Lindsay Corporation CEO Discusses F4Q10 (Qtr End 9/30/10) Earnings Call Transcript

Oct.20.10 | About: Lindsay Corporation (LNN)

Lindsay Corporation (NYSE:LNN)

F4Q10 (Qtr End 8/31/10) Earnings Call

October 20, 2010 11:00 a.m. ET

Executives

Rick Parod – President and CEO

Dave Downing – CFO, President – International Operations and IR Officer

Analysts

Brian Drab – William Blair

Ned Borland – Hudson Securities

Ryan Connors – Janney Montgomery

Paul Mammola – Sidoti & Company

David Rhodes – Red Bush Securities

Davis Paddock - Investco

Operator

Good morning. My name is Tina, and I will be your conference operator today. At this time I would like to welcome everyone to the Lindsay Corporation Fourth Quarter 2010 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions)

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

Forward-looking statements include the information concerning possible or assumed future results of operations of the company and those statement that are proceeded by, followed by, or including the words expectations, outlook, good, may, should, or other similar expressions. For these statements we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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

Rick Parod

Good morning, and thank you for joining us today.

Our revenues for the fourth quarter of Fiscal 2010 were 87.2 million, increasing 19% over the same quarter of last year. Net earnings were 6 million or $0.48 per diluted share compared with 2.1 million or $0.17 per diluted share in the prior year’s fourth quarter. Total revenues for Fiscal 2010 were 358.4 million, up 7% from Fiscal 2009. Net earnings for the fiscal year were 24.9 million or $1.98 per diluted share compared to 13.8 million or $1.11 per diluted share Fiscal 2009.

Fiscal 2010 was Lindsay Corporation’s second highest earnings year, exceeded only by 2008.

In the U.S. Irrigation Market, revenues were 33.9 million for the fourth quarter, increasing 16 percent over the same quarter of last year.

Since early June, commodity prices rose significantly with corn up 70%, soybeans up 26% and wheat increasing over 60%. The most recent USDA projections for 2010 net farm income show a 24% increase over 2009 and projected to be the fourth highest on recorded, creating generally positive economic conditions for U.S. farmers.

For the full year Fiscal 2010, U.S. Irrigation revenues were 152.8 million, down 2% from Fiscal 2009, which benefited from a record backlog at the start of that year carried over from Fiscal 2008.

International Irrigation revenues were 23.3 million for the fourth quarter, declining 9% from the same period last year due to lower exports in some regions.

For the Fiscal 2010 year, International Irrigation revenues were 105.8 million, up 6% from Fiscal 2009.

Our International Irrigation Business Units in South American, South Africa and Europe, as well as exports to Mexico all received solid growth in Fiscal 2010.

Long-term market drivers are improving diets in the worldwide population, combined with the water use efficiencies available for mechanized irrigation systems, continue to be positive drivers for our global irrigation equipment demand.

Infrastructure Segment revenues were 30 million, up 61% from the fourth quarter of last year, driven my increased sales of quick-change movable barrier systems, rail structures, and lights and commercial tubing.

During the quarter, we booked and completed a barrier project from the East Coast of the U.S. worth a little more than 9 million. Later in the quarter we also received an order for just under 15 million of Movable Barriers Products for another East Coast project.

We continue to see strong interest in our Moveable Barrier Products, which provide a very cost effective way to add wing capacity.

For Fiscal 2010, infrastructure revenues were 99.8 million, increasing 24% from the same time last year, driven by higher product sales.

Gross profit was 25.7 million for the fourth quarter versus 17.6 million in the same quarter of last year. Gross margins increased to 29 ½% compared to 24% for the fourth quarter last year.

Infrastructure margins increased primarily due to higher revenues of Moveable Barrier Products while irrigation margins increased from improved factory efficiencies at our Nebraska facility.

For the full year Fiscal 2010, gross profit was 98.9 million reflecting a 23% increase over 2009. Gross margins grew to 27.6 percent in Fiscal 2010 compared to 24% in 2009 driven by the higher barrier sales, favorable regional mix and improved factory efficiencies.

Operating expenses for the fourth quarter were 16 million versus 14.1 in the same quarter last year, reflecting higher research and development expenses, commissions and incentive compensation costs.

Total operating expenses for Fiscal 2010 increased 2.8 million; however, dropped to 17% of sales for the year. The full-year increase of operating expenses was due primarily to increased investments in product development and to higher incentive compensations resulting in improved financial performance.

Our order backlog was 38.4 million on August 31, 2010 compared to 43.6 million on August 31, 2009 and 33.9 million on May 31st, 2010.

