Lindsay Corp (LNN) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by and welcome to Lindsay Manufacturing Company's third-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, June 22, 2005. I would now like to turn the conference over to Diane Headward (ph) with the Financial Relations Board.

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, 2005. If anyone has not received the release, please call the Financial Relations Board at 312-266-7800 and ask for Karen Jova (ph), 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; Bruce Karsk, Executive Vice President of Finance and Treasurer and Tim Paymal, Corporate Controller.

Management will provide an overview of the quarter and then open up the call to your questions. Before we begin, we'd like to remind all participants that this conference call may contain certain forward-looking statements that are subject to the Safe Harbor disclaimer in today's press release. In conjunction with this call, the Company has posted a slide presentation on its Web site which can be viewed at www.LindsayManufacturing.com. At this point, I would like to turn the call over to Rick. Please go ahead Rick.

Good morning and thank you for joining us today. Revenues for the third quarter of fiscal 2005 were 56 million, declining 10% from 62.3 million for the same prior year quarter. Net earnings were 4 million, or $0.34 per diluted share compared with 4.3 million or $0.36 per diluted share in the prior year's third quarter.

Orders continued to be comparatively weak throughout the quarter as farmers deferred equipment purchases due to significantly lower worldwide agriculture commodity prices as compared to a year ago and higher foreign input costs. In the domestic irrigation market, revenues declined 22% and units declined 36% in the third quarter compared to the same period last year. Year-to-date, domestic irrigation revenues are down 20% from last year. Significantly lower agricultural commodity prices, higher foreign input costs and a reduction in drought conditions in the U.S. drove the reduction in market demand and lower consequential revenues.

While agricultural commodity prices have rebounded some from earlier this year, the price of corn has declined approximately 19% and soybeans approximately 21% from the same time last year. Reflecting a plentiful harvest last year, season domestic ending stocks of corn for the '04-'05 year more than doubled as did cotton and ending stocks for soybeans more than tripled.

While ethanol demand continues to drive corn usage higher, now estimated to comprise about 13% of total usage, ending inventories for corn are not projected to decline this season. Currently, overall growing conditions for farmers through most of the U.S. remain favorable. The drought conditions experienced in much of the West and Plains regions have now greatly been alleviated by winter snow pack and spring rain.

In some areas of the Midwest, overall moisture has hindered planting and lessened demand for irrigation systems. And in the Northwestern region, which is a major potato brush (ph) area, moderate to severe drought conditions remain.

In the international markets, including exports, revenues were 15.7 million for the third quarter, increasing 4% from the same period last year. Year-to-date, international revenues are 3% higher than the same time last year. The increase is attributable to the addition of Stettyn, the irrigation company acquired in South Africa in the fourth quarter of fiscal 2004 and higher export sales to the Middle East.

The significantly lower commodity prices and lower value of the U.S. dollar relative to local currencies continues to greatly impact farmers' profitability in international markets and more specifically in Brazil. Recently in Brazil, farmers have protested the current economic downturn with a tractorcade in the capital city of the Brasilia, attempting to draw some form of relief from the government. In response to the decline in international demand, each of our international business units has taken action to cut expenses. We will continue to monitor the markets and make additional reductions as necessary.

Diversified Manufacturing revenues increased 70% to 6 million for the quarter. Year-to-date, Diversified Manufacturing revenues are 15.7 million, up 78% from the same time last year. Our Commercial Tubing and Contract Manufacturing revenues within Diversified Manufacturing are both significantly higher than last year for the quarter and year-to-date.

We are continuing to develop new relationships for Diversified Manufacturing in industries outside of Agriculture and Irrigation. Additionally, we are pursuing incremental growth adds (ph) for our profit profitable Commercial Tubing business. We remain optimistic about new opportunities for growth and expansion of our Diversified Manufacturing business, organically or through acquisition.

Gross profit was 12.6 million compared to 13 million for the comparable quarter last year on lower revenues. Gross margins for the quarter climbed to 22.4% as compared to 20.9% for the comparable quarter last year. The improved margins reflect a pass-through of the steel cost increases realized in fiscal 2004 partially offset by manufacturing variances resulting from lower production volumes. Year-to-date, gross margins are 19.6% compared to 21.3% last year with the lower margin resulting from the significant unit volume reduction.

