Lindsay Corporation (LNN) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Chad, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Second Quarter 2019 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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 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 conference over to Mr. Tim Hassinger, President and Chief Executive Officer. Please go ahead, sir.

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. The objective of this call is to discuss our quarter two results. Before we go to that overview, I’ll make a few introductory comments. The ag market conditions this past quarter were very challenging given the continued lower commodity prices and decreased farmer sentiment compared to the prior quarter and versus the prior year. A recent farmer confidence chart produced by DTN, best reflects our view of the market this past quarter, as it showed a sudden and dramatic downturn in farmer sentiment post harvest. This worsening market environment meant that we saw a reduction in our irrigation sales versus same quarter prior year. For the infrastructure business, the higher margin Road Zipper System sales were lower than prior year. Last year was a record sales year for Road Zipper that included large projects that have not been duplicated this fiscal year. This overall challenging environment and the fact that our foundation for growth initiatives were not far enough along yet to generate meaningful contributions to our earnings, meant our quarter results fell well short of expectations. Our disappointing quarter two results do not impact our objective to improve operating margin in the trough of the market. Our 2020 objective of 11% to 12% operating margin was based on our view that the fiscal year 2017 represented the trough of the market. While current market conditions have been negatively impacted by tariffs and unresolved trade conflicts, we do not believe this is a sustained market environment. Of course, the challenge is knowing when the timing of these factors will be resolved. We remain committed to our goal of improving our operating margin performance by 300 to 400 basis points, and Page 9 of the slide deck provides the line of sight to where that improvement is expected to be delivered by workstream. Our foundation for growth initiative continues to progress and is creating positive change for Lindsay. We are meeting the milestones that we laid out more than one year ago. In our last earnings call, I referred to the direction we have taken at simplify, then grow. We’ve spent most of the 2018 calendar year focused on simplifying the organization. We have achieved a lot in this area and these actions have put us in a position to focus more on growth, and specifically, how we strengthen our technology leadership position. On this topic, you've heard me discuss our intent to grow FieldNET Advisor and Road Zipper given their differentiation in the market. I'm very pleased to say that we made progress this past quarter towards achieving these goals. For FieldNET Advisor, we announced commercial partnerships with Nutrien Ag Solutions and Climate Corporation, a subsidiary of Bayer to help improve our demand creation capabilities. Nutrien Ag Solutions, the world's largest provider of crop inputs and services, and Lindsay Corporation announced a partnership that will enable Nutrien Ag Solutions’ crop consultants, which number over 3,500, to leverage Lindsay's Remote Irrigation Management and Scheduling platform to supplement Nutrien Ag Solutions’ offers. The Climate Corporation and Lindsay announced a platform agreement that will establish data connectivity between Climate’s FieldView digital agricultural platform, and Lindsay’s FieldNET platform. These two agreements, with leading companies in the agronomic space that offer digital solutions, are aligned with our strategy to increase the use of FieldNET Advisor. Regarding Road Zipper, we recognized the need to address the lumpiness of this business. Our position is to address this need through growing the business and increasing the leasing percent of the total sales. An action we have taken to increase our capability to grow this business is the agreement between Lindsay and Iteris that was recently announced. By utilizing Iteris’ software analytics capability, it's our desire to identify congestion issues and measure the impact of utilizing the Road Zipper System. This agreement is matched well with our shift-left strategy to get more involved in the planning and design stage of projects where Road Zipper can be potentially utilized. I'm encouraged by the early signs of success resulting from this strategy. These initiatives represent the change that is occurring at Lindsay. Action is being taken to create more innovation and more differentiation. So now, let's move to our Q2 results. 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 costs incurred in the second quarter related to our Foundation for Growth initiative which were reported in corporate expense. Total pre-tax costs of $5.3 million were incurred in the quarter, of which $4.8 million represents professional consulting fees. These fees are performance-based and correspond to workstream projects that have advanced through a stage gate process to the implementation stage. We expect to incur additional consulting fees in our third quarter as additional projects advance through the process to implementation. Other costs during the quarter related to Foundation for Growth were severance costs of approximately $500,000 related to the centralization of shared services activities. The remainder of my comments regarding the second quarter are based on adjusted results, which are detailed in the Regulation G disclosure at the end of the press release. Total revenues for the second quarter of fiscal 2019 were $109.2 million, a decrease of $21.2 million or 16% over the same quarter last year. Net earnings for the quarter were $200,000, or $0.02 per diluted share, compared to net earnings of $6 million or $0.56 per diluted share in the same quarter last year. Approximately $19.6 million of the decline in revenues is the result of the previously announced business divestitures, while the net earnings impact of these divestitures on a year-over-year comparison was minimal. Irrigation segment revenues for the second quarter were $95.8 million, a decrease of $16.1 million or 14%, compared to the same quarter last year. Excluding the impact of the divestitures, North America Irrigation revenues decreased $1.6 million or 3%, compared to the prior year. Irrigation equipment sales were lower than expected as the unresolved US-China trade dispute contributed to a further decline in farmer sentiment toward investment. The impact of lower sales volume was partially offset by higher average selling prices and higher revenue from engineering project services. Average selling prices declined during the quarter, because of the pass-through of lower steel cost to customers. However, they remain higher compared to the same quarter last year. Higher revenue from engineering project services in the quarter are connected to a new irrigation development project in the Pacific Northwest converting timberland to row crops. In the international irrigation markets, revenues increased $5.1 million or 15% compared to last year’s second quarter. Revenues were negatively impacted by $2.3 million from differences in foreign currency translation rates compared to the prior year. Excluding the impact of foreign currency translation, international irrigation revenues increased $7.4 million or 22% compared to the prior year. The increase resulted primarily from a higher level of project sales in developing markets compared to the prior year, while revenues in established international markets were relatively flat overall in comparison. Total Irrigation segment operating income for the second quarter was $7.5 million compared to $12.5 million in the prior year. And operating margin was 7.9% compared to 11.2% in the prior year. Operating margin was negatively impacted in the quarter by negative margin mix from lower equipment sales volumes in North America, higher warranty costs and operational inefficiencies. Infrastructure segment revenues for the second quarter were $13.4 million, a decrease of $5.1 million or 27% compared to the same quarter last year. The decrease resulted primarily from lower Road Zipper System sales along with slightly lower sales of road safety products. With the second quarter being the lowest seasonal quarter of the year and without the benefit of the large Road Zipper project, the Infrastructure segment incurred an operating loss of $400,000 in the quarter compared to operating income of $2.5 million in the prior year. Cash and cash equivalents were $102.8 million at the end of the quarter compared to $160.8 million at the end of the prior fiscal year. Cash was utilized in the quarter to fund working capital increases 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. At this time, I would like to turn the call over to the operator to take your questions.

