Lindsay Corp (LNN) 2008 Q3 法說會逐字稿

Good morning, my name is Clayton, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Lindsay Corporation Third Quarter 2008 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-answer session. (OPERATOR INSTRUCTIONS) During this call, Management may make statements that are subject to risks and uncertainties in which reflect Management's current beliefs and estimates of future economic circumstances, industry conditions, Company performance (inaudible) actual results. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company. And, those statements preceded by, follows by or including the words expectation, outlook, could, may, should or similar expressions. For these statements, we claim the production of 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 Rick Parod, President and Chief Executive Officer.

Good morning, and thank you for joining us today. Revenues for the third quarter of fiscal 2008 rose 54% to $143.6 million as compared to $93.1 year for the same prior year quarter. Net earnings were $14.1 million, or $1.15 per diluted share, compared with $7.5 million, or $0.62 per diluted share, in the prior year's third quarter The quarter also included a decrease in our income tax expense of $1.1 million, increasing earnings $0.09 cents per diluted share, implementing a correction of previously recorded tax expense related to Section 162(m) of the Internal Revenue code. Total revenues for the first nine months of fiscal 2008 were $327.9 million, rising 57% above the same period last year. Net earnings for the first nine months were $28.2 million, or $2.29 per diluted share, compared with $11.8 million, or $0.99 cents per diluted share, for the first nine months fiscal 2007. In the domestic irrigation market, revenues were $79.1 million for the third quarter increasing 46% over the same quarter last year. Economic conditions for U.S. farmers have been very robust due to higher agricultural commodity prices. The most current USDA projections are for net farm income to be up for 4.1% for the '08 crop year, achieving a new record of $92.3 billion. Recent wet weather conditions jeopardized earlier production and yield estimates for corn in the U.S., pushing commodity prices higher. While it remains to be seen what crop damage has resulted from the weather, the year-over-year higher commodity prices have favorably impacted demand for our equipment. International irrigation revenues were $41.5 million for the third quarter up 95% over the same period last year. Exports up in all regions and were up in total more than double the same quarter last year, driven by agricultural development and high yield improvement initiatives.

In addition, we have seen significant growth in revenues from each of the international irrigation business units in Brazil, South Africa and France. For the first nine months of fiscal 2008, international irrigation revenues were $92.5 million, up 96% from the same time last year. Higher global commodity prices, pressure on increasing food production and demand for bio fuels has increased investments in agricultural development including expanding efficient irrigation. Infrastructure -- infrastructure revenues rose to $23 million, or up 30%, from third quarter of year. Most of the increase revenue in the quarter was from the lower margin highway tape product line from Snowline in Milan, Italy and from our diversified manufacturing business. Various systems revenues were also higher in the quarter. We have now completed the large port project in Puerto Rico. However, we continue to pursue other traffic mitigation projects some of which are similar in size and larger. Year-to-date at the end of the third quarter, infrastructure revenues were $68.2 million, up 55% from the same time last year. Various system revenues up more than 47% and diversified manufacturing revenues were over 35% higher than in the first nine months of fiscal 07. Gross profit rose to $37.1 million for the third quarter versus $24.4 in the same quarter last year. Gross margin declined to 25.8% compared to 26.2% for the third quarter last year. Gross margin on irrigation products increased during the quarter over the same time last year, and margin on infrastructure decreased due to unfavorable product mix and higher still cost on contract manufacturing orders. Year-to-date at the end of the third quarter gross profit was $86.4 million compared to $51.3 million in the prior year period. While revenues rose 57% in the first nine months of fiscal 2008, gross profit rose 68%, reflecting leverage from the higher volume. Gross margin was 26.4% year to date, compared to 24.6% in the first nine months of last year.

Total operating expenses for the quarter $16.7 million versus $12.9 million last year primarily due to the inclusion of Watertronics, Inc acquired in January of this year and high personnel related expenses. For the quarter, operating expenses 11.6% of sales compared to 13.9% in the prior year third quarter, reflecting continued leveraging of expenses. For the first nine months of fiscal 2008 operating expenses $43.6 million, or 13.3% of revenues, compared to $33.5 million and 16.1% in the first nine months fiscal 2007. Our order backlog rose to $84.4 million, on May 31st, 2008, as compared to $30.0 million, May 31st, 2007. The irrigation backlog was up $48.5 million, achieving the highest irrigation backlog for the end of the third quarter. And, infrastructure backlog increased $5.9 million. Accounts receivable increased $27.4 million from the same time last year due to the higher revenues. Inventories increased $15.8 million over the same time last year in support of the backlog. Our consolidated inventory turns were approximately 5.1 times equal to the same time last year.

