Lindsay Corp (LNN) 2006 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Lindsay Manufacturing fiscal third quarter conference call.

[OPERATOR INSTRUCTIONS]

During this call, management may make forward-looking statements that are subject to risks and uncertainties which reflect management's current beliefs, estimates of future economic circumstances, industry conditions, company performance and financial results. Forward looking statements include the information concerning possible or assumed future results of operations of the company and those statements proceeded by, followed by or including the words expectations, outlooks, 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. Thank you.

I will now turn the call over to Mr. Rick Parod, President and Chief Executive Officer. Sir, you may now begin your conference.

Thank you, good morning and thank you for joining us today.

Revenues for the third quarter of fiscal 2006 were $75 million, up 34% from the same prior year quarter. Net earnings were $6.4 million, or $0.55 per diluted share compared with $3.8 million, or $0.32 per diluted share in the prior year's third quarter.

In the domestic irrigation market revenues were $48.9 million for the third quarter, increasing 43% from the same quarter last year. At the end of the quarter, commodity prices for the primary agricultural commodities on which our equipment is used remained relatively stable with corn prices increasing approximately 15%, fueled by increased ethanol demand.

As discussed last quarter, increased ethanol demand and a projected reduction in corn acreage planted has moved corn prices higher. Corn usage for ethanol production is now expected to be more than 30% higher than the previous year and approximately 18.5% of total corn usage.

Aided by the increased ethanol demand, corn inventories are projected to decline, further supporting strong corn prices. Even though USDA estimates project that net farm income will be lower by 22.6% in the '06 crop year, the domestic farmer's sentiment for irrigation equipment remains significantly improved over last year.

Dry weather conditions in the Southwest and Midwest and stabilized crop prices have created strong recovery conditions for irrigation equipment. Year-to-date domestic irrigation revenues were $108.5 million as compared to $83.9 million, increasing 29%.

In the international markets, including exports, revenues were $20.1 million for the third quarter compared to $15.7 million for the same period last year, up 28%. Most of the international revenue increase was realized in Latin America excluding Brazil, Australia and New Zealand, and China.

The agricultural sector in Brazil remains depressed in spite of the Brazilian's government recently-announced support plans which include debt extensions, lower interest rates and higher debt limits.

We're pleased to see an expansion of revenues in China in the quarter. While we've been selling in China for a few years, this year we're realizing the benefits of a greater appreciation of our technology and government funding and support of efficient irrigation.

Year-to-date, total international revenues including exports are $43.8 million, up 16% over the same time last year. Also year-to-date international revenues were 28.8% of total irrigation revenues, down slightly from 30.9% of irrigation revenues for the third quarter of '05 due to stronger domestic demand.

We continue to realize strong revenues in our contract manufacturing business and in commercial tubing sales, even though diversified manufacturing revenues were flat with the third quarter of last year.

In addition, on June 1st, we completed the acquisition of Barrier Systems Inc., a manufacturer of movable barrier systems and road safety products. The acquisition reflects the execution of our strategy to build up our diversified manufacturing business with more proprietary infrastructure products.

Barrier Systems Inc. has been a customer of our diversified manufacturing business for many years and we see exciting opportunities to create shareholder value through manufacturing synergies, supporting their expansion in the U.S., and in international expansion where we can provide support for our local entities.

Gross profit was $17 million for the third quarter versus $12.2 million in the same quarter last year. Gross margins for the quarter were 22.7% as compared to 21.8% for the third quarter of last year.

During the quarter we experienced rapidly rising costs in zinc and copper, which were approximately 8% and 5% representatively of the cost of a standard pivot. At the same time, steel costs remained relatively stable.

We have proactively responded to the rising costs by passing through multiple price increases on our products equating to approximately 5% in the quarter and approximately 10% year-to-date. The environment for passing through and retaining those price increases was improved over the previous quarter and over fiscal '05.

Most recently, we've seen some pricing rollback on zinc and copper costs. We continue to expect the price increases implemented will be effective and to realize margin improvements as costs stabilize.

In addition, we are realizing benefits from our manufacturing and schedule improvements implemented at our Lindsay, Nebraska facility. During the third quarter we experienced efficiency improvements resulting from the higher volume and from the lean manufacturing principles implemented.

We've recently hired a new plant manager from the automotive industry with lean experience and we expect to continue to realize financial benefits as we improve our processes and work flow.

Total operating expenses for the quarter were $8.7 million compared with $6.8 million for the same quarter of last year. The increase in operating expenses for the quarter is primarily attributable to the inclusion of stock-based compensation expenses of $500,000 and an increase in performance-based incentive compensation expenses of $800,000.

Year-to-date operating expenses were $23.5 million versus $20.9 million at the same time last year. Approximately $1.2 million of the increase is resulting from the inclusion of stock-based compensation expenses.

Our order backlog was up 73% at May 31, 2006 to $19.2 million as compared to $11.1 million at May 31, 2005. The backlog was higher for domestic irrigation, international irrigation, and diversified manufacturing.

