Lindsay Corp (LNN) 2007 Q2 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the Lindsay Corporation second-quarter 2007 earnings 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).

During this call, management may make forward-looking statements that are subject to risks and uncertainties and which reflect management's current believes and estimates of future economic circumstances, industry conditions, Company performance and financial results. Forward-looking statements include the information concerning possibly 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.

I would now like to introduce Rick Parod, Chief Executive Officer, and turn the call over to him. Thank you. Mr. Parod, you may begin your conference.

Good morning and thank you for joining us today. Revenues for the second quarter of fiscal 2007 were $63.7 million, as compared to $54.9 million for the same prior-year quarter. Net earnings were $2.5 million or $0.21 per diluted share, compared with $1.7 million or $0.15 per diluted share in the prior-year second quarter.

In the domestic irrigation market, revenues were $37.2 million for the second quarter, increasing 2% over the same quarter last year. At the end of the quarter, commodity prices for the primary agricultural commodities in which our equipment is used were strong. Corn prices are up 80% over the same time last year. Soybean prices are up between 20 to 25%, and wheat is up close to 20%. [High oil] refineries continue to have a major impact on corn demand and pricing, estimated by USDA to consume more than 18% of the corn produced in the 2006-2007 season. The USDA also estimates that the corn used for ethanol production will be up 34% from the prior year, reducing corn inventories to less than one-half the levels of a year ago.

Crop prices are significantly higher, and recent USDA estimates place net farm income up approximately 10% over last year, even with increases in input costs. Total direct government subsidy payments to farmers are expected to be down approximately 24%.

With a higher percentage of farm income coming from crop receipts, farmers are generally very optimistic about this crop season. We believe the higher crop prices, improved farm income and improved farmer sentiment create favorable market conditions for equipment sales.

In the second quarter, we experienced unfavorably cold, wet weather that hindered farmers' ability to get new irrigation equipment into the fields and that resulted in [demand lower] expectations, given the strong market dynamics. We anticipate strengthening demand, as markets dry out and as farmers are able to realize the strong crop prices.

International revenues were $13.7 million for the second quarter, up 8% over the same period last year. Exports to Australia, New Zealand and Middle East were stronger in the quarter. Revenues from our operations in South America significantly improved, and we anticipate further improvements in view of the high soybean prices and strengthening farm economy in Brazil.

Recently, Australia passed new water legislation that will give the government more control over river systems feeding agricultural regions. With this new legislation, the Australian government will invest in helping farmers to implement water conservation methods such as efficient pivot irrigation. We anticipate that this legislation, as enacted, will result in even improved demand in Australia over the next few years.

Infrastructure revenues increased to $12.7 million, up from $5.7 million in the second quarter of last year, with the addition of Barrier Systems, acquired in the fourth quarter of fiscal 2006, and Snoline, acquired December 27, 2006. Revenues in earnings from BSI were below our expectations due to delays in specific project revenues. BSI's order backlog remains very strong. Snoline, based in Milan, Italy, expands our presence in crash cushions and other road safety products in Europe, while recapturing the license fee paid by BSI to Snoline for marketing their crash cushion technology.

In addition, we believe there will be opportunities to sell Snoline's products throughout the world through BSI's distribution channel and to expand the BSI's market in Europe through Snoline. We are also optimistic about new opportunities for growth and expansion of our infrastructure business, organically and through acquisition.

Gross profit was $14.5 million for the second quarter versus $9.9 million in the same quarter last year. Gross margin for the quarter was 22.7%, as compared to 18% for the second quarter of last year. The gross margin improvement was a result of significantly improved irrigation margins in North America.

During the quarter, input costs for irrigation equipment was fairly stable, supporting improved selling margins. In the North American market, we implemented price increases of approximately 5%.

In the infrastructure segment, selling margins were better than in the same quarter last year, due to the inclusion of BSI and Snoline. However, they were below the first quarter of this year and below our expectations, due to lower Barrier leasing revenue affected by project timing and weather.

