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Lindsay (NYSE:LNN)

Q3 2011 Earnings Call

June 29, 2011 11:00 am ET

Executives

Richard Parod - Chief Executive Officer, President and Director

Timothy Paymal - Chief Accounting Officer and Vice President

Analysts

Christopher Williams - BB&T Capital Markets

Ryan Connors - Janney Montgomery Scott LLC

Jonathan Braatz - Kansas City Capital Associates

Brian Drab - William Blair & Company L.L.C.

Unknown Analyst -

Operator

Good morning. My name is Thea, and I will be the conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Third Quarter 2011 Earning Conference Call. [Operator Instructions]

During this call, management may make forward-looking statements that are subject to risks and uncertainties, and which reflect management’s current beliefs and 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. I would now like to turn the call over to Mr. Rick Parod, President and Chief Executive Officer.

Richard Parod

Good morning, and thank you for joining us today. Joining me today for this call are Jim Raabe, who recently joined Lindsay Corporation as Chief Financial Officer; Tim Paymal, our Chief Accounting Officer; and Dave Downing, President of International Operations. As many of you are aware, David served in a dual role in the past few years as CFO and President of International Operation. Now, with Jim Raabe on board, David will be able to focus his full attention to the growth of our International businesses. We're pleased to have someone of Jim's caliber and breadth of experience join our team, and I would like to thank Dave for his willingness to serve in the dual role during the recession and during our CFO search. These changes strengthen our team of results oriented people and support our continued growth.

Revenues for the third quarter of fiscal 2011 were $153.4 million, increasing 53% over the same quarter last year. Net earnings were $15.3 million or $1.20 per diluted share compared with $6.2 million or $0.50 per diluted share in the prior year's third quarter. Total revenues for the first 9 months of fiscal 2011 were $362.8 million, increasing 34% from the same period last year. Net earnings for the first 9 months rose 63% to $30.9 million, or $2.44 per diluted share compared to $1.50 per diluted share in the first 9 months of fiscal 2010.

In the U.S. irrigation market, revenues were $76.7 million for the third quarter, increasing 60% over the same period last year. Favorable economic conditions in U.S. agricultural markets continued to fuel strong demand for irrigation equipment. Agriculture commodity prices remained comparatively high, with corn increasing 111%, soybean's up 47%, wheat increasing over 79% from the same time last year.

In February, the USDA projected U.S. 2011 net farm income to be the highest on record and 20% higher than 2010. Order flow continued to be robust throughout the peak U.S. irrigation selling season, which has now ended. In spite of the currently high agricultural commodity prices, uncertainty has been created in the U.S. agriculture market over the future of processor tax credits for corn-based ethanol. Significant reductions or elimination of the credits will likely impact corn demand and pricing in that 35% to 40% of corn usage in the U.S. is for ethanol.

In addition, the significant rainfall in the eastern corn belt delayed planting and some parts of the corn belt remained affected by flooding, all of which will likely impact yields and profit potential for farmers. However, most of the affected acres are not in the primary U.S. irrigation market, which is west from Missouri River.

International irrigation revenues were $50.2 million for the third quarter, increasing 55% from the same period last year. Revenues increased in nearly all international markets, most notably in China, Europe and Brazil. For the first 9 months of fiscal 2011, Global Irrigation segment revenues were $278.6 million, rising 38% over the same period last year. Long-term market drivers of improving diets and a growing worldwide population combined with the water use efficiencies available for mechanized irrigation systems continue to be positive drivers for global irrigation equipment demand.

Infrastructure segment revenues were $26.5 million, increasing 35% from the third quarter of last year. Infrastructure segment results improved over the prior year on higher QuickChange Moveable Barrier sales and growth in the Railroad and Tubing businesses. We continue to see strong interest in our Moveable Barrier products which provide a very cost-effective way to safely add lane capacity. The outlook for Infrastructure spending remains unclear with uncertain timing at a multi-year U.S. highway bill, and significant government budget constraints in Europe.

Year-to-date, at the end of the third quarter, Infrastructure revenues were $84.2 million, increasing 21% from the same time last year. Gross profit was $41.5 million for the third quarter versus $25.3 million in the same quarter last year. Gross margins were 27% compared to 25.2% for the third quarter of last year, primarily reflecting improvements in our international irrigation margins and operational improvements in our Infrastructure business segment. Operating expenses for the third quarter were $18.4 million versus $15.2 million for the third quarter of fiscal 2010.