During the past quarter, we've experienced a slight reduction in steel costs from the high level achieved in fiscal 2004. At this time, we do not anticipate a significant change in the steel prices during the fourth quarter and we do not plan to change our equipment prices outside of normal seasonal promotions. While the price increases implemented over this past year have been sizable, we remain competitive and have not lost market share due to the increases.

Total operating expenses were equal to the third quarter of last year, reflecting expense reductions made earlier this year, offset by incremental operating expenses from the addition of Stettyn and Sarbanes compliance-related costs. Year-to-date, operating expenses are $610,000 higher than last year, also reflecting the incremental expenses from Stettyn and higher insurance and compliance-related expenses.

Lindsay's order backlog at May 31, 2005 was 11.1 million as compared to 20.2 million at May 31, 2004. The lower backlog reflects the significant reduction in demand due to lower agricultural and commodity prices, a reduction in domestic drought conditions and higher foreign input costs. Cash and marketable securities at May 31, 2005 were 53.7 million compared with 57.2 million at May 31, 2004. Accounts receivable declined 4 million from the same time last year, reflecting the lower revenues in the quarter. Inventories declined 7.2 million from the second quarter of fiscal 2005 to now be equal with the same time last year.

Additional reductions in accounts receivable and inventories are expected in the fourth quarter. We did repurchase 186,000 shares of common stock during the third quarter at an average price of $18.69 per share for an aggregate amount of 3.5 million. We have a remaining repurchase authorization for 881,000 shares.

In summary, the irrigation equipment demand during the third quarter of fiscal 2005 remained soft due to lower commodity prices and higher foreign input costs. The short-term softness in the market demand is global in nature, affecting our exports and sales from our international units. During the past two quarters, we've taken actions to reduce expenses, improve the efficiency in all locations and to improve cash flow. We're pleased with the results these actions are yielding.

We have also realized savings in our operating expenses; however, they've been offset with higher than expected Sarbanes compliance-related expenses. While the market is softer than expected, we're continuing our geographic expansion where appropriate. We continue our investments in new products and technology. Over the past few years, we've made sizable market share gains globally and we remain competitively strong. We're continuing our investments in manufacturing process improvements globally to enhance our margins.

In addition we've expanded our acquisition initiative, seeking bolt-on acquisitions and synergistic differentiation opportunities. These initiatives will remain our focus. I would now like to open it up for any questions.

(Operator Instructions). Alex Gisselle (ph), Barrington Research.

Hi, this is Alex Gisselle (ph) from Barrington Research actually speaking on behalf of Alexander Paris. You experienced a big gain in Diversified Products. Is that mostly new business or existing? Also, how did the Parts business do in the quarter?

Yes, thanks. The gain in the diversified business is relatively new business. It's mostly from accounts that we have picked up in the last, oh probably nine months. And that has been building in size and momentum over the last probably four or five months.

Okay.

As far as the Parts business, the Parts business was fairly strong in the quarter as well; in fact, higher than last year, in total. And I think that partly reflects the lower overall demand in the market and that farmers may be spending more time and money on repairing existing equipment.

Okay. A question concerning international. Taking out Stettyn, how are international sales? Are they up or down?

International -- well you know, we're really not disclosing international totals outside of what we're covering as international in total. I think that we did have higher export sales and we did have the Stettyn piece added in as well.

All right, thank you so much.

James Gentile.

Hello, from Sidoti & Company. Looking at your -- you guys did a great job cutting some expenses out of the mix. The gross margin leverage was pretty dramatic and I think exceeded a lot of folks' expectations, including my own. I was curious -- as you look at the accounting conventions you used from a LIFO perspective mixed with your higher average selling prices, which in the second half of last year, steel prices obviously spiked yet again from the first half of F '04 for you guys. So I was just wondering essentially where the pickup came from more specifically?

Comparing it to where we were, I think the primary pickup, really the fact that I'd probably entirely attribute to passing through the steel cost increases (multiple speakers) all price increase, correct. And it's partially offset by -- in fact, the margins were reduced by manufacturing variances because of the lower volumes relative to last year.

So if you were to look at it on a comparable volume level, I think we would have seen higher margins.

Could you give us an order of magnitude as to the price increases that you passed through so I can get an interesting unit-over-unit comparison for your gross margin?

We talked about looking at it, and I'll look at it from the standpoint of I believe what we disclosed last quarter. Year-to-year, it was about a 20% -- a little over a 20% increase. Through that, I think -- yes, year-to-year, it was about 20%.

