Lindsay Corp (LNN) 2016 Q3 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time I'd like to welcome everyone to the Lindsay Corporation FY16 third-quarter earnings 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 and 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 proceeded by, followed by or including the words 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'd 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 Brian Ketcham, Lindsay Corporation's Chief Financial Officer, and Lori Zarkowski, our Chief Accounting Officer. As we previously disclosed, Brian join Lindsay in April so this is his first earnings release call with the Company.

Total revenues for the third quarter of FY16 were $141.3 million, 12% less than the same quarter last year. Irrigation equipment revenues decreased in the quarter due to lower sales in the US, while infrastructure sales declined primarily due to fewer large projects as compared to the same time last year. The Company reported net earnings in the quarter of $9.6 million, or $0.90 per diluted share, compared with net earnings of $12.9 million, or $1.10 per diluted share in the prior-year quarter. The effects of foreign exchange translation continued to subside in the quarter compared to the same quarter last year, reducing sales by $1.6 million, or 1%, and reducing operating income by approximately $100,000.

For the Irrigation segment in total, sales were $117.3 million, 11% lower than the same quarter last year. Irrigation operating margins decreased to 14.1% of sales from 15.1% of sales in the same quarter last year. In the US irrigation market revenues were $73.4 million in the third quarter, decreasing 18% from the same period last year due to the combined effect of lower irrigation equipment volume and reduced market pricing resulting from passing through lower steel costs.

Overall lower commodity prices and reduced farm income continued to negatively affect 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 record highs set in 2013. 2016 net farm income is projected to be the lowest since 2002.

During this year's primary selling season in the US, irrigation equipment demand appeared to be similar to the previous year in the early part of the season and then dropped and flattened out as the season progressed. The demand continued to reflect a recognition by growers of the yield enhancement importance of adding efficient irrigation, but was not as robust as we had hoped.

In the international irrigation markets revenues for the third quarter were $43.9 million reflecting a net 4% increase over the same quarter last year, inclusive of a 4% decline due to foreign currency exchange rate changes. Sales increases in Europe, Russia and other markets were offset somewhat by declines in Brazil and some export markets. Brazil remains a near-term challenge with slow FENAMI funding for equipment purchases and significant government turmoil. The good news is, is that Brazil has been an excellent growth market in recent years for the Company, and conditions are right to return to growth as stability and economic conditions improve.

Now with Great Britain's decision to exit the EU, economic uncertainty has been created in that region. For Lindsay, however, our revenues in Great Britain are very small, less than 1% of our total revenues, and our revenues in Europe are less than 10% of total, although it will vary from year to year. In addition the Company has a hedging policy in place for large dollar denominated -- or large non-dollar denominated transactions and for foreign assets. Overall for the international markets we remain encouraged by the project quoting activity in several regions, but caution that quoting activity does not always translate to sales trends.

For the first nine months of FY16 total Irrigation segment revenues decreased 9% to $321.7 million. In the US irrigation market revenues were $204.9 million, 7% lower than the prior year. In the international markets Irrigation revenues were $116.8 million, 13% lower than the prior year and 5% lower excluding the foreign exchange impact. The Irrigation segment generated $40.3 million of operating income in the first nine months of the year, or 12.5% of sales, as compared to 13.5% of sales in the comparable period of the prior year.

Infrastructure segment revenues were $24 million in the quarter, decreasing 18% from the same quarter last year. The decline was primarily due to fewer larger Road Zipper system projects completed as compared to the prior year. Road safety product sales were relatively flat with the prior year, maintaining the strong revenues achieved last year. The Infrastructure segment generated operating income of $4.7 million in the quarter, or a 19.4% operating margin.

Infrastructure segment revenues for the first nine months of FY16 were $61.8 million, decreasing 25% from the same period last year. The most significant portion of the decline is due to the completion of the Golden Gate Bridge project last year and other larger projects completed. The Infrastructure segment generated operating income of $9.3 million year to date, or 15% of sales as compared to 19.7% last year. The underlying performance in the Infrastructure business continues to improve, even without the benefit of incremental larger Road Zipper projects. The overall market remains stable and we're encouraged by increasing project activity.

