Lindsay Corp (LNN) 2017 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 would like to welcome everyone to the Lindsay Corporation Third Quarter 2017 Earnings Call.

(Operator Instructions) And please note this event is being recorded.

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.

Please go ahead.

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 third quarter of fiscal 2017 were $151.5 million, increasing 7% over the third quarter last year.

Revenues in both U.S. and international irrigation were modestly improved in the quarter, while infrastructure revenues were substantially higher than the same quarter of last year.

Net earnings for the quarter were $11 million or $1.02 per diluted share, increasing 14% over net earnings of $9.6 million or $0.90 per diluted share in same quarter last year.

Revenues for the irrigation segment in the third quarter were $120 million, reflecting an increase of 2% over the same quarter last year.

Irrigation segment generated operating income of $16.5 million for the quarter with an operating margin of 13.8% of sales.

In the U.S. irrigation market, third quarter revenues were $75.2 million, increasing 2% over the same quarter last year.

U.S. irrigation revenue rose on higher average selling prices and higher irrigation equipment unit volume, including some recovery of the weather-delayed sales through our company-owned store in the Northwest discussed at the end of the second fiscal quarter.

Partially offsetting those increases, revenue and other irrigation components, such as filtration and pump systems were lower in the quarter.

The increased average selling prices in the U.S. were primarily driven by the pass-through of higher raw material costs.

We were encouraged to see U.S. irrigation equipment volume levels improved during the third quarter after experiencing declines in the first 2 quarters of our fiscal year.

In the international irrigation markets, revenues in the third quarter were $44.8 million, increasing 2% over the same quarter last year.

This increase resulted from a continuation of the notable recovery in Brazil, increased project activity in developing markets, and a slightly favorable currency translation impact.

Lower revenues in other international markets partially offset those increases.

Recently, the Brazilian government announced changes in the primary financing program for irrigation equipment called MODERINFRA, increasing the total amount of available funding and reducing the charged interest rate under the program from 8.5% to 7.5% effective July 1. These changes should provide additional support for continued growth in this market.

However, Brazil continues to be affected by political upheaval.

Quoting activities for projects in international markets remain strong, and we continue to see sizable agricultural projects undertaken in developing regions around the world.

For the first 9 months of fiscal 2017, total irrigation segment revenues were $316.1 million and were 2% lower than the same period last year.

U.S. irrigation revenues of $187 million were 9% lower than last year, while international irrigation revenues of $129.1 million were 11% higher than last year.

Irrigation segment generated operating income of $33 million or 10.4% of sales for the first 9 months of fiscal 2017 compared to $40.3 million and 12.5% of sales in the same period last year.

Infrastructure segment revenues in the third quarter were $31.5 million, increasing 31% over the same quarter last year.

The increase was driven by higher Road Zipper system sale and lease revenue and increased sales of road safety products in the international markets.

Sales of road safety products in the U.S. increased modestly during the quarter over the same period last year.

The Infrastructure segment generated operating income of $8 million for the quarter and operating margin of 25.5% of sales compared to operating income of $4.7 million and operating margin of 19.4% in the same quarter last year.

As previously stated, we continue to run a higher level of engineering and R&D expense in the Infrastructure segment for developing and testing of products to the new MASH standard for road safety hardware.

Under the Federal Highway program, road safety hardware will be evaluated for reimbursement under MASH standards with various effective dates that extend through December 2019.

However, several states have moved or will be moving to the new standards before the required federal dates.

We've already received letters of eligibility from FHWA for products tested and submitted for review and are in process of completing testing and preparing requests for eligibility of the next group of products.

This level of development and testing is expected to continue through the next fiscal year as we complete the transition of the core product lines to the new standards.

For the first 9 months of fiscal 2017, total infrastructure segment revenues of $69.9 million were 13% higher than the same period last year.

The segment generated operating income of $12.6 million or 18% of sales in the first 9 months of fiscal 2017 compared to $9.3 million or 15% of sales in the same period last year.

For the total company, gross margin for the third quarter of fiscal 2017 was 30.3% of sales versus 29.6% of sales in the same quarter last year.

Improved gross margins in the Infrastructure segment was partially offset by slightly lower gross margins in the irrigation segment.

Infrastructure gross margins improved due to higher Road Zipper system sale and lease revenue and volume leverage from higher road safety product sales.

International irrigation gross margins were lower during the quarter due to less favorable regional sales mix compared to the prior year.