In summary, strong agricultural commodity prices continue to support demand for efficient, high yielding, yield enhancing irrigation equipment. We continue to experience robust demand for our irrigation equipment globally driven by high economic returns for farmers, global food requirements, agricultural development and water use efficiency demands. In our infrastructure segment, we are pleased with the strength of demand and interest and barrier systems unique movable barrier product lines, and the growth we've experienced in their other road safety products. We continue to see many domestic and international opportunities for growth and infrastructure business, including leveraging across our international platform. I would like to now open it up for any questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Joe Giamichael from Rodman & Renshaw. Your line is open.

Thank you, gentlemen. In the release, you said weakness in the infrastructure segment is the reason for the declining margins, but I would like to focus on the irrigation business for a couple of questions. We don't have the queue yet, but given the $120 million in irrigation revenues, I would have expected significantly more gross profit. It would appear that inputs have run against you more aggressively than the 30-day pricing guarantees allow you to pass through. I know that you don't break out gross margins, and you did say that irrigation gross increased year-over-year, but could you give us a better sense of what this looks like on a sequential basis relative to Q2?

Well, what I think we can do, Joe, is -- first I'll can come back to the point that gross margins for irrigations did improve year-over-year and Tim Paymal, our Chief Accounting Officer, has the breakout of the segment information. He can describe that a little further.

And, Joe, on the irrigation side, $26.1 million was the segment operating income number, and, in the prior year, it was $16.1 million, comparatively.

I'm sorry, go ahead, Tim.

21.6% for the current year quarter. And, 21.3% as a percentage of prior year third quarter.

And, just can you compare that with what you showed in Q2 just on a percentage basis?

I don't have that --

I can look up that.

Just a second.

Joe, this is Mark Roth, in Q2, operating margin in the irrigation segment was 21.1%.

Got it.

That's how it broke down in the quarter.

So, it did rise.

Got it. So, you have actually shown sequential and year-over-year growth there.

That's right.

When we see the queue, with the segment break down from the infrastructure business, I have to assume that the contribution there was negative the quarter. Can you give us just a little more color as to the magnitude of the turn relative to what they did there in Q2?

Yes. Tim has that information also.

Joe, in the current quarter operating income is $2.1 million and 9.2% of sales. And, for prior year third quarter '07, that number is $3.5 million and 19.8% of sales.

Okay. Got it. As we look out at Q4 in the next year, do you feel that the price increases are still able to be passed through even if only to sustain your margins? I mean it seems apparent that investors fear continue revenue growth could be offset by margin degradation.

So far, we have been successful in passing through the input increases in the irrigation segment very effectively. I don't see that really changing at this point.

However, we are coming to the end of the season. It's different situation. We will see a different mix potentially in the fourth quarter. Meaning, we may see more mix of international sales versus domestic sales. But, in terms of our ability to pass through overall increases, I don't really feel any differently about that than last quarter. I think we are in a strong position. And, we tend to see competition follow what we do from a pricing standpoint.

Got it. Okay. And, just one or two last questions. If we were to look at the typical center of irrigation system on a year-over-year basis, how much is the average sale price increase? I guess I'm just trying to get a sense of how this 60% year-over-year growth comes out on a pricing versus volume basis.

Well, I think one way to look at this would be the impact year-over-year in terms of the revenue increase, and as we've said in the previous quarter, it was generally about one-third price, two-thirds volume, that would hold true for this quarter as well.

And, in terms of price per unit prior year, third quarter was approximately 37,400, and in the current year it's approximately 40,900.

To a dealer.

Correct.

Got it. Got it. And, dealer margin is typically what 15%ish?

It's probably going to be in that 10% to 15% range.

Okay, got it. One last question, and I'll jump back in the queue. Much has been made about the flooding in the Midwest, could just quickly address the impact that this could potentially have on your business?

Yes. Well, the impact in terms of total acres lost or crop damage isn't really known yet. And, it's being assessed. I've heard quite a few different numbers in terms of yield loss, five bushel per acre, a number of different numbers. I think it's difficult to estimate yet, but I would say that as it pushes commodity prices up. As we see, let's say, less than what's expected in terms of supply in corn, it will generally be good for our business in that we will see growers globally trying to enhance yields further to make up the shortfall.

So, I think -- I don't view this as a negative. It's certainly not a beneficial situation for the farmer, but I don't see this having a negative impact on our business.

Okay, great. Thank you.

One other -- I want to come back to one other point, though, Joe, because we really didn't talk about the infrastructure margin impact, and I just want to make a couple of clarifications or highlights to that. The single biggest issue with the infrastructure margins in the quarter was significantly less Quick Move Barrier sales than what we seen in previous quarters. In fact, I would consider it to be a anomaly in the quarter because the Quick Move Barrier, the actual concrete barrier, that is used in the projects was significantly less than what we've see in previous quarters. This has more to do with timing of projects fall than it has to do with a change in demand or government spending or anything of that nature, but it's purely a project flow issue. So, this was a bit of a anomaly. But, we referenced in the earnings release talking about the effect of steel. But that is a pretty, let's say, a secondary minimal impact, and that's on our contract manufacturing piece of business which is a small part of the infrastructure business in total. So, in general, the single biggest impact was the mix issue where we had very little Quick Move Barrier sales in the quarter. That had a big impact for the infrastructure.

