Lindsay Corp (LNN) 2019 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Lindsay Corporation Fourth Quarter and Fiscal Year 2019 Earnings Call.

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.

(Operator Instructions) I would like to turn the call over to Mr. Tim Hassinger, President and Chief Executive Officer.

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.

The objective of this call is to discuss our quarter 4 results.

Before we go to that overview, I'll make a few introductory comments.

For the domestic irrigation business, the unresolved trade disputes continue to put downward pressure on farmers' sentiment, along with the lower commodity prices compared to what we were seeing at the end of our third quarter.

However, there is upside potential for commodity prices given the uncertainty on what final yields will be.

On the international irrigation business, a large Middle East order that we mentioned on our last earnings call illustrated that we continue to be active in a growing Middle East, Africa region.

Currently, we are working to fulfill that order.

We continue to see a healthy amount of project prospects in the developing markets.

However, we have seen a delay, several of them, during this past quarter that will push their start date to later in the fiscal year and this delay does bring more risk to their eventual start date.

One other area to highlight is Brazil.

And although there have been delays in orders waiting for financial approvals, we continue to be bullish on the opportunity in this market based on the potential orders in our sales funnel.

For the infrastructure business, there were 2 good proof points provided in the last call that the Road Zipper business is moving in a positive direction.

The increased use of Road Zipper in road construction projects aligned to our shift-left strategy and the new Japan $15 million order were great examples that we are successfully addressing the need to grow this business and increase the leasing business.

As we have said before, by addressing these 2 objectives, we can reduce the lumpiness associated with this business.

Our focus on these 2 objectives is moving this business forward at an accelerated rate.

Our overall sales funnel projects based on a 50% probability of success is at the highest level it has ever been.

As these projects progress to the signed agreement status stage, we will announce them on future updates.

Another positive development for the Road Zipper business was the announcement on September 26 that the Federal Highway Administration repealed a 103-year-old federal procurement rule that prohibited state and local governments from using patented or proprietary products on highway and bridge projects that received federal funding.

This change removes a historical roadblock that has inhibited the consideration of our Road Zipper solution when federal dollars were a funding source.

On innovation, last quarter, I said that Lindsay was bringing new products to the marketplace and mentioned Pivot Watch as the latest example.

Pivot Watch has been launched in the North American irrigation market, and we continue to make significant progress on our innovation strategies.

Our new computer control panels were launched at the fall farm shows.

All panels now have embedded FieldNET technology, which means that 100% of our machines will ship from the factory, FieldNET-enabled.

We also released access to satellite imagery in the quarter.

All FieldNET Advisor customers now have access to satellite imagery and, through our partnership with Farmers Edge, our mutual customers can access high-resolution daily satellite images enabling anomaly and stress detection.

Images are imported directly into the FieldNET platform where they are available to users as part of their FieldNET Advisor subscription.

With all these improvements that have been introduced, the interest in FieldNET Advisor continues to build as we had a 78% increase in the number of year-over-year subscriptions.

Lastly, regarding our foundation for growth initiative.

We have previously stated that we expect to realize $13 million to $18 million in margin improvement from the 4 work streams that have been highlighted.

Since the beginning of this transformational journey, our goal has been to have these margin improvement projects implemented as we enter fiscal year 2020.

While we recognize that market conditions will have an impact on our ability to achieve our goal of 11% to 12% operating income, I can confirm that these margin improvement projects have been implemented.

What is clear to us, our foundation for growth initiatives has led to a transformational change for Lindsay.

So now let's move to our Q4 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 2 items that impacted our reported results for the quarter.

First, we incurred expense of $1.9 million for professional consulting fees in connection with our Foundation for Growth initiative, which represent the final expenses for this engagement that was completed August 31.

Second, we incurred a onetime, noncash expense of $2.8 million in connection with the valuation adjustment applied to indirect tax credits carried in a foreign jurisdiction.

The after-tax impact of these 2 items amounted to $4.3 million or $0.40 per diluted share.

The remainder of my comments regarding the fourth quarter and full year results are based on comparisons of adjusted results, which exclude Foundation for Growth costs and the valuation adjustment and are detailed in the Regulation G disclosure at the end of the press release.

Total revenues for the fourth quarter of fiscal 2019 were $101.9 million, a decrease of $21.4 million or 17% compared to the same quarter last year.

Net earnings for the quarter were $5.8 million or $0.54 per diluted share compared to net earnings of $4.5 million or $0.42 per diluted share in the prior year.

The previously announced business divestitures accounted for approximately $18.7 million of the decrease in revenues, with a net earnings impact of $1.2 million or $0.11 per diluted share.

Total revenues for the full year of fiscal 2019 were $444.1 million, a decrease of $103.6 million or 19% compared to the prior fiscal year.

