Lindsay Corp (LNN) 2017 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Lindsay Corporation Second Quarter 2017 Earnings Call.

(Operator Instructions)

During this call, management may make forward-looking statements that are subject to risks and uncertainties which reflect management's current beliefs, estimates of future economic circumstances, industry conditions, company performance and financial results.

Forward-looking statements include the information concerning possible or assumed future results of operations of the company and those statements preceded by, followed by or including the words expectation, outlook, could, may, should or similar expressions.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

I would now like to turn the call over to Mr. Rick Parod, President and Chief Executive Officer.

Good morning, and thank you for joining us today.

With me on today's call is Brian Ketcham, Lindsay Corporation's Chief Financial Officer; and Lori Zarkowski, our Chief Accounting Officer.

Total revenues for the second quarter of fiscal 2017 were $124.1 million, an increase of 3% over the same quarter last year.

Both international irrigation and infrastructure revenues increased in the quarter while U.S. irrigation revenues were lower than a year ago.

Net earnings for the quarter were $5 million or $0.47 per diluted share compared with a net loss of $4.1 million or $0.37 per diluted share in the prior year.

The prior year second quarter included $13 million environmental remediation expenses, which, on an after-tax basis, reduced net earnings by $8.5 million or $0.78 per diluted share.

Revenues for the irrigation segment in the second quarter were $106.2 million, reflecting an increase of 3% over the same quarter last year.

Irrigation segment generated operating income of $11.3 million for the quarter with an operating margin of 10.6% of sales compared to operating income of $11.1 million in the same quarter last year with an operating margin of 10.7% of sales.

In the U.S. irrigation market, second quarter revenues were $61.5 million and were 15% lower than the same quarter last year.

The lower U.S. irrigation equipment revenue was primarily driven by harsh winter weather conditions in the Northwest region of the U.S., making it difficult for new systems to be sold and installed during the quarter.

This affected our sales to dealers in the region, along with revenue from our company-owned irrigation dealership in the region.

The weather conditions also affected the delivery and installation of some pump system projects.

Overall, we were pleased to see U.S. irrigation equipment order levels improved during the second quarter after experiencing a slower-than-expected first quarter.

In the international irrigation markets, revenues in the second quarter were $44.7 million, an increase of 46% over the same quarter last year.

This increase was driven primarily by increased project activity in the Commonwealth of Independent States region and Africa and by overall improved demand in Brazil.

Quoting activity for projects in the international markets remain strong while our complete turnkey solution differentiates us from all others in the industry.

We have continued to see global agricultural development throughout the cyclical trough.

For the first 6 months of fiscal 2017, total irrigation segment revenue were $196.1 million and were 4% lower than for the same period last year.

U.S. irrigation revenues of $111.8 million were 15% lower than last year while international irrigation revenues of $84.3 million were 16% higher than last year.

The irrigation segment generated operating income of $16.5 million or 8.4% of sales in the first 6 months of fiscal 2017 compared to 11.6% of sales in the same period last year.

Infrastructure segment revenues in the second quarter were $17.9 million, increasing 2% over the same quarter last year.

The increase resulted from improved demand for road safety products and from higher Road Zipper System sales and lease revenue.

The infrastructure segment generated operating income of $1.6 million for the quarter and operating margin of 8.9% of sales compared to operating income of $1.5 million and operating margin of 8.8% in the same quarter last year.

The infrastructure business continued to perform well in the second quarter of fiscal 2017 even at seasonally lower revenue levels.

The pipeline of Road Zipper projects remained solid with production levels higher than last year in support of anticipated future sales.

As we stated previously, we're currently running at a higher level of engineering and R&D expense in the infrastructure segment for product development and testing related to the new MASH standards for road safety products.

We're making good progress in this area but expect the increased product development and testing activity to continue throughout the current fiscal year.

For the first 6 months of fiscal 2017, total infrastructure segment revenues of $38.4 million were 2% higher than for the same period last year.

The segment generated operating income of $4.6 million or 11.9% of sales in the first 6 months of fiscal 2017 compared to 12.2% in the same period last year.

For the total company, gross margin for the second quarter fiscal 2017 was 26.5% of sales, down slightly from the 26.9% of sales in the same period last year.

Irrigation gross margins were slightly lower than the same quarter last year due to a higher mix of international project revenue and comparatively lower margins.

