Lindsay Corp (LNN) 2006 Q4 法說會逐字稿

Good morning. My name is Casey and I will be your conference operator today. At this time I would like to welcome everyone to the Lindsay Manufacturing fiscal 2006 fourth-quarter and year end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks that will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

During this call management may make forward-looking statements that are subject to risks and uncertainties, and which reflect management's current beliefs and estimates of future economic (technical difficulty), 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 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. Thank you, I would now like to turn the call over to Mr. Rick Parod, President and Chief Executive Officer. Please go ahead sir.

Good morning and thank you for joining us today. Revenues for the fourth quarter fiscal 2006 were $56.6 million, up 41% from the same prior year quarter. Net earnings were $3.1 million, or $0.26 per diluted share, compared with $293,000, or $0.03 per diluted share, in the prior year's fourth quarter.

Total revenues for fiscal 2006 were $226 million, up 27% from 2005. Net earnings were $11.7 million, or $1 per diluted share, compared with $4.8 million, or $0.41 per diluted share, for fiscal 2005.

In the domestic irrigation market revenues were $26.7 million for the fourth quarter, increasing 24% from the same quarter last year. The irrigation equipment demand remained relatively strong during the quarter when compared to the same time last year. Dry weather conditions in the West continued to encourage demand throughout the summer. Increased ethanol production continued to support corn prices more than 20% above prices at this time last year even with estimates of a plentiful harvest, further strengthening the farmer's optimism.

Recent USDA estimates place corn usage for ethanol at approximately 18% of total corn usage for the '06, '07 crop year, and 34% higher than in the previous years. There are now more than 100 ethanol bio refineries operating in the US, and more than 50 either under construction or expanding.

For the full year of 2006 domestic irrigation revenues were $135.2 million, up 28% over fiscal 2005. Irrigation revenues rebounded on improved farmers' sentiment and stabilized agricultural commodity prices.

In the international markets, including exports, irrigation equipment revenues were $14.7 million for the fourth quarter, up 11%, compared to $13.2 million for the same period last year. Most of the international irrigation revenue increase was realized in Australian, New Zealand, China and Latin America, excluding Brazil.

We were pleased to see an expansion of revenues in China over the past few quarters. While we've been selling in China for a number of years, in 2006 we began to realize revenues direct from local farmers supported by Chinese government subsidies. The local grower interest in government support demonstrates an appreciation for the advancement in technology and efficiency our equipment offers.

For the full fiscal year of 2006 international revenues were $58.5 million, up 15% from the previous year. We were pleased with our continued rapid growth in the international market, despite depressed market conditions in Brazil and Europe in 2006. We also continue to have new international growth opportunities, some of which are fueled by increased sugar cane demand, also for ethanol production.

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 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 international -- or their expansion in the US and in international expansion where we can provide support through our local entities.

With Barrier Systems Inc. or BSI, added to our previously existing diversified products business we have significantly enhanced our position in the attractive road and railroad infrastructure markets. As such, we will now report the combined business as the infrastructure segment as of the fourth quarter of fiscal 2006.

For the fourth quarter of fiscal 2006 infrastructure revenues were $15.2 million with the addition of BSI, compared to $5.3 million in the same quarter last year. For the full fiscal 2006 year infrastructure revenues were 32.3 million compared to 21 million in fiscal 2005. With the addition of BSI, we continue to build our infrastructure of revenues through proprietary products, commercial tubing and selected contract manufacturing. We see many more opportunities to add additional proprietary products to this business organically and through acquisitions.

Gross profit was $13.9 million for the fourth quarter versus $7 million in the same quarter last year. Gross margins for the quarter were 24.6% as compared to 17.6% for the fourth quarter last year. The improved margins resulted from the inclusion of BSI, stronger effective pricing on irrigation equipment, and higher factory volume when compared to the same quarter last year.

During the quarter steel and zinc prices were relatively stable, allowing us to recover much of the increases experienced in previous quarters through our product pricing. Steel, zinc and copper prices remain relatively stable, and we believe we will see some relief in future quarters, which should also be beneficial to irrigation equipment margins.