Operating expenses as a percentage of sales were 12% for the quarter compared to 15.2% for the same period last year. The increase in operating expenses included higher personnel-related costs, incremental operating expenses from the acquisition of Digitec, and WMC and additional expenses for environmental monitoring and remediation as part of our ongoing development and implementation of the EPA work plan at the company's Lindsay Nebraska facility.

Our order backlog was $43.3 million on May 31, 2011 compared to $33.9 million May 31, 2010. May 2011 backlog is higher than the same time last year in both Irrigation and Infrastructure. While the quarter-end backlog reflects better-than-normal seasonal order level, it was still well below the record backlog at the end of the third quarter in fiscal 2008.

Cash and cash equivalents rose 17.1% -- $17.1 million to $100.6 million, while debt decreased $4.3 million over the same period, and nearly $8 million has been invested in acquisitions since the same time last year. Accounts receivable rose $30.8 million in higher sales, while days sales outstanding and accounts receivable improved. Inventories increased $5.8 million and inventory turns also improved.

We will continue to use cash repurchase to invest in organic growth opportunities such as new product development, geographic expansion, funding seasonal and cyclical fluctuations, and in the acquisition of synergistic technologies and product lines. In addition, we continue to seek larger synergistic acquisitions representing additional businesses in water use efficiency or transportation safety and security.

In summary, significantly increased irrigation equipment demand and improved operating results from our Infrastructure segment were realized in the quarter, resulting in record third quarter revenues and earnings.

In the Irrigation segment, favorable economic conditions globally resulted in positive farmer sentiment and increased sales. However, the current governmental debt environment will likely lead to additional examination of subsidies and tax credit, such as the credit for ethanol processors which may result in changes impacting farmers' future profit potential. Overall, we're confident that increasing agricultural yields to boost food supply, improving water use efficiency, expanding biofuel production and improving transportation infrastructure will remain global priorities and continue to be strong drivers for our markets long term. In addition, we continue our disciplined approach to finding and integrating accretive acquisitions that add new businesses and/our product lines and to investing in organic growth opportunities. I'd now like to open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Brian Drab with William Blair.

Brian Drab - William Blair & Company L.L.C.

I'm wondering, Rick, if you could give us any hint as to what the QuickChange Moveable Barrier sales were in the quarter given that you had really solid growth there, solid sales in that business over the last few quarters. If I'm not mistaken, I think that we did a -- going back to the fourth quarter of 2010, something in the $9 million range and then $8 million in the first quarter. And I think if this number is -- if my notes are correct here, about $14 million in the second quarter and how did those look in the third quarter?

Richard Parod

Well, I would characterize the third quarter's QMB sales, Brian, as significantly less than some of the other quarters and probably in the range of about 20% or less than 20% of the total infrastructure revenue. So I was pleased to see the growth in the other Infrastructure business segments and the improvement in profitability from those segments so they all contributed to the improvement that we've seen.

Brian Drab - William Blair & Company L.L.C.

Great. And then could you elaborate a little bit on the productivity improvements that you saw, or that you drove in the Infrastructure segment in the quarter?

Richard Parod

Well, a number of the changes that took place in the Infrastructure business have really taken place over the last couple of quarters, but they've included things like expense reduction. We have changed staffing. They've included automation of some of the manufacturing processes and additional automation, including a rationalization of a facility and closing a facility. So there's a number of factors that have been tied to it and some of them are more operational control type procedures as well including approval of pricing levels and various things. So all of those things have led to improved results in the Infrastructure business.

Brian Drab - William Blair & Company L.L.C.

Okay, great. And then can you -- just last question, could you give a little more detail on specific international regions where you saw strength? I mean, you went from $25 million in international irrigation revenue in second quarter to $50 million in the third quarter. Could you help us understand a little bit better what's going on there?

Richard Parod

Well, in the previous quarter, we really hadn't seen the growth yet in some of the international markets and we commented that we felt it was lagging, some the U.S. growth that we had seen. So what we saw during the third quarter was growth, certainly in South America, particularly Brazil, with emphasis on sugarcane for ethanol, but also in Brazil in general and South America in general. We also saw growth in China and believe that, that market is developing really pretty nicely. The other area that we saw some pretty good growth in was in Eastern Europe, in the former Soviet Region. So all of those areas, we saw some good growth in things that have stepped up in the international markets.

Operator

The next question will come from Ryan Connors with Janney Montgomery.

Ryan Connors - Janney Montgomery Scott LLC

Couple questions here. First off, just kind of on the capacity side, Rick. I guess one of the challenges that we're having in terms of figuring out what kind of further upside there could potentially be to unit volumes from here is just what kind of capacity there is both at Lindsay and on an industry basis to deliver that. So could you just talk a little bit to us about where you are today on a capacity utilization basis in irrigation and just how you think about capacity relative to potential, if in fact the industry were to continue growing at this kind of pace?

