Lindsay Corp (LNN) 2018 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Lindsay Corporation Third Quarter 2018 Earnings Call.

(Operator Instructions) 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 performances 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 conference over to Mr. Tim Hassinger, President and Chief Executive Officer.

Mr. Hassinger, please go ahead.

Good morning, and thank you for joining our call.

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

As you know, the objective of this call is to discuss our quarter 3 results.

Before we jump into that overview, I will make a few introductory comments.

In our past quarter's earnings call, I provided an overview of the Foundation for Growth initiative we launched earlier this calendar year.

In this call, I said that we were focused in 4 primary areas.

Those areas are: one, our manufacturing footprint with the desired result being to optimize our cost structure; two, G&A.

This work stream is focused on gaining the efficiencies in our back-office activities; three, sourcing.

The primary focus is to move towards a centralized approach for our buying activities; and four, commercial.

We are identifying and implementing actions to optimize our channel management processes.

Overall, the goal that we want to achieve from these projects is very clear.

We want to simplify the way we conduct our business and align to that improve our productivity to build a foundation for growth.

With that goal in mind, we are planning to take the following actions.

We intend to divest the business and all associated assets, including the manufacturing plants for Watertronics and LAKOS.

Also, we plan to divest Irrigation Specialist, our company-owned dealership in the Pacific Northwest.

In addition, we announced that we will close our Crown Point manufacturing plant in the Omaha area later this year.

This plant is dedicated to the infrastructure business.

And because of this change, this work will transfer to our Lindsay, Nebraska plant that is only a 2-hour drive away from the Crown Point plant.

This action creates further leverage across our manufacturing footprint.

These moves simplify our operations and are aligned to our internal evaluation process of determining if a business is meeting margin expectations and/or if it is providing leverage to our core businesses.

Through this evaluation process, we have kept the discipline that when a business does not meet these criteria, a best-owner evaluation is initiated.

What makes the Watertronics and LAKOS divestment aligned to our simplification direction and still be aligned to our turnkey irrigation strategy, is our intention to have a commercial agreement in place with the buyer of these businesses.

And at the same time, these divestments will allow Lindsay to eliminate complexity that existed in owning and running these businesses.

In other words, Lindsay keeps access to what is strategic to the irrigation business and will simplify its operations at the same time.

Irrigation Specialist represents a very important dealership for Lindsay, serving some of our largest customers in the world.

We have concluded that Lindsay is not the best long-term owner of this business.

It's our view that this change will provide the required service and support to our customers to create growth in this important market.

When I look at the self-help effort that we have started, I like the direction the Foundation for Growth initiative has taken us.

It is also important to highlight the progress we are making in the innovation space.

As each of you have heard me talk about FieldNET Advisor, and the fact that it is a highly differentiated offering in the marketplace, we have continued to add to our capabilities in this area.

Last quarter, we announced the agreement with John Deere, and we just recently announced a collaboration agreement with Farmers Edge to broaden our capability in the irrigation scheduling space.

Also, our strategy is to expand our global reach with FieldNET Advisor.

This year, we are launching and/or doing a beta test in 17 countries on 21 different crops.

To put this in perspective, last year, FieldNET Advisor was offered in only 1 country and on 2 crops.

Hopefully, you can tell by these comments that we are making excellent progress towards our goal of achieving 11% to 12% operating margin in fiscal 2020.

We will continue to update you on the status of the key projects that we will be focused on over the next several quarters.

So now let's move to our Q3 results.

And for that, I'll turn the call over to Brian.

Thank you, Tim, and good morning, everyone.

To begin, I would like to cover the $7.6 million of pretax cost incurred in the third quarter related to our Foundation for Growth performance improvement initiative as this had a significant impact on our reported results.

$6 million of this amount represents an adjustment to reduce the carrying value of the businesses held for sale, which are the planned divestitures that Tim referred to in his comments.

In determining this adjustment, the carrying value of each of the businesses held for sale was compared to its estimated selling price less cost to sell.

Where the carrying value exceeded estimated selling price and expense was recognized.

Where the carrying value was less than estimated selling price, the related gain is deferred until the sale is completed.