During the fourth quarter we continued to realize benefits from our manufacturing and scheduling improvements implemented in our Lindsay Nebraska facility. We experienced efficiency improvements resulting from the higher volume and from the lean manufacturing principles implemented. We are also continuing our investment in automation and other efficiency improvements.

For the fiscal year 2006 gross profit was $48.2 million compared with $33.6 million in fiscal 2005. Gross margins were 21.3% compared to 18.9% to previous year, benefiting from the higher volume, inclusion of BSI in the fourth quarter, and stronger product pricing. We believe that the stabilization of major input costs such steel, zinc and copper, will create an opportunity for future strengthening of our irrigation gross margins.

Total operating expenses for the quarter $9.2 million compared with $7.1 million for the same quarter last year. The increase in operating expenses for the quarter is primarily attributable to the inclusion of BSI's operating expenses and stock-based compensation expenses.

The full fiscal 2006 year operating expenses were $32.7 million versus $28.1 million at the same time last year. Approximately $1.5 million of the increase is attributable to the inclusion of stock-based compensation expenses, and $1.8 million for the inclusion for BSI in the fourth quarter.

Our order backlog was up 89% at August 31, 2006 to $26.8 million as compared to $14.2 million August 31, 2005. Irrigation equipment backlog increased $2.2 million, or 25%. Infrastructure backlog increased $10.4 million due to the inclusion of BSI.

Cash and market securities at August 31st, 2006 were $59.3 million compared with $54.8 million August 31, 2005. Accounts receivable were higher by $9.2 million, with $9 million of the increase attributable to BSI. Inventories were $7.5 million higher than at year end last year, with $7.7 million of the increase from BSI. Overall prior to the inclusion of BSI, we improved inventory turns and accounts receivable DSO over the previous year.

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

In summary, irrigation equipment demand during the fourth quarter of fiscal 2006 continued to be comparatively strong on improved farmers' sentiment in the domestic market and continued strong export sales.

Dry weather conditions in the US and expanded ethanol production are important market drivers for the US market at this time. In the international markets improved corn prices and increased demand for sugar cane for ethanol are strong drivers as well.

During fiscal 2006 we experienced rapidly rising zinc and copper costs and fluctuating steel costs. I'm pleased to see those costs increases abate, and I believe we have reacted proactively in passing through price increases on our products. We believe that the opportunity for significant improvements in margins still exist.

I am also pleased with the progress that our organization made in fiscal 2006 in implementing lean manufacturing techniques, improving working capital management, developing international markets such as China, and developing and introducing new products -- and introducing new products to the market. All of those activities enhance the Company's value for our shareholders.

In addition, I'm pleased with the addition of BSI to Lindsay Manufacturing Company. BSI has a strong, unique product line with a superb management team. We expect to realize strong growth in our infrastructure segment with the addition of BSI, the introduction of newly developed products, and through acquisitions. I would now like to open it up for your questions.

(OPERATOR INSTRUCTIONS) James Gentile with BB&T Capital.

You mentioned some positive language around China that we haven't heard in some time. Could you give us insight into how much China generated in terms of total international revenues?

Well, we're not breaking out any in terms of specific markets, James, China included, in terms of the total revenues. What I was commenting on, and I think this is the important change that we have seen, is we have over the past number of years made some sales to China primarily to large US companies either growing potatoes or the potato processing -- process in some form. In this year we saw a quite a bit of change where we had a fair amount, or a significant amount of volume, with local growers, also with some government subsidies. We believe that is a change that's now taking place. And we are seeing a continual increase in demand. We now have a country manager in China, and it strengthened our distribution channel in China. So we believe are starting to see that market develop at a faster pace.

I got you. Could you give us an example of the level of growth that you're seeing there? Did you see sales double in the past year, or an order of magnitude in terms of growth rate then?

I would say it is in that range, maybe a little more.

Of the 19% total revenue growth we saw in the irrigation equipment segment in the quarter, I was wondering if you can give us the split between volume and price?

