Lindsay Corp (LNN) 2022 Q1 法說會逐字稿

Good morning. My name is Vaishnavi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation First Quarter Fiscal Year 2022 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 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 expectations, 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. Randy Wood, President and Chief Executive Officer. Please go ahead.

Thank you, and good morning, everyone. Welcome to our first quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer. I'd like to start by once again thanking our employees around the world for their continued resiliency and focus during the global pandemic. Our manufacturing teams continue to operate safely and efficiently around the world. While our nonmanufacturing resources continue to maintain productivity and efficiency by working from home or the office. We greatly appreciate all you're doing to support our dealers, distributors and customers around the world.

Turning to the current operating environment. Material cost increases and supply chain constraints continue to impact our business and we expect that to persist through the spring and summer seasons for our irrigation and infrastructure products. Our teams continue to work diligently to offset these risks while minimizing customer impact. We have been able to leverage our sourcing talent and global footprint to take advantage of the strong market demand, and we continue to pass through cost increases and see a rational pricing environment in the market.

In the area of innovation, we continue to enhance both the FieldNET and RoadConnect platforms. We see growth in adoption of these technologies that reduce labor and improve efficiency for our customers. We're also pleased to announce that Mike Stern, former Head of the Climate Corporation and Digital Farming for Bayer has joined our team as an innovation adviser reporting directly to me. Mike is a pioneer and trusted expert in the AgTech space and his guidance will prove invaluable as we continue to expand our product offering and leverage partnerships to deliver value for our customers. And Mike's personal views on sustainability and environmentally sound management practices align well with our mission and purpose.

We're also very pleased to welcome Pablo Di Si to our Board of Directors. Pablo is currently the Executive Chairman for Volkswagen Latin America. His previous experience includes finance leadership roles at CNH Global, Kimberly-Clark and Monsanto. Pablo's experience in international operations and business management as well as his knowledge of corporate finance brings tremendous value to our Board and our company, and we look forward to his contributions. Pablo fills the Board opening created by the departure of Michael Nahl, who announced his retirement at the end of last year. Michael has been a significant contributor to Lindsay since he joined our board in 2003 and we thank him for his dedication to our company and wish him the best in the future.

Turning to market conditions. In the domestic U.S. irrigation market, demand remained strong as commodity prices and net farm income continue to be positive market drivers. Net farm income is projected to approach $117 billion in 2021. This is up 23% from the prior year, and would be the highest farm income level since 2013. In international irrigation, we see some of the same positive market drivers linked to strong commodity prices and farm income in the developed markets, including Brazil, where we continue to set shipping records, Australia, New Zealand and Western Europe.

The developing project-oriented markets of Central and Eastern Europe, the Middle East and Africa are also showing signs of continued strength linked to food security, economic diversification and private investments. We have continued shipments of our $36 million project into Egypt and expect those deliveries will carry into the first half of our second quarter. We continue to be well positioned to compete for and win additional project business in this region.

Moving to infrastructure. Consistent with discussions on our fourth quarter earnings call, we did not see any significant Road Zipper projects exit the sales funnel in the first quarter, and we have similar expectations for our second quarter. However, we do expect to see projects beginning to close and deliver in the second half of the year. The project funnel remains robust, and we are seeing signs of progress as we've been able to get back into the market to visit customers and actively move projects along. Maintaining the ability to travel will be key to managing the sales process and exiting project from the sales funnel.

The Infrastructure and Investment Jobs Act was signed into law on November 15. This legislation adds $110 billion in incremental funding to repair our roads and bridges and support major transformational projects. The bill also includes a $370 billion reauthorization of the Fixing America's Surface Transportation, or FAST Act. This reauthorization coupled with the increased infrastructure bill funding provides long-term stability for surface transportation investments. We expect this will support project funding over the next several months, and we should see some market lift in the 2022 summer construction season.

I'll now turn the call over to Brian to review our first quarter financial results.

Thank you, Randy, and good morning, everyone. Total revenues for the first quarter of fiscal 2022 increased 53% to $166.2 million compared to $108.5 million in the prior year quarter.

Net earnings for the quarter were $7.9 million or $0.72 per diluted share compared to net earnings of $7.1 million or $0.65 per diluted share in the prior year quarter. Net earnings for the quarter were reduced by an after-tax LIFO impact of approximately $4.5 million or $0.41 per diluted share, while net earnings in the prior year quarter included an income tax benefit of $1.7 million or $0.16 per diluted share related to the release of a valuation allowance in a foreign jurisdiction.