The carrying value adjustment is not deductible for tax purposes, therefore, a tax benefit was not recognized.

Additional cost of $1.6 million related to the Foundation for Growth initiative are comprised of severance cost and professional consulting fees.

The remainder of my comments regarding the third quarter will refer to adjusted results, which omit the impact of the Foundation for Growth initiative.

Adjusted results are detailed in the Regulation G disclosure at the end of the press release.

Total revenues for the third quarter of fiscal 2018 were $169.6 million, an increase of 12% over the same quarter last year.

Net earnings for the quarter were $17.9 million, an increase of 63% over last year.

Diluted earnings per share for the third quarter were $1.66 compared to $1.02 in the same quarter last year.

Irrigation segment revenues for the third quarter were $128.4 million, an increase of 7% over the same quarter last year.

In the North America irrigation market, revenues increased 11% over last year, driven by higher irrigation system sales volumes along with higher average selling prices.

In the international irrigation markets, revenues were slightly lower compared to last year's third quarter.

A higher level of project activity in developing markets was offset by a market slowdown in Brazil.

A few things have contributed to the slowdown we experienced in Brazil.

First, a trucker strike resulted in a countrywide work stoppage over the last 10 days of our third quarter.

Although temporary measures were put in place by the government in order to end the strike, rising freight costs have resulted in grain handlers halting purchases of corn and soybeans from local farmers.

In addition, we believe some irrigation equipment purchase decisions have been delayed in anticipation of the July 1 reduction in government-subsidized interest rates.

These situations create short-term challenges.

However, we remain optimistic about our future growth potential in Brazil.

Total irrigation operating income for the third quarter increased 9% compared to the prior year.

The effects of sales growth in North America and the recovery of $2.5 million in previously reserved accounts receivable were offset by the effects of higher freight costs in the U.S. and a lower margin mix from international project orders.

Irrigation operating margin for the quarter was 14.1% of sales compared to 13.8% of sales in the prior year.

Infrastructure segment revenues for the third quarter were $41.2 million, an increase of 31% over the same quarter last year.

The increase was driven by our ability to deliver a significant portion of the Alex Fraser Bridge and Japan Road Zipper orders during the quarter.

Infrastructure segment operating income for the third quarter increased 80% compared to the prior year, as a result of an improved margin mix coming from a higher proportion of Road Zipper revenue and improved operating cost leverage.

Infrastructure operating margin for the quarter was 35% of sales compared to 25.5% of sales in the prior year.

Cash and cash equivalents were $111.8 million at the end of the quarter compared to $121.6 million at the end of the prior fiscal year.

Cash was utilized in the quarter to fund working capital increases in support of sales growth as well as capital expenditures and dividend payments.

No share repurchases were made during the quarter.

However, a total of $63.7 million remains available under our share repurchase authorization.

The strength of our balance sheet continues to position us to pursue growth initiatives, both organic and through acquisitions, and other initiatives to drive improved returns for shareholders.

At this time, I would like to turn the call over to the operator to take your questions.

(Operator Instructions) The first question today comes from Mike Shlisky with Seaport Global.

So I wanted to first start off about the Infrastructure segment.

Sounds like, obviously, there were some great deliveries in the quarter.

I guess I want to make sure I get -- could you maybe tell us how did the deliveries progress compared to your initial expectations?

I guess, really, I'm trying to figure out, do you feel better about the business for the full year today than you felt 3 months ago?

Or was it all just timing within the year as far as those 2 big projects?

Yes.

So, Mike, this is Brian.

I think on both of the projects, if you separate the barrier versus the machines, we had said earlier that we expected both of these -- the majority of these projects to be in the third and fourth quarter.

What we saw in the third quarter was that we shipped a majority or we were able to deliver a majority of the barrier in the third quarter, some of which may come out to the fourth quarter, but that's the full year.

I would say our full-year outlook remains the same.

Also during the quarter, we began production on San Rafael Bridge.

That still is a first quarter 2019 expected revenue recognition on that project.

Okay.

Also wanted to turn also on Infrastructure to the upcoming closure of the facility, and it's not a very long drive away, it sounds like.

Are you exiting any products in that shift?

