Lindsay Corp (LNN) 2015 Q2 法說會逐字稿

Good morning. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation second-quarter 2015 earnings call.

(Operator Instructions)

During this call, management may make forward-looking statements that are subject to risks and uncertainties 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 word, expectation, outlook, could, may, should or similar expression. 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. With me on today's call is Jim Raabe, Lindsay Corporation's Chief Financial Officer, and Lori Zarkowski, our Chief Accounting Officer.

Total revenues for the second quarter of FY15 were $141.1 million, 8% less than $152.8 million revenue in the same quarter of last year. US and international irrigation revenues decreased, and were partially offset by increases in infrastructure sales.

Operating margins decreased to 10.3% in the quarter, compared to 13.7% in the same quarter of last year. Net earnings were $9 million or $0.75 per diluted share, compared with $13.5 million or $1.04 per diluted share in the prior year quarter.

For the first six months of FY15, total revenues were $275.9 million, decreasing 8% from the same period last year. Net earnings were $16.6 million or $1.36 per diluted share, compared to $23.7 million or $1.83 per diluted share in the prior year. Foreign currency exchange negatively affected year-to-date sales by approximately 2%, and operating earnings by a little more than 1%.

For the irrigation segment in total, sales were $108.3 million, 20% lower than the same quarter last year. Irrigation operating margins decreased to 11% of sales from 18.1% of sales last year, due to lower US sales, competitive pricing pressure, as well as deleveraging of fixed expenses.

In the US irrigation market, revenues were $68 million for the second quarter, decreasing 27% from the same period last year, and declining 30%, excluding the revenue from the newly-acquired Elecsys Corporation. Lower commodity prices and reduced farm income have driven the reduction, causing a dampening of farmer's sentiment regarding investments.

As the primary selling season is now underway, US order volumes have been within anticipated levels for 2015, with the most significant reductions in the corn belt region. While corn prices have stabilized over the last few months, they remain well below peak in 2012. And in February, the USDA forecasted 2015 net farm income to be 32% below 2014.

With a reduction in export demand anticipated and ethanol production under pressure, there does not appear to be a current catalyst for sustainable corn price improvement. However, weather remains a wild card in agriculture production, and a major weather event could change the picture relatively quickly.

In the international irrigation markets, revenues for the second quarter were $40.3 million, decreasing 6% over the same quarter last year, with the decreased driven primarily by foreign exchange impact. Revenue declines in the Middle East, Europe and Russia were partially offset by sales increases in Australia, with increases also in Brazil and Canada. Our outlook for irrigation equipment demand in international markets remains positive, although competitive intensity for large projects have increased, and the strengthened dollar could affect sales in some markets.

At the beginning of March, we began manufacturing operations at our facility in Turkey. While the start-up will potentially have minor negative impact to our margins as we gain scale and experience at this new facility, the addition of manufacturing capacity in the region will provide opportunities for sales growth and margin improvement. We expect to ship our first pivots from this facility by the end of this month.

In addition, we began including Elecsys Corporation results in the irrigation segment late in January. Elecsys contributed $3.5 million in sales, was roughly breakeven after factoring in purchase accounting adjustments. More importantly, performance was in line with our expectations.

The integration of the Elecsys Corporation is proceeding well, including the consolidation of some manufacturing operations into their facility in Kansas. We are very pleased with the management of Elecsys, and are excited about what they can contribute to the development of our technology platform, as well as improving the cost and quality of our electronic technologies. We expect Elecsys results to be accretive to our earnings in the first 12 months of operations.

For the first six months of FY15, total irrigation segment revenues decreased 16% to $223 million. In the US irrigation market, revenues were $129.1 million, 25% lower than the prior year. In the international markets, irrigation revenues were $93.9 million, 2% higher than the prior year, and approximately 6% higher after consideration of the foreign exchange impact.

Infrastructure segment revenues were $32.8 million in the quarter, increasing 94% from the same quarter of last year, driven by the completion of the $12.7 million Road Zipper System installation on the Golden Gate Bridge, and higher road safety product revenues. The infrastructure segment generated operating income of $7.3 million in the quarter, compared to breakeven in the second quarter of last year due to the higher Road Zipper project sales.

Our outlook for infrastructure continues to be positive, although somewhat mitigated by the lack of a long-term US highway bill. For the first six months of FY15, infrastructure revenues increased 49% to $52.9 million, with operating margins of 18%.

As we disclosed recently, the President of infrastructure segment left the organization at the end of the quarter. While this resulted in an untimely vacancy, we have experienced and dedicated business managers in the infrastructure segment who are conducting business as usual. I'm confident in the infrastructure's team ability to maintain the momentum they have built, while a leader is selected for this segment.

Gross profit in the second quarter was $39.6 million or 28% of sales, versus $42.7 million or 27.9% of sales in the same quarter of last year. Gross margins in irrigation decreased by approximately 3 percentage points, as compared to the same quarter of last year.

A more competitive pricing environment and cost deleverage on lower sales had a negative impact on margins. The pricing environment, both in the US and on large projects in international markets, is expected to remain competitive in the near-term. Infrastructure gross margins increased by approximately 14 percentage points, primarily due to an improved product mix of road safety products, and the completion of the Road Zipper project on the Golden Gate Bridge.

