Lindsay Corp (LNN) 2008 Q1 法說會逐字稿

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation first-quarter 2008 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 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.

I would now like to turn the call over to Mr. Rick Parod, Chief Executive Officer.

Good morning and thank you for joining us today. Revenues for the first quarter of fiscal 2008 were $75.9 million as compared to $51.5 million for the same prior year quarter. Net earnings rose to $4.4 million or $0.36 per diluted share compared with $1.8 million or $0.15 per diluted share in the prior year's first quarter.

In the domestic irrigation market, revenues for $34.6 million for the first quarter, increasing 34% over 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 very strong. Corn prices are up more than 8% over the same time last year, soybean prices are up more than 70%, and wheat has increased more than 80% in price per bushel.

Net farm income is projected to be up 48% for the 2007-2008 crop year, achieving a record $87.5 billion, creating very positive economic conditions for U.S. farmers. Corn usage for ethanol production for the 2007-2008 crop year is estimated to be 25% of production, rising to more than 30% for the 2008-2009 year, and corn exports are estimated to be at record levels for the 2007-2008 year, all continuing to support high corn prices.

International irrigation revenues were $21.9 million for the first quarter, up 79% over the same period last year. Exports to the Middle East, Australia and New Zealand were significantly higher in the quarter. In addition, we have seen strong growth in our sales from our business units in Brazil and South Africa.

The higher global commodity prices have improved economic conditions for growers in most international markets, boosting demand for efficient irrigation technology. Infrastructure revenues rose to $19.4 million, up from $13.6 million in the first quarter last year, with most of the increase attributable to the inclusion of Snoline, acquired in the second fiscal quarter of 2007.

Barrier Systems revenues were flat in the quarter. However, their order backlog at the end of the quarter was close to double the backlog at the same time last year. We continue to see strong domestic and international interest in Barrier Systems' movable barrier and crash cushion product lines.

During the quarter, we acquired a product line of truck mounted attenuators, or TMAs, which has been added to Barrier Systems' product offering. The addition to this road safety product line further enhances Barrier Systems' product offering, improving project sales opportunities and their ability to attract premium dealers in the road safety market.

Our diversified manufacturing business, which includes our contract manufacturing and commercial tubing activities, was up more than 34% in the quarter over the same quarter last year. We continue to experience growth in this business with value-added products and services.

Gross profit rose to $19.3 million for the first quarter versus $12.5 million in the same quarter last year. Gross margin climbed in the quarter to 25.4% compared to 24.2% for the first quarter last year. The gross margin improvement primarily resulted from significant strengthening in irrigation margins due to stability in input costs, improved pricing and improved factory realization over the first quarter of last year.

During the quarter, infrastructure margins decreased, partly due to the inclusion of Snoline, the road safety products business in Milan, Italy. For the past two quarters, we have experienced lower selling margins than expected at Snoline due to a mix of more road marking tape sales versus higher margin engineered products. An action plan is in place to improve the product mix and overall performance of Snoline. Snoline is expected to be an important cornerstone for our participation in road safety products, including movable barrier, in Europe.

Total operating expenses for the quarter were $12.8 million versus $929 million in the same quarter last year, primarily due to the inclusion of Snoline and personnel-related expenses. Our order backlog rose to $51.2 million on November 30, 2007, as compared to $24.6 million November 30, 2006. The irrigation equipment backlog was up approximately 120% due to stronger demand in both the domestic and international markets.

Infrastructure backlog is up more than 90%, due mostly to higher Barrier Systems orders. Accounts Receivable increased $13.9 million from the same time last year due to the inclusion of Snoline and higher revenues. Inventories increased $20.3 million over the same time last year, due to the inclusion of Snoline, higher inventories at Barrier Systems to support planned growth and current projects, and a build in irrigation inventories in support of the upcoming selling season starting in January.

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 continued strengthening in irrigation equipment demand in both the domestic and international markets.

Our irrigation equipment dealers are optimistic about the upcoming selling season and expect real unit growth over the previous year. Recently, our new product, FieldNET, the Web-based irrigation management system, won an award from the Irrigation Association for the best new agricultural irrigation product. You should expect to see continued organic growth in our irrigation equipment globally, with new products like FieldNET, as well as product line extensions and additions through acquisition.

In our infrastructure business, we are pleased with the strength of demand and interest in Barrier Systems' unique movable barrier product line. We have also achieved growth in revenues and selling margins in our diversified manufacturing business.

In addition, our lean implementation is progressing well in our Nebraska factory. And while we see lean as a continuous journey, we expect notable improvements in fiscal 2008 from the implementation of lean.