Last year’s backlog at this time included 20 million for the next Mexico City Barrier Project, which was completed in the first half of Fiscal 2010. The Fiscal 2010 year-end backlog includes there recently-formed East Coast Project worth slightly under 15 million. That project is expected to be completed during the first half of Fiscal 2011.

Our balance sheet has strengthened compared with the prior year. Cash and cash equivalents were 2.5 million lower, while long-term debt has been reduced 12.8 million improving our net-cash position by more than 10 million.

Accounts receivables were higher year over year due to the higher sales at the end of the fiscal year and the Moveable Barrier projected at the end of the quarter.

Inventories remain relatively flat while inventory turns improved.

In summary, strong results from our infrastructure segment along with solid domestic irrigation performance, both significantly improved fourth quarter results.

In the Infrastructure Segment, we continue to see strong interest in our Quickchange Moveable Barrier Systems and grow safety products.

In the Irrigation Segment, improved farmer sentiment has resulted from increased commodity prices and projected higher farm income. And we’re optimistic that the improved sentiment that we’ve seen will result in an increase in irrigation equipment demand in Fiscal 2011.

In addition, actions implemented to enhance cash flow have resulted in a stronger balance sheet with a further-improved net-cash position.

We continue our physical process to find accretive acquisitions that add new businesses and/or product lines and to invest in organic growth opportunities.

We confident that increasing agricultural yields to boost food supply, improving water use efficiency, expanding biofuel production, improving transportation infrastructure will remain global priorities and will continue to be strong drivers for our market long term.

I would now like to open it up for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question will come from the line of Brian Drab with William Blair.

Brian Drab – William Blair

Hey. Good morning, Rick.

Rick Parod

Good morning, Brian.

Brian Drab – William Blair

Congratulations on a really solid quarter, and it’s great to see the QMB business gaining a lot of interest right now. So first of all, in the QMB side of things, you have 15 million in backlog. Can you comment on – can you give us any more detail on the pipeline beyond that 15 million? It sounds like interest is instrumentally better than it was in the last quarter.

Rick Parod

Well, I commented in the past, Brian, that we track a project with – that’s in the range of somewhere between 100 to 150 million in projects, or you know, averaging maybe in that 120 range. And I’d say that we’ve continued to see that kind of interest and from time to time it will grow a little bit or contract, depending on what projects are on the list and what’s happening in terms of discussions. But I would say right now that that list remains in that kind of level that we’ve discussed in the past and the interest in QMB remains very strong globally.

I think the interesting point that I would make regarding the couple of project that – we talked about one that was completed in the fourth quarter and one that is currently in backlog, is that neither of these appear to be really impacted in any way by stimulus funding. In both cases, these are ones that are supported by holds that are collected.

I know the question has come up in the past regarding whether stimulus funding or the highway bill would really impact the QMB growth. And as I’ve commented in the past, it really doesn’t seem to have much of an impact.

Brian Drab – William Blair

Okay, great. And then just into the irrigation business, can you give us an idea what your capacity utilization was in irrigation, hot rations in 2010? And a follow-up question there is can you help us at all in trying to forecast what the incremental operating margins would be on stronger irrigation sales in Fiscal 2011?

Rick Parod

Well, I would say that our operating capacity, or manufacturing capacity level in irrigation is probably in that 60 to 65 percent range in terms of where we have operated in say the last half of the fiscal year. So that leaves quite a bit of capacity available and obviously, how we manage that capacity or what happens with that capacity will be somewhat determined by where the volume or the incremental revenues are going to come from.

We currently have the incremental capacity in all of our irrigation facilities today to handle what we think will come down the line.

The second part of your question was around the incremental margin aspect and I’d say first that looking at what we saw in the fourth quarter is margins for irrigation improved somewhat. The bigger margin improvement really came from the official QMB sales in the infrastructure part of our business.

What we did see, and have seen some consistent improvements in our irrigation margins, some of which was driven by lean and other things that we’ve done in our factory to improve efficiency followed by the incremental volume. As volume goes up I would expect to see some potential leveraging from that incremental volume. However, the offset of that is how fast that could go up because obviously as we saw in 2008, a very, very rapid increase in volume and also while creating some leverage opportunities create some inefficiencies in the factory as we’re trying to expedite parts and bring in things, a number of different things have to happen to really expedite production.

So I’d be hesitant to project incremental leverage or incremental margin other than to say we expect to see something. I wouldn’t really put a number on that at this point.

Brian Drab – William Blair

Okay. And then if I could ask maybe one more. The Digitech acquisition, can you add any detail around that and how much you spent on that and how that fits in strategically?