Irrigation segment revenues for the first quarter increased 67% to $145.9 million compared to $87.4 million in the prior year quarter. North America irrigation revenues of $79 million increased 50% compared to the prior year quarter. The increase in North America irrigation revenues resulted from a combination of higher irrigation equipment unit sales volume and higher average selling prices. In the international irrigation markets, revenues of $66.9 million increased 94% compared to the prior year quarter. The increase in international irrigation revenues resulted primarily from higher unit sales volume along with higher selling prices and a favorable foreign currency translation impact of $1.1 million. The largest sales volume increases were in the Brazil, Middle East and Europe markets.

Total irrigation segment operating income for the first quarter was $17.2 million, an increase of 62% compared to the prior year quarter. And operating margin was 11.8% of sales compared to 12.2% of sales in the prior year. The impact of higher irrigation system unit volume was partially offset by the impact of higher cost of raw materials and other inputs. While we have been successful in passing along most of our cost increases through higher prices, during the quarter, we continued to experience additional inflation in a number of areas. First quarter operating results for irrigation were reduced by approximately $5 million resulting from the impact of the LIFO method of accounting for inventory, under which more recent and more expensive raw material costs are included in cost of goods sold rather than in ending inventory values. We would expect to realize some benefit of this LIFO impact in future periods as the current inventory quantities decline.

Infrastructure segment revenues for the first quarter were $20.2 million, a decrease of 4% compared to $21.1 million in the prior year quarter. The decrease resulted from lower Road Zipper System sales, which were partially offset by higher Road Zipper lease revenue and increased sales of road safety products compared to the prior year quarter. Infrastructure segment operating income for the first quarter was $2.8 million compared to $4.3 million in the prior year quarter. Infrastructure operating margin for the quarter was 13.7% of sales compared to 20.1% of sales in the prior year. Current year results reflect lower revenues and a less favorable margin mix of revenues compared to the prior year quarter and were also reduced by approximately $1 million resulting from the impact of LIFO.

Turning to the balance sheet and liquidity. Our total available liquidity at the end of the first quarter was $164.9 million with $114.9 million in cash, cash equivalents and marketable securities and $50 million available under our revolving credit facility. Our total debt was $115.7 million, almost all of which matures in 2030. At the end of our first quarter, we were well within the financial covenants of our borrowing facilities, including a gross funded debt-to-EBITDA leverage ratio of 1.4 compared to a covenant limit of 3.0. We are well positioned going forward to invest in growth opportunities that create value for our shareholders.

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

(Operator Instructions) The first question comes from Nathan Jones with Stifel.

Maybe you could just start on some of the supply chain issues to beat the dead horse for another quarter. You guys have seen the backlog in irrigation increase. You are at a seasonally slow period. Can you talk about how supply chain is at the moment, whether it's getting worse, whether it's getting better? And how confident you are on your ability to ramp up with volume as we go into the seasonally stronger spring selling season?

I'll cover that one, Nathan. In supply chain, issues, obviously, you see these across industries right now, and we're no different than anyone else. It's a daily task of our sourcing organization to identify where shortages might exist and then fight to find supply to keep our factories running. And we've really benefited in our opinion, from our global footprint, and we have the ability to move supply around as the market dictates. And a good example is a market like Australia and New Zealand that would generally get most of their supply here from the U.S., we've been able to divert that supply to factories in Turkey and South Africa to open up some additional capacity here.

So the supply chain constraints, we do see those persisting through spring and summer into next year, but our teams are working daily to make sure they don't disrupt our ability to meet demand. And we're in a good position based again on our global footprint to meet the demands that we see for this coming season, and then we'll have the ability to adapt on the upside or the downside.

So you don't see supply chain as limiting your ability to ramp up with the seasonality in revenue?

We do not right now.

Great. And then maybe one for Brian on the LIFO charge. We have seen steel prices start to come down pretty significantly, particularly in the U.S. over the last few months. Do you have any expectation for what the LIFO charge might be in the second quarter? And when we should start seeing these LIFO charges disappear?

