Lindsay Corporation (LNN) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Second Quarter 2015 Earnings 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 risks and uncertainties, 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.

Good morning and thank you for joining us today. With me on today's call is Jim Raabe, Lindsay Corporation's Chief Financial Officer, and Lori Zarkowski, our Chief Accounting Officer. Total revenues for the second quarter of fiscal 2015 were $141.1 million, 8% less than the $152.8 million revenue in the same quarter last year. U.S. and international irrigation revenues decreased and were partially offset by increases in infrastructure sales. Operating margins decreased to 10.3% in the quarter compared to 13.7% in the same quarter last year. Net earnings were $9 million or $0.75 per diluted share, compared with $13.5 million or $1.04 per diluted share in the prior year quarter. For the first six months of fiscal 2015, total revenues were $275.9 million, decreasing 8% from the same period last year. Net earnings were $16.6 million or $1.36 per diluted share compared to $23.7 million or $1.83 per diluted share in the prior year. Foreign currency exchange negatively affected year-to-date sales by approximately 2% and operating earnings by a little more than 1%. For the irrigation segment in total, sales were $108.3 million, 20% lower from the same quarter last year. Irrigation operating margins decreased to 11% of sales from 18.1% of sales last year due to lower US sales, competitive pricing pressure as well as de-leveraging of fixed expenses. In the US irrigation market, revenues were $68 million for the second quarter, decreasing 27% from the same period last year and declining 30% excluding the revenue from the newly acquired Elecsys Corporation. Lower commodity prices and reduced farm income have driven the reduction causing a dampening of farmer sentiment regarding investments. As the primary selling season is now underway, US order volumes have been within anticipated level for 2015 with the most significant reductions in the corn belt region. While corn prices have stabilized over the last few months, they remain well below peak in 2012 and in February, the USDA forecasted 2015 net farm income to be 32% below 2014. With a reduction in export demand anticipated and ethanol production under pressure, there does not appear to be a current catalyst for sustainable corn price improvement. However weather remains a wildcard in agricultural production and a major weather event can change the picture relatively quickly. In the international irrigation markets, revenues for the second quarter were $40.3 million, decreasing 6% over the same quarter last year with the decrease driven primarily by foreign exchange impact. Revenue declines in the Middle East, Europe and Russia were partially offset by sales increases in Australia with increases also in Brazil and Canada. Our outlook for irrigation equipment demand in international markets remains positive, although competitive intensity for large projects have increased and the strengthened dollar could affect sales in some markets. At the beginning of March, we began manufacturing operations at our facility in Turkey. While the start-up will potentially have minor negative impact to our margins as we gain scale and experience at this new facility, the addition of manufacturing capacity in the region will provide opportunities for sales growth and margin improvement. We expect to ship our first pivots from this facility by the end of this month. In addition, we began including Elecsys Corporation results in irrigation segment late in January. Elecsys contributed $3.5 million in sales and was roughly breakeven after factoring in purchase accounting adjustments. More importantly, performance was in line with our expectations. The integration of Elecsys Corporation is proceeding well, including the consolidation of some manufacturing operations into their facility in Kansas. We’re very pleased with the management of Elecsys and are excited about what they can contribute to the development of our technology platform, as well as improving the cost and quality of our electronic technologies. We expect Elecsys results to be accretive to our earnings in the first 12 month of operations. For the first six months of fiscal 2015, total irrigation segment revenues decreased 16% to $223 million. In the US irrigation market, revenues were $129.1 million, 25% lower than the prior year. In the international markets, irrigation revenues were $93.9 million, 2% higher than the prior year and approximately 6% higher after consideration of the foreign exchange impact. Infrastructure segment revenues were $32.8 million in the quarter, increasing 94% from the same quarter last year, driven by the completion of the $12.7 million Road Zipper system installation on the Golden Gate Bridge and higher road safety product revenues. The infrastructure segment generated operating income of $7.3 million in the quarter compared to breakeven in the second quarter of last year due to the higher Road Zipper project sales. Our outlook for infrastructure continues to be positive, although somewhat mitigated by the lack of a long-term US Highway Bill. For the first six months of fiscal 2015, infrastructure revenues increased 49% to $52.9 million with operating margins of 18%. As we disclosed recently, the president of the infrastructure segment left the organization at the end of the quarter. While this resulted in untimely vacancy, we have experienced and dedicated business managers in the infrastructure segment who are conducting business as usual. I am confident in the infrastructure’s team ability to maintain the momentum they