Operating expenses in the second quarter increased to $25 million from $21.8 million in the prior year period. $3 million of the increase in expenses is due to the inclusion of Elecsys, which added $1 million of operating expenses in the quarter, $1 million of acquisition and integration expenses, and $1 million attributable to a combination of overall increased medical costs, as well as increased commissions on higher infrastructure revenue.

Included in the integration expense is the planned consolidation of our Digitec manufacturing facility in Nebraska, with the Elecsys facility in Kansas. This resulted in expenses in the quarter for severance costs, as well as the write-down of certain fixed assets and intangibles. While this consolidation is taking place at this time, I would like to compliment the Digitec management, and the entire team for their cooperation and professionalism through this process.

The order backlog at February 28, 2015 was $74.3 million, compared to $89.3 million at February 28, 2014, and $68.3 million at November 30, 2014. The February 28, 2015 backlog includes $7.9 million of backlog at Elecsys Corporation. Year-over-year irrigation backlog levels excluding Elecsys have decreased, reflecting the change in agricultural market conditions.

Infrastructure backlog has also decreased, now that we have completed the Golden Gate Bridge project. Our backlog typically represents some long-term irrigation and infrastructure projects, as well as short lead time orders, and therefore as I have indicated in the past, backlog is generally not a good indication of future quarter's revenues.

Cash and cash equivalents were $167 million of the end of the quarter, and were $1.7 million higher than the same time last year. We've continue the execution of our capital allocation plan, including the acquisition of Elecsys, the investment of $90.4 million of the repurchase of Company stock, continuation of dividend increases, and continued investment in organic growth initiatives.

At the same time, we have also completed a private placement of debt for $115 million with a due date of February 2030, taking advantage of historically low interest rates. The added debt improves our capital structure, and positions us for additional growth through acquisitions and other initiatives, and driving improved returns for shareholders.

In summary, as we progressed through the primary selling season, the irrigation equipment market remains constrained. US demand continues to be affected by lower commodity prices and reduced farm incomes as anticipated.

While competitive pricing pressure remains, it does not appear to have worsened, and other than becoming more prevalent on large international projects. This too, is not unexpected.

The near-term market challenges include high stocks of corn and the strengthened dollar. However, the need for increased agricultural production to meet the needs of the growing population will continue to drive irrigation equipment demand. While farmer's sentiment regarding investment may be dampened, irrigation equipment provides an attractive return on investment.

During the quarter, we made significant progress on a number of projects and initiatives. The infrastructure team completed the Golden Gate Bridge project, which not only made driving on the bridge more safe, but also significantly increased visibility of our unique Road Zipper solution.

In addition, our irrigation team put the final touches on our manufacturing plant in Turkey, and are now ramping up production. This facility better positions us to serve irrigation equipment customers timely and cost-effective now, as well as providing a platform for vertical integration, cost reduction and the supply of other Lindsay products in the future.

Also as mentioned earlier, we completed the Elecsys acquisition, and have begun the integration of the [planned] consolidation of electronics manufacturing operations. We're confident that this acquisition will facilitate future sales and earnings growth, and contribute to the advancement of our leadership position in irrigation.

Finally, we completed the $115 million long-term private debt placement at very attractive interest rates, further enhancing our balance sheet. All of these transactions reflected solid execution and teamwork throughout the Lindsay organization.

We are persistently enhancing our position to meet the challenges, and to take advantage of the opportunities we see in the markets we serve. We are uniquely positioned for developing and delivering turnkey irrigation solutions for agriculture, providing the best irrigation management and control technologies, providing a broad line of market-leading irrigation solutions, engineering integrated pumping and filtration solutions for landscape and industrial applications, as well as providing energy-absorbing road safety solutions and Quickchange Movable Barrier that expands the capacity of existing roads and bridge infrastructure.

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

(Operator Instructions)

Nathan Jones, Stifel.

Good morning, Rick, Jim.

Good morning.

Just, if I could start with a couple housekeeping items. Can you just give us any color on what the impact of the purchase price accounting from the Elecsys acquisition was in the quarter?

Sure. I would say that we've been very pleased with overall the Elecsys performance to date, it's only been 5.5 weeks but obviously, the sales performance was very good. The operating margins, excluding the purchase price adjustments approached 20%. So we've also been very pleased with what we've seen from an earnings standpoint from Elecsys as well.

And I think obviously, we do have some purchase price adjustments. I would say that some of those as you are probably aware, amortize fairly quickly.

So a part of those -- the difference between kind of what they've seen historically and the as-adjusted numbers will get improved over the next couple quarters. And then further, we, the transition of the manufacturing facilities out of Milford into Elecsys will provide some additional improvements for Lindsay as a whole, from an operating margin standpoint going forward.

Okay. Could you possibly give us any indication of what kind of impact you're expecting from the integration purchase price accounting, wrapping that all up, on earnings over the next quarter or two?

Well, I would say the next quarter or two, the impacts will not be that significant, because the transition is occurring now. But I think by the time we get to the end of the year, we will get most of those benefits. So I wouldn't see a significant change here in the next quarter or so.

