Lindsay Corp (LNN) 2007 Q3 法說會逐字稿

Good morning. My name is Matthew and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation third-quarter 2007 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 currents beliefs and 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 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. You may begin your conference.

Good morning. Thank you for joining us today. Revenues for the third quarter of fiscal 2007 were $93.1 million as compared to $75 million for the same prior-year quarter. Net earnings rose to $7.5 million or $0.62 per diluted share compared with $6.4 million or $0.55 per diluted share in the prior year's third quarter.

In the domestic irrigation market, revenues were $54.1 million for the third quarter, increasing 11% 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 remained strong. While corn prices have fallen some from a quarter ago, prices are still up more than 60% over the same time last year. Soybean prices are up more than 35%. Wheat is up more than 45%. USDA estimates for ending corn inventories are approximately one-half the previous year's level. And net farmed income is projected higher by approximately 10% over last year.

Given the strong farm economics, U.S. farmers remain optimistic about this crop season and the future. The higher crop prices, improved farm income and improved farmer sentiment created favorable market conditions for equipment sales in our third quarter.

International revenues were $21.3 million for the third quarter, up 6% over the same period last year. The increase was led by our business in Europe, where revenues increased significantly over the same quarter last year due to better commodity prices and favorable weather conditions.

Exports were below the same period last year, with declines in the irrigation equipment market in Mexico due to suspended government funding following the elections. We anticipate a stronger market in that region in the near future.

Australia passed new water-related legislation that will give the government more control over river systems feeding agricultural regions. We anticipate that this legislation as enacted will result in improved irrigation equipment demand in Australia over the next few years.

Infrastructure revenues increased to $17.7 million, up from $6 million in the third 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 and earnings from BSI lagged our expectations in the quarter due to continued delays in specific project revenues. However, quote activity and interest in our unique products remain very strong. BSI's order backlog is also strong.

The third quarter was the first complete quarter under Lindsay ownership for Milan-based Snoline. Snoline expands our presence in crash cushions and other road safety products in Europe, while also recapturing the license fee paid by BSI to Snoline for marketing their crash cushion technology. Snoline's revenue and earnings were somewhat better than we anticipate for the quarter. We remain very optimistic about new opportunities for growth and expansion of our infrastructure business, organically and through acquisition.

Gross profit was $24.4 million for the third quarter versus $17 million in the same quarter of last year. Gross margin for the quarter was 26.2% as compared to 22.7% for the third quarter last year. The gross margin improvement was a result of significantly improved irrigation margins and the inclusion of new infrastructure acquisitions. During the quarter, input costs for irrigation equipment remained fairly stable, supporting improved selling margins.

In the infrastructure segment, selling margins were better than the same quarter of last year due to the inclusion of BSI and Snoline. Recently, we have seen a slight pull-back in steel costs, which, if sustained, should be beneficial for irrigation and infrastructure margins.

Total operating expenses for the quarter were $12.9 million versus $8.7 million in the same quarter of last year, due primarily to the inclusion of BSI and Snoline. Our order backlog was $30 million on May 31, 2007, as compared to $19.2 million on May 31, 2006. The irrigation equipment backlog is up approximately 10%. Infrastructure backlog is up approximately $9.4 million due to the inclusion of BSI and Snoline.

Cash and marketable securities at May 31, 2007, were $40.7 million compared with $52.9 million on May 31, 2006. Accounts receivable increased $13.1 million from the same time last year due to the inclusion of BSI and Snoline and increased irrigation sales. The majority of the extended terms granted on irrigation equipment earlier in the year were collected during the third quarter. Inventories increased $20.6 million over the same time last year, due primarily to the inclusion of BSI and Snoline.

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

In summary, irrigation equipment revenue during the third quarter of fiscal 2007 was improved over the previous year. Strong agricultural commodity prices, driven in part by demand for ethanol, have created improved economic conditions for farmers, which in turn has resulted in an improved market for capital goods like irrigation equipment. So far in fiscal 2007, we are pleased with the increase in economic conditions for farmers and the resulting improvement in the irrigation equipment market. We believe that the strong agricultural commodity prices should result in further market strengthening during the next season.