I would now like to open up for your questions.

(Operator Instructions). Ryan Connors, Boenning & Scattergood.

Congratulations on an outstanding quarter, first off. I wondered if, first off, if we could break down the revenue growth both domestically and internationally on a price versus volume basis at least in rough terms?

Well, I think the revenue breakout between domestic and international is identified, and rather than breaking out the price and volume between those two pieces, what I can tell you is that of the irrigation revenue growth, two-thirds of it would be unit growth and a third of it would be price year over year.

That is perfect. And then I just wonder, obviously the revenue growth was phenomenal, and I wondered if you can talk, without getting into the numbers and guidance and so forth, just if you could talk qualitatively about how sustainable you think these types of revenue growth numbers are into the future, in terms of demand?

I think a couple of points that I would make along that line would be that, one, the first quarter is really not -- we are not into our primary domestic selling season yet. So it is hard to project from the first-quarter domestic demand. However, what we did see in the first quarter in demand and in orders was stronger than what we have seen in the past as is indicated in the revenue and in the backlog. So I would say that is a very good indication, and we have anticipated a strong domestic demand, given what the ag equipment manufacturers have seen in the past, and we anticipated a lag impact on our business.

In the international markets, we're seeing continued strong demand in specific projects that are appearing throughout the world, whether it is in the Middle East or now Eastern Europe, and really in many places throughout the world.

But, in addition, we are also seeing a recovery in Brazil and Africa, which we had not seen up until this past quarter. So I would say in general, if there is a lot of really good indications, however the real indicator for the domestic market is probably more in what we're seeing in that backlog and in what it happens starting, say, in January in terms of order flow.

Is there a point at which capacity becomes an issue with these types of real dramatic revenue gains?

There certainly is a point at which it becomes an issue. However, I am not anticipating a capacity constraint at this point. It really does depend on how that order flow comes in and what the demand is, say, in early spring and where that demand is. We have a lot of worldwide capacity, meaning our international businesses have quite a bit of capacity to handle the kind of order flow that they are seeing. Domestically, we have projected a stronger year. We anticipate a stronger year. We believe we can handle it from a capacity standpoint.

Now, in terms of -- I know you have competitive concerns and so forth, but to the extent you can, I wondered if you could dive into the pricing situation a little deeper, what types of -- what kind of environment you are seeing on pricing, what the competitive environment looks like at the moment?

I know there has been a perception out there that Lindsay has kind of played the role of price leader. I wondered if you could talk to whether or not you would concur with that, and any color you can give around the competitive situation would be helpful.

I guess the term price leader depends a little bit on the perspective in which you mean it whether it is in low price leader or high price leader. We believe that we have tended to lead in passing through price increases. There has been times when we have heard from a competitor that they thought we were leading in being on the low-end. I don't think we are ever in that position. We do have one other competitor domestically who does tend to be at that low-end. And occasionally, as we saw in probably the 2005 time period, that gap between us and the lower price competitor, would get a little bit big, and we could see share shift at that point.

Now what we have seen in the last year to 18 months I would say is good pricing discipline across the board and fairly steady share positions. So I would say I would expect to see that continue, that we would see good pricing discipline.

And then so with regard to actual magnitude of what kind of price increases you are seeing, are they single digit; are they double-digit?

Generally we're seeing single digit, and they may be even in low single digit moves at a time in terms of price moves.

Just a few more. Just on the profitability side, obviously the revenue numbers looked strong, but the gross margins do not really appear to be showing too much leverage. I wonder if you could talk about the issue of operating leverage and whether as the cycle plays out, we should see margins -- whether we will see margins at some point take another leg up or if the mid to high 20s is as high as you see them going.

I would say first, if you listen a little to a couple of different points and one of them that I covered in the script, we did see really good gross margin improvement in irrigation. We did see some decrease in the gross margin in infrastructure. So I think there is a bit of a mix factor that is pulling down the gross margin appearance in the first quarter.

So I would say I am very pleased with what we are seeing in gross margin movement in irrigation. And I think it is a combination of pricing, is it a combination of more stable input costs such as steel, and we have seen decreases now in zinc, and cost reductions and changes that we're making internally that have really improved those irrigation margins I think fairly significantly year over year.

So I would expect that -- and coming back to your question, I don't believe that it is completed. I expect to see continued improvement, but we are seeing a very significant improvement in the irrigation margins.