U.S. irrigation gross margins improved during the quarter on a favorable mix of higher-margin technology products.

Overall, selling margins on irrigation machines remained relatively stable in spite of raw material inflation experienced during the quarter.

After a difficult first quarter with irrigation volumes below expectations, our primary irrigation factory in the U.S. did an excellent job of boosting efficiencies and reducing spending in view of the changing conditions.

Infrastructure gross margins improved due to increased cost absorption from Road Zipper System production and volume leverage from the higher road safety product sales.

Operating expenses for the second quarter of fiscal 2017 were $24.4 million, a decrease of $12.7 million from the same quarter last year.

Excluding the impact of the environmental remediation expenses in the prior year second quarter, operating expenses were slightly higher in the current year primarily due to increased new product development and testing costs related to road safety products.

The order backlog at February 28, 2017, was $62.3 million compared to $52.6 million at February 29, 2016.

Our order backlog in both irrigation and infrastructure are higher in comparison to the same time last year.

As we've stated before, our backlog typically represents the longer-term irrigation and infrastructure projects as well as short lead-time orders and therefore is not necessarily a good indication of future quarters' revenues.

Cash and cash equivalents were $102.8 million at the end of the second quarter compared to $101.2 million at the end of the prior fiscal year and $89.5 million at the end of the prior year second quarter.

Cash generated from operations in the first 6 months of the current year were $10.7 million compared to cash used in operations of $5 million in the same period last year.

Capital expenditures in the first 6 months of the current year were $4.2 million compared to $7.4 million in the same prior year period.

Capital expenditures for the current fiscal year are expected to be approximately the same level as the prior fiscal year.

However, current CapEx spending levels are below our expectations.

There were no share repurchases made during the second quarter, and a total of $63.7 million remains available under our share repurchase authorization at the end of the quarter.

The strength of our balance sheet continues to position us for additional growth through acquisitions and other initiatives to drive improved returns for shareholders, including share repurchases.

We are currently in the midst of the primary selling season for irrigation equipment in North America and seeing overall market stabilization.

Comparatively, demand continues to be affected by lower commodity price and farm income environment.

Pricing for irrigation equipment remains competitive but rational in both domestic and international markets.

Raw material prices, particularly steel and zinc, have continued to increase, and we expect to be successful in passing through cost increases to the market as we have in the past.

I'm pleased with the response and flexibility of our domestic irrigation operation during the quarter, and adjustments have been made to improve our operational efficiencies under dynamic market conditions.

In addition, we continue to recognize benefits from water-related acquisitions completed over the past few years.

From a financial standpoint, these acquisitions have helped us to improve gross margins, produce revenue synergies and provide incremental revenues in markets outside of agriculture.

From a strategic standpoint, these acquisitions in water engineering services, integrated pumping systems, filtration, irrigation control systems and machine-to-machine controls have positioned us as the recognized leader in fully integrated irrigation solutions, providing a differentiated, value-added proposition to our customers.

The turnkey nature of our value-added proposition is particularly important in the international high-growth potential markets.

In the infrastructure segment, we continue to see strong interest domestically and internationally in Road Zipper System projects as well as increased demand for our road safety products.

Under the current Federal Highway Bill that has been in place for over a year now, there has not been a significant incremental increase in spending for surface transportation projects.

However, we expect the continued development of the project pipeline to drive growth in the demand for critical road safety products.

While the agricultural markets are cyclical and underlying drivers for our business remain intact, throughout the peaks and valleys of the cycle, farmers remain acutely aware of the benefits of efficient irrigation in increasing crop yields and quality.

We continue to drive initiatives to strengthen our market position, expand our solutions offering and improve our global cost structure.

All of these will benefit the company now and long term.

In February, I announced my intention to retire from Lindsay Corporation on December 1, 2017, after 17 years as President and CEO of the company.

My rationale for this decision is to have more time to spend with family and enjoy other interests, including personal travel.

In my retirement from Lindsay Corporation, I'm extremely confident in the differentiated market positions established; the global growth opportunities; and most importantly, the purpose-driven, intelligent management team here, along with a superb group of dedicated multinational employees.

The entire organization is passionate about our contributions towards expanded food production, efficient use of natural resources and transportation safety and committed to building value for all of our shareholders.