have built while leader is selected for the segment. Gross profit in the second quarter was $39.6 million or 28% of sales versus $42.7 million or 27.9% of sales in the same quarter last year. Gross margins in irrigation decreased by approximately 3 percentage points as compared to the same quarter last year. A more competitive pricing environment and costs deleveraged on lower sales had a negative impact on margins. The pricing environment both in the US and on large projects in international market is expected to remain competitive in the near-term. Infrastructure gross margins increased by approximately 14 percentage points, primarily due to an improved product mix of road safety products and the completion of the Road Zipper project on the Golden Gate Bridge. Operating expenses in the second quarter increased to $25 million from $21.8 million in the prior year period. $3 million of the increase in expenses is due to the inclusion of Elecsys which added $1 million of operating expenses in the quarter, $1 million of acquisition and integration expenses and $1 million attributable to a combination of overall increased medical costs as well as increased commissions on higher infrastructure revenue. Included in the integration expense is the planned consolidation of our Digitec manufacturing facility in Nebraska with the Elecsys facility in Kansas. This resulted in expenses in the quarter for severance costs as well as the write-down of certain fixed assets and intangibles. While this consolidation is taking place at this time, I’d like to compliment the Digitec management and entire team for their cooperation and professionalism through this process. The order backlog at February 28, 2015 was $74.3 million compared to $89.3 million at February 28, 2014 and $68.3 million at November 30, 2014. The February 28, 2015 backlog includes $7.9 million of backlog of Elecsys Corporation. Year-over-year irrigation backlog levels, excluding Elecsys, have decreased reflecting the change in the agricultural market conditions. Infrastructure backlog has also decreased now that we’ve completed the Golden Gate Bridge project. Our backlog typically represents some long-term irrigation and infrastructure projects as well as short lead time orders and therefore as I have indicated in the past, backlog is generally not a good indication of future quarters’ revenues. Cash and cash equivalents were $167 million at the end of the quarter and were $1.7 million higher than the same time last year. We’ve continued the execution of our capital allocation plan, including the acquisition of Elecsys, the investment of $90.4 million on the repurchase of company stock, continuation of dividend increases and continued investment in organic growth initiatives. At the same time we’ve also completed a private placement of debt for $115 million with a due date of February 2030, taking advantage of historically low interest rates. The added debt improves our capital structure and positions us for additional growth through acquisitions and other initiatives in driving improved returns for shareholders. In summary, as we progress through the primary selling season, the irrigation equipment market remains constrained. US demand continues to be affected by lower commodity prices and reduced farm incomes as anticipated. While competitive pricing pressure remains, it does not appear to have worsened other than becoming more prevalent on large international projects. This too is not unexpected. The near-term market challenges include high stocks of corn and the strengthened dollar. However the need for increased agricultural production to meet the needs of the growing population will continue to drive irrigation equipment demand. While farmer sentiment regarding investment may be dampened, irrigation equipment provides an attractive return on investment. During the quarter we made significant progress on a number of project initiatives. The infrastructure team completed the Golden Gate Bridge project which not only made driving on the bridge more safe but also significantly increased visibility of our unique Road Zipper solution. In addition, our irrigation team put the final touches on our manufacturing plant in Turkey and are now ramping up production. This facility better positions us to serve irrigation equipment customers timely and cost effectively now as well as providing a platform for vertical integration, cost reduction and the supply of other Lindsay products in the future. Also, as mentioned earlier, we completed the Elecsys acquisition and have begun the integration of planned consolidation of electronics manufacturing operations. We’re confident that this acquisition will facilitate future sales and earnings growth and contribute to the advancement of our leadership position in irrigation. Finally, we completed the $115 million long-term private debt placement at very attractive interest rates, further enhancing our balance sheet. All of these transactions reflected solid execution and teamwork throughout the Lindsay organization. We're persistently enhancing our position to meet the challenges and to take advantage of the opportunities we see in the markets we serve. We’re uniquely positioned for developing and delivering turnkey irrigation solutions for agriculture, providing the best irrigation management and control technologies, providing a broad line of market-leading irrigation solutions, engineering integrated pumping and filtration solutions for landscape and industrial applications as well as providing energy absorbing road safety solutions and Quickchange Moveable Barrier that expands the capacity of existing roads and bridge infrastructure. I would now like to open it up for your questions.