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 investment in lean manufacturing process improvements globally to enhance our margins and reduce working capital investments. We are also very pleased with the improvements we have realized in our selling margins as a result of these initiatives and our pricing discipline.

In our infrastructure segment, we have expanded our revenue base with the acquisitions of BSI and Snoline. While BSI's revenues and earnings are somewhat lagging our expectations, we believe that the road safety market is attractive and that we have a unique and attractive product offering. With the addition of Snoline, we have significantly strengthened our global market position.

I am especially pleased with the management team we have assembled and our continual improvement in business processes. I am confident that this team will continue to drive strategies that enhance earnings. 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). Mike Marianacci, Ragnarok Capital.

I was wondering if you could actually give us the BSI/Snoline revenues for the quarter.

Mike, I am sorry, we don't really split that out. We do have really just infrastructure split out as a segment. And those -- we have reported the infrastructure segment revenues, but not BSI and Snoline. Those are not split out.

Do you have the BSI and Snoline inventory that you are carrying?

No, not specifically. I believe that we've -- obviously, we have identified the inventory adjustment and -- or sorry, the inventory increase, and also in the slide deck on the website splits out how much of it was from -- or excluding acquisitions, the increase excluding acquisitions. So I think you could back into the amount that's from the acquisitions.

Okay, that is very helpful. The breakdown in the 10-Q, with the FIFO inventory -- is that all BSI/Snoline or does that include a piece of your business in China as well?

The FIFO inventory, I believe -- I guess the question is -- I am trying to remember from the Q, is it split out between segments -- I don't believe it is. So it would include inventory anywhere in the world, including BSI, Snoline or inventory in China or any other location.

So that is carried under FIFO.

Yes.

Ryan Connors, Boenning & Scattergood.

Congrats on some great results. A few questions. First of all, you mentioned pricing as a factor in the strong year-over-year growth on the irrigation side. Obviously, that is pretty encouraging, given that sort of the noise out there in the market from some of your competitors has been that they have had to -- they have been trying to cut prices and so forth, I guess is what some people have been hearing. So would it be reading too much into that to think that maybe Lindsay is picking up a little bit of market share on the margin, or is that not the right way to think about that?

Well, I would really look at those two pieces separately. I think that a question that could come from it would be, what is happening with market share through this process as well? And I would say that from the information we have, we would say that we're basically holding share. We're not really aggressively going out and trying to gain share, and I don't believe we are really losing share. So we're holding share pretty much across the U.S. market.

On an international basis, I would be willing to say that we are definitely gaining market share. So on a domestic basis, holding share and improving our pricing position and are improving our margins at the same time. So I think that is a very good position to be in.

That is very helpful. Another question -- obviously the domestic irrigation revenues were very strong, but internationally, up just 6% in the quarter, and that growth on that side of the business has kind of been decelerating here for a few quarters. I wonder if you could just comment on what is driving that. And also, do you still believe, as you have mentioned in the past, that the international sales will continue to grow as an overall percentage of the irrigation business?

Yes, I will take the last part of that question first. And yes, I absolutely do believe that the international sales will grow as a percentage of total irrigation sales. I think there are a lot of macro drivers that would really indicate that that is going to be the case -- things like population growth, the need for water use efficiency, food and dietary changes that are taking place, things of that nature all around the world.

Now, coming back to the first part of the question, I would say yes, it is true that it has been fairly flat, in fact, a little lumpy from the standpoint of those international markets. And it really consists of a number of different pieces. There's our export part, which also consists of a number of markets like Australia and New Zealand and Mexico and parts of Latin America, and then there is the international business units of Brazil and Western Europe, or actually Europe and Africa or South Africa.