Okay. And if we could just go to the pricing environment on domestic irrigation. The checks we've done would suggest that Lindsay hasn't been cutting price to the dealers. When you're talking about pricing pressure, are you talking about potentially maybe others cut price, but you're not, versus impact on margins?

I missed a piece of that question, because it broke up unfortunately, but at least on our end. But I think the comment was that we're not seeing -- in terms of your dealer check, it showing that Lindsay is not reducing price to the dealers. And I would say that overall, we've seen some of the projects we're bidding, whether it's domestic or international, are becoming more competitive, in terms of we're often hearing back that there's more competition and some of our competitors dealers are more competitive, which puts our dealers into a more competitive situation.

But we have seen some price change. Some of it may be mix related in terms of some of the types of machines sold tend to be a little of the -- let's say, lower cost, difference type of product than maybe we did see in the previous year. So we have seen some price change in that, but it's a little bit of a movement towards the less expensive machines.

Okay. And if I could just ask one more on price. Going forward, do you feel like you're going to need to reduce price to your dealers in order to keep them competitive in the marketplace, or do you feel like you can maintain pricing where it is?

Well, first I would say, that we will do what we need to, to keep our dealers competitive, and to protect our market share as we have in the past. We don't have an indication that there is any significant change from we've seen, that we have to make in order to be able to do that. I do think that we're seeing competitive pressure that is moving towards, in many cases as I said to some less expensive machines, possibly lighter machines in some cases or fewer features, and we're going to have to be able to provide competitive features from that standpoint.

We will do what we have to do, in order to keep our dealers competitive. And yet at the same time, we're going to continue to differentiate and try not to load the price situation.

That's very helpful. Thanks, Rick.

Okay.

Schon Williams, BB&T Capital Markets.

Hi, good morning, gentlemen.

Good morning.

I wonder if we could maybe just talk about the project pipeline for the infrastructure business? Now with Golden Gate behind you, can you talk about what you see in terms of opportunities over the next 6 to 12 months? To fill more optimistic, less optimistic?

And than, anything maybe that you're hearing in terms of highway bill this summer or this fall. Any update there would be helpful?

Yes. I would say I am not hearing much of significance in terms of a highway bill, I'll take the first. I would say that, in talking with our people in DC that we work with, there is a lot of discussion about infrastructure.

There's a great awareness that something needs to be done in order to address the highway situation, infrastructure situation in general. And yet, I can't say that I'm optimistic about action being taken, but maybe I'm just -- a pessimist in this case. It's just that it's taking too long to get to a solution. But I --at some point, it will have to change.

Now looking at it from a pipeline standpoint primarily for projects like the Road Zipper System, similar to what we had on the Golden Gate Bridge, we typically maintain a strong pipeline list that can be anywhere from $100 million to $200 million in identified projects, where we're talking with companies or states or governments on potential projects, and they'll be in various stages of discussion. Often projects will take three years gestation period in order to -- from the beginning of a discussion to when something happens. Golden Gate Bridge took 30, and that's obviously a very unusual situation.

The pipeline I would say right now is good. We have projects on the pipeline, in our pipeline today that are as big as, and some bigger than the Golden Gate Bridge project, but nothing I would consider to be imminent.

I do think we're in a better position than we were say, a year or so ago, where we have a little more of a sustainable pipeline of projects, sale projects, but also lease projects for our removable barrier system. So I'm optimistic. I am optimistic from the standpoint of the revenue stream that can come from the removable barrier. I'm optimistic in terms of eventually getting to a more sustainable highway bill in place, that will support the road safety products in general.

Okay that's helpful, Rick. And then, I wonder if we can just maybe focus on the leadership within infrastructure. Obviously, there has been some turnover there the last couple years.

I wondered if -- if you were to kind of dream up what your ideal candidate for that job would be, is it more of an operational person? Is it more of a kind of marketing and growth leader? Maybe talk about what you ideally would like to see in that position versus kind of recent history?

Well, I would just say that from what we've done in the past, just to take it from our recent history standpoint, is we view the leadership position, infrastructure, as part of an organization development position. And it's been a situation, where we obviously we're not pleased with the outcome recently. But it's -- I don't consider this a major setback.

I think that the infrastructure business is in a very strong position, because of the strong managers we have in that business. And I think the business leader to run this going forward, is one that can really help to facilitate with the team removing obstacles, developing focus clarifying the strategy further.

And I would say that with a good experienced business managers as we have, they don't need to be told what to do. They have been executing very well. Most of what I think a leader in this case is going to be doing, is helping to remove obstacles and develop that focus, and facilitate any conflicts and other things that come up, either between the infrastructure business segment pieces or other areas. So that's the kind of leader we need, is somebody who can pull them together, and keep them moving forward at a very focused way, and help to facilitate those business managers.

All right. That's helpful, guys. Thank you very much.

Yes, thank you.

Brett Wong, Piper Jaffray.

Hi, guys. Thanks for taking my questions. First, just looking at the recent acquisition, I was wondering what your expectations for Elecsys contribution was this year? Or basically what are you looking at for growth for that business, compared to last year? And then, just on a seasonality standpoint, should we expect kind of a similar seasonality that we saw before?

I would say that, for your model purposes and things that you would look at from a seasonality standpoint, I probably wouldn't change much from what you've seen. And we are not really identifying the specific growth that we're seeing from it, but the purpose of the acquisition really had multiple purposes for Lindsay.

