Lindsay Corp (LNN) 2011 Q3 法說會逐字稿

Good morning. My name is Tia and I will be the conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation third-quarter 2011 earnings 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.

Good morning, and thank you for joining us today. Joining me today for this call are Jim Raabe, who recently joined Lindsay Corporation as Chief Financial Officer; Tim Paymal, our Chief Accounting Officer; and Dave Downing, President of International Operations. As many of you are aware, Dave has served in a dual role in the past few years as CFO and President of International Operations. Now with Jim Raabe on board, Dave will be able to focus his full attention to the growth of our international businesses. We're pleased to have someone of Jim's caliber and breadth of experience join our team and I would like to thank Dave for his willingness to serve in the dual role during the recession and during our CFO search. These changes strengthen our team of results-oriented people and support our continued growth.

Revenues for the third quarter of fiscal 2011 were $153.4 million, increasing 53% over the same quarter last year. Net earnings were $15.3 million, or $1.20 per diluted share compared with $6.2 million, or $0.50 per diluted share in the prior year's third quarter. Total revenues for the first 9 months of fiscal 2011 were $362.8 million, increasing 34% from the same period last year. Net earnings for the first 9 months rose 63% to $30.9 million, or $2.44 per diluted share compared to $1.50 per diluted share in the first 9 months of fiscal 2010.

In the US Irrigation market, revenues were $76.7 million for the third quarter, increasing 60% over the same period last year. Favorable economic conditions in the US agricultural markets continue to fuel strong demand for irrigation equipment. Agricultural commodity prices remain comparatively high with corn increasing 111%, soybeans up 47%, wheat increasing over 79% from the same time last year. In February, the USDA projected US 2011 net farm income to be the highest on record and 20% higher than 2010.

Order flow continued to be robust throughout the peak US irrigation selling season, which has now ended. In spite of the currently high agricultural commodity prices, uncertainty has been created in the US agricultural market over the future of processor tax credits for corn-based ethanol. Significant reductions or elimination of the credits will likely impact corn demand and pricing in that 35% to 40% of corn usage in the US is for ethanol. In addition to significant rainfall in the eastern corn belt, delayed planting in some parts of the corn belt remain affected by flooding, all of which will likely impact yields and profit potentials for farmers. However, most of the affected acres are not in the primary US irrigation market, which is west of the Missouri river.

International irrigation revenues were $50.2 million for the third quarter, increasing 55% from the same period last year. Revenues increased in nearly all international markets, most notably in China, Europe and Brazil. For the first 9 months of fiscal 2011, global irrigation segment revenues were $278.6 million, rising 38% over the same period last year. Long-term market drivers of improving diets and a growing worldwide population combined with water use efficiencies available for mechanized irrigation systems continue to be positive drivers for global irrigation equipment demand.

Infrastructure segment revenues were $26.5 million, increasing 35% from the third quarter of last year. Infrastructure segment results improved over the prior year on higher quick change Movable Barrier sales and growth in the railroad and tubing businesses. We continue to see strong interest in our Movable Barrier products, which provide a very cost effective way to safely add lane capacity. The outlook for Infrastructure spending remains unclear with uncertain timing on a multi-year US highway bill and significant government budget constraints in Europe.

Year-to-date at the end of the third quarter, Infrastructure revenues were $84.2 million, increasing 21% from the same time last year. Gross profit was $41.5 million for the third quarter versus $25.3 million in the same quarter last year. Gross margins were 27% compared to 25.2% for the third quarter of last year, primarily reflecting improvements in our international irrigation margins and operational improvements in our Infrastructure business segment.

Operating expenses for the third quarter were $18.4 million versus $15.2 million for the third quarter of fiscal 2010. Operating expenses as a percentage of sales were 12% for the quarter compared to 15.2% for the same period last year. The increase in operating expenses included higher personnel-related costs, incremental operating expenses from the acquisition of Digitec and WMC, and additional expenses for environmental monitoring and remediation as part of our ongoing development in implementation of the EPA work plan at the Company's Lindsay, Nebraska facility.