[Operator Instructions] And your first question is from the line of Nathan Jones with Stifel.

Just if I can start with a couple of housekeeping items. Can you just give us any color on what the impact of the purchase price accounting from the Elecsys acquisition was in the quarter?

Sure. I would say that we’ve been very pleased with overall the Elecsys performance today, it’s only been five and half weeks but obviously the sales performance was very good. The operating margins, excluding the purchase price adjustments approached 20%. So we’ve also been very pleased with what we've seen from an earnings standpoint, from Elecsys as well. I think obviously we do have some purchase price adjustments. I would say that some of those, as you’re probably aware, amortized fairly quickly. So a part of those -- the difference between kind of what they have seen historically and the as adjusted numbers will get improved over the next couple of quarters and then further the transition of the manufacturing facilities out of Milford into Elecsys will provide some additional improvements for Lindsay as a whole from an operating margin standpoint going forward.

Okay. Could you possibly give us any indication of what kind of impact you’re expecting from the integration, purchase price accounting wrapping that all up on earnings over the next quarter or two?

Well, I would say the next quarter or two, the impacts will not be that significant because the transition is occurring now but I think by the time we get to the end of the year we will get most of those benefits. So I wouldn’t see a significant change in the next quarter or so.

Okay, and then if we can just go to the pricing environment on domestic irrigation, the checks we’ve done would suggest that Lindsay hasn't been cutting price to the dealers. When you’re talking about pricing pressure, are you talking about that potentially maybe [Trimble] [ph] and others cutting price that you’re not, does this impact on margins?

Well I missed the piece of the question because it broke up unfortunately but at least on our end, but I think the comment was that we’re not seeing in terms of your dealer check it’s showing that Lindsay is not reducing price to the dealers. I would say that that the overall we’ve seen that some of the projects that we’re bidding whether it’s domestic or international are becoming more competitive in terms of – we’re often hearing back that there is more competition and some of our competitors’ dealers are more competitive which puts our leaders into a more competitive situation. But we have seen some price change, some of that may be mix related in terms of some of the types of machines that are sold tend to be a little – let’s say lower cost different type of product than maybe we did see in the previous year. So we have seen some price change in that, but it’s a little bit of a movement towards the less expensive machines.

Okay and if I could just ask one more on price. Going forward do you feel like you're going to need to reduce price to your dealers in order to keep them competitive in the marketplace or do you feel like you can maintain price synergies?

Well, I would say that we will do what we need to, to keep our dealers competitive and to protect our market share as we have in the past. We don't have an indication that there's any significant change from what we've seen that we have to make in order to be able to do that. I do think that we’re seeing competitive pressure that is moving towards in many cases as I said some less expensive machine, possibly lighter machines in some cases or fewer features, and we’re going to have to be able to provide competitive features from that standpoint. We will do what we have to do in order to keep our dealers competitive. At the same time we’re going to continue to differentiate and try not to erode the price situation.

Your next question is from the line of Schon Williams with BB&T Capital Markets.

I wondered if we could maybe just talk about the project pipeline for the infrastructure business. Now with Golden Gate behind you, can you talk about what you see in terms of opportunities over the next 6 to 12 months? Do you feel more optimistic, less optimistic and then anything maybe that you're hearing in terms of Highway Bill into the summer, this fall, any update there would be helpful?

Yes. I'm not hearing much of significance in terms of a highway bill, take that first, I would say that in talking with our people in DC that we work with, there is a lot of discussion about infrastructure. There's a greater awareness that something needs to be done in order to address the highway situation, infrastructure situation in general. And yet I can't say that I am optimistic about action being taken but maybe I'm just a pessimist in this case, it’s just that it’s taking too long to get to a solution but at some point it will have to change. Now looking at it from a pipeline standpoint primarily for projects like the Road Zipper system, similar to what we have in the Golden Gate Bridge we typically maintain a strong pipeline list that can be anywhere from $100 million to $200 million in identified projects where we’re talking with companies or states or governments on potential projects and they will be in various stages of discussions. Often projects will take to three years on gestation period in order to - from the beginning of the discussion to when something happens. Golden Gate Bridge took 30, that’s obviously very unusual situation. The pipeline I would say right now is good. We have projects on that pipeline, in our pipeline today that are as big as and some bigger than the Golden Gate Bridge project but nothing I would consider to be imminent. I do think we’re in a better position than we were say a year or so ago where we have a little more of a sustainable pipeline of projects, sale projects but also lease projects for our moveable barrier system. So I am optimistic. I am optimistic from the standpoint of revenue stream that can come from the moveable barrier. I am optimistic in terms of eventually getting to a more sustainable highway bill in place that will support the road safety products in general.

And then I wondered if we could just maybe focus on the leadership within infrastructure. Obviously there has been some turnover there the last couple of years. I wondered if you -- if you were to kind of dream of what your ideal candidate for that job would be, is it more of an operational person, is it more of a marketing and growth leader? Maybe talk about what you would ideally like to see in that position versus in recent history?

Well, I’d just say that from what we've done in the past just to take it from a recent history standpoint, as we’ve used a leadership position infrastructure as part of organization development position and it's been a situation where we obviously were not pleased with the outcome recently. But I don't consider this a major setback. I think that the infrastructure business is in a very strong position because of the strong managers we have in that business. And I think the business leader to run this going forward is one that can really help to facilitate with the team, removing obstacles, developing focus, clarifying the strategy further, I would say that with the good experienced business managers as we have, they don't need to be told what to do. They’ve been executing very well. Most of what I think a leader in this case is going to be doing is helping to remove obstacles and develop that focus and facilitate any conflicts and other things that come up either between the infrastructure business segment pieces or other areas. So that’s the kind of leader we need and somebody who can pull them together and keep them moving forward in a very focused way and help to facilitate those business managers.

Your next question is from the line of Brett Wong with Piper Jaffray.

First, just looking at the recent acquisition, I was wondering what your expectations for Elecsys contribution was this year or basically what are you kind of looking at for growth for that business compared to last year and then on a seasonality standpoint, should we expect kind of a similar seasonality that we saw before?

