Lindsay Corp (LNN) 2016 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Lindsay Corporation FY16 second-quarter conference call.

(Operator Instructions)

During this call, management may make forward-looking statements that are subject to risk 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 all statements proceeded by, followed by, or including the words expectations, 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 turn the call over to Mr. Rick Parod, President and Chief Executive Officer.

Please go ahead.

Good morning and thank you for joining us.

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 FY16 were $120.6 million, 15% less than the same quarter last year.

Irrigation equipment revenues decreased modestly in the quarter while infrastructure sales declined primarily due to the completion of the Golden Gate Bridge project in the prior year.

Including a $13 million increase in environmental expenses, the Company reported a net loss in the quarter of $4.1 million or $0.37 per diluted share compared with net income of $9 million or $0.75 per diluted share in the prior-year quarter.

The environmental charge on an after-tax basis reduced net income of $8.7 million or $0.79 per diluted share.

Our manufacturing facility in Lindsay, Nebraska has been around since the 1960s.

As many of you know from reading the 10-Ks over the years, we've had an ongoing process to remediate legacy environmental matters at the facility first detected in 1982 and resulting from manufacturing processes going back even further.

Since detected, the Company has been committed to remediation of those issues, working with the relevant regulatory agencies.

This process takes time because it involves working with our internal and external experts and regulators in developing testing and remediation plans.

In recent years, we've used GRS, a nationally known environmental engineering company to assist with environmental testing and evaluation of remediation alternatives.

Progress of the remediation efforts implemented is continually monitored and plans periodically modified.

The prior reserve plus the current expense recorded are big numbers, but none of these are going to be material to the liquidity or financial results of the Company.

We at Lindsay are committed to this remediation effort and in being good stewards of the environment.

Despite the difficult financial comparisons for the quarter, the results in the quarter reflecting continued progress in our business.

Excluding the impacts of these two large events, the Golden Gate Bridge project and the environmental accrual, our net operating profit was flat on a year-over-year basis on modestly lower sales.

The effects offer foreign exchange translation also moderated somewhat in the quarter compared to the same quarter last year, reducing sales by $4.1 million or 3% and lowering operating income by approximately $150,000.

For the irrigation segment in total, sales were $103.1 million, 5% lower than the same quarter last year.

Irrigation operating margins were 10.7% of sales compared to 11% of sales last year.

In the US irrigation market, revenues were $72.3 million in the second quarter, increasing 6% from the same period last year and declining 1% excluding revenue from businesses acquired last year.

Overall, lower commodity prices and reduced farm income have dampened farmer sentiment regarding capital goods purchases.

The USDA is now projecting 2016 net farm income to be $54.8 billion, dropping 3% from the prior year and declining nearly 56% from the record high set in 2013.

2016 net farm income is projected to be the lowest since 2002.

While domestic irrigation demand and the macro factors that drive farmer sentiment appear to have reached equilibrium, we have not seen an upturn in the overall market or sensed a significant positive change in farmer sentiment.

There's been continued downward pressure on all farm input costs, including land prices and rents, which should result in improved profitability per bushel and will likely translate into greater support for adding or upgrading irrigation as a primary method of yield enhancement.

In the international irrigation markets, revenues for the second quarter were $30.8 million, decreasing 24% over the same quarter last year.

The revenue declined 9% due to foreign currency exchange rate changes with the remainder of the decrease primarily attributable to reduced demand in Brazil and some export markets.

The impact of lower global crane prices on irrigation equipment demand often lags that of the domestic market as we believe we're seeing.

We remain encouraged by the project quoting activity in several international markets but recognize that quoting activity does not always translate to near-term revenues.

For the first six months of FY16, total irrigation segment revenues decreased 8% to $204 million.

In the US irrigation market, revenues were $131.5 million, 1% higher than the prior year.

In the international markets, irrigation revenues were $72.8 million, 21% lower then the prior year and 11% lower after consideration of the foreign exchange impact.

The segment generated $23.8 million of operating income in the first six months of the year or 11.6% of sales as compared to 12.5% in the first half of last year.

Infrastructure segment revenues were $17.5 million in the quarter, decreasing 47% from the same quarter last year.

Excluding the effects of currency translation and the Golden Gate Bridge project completed in the prior year, infrastructure sales decreased 6%.

The decrease was driven by lower contract manufacturing and tubing sales.

The infrastructure segment generated operating income of $1.5 million in the quarter or an 8.8% operating margin.

The infrastructure business continues to perform well in 2016 despite this being the second lowest seasonal quarter and without the benefit of a large road zipper project.

We have not yet seen the benefit of the new five-year highway bill but expect to see improved infrastructure activity in FY17.

For the first half of FY16, infrastructure segment revenues were $37.8 million, decreasing 29% from the first half of last year.

Excluding the effects of currency translation and the Golden Gate Bridge project completed in the prior year, infrastructure sales decreased 1% in the first half of the fiscal year.

The infrastructure segment generated operating income of $4.6 million year to date or 12.2% of sales as compared to 18.4% last year.

For the total Company, gross profit in the second quarter was $32.4 million with a gross margin of 26.9% of sales, approximately 1 percentage point lower than the same period last year.

