Lindsay Corporation (LNN) Q3 2018 Earnings Report, Transcript and Summary

Good morning. My name is Anita, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Third Quarter 2018 Earnings Call. [Operator Instructions] Please note, this event is being recorded. During this call, management may make forward-looking statements that are subject to risks and uncertainties, which reflect management's current beliefs, estimates of future economic circumstances, industry conditions, company performances 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 conference over to Mr. Tim Hassinger, President and Chief Executive Officer. Mr. Hassinger, please go ahead.

Good morning and thank you for joining our call. With me on today's call is Brian Ketcham, Chief Financial Officer; and Lori Zarkowski, our Chief Accounting Officer. As you know, the objective of this call is to discuss our quarter three results. Before we jump into that overview, I will make a few introductory comments. In our past quarter's earnings call, I provided an overview of the foundation for growth initiative we launched earlier this calendar year. In this call, I said that we were focused in four primary areas. Those areas are, one, our manufacturing footprint with the desired result being to optimize our cost structure. Two, G&A. This work stream is focused on gaining efficiencies in our back office activities. Three, sourcing. The primary focus is to move towards a centralized approach for our buying activities. And four, commercial. We're identifying and implementing actions to optimize our channel management processes. Overall, the goal that we want to achieve from these projects is very clear. We want to simplify the way we conduct our business and aligned to that, improve our productivity to build a foundation for growth. With that goal in mind, we are planning to take the following actions. We intend to divest the business and all associated assets, including the manufacturing plants for Watertronics and LAKOS. Also, we plan to divest irrigation specialist, our company owned dealership in the Pacific Northwest. In addition, we announced that we will close our Crown Point manufacturing plant in the Omaha area later this year. This plant is dedicated to the infrastructure business and because of this change, this work will transfer to our Lindsay Nebraska plant that is only a two hour drive away from the Crown Point plant. This action creates further leverage across our manufacturing footprint. These moves simplify our operations and are aligned to our internal evaluation process of determining if a business is meeting margin expectations and/or if it is providing leverage to our core businesses. Through this evaluation process, we have kept the discipline that when a business does not meet these criteria, a best owner evaluation is initiated. What makes the Watertronics and LAKOS divestment align to our simplification direction and still be aligned to our turnkey irrigation strategy is our intention to have a commercial agreement in place with the buyer of these businesses. And at the same time, these divestments will allow Lindsay to eliminate complexity that existed in owning and running these businesses. In other words, Lindsay keeps access to what is strategic to the irrigation business and will simplify its operations at the same time. Irrigation specialist represents a very important dealership for Lindsay, serving some of our largest customers in the world. We have concluded that Lindsay is not the best long-term owner of this business. It's our view that this change will provide the required service and support to our customers to create growth in this important market. When I look at the self-help effort that we have started, I like the direction the foundation for growth initiative is taking us. It is also important to highlight the progress we're making in the innovation space. As each of you have heard me talk about FieldNET advisor and the fact that it is a highly differentiated offering in the marketplace, we have continued to add to our capabilities in this area. Last quarter, we announced the agreement with John Deere and we just recently announced a collaboration agreement with Farmers Edge to broaden our capability in the irrigation scheduling space. Also our strategy is to expand our global reach with FieldNET advisor. This year, we are launching and/or doing a beta test in 17 countries on 21 different crops. To put this in perspective, last year FieldNET advisor was offered in only one country and on two crops. Hopefully, you can tell by these comments that we are making excellent progress towards our goal of achieving 11% to 12% operating margin in fiscal 2020. We will continue to update you on the status of the key projects that we will be focused on over the next several quarters. So now, let's move to our Q3 results and for that, I'll turn the call over to Brian.