With that, I'd like to open it up for your questions.

(Operator Instructions) And our first question comes from Nathan Jones of Stifel.

Rick, I wonder if you could give us a little more color on the international markets.

You talked about improved project activity and also improved underlying activity in South America.

I think that probably implies that Brazil is getting better and the project activity is probably Africa and the Commonwealth of Independent States.

Can you talk a little bit about what drove the upside in that segment of the business and split it out between underlying improvement and discrete projects?

Yes.

I think I'll give you a little more color on that to the best that I can.

I would say that definitely, the Brazilian market has improved.

We have seen stronger market demand, improved farmer sentiment, overall improved conditions.

And also, I'd say the harvest information in Brazil has been pretty positive.

So in general, that market is more upbeat than we've seen for a while now.

We have also seen improved demand in the Southern African market, which includes South Africa and some export regions within there.

And that would be overall demand similar to what we would see in Brazil or in some other markets.

So it's overall grower interest and demand and putting in efficient irrigation systems.

And then in addition to that, we have seen some significant project activity in the CIS region, as we refer to, and in Africa.

And these are projects that had been brewing for a while.

And we're starting to see more of them now culminating, coming to the point of being implemented.

And we see a backlog of those kinds of projects still being discussed or in some various stages of production.

So from our standpoint, I'm optimistic and positive about the project level of activity.

I would say that we're not seeing a big, sustained growth in terms of overall international markets with the typical growers at this point on a very broad basis.

But I would say that it's pretty sound in general, and we're seeing some real upside in terms of Brazil and a few other markets.

So then, I guess, on the project business.

Is there any way you can quantify to us what that contributed to the quarter and then what the backlog of projects looks like and what's in backlog to maybe ship over the rest of this year and then how the quoting activity per projects is?

What I'm trying to get at is, is this a more of a onetime event?

Or is this something where you're seeing a more repetitive improvement in the project outlook where, while lumpy, this might be able to be -- to continue at a higher level for a longer period of time?

Yes.

I understand your question on this, Nathan.

I don't have a split out to really identify how much of that growth from international would be, say, sustainable, just general market growth versus specific projects.

I'd say that it is a combination of both that we're seeing, and I really don't have a split out for those pieces.

I'd probably characterize it as the project activity in the international markets.

And what it contributed was a little better than what we expected and probably better than a comparable period last year, but not anything that I consider to be really extraordinary and a onetime event necessarily.

Okay.

And then the outlook for -- higher than we've seen project activity over the next year or 2?

Well, I think the outlook for project activity is very positive and very good, and I may characterize it as higher than what we have seen.

The problem with the project activity is it can be lumpy.

So while I can be optimistic and am about the projects that we're having discussions on and things that are pending, I couldn't really project how it impacts the next quarter, for example.

So I'd say from the overall optimism standpoint, yes, absolutely, but difficult to project the timing of those.

And our next question comes from Mike Shlisky of Seaport Global.

So bottom line here, I wanted to ask about irrigation first.

I mean, I guess, do you feel better about that segment now than 3 months ago?

Are we looking at a growth year now when you count all-in between domestic and international?

Just some directional view as to how you feel on irrigation for the rest of '17.

Well, it's difficult to define it as a growth year or anything at this point.

I'd say to answer the first part of the question, I definitely feel more optimistic about it than I did 3 months ago.

And a big part of that is we weren't really sure what was going to happen as this season turned on, and there were a lot of unknowns and variables in this.

So as it started and where we were sitting at the end of the first quarter, I was concerned -- more concerned than I am today.

And I would say that what we have seen is good, underlying demand.

Now one of the other things that does give me some -- I guess, a positive perspective on this is when I look at things that we typically watch, which is how much of what we sell in machines are going into conversion or dryland and replacement, I see that the dryland -- that the machines going into dryland during the quarter were about 35% of our sales of machines in the domestic market.

And if I look back on a comparative basis over the last few years, I've seen that move upward just a little bit.

So say from 33% to 34% to 35% in the comparable quarters.

So I think there is some signs that there's good demand in dryland, putting in irrigation for the first time, good demand in terms of replacement and in conversion as well.

Okay.

I also wanted to touch on the Northwest region issues in the quarter.

I guess, it's a 2-part question.

