Lindsay Corp (LNN) 2010 Q4 法說會逐字稿

Good morning. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation fourth-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 of the Company, and those statements preceded by, followed by or including the words expectation, outlook, could, may, should, or other similar expressions.

For these statements, we claim the protections 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 fourth quarter of fiscal 2010 were $87.2 million, increasing 19% over the same quarter last year. Net earnings were $6 million or $0.48 per diluted share compared with $2.1 million or $0.17 per diluted share in the prior year's fourth quarter.

Total revenues for fiscal 2010 were $358.4 million, up 7% from fiscal 2009. Net earnings for the fiscal year were $24.9 million or $1.98 per diluted share compared to $13.8 million or $1.11 per diluted share for fiscal 2009. Fiscal 2010 was Lindsay Corporation's second-highest earnings year, exceeded only by 2008.

In the US irrigation market, revenues were $33.9 million for the fourth quarter, increasing 16% over the same quarter of last year. Since early June, commodity prices rose significantly, with corn up 70%, soybeans up 26% and wheat increasing over 60%. The most recent USDA projections for 2010 net farm income show a 24% increase over 2009, and project it to be the fourth highest on record, creating generally positive economic conditions for US farmers.

For the full year of fiscal 2010, US irrigation revenues were $152.8 million, down 2% from fiscal 2009, which benefited from a record backlog at the start of that year, carried over from fiscal 2008.

International irrigation revenues were $23.3 million for the fourth quarter, declining 9% from the same period last year due to lower exports in some regions. For the fiscal 2010 year, international irrigation revenues were $105.8 million, up 6% from fiscal 2009.

Our international irrigation business units in South America, South Africa and Europe, as well as exports to Mexico all achieved solid growth in fiscal 2010. Long-term, market drivers of improving diets and a growing worldwide population, combined with water use efficiencies available from mechanized irrigation systems, continue to be positive drivers for our global irrigation equipment demand.

Infrastructure segment revenues were $30 million, up 61% from the fourth quarter of last year, driven by increased sales of Quickchange Movable Barrier Systems, rail structures and lights and commercial tubing. During the quarter, we booked and completed a barrier project on the East Coast of the US worth a little more than $9 million. Late in the quarter, we also received an order for just under $15 million of Movable Barrier products for another East Coast project. We continue to see strong interest in our Movable Barrier products, which provide a very cost-effective way to add lane capacity. For fiscal 2010 infrastructure revenues were $99.8 million, increasing 24% from the same time last year, driven by higher barrier product sales.

Gross profit was $25.7 million for the fourth quarter versus $17.6 million in the same quarter of last year. Gross margins increased to 29.5% compared to 24% for the fourth quarter last year. Infrastructure margins increased primarily due to higher revenues of Movable Barrier products, while irrigation margins increased from improved factory efficiencies at our Nebraska facility.

For the full year of fiscal 2010, gross profit was $98.9 million, reflecting a 23% increase over 2009. Gross margins grew to 27.6% in fiscal 2010 compared to 24% in 2009, driven by the higher barrier sales, favorable regional mix and improved factory efficiencies.

Operating expenses for the fourth quarter were $16 million versus $14.1 million in the same quarter last year, reflecting higher research and development expenses, commissions and incentive compensation costs. Total operating expenses for fiscal 2010 increased $2.8 million, however, dropped to 17% of sales for the year. The full-year increase in operating expenses was due primarily to increased investments in product development and to higher incentive compensation, resulting from improved financial performance.

Our order backlog was $38.4 million on August 31, 2010 as compared to $43.6 million on August 31, 2009 and $33.9 million on May 31, 2010. Last year's backlog at this time included $20 million for the Mexico City barrier project, which was completed in the first half of fiscal 2010. The fiscal 2010 year-end backlog includes the recently booked East Coast project, worth slightly under $15 million. That project is expected to be completed during the first half of fiscal 2011.

