Lindsay Corp (LNN) 2021 Q3 法說會逐字稿

Good morning. My name is Betsy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Third Quarter Fiscal Year 2021 Earnings Call. (Operator Instructions)

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

Forward-looking statements include the information concerning possible or assumed future results of operations of the company and those statements preceded by, followed by, or including the words expectation, outlook, could, may, should or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Please note, this event is being recorded.

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

Thank you, and good morning, everyone. Welcome to our third quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer. I'll share some opening comments on our key initiatives and market outlook before turning it over to Brian to review our third quarter results.

I'd like to acknowledge and thank our employees and channel partners around the world for their continued support of our customers and end users through the global pandemic, particularly those on our manufacturing teams that are keeping our factories running every day. We have maintained our work-from-home option for roles that can be performed remotely, and we continue to be pleased with the productivity of our employees under extraordinary circumstances.

We have created an employee-led return-to-work committee to help define our work structure going forward. Future plans will ensure the safety of our employees, while recognizing the importance of culture, in-person collaboration, productivity and the potential for a more flexible office environment.

Moving to manufacturing. We continue to make strategic investments in our global operations function to improve safety, productivity and capacity. Material increases and supply chain constraints continue to impact the business. We have been able to leverage our sourcing talent and global footprint to maintain production and take advantage of the strong market demand.

Labor availability in the U.S.A. and historically low unemployment rates in Nebraska, in particular, have driven some wage inflation and increased competition for labor. We continue to pass-through cost increases and see a rational pricing environment in the market.

In the area of innovation, we're seeing positive customer feedback from the pilot launch of our Road Connect platform in the Infrastructure segment. This leverages hardware and software from our industry-leading FieldNET platform to create a monitoring network for roadway assets that improve safety and serviceability. We're currently deployed or have commitments for more than 50% of the Department of Transformation districts across the U.S.

In the environmental, social and governance, or ESG space, we continue to make good progress on many of our initiatives. Our diversity, equity and inclusion strategies focused on training and organization development, recruiting and talent management, community involvement and expanding our global reach has created significant energy and purpose inside the organization. This summer, we welcomed the largest and most diverse group of individuals into our internship program. Over 40% of our 2021 class are female and more than 40% are ethnically diverse. This is a great proof point in our effort to increase representation of all genders and underrepresented groups across our businesses. We're very optimistic about the future of our company and our industries with the quality of talent we've been able to attract.

Turning to the market environment. North American irrigation remained strong through the key spring selling season. Commodity prices and net farm income projections remained high and the market remains very active. Storm activity has been light this year. And although drop conditions across portions of the country have created some supply uncertainty, recent rains across the Midwest and Western corn belt have provided some temporary relief. Our thoughts are with the growers in the West and Northern Plains who are dealing with extreme and very difficult drought conditions right now.

In the international irrigation markets, we continue to see sustained strength in both the mature and developing markets. And as mentioned earlier, we're making strategic investments in our global footprint to increase capacity that supports current and projected market demand. Additional investments in Brazil, Turkey and China specifically will support opportunities for growth.

Brazil continues to be a very active market, where shipments more than doubled in the quarter versus prior year with a strong backlog going into Q4. This has been a very competitive market, and we see some of the same rapid cost escalation here that we've seen in the U.S. We continue to manage capacity and pricing actions to support business quality.

Transitioning to the Europe, Middle East, Africa region. We have been awarded a $36 million project in Egypt that began shipping in June, with deliveries expected to conclude in the second quarter of fiscal 2022. We are leveraging our global footprint to meet the timing and volume expectations of our customer. We see strong long-term growth potential in this market and are positioned well geographically and strategically in the region to compete for and win this competitive project business.

Moving to Infrastructure. Following a record year last year, the infrastructure business has experienced a temporary slowdown in project activity as government entities shift priorities to coronavirus response efforts. As previously communicated, we've had approximately $11 million in anticipated Road Zipper projects move out of fiscal year 2021 due to COVID-related delays. These projects are still very active, and we expect to see those projects close in fiscal 2022.

We see continued strengthening in the U.S. road safety business as we enter the construction season, and more regions are returning to pre-COVID demand levels, although slower vaccination progress in the international markets continues to limit growth potential in many parts of the world.

There have been several developments in infrastructure policy and federal investment plans. Last week, it was announced that a bipartisan agreement had been reached on an infrastructure framework valued at over $1.2 trillion. The potential package includes more than $120 billion above baseline funding for roads, bridges, major projects and roadway safety.