Thank you, Tim and good morning, everyone. To begin, I would like to cover the $7.6 million of pre-tax costs incurred in the third quarter related to our foundation for growth performance improvement initiative, as this had a significant impact on our reported results. $6 million of this amount represents an adjustment to reduce the carrying value of the businesses held for sale, which are the planned divestitures that Tim referred to in his comments. In determining this adjustment, the carrying value of each of the businesses held for sale was compared to its estimated selling price less cost to sell, where the carrying value exceeded estimated selling price and expense was recognized, where the carrying value was less than estimated selling price, the related gain is deferred until the sale is completed. The carrying value adjustment is not deductible for tax purposes. Therefore, a tax benefit was not recognized. Additional costs of $1.6 million related to the foundation for growth initiative are comprised of severance costs and professional consulting fees. The remainder of my comments regarding the third quarter will refer to adjusted results, which omit the impact of the foundation for growth initiative. Adjusted results are detailed in the Regulation G Disclosure at the end of the press release. Total revenues for the third quarter of fiscal 2018 were $169.6 million, an increase of 12% over the same quarter last year. Net earnings for the quarter were $17.9 million, an increase of 63% over last year. Diluted earnings per share for the third quarter were $1.66 compared to $1.02 in the same quarter last year. Irrigation segment revenues for the third quarter were $128.4 million, an increase of 7% over the same quarter last year. In the North America irrigation market, revenues increased 11% over last year, driven by higher irrigation system sales volumes along with higher average selling prices. In the international irrigation markets, revenues were slightly lower compared to last year's third quarter. A higher level of project activity in developing markets was offset by a market slowdown in Brazil. A few things have contributed to the slowdown we experienced in Brazil. First, a trucker strike resulted in a country wide work stoppage over the last ten days of our third quarter. Although temporary measures were put in place by the government in order to end the strike, rising freight costs have resulted in grain handlers halting purchases of corn and soybeans from local farmers. In addition, we believe some irrigation equipment purchase decisions have been delayed in anticipation of a July 1 reduction in government subsidized interest rates. These situations create short term challenges, however, we remain optimistic about our future growth potential in Brazil. Total irrigation operating income for the third quarter increased 9% compared to the prior year. The effects of sales growth in North America and the recovery of $2.5 million in previously reserved accounts receivable were offset by the effects of higher freight costs in the US and a lower margin mix from international project orders. Irrigation operating margin for the quarter was 14.1% of sales compared to 13.8% of sales in the prior year. Infrastructure segment revenues for the third quarter were $41.2 million, an increase of 31% over the same quarter last year. The increase was driven by our ability to deliver a significant portion of the Alex Fraser Bridge and Japan Road Zipper orders during the quarter. Infrastructure segment operating income for the third quarter increased 80% compared to the prior year, as a result of an improved margin mix coming from a higher proportion of Road Zipper revenue and improved operating cost leverage. Infrastructure operating margin for the quarter was 35% of sales compared to 25.5% of sales in the prior year. Cash and cash equivalents were $111.8 million at the end of the quarter compared to $121.6 million at the end of the prior fiscal year. Cash was utilized in the quarter to fund working capital increases in support of sales growth as well as capital expenditures and dividend payments. No share repurchases were made during the quarter, however, a total of $63.7 million remains available under our share repurchase authorization. The strength of our balance sheet continues to position us to pursue growth initiatives, both organic and through acquisitions and other initiatives to drive improved returns for shareholders. At this time, I'd like to turn the call over to the operator to take your questions.

[Operator Instructions] The first question today comes from Mike Shlisky with Seaport Global.

So I wanted to first start off about the infrastructure segment. Sounds like obviously, there were some great deliveries in the quarter. I guess I want to make sure I get – could you maybe tell us how do the deliveries progress compared to your initial expectations? And I guess really trying to figure out, do you feel better about the business for the full year today than you thought three months ago? Or is it all just timing within a year as far as those two big projects.

Yeah. So Mike, this is Brian. I think on both of the projects, if you separate the barrier versus the machines, we had said earlier that we expected both of these -- the majority of these projects to be in the third and fourth quarter. What we saw in the third quarter was that we shipped the majority or we were able to deliver a majority of the barrier in the third quarter, some of which may come out of the fourth quarter, but that's the full year, I would say, our full year outlook remains the same. Also, during the quarter, we began production on San Rafael Bridge. That still is a first quarter 2019 expected revenue recognition on that project.