Our balance sheet has strengthened compared with the prior year. Cash and cash equivalents were $2.5 million lower, while long-term debt has been reduced $12.8 million, improving our net cash position by more than $10 million. Accounts receivable were higher year-over-year due to the higher sales at the end of the fiscal year and the movable barrier project completed at the end of the quarter. Inventories remained relatively flat, while inventory turns improved.

In summary, strong results from our infrastructure segment, along with solid domestic irrigation performance, drove significantly improved fourth-quarter results. In the infrastructure segment, we continue to see strong interest in our Quickchange Movable Barrier Systems and road safety products. In the irrigation segment, improved farmer sentiment has resulted from increased commodity prices and projected higher farm income. And we are optimistic that the improved sentiment, if sustained, will result in increased irrigation equipment demand in fiscal 2011.

In addition, actions implemented to enhance cash flow have resulted in a stronger balance sheet, with a further improved net cash position. We continue our disciplined process to find accretive acquisitions that add new businesses and/or product lines and to invest in organic growth opportunities.

We are confident that increasing agricultural yields to boost food supply, improving water use efficiency, expanding biofuel production and improving transportation infrastructure will remain global priorities and will continue to be strong drivers for our market long term. I would now like to open it up for your questions.

(Operator Instructions) Brian Drab, William Blair.

Congratulations on a really solid quarter, and it's great to see the QMB business gaining a lot of interest right now.

First of all, on the QMB side of things, you have $15 million in backlog. Can you comment on -- can you give us any more detail on the pipeline beyond that $15 million? It sounds like interest is incrementally better than it was in the last quarter.

I've commented in the past, Brian, that we track a project list that is in the range of somewhere between $100 million to $150 million in projects or -- averaging maybe in that $120 million range. And I would say we've continued to see that kind of interest. And from time to time, it will grow a little bit or contract, depending on what projects are on the list and what is happening in terms of discussions. But I would say right now that list remains in that kind of level that we've discussed in the past, and the interest in QMB remains very strong globally.

I think the interesting point that I would make regarding the couple of projects that we've talked about, one that was completed in the fourth quarter and one that is currently in backlog, is that neither of these appear to be really impacted in any way by stimulus funding. In both cases, these are ones that are supported by tolls that are collected. So I know the question has come up in the past regarding whether stimulus funding or the Highway Bill would really impact the QMB growth. And as I've commented in the past, it really doesn't seem to have much of an impact.

Okay, great. And then shifting to the irrigation business, can you give us an idea of what your capacity utilization was in the irrigation operations in 2010. And the follow-up question there is can you help us at all in trying to forecast what the incremental operating margins would be on stronger irrigation sales in fiscal 2011?

I would say that our operating capacity or manufacturing capacity level in irrigation is probably in that 60% to 65% range in terms of where we have operated in, say, the last half of the fiscal year. So that leaves quite a bit of capacity available. And obviously, how we manage that capacity or what happens with that capacity will be somewhat determined by where the volume or the incremental revenues are going to come from. But we certainly have incremental capacity in all of our irrigation facilities today to handle what we think could come down the line.

I think the second part of your question was around the incremental margin aspect. And I would say first that looking at what we saw in the fourth quarter, is margins for irrigation improved somewhat. The bigger margin improvement really came from the additional QMB sales in the infrastructure part of our business. But we did see and have seen some consistent improvement in our irrigation margins, some of which was driven by lean and other things we've done in our factory to improve efficiency, some by the incremental volume.

So as volume goes up, I would expect to see some potential leveraging from that incremental volume. However, the offset of that is how fast that could go up, because obviously, as we saw in 2008, a very, very rapid increase in volume can also, while creating some leverage opportunity, create some inefficiencies in the factory as we are trying to expedite parts and bring in things, and a number of different things that have to happen to really expedite production.

So I would be hesitant to project incremental leverage or incremental margin, other than to say we would expect to see some. But I wouldn't really put a number on that at this point.

Okay. And then if I could ask maybe one more. The Digitec acquisition, can you add any detail around that and how much you spent on that and how that fits in strategically?