Okay. And then the selling expense, was that variable due to the decline in unit sales essentially, because they saw a sequential and a year-over-year decline by a couple of hundred thousand?

At some portion, it's variable but not a significant portion. Most of it reflects cost reductions made, expense reductions that were taken -- actions that were taken.

And those are permanent?

I hesitate to call them permanent, James, because it reflects a pulling back that is tied to what has happened with the market in total. I think we would see more spending in some of the sales and marketing activities as that market picks back up.

So as (ph) the cycle kind of turns back in your favor?

Yes.

And then you mentioned after -- as you discussed the International business, yes, Stettyn added some to the top line in the quarter. But also, you mentioned for the first time in I think years higher export costs, or higher export sales to the Middle East. And could you comment on that?

Yes, and it's true. I think this is the first time in a while that we've had higher exports through the Middle East. We did have some orders to the Middle East, specifically Saudi Arabia during the quarter, and so it was nice to see some of that -- the volume back. And whether it was tied to let's say the higher oil prices and the money that is available, we really don't know. But it is good to see some of that activity again.

Could you comment on the absolute dollar value that you sent out for the Middle East?

I really can't comment on a specifically on an order or dollar value or break out our international sales further than I have.

Gotcha. Could you comment then on the historical sales that Lindsay has derived from the Middle East in prior periods where the Middle East has been strong?

It's a difficult one because it's so varied between periods, James. There were times way back in history when Middle East sales, Saudi Arabia's sales were a significant portion of Lindsay's sales in total, I mean a very sizable percentage. In recent years, that has not been the case and our total Middle East sales probably were -- they have never -- let's say that they are not a significant part of our export sales or have not been for a few years now. I think that's the extent I can bring it up.

Fair enough, thanks.

Richard Paget.

Morgan Joseph, good morning everybody. Getting back to James' question on the expenses, exactly what were you cost-cutting on? Were you just scaling back your marketing plans? Were there -- I think you mentioned you had lower insurance costs, which surprises me because you're the first Company that I've seen who (indiscernible) actually has lower cost. Are you changing your insurance, or if you could just be more specific on that?

No. Actually, our lower insurance cost, Richard, came primarily from closing some old workers compensation claims at lower than what we had expected.

So that will be more permanent cost savings then?

Those were specific to the period of time, more specific to a period of time, not necessarily permanent run rates that you would project out. And coming back to the other part of the question in terms of the kinds of reductions, the reductions that we made in selling and administrative expenses were fairly broad in nature, meaning we cut back expenses both in staffing, expenditures on programs, those types of things in general in response to the market conditions. That was across the board. And as I said earlier, I think it would be reasonable to pick up some of those -- the programs themselves or spending on programs relative to what happens to the market.

Right now, we don't see that happening so we will maintain those cost reductions that have been -- the actions that have been taken.

And then how should we be looking at next year? Obviously, the drought monitor, your farmer paints a lot better picture compared to last year. And if commodity prices don't go back up, could we have another year of farmers deferring these purchases again?

I think to some degree. I think there is a couple of points I'd make. We talked earlier in the previous quarter about some of the things that were affecting demand at that time, and there were a number of things. One was the commodity prices dropping which affected the farmers' perspective and psychology going forward because we've seen a decline in commodity prices.

The other one was the significant rise that we had in cost of our equipment because of steel price increases that have taken place. In that there was an element of sticker shock associated with that was farmer. We believe we are past the sticker shock effect and that we did see demand pick up some in the third quarter. So we believe that part is behind us. And we think if commodity prices stabilize, it changes the farmer's psychology a bit and he's not looking at that downside in commodity prices, and therefore potential threat on his farm income.

So I think that it changes psychology a little bit and as the third quarter demonstrated, there is demand and we did see that demand once a couple of those variables shook out a little bit.

So looking forward, what do we expect? I think I wouldn't expect volume to be at the '04 level given commodity prices at the current level or to even stabilize at this level because of the difference in the commodity prices and the perspective the farmer has with commodity prices rising in current (ph) state we're in, but I would expect more of a stabilization of the market and market demand overall.

And do you have operating income broken out for Irrigation and Diversified Products?

Yes. But I don't think we've -- .

We do not have that broken out. I do believe that it is covered in the Q. It will be disclosed in the Q. We do not have that program at this time for this call.

