Lindsay Corp (LNN) 2010 Q3 法說會逐字稿

Good morning, I will be your conference operator today.

At this time I would like to welcome everyone to the Lindsay Corporation third quarter 2010 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 at 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.

Good morning and thank you for joining us today.

Revenues for the third quarter of fiscal 2010 were $100.1 million, up 18% over the same quarter last year.

Net earnings were $6.2 million or $0.50 per diluted share, compared with $5.3 million or $0.42 per diluted share in the same prior-year third quarter.

Total revenues for the first nine months of fiscal 2010 were $271.2 million, up 3% from the same period last year.

Net earnings for the first nine months were $18.9 million or $1.50 per diluted share, compared to $11.7 million or $0.94 per diluted share for the first nine months of fiscal 2009.

In the domestic Irrigation market, revenues were $48.5 million for the third quarter, increasing 17% over the same quarter last year.

While commodity prices for corn, soybeans and wheat were down 20% to 30% compared to the same time last year, commodity prices were relatively stable through the past six to nine months, resulting in improved farmer sentiment regarding capital goods purchases.

In addition, USGA projections for 2010 net farm income reflect a 12% increase over 2009 estimates and project farm income to be near the ten-year average.

For the first nine months of fiscal 2010 domestic Irrigation revenues were $120.1 million, down 7% from the same time last year.

The comparable nine-month period of fiscal 2009 reflected a record first quarter irrigation revenue, resulting from a record backlog at the end of fiscal 2008.

International Irrigation revenues were $31.9 million for the third quarter, 29% higher than the same period last year.

Significant increases in exports to Australia and Mexico, along with strong revenues from our South American and South African business units drove the revenue increase in the quarter.

For the first nine months of fiscal 2010, international Irrigation revenues were $81.4 million, up 13% from the same time last year.

Improving diets and a growing worldwide population, combined with achieving water use efficiencies from mechanized irrigation systems, continue to be positive market drivers globally.

Infrastructure revenues increased 8% over the third quarter of last year, driven by increased sales of railroad structures and lights and commercial tubing.

Road safety product revenues rose in the quarter and we've experienced somewhat higher quote activity related to stimulus funded projects.

Year to date, as of the end of the third quarter, Infrastructure revenues were $69.7 million, an increase of 12% over the same time last year, driven by the large Quickchange Moveable Barrier project completed in Mexico City earlier in the year.

The infrastructure segment revenue increase from that period was partially offset for the nine-month period by lower revenues and contract manufacturing and commercial tubing in the previous two quarters.

For the Company in total, gross profit was $25.3 million for the third quarter versus $21.1 million in the same quarter last year.

Gross margin increased to 25.2% compared to 24.9% for the third quarter last year.

Irrigation margins were higher in the quarter due to improved factory efficiencies at our Lindsay, Nebraska facility and favorable regional mix compared to the same period last year.

Infrastructure margins were lower than the comparable period last year due to less favorable product mix.

Total operating expenses for the quarter were $15.2 million versus $13.5 million in the same quarter last year.

The higher operating expense level was due to increased incentive compensation and R&D expenses.

For the quarter, operating expenses were 15.2% of sales, compared to 16% in the prior year's third quarter.

Our order backlog was $33.9 million on May 31, 2010, as compared to $33.6 million on February 28, 2010, and $40.2 million on May 31, 2009.

The May 2009 backlog included $19.6 million for the Mexico City road project that was completed in the first half of fiscal 2010.

Our balance sheet has continued to strengthen.

Cash and cash equivalents were $20.3 million higher while long-term debt has been reduced $13.2 million, improving our net cash position $33.5 million.

During the quarter, the Company repaid a $7.1 million note related to the acquisition of Snoline in Italy.

Accounts receivable decreased $600,000 from the same time last year, even though sales for the quarter were higher.

Inventories were $7.3 million lower than the same time last year, primarily in Infrastructure products.

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

In summary, Irrigation revenues rose domestically in several key international marks on improved farmer sentiment.

Stimulus-funded infrastructure projects are resulting in increased road safety project quoting and supporting revenues comparable to last year.

