Lindsay Corp (LNN) 2009 Q3 法說會逐字稿

Good morning.

My name is Carrie and I will be your conference operator today.

At this time I would like to welcome everyone to the Lindsay Corporation third-quarter 2009 conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

During this call management may make forward-looking statements that are subject to risks and uncertainties and which reflect management's current 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, President and Chief Executive Officer.

Please go ahead, sir.

Good morning and thank you for joining us today.

Revenues for the third quarter of fiscal 2009 were $84.6 million, 41% below the same prior-year quarter.

Net earnings were $5.3 million or $0.42 per diluted share compared with $14.1 million or $1.15 per diluted share in the prior year's third quarter.

Total revenues for the first nine months of fiscal 2009 were $262.8 million, down 20% from the same period last year.

Net earnings for the first nine months were $11.7 million or $0.94 per diluted share compared to $28.2 million or $2.29 per diluted share for the first nine months of fiscal 2008.

In the domestic irrigation market revenues were $41.7 million for the third quarter, decreasing 47% over the same quarter last year.

While commodity prices improved during the quarter with corn increasing approximately 25% and soybeans approximately 40% from March prices, farmers remain cautious regarding investments.

Even with the healthy increases in commodity prices corn remained about 25% below prices at this point last year, while soybeans were about 10% lower.

USDA projections for 2009 net farm income reflect a 20% decline when compared to 2008 estimates, although the projections are still 9% above the 10-year average.

Farmers' balance sheets remain strong and financing for irrigation equipment purchases remains available yet farmers have remained conservative regarding capital equipment purchases.

For the first nine months of fiscal 2009 domestic irrigation revenues were $128.6 million, down 23% from the same time last year.

International irrigation revenues were $24.7 million for the third quarter, 40% lower than the same period last year.

Irrigation exports were down in most regions driven by general economic conditions, lower commodity prices, and funding availability in developing markets.

Revenue from our international irrigation business units in Brazil, South Africa, and France were also significantly lower than the third quarter of 2008 similarly impacted by economic conditions.

For the first nine months of fiscal 2009 international irrigation revenues were $72.1 million, down 22% from the same time last year.

In total domestic and international irrigation revenues for the third quarter of fiscal 2009 were down 45% from the same quarter of last year.

For the nine months total irrigation revenues declined 23% from the same period last year.

As you may recall, during the first nine months of fiscal 2008 irrigation revenues had increased 58% over the previous year.

Infrastructure revenues declined 21% from the third quarter of last year.

This was primarily attributable to revenues decreasing approximately 35% in our diversified manufacturing and tubing business as compared to the prior year's third quarter.

Revenues in this market decreased significantly due to lower sales of tubing to manufacturers of grain handling equipment also affected by farmer's sentiment regarding equipment purchases.

Barrier Systems Inc.

revenues were also lower in the quarter as compared to the same quarter of last year due to a lag in spending in government infrastructure projects.

Year to date at the end of the third quarter infrastructure revenues were $62.1 million, down 9% from the same time last year.

Barrier Systems' revenues were down 23% while Snoline revenues increased 12% compared to the same period last year, reflecting stronger sales of road marking tape products and crash cushions in the European market.

Overall gross profit was $21.1 million for the third quarter and gross margins were 24.9%, declining from 25.8% for the third quarter last year.

Gross margin on irrigation products decreased during the quarter over the same quarter of last year from significantly reduced factory volumes.

Infrastructure margins increase slightly due to a favorable shift in product mix.

Year-to-date gross profit was $63 million compared to $86.4 million in the prior-year period.

Gross margin was 24% year-to-date compared to 26.4% in the first nine months of last year, primarily impacted by the lower production volumes.

Total operating expenses for the quarter were $13.5 million dropping $3.2 million from the same quarter of last year reflecting significant reductions in personnel-related expenses.

In the third quarter we continued to make appropriate reductions in staffing and other expenses.

For the most part we believe we have right-sized the business for current market conditions and we don't anticipate significant further reductions at this time.

For the first nine months of fiscal 2009 operating expenses were $44.1 million compared to $43.6 million for the first nine months of fiscal 2008.

On an annualized basis the personnel-related expense reductions that have been made are estimated to be approximately $4.2 million with most of the reductions having occurred in the first and second quarters of fiscal 2009.

Our order backlog decreased to $40.2 million on May 31, 2009, as compared to $84.4 million on May 31, 2008.

The largest component of the backlog decrease was in orders for irrigation equipment.

Our balance sheet has strengthened compared with the same time last year.

Cash and marketable securities are $44.1 million higher while debt has been reduced $6.2 million, improving our net cash position by more than $50 million.

Accounts receivable decreased $25.5 million from the same time last year due to the lower revenues and inventories decreased $6.8 million.

Balance sheet initiatives remain focused on working capital reductions and overall cash management.

In summary, the current global economic conditions continue to adversely impact our irrigation and infrastructure businesses in the quarter.

While commodity prices improved, farmers continue to demonstrate hesitancy in purchasing capital goods due to uncertainty in income opportunities.