For the total Company gross profit in the third quarter was $41.8 million with a gross margin of 29.6% of sales, approximately 1 percentage point higher than the same period last year. Gross margins improved by approximately 1 percentage point in both Irrigation and Infrastructure. Gross margin improvement in Irrigation resulted primarily from lower input costs in the US. Infrastructure margin improvement was driven by revenue growth and cost leveraging in our European Infrastructure operations.

Operating expenses in the third quarter increased to $26.5 million from $24.9 million in the prior-year period. The increased spending was primarily an outside professional fees of $800,000 and increased R&D spending of $500,000. The increase in outside professional fees were mostly in public company compliance-related expenses. Increased R&D spending is driven by new product development in Infrastructure and support of a new certification standard for road safety products.

The effective income tax rate for the third quarter was 31.4% compared to 36.7% for the same period a year ago. The lower effective tax rate in the current year results primarily from a proportionately higher level of earnings coming from foreign operations with tax rates lower than the US.

The order of backlog at May 31, 2016 was $61.2 million compared to $53.2 million May 31, 2015. The majority of the backlog increase is in Infrastructure products. Our backlog typically represents some long-term Irrigation and Infrastructure projects, as well as short-lead times orders, and therefore as I've indicated in the past, backlog is generally not a good indication of future quarters' revenues.

Cash and cash equivalents were $91.5 million at the end of the quarter and were $47.6 million lower than at our fiscal year end, August 31, 2015. The decrease year to date is primarily related to our share repurchases, which totaled $48.3 million. In the third quarter we repurchased 219,578 shares for $16.1 million. As of the end of the quarter we have $63.7 million of share repurchase authorization outstanding.

Cash flow from operations of $20.2 million were offset by CapEx spending of $10.1 million and dividend payments of $9.2 million. The strength of our balance sheet continues to position us well through this cycle -- or cyclical downturn, and for additional growth through acquisitions and other initiatives to drive improved returns for shareholders.

In summary, we continue to manage through a prolonged downturn in the agricultural cycle. While we've seen some positive movement in key agricultural commodities in the US with corn moving above $4 a bushel during the quarter, it has not proven to be a significant catalyst for a significant improvement in farmer sentiment or increased agricultural equipment demand. Most recently corn prices have fallen back, projecting strong yields from the current crop due to favorable rain and heat conditions.

We expect that in the near term, challenging agricultural market conditions will persist; however, the stabilization of commodities and recalibration of farm input costs are certainly positive signs that are likely to improve farmer sentiment towards investment. This is expected to result in increased investment in efficiency and yield enhancing equipment, such as our irrigation machines and irrigation management platform.

Our Irrigation business continues to perform well in a -- in challenging market conditions, while demand has been exceptionally difficult to forecast. Gross margins continue to hold steady and show improvement through effective cost and price management. Our opportunistic steel purchasing as steel prices decline continued to benefit us in the quarter. Recently we've experienced steel price increases, which we've been passing through in price increases in our equipment.

The relative stickiness of the steel cost increases as well as the competitive response in pricing in the irrigation equipment industry is still unknown. Historically when steel prices have increased we've generally been successful in passing through those costs after a brief recalibration period, as we expect in today's environment.

We also continue to recognize benefits from the water-related acquisitions we've completed over the past few years. From a financial standpoint these acquisitions have helped us to improve gross margins and have provided incremental revenue and profits derived from non-ag markets. They've also provided platforms for future growth.

While these smaller strategic businesses currently carry higher SG&A run rates than our core pivot irrigation business, these additions position us well in the irrigation market, providing a value-add proposition for our customers beyond our market leading sur pivot product line. Over time we expect the water-related businesses acquired to further leverage SG&A expenses and to generate attractive growth rates and operating margins.