We believe the higher backlog reflects the improved farmer sentiment, [prime] market conditions, and general market recovery from the decline experienced in fiscal '05.

Cash and marketable securities at May 31, 2006 were $52.9 million compared with $53.7 million at May 31, 2005. Accounts receivable were higher by $10 million on higher revenues, however, our days sales in accounts receivable improved.

Inventories increased $2.1 million from the same time last year as a result of our higher production levels and higher order flow. Inventory turns also improved over the same time last year.

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

In summary, the irrigation equipment demands during the third quarter of fiscal 2006 continue to strengthen on improved farmer sentiment in the domestic market and continued strong export sales.

While current USDA estimates forecast that higher input costs primarily energy related and fewer production acres will decrease net farm income, conditions continue to support demand for our equipment. Dry weather conditions and expanded ethanol production are the key demand drivers in the U.S. at this time.

In the international markets, improved corn prices and increased demand for sugar cane for ethanol appear to be strong drivers as well.

Through most of the third quarter, we experienced rapidly rising zinc and copper costs. We have an effective process for forecasting and tracking price changes in key commodities affecting our business and we've reacted proactively in passing through price increases on our products.

We continue to believe that the opportunity for significant improvements in margins exist as steel and zinc prices stabilize. Additionally, we have a strong product development process with a product flow that will continue to differentiate our offering and generate revenues.

I would now like to open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Matthew Spon with TCW.

Good morning, Rick.

Good morning.

Hi. Good results.

Well, thank you.

On the Barrier Systems acquisition, that appears to me to be a low-risk transaction for Lindsay that's accretive to margins. Is the Company contemplating other acquisitions with characteristics similar to that of Barrier Systems in the future?

Well, we really like the characteristics we saw with Barrier Systems, Matthew. We saw that just a couple of different opportunities in terms of ability to create returns for shareholders, but that one was the manufacturing synergies that we thought here we're producing currently about 40% of the metal products that they have produced, so there's a significant opportunity to produce more.

We also saw synergies to help them to expand their U.S. demand through some funding and some other processes. And we see some opportunities to really expand their international opportunities as well, possibly by manufacturing in our international locations.

And the answer to that question is, yes, we do see other acquisition opportunities that would be similar in that process. We see pieces that we can add to a barrier, for example, and roll up within that infrastructure business with similar characteristics.

We also see some opportunities in other water-related type products where, again, we could leverage our international manufacturing capability or leverage other capabilities and processes within the Company. So we continue to find quite a few with those opportunities, granted we can't guarantee when they will close or what that timing would be, but the list is still very good.

That's great to hear. And also, on a grander level on acquisitions, how do you see the valuations generally of Canada today versus in the past perhaps a year ago? Are they more attractive on the whole, less attractive on the whole?

Well, we saw, particularly in the water area, that the types of multiples that we were seeing were ramping up probably over this past year in terms of potential water acquisitions. I think they're still relatively high, but I would say that the candidates that we're generally looking at are not ones where we're going head to head with the larger firms.

We're paying, what I consider to be extremely high multiples, and I find it would be difficult for us to achieve a reasonable return to shareholders on. So generally what we're finding are those unique opportunities, like a Barrier System, where we can pay reasonable multiple and we have very good plans in terms of how we'll generate value out of it.

Good. Well, good results, and thanks.

Thank you.

Once again, to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Ted Beatty with 150 LLC.

Hello.

Good morning.

I was just hoping that you guys could just kind of walk me through. You said you were hopefully you improve margins, I guess, top line growth and then margin growth over, you know, we've seen in the next three to four quarters. I guess, what do you guys hope for?

Well, I would say that we're really are not going to make any kind of a projection or forecast at this point and give guidance in terms of where we see margins going. I would say that what we saw in third quarter was an excellent sign in terms of the price increases that had passed through.

Also, we saw some effective volume and efficiency improvements that have been made in our factory. And if you look back historically, Ted, at Lindsay's margins, you can see in the '03 year, for example, our margins were in the 24+ range.

We really don't see anything that prevents us from getting back to those kinds of margins or better inherent in our business structure. However, what has been a challenge most recently in the last year plus has been the rapid change in the -- some of our input costs.

And as I said earlier, as we see those input costs in primarily metals stabilize, that gives us some real upside in terms of margin opportunity.

Okay, great. Thank you.

Thank you.

At this time, there are no further questions.

With our business the global long-term drivers of water conservation, population growth and improving farm efficiency remain very positive. We continue to take aggressive actions 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 in water and infrastructure. Lindsay is committed to achieving earnings growth through global market expansion, improvements in margins as materials stabilize, and acquisitions that form growth paths and that are accretive to earnings.

We have strong cash flow and financial flexibility to continue to create shareholder value by pursuing a balance of organic growth opportunities, accretive acquisitions, share repurchase and dividend payments.

Thank you for your questions and participation in this call.

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