Lindsay Corp (LNN) 2006 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Lindsay manufacturing fiscal second-quarter 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

This conference call contains 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, 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 operation to differ materially from management's beliefs expressed in the forward-looking statements. 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 statements released reference the Company's press release dated March 22nd, 2006.

Representing management today will be Rick Parod, President and Chief Executive Officer; David Downing, Chief Financial Officer; Tim Paymal, Corporate Controller. I would now like to turn the conference over to Mr. Parod. Sir, please go ahead.

Good morning, and thank you for joining us today. Revenues for the second quarter of fiscal 2006 were 54.9 million, up 32% from the same prior year quarter. Net earnings were 1.7 million or $0.15 per diluted share compared with 600,000 or $0.05 per diluted share in the prior year's second quarter.

In the domestic irrigation market, revenues were 36.5 million in the second quarter, increasing 42% from the same quarter last year. At the end of the quarter, commodity prices for the primary agricultural commodities in which our equipment is used remained relatively stable, and improved over the first quarter of fiscal '06.

Corn prices were up about 4% over the same time last year, while soybean prices were down approximately 12%. Increased F&L demand and a projected reduction in corn acreage planted could positively move corn prices higher, in spite of the high carryover inventories.

Even though USDA estimates project that net farm income will be lower by 22.6% in the '06 crop year, the domestic farmer sentiment for irrigation equipment is relatively improved over last year. Dry weather conditions in the southwest and midwest stabilized crop prices, and pent-up demand from the market decline last year created a stronger market for irrigation equipment in the first half of '06. Year to date, domestic irrigation revenues through the first half of the year were 59.6 million as compared to 49.6 million in the first half of fiscal '05, reflecting an increase of 20%.

In the international markets, including exports, revenues were 12.7 million for the second quarter compared to 10.5 million for the same period last year, up 22%. Each of our business units in South Africa, South America and Europe realized increases in revenues over the same period last year, yet all continued to experience depressed market conditions.

Farmers in Brazil have experienced pressure on their profitability from drought conditions, Asian rust affecting soybeans, and a strengthening in the value of the Brazilian real relative to the U.S. dollar. In South Africa, the profitability picture is now improving for farmers as maize prices have increased.

In Western Europe, the market for [pivots] has remained strong, primarily on the Iberian Peninsula, while [hoes real] demand is down due to wet weather conditions in France. During the second quarter of fiscal '06, we also continued to realize revenue growth in Latin America.

Year to date, international revenues, including exports are 23.7 million, up 8% over the first half of fiscal '05. For the first half of fiscal '06, international revenues were 28.5% of total irrigation revenues, down slightly from 30.6% of irrigation revenues in the first half of fiscal '05 due to stronger domestic demand.

Diversified manufacturing revenues increased 8% to 5.7 million for the quarter compared with 5.3 million in the second quarter of last year. We continue to realize strong revenues at our contract manufacturing business and in commercial tubing sales. We are continuing our initiative of developing new customer relationships with our diversified manufacturing business and in seeking new opportunities for growth and expansion of our diversified manufacturing business organically or through acquisition.

Gross profit was 9.9 million for the second quarter versus 7.8 million in the same quarter last year. Gross margins for the quarter were 18% as compared to 18.7% for the second quarter last year. During the quarter, margins were compressed by higher steel prices, rising zinc costs, and increased competitive pricing pressure.

We realized increases in steel, which comprises more than one-third of our product cost, of more than 7.5%, and at the same time, zinc rose more than 20%. Given the increase in our production input cost, we implemented a 4% increase on our product prices in early January and an additional 1% increase in February. However, we experienced an overall sluggishness and market acceptance of the increases passed through due to competitive conditions.

In addition, we earned a sizable percentage of our domestic revenues in the quarter from significant projects, where we face more competitive bidding. We do expect the price increases we have implemented and others planned to [stick], and to realize margin improvements as costs stabilize.