One is to further strengthen and build our technologies that we use in irrigation segment, to develop a path for future growth in those technologies. But also as we see growth opportunities within the Elecsys business itself, we believe that we can, we are well-positioned to be able to support those growth initiatives.

So at this point, I am not going to break out any specific growth that we would say for it. The other -- the third piece of this, from our perspective was the consolidation of manufacturing operations. And there is a pretty significant benefit we get by consolidating operations there, but also we get I believe, quality improvement and more consistency, because of the type of manufacturing processes that they have, has nothing to do with much else -- and [the other thing] I think it's a very efficient and well-run operation that we can benefit from, from a technology standpoint, in many ways.

Okay, thanks. And on the international competition, are there any specific markets where you're seeing that pick up more than others?

No, I would probably characterize it wherever we see large agricultural projects, which could be Middle East or Africa or anywhere, we're seeing a little bit more competition. And I expect that we're going to see a little more aggressive competition from our European competitors, who are probably in a little better pricing position today obviously than they were a year ago.

So I'm not surprised at the increased competition, given a little bit of contraction in the market. But we're seeing it wherever there are significant projects to go after. And I'm sure we will have some of our -- let's say, institutional type customers who will use that a bit as well, to solicit more competition to some extent in large projects.

Okay, great. And then, any chance you guys can quantify how opening of the Turkey plant will benefit internationally the Asian market?

Well, we really don't have anything to quantify that at this point. The intention had always been to transfer some of the manufacturing operation that's handled in the United States, in terms of export to Europe and Middle East to that operation in Turkey. And that would alleviate some capacity issues when in the -- let's say, the peak of the market.

That will give us more capacity to respond and respond quicker in the United States and some of their export markets. But at the same time, I think this really positions us well now, especially given some of the changes we've seen with the euro to the dollar, positions us well to be able to, not only supply faster quality product in those -- Europe and Middle East and Africa markets, but to do it very cost effectively.

And what we will be doing is scaling up in that factory, and also improving our vertical integration including galvanizing in that factory. So it will put us in a very good cost position, but also a delivery position to be able to take care of customer needs.

Yes, and just kind of going off of that, Rick, the -- obviously, there is significant impact from FX this current quarter Kind of what are you seeing here as we look forward, and what you guys kind of looking at in terms of expectations for the year?

While I think I would say the FX impact that I would expect to continue at essentially the current rates, the least from a translation standpoint. But -- and the, from a bottom-line standpoint, it has a much smaller impact.

It's a little bit more difficult to predict how that affects us, to Rick's point on from a competitive standpoint and a pricing standpoint. But from a translation standpoint, I would expect it to continue at similar rates.

And I we add too, that we do hedge sometimes large transactions if they are foreign currencies, we will hedge those. We also hedge our balance sheet. So we do have hedging activities where we believe there's a currency risk to the extent that we can. And yet, what you are seeing obviously is the currency translation impact on our revenue, on our income statement as you would expect.

Yes, great. And then, one last housekeeping thing for me. Jim, what is the interest rate on the new debt?

So the interest rate on the new debt is [3.82]%.

Great. Thanks a lot, guys. Appreciate it.

Thank you.

Ryan Connors, Boenning & Scattergood.

Great. Thanks for taking my call. I had a couple of bigger picture items I wanted to get your take on, Rick. The first is just the technology side. I mean, there has been a lot of talk on this call about Elecsys and so forth.

But you have not been alone, in terms of being active in technology. I know your competitor there, made a pretty significant acquisition in technology, and a bigger Company like Trimble seems to be getting more involved in irrigation technology side. So I wondered if you just talk to us about how that impacts -- this sort of technology competitiveness of fieldNet? And how much that part of the business is changing, as it seems like there is a lot more product developing going on there?

Well, it definitely has been changing, Ryan. We have seen competitors, as you mentioned that were not in this business, four or five years ago, or five years ago we launched fieldNet, that are now getting into this space, and they are seeing opportunities to do some things here. However, I think we are in a very strong position, fieldNet is still a leading product in many respects, and we continue to invest in enhancing our fieldNet offering in many different ways. So we have new products that are launching, and new add-ons to the product that are certainly in development.

So we do think this is a very competitive space. But I think it's an important space, because as we've talked about in the past it's a -- the technology and intelligence of the system is really important for the future in managing what happens with irrigation from an efficiency standpoint, but also in applying chemicals and fertilizers and other things.

So this is the intelligence that moves the pivot from basically a irrigation system or pipe on wheels to this intelligent machine in the field, and it's a space that we consider very important to us. We're aggressively going to participate in it, and Elecsys put this into a much stronger position with the manufacturing capability, but also development capability that it brings. And we continue to look for other pieces, from a technology standpoint that we would consider.

And we're in a good position with the balance sheet that we have now, also with this debt, to have this cash available to make acquisitions, whether they are defensive ones in terms of where we feel we have to do something to protect our technology position. Or whether they're offensive when we see something that we really think it's interesting that we can build on. But either way this is a very important part of our business today and going forward.

We also see this as a key piece in terms of the integration of some of our other technologies. Now as I mentioned in some of the opening comments, we are in a unique position with our integrated system where we have pump systems, we have filtration.