U.S. irrigation gross margins increased during the quarter due to higher margin on technology products, partially offset by the impact of higher raw material costs.

Operating expenses for the third quarter of fiscal 2017 were $28.5 million, reflecting an increase of $2 million from the same quarter last year.

The increase resulted primarily from the higher product development testing and professional -- testing cost and professional fees.

Operating expenses were 18.8% of sales in the third quarter compared with 18.7% of sales in the same quarter last year.

The order backlog at May 31, 2017, was $70.1 million compared to $61.2 million at May 31, 2016.

Irrigation segment order backlog was higher at the end of the quarter as compared to the same time last year, and infrastructure segment backlog was lower.

As we've stated before, our backlog typically represents some 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 $113.2 million at the end of the third quarter compared to $101.2 million at the end of the prior fiscal year.

Cash generated from operations in the first 9 months of the current year was $24.5 million compared to $20.3 million generated in the same period last year.

Capital expenditures in the first 9 months of the current year were $6.2 million, which was lower than this time last year and lower than our expectations.

Capital expenditures for this full fiscal year are expected to remain lower than last year as some capacity expansion projects have continued to be temporarily deferred based on market conditions.

We are, however, planning higher capital expenditures in the next fiscal year.

There were no share repurchases made during the third 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, other initiatives to improve returns for shareholders, including share repurchases.

The primary selling season for irrigation equipment in North America has essentially come to a close.

What we experienced this year I will describe as a shorter, more compacted season in several parts of the country due to weather issues at the beginning of the season and some delayed equipment purchasing by growers.

However, the stabilization of commodities, recalibration of farm input costs and general economic optimism have contributed to improved farmer sentiments toward investment, particularly in efficiency and yield enhancing equipment, such as our irrigation equipment and irrigation management platform.

Pricing for irrigation equipment remains competitive but rational in both domestic and international markets, and we've continued to be successful in passing through material cost increases to the market.

In April, we introduced FieldNET Advisor, a revolutionary add-on to FieldNET, our best-in-class irrigation management solution.

FieldNET Advisor was designed to provide growers with simple science-based irrigation recommendations to enable faster, better informed irrigation management decisions.

FieldNET Advisor aids growers in their efforts to maximize their profitability through better irrigation management by helping them to better maximize yield output and crop performance, reduce input costs and conserve water, save time and labor by providing quick, simple, intuitive irrigation management recommendations and alerts.

In addition to our technology products, we continue to recognize benefits from the water-related acquisitions completed over the last 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-add position -- proposition to our customers.

The turnkey nature of our value-add proposition is particularly important in 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, the FAST Act, that has been in place for over a year now, we still have not seen what we would call a significant increase in spending for surface transportation projects.

However, there continues to be a need for infrastructure development and improvement in the U.S. and a desire for increased spending, which will drive future growth and demand for critical road safety products.

While the agricultural markets are cyclical, farmers remain acutely aware of the benefits of the efficient irrigation and increasing crop yields and quality.

We continue to drive initiatives to strengthen our market position, expand our solutions offering, improve our global cost structure, and all of these will benefit the company now and long term.

And with that, I will open it up for your questions.

(Operator Instructions) Our first question comes from Mike Shlisky of Seaport Global.

This is Jordan Bender, on for Mike this morning.

My first question is sales were up in the quarter but selling costs were not.

Can we get a little more color behind this?

Yes, Jordan, I think the -- it's really due to the mix of where those sales occurred and the largest increase being in our Road Zipper project business and the sales to an existing customer that did not go through an agent.

So commission -- sales commissions were lower relative to the sales increase.

Okay.

And additionally the G&A was up quite a bit over the prior year.

Were there any, say, like onetime costs that might have gone into that?

Yes.

And most of that would have been at the corporate level, and we refer to outside professional fees that includes both legal fees as well as executive recruiting fees that we would consider to be nonrecurring in nature.

Got it.

And I have one more here.

Do you feel better about irrigation here than 3 months ago?

And are we looking at growth for the year, considering domestic and international?

Yes, Jordan, this is Rick.

I'll answer that.

I'd say that I feel better about irrigation than I did in the past, say, year in many cases because we're seeing some stabilization in the domestic market.

We're seeing the infrastructure of the, let's say, international -- I'd say, development projects really starting to take hold, and we had seen some delay in those in the past.

So I'm feeling much better about what's happening with irrigation market today.

However, commodity prices, as you know, are relatively low, and we're not seeing that change probably not likely too rapidly.