And then just a couple things on the financial side. First off, obviously you mentioned that the jump in Accounts Receivable, a big part of that is on the infrastructure side with the acquisitions, but I am assuming a portion of that is also in the irrigation business. Can you give us a breakdown of your sort of domestic Accounts Receivable build in international in irrigation and talk about whether there is any sort of a collection risk associated with any of those items?

Rather than breaking it out, I think it would be probably more appropriate to add a little color to it from the standpoint of the DSO. And I would say that we did, and I think it is noted in the slide, see an improvement in days sales outstanding in receivables year over year from last year to this year.

I would say that from international standpoint, we are going to typically run longer day sales outstanding in receivables, and it is probably in the 90-day range. And Dave, you can jump in if that is incorrect. And domestically we will be lower.

The other would be that I think we are in pretty good shape in terms of our receivables in total, and we have got adequate reserves to cover anything we consider to be at risk. So I think we are in very good shape from a receivables standpoint.

And then it leads kind of to the final one, which is that more generally at this point in the cycle, it seems like net working capital needs are high. You talked about the inventory and so forth. As the cycle sort of plays out, is there a point at which you begin to ring some of that cash out of the balance sheet and free cash flow improves, and if so, what timeframe do you think about for when that might begin to occur?

Absolutely there is. I really don't like to see inventories this high, but there's a couple factors that come into play. One is with Barrier Systems, as you recall, we talked last quarter about a large Puerto Rico project of roughly $13 million, and part of that has been shipped, but there is a fair sized amount, probably half or more, that is still in backlog to be shipped.

In addition, there will be more project orders that come in for Barrier Systems, and that, of course, has built some inventory in for that project. So we will see some of that inventory build on the infrastructure side.

In addition to that, this is the beginning of the season or anticipation or let's say the build for the season. So we are having some inventory build for the irrigation season for production right now.

That's all very helpful. Congrats again on a great quarter, and thanks for all the color. Happy holidays.

Scott Macke, aAd Capital.

First question, and I apologize if you gave this already, but I was just hoping to get the operating margin breakout that you typically provide in the Q between irrigation and infrastructure for the quarter.

We will see irrigation segment operating margin at 16.1%, which is a little higher than we were from last year, and we will see infrastructure margin at 18.4%, which will be a little bit lower than we saw last year as Rick just commented.

I was also looking just within the infrastructure segment, if we could talk just about the -- what I ultimately want to get at is just the underlying organic growth profile of Barrier Systems and Snoline and some of the recent acquisitions, and maybe it would be helpful as a starting point if you could help us out just with the organic growth in the infrastructure segment in last year's fiscal year as well as the first quarter, and if you don't want to give precise numbers, then just give us an idea of what organic growth was last year and the first quarter this year.

We talked at the end of last year with our quarter, fourth-quarter call and full-year call that we did not see significant unit volume growth in the irrigation side of the business. And this year we have seen about two-thirds of that growth on the irrigation side being unit volume. So we are seeing nice unit volume through the first quarter of this year.

I am sorry; I think I misspoke. I meant in the infrastructure side, not the irrigation --

You did. I think we really haven't broken out the infrastructure growth. I think I would come back to if you look at when we acquired Barrier Systems, which we bought a year ago this past June, the revenues were approximately -- was it, what was the -- (multiple speakers) -- trailing roughly $20 million revenue.

So if you were to look at our infrastructure business, in fact, I would really refer you back to the Qs on this to look at the year-over-year growth in the infrastructure segment because I don't have that information handy right now.

What was the trailing run-rate on Snoline when you purchased that?

Revenue was roughly about EUR13 million.

Thank you. That is helpful. And then in terms of generalities, what sort of organic growth profile do you expect these companies to have over the next, say, one to three years? And I also want to get a better understanding of the seasonality that we might expect in the infrastructure segment going forward.

We have not really made anything public in terms of projecting out growth or any real estimates for the infrastructure or really given any guidance on the business in total from a growth standpoint. So I am hesitant to do that on the infrastructure piece as well.

I would say, however, what we saw was very significant growth opportunities with Barrier Systems in the movable barrier product line and also in road safety. And just to kind of tie that back to the Snoline piece of it, there's new regulations that have passed in terms of some road safety requirements and that are being considered in road safety requirements in Europe, and Snoline is -- can be very key in providing the crash cushions and types of barrier that would be applied in those applications. So we see Barrier Systems and Snoline playing a very key role in terms of road safety products in Europe in total and believe that there are some significant growth opportunities there.

