Lindsay Corp (LNN) 2005 Q4 法說會逐字稿

Thank you for standing by. Welcome to the Lindsay Manufacturing Company fiscal fourth quarter and year end 2005 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Wednesday, October 12, 2005.

During this call, management may make certain forward-looking statements that are subject to risks and uncertainties and which reflect management's current beliefs and estimates of future economic circumstances, industry conditions, and Company performance and financial results. Forward-looking statements include the following concerning possible or assumed future results of operations of the Company and those statements preceded by, followed by, or including the words expectation, outlook, could, may, should, or similar expressions. For these statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. In conjunction with this call, the Company has posted a slide presentation on its website which can be viewed at www.LindsayManufacturing.com.

Joining us today from the Company are Rick Parod, President and Chief Executive Officer; Dave Downing, Vice President and CFO; and Tim Paymal, Corporate Controller. At this time I would like to turn the call over to Rick Parod.

Good morning. Thank you for joining us today. Revenues for the fourth quarter of fiscal 2005 were 40 million, declining 14% from 46.4 million for the same prior year quarter. Net earnings were 293,000 or $0.03 per diluted share, compared with 345,000 or $0.03 per diluted share in the prior year's fourth quarter.

The fiscal 2005 period net income was reduced by 1.5 million pre-tax, or approximately $0.09 per diluted share after-tax, due to the previously announced repair campaign of the end gun solenoid valve (technical difficulty) Lindsay center pivot irrigation systems.

Orders remained comparatively weak throughout the quarter as farmers deferred equipment purchases due to lower worldwide agricultural commodity prices and higher farm input costs, primarily energy and fertilizers.

For the full fiscal 2005 year, revenues were 177.3 million, reflecting a 10% decrease from 196.7 million in fiscal 2004. Net earnings were 4.8 million or $0.40 per diluted share compared with 9.3 million or $0.78 per diluted share for fiscal 2004. While 2005 earnings were lower, cash flow from operations in fiscal 2005 was 11.8 million, which is an increase of 10.6 million over the prior period.

In the domestic irrigation market, revenues were 21.6 million for the fourth quarter, declining 22% from the same quarter of last year, and unit volume declined approximately 27% from the comparable quarter. At the end of the quarter, commodity prices for the primary agricultural commodities on which our equipment is used were mixed as compared to the same time last year.

Corn was down more than 10% (technical difficulty) was relatively flat. At the same time cotton was off approximately 8% and wheat was up approximately 12%. Overall (technical difficulty) commodities we have not seen significant appreciation since the same time last year when the market had softened. For farmers, the relatively soft commodity prices, coupled with high energy and fertilizer costs, has resulted in pressure of (ph) their profitability, dampening their willingness (technical difficulty).

Strong US harvests are estimated for this fall season, including speculation that the corn harvest will be the second-largest on record, only behind last year's harvest. For the strong harvest ending stocks are likely to remain high even though ethanol has become a larger element in corn usage.

For the total year 2005 domestic irrigation revenues were 105.5 million compared to 132.9 million in fiscal 2004, declining 21%. While year-over-year, prices increased approximately 10%, units sold declined approximately 35% for fiscal 2004. General softness in commodity prices and increases in farm input costs were the primary drivers for the reduced demand.

In the international markets, including export revenues were 13.2 million for the fourth quarter, declining 11% from the same period last year. For the total fiscal 2005 year, international revenues were 50.8 million and flat when compared to fiscal 2004. For the (technical difficulty) revenues in each of the major international markets of Europe, Africa and South America, declined from the same quarter of last year, reflecting the softer global farm economy.

Exports, however, were stronger in the fourth quarter of fiscal 2005 and the same period last year. For the full fiscal 2005 year, revenues in South America were below fiscal 2004 due to the low commodity prices, Asia rust and tough economic conditions for farmers in general in Brazil.

For the full year, revenues were also lower in Europe where 2004 demand was aided by drought conditions that have now subsided. Other international revenues were higher for the full fiscal 2005 year.

