Lindsay Corp (LNN) 2007 Q4 法說會逐字稿

Good morning. My name is Jennifer and I will be your conference operator today. At this time I would like to welcome everyone to the Lindsay Corporation fourth quarter 2007 conference call. (OPERATOR INSTRUCTIONS). During this call management may make forward-looking statements that are subject to risks and uncertainties and which reflect management's current belief 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 expectations, 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, Chief Executive Officer. You may begin your conference.

Good morning and thank you for joining us today. Revenues for the fourth quarter of fiscal 2007 were $73.5 million as compared to $56.6 million for the same prior year quarter. Net earnings rose to $3.8 million or $0.32 per diluted share compared with $3.1 million or $0.26 per diluted share in the prior year's fourth quarter.

For the full fiscal 2007 year revenues were a record $281.9 million, up 25% from the previous year. Net earnings were $15.6 million, up 34% from fiscal 2006. And diluted earnings per share were $1.31 versus $1 last year.

In the domestic irrigation market revenues were $29.8 million for the fourth quarter, increasing 12% over the same quarter of last year. At the end of the quarter commodity prices for the primary agricultural commodities in which our equipment is used remained very strong. Corn prices remained up more than 40% over the same time last year. Soybean prices are up more than 80%, and wheat has more than doubled in price per bushel. Net farm income is projected to be up by over 45% over the '07 -- for the '07 crop year, creating very positive economic conditions for U.S. farmers.

For the full fiscal 2007 year domestic irrigation revenues were $146.9 million, up 9% from the previous year. The higher revenue reflects modest price increases implemented throughout the year, triggered by rising input costs. We believe that the favorable economic conditions for U.S. farmers have not been fully realized in the irrigation equipment market as of yet, and expect to see some continued strengthening in fiscal '08.

International irrigation revenues were $22.3 million for the fourth quarter, up 52% over the same period last year. Exports to the Middle East and Mexico were higher in the quarter, along with our business in Europe. The higher global commodity prices have improved economic conditions for growers in many international markets, boosting demand for efficient irrigation technology.

For the full 2007 fiscal year international irrigation revenues were $69.6 million, rising 19% over the previous year. Higher commodity prices and expanded agricultural development in many regions have increased the need for our irrigation equipment and has improved the ROI for growers.

We have recently won a large irrigation project in Egypt, which we will be delivering starting in the first quarter of fiscal 2008. We expect to see more project opportunities arise in the international markets in future periods.

In addition to the expansion of projects, some of which will be ethanol related, we expect overall improved agricultural economic conditions to continue to support expanded irrigation demand.

Infrastructure revenues increased to $21.4 million, up from $15.2 million in the fourth quarter of last year, with most of the increase attributable to the inclusion of Snoline acquired in the second fiscal quarter of 2007.

BSI revenues were down in the fourth quarter, however, orders were very strong. During the quarter BSI received a large order for movable barrier from the government in Puerto Rico totaling approximately $13 million, of which a small portion was shipped in the fourth quarter.

We continue to see strong domestic and international interest in BSI's movable barrier and crash cushion productlines. With the addition of Snoline, we have expanded our presence in crash cushions and other road safety products in Europe.

For fiscal 2007 infrastructure revenues were $65.4 million, up 102% from the previous year. The increased infrastructure revenues are primarily attributable to the inclusion of BSI and Snoline.

Fiscal 2007 includes a full year of BSI's results and eight months of Snoline financial results. We are pleased to have these two businesses as part of our infrastructure strategy. The interest in movable barrier products we have discussed in previous quarters is being realized, as is reflected in the rising infrastructure backlog. We expect to see continued growth from these businesses organically and through acquisitions.

Gross profit was $18.4 million for the fourth quarter versus $13.9 million in the same quarter of last year. Gross margin for the quarter was 25% as compared to 24.6% for the fourth quarter last year. The gross margin improvement reflects the continuation of improvements in irrigation margins. During the quarter input costs for irrigation equipment remained fairly stable with comparatively strong equipment demand. We were able to maintain higher efficiency in our Nebraska factory.