Gross margins in irrigation increased approximately 1 percentage point while gross margins in infrastructure declined approximately 8 percentage points due to the completion of the Golden Gate Bridge project.

Improved margins in our value-added product lines of pump stations, filtration and end-to-end controllers were contributing factors to solid irrigation gross margins while any pricing pressures were largely offset by lower input costs.

Operating expenses in the second quarter increased to $37.1 million from $25 million in the prior-year period.

The $12 million increase in operating expenses includes the $13 million accrued environmental expenses and $1.7 million of incremental operating expenses of the businesses acquired last year.

Other operating expenses decreased $2.1 million with the largest reduction in personnel related expenses.

The orders backlog of February 29, 2016 was $52.6 million compared to $74.3 million February 28, 2015 and $61.9 million November 30, 2015.

Both irrigation and infrastructure backlogs are lower than the same time last year.

The largest dollar and percentage decrease in irrigation backlog is in Brazil where revenues are significantly impacted by both FX and demand.

The infrastructure decrease in backlog was in road zipper system orders while road safety product backlogs are higher than a year ago.

Our backlog typically represents some long-term irrigation and infrastructure projects as well as short lead time orders and therefore, as I've pointed out in the past, backlog is generally not a good indication of future quarters' revenues.

Cash and cash equivalents were $89.5 million at the end of the quarter and were approximately $50 million lower than our fiscal year end August 31, 2015.

The decrease year to date is primarily related to our share repurchases of $32.2 million.

In the second quarter, we repurchased 333,000 shares for $23 million, and as of the end of the quarter, we have $79.8 million of share repurchase authorization outstanding.

With the strength of our balance sheet, we remain well positioned for additional growth through acquisitions and investments in other initiatives to drive improved returns for shareholders.

Overall operating income excluding the Golden Gate Bridge project last year and the environmental charge this year was flat to the year-ago quarter.

This reflects some good news in US irrigation market as year-over-year sales were roughly flat in the quarter after year-over-year quarterly declines for the past few years.

In addition, we've been able to maintain irrigation gross margins offsetting some competitive pricing changes with input cost reductions.

In addition, we're seeing significant benefits from the water-related acquisitions we've completed over the last few years.

From a financial standpoint, those acquisitions have helped us to improve gross margins and have provided revenue synergies and a revenue base not tied to the agricultural commodity cycle.

From a strategic standpoint, these acquisitions have uniquely positioned us in the market, providing an added value turnkey solution proposition for our customers beyond our market-leading center pivot product line.

In the infrastructure segment, costs have been controlled and sales and profits have been stabilized to provide more consistent results.

The recent passage of the highway bill provides an opportunity for future revenue growth.

However, it will take a bit of time to translate into stronger infrastructure project revenues.

While we do not have a large road zipper project in our current backlog, the road zipper lease business continues to grow as we aggressively pursue leasing projects which generate high returns on the fleet assets.

We are also encouraged by the development of our project pipeline for road zipper system sales.

Many of the international irrigation markets currently face the headwinds of lower crop prices and regional economic and political issues.

However, foreign currency exchange rates appear to be stabilizing, and quoting of international projects is showing signs of improvement.

As I've stated in the past, we will aggressively protect and expand our market share in both irrigation and infrastructure while continuing to broaden our competitive advantages with our differentiated offering of products and services.

I'm excited about the new products and technologies and development throughout the Company, which are just part of our global growth plans.

We are investing in productivity enhancements and new product development as we position for the growth of the agricultural market and expansion in other markets we serve.

Lastly, we are executing on our stated capital allocation plan including capital expenditures, share repurchases, paying dividends and pursuing synergistic water-related acquisitions that offer attractive returns to our shareholders.

Our M&A activity is strong today, but as always, it's difficult to predict the timing on completing deals.

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

(Operator Instructions)

Your first question comes from the line of Nathan Jones of Stifel.

Good morning Rick, Jim.

Good morning.

I wonder if we could start with the margins.

You're getting margins down now in the irrigation business specifically, down around levels that are lower than they were in 2009, 2010.

You've got SG&A as a percentage of sales that's fairly significantly higher than it was at the last few troughs.

Are there further levers that you can pull on the SG&A front to help protect margins at the bottom of this cycle?

I think -- Nathan, this is Jim.

We're always obviously looking for opportunities for productivity and cost reduction.

And I think what's a little bit different about today versus where we were in 2009, 2010 is we've added a number of businesses that are more value-added products, some engineering.

And as a result, they have a little bit higher SG&A run rate.

Now, they also bring with them some opportunities, both for margin improvement as well as some ability to be more comprehensive, more solution-based in our approach.

So we think overall it's a positive, but it's a little bit difficult to compare those periods just because of the nature and makeup of the business, but we will continue to look at where we can reduce costs and improve the margins.

Outside of the comparisons, are there things that are currently being contemplated on the SG&A front in order to protect margins at this point in the cycle?

I don't think there's anything I would point out in particular.

We've obviously taken a number of costs out, and you can see that in the numbers, what's happened with some of our personnel related costs on a year-over-year basis.

But I would also say that we're very focused on making sure that we're continuing to invest in the business from the standpoint of product development.

And so you see the R&D costs being maintained, and we've also looking at geographic expansions and getting synergies, the revenue synergies.