In the Infrastructure segment sales and profits have been stabilized to provide more consistent results and attractive returns. The recent passage of the Highway Bill provides a foundation for future growth of road safety products sales and Road Zipper Systems sales and leases, and has been key in the recent increase in our current order backlog. We're also encouraged by the development of our Road Zipper System potential project pipeline.

While we currently remain in trough conditions in the ag cycle, the underlying drivers of water use efficiency and the need for food and fiber to meet the needs of growing population remain very positive. We will continue to invest in operating efficiencies, near-term growth initiatives and in value-creating differentiation and products and services that benefit us now and as the markets improve.

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

(Operator Instructions)

Your first question comes from the line of Schon Williams of BB&T Capital Market.

Hi. Good morning.

Good morning.

I wonder if maybe just start in kind of a price/cost here. I don't know, can you guys quantify what has price been running down the last couple of quarters? And then where are we now in terms of price moving up and when should we actually start to see that impacting the top line? Will that come through as early as next quarter? Is there a little bit of a lag, just given the accounting? Any clarity there would be helpful.

Well Schon, I'd characterize it first as the change we saw in the US market, down in the quarter was probably about half volume and half pricing, which probably a little more than what we expected, but that's what took place and that was passing through steel price decreases from an overall market standpoint. And as I said, what we anticipate is now that we've seen steel move up as we have passed through increases and we anticipate that there will be a little recalibration taking place in the market, as there has in the past, and that those will be successful in being passed through. Sometimes it takes a little bit of time for that to really stick. And it depends on what happens with fuel prices at this point, but right now that's what we anticipate.

Would it be fair to say just based on those comments that that 100 basis points of tailwind that you're getting right now, is it fair to say that we could see a quarter or two here near term where that tailwind goes away or becomes a negative and then it turns to a positive as we get farther down the road? Is that the way to think about it?

Are you referring to the tailwind from the steel pricing standpoint?

Yes, just from a margin standpoint. It was 100 basis points of tailwind last quarter, 100 basis points this quarter. I'm trying to think, like during this transition period, do we maybe get a quarter or two where it's either more neutral or actually a headwind before it turns to being positive again?

Yes, it's a tricky one to estimate, and I don't really want to forecast margins in terms of what they will be. I'd just say that we've already seen steel price move. I'll come back to, we're talking about opportunistic steel purchases and we bought in a really good position and we've been using that steel and been able to maintain the benefits from that. We've been buying steel since then.

And we've gone back to our previous steel purchase process which is hedge buying two to three months out ahead, because steel prices have been rising. So I can't tell you specifically when that mix starts to comes through but I will tell you from a pricing standpoint, we price based on the steel that we are buying at that time. So we are passing it through very quickly. So how that will shake out in terms of the quarters I'm not going to project at this stage. I would just say that we do sometimes see that as we put those pricing changes into effect when steel is moving up, from a market standpoint there is sometimes a calibration that takes place out there before it all starts to stick.

That's helpful. And then one more, if I may. I just wanted to come back to the -- you called out operating expenses up $1.6 million. Part of that was R&D, I think you said for new road safety standards, and then $800,000 for professional services. I just want to get a sense of how much of that is going to be ongoing for the next several quarters. And then maybe related or unrelated to the unallocated portion of kind of corporate overhead was unusually high this quarter. Usually it's running in that $4 million, $4.5 million. This quarter I think it's closer to $6 million. Was that some of this pick-up in operating expenses, or was there something in addition there? Any clarity there would be helpful.

Hi, Schon. This is Brian. Yes, the increase for the quarter in our professional fees of $800,000, pretty much all of that was related to increase in scope as well as accelerated timing of our external audit, which also drove some of our outsourced internal audit costs a little bit higher. But really there's an increase for the full year. We saw most of that take place in the third quarter because of the accelerated timing. I would expect that to flatten out in fourth quarter as far as the year-over-year comparisons.

To your question on the unallocated corporate costs, again that increase for the quarter is driven by the professional fees and that should moderate back out to on average around $5 million a quarter. It can fluctuate quarter to quarter, but on average that would be where we'd expect it to end up.