I would say that for your model purposes and things that you would look at from a seasonality standpoint, I probably wouldn't change much from what you’ve seen. And we’re not really identifying the specific growth that we’re seeing from this but the purpose of the acquisition -- really have multiple purposes for Lindsay. One is to further strengthen and build our technologies that we use in the irrigation segment to develop the path for future growth in those technologies. But also as we see growth opportunities within the Elecsys business itself we believe that we can – we are well positioned to be able to support those growth initiatives. So at this point I am not going to break out any specific growth that we would say for it. The other, the third piece of this from our perspective was the consolidation of manufacturing operations. And there is a pretty significant benefit we get by consolidating the operations there but also we get I believe quality improvement and more consistency because of the type of manufacturing processes that they have, has nothing to do with much else, in that I think it’s a very efficient and well run operation, that we can benefit from, from a technology standpoint in many ways.

And on the international competition, are there any specific markets where you’re seeing that pick up more than others?

No, I would probably characterize it as where we see large agricultural projects which could be Middle East or Africa or anywhere, we’re seeing a little bit more competition and I expect that we’re going to see a little more aggressive competition from our European competitors who are probably in a little better pricing position today, obviously than they were a year ago. So I'm not surprised at the increased competition given a little bit of contraction in the market but we’re seeing it wherever there are significant projects to go after and I'm sure we will have some of our let’s say institutional type customers who will use that a bit as well to solicit more competition to some extent in the large projects.

And then you guys can quantify how opening of the Turkey plant will benefit the international irrigation market?

We don’t have anything to quantify that at this point. The intention had always been to transfer some of the manufacturing operation that’s handled in the United States in terms of export to Europe and Middle East to that operation in Turkey and that would alleviate some capacity issues when – in, the let’s say peak of the market, that will give us more capacity to respond and respond quicker in the United States than some other export markets. But at the same time I think this really positions us well now especially given some of the changes we've seen with euro to the dollar positions us well to be able to not only supply faster quality product in those Europe and Middle East and Africa markets but to do it very cost-effectively. And what we will be doing is scaling up in that factory and also improving our vertical integration, including galvanizing in that factory. So it will put us in a very good cost position but also a delivery position to be able to take care customer needs.

And just kind of going on that, Rick, obviously there has been significant impact from FX the current quarter, kind of what you would be seeing here as we move forward and what are you guys kind of looking at in terms of expectations for the year?

Well, I think I would say the FX impact I would expect to continue at essentially the current rates, and at least from a translation standpoint but -- and then from online standpoint it has a much smaller impact. It’s a little bit more difficult to predict how that affects us, to Rick’s point, on from a competitive standpoint and the pricing standpoint. But from a translation standpoint I would expect it to continue at similar rates.

And I would add to that we do hedge sometimes in large transactions, if there are proceeds, we will have hedge those, we also hedge our balance sheet. So we do have hedging activities where we believe there is a currency risk to the extent that we can and yet what you’re seeing obviously is the currency translation impact on our revenue on our income statement as you would expect.

And then one just last housekeeping from me. Jim, what are the interest rates on the new debt?

So the interest rate on the new debt is 3.82%.

Your next question is from the line of Ryan Connors with Boenning & Scattergood.

I had a couple of bigger picture items I wanted to get your take on, Rick. The first is just the technology side. I mean there has been a lot of talk on this call about Elecsys and so forth. But you’ve not been alone in terms of being active in technology. I know your competitor there made a pretty significant acquisition in technology, the bigger company like Trimble seems to be getting more involved in the irrigation technology side. So I wondered if you could just talk to us about how that impacts the technology competitiveness of FieldNET and how much that part of the business is changing as it seems like there is a lot more product development going on there?

Well, certainly it has been changing, Ryan. We’ve seen competitors as you mentioned that were not in this business four, five years ago or five years ago when we launched FieldNET, that are now getting into the space and they are seeing opportunities to do some things here. However I think we are in a very strong position. FieldNET is still a leading product in many respects and we continue to invest in enhancing our FieldNET offering in many different ways. So we have new products that are launching and new add-ons to the product that are certainly in development. So we do think this is a very competitive space but I think it’s an important space because as we’ve talked about in the past the technology and the intelligence of the system is really important for the future in managing what happens with irrigation from an efficiency standpoint but also in applying chemicals and fertilizers and other things. So this is the intelligence that moves the pivots from basically irrigation system or pipeline wheels to this intelligent machine in the field. And that’s a space that we consider very important to us, we’re aggressively going to participate in it. Elecsys puts us into a much stronger position with the manufacturing capability but also development capability that it brings and we continue to look for other pieces from a technology standpoint that we would consider. And we’re in a good position with the balance sheet that we have now, also with this debt to have this cash available, to make acquisitions whether they are defensive ones in terms of where we feel we have to do something to protect our technology position or whether they are offensive when we see something that we really think is interesting that we can build on. But either way this is a very important part of our business today and going forward. We also see this as a key piece in terms of the integration in some of our other technologies. As I mentioned in some of the opening comments, we’re in a unique position with our integrated system where we have pump systems, we have filtration, we have the engineering design and the front end, plus we have FieldNET. So we can deliver this fully integrated system which we intend to continue to enhance but also provide this kind of technology and integration into some of the adjoining markets rather than just agricultural irrigation.