So I think our focus is, is really driving the business long term while finding opportunities where we can on the cost reductions.

And then if we could just talk a little bit more in more detail about Brazil.

I understand you've got a couple of things at play here in local currency.

The corn is quite valuable to the Brazilian farmer, but on the other hand, you've got a disastrous economic situation that's probably making it difficult to obtain financing.

Can you talk about what you're seeing in the Brazilian market, how it's changed over the last year or two and what your expectations are for that going forward?

Yes, Nathan, this is Rick.

I do think that Brazil still represents a fantastic opportunity going forward.

I think that as we've seen in past periods, Brazil goes through these cycles up and down, and it probably will continue to do that for a bit of time.

They're definitely going through some political changes right now, and if you've been following any of it, there's everything from corruption charges and discussions of impeachment of their president.

And as you know, most of the units that we're selling are going through some form of Brazilian government financing through [BMDES], and we're seeing slowdown in terms of approvals and payments on funding.

Part of it is lack of funds, and part of it is lack of, I think probably -- maybe the lack of ability on people part and government to feel that they can take action and do some things.

So I certainly don't think this will last, but it's part of a cycle, and we've seen these ups and downs before in Brazil.

But the opportunity is still excellent, and we're in a good position in Brazil, so we will ride through this.

It's definitely been a tough impact between the FX and seeing sales declining, but we still get feedback of strong demand in Brazil.

Okay, thank you.

Your next question comes from the line of Schon Williams of BB&T Capital Markets.

Good morning.

Schon, if you are on speaker phone, please pick up your handset.

And if you're on mute, unmute your line.

Hi, good morning.

Good morning.

If we could talk a little bit about cash flow, maybe Jim, the operating cash flow in the quarter was a drag on overall cash flows for the quarter.

A little bit unusual maybe from a seasonal standpoint, and could you maybe just clarify exactly like how much of the $13 million expense, was that all cash?

Is that the primary drag there, or there's some other pieces that maybe hit the operating cash flow this quarter?

So the $13 million is non-cash, so that was not a driver of the cash.

I would say that it really is more working capital related, and some of this goes into things like expansion of some of the business, like the ramp up of the Turkey facility.

It's not a big number, but there are some contributors to inventory on that side.

I would also say we've had a little bit more in extended terms on the receivable side in some of the markets, international project type of things as well.

So I would just say that it's a few of -- we always get a little bit of this working capital swing when we go from -- as we head into the primary selling season, but there's been a few other variables that have maybe made it a little bit more than normal.

All right, that's helpful.

And then I'm interested, the commentary intro, you talked about being on plan with the capital expenditures relative to the capital allocation plan, but.

So the guidance is $20 million to $22 million, you were a good bit below that in last fiscal quarter or last fiscal year, you're on pace to be below it this year.

I'm just wondering has anything changed relative to when you put the capital plan out there?

Has the market outlook affected the spending on that side?

I'm just trying to reconcile the commentary.

Yes, this is Rick.

I wouldn't characterize it as really having changed that.

The outlook in terms of what we would spend capital on with the exception of, we probably had intended, and in fact I know for a fact we intended when we developed that plan, that we would probably have some additional investment in one other regional market from manufacturing in some form which was delayed, and that was Russia.

So that definitely is not on the table right now, but it not a significant amount of money.

But it was anticipated that we would have additional expansion there at that point.

And that would be primarily for irrigation?

Yes.

Okay, that's helpful.

And then one more if I may.

Just you mentioned some weakness on the contract and tubing side within infrastructure.

Is that actually -- most of that would go into agricultural markets.

Is that things like, I don't know, grain towers?

Yes.

Okay.

Most of our contract manufacturing is still for agricultural equipment providers, and the commercial tubing that is still in that product line is generally one of our biggest groups of customers would be in the grain handling.

Okay, that's helpful guys.

I will get back in the queue.

Your next question comes from the line of Joe Mondillo of Sidoti & Company.

Good morning, guys.

Good morning.

In terms of the domestic irrigation business, just wondering, relative to your expectations, was that a surprise on the upside, seeing that flat year over year?

Just given with the environment, I would have thought, especially in the whole architecture equipment space, that seems not too bad considering the environment.

Well, I agree it's not bad.

In fact, we're happy with the fact that it was flat.

The way I looked at it is last quarter, when we talked about this is really uncertain in terms of what we were going to find out coming into the North America selling season.

But we're pleased that it was flat, it looks like we've leveled off in terms of that demand.

There was nothing really specific in terms of any big opportunities or large significant purchases that skewed it that I'm aware, so I think it reflected market demand.

So from that standpoint, I think it's good and healthy that we've seen that level off the way it did.

Adding to that, I think what we've seen in a couple of the international markets, in primarily ones like Australia, New Zealand and Mexico or Canada, which are very similar to the US, we've seen the global commodity price effect and lower commodity prices impact those markets similar to it has in North America.

As we've often seen, there's a bit of a lag sometimes in those markets, but those were more affected by the lower commodity prices now in the last couple of quarters.

But those two are ones that will respond as commodity prices pick back up again, so I think to come back to your point, we're pleased to see a pretty level situation in North America, not totally surprised with some of the international markets.