Our order backlog was $43.3 million on May 31, 2011 compared to $33.9 million May 31, 2010. May 2011 backlog is higher than the same time last year in both Irrigation and Infrastructure. While the quarter-end backlog reflects better than normal seasonal order levels, it was still well below the record backlog at the end of the third quarter in fiscal 2008. Cash and cash equivalents rose $17.1 million to $100.6 million, while debt decreased $4.3 million over the same period and nearly $8 million has been invested in acquisitions since the same time last year. Accounts receivable rose $30.8 million on higher sales, while day sales outstanding and accounts receivable improved. Inventories increased $5.8 million and inventory turns also improved.

We will continue to use cash resources to invest in organic growth opportunities, such as new product development, geographic expansion, funding seasonal and cyclical fluctuations, and in the acquisitions of synergistic technologies and product lines. In addition, we continue to seek larger synergistic acquisitions representing additional businesses and water use efficiency, or transportation, safety, and security.

In summary, significantly increased irrigation equipment demand and improved operating results from our Infrastructure segment were realized in the quarter, resulting in record third-quarter revenues and earnings. In the Irrigation segment, favorable economic conditions globally resulted in positive farmer sentiment and increased sales. However, the current governmental debt environment will likely lead to additional examination of subsidies and tax credits, such as the credit for ethanol processors, which may result in changes impacting farmers' future profit potential.

Overall, we're 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 continue to be strong drivers for our markets long-term. In addition, we continue our disciplined approach to finding and integrating accretive acquisitions that add new businesses and/or product lines and to investing in organic growth opportunities. I would now like to open it up for your questions.

(Operator Instructions) Brian Drab, William Blair.

Congratulations on a great quarter. I'm wondering, Rick, if you could give us any hint as to what the Quickchange Movable Barrier sales were in the quarter, given you've had really solid growth there, solid sales in that business over the last few quarters. If I'm not mistaken, I think that we did going back to the fourth quarter of 2010, something in the $9 million range and then $8 million in the first quarter and I think, if this number is -- if my notes are correct here, about $14 million in the second quarter, how did those look in the third quarter?

Well, I would characterize the third quarter's QMB sales Brian as significantly less than some of the other quarters and probably in the range of about 20%, or less than 20% of the total Infrastructure revenue.

Okay, that's helpful.

I was pleased to see the growth and the other Infrastructure business segments and improvement in profitability from those segments, so they all contributed to the improvement that we've seen.

Great. And then could you elaborate a little bit on the productivity improvements that you saw or that you drove in the Infrastructure segment in the quarter?

Well, a number of the changes that took place in the Infrastructure business have really taken place over the last couple of quarters. But they have included things like expense reduction. We have changed staffing. They have included automation, manufacturing processes, additional automation, including rationalization of a facility and closing a facility.

So there's a number of factors that have been tied to it. And some of them are more operational control type procedures as well, including approval of pricing levels and various things. So all of those things have led to improved results in the Infrastructure business.

Okay, great. And then can you -- just last question, could you give us a little more detail on specific international regions where you saw strength or you went from $25 million in international irrigation revenue in second quarter to $50 million in the third quarter. Would you help us understand a little bit better what's going on there?

Well, in the previous quarter, we really hadn't seen the growth yet in some of the international markets, and we commented that we felt it was lagging some of the US growth that we had seen. What we saw in the third quarter was growth certainly in South America, particularly Brazil, with emphasis on sugar cane for ethanol. But also in Brazil in general and South America in general. We also saw growth in China and believe that, that market is developing really pretty nicely. The other area that we saw some pretty good growth in was in eastern Europe, in the former Soviet region. So all of those areas, we saw some good growth and things have stepped up in the international markets.

Okay. Thanks very much.

Ryan Connors, Janney Montgomery.

Good morning, and congratulations to you and everyone at Lindsay on a great year so far. Couple questions here. First off, just kind of on the capacity side, Rick, I guess one of the challenges that we're having in terms of figuring out what kind of further upside there could potentially be to unit volumes from here is just what kind of capacity there is both at Lindsay and on an industry basis to deliver that. So could you just talk a little bit to us about where you are today on a capacity utilization basis in Irrigation and just how you think about capacity relative to potential, if in fact the industry were to continue growing at this kind of pace?