Okay. That's it. Thanks.

(Operator Instructions) James Gentile.

I just wanted more clarification. Usually at the end of your call, Rick, you give your kind of value-added discussion about share repurchases, accretive acquisitions et cetera. And now, you've suggested that you expanded your acquisition strategy to kind of a bolt-on type of situation. Is there anything else that we can expect? Could you give us any more details as to the kind to candidates that you're looking at, a certain end market kind of expansion opportunities or any other kind of color as you develop this acquisition strategy further?

You've preempted my closing now James, but that's alright. But I guess the color that I would add to it, and I think there's one other element I would add that is slightly different, is -- because the focus has continued to be around acquisitions, centered around our mission in our core business, which is irrigation -- water-related. And that included things like filtration, the fertigation, the geographic expansion, adding in other irrigation systems like Stettyn.

But, it would also include other types of irrigation that could be added to our business. So I think that still remains the mission and still the core of our acquisition initiative. And they could be bolt-on product line additions or business -- complete business pieces, but still tied around that core mission. That really has not changed really in the past five years.

The one that we still consider also as an opportunity in some cases is looking at proprietary product acquisitions that have a manufacturing synergy and could fit into a diversified business from the standpoint of very similar manufacturing processes or things that could enhance that business. But generally, we're looking for proprietary type products with respectable margins associated with it. So when we look at that acquisition strategy, those are the two things that I would point out.

Good luck finding an appropriately priced filtration company.

It's a little bit of a crazy time in terms of pricing on acquisitions, but we're selective. We go through a lot of analysis and we're cautious about what we buy and we've been successful to date in buying at reasonable prices and we plan to continue to do that.

Can you give an expectation of the Diversified Manufacturing business in fiscal 2006 as you kind of develop the business development initiatives there?

I think the expectation I would add is we expect to see continued good growth in diversified manufacturing above market kind of growth in diversified manufacturing and we expect to see a continual enhancement of margins in Diversified Manufacturing.

We also expect Diversified Manufacturing as we're adding in the new business today will continue to be businesses that are a somewhat countercyclical or seasonal to what we're doing in some of the ag part of the business so that they're efficient in terms of utilization of manufacturing capability. They don't have to be completely counterseasonal or cyclical to it, but having -- in the past, much of the Diversified Manufacturing business was on the same cycle and season. So we have had some diversification that has taken place in that business and that -- it will be beneficial to our manufacturing utilization.

And then just one more question and I will get off you guys' cases. Third quarter revenue for Diversified was $6 million, which is up 70%, close to 70% year-over-year. How much of that would you contribute to the total company, or I guess expense leverage, earnings surprise (ph), if you will versus the kind of weak Irrigation segment?

It's difficult to answer in the sense that I can't break that out specifically. My response would be -- it was a significant amount in terms of that overall leverage, in terms of production utilization which I believe is what you're asking about.

Yes. I just wanted to see if you're picking up above average profitable business there?

I would say that the business that we've brought in there is a nice business with good opportunity and more opportunity for margin improvement. We have not quite matured that business yet in terms of the manufacturing processes (multiple speakers) to get to the margins that we should be getting.

So you can see -- is it safe to say that over a couple of year period, you like to see diversified at around 15% operating margin?

I wouldn't really state a target at this point, James. I'm afraid I can't do that.

That's fine. Thanks.

Management, I'm showing we do not have any more audio questions. I will turn the call back over to you for any closing remarks you may have.

Thank you. For our business, the global long-term drivers of water conservation, population growth and improving farm efficiency remained very positive. We believe we're taking appropriate actions to react to the market conditions and at the same time, we will continue to execute our strategy, grow organically and differentiate our offerings.

In addition to the overall business enhancements that have taken place, we continue to have an ongoing structured acquisition process that will generate growth opportunity throughout the world. We have strong cash flow and financial flexibility to create shareholder value by pursuing a balance of organic growth opportunities, accretive acquisitions, share repurchase and dividend payments. We would like to thank you all for your questions and participation in the call.

Ladies and gentlemen, that concludes today's teleconference. If you would like to listen to a replay of today's conference, you may dial in at 303-590-3000, or 1-800-405-2236, followed by the access code of 11031979 and then followed by the pound sign. (OPERATOR INSTRUCTIONS) Thank you for your participation in today's conference. You may now disconnect.