Richard Parod

Yes. As we've talked about in the past, we do not have real many specific capacity constraints and that some of our processes can be augmented with manual processes. I would say that in general, we're probably in the range of the, let's say 60% to 70% capacity level. However, we can bring in more people and add people to the, say, the assembly line electronics and different areas to augment that assuming we have the component. In the international markets, with our factories there, as we've talked about in that past, we're buying tubing outside in many cases and importing some of the materials from the U.S. in our U.S. factory. But in general, we don't really see significant capacity constraints. We may be, from time to time, more limited by material or component availability. We haven't really seen any significant constraints there, other than we've seen a little bit recently in some LCDs and some electronic components, partly related to the incident in Japan. However, in general, there's nothing really significant on the horizon from a capacity level, capacity constraint level.

Ryan Connors - Janney Montgomery Scott LLC

Okay, and I guess, kind of a related question on used pivot sales. Do you see -- logically, one would think that when new pivot sales are so strong that there might be more used pivots as "trade-ins" hitting the market. Do you see that and what impact, if so, did that have on demand for new pivots, and I guess in particular internationally, because I guess logically, one of the things that less affluent emerging markets might be a place where the used pivots would be more likely to sell?

Richard Parod

Well, we hear of some concern, let's say, from time to time in some of the international markets in terms of, let's say, more availability of used pivots. I haven't really heard anything recently on that. I don't believe that's really a factor. The other part of it that ties into this, Ryan, is looking at where the pivot sales are going in the United States. As we talked about in the past, typically we've seen quarter-to-quarter, and in a normal year, it would run about 1/3 going into dry land, 1/3 into replacement and 1/3 into conversion. So obviously, the replacement piece would be the bigger concern where we're taking pivots off some of the old pivots off and selling them. What we've seen this past year, I'd say in the past quarter, about probably more than 45% of the machines were going into dry land, which is not a big surprise given the high commodity prices.

Ryan Connors - Janney Montgomery Scott LLC

Okay. And then just a final question, I know you touched on this but if you can just talk a little bit more about the related issues of pricing in raw materials, is there any -- will there be any contract roll-offs or supply contracts or anything like that that will cause raw material cost to jump for you over the remainder of the year? And then what do you see going on in the price environment, just generally in terms of you and your competitors trying to price the product for the higher input cost levels of steel and zinc up and so forth?

Richard Parod

Well, as you know, steel is the most significant one. It is about 1/3 of our cost of goods sold. What we saw in the -- during the quarter was about a 35% increase in steel cost and we believe steel has now stabilized. And as you know and we've talked about in the past, in times of rising steel prices, we tend to cover about 70% or more of our next 3 months or the next quarter's needs in either inventory on hand or through purchase commitments. And that's a practice that has been in place for quite a while. We've also -- during times, as we're starting to see now when steel stabilizes or decreases may pull that back from that 70% level. We're following that practice today and we believe we're able to align our pricing with our material costs. Of course, that is dependent sometimes on competitive actions on price. However, I would say that indications from the past quarter are that we've been able to appropriately align that.

Operator

The next question will come from Schon Williams with BB&T.

Christopher Williams - BB&T Capital Markets

I just wanted to dig in on the irrigation numbers a little bit more. Seasonally, domestic revenues would typically be up kind of 25%, 30% in fiscal Q3 versus fiscal Q2. This quarter came in more like 15%. I'm just wondering if you have any thoughts about maybe why this quarter was a little bit kind of seasonally weaker than historically?

Richard Parod

No, I don't really have anything that would really characterize it as seasonally weaker. I do understand your point on this. However, I'd say we had a good second quarter and a good solid third quarter. I think demand was really pretty robust through both of those periods. We have seen, at times, where the third quarter will ramp up a little more significantly than the second quarter. Some of that has to do weather patterns and things, but there was nothing that I would point to that would indicate that there was any change or anything of that nature, although obviously, the wet weather may have had some impact in terms of the third quarter revenues.

Christopher Williams - BB&T Capital Markets

That's where I was going with maybe, was there any impact from the flooding that might have either delayed farmer purchases later than normal and might have actually gotten pushed into the fourth quarter? Or are those sales potentially lost and they would actually get pushed into next year?

Richard Parod

I'm sure that there were some, Schon, that took place that may have -- where they were impacted by the flooding and heavy rains. However, as I mentioned that's not our primary irrigation market, which the primary irrigation market would be west of the Missouri River, but I know that there are customers who certainly would not have purchased because of the flooding and the heavy rains in the spring.