Yes, I think one way to look at it -- and in fact I guess looking at the total volumes on the irrigation side of it year-over-year price probably has about a 7% total impact. Quarter over quarter it is probably about a 10% effect.

Okay so year on year 7% due to higher prices and 10% sequentially. No, quarter over quarter.

Quarter over quarter, yes.

[Adam Reeses] with Glacier Bay Capital.

Just wondering a little if you could give a little more color on Barrier Systems, I guess how you did, I think, about a $10.3 million in the quarter on the top line. Just wondering if that is kind of the right runrate or how to think about that business from sort of a seasonal perspective there?

I think the way to think about Barrier is since part of their -- a good part of their revenue is really going to be related to construction, it's going to be primarily -- much of it in the summer months. You will see a higher runrate in the second half of our fiscal year than you will in the first half of our fiscal year. So they're going to have a little higher runrate in the summer months due to the construction activity that's taking place.

So, I guess when you gave the numbers the previous I guess ended April '06 I think in your previous release is about $21 million for the previous 12 months ended April '06. Any sense of kind of the growth rate you expect for that business going forward?

Well, we're really not giving any guidance on this or any of our business at this point, including a projected growth rate for Barrier. But I would say we certainly do expect growth, and that's why we acquired it, and they have experienced growth over this past year.

[Matthew Fond] with TCW.

Would you provide some color on the pipeline of potential acquisition candidates, like are the characteristics of candidates similar to that of Barrier Systems where the Company is going to continue to build up its diversified manufacturing segment with more proprietary products?

Guess I can, a little bit. I can say that we have candidates in the road safety type products that are probably very clear direct fits with Barrier Systems that would be both domestic and international candidates. We see some good opportunities in a number of the international markets which could consolidate that road safety product type segment.

In addition to that, we see some other somewhat tangent markets or segments that are attractive to get into areas like security barrier type systems, very closely related from a manufacturing standpoint, closely related from a project sale standpoint. So those would also be ones that would fit within that category. We see quite a few candidates in both domestically and internationally in all of those areas.

Good to hear. So then the management of Barrier Systems are probably being helpful to you to seek out good potential candidates in those businesses.

Yes, absolutely. In fact they created a good potential candidate list for us very early on. And we of course are working through that list. We've added to that list quite a bit since we have started working with Barrier. So the list has become pretty extensive, and we continue to add new ones to it.

That's good. On general acquisition evaluations, would you say the evaluations today generally speaking are more favorable maybe compared to last year? And has the universe of potential acquisitions increased over the last year?

I would have a hard time saying that the evaluations have really changed much over the last year. I think one area where we still see some pretty high evaluations from a acquisition candidate standpoint, Matthew, is in the water area, as you know. That's still a bit pricey. But we do still have candidates there also that fit within price ranges that we would consider.

From I guess the pool of acquisition candidates I haven't really seem much change take place there either. But we are generally looking for ones that may be in a category outside of what some of the larger companies would look for. And for us what we're finding normally is it's not just a matter of finding those really good attractive acquisition candidates, but really finding it and working it at the right time.

Barrier Systems is a great example where it took us a number of years of discussion and communication before that was resolved. We have some that we're currently still talking with that have been going on for probably a year or two. So it's a matter of getting the right time and at the price.

Great, thank you. And then one last question. Is it fair to say that Lindsay is accelerating its commitment to lean manufacturing principles?

Yes, I would definitely say that we have accelerated our commitment to lean manufacturing in the past 12 to 18 months, and its continuing to accelerate. We have more and more projects on the table today in our -- primarily in our Lindsay Manufacturing factory. I'm sorry, Lindsay Nebraska factory.

(OPERATOR INSTRUCTIONS) Rob Norfleet with Davenport.

Hey guys, this is actually Alan Bach in for Rob. I have one quick question for you. Have you guys given any insight as to the size of an acquisition you would be comfortable with moving forward?