In response to the relatively tepid economic conditions we've implemented actions within our business to enhance cash flow, which has resulted in a stronger balance sheet with a further improved net cash position.

At the same time, we continue to invest in efforts to find accretive acquisitions that add new businesses and/or product lines and in funding organic growth opportunities.

These initiatives, along with our strong balance sheet, have positioned Lindsay well in the current economic conditions and for the future.

I would now like to open it up for your questions.

(Operator Instructions).

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Alex Potter with Piper Jaffray.

Hi, guys.

Congrats on the quarter.

Thank you.

Good morning.

Was wondering if you could comment a bit here on gross margins, and if you have any commentary I guess on some of the moving parts that might lead to you believe that gross margin could be higher or lower or somewhat stable looking forward.

I think in terms of gross margins, one of the comments I would make is that last quarter, we expressed some concern about competitive pricing, given what we're facing with some rising material costs and things.

And what we experienced during the quarter was some increase in competitiveness regarding pricing and material costs did go up and we were able to pass through most of those increases.

I think there may have been a gap, somewhere between a 0.5% to 1% in terms of pricing, but we also had improved factory efficiency, which moved gross margins up higher in terms of Irrigation.

So I think in terms of the quarter, I was pleased with how that turned out.

Factory efficiency certainly benefited the quarter, and I think that there's opportunities in the future.

However, we do have increased competitive pressure in general, as the market was a little tighter earlier in the quarter.

I guess it stands to reason that if you're moving less volume in some of the seasonally weaker quarters that are coming up, then you might lose some of that factory efficiency benefit.

Yes, I think that's true.

I think you could assume that we would lose some of that factory efficiency.

I would say, however, that the margins have been well-managed in terms of being able to pass through increases.

I would also comment that the competitive pressure on pricing is probably less than what we've seen a number of years ago.

So I would say in that general, I am not overly concerned with that, but it was a little bit of a concern we saw at the end of the previous quarter that was expressed by some of our dealers, and it wasn't as significant as we thought it would be.

Very good.

And then moving to some of the other expense line items, it looks like here over the last, call it three-quarters or so, that your operating expenses upselling G&A, R&D in aggregate have leveled off for the most part around -- call it $15 million dollars per quarter.

Do you see that being a sustainable run rate, or what do you see being the factors that could influence that up or down?

I think the key here, Alex, and this is Dave, is the investments we're making in our engineering and R&D area, and then as we adjust our incentive comp, as we talked about, in our press release to match our actual results.

So I would expect SG&A to be up this year but still have some leverage over prior-year SG&A as a percentage of sales.

Okay.

I would add to that point, on the R&D, as I mentioned in the comments, we do see opportunities in acquisitions, but also in organic growth opportunities, which includes new products sold.

So we have stepped up our R&D activity a little bit, and you'd find that the R&D were -- maybe in the past was running about 1.6% of sales, moved to about 2%, so R&D was stepped up a little bit because of the projects and the opportunities that we see there.

Okay, great, that's very helpful.

Then I was wondering also if you could comment a bit on international Irrigation growth.

And clearly that was a good performer in this quarter, and it's become a pretty significant driver of growth in your business overall.

Basically the question I'm driving at here, I can appreciate that fluctuations are inevitable at some level, but I guess from a high level, do you think that this segment could or should continue growing faster than domestic Irrigation?

And if so, is it possible to quantify?

Is it 2x?

3x?

What do you see being I guess the disparity in growth between the two?

As we've talk about the international as a large segment in the past in total, we've typically said that we expected the growth rate in that international market will definitely exceed the domestic market.

It's probably somewhere between the 2x to 3x level.

It's difficult to forecast or project from that because it is somewhat lumpy in the sense that in one quarter, for example, previous quarter, we had significant sales from Mexico which were probably a little out of the ordinary to some degree.

This quarter, it was probably a little more representative of the sales from a number of different international markets all being up rather than any one specific market driving it.

But we will see times when one specific market may move it up or down depending on the significance of that market at that time.