And are you reducing your capacity if you have less square foot?

Would you be able to kind of make the same amount of product in that other facility?

And can you give us a sense also for what this might mean for the margin of that segment next year, so I mean, you can get out of this facility by the end of this year?

Yes.

So, Mike, this is Tim.

There will be no reduction in portfolio offering as a result of this change.

As I mentioned in my opening comments, this is an overlap opportunity.

We are going to be shutting this plant down and then taking those capabilities and moving it into our Lindsay, Nebraska plant.

So again, no change in portfolio.

In terms of financial impact, that is captured into our broader goal related to the Foundation for Growth initiative.

So we're not spudding out in communicating the specifics of that, but this would be one of the projects that is contributing to the overall goal that we had set.

So it's the same product line, same potential sales after this is over?

Correct.

And let me say it this way, there will be no impact to our customers.

So opportunity to buy the same product, same service, et cetera.

The only difference is from a Lindsay perspective, our manufacturing footprint has gotten smaller because we see an opportunity to consolidate.

Got it.

Okay.

And then just touching on Brazil, Brian, your comments clearly some of those issues did impact the quarter.

I totally hear you on that.

And the rates do shift over the next couple of days here to a bit lower.

But do you get the sense that farmers are okay with the lower rates?

Or were they hoping for an even lower rate in the next harvest plan, which starts July 1?

Yes, it was -- the rate reduction was about -- well, it was 50 basis points.

I think, they have been optimistic that it may be 100 basis points.

But it's still long-term tenor on these -- on the financing.

So I think it's -- overall, it's still a positive move.

I think it's just the -- they had announced the change would be put in place July 1 a while back.

And so I think we saw some delayed in purchasing activity just waiting until the new rates go in place.

And just to quickly follow-up on that.

If we see a very strong crop here in the U.S., things look awfully good and a large part of the soybean corn belt out there.

If we see very high yields this year and prices come down to the summer, do the trends in Brazil still support increased irrigation adoption?

Do you need to have a good pricing?

Or is it more of a long-term plan that the government wants to get more irrigated?

Mike, this is Tim.

I would describe.

We see the fundamentals still being very strong in Brazil with one unknown, that could be a potential upside for Brazil, and that's the trade retaliation discussions that are going on.

So we still are optimistic for Brazil.

To Brian's point though, this change in financing, although we see it as positive, we do think it will take some time for projects to move through the system, just given the lag time that exists in that type of move.

The next question comes from Nathan Jones with Stifel.

So I guess, I'll start with some of the commentary around steel pricing.

And just a comment in the press release about potential for passing that through.

If we take the AR reversal out of operating income during the quarter, margins were down year-over-year on higher revenue.

You probably should have had a little bit of a better mix domestic versus international, but you said you had a poorer mix from projects in the international business.

Did you -- do you feel like you covered still dollar for dollar in the quarter?

And then any color you can give us around those comments about maybe it'll be more challenging for you to pass on steel cost in the future?

Yes.

So, Nathan, this is Tim.

And our goal continues to be to pass the cost increases onto the marketplace to address the cost escalation.

We had talked about that in the last earnings call.

We led the industry this year, in our view, in the implementation of the steel surcharges to address this need.

And our results so far, we would say, they reflect that we're being successful with the strategy, and our intention is to continue with the strategy.

The comments in the press release though reflect the reality of -- it's some unknown here going forward.

So we're going to continue with the direction that we have laid out.

We've been successful to date with that direction.

But we did want to give at least a caution in that, that there is some unknown going forward as to how much we can continue to be successful in that area.

So that commentary just there sounds a little bit more positive on your ability to pass through steel price and maybe it came across in the press release.

So are you saying that you're not -- at this point, you're not seeing any problems passing through steel price?

Obviously, there's always problems passing it through.

But you're being successful.

You don't really have any reason to think that you want to continue to be successful, but you're just being cautious with the way you're framing it?

Nathan, I'd describe it this way.

You saw our quarter results in North America.

And that would reflect, in our view, we've been successful.

Okay.

Then I want to ask a little bit more of a strategic question around the divestitures.

I remember, particularly when the company bought that LAKOS business, the part of the reason for that was to open up a path to get more into some industrial water applications.