Got it. So, I guess I will ask one more question on that.

Sure.

So, on the infrastructure side could you walk us through the composition of the segment revenues more of a order of magnitude basis. Quick Move Barriers accounted for X. Snowline for Y. And, then just sort of talk about your ability to grow the business in the environment with sort of domestic declining tax receipts leading to lower government spending on infrastructure?

Well, for competitive purposes, Joe, I wont break out the sales much further than what we do in terms of infrastructure other than say that typically the contract manufacturing piece, which is a smaller piece, will be 25% or less of the -- those sales. So, it's not the most significant piece, and our overall strategy is to build the proprietary product piece of our infrastructure business which are definitely higher margin. Barrier systems has not been as impacted as other competitors and road safety products maybe in government spending or government pull backs because the business is more concentrated on the very unique and specific Quick Move Barrier system versus other road safety products like crash cruisers.

Now they sell those, but it isn't the biggest piece of their business. Do, what we are going to see with barrier systems will be demand driven by interest in traffic mitigation, either on bridges or on highways, and somewhat they will be more emotional driven than by what is happening with pure government spending and government budgets. So, our mix I feel is favorable from that standpoint. However, we will see periods like this where we will have maybe lower Quick Move Barrier -- concrete barrier type sales, and we'll have other periods where we will have big project sales. So, it will fluctuate a bit.

And, as those business grow, do you think it will be a smoothing affect to that?

Yes, I do. I think we will see a smoothing because I think we'll see an expanse of the product line. We'll see a smoothing because we'll a broader base of Quick Move Barrier globally being sold around the world. But, in many views I still view this as a somewhat early stages on -- in the product, even though it's been around for a long time. It's really now gaining more market acceptance due to more exposure. So, I think we are in the early stages, I wouldn't say embryonic, but early stages in terms of maturity of this product. So, I think it will flatten out over time or maybe I should say become more predictable over time.

Got it. Thank you, I appreciate you taking the questions. I will jump back in the cue.

Yes.

Your next question comes from the line of Ryan Conners with Boenning Scattergood. Your line is open. That's pretty close.

Good morning, Ryan.

Hi, Rick. It's pretty comprehensive. I think a lot of my issues were addressed there. But, I guess if we could just sort of revisit the issue that Joe's initial question on margins and irrigation, and I mean look at it from a bigger picture perspective. Given how strong the youth volume growth has been in irrigation and given that the industry is relatively well consolidated and that pricing has been firm. I'm wondering what is keeping the Company from translating the top line growth in to even more leverage on the bottom line if for nothing else then just pure operating leverage, spreading the fixed costs over greater unit base. So, any kind of additional commentary, just in terms of long-term view about the profitability profile in that business in an up-cycle I think would be helpful as we move forward.

I think I understand the question you're asking, and I would say to some degree, Ryan, it's limited by the amount of volume that's going to push through the quarter in any quarter for irrigation equipment in total. And, I say in total because I'm also looking in terms of leveraging our costs on a global basis. And, what we are seeing is our business is ramping up in Brazil. We're increased volume, leveraging costs in South Africa. Increased volume in Europe and, obviously, the U.S.

So, as those markets continue to build, we will see or we can see and should see more volume in the quarter, which will leverage expenses more as time goes through. It isn't really limited by let's say necessarily existing capacity. It's limited by the way those the global markets are really ramping up. But, I think there is more leveraging opportunity out there as the markets continue to expand.

Okay. That helps a whole lot. Then, Rick, you've talked in the past about the fact that you don't see capacity constraints as a issue necessarily, and you just mentioned that there. But, you have talk about the supply chain being a concern for you. Can you just update us on what you're seeing there now in terms of whether those issues impacted the third quarter results at all, and whether you see supply chain issues impacting us over the next couple of quarters?

Yes, I would be happy to. First, I would say I would never completely dismiss capacity issues because they will be potential issues from time-to-time in any one of our locations. I -- but, what I had made the comment on in the past is that we have variable methods of expanding capacity or various methods for expanding capacity. We can do things like add more manual processes in addition to some automated processes in any of our facilities. So, there's number of things we can do inside to expand capacity in response to increased demand.

Where we do run into limitations would be on the supply chain. For example throughout the quarter, we would have issues with periodically with getting enough tires to support the number of units we needed ship or other sub-components. And that sill remains a problem through the or did remain a problem through the third in each of our locations. Part of that is driven by our supply chain's ability to ramp up and part of it is driven by our ability to forecast significant increases in demand as we have been going along. It's a difficult one to forecast, and we've been surprised at times in some of the markets. One of the recent ones that we've seen that added additional demand into our product -- into our capacity in general has been the machines that were damaged in recent storms in the Midwest, primarily in Nebraska and Kansas and across this area. And, there was a estimate I saw in the newspaper a couple -- a day or two ago said they were up to 500 or more machines in Nebraska that were either destroyed or damaged. And, all of that has created additional demand on top of what we had originally forecasted for markets, which then backflows to demand for our suppliers as well.

