Lindsay Corp (LNN) 2006 Q1 法說會逐字稿

Good morning, I will be your conference facilitator. At this time I would like to welcome everyone to the Lindsay Manufacturing fiscal first quarter 2006 conference call. [OPERATOR INSTRUCTIONS] This presentation contains forward-looking statements that are subject to risks and uncertainties, which reflect management's current beliefs and estimates of future economic circumstances, industry conditions, Company performance and financial results. Listeners should understand that a number of factors could cause future economic and industry conditions and the Company's actual financial condition and results of operations to differ materially from management's beliefs expressed in the forward-looking statements contained in this presentation.

These factors include those outlined in the "Risk Factors" section of the Company's most recent annual report on Form 10-K, filed with the Securities and Exchange Commission. And listeners are urged to review these factors when considering the forward-looking statements contained in this presentation. 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. For full financial statement release, reference the Company's press release dated December 21, 2005. Thank you. I will now turn the call over to Rick Parod, President and Chief Executive Officer. Sir, you may begin your conference.

Good morning and thank you for joining us today. Revenues for the first quarter of fiscal 2006 were 39.5 million, as compared to 39.8 million for the same prior year quarter. Net earnings were 511,000 or $0.04 per diluted share, compared with 175,000 or $0.01 per diluted share in the prior year's first quarter.

In the domestic irrigation market, revenues were 23.2 million for the first quarter, declining 3% from the same quarter last year. At the end of the quarter, commodity prices for the primary agricultural commodities, on which our equipment used, continued to be mixed relative to the same quarter last year. Corn prices were down 3% to 4%. While soybean and cotton prices were up approximately 8% and 15% respectively. Ending stocks for corn and soybeans after the 2005 harvest were recently projected higher by the USDA due to lower than expected export demand.

With the lower crop prices, agricultural subsidies will likely make up more than 27% of net cash farm income, as compared to roughly 16% of net cash farm income the year before. In addition, high costs for fuel and fertilizer have pushed input costs higher for farmers. For many, the higher percentage of income from subsidies versus crop receipts and the higher input cost in general leads them to a conservative stance regarding capital equipment purchases at this time. We have however, seen an improvement in demand in the midwest. Where drought conditions impacted crop production last season.

In the international markets, including exports, revenues were 11 million for the first quarter, compared to 11.5 million for the same period last year. Farmers in most of the major international agricultural markets are impacted by the lower commodity prices and higher energy related input costs. Each of our business units in South Africa, South America and Europe experiences lower revenues when compared to the same quarter last year. Brazilian farmers continue to battle Asian rust affecting soybeans, yet favorable weather is likely to yield a very good harvest, improving their profitability.

Export revenues were higher for the quarter, reflecting improved demand in the Middle East and continued strong demand in Latin America for much of our sales or government subsidized. Diversified manufacturing revenues increased 23% to 5.4 million for the quarter, compared with 4.4 million in the first quarter of last year. We continue to realize strong revenues in our contract manufacturing business and we have also achieved improved margins. In addition, commercial tubing sales increased for the quarter, driven by overall strength in the industrial sector.

We are continuing our initiative of developing new customer relationships for our diversified manufacturing business in industries outside of agriculture and irrigation. We remain optimistic about new opportunities for growth and expansion of our diversified manufacturing business, organically or through acquisition. Gross profit was 7.4 million for the first quarter, versus 6.6 million in the same quarter of last year on comparable revenues.

Gross margins for the quarter improved to 18.8%, as compared to 16.5% for the first quarter last year. The improved margins reflect improvements in factory spending leverage at all locations and somewhat lower steel costs. Total operating expenses for the quarter were flat with the first fiscal quarter of last year. With higher audit and Sarbanes-Oxley compliance related expenses offset by global expense reductions made in response to the decrease in demand.

Additionally, the Company adopted FAS 123R recorder, which requires expensing stock-based compensation. This change negatively impacted earnings by $0.02 per diluted share. Our order backlog was up 58% at November 30, 2005 to 20.9 million, as compared to 13.2 million November 30, 2004. We believe the higher backlog reflects a slight improvement in farmers' confidence after the significant decline in commodity prices that occurred a little more than a year ago. The backlog was higher for both irrigation and diversified products.