And one, are there any delayed orders that might be coming here in fiscal Q3?

And then secondly, I mean, given the harsh weather, does that mean there's going to be some good parts and service demand in fiscal Q3 in that region because some stuff may have been damaged during those weather events?

Well, I haven't heard -- I'll take the second part of that.

I haven't heard anything really significant in terms of damage in the weather events, what's been primarily is cold, wet and a lot of snow on the ground.

And I haven't heard of much in terms of the damage of systems, but I think that really is determined more now when the systems turn on as they're able to get into the market and really start activity, which is probably starting.

But I'm really not up-to-date to know how much of that has taken place at this stage.

Now on the other side of it, I think there is some revenue that would have fallen out of the second quarter that moves into the third.

I wouldn't call it very substantial amounts, but I'd say that there is some because there -- definitely, with our own -- company-owned store up there, there were projects that were delayed in terms of getting sold and installed that were anticipated so they were moved.

What we always see with conditions like this when you have a weather-situation-affected region is it will cause a little bit of revenue shift from one period to another.

It may cause some projects that will also shift out of the year towards at the end of the year in terms of they will only get so many things done during the season.

I don't see that as a significant factor.

I think that most of this revenue that would have taken place will still take place, but it's not a substantial amount that will really change your model significantly.

Okay.

I also wanted to come back to a question that I asked a while back about acreage changes in the U.S. in 2017.

Now that we're going to have some data on this tomorrow, and there's a consensus out there.

If we see the acreage for soybeans were up by 5 million acres and we see corn go down by, let's say, 3 million and wheat down by 4 million, can you guys give us a sense as to what that might mean for your business?

Are your products used in a different way for different crops?

And will farmers that have to change their acres, will they have to buy any new parts or software to have a different crop out there?

Just kind of some thoughts as to how that might change stuff this year.

Well, the primary impact between corn and soybeans, for example, would probably be very little in terms of revenue impact as far as changing machines or buying more for one crop versus another.

Typically, they're often in rotation, so farmers will grow both and they'll switch based on commodity prices and a number of factors that will be involved in that decision-making.

We've seen evidence or at least signs that there is a change that's taking place from last year to this season with corn acreage planted and -- versus soybean acreage planted.

There is some shift that's taking place.

That, in itself, is not impactful on our revenue from -- because of the type of machine or the type of crop that's grown.

It has a bigger impact in terms of farmer sentiment and what it does to commodity prices.

And I believe that most of that is anticipated and probably baked into commodity prices to date.

But there can always be some surprises now in planting reports that would cause that to shift more.

Higher commodity prices, in general, are obviously going to be beneficial.

Higher corn prices are typically even more beneficial to us in terms of farmer sentiment and willingness to buy equipment.

Okay.

Got you.

I was just going to squeeze in one more here.

Again, a follow-up from an earlier question from, I think, a few quarters back.

The balance sheet of a U.S. farmer, they're under a little bit more stress this year, as you've been hearing.

Kind of what are dealers telling you about farmer desire to borrow this year and their ability to borrow equipment?

And what are some of the banks telling you about rates for the rest of 2017 that they can offer to some of these farmers?

Yes.

Mike, this is Brian.

Yes.

When you look at the overall farm credit environment, there is clearly some overall deterioration being seen.

But up to this point, we have not seen it have any impact on our business.

And really even anecdotally, we haven't heard where that's putting any constraints on our customers in particular.

And our next question comes from Ryan Connors of Boenning.

And congratulations on your upcoming retirement, Rick.

Thank you.

I would -- actually wanted to switch over to the infrastructure segment a little bit.

And then you talked a few times, both in the slides and in your prepared remarks, about increased lease revenue.

And I'm wondering if you can just talk to us about how that business is transitioning.

Should we interpret that to mean that, that business is going to evolve into more of a recurring revenue-type business where you get more of that lease revenue that's less project oriented than that business has been historically?

And then what are the margin impacts of that?

Can you just walk us through that lease revenue dynamic?

Yes.

One, the Road Zipper Systems side of it.

Excuse me, the movable barrier side, there has always been lease revenue where there's projects that we will be involved in, in leasing the barrier and machines for construction projects or other kinds of applications.

That has been an emphasis in the last year or 2 to really expand that lease revenue and be involved in more and more projects globally.