I think the one part on the international front that probably skews this a little is we've seen some slowdown in just the generation of projects, or at least completion of the quoting activity on projects to turn into sales dollars.

And that tends to maybe rely more on more of the developed markets and see this is an impact of the lower commodity prices.

So just given the lower farm income, farmers are doing everything they can to try to cut their costs.

Why do you think your revenue was flat year over year, considering those headwinds?

And now that we're through the month of March, how do you see the spring and rest of this year playing out in your eyes?

I'm not going to make any comments regarding the projection for the rest of the spring.

I'd say what we saw in the units that we sold in the quarter in terms of the activity was nothing much of a surprise in terms of the, let's say the distribution of the use of those machines.

So for example, we've talked in the past about the split between the units going into conversion or dry land or replacement.

And I think the only part that was maybe a little bit of a surprise to me is the dry land is holding up pretty well, and that was about one-third of the machine, so roughly 33% of the machines were to dry land, 42% to replacement and 25% to conversion.

And I think if we look back, we would find that that is very similar to almost right on the previous, the same quarter last year, so very similar comparison.

But that split is holding up pretty well and indicating still good interest in conversion and in putting irrigation on for the first time.

So I think the recognition of the yield enhancement is still the draw for the customer.

And obviously the replacement market is holding up well too in terms of replacing older units, and that older unit volume or capacity out there continues to increase every year.

So there's good potential long term for that.

Okay, and then I just wanted clarify one of your prepared commentary remarks, regarding international irrigation.

Were you implying that the bidding activity is actually stronger than the actual results that you saw in this quarter?

Well, I wouldn't characterize it as stronger than the results.

I'd say that the bidding activity has continued it to be pretty strong.

We've seen ups and downs, ebbs and flows in bidding activity on projects, but there's still some good bidding activity taking place.

The problem is is they aren't getting closed as fast as we had seen back, say a couple of years ago in more peak periods, and it's taking longer to see those come to fruition.

So it's a little tougher process, and we've also seen some projects that were on the table that have been delayed now for months.

We still believe those projects will take place, but they are currently delayed for one reason or another.

So I wouldn't characterize it as stronger than the market or the sales reflects.

I'd say it's still pretty strong that keep us encouraged about opportunities in the international markets.

Okay, and then just lastly if you will, in terms of your CapEx, you're planning in the next couple of years $20 million, $25 million annually.

You're only at about $7.5 million here year to date.

Just wondering if you could update us on that and update us on the projects that you have going on in your CapEx budget.

First comment I'd make is that we are encouraging our operations to identify those opportunities to use the CapEx in opportunities for improvements in their operations, either it could be efficiency improvements or it could be new projects or new products.

So they're encouraged to do that where possible.

I think we're on track to about where we were at the same time last year, or let's say to the total we got to last year of about $15 million.

And I suspect that's probably closer to where we will end up this year.

But there's a lot of activity on projects, there's certainly opportunities for improvement that have been identified that our factories are working on, but it's not going necessarily as fast as we expected, not for any specific reason.

And also even the completion of the Turkey facility is taking a little longer than expected, and there's capital still going into there to get our galvanizing operation up and running.

So it isn't anything specific.

I'd say that everybody is encouraged to find those opportunities and they're pursuing them at a pretty rapid rate.

Okay, thank you.

Thank you.

Your next question comes from the line of Ryan Connors of Boenning & Scattergood.

Great, thank you.

Rick, I wanted to touch on the international supply and demand situation.

I know we've had a substantial reduction in demand, and domestically you've always talked about a pretty rational market that can scale down effective capacity and help to maintain pricing that way.

But as we go through this big reduction in demand internationally, in theory some of those, some of that effective capacity reduction might be less orderly.

And I wonder if you can just talk to us about supply and demand situation globally, especially some of your emerging market competitors and how that's impacting the pricing environment on these international bids that you've talked about here.

Well, as we've talked about in the past, Ryan, we've seen some increase in competitiveness on projects from some of the international competitors, but I wouldn't say there was anything really notable in this particular quarter or anything that's really changed much.

And I don't consider that to be a major factor.

And right now if I were to characterize the, let's say slowdown or the impact on our operations from the market demand reductions that we're seeing, the largest impact from an international manufacturing operations has been Brazil.

And that one has had definite impacts from the standpoint of lower demand, partly due to the whole economic and government stuff that's going on, so there's an impact there.

Other markets that are impacted are more of our export markets currently that are coming out of our Lindsay, Nebraska factory, which has done a really good job in terms of adjusting scale to be able to adjust for that.

Our other factories in general are doing a great job in terms of managing capacity levels and meeting demands.

And as I said, many of the international markets are still holding up pretty good.

Brazil is the one single biggest impact in terms of a factory, and they're having to adjust their factory to the new levels of demand that they're seeing.

Got it, that's helpful.

And you mentioned commodity prices a few times on the call.

I wonder if you -- big picture question about rules of thumb.

You hear a lot in the oil market about if oil gets back to X, that's going to trigger a round of CapEx activity and whatnot.

When you talk to your distribution channel and whatnot, are there rules of thumb that people have in mind, that if on a benchmark like corn or soybeans for example, we need to get above X and then that will really start to improve sentiment and demand activity?