Okay, well, that's very helpful. And, I would certainly say that most of us on the financial side share your understand the challenge and forecasting, so good luck the rest of the year. Thanks for all the detail, guys.

You're welcome.

Next question comes from the line of Michael [Riley] from Maxim Group. Sir, your line is open

Hey, guys. Thanks for taking my question. I'm going to look at it from a different perspective. I'm not too concerned about 4/10ths of a decline in margins, but more looking at the growth you had in each business unit or business sector and what I call significant growth in terms of normal companies. You guys lie in the sweet spot of where water is going to turn in to a commodity. And I think I read that $35 billion in a $260 billion water industry, $35 billion lies in wasted water due to poor irrigation products, not only here domestically, but internationally. And, so that's why I think you guys are going to be up and running and be extremely strong company. So, I don't really care about the little hiccup we have today or the 4/10th of a basis points in gross margin, but more interested in your growth, and how you've seen an adoption of your products internationally. Can you talk about that a little bit?

Yes, I would be happy to. And, I think you hit on a couple of excellent points. And, one is, if you look at the true drivers for this business today and going forward it's water, food, energy in terms of biofuels, environmental issues in terms of implementing irrigation systems that are environmentally friendly and safety, which ties into our infrastructure part of the business. So, I agree with you in terms of the sweet spot analogy.

Coming back to your question about the international markets what we are seeing is continued growth in markets like Brazil, where agricultural development is pretty strong. We are seeing growth and continued development now in China, which we see as a potentially a very strong market for the future and probably not distant future, but near future. We are seeing certainly in some enhancements there. Just recently came back from Ukraine, and I see continued expansion in that area, both Ukraine and Russia I think will be good markets for us in the future. We've seen expansion recently, and I think you can find articles, where there's investment in the Middle East and Egypt and (inaudible) market and money from the Middle East going into various markets in terms of agriculture development globally. And, the other interesting point is that if you look at the penetration pivot irrigation in to the U.S. market, it's basically 40% of -- or 41% of irrigated acres, which only 13% of total acres. So that's maybe a significant percentage in terms of the total irrigated acres, but when you get to the global markets, the percentage of pivot that penetration in total is certainly well below 5% in total. So, I think there is a tremendous opportunity and it's at a very early stages. But, I think the interesting trend in development that's significant here is as commodity prices rise or profit opportunity rises for farmers, the interest in expanding their yields also certainly increases, which means they are willing to make the investments in equipment like ours to expand those yields. So, I think we are in early stages of continued global expansion.

Right, I think you touched on it with the flooding is, unfortunately, through the floods, but the farmers will be looking at the most efficient means of being able to irrigate their land. And, that's where you guys lie and using the GPS technology, et cetera, and penetration of questions to the Far East is where a majority of that inefficient irrigation lies. So, I mean, that should be a great market as -- and I know you're in Brazil, I know that's like the big three -- Far East Brazil, South America, and that how about India? Are we looking at the Indian?

We are. We are in early stages in terms of India. But, we also view that potentially as a very good market. But, I'd come back to the environmental part that you were referencing and just add a bit of color, which would be, when you look at the pivot irrigation. The equipment we sell versus flood irrigation, flood irrigation will typically be in that 50% to 60% efficient -- efficiency level, meaning the right amount of water applied at the right time. And, a lot of the water may evaporate and run off into rivers and streams and carry fertilizers, chemicals and seeds versus a pivot can be 95% efficient, and sometimes more in terms of the application of the water. And, from a environmental standpoint, certainly much better. So, I think there is very important points there that are starting to be recognized globally.

Right. I guess today's the -- short side of the day of the anomaly, I think you guys -- you guys are in the sweet spot of this whole agriculture and water turning in to a commodity play. Whether -- Even if agriculture was the pricing of corn, soy, wheat, even gone down, they are going to want to max -- farmers are still going to want to maximize their yields and their efficiencies, and you guys lie in it. So, thanks for taking my questions. And --

Absolutely, thank you.

Good luck going forward.

Thank you.

Your next question comes from Ben [Faulk] from Marble Bar. Your line is open.

Hey, quick two questions. Firstly, just coming back, if you clarify, I kind of missed what you said about the irrigation margins for the third quarter and year-on-year and also compared to sequential. Just a clarification there. And, secondly, just coming back to the anomaly you talk about in infrastructure, you said this is more due to timing and less quick barrier sales. When you say it's anomaly, the margins going from 19.8 to 19.2, is -- do you expect it to bounce back any time soon, next quarter or the quarter after. And, you talked about a smoothing effect. How does this come back because clearly the initial comments this morning (inaudible) steel, which is kind of more of a structural issue, when actually sounds more of a one off pressure to the margins. I want to get a understanding. Obviously, steel isn't the main issue, but timing of. Could you just explain more this whole anomaly in the infrastructure business because that would be helpful. Thanks.