In addition, our ongoing cost reduction process, coupled with pricing discipline, has been effective in moving irrigation margins higher. While we continue to focus on margin improvement opportunities, we will keep our dealers competitive in the market.

In the infrastructure segment selling margins were slightly lower than the same quarter last year with the inclusion of Snoline. Snoline's margins were lower than expected in the quarter due to unfavorable product mix. The rationalization of Snoline's productline and realization of the synergies between BSI and Snoline has the full attention of both management teams.

For fiscal 2007 gross profit was $69.7 million, up 45% from the previous year. Gross margins increased to 24.7% from 21.3% last year. Irrigation margins moved up close to 250 basis points as we made efficiency improvements in our factories and experienced more stability in production input costs, primarily steel and zinc.

Infrastructure margins also moved up significantly for the year due to the inclusion of a full year of BSI and the acquisition of Snoline.

Total operating expenses for the quarter were $12.5 million versus $9.2 million in the same quarter last year. Higher medical expenses, infrastructure productline development costs, the inclusion of Snoline's expenses, and added personnel in key positions supporting growth contributed to the higher expense level. For the full year operating expenses were $46 million compared to $32.7 million in fiscal 2006, with over 70% of the increase from the inclusion of the full year of BSI and acquisition of Snoline.

Our order backlog was $49.4 million on August 31, 2007 as compared to $26.8 million on August 31, 2006. Irrigation equipment backlog was up approximately 112% due to stronger demand and a large international shipment not included in our revenue, that was at the port awaiting containers for transport at the end of the year, and subsequently shipped in early September. Infrastructure backlog is up 65% due mostly to the recently received movable barrier project in Puerto Rico.

Cash and marketable securities at August 31, 2007 were $48.6 million compared with $59.3 million August 31, 2006. Accounts receivable increased $8.9 million from the same time last year due to the inclusion of Snoline and increased irrigation sales.

Inventories increased $14.3 million over the same time last year due primarily to the inclusion of Snoline, higher inventories at BSI to support planned growth, and the aforementioned $5.4 million international irrigation shipment at the port at year end.

In summary, strong agricultural commodity prices have created better economic conditions for farmers, which in turn is resulting in growth in capital goods purchases such as irrigation equipment. We are pleased with the improvement we are seeing in the irrigation market globally, and expect to see continued market expansion in fiscal 2008.

In 2007 we launched many new irrigation products and services aimed at improving farming and water use efficiency and further differentiating our market position.

Recently we launched FieldNET, the Web-based irrigation management system that further solidifies our leadership position. You should expect to see continued organic growth for our irrigation equipment globally, as well as productline extensions and additions through acquisition.

In our infrastructure segment we are pleased with the strength of demand and interest in BSI's unique movable barrier productline. We're also delighted with the organization at BSI and the additions that have been made in the past year to position the business for growth.

We believe that with the addition of Snoline in Europe we are well-positioned to increase market penetration for our road safety products worldwide. We will continue to expand our infrastructure productline and market position organically and through acquisitions.

During fiscal 2007 we stepped up our implementation of lean principles globally to enhance our margins and improve working capital use efficiency. We're happy with the improvements we have realized so far, and we can see the pace of change quickening. Lean will continue to be a major initiative for us in fiscal 2008.

I'm especially pleased with the management team we have assembled throughout the organization. We have continued to strengthen, grow and adapt our organization, and our employees have embraced the changes and addressed the challenges.

The organization is results oriented and driven to create shareholder value. I would like to thank my team for their hard work and dedication and for making fiscal 2007 a success.

I would now like to open it up for questions.

(OPERATOR INSTRUCTIONS). Ryan Connors, Boenning & Scattergood.

I had a few questions. Number one, I wonder if you can give a breakdown domestically which areas were stronger and which areas were weaker here in the U.S. on the irrigation side?

I think -- for competitive purposes I don't want to break it down too much. I think I would say that we did see this year some additional strength in the Southeast due to dry weather conditions. We have seen traditional -- or strength in the traditional Midwest markets, and also strength in the Northwest, which is also fairly normal.