Right. Now in terms of – I know that at one time FieldNET system and similar technology was really largely utilized by the more sophisticated grower, the larger grower. Has that become a lot more mainstream in the last few years, or still not the case but what’s your view there?

I would say that I consider any grower who uses FieldNET to be a sophisticated grower. That’s probably a different perspective. I think it is becoming more mainstream. I think we’re seeing the change in the customer base where there are definitely some of the next generation coming in as growers. This fits very well into the trend of consolidation of farms whether it’s in the US or globally and as farms consolidate and they need to manage those farms with better technologies and products, FieldNET is the direct fit for that. So with FieldNET you can manage hundreds of pivots whether it’s in Russia or Africa or United States or wherever it happens to be and do it with less labor and be able to respond quicker to changes that need to – or either change that second place in the field, or changes that you need to make. So this is, I believe, a very important trend that ties into the consolidation of our farming -- of farms and ties into the advancement of other technologies that are used in farming today.

My other question, Rick, had to do with more of a niche area but small field pivots. I know historically the seven-tower pivot has kind of been the dominant technology and it’s the 160 acres I guess as the rule of thumb in terms of the irrigation area there. But I noticed recently it seems like there's a lot more focus on and I know you’ve got the Greenfield, small field pivot lines, competitors are also marketing these smaller field pivots. Can you talk about kind of whether that's -- how that impacts the addressable market, what the uptake rate has been on those small field pivots, maybe even some rough quantification of what percentage of your business that is today and whether you think that can grow into something material over the next several years?

I wouldn’t categorize any of this as major trend towards let’s say a small field pivot. I would say that there has always been a market out there for small field pivots and some of them are in slightly different crops, whether it’s for few crops or horses or different ranches and things but could be a number of areas where we continue to see those small fields and a market for small field pivots. I would characterize it more as there is still a very growing opportunity out there in the small fields in general for an automated irrigation solution whether it’s a pivot or something else. But there constantly is a search for another method of irrigating versus let’s say sprinkle or flooding those fields, something that will improve water use efficiency and increase in yields. We’re seeing currently it’s probably more of a trend towards lower cost per acre type systems where the trend has been – and I think it ties in a little bit to what’s happening with commodity prices, it’s more to how do we get costs out of the system and provide a cheaper solution for irrigating the same amount of acres. But there will continually be the search for a better solution for those smaller fields and there is a number of different ways to do it. But we haven't really seen a major trend towards more small pivots for those small fields.

Your next question is from the line of Brian Drab from William Blair.

Hey I just wanted to talk a little bit more about pricing because as I'm looking at your report today and I'm looking at your primary competitors’ report for February, mid-February. The comments from them at the time was that pricing had not been significant to really any sort of issue on the irrigation type of business. And when I look at your numbers today, 11% operating margin in irrigation if I adjust for the acquisition expenses and take Elecsys into account, it’s more like 12% but sequentially it suggests decremental margin of higher than your historical average closer to 40% decremental operating margin compared with roughly high 20s or low 30s that you’ve seen historically. And my questions are around, that maybe if you could give any color on the timing of price decreases in the market because it doesn’t make – if the price decline happened since mid-February, it seemed like you’d be pretty dramatic double-digit decline in price since then and I am suspecting that's not really how it played out. And I guess secondarily, is there another factor – I know there are lot of moving parts here but is there another factor that would have had as significant impact on margins as price did?

Well just for clarification and we will get Jim then put on this also. Are you referring to an operating margin level irrigation in total, correct?

Yes.

I think one of factors that will play into this as you look at let’s say deleveraging or as you see volume come off is that we have more business entities, international business entities out there now with some of an embedded, let’s say, fixed cost structure than we did say 3 to 5 years ago. And obviously that means that the deleveraging is a little more challenging as the volume comes off. We can see a little more event of an impact in terms of some degradation in terms of operating at this point. Now as those businesses grow, we have more opportunities to apply vertical integration to expand in terms of whether it’s tubing and galvanizing different things within those operations, that will change that composition. But as we’re growing and expanding those international markets we will see that that deleverage impact is a little different than it used to be. So I wouldn’t attribute it all to price from that standpoint.

Rick, can I ask – are we talking primarily about Lycos or other specific acquisitions that have changed the mix?

I think yes, it’s all of the above. It’s the international -- opening up of the international operations which could have higher SG&A run rates for example than say the irrigation business in total but also operations like Watertronics or Lycos and others that would have higher SG&A run rate as well. So that would change that composition sum from where we were five years ago. All of those are important to the integrated system and to where we go from a growth standpoint and create additional growth opportunities. But it does change the pictures a bit in terms of let’s say deleveraging effect.