Is there any kind of rule of thumb out there?

You did mention costs coming down, so it's a moving target, but any color you have there might be of interest.

Well, as we've talked to people recently, and this is from a US domestic perspective, we've heard comments of corn at $4.20 a bushel or corn at $4.50 being trigger points to see increased activity in terms of capital goods purchases.

And I've seen a number of articles that would indicate a couple different levels in that range as well.

However, I look at it as a rising tide in the sense of as the price goes up, we do see increased activity and particularly pivots and irrigation going into dry land for the first time.

So I don't know there's a specific trigger point, especially as you've commented that when you're seeing input costs adjusting and decreasing at this stage, that trigger point may change.

Right now farmers are having to adjust those perspectives they've had in the past of seeing, say $7 corn prices and obviously high input costs, input costs are falling as commodity prices have fallen.

So there's adjustments in their sentiment and mindset taking place all the time.

But I think that certainly that $4 range is a trigger point that's probably pretty important, and I don't know if it's $4 or $4.20 or what that number is.

But it's certainly crossing that $4 target is a factor I think that's in most farmers' minds today.

Got it, and one quick one on the infrastructure.

Obviously we've got the Golden Gate project rolling off.

You mentioned that in the press release, but it seems like if I look at the run rate of infrastructure on the top line, it seems like maybe that positive impact of the guard rail competitive legal problems last year may -- that benefit may be dissipating as well.

Can you comment on that at all for us?

Well, I would describe it more as if you were to look at it on a year-to-date basis, there really isn't much change that's taking place in that road safety products piece of it from year to year.

In other words, the benefit that we receive this past year, we have held on to.

I think the opportunities for continual growth and advancement still exist there.

I think the growth rate has slowed down, but not the opportunity in terms of that's in front of us, and we haven't gone backwards in terms of road safety products piece of it.

What's pulled down the infrastructure part this quarter has really been truly the Golden Gate Bridge project, which is obvious, but also the reduction in the tubing and contract manufacturing which are significantly tied to agricultural demand.

Got it, well, thanks for your time.

Thank you.

Your next question comes from the line of Tim Mulrooney of William Blair.

Good morning, I'd like to start on the irrigation business.

To start, you said competitive pricing is a headwind in the quarter.

Has pricing pressure stepped up this selling season, or is it just more of the same of what you have been seeing lately?

And is this broad based across the industry, or are you seeing pricing pressure from one or two specific competitors or in one or two specific regions?

During quarter, we did see pricing pressure in the domestic market or pricing changes take place.

I'm not going to single outcome competition on this.

I would say that I do believe some of that pricing pressure and change we saw was giving back some of the steel decreases that we've also experienced, and of course, steel is roughly one-third of our cost of goods sold.

So it's a significant factor in this.

The good news is, is that it wasn't giving back all of the reduction in steel that we've been able to experience, so it's been beneficial from that standpoint.

I think its been pretty rational, nothing really major.

Little pockets, as we always have, in different regions where it's a little more competitive than others, but again, I attribute that often to dealers, not to the manufactures.

But there's definitely been some movement down in pricing, but as I said, it is offset with input costs.

Okay, thank you, and then just one more, also on irrigation.

Can you talk just a little bit more about the value-added products, your pumps, controls and filtration products that lifted gross margins by 1 point in the quarter?

How big is this piece of business today, how fast is it growing, and where do you think it can be in a couple of years?

Thank you.

Jim, do you want to take that?

Just from an overall when the filtration, the pump and the Elecsys end-to-end business, this always ranges because they have international projects, and it is somewhat project driven.

And they have some other product lines that they have.

But roughly it can be 15% to 25% of our business within the irrigation business in any particular time.

And obviously I think, and probably more importantly is really how it affects our ability to get into projects and really give it more comprehensive solution.

So we expect it to help us grow the historical pivot business, but also to contribute more to the growth in those individual product lines as well going forward.

Got it.

In addition, just to add to Jim's comments, in addition to what it does for us in the irrigation market in terms of adding to our complete solution, they also have strong positions in other markets, in industrial filtration or industrial water applications, pump stations that will go on to golf courses or in landscape applications.

Other areas that are not necessarily tied to the ag cycle, but very closely tied to what we do.

So they brought in a synergistic piece of revenue for us and an opportunity to improve the mix and margins, but at the same time expanded the markets that we serve.

Okay, thank you.

Thank you.

Your next question comes from the line of Tyler Etten of Piper Jaffrey.

Hi guys, thanks for taking my question.

I appreciate it.

With margins spinning to the points --

Tyler, we can barely hear you, so if you could get closer to the phone or speak up please?

Can you hear me now?

Yes that's better, thank you.

Okay, with margin spending to the point of the 2009, 2010 levels, how should we look at margins pre-Elecsys, or what were the margins before the Elecsys acquisition?

Yes, that's not a break out that we do, so I can't really provide that information.

Okay, no problem.

How about on the infrastructure side, with the highway bill not providing any impact yet, do you have any visibility from your customers on when you could see some sort of impact from that bill?

We don't have specific visibility on that.

I'd describe it more as what our salespeople are running into with our distribution channel and others that we're working with is increased activity in the planning stages taking place that will turn into projects downstream.