Does the divestiture of those businesses kind of take that strategic path off the table?

I know that was done prior to your leadership.

How are you thinking about the strategic outlook for where the company can go in the future?

The way I'd see these divestitures, Nathan, is -- I would describe it as evolution.

We bought those companies.

We developed on the irrigation side a turnkey strategy.

We've had success with that.

Now we've come to a point where we have publicly stated we want to simplify the organization.

These agreements that we're moving forward with will allow us to keep the turnkey strategy with the commercial agreement that we'll have with those companies.

Commercial agreement to continue with the turnkey strategy in irrigation and then simplify the organization and not be involved in as many other markets.

So it's around the theme of focus, simplifying the business, which were the real key tenets that we wanted to achieve with our Foundation for Growth initiative.

Okay.

I think you've been pretty clear about that.

So I don't think anybody should be surprised about these divestitures.

And I would say, I don't think anybody should be surprised when maybe you're not quite done yet.

When it comes to deployment of capital, does this take that in path to industrial water off the table for you?

Is that not something that the company is no longer looking at?

We are -- our core businesses, we've been clear, are the Infrastructure and our irrigation business.

That's where our key focus is at this point in terms of what we would define as core businesses.

The next question comes from Brian Drab with William Blair.

So the first one.

I just want to talk a little bit more about the margins.

In the irrigation segment, if you exclude the accounts receivable recovery, adjusted operating margin was 12.3%.

And that really was the lowest operating margin that you've reported in that -- in the third quarter in irrigation in over a decade.

So just wondering if you could talk more about the dynamics that are driving that?

And what we should expect in fourth quarter and going into fiscal 2019?

I assume, it obviously has a lot to do with steel.

You talked about Brazil, but does that get better as we go forward?

Or are you concerned about this, really relatively low level of operating margin?

Yes, this is Brian.

I think there's 3 key things that impacted our operating margin in irrigation in the third quarter.

I would say, the first one being in the international project area.

One project, in particular, was fairly low margins.

You couple that with -- I think the second thing being our slowdown in Brazil that had a, I would say, the second probably largest impact.

And then the freight increases in the U.S. that we were a little bit delayed in reacting to that.

So I think in all of those cases I would -- the freight cost we have addressed -- project markets in international have become very price competitive.

And -- but we still see a lot of opportunities there.

I think the Brazil situation is -- we feel it's more of a short-term situation as well.

Okay.

And can you give us any sense for what volume versus price was in terms of revenue growth for irrigation?

Yes.

I would say in the quarter, price played a slightly higher part in the sales growth than volume.

And I would say the other -- just a little more clarity on the third quarter, too, is there may have been a little volume pull forward into the third quarter just because of the increasing price environment.

We don't have that quantified, but I think that may have played a little bit of a part in volume growth in the third quarter versus what we had expected going into it.

Okay.

Is that split -- does that split apply to the domestic business and the international?

Or is that only for consolidated?

No, that was -- yes.

No, that was only for domestic, for North America.

Okay.

So for domestic, price played a little bit more of a...

Yes.

I would say slightly higher.

Overall in the higher and volume was helped by some pull forward potentially?

Yes.

Okay.

Okay.

Got it.

And Brian, can you just give us FX impact?

I don't know if I missed that, but FX impact on revenue growth in the quarter?

Yes, it's overall fairly insignificant.

We had some currencies that had strengthened versus the Brazilian currency that had weakened.

So overall, it was negligible.

Okay.

And then just quickly.

Do you expect more QMB revenue in the fourth quarter or less versus the third quarter?

Quarter-over-quarter, we would expect less, definitely.

Since the majority or a significant portion of those 2 projects shift in the third quarter.

Quarter-over-quarter, we'd expect it to be lower.

The next question comes from Joe Mondillo with Sidoti & Company.

So I just want to dig in a little bit more relative to the Infrastructure segment.

And sort of about last question.

I think you guys have divulged that Alex Fraser was about $14 million total project.

And the Japan follow-ons were about $11 million.

So that brings it to about $25 million.

And you said the majority hit in the third quarter.