Well, what we have defined in our acquisition candidate profile is we really look for acquisition candidates in the say $20 million to $50 million revenue range for business add-ons. We also of course consider a lot of small product or technology add-ons within any of our -- within our business segment. Generally we are looking for that $20 million to $50 million revenue range.

Adam Reeses with Glacier Bay Capital.

Just a follow-up. I am sort of just new to this story and I am just trying to understand with regard to ethanol kind of I guess sort of the impact of ethanol on your business today, and sort of the opportunity going forward kind of what -- if you could just maybe talk about a little bit of sort of what portion of the business is impacted by today and how you think about the opportunity.

Certainly, and I'm certainly not an expert on ethanol itself, but I would say that we have seen an expansion in demand due to ethanol. And it certainly is also assisting in boosting up corn prices, which has an effect of improving farmers' sentiment, but also has the effect of increasing that profit opportunity for farmers in expanding their yields and their production. And that is really in many -- to many extent what our equipment does.

So with our irrigation equipment they can expand the quality -- or improve the quality of the product they're growing, but also expand their yield per acre. So as corn prices move up, it becomes even more important and more profitable for them to add that irrigation. Obviously it becomes a bigger issue in a drought situation where they could potentially lose a significant part of their crop.

The other side of that is when you look at total irrigated acres in the United States, roughly 17, 18% of farm cropland is irrigated. But when you look at the total irrigated acres, somewhere in the range of 35 to 40% of that irrigated land is irrigated with pivots. Probably about one-third of the crops grown under those pivots today is corn. And what we expect to see as ethanol production and demand is expanding is that percentage will probably change and more acres will go from soybeans or other crops into corn and we will see more corn acres. Generally that's beneficial. Corn is a fairly thirsty crop. And as we know, many of our -- certainly our pivots are irrigating that crop, so we would expect to see that beneficial to our business in total.

Okay great. Thanks very much. I appreciate it.

I would also add on to that too, Adam, I think there's another piece to it which is more outside of the United States than inside, and that's in the sugar cane production. What we are also seeing outside on our international basis is development -- quite a few development projects going on in expanding sugar cane production also for ethanol. And in doing that they are also looking at adding pivots for the sugar cane production. I think we will see in the international markets as well as the domestic markets.

Great, and does that I mean change your profile at all for sort of the growth of the -- I guess of the irrigation business in general? I mean has there been relative to maybe the past ten years if you look forward because of ethanol?

I think that ethanol can potentially change the dynamics of our business quite a bit in the fact that it can boast up corn prices, and obviously create very positive economics for the farmer, and also for him in terms of expanding corn production and corn yield. So I can see the farmer being in a better position and more desirable position to buy irrigation equipment. I also see it creating more opportunities in the international market with the sugar cane production. So I would say, yes, it does change the scope.

Elizabeth Levy with Winslow Management.

I have a related question to that last one. I'm also new to this story, so I am not sure if you have disclosed this. But looking down the road, have you talked about what proportion of the business will be in infrastructure versus irrigation?

Well, I guess the answer is if you do the math about -- and look at what was our diversified products business relative to total, it was about 12% of our total revenues. Now diversified plus the BSI portion would be approximately 25% of our total revenues, somewhere in the range.

And I have said in the past that I would like to see us get to a point where approximately 50% of our revenues are outside of the pure irrigation market, which means could be additional water acquisitions, or it could be in that infrastructure type business. But within those infrastructure would be about 25% today, and obviously we would like to expand on that.

We have no further questions at this time. Mr. Parod, do you have any closing remarks?

I'm pleased with the progress we made in fiscal 2006. We experienced a strong market recovery, improved our business on all fronts, and made a strategic exciting acquisition. For our business overall the global long-term drivers of water conservation, population growth, increasing production of biofuels, and improvements in infrastructure remain very positive.

In addition to the overall business enhancements that are taking 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 raw material costs stabilize, and acquisitions that form growth paths and are accretive 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 repurchases and dividend payments. We thank you for your questions and participation on this call.

This concludes today's Lindsay Manufacturing conference call. You may now disconnect.