Yes. I will attempt to. I'm not sure I got all of the question due to the quality of the line. But, I think there were three questions in there. So, I will attempt to take those sequentially. The first one I believe was irrigation question of volume versus price in volume if I understood that correctly. And, I think the answer is that in the quarter, the increase that we saw in irrigation about one-third is price, and two-thirds volume increase. Is that the question that you were asking?

No, just actual clarification on the margin for the third quarter this year versus last year.

I see. Okay.

The --

I think we're talking about segment operating margin for irrigation.

Correct.

Then I will clarify that for you. For the third quarter of fiscal '08, that was $26.1 million --

Yes.

And, 21.6% of sales. And, then third fiscal year 2007, that number is $16.1 million,, or 21.3%.

Okay. I hear you Do you have just the last quarter's numbers, so I can get the sequential?

Second quarter.

Yes.

Second quarter was 20.1%. And, on the margin basis in $16.6 million in --.

Got you. Thank you. And, the second question on infrastructure and the anomaly, and the --.

Yes. The second question regarding my comment of the movable barrier anomaly. And, what I said, was that we have very low movable barrier sales in the quarter in the quarter -- third quarter of this year. Which I consider to be an anomaly in that if you look to the third quarter last year, we had pretty good movable barrier sales. That's a very high margin product line for us. And, this going to ebb and flow with significant projects that come in, well I shouldn't say significant, but projects in total. So, a barrier systems we will see projects or earned projects consisting of Quick Move Barrier, as in the case with the past quarter they finished the Puerto Rico project and really had very little than movable barrier revenue, which is a high product line for them. So, that's where the mix issue is. It's in that concrete bare barrier that's part of the Quick Move Barrier system.

Just a clarification. When you say this is anomaly, would you expect the margin to bounce up to a normal run-rate of 19% going forward to next quarter as you get projects coming back?

So -- The answer is slightly different. I would expect to see future quarters with more movable barrier sales. But, I would also add that because it is a project-oriented business it is likely we will see some in the future with low movable barrier sales again. But, because it is tied to projects, but I would not expect to see that typically in a quarter.

So, what you lost in this quarter you might make up next quarter, is that what you're saying?

I wouldn't view it as make up or loss I would view it as tied to project as they come in and timing of projects. And, I think they way to look at this, on a long-term basis, this is a very unique product with tremendous growth opportunities. And, you will see some periods when orders will come in, and backlog will build for the movable product line. That will be I would say probably exceptional. And, they'll be other times when we won't be seeing the order come in, but it's really a timing of project issue more than anything else. It is not a long-term growth issue. It's not a performance issue. But, it's tied to the timing of when projects are earned or when they fall in.

Okay, thank you very much.

I think there was another question you had regarding steel and I want to come back.

Yes, it was steel, absolutely.

Yes, the steel one was really I said it's really a small piece relative to the whole picture, but tied to our contract manufacturing business and infrastructure, which as I said is roughly about 25% of those revenues, a fairly small piece of those infrastructure revenues. But that's a case where we have taken on contract manufacturing work for other companies at a price without as much control in terms of the ability to reprice those orders as we have with proprietary products. But, our overall strategy has minimizing contract manufacturing. However, we will continue to support the customers we have. There is no issue with that. But, we are trying to continue to build our base of proprietary products.

Okay. Thanks. So, it would be wrong to assume you continue at a 9% margin going forward? You kind of bounce black to a kind of blended average in the last couple of quarters?

Without giving guidance I would say, yes, that's true.

Okay, thank you.

Your next question comes from Patrick Forkin with Tejas Securities. Sir, your line is open

Good morning, thanks for taking my question here. Could you give me any kind of idea as to what the breakout is on the irrigation side between business in the United States and business outside of the U.S.?

Yes. In fact, it's in the slide deck we have published on the site. Which, one moment, I can pull that sheet for you. For the quarter, the U.S. revenues were $79.1 million. In international, revenues were $41.5 million.

Okay. I'm fairly new to the story, has there been much movement in the relationship over the last year? Have you seen much movement in that going forward?

Well, there is movement, but I would highlight the growth that took place year-over-year in the quarter, in those two -- tow pieces of our irrigation business. One is that if you looked at the domestic revenues at $79.1, it's up 46% from the same quarter last year. The international revenues are up 95% from the same quarter last year, and we saw roughly if I recall 130% growth in international last quarter over the previous second quarter. So, we are seeing very good international growth. So, I would say it is at this stage typically growing faster than the domestic market is.

Okay. And, that's very interesting. Any particular part of the world where that more of that growth is coming from on the international side?