Your Infrastructure revenue was up year-over-year by about $10 million.

So I assume most of that $10 million was related to the QMB, which leaves -- out of $10 million will leave $15 million more dollars related to Alex Fraser and Japan follow-ons.

But you're saying that Q3 will be larger than Q4.

So my analysis is sort of bringing me that $10 million in third quarter, and you have $15 million left over for those 2 projects, but obviously, I'm not -- I'm missing something.

So could you just clarify what's going on, if the core business was actually down much more than I actually expected and a large part of the segment was really driven by those 2 projects?

Joe, this is Tim.

Let's first of all take the direction from a QMB, and then Brian can give more color to your specific question.

First -- important to highlight is we've said in prior calls, we do not include any sales in backlog until a contract is signed.

But we are seeing an increased interest in Road Zipper on a global basis.

And we've said this before, and we're going to continuing to focus on this as to increase the demand and move more of this business to leasing, reduces the lumpiness.

And these 2 actions help address the lumpiness, so we feel we're making good progress in creating new leasing opportunities, that's a key part of our strategy.

But I'm going to let Brian help address more of the specifics of what you're asking here in terms of quarter versus quarter.

Yes.

On both of those projects, there are -- well, I'd say Japan definitely has both third and fourth quarters.

On Alex Fraser, there was a portion that we had indicated for our first quarter of 2019.

But clearly, there is still a portion of both of those projects that we'll go through in the fourth quarter.

But directionally it will be lower than third.

Okay.

So could you -- I guess what I'm getting at is Alex Fraser and Japan follow-ons was $25 million.

Of that $25 million backlog, how much hit in the third quarter?

I am not going to break up the specifics for those 2 projects on what hit in the third quarter.

Well, just not -- I don't need the -- you don't need to break it up between the projects.

I'm just wondering, of the total backlog of QMB of those 2 projects, how much hit in the third?

I would say roughly 2/3.

Okay.

I also wanted to ask on a different subject, was it just relative to the international business.

I know going into the third quarter, at least over the last couple of quarters, backlog was up year-over-year, inventory was up year-over-year, and we were sort of talking about aside from what you had in infrastructure that some of that was being driven by international projects.

And we did see a sequential uptick in international, but it was actually still down year-over-year.

But now we're seeing sort of backlog down year-over-year and inventory down year-over-year.

So is 3 quarter -- is 3Q sort of the high watermark of international for the year?

And, sort of, overall what does the outlook look like for international?

I know you touched on Brazil, but you can talk about other areas, if you want to?

Yes.

Joe, this is Tim.

I'll give you a feel of the flavor for international business.

Year-to-date, our revenue has decreased 9% versus prior year.

These results are below the expectations we had at the beginning of the year.

The key reasons for this year -- the year-to-date decrease is less volume and large projects.

And more recently the slowdown in Brazil, that Brian mentioned earlier in his points in addressing one of the questions.

We do have a good pipeline of projects in place, but the timing of the sale is always difficult to predict on these.

How well we do this year versus prior year on a total fiscal year will depend on closing several targeted projects this quarter that are in our pipeline.

Okay.

And so I think -- last quarter, I think, I asked the question.

Do you anticipate international irrigation being up year-over-year in the back half of the year?

Obviously, 3Q was down year-over-year.

So does that -- is that still a possibility?

Or is 4Q is the -- is it just not as strong as you initially thought?

Is 3Q sort of the high watermark at this point?

Or could 4Q still be the sort of a big quarter?

Year -- do you still see year-over-year growth?

Or could you give us any more sort of color related to that?

Yes, I think couple of things have impacted the outlook for the full year.

I think this slowdown in Brazil being something that hadn't been on the radar when we talked at the last quarter.

And then the other thing is just the timing of some of these projects.

There's -- we've seen a number of projects get pushed out further.

So I think, as Tim mentioned, I think the fourth quarter will depend on a project or two getting into the quarter versus getting delayed into next year.

At this time, there appears to be no more questions.

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

Great.

Well, thanks for your interest and participation in today's call.

This concludes our third quarter earnings call.

I'm looking forward to updating you on our continued progress in our quarter 4 call to be held in October.

This conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.