Yes. Well, let me first start with just explaining a little bit about the LIFO impact because I'm not sure that it's well understood by everyone. We are under LIFO, the LIFO method of accounting for inventory, which very few companies are anymore. But under LIFO in an inflationary environment like we've had, the most recent purchases and higher-priced purchases flow through cost of goods sold right away whereas if you are under FIFO, those higher costs would be including in your ending inventory valuation.

So what we saw in our fourth quarter is we had called out about -- while it was the same number of $6 million total LIFO impact where ending inventories had we been under FIFO would have been $6 million higher. Going into the first quarter, what we saw was at the end of our first quarter, that difference between FIFO and LIFO is actually $12 million. So we did have the $6 million for the first quarter that rolled through as a benefit in the first quarter, but it was offset by an additional $12 million of inflation. So the full impact of inflation, we really started to see the increase of it in our fourth quarter. It's continued on into the first quarter.

To your point about steel, it's really been the hot-rolled coil that we started to see that moderate and reduce really toward the end of our first quarter into our second quarter. But at the same time, we've seen continued cost increases in structural steel and other components. So we're still in an inflationary environment. As you -- as we look forward to our second quarter, to your question on the anticipated LIFO impact there. We may see the hot-rolled coil continue to soften, but other items continue to increase. So I would expect to have a similar LIFO impact in our second quarter because I don't expect our inventory values to decline between now and the end of February, where we could start to see more of a benefit would be in our third and fourth quarters.

The next question comes from Brian Drab with William Blair.

I thought maybe I could start by just asking about the international irrigation segment and what you're seeing, first of all, with the Egypt project, how that's progressing? It looks like since you announced that project, you've had a step function increase in international irrigation revenues. I assume it's going well, but an update would be great. And what are you seeing in the other markets and just any trends there?

Brian, this is Randy. I'll take that one. Egypt project is going very well. Deliveries moving through the system, erections, installations, operations going very well locally. It's become, obviously, a very important market in the international scope of our business, and we do see continued opportunities there and executing well on our current project, we feel certainly puts us in a good position to compete and win for future projects as we stated.

And the rest of the international markets, you really see 2 trends that we've talked a lot about here. One is those more mature-ish markets like Brazil, Australia and New Zealand. We see a lot of the same strong market fundamentals connected to net farm income, connected to strong commodity prices globally. So we see sustained growth there. In the project-oriented or developing markets, we go back to those macro trends on food security, diversification of GDP and still continued ongoing private investment in those markets. So we're in an environment now where we see good strength, good opportunities in both those developed and developing markets, Brian.

Great. And now in irrigation, you're coming up on the tough comps. And I'm wondering with corn prices still being near $6. As you just mentioned, there's a positive sentiment, largely driven by the higher commodity prices. Do you expect the irrigation segment to continue even with these tough comparisons that you're coming up on the 30% next quarter and then 50% and 60%? Can you grow on top of those comps?

Yes, Brian, I'll take that. I think we see the continued demand. Obviously, last year, very strong demand. And I think some of that demand got pulled forward a little bit with the rapidly increasing steel costs and other costs. But we still feel that year-over-year unit volume growth won't be as strong in our second and third quarters, but we still have the benefit of the higher pricing. We don't anticipate prices to drop just given the continued inflationary environment we have. So we would see domestic market growing, driven primarily by price but still having some unit volume growth. And as Randy mentioned, in the international markets, we continue to expect strong growth there.

Okay. And then just continuing along that line of thinking on pricing. What did price -- can you tell us, at least roughly, what price contributed to revenue growth in each of the segments in the first quarter?

Yes, starting with the domestic irrigation business and just related to the Pivot revenue, price was in the mid-40% range. We had a volume increase in the mid-teens. And some of our other service parts, subscription revenue did not grow as much. They were up, but that's what drove the domestic revenue increase. On the international side, by and large, it's a volume increase. We had -- we have had a similar inflation in Brazil that we've seen in the U.S., but unit volumes in Brazil were roughly double what they were last year and pricing probably in that 50% range. So some pretty significant price increases in Brazil. But by and large, volume is what's driving the international revenue.

Okay. And on the infrastructure side, you also mentioned in your prepared remarks, price increases. Is that -- can you add some granularity to that comment?