I think, Brian, the only thing I would add is, as to your specific question, I don't think there's any other large factor that changed dramatically within the quarter that threw any of these numbers around a little bit but to Rick's point, we also have a little bit of mix shift into some of the international businesses and some of those businesses that we've always noted have a little bit lower margins as well. So that’s also playing in.

That's really helpful to understand that the mix has changed, there is more fixed cost in the business in general, and then more international of course, but how about on pricing, can you make any kind of – because this is still just really puzzling to me that – there’s basically two players in this market that account for 80% of the market. One says pricing is not an issue, the other one said it's a significant issue and the only thing that's changed is we’re 30 days beyond when the competitor made the comments. Is there any way you could help to make a little more sense to that for everyone?

I think that I’d describe it as pricing competitiveness, the competitive intensity has increased and probably one of those situation that has increased even in the past 30 days to where we had been – we’re seeing it more in large projects today. We see it in terms of, as we are working with dealers some of the factors that they are facing in the market. So I can't really answer why one company would say one thing but I can say that we hear this real time from our dealers that they believe competitive intensity has improved and as I said we’re going to do what we have to do to keep them competitive and we’ve seen this real time on projects that we’re going after. I think that probably has more of an impact on some of the international markets now where we've seen there’s bigger project with competitive intensity increasing. But I think -- I can't really explain why they would say what they did. I can just tell you what we see as the facts.

And then steel historically has accounted for 35 or maybe I'll just broaden the range and take 30% to 40% of your cost of goods. Have you commented yet on today's call as to whether given steel is down something like 20% year-to-date, the calendar year to date, if that will be a tailwind and how significant a tailwind that could be for you in terms of margins?

This is Jim. We have not – we haven’t commented but I would say we’re certainly seeing a little bit of improvement on steel in the last quarter or two versus the year ago steel prices aren’t dramatically different but we have seen some improvement and that has helped us a little bit. We will have to see how it plays out but that has been a little bit of good news.

And then someone asked to Jim what the interest rate is. Can you just tell us what interest expense is going to be for the next quarter and what a run rate would be?

I think the number is about a little over $4 million annually, so it’s like 2 million, little over $2 million balance of the year.

The next question is from the line of Joe Mondillo with Sidoti.

My first question, I just was wondering if you can comment on the inventory amongst your dealerships and how much have we sort of reduced and do we have a ways further or is it starting to sort of normalizing to demand yet? If you could just talk about that.

We don't typically have much --we really don't have any inventory out with dealers. So our dealers are generally maybe would have a unit or two, machine or two on hand, or components for a couple of machines for let’s say a lock-in and type customers. But unlike other ag equipment type businesses we really don't have a stock program of that type. So our dealers are running pretty lean and most of the machines that we’re selling are basically configured to the specific order which is also what why we don’t have a lot of machines out there. So that we don’t have that same issue that you would see in some of the other ag markets.

And in terms of your cost structure, it seems like a bad timing I guess with the Turkey facility regarding some costs that are coming online even though long-term that should benefit you. But I was just talking – I was just wondering in general in terms of your utilization amongst all your facilities, how does that the utilization look and do you anticipate any cost-cutting initiatives going forward just considering the headwind of demand?

Well, in terms of utilization of facilities, I would say that most of the facilities are probably in the, I think, maybe 50% to slightly more than that in terms of total utilization of the facility with additional capacity that can be added through additional shifts to their factories or other types of things and that’s a broad characterization of capacity at this point. But I think in terms of overall reductions, I would say that we made sizable reductions in domestic and international SG&A, some of them more recently, that probably were not truly reflected in the financials yet. And these reductions are offset in some cases by increases in infrastructure and some of our more growth oriented type businesses and including continuing to invest in technology. Along with other things that you’re going to see in the income statement for example, EPA reserve adjustments and the integration and acquisition expenses that you’ve seen in this quarter. So there's some of those one-off type things that are definitely in there maybe some extent, covering some of those changes that have been made. But at the same time I would say based on what we see with the markets today we will continue to assess our SG&A position and look for additional areas where it may make sense to cut. At the same time we’re not going to deviate from the overall strategy or really turn the initiatives that we have in process that we think are critical for our future growth.

So at this time you have no plans to reduce headcount or maybe you’ve reduced hours worked to attempt to lower the cost base to the –

No, I wouldn’t say that at all, I would say, effective. We’ve looked at our Lindsay factory. We’ve continually made adjustments in headcount as we go along and that their productivity level in terms of what they are producing for the number of hours worked is high, in fact, probably higher than it was last year. So they are running at a pretty good rate and in our future of our factories we will make adjustments as they go along in terms of what the outlook looks like and they are doing this on a regular basis, and now we will continue to make adjustments. My reference on that was more from an SG&A standpoint and there too we will make adjustments as we feel we should as necessary.