Net earnings for fiscal 2019 were $15.6 million or $1.45 per diluted share compared to net earnings of $31.6 million or $2.94 per diluted share in the prior fiscal year.

The business divestitures accounted for approximately $78.1 million of the decline in revenues, with a net earnings impact of $2.0 million or $0.19 per diluted share.

Irrigation segment revenues for the fourth quarter were $69.5 million, a decrease of $26.7 million or 28% compared to the same quarter last year.

Excluding the impact of the divestitures, North America irrigation revenues of $41.5 million were relatively flat compared to the prior year.

Higher revenue from engineering project services and the impact of higher average selling prices were offset by lower irrigation equipment unit volume.

Demand for irrigation equipment is at its seasonal low point during our fourth quarter and is primarily driven by replacement activity.

In the international markets, revenues of $28 million decreased $7.6 million or 21% compared to last year's fourth quarter.

Sales activity was lower in several markets, including Brazil, which, as Tim mentioned, was impacted by delays in farmers receiving government financing approvals.

Revenues were also negatively impacted by approximately $1 million from differences in foreign currency translation rates compared to the prior year.

Total irrigation segment operating income for the fourth quarter was $6.3 million, a decrease of 2.1 million -- or $2.2 million compared to the same quarter last year, and operating margin was 9.0% of sales compared to 8.8% of sales in the prior year.

The divestitures accounted for approximately $1.7 million of the decrease in operating income, while the impact of lower irrigation equipment sales volume was partially offset by improved cost and pricing performance.

For the full fiscal year, total irrigation segment revenues were $351.5 million, a decrease of $88.4 million or 20% compared to the prior fiscal year.

Excluding the impact of the divestitures, North America irrigation revenues of $218.6 million increased 1% compared to the prior fiscal year.

International irrigation revenues of $132.9 million decreased 9% compared to the prior fiscal year with approximately 5% of the decrease attributable to differences in foreign currency translation rates.

Irrigation operating income for the full fiscal year was $33.3 million or 9.5% of sales compared to $46.9 million or 10.7% of sales in the prior fiscal year.

Infrastructure segment revenues for the fourth quarter were $32.4 million, an increase of $5.3 million or 20% compared to the same quarter last year.

The increase resulted primarily from higher Road Zipper System sales and lease revenue, while sales of road safety and other products were slightly lower compared to the prior year.

Infrastructure segment operating income for the fourth quarter was $9.3 million, an increase of $4.9 million compared to the prior year.

Infrastructure operating margin for the quarter was 28.8% of sales compared to 16.6% of sales in the prior year.

This increase resulted from higher revenue, a more favorable revenue mix and lower operating expenses compared to the prior year.

For the full fiscal year, infrastructure segment revenues were $92.6 million, a decrease of 14% compared to the prior year.

Infrastructure operating income for the fiscal year was $16.8 million, a decrease of 32% compared to the prior year, and operating margin was 18.1% of sales compared to 22.9% of sales in the prior year.

Record results in fiscal 2018 were driven by large Road Zipper projects that did not repeat in fiscal 2019.

Cash and cash equivalents were $127.2 million at the end of the quarter compared to $160.8 million at the end of the prior fiscal year.

No share repurchases were made during the quarter, and a total of $63.7 million remains available under our share repurchase authorization.

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

Your first question comes from Brian Drab with William Blair.

So I think I heard this, but I just want to make sure.

Where do you stand now on the commitment to 11% to 12% operating margin in fiscal 2020?

Is that still on the table?

Brian, it's Tim.

And yes, we're still targeting for that.

Obviously, project foundation, the Foundation for Growth initiative that we laid out, was a key driver for that.

And the growth initiatives, as we mentioned, are being implemented.

We've hit the milestones that we laid out 1.5 years ago.

And the financial results are starting to take hold related to that.

A good example is the shift-left Road Zipper strategy.

So the key actions that we've been continuing to update you are truly -- are taking hold.

Having said that, we've been real clear on this throughout the journey here -- is that we need a market similar to 2017 in terms of market conditions there.

So that's the status of where we're at right now.

Okay.

And then, Tim, can you give any sort of granularity or detail around some of the other specific initiatives, like, how -- I know sourcing was a big component of getting to that 11% to 12%.

How has that progressed over the last few quarters?

And where are you with the G&A reduction?

And you also mentioned -- maybe you could comment on -- what are you doing in terms of the commercial channel optimization.

What does that mean exactly?

Yes.

So let me just highlight some of the key achievements along the way here, Brian, that we've had.

We've had the 1 infrastructure plant closing.

We've had 4 business divestments.

We had a shared service integration moving from several locations to centralize here in Omaha.

We created, as you just mentioned, a centralized sourcing team, and there's been several cost reduction and sales growth initiatives also underway.