And then the R&D just related to the road safety, is that something that's going to be ongoing for the next several quarters?

It will be. This is the new what's called MASH standard that is a federal standard that's being adopted on more of a state-by-state basis at this point. But we have some product development in place for products and testing of those new products. So this is ongoing for a bit. It will be a little lumpy in terms of when that appears. I wouldn't necessarily project that every quarter it will be up. I would just say it will be an ongoing development process.

That's very helpful, guys. I'll get back in the queue. Thank you.

Your next question comes from the line of Michael Shlisky with Seaport Global.

Good morning, everybody.

Good morning.

Wanted to touch briefly on some of your comments on the Infrastructure backlog. Just to be clear, it doesn't appear that way, but is there an actual Road Zipper in the backlog or is the increase from the previous year just parts and service or other kinds of things of that nature?

There is Road Zipper revenues in the backlog. There are both lease revenues and some smaller sales revenues. There's not a significant big project in backlog that I'm aware of. I don't know, Brian, do you know of one? But I don't think there's a significant big project in there by any means. But a majority of the backlog increase was Infrastructure and the majority of that would have been Road Zipper System related.

Okay.

And this is the time of year when we would see more of the leasing of those systems for road construction projects.

Got it, okay. Switching gears over to the Irrigation side. Sometimes you've put out in your comments that there are sometimes there's storm-related revenues during the third quarter in previous years. I know there were some hail storms in Nebraska during the quarter. Could you point out there were any major storm-related revenues this year, I guess compared to last year?

Yes. From a storm revenue standpoint I'd say it was fairly typical this year. There was really nothing major. There were some storms, as you noted, and I'd say that our dealers did a great job of identifying the opportunities there and our factory did a fantastic job of being able to respond quickly in terms of getting machines out for those. I wouldn't call it a very notable or significant amount to talk about. It's kind of a typical season. We have had some that obviously were much bigger, but this is just probably a typical summer season.

Okay. I also wanted to, I guess, ask just one last one, kind of more theoretically. Let's just say between July and August we do see some kind of dry conditions in the corn belt. Just take us through what you'd expect to happen as far as orders. Do orders come in very quickly or do you have to wait until the next season to see if the crop prices are going to hang in there at higher levels if the yield gets impacted? Just kind of a sense as to what the timing is for orders if we were to see a dry patch in the next couple of months.

If things are dry in the next couple months I wouldn't expect it to have a significant impact, let's say, in July and August. Where it may have some impact is right after harvest, because the farmers generally won't put anything in to the field then until harvest. And they will be looking at conditions, which could include weather conditions plus commodity prices at the time of harvest and make some decisions on irrigation at that stage.

And basically if they see some dry conditions and are concerned about the spring, or commodity prices have peaked up and they are able to put more money in their pocket they may make some decisions at that time to buy more equipment. So we typically will see in conditions like that a little boost in the Fall from weather conditions or farmers' sentiment at that time. Otherwise it's more likely going to affect it if those dry conditions stay dry and they're concerned about the Spring, it will affect their decision then into the next season, in the Springtime when they are making their purchase decisions.

I guess then just as a follow-up, I did see some dry weather conditions reported in Brazil at the end of their season. Do you know if there's any major impact to farmer interest in Brazil, or are the interest rates and the macro political uncertainty is just offsetting any kind of weather-related interest in that country?

I think the farmer interest in Brazil is still very, very good. It's the macroeconomic issues and political issues that are overshadowing it and the availability of the funding from FINAME to buy equipment that's really getting in the way at this time. I'm optimistic about Brazil for the long term because we saw such great progress there in many parts of Brazil in terms of the putting in irrigation systems with a lot of interest still remaining. So when those conditions start to settle down we'll see it turn back on, but it may take awhile.

Okay. I'll leave it there. Thanks so much, guys.

Thank you.

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

Hi. Good morning.

Good morning.

Congrats again, Brian, on your new role.

Thank you.