And then in terms of some of these cost benefits from the Turkey facility, from the Elecsys acquisition in terms of the integration of facilities, is there any a point in time where you guys are going to provide us with the benefits from these initiatives? They seem like significant initiatives that you’ve highlighted not only in this call but in past calls, and it’d be nice to be able to know how big of a benefit that they are for modeling purposes and to start analyzing profitable a company can be?

I think we can provide some more clarity on some of these benefits as we go along and particularly I would say the Turkey facility in terms of the start-up of that operation was primarily to add additional capacity for international expansion and to reduce costs in total for delivery to specific markets. And at some point we may be able to break that out further as we get up and running and are in full production on that facility. In terms of the Elecsys piece, there are a number of pieces to it which included the advancement of the technology as we talked about and the expansion of their business as well as the cost savings that we expected from integration of manufacturing facilities plus the quality and other benefits that we could see in our existing products, and that I would characterize as probably in that million and a half plus kind of range that we would expect on an annualized basis once fully implemented. But that’s only a piece of the basis on the justification for the Elecsys acquisition.

And then just lastly if you will, in terms of the Turkey facility, you mentioned in your prepared comments that it can – in the future you can use it as a platform for vertical integration. What exactly did you mean by that?

Well, we are adding in now the galvanizing operation, we may go further and add in tubing production in that facility at some point, if we feel we need to. I can say that we have plans to do pump stations in that facility. We may be doing filtration systems that are from Lycos in that facility. So there are many other products that we believe that we can build there that would be important for those markets and the facility was designed to be able to take that on in time.

So these are products that you already manufacture in the US or elsewhere, that you’re going to be able to implement that into that facility?

Yes, it would be products plus manufacturing operations that we do in some factories but not initially in that factory. So it would be the vertical integration of manufacturing operations plus products that we produce and other ones that we’ve produced there.

Your next question is from the line of Kevin Bennett with Sterne Agee.

Rick, first off, if we think in terms of volume in the irrigation segment, can you talk about how the quarter progressed? I know it’s not the peak season but I mean is it getting worse or getting better or how should we think about that?

I am not sure how to characterize that other than to say at the beginning of the quarter, it started a little slow. I would say and probably a little and has been kind of a lumpy start to the beginning – for the beginning of the quarter and beginning of the selling season for us where we saw order rates varying quite a bit. But still wasn't that, it was just a little bit lumpy and a little slower than what we expected in order to get – in terms of getting started. But that’s about all I could really characterize it as, I would say that orders have continued to flow pretty well, once things that get started.

And then I know nobody’s crystal ball is perfect but you went through a few cycles in this business and I would love your thoughts, how close do you think we’re getting to the trough this cycle? I mean what do you think it's going to take to finally stop seeing volumes go down 30% a quarter?

I am not sure that I would have a expectation assuming volumes go down 30% a quarter. I think that the key now is really what happens during this season as I see in terms of what’s planted and I have seen many different numbers in terms of planting expectations, obviously corn planting is expected to be down and could be down quite considerably from last year in terms of the acreage planted. So we could see an impact of that. I've seen – and certainly it’s going to – weather will make a difference in terms of what happens with yields this year and I have seen all kinds of weather projections that would say weather similar to last year but yields expected to be a little lower. So there is no crystal ball to this and I would say what we have seen in the recent cycles is it really only takes one or two major weather events to change the situation and reduce the ending stocks in corn and other commodities that we have. I think there are some differences today where we have low oil prices which are both negative and positive when it comes to farming. Certainly one of the positive impacts from an energy standpoint is it reduces farmers’ input costs. So that’s beneficial to the return on investment for us. We are seeing the strengthened dollars which obviously has some impact in terms of demand on exporting of commodities. So that’s going to be a little bit of a headwind potentially in the very near-term but outside of that I don’t really have a crystal ball, we’re just kind of prepared for where this is going to go. I don't anticipate a significant change in the next year from what we’ve seen this year but a lot of it will depend on what happens with this growing season.

If I switch to the infrastructure business real quick, can you help us understand the operating profit contribution from the Golden Gate project? I am just trying to get an apples to apples comparison versus recent quarters in that business.

Well, we don't provide specific numbers relative to Golden Gate Bridge or any particular project just for competitive reasons. But I think everybody is aware of the margins there are certainly much better in that – with those projects in that product line than they are with our other product lines and that's reflected in the quarter. So I really wouldn't say much more than that. I mean you can see from the increase in volume and the increase in margins, that most of that is due to the Golden Gate Bridge itself. So I think the improvement from that is pretty apparent.

Sure, Jim. I mean I guess if I look, is the base business similar to the last couple of quarters, is that the way to think about it?

Well I think we’ve been making progress all long. So I don't know particularly, we wouldn’t look at last year as a good comparison point because we made some cost adjustment and we've seen good improvement in our overall road safety product sales both from a sales standpoint and a margin standpoint. So I think looking at something a little bit more recent as a comparison point probably gives you a little bit better view and we have continued to see good progress in road safety sales in the current quarter and the margins in that business. So it’s not an entirely Golden Gate Bridge.