So what we're seeing is that the highway bill is providing more funding confidence to develop the projects that will turn into projects for us in the future.

However, those have not come to fruition yet at this stage.

The general talk is we should see more of these starting to really hit within a few quarters, and I don't really know if it's within the next two or three or four.

But we will start to see those projects come together that are out there in the planning phases right now.

Okay, that's helpful.

Just last one for me, with pricing getting more competitive in the market, is it possible to match pricing much further or would there have to be additional restructurings for that leeway to happen?

I think your question is, is it possible to match pricing without having a significant impact on margins?

Right.

If there were to be another leg down in pricing from competitors.

Well, obviously pricing impacts do pull down margins.

And as I said, we've been fortunate in terms of offsetting with input costs.

We would hope that we aren't going to see more of that really taking place.

However, we will go where we need to go in terms of competitive positions in the market.

And there's always things we're going to be doing in our organization which could be looking for reductions in input costs or manufacturing improvements in efficiency and other things we will do to match that.

We will go where we need to go, this is a primary focus of our business and we will support our position in the market.

All right, great thank you.

Your next question comes from the line of Kevin Bennett of Stern Agee Capital.

Hi guys, good morning.

Good morning.

Jim, first a quick question for you on the environmental reserve.

I know the $13 million is your best guess as of now, but I'm wondering if you think this is the final charge, or are there other parts of that site that you're still testing or unsure of at this point, or is this it?

Well, I would never say that there couldn't be further adjustments.

There's obviously uncertainties and those types of things.

But I think to your point, I think certainly what's changed with this accrual is that previously, we had accrued for areas that we knew there were issues.

But there were also areas on the site that it was difficult for us to assess the level of contamination and what it would -- what options would be available for us to clean it up.

And so what we did last fall was we expanded our testing to get at these difficult areas.

In particular, there was one associated or around a building and under a building that we were -- it had been difficult for us to test.

We basically expanded our testing into that area, and that really -- the findings out of that is really what resulted in this adjustment to the accrual.

So in the past where I think we've had more uncertainties, the testing that we have done now has been comprehensive.

And so it's always difficult to say that the testing is always sampling, so you never know for sure.

But I think the testing that we've done at this point is very comprehensive, and I think we feel good about our level of understanding of the contamination on the site.

Okay, great.

And then I certainly understand this is non-cash right now, but I guess over the next however many years it takes you to remediate, should I assume that this is going to be $13 million of cash outlays at some point in the future for you guys?

It will at some point be a cash outlay.

I will say that -- as I said, there's still some uncertainties including the fact that we have -- we need to have discussions with the EPA and get approvals from the EPA on what our plans are.

But this is a 10-year plus type of number that we're talking about, so it is an extended period of time.

And there may be periods where the cash outflows are larger, but for the most part it is a long-term type project.

Okay, great.

And then Rick, going back to the margins and pricing within your domestic irrigation business, the way I read your release in terms of margins on specifically the center pivots.

It seems like they were probably down a little bit, as you say, competitive pricing were largely offset by lower input costs.

Is that a fair way to read it, that gross margins on just your center pivots were actually down in the quarter?

I would read it as pricing on center pivots was down in quarter, and it was offset by input costs.

Okay, great.

And then based on your experience, you've been in this industry for a long time.

And I'm just curious, if we saw some correction in steel prices, do you think that would lead your competitors to stop cutting price and going after volume and stabilize there, or is there something else at play here?

Well, I can't make decisions for competitors obviously.

I would say that based on historically what's happened, is when we've seen steel price move up, we're usually the first or one of the first to move our pricing up and we've seen competitors follow.

So I think that the industry has been pretty rational in terms of responding to what happens to the steel market in terms of pricing.

And frankly, there are not additional units that you're really going to get by having significantly lower price or holding back on those increases.

And the farm economy generally knows and understands that farmers do what's happening with steel.

So yes, I think we can pass through price increases in steel when it's necessary.

Last question for me, again, speaking for the US but more on the volume side, I was wondering if you could comment on any promotional activity that you guys may have ran.

I know we did some in the first quarter.

I'm wondering if you did any in the second quarter or any discounting that you guys might have done to the dealers.

There were some promotions that did go on in the second quarter.

I think they were similar to what some competitors had as well in terms of some rebate on per tower.

But also there was an element of it where we are offering a FieldNET, that pivot control for example, as an option in some cases to expand our market position with our FieldNET product line.

So there were some things.

I'm not familiar with all of the specific details of it, but I know there were some programs in the second quarter.

Okay, great.

Thank you.

Your next question comes from the line of David Rose of Wedbush Securities.

Good morning, this is actually James calling in for David.

So my first question actually is on your outlook on infrastructure.

I know you've talked about your expectations for 2017 to begin seeing benefits from the highway bill before the road zipper projects.

In the past you've talked about maintaining a sustainable pipeline ranging from perhaps $100 million to $200 million and identify projects, with some projects bigger than the Golden Gate project.

Is that still the case?

And overall, I know Q2 was weaker for the reasons you already discussed, but can you also provide any color on what you may expect in the second half, whether it may ramp back up to last -year levels?

Yes, I won't really provide much in terms of the second half.