Where we have seen a little bit of concern, or let's say I think we can see a little bit of pull back is in some areas where there are some water restrictions. For example, in Nebraska we have seen some well moratoriums that will affect demand a bit. But overall in general we have seen the demand in the U.S. market in the traditional irrigation market. The one that is a little bit different is in the Southeast region.

I guess probably the same issue here in terms of competitive reasons. But of that 12% revenue growth, any color you could provide about how that breaks down between price and volume would be helpful, to the extent you can do that.

I think the one point -- in fact, I would -- really in fact I think it is very closely related to your first question. The one point that I would tack on to that first one is that a good share of the revenue increase in the domestic market in '07 was more price related than volume. There really wasn't much volume growth. In fact, it was relatively flat year-over-year in the domestic market in number of units for irrigation.

That was a little bit of a surprise. And primarily we saw that, as you recall, at the beginning of the year when we expected that the higher commodity prices would fuel the growth. And what we have seen is that farmers had a little bit of a wait and see. There was more capital spending taking place on things like tractors and combines and things of that nature.

I will say that we have seen improvement, but as we have expected, the irrigation lags some of those other equipment purchases. And that is why I am confident in saying that we expect to see growth in '08. So we had relatively flat unit levels in '07, but we expect to see unit growth in '08.

That is helpful. That is actually a nice segue into the next question I have, which is that you mentioned earlier that the strong farm incomes and so forth, but the school of thought out there sort of among the investors that I'm talking to that domestic center pivot volume growth will not materialize as it was once hoped.

And there is two reasons. Number one is that input costs for farmers are up along with the commodities that they are selling, so really profits aren't much higher for the farmers. Then number two is what you mentioned in terms of the well moratoriums and all that sort of thing. So I wondered if you could just respond to that school of thought?

I would be happy to. I would I would look at it from a couple of different perspectives. One is I think that the business has been cyclical. If you go back a couple of years, you can see the down trend and the drop in volume we had -- recalling about a 35% decrease a few years ago.

We have been rebuilding in terms of volume since then. And that is, I think, what I would consider to be a -- what I would expect as a traditional cyclical trend. And I think that trend is up at this point. That is one aspect.

The other is that there is really three different applications for the center pivots in our irrigation equipment. One is in replacements, and certainly that annuity or that installed base of pivots continues to grow and the replacement market itself will grow.

The other is in dryland application. And certainly I think as overall farm acreage increases, whether it is going into corn or soybeans, it probably doesn't matter much if it is not efficiently irrigated. Efficient irrigation will still be a consideration.

The third is conversion from that less efficient to -- we will say less efficient flood irrigation to a more efficient irrigation method. I think that conversion will continue to take place.

Another aspect related to that is there has been funding in the farm bill under the EQIP program, that has also supported that conversion to more efficient irrigation systems. And I think as we look at what to expect from the next farm bill, the current expectation is it is likely to be similar to the existing one, and there will continue to be emphasis on EQIP money that will result in hopefully continued conversion to efficient irrigation.

So when I take all those factors into consideration, I think it is still very positive for irrigation and center pivot growth.

Then on the international side, obviously the growth there has been good, but it has been very volatile from quarter to quarter in terms of the growth. Last quarter it was a little bit disappointing. This quarter obviously tremendous. Do you think that will smooth out a little bit? And if so, what do you think is a good sustainable growth rate over the next few years for that kind of business? Is it midteens, is it lower than that? I am just trying to get a feel because it has been jumping around so much of what the real sustainable growth trajectory is there.

I think the growth in the international markets is difficult to predict. And I understand your question in that because we have seen volatility in markets like Brazil. And Brazil was down significantly, and yet I would take a look at what is taking place within Brazil right now, primarily with other kinds of equipment purchases. And it is definitely on the uptrend. I would expect that Brazil is going to be one of those markets picking up.

We look at some of the other markets like the Middle East, which had been down, and now we're starting to see projects taking place in the Middle East. And I think there is certainly funding available for those projects. So I would expect to see continued growth there.