But in general, generally speaking, I would expect it to be from a growth rate standpoint, probably in the range of probably two to three times the US, and I think it's somewhere in that range.

That's very helpful.

And I guess just two last questions.

Switching over to domestic Irrigation, are you seeing pivot uptake in any, I guess call them nontraditional pivot geographies outside of places like Nebraska, which have obviously been historically very strong for you and for the pivot business in general.

But I'm wondering if other maybe less penetrated areas like California or any other geographies are starting to purchase pivots more?

We are, but I would probably characterize more as something that's occurred over the last few years.

We've seen increases, certainly in the California market over the past few years.

The other aspect that -- or crop that I would say that is driving some increase or will see some continued increase would be in areas where rice is grown, because we are having some progress -- or making some progress in pivots on rice.

So that will drive some growth for the future.

But in general, the only probably major market that we've seen a shift in, and that's probably been over a few-year period, has been the California market.

Okay.

Very good.

And then last, a modeling question.

What do you think we should be modeling here for tax rate going forward over the next quarter and then next year?

Alex, our tax rate for the period this period was 35.2%, I expect for the full year we will be in the 31% to 32% range.

Because you had this tax benefit last quarter?

Right.

okay.

And the 35.2% is pretty pure for the quarter.

Okay.

So 31% or thereabouts?

31% or 32% for full-year this year.

Okay, very good.

Appreciate it guys, thanks a lot.

Thank you.

Your next question comes from the line of Brian Drab with William Blair.

Hi, Rick, hi Dave.

Congrats on a solid quarter.

Thank you.

Good morning.

First question, on the Infrastructure business, and I know the stimulus package had about $28 billion allocated to improvements in the transportation markets.

My understanding is that only about $8 billion of that has been spent to date, and we need to spend it quickly here before the fiscal year is up.

So should we expect that to drive some sequential improvement in your Infrastructure, from the third to the fourth quarter?

I think it would be -- there could be some sequential improvement from third to fourth and some of that is seasonal improvement, in the sense that, for our Infrastructure business, a lot of our products will be sold during the summer time period going into construction projects at that time.

And as you think about the Infrastructure spending relative to our -- or the stimulus spending relative to our Infrastructure products, I would think of it in terms of many of our road safety products will typically be towards the tail-end of the project.

So of the, let's say the $8 billion spent, the earlier money that was spent, we're probably seeing some of that now in terms of driving the demands up for our products.

So as this money is spent and allocated to projects and it starts to flow more readily, we're probably going to be in the later stages in terms of adding things like crash cushions and things of that nature in the project.

Okay, so you would say that we could expect a sequential increase in Infrastructure, but a lot of that is going to be seasonal and somehow from the stimulus.

Is that fair?

Well I'm not projecting or forecasting a sequential increase because I couldn't do that, but I would just say that from a seasonal standpoint and from quote activity standpoint, there is good demand in terms of how projects fall.

I really couldn't tell that you the fourth quarter is better than the third, but from a seasonal standpoint, it would be fairly typical to have a good fourth quarter in infrastructure road safety projects.

The other side of that, of course, is the Quickchange Moveable Barrier, which is less impacted by some of the stimulus money and certainly more project-oriented.

And what we typically see, and see toda,y is probably a project tracking list that will exist of something like $120 million to $150 million of projects, dollar value of projects that we're tracking, of which some portion of it could fall still yet this year and some of it, of course, will be into next year and that project list will continue to grow.

Okay.

So my next question was on the Quickchange product.

Was there any revenue in this third quarter, 2010, from the Quickchange?

Yes, there was.

I don't know the amount but there was some revenue in it.

None of it, of course, related to Mexico City, that was finished in the first half.

Okay, and so you mentioned that you have projects, potential projects that give you a pipeline totaling potential -- what would you say, $115 million?

In our projects, in our, what we he would consider to be relatively close-in tracking list, simply looking at a project list in the range of $120 million to $150 million in projects.

Now, when I say relatively close-in, those are ones that could be -- some of it this year, it could be next year.

Projects obviously get postponed and moved, so it could even be the year after, but that list is constantly changing with new ones coming on and ones getting pushed out.

