Lindsay Corporation (NYSE:LNN) Q2 2023 Earnings Conference Call April 4, 2023 11:00 AM ET
Company Participants
Randy Wood - President and Chief Executive Officer
Brian Ketcham - Chief Financial Officer
Conference Call Participants
Ryan Connors - Northcoast Research
Brian Wright - ROTH Capital
Adam Farley - Stifel
Brett Kearney - Gabelli Funds
Blake Keating - William Blair
Operator
Good day and welcome to the Lindsay Corporation’s Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. And again this is Lindsay Corporation’s second quarter 2023 earnings conference call. I would now like to turn the conference over to Randy Wood, President and Chief Executive Officer of Lindsay Corporation. Please go ahead.
Randy Wood
Thank you and good morning, everyone. Welcome to our fiscal 2023 second quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer. With the first half of our fiscal year complete, I am pleased with the performance of our business and encouraged by our ability to execute operationally and strategically to drive improved profitability across the organization amidst a volatile macroeconomic environment. While we have been faced with broader economic headwinds and strong year-over-year comparisons that have created pressure on the top line during the quarter, our organization continues to prove its resilience as demonstrated by the strong operating income results.
Looking at the macro environment. During the quarter, we continued to observe constraints across the supply chain, most notably in electronics. Our teams are working hard to mitigate these issues and we maintain our expectation that we will see continued improvement throughout the second half of the fiscal year. Compared to the prior year period, inflationary pressures have subsided moderately. Having said that, we are still taking a cautious approach to managing costs and this helped drive expansion in our operating margins during the quarter. Additionally, strong price realization contributed to improved operating income across the business.
Shifting to technology and business development. We continue to make progress on implementing our innovation strategy. Last quarter, we announced a strategic partnership with Ceres Imaging, a leading provider of high-resolution imagery and analytics that will expand the capabilities of our FieldNET platform. This partnership will provide valuable insights into crop health in alignment with our smart pivot roadmap, while giving customers a choice in the imagery platform that best suits their unique needs.
During the quarter, we also introduced the TAU-XR to our MASH Crash Cushion Lineup in our infrastructure business. This easy-to-install crash cushion expands our offering, increases safety and reduces maintenance labor in the field. We also recently appointed Brian Magnusson as our Senior Vice President of Strategy and Business Development. Brian’s role will be focused on accelerating growth and creating value for all stakeholders through synergistic partnerships as well as strategic M&A. This is going to be a critical role for the organization as we continue to strengthen our position in the market, drive deeper penetration and position Lindsay for stable top and bottom line growth.
Touching on irrigation market conditions. The North American market continues to demonstrate stable demand trends. Our outlook remains positive despite the anticipated reduction in net farm income in 2023. In February, the USDA released its updated forecast for the year, indicating that net farm income is expected to decrease nearly 16% versus 2022 in nominal dollars. Net farm income is still expected to be more than 26% above its 20-year average when adjusted for inflation. Strong commodity prices and net farm income should support market stability and an investment in irrigated agriculture and water management technology will generate a positive return for our customers.
Regarding drought conditions, we have seen relief to some of the harsher conditions in California and other parts of the West. However, drought conditions have persisted and in some instances continue to worsen in the Midwest, including Kansas and Nebraska. This will likely drive an early start to the irrigation season and highlight the importance of efficient water and energy management with tools like FieldNET and FieldNET Advisor.
Fundamentals in the international markets remain strong. Mature markets continue to be supported by high commodity prices and the developing markets are supported by increased focus on food security. The irrigation business did experience some delays in sales activity in Brazil during the quarter due to the transition in federal government following the Presidential election at the end of 2022. We do not expect these delays to materially impact the full year results.
Project revenue in Egypt was elevated in the second quarter of fiscal 2022. This, along with sales in Ukraine and Russia in the prior year added a challenge on year-over-year comparisons in the quarter. Looking ahead, there are additional opportunities in the international markets that we are well positioned to capitalize on.
Moving to infrastructure. As government spending increases in response to the Infrastructure Investments and Jobs Act, states should see additional funding flow from the federal programs. We are well positioned in the market to supply state and local government programs as the construction season starts this spring. We are encouraged by what we have seen in the success of our Road Zipper program and the strength of our sales and lease funnel. Going forward, we will continue to actively manage the funnel to drive continued infrastructure segment growth.
I will now turn the call over to Brian to review our second quarter financial results. Brian?