Rick Parod

Really, we haven’t disclosed any acquisition amount, but I would characterize it as Digitech is a very small technology company based in Nebraska and they employ approximately 30 people. They’ve been our primary supplier of technology products and components used in our irrigation control and have very good capability when it comes to hardware, firmware, software design, and we have in the past been their largest customer.

In the recent years what we’ve seen is their control technology and support related to it have become more important in delivering of irrigation solutions to our customer and in fact it’s really been expanding to become a more comprehensive field management solution that they really are providing.

The acquisition of Digitech really provides the opportunity to fully integrate our product development process, accelerating development of those technology products and solutions and yet better controlling quality of the total customer experience. That’s been really important to our dealers and customers that we control that quality and experience.

We also intend to leverage that capability across whole irrigation and the infrastructure business segment.

Brian Drab – William Blair

Okay. Thanks very much. I’ll get back in line.

Rick Parod

Thank you.

Operator

Our next question will come from the line of Ned Borland with Hudson Securities.

Ned Borland – Hudson Securities

Good morning, and good quarter.

Rick Parod

Thank you.

Ned Borland – Hudson Securities

On irrigation, I just – if you could delve into the sort of the disparity a little bit with international versus domestic, you know, it seems like that’s sort of the inverse of what we heard out of one of your competitors last week.

Rick Parod

Yes. One of the – the point that I’d make on the international market, and that is that in many respects it is such a diverse group of markets that it can be more project oriented and very regional oriented in that we saw good growth in some of the international markets and we saw some declines in other areas where we did see declines. In at least one or two cases we saw increased competition and in some cases even increased price competition which made the comparable maybe a little bit different.

So I think that would be one aspect. I think the other that I would look at is the fourth quarter is a relatively low quarter for us in general in that when you look at our total international revenues on the irrigation side, the difference between say a 15% growth number for a 9% decline number is, as you’ll see in the quarter, probably $6 million of revenue. So it’s not a huge swing one way or the other in a low quarter such as the fourth quarter.

And we do see these regional swings from time to time. It’s not a great concern but I would say that in some markets we have seen some increased price competition.

Ned Borland – Hudson Securities

And this competition would be from you know, your major global competitors or would this be from more localized competitors?

Rick Parod

I don’t really want to characterize it into – in terms of pointing to which competitor. I would say that it is – we have seen it and it is relatively isolated which tells me that it can often come down to either specific viewers that are doing something or specific salespeople in a region.

I wouldn’t want to characterize it in terms of specific competitors.

Ned Borland – Hudson Securities

Okay. Fair enough. If you could just talk about the pricing environment. I guess you kind of have to balance the good backdrop within the domestic agricultural landscape, but also economic factors, farmers are pretty conservative consumers. I mean, do you think you can get some price in what looks to be a strong selling season in the upcoming year?

Rick Parod

I think your question is can we get more price in the market in the coming years. Is that correct?

Ned Borland – Hudson Securities

Yeah, that’s correct. That’s correct.

Rick Parod

I’d be hesitant to project more pricing. I’d say we’ve seen good improvement in our overall growth margins in the irrigation segment in total and also in more specifically to the U.S. market. I would also say that there really isn’t much that has changed in terms of the competitive landscaping in terms of pricing in the U.S. market, and that there’s pretty good kind of overall pricing discipline and perspective has not really changed at all.

The other side of that equation is what happens with steel pricing and what we’ve seen in recent months is steel has tended to level out but it’s down just slightly from – or a bit from where it was earlier in the fourth quarter and that’s always a factor. If we see steel pricing fall, we could see competition tend to get some of that back, at which point we will be competitive. So I can’t really say that I would see a price increase opportunity. I think some of it will certainly be determined probably by what competitors do.

Ned Borland – Hudson Securities

Okay. Thank you.

Rick Parod

Thank you.

Operator

Our next question will come from the line of Ryan Connors with Janney Montgomery.

Ryan Connors – Janney Montgomery

Good morning, Rick, and congratulations from our end to you and your employees on a great quarter.

Rick Parod

Thanks, Ryan.

Ryan Connors – Janney Montgomery

I had a couple of questions. First off, just on the issue of the outlook for next year, I mean, obviously the run-up in commodity pricing, corn specifically, has been very recent here and so it’s a little early to tell and remember, we’re a little, you know, we’re still a few months away from the core of the ’11 selling season. But can you kind of update us on what you’re hearing from the front lines in terms of your dealers and your sales people about whether or not this very recent ramp up in corn is having an impact on customer activity in terms of inventories and things like that?