So we have got a lot of different pieces to this. And what we have seen is that from time to time, we will have one market that's -- or a number of them, actually, that could be doing very well, but we will have a few that were maybe suffering, whether it was from drought conditions or lower commodity prices.

But what we're seeing right now, Ryan, in the international markets is that the increase in overall agricultural commodity prices is raising all of the markets somewhat. Brazil has a little tougher time because they have had some difficult economic issues there and reduction in the past in some government subsidies, but we're seeing that market now coming back.

So I think what we are seeing is the rising commodity prices are really starting to strengthen all of the markets, and we will from time to time see some things like drought conditions affect one market over another. And since this is a basket of a number of different regional markets, we will feel a little bit of lumpiness in it. But on a macro basis, there is no doubt that the drivers are very strong for this, and there are very positive markets like China, Eastern Europe, and I even would say parts of Africa that will be very strong because of those very positive macro drivers.

Okay, that is very helpful. Also, last quarter you mentioned weather as a contributing factor in the weakness on the irrigation business in that quarter. I was just wondering, to what extent did sort of a shifting of demand or shipments from that quarter into this quarter contribute to the strength in the irrigation business versus just organic, so to speak, year-over-year growth?

Well, my view of that would be that there really isn't a shift that has taken place. I think it did delay a little bit the start of the season in the second quarter. I don't really think that we saw a significant change where it was really made up in the third quarter. I would say that there may have just been a little bit of a sliding in terms of some of the equipment sales. It could even be falling into an increase into the next crop season. So we may see more of it in the next year rather than in the third quarter of this year.

So I don't think there was a real significant slip from one quarter to the other due to weather. We do believe that weather did have an impact early in that second quarter due to wet weather and some cold conditions, but that did change. And weather will have still an impact, to some degree had some impact in our third quarter, has impacted our fourth quarter. For example, there is still some concern about drought conditions in a few markets. So it will have impact from time to time, but I don't think it really had any impact overall on shifting things into the third quarter.

And then last one -- can you just give us an update on your capital spending plans for the next year or so? In particular, you have talked about adding facilities internationally on the irrigation side. So just any update on your thinking there would be helpful.

Well, first I would say that when we have talked about CapEx in the past and we have looked at CapEx for '07, we've said our estimate would probably be somewhere in probably about the $7 million range. I think that is kind of the range we have talked about. And CapEx would be up this year over previous years because of the addition of BSI and Snoline, but mostly BSI, because with BSI, as you recall, we have the leased Barrier fleet and the truck fleet for moving, which is also leased, for moving that Barrier. And what we have seen this year is an expansion in those opportunities with the Barrier Systems, as we expected when we acquired them. So we are putting more CapEx into expanding that Barrier fleet to be able to care of or take advantage of those construction projects when they come up. So CapEx in general will be higher.

And as I have talked about, the international markets, the primary international market where I have seen from an irrigation standpoint that we would put capital would probably be the China market, where I have said from time to time that we will definitely have to look at expansion of our manufacturing capability in China. I would say that is still absolutely the plan. But I am not ready to put a time frame on that or an amount yet. I would say it is probably not likely to be any significant capital on the fiscal year '07, but the fiscal year '07 expansion would be mostly the Barrier Systems leased fleet.

That is great detail. Thanks a lot, Rick.

There are no further questions at this time.

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 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, and acquisitions that form growth paths that are accretive to earnings. We have the financial flexibility to continue to create shareholder value by pursuing a balance of organic growth opportunities, creative acquisitions, share repurchase and dividend payments.

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

Thank you for participating in today's Lindsay Corporation conference call. This call will be available for replay beginning at 12PM Eastern Standard Time through 11.59PM Eastern Standard Time Wednesday, June 27, 2007. Once again, that is 12PM Eastern Standard Time today through 11:59PM Eastern Standard Time Wednesday, June 27, 2007. The conference ID number for the replay is 3185354. (OPERATOR INSTRUCTIONS). The number to dial for the replay is 1-800-642-1687 or 706-645-9291.