So we'll watch what happens with this season in terms of the growing season and yields and see what that does to ending stocks as we move forward.

But in general, I'd say, I'm much more optimistic about the irrigation market than I was, say, a year ago.

Our next question comes from Brian Drab of William Blair.

First one, I don't know if you mentioned it on the call yet, but the breakdown, can you just give us the breakdown of the irrigation revenue in terms of dry land replacement and conversion?

I haven't mentioned that Brian, but I will go through that.

Looking at the quarter, the conversion was 26%, dry land 30% and replacement 43% in the quarter.

I'd comment that replacement was a little higher than what I expected.

And just looking at some of the digging that we did on this, it was kind of regional where there was some definite replacement that took place in a couple of regions.

It appeared to be some storm damage-type things, more than anything else.

So it wasn't too surprising.

It wasn't a real significant amount of storm damage.

However, on a regional basis, there was more replacement than expected.

Okay.

And then, this is -- on the infrastructure side for a second that you have this issue earlier in the year in Tennessee.

I'm wondering if you could maybe summarize how -- what happened there and if that is an issue that we should be thinking about.

It looks like it didn't really have any impact on your infrastructure segment in the quarter.

Did it or didn't it have an impact on the quarter?

And would you expect it to have any impact going forward?

Well, I'm assuming what you're referring to, Brian, is the issue regarding X-LITE and the accident in Tennessee, which if you've watched -- seen in some of the recent news coverage over the last 24 hours, there has been coverage regarding litigation involving X-LITE, our end terminal product.

But to kind of put this into perspective for you, the sales of end terminal products in 2016 for us represented slightly over 2% of total company revenue.

And sales to states that have removed X-LITE from the QBL, the qualified buying list, represent less than about 0.5% of total company sales.

In addition, we anticipate that X-LITE will be replaced in our product offering by MASH-compliant products by the end of the calendar year as states transition from the NCHRP 350 standard to MASH.

I think the other part of this that's important is to Lindsay Transportation Solutions, top priority is to provide products that save lives.

X-LITE has successfully passed crash and safety tests in accordance with federal standards and criteria remains eligible for federal transportation funding.

When -- you may know when drivers fail to stay on the road, there are a variety of factors that contribute to the severity of the impact, and the equipment's inability to singly prevent every tragedy doesn't indicate a flaw or defect.

And we stand behind X-LITE and will vigorously defend those -- these claims, and what I -- but also add, though we won't commenting any further on this at this time due to the pending litigation.

Okay.

Okay.

That is helpful and gives some perspective on what's happening there.

Just back on your -- I just have one more question on irrigation.

You had some weather-delayed sales and wondering how much of an impact do you think that, that had on the third quarter, if that helped or not?

And then it seems like between the weather-delayed sales and the storm damage that, that did give the segment a boost somewhat in the quarter.

Is that fair to conclude?

Well, I wouldn't conclude that specifically.

I'd say that what we saw in terms of storm damage activity, in general, I would really describe more as pretty typical for third quarter.

Nothing really significant.

We've seen probably a little more storm damage as of -- as the quarter ended in some regions.

But I wouldn't call it anything out of the ordinary in terms of storm damage in the quarter.

So I don't really see anything exceptional there.

In terms of the weather-delayed sales, though, is there any way I could get...

In weather delay, I -- we picked up a little bit from our -- as we saw, from our company store.

But when we look at a specific region, I think there were more delayed projects that probably push out of the season than they were really, let's say, catching up during the quarter.

So we didn't see a significant increase in those regions.

We saw them probably better than they were the previous quarter, but nothing significant in terms of a lot of catchup.

I think it impacted our store some, but even that wasn't a material amount, but it did impact our store because they were dealing directly with growers in that region.

Our next question comes from Tyler Etten of Piper Jaffray.

I was wondering if we could talk about the international markets a bit.

We've seen Brazil pick up in the equipment markets based on more stable politics, but more recently, it seems to be reversing.

From what you're seeing on the ground right now, do you see a slowdown in purchases or intentions to buy based on the new allegations for the current President?

We don't.

We have not heard that right now, and I think just looking at the last couple of weeks, I don't see anything that has really changed.

What we were seeing previously with the corruption allegations and things that were going on was basically funding getting tied up and money, excuse me, wasn't flowing.

And we have not seen that happen at this stage, and I think the programs that have been put in place are favorable to development in Brazil.

I suspect that if the corruption issues or this drags on for a long time or becomes a bigger issue, we could see that affect funding at some point, but we haven't seen that happen.