The bipartisan framework will focus on climate change mitigation, resilience, equity and safety for all users, including cyclists and pedestrians. And it represents the single largest dedicated bridge investment since the construction of the interstate highway system. While there's still work to do, we expect this package will create a positive tailwind for the infrastructure business, including Road Zipper, Road Safety and our new technology products.

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

Thank you, Randy, and good morning, everyone. Total revenues for the third quarter of fiscal 2021 of $161.9 million increased $38.8 million or 32% compared to $123.1 million in the same quarter last year. Net earnings for the quarter were $17.8 million or $1.61 per diluted share compared to net earnings of $10.1 million or $0.93 per diluted share in the prior year.

Irrigation segment revenues for the third quarter of $140.2 million increased $44.7 million or 47% compared to the same quarter last year. North America irrigation revenues of $87.4 million increased $24.5 million or 39% compared to the same quarter last year. The increase resulted from a combination of higher irrigation equipment sales volume and higher average selling prices. This increase was partially offset by lower engineering services revenue of approximately $4.5 million related to a project in the prior year that did not repeat.

In the international irrigation markets, revenues of $52.8 million increased $20.2 million or 62% compared to the same quarter last year. The increase resulted primarily from higher irrigation equipment sales volumes in most international markets. There was also a favorable foreign currency translation impact of $2.3 million compared to the prior year.

Total Irrigation segment operating income for the third quarter was $23.9 million, an increase of $8.5 million or 55% compared to the same quarter last year. And operating margin improved to 17.1% of sales compared to 16.1% of sales in the prior year. Improved margins were supported by higher irrigation equipment sales volume and was partially offset by the continuing impact of higher raw material and other costs.

In North America, margin headwinds are diminishing as multiple price increases implemented over the past several months are being realized. However, as Randy mentioned, we have also experienced significant cost increases in Brazil that have compressed margins and will continue to do so as we work through a large backlog of orders. We expect this margin pressure to continue through the first quarter of fiscal 2022 until price increases are fully realized.

Infrastructure segment revenues for the third quarter of $21.8 million decreased $5.8 million or 21% compared to the same quarter last year. 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. The current quarter did not have any significant Road Zipper sales, while the prior year included over $9 million in revenue related to the Highways England project and Japan order.

Infrastructure segment operating income for the third quarter was $3.8 million compared to $8.2 million in the same quarter last year. And operating margin for the quarter was 17.3% of sales compared to 29.5% of sales in the prior year. Current year results reflect lower revenues, coupled with a less favorable margin mix compared to the prior year.

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

(Operator Instructions) Our first question comes from Ryan Connors with Boenning and Scattergood.

I wondered if you could actually expand on an issue you touched on in your prepared remarks that you talked a little bit about the wage pressures and sort of the labor-related issues. I know that's an issue that's received a lot of attention nationally, just manufacturing sector having a hard time kind of keeping good people and so forth. Can you just expand a little bit and give a little more detail on what you're seeing on that front?

Yes. Ryan, this is Brian. I think early on, as the demand picked up last fall, we adapted with increased overtime and also bringing in workers from outside of the area to help with the demand. And more recently, I think what we're -- as we've mentioned, wage rate increases, we have implemented a wage rate increase in our Lindsay plant. And part of this is an effort to both recruit and retain people, but also would like to be able to reduce our overtime levels. So I would say labor has clearly been an ongoing challenge as it is for a lot of other companies.

Okay. And then my other question just has to do with, I think, the -- always the obvious question. I mean you've got secular growth drivers, but obviously, the cyclical dynamics in ag and commodities are important. And it just seems like from one week to the next, there's varying opinions on where we are with the commodities. And so I'm just curious of your opinion of what kind of staying power you think the cycle has, especially as it relates to coming off of such a deep and protracted downturn? I mean, is there enough pent-up demand to keep things going, even if commodities settle down a little bit? Just your kind of view on that cyclical dynamic would be helpful.

You bet. Ryan, this is Randy. And I really try to simplify this assessment. This is obviously a question we ask ourselves a lot. Investors or yourselves ask us. I really trying to simplify it down to what we see in supply and demand, and that's what's really going to support price and net farm income.

There's a lot of really stable demand drivers right now, and we don't project a lot of significant shifts in any of those demand drivers, maybe some renewable fuel standard ethanol movement that may not be significant, but we've got good stability on the demand side. The only question right now is on supply. And then there were some surprises from the USDA's acreage report yesterday that took corn and soybeans near limit, upper limit up yesterday. So the only potential disruption we see in the short-term is supply going to be shorter than expectations. And if it is, that's going to sustain higher crop prices through the new crop season as we get into harvest this fall.