On the infrastructure commercial team, there has been several projects.

I would say the big highlight that I've mentioned is the shift-left.

We're really pleased with the Road Zipper, what's happening there and the fact that that strategy is taking hold.

On the irrigation, it has been more channel management.

And all of those actions are in process of being implemented right now for the fiscal year '20 season.

Okay.

All right.

There's no way that you would be able to put any dollar amounts and savings around any of these, like the sourcing that's been accomplished.

Is there -- I don't want to press you too much on that, but that's kind of what I was looking for.

Are you hitting the financial cost-cutting targets that you talked about previously there?

Yes.

And Brian, this is Brian Ketcham.

I think we've seen some of that take a hold during the year.

I think we saw some of that impact our Q4 results.

I would say, in Q4, what we saw was some of the operational initiatives as well as sourcing initiatives that helped improve margins not only in irrigation but also in infrastructure.

And as Tim had mentioned earlier, all of the projects that we had identified to get us to that target have reached the implementation stage by the end of the year.

And, of course, now realization is the next step and sourcing being an example.

That starts to get realization when you burn through existing inventories and those kinds of things.

I got it.

Okay.

And then just the last one and then I'll turn it over.

Just a housekeeping sort of question, what's the breakdown in the fourth quarter of -- within irrigation of dry land conversion replacement?

Yes.

So in our fourth quarter this year, it was 15% dry land, 23% conversion, 62% replacement.

Fourth quarter is typically a higher percentage of replacement than other quarters.

And is that driven more just by that typical seasonality that you just mentioned?

Or was there any specific weather-related driver there as well?

No, it's typically the seasonality and a lot of that being driven after the crops are planted by storm replacement.

I would say our level of storm activity this year was lower than it was last year.

Your next question comes from Nathan Jones with Stifel.

Just following up to a couple of Brian's questions there.

Firstly, on the 11% to 12% operating margin target, and you guys have been clear since the start that you needed a market pretty similar to 2017.

Clearly through 2019, volumes in irrigation are down, I know revenues are pretty flat but I think a lot of that comes from price, infrastructure revenues through 2019 are about 10% lower than they were in 2017.

So it doesn't seem like 2020 is actually going to be a market that's similar to 2017.

So would you be able to help level set expectations for where you think margins can get to in 2020 given the current market conditions?

Yes, Nathan, this is Brian.

I think just to the point on the market conditions.

I think, clearly, the infrastructure business was lower, as you pointed out.

I think our outlook for infrastructure would be that we would get back to, at least 2017, potentially 2018 type level with infrastructure.

So that's a headwind that we feel pretty good that we have addressed.

I think it comes back to the irrigation side.

And I think without the market similar to last year, it creates additional headwind to get to the 11%.

If we see a recovery, clearly, we've still got line of sight to the 11%, but I don't want to speculate on what -- without the market help, obviously, chances are it falls short of that.

But I don't want to give you a firm number on what that might be because I don't -- nobody knows what exactly the market's going to do.

Yes, irrigation is fairly hard to predict.

And it sounds like there's some uncertainty potentially on when those international projects might ship later in your fiscal '20 or possibly to fiscal '21?

Yes.

Nathan, this is Tim.

We would continue to say that we're seeing good prospects out there.

There's a good profile of projects.

However, just as you mentioned, there has been some delays and that always brings more risks when there is delays.

But there's still active projects, and we're encouraged by the potential.

But obviously, the uncertainty is a factor here.

So are those projects kind of at the point where you've won the project, been awarded the project but the owner doesn't have committed financing in place yet, and that's kind of what we're waiting on in order for it to be released and go into production for you?

Nathan, there isn't the 1 answer I can give you.

There's a wide range of different scenarios here from in-tender and final decision making.

Dates haven't been finalized or tenders in process but uncertain when the person that -- the company that's selected when the start date would be.

So there's a wide range of different scenarios here.

Okay.

And then maybe just tell me a little bit more about the shift-left strategy on the Road Zipper business.

Clearly, 3Q -- or 4Q here '19, for you guys, was a strong quarter for that business.

Are you to the point with those initiatives now where we should see a more consistent level of revenue quarter-to-quarter and year-to-year rather than the lumpy, up and down kind of stuff that we've had over the last few years?

Or is there still a significant amount of work to do to try and smooth that kind of business out?

Yes.

Nathan, we viewed last -- this past year as our launch here for the shift-left strategy.

We continue to see increased interest in Road Zipper on a global basis for projects and leasing opportunities.

We're finding opportunities earlier in the buying process that we've talked a lot about.

I announced success in last quarter's earnings call that there was a strong proof point that the shift-left strategy is advancing in a positive direction.