Unfortunately, what we have seen is very significant growth in our export business, which includes areas like Australia, Central America, Mexico, Middle East, and China. And, we also seen very good growth in the last year in our foreign operations, which are in Brazil, South Africa and France covering Western Europe. So, all of these -- all of them have seen very good growth. I would say there is particular hot spots, which I would probably include china As one of those. Australia, New Zealand has been hot for the past couple of years. So, there's some good growth markets, and I think there's some new developing ones that we haven't really scratched the surface much with yet. That would come back to Russia, Ukraine, and longer-term India, and we've also seen really good growth in international operations in Brazil.

Okay. So, that profile really supports, I think you made a comment earlier, that if U.S. farmers in the Midwest, were, even though commodity prices are high, were pinched by lower yields and maybe had less available for CapEx that at the higher commodity prices in other parts of the world that were working to increase yields would support that continued international growth. Is that a safe way to look at it?

I think it's a safe way to look at it. Now, whether it's a direct correlation or how you would view that I'm not certain. I would come back to the point that the real message in the equipment that we sell is first a yield improvement or yield efficiency, message, meaning when somebody is putting a irrigation system like ours, if they're dry land farmer may say 50% to 100% yield improvement. If they're converting from flood irrigation, it can be 20% yield improvements or more. So, the real message for the farmer, what's going to be the driver will be that yield enhancement opportunity.

The second part of it will be the water saving or water efficiency aspect meaning in areas where there is limited water to work with, farmers will also consider, excuse me, conversion for that water savings opportunity. And, basically maximizing the crop they can produce given the amount of water they have to work with. So, I think higher commodity prices will continue to drive farmers through install yield enhancing equipment like ours.

Okay. And, Then on the conservation and yield enhancement front, and I should know this about your products, but I don't. But, a lot of the GPS guys are using a allowing farmers to use GPS to bury the application of chemicals and fertilization within a field. Do you guys -- Is the application of water pretty much uniformed on a given sprinkler system or is there something built in that would allow the farmers to bury that application by the pitch or the drainage in a particular field?

Typically the application is pretty uniform. We do use GPS control for certain functions or processes on our equipment like end-gun controls, for example, that will turn on or off. An end-gun as it's passing certain parts of the field or as it's coming up to, let's say, a roadway to shut off the end-gun. There is certain functions that are controlled through GPS. What we have seen is that, and we do have the option of, by the way, of being able to have more variable application through irrigation systems. However, it does include incremental costs in order to do that. More control of specific sprinklers along the pipeline. Typically, we found that farmers have not either seen the benefit to warrant the additional expense or that the expense has been prohibitive to go that route. So, we haven't seen that yet.

However, I would say that in the future as the next step comes to for opportunities and yield enhancement, I wouldn't be surprised to see that as a gross pass of the future.

Okay. And, last question, you used the -- you said that demand on the irrigation side is robust. Qualitatively, any significant change since the last time you guys have reported here?

No, I think what I would point to as an indicator is the backlog. And, if you look at the backlog of over $84 million in total, and I made the comment it was the highest third quarter backlog for irrigation that we have seen. I could also comment that it's more than double what we seen in any other third quarter -- at the end of any other third quarter period for irrigation. So, I think that demonstrates a pretty robust demand.

Okay. Very good Thanks for taking my questions.

Yes, thank you.

Next questions comes from the line of Ned Borland from NGE. Sir, your line is open.

Hi, Ned from Next Generation Equity Research.. Following up on your last comment there, Rick, on backlog, can you give me a sense of what your production lead times on center pivots are doing versus the previous quarter and versus a year ago?

Well, I would say that the specific lead time on irrigation machine is higher than what it would have been a year ago. In fact, today, given the machines we dropped in to the schedule from, let's say, the storm damaged machines and the repair parts that required for the storm damaged machines, I think, we're still probably looking at lead times that may be in the 30 days to probably 30 days out. Probably roughly in that area. Not for all machines, but roughly in general. Typically, what we would see at this time of year is a very short lead time, where we'd have machines in stock and turn that to where we'd be supplying those machines within a week to ten days. So, we are seeing a longer time in terms of turning those out, and some of it is due to the supply chain. In fact, I would say more is due to either forecasting receipted materials and supply chain in general than to any other factor.

Okay. And, then, can I get a sense for what your steel costs have done during the quarter? How much have they appreciated versus the end of the last quarter?

Yes. I don't have that handy, but we seen a significant appreciation in steel. My recollection -- well, I just don't have that specifically in front of me at the moment, sorry.

Okay. Well, the level of pricing that you're at now, and I imagine that you 30 year growth has come from pricing -- do you envision that basically you're going to need future price increases to maintain margins where they are now. Or -- or, can you expand margins basically through increased operating leverage?

I would expect that we will have expansion of margins from operating leverage. However, I don't really think we are finished with price increases, either. I expect we will continue to see additional price increases, in fact, I'm sure we will see additional price increases in irrigation, in particular, given what we've seen happen in terms of steel costs and the cost rise that took place in the last 45 to 60 days.

Okay.

We will continue to see price increases, and I do expect to see competition continue to follow where we go from a pricing standpoint.