Christopher Williams - BB&T Capital Markets

Okay. And then on the international side. I mean it sounds like the demand was with very broad-based. I just want to make sure that given that you are seeing broad-based demand across a number of geographic markets, then you think that, I guess, $40 million to $50 million is a sustainable number for the irrigation for the international side? I was just going to say, I mean that segment tends to be very lumpy given that it's more project-oriented. I'm just wondering is this more of a timing issue where we had 2 or 3 projects all kind of hit all at the same time and maybe that number needs to get dialed back over the next quarter or 2?

Richard Parod

Well, as you know, we don't give guidance. So I'm not going to really characterize the number as sustainable or not sustainable. I would say that you are right that the international markets tend to be lumpier certainly than the U.S. market. However, some of these regions, for example, Brazil, is not as lumpy and we've seen more sustainable demand in order flow in that region. We will have some lumpiness in our international revenues because of the nature of a large projects from time to time. There are no real significant ones that stand out. We did have a couple of projects in the quarter. I expect that there could be projects in future quarters on a comparative basis, but nothing significant that I would say you should back out from that 10 points.

Christopher Williams - BB&T Capital Markets

Okay. And then last question just on outlook for next year. I mean, there is a large agriculture machinery manufacturer out there talking about U.S. farm income actually being slightly down during 2012 versus 2011. I'm just wondering what is your take maybe on that outlook and then if that were to come true that we fell kind of flattish to slightly down farm incomes. Do you still think you could grow the irrigation side of the business in that environment?

Richard Parod

Well, certainly there's that number of factors and if we're looking at the U.S. market, it will depend on what happens with ending stocks at the end of this season and what takes place or transpires during the next season in terms of yields and harvest and weather and patterns -- weather patterns as well. However, outside of the U.S., when we get to the international markets, they're significantly less developed from an irrigation standpoint than the U.S. Market. So I believe that the opportunities that exist in the international markets are different than they would be potentially for, let's say, ag equipment dealer or sellers or manufacturers in that we're really developing the sustainable irrigation in those markets.

Operator

The next question will come from Andrew O'Connor [ph] With Harris Investments.

Unknown Analyst -

Rick, I wanted to know, what are Lindsay's priorities for cash which continues to build? The company's in great shape that way.

Richard Parod

Well, yes. Well, as you know our cash balance has increased. In terms of priority, I would say our first priority would be organic growth. As you know, we also pay a dividend which we continually, annually review and have increased for a number of years and we'll continue to review that. Outside of that, I would say acquisitions and acquisitions that may be first product line or technology-type acquisitions synergistic to our existing businesses. As I mentioned earlier, we also look for larger acquisitions that would be synergistic in some way that would be in water use efficiency or the transportation safety and security similar to our Infrastructure business. I often get asked, is there a priority over -- of one over the other and I'd say that, certainly, if we can find appropriate, sizable acquisitions tied into the water side of it, that is a bit of preference, but we do look for acquisitions in any parts of those areas that I mentioned, in any of those areas.

Unknown Analyst -

All right, that's helpful. And then I'm relatively new to the company, is there an economic return that you guys target in terms of deploying new capital? Or how should investors think about that?

Richard Parod

We look at any of the deployment of capital in terms of our weighted average cost of capital and what that rate would be and we do discounted cash flow analysis and if we're looking at acquisitions, we look at multiple models where we'll look at best case, most probable case and worst-case scenarios before we are ready to deploy capital and make a deal. So the primary measure that we're going to look at initially will be the weighted average cost of capital.

Unknown Analyst -

All right, sir. And then lastly, can you further characterize the pricing environment for both irrigation systems and infrastructure products and how pricing compares to, say, maybe 6 to 12 months ago and how you see it trending, looking ahead? Mindful of your prior comments, but I wanted to know if you could elaborate a little bit more.

Richard Parod

Well, I would -- my comment on pricing would be that we've seen a pricing environment that has allowed us to pass on material increases appropriately. It's been a pretty measured pricing environment from the standpoint of no real radical changes other than passing through the material costs in general. And this is primarily for the irrigation market. There have been times when we've seen more dramatic shifts from some competitors, but that's usually from time to time we'll see that or in certain regions. And we do see some -- a little more regional variation in price and particularly when it comes to larger projects things get much more competitive. In the infrastructure market, I would define it as pretty stable pricing environment. We certainly don't have the larger fluctuation pricing due to material cost, because they're not really as significant a factor, any one material in our infrastructure product line. So, it's a little more stable pricing environment in infrastructure.