China, as you know, is one that has been volatile, and it is -- and I think it will continue to be very volatile and difficult for us to predict for awhile until that becomes a more let's say sustainable sale level. And right now it is more project oriented.

And I think that is one of the difficulties with the international markets in general is it will continue to be project oriented, and we will continue to see some volatility in markets like Brazil. So it is difficult to predict, but I think if you were to look at our international revenues on a percentage of total irrigation revenues or total revenues year-over-year, it is probably changed by about 1 point.

I wondered if we could touch on the backlog per a second. I guess two questions there. Number one, to the extent you can break out the actual size of that Egypt deal -- I know that you may not be able to do that, but just whether that was the predominant increase in the international backlog, or whether it was a smaller component?

And then number two, if you can just talk about more generically the margin level of the business in that backlog. Is it -- both internationally and domestically, is what is in that backlog kind of at or above or below the corporate average in terms of where you have been running at in terms of margins on the irrigation side?

I will try and answer those questions the best I can. I think if we are looking at the international irrigation backlog, that one specific shipment is a significant piece of that backlog. And if I were looking at margins in our irrigation backlog in total, I would say that they would probably be comparable to what you are saying in our irrigation margins. You're not going to see any significant upward or downward surprise there in those margins based on what I have seen in that backlog.

And I think if we were looking at the infrastructure backlog, you would find it similar there. You would find obviously the leased barrier project -- or sorry, the sale project for Barrier Systems, and there is decent margin there as well.

This is very, very helpful. Just a couple of more. Number one, just high level it seems like looking at the quarter the revenue growth was very, very strong. And I was actually a bit surprised that there wasn't more -- a little bit more gross margin leverage, given how strong the top line was. I wonder if you can just talk about that a little bit?

And specifically you have -- your sort of soft guidance is that you think over the course of the cycle you can get to 27% gross margins at the high end. Is that still doable in this current up cycle in your view?

While I haven't really given any guidance at all, and would continue to not really give guidance, I think your reference is that questions come up of looking back at historical margins and asking the question, can we get back to those kinds of margins? But I think from an irrigation standpoint getting back to the margin levels that we were at with a very significant portion of the sales going to Saudi Arabia at the time, where there was an extensive wheat production and a lot of spending taking place, those are unusual margins. But I do see that irrigation margins are strengthening and will continue to strengthen at this point.

And then coming back to your other question, I would say that on a relative basis the fourth quarter is a fairly low quarter for us -- the first and fourth. So from a production level standpoint I wouldn't call it our most efficient production level. I would say that we were busy during the quarter, but it certainly isn't a peak quarter for us.

And we did achieve a higher level of efficiency to some degree than we would have in maybe the previous fourth quarter, but also what had an impact in our fourth quarter this year was mix. And mix between the infrastructure and the irrigation piece of it. And as I mentioned earlier, we're very pleased with the margin movement we have seen on the irrigation side.

Then a final one. Obviously the dollar has been weak, and with international contributing well. I wonder if you could talk about what kind of contribution the currency translation made on the top line and on margins?

I think I will let Dave take the currency impact question. And I think he can answer that maybe not as much on the top line but certainly in terms of overall currency impact.

I don't think it was significant on the top line. Certainly we have seen strengthening year-over-year. But on the bottom line that would go down below the line, and we did see some movement below the line on currency transaction gains in the period.

What I would expect to see with the low dollar is continued opportunities for export within our business. I think that we have seen some of that. I would expect to see that continue with the dollar as it is today.

Trey Snow, Priority Capital.

If I did my numbers right, it looks like you had a massive increase in CapEx in the fourth quarter, like $8 million -- not an increase of $8 million, but a total spend of $8 million. First of all is that right? Second, why so high?

Yes, we had a very large CapEx spending level in '07, and a lot of it was in the fourth quarter. What is different from the past for us, and if you look back historically our business would spend in CapEx maybe $3.5 million to $4 million a year in machinery and equipment. This year that amount was about $7.7 million in machinery and equipment for the irrigation business plus the infrastructure business.