Brian Ketcham
Thank you, Randy and good morning everyone. Total revenues for the second quarter of fiscal 2023 were $166.2 million compared to $200.1 million in the same quarter last year. The decline in consolidated revenues came mainly from the Irrigation segment as infrastructure revenues showed only a slight decline. The lower revenue generation in our Irrigation segment compared to the prior year quarter resulted in part from differences in market timing as well as from international project volume in the prior year that did not repeat.
Operating income for the quarter was $27.3 million, an increase of 49% compared to $18.3 million in the same quarter last year. Strong operating income results helped drive improved operating margins of 16.4%, up meaningfully compared to 9.2% in the prior year. Strong gross margin improvement in both irrigation and infrastructure drove the expansion in total operating margin. This increase was partially offset by higher operating expenses compared to prior year, which resulted primarily from higher employee compensation costs and increased investments in new product development.
Net earnings for the quarter were $18.1 million or $1.63 per diluted share compared to net earnings of $14.6 million or $1.32 per diluted share in the prior year. The 24% increase in net earnings resulted from the increased operating income and was partially offset by foreign currency transaction losses in the current year compared to gains in the prior year and from higher income tax expense. The increase in the effective tax rate reflected a greater proportion of earnings in higher rate foreign jurisdictions, primarily Brazil compared to the same quarter last year.
Moving on to the Irrigation segment performance for the quarter. Irrigation segment revenues for the second quarter were $147.8 million compared to $180.7 million in the same quarter last year. North America irrigation revenues were $90.4 million compared to $100.7 million in the same quarter last year. A decline in unit sales volume was partially offset by the impact of higher average selling prices. Prior year unit volume was bolstered by a pull forward of orders in advance of announced selling price increases. Current year unit volume reflected a return to a more traditional seasonal demand cadence as selling prices have stabilized over the past few quarters.
In the international irrigation markets, revenues were $57.4 million compared to $80 million in the same quarter last year. This decrease resulted primarily from the completion of a large Egypt project in the prior year that did not repeat and from lower sales volumes in Brazil, Ukraine and Russia compared to the prior year. As Randy mentioned in his opening comments, sales and order activity in Brazil were temporarily reduced as a result of the federal government transition following the October 2022 Presidential election. We expect the reduced order activity will have some impact on year-over-year comparisons in our third quarter. However, our full year outlook for Brazil remains unchanged.
Total irrigation segment operating income for the second quarter was $32.8 million, an increase of 33% compared to the prior year despite the year-over-year decline in segment revenues. Operating margin represented 22.2% of sales, expanding meaningfully compared to 13.7% of sales in the prior year. The increase in operating income and operating margin resulted primarily from improved price realization, less inflationary impact on input costs and a more favorable margin mix of international irrigation revenues compared to the prior year. The prior year second quarter included additional cost of sales of approximately $2.8 million related to the LIFO method of accounting for inventory, while current year cost of sales, were reduced to approximately $1.5 million. Additionally, the prior year included non-recurring costs of approximately $1.8 million related to factory maintenance and outside consulting services.
Turning to the Infrastructure segment. Infrastructure segment revenues for the second quarter were $18.5 million compared to $19.4 million in the same quarter last year. Lower sales of road safety products were partially offset by an increase in Road Zipper system lease revenue, while Road Zipper project sales were similar to the prior year period.
Infrastructure segment operating income for the second quarter was $2 million compared to $300,000 in the same quarter last year. This increase in operating income helped improve operating margin for the quarter, which was 10.9% of sales compared to 1.7% of sales in the prior year. These improved current year results reflect improved price realization, a more favorable margin mix of revenue and lower inflationary impact on input costs compared to the prior year.
Turning to the balance sheet and liquidity. Our balance sheet remains solid, and our total available liquidity at the end of the quarter was $156.4 million, with $106.4 million in cash, cash equivalents and marketable securities and undrawn capacity on our revolving credit facility of $50 million. Through improved operating income performance and an ongoing focus on working capital management, we expect to see enhanced free cash flow generation in the balance of fiscal 2023. This stronger cash flow will be strategically beneficial as it will further enhance our ability to invest in growth opportunities and create value for our shareholders.
At this time, I’d like to turn the call back over to the operator to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Ryan Connors from Northcoast Research. Ryan, please go ahead.