Total operating expenses for the quarter were $10.7 million, up $3 million due to the inclusion of BSI and Snoline. Our order backlog was $38.4 million on February 28, 2007, as compared to $23.9 million on February 28, 2006. Irrigation equipment backlog is up 20% from the same time last year on stronger market conditions. Infrastructure backlog is up approximately $9 million, due to the inclusion of BSI and Snoline.

Cash and marketable securities at February 28, 2007 were $32 million, compared with $50.9 million at February 28, 2006. Accounts receivable increased $16.1 million from the same time last year, due to the inclusion of BSI and Snoline and extended terms on irrigation equipment sales.

Inventories increased $18.5 million over the same time last year, due to the inclusion of BSI and Snoline and due to a buildup of irrigation equipment inventory in anticipation of a strong selling season. Season demand has been somewhat lower than expected, due to weather conditions and a reduction in drought conditions in the Southwest.

We did not repurchase any Company stock during the second quarter of fiscal 2007. However, we have a remaining repurchase authorization for 881,000 shares.

In summary, irrigation equipment revenues during the second quarter of fiscal 2007 was comparable to the second quarter of fiscal 2006, yet demand was somewhat greater, resulting in a higher backlog. Strong agricultural commodity prices, driven in part by demand for ethanol, have created improved economic conditions for farmers and have accelerated the return on their investment in irrigation equipment. While we anticipate further strengthening in market demand, spring weather will play an important role.

In our irrigation segment, we continue to launch new products and services aimed at improving farming and water use efficiency. We are also continuing our investments in Lean Manufacturing process improvements globally to enhance our margins and reduce working capital investments. We're pleased with the improvements we realized in selling margins in the second quarter, and we believe there is still significant upside in selling margins with stable input costs and competitive pricing discipline.

In our infrastructure segment, we have expanded our revenue base with the acquisitions of Barrier Systems and Snoline. While BSI's revenues and earnings were below our expectations for second quarter, we believe the road safety market is attractive, and that with the addition of Snoline we have significantly strengthened our global market position. We believe that the expansion of our infrastructure business will continue to be beneficial in the effective utilization of our manufacturing capabilities and in diversifying our revenues and profits.

For our irrigation and infrastructure segments, we continue to aggressively seek acquisitions that are synergistic and that create differentiation opportunities. We are also pursuing attractive acquisitions that provide an additional growth path for Lindsay Corporation.

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

(OPERATOR INSTRUCTIONS). Ryan Connors with Boenning.

On the demand side for irrigation, to what extent does the weather-induced weakness in the quarter bounce back in subsequent quarters versus those sales being lost altogether? In other words, does that shift revenue from one quarter to another, or is that not the right way to think about it?

I think there's two aspects to that. One is, as I mentioned, our backlog is up, and there's a piece of revenue that's sitting in our backlog that we really were not able to ship because it wasn't scheduled by our customers, either the dealer or their end user, because of wet weather and wet conditions in the field. So there's a portion of that that's already on the books.

There's also a portion that would be related to whatever the weather conditions are at the time when the farmer is looking at making a purchase. If he is anticipating a wet spring and wet weather, it may defer that purchase a year. If it's really just wet conditions affecting his decision or ability to put the equipment in right now, that probably will not be a deferral for a year, but really just delay the time in placing the order.

So I guess what I'm hearing is there's a little bit of both, but there will be some shifting effect?

Yes. I think we could anticipate some shifting effect and, as I said earlier, I think a real key to this is what will happen with spring weather. We know that there has been some lessening of drought conditions in some of the Southwest -- particularly, let's say, Texas. But there still remains some fairly good -- I guess, if you want to call drought conditions good -- some drought conditions in parts of the western states that could continue to drive demand. But I think there's some potential shift that could take place, but we really don't know that yet.