Diversified manufacturing revenues increased 31% to 5.3 million for the (technical difficulty). For the full year, diversified manufacturing revenues were 21 million, up 63% from 2004. Our contract manufacturing revenues within (technical difficulty) manufacturing were higher than the same quarter last year and for the full year, as we have continued to build our relationship with GE transportation systems. Commercial tubing revenues were also significantly higher for the full year.

We're continuing to develop new customer relationships for diversified manufacturing (ph) (technical difficulty) industries outside of agriculture and irrigation. Additionally, we're pursuing incremental growth paths for our 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 7 million for the fourth quarter on lower revenues, as compared to 7.6 million for the comparable quarter last year. Gross margins for the quarter improved to 17.6%, including the field repair campaign, as compared to 16.3% for the comparable quarter last year. The improved margin (ph) (technical difficulty) improvements in factory spending leverage, favorable year-over-year inventory-related adjustments, and improved international margins.

(technical difficulty) Fair (ph) gross margins were 18.9% compared to 20.1% last year, with the lower margin resulting from the significant unit volume reduction. Total operating expenses for the quarter were flat with the fourth quarter of last year.

While last year's operating expenses included expenses related to the insolvency of the dealership, this year's spending level represented significant incremental Sarbanes compliance related costs. For the full year, operating expenses were 596,000 higher than last year, also reflecting the incremental expenses for Stettyn, the pivot Company acquired in South Africa in '04 (technical difficulty) and significantly higher compliance-related expenses.

Lindsay's order backlog at August 31, 2005 (technical difficulty) 14.2 million, as compared to 16.5 million August 31, 2004 (technical difficulty). Lower backlog reflects the reduction in demand due to changes in the farmers' sentiment driven by lower agriculture commodity prices and higher farm input costs.

Cash and marketable securities at August 31, 2005 were 54.8 million compared with 56.3 million of August 31, 2004. Accounts receivable declined 5.5 million from the same time last year, reflecting improvements in credit management in the quarter. Inventories declined 0.5 million from the end of fiscal 2004 and by year end had declined more than 10 million from peak levels reached earlier in the year.

We continue to implement action to improve working capital effectiveness. During fiscal 2005 we used 6.6 million of internally generated cash to repurchase approximately 324,000 shares. We have a remaining repurchase authorization for 881,000 shares.

In summary, the irrigation equipment demand for the fourth quarter of fiscal 2005 remains soft due to lower commodity prices, and higher farm input costs. The short-term softness in market demand is global in nature, affecting our exports and sales from our international units.

During the past few quarters we've taken actions to reduce expenses, improve efficiency in all locations, and to improve cash flow, which we will continue to do. We are pleased with the results these actions are yielding.

We have also realized savings in our operating expenses that benefit us now and in future periods. However, they have been offset with higher-than-expected Sarbanes compliance related expenses. In addition we're continuing our geographic expansion where appropriate, and we continue our investments in new products and technologies.

Over the past couple of years we've made sizable market share gains globally, and we remain competitively strong. We are continuing our investments in manufacturing process improvements globally to enhance our margins. In addition, we continue to aggressively seek acquisitions that are synergistic and that create differentiation opportunities. These initiatives will remain our focus. I will now like to open it up for any questions.

(technical difficulty) James Gentile, Sidoti & Co.

As is expected, your prepared remarks address your share repurchases, dividends and perhaps accretive acquisitions, it looks like. We saw a dividend increase and about $7 million in share repurchases fiscal 2005. Is that the indication to you that you're kind of slowing down in your acquisition search?

No, not at all. The acquisition search continues to proceed. In fact, it's very active. But as I think anyone knows, that has been involved in the process, it takes time and you have to look at a lot of businesses and opportunities in order to find the right ones.

In fact, I was looking back at our activity this past year, and we probably have had discussions with or investigated between 50 to 60 companies, had proposals with many and continue to have a very active process.

This is the first time that you mentioned perhaps growing the diversified manufacturing business through acquisition. Given your existing capacity for tubing and contract manufacturing, how much could diversified manufacturing be from an organic perspective in terms of (technical difficulty) should these newer relationships sustain themselves?