Got it.

And yes, of course, the new equipment rates will certainly be a tailwind for irrigation products.

Maybe on the other international markets, could you just talk about if you're seeing any material changes in any certain regions or just any color there would be great?

I think what's been interesting, it was what we've seen over the last couple quarters is continued growth in developing markets with projects.

So we see growth opportunities certainly in the CIS region, Africa.

We've seen some improved situations to some degree in China, South America as we've talked about.

So I think, in general, there is more optimism and more progressing of these projects that we've, in the past, described as food security-related.

And I think that we saw this slow down and go on hold a little bit.

Some of it had to do with oil prices in the past.

Some of it had to do with commodity prices.

But it definitely -- we're seeing this coming back now at a more comfortable level.

Great.

And then just one more from me.

With the U.S. market stabilizing greater at a lower level of grain prices, do you see the technology side of your business in U.S. irrigation helping support margins for the foreseeable future while the regular or new projects are relatively muted?

Just, I guess, any thoughts around that?

Well, I think the technology products have been very beneficial to expanding our margins and the -- I guess, the support of our margins long term.

And I would expect that we'll be able to continue to improve the overall structure longer term because we're also differentiating and strengthening our product line as we go.

And we would like to see more in terms of these project sales with the turnkey solutions and integrated pieces in those projects.

And that's also beneficial to our margins long term, but definitely the technology project -- products, in general, have been beneficial to our margins.

Our next question comes from Joseph Mondillo of Sidoti & Company.

A question on your backlog in inventory.

Looks like the backlog -- I know the backlog is very short-term sighted, but I guess it does give you a sort of a view into the next couple of weeks or few weeks.

So just wondering the backlog at the end of this third quarter is essentially one of the strongest quarter end backlogs for the third quarter.

Even if you go back to the peak of the cycle, it's very close to where it was back then.

So wondering what you -- what your thoughts on that.

Are we expecting a pretty good fourth quarter?

And it seems like in your earlier remarks, you mentioned that it was because the irrigation offsetting slightly lower infrastructure.

And then in addition to that question, your inventory spend, it looks like in the third quarter was one of the strongest inventory spends that you've made over the last 7, 8 years.

So I don't know if those are related, but if you could comment on those questions?

Yes, Joe, this is Brian.

I'll provide a little bit more color on the backlog.

The total backlog increase is all coming from irrigation with infrastructure down slightly compared to last year.

And the irrigation backlog, it's up slightly in the domestic market, but the majority of that increase is coming from the international business.

And again, some of that is project oriented.

So the likelihood of that all flowing through in the fourth quarter, it's unknown.

It's probably unlikely that, that would all flow through the fourth quarter.

On the infrastructure side, last year's fourth quarter was particularly strong with 2 or 3 mid-sized projects and that accounts for some of the change there, but we still continue to have a pretty healthy backlog in infrastructure.

Regarding your question on inventory, the overall inventory is up compared to last year and that's really in those international markets where we've had the increase in sales.

Domestic inventory levels have been brought down slightly, but where we're seeing the increase in inventory is going to be in Brazil, our Turkey facility and other areas where we're experiencing sales growth.

Okay.

So in terms of the international projects that you have, what is the sort of time line of these projects that you have in the backlog right now?

Is it over the next couple of quarters?

Or is it over the next couple of years?

Or...

I would say it's typically going to be within a 6-month time frame and, again, not necessary looking at quarter-over-quarter.

But depending on the size of the projects, they can be anywhere from 2 to 6 months.

Okay.

And then just lastly, I wanted to ask you about the QMB business because that helped you in this quarter, and I believe going into the fourth quarter, we're going up against somewhat of a tough comp.

Just wondering what your outlook going forward is on QMB in the fourth quarter and beyond?

Well, I agree the fourth quarter -- going into the fourth quarter is a tough comp on QMB.

I think one of the other factors that comes into play with QMB is we saw increases in sales and leasing of QMB in the third quarter as we referred to.

We're getting at the end of the lease season to some extent or we'll have less of the lease revenue.

What really has happened in the last couple of years, which has been nice, is that our overall utilization of our lease fleet of barrier trucks has really expanded again.

So we're seeing that at good levels and would hope that, that would continue.

But we'll probably see more of that in the next year rather than in the next quarter.

And then on the sales front, anything significant on the downside or upside related to the...

There is definitely some good projects that are pending and that we're working on in terms of sizable ones.

As we've talked about in the past, we've got a good project base of active projects, better than what we've seen in some of the previous years.