During the quarter spending on highway infrastructure projects was seasonally improved.

However, the stimulus of funds have had less of an impact on demand to date than expected.

We responded to the contracted market activities with reductions in our workforce and overall spending in all of our operations.

While forecasting demand in these market conditions have been challenging, I am very pleased with our management team's actions in reducing expenses and proactively adjusting the implementation of growth initiatives.

In addition, we have been successful in reducing working capital debt resulting in a stronger balance sheet which further improved net cash position.

We remain confident that increasing agricultural yields to boost food supply, improving water use efficiency, expanding biofuel production, and improving our transportation infrastructure will remain global priorities that will be strong drivers for our markets long term.

With our strong balance sheet, the expense reductions made, and our global footprint we remain well-positioned to endure the current market conditions and to benefit from future growth opportunities.

I would now like to open a bit for your questions.

(Operator Instructions) Michael Cox, Piper Jaffray.

Good morning and congratulations on a very nice quarter.

My first question is on the gross margin.

You commented that the sequential improvement, and partially it seems to be driven by mix in the infrastructure segment, but I was just wondering if you could comment on the sustainability of these margin trends in the mid-20s?

Well, Mike, I think there are a couple of things that really impacted the margins in the quarter and the improvement that we have seen.

One of those is there has certainly been more stability and better situation regarding steel pricing.

We are currently at basically market price in terms of our steel purchases, so steel in general has been relatively favorable during the quarter.

I think the other one is that we have seen improvements in efficiency in terms of being able to respond to the lower production volumes during the quarter, because as you can imagine with the reductions we have seen in the last few quarters in the market we have been obviously trying to keep ahead of that or keep up with it in terms of staff reductions and maintaining efficiency.

And I think we have gotten to a point where we have achieved a higher level of efficiency as the volume has come down.

So I think those are two big factors, probably bigger factors than a change in product mix.

Okay, that is helpful.

Just a housekeeping item on the operating profit by segment, I was wondering if you could provide that between irrigation and infrastructure?

Yes, it's in the slide deck that is on the website.

Okay, I can pull that off then.

That is fine.

My last question is on the international side of the business on a sequential basis there was a very noticeable uptick, more so than we have seen historically from Q2 to Q3.

I was wondering if you could speak to that; if there were specific regions that you saw some sort of improvement or areas that perhaps you allocated more resources to.

And then a follow-up on that, an update on the timing of your China facility.

Yes.

Well, there is nothing significant in terms of any particular market that was a major uptick.

I would say that, as I commented, most of the export markets year-over-year are down.

We still continue to see strength in the market in China.

That is one market that has been strong growth both year-over-year and strong in the quarter in general.

So I think that what you are likely to -- what really is like to have the impact that you are referring to is more project related in either export markets or in specific geographical regions.

So it will be a bit spotty as we have more projects in some of the regions and I think that is what happened in the third quarter.

I am sorry.

What was the second part of your question?

Just an update on the timing of your China facility.

Oh, yes.

At this stage with China we have a facility and we are in the process of setting up that facility, which we expect will be in operation in some form probably early September.

Okay, great.

Thank you.

Ned Borland, Next Generation.

Hi, good morning, guys.

I was wondering if you could comment on pricing and irrigation, is there any difference?

First of all, how firm has it been or have you seen any declines given that steel has fallen down here to lower levels?

And is there any differences in pricing internationally versus domestically?

I would say that what we have seen in the last quarter in terms of pricing has been fairly stable in the US market.

There is some more price competition than what we would have seen in 2008, but it still has been fairly disciplined.

I think there is a recognition that pricing has probably leveled off and the opportunities that farmers are seeing in terms of buying the equipment are probably as good as they are going to get in many respects.

So I think the pricing has been pretty stable in the domestic market.

In the international market it will vary a little bit by region, but I would also say it has been fairly stable in general.

However, we do have more project-oriented business in the international markets so they become a little bit more competitive at times.

So we can see some swings in the international markets based on the amount of projects or the size of the projects that are being addressed or pursued.

Okay.

Then on the Mexico City situation, is there any color you can provide on that situation?

There is really not much more color than what has been provided in our previous releases.

It is primarily an issue between the contractor and the Mexican government in terms of how the project is being conducted and really completed in terms of the process and things.

So we are kind of caught in the middle in terms of being able to start the quick move barrier piece of that.

So that is about as much color as I can provide on that.

Okay.

And then you are sitting on a pretty large pile of cash there on your balance sheet.

Any plans for that cash?

There was always plans for the cash.

But I would say this, our first order of business in terms of priority with the cash is that we are currently in our planning process for the next year and really our strategic planning for the next few years where we will look at all of the opportunities that exist in terms of the organic growth opportunities and acquisitions as well and determine really what we need in terms of CapEx and working capital changes for the next year and being able to obviously fund that.

That would be number one priority.

Then look at the acquisition options and opportunities that we have as well.

So that is the process we are in right now.

Okay, thank you.

Ryan Connors, Boenning & Scattergood.