But in addition, Barrier Systems itself with their movable barrier was not very well-known, and their barrier was not very well-known outside of the U.S. And what we have seen already since the acquisition is an expansion of that to where we are getting projects in Europe, projects in Brazil that we are starting -- we have the project in Puerto Rico that we just recently were awarded and many others. So we are expanding that international presence.

So I guess I would say or sum it up by saying I believe that there are very significant growth opportunities with the movable barrier product line and road safety products.

As we think about modeling this segment going forward, how should we think about the seasonality of those two businesses, Snoline and Barrier Systems?

A portion of Barrier Systems' and Snoline's revenues are going to come during the, let's say, peak road construction season. We will face spring/summer months because that is when the road construction will be taking place, and they will be putting in the crash cushions. Plus, a portion of Barrier Systems' revenue will come from leased barrier and trucks moving the barrier for those road construction projects.

So I would view the peak of this season for them being the spring/summer months.

I guess if I think of that in terms of the peak, would I expect something like 60% or 70% of revenue for the year to come in those two seasons?

I am afraid I really can't split that out for you right now. I just don't really have that handy to -- and I really can't make that projection at this time.

That is fair enough. And also, just kind of wanted to understand the underlying demand drivers for that in terms of the type of projects that Barrier Systems go into. Are these projects that tend to be two to three-year type of projects from planning to implementation that are tied highway build funding, or are these -- can these be one-off projects that a city would decide to do and be triggered in, say, a year or so?

It is a combination of the two, but a portion of it will be sold through their dealers and could be one-off type projects and any kind of restructuring project that is going on. When you are looking at the movable barrier, they are probably going to be more likely two to three-year planning type projects, and the implementation of it, in terms of, let's say, if it is a leased barrier project could be a two-month to two-year kind of project. They could have the barrier out on lease. And if it is a sale, that could occur at anytime.

For example, a lot of the installations on bridges for traffic mitigation, traffic congestion could occur at anytime and may not have a real long leadtime or notice to that. I would say the majority of it will probably be longer time periods and more of the two to three-year project type.

Great. Thank you. And one more, if I may, and I appreciate all your time this morning. Just on the irrigation side now, you spoke about this earlier in terms of capacity, do you implement programs or try to -- I am going to use the word shift -- but do you incentivize your dealers to take product away from peak to help workaround capacity issues? As we look at the segment results, is there an element to that, or is this just a function of the end market being that much stronger?

We do have some programs from time to time at the beginning of a fiscal year, or let's say the end of the fiscal year, where we will have some type of a dealer stock or inventory kind of program to give them an incentive to take some inventory in anticipation or preseason so that it takes a little bit of the load off the peak.

What we -- but generally, by the way, that is a very small percentage of the total revenues. I would say less than 10% of the season, probably less than 5% will go out in that kind of a season build. And generally, the dealers at this point would not have much of that in their inventory at all. And a dealer would typically, if he were taking machines, may have one or two machines preseason in anticipation of that season, but it is a very small amount.

(Operator Instructions). James Gentile, Newland.

I am looking at the leverage -- I mean, your international performance during their seasonally strong quarter was actually quite strong, but I am surprised at the degree of operating leverage did not show up even stronger on the earnings line. What were some of the impediments at this level of volume?

I mean, historically you have been able to achieve higher gross margins on much lower sales volumes. And your SG&A and engineering expense actually took a leg up. Obviously a portion that is variable due to the international pickup. But help me understand why Lindsay did not enjoy greater operating leverage in the quarter.

Part of it, I would go back to, as I mentioned earlier, about the gross margin mix issue. The irrigation margins were very strong in the quarter year over year. There is a little bit of a decrease in the margins on the infrastructure side, partly from Snoline. The Barrier Systems/Snoline mix pulled down those margins somewhat.

By what factor, though?

I don't think I can answer that specifically. We are not really disclosing the specific margins by the segment.

Because the lion's share of the revenue contribution comes from irrigation. So if you enjoyed higher mix, one would assume a greater gross margin leverage would have been enjoyed. And I was just wondering if there was any kind of inefficiencies in some of the -- and perhaps in the facility in South America or anything that you have identified that perhaps could or could not be fixed or --

No, there is not.

Or was it a function of Lindsay being aggressive on price?

No, I would not really define it as any kind of an inefficiency. We have not seen any real specific inefficiency that came out from analysis or what we saw in the quarter.

As far as being aggressive on price, I would say that the price in some of the international markets, particularly where our business units are, the competitive environment may be different, but our competitive position in terms of how we price is very much the same. In other words, we tend to be towards the high-end. But it may be a more competitive environment in some cases than -- it certainly is in a few cases than it is in the domestic market.