However, predicting the timing that -- on that is very difficult, especially from a quarter-to-quarter standpoint because projects do get delayed and it becomes very difficult.

And if it isn't in backlog, it's a pretty tough one to predict for the next quarter whether it would fall into that.

We do, however, from time to time get some very rapid sales that can come through for small amounts of barrier that can be beneficial.

But that's, like I said, it's otherwise on the projects, they are generally in backlog for a while when they materialize and turn to revenue.

Our next question comes from Jose Garza of Gabelli & Company.

Just had a question about the international side on the irrigation.

You talked about the backlog there having some of that.

How do we think about kind of that margin headwind you had from that?

How do we think about that going forward?

Do you expect that to continue?

It's a difficult one to answer from the standpoint of it is sometimes project related or region related and depends on competitive environment at times.

I think that when we're dealing with projects, we do see, depending on the region, some increased competitive intensity that will be a factor.

But I'd say that, in general, I don't really see anything in this that was specifically negative.

I think it's just the project mix at times.

So from time to time, I think we'll see it have more of an impact than others and nothing real specific in there.

Okay.

And then on the capital investment, you talked about next year being higher potentially.

Can you just kind of give us maybe the incremental change there that you foresee next year, maybe some projects you guys are thinking about?

Well, I think the range we're looking at for the next fiscal year and CapEx is probably going to be in the 12 to 15 range, and I would expect and hope it's going to be in that $15 million CapEx range.

Now at the same time, what we have talked about in the past, we've delayed some expansion projects and we haven't gone into too much detail.

But there are some countries where we're participating today that we know are talking about requiring more local content.

So that would potentially require some CapEx in some different regions.

But in addition to that, there may be some CapEx in our existing facilities that will also expand capacity or reduce costs.

But it's somewhat market related in terms of meeting that additional market growth to support that expansion of that capacity.

So those are the kinds of things that we're looking at, but the range we're considering for this next fiscal year is in that $15 million range.

Okay.

And then I guess, in terms of M&A, Rick, if you want to just kind of comment on just kind of the general state of multiples and kind of what you're seeing out there?

Well, in terms of opportunities and state of multiples, we're not really seeing anything significantly different.

We still have good water-related acquisitions that we find.

We still have good acquisition candidates.

I would add that we -- it is a little bit more of a challenging time, given the announcement of CEO succession and the transition period that we're going through from an acquisition standpoint.

But that's -- there are definitely good candidates out there, and we continue to have discussions.

Okay.

And then I guess, just about the CEO transition.

Any kind of updates there?

I guess, I walked right into that question.

But yes, nothing really to update other than, I think, the process in terms of as it was described as the search process and consideration of internal and external candidates is progressing well and is progressing as expected.

We knew it would take some time and there is fair consideration our Board has given in terms of going through this process.

So I think it's basically on track, and I'm not at all concerned about that.

So it's progressing very well.

Our next question is a follow-up from Brian Drab of William Blair.

You talked a couple of callers ago about the infrastructure forecast for the fourth quarter, and I think I heard that there will be somewhat less leasing revenue in the quarter.

Can you put a finer point on that in terms of directionally up or down in terms of revenue in the fourth quarter?

I know you said it's a tough comp, but does tough comp mean that we could expect revenue to be down slightly year-over-year?

Or any color on that?

Yes.

This is Brian.

I guess, the color I would add is, again, back to the fourth quarter last year being a pretty strong quarter because of really 3 medium-sized projects that we had.

I would, at this point, expect it will probably be slightly lower than that, but again still a good base of business.

I think the reduction wouldn't be coming from the lease side of the business, it would be more just the level of projects that actually get completed and delivered during the quarter.

Okay.

And then can you add any -- if you can maybe give us an update at all on the breakdown of the infrastructure segment and however you would like to present it, but in terms of -- I'm thinking about in terms of the 3 components like barrier systems, highway safety products, and then the steel tubing business.

Is that sort of -- I know it's not 1/3, 1/3, 1/3.

Is it kind of half barrier system, like 30% or 40% highway cushion and 10% steel tubing or something like that?

Well, for competitive reasons, we don't split that out specifically.

And I'd really have to stay with that at this point.

And there appears to be no other question.

Mr. Parod, I will turn the call back to you for closing remarks.

Thank you.

The global long-term drivers of our water conversation and population growth, importance of biofuels and the need for safer, more efficient transportation solutions remain positive.

We are 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 systems 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.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.