Yes, as we've talked about in the past, we do not have real -- many specific capacity constraints in that some of our processes can be augmented with manual processes. I would say that in general, we're probably in the range of the, let's say 60% to 70% capacity level. However, we can bring in more people and add people to the say the assembly line, electronics and different areas to augment that, assuming we have the components.

In the international markets with our factories there, as we've talked about in the past, we're buying tubing outside in many cases, and importing some of the materials from the US and our US factory. But in general, we don't really see significant capacity constraints. We may be from time to time more limited by material or component availability. And we haven't really seen any significant constraints there, other than we've seen a little bit recently in some LCDs and some electronic components partly related to the incident in Japan. However, in general, there's nothing really significant on the horizon from a capacity level.

Okay.

Capacity constraint level.

Okay, and I guess kind of a related question on used pivot sales. Do you see -- logically, one would think that when new pivot sales are so strong, that there might be more used pivots as quote-unquote, trade-ins hitting the market. Do you see that, and what impact, if so, does that have on demand for new pivots, and I guess in particular, internationally? Because I guess logically, one would think that the less affluent emerging markets might be a place where the used pivots would be more likely to sell.

Well, we hear of some concern let's say from time to time in some of the international markets in terms of let's say more availability of used pivots. I haven't really heard anything recently on that, and I don't believe that's really a factor. The other part of it that ties into this, Ryan, is looking at where the pivots sales are going in the United States. As we've talked about in the past, typically we've seen quarter-to-quarter that in a normal year, it would run about a third going into dry land, a third into replacement, and a third into conversion. So obviously the replacement piece would be the bigger concern, where we're taking pivots off some of the old pivots off and selling them. What we've seen this past year, I would say in the past quarter, the -- about probably more than 45% of the machines were going into dry land, which is not a big surprise, given the high commodity prices.

Okay, and then just a final question. I know you touched on this, but if you could just talk a little bit more about the related issue, the pricing and raw materials. Is there any -- will there be any contract roll-offs for supply contracts or anything like that, that will cause raw material costs to jump for you over the remainder of the year? And then what do you see going on in the pricing environment, just generally in terms of you and your competitors trying to price the product for the higher input cost levels of steel and zinc up, and so forth?

Well, as you know, steel is the most significant 1 and it's about a third of our cost of goods sold. What we saw in the -- during the quarter was about a 35% increase in steel costs, and we believe steel has now stabilized. And as you know, and we've talked about in the past, in times of rising steel prices, we tend to cover about 70% or more of our next 3 months, or the next quarter's needs in either inventory on hand or through purchase commitments. And that's a practice that's been in place for quite a while.

We've also during times, as we're starting to see now when steel stabilizes or decreases, may pull that back from that 70% level. We're following that practice today and we believe we're able to align our pricing with our material costs. Of course that is dependent sometimes on competitive actions on price. However, I would say that indications from the past quarter are that we've been able to appropriately align that.

Okay. Well, thanks for your time this morning. Very helpful.

Schon Williams, BB&T.

I just wanted to dig in on the Irrigation numbers a little bit more. Seasonally, domestic revenues would typically be up, kind of 25%, 30% in fiscal Q3 versus fiscal Q2. This quarter came in more like 15%, and I'm just wondering if you have any thoughts about maybe why this quarter was a little bit kind of seasonally weaker than historically.

No, I don't really have anything that would really characterize it as seasonably weaker. I do understand your point on this. However, I would say we had a good second quarter and a good solid third quarter. I think demand was really pretty robust through both of those periods. We have seen at times where the third quarter will ramp up a little more significantly than second quarter. Some of that has to do with weather patterns and things. But there was nothing that I would point to that would indicate that there was any change or anything of that nature, although obviously the wet weather may have had some impact in terms of the third-quarter revenues.

Yes, that's where I was going. Was maybe was there any impact from the flooding that might have either delayed farmer purchases later than normal, that might have actually gotten pushed into the fourth quarter? Or are those sales potentially lost and they would have to get pushed into next year?

I'm sure that there were some, Schon, that took place. That may have -- or where they were impacted by the flooding and the heavy rains. However, as I mentioned, that's not our primary irrigation market, which the primary market would be west of the Missouri river. But I know there are customers who certainly would not have purchased, because of the flooding and the heavy rains in the spring.