We have the engineering design on the front end, plus we have fieldNet. So we can deliver this fully integrated system which we intend to continue to enhance, but also provide this kind of technology and integration into some of the adjoining markets rather than just agricultural irrigation.

Right. Now in terms of -- I know that at one time the fieldNet system and similar technology was really largely utilized by the more sophisticated grower, the larger grower. Has that become a lot more mainstream in the last few years? I would assume that's the case, but what's your view there?

I would say that I consider any grower who uses fieldNet to be a sophisticated grower. But that's probably a different perspective. I think that it is becoming more mainstream.

I think there is -- we're seeing a change in the customer base, where there are definitely some of the next-generation coming in as growers. This fits very well into the trend of consolidation of farms, whether it's in the US or globally And as farms consolidate and they need to manage those farms with better technologies and products, fieldNet is a direct fit for that.

So with fieldNet, you can manage hundreds of pivots, whether it's in Russia or Africa or the United States or whatever happens to be, and do it with less labor and be able to respond quicker to changes that need to -- either changes that have taken place in the field, or changes that you need to make. So this is I believe this is a very important trend, that ties into the consolidation of farming, of farms, and ties into the advancement of other technologies that are used in farming today.

That's great color. My other question, Rick, had to do with more of a niche area. But small field pivots, I know historically the seven tower pivot has kind of been the dominant technology, and it's the 160 acres I guess, is the rule of thumb in terms of the irrigation area there.

But I noticed recently it seems like there is a lot more focus on -- I know you have got the Greenfield small field pivot line, competitors also marketing these smaller field pivots. Can you talk about kind of whether that's - how that impacts the addressable market? What the uptake rate has been on those small field pivots, maybe even some rough quantification of what percentage of your business that is today, and whether you think that can grow into something material over the next several years?

Well, I wouldn't categorize any of this as a major trend towards, let's say a small field pivots. I would say that there has always been a market out there for small field pivots, and some of them are in slightly different crops, whether it's alfalfa or feed crops for horses or different ranches and things. But it could be a number of areas where we continue to see those small fields, and a market for small field pivots.

I would categorize it more as, there is still a very growing opportunity out there in small fields in general, for an automated irrigation solution whether it's a pivot or something else. But they are constantly is -- as a search for another method of irrigating versus let's say, a sprinkler or flooding those fields, something that will improve water use efficiency and increase the yields.

Now what we're seeing currently is probably more of a trend towards lower cost per acre type systems where the trend has been -- and I think it ties in a little bit what to happened with commodity prices, it's more to -- how do we get cost out of the system and provide a cheaper solution for irrigating the same amount of acres. But there will continually be this search for a better solution for those smaller fields, and there's a number of different ways to do it. But we haven't really seen a major trend towards more small pivots for those small fields.

Okay, interesting. Well, thanks your time today.

Thank you.

Brian Drab, William Blair.

Morning, Rick, morning Jim.

Morning.

I just wanted to talk a little bit more about pricing, because as I'm looking at your report today, and I'm looking at your primary competitor's report from February, mid-february. The comment from them at the time was that pricing had not been significant or really any sort of issue on the irrigation side of the business.

And when I look at your numbers today, 11% operating margin in irrigation, and if I adjust for the acquisition expenses and take Elecsys into account, it's more like 12%. But sequentially, it suggests decremental margin of -- higher than your historical average, closer to 40% decremental operating margin, compared with roughly high 20%s or low 30%s that you have seen historically.

And my questions are around -- maybe if you can give any color on the timing of price decreases in the market? Because it doesn't make -- if the price decline happened since mid-February, it would seem like it would be a pretty dramatic double-digit decline in price since then, and I am suspecting that's not really how it played out. And I guess secondarily, is there another factor -- I know there are a lot of moving parts here -- but is there another factor that would have had as significant an impact on margins as price did?

Just for clarification, and we'll get Jim's input on this also, you're referring to an operating margin level irrigation in total, correct?

Yes.

I think one other factors that will play into this as you look at, let's say a deleveraging or as you see volume come off, is that we have more business entities, international business entities out there now, with some of an embedded let's say, fixed cost structure than we did say, three to five years ago. And obviously that means that the deleveraging is a little more challenging as the volume comes off. So we can see a little more of an impact, in terms of some degradation in terms of operating at this point.

Now as those businesses grow, we have more opportunities to apply vertical integration, to expand in terms of whether it's the tubing and galvanizing, different things but in those operations that will change that composition. But as we're growing and expanding those international markets, we will see that deleverage impact is a little different than it used to be. Now and so, I wouldn't attribute it all to price from that standpoint. (Multiple Speakers).

Rick, can I ask -- are we talking primarily about LAKOS, or other specific acquisitions that have changed the mix?

I think it's, yes, it's all of the above. It's the international -- opening up the international operations, which would have higher SG&A run rates. For example, [let's say] the irrigation business in total.

But also operations like Watertronics or LAKOS and others that would have higher SG&A run rates as well. So that would change that composition some, from where we were five years ago. And all of those are important to the integrated system and to where we go from a growth standpoint, and create additional growth opportunities, but it does change the picture a bit in terms of let's say, deleveraging effect.

Okay.