Hi, Rick, and congratulations as well on very nice results.

I had a few questions.

First off, just to follow up on the discussion of steel and raw materials, just in terms of the accounting around that is there any -- you say you are at market price now in steel.

Is there any higher-cost steel still in inventory that will ultimately have to come through or can we make the assumption that market price for steel going forward is the right way to think about it?

I think the way to think about that, Ryan, is that we are basically at market price.

We have a little bit of mix that would be somewhat higher than what, say, today's market would be, not a significant amount.

So I would view it as we are mostly at market price today.

Okay, great.

Then I wanted to make sure I understand this number you mention.

In terms of the annualized cost reductions you mentioned a $4.2 million figure, so that is in terms of the headcount reductions on an annualized basis all else being equal that is how much lower annualized your headcount costs will be.

Is that what you mean to say there?

That is the personnel-related expense in SG&A.

If you look at the total headcount reductions that have taken place in terms of number of people, obviously given the market it has been pretty significant.

In fact, our SG&A staff reductions are about 25% in terms of total people and overall as an organization close to 37%.

But the $4.2 million is the personnel-related expense associated with the SG&A staff reductions.

Okay.

Now is there a certain level at which -- obviously if the market were to rebound some of those people presumably would -- you would have to staff back up.

How sticky, I guess, would you look at those cost savings as in an up-turn?

Is half of that sustainable even if volumes pick up or how sticky are those things?

I think they are relatively sticky, fairly strategic when it comes to the SG&A staff reductions or additions depending on which direction you want to look at them.

Meaning that there is a significant savings that would be there as we ramp back up.

We would certainly pick certain additions rather in terms of staffing that we would want to make to support growth initiatives.

Okay.

Then just have one final question again following up on the price discussion.

The price reductions that you do say have taken place, in terms of what form those take, are those actual list price reductions or are those rebates and incentives and that sort of thing?

And if they are the latter, how does the accounting work on that?

In other words, if you do a rebate does that show up up-front or ultimately when you ultimately send out the rebate does that get credited back?

Most of the reductions that have taken place have been in the form of rebates or discounts right up front.

And they are taken and shown right up front when we book it.

Okay, that is helpful.

Thanks for your time this morning, Rick.

(Operator Instructions) [John Bratts], [Kansas City Capital].

Good morning, Rick.

A short question; over the last two years irrigation revenues have been obviously very volatile.

When you look from this point forward what do you think might be sort of a trendline growth that you think is achievable on a long-term basis in the irrigation business?

And is it different from maybe what you were thinking three years ago, four years ago?

Well, what we have talked about in the past in terms of kind of a trendline growth for the domestic market has been in the 4% to 7% range.

And I don't really think that my view has changed much on that.

I do believe that, obviously, it is cyclical and we will have some ups and downs to that.

But I still think that 4% to 7% is a sustainable kind of growth rate from a trendline perspective.

On the international markets it's much more difficult to really give you a trendline number, but I would say it's a double-digit growth number and it's probably in the 12% to 20% range.

The reason for the wide range on that, John, is the variety in the markets that we are talking about.

For example, we see very good growth in markets like China.

We will see lesser growth rates in some other markets, so it's a very mixed bag.

But I think overall we are seeing some fantastic growth rates in the international markets long-term and are really optimistic about that.

The one under-penetrated market here domestically is California, of course.

I am just wondering do you see anything on the horizon that would change that at all, in terms of California?

I would say that I have seen a number of things in the past on the horizon that I thought would change it in terms of potential water legislation or potentially charging appropriately for the use of water, cost of water.

I can't say that I have seen that enacted in the past.

I do think that we continue to see a trend towards improving water use efficiency in California.

We have seen that market growing for us over the last few years.

I think we will continue to see that.

I don't see anything really imminent that is going to change that perspective at this time.

In other words, I don't know of any pending legislation that is really going to flip that switch and cause it to change rapidly.

I think we will continue to see the heating up of that market.

Okay, thank you very much.

Michael Cox, Piper Jaffray.

Thanks.

Just a couple quick ones.

The backlog, could you provide a mix by segment for the backlog?

I know you called out the $19 million for Mexico City, but what else may be on from the infrastructure side in that $40 million?

Sure, Mike.

It's Dave.

$14 million in irrigation and $26.2 million in infrastructure.

Okay, great.

Thank you.

Then the foreign currency impact in the quarter, can you quantify that?

Sure.

This is Tim.

On the revenue line we had approximately a 3.8% reduction from foreign currency in the quarter and then year-to-date approximately 2.7%.

Then dropping down to the operating income line, again, approximately a 3.3% reduction on operating income for the quarter and 1.6% on the year-to-date operating income number.

Great.

Thank you very much.

At this time there are no further questions.

Gentlemen, are there any closing remarks?

Yes.

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 pursuing organic growth opportunities, 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 revenue and earnings growth through global market expansion, improvements in margins, and strategic acquisitions.

Thank you for your questions and participation in this call.

This concludes today's Lindsay Corporation third-quarter 2009 conference call.

You may now disconnect.