Thank you, we'll now begin the question-and-answer session. [Operator instructions] At this time, we'll pause momentarily to assemble the roaster. First question will come today from Nathan Jones with Stifel. Please go ahead.

Yes, hi. Good morning, this Adam Farley on for Nathan. So my first question is on irrigation margins. There is a bunch of moving pieces, sales mix, lower volumes in North America, warranty costs. I was wondering, if you could, maybe bucket or kind of highlight what's most important as we think about for the rest of the year? I know you said, average selling prices also came down for steel pass-through, so maybe just some color on that would be very helpful?

Yes, this is Brian. Just to address the average selling prices, average selling prices for the quarter year-over-year were up probably mid-single-digits compared to last quarter when we at our call we spoke of being up about mid-teens. So it gives you a sense of how steel prices have come down and how we passed that along in our average selling prices. The volume in North America was down about, I would say, upper teens compared to last year. Obviously we spoke to the market conditions being part of that. Also last year, we had a very strong second quarter, our highest second quarter in the last three or four years. So there's a little bit of a comparison year-over-year in the volume aspect of it. Getting to margins, I would say the overall selling margins remained fairly stable, although pricing has gotten more competitive. But I think the mix with a drop in North America equipment volume being replaced with incrementally lower margins from the international sales, as well as the engineering sales had a big part of the drop, as well as the higher warranty costs and some of the operating inefficiencies that we experienced as we planned for a stronger quarter operationally and these were not able to reduce the cost quick enough to adapt to that environment.