And we're seeing that pay off in terms of there are more projects taking place.

Then I'd say what we would expect is as there is more infrastructure spending, that would also take place and more projects undertaken, there'll be more opportunities for leasing.

We'd like to see a higher percentage of this -- of that revenue coming from leasing.

It's very profitable.

It's sustainable.

There's a lot of good benefits that come with that.

But it's somewhat tied to construction activity primarily today still in North America.

But certainly globally, we are involved in lease projects as well.

Okay.

And if you had your druthers, what do you prefer?

Would you prefer to lease a system?

Or I guess, you'd probably prefer to sell it, right?

I love the sales.

I think they're both very profitable for us.

I think having a nice mix of both is excellent.

And the reason I say that is the project sales are great from the standpoint of profitability, and there are another -- it's another installation.

And what we typically find is the more of these systems we sell, the more of those customers will buy because they often will not just put one in, they'll do another one in the state or 2 or like Hawaii, multiple projects.

So they tend to generate more additional ones.

But at the same time, having that sustainable lease platform is also very beneficial because it's a little bit of a buffer to the project spiking.

Got it.

Okay and I just had a bigger-picture question on the irrigation side.

Just a big-picture question to get your take on.

It seems like, if you look at some of the new administration -- some of their moves: pretty big cuts to the USDA budget, exiting the TPP agreement, even some of the immigration stuff having -- impacting some areas of agriculture in terms of the labor force.

It seems like there's a bit of a -- a lot of the stuff is maybe not intended to be negative for the ag space.

But the ag space is clearly not -- doesn't seem to be a priority, and some of these developments may be negative on the margin.

Can you just give us your take on whether any of those things concerns you or is material to your business or what your outlook is in terms of policy?

Well, I think the points that you've raised in terms of the topics discussed and some of the actions proposed are concerning and something definitely to be watched.

We definitely look at and are trying to anticipate what's going to be actions regarding ethanol as well as the discussions that's been taking place on USDA budget cuts.

As you know, the number that was proposed was something like a 21% reduction, which would make it the third largest reduction of the departmental budget cuts proposed.

And that would mean a lot of people out of USDA plus some programs out of the USDA.

But at this point, what we really have in all of these topics, whether it's the trade -- potential trade restrictions or whether it's budget cuts or any of these other topics, is primarily at this stage, it's words, and we really don't have a clear view in terms of where it's going to go.

And underlying that, there's a lot of farmers at stake and farmers' wealth at stake.

So it affects a lot of people.

So I'm not really overly concerned about these things at this stage, but they're definitely all ones that we're watching and keeping an eye on that could have a big impact.

Yes.

And would you -- I would assume that's impacting sentiment, at least, to see some of the stuff isn't really helping sentiment in terms of farmers either.

I think it might, but I don't really hear a lot of farmers talking about this from a sentiment standpoint.

They're like all of the rest of us.

They're talking about it from a "what the heck is happening" perspective.

But from a sentiment standpoint, I think they are probably more influenced by today in terms of what are the commodity prices and what's happening and their opportunity for farm income potential in the next year to possibly not taking into consideration all of these other topics that are being discussed.

I think they're just too -- it's just too soon to have a very significant impact or much of an impact on farmer sentiment.

And our next question comes from Joe Mondillo of Sidoti & Company.

I was wondering, can you tell us what the net effect of pricing net of material inflation was?

Was it slightly positive?

Yes.

Joe, this is Brian.

Yes.

For the quarter, I would say there's -- when you look at -- factor in the raw material inflation that we've seen as well as our pricing actions, I would say there was really no impact on our overall margins.

I think we saw during the quarter both steel and zinc rise double digits.

If you go back a little more towards the early part of November, steel coil prices have gone up about 30%.

But because of inventory levels and hedge buys that we put in time of rising prices, our actual costs aren't impacted to the same degree as what the market price increases that we've seen.

The other thing, steel represents about 1/3 of our cost of goods sold, so the impact on total product cost is limited by that.

But I think more in terms of potential headwinds in the future and continuing to managing -- manage the pricing side of it, we -- it had no impact on the current quarter, but clearly something that if raw material increases continue, we'll have to take additional pricing actions.

Okay.

And in terms of the international margins, they have historically been lower than the domestic, and I think as you mentioned, they continue to be.