Ryan Connors
Thanks for taking my question. I wanted to ask about the issue of these international projects, Brian, you said there was a project that did not repeat from last year. And you mentioned that pretty prominently as a positive mix driver. I know you’ve never really quantified that the exact magnitude of the margin differential on those projects relative to the other business. But it sounds like that margin differential might be expanding. I mean, is – has that business gotten more competitive? Or is that – am I reading too much into that?
Randy Wood
Yes, good morning. Ryan, this is Randy. I’ll take that one. And I think it’s always been more competitive just due to the size and the magnitude of those projects. And I wouldn’t say with certainty that it’s expanding versus where it’s been historically. I just think some of those projects are potentially larger than they have been historically. So you do see some of that draw down with a little more significance. But I wouldn’t say, again, with confidence that, that gap is getting any larger.
Ryan Connors
Okay. Okay. And then in terms of the backlog, as noted in the press release that the backlog is down in irrigation. But can you talk about the composition of backlog, any color there you can give us on international versus North America within that irrigation backlog.
Brian Ketcham
Yes, this is Brian. I would say both international, irrigation and North America backlogs would be lower than last year. And I think similar dynamics driving that. I think, again, a year ago coming into the quarter, both international and North America, we had stronger backlogs as that pull ahead in orders to try to beat the price increases was going on. And we’ve seen the prices stabilize in both markets. So I’d say Brazil, backlog year-over-year is down. But from a seasonal standpoint, nothing there other than just the difference in timing of orders. But as we’ve commented in the past, backlog is not necessarily always the best indicator, especially in shorter lead time situations where there is industry capacity and nothing really going on of any significance on the pricing side.
Ryan Connors
Got it. Okay. And then just one last housekeeping, Brian, you mentioned the tax rate and the shifts there and the reasons behind that. But is that something from a modeling standpoint, we should expect that to remain elevated or will that jump right back down in 3Q?
Brian Ketcham
Yes. I think last quarter, I had mentioned 27.5 for the year. I think that still remains the case. And if you look back over the last couple of years, I think the biggest driver in the increasing effective tax rate is just a greater proportion of earnings coming from Brazil, which has a higher statutory tax rate.
Ryan Connors
Got it. Okay, thanks so much.
Operator
We now have a question from Brian Wright from ROTH Capital. Brian, please go ahead.
Brian Wright
Thanks. Good morning. I was wondering, is it possible to maybe try and quantify the demand pull forward from the irrigation in the year ago quarter to kind of get to kind of a normalized?
Brian Ketcham
Yes. I don’t – I guess I’ll put it in some context. When you – if you look at the last, let’s say, 9 or 10 years, generally, our strongest quarter is going to be the third quarter as we get closer to planning season. Last year was 1 of 2 years. I think that second quarter was our strongest quarter. And so that’s what – and again, going into the second quarter last year is when we had the higher backlogs being driven by the order pull ahead. So – it’s – I think the overall demand environment is fairly stable with a year ago. I think it is just a little bit of that shift from last year being more pulled forward into more of the traditional seasonal demand this year. But difficult to put an exact number on it because there is other variables that come into play in terms of regional differences across the U.S.
Brian Wright
Okay. No, no, that’s very helpful. I was just wondering on Slide 6 of the presentation, you kind of break out the revenue from conversion volumes in dry land volumes. And I was just hoping you can help us on how those are defined.
Brian Ketcham
Yes. And that’s tracked with every order that we take depending on what the application is, if it’s a replacement machine or if it’s dry land, which would be irrigation for the first time or conversion. And that can vary from quarter-to-quarter, again, it can vary from region to region. But that’s something that we have tracked for some period of time.
Brian Wright
And then I guess, just given the conditions in Nebraska and in Kansas in particular, and a little bit in Oklahoma as well, just how to think about that from a historical perspective and how that could impact demand?
Randy Wood
Right now, Brian, we’d say that the drought is at a point that it’s probably positive for demand in general. And there is a couple of reasons for that. We do believe that there could be an earlier start to the irrigation season if there is not a lot of natural spring precipitation to Germany, the crop starter crop and the pivots mice started a little earlier. I know talking with customers across Kansas and Nebraska, that’s kind of their mindset right now. It could also accelerate some machine replacements. If they think they are going to put more hours on a machine this year, it could drive machine replacement, it could drive more parts upgrade programs as well. And we’ve often talked about drought being a positive demand driver to a point, but when you run out of water to finish a crop and the machine stop, then it stops becoming a positive demand driver. We don’t see a lot of that severity this early in the season, but it’s something that we’re going to monitor very closely as we move into the core summer months here.