So our line of sight to the fall and the crop that's in the ground today, I think, does build confidence going into the fall selling season. And then we're going to turn right back to what is next spring and planting intentions and next year's crop supply situation look like. So in the short term, I think we can have a lot of confidence in what the market indicators are telling us beyond that. It's going to be tough to know if this will be a multiyear run or not. We'll have to continue watching both those supply and demand indicators to make that assessment.

Okay. And then one last one. Just regionally in the U.S. I think you did touch on this briefly as well, but can you just kind of give us some more color on kind of where regionally in the U.S., you're seeing the real strength or is it just a uniform across the board or any granularity there?

There aren't a lot of patterns in the data right now that we would say are interesting at all, Ryan. We've got strength almost across the board domestically and internationally right now. So it's a unique position to be in. We feel very fortunate, but there's nothing interesting in the data that we can share.

The next question comes from Brian Drab with William Blair.

So first on Egypt, can you say who the customer is in Egypt? It seems like there's obviously a lot of focus on food security in Egypt following the pandemic.

Yes, you're right. We do see that being certainly a positive market driver in the region and some confidentiality from the customer's perspective, Brian. So yes, we can't share that with you. We can say it wasn't into the private sector. But we can't name the specific client.

And can you say whether it's the same customer or that it's not the same customer that Valmont is serving or any comment there?

I cannot, unfortunately.

Okay. Did you -- can you say whether you won business from a competitor? Or is this a new -- completely new project that you...

We can say that this was a market tender that was a published tender in the market that we were victorious on.

Okay. And then the -- I think I know the answer to this one, but I'd love to just hear a comment on it. In Irrigation, the incremental operating margin was about 20% year-over-year, 27% sequentially, and it's a little lower than historical. I guess, is that just obviously related to the huge increase in steel prices or any other factors to consider there?

Yes, Brian. I would say in North America, during the quarter, we got close to what we would expect on the incremental margin side. I think what really -- where we're seeing more of the dilution right now is on the international side and, as we mentioned, particularly in Brazil. If you look at it on a Q2 to Q3 basis, I think incremental margins were in that 25% range on a quarterly look or actually a little bit above 25% -- 27%. So we're making a progress in the U.S., capturing the price realization.

In Brazil, is it -- sorry, if you said, but is it primarily steel or is it wages or all of the above?

It's all of the above. Obviously, steel is the big thing. And the other unique thing about Brazil that's different than the U.S. is just the lead time from quote to delivery. Because of the government subsidized financing, we can quote a project that doesn't go into backlog until it gets the approved financing. And that whole process can take 6 months from when we quote it to when it's delivered.

We obviously try to anticipate where costs are going to be at delivery time. But again, with the rapid increase in costs that we've seen, that's -- and just the large order volume that we're experiencing in Brazil, it's causing similar margin compression than what -- as what we saw in the first couple of quarters in North America.

Okay. And then can you comment on how much price contributed to the 47% growth in irrigation? How many points of growth were associated with price?

Yes, roughly around 10% year-over-year.

Okay. And then last, Brian, do you mind giving me just the dry land conversion replacement figures in the quarter?

Yes. For the quarter, dry land was up to 33%, which is about a 500-basis point increase over last year. Conversion was 28% and replacement 39%.

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

On the international side of the business, Brazil was obviously strong. You got a nice order from Asia. But can you talk a little bit about the relative strength of the other markets versus sort of Brazil? And do you see the funding and financing remaining in place to extend those gains that we've seen this year into next year and maybe beyond? Do you see the ability of the international growth to sustain itself in sort of the non-Brazil markets?

Yes. I'll take that one, Jon. We've really seen, and we mentioned it in our comments, there aren't a lot of trend differences when we look at our international business around the world. And we often look at this between the mature and the developing or the mature and project-oriented markets, and there aren't significant trends in the data that show that one is driving growth more than the other. Again, we're in a unique position where all markets are driving growth trends, and it's for different reasons.

The food security population growth issues, some of those longer-term drivers are certainly impacted in those developing markets. Strong commodity prices are impacting those mature markets like Australia, New Zealand, Brazil and Western Europe. So we don't see a lot of differences that are interesting right now. And for different reasons, again, we're seeing growth in all of those.

How long it sustains itself? And are those growth rates going to sustain or increase? We continue to see good long-term market drivers in those markets. So predicting whether the rate or the slope of the line will increase/decrease is maybe difficult to do right now, but we do believe in the long-term growth and the potential in both the mature and developing markets internationally.

Okay. Brian, the backlog is up rather significantly. You mentioned some supply chain issues and so on. How much of an influence or how much did those issues impact the backlog number? Is it significant?