Okay. Also -- wanted to turn also in infrastructure to the upcoming closure of the facility and it’s not a very long drive away, it sounds like, are you exiting any products in that shift? And are you reducing your capacity, if you have less square footage? Would you be able to kind of make the same amount of product in that other facility? And can you give us a sense also for what this might mean for the margin of that segment next year, assuming you can get out of this facility by the end of this year.

So Mike, this is Tim. There will be no reduction in portfolio offering as a result of this change. As I mentioned in my opening comments, this is an overlap opportunity. We are going to be shutting this plant down and then taking those capabilities and moving it into our Lindsay Nebraska plant. So again, no change in portfolio. In terms of financial impact, that is captured into our broader goal related to the foundation for growth initiative. So we're not splitting out and communicating the specifics of that, but this would be one of the projects that is contributing to the overall goal that we had set.

So it’s the same product line, same potential sales after this is over?

Correct. And let me say it this way. There will be no impact to our customers. So opportunity to buy the same product, same service, et cetera, the only differences from a Lindsay perspective, our manufacturing footprint has gotten smaller, because we see an opportunity to consolidate.

Got it. Okay. And then touching on Brazil, Brian, your comments, clearly, some of those issues did impact the quarter. I totally hear you on that. And the rates do shift over the next couple of days here too a bit lower. But did you get the sense that farmers are okay with the lower rates or were they hoping for an even lower rate in the next harvest plan, which starts July 1.

Yeah. It was -- the rate reduction was about, well, it was 50 basis points. I think they had been optimistic that it may be 100 basis points, but it's still long term tenor on these, on the financing. So I think it's overall, it's still a positive move. I think it's just the -- they had announced the change would be put in place July 1 a while back. And so I think we saw some delayed in purchasing activity, just waiting until the new rates go in place.

And just to quickly follow-up on that. If we see a very strong crop here in the US, things look awfully good in a large part of the soybean corn belt out there, if we see very high yields this year and prices come down through the summer, do the trends in Brazil still support increased irrigation adoption, do you need to have good pricing or is it more of a long term plan that the government wants to get more acres irrigated?

Mike, this is Tim. I would describe it. We see the fundamentals still being very strong in Brazil with one unknown that could be a potential upside for Brazil and that's the trade retaliation discussions that are going on. So we still are optimistic for Brazil. To Brian's point though, this change in financing, although, we see it as positive, we do think it will take some time for projects to move through the system, just given the lag time that exists and that type of move.

The next question comes from Nathan Jones with Stifel.

So I guess I'll start with some of the commentary around steel pricing and just the comment in the press release about potential for passing that through. If we take the AR reversal out of operating income during the quarter, margins were down year-over-year on higher revenue, you probably should have had a little bit of a better mix domestic versus international. But you said you had a poorer mix from projects in the international business. Do you feel like you covered still dollar for dollar in the quarter? And then any other -- any color you can give us around those comments about maybe it'll be more challenging for you to pass on steel costs in the future.

Yeah. So Nathan, this is Tim and our goal continues to be to pass the cost increases on to the marketplace to address the cost escalation. We had talked about that in the last earnings call. We led the industry this year in our view in the implementation of the steel surcharges to address this need and our results so far, we would say, they reflect that we’re being successful with this strategy and our intention is to continue with this strategy. The comments in the press release though reflect the reality of -- it's some unknown here going forward. So we're going to continue with the direction that we have laid out. We've been successful to date with that direction, but we did want to give at least a caution in that that there is some unknown going forward as to how much we can continue to be successful in that area.

So that commentary just there sounds a little bit more positive on your ability to posture steel price and maybe it came across in the press release. So are you saying that you're not, at this point, you're not seeing any problems passing through steel price. Obviously, there's always problems passing it through, but you're being successful, you don't really have any reason to think that you want to continue to be successful, but you’re just being cautious with the way you're framing it.