Okay. And then on the international side, it sounds like the demand was very broad based. I just want to make sure that, given that you are seeing broad-based demand across a number of geographic markets, do you think that, $40 million to $50 million is a sustainable number for the Irrigation, for the international side?

Well--

Or --

Go ahead.

I was just going to say that, that segment tends to be very lumpy, given that it's more project oriented. I'm just wondering, is this more of a timing issue where we had 2 or 3 projects all kind of hit all at the same time and maybe that number needs to get dialed back over the next quarter or 2?

Well, as you know, we don't give guidance, so I'm not going to really characterize the number as sustainable, or not sustainable. I would say that you are right, that the international markets tend to be lumpier certainly than the US market. However, some of these regions, for example, Brazil, is not as lumpy, and we've seen more sustainable demand and order flow in that region.

We will have some lumpiness in our international revenues, because of the nature of large projects from time to time. There are no real significant ones that stand out. We did have a couple of projects in the quarter. I expect that there could be projects in future quarters on a comparative basis, but nothing significant that I would say, you should back out from that standpoint.

Okay, and then last question, just on outlook for next year. There is a large agricultural machinery manufacturer out there talking about US farm incomes actually being slightly down during 2012 versus 2011. I'm just wondering, what, what is your take maybe on that outlook? And then if that were to come true, that we saw kind of flattish to slightly down farm incomes, do you still think you could grow the Irrigation side of the business in that environment?

I certainly think there's a number of factors. If we're looking at the US market, it will depend on what happens with ending stocks at the end of this season and what takes place or transpires during the next season in terms of yields and harvest and weather patterns as well. However, outside of the US when we get to the international markets, they are significantly less developed from Irrigation standpoint than the US market. So I believe that the opportunities that exist in the international markets are different than they would be potentially for let's say ag equipment dealers or sellers or manufacturers in that we're really developing a sustainable irrigation in those markets.

All right, thank you. Thank you for the update.

Andrew O'Connor, Harris Investments.

Good morning, guys. Congratulations on your quarter. Rick, I wanted to know what are Lindsay's priorities for cash, which continues to build? The Company's in great shape that way. Thanks.

Yes, well, as you know, our cash balance has increased and in terms of priorities, I'd say our first priority would be organic growth. As you know, we also pay a dividend, which we continually, annually review and have increased for a number of years and we'll continue to review that. Outside of that, I would say acquisitions and acquisitions that may be first product line or technology type acquisitions, synergistic to our existing businesses. As I mentioned earlier, we also look for larger acquisitions that would be synergistic in some way that would be in water use efficiency or the transportation, safety and security, similar to our Infrastructure business.

I often get asked, is there a priority over, of 1 over the other. I would say that certainly if we can find appropriate, sizable acquisitions tied into the water side of it, that is a bit of a preference, but we do look for acquisitions in any parts of those areas that I mentioned, in any of those areas.

All right. That's helpful, thanks. And then I'm relatively new to the company. Is there an economic return that you guys target in terms of deploying new capital? Or how should investors think about that? Thanks again.

Well, we look at any of the deployment of capital in terms of our weighted average cost of capital and what that rate would be, and we do discounted cash flow analysis. And if we're looking at acquisitions, we look at multiple models where we'll look at best case, most probable case and worst case scenarios before we are ready to deploy capital and make a deal. So the primary -- I would say the primary measure that we're going to look at initially would be the weighted after-cost capital.

All right. And then lastly, can you further characterize the pricing environment for both Irrigation systems and Infrastructure products, and how pricing compares to, say, maybe 6 to 12 months ago and how you see it trending looking ahead. I'm mindful of your prior comments, but I wanted to know if you could elaborate a little bit more. Thanks.

Well, I would -- my comment on pricing would be that we've seen a pricing environment that has allowed us to pass on material increases appropriately. It's been a pretty measured pricing environment from the standpoint of no real radical changes other than passing through the material costs in general. This is primarily for the Irrigation market. There have been times when we've seen more dramatic shifts from some competitors. But that's just usually from time to time we'll see that, or in certain regions.