We haven't disclosed the acquisition amount, but I would characterize it as Digitec is a very small technology company, based in Nebraska, and they employ approximately 30 people. They have been our primary supplier of technology products and components used in our irrigation controls and have very good capability when it comes to hardware, firmware, software design. And we have in the past been their largest customer.

In the recent years, what we have seen is the control technology and support related to it have become more important in delivering irrigation solutions to our customers, and in fact it has really been expanding to become a more comprehensive field management solution that we really are providing.

So the acquisition of Digitec really provides us the opportunity to fully integrate our product development process, accelerating development of those technology products and solutions, and yet better controlling quality of the total customer experience. And that has been really important to our dealers and our end customers, is that we control that quality of that experience.

We also intend to leverage that capability across both irrigation and the infrastructure business segments.

Oh, okay. Thanks very much. I'll get back in line.

Ned Borland, Hudson Securities.

Good morning and good quarter. On irrigation, I guess if you could delve into the -- sort of the disparity a little bit with international versus domestic. It seems like that is sort of the inverse of what we heard out of one of your competitors last week.

Yes. I think one of the points I would make on the international market, and that is that in many respects, since it is such a diverse group of markets, is that it can be more project-oriented and very regional-oriented. And we saw good growth in some of the international markets, and we saw some declines in others. Areas where we did see declines, in at least one or two cases, we saw increased competition, and in some cases even increased price competition, which made the comparables maybe a little bit different. So I think that would be one aspect.

I think the other that I would look at is the fourth quarter is a relatively low quarter for us in general, and that when you look at our total international revenues on the irrigation side, the difference between, say, a 15% growth number or a 9% decline number is -- as you would see in the quarter -- is probably $6 million of revenue. So it is not a huge swing one way or the other in a low quarter such as the fourth quarter.

And we do see these regional swings from time to time. It's not of grave concern, but I would say in some markets we have seen some increased price competition.

And this competition, this would be from your major global competitors, or would this be from more localized competitors?

I don't really want to characterize it in terms of pointing to which competitor. I would say that it is -- we have seen it, and it is relatively isolated, which tells me that it can often come down to either specific dealers that are doing something or specific salespeople in a region. So I wouldn't want to characterize it in terms of a specific competitor.

Okay. Fair enough. Domestically, if you could just talk about the pricing environment. I guess you have to kind of balance the good backdrop within the domestic agricultural landscape, but also economic factors, farmers are pretty conservative consumers. Do you think you can get some price in what looks to be a strong selling season upcoming here?

I think your question is can we get more price in the market in the coming year. Is that correct?

Yes, that's correct.

I would be hesitant to project more price. I would say we've seen good improvements in our overall gross margins in the irrigation segment in total, and also in more specifically to the US market. I would also say that there really isn't much that has changed in terms of the competitive landscape in terms of pricing in the US market, and that there is pretty good overall kind of pricing discipline. And that perspective has not really changed at all.

The other side of that equation is what happens with steel pricing. And what we've seen in recent months is steel has tended to really level out, but is down just slightly from -- or a bit from where it was earlier in the fourth quarter. And that is always a factor; if we see steel pricing fall, we could see competition tend to give some of that back, at which point, we will be competitive.

So I can't really say that I would see price increase opportunities. I think some of it will certainly be determined by what competitors do.

Okay, thank you.

Ryan Connors, Janney Montgomery.

Good morning, Rick, and congratulations from our end, too, to you and your employees on a great quarter.

Thanks, Ryan.

I had a couple questions. First off, just on the issue of the outlook for next year, I mean, obviously the run-up in commodity prices in corn specifically has been very recent here. So it is a little early to tell, and we are still a few months away from the core of the '11 selling season. But can you kind of update us on what you are hearing from the front lines in terms of your dealers and your salespeople about whether or not this very recent ramp-up in corn is having an impact on customer activity in terms of inquiries and things like that?