But are those trending closer to the domestic margins?

And given the strength that we're seeing in the international markets, do you expect at some point in time, I don't know if it's a couple of years or whatnot, if we're going to see margins more similar to the domestic margins that you're seeing on the irrigation side?

Well I'd say that the international margins are probably not trending much closer than where they were a couple of years ago and from our international operations.

And part of it is because of the lower volume through a cyclical trough period.

As we were seeing a couple of years back, we had 1 or 2 plants that were at the stage of probably moving to the next level of automation and integration in their operations, which would have been beneficial to those margins.

I think as the market recovers, we're going to see that volume impact allow us to do more in terms of moving those margins up in the international operations.

From a overall pricing standpoint and in terms of how things are working in the international markets, we really haven't seen a change that has made it significantly more competitive and reduce margins.

But we haven't really seen much that has really changed that in the last couple of years.

But our big opportunity for the incremental margin improvement in international operations will come as the market recovers and we see the -- more volume and growth going through there.

Okay.

And then just last question for me.

As we start to get into a possible recovery overall in the overall market globally, do you have any idea -- and I don't know if you do or not -- any idea sort of where the pent-up demand in terms of farming CapEx will be?

Do you think that irrigation is going to be the #1 sort of area where farming -- farmers kind of start to spend more?

Or is it more so fertilizers, heavy equipment or anything else?

Do you have any idea or thoughts about sort of that?

Well, in the past, as I've talked about this, I've characterized it as the longer the trough period goes, the more likely it is that there will be some things that may get in front of some irrigation equipment and a recovery in North America or in some markets.

And that could be things like tractors or trucks or things that are a little more interesting or, let's say, fun than a pivot would be if it's a long -- long bottom of the cycle.

On the other hand, the -- one of the highest paybacks that they can really achieve will be putting irrigation onto the dryland and continue with the irrigation implementation.

And what we have seen over the time -- and I wouldn't describe it necessarily as pent-up demand when we come out of these cycles as I see this continuation of adding irrigation to dryland and farming the most efficient land that they can, which would be that land that they put pivots on.

But in addition to that, adding -- converting that flood irrigation to pivot irrigation.

So that process is always going on, but it gets accelerated with higher commodity prices without a doubt.

But we do see and have seen at least once in one of the cycle recoveries that some things that they hadn't been able to buy for, say, 5 years, which could have been tractors or trucks, got in front of that for a short period of time.

Now when I say short period of time, it was probably a 6-month process, and then we saw the pivots really kind of coming back in.

But I've only seen that one time, and that was because of a longer down cycle.

Longer than the one that we've seen currently?

Well, as I said, I think it depends on when the recovery takes place.

I won't put a time period on it.

I would just say that, when we've seen that they haven't bought some of new equipment for 5 or 7 years, then we have seen that some of those purchases might move in front for various reasons.

But that's -- we've only seen that one time.

And our next question comes from Tyler Etten of Piper Jaffray.

And congratulations, Rick.

Okay.

I was wondering if you could talk a little bit about the infrastructure segment and the Highway Bill?

We haven't seen anything come through yet.

Just any new visibility from your guys' perspective on when some of that spending would come through?

Yes.

I would say the spending is coming through.

What we haven't really seen is a real uptick in terms of projects where there's a major step-up in terms of any spending.

Now keep in mind that the Highway Bill is really at a comparable level to what the previous Highway Bill was.

So there wasn't a significant amount of additional spending that was in the Highway Bill.

But what we did anticipate is that by having a multiyear Highway Bill in place, that additional visibility would give the states more confidence in terms of taking on projects and getting projects started.

Now one of the things I think that is entering into this and factoring in today is some of the current discussion about a much larger infrastructure spending bill.

And from that standpoint, I think there's probably a bit of wait-and-see taking place with some of the states.

And in terms of accelerating projects, or doing much more, they're running at a similar rate to what they did in the past, but we're not seeing a real acceleration taking place in there.

I think there's a bit of waiting to find out what's going to happen now with the new administration, whether or not this huge infrastructure bill will take place.

Excellent.

That's helpful.

And then maybe bigger picture here.

Some ag lenders have talked about the fact that some high-cost farms are getting close to the end of their credit lines.

If we see some land turnover to much lower-cost farmers, do you believe that, that could drive some growth in the irrigation segment?