Cash and marketable securities at November 30, 2005 were 49.3 million, compared with 43.6 million at November 30, 2004. Accounts receivable declined 5.4 million from the same time last year, reflecting continued improvements in credit management in the quarter. Inventories declined 3.5 million in the same time last year. We continue to implement actions to improve working capital effectiveness. We did not repurchase any Company stock during the first quarter of fiscal 2006. However, we have a remaining repurchase authorization for 881,000 shares.

In summary, the irrigation equipment demand during the first quarter of fiscal 2006 remains soft, due to lower commodity prices and higher farm input costs. The short term softness in market demand is global in nature. During the past few quarters, we've taken action to reduce expenses, improved efficiency in all locations, which will improve cash flow, which we will continue to do. These actions are yielding results. Even though current market conditions have resulted in softer demand, we believe significant earnings enhancement opportunities exist. We are continuing our geographic and market share expansion initiatives to build revenues.

We have and will continue to launch new product and services and then improve farming and water use efficiency. We are also 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 would now like to open it up for any questions you have.

[ OPERATOR INSTRUCTIONS ] Your first question comes from the line of James Gentile with Sidoti and Company.

Good morning, gentlemen, how you doing?

Good morning, James.

You - - in your - - in the leader comments you suggested that your market share and geographic growth initiatives are continuing. Could you enhance your market share, the market share portion of that statement; in terms of price, behavior in the industry and in terms of other differentiating factors with regard to your product versus competitors?

Yes. Well, I'd start off by saying we estimate our market share globally at about 30%. A little bit higher domestically, slightly lower on an international basis because we had a little later start on some of the international markets. From a price standpoint, we are what I would consider to be competitive in price. And generally in the domestic market there's a fairly good price discipline between us and our primary competitor or competitors in the market. So, we're generally priced pretty close to each other in all of the markets that we're in. There is some points of differentiation. We believe and we hear that our product is considered to be of premium quality, particularly in the international markets. With additional features in terms of some of the technology that we offer for control purposes. Our telemetry system, for example, we believe is the best that's available in the industry. The integration that we offer with things like fertigation, chemigation, soil moisture sensing, we believe is the best in the industry. And we hear that from our customer base, as well. So, for our points of differentiation, yet on the basic system we are competitive with our competitors globally.

Could you characterize the increase in backlog with regard to last year? Up pretty sizably. How much of that is inflated steel price - - steel prices baked into your average selling prices? And also have you gotten a little bit more aggressive in this slow period of backlog accumulation with price to kind of increase your factory utilization?

Well, without being able to really specifically break out the backlog into a great amount of detail. What I can say is that this does not represent any significant programs or changes in pricing or anything aggressive from a marketing standpoint to go out and solicit demand. This is a very real backlog in that sense. What we believe the backlog really represents is a little more confidence on the part of the farmer and where the market is going at this point. If you think back to a about 1.5 year ago or a year ago, even to the comparable period, there was a shock when - - from the - - a pretty significant market change; from a strong market with a lot of demand to a drop-off with commodity prices. And demand dropped accordingly. So, we believe that the overall backlog is showing some improvement due to a greater confidence on the farmer.

Okay. So I guess let me ask it differently this way, is the 50+% increase in backlog solely volume driven? Or is there some price baked into that, due to cost inflation?

There would be year-over-year price change that would be in that backlog. And again, that backlog is higher for both irrigation and diversified products. So - - but yes, there is price effect in the backlog.

Great, thank you.

Your next question comes from the line of Richard Paget with Morgan Joseph.

Hi, good morning, everybody.

Good morning, Richard.

A key thing on that same topic. In this quarter, how were volumes and pricing? Revenues in irrigation were up slightly. Was that all pricing?

I'm not sure I understand the question, Richard, you're asking in terms of the first quarter, how much of it was pricing versus - -?

Yes.

Well, the - - domestic irrigation revenues were down slightly, quarter to quarter from last year. And I believe that on a volume unit basis it would be comparable to the revenue change. So, I think there's a slight difference in the volume in the first quarter. However, as I said, I think we have seen more recently and we saw it towards the mid to end of the first quarter, is a little greater confidence on - - from the farmer in making capital equipment purchases.

I mean then looking - - trying to get a sense of next year, I mean - -?

Yes?

What would be the signs that we should start looking for that would continue that trend of greater confidence? Would it have to be commodity prices going up? Maybe more drought signals?