Nathan, to describe it this way, you saw our quarter results in North America and that would reflect in our view, we've been successful.

Okay. Then I’d go on, ask a little bit more of a strategic question around the divestitures. I remember particularly when the company bought that LAKOS business that part of the reason for that was to open up a path to get more into some industrial water applications. Does the divestiture of those businesses kind of take that strategic path off the table? I know that was done prior to your leadership, how are you thinking about the strategic outlook for where the company can go in the future.

The way I see these divestitures Nathan is, I would describe it as evolution. We bought those companies. We developed on the irrigation side a turnkey strategy. We've had success with that. Now, we've come to a point where we have publicly stated we want to simplify the organization. These agreements that we're moving forward with will allow us to keep the turnkey strategy with the commercial agreement that we’ll have with those companies, commercial agreement to continue with the turnkey strategy in irrigation and then simplify the organization and not be involved in as many other markets. So it's around the theme of focus, simplifying the business, which were the real key tenants that we wanted to achieve with our foundation for growth initiative.

Okay. I think you've been pretty clear about that. So I don't think anybody should be surprised about these divestitures and I would say, I don't think anybody should be surprised when maybe you're not quite done yet. When it comes to deployment of capital, does these take that path to industrial water off the table for you? Is that not something that the company is no longer looking at?

Our core businesses, we've been clear, are the infrastructure and our irrigation business. That's where our key focus is at this point in terms of what we would define as core businesses.

The next question comes from Brian Drab with William Blair.

So the first one, I just wanted to talk a little bit more about the margins. In the irrigation segment, if you exclude the accounts receivable recovery, adjusted operating margin was 12.3% and that really was the lowest operating margin that you reported in that – in the third quarter in irrigation in over a decade. So just wondering if you could talk more about the dynamics that are driving that and what we should expect in fourth quarter and going into fiscal 2019? I assume it obviously has a lot to do with steel. You talked about Brazil, but does that get better as we go forward or are you concerned about this really relatively low level of operating margin?

Yeah. This is Brian. I think there's three key things that impacted our operating margin in irrigation in the third quarter. I would say the first one being in the international project area, one project in particular with fairly low margins, you couple that with, I think, the second thing being our slowdown in Brazil, that had, I would say, the second probably largest impact. And then the freight increases in the US that we were a little bit delayed in reacting to that. So I think in all of those cases, I would expect -- the freight costs we've addressed, project markets in international have become very price competitive. But we still see a lot of opportunities there. I think the Brazil situation is, we feel, it's more of a short term situation as well.

Okay. And can you give us any sense for what volume versus price was in terms of revenue growth for irrigation?

Yeah. I would say in the quarter, price played a slightly higher part in the sales growth than volume. And I would say the other -- just a little more clarity on the third quarter too is there may have been a little volume pulled forward in to the third quarter, just because of the increasing price environment. We don't have that quantified, but I think that may have played a little bit of a part in volume growth in the third quarter versus what we had expected going into it.

Okay. Does that split apply to the domestic business and the international or is that only for consolidated?

Yeah. No. That was only for domestic, for North America.

Okay. Just – okay, so for domestic, price played a little bit more of a role.

Yes. I would say slightly higher.

In growth than volume and volume was helped by some pull forward potentially?

Yeah.

Okay. Got it. And Brian, can you just give us FX impact? I don't know if I missed that, but FX impact on revenue growth in the quarter?

Yeah. It’s overall fairly insignificant. You had some currencies that had strengthened versus the Brazilian currency that had weakened. So overall, it was negligible.

Okay. And then just quickly, do you expect more QMB revenue in the fourth quarter or less versus the third quarter.

Quarter-over-quarter, we would expect less definitely, since the majority or a significant portion of those two projects shipped in the third quarter. Quarter-over-quarter, we'd expect it to be lower.

The next question comes from Joe Mondillo with Sidoti & Company.