Yes, I think, Brian, the only thing I would add is to your specific question, I don't think there's any other large a factor that changed dramatically within the quarter, that threw any of these numbers around a little bit. But to Rick's point, we also have a little bit of a mix shift into some of the international businesses, and some of those businesses that we've always noted have little bit lower margins as well. So that's also playing in.

Okay, no, that's really helpful to understand that the mix has changed, there's more fixed cost in business in general, and then more international, of course. But how about on pricing?

Can you make any -- because this is still really puzzling to me that there are basically two players in this market that account for 80% of the market. One says pricing is not an issue, the other one said, it's a significant issue, and the only thing that has changed is we are 30 days beyond when the competitor made the comment. So is there anyway you could help make a little more sense of that for everyone?

Yes, I think that -- I've described it as pricing competitiveness and competitive intensity has increased, and it's probably one of those types of situation that has increased even in the past 30 days, where we had been. We're seeing it more and large projects today. We see it in terms of -- as we're working with dealers, some of the factors that they're facing in the market.

So I can't really answer why one company would say one thing, but I can say that we hear this real-time from our dealers, that they believe competitive intensity has improved. And as I said, we're going to do what we have to do to keep them competitive, and we have seen this real-time on projects that we're going after.

And I think that probably has more of an impact on some of the international markets now, where we've seen bigger projects with competitive intensity increasing. But I think it's -- I can't really explain why they would say what they did. I can just tell you what we see as the facts.

Okay, thanks for that. And steel historically has accounted for 35% -- or maybe I'll maybe just s broaden the range, and say just 30% to 40% of your cost of goods.

Yes.

Have you commented yet on today's call, as to whether given steel is down something like 20% year-to-date -- calendar year-to-date, if that will be a tailwind, and how significant a tailwind that could be for you in terms of margins?

This is Jim. We have not. We haven't commented, but I would say we have certainly seen a little bit of improvement on steel in last quarter or two. Versus a year ago, the steel prices aren't dramatically different, but we have seen some improvement, and that has helped us a little bit. We'll have to see how it plays out, but that has been a little bit of good news.

Okay. And then, someone asked you, Jim, with interest rate is. Can you just tell us what interest expense is going to be for the next quarter, and what a run rate would be?

I think the number is about a little over $4 million annually, so like it's $2 million -- a little over $2 million for the balance of the year.

Okay. Thanks a lot.

Joe Mondillo, Sidoti.

Good morning, guys.

Good morning.

My first question, I was just wondering if you can comment on inventory amongst your dealerships, and how much have we sort of reduced, and do we have a ways further? Or is it starting to sort of normalizing to demand yet, or if you could just talk about that?

We don't typically have much -- we really don't have any inventory out with dealers. So our dealers are generally -- maybe would have a unit or two, a machine or two on hand, or components for a couple machines for let's say a walk-in type of customers. But unlike other Ag equipment type businesses, we really don't have of stock program of that type.

So dealers are running pretty lean, and in most of the machines that we're selling are basically configured to the specific order, which is also why we don't have a lot of machines out there. So that we don't have that same issue you would see in some of the other ag markets.

Okay. And in terms of your cost structure, it seems like bad timing I guess with the Turkey facility regarding some costs that are coming online, even though long-term that should benefit for you. But I was just talking, I was just wondering in general, in terms of your utilization amongst all your facilities, how does that utilization look? And do you anticipate any cost cutting initiatives going forward, just considering the headwind of demand?

Well, first, in terms of utilization of facilities I would say most of the facilities are probably in the -- I think maybe 50% to slightly more than that in terms of total utilization of the facility, with additional capacity that can be added through additional shifts to their factories or other kind of things. And that's a broad characterization of capacity at this point. But I think in terms of overall reductions, I'd say that we've made sizable reductions in domestic and international SG&A, some of them more recently that probably are not truly reflected in the financials yet. And these reductions are offset by, in some cases by increases in infrastructure in some of our more growth-oriented type businesses, including continuing to invest in technology. Along with other things that you're going to see in the income statement, for example, [EPA] reserve adjustments and the integration and acquisition expenses that you've seen in this quarter.

So there is some of those one-off type things that are definitely in there, maybe to some extent covering some of those changes that have been made. But at the same time, I would say based on what we see with the markets today we will continue to assess our estimate position, and look for additional areas where it may make sense to cut. At the same time, we're not going to deviate from the overall strategy, or really harm the initiatives we have in process that we think are critical for our future growth.

So at this time, you have no plans to reduce headcount, or maybe reduce hours worked to attempt to lower the cost base to the -- ?

No, I wouldn't say that at all. I would say, in fact, if we looked at our Lindsay factory we have continually made adjustments in headcount as we go along, and that their productivity level in terms of what they are producing for the number of hours worked is high, in fact probably higher than it was last year. So they're running at a pretty good rate, and each of our factories will make adjustments as they go along, in terms of what the outlook looks like, and they are doing this on a regular basis.

So no, we will continue to make adjustments. My reference on that was more from an SG&A standpoint, and there too, we will make adjustments as we feel we should as necessary.