I guess I'll be the one to ask about the UK and Europe. I don't know how much you want to get into specifics, but here are my questions. What percent of revenue roughly is generated in the UK and Europe? What percent of revenue is denominated in pounds and what percent in euros? And then can you talk a little bit about the hedging and give us any idea what rates you have locked in for those two currencies?

Yes, Brian. This is Brian. Our revenues in the UK are fairly small, less than 1% of our sales, and they would generally be denominated in euro. And our euro revenue, as Rick mentioned earlier, less than 10% of our total sales. As far as our current hedging of our euro-based assets, I don't know the specific rate offhand, but I think what we're seeing in the euro, it's so far behaving fairly well, kind of consistent to where it had been a few months back. But at this point it's hard to anticipate where it might head. But I think with our hedging we should be covered fairly well.

I'd add to this just a little bit, Brian, that it's our policy to hedge large non-dollar denominated transactions, of which we really rarely have any in Great Britain. But we do occasionally in the Infrastructure side have some transactions that we have had them in the past. I don't think there's anything pending. So if there's a large non-dollar denominated one we'll hedge that, regardless of whether it's Infrastructure or Irrigation. We also hedge the majority of our direct euro-based assets in our businesses there. So not all, but we are hedging the majority of it.

Okay, got it. And did I hear correctly, you said sales into the UK are all denominated in euros?

I believe so, yes.

Okay, thanks. And then on pricing, it seems that this is really the first quarter when we see material decrease in pricing in the irrigation market. Is that right, Rick? And can you maybe just quickly review what you've seen pricing since the peak in 2013?

We've definitely seen movement in pricing in some other quarters as well. Some of it related to some mix changes. I think we've talked about it on previous quarter or two where we've seen some smaller machines that made up a quarter versus a previous periods. We saw some pricing differences there. And it could be also mix in terms of what types of machines were sold versus a comparable quarter.

And in this quarter, quarter to quarter there's not a significant mix change. It is predominantly truly price. Now we've seen this building a little bit over a number of months of some of the, let's say, the pricing going back in terms of the lower steel costs. So I wasn't completely surprised by it. I maybe a little surprised by the magnitude of it that we saw in this quarter.

But as I said, what we've also seen now is a different steel market and we know how the market has historically behaved when steel prices changed and are getting passed through, or when we see the price increases, the market's usually been pretty effective in terms -- as we have, in terms of being able to get those -- get that pricing changed as well.

Okay. And going forward, steel has moved up so much this year, 60% or so, what kind of impact on pricing could we expect? Should we expect pricing to be up, I don't know what the number is, but it seems like an increase in 20% or thereabouts would be required for you to pass through that type of steel increase.

Well, lately it's been moving fairly quickly. So I couldn't -- I'm not going to get into a specific amount. But I'd say that's not unreasonable in terms of what you're talking about. It's been moving fairly quick. However, we've also heard and seen comments and expectations now of steel pricing coming down some. In other words, that the increases are not sticking as well as expected and there may be some mills taking capacity offline, that type of thing. So I'm not sure where this is going to go, but I'd say at this stage we see steel prices increase, we continue to have our hedge process in place where we buy ahead and we price according to the steel we have on hand.

And then just one last question on the competitive landscape in the Infrastructure segment. Are you seeing Trinity back in the market now or do you continue to think you're possibly taking share, given some of the challenges that they've had?

Everything that I've seen and heard, I would say that they are definitely back in, in terms of -- and I'm not sure they were really out, but I understand your question. I'd say that they are in. And we see some pockets where there may be a little more progress from Trinity's standpoint in terms of picking up some of the share back that they lost, but it is really not a significant element from what we see today.

As I said in my comments, I think we're pleased with the progress the Infrastructure business has made and we've seen that the sales growth that they picked up, or the additional revenues they picked up, have been holding. And we still see very good opportunities to continue to expand the market share and those revenues in the Infrastructure business.

Okay. Thanks for taking my questions.

Thank you.

Your next question comes from the line of Brett Wong with Piper Jaffray.