Total operating expenses for the quarter were 7.8 million compared with 7.1 million for the same quarter last year. The increase in operating expense for the quarter is primarily attributable to the inclusion of stock-based compensation expenses of 421,000 and expenses related to our factory consolidation in South Africa of 186,000.

For the first half of fiscal '06, operating expenses were 14.8 million versus 14.1 million for the previous year period. Year to date in fiscal '06, the inclusion of expense-based compensation has added approximately 750,000 to operating expenses.

Our order backlog was up 56% at February 28, 2006 to 23.9 million as compared to 15.3 million February 28, 2005. We believe the higher backlog reflects the improved farmer sentiment, dry market condition, and some pent-up demand carryover from fiscal '05. The backlog was higher for both irrigation and diversified products.

Cash and marketable securities at February 28, 2006 were 50.9 million compared with 43.8 million February 28, 2005. Accounts receivable were basically flat on higher revenues, reflecting a reduction in our preseason dealer stock sales of extended terms. Inventories declined 3.6 million from the same time last year as a result of our actions to improve inventory utilization and working capital management in general.

We did not repurchase any Company stock during the second quarter of fiscal 2006; however, we have a remaining repurchase authorization for 881,000 shares.

In summary, the irrigation equipment demand during the second quarter of fiscal 2006 strengthened on improved farmer sentiment in the domestic market, and continued strong export sales. Even though USDA estimates predict that higher input costs will decrease net farm income, dry conditions continue to support demand for our equipment. Our international operations continue to experience depressed markets; however, we believe the conditions are improving, as evidenced by improved second-quarter revenues. As a result of those depressed market conditions, we've taken aggressive action to cut expenses, including the consolidation of our factories in South Africa.

One of the toughest challenges we face during the second quarter of fiscal '06 has been effectively passing through the rising steel and zinc costs. We have implemented the price increases in a timely matter; however, the competitive environment has not allowed the increases to be absorbed by customers as quickly as we would ,like thereby continuing to compress margins. We continue to believe that the opportunity for significant improvements in margins exist as steel and zinc prices stabilize.

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

(OPERATOR INSTRUCTIONS) [Matthew Spon], [TCW].

On the acquisition side, can you describe some characteristics of some acquisition candidates that Lindsay has evaluated this quarter, perhaps some business descriptions and evaluations?

Yes, Matthew; I think the way that I would characterize it without getting into too specific of business descriptions is that our acquisition efforts have been focused in two primary areas. One is in water-related type products, and that could include anything in -- I think categories that we have looked at would be valves and filtration. We have also looked at some water-treatment-type equipment -- but water-related-type products, and the other category would be infrastructure-type products. And that could be road or railroad buildout type of infrastructure. And we have found good candidates in each of those categories, and continue to pursue candidates in those categories.

How are the valuations looking today versus in the past perhaps a year ago?

Well, I think the valuation -- and I think many of the things that we read, and I'm sure you do too, is that evaluations are pressed a little higher on acquisitions. We are seeing that to some degree. But generally, the type of acquisition candidates that we are looking at are smaller companies, privately owned companies, maybe slightly below the radar of some of the other larger -- companies out looking for acquisitions, which may keep a little more pressure off of those multiples. But there are still, particularly in the water area, I think a threat of higher multiple movement.

[Bill Church], [TGRA].

Good morning, just a quick question on cost. Zinc -- how important is that to you? Because it looks like there are some things going on with [Strada] in Australia that -- zinc is going to be a continuing problem for two or three years.

While zinc is important, obviously, in our galvanizing process, I think we would estimate it's somewhere in the range of between 6 and 7% of total product cost. So it's a significant factor -- obviously not as a significant or material as steel, but it still is an important factor.

(OPERATOR INSTRUCTIONS) At this time, I'm showing no further responses. Mr. Parod, would you like to have any closing remarks?

Yes, 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 appropriate aggressive action to implement margin improvement initiatives, further differentiate our offering, and to expand into new geographic growth markets.

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 repurchase, and dividend payment.

We thank you for your questions and participation on the call. Thank you.

Thank you for participating in today's conference. You may disconnect at this time.