Yes. I think on the infrastructure side, price is going to be less impactful as the driver in revenue in that case. I mean, when you're talking about the lease revenue on Road Zipper and some of the project-type business, which we really didn't have any in the quarter. It was the road safety products, and I would say, road safety products, price increase year-over-year is probably in the 20% range.

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

There's some economic angst in Turkey, and I know you have a facility there, the Turkish lira is down significantly. Is that impacting your business at all in Turkey and your ability to meet orders and produce?

Yes, Jon, this is Brian. Yes, despite the devaluation in the Turkish lira, it's really, I would say, it had minimal impact on our business. Our functional currency in Turkey is the U.S. dollar. It's really a business that's set up to be an export business for us. So most of -- all of our sales are based in U.S. dollars and most of our significant input costs are also in U.S. dollars. The exception to that would be labor costs. And it's really the devaluation has been more impactful for our employees and inflation in some of their daily needs and purchases. So we've had wage inflation or we expect to have further wage inflation in Turkey, but that is again offset when you translate that back into U.S. dollars. So again, minimal impact on our business at this point.

Okay, okay. And then -- and Brian, when you look at the third quarter results, again, costs are a little bit above your price increases. On net, how much of your -- how much costs were unrecovered in the quarter? Can you give us an idea?

I would say, Jon, in both the domestic market and our Brazil market, which we've called out before is having a little bit of a lag until we get to full price realization. I would say by the end of our quarter or even during our quarter, we were where we needed to be from a price standpoint given the inflation that we had expected. So if there's further inflation like we're seeing, we'll have further price increases. But I don't think it was outside of the LIFO, which we obviously -- that's more of a timing difference. But I would say that the pricing headwinds have subsided at this point. Again, further inflation will require further price increases.

The next question is from Brett Kearney with Gabelli Funds.

I was curious what the opportunity set looks like for you all on the M&A landscape. And I know there was a highway products business that transacted recently. Curious if that's the type of asset you all evaluate or what is kind of the best fit that you guys are looking at on that front?

Yes, Brett, this is Brian. I would say our -- where our main focus is from an M&A standpoint would be more aligned with our irrigation business and more specifically, anything related to technology and building out our capabilities on the irrigation technology side. Broadening that out a bit, where technology and water, where there's a connection there. Not necessarily looking to add to our road safety products portfolio. I think on the infrastructure side, as we've stated before, anything that would help us with Road Zipper growth because that's where portion of infrastructure that we're really focused on growing to high-value, high-margin product where we see a lot of growth opportunities there. So hopefully, that helps.

The next question is from Ryan Connors with Boenning and Scattergood.

Great. Wanted to sort of explore the supply chain dynamics in a couple of different angles. The first is, have you had any kind of sort of component switching where you've had to switch out to different suppliers and different types of chips and things like that, especially in the FieldNET side? Or any other significant sort of alterations to the component base or the supply chain that could potentially at some point in the future, manifest itself in terms of a product quality issue or a warranty issue or anything like that? I mean, is there anything that's been switched on the fly that gives you any concern on that side?

Yes, I'll take that, Ryan. And I don't know, but I'd describe it as a significant swap out. But like many companies, we've really been leveraging engineering talent, sourcing and supply chain talent to allow us to respond quickly to any shortages that we see in front of us or shortages that we might see even months in advance. So I think we've got the systems and demand tracking solutions in place to really understand and be as proactive as we can to get in front of these, Ryan. And then I would say with confidence, nothing gets released without full validation. So while we are making some substitutions to allow us to meet the needs of our customers, I don't see that creating any risk at all for future product quality.

Got it. Okay. That's reassuring. And then the other thing, one of the unique things about Lindsay is that even for the farm industry sector, your flagship facility and your namesake town of Lindsay, Nebraska, it's a very rural facility. I know that's why the prior management had moved in that HQ at Omaha because it was a little too off the beaten path. Curious how that impacts -- how that facility has been impacted more or less by all these supply chain issues, given it's -- how far-flung it is? And then also in terms of the labor front, is there a sufficient labor force there? Or have you had issues staffing there? Just curious how that rural facility has held up in this environment?

Sure. You bet, Ryan. This is a facility, obviously, it's the flagship facility for us around the world, our largest, most vertically integrated facility. And I think when you look at the workforce quality in a rural work environment, we've got people that work in that facility that understand the importance of the products they're making to the customers that they'll serve. So I think we like the work ethic of a good Midwest workforce. We like the work ethic of a rural-based workforce because, again, they understand how this equipment has to be used, how it has produced more food for a growing population. So that's a mindset that we like.