I'm not sure that I can (technical difficulty) a specific amount. I think we have the flexibility of utilizing a significant amount of our existing resources and manufacturing capability, to move from irrigation to diversified as the need arises. So depending upon what that market need is, whether irrigation is very strong or whether diversified is strong and growing, the manufacturing resources used in these processes are very similar, basically the same resources.

I got you. So there's not additional assets allocated toward specific diversified manufacturing contracts?

For the most part that's correct. There is some exceptions we consider. For example, we are looking at expanding possibly our tubing line, which would require or support additional capital investment. And that would be probably beneficial to all aspects of our business if we went that route. That would be a different (ph) (technical difficulty) consideration.

Fair enough. Last question, you mentioned kind of a fluffy line which I haven't heard in while. That you're investing in new products and technologies. You keep your engineering expense pretty much at $3 million a year or so. Actually even less than that. I was wondering if you can perhaps give us insight into some of these products or technologies that you mentioned.

Yes. (technical difficulty) a direction of -- from a market perspective. We look at the market and market needs. We've seen ever-increasing need and demand for things that will improve water use efficiency, and (technical difficulty) in farming practices.

So (technical difficulty) in product development is typically on water efficiency improvement and reductions in labor, which means telemetry systems and automated-type systems. As well as investments we've made in things like soil moisture, fencing, and an integrated technology to pull all the technology together.

We (technical difficulty) in both types of things and believe that's the right approach in terms of what is required for advanced farming practices.

It's not particularly new compared to the last couple years.

It's really not new; it's a continuation of the strategy. And we are always searching for, either through acquisitions or through partnerships or through organic development, opportunities to expand that technology base.

Richard Paget, Morgan Joseph.

Good morning, everybody. I wonder if you could comment on how steel prices affected the quarter at all. Whether pricing has been able to hold, whether you've got any benefit because -- it looks like it did go down; at least over the quarter I know it's been up recently. I wanted to see if that had any effect.

We did see steel prices drop some. In fact, steel prices in general in terms of the types of steel that go into the cost of our product are down roughly 7 to 8%. Looking at all different types of steel that this point from where they were at the peak. However, we are seeing some movement upwards again in the next couple of months.

From an overall pricing standpoint, we have not seen a real emphasis -- particularly in the domestic market where there's a pretty good pricing discipline in general, to give those -- that change or that decrease back. Also I think there's a pretty fair understanding in the market that there is some upward pressure on steel as well. While we've seen some temporary benefit with steel reduction, it's not likely to be permanent at this point.

And then with the SG&A, that kind of delta versus (technical difficulty) all Sarbanes-Oxley, and should we think about SG&A from going forward is going to be in that 3.5, 4 million range now?

I think if you look at SG&A and look at what companies are spending on a Sarbanes-Oxley basis -- for Sarbanes-Oxley compliance, you would find it is pretty significant amount. And it may be somewhere in the range of 0.5 percent (ph) (technical difficulty) of revenues and we are in that same range. So it is a pretty big piece of the SG&A.

And that's going to be ongoing, at least that is what your expectations are?

We believe it's going to come back some from what we saw this year, or this past year, but it may be still in the range of 60 to 75% of that number.

Finally, you have pretty -- larger than normal cash balance. Any reason why you're holding cash and not (technical difficulty) moving it in elsewhere?

We are in a fairly flat yield curve, and just have not moved cash from overnight investments over into our normal bond fund (technical difficulty) recently.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Well, thank you. For our business, the global long-term drivers of water conservation, population growth and improving farm efficiency remain very positive. We believe we're taking the appropriate actions to react to the market conditions, at the same time we will continue to execute our strategy to grow organically and 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 a strong cash flow, financial flexibility to create shareholder value by pursuing a balance of organic growth opportunities, accretive acquisition, share repurchase and dividend payments.

We thank you for your questions and participation in this call (technical difficulty). Thank you.

This concludes today's conference. You may now disconnect.