I'd say that the answer to your pipeline question is yes, we're seeing similar levels in terms of pipeline today.

One of the good things we've seen is a little bigger pipeline in terms of the lease opportunities for QMB systems, the moveable barrier systems.

So that's been favorable and also could be fantastic profit as we get those lease projects in on our low-cost base lease assets today.

But yes, the pipeline is still looking very good, and there are still projects in there that are equal to or bigger than Golden Gate Bridge project.

But as we see from quarter to quarter, the projects that we often expect to happen in a specific quarter or any point in the year will be delayed or timing will change on those.

There's nothing other than that that I can really comment on and say that that pipeline still looks very good.

Okay, my follow-up question is on irrigation margins.

Obviously you've talked about competitive pricing offset by lower input cost and product mix of more value-added products, but for center pivots, are you still seeing that mix moving more towards less expensive lighter machines?

Or are you seeing return to some of the larger more sizeable projects?

And I'm assuming you're also benefiting from heavier mix of domestic sales versus lower margin international sales in the quarter.

So with that, are there other maybe factors that may sway your gross margin profile for irrigation further up or down from where you are today?

Thank you.

There was nothing significant that I'm aware of in the quarter that would affect the gross margins in terms of a mix impact on the irrigation equipment.

As we commented on, I believe in the last quarter, we did see some shorter machines that were sold that had some pricing effect in terms of pricing impact in the quarter.

I can't specifically say in this quarter, I suspect that that mix is similar.

One of the things we see as the market becomes more robust is we will see expansion into people putting the machines on to larger plots of land.

And it doesn't -- again, I can't say specifically in this quarter, but we do see that typically as the market becomes more robust and picks up again.

Other than that, there's nothing really significant in product mix that would have made margins either better or worse in the quarter that I'm aware of, and I'm sure Jim, if you have any comments?

Nothing.

Nothing on that at all?

Well the domestic mix, domestic and international mix how that impacts going forward?

The domestic was a little bit higher than it was a year ago, but I would say that I don't think that had a very significant impact on the overall margin.

I think the factors that we outlined really being some of the value-added product lines that have continued to see good contribution to our overall gross margin rate.

Okay, thank you.

Your next question comes from the line of Jose Garza of Gabelli & Company.

Good morning, guys.

Good morning.

Rick, I was wondering if you could just touch on, maybe give us some data points on FieldNET and what the uptake is from customers, especially as you talked about on maybe some new customers on dry land conversion.

Well I can't -- I'm not going to be able to split out specific data in terms of the FieldNET uptake other than to say we're pleased with the growth that we're continuing to see with FieldNET in the market.

This past year, we launched the new product called Pivot Control that will put FieldNET capability on to any other pivot that's out there in the market.

And that's been very successful, and we've used that as part of our promotion program in the second quarter.

And we had a very good uptake in terms of people taking the pivot control product line.

In fact, our pivot control product, I think that was probably the single biggest demand from that program was on the pivot control.

But in general, I'd say that the success of FieldNET is excellent, and we're continuing to look at and building out new features and other things that we can add to it.

So we're very pleased with the growth path and where it's going and also the very significant installed base and number of machines out there in the domestic and international markets that allow future growth of the FieldNET product line worldwide.

We're a market leader from an international standpoint, and FieldNET is in the international markets and most all of them we're doing business today with great success.

So we continue to see good opportunities to expand that, and it also helps us significantly with projects.

Okay thanks, and if you could just give a quick update on where you stand on the Turkey facility and the galvanizing that you want to install there?

The facility in Turkey is operational and up and running.

We've had galvanizing plant, I don't believe is quite turned on yet.

I know that the equipment was being installed in the last few weeks.

I don't believe it is completed yet, so they will be testing probably within the next couple of weeks in terms of the galvanizing operations.

So it's in pretty good shape and we're happy with that facility.

It obviously is not at a time where we have peak revenue, so it would be great to be able to absorb that overhead in a more effective way, but it still will be a very good facility for us and able to absorb the manufacturing capacity for that region.

Okay, thanks very much, guys.

Yes, thank you.

Your next question comes from the line of Chris Shaw of Monness Crespi.

Good morning, how you doing?

Good morning.

Do you have any sense -- I feel like in North America, that land is changing hands between farmers a little bit more than frequently this year than in the past.

It's more so on rented land that -- I don't really have data on the sale, but maybe that's anecdotal as well.

But do you have any sense if the change in ownership or at least farmership of the acreage increases, is that good or bad for irrigation?

People tend to invest more when they're taking over a farm or less?

Do you have any sense of that at all?

I don't have any specific data to support this.

I'd say anecdotally, we find that as people are coming in and picking up land, that they are looking at ways to improve the efficiency of that land.

And we've worked with a lot of larger companies and individuals who are acquiring land and REITs that are acquiring land, and generally their philosophy is they are looking for efficient land to pick up.

And in many cases, we will improve the efficiency of that land by adding irrigation, which also raises the value for the land.

So from that standpoint, we generally feel it's good.

But I don't have any specific data to point to a percentage of change that's taking place from new land owners.

But I think there's definitely more changing hands at this point, and we will see more as we've seen land prices decrease in a few areas now.