You mentioned the backlog. In terms of that, what proportion of that bigger backlog would you expect to ship out in the second quarter. Also, is there a chance that there's some cancellations in there, or do you expect pretty much 100% of that business to ship?

Yes. We don't anticipate any cancellations, and I would say the majority of that backlog, if not all, will ship in the third quarter.

In terms of the timing, you talked a lot about the farmer sentiment and when commodity prices translate into actual income for the farming community. I guess a lot of people are trying to get their arms around the timing there, in terms of the dance between commodity prices moving higher, farmers actually realizing the revenue and irrigation equipment sales actually taking place. Any color you can provide on how you expect that to play out, and ultimately when you think the irrigation sales will really start to pick up, not just for Lindsay but for the industry as a whole, I think it would be very useful.

Yes. It's an excellent point, because it's a difficult one to get your arms around, in many respects. I think there's a number of factors that come into play here.

There have been a few years, or at least a couple of years, where farmers had lower commodity prices and maybe had held back on some purchases and other capital equipment, whether it was tractors or combines or whatever. I do believe that those purchases are fairly strong, and there may be some of those purchases that will take place prior to some irrigation purchases. In other words, there could be some lag.

On the other hand, I would say, in cases where there's dry weather, and [dryness can] play an impact in the spring, irrigation is a very high priority for the farmers, and could be the number-one purchase that they would look at. So that's certainly a factor. So I think there's a number of different things that come into play here. I'd look at it as, on an overall basis in terms of the cycle, the drivers are very strong. Commodity prices are strong. Farmers will be able to pocket the higher commodity prices in the future, which leaves them in a good, strong position for making equipment purchases.

But even more importantly, when you look at one of the comments I made earlier, the higher prices significantly improves their return on investment in their payback period and expanding their yields in their fields. So investing in irrigation has an excellent payback for the farmer.

International revenues up 8% in irrigation. I'm assuming that's a pretty big range there, with some markets well above that and others below that. If you could just talk about where you are seeing the most strength internationally?

We're seeing strength now in Brazil. Brazil is an interesting one, because it is up quite a bit from where we were at this time last year. However, this is now, in a sense, the beginning of their selling season in Brazil. So we anticipate further strength in that market.

Europe is better than what it was last year. We are seeing improvements in things like hose reel sales, some of our other product lines out of our European business.

China is a little less at the moment, but it has been primarily project-oriented, in that we see projects that are on the horizon now that potentially make China bigger than it was last year, but China as a developing country will continue to be lumpy for us. We'll see it quarter to quarter, with a fair amount of variation.

South Africa is still lagging a bit from what we have seen last year. But with higher corn prices, higher maize prices now, we expect to continue to see strengthening in Africa as well.

On Australia, you mentioned Australia, obviously the big legislation there. You don't expect that to really impact you guys for a couple of years, then, I would assume?

I don't know that I would go that far out. I think I would say more we could see some impact this year. We will see potentially more impact next year and more the year after. I think this will be a building and compounding effect as legislation is implemented.

There are a number of facets to it, but a large percentage of the investment will be focused on the Murray River region and the water feeding the primary agricultural areas. We expect that there will be some significant investment in advancing irrigation efficiency, which includes pivot irrigation. But that will be over the next few years.

[Adam Latusis], Glacier Capital.

I'm not sure if you you mentioned it, but I was curious if you could give the actual contributions in the quarter from BSI and then from Snoline?

Well, we don't specifically break that out. What we will break out in our Q will be the infrastructure financials for the infrastructure segment in total.

Can you talk about trends kind of in just the core business, ex- BSI and Snoline in general? Or not the core business, but the [pre-acquistion]?

I think what we say in terms of margins, which is important, is that the overall irrigation margins were up significantly from the previous year. We have seen a number of point increase in our margins, and that's with some stability in raw materials, but also pricing that we put into effect. Certainly, our infrastructure margins in total are up significantly from last year. That includes the higher margin rate, and if you look back at Barrier Systems' financials that have been public at the time of the acquisition, their selling margins would run in that 45% range. Obviously, they are going to boost our margins.