And we do see some a little more regional variation in price, and particularly when it comes to larger projects, things get much more competitive. In the Infrastructure markets, I would define it as pretty stable pricing environment. We certainly don't have the larger fluctuation in pricing due to material costs, because they are not really as significant a factor in any 1 material in our Infrastructure product line. So it's a little more stable pricing environment in Infrastructure.

Got it. Thanks very much.

(Operator Instructions) John Braatz, Kansas City Capital.

You talked a little bit about the ethanol issue. I'm not sure when that's going to be clarified in Washington. But let's say it drags out a little bit. Do you think that the ethanol uncertainty could by itself weigh on some of the equipment purchasing decisions that your customers might make in the latter half of this year, when the selling season begins? Do you think that uncertainty could weigh on those decisions?

I think that it's certainly possible, John. I don't really foresee that having a big impact in terms of weighing on the decision process while pending. I don't think that's what most of our customers are thinking about today. They are looking at some pretty strong commodity prices. I also believe that they are looking at what is that potential impact if that credit goes away? And the things that I've read on it would indicate that there's quite a variation in thought on this in terms it may not have much effect, in terms of the processors, and because the demand is there. There is a need to produce ethanol.

Or it could have a pretty significant effect on overall corn demand. So I don't think that's really known, and I think our customers in general are taking that wait and see approach. But it's not holding them back from making decisions today. And I don't foresee that holding them back. I think the outcome will be a bigger issue for them, whatever that -- whichever way it goes.

Okay. How much of your new Irrigation sales do indeed go to the, let's say the corn and soybean market?

I don't know that offhand. I would tell you that just thinking back to 2008 data, what we saw was about a third of the, the crops that were irrigated, about a third where pivots were applied was irrigating corn at that time. So I can't say that a third of what goes out the door is going to irrigate corn and soybeans. But we did see in the I think it was USDA Farm and Rancher Irrigation Survey, that was about 33%, somewhere in that range, was irrigating corn at that time.

Okay. Thank you very much.

Shawn Boyd, Westcliffe.

Hi. Thanks for taking my questions. First, and I apologize if I missed this, but in terms of operating income, can you break that down by segment, Irrigation and Infrastructure?

Sure. I can take that question. The operating income for the Irrigation segment in the quarter was $25.6 million and for the Infrastructure segment, it was $1.1 million.

Helpful. Thank you, Jim. So basically we ran solid margins in Irrigation, a little bit lower.

Exactly. The operating margin for the Irrigation segment in the quarter was 20.2%, and 4.1% for the Infrastructure segment.

Right, and that 4% being lower quarter-to-quarter, the biggest driver there is just that it's a much lower QMB mix in the quarter?

But significantly improved over prior year third quarter 2010.

Yes, okay. Second question for me is just on the backlog and, probably goes to me being relatively new to the company. Backlog down significantly quarter-to-quarter, but still up nicely year over year. And then when I back into implied orders, also still up very nice year over year. So kind of 2 things come out of that. Number one, should I read much into that quarterly sequential fluctuation in the backlog? And number two, would you expect sort of a continuation of the nice order growth in that backlog bouncing back in the coming quarter?

Well, I think from the quarter sequential decline, I would describe that as fairly normal sequential adjustment or decline from the third -- from the second to third quarter ending backlogs. I would not read a lot into what the actual backlog number says, keeping in mind that this is the low-end of the season for us. The primary selling season has ended, so I think it's nice that the backlog has increased. But I wouldn't read a lot into that in terms of going forward.

Okay, that's helpful. And on the order growth, that -- the question there is in terms of the order growth that we're seeing and the 30% year over year level here, is that a -- given what you're seeing right now, is that a fair level to think about going forward?

Well, I think I understand your question. As I said, we don't really give guidance, but I would say that we're pleased with the order growth, and it is good, solid growth over the previous year, but I would not give guidance in terms of what that means for the next quarter or anything of that nature.

Okay. Good enough. Thank you very much.

(Operator Instructions) And at this time, there are no further questions. I would like to turn the conference back over to Mr. Parod for any 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 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, improvement in margins, and strategic acquisitions. We would like to thank you for your questions and participation in this call. Thank you.

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