Brian Wright
Okay. Great, thank you.
Operator
Our next question comes from Nathan Jones from Stifel. Nathan, please go ahead.
Adam Farley
Good morning. This is Adam Farley on for Nathan. I wanted to start on the infrastructure segment. What is your outlook for the Infrastructure segment for the remainder of the year? When does – what do you expect federal funding to improve the road safety business? And – maybe is there any notable timing related to the growth of the products on all that we should be looking out for? Thanks.
Brian Ketcham
Yes, Adam, this is Brian. Yes, what we have been saying the last couple of quarters is we do expect to see some of the IIJA funding start to have an impact in the second half of our year. As that gets to the states and then the states plan their projects, I think that’s still the expectation. We – and one of the areas that we expect to see some growth in the second half of the year is in the Road Zipper leasing side of the business as Road Zipper gets involved with some of those construction projects. Timing can vary. I think the inflation that we’ve seen that’s impacting some of the costs of some of these construction projects that have, in some cases, resulted in the projects going back and getting rebid, that kind of plays into some of the timing. I think the other – a little bit of a wildcard out there right now, too, is just you’ve seen the extreme weather in California. We do have projects that we were planning in California. So, the question is, with the priorities, do the priorities get shifted into repairing a road versus a road construction project. So, again, a number of variables, but still positive, I would say, tailwind to the infrastructure business, starting into the second half of ‘23, but really continuing on into 2024, probably a little bit more strongly.
Adam Farley
Okay. Thanks for that. And then I wanted to shift gears to the increased investments in new products. What are the investments being made? What are the expected contributions to revenue from new products? Should we expect these expenses to be discrete or maybe should these new product development expenses continue at this level or higher?
Randy Wood
Yes. This is Randy, Adam. I will take that one. And we are seeing today a couple of things, an increase in total spending, but also a shift in spending. And our focus is really move towards technology and innovation tools like FieldNET, our strategic partnerships to kind of broaden our presence in our customers’ ecosystem. So, we are really seeing more money and a shift of our total spending portfolio going into technology and innovation. We will see our smart pivot platform that we have got out on beta launch right now, full commercial availability later this fall. We will see a new FieldNET user interface that we have been working on pretty aggressively, getting a lot of tremendous customer feedback there. But those products are going to get to market before the end of this calendar year, be in our customers’ hands for this fall season, and we think it will do a lot in terms of customer loyalty and retention. We also think it’s going to give us an upper hand on attracting new customers to the FieldNET spaces as well. As you know, we haven’t broke out kind of the technology innovation sales as part of our mix. And when you look at the value of our hardware device and a subscription compared to the value of a machine, there really isn’t – you can’t compare those two with an acceptable ratio. So, we do see it being an important part of long-term market share growth, our ability to attract and retain customers. But we, again, haven’t broken it out in terms of revenue percent. When it comes to spending rates, this is an area that we feel we need to differentiate. So, we will continue to see, in my view, spending at these levels. And if we see a great market opportunity that comes back to our voice of the customer process, we don’t have any fear of increasing spending there. And there is really a meritocracy in many ways. As we start to generate gross margin, operating income improvement, we are going to be more than willing to put that back into our new product innovation that we think will allow us to grow market share and retain and attract customers.
Adam Farley
Thank you for taking my questions.
Randy Wood
Thanks Adam.
Operator
Our next question comes from Nathan Jones, I am sorry, from Brett Kearney from Gabelli Funds. Brett, please go ahead.
Brett Kearney
Hi guys. Good morning. Thanks for taking my question.
Randy Wood
Good morning Brett.
Brett Kearney
With the new TAU-XR crash cushion, just wondering how that was received, I think you guys were recently out at a convention traffic expo. And also, I know you guys talked about a strong funnel for the Road Zipper offering, and you have developed a lot of good relationships across the state and local Department of Transportation levels in the country. Are you able to kind of tie in some of your other road safety, crash cushion projects to those conversations, or is it kind of a different sales cycle?
Randy Wood
Yes. Brett, I think the TAU-XR was launched at AABS [ph] and that was, I think very well received, and it really opens up our channel to have access to a different product segment that had been a gap for us. So, I think it did generate a lot of excitement and allows our dealers and Lindsay to participate in some of the bids and tenders in certain parts of the country where we maybe had to sit on the sidelines historically. So, we do have big plans for that product line. In terms of the Road Zipper and the road safety products, there is some overlap there, but they are really targeting two different ends of the construction spectrum for the most part when we look at Road Zipper and the construction application at least. So, there is some overlap, but we do view those as being fairly independent markets. And when we go-to-market in those two market segments differently, different commercial teams focused on some of those activities. So, we do our best to meet the customers where they want us to be for those product lines.