And what we're hearing is more activity in terms of land sales, so it could be beneficial to new farmers coming in and setting up irrigation for the first time.

Just as you mentioned it, do you guys work with that farmland partners FTI, that REIT?

Well I don't want to specifically talk about any one customer.

I would say that we worked with REITs, and we believe that we're seeing more activity with those companies picking up farmland and many of them are very good, good business people and good business partners, and we like to work with them all.

I see.

And then on Elecsys, can you just give us an occasion of what you expect organic growth to be for that business?

I assume it's positive, but is it something that's really growing significantly, or is it just, I don't know, is it single digits, is it double digits, is it 50%?

Well for Elecsys, we see great opportunities for significant organic growth in their existing markets.

Now in the near term, there's some changes that are taking place with Elecsys.

For example, they picked up the volume that we had with another manufacturing facility that we owned and was consolidated into them.

So that increased their capacity and increased their utilization and manufacturing that they were doing.

So instantly, they picked up more internal volume from our operations, and that was a plus.

At the same time, there's some other changes that are taking place with their contract manufacturing part of the business where one customer is phasing out some of their business with Elecsys.

They are also -- a portion of their business is with oil and gas and with the rail industries, which were seeing some decreases in those markets.

At the same time, given Elecsys' great capabilities in M2M technology, they have many other new markets they are starting to get involved in and work with.

So I can't give you a specific in terms of an organic growth rate for the Company.

I would just say that we're very optimistic about it and believe that they have excellent capability that not only serves us from Lindsay's standpoint in all of our businesses, but also will be beneficial in terms of growth into other markets with their capabilities.

How about just for 2016?

Do you expect it to grow organically, or I couldn't figure out from the puts and takes which way you were indicating.

Well, I think if I understand your question, you're asking are we expecting significant growth or anything from them for FY16, is that correct?

Not significant, but is it going to be positive organic growth for Elecsys this year?

Yes, I think we don't, we try not to get into the discussion on the individual business units and where they are.

But I think to Rick's point, certainly, how things go within the irrigation business as well as in oil and gas and rail is going to have an impact on the near-term revenue numbers for Elecsys.

Okay, that helps.

Thanks so much guys.

Your next question comes from the line of Schon Williams of BB&T Capital Markets.

Hi, thanks for squeezing me back in.

Rick, I wondered if you've seen anything out there either from a positive or negative standpoint on the regulatory issues or water access?

There's been a lot of chatter recently around nutrient loss in Illinois farmland, runoff into the Gulf.

I think Iowa's got a large water quality lawsuit going on right now because of nitrates, so I'm just wondering if there's anything you're watching with particular interest that could be a positive or negative catalyst out there?

Generally speaking, we're watching all of that because they can have negative impacts.

And in some cases, as you said, it could be positive as well.

But we aren't really seeing anything we believe is imminent that's a trigger that will have significant impact in any way.

We're watching everything from the waters of the US legislation to the specifics that you're talking about that are much more regional.

But generally, they can have limitations or have some impact if, for example, they decide that you either can't irrigate or you can't apply fertilizer or chemicals through irrigation practices or things.

But we aren't really seeing anything moving in that direction.

So generally speaking, most of the legislation and regulation that we see is water efficiency oriented.

And as you said, there are some others that are more nutrient and pollution oriented, but the water efficiency oriented would be beneficial to us.

But there's nothing specific or eminent that I see as a big impact.

Okay, and then maybe specifically, I'd be interested have you seen any change in purchasing patterns as you look at the California market?

Obviously that's not a big center pivot market, but I'm surprised that an ongoing drought there hasn't maybe driven more conversion opportunities.

Could you just talk about what you're specifically seeing out of the West?

Well I don't have the facts specifically on what's happened to date in California.

I'd say what we have seen year-over-year for a few years is better growth in California.

So we have definitely seen there have been more pivots going in than there used to be, but I can't point to the specifics on where we're at right now.

I think the drip irrigation market was extremely robust in the last couple years in California as farmers with primarily vineyards and orchards and especially vegetable crops were putting in drip irrigation for water efficiency.

And we benefited from that, by the way, through our LAKOS business, which sells filtration into the drip irrigation industry.

So from that standpoint, that's been beneficial to us.

We see good opportunities in California for pivots and for drip irrigation expansion, including pump stations and filtration for drip.

So either way, I think that as long as there's movements towards improved efficiency in California and water use, we can benefit from that.

We have reached the end of our allotted call time.

I will now turn the call back over to Rick Parod for closing remarks.

Well, the global long-term drivers of water conservation, population growth, importance of biofuels and the need for safe, more efficient transportation solutions remain positive.

We're uniquely positioned for developing and delivering turnkey solutions.

Our offerings include broad line of market-leading irrigation solutions for agriculture, providing the best irrigation management and control technology, engineered integrated pumping solutions and filtration solutions as well as providing energy-absorbing road safety solutions and solutions for expanding the capacity of the existing roads and bridges.

We're committed to creating shareholder value through investments in organic growth, dividend increases, strategic water-related acquisitions and share repurchases congruent with our capital allocation plan.

I'd like to thank you for your questions and participation in this call.

Thank you, ladies and gentlemen.

That does conclude today's conference call.

You may now disconnect.