Or do you think that CapEx for those -- that hypothetical turnover would remain low?

I don't really have a specific view on that.

I'd say that we don't really see a major CapEx spike or a spike -- I would say CapEx investment, necessarily taking place on land transfer or change in ownership.

It does when it moves from, let's say, maybe the smaller farmer who has a piece of land and it's been consolidated with some larger farmers who farm it in a different commercial perspective, and they will often put irrigation on right away when they do that.

So there's not a significant change that I would expect there, but it definitely does happen in some cases.

And our next question comes from Chris Shaw of Monness, Crespi.

Congrats, Rick, on your pending retirement.

In international, I'm just curious, how big is the average project size?

(inaudible) like the sort of the delta -- the $50 million delta in revenue.

Like maybe how many projects that was year-over-year that made the difference?

It's very difficult to define an average project in terms of the international markets.

But I'd say that we have had -- a project could be anything from a few million dollars in terms of size to a $40 million contract we had with Iraq at one point, which was pivots and pumps and installation and a number of other things.

Now that was probably on the high end.

Typically, what we're more likely to see in terms of project ranges would be, I would say, in the maybe $3 million to $15 million to $20 million range.

That's probably more typical than some of the agricultural projects.

And probably more of them in that $3 million to $10 million would be probably more of a cluster.

But it does vary depending on location and the investors and what they're attempting to do.

Okay.

So the $15 million increase in sales for that segment could have been technically one project.

I'm not going ask you to give me the details, but I mean, that's the kind of range we're seeing on those project sizes, I guess.

It could, but those are a little rare and on the higher end, but it does happen.

Yes.

Right.

Okay.

And then switching to infrastructure for a second.

Do you guys know -- and I assume you do.

Has the bid gone out for the Richmond-San Rafael Bridge in Oakland?

That's the movable median barrier project there.

Well, I don't want to get into discussing any specific pending project or ones that we're talking about.

So I really don't want to get into any of those that are -- at that kind of a stage.

I'd say I'm aware of that project, but that's really all I can comment on at this point.

Okay.

I understand.

And I guess, just a quick one back to irrigation.

I think you'd see some strength in South America.

What is the main crop that, say, Brazil uses irrigation for?

Is it corn?

Well, it's -- I'd say soybeans have been one of the largest and probably -- I haven't seen the analysis recently, but I'd guess, that it is still the largest.

It's also used in corn, also in sugarcane.

Oh, but they do use it for the beans as well.

Okay.

All right.

And our next question comes from Brian Drab of William Blair.

This is Kyle Dicke on for Brian Drab.

Can you give us an update on the M&A market?

It's been a couple of years since you did a deal.

So just wondering if you've seen any changes in the marketplace there recently.

Well, I wouldn't describe anything as changes.

I'd say that we're still active in it, and we continue to see and evaluate water-related acquisitions as well as some technology-related acquisitions that are synergistic to our business and add additional growth opportunities.

And we always have some in the pipeline that we're talking with.

I think we've seen a little more activity recently in terms of some technology-oriented acquisitions related to agriculture that are small companies, some profitable, some not, that probably are indicating more of a -- from a seller standpoint, that they see this upside potential in terms of that the market may be turning.

So we're seeing a little more activity on some of those technology projects than we have over the last couple of years.

But I'd say that the pipeline is still good in terms of overall projects, and we're continuing to look.

Now I am disappointed that we didn't get one completed in the last fiscal year.

That's always a disappointment to me if we don't.

But we still see a lot of good potential acquisitions and continue to work the process.

And sticking with the capital allocation.

Looks like CapEx is trending kind of below your annual target of $15 million, $20 million.

Do you expect spending to kind of ramp up here in the second half of the year?

Is the target for 2017 going to be a little bit lower than that $15 million to $20 million?

Yes.

Kyle, this is Brian.

Yes.

I mean, the year-to-date capital spending is definitely lower than we anticipated or where we'd like to see it.

But there's a number of projects currently in the planning stage that -- where the actual spend hasn't occurred yet.

So that's why we're anticipating full year CapEx to be at a similar level to last year, which was about $11.5 million.

But certainly, that's an important part of our capital allocation and areas where we look to drive continued improvement in efficiencies in our operations.

Okay, great.

And then just one last quick one.