Okay. But, do you get a sense that maybe farmers are reaching a kind of a some a point of resistance maybe that pricing on an absolute basis is getting to a level where it causing -- it's effecting purchasing decisions?

I get concerned about that. We haven't heard that farmers are ready to pull back or anything, regarding a change of their buying behavior based on the current pricing. However, it is one of those areas where I do get concerned.

I would says, it's somewhat beneficial that this price run up in steel has occurred when it did. It's really toward the end of the typical U.S. irrigation season, meaning most of machines are in the field and the farmer is not coming back, let's say, next week buying his next machine. But, may be coming back to be looking at his machine for the next season. With the exception of the, let's say, replacement machines due to storm damage or something of that nature. Now, the international markets continue to go. From a domestic standpoint, I think, there is a big of a time lag, where it allows the farmer to catch his breath and next time he comes back I think he will expect to see price increase on the equipment that he is buying.

Okay. Thanks. That's all --

And, I want to come back to the steel issue because I did find a couple of things here in my notes. I'd say what we are seeing is that steel back probably early in the second quarter, or, sorry, end of the second, was probably about $0.29 cents a pound. The spot market on steel is probably $0.53 cents a pound. And, that does not mean those are the prices we incurred in any specific quarter. We always have the mix of buying on the spot and hedging, and basically quarter-to-quarter looking at about 80% of the steel -- steel requirement will be covered by a hedge buy.

Okay. Thanks.

Thank you.

Next question comes from Joel -- Joe Giamichael again from Rodman & Renshaw. Sir, you line is open.

Thank you. Two quick questions for you. The first is from a pricing standpoint. Most increases has been steel related. Assuming steel prices lessen at all, is there a push back from dealers in terms of trying to look for lower prices, or do these remain -- are these relatively sticky?

Joe, I feel they are relatively sticky. It is possible depending on what happens with steel there could be a push back. The real factor that determines how much of a push back that will be is what our competition does. If we start to see one of our competitors, there is really only two were are concerned about, start to give back a reduction they see in steel costs, and then it will increase the pressure and momentum to give back pricing. We have not seen that in the past when steel did run up and fall back a little back. I would expect not to see that in the future.

Okay, great. Just, to get a better picture of the international opportunity, can you describe the competitive environment, I guess, just more globally, and then give us a better sense of what the strategy is regarding the ability to serve some of the larger markets? Do you have any intend to have local -- a local manufacturing presence in China and India. And, have any of the locally produced products started to take, sort of, the early adopter share?

Yes, let me talk first about the competitive environment and say that in general there are really two global competitors throughout the world and all the markets, and that's Lindsay and Valmont. Outside of that, we certainly have [Renkey] that competes by export in many of those markets. We do have regional competitors in all of I would say most of the markets we are in. They vary in terms of strength in the markets. In Brazil, we have a regional competitor. South Africa, there is a regional competitor. And, in Europe, which is the most competitive market, there is probably seven or eight regional competitors that do tend to make that one messier than some other market, but in general it comes to -- comes back to Lindsay and Valmont.

One of the points I would highlight about that is that there is investment that's required in order to keep a product line full, up-to-date, functioning correctly, add new technologies. Have strong distribution channel that can serve the growers, and those are, let's say, barriers to entry that we have. And, I think those are significant barriers to entry that you don't find in all industries, including things like drip irrigation to some degree. And, I think From that standpoint, globally, we are in a pretty strong position. Now, there was a second part of your question? I'm sorry, what was that, Joe.

Just about whether or not you started see -- I know there are a couple of smaller center pivot companies in China and things of nature. Whether you're seeing any locally produced products from emerging competition starts to take any share?

We have not. We have from time-to-time see these smaller companies pop up in areas like China. Somebody pointed out recently that there was one that appeared in Turkey, which we haven't seen before. We haven't seen significant -- well, I should say significant, we have seen any kind of major share gains from those local competitors. I do think, as we expand our business, this will come back to the second part of your question, as we expand our business footprint globally, it will change some of the competitive dynamics. For example, I wouldn't be surprised if in the future that China potentially had subsidies that were tied to more greater subsidy from local manufacturing. And, that's why It's important for us to have, one of the reasons why it's important for us, to have local manufacturing or supply in those major agricultural regions.

And, this comes back to the second part of your question, which is our strategy for serving those markets. And, as we have demonstrated in Brazil, for example, the strategy has been to go in and set up a manufacturing operation, fairly limited in scale in terms of types of processes better there, outside pipe and better galvanizing and expand those operations as the market continues to expand and grow. That is our overall strategy for all developing agricultural markets.

Got it. Thank you very much. I appreciate it.

You're welcome.

Next question comes from the line of Ben [Faulk] from Marble Bar. Sir, your line is open

Hello, I just -- coming back. Couple of questions, please. Firstly, just on the Watertronics acquisitions that you made. I was trying to understand the incremental margin there. There was obviously good growth in irrigation. Margins up a little bit, but not huge, it kind of implies that incremental margins were flat to downish. But, that's just based on I don't obviously have the volume price plus acquisition impact. I was trying to understand what the acquisition dilution could have (inaudible) on lines going forward. This is the first question.