And then last question from me, if you, Jim, could provide the breakdown that you usually do between the dryland and the conversion in replacement of irrigation?

I have that. This is Rick. I have that in front of me but the conversion for the quarter was 24%, dryland 34% and replacement 41%.

Your next question is from the line of Chris Shaw with Monness Crespi & Hardt.

Just give me the breakdown in what kind of the sales were for dryland acre conversion versus replacement and conversion from other types of irrigation?

I think that's what I just did.

I just thought for a second, I apologize.

No, no, that’s okay. That’s all right. But I will repeat it. The conversion was 24% in the quarter; dryland 34%; replacement 41%.

And then also on the M&A front, I mean what are you guys seeing there – are there still lot of opportunities out there? I mean should we see something like another Elecsys coming soon or do you think it’s still digesting for a while and to look out there?

When it comes to acquisitions and the M&A front, I would never say coming soon on anything just because it’s always so unpredictable. I would say that we had an acquisition recently, an acquisition candidate that we were pretty close on and pretty optimistic about. However we ended up pulling away from it and backing off, it brought with it some expense but it was definitely the right thing to do in this specific case. So it’s always difficult to predict but I would say that the pipeline that we see is still very good. We still have some good candidates and we’re out there aggressively looking for pieces that fit well. I think we are finding some interesting ones that fit well with Elecsys in terms of the kinds of technologies that they have that can provide additional growth paths as well. So I am optimistic but I would never say anything as really imminent or current but we are still in the pursuit.

Your next question is from the line of Craig Bit [ph] with CGS Securities.

I was hoping – just to give us a little bit more clarity on price. Is it more mix or more straight prices, was unclear to me?

Well, I think I have put this into the category of two things. One is we've seen from a mix standpoint a change in our overall let’s say domestic average price of a few points in the quarter versus the same time last year that I would attribute as much to mix as to actual price adjustment because there is a change in the mix that’s taking place. We do know that we’re seeing a competitive pricing pressure intensity increasing and what this can also mean is we’re seeing – given the lower price, given that are taking a larger share of the market, so we’re having to price at that level. So it is a combination of both price and mix in terms of meeting that market need.

And you and your largest competitor didn’t have full feature sort of pivots, who benefits that, if there is a shift towards less fully featured?

I don’t think that either one of us really benefits from this. I think that it tends to be a third competitor in there who is on the lower price and to sometimes when the market contracts, drives a little bit more of what’s happening from a pricing environment standpoint. So it can potentially for both us and our largest competitor in this but it does mean that we're constantly, as I am sure, they are too looking for ways to reduce the costs – the cost per acre of irrigating [ph].

Are there different lower end competitors in Europe and are you seeing anything from China?

Differently, we have different low end competitors and you could identify at least one in every major market we serve in, and that we participate in and there are generally different competitors. In China we have a number of competitors there that weren’t there five years ago, and become a more competitive market. And there you’ve got some of the lower end competitors to the point of the machines are third quality where they may not make around in a circle before they fall. They have some that have been around for few years and they are starting to get it right but on little lower end. But yes, there will always be those price competitors but I think there is a general acknowledgement in the industry that we have a superior machine in many respects and high quality machines as well as our major competitor also has a high quality machine. There is a difference in the market in terms of the perception of that versus the low quality guys but there are times when it matters less.

Is trade price pressure on larger orders and more mix pressure on smaller purchase, is it the right way to look at it?

I think it’s a reasonable way, it’s obviously not quite that specific but it’s a reasonable way to think about it.

And the price and mix issues are the same more or less US, internationally or is it more pronounced in one of the other?

I don’t know that I would characterize them the same. I would say that the machines in many of the international markets tend to be smaller anyway. So it’s a little different situation but it’s probably a similar – I would say more US situation in terms of the mix and the price issue that we’re talking about, as well as large projects.

And then you were saying the pricing increased during the quarter and it’s not worsening now, is that fair way to characterize it?

Yes.

And what happens next quarter, you will find out or see a way to look at backlog or to have comfort with where pricing might be six months from now –

We have ways of monitoring what’s happening but I would just say that we don’t believe that the pricing situation is worsening and/or we have been – this was the comment that was made earlier, we don’t believe that it is worsening. We do monitor it constantly and it may show up first as an additional discounting that may be necessary with dealers in order to be able to meet the competitive price situation and we monitor it very closely. End of Q&A

I would now like to turn the call back over to Mr. Rick Parod for closing remarks.

Well the global long-term drivers of water conservation, population growth, importance of biofuels and the need for safer more efficient transportation solutions remain very positive. We're committed to creating shareholder value through investments in organic growth, dividend increases, strategic water related acquisitions, share repurchases congruent with our capital allocation plan. We thank you for your questions and participation in this call. Thank you.

This will conclude today’s conference. You may now disconnect.