Rick Parod

Yes. I’d say from what our salespeople are saying and what our dealers are saying today is that there’s definitely an improvement in farmer sentiment and farmer’s willingness to invest during this coming year based on that sentiment at this time. As you pointed out, this is early in the season, or preseason in terms of that farmer sentiment. So it isn’t much of a determinant yet in terms of what’s going to happen this next year. I’d say that everything we’ve picked up has been very positive. I haven’t really picked up any negatives in terms of farmer sentiment or any specific markets that would view this differently.

I think the other point which we will be watching is, as you know, there was the – Section, I think, 179 Tax Incentive, or Accelerated Depreciation that was available to people in terms of accelerating depreciation and tax credit on buying equipment and that was renewed and basically extended into 2011 also.

So from an end-of-year standpoint, I think farmers will be optimistic in terms of looking at the potential tax benefits that they receive, especially coming off a pretty good harvest for them. So that doesn’t mean I’m projecting strong revenues at this time for that period. I just think that it’s another positive for the market in general.

Ryan Connors – Janney Montgomery

And then kind of revisiting the international versus domestic discussion, you know, as you look out at the outlook for 2011, are there – and you look at the commodities and, I mean, is the outlook more or less bullish for international versus domestic, one or the other, or is it pretty uniformed across the board? Again, just given the way, the dynamics the harvest has played out domestically and abroad and so forth.

Rick Parod

My outlook would be generally fairly bullish for both domestic and international and they’re quite different. I think the – in the domestic U.S. market I would expect to see farmer sentiment really supporting additional equipment purchases from a standpoint of implementing efficient irrigation in some of their dry-land fields and it’s kind of an incremental improvement process as we’ve seen in the past as well as converting and replacing some of the older equipment.

In the international markets, in that case I would expect to see higher commodity prices stimulate some of the larger projects in more of the project phase-type activity that we’ve seen in some of the past years in 2007, 2008 that we saw shut down quite a bit in 2009. Though I think what we’re seeing and hearing today is more of the project oriented activity in the international markets, which is very bullish.

Ryan Connors – Janney Montgomery

And then over on this – on the acquisition side, you know, it’s interesting that in the past I know you’ve talked about acquisitions outside of your two primary platforms right now; being irrigation and infrastructure, maybe looking in other types of water infrastructure products, things like that. But yet, you know, the Digitech acquisition obviously being sort of a vertical integration then within irrigation, would you say from here you’re going to be looking more closely at further kind of vertical integration within your existing platforms or are you still thinking that looking at unrelated businesses as well and potentially a third platform?

Rick Parod

I'm hesitant to really focus our acquisition activity on unrelated businesses. I think everything that we have looked at has a leverage or synergy in some way and how we tend to look at our business today is really in the segments of water use efficiency and transportation safety and security. We continue to look for acquisitions in those two segments or areas but some of those may be vertical in terms of supporting or irrigation business or current transportation safety-type business. And some may add in another way just as Watertronics did. You could argue Watertronics was vertical as well, but I think it’s the – the Digitech acquisition is a very good technology to be adding to this business, which we should be able to be leveraged profitability.

We’ll continue to look for businesses that fit in water use efficiency and transportation safety and security.

Ryan Connors – Janney Montgomery

Super. Thanks for your time today, Rick.

Rick Parod

Yep, thank you.

Operator

Our next question will come from the line of Paul Mammola with Sidoti & Company.

Paul Mammola – Sidoti & Company

Hi. Good morning, everyone.

Rick Parod

Good morning.

Paul Mammola – Sidoti & Company

Rick, if we look at that new moveable barrier project for the first half of ’11, is that weighted towards the first or second quarter, more one than the other?

Rick Parod

Well, I’m hesitant to really split that up for anyone, Paul, because I – as you know, some of these projects can move and I’m just concerned about where that – the timing of that will fall. I would be hesitant to try and characterize that further than to say it will be in the first half.

Paul Mammola – Sidoti & Company

Okay. Switching to irrigation, is it fair to say that replacement drove most of the domestic growth that you saw in the quarter?

Rick Parod

No. I think that the split was still fairly even between the – let’s say dry-land replacement and conversion. I think there may have been a little higher percentage on conversion in this last quarter.

Paul Mammola – Sidoti & Company

Okay. That’s helpful. And if I can try and go back to Ned’s question and reconcile your irrigation results with your closest peer, is it fair to say that the international market has rebounded in the first fiscal quarter? Would you be willing to say that?