Getting into the backlog a little bit more. Wondering, this is the first time in quite some while that you've seen a lift in the backlog year over year. Obviously as you've mentioned, Rick, this is due to infrastructure. So can you just talk a little bit more on why that's happening and why you're seeing this lift in the backlog at this point?

Well, I think from the infrastructure standpoint there's a couple things going on. Obviously from a seasonal standpoint this is a peak season for them where road construction is taking place and those types of things. And we've had very good success in growing our Road Zipper lease business over the last year to two years with a good emphasis on that. And we're seeing that lease revenue, which is a good profitable piece of business, expanding. So I think that's one part of it that I'd probably attribute it to, as well as the fact that we did, as we're talking about earlier, build our position on other road safety products as well in terms of overall market share.

Okay. And then I have to ask, I think we ask every time now. But just, do you have any improved visibility in terms of the Highway Bill when you think projects or funds start to flow from that? And ultimately you've talked about next year, but just wondering if you have any (technical difficulty) term visibility there?

Nothing concrete. I'd describe it more as indications from our salespeople and everything else that we're hearing is that momentum is picking up and they're pleased with what they are seeing from the overall market in terms of projects that are taking place. And I hear this from a number of different sources. So I'd say the activity level is definitely getting better. And I think as much of an impact in this for us is that there's more, let's say, sustainability in terms of these projects taking place, and more consistency. So I believe that there will really turn into additional revenues in the process. So in terms of saying exactly when, I'd say that we're definitely seeing a change taking place, but I wouldn't go further in terms of projecting order rates or anything like that at this point.

Okay, fair enough. Moving into Irrigation, just wondering if you can talk to what international irrigation markets are showing some strength, as you mentioned kind of broadly in your remarks? And then in addition to Brazil, what other export markets are struggling?

As I mentioned, Europe has held up pretty well. Actually Russia is holding up surprisingly well. So we're pleased with that. We see progress in many other markets in South America, northern Africa, even Middle East. So a number of markets where there's some significant project activity. Some of the difficulty is that the projects are tough to predict in terms of when they will close. But at least we've had some good quoting activity and there's still significant amount of interest overall for global food security and new projects taking place. So I think the global food security drive that we've seen over the past few years, it's still there. It's just moving at a little slower pace, possibly due to commodity prices and certainly due to some of the other issues and conflicts that are taking place worldwide.

Thanks. And you'd mentioned, Rick, the aspect about quoting activity picking up. I get that doesn't always result in sales, but is that activity higher at this point than it was last year at this time?

I don't know that I could characterize it as that. I'd say that based on information that I see it's at least equal if not better than that. But if you say directly, it's much better, I really couldn't characterize it that way at this point.

Okay. Yes, I know that's not an easy question. (Laughter) (Multiple speakers) And then wondering too, obviously irrigation demand has been weak, specifically domestically. But how has demand for FieldNET been and farmers willing to pay for or adopt these efficiency tools?

I'm sorry, are you asking if they are willing to?

Yes, just if you've seen any kind of deviation with FieldNET or other offerings that you guys provide versus the steel?

Well, I'd describe FieldNET demand and what we've seen with FieldNET as very strong still. And it definitely pulled back some with the market, as you would expect. But not as much as, say, necessarily buying a center pivot. So it's held up really pretty well and I think that there's even more of an interest now looking forward. Because I think what farmers are going to really be focused on is anything that's going to be yield enhancement and efficiency enhancement to get the most money they can out of per acre out of their farming practices. And products like FieldNET tie directly into that. So even though I think there was a little maybe shock to the system for farmers as the cycle changed and we started heading down into the trough, more trough conditions, they definitely see and understand the benefit of those efficiency products like FieldNET. And I expect that will continue to have strong demand for that.

Sorry, technical difficulty there. That's helpful, Rick. Thanks a lot. One last final one for me. Just wondering if there's any acquisitions in water out there that have become more interesting lately.

Well we definitely have a pipeline of water-related acquisitions. And it's been interesting to the point of, as we look at our cash resources, making decisions in terms of what we do. But as you know with acquisitions in this process, it's always difficult to predict the timing or likelihood of a deal getting done. So we continue to refill that pipeline as much as we can. We have ones we're always active on. But I couldn't predict that it's likely to close at a certain time or at all, and couldn't make that estimate today.