I think the large order in Japan that was also mentioned has begun to be fulfilled.

So most of the sales occurring throughout fiscal year '20 on that one is also a strong proof point that the new strategy is working.

So just as you referenced, our focus is to increase the overall demand and specifically increase our lease sales.

There's 2 -- a couple of points here I want to make that are really critical.

When I look at our sales funnel for fiscal year '20 and beyond, we continue to see good progress in both areas.

We have more machines being leased than ever before, and our sales funnel is the best it's ever been.

That's why I'm -- have optimism for Road Zipper going forward.

And the comment you made about the regulation being removed of using federal funds to buy patented intellectual property, how meaningful could that be to that to the business there?

I can't give you a number yet, Nathan, on how much that is, but it's just the -- a barrier that has existed, and that is now being repealed.

So we see only upside potential with this, but we're not far enough along to be able to frame it for you as how big of an opportunity that will be.

Your next question comes from Jon Braatz with Kansas City Capital.

Tim, steel prices have come down a little bit.

What do you see for 2020 in terms of pricing, independent of any competitive issues, but what do you see for pricing in the irrigation segment for next year?

Yes.

So, John, you're correct.

Steel prices have decreased, specifically the past few months.

However, tariffs associated with purchased materials from other than steel are still in place.

So our goal has continued to be to pass on these cost increases to the market.

As we've discussed in prior calls, we led the industry and the implementation of the surcharge to address that need.

So our intention is to continue with this strategy.

And, of course, we've got to remain competitive at the same time.

So it's all about finding that balance.

But our intention, as tariffs still are in place on these materials, other than steel, we're attempting to pass that on.

Okay.

All right.

And secondly, geographically speaking here within the United States, obviously, there were some markets that were fairly strong.

I think, maybe out west and maybe southeast, I may be wrong.

But when you look at those geographical markets that were strong last year, any reason why that would not be the case again this year?

Any changes that you're seeing in those specific markets?

Well, if you look west, potatoes is one crop that definitely jumps out, and we're seeing strong demand.

The U.S.-Japan trade agreement is supportive for that.

So overall, we would say, if I were to give 2 extremes, I would say potatoes market looks encouraging.

And on the other extreme, the cotton growers are the one that seem to be right now in the more difficult situation in the south, southeast.

(Operator Instructions) Your next question comes from Chris Shaw with Monness, Crespi.

My first question, I had a question about the inventories on the balance sheet.

I mean, year-over-year, they're up 16%, I think, it is?

Is that just what we were just talking about before, the sort of cost inflation or is there something else happening there?

And if so, does that -- how is it going to flow through later on -- into the income statement?

Yes.

Chris, this is Brian.

Yes, I'd say inflation has a part of it, but that's not the biggest part.

I think probably one of the bigger things is around infrastructure and support for the Road Zipper activity that we're seeing, particularly in the barriers.

So there's a lot of components that are brought in to build the barriers for the projects that we've got in front of us.

I'd say the other area is in irrigation, domestic inventory levels in irrigation.

Some of that is to support export, but I think we've been challenged with some supply chain issues with tariffs and some of the components coming from China.

So we probably carried a little bit more inventory as a result of that.

So I expect inventory levels for irrigation to come down.

I think what's unknown at this point is inventory related to infrastructure as the Road Zipper projects continue to develop.

That makes sense.

And just curious, in international irrigation, sort of similarly to infrastructure, is lumpy.

I think it was up double digits, down double digits, down double digit kind of thing this year.

Is there an opportunity there to convert customers to leasing as well?

Or is that just something that wouldn't work in that market?

And, Chris, are you just talking on Road Zipper?

Or are you talking irrigation (multiple speakers)?

No, international irrigation.

Because it's pretty lumpy as well, similar to infrastructure.

It is more lumpy than domestic.

That's driven obviously, by the large project-driven markets.

So I think that's -- I would describe that more as just a dynamic of that market.

I think it's going to be difficult to smooth that out just given the fact that these projects tend to be large whether you win or lose them.

Is there no -- anywhere in the world sort of leasing of irrigation equipment?

Is that ever a model for either domestic or international that you've seen?

There are certain countries where we have done some leasing.

It's not a very big piece of the business.

I think just the nature of these installations being more or less permanent once you put them on a field, but it's an area that, like I've said, we've done some in some countries but not something that we look at as a large opportunity overall.

And then just for the irrigation breakdown, the dryland and replace and all.

Do you have that on the annual basis?

I know you gave us the fourth quarter, but I wasn't sure if you gave the full year.

Yes.

No, full year, it's about 22% dryland, 39% conversion and 38% replacement.

There appear to be no more questions at this time.

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

Well, we appreciate the interest.

So this concludes our fourth quarter earnings call.

Thank you for your interest and participation in today's call.