I wouldn't say because of delivery constraints or anything like that, Jon. Lead times obviously have extended, but both domestic and international backlogs are up. Obviously, the biggest increase is related to the $36 million Egypt project. But when we look at Brazil, that backlog is up more than double what it was a year ago. But it's -- the backlog is up in all of the international regions, in North America, at the end of the spring selling season, but the backlog is still up year-over-year.

Okay. How extended are the lead times now versus maybe a year ago?

In the U.S., I think, as the volume -- seasonal volume drops off, I think the lead times are getting shorter, again, kind of more in that traditional, let's say, 3- to 4-week time frame or so. But Brazil, obviously, as I mentioned, some of the longer lead times there, you could go 5 or 6 months. So it varies from different parts of the world.

The next question is from Nathan Jones with Stifel.

This is Adam Farley on for Nathan. I was wondering if you could help us with the cadence of the Egypt project, is it going to ramp up once it starts shipping in June? Or should it be more evenly split?

Yes. This is Brian. I would think about it this way, $36 million project really spread over the next 3 quarters weighted probably more heavily to fourth quarter, first quarter of 2022, with the remainder going to the second quarter.

Okay. And then shifting over to the infrastructure business. Could you just provide an update on the Road Zipper project funnel and maybe any additional color on when you think some projects are going to begin to convert?

You bet. We're still very pleased with the shift left strategy that we've deployed in Road Zipper, and we continue to put projects into the funnel. We continue to manage projects through the funnel. And in terms of total dollars, we see a lot of stability and slight growth overall. The tricky part is exiting the funnel.

And as we've commented in our opening, we do have a couple of very specific ones that we had projected would exit in fiscal year '21 that we now have confirmed we'll move to fiscal year '22. So we view '22 as an important year with those project deferrals coming out and then any new business that we have been generating and expect to deliver in '22 being there as well. So 2022 will be the key year for us.

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

Follow-up on infrastructure, I was going to ask about Road Zipper. But the other piece of infrastructure, I know it's just highlighting that it's been still sort of slower because of just getting back -- just construction projects getting back after COVID and all. So we would -- I guess, you'd expect that piece to grow as well in 2022. But I was curious is there any sort of dynamic around when you get these infrastructure bills to the spending or the decision on spending or decision on projects just take a backseat for a while until that bill actually or that law or funding gets passed and it's available, everyone is going to wait and see? Or is this -- are projects and safety infrastructure products still going to be selling next year, and that doesn't matter that much?

Yes. There's a combination of both. And we've talked here previously about the notion of the market freezing. And if you know that there's some money -- program money coming along sometime in the future, you might defer, delay and hold off on some projects until that money is there. But our view right now, Chris, is there's enough money in the funnel, natural demand from construction season, states returning to normal conditions in terms of tenders being let and getting the work done, getting people back to work. So there could be an element of market freeze happening as that infrastructure plan makes its way through the approval process, but we don't view that as being significantly impactful because there is enough other funding and money in the system to fund the investments and the upgrades that need to be made right now. So not a significant market freeze as you might assume. There'll be some activity in the market.

So you would anticipate both sides of the infrastructure business, both Road Zipper and sort of safety products growing next year?

There's positive market drivers for both. And obviously, the road safety business and those projects are going to turn a little quicker. And there's going to be more of those. Road Zipper, our view is that it's not going to speed up Road Zipper implementation. Those are still longer-term, more complex projects. We do see a terrific fit for the infrastructure money. When they focus on safety for pedestrians and cyclists, we've got an application for that. When they focus on increasing capacity and safety and reducing carbon footprint, we've got a product and solution for that.

So we do view both Road Safety and Road Zipper impacting from any increases in infrastructure spending for different reasons and potentially on different time lines, but we do think it's obviously a good tailwind for the infrastructure business as a whole.

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

Well, thank you again for your interest and participation today. We remain optimistic about the growth potential in our global irrigation business, strong commodity prices and farm income projections will continue to be a tailwind in the mature established markets. And we expect food security concerns and population growth will continue to sustain the international project business.

We're uniquely positioned with a broad manufacturing and commercial footprint that provides strategic access to all global markets and a growing technology and innovation platform that allows growers to operate more sustainably, efficiently and profitably.

Our Infrastructure segment, we see a return to normal in the North American road safety market with other international regions expected to show recovery in 2022. While Road Zipper projects have faced short-term headwind due to specific project delays, we're still positioned very well with a highly differentiated solution that improves transportation safety and mitigate traffic congestion, lowering emissions and improving air quality. New technology penetration opportunities and the pending infrastructure investment package create additional tailwinds supporting the infrastructure business.

This concludes our third quarter earnings call. We look forward to updating you on our continued progress, following the close of our fiscal 2021 fourth quarter. Thank you for joining us.

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