Operator

[Operator Instructions] The next question will come from Jon Braatz with Kansas City Capital.

Jonathan Braatz - Kansas City Capital Associates

You talked a little bit about the ethanol issue. I'm not sure when that's going to be clarified in Washington or -- but let's say it drags out a little bit. Do you think that it's -- that the ethanol uncertainty could, by itself, weigh on some of the equipment purchasing decisions that your customers might make in the latter half of this year and when the selling season begins? Do you think that uncertainty could weigh on those decisions?

Richard Parod

I think that it's certainly possible, Jon. I don't really foresee that having a big impact in terms of weighing on the decision process while pending. I don't think that's what most of our customers are thinking about today. They're looking at some pretty strong commodity prices. I also believe that they're looking at what is that potential impact if that credit goes away. And the things that I've run on it would indicate that there's quite a variation in thought on this in terms it may not have much effect in terms of the processors and because the demand is there, there is a need to produce ethanol. Or it could have a pretty significant effect on overall corn demand. So I don't think that's really known and I think our customers, in general, are taking that wait-and-see approach. It's not holding them back from making decisions today, and I don't foresee that holding us back. I think the outcome will be a bigger issue for them, whatever that -- whichever way it goes.

Jonathan Braatz - Kansas City Capital Associates

Okay. How much of your new irrigation sales do indeed go to the, say, the corn and soybean market?

Richard Parod

I don't know that off-hand. I would tell you that just thinking back to 2008 data, what we saw was about 1/3 of the crops that were irrigated, about 1/3 of -- sorry, about 1/3 of where pivots were applied was irrigating corn at that time. I can't say that 1/3 of what goes out the doors is going to irrigate corn and soybeans but we did see in the -- I think it was USDA Farm and Ranch Irrigation Survey that it was about 33% from our net range was irrigating corn at that time.

Operator

The next question will come from Sean Boyd with Westcliffe [ph]

Unknown Analyst -

First, and I apologize if I missed this, but in terms of operating income, can you break that down by segment, Irrigation and Infrastructure?

Timothy Paymal

Sure, I can take that question.

Richard Parod

Tim Paymal.

Timothy Paymal

The operating income for the Irrigation segment in the quarter was $25.6 million. And for the Infrastructure segment, it was $1.1 million.

Unknown Analyst -

That's helpful. So basically, we ran -- yes, [indiscernible] solid margins than Irrigation...

Timothy Paymal

Exactly. The operation margin for the Irrigation segment in the quarter was 20.2% and 4.1% for the Infrastructure segment.

Unknown Analyst -

Right. And that 4% being lower quarter-to-quarter, the biggest driver there is just that it's a much lower QMB mix in the quarter?

Timothy Paymal

But significantly improved over prior year third quarter 2010.

Unknown Analyst -

Yes. Okay. Second question for me is just on the backlog and probably goes to me being relatively new to the company. Backlog down significantly quarter-to-quarter but still up nicely year-over-year and then when I back into implied orders, also still up very nice year-over-year. So kind of 2 things come out of that number. One, should I read much into that quarterly sequential fluctuation in the backlog? And number 2, would you expect sort of the continuation of the nice sort of growth in that backlog bouncing back in the coming quarter?

Richard Parod

Well, I think the -- from the quarter sequential decline, I would describe that as fairly normal sequential adjustment or decline from the third -- from the second to third quarter ending backlogs. I would not read a lot into what the backlog, actual backlog numbers says, keeping in mind that this is the low end of the season for us. The primary selling season has ended. So I think it's nice that the backlog has increased. But I wouldn't read a lot into that in terms of going forward.

Unknown Analyst -

Okay, that's helpful, and on the order growth. That -- the question there in terms of the order growth that we're seeing and the 30% year-over-year level here. Is that a -- given what you're seeing right now, is that a fair level to think about going forward?

Richard Parod

Well, I think I understand your question. And as I said, we don't really give guidance. But the -- I would say that we're pleased with the order growth and it is good solid growth over the previous year but I would not give guidance in terms of what that means for the next quarter or anything of that nature.

Operator

[Operator Instructions] And at this time, there are no further questions. I would like to turn the conference back over to Mr. Parod for any closing remarks.

Richard Parod

Before [ph] our business overall, the global long-term drivers of water conservation, population growth increase the importance of biofuels and improvements in infrastructure remain positive. In addition to the overall business enhancements that have taken place, we can 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 market expansion, improvement in margins and strategic acquisitions. We'd like to thank you for your questions and participation in this call. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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