Brett Kearney
Excellent. And then with the appointment of Brian, the VP Strategy, Business Development, do you guys feel the focus there will be primarily opportunities in the North America market and probably more skewed towards the irrigation side of the portfolio or also encompassing infrastructure?
Randy Wood
I would say right now that Brian doesn’t have a lot of obstacles. As a global company, I think we are more than capable and willing to look at the globe for good opportunities. We do see a lot of good opportunities for industry consolidation. We see a lot of good technology innovation opportunities, a lot of bolt-on opportunities. We see some transformational stuff. So, I think Brian is really not going to be limited in his ability to look around the world for anything that we think could grow Lindsay in both infrastructure or irrigation. Having said that, are some of the near-term opportunities easier to identify in irrigation, I think there is maybe a little more target-rich environment there. But Brian’s got – Brian’s got an open book to look at all opportunities that we think will create value for shareholders and our customers.
Brett Kearney
Excellent. Very helpful. Thanks so much Randy.
Randy Wood
Thanks Brett.
Operator
[Operator Instructions] We will follow now with a question from Brian Drab from William Blair. Brian Drab, please go ahead.
Blake Keating
Hi. Good morning. This is Blake Keating on for Brian.
Randy Wood
Hi Blake.
Blake Keating
I just wanted to ask about the outlook for Brazil. I know you guys said it won’t impact full year revenue, but I was just curious how much revenue was delayed and timing of that revenue being recognized?
Brian Ketcham
Yes. I will take the first part of the question, Blake. I think in terms of dollar amount, I won’t quantify specifically, but we were – I would say we were down slightly year-over-year in Brazil in the second quarter. If you compare that to the first quarter, we were up, I think it was 65%. So, I mean it was a significant slowdown from what we would have expected. But this does traditionally happen when there is a transition. And in this particular case, probably more so just because of the amount of protesting and things like that, that was going on. But what we are – I think we have gotten past that now and what we are hearing from our teams down there, there has been – this is kind of the season, March, April, where you traditionally have your our agri shows and the feedback we are getting is quoting activity, order activity has kind of returned to where we would have expected it to be. Randy, if you want to add anything to that?
Randy Wood
Yes. I think that’s the important part for us is the market fundamentals in Brazil are very strong. We only saw kind of a temporary lull in new order activity that obviously as it works its way through the system results in a temporary lull in shipments. But as Brian said, they are in their fall show season, which are key selling shows for our company, our dealers. And the feedback we are getting now is customers are back in the market, a lot of activity, and we expect that to really drive some opportunities in the second half of the year.
Blake Keating
Alright. Thank you. And then just lastly, any additional color on pricing? Do you expect pricing to come down for pivots? I think you guys have said you plan to hold on to it as long as you can. Just any color there.
Brian Ketcham
Yes. I think we had said prices had stabilized. We have seen, I would say, prior to about three months ago, steel, hot-rolled coil prices had started to come down. I would say what we have seen more recently is the steel mills pushing through price increases. So, I think that certainly supported not lowering our price. I think what we are looking at now is if those steel cost increases continue that we may have to increase price again, which we have said in the past, as costs go up, we want to lead on the way up and protect our margins. So, I would say, overall right now, still stable, but with the situation where we could be increasing prices here if we still – if we see steel continue to go up.
Blake Keating
Understood. Thank you. I will pass it on.
Operator
And this concludes our question-and-answer session. I would like to turn the conference back over to Randy Wood, President and CEO, for any closing remarks.
Randy Wood
Thank you for your interest and participation in today’s conference call. We are pleased with our second quarter results and look forward to continued execution through 2023. The Infrastructure segment continues to be supported by strong lease and sales demand as well as funding from the Infrastructure Investments and Jobs Act. While the Irrigation segment may be faced with the decline in U.S. farm income throughout 2023, we still see strong underlying fundamentals in both the mature and developing markets. And both segments continue to benefit from ongoing investments in technology and innovation to drive growth. This concludes our second quarter earnings call. We look forward to updating you on our continued progress following the close of our fiscal 2023 third quarter. Thanks for joining us.
Operator
Thank you for attending today’s presentation. You may now disconnect.
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