Very good. Thanks a lot for the time (technical difficulties).

Yes, thank you.

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

Great. Thanks for taking my question. I wanted to revisit the issue of Infrastructure margins a little bit, Rick. I know you've talked about some of the positives there, the more lease revenue, I guess, you mentioned as being a driver. But if we look at that from a bigger picture perspective it feels like things have really improved in terms of the underlying base level margins. We went through a period where it was feast or famine from one quarter to the next based on whether we had a Road Zipper order. And it kind of feels like you've really made a lot of progress in sort of establishing a higher baseline of margins there.

Is that a fair interpretation? And do you think we are kind of setting out a nice range here where we will top up on the Road Zipper but we won't have those real tough quarters that we've had in the past where you don't have a Road Zipper going through the P&L?

Well Ryan, that is certainly our belief and what has been our goal and what we've attempted to do. We've reduced the break-even level for the business. We've really made the significant improvements in terms of cost efficiencies and things in our factory, and a number of different things that were done to really help improve the overall performance of the business, basically for the reason you're talking about. It doesn't necessarily reduce the lumpiness that comes with Road Zipper System projects but improves the underlying performance and profitability of the business even without those projects. So that has been the focus. I believe we've made some good progress. It's a continual process, but I think the team's done a great job to date in the changes that have taken place.

That's good news. I wanted to clarify something you said about pricing, Rick. You mentioned that it was a half price/half volume in terms of the top-line pressure. Just want to clarify, were you making that statement as regards to Irrigation as a whole or for the US business?

US Irrigation.

US Irrigation, okay. And on that pricing topic, can you talk to us about how that pricing situation manifests itself tactically with the customer? When you're talking about price movement, are you talking about actual list price changes or do you have some kind of a surcharge for steel or are there rebates that you offer? Just curious how that actually plays out at the front lines, what form those price moves take.

There are actual list price and occasional list price changes. More recently what it's been is reducing tower rebates on equipment sales. So we've had some tower rebates that have been in effect for a period of time, and every once in awhile we'll make adjustments and reduce the tower rebates and roll it into a list price or make other changes. But structurally what's been taking place is reducing tower rebates to affect price increases. And that's what's been taking place.

Now at the same time, we work with our dealers all the time in terms of equipment purchases that are taking place for customers who have plans to buy equipment in competitive situations to understand what's taking place in specific markets. And we have discounts that occasionally are adjusted based on market conditions. And they tend to be a little more consistent within various regions of markets based on overall conditions. But so we will kind of stay on top of it and occasionally have to make some adjustments to keep the things in balance for us and for our dealers.

Got it. That's helpful color. Thanks for your time today.

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

Hello?

Hello. Good morning.

Hey, just a quick question from me. If I look back on historically, your inventory came down sequentially second quarter to third quarter and this quarter kind of went up a little bit. Is there anything to that, Rick, or maybe Brian?

Yes, Jose. This is Brian. Really a couple things in particular. We did have a couple of larger export orders that we had some inventory build at the end of the quarter, one of which would ship but we didn't recognize revenue during the quarter. The other thing is year over year we have the Turkey facility now, and that was probably maybe $3 million of the increase.

Thanks very much.

At this time there appear to be no more questions. Mr. Parod, I'll turn the call back to you for closing remarks.

Thank you. The global long-term drivers of water conservation, population growth, importance of biofuels and the need for safer, more efficient transportation solutions remain positive. We're uniquely positioned for developing and delivering turnkey solutions. Our offerings include a broad line of market leading irrigation solutions for agriculture, providing the best irrigation management and control technology, engineered pump -- integrated pump systems and filtration solutions as well as providing energy absorbing and road safety solutions, and solutions for expanding the capacity of 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 all of you for your questions and participation in the call.

This concludes today's conference call. We thank you for your participation, and ask that you please disconnect your line.