However, our [fuel hit], the total revenues for the quarter, infrastructure would be somewhere in the range of about 20% of revenues -- in fact, 20% of revenues for the quarter. So it's not going to -- even if those were higher margins from BSI, it's not a significant impact on the total business in the quarter, with a 20% revenue mix.

In terms of acquisitions, I think you mentioned looking at sort of bolt-on type businesses for the existing businesses. But you also mentioned you might explore something outside of what you're doing today. Could you discuss that a little bit?

Yes, and this is something that I've commented on a number of times. But we continue to look for acquisitions in water, in that water space -- which could include filtration valves, pumps, those kinds of things -- that could be another piece of our business. I've stated in the past that I'd like to see us get to the point where about 50% of our revenues are purely from the irrigation business, 50% from other areas, including infrastructure, and anything else that we add to it. So the point is I think there's a lot of other opportunities of other kinds of products we can have, or businesses, in the water sector.

(OPERATOR INSTRUCTIONS). Chris Terry, First Dallas.

My questions have been answered.

Neal Miller, Fidelity Investments.

I apologize; I missed a good part of your presentation. But I'm just wondering about the produce conference that is coming up. I guess there are several of them, but I'm just wondering what role irrigation plays for the E. coli backdrop here in produce.

I'm not aware of the specific conference that is coming up, and I really can't comment greatly on the E. coli issue, other than to say that irrigation has had an impact or has played a role in it in the past, in terms of water pumped through irrigation systems. But I'm really not in a position to comment much on that specific topic. I'm sorry.

Are there any scenarios that would be positive -- in other words, the type of irrigation or filtration, or --? In other words, it seems like somehow they want to reduce contaminants, so that the service profile or the type of irrigation might be enhanced.

Right. I think there's a number of types of contaminants that take place. I think you are looking at more the contaminants through the water supply that are applied to crops. That does require filtration in some form. Whether it's attached to a drip irrigation systems or to a pivot irrigation system, it will require some form of filtration in order to overcome that.

The other big issue in irrigation is obviously contaminants to water supply through runoff (multiple speakers). That's one where our equipment plays a pretty key role, because it's very efficient in the application of water. It's contrary to flood irrigation, where you're primarily just pumping the water out into the furrows, and it will either evaporate in some cases or penetrate into the soil or run off into the rivers and streams and carry with it whatever is out there, including fertilizers and all kinds of other materials.

Efficient irrigation like ours applies water and adds applicable rates that will penetrate the soil, and not cause that same type of runoff. So I think you will see continued to pressure on conversion of that flood irrigation to more efficient means of irrigating.

I assume what will come out of all these discussions, including with the FDA, will be some sort of a certification. I guess, in terms of contamination or filtration, is that left up to the operator of the system, whereas you all might be able to provide a service in terms of the certification process?

It's an excellent opportunity potentially. Right now in most cases -- I'd say all cases that I'm aware of -- it's left to the grower, in terms of pumping the water and monitoring the water. There is a fair amount of monitoring that takes place, in the case of using recycled water, where our equipment does come into play as well. In those cases, there is some certification that takes place by our farmers, and we supply some data through our systems for that certification process. That's the case where we are really providing information on the mix of fresh water versus reused or recycled water. But I do think it's an excellent point that there may be additional opportunities on that service and to provide more information.

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

Well, thank you. 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 have taken place, we continue to have an ongoing structure 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 and acquisitions that form growth paths that are accretive to earnings. We have the strong cash flow and financial flexibility to continue to create shareholder value, by pursuing the balance of organic growth opportunities, accretive acquisitions, share repurchase and dividend payments.

Thank you for your questions and participation in the call this morning.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.