Yes. Well, I would say from what our sales people are saying and what our dealers are saying today is that there is definitely an improvement in farmer sentiment and farmers' willingness to invest during this coming year, based on that sentiment at this time.

And as you've pointed out, this is early in the season -- or preseason in terms of that farmer sentiment. So it isn't much of a determinant yet in terms of what is going to happen this next year. But I would say that everything we've picked up has been very positive. I haven't really picked up any negatives in terms of farmer sentiment or any specific markets that would view this differently.

I think the other point which we will be watching is, as you know, there was the Section -- I think -- 179 tax incentive or accelerated depreciation that was available to people in terms of accelerating depreciation and tax credit on buying equipment. And that was renewed and basically extended into 2011 also. So from an end of year standpoint, I think farmers will be optimistic in terms of looking at the potential tax benefits that they could receive, especially coming off of a pretty good harvest for them.

That doesn't mean I'm projecting strong revenues at this time for that period. I just think that it is another positive for the market in general.

And then kind of revisiting the international versus domestic discussion, as you look out at the outlook for 2011, are there -- and you look at the commodities and -- I mean, is your outlook more or less bullish for international versus domestic, one or the other? Or is it pretty uniform across the board, again, just given the way the dynamics of the harvest have played out domestically and abroad and so forth?

My outlook would be generally fairly bullish for both domestic and international, and they are quite different. I think in the domestic US market, I would expect to see farmer sentiment really supporting additional equipment purchases from a standpoint of implementing efficient irrigation in some of their dryland fields and as kind of an incremental improvement process, as we've seen in the past, as well as converting and replacing some of the older equipment.

In the international markets, in many cases, I would expect to see the higher commodity prices stimulate some of the larger projects and more of the project-based type activity that we've seen in some of the past years, saying 2007, 2008, that we saw shut down quite a bit in 2009. So I think what we are seeing and hearing today is more of the project-oriented activity in the international markets, which is very bullish.

And then over on -- just on the acquisition side, it is interesting that in the past, I know you've talked about acquisitions outside of your two primary platforms right now being irrigation and infrastructure, maybe looking in other types of water infrastructure products, things like that. But yet the Digitec acquisition obviously being sort of a vertical integration theme within irrigation.

Would you say from here, you are going to be looking more closely at further kind of vertical integration within your existing platforms? Or are you still thinking that -- looking at unrelated businesses as well on potentially a third platform?

I'm hesitant to really focus our acquisition activity on unrelated businesses. I think everything that we have looked at has a leverage or synergy in some way. How we tend to look at our business today is really in the segments of water use efficiency and transportation safety and security. We continue to look for acquisitions in those two segments or areas.

Some of those may be vertical in terms of supporting our irrigation business or our current transportation/safety type business. And some may add in another way, just as Watertronics did. And you could argue Watertronics is a vertical as well.

But I think Digitec acquisition is a very good technology to be adding to this business, which should be able to be leveraged across both. But we will continue to look for businesses that fit in water use efficiency and transportation, safety and security.

Super. Thanks for your time today, Rick.

Paul Mammola, Sidoti & Company.

Good morning, everyone. Rick, if we look at that new Movable Barrier project for the first half of 2011, is that weighted towards the first or second quarter, more one than the other?

Well, I'm hesitant to really split that for anyone, Paul, because, as you know, some of these projects can move. And I'm just concerned about where the timing of that will fall. And I would be hesitant to try and characterize that further than to say it will be in the first half.

Okay. Switching to irrigation, is it fair to say that replacement drove most of the domestic growth that you saw in the quarter?

No, I think that the split was still fairly even between the, let's say, dryland replacement and conversion. I think there may have been a little higher percentage on conversion in this last quarter, but certainly, replacement was not driving it.

Okay, that's helpful. And if I can try and go back to Ned's question and reconcile your irrigation results with your closest peer, would it be fair to say that the international market has rebounded thus far in the first fiscal quarter? Would you be willing to say that?