But outside of that, I would not say it is Lindsay trying to buy share or be more aggressive in any way in any of those international markets. I am very pleased with what we saw in the growth in the irrigation margins.

Great. With regard to pursuing the acquisition strategy, wouldn't it be prudent for Lindsay to start using equity as a currency, given the extraordinarily rich multiple awarded to the Company right now relative to historical levels?

We consider all options when it comes to the acquisitions, whether it is using equity or debt or any form. We consider all of those, and it really comes down to the specific acquisition opportunity and how we can make that take place.

And I would add on acquisitions, too, because I think it is important to note that if you look at the history in terms of what we have added recently, there has been more in the infrastructure side of the business. And that is not the strategic plan to just build out infrastructure. The plan is to build out both of our segments of the business, irrigation and infrastructure. So I think any investor should really consider or look at it from the standpoint that you can expect acquisitions in both of those segments.

What type of acquisitions would Lindsay pursue in the agriculture area?

We would look at it more in terms of the irrigation or water management piece of the business. You could expect acquisitions that would be tied to that water management aspect, which could be valves or filtration or pump systems, things like that that could either be leveraged through distribution or leveraged on our international projects.

Isn't that sort of in a competitive area? Lots of other players with more -- larger players are looking in that same end market. Could you characterize the type of sizes of the candidates that you are looking at in that area?

The candidates we would look at, an ideal candidate from a revenue standpoint may be $50 million in terms of a big piece -- $50 million in revenue that we would add. However, the candidates that we would typically be looking at would be $15 million to $50 million in revenue.

And what we really are looking for and have found are ones that are strategically important, where they really give us an advantage in a marketplace or add a strategic opportunity for us and something that we can leverage, as I said, through manufacturing or distribution or very significantly through international projects.

Great. And then final question on domestic market. A competitor articulated there has historically been an incentive given to a farmer from a pricing perspective in the domestic market to kind of place orders during the seasonally slow period so to ensure delivery ahead of the growing season. And one of the competitors -- I talked to both of them -- articulated that the selling season in the domestic market was slightly muted, even given the pricing concessions, that have been given.

So I was just wondering if there is the expectation that domestic demand could perhaps accelerate, and we are growing backlog off a very low base here quarter over quarter. I was wondering if you can kind of characterize Lindsay's behavior in this period of reasonable incentives, if you will.

I would say I think the point that you are referring to is that competitors often have either a rebate or some type of a buydown on interest rates offered to growers. And they can use that money in one of a couple of different ways, which is pretty typical in the early part of the year, late part of the year. And yes, I have not really seen anything different this year in terms of the, let's say, more competitiveness in terms of those rebates or anything like that. I would say it is very typical. And yet what we're seeing in terms of demand was stronger this year in anticipation of this season and what we have seen in the past as our backlog and our revenues show. So it is a little hard for me to collect fairly muted from that standpoint.

I am just quoting what I have heard.

And I think if you are asking then could the market still get significantly better, I think yes, we really don't know where it will go until this season really starts. But as we have said in the past, we expected unit growth over last year, and I believe that as we have also said in the past that we expect to see this increase take place over a couple of years, not all in a one-year time period.

Of course. But we are through kind of a period of now since last year was new, a lot of farmers locked in their lower grain and corn prices before, and now here we are at a more sustained, higher commodity price level. Wondering if -- I don't know, I guess logically I am thinking if I was a farmer, wouldn't I a) want a cheaper system during this period of the year to ensure that I would have my system in place for the growing season? I just was surprised that the backlog was not up higher. Because last year was extraordinarily muted across the industry.

I think that is a question I probably can't answer or I already have answered from the standpoint of we have not really seen anything extraordinary in terms of incentives offered, and yet we have seen better, much better demand than we saw last year in the early part of it. But again, the real telling part for us in this season is this next quarter.

(Operator Instructions). Ryan Connors, Boenning & Scattergood.

Just a quick follow-up on a data point. Do you have a number for foreign currency contribution either in dollars or percentage terms on revenue?

On the revenue side, it was very small, somewhere in the just slightly higher than 1% range is all.

And there appear to be no further questions at this time.

In closing, I would add that 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 strategic acquisitions. We continue to have the financial flexibility to create shareholder value by pursuing balanced organic growth opportunities, strategic acquisitions, share repurchases and dividend payments.

We would like to thank all of you for your questions and participation in this call, and we wish all of you a very happy holiday season and prosperous new year. Thank you.

This concludes today's Lindsay Corporation first-quarter 2008 conference call. Thank you for your participation. You may now disconnect.