So I just want to dig in a little bit more relative to the infrastructure segment and sort of about last question. I think you guys have divulged that Alex Fraser was about $14 million total project and the Japan follow-ons were about 11. So that brings it to about $25 million and you said a majority hit in the third quarter, your infrastructure revenue was up year-over-year by about 10 million. So I assume most of that 10 million was related to this QMB, which leaves out of 10 million, would leave 15 million more dollars related to Alex Fraser in Japan follow-ons, but you're saying that Q3 will be larger than Q4. So my analysis is sort of bringing me that $10 million in third quarter and you have $15 million left over for those two projects, but obviously, I'm not missing something. So could you just clarify what's going on if the core business was actually down much more than I actually expected and a large part of the segment was really driven by those two projects?

Hey, Joe. This is Tim. Let's first of all take the direction from a QMB and then Brian can give more color to your specific question. First, it’s important to highlight, as we've said in prior calls, we do not include any sales and backlog until a contract is signed, but we are seeing an increased interest in Road Zipper on a global basis and we've said this before and we're going to continuing to focus on this is to increase the demand and move more of this business to leasing, reduces the lumpiness and these two actions help address the lumpiness. So we feel we're making good progress in creating new leasing opportunities. That’s a key part of our strategy. But, I’m going to let Brian help address more of the specifics of what you're asking here in terms of quarter versus quarter.

Yeah. On both of those projects there, well, I'd say Japan definitely is both third and fourth quarters. On Alex Fraser, there was a portion that we had indicated for the first quarter of 2019. But clearly, there's still a portion of both of those projects that will go through in the fourth quarter, but directionally, it will be lower than third.

Okay. So could you -- I guess what I'm getting at is Alex Fraser and Japan follow-ons was $25 million. Of that $25 million backlog, how much here in the third quarter?

I'm not going to break out the specifics for those two projects on what hit in the third quarter.

I don't need, you don’t need to break it out between the projects, I'm just wondering of the total backlog of QMB, of those two projects, how much hit in the third.

I would say roughly two-thirds.

Okay. I also wanted to ask on a different subject, with just relative to the international business. I know going into the third quarter, at least, over the last couple of quarters, backlog was up year-over-year, inventory was up year-over-year and we were sort of talking about aside from what you had in infrastructure that some of that was being driven by international projects and we did see a sequential uptick in international, but it was actually down -- still down year-over-year, but now we're seeing sort of backlog down year-over-year and inventory down year-over-year. So is 3Q sort of the high watermark of international for the year and sort of overall, what does the outlook look like for international? I know you touched on Brazil, but you can talk about other areas if you want to.

Joe, this is Tim. I’ll give you a feel and a flavor for international business. Year-to-date, our revenue has decreased 9% versus prior year. These results are below the expectations we had at the beginning of the year. The key reasons for this year-to-date decrease is less volume and large projects and more recently the slowdown in Brazil that Brian mentioned earlier in his points in addressing one of the questions. We do have a good pipeline of projects in place, but the timing of the sale is always difficult to predict on these, how well we do this year versus prior year on a total fiscal year will depend on closing several targeted projects this quarter that are in our pipeline.

Okay. And so I think last quarter, I think I asked the question, do you anticipate international irrigation being up year-over-year in the back of the year. Obviously, 3Q was down year-over-year. So is that still a possibility or -- 4Q, is it just not as strong as you initially thought. Is 3Q sort of the high watermark at this point or could 4Q still be the sort of a big quarter, do you still see year-over-year growth or could you give us any more sort of color related to that?

Yeah. I think a couple of things have impacted the outlook for the full year. I think this slowdown in Brazil being something that hadn't been on the radar when we talked at the last quarter. And then the other thing is just the timing of some of these projects. There is, we've seen a number of projects get pushed out for there. So I think as Tim mentioned, I think the fourth quarter will depend on a project or two getting into the quarter versus getting delayed into next year.

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

Great. Well, thanks for your interest and participation in today's call. This concludes our third quarter earnings call. I'm looking forward to updating you on our continued progress in our quarter four call to be held in October.

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