I would say that the international markets are rebounding and, in general, have rebounded. And I would also say that it is still a little bit spotty or fragmented, some markets less so. But in general, I would say that the international markets have definitely rebounded.

Okay. And then on your credit concerns, do you think that is adding or compounding the decline in the quarter, or is that still just a general concern?

I don't think it is adding or compounding any of the issues that we've seen to date. My concern is more going forward. And one of the areas where we've seen certainly renewed interest in the last quarter has been in Russia and the Ukraine. And certainly, that makes a lot of sense if you follow what has happened in Russia, with the drought and the fires and everything else, and the shortage in wheat.

So there has been renewed interest. But I think that renewed interest and excitement is tempered a bit by the lack of credit availability. So that will continue to be a challenge. While I think it could be an excellent growth market, credit will still be an issue.

Okay. Thanks for your time, Rick.

(Operator Instructions) David Rose, Wedbush Securities.

Again, great quarter. I just had a couple questions regarding the infrastructure and the irrigation business as it relates to -- on the initiatives for the infrastructure business, you clearly benefited from better volumes. But can you walk us through some initiatives that you plan to take to improve margins or at least eliminate some of the variances in margins going forward?

David, you are referring specifically to the infrastructure business?

Yes, sorry.

Yes. I think what you are referencing and referring to is when you look at the previous quarters, which were fairly flat to even negative in some cases from an operating margin standpoint. And obviously, the QMB is a very significant piece of that infrastructure business and pulled up those operating margins at the end of the year.

And one of the things that we are focusing on from in analyzing our infrastructure business today, especially with the new president of infrastructure who just started, is really looking at the product line rationalization, what makes sense and what doesn't, and what we can do to improve overall efficiency in that business.

We would like to see that business earning decent margins with and without the QMB business coming in as projects, to get to the point where it is more incremental rather than something that we have to have to live off of. I do think that from a scale standpoint, that is still a little bit of a challenge, but we will get to that point.

So there is a number of things happening from an operation efficiency standpoint, product cost reductions, product rationalization, market rationalizations; all of those types of things are on the table for review in the infrastructure segment today.

So assuming we have a similar type of revenue stream in Q1 that we had in Q4, as it relates to the orders on QMB, then we are looking at similar types of margins. But going forward, we should begin to see margin improvement in the second half year-over-year, X out any QMB business?

I'm not going to project or give guidance in terms of when or how you will see that margin improvement take place. I am really more concerned about implementing the changes -- identifying the things that we need to change and implementing those changes and having that show up in the results. But I am not prepared to put a timeframe on that yet.

Okay. And then lastly, on the irrigation side, I assume the acquisition was on the irrigation side, correct?

Yes.

I mean, that is what you're folding it into.

Yes.

So does that imply that the irrigation revenues on an organic basis were down year-over-year?

No, no, this is a very -- first of all, it is a very, very small acquisition. And the majority of their business was from us. And it was rolled in right at the end of the year. So no, this does not imply that.

Okay, great. Thank you.

Davis Paddock, Invesco.

Thank you. Can you break out your operating expenses for the Q4 between selling, G&A and R&D?

Dave probably has that and can do that, Dave Downing.

Sure, Davis. It is -- selling expense -- I'm sorry, Q4, you asked. Selling expense was $6,387,000. Administrative was $7,233,000. And engineering and R&D was $2,374,000.

Great. Thank you very much.

There are no further questions at this time. I would like to turn the call back over for closing remarks.

Well, for our business overall, the global long-term drivers of water conservation, population growth, increasing importance of biofuels and improvements in infrastructure remain very positive.

In addition to the overall business enhancements that have taken place, we continue to have an ongoing structured acquisition process that will generate additional growth opportunities throughout the world in water and infrastructure. Lindsay is committed to achieving earnings growth through global market expansion, improvements in margins and strategic acquisitions. We would like to thank you for your questions and participation in this call.

This concludes today's teleconference. You may all disconnect.