Rick Parod

I would say that the international markets are rebounding and in general, have rebounded and I would also say that it is still a little bit spotty of a fragment in some markets less so. But in general, I would say that the international market has definitely rebounded.

Paul Mammola – Sidoti & Company

Okay. And then on our credit concerns, I mean, do you think that’s adding or compounding decline in the quarter or is that still just a general concern?

Rick Parod

I don’t think it’s adding or compounding any of the issues that we’ve seen today. My concern is more going forward. And one of the areas where we’ve seen certainly renewed interest in the last quarter has been in Russia and Ukraine. And certainly that makes a lot of sense if you follow what’s happened in Russia with the drought and the fires and also the shortage in wheat.

So there’s been renewed interesting, but I think that renewed interest and excitement is tempered by the lack of credit availability. So that will continue to be a challenge. I think it could be an excellent growth market but credit will still be an issue.

Paul Mammola – Sidoti & Company

Okay. Thanks for your time, Rick.

Rick Parod

Thank you.

Operator

(Operator Instructions) Our next question will come from the line of David Rhodes with Red Bush Securities.

David Rhodes – Red Bush Securities

Again, great quarter. I just had a couple questions regarding the infrastructure and the irrigation business as it relates to on the initiatives to the infrastructure business, you clearly benefited from better volumes. But can you walk us through some initiatives that you plan to take to improve margins or at least eliminate some of the variances in margins going forward?

Rick Parod

David, you’re referring specifically to the infrastructure business?

David Rhodes – Red Bush Securities

Yes, sorry.

Rick Parod

Well, I think what you’re referencing or referring to is the – when you look at the previous quarters which were fairly flat to even negative in some cases and from an operating margins standpoint and obviously QMB is a very significant piece of that infrastructure business and pulled up those operating margins at the end of the year.

One of the things that we’re focusing on from a – in analysing our infrastructure business today, especially with the new President, is really looking at the product line rationalization, what makes since and what doesn’t and what we can do to improve overall efficiency in that business.

We would like to see that business earning decent margins with and without the QMB business coming in on projects to get to the point where it is more incremental rather than something that we have to live off of. I do think that from a scale standpoint, that’s still a little bit of a challenge, but we will get to that point.

So there’s a number of things happening from an operation efficiency standpoint, product cost reductions, product rationalizations, market rationalizations, all of those types of things are on the table for reviewing the infrastructure today.

David Rhodes – Red Bush Securities

Assuming that we have this similar type of revenue stream in Q1 that we’ve had in Q4, as it relates to any orders in QMB, we’re looking at similar types of margins going forward we should begin to see margin improvement in the second half year over year aside of any QMB business?

Rick Parod

I’m not going to project or give guidance in terms of when or how you will see that margin improvement take place. I’m really more concerned about implementing the changes, identifying the things that we need to change and implementing those changes and having it show up in the result. I’m not prepared to put a time frame on that yet.

David Rhodes – Red Bush Securities

And approximately on the irrigation side, I assume the acquisition was on the irrigation side, correct?

Rick Parod

Yes.

David Rhodes – Red Bush Securities

I mean, that’s where you’re pulling it into. So does that imply that the irrigation revenues on an organic basis were down year over year?

Rick Parod

No. No, this is a very – first of all, it’s a very, very small acquisition and the majority of their business was from us and it was rolled in right at the end of the year. So no, this does not imply that.

David Rhodes – Red Bush Securities

Okay. Great. Thank you.

Operator

Our next question will come from the line of Davis Paddock with Investco.

Davis Paddock – Investco

Yes. Thank you. Can you break out your operating expenses for Q4 between selling G&A and R&D?

Rick Parod

Dave probably has that and do that. Dave Downing.

Dave Downing

Sure Davis, it’s selling expense, I’m sorry, Q4 you asked. Selling expense was 6.387 million; administrative was 7.233 and engineering and R&D was 2.374 million.

Davis Paddock - Investco

Great. Thank you very much.

Dave Downing

You’re welcome.

Operator

There are no further questions at this time. I would like to turn the call back over for closing remarks.

Rick Parod

Well, for our business overall, the global long-term drives are water conservation, population growth, increasing the importance of biofuels and the importance of infrastructure remain very positive.

In addition to the overall business enhancements that have taken place, we continue to have an ongoing structured acquisition process that will generate additional growth opportunities throughout the world in water and infrastructure.

Lindsay is committed to achieving earnings growth through global marketing expansion, improvements in margins and strategic acquisitions.

We’d like to thank you for your questions and participation in this call.

Operator

This concludes today’s teleconference. You may all disconnect.

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