I think you commented last quarter, you kind of expected total operating expenses to be in that 19% of revenues range for the full year.

I know you've commented on some of the other operating expenses this quarter.

But is that still an appropriate rough estimate for the year?

Yes.

I would say it's still in that 19%, 19.5% range that we're looking at for the full year.

And that includes the first quarter where it was higher than what it would normally be on a run rate basis.

And our next question comes from Jose Garza of Gabelli & Company.

Just wanted to get -- just if you had a quantification of the impact from the weather in the Northwest.

Not a specific number that we would break out.

I would just say that the majority of the North America sales difference that we saw in the quarter was due to the Northwest, a substantial amount of that.

And it was really split between -- somewhat evenly between sales to dealers and sales to our -- or sales from our own company store.

But it was all an indication of the weather impact in that specific region.

Okay.

And Rick, you gave the dryland conversion.

I was just wondering if you could just kind of give me the rest of the numbers on the domestic side.

Yes.

So the end of the quarter of the machines sold, and this is basically North America, conversion was 24%; dryland, 35%; and replacements, 39%.

And you'll find that there's maybe off a point or 2, and it's due to some machines that we didn't have the data on.

Okay, great.

And just in terms of the backlog.

You noted the backlog on the infrastructure side improved a little bit.

Wondering if there was anything to call out in terms of larger projects or anything there.

Yes.

Jose, the backlog on infrastructure, I would say, the improvement is in both road safety and Road Zipper.

Probably more of it.

So more so on the Road Zipper side, and it's a combination of -- there's probably a couple of smaller projects in there as well as some of the lease business.

And our next question comes from Nathan Jones of Stifel.

I just wanted to follow up a little bit on the steel costs here.

I heard a question was asked about the impact that it had on margins.

Can you talk a little bit about the impact that it had on the top line?

I mean, you're looking at it in an environment here where -- and I know you guys have managed some of this so it doesn't hit you, but steel's up over 100% year-over-year, and if it's 30% of COGS, that would imply that you'd have to raise prices 30%.

Can you talk about just how -- what impact it's had so far?

And if steel prices stay here, then I guess, eventually, that's going to catch up, and you're going to have to (inaudible) .

Yes.

I think, Nathan, if steel prices maintain where they're at, clearly, they would have an impact on selling prices.

I think what we've seen over the past year is some kind of -- some peaks and valleys.

We've gone on another price increase here in the last quarter or so.

Some projections have steel softening into the next quarter.

But again, the percentages work out in terms of the steel cost increases and how they affect our product costs.

And again, our intention is to pass those along to maintain our overall gross margins.

Is there any quantification you can give us on the impact to revenue, say, on a year-over-year basis from passing those increases in steel prices through?

I really don't have that quantification on a full year or year-over-year basis.

Again, it varies a little bit quarter-to-quarter depending on how the costs move.

And again, the way we operate our inventory and our hedge buys, we kind of avoid the peaks and sometimes also don't take full advantage of the valleys in some of the steel costs.

So we have it on a more stable cost environment than what the market pricing would indicate.

Okay.

And then I wonder, Rick, if I could just get a comment on whether or not you think increasing prices has or could have an impact on demand.

Maybe farmers say, "Okay.

It's too expensive," or they say, "I'd wait until steel prices come down." Have you seen -- or do you expect to see anything -- any impact from that?

I have not.

And I'd say that historically, what we've seen is that as steel prices have moved up and we've passed it through in pricing.

And I'd go back even over the last 15 years, there have been some times when it's moved up very rapidly.

We have seen it impact demand on a short-term basis just as farmers were adjusting to the new reality of where steel prices were.

But there are also -- when that does happen, they're seeing it in tractors and trucks and everything else that they buy.

So they adjust to it, and they understand the steel market and its impact.

I'd say that what we have seen recently in terms of steel pricing passing through and what's happened with it has really not affected demand.

Demand is much more impacted, and obviously, the primary driver has been commodity prices and farm income and not really what's happened with steel.

And at this time, there appear to be no more questions.

Mr. Parod, I'll turn the call back over to you for closing remarks.

With global long-term drivers of water conservation, population growth, importance of biofuel, 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 integrated pumping and filtration solutions as well as providing energy-absorbing 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 plans.

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

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Have a great day, everyone.