But generally they're projects that we would expect will fall at some point in time.

So can you give us any more color?

Because I think obviously it would be very material to our fiscal 2011 forecast.

Are any of these projects in the pipeline?

Could you place a high probability of winning a particular project or give us any sense for what percentage of those you might win in 2011?

I couldn't give you a dollar amount.

I would tell you that there is a fair size amount in that project list that we would put a high probability of some of that still occurring this year, and a high probability of some of those projects certainly in next year's plan.

But, on the other hand, I would never go much further than that because I also know that funding gets postponed at times and there can also be technical difficulties in getting these things to start.

But from our internal standpoint, the way we look at it is, we believe there's some high probability, certainly for projects next year and possibly even more by the end of the year.

Okay, great.

And I'll just ask one more question, if I could.

On the Irrigation side, internationally, was there anything, I guess this is a multiple-part question, but was there anything in the quarter that was one-time in nature?

Like you had some unusual demand for Mexico last quarter.

And then secondly, how should we think about the Irrigation business internationally on a sequential basis?

I know domestically, obviously, we should expect a downtick as we move out of the high season here, but how should we think about the international business sequentially?

Well to take the first question, there was nothing of significance of a one-time nature in the quarter in the international market.

As we've looked at the -- where we saw the growth in international markets, it was primarily driven by higher agricultural activity or just pure growth in those markets.

And we have seen improvement in the last quarter or two in a number of the international markets.

For example, in South America, Brazil specifically; I think we've seen some growth in Europe, but that's probably starting to slow down.

So there's definitely been growth in some of the markets, and we continue to expect -- or we expect that to continue.

To come back to the second part of the question in terms of how do we see that during this next quarter, I wouldn't make a projection from a sequential basis, but I would say that most of the Irrigation markets we do see slow down in a similar seasonal pattern as the US, obviously southern hemisphere is a little bit different.

Okay, thank you.

Our next question comes from the line of Ned Borland with Hudson Securities.

Good morning, great quarter.

Good morning, thank you.

I was wondering if you could either give us the split on the backlog between the two businesses or at least give us some flavor as those -- how they related to last year's third quarter?

Well, we won't split out the backlog between the Irrigation and Infrastructure.

However, I think if you were to look at the backlog numbers last year versus this year and back out the $20 million Mexico City project from last year, you can see a pretty sizable increase on the backlog.

Most of that I would attribute to international Irrigation marks.

But the other point I would make is that our backlog is generally not very indicative of anything to project for the future in the sense that it's usually less than a month's worth of demand in any one of the markets.

So I wouldn't put a lot on the backlog number on it at any point in time.

Not it was a little different, probably in 2008, when our backlog built up towards the end of the year.

But in general, backlog is not going to be indicative of the next quarter because it is so short in duration.

Okay, I guess I'm just trying to arrive at the Infrastructure business, if we were to net out Mexico City, if there are some stimulus projects that are sort of getting going here, how that would appear in your backlog?

I understand the question, and I think I would characterize it as I said in the comments, I would say that our road safety product revenues were comparable to about the same period last year.

And what we've seen to date in terms of the effect of the stimulus-funded projects has been primarily supporting the kind of project activity that we've seen, meaning we really didn't see a decrease in sales, either year or last year, from the previous year because of the stimulus money being out there.

We haven't seen it really significantly drive incremental demand in any way other than to support the kind of projects and demand that was there.

Now, going forward, if this money flows out faster and better, I think it's possible, in fact likely, that we could see some improvement.

I'd say we haven't really seen that reflected in our numbers to date.

Okay, and then the operating margin in Infrastructure, looks like you had another loss here.

Is that all just kind of the volume-related -- lower volumes, or is there diversified manufacturing?

I think that was a problem last quarter.

What is sort of dragging things down, other than just volume, if anything?

It's still primarily mix-related, more than it is volume-related.

Obviously more Quickchange Moveable Barrier will boost the margins in the quarter, but without relying on that, I'd say the other part of it is the diversified manufacturing, as we talked about last quarter.