But in addition we had this one other new aspect to it. In this year we spent $6.9 million in CapEx to expand Barrier Systems' fleet of leased barrier and trucks. And primarily it was in barrier. And that one is going to be primarily revenue opportunity driven.

So what happens is we will -- and I think as you are looking forward, you can expect CapEx rates for machinery and equipment in that $8 million range, with the exception of maybe some special things that could come along in terms of opportunities -- for significant opportunities for cost reduction or improvement. But then in addition we will have CapEx that will expand that Barrier fleet as necessary as opportunities come along, and those are revenue generating expenditures.

So these vehicles are probably being depreciated over what, three to five years?

Vehicles would be over 8, 8 to 10.

And the barrier?

And the barrier is 12.

Matthew Fong, TCW.

It is great to hear that Lindsay is stepping up lean implementation. I think that is a very good long-term positive for the Company. It also requires a fundamental cultural change. How are the employees buying into this fundamental cultural change so far?

Very well. I think, Matthew, anyone who has gone through this process, and I know you have seen this process, knows that it is a difficult, or at least it takes time to make this cultural change. It does take time. What we have seen is, while we have worked on this for a period of time, maybe eighteen months in terms of some of the cultural change pieces of it and aspects of it, we're really starting to see that click now to where employees are embracing that cultural change.

What it means for them is more opportunity in terms of participation in problem solving. Not really waiting for or looking for somebody else in the organization to fix it, and to fix problems as they are identified. And are taking a very active role in problem identification and resolution.

It is being embraced. I would say it is still not at the broadest level that I would like to see. But in fact I was up to -- just witnessed a Kaizen event just last week for a group of employees. It definitely is taking place, and I can say that they are enthusiastically embracing it.

Sometimes a Kaizen event like that can be great, because then other people can see the change in that cell, and then they get excited for that type of improvement to come to their cells. So there could really be a good viral benefit over time. So I am happy to see that you are stepping it up. Thank you very much.

You are welcome. And that is very correct, as this group was working through the Kaizen event there were other employees in the organization that were extremely interested in what they were doing and what they were accomplishing. And there is a high level of excitement around it. So you're right, it does spread quickly.

It's great stuff. Thanks a lot, gentlemen.

(OPERATOR INSTRUCTIONS). Steve Gambuzza, Longbow Capital.

I was wondering if you could say what the operating income for the irrigation segment was for the quarter? I didn't see that in the release.

I don't have that handy. That will be identified in the K. But I really don't have that information in terms of a split of operating income for irrigation and infrastructure at this time.

When do you expect to file that?

It will be the early part of November.

Then I'm just trying to reflect on the question that was asked earlier regarding the gross margin that was achieved in the quarter being relatively flat, given the strong revenue momentum you had. I just didn't quite understand the answer to that. If you wouldn't mind going through that one more time.

I made the reference to mix. And I think one of the -- if you are looking quarter to quarter, fourth quarter this year to fourth quarter last year, one of the points to really look at is the very significant level of sales and contribution that Barrier Systems made in the fourth quarter of last year, which was basically their first full quarter.

That really moved the fourth quarter margins up traditionally higher than what we have seen in fourth quarters in previous periods. So when we're looking at that comparison, we're looking at a somewhat inflated fourth quarter, or a very good strong fourth quarter last year, due to Barrier Systems contributions last year.

My reference was that the fourth quarter is traditionally a low quarter for us, and that is for irrigation. What you would have seen last year is a low irrigation sales number and a high infrastructure or -- heavily influenced by Barrier Systems number, which moved that margin number up. So we are not seeing the kind of gap maybe that you would have expected to see. But if you look year-over-year, there is very significant bargain margin movement upward for the Company in total. Does that explain or help to answer it for you?

He actually withdrew his question. I'm showing no further questions at this time.

For our business overall the global long-term drivers of water conservation, population growth, increasing importance 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 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 and are accretive to earnings.

We continue to have the financial flexibility to create shareholder value by pursuing a balance of organic growth opportunities, accretive acquisitions, share repurchases and dividend payments. I would like to thank you for your questions and participation in this call.

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