I think that commodity prices are climbing, particularly in corn and soybeans. And I would say soybeans are relatively strong now. But commodity prices going up in corn. More drought signals and we are seeing more volume in parts of the midwest that did experience drought this past season. But more drought signals would also fuel for demand. But I think that the - - really looking at the backlog situation at this point, it's an indicator, but it's an early indicator and I really wouldn't project that yet. I think what we will see in the next few months, which is the second quarter is an important quarter for us, will be a better indicator of what's really happening in the market.

Okay. And then could you give us a sense of what operating income was by segments?

I think that - - we don't have that operating income by segment at this point. We will have an operating income defined in the Q.

Okay. As the tax rates seem to be up a little bit, is this what we should think going forward to be the normalized rate or did something happen in the quarter that was different?

No, that's approximately the rate we would expect for this fiscal year.

And then in terms of CapEx, that seems a little lighter than usual. Is that going to be the run rate? Or it was just - -?

We're expecting a CapEx run rate that would be in the range of 4.5 - - 4 to 4.5 million for the year. And depreciation probably in about the $4 million range.

Okay. And then in terms of the stock option expense, is that going to be pretty much the normalized number, as well?

No, it's - - it certainly is affected by the timing of the stock-based compensation when it takes place. At this point, there was a $0.02 impact in the first quarter. We're estimating somewhere approximately around a $0.10 impact for the year.

Okay, so, about $0.02 to $0.03, just depending on timing, per quarter?

Yes. Yes.

Okay, that's it for me. Thanks.

Thank you.

[ OPERATOR INSTRUCTIONS ] Your next question is a follow-up from the line of James Gentile with Sidoti and Company.

Everybody is getting ready for the holidays. But you mentioned in the release, a recent opening of a new galvanizing facility. This is, unfortunately, new news for me. So, how much did it cost? And what sort of capital investment decisions with regard to expanding your galvanizing capacity or introducing new - - how did you come to the conclusion that you needed more galvanizing capacity? And what was the rate of return on invested capital type of analysis associated with that investment?

I can answer part of that for you, James. The total capital amount for the galvanizing facility was approximately $4 million. And this was a project that had been planned and in process here for a period of time. For over a year. The primary drivers for this were a couple of different factors. One was capacity issues. We had exceeded the capacity and really outsourced some amount of our galvanizing every year. And it's going back a couple of years, we were outsourcing a significant amount of our galvanizing.

The other is quality improvement. And one of the things that certainly affected us is, as we put more through our prior galvanizing kettle and galvanizing process, the galvanizing quality decreased. And in order to maintain the quality level that our customers require and that we want to see, this investment in the galvanizing facility was essential. The third is that it reduces our overall cost of galvanizing through this process. So - - and I'm not going to get into the specific return on investment on this project but those were the drivers for it. And the quality as well as the capacity were significant drivers.

Okay, I guess then looking out, how do you intend to - - for the last year and previous years you spent about $4 million in property, plant and equipment. Was that all the galvanizing investment for the most part? Or was this kind of a couple of year project?

It was a couple of year project. A piece of it was in last year. A piece of it is in this fiscal year's CapEx.

Okay. And then how does - - I guess essentially how - - it's a sizeable investment historically, I'd imagine for Lindsay. I just wondering if you could kind of quantify how these type of investments - - this type of use of capital drives your long term operating margin forecasts, 10% to 13%? It appears that given the cyclicality of your business etc. that additional overhead investments aren't as prudent now. Maybe you can confirm or reject that statement?

I think that in capital investments and the core processes in producing our product are still very prudent, particularly in the domestic market. In fact, I would say in any of the markets that in we're in. But in the galvanizing, as I would conclude to main productions; tube mills and welding, would be definitely core process in the production. And they are improvements reduce the costs, improve the quality and have a significant return on investment, which a project like this did, I think it's still very prudent to do.

Okay, thanks.

Thank you.

At this time, there are no further questions.

Well, in closing, I would add that 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. And at the same time, we will continue to extricate 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 strong cash flow and financial flexibility to create shareholder value by pursuing a balance of organic growth opportunities, accretive acquisitions, share repurchases and payments. We thank you for your questions and participation in this call. And we wish you all a very merry Christmas and happy New Year. Thank you.

This concludes today's Lindsay Manufacturing fiscal first quarter 2006 conference call. You may disconnect at this time.