Okay. And then in terms of some of these cost benefits from the Turkey facility, from the Elecsys acquisition in terms of integration of facilities, is there any point in time where you guys are going to provide us with the benefits from these initiatives? They seem like significant initiatives that you highlighted, not only in this call but in past calls, and it would be nice to be able to know how big of a benefit that they are for modeling purposes, and just for analyzing how profitable the Company can be?

I think we can provide some more clarity on some of these benefits as we go along. And particularly, I would say the Turkey facility in terms of the startup of that operation was primarily to add additional capacity for international expansion, and to reduce costs in total for delivering to specific markets. And at some point, we may be able to break that out further as we get up and running, and are in full production on that facility.

In terms of the Elecsys piece, there are a number of pieces to it which include the advancement of the technology as we have talked about, and the expansion of their business, as well as cost savings that we expected from integration of manufacturing facilities, plus the high quality and other benefits that we can see in our existing products. And that I would characterize as probably in that $1.5 million-plus kind of range, that we would expect on an annualized basis once fully implemented. But that's only a piece of the basis and the justification for the Elecsys acquisition.

Okay. And then, just lastly if you will, in terms of the Turkey facility, you mentioned on your prepared comments that it can, in the future you can use it as a platform for vertical integration. What exactly did you mean by that?

Well, we are adding in now the galvanizing operation. We may go further and add in tubing production in that facility at some point, if we feel we need to. I can say that we have plans to do pump stations in that facility.

We may be doing filtration systems from LAKOS in that facility. So and many other products that we believe we can build there, that would be important for those markets, and the facility was designed to be able to take that on in time.

Okay. So these are products that you already manufacture in the US or elsewhere, but you're going to be able to implement that into that facility?

Yes. So it would be products, plus manufacturing operations that we do in some factories, but not initially in that factory. So it would be the vertical integration of manufacturing operations, plus products that we produce, and other ones that we can produce there.

Okay, great. Thanks a lot.

Thank you.

Kevin Bennett, Sterne Agee.

Thanks, good morning, guys.

Good morning.

Rick, first off, if we think in terms of volume and irrigation segment, can you talk about how the quarter progressed? I know it's not the peak season, but I mean, is it getting worse or getting better, or how should we think about that?

Yes, I am not sure how to characterize that, other than to say at the beginning of the quarter, it started a little slow I would say, that and probably a little later, and has been kind of a lumpy start to the beginning of -- for the beginning of the quarter, the beginning of the selling season for us, where we saw order rates varying quite a bit. But it still wasn't bad. It was just a little bit lumpy and a little slower than what we expected in order to get -- in terms of getting started.

But that's about all I can really characterize it as. I would say that orders have continued to flow pretty well, once things did get started.

Got you. That's helpful. And then, I know nobody's crystal ball is perfect, but you been through a few cycles in this business, and I would love your thoughts. How close do you think we're getting to the trough this cycle? I mean, what do you think it's going to take to finally stop seeing volumes go down 30% a quarter?

Well, I am not sure that I would have an expectation seeing volumes go down 30% a quarter. I think the key now is, really what happens during this season as I see it, in terms of what's planted, and I've seen many different numbers in terms of planting expectations.

Obviously, corn planting is expected to be down. It could be down quite considerably from last year, in terms of acres planted. So we could see an impact of that.

I've seen -- certainly it's going to -- weather will make a difference in terms of what happens with yields this year. And I've seen all kinds of weather projections that would say weather similar to last year, but yields expected to be a little lower.

So there is no crystal ball to this. And I would say, what we have seen in recent cycles is, it really only takes one or two major weather events to change the situation, and reduce the ending stocks in corn or other commodities that we have.

I think there are some differences today, where we have low oil prices which are both negative and positive when it comes to farming. I think certainly, one of the positive impacts from an energy standpoint is it reduces farmers input costs. So that's beneficial to the return on investment for us.

We are seeing the strengthened dollar, which obviously has some impact in terms of demand on exporting of commodities. So that's going to be a little bit of a headwind potentially in the very near-term.

But outside of that, I don't really have a crystal ball. We're just kind of prepared for where this is going to go. I don't anticipate a significant change in the next year from what we've seen this year, but a lot of it will depend on what happens with this growing season.

Sure, thank you. And then on the -- if I switch to the infrastructure business real quick, can you help us understand the operating profit contribution from the Golden Gate project? I am just trying to get an apples-to-apples comparison versus recent quarters in that business?

Well, I -- we don't provide specific numbers relative to Golden Gate bridge or any particular project, just for competitive reasons. But I think everybody is aware, of the margins there that are certainly much better in that, with those projects, and that product line than they are with our other product lines, and that's reflected in the quarter.

So I really wouldn't say much more than that. I mean, the -- you can see from the increase in volume and the increase in margins that most of that is due to the Golden Gate Bridge. And so, so I think improvement we get from that is pretty apparent.

Got it. Sure, Jim. I mean, I guess, if I looked -- is the base business similar to the last couple quarters? Is that the way to think about it?

Well, I think we've been making progress all along. So I don't know -- I particularly wouldn't look at last year as a good comparison point, because we've made some cost adjustments, and we've seen good improvement in our overall road safety product sales both from a sales standpoint and a margin standpoint.

So I think looking at something a little bit more recent as a comparison point, probably gives you a little bit better view. And we've continue to see good progress in road safety sales in the current quarter, and the margins in that business. So it's not entirely Golden Gate Bridge.