Those margins were still -- the revenue was higher, but the margins were still significantly less than what we see in the rest of the Infrastructure business.

So more sales in that area is dilutive to the Infrastructure margin.

And that's been contract manufacturing plus some of the commercial tubing sales that we've had, where we saw some of increases in the last quarter.

I will say that we are seeing improvements in that business.

There's quite a bit of focus on operational efficiency improvements and a number of other factors.

However, it did still have somewhat of a dilutive effect in the margins in the quarter.

Okay.

And then switching over to Irrigation, domestically, obviously there's been quite a bit of rainfall in the Midwest.

Crop prices are lower, yet farmer sentiment is better.

If we're looking at that time three buckets of demand, replacement, new farmland, conversion, what's the story here on the improvement year-over-year?

If we looked at the data today in terms of what impact there was in the past quarter in terms of how those numbers came out, I would say we would see that the percentage of units shipped out would have been a little bit higher going into dry land application in the quarter, and year-to-date, it probably would be very, very close to one-third, one-third, one-third, as we see in a typical year.

So in other words, we're not seeing any kind of a shift in that at all.

The fact that more of it is going into -- more systems are being installed in dry land at the peak of the Irrigation season is not a surprise, we would expect to see that.

Because that would be the case where the farmer sees that financial opportunity to put in a pivot to boost his yields.

And that's what we saw this past quarter.

Okay, thank you.

Thank you.

Your next question comes from the line of Paul Mammola with Sidoti & Company.

Hi, good morning, everyone.

Good morning.

If I can take you back to international Irrigation, can you comment on China?

And I guess I'm specifically looking for when that subsidy expires, and what level of revenue would it take for you to install a tube mill or make that facility more vertically integrated?

Well, at first I would say that China was one of the markets that was not up in the quarter, and yet if we went back to last year where a number of the international markets were down, China was up.

So it's going to be a little bit of a bumpy ride as China matures and grows.

And I don't think the fact that China was a little behind what we expected or behind where we were really means that much this year.

I think that it just -- it's part of the development of that market itself.

And I don't know, Dave, if you have any specifics on the subsidy in terms of when that expires.

I don't know the expiration date of that.

There's been no change in terms of the subsidies in China year-over-year or quarter-over-quarter, and we don't see any sunset dates in terms of expiration dates on those subsidies at this point.

The last part of that question in terms of at what level we would put in a tube mill or expand the production, we haven't really defined a specific level, but I would state it more as we know that at some point in the future, and we've projected it to be a year or two or some point out where that change would probably take place.

However, that could be accelerated by additional things -- well by, for example, some of the things we're considering,z shipping more product out of China for other locations than we're doing today.

So I think that we could accelerate that process or may not, but it will be based on some other strategic issues we'll be discussing.

Okay, that's all very helpful.

On the financing side of things, can you comment as to where you have seen difficulty, especially with the credit disruptions we've seen over the past couple months?

I think the primary areas where we've seen impact from financing has been primarily what I'd consider the truly developing markets.

Certainly eastern Europe has continued to be an issue, and the whole CIS area of Ukraine, Russia, but all through the Eastern European market as well, we've seen that financing continues to be a challenge.

Outside of that, certainly some of the African markets, financing has been and will continue to be a challenge, at least in the near term.

Rick, would you say it's been meaningful in terms of what you have lost from sales there, or what could be potential sales there?

I wouldn't call it -- I guess I was going to say I wouldn't call it meaningful, but it is meaningful in terms of potential sales.

yes, it isn't meaningful from a standpoint of carving out a large portion of our sales.

What's painful in some respects with that is we were really starting to see some good progress in those markets, where I think farmers are ready, they've seen the benefits of what mechanized irrigation can do in those markets, and funding was really stepping up to the plate, and that was back in the 2007-2008 time period, and we've seen that pull back.

So I think that's the more painful part of it than it is a specific number or dollar amount of sales lost.

But we definitely lost some momentum.

Okay.

And then finally, Dave, can you remind us how much is available on your revolving credit facility and have you at all explored how much you could borrow on a term-loan basis or on a debt offering basis?