Okay, that's helpful. Then just turning to the Road Zipper Systems quickly. Was there any movement to the right maybe related to the San Rafael project? Is there any weather in there that maybe affected that?

No, this is Brian again. San Rafael, we’ve recorded majority of that in our first quarter. We still have some left to record that is now in our fourth quarter. And that's really driven more towards the customer readiness to deploy the Road Zipper on the bridge.

The next question will come from Brian Drab with William Blair. Please go ahead.

Good morning. This is actually Joe Aiken on for Brian Drab today. I was wondering if you could just touch on the International Irrigation segment. What areas are showing strength there? I know you've talked about Brazil in the past. So maybe, if you could expand a little on the environment is like there? And you also mentioned on the last call project in the Middle East potentially. I was wondering if that is something you might be able to touch on?

Yes, Joe. This is Tim. So let me give you an overview on the international and then at the very end let me just focus then on Brazil. Given the size of that market, we will go into a little more detail on that. Overall, international revenue for us increased versus prior year. To your point for the project market, we mentioned in our last quarter's call that we have been granted a large order in the Middle East. Those sales were realized this quarter. We continue to have a good pipeline of projects in place. The opportunities are identified. I can say in all of these cases, Lindsay leadership has met with the key decision makers for these projects. The needed efforts to finalize those deals are well underway. So we will continue to update you on how that's progressing. On the traditional markets, overall, we would say our business was flat. We saw a decrease in the APAC region that was driven heavily by a severe drought in Australia that negatively impacted farmer sentiment. On the other side, we’ve seen good growth in the Western Europe region and Brazil, where Western Europe commodity prices are up year-over-year, which has driven a more favorable positive farmer sentiment situation. I'll come back to Brazil in just a second here. In the developing markets, we continue to see strong demand in the CIS region. I’d describe this demand as being directly linked to food security and investments being made to rehabilitate the irrigation infrastructure that has been in place going back many years to actually the Soviet Union era time frame. On Brazil specifically, we -- the early drought that was being talked about impacted the soybean yield, but there was some late season rains that we believe helped limit the losses. So right now we would align to the estimate that the production is expected to drop approximately 4% versus the prior year. So it hasn't really impacted in any significant way farmers’ sentiment. The second corn crop, safrinha, was planted early due to an early soybean harvest. So, they are off to a very favorable growing season. In the area of financing, the environment there remains positive for irrigation sales. Applications for the modern infra program which we all know is important for irrigation financing is up 18% versus prior year through February. We did see some approval delays described between December-February time frame but they seem to all be cleared up now. We continue to be optimistic on this market. This market is benefiting from US-China trade dispute. And from the Lindsay side, we consider ourselves positioned well for the growth that can occur there given the fact that we have a manufacturing locally there. So hopefully helps give you at least a little color of what we're seeing across the international business.

Yes, that's great. Thank you. And then just quickly turning to domestic. I was just wondering on the farmer sentiment, with net farm income forecasted to increase 10% in 2019, I think it is right now, do you see that potentially being able to turn farmer sentiment in the near term at all, or have you seen -- do you think that has potential to - expect to turn soon?

Well -- I wouldn't give you an estimate of when that's going to turn, we obviously see the same estimate. We did not see that environment so far through this calendar year. Actually, from our standpoint, we're continuing to see the lower commodity prices put downward pressure on the market. To your point there, we did see farmer sentiment decrease this quarter driven by the continued lower commodity prices but also the steel tariffs and the uncertainty surrounding the trade agreements, so the key one being the US-China trade conflict. I saw an article this morning that really caught my attention for this call is, the title was the trade war almost couldn't have come at a worse time for the agricultural industry. And with all that going on, we have seen in the domestic market, what I would describe as a wait and see buying attitude for irrigation. The many farmers believing are hoping that steel costs will come down and delaying their purchase, wanting more certainty around the trade conflicts and others just waiting for some sign or some increase in the commodity prices to happen before spring. We would describe the overall domestic market this quarter down in the mid to upper teens versus same quarter prior year.