The second question, again, on steel, you said you're talking about passing on price increases going forward. How much of this price increase is actual a net price gain? In other words, more than offsetting your input costs? Thanks.

We'll come to the first question, Ben, which was regarding Watertronics, and the point I would make regarding the increment into the quarter is that Watertronics is a very small organization, but profitable. But, it really had a little, a minor impact or benefit to the quarter. Watertronics was an acquisition made for strategic purposes in terms of being able to integrate or pump systems and controls into and our irrigation controls in to a complete turnkey type system. And, that's a process that we are working through. So, what you should expect is very little impact from Watertronics in terms impact form an income or balance sheet standpoint. Because it's a relatively small business in total. Coming back --

Okay. I was trying to understand the mech -- in terms of how much -- obviously you got a revenue with that, but without the income. So, how much of what dilution was that? So, I can work out the incrementals.

I don't have the revenue number offhand for Watertronics. I just don't have that handy. But, it's a pretty small business with total revenue in the $18 million range for the year.

Alright. Many thanks.

And, the second question was relative to steel, and could you repeat that part, please?

Yes,. Just a question on steel pricing. You said that you can continue to increase prices here, subject just passing on the steel price. How much of this -- how much of this price increase is a net price increase? In other words, you're passing on a price increase that more than off-sets your input costs, or is it just a wash?

Well, I would that in general what we are attempting to do with our price increases is to price to, not only what we have seen in terms of steel, but we're looking forward in terms of the impact that we expect to have in any -- any of our input costs. So, for example, when we are looking at our pricing action today it's based on what we see happening with steel tomorrow or let's say a month out from now. And, hen we may have to match that up or supply it in terms of products. What we will see from time-to-time will be net margin fall through, but, in general, what we are trying to do is stay current in terms of passing on those costs increases in the cost of our product.

Okay. Great. Thank you very much.

Thank you.

Your next question comes from the line of Alice [Frickey] with Craton Capital. Ma'am your line is open. Hello? (OPERATOR INSTRUCTIONS)

Hello?

Ms. [Frickey], your line is open. I'm sorry, sir, your next question is from the line of Michael Riley from Maxim Group. Sir, your line is open.

Hi, guys, I'm sorry I had to drop off the forum. Just go ahead and jump back on heard the tail end of a couple of questions. Having coming back -- having had a background in production myself, I don't want to lead the witness here, but there is two ways of or at least two ways of improving margin. One is, obviously, production process improvement, which I would think you guys would through your R&D would be able to figure that out as you continue to build your products smarter and more efficient. And, the second is going back to the conversations I heard about steel, and that's to find alternative either commodities or alternative parts. And, it is hypothetical, but I mean you guys wind up saying that you're going to use titanium or something like that down the road, where you wouldn't be affected by steel prices as much anymore if you found that, and that again could continue to lead to margin expansion. And, again, I don't want to lead the witness, but am I on the right line there?

Well, You are on the right line. I think there is a couple of points to what you said. There is the production process improvements, and there is product let's say product design type improvements that could be using alternate materials and things. We do continue to look at all of alternate materials in place of galvanized steel on pivots, and we do sell systems that aluminum and systems that stainless depending applications. We sell systems that are poly-lined, systems for [rosa] water applications.

And, we do consider and do continue to redo alternate materials like composite materials and things of that nature. The difficulty is that many of those materials are also somewhat expensive and have to withstand the weight and pressures of our application. But, it's definitely right on. And, I think as steel or any other material input cost rises we need to continue to look at all alternatives. And, the first part of your comment was relating to production process improvements. And, in our primary U.S. factory, we are also in the process of implementing many lean initiatives to continue to improve those processes. Now, that has helped us this past year in terms of meeting the capacity needs and requirements or meeting the demand by our expanding capacity in different functions and processes of the factory. But, it, also now and in the long-term, will continue to reduce our overall production costs and enhance our factory processes throughout the organization, not just in the US, but in all of the global operations as well, which we really haven't even scratched the surface of yet. So, I think there's still significant opportunities from lean initiatives and certainly the other in terms of alternate material will be is what we'll you be the to watch and monitor and make those comparisons.

Excellent. Thanks guys.

Yes. Thank you.

There are no other questions in queue at this time. Sir, do you have any closing remarks?

Yes. For our business overall, the global long-term drivers of water conservation, food requirements and environmental concerns, biofuels and improvements in infrastructure remain positive. In addition to the overall business enhancements that have taken place, we continue to have 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 margin and strategic acquisitions. We continue to have the financial flexibility to create shareholder value by pursuing a balanced and organic growth opportunities, strategic acquisitions, share repurchases and dividend payments. We would like to thank you for your questions and participation in this call.

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