference call. If you would like to listen to a replay of today's conference call, you may do so by dialing into 303-590-3000 or 1-800-405-2236 followed by the pass code 11017738. Thank you and have a good day and you may now disconnect. `