The next question comes from Jon Braatz with Kansas City Capital. Please go ahead.

Good morning, Tim, Brian. Brian, you touched on some of the factors impacting the irrigation operating margin, as you mentioned warranty costs. Was there anything significant to that, anything that might have some legs to it?

Jon, this was -- I would say it was a limited number of machines that were identified that certain components weren't performing to the customer expectations. And so we went ahead and replaced those components. It was limited, but the cost of the components was pretty expensive. So I think part of it too is the year-over-year comparison versus last year pretty low warranty cost for the same period. But we believe that we've taken care of the issue, so the customer satisfaction and -- wouldn't consider that -- I can't say that it won't pop-up again but we don't believe that there's any others that we needed to address. We think we’ve addressed them all in the quarter.

The other question is, obviously there are a lot of headwinds facing the farmer -- the US farmer. And this March was tough month with a lot of flooding. And I know it's difficult to project the impact of the flooding issues at Lindsay. But I guess my question is, have you seen the sentiment change at all so far here in your third quarter versus the second quarter because of the flooding, has it worsened at all, did you get a sense of that?

Jon, this is Tim, I'll take a shot at it, and of course the obvious answers depends on where you're at in terms of that, whether it impacted you? So have we seen the sentiment? There's some degree of -- the spring is just around the corner. So if you were delaying purchase but you were planning on doing that purchase before planning, you're running out of time. So there's that dynamic. But let's talk about the flooding, because there's been a lot of discussion around that. One thing that's critical here is that typically floods do not require a replacement of the entire machine as we would see often in a tornado damage as an example. We do expect and you often see a part placement as a result of flooding. Specifically motors and panels are the primary parts that you would anticipate are going to need to be replaced. The thing that is significant here with this recent flood is that we're seeing many acres may not be planted this year. So in that case, that needed repairs for the machines that are on those acres, that most likely will occur over an extended timeframe given the fact that some of these acres will not be planted. So in the short-term, we see a downside in pivot sales in the areas that were impacted by the flooding. And we'll be able to still plan, but an increase in part sales we think will occur on those same acres. And of course, the last comment here is that we're concerned about what we're seeing as a forecast of additional rains coming and conditions get worse before it actually gets better. So that's where we're at right now related to the flooding and how we're seeing it.

Yes. What -- a resolution of the trade issues and some of these other concerns, tariffs and so on. It's really too late, let’s say if there were resolved over the next week or so, it's really too late to have much of an impact as your selling season is closing down. Would that be a fair assessment?

Yes, the window is -- I mean the window is still open, but to your point, it’s closing rapidly with planting just around the corner. So, it would help, we would obviously welcome that. But Jon your point, I’d welcome a more for looking outward as opposed to just immediate it would bring. I believe and our view is that the tariffs and the trade conflict is weighing on farmer sentiment at a even heavier rate than it would have been say a year ago.

Okay. One last question Brian, Foundation for Growth cost going forward, how you see that in the third quarter and fourth quarter?

Yea, Jon I would -- our objective is to try to wrap up the additional initiatives that we have got working through the stage gate process in the third quarter. If what we have in the pipeline now gets through that process, we’d probably have a similar level of consulting fees in the third quarter and that would complete that phase of the project as we move into more of the implementation and realization phase.

[Operator instructions]. At this time, there appears to be no more questions. Mr. Hassinger, I'll turn the call back to you for any closing remarks.

Well, thank you for interest and participation in today's call. This concludes our second quarter earnings call and look forward to updating you on our continued progress in our quarter three fiscal ‘19 call. Thank you for joining.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.