Perfect, thanks. And then, last question for me if you, Jim, could provide the breakdown that you usually do between the dry land and the conversion, and replacement of irrigation?

I have that -- this is Rick, I have that in front of me. But the conversion is -- for the quarter was 24%, dry land 34%, and replacement 41%.

Perfect. Thank you, guys.

Thank you.

Chris Shaw.

Morning, guys. Could you give me the breakdown in --what the percent of sales were for dry land acre conversion, versus replacement and conversion from other types of irrigation?

I think that's what I just did. (laughter)

I just -- I jumped off for a second, I apologize.

No, that's okay, that's all right. But I will repeat it, the conversion was 24% in the quarter, dry land 34% percent, replacement 41%.

Great. I'm sorry about that.

No, it's okay. It's all right.

And then, just also on the M& A front, I mean, what are you guys seeing there? Are there still a lot of opportunities out there? I mean, should we see things like another Elecsys coming soon, or do you think it still -- digest this one for a while, and then see what's out there?

Well, when it comes acquisitions and the M&A front, I would never say coming soon on anything, just because it's always so unpredictable. I would say that we had acquisition recently, and acquisition candidate that we were pretty close on and pretty optimistic about, however we ended up point away from it and backing off, and brought with it some expense, but it was definitely the right thing to do in this specific case.

So it's always difficult to predict, but I would say the pipeline that we see is still very good. We still have some good candidates, and we're out there aggressively looking for pieces that fit well.

And I think we're finding some interesting ones that fit well with Elecsys in terms of the kinds of technologies they have, that can provide additional growth paths as well. So I am optimistic, but I would never say anything is really imminent or current, but we're still in pursuit.

Great. Thank you.

Craig Bibb, CJS Securities.

Hi, I was hoping to just get a little more clarity on price. Is it more mix or more straight price is -- was unclear to me?

Well, I think the -- I would put this into the category of two things. One is, we've seen from a mix standpoint, a change in our overall, let's say domestic average price of a few points in the quarter, versus the same time last year, that I would attribute as much to mix, as to actual price adjustment. Because there is a change in the mix that has taken place.

We do know that we're seeing competitive pricing pressure intensity increasing. And what this can also mean, is we're seeing -- even the lower priced units are taking a larger share of the market. So we're having to price at that level. So it is a combination of both price and mix, in terms of meeting that market need.

And you and your largest competitor [that] have full-featured set of pivots, is there -- who benefits with -- if there is a shift towards less -- less fully featured pivots?

I don't think that either one of us benefit from this. I think it tends to be a third competitor in there, who is on the lower price end, who sometimes when the market contracts drives a little bit more of what's happening from a pricing environment standpoint.

So I think it can potentially hurt both us and our largest competitor in this. But it does mean that we are constantly as I'm sure they are too, looking for ways to reduce the cost of the machine, and cost per acre of irrigating.

Great. And is there other different, low end competitors in Europe, and are you seeing anything from China?

Yes, definitely we have different low income competitors, and you can identify at least one in every major market we serve in, and we participate in, and they're generally different competitors. In China, we have a number of competitors there that weren't there five years ago, and it's become a much more competitive market. And there you've got some of the lower end competitors to the point of, their machines are sub quality, where they may not make it around in a circle before they fall.

You have some that have been around for a few years, and they're starting to get it right, but on a little lower end. But so, yes, there will always be those price competitors.

But I think there's a general acknowledgment in the industry that we have a superior machine in many respects, a high-quality machine, as well as our major competitor also has a high-quality machine. So there is a difference in the market in terms of the perception of that, versus the low quality guys, but there are times when it matters less.

Okay. And it's straight price pressure on large orders, and more mix pressure on small orders, is that a reasonable way to look at it?

I think that's a reasonable way. It's obviously not quite that specific, but it's a reasonable way to think about it.

And the price and mix issues are the same more or less US and international, or is it more pronounced in one or the other?

I don't know that I would characterize them the same. I would say that the machines in many of the international markets tend to be smaller anyway, so it's a little different situation. But it's probably similar in -- and I would say it's a more US situation in terms of the mix and the price issue that we're talking about, as well as large projects.

Okay. And you were saying, the pricing increased during the quarter, and is not worsening now? Is that a fair way to characterize it?

Yes.

And what happens next quarter, you'll find out? Or is there a way to look at backlog, to have comfort with where pricing might be six months from now or (inaudible)?

Well, we have ways of monitoring what's happening, but I would just say that we don't believe that the pricing situation is worsening, or we can -- this was the comment that we made earlier, we don't believe that is worsening. We do monitor it constantly, and it may show up first as additional discounting that may be necessary with dealers in order to be able to meet a competitive price situation, and we monitor very closely.

Okay, great. Thank you very much.

Thank you.

I would now like to turn the call back over to Mr. Rick Parod for closing remarks.

The global long-term drivers of water conservation, population growth, importance of biofuels and the need for safer, more efficient transportation solutions remain very positive. We are committed to creating shareholder value through investments in organic growth, dividend increases, strategic water-related acquisitions, share repurchases, congruent with our capital allocation plan.

We thank you for your questions, and participation in this call. Thank you.

This will conclude today's conference. You may now disconnect.