In terms of labor attraction, there is adequate workforce in the area, and our human resources team has worked very aggressively to pull people in as we needed them. We're implementing a number of lean initiatives to be more efficient and require less labor to produce the goods that will allow us to meet demand. We have the ability to work over time. So we're in a good position we feel with the quality of the workforce and our ability to attract workers. With the supply chain specifically, it's really a similar answer. We're in front of the things that we think we need to be in front of. Our strategic sourcing group working aggressively, both short and long term to be as proactive as they can, and we don't see this creating any significant risk or being a detriment to the business overall.

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

Just on the backlog, it's -- you reported up quite significantly year-over-year and attribute it all to the irrigation business. But given sort of your comments or the numbers you gave on price volume for the quarter, just trying to gauge like how much of that is -- of that increased backlog is pricing approximately? I guess it would seem like it would be a lot of it given what you said the pricing was for the quarter. But is that accurate?

Yes, Chris, this is Brian. Yes, first of all, I'd just say on that increase in backlog, the domestic backlog is probably at a similar level to last year. And as you recall, last year, end of the first quarter, we had a significant increase in backlog. So I would say similar in the domestic market. So all of that increase, or most of the increase, I should say, is coming from the international markets. And again, most of that would be volume related. Again, at the end of November, there's always the timing on the domestic side, but there's clearly some price baked into there on the domestic side, but it's still roughly the same level as last year.

That's interesting. But there wouldn't be that much in the -- on the international pipeline there. There wouldn't be that much of the Egypt project left in there, right? I mean that's mostly been recorded?

Yes. There's -- I think we -- roughly $10 million left to ship in the second quarter on that.

There's a lot of new international projects in there. That's great.

I would characterize that international backlog is really being up in all markets. Again, the primary -- the largest increase year-over-year is going to be in Brazil.

And then if I could just ask, a lot of us probably know Mike Stern back from Monsanto and Climate. Just want -- you've talked a little bit about his role, but is he going to be looking at like M&A for tech stuff because I know you just referenced that that's kind of an area where you're looking at in M&A? Or is he trying to be more sort of like kind of integrate your platforms, maybe with other things out there like Climate or whoever has stuff out there because I know he's very familiar with all the competing products out there in the ag digital world. So I'm just curious if you have any more detail there.

Yes. Mike is going to play a critical role in technology strategy, our innovation strategy. It will include industry partnerships that will include potential assessment integration of M&A. It will include voice of the customer work to make sure we're in front of market needs. So somebody with the experience and skills that Mike has, we're going to leverage him in a number of different and unique ways. But a big add to the company. We can't wait to get started with him.

Next is a follow-up from Brian Drab with William Blair.

Just 2 quick follow-up questions. Randy, you mentioned, I think Road Zipper project activity picking up in the second half of fiscal '22. Is that coating activity? Do you expect revenue from some major projects in the second half?

Yes. A lot of these, Brian, are projects that have been kind of delayed and deferred and pushed through the COVID era. So these are ones that have been moving their way through the funnel, ones where we've got line of sight on funding. So we'll move into sales funnel exits in the second half of the year and should start to see some revenue recognition on those projects.

Okay. And I guess just the last one, Brian, eventually, you're going to put this in the slides, I think, if I ask for another 10 years. But the question around the breakdown of irrigation equipment sales, dry land replacement, et cetera, if you have that?

Yes, you're right. It would make it easier if I just put it in this slide. So yes, dry land in the first quarter was 25% conversion, 38%; and replacement 37%.

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

Thank you all for your interest and participation today. The megatrends fueled by global food security, sustainable agricultural practices, infrastructure capacity and roadway safety all create positive tailwinds, and we remain optimistic about the growth potential for both the infrastructure and irrigation business segments. We continue to develop technology and innovation that makes our customers more efficient and productive, creating ongoing opportunities for recurring revenue and differentiation that supports customer attraction and retention. Our global footprint and ability to leverage capacity also puts us in an advantageous position, allowing Lindsay to capitalize on growth opportunities around the world. This concludes our first quarter earnings call. We look forward to updating you on our continued progress following the close of our fiscal 2022 second quarter. Thank you for joining us.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.