Paul, we have $30 million that's available under our current credit line with Wells Fargo.

That is, we have no borrowings against that.

And in terms of leverage, we're at about 6.2% of equity today.

We'd be comfortable up to around 30%, so we have somewhere around $50 million available there as well.

Okay, thanks for your time, guys.

Your next question comes from the line of Jon Braatz with Kansas City Capital.

Morning, Rick, Dave.

Morning.

Some years your maintenance revenue associated with Irrigation can be quite good, depending on wind damages and how dry it is.

Can you give us -- I know it's been wet out here in the Midwest, I'm not sure about the tornadoes and so on in Nebraska, but can you give us a sense maybe how the maintenance revenue might be this year in terms of the Irrigation business?

Yes, the way I would answer that, Jon, is that there are years when we've seen storm damage machines play a fairly sizable role in revenue in the third quarter, and maybe a little bit in the fourth, but generally it's more in the third.

When we look at what happened this quarter relative to last quarter, it was probably about same.

In fact, we had less storm damage this year, storm-damaged machines, than we did the previous year.

So it wasn't significant in either year, but it was a little bit less this year.

Okay, all right.

And early on in the conference call, Dave, you were talking about -- or I mean, Rick, you were talking about R&D spending being up.

Can you talk a little bit about where you are spending that money and whether, as we go on, that you might see even higher spending levels in R&D?

Yes, I can comment on that little bit.

From an Irrigation standpoint, a couple areas where we've seen significant opportunities and opportunities to invest would be in things like water use efficiency applications, where we have invested in some R&D in that area.

Also in our FieldNET technology, which is kind of a comprehensive monitoring and control system, that we sell that's installed on machines as well as sell a subscription to growers.

We've continued to expand the capability of that.

We also looked at a number of new products for some specific international markets that are very geared towards the growth opportunities in those markets, whether it's the sugar cane or rice or whatever the market is and have invested in some product developments there.

On the Infrastructure side we've had some investment in some road safety product as well.

All right.

Any reason why you might see the spending levels increase on a relative basis?

No, I wouldn't necessarily project that.

I've looked at it as these are opportunities that we see today, and it really made sense, I think in the current environment to step up the pace a little bit, but I don't see this as anything where I would project longer-term higher R&D run rate.

Okay.

Thank you very much, Rick.

(Operator Instructions).

Our next question comes from the line of Jason Kraft with Cato Partners.

Hey, guys, how are you?

Good morning.

Doing well, how are you?

Doing well.

I wanted to circle back on your project list comment for Infrastructure and the $120 million that in project list it and perhaps the lumpiness that comes with that.

You're coming off the Mexico City project that was close to $20 million.

Are there projects in that pipeline along the size of what Mexico City did, around $20 million, that actually have a high probability of closing, or should we consider the Mexico City deal as just a large one-time opportunity?

Yes, there are projects on that list of comparable size and larger, as well.

I would not consider Mexico City a one-time-type thing or an anomaly in any way.

I would say that the larger projects, probably in that $20 million and up, are probably fewer and far between than, say, a $5 million to $6 million project will be, and we're probably going to see a lot more of those $5 million to $6 million, but there's definitely ones of the larger variety as well on the list.

From trying to back in, because I know you guys do not disclose the gross margin dynamics, but is it safe to say the incremental margins, or at least incremental gross margin, on some of those large QMB projects could be 50%, 60%?

You are right, we don't disclose that.

Sorry, I really don't want to get into the specifics on the size of the margins.

On the Quickchange Movable Barrier, I would say that they're attractive, and we'd love to see those projects.

Okay, fair enough, thanks.

Thank you.

And at this time there are no further questions.

I will turn the conference over to Mr.

Parod for any closing remarks.

For our business overall, the long-term drivers of water conservation, population growth, increasing importance of 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 and in water and Infrastructure.

Lindsay is committed to achieving earnings growth through global market expansion, improvements in margins and strategic acquisitions.

Thank you for your questions and participation in this call, and we wish you a safe and happy Fourth of July weekend.

This concludes today's Lindsay Corporation conference call.

You may now disconnect.