Lindsay Corporation (LNN) Q4 2019 Earnings Report, Transcript and Summary

Good morning. My name is Lexi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Fourth Quarter and Fiscal Year 2019 Earnings Call. During this call, management may make Forward-Looking Statements that are subject to risks and uncertainties, which reflects 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. [Operator Instructions]. I would like to turn the call over to Mr., Tim Hassinger President and Chief Executive Officer. 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. The objective of this call is to discuss our quarter four results. Before we go to that overview, I will make a few introductory comments. For the domestic irrigation business, the unresolved trade disputes continue to put downward pressure on farmer sentiment along with the lower commodity prices compared to what we were seeing at the end of our third quarter. However, there is upside potential for commodity prices, given the uncertainty on what final yields will be. On the international irrigation business, a large Middle East order that we mentioned on our last earnings call illustrated that we continue to be active in a growing Middle East Africa region. Currently we are working to fulfill that order. We continue to see a healthy amount of project prospects in the developing markets. However, we have seen a delay in several of them during this past quarter that will push their start date to linger in the fiscal year. And this delay does bring more risk to their eventual start date. One other area to highlight is Brazil. And although there have been delays in orders waiting for financial approvals, we continue to be bullish on the opportunity in this market based on the potential orders in our sales funnel. For the infrastructure business, there were two good proof points provided in the last call that the Road Zipper business is moving in a positive direction. The increased use of Road Zipper in road construction projects aligned to our shift-left strategy and the new Japan $15 million order were great examples that we are successfully addressing the need to grow this business and increase the leasing business. As we have said before, by addressing these two objectives, we can reduce the lumpiness associated with this business. Our focus on these two objectives is moving this business forward at an accelerated rate. Our overall sales funnel projects based on a 50% probability of success is at the highest level it has ever been. As these projects progress to the signed agreement status stage, we will announce them on future updates. Another positive development for the Road Zipper business was the announcement on September 26th that the Federal Highway Administration repealed a 103 year old federal procurement rule that prohibited state and local governments from using patented or proprietary products on highway and bridge projects that receive federal funding. This change removes a historical roadblock that has inhibited the consideration of our Road Zipper solution when federal dollars were a funding source. On innovation, last quarter, I said that Lindsay was bringing new products to the marketplace and mentioned Pivot Watch as the latest example. Pivot Watch has been launched in the North American irrigation market and we continue to make significant progress on our innovation strategies. Our new computer control panels were launched at the fall farm shows. All panels now have embedded FieldNET technology, which means that 100% of our machines will ship from the factory FieldNET enabled. We also released access to satellite imagery in the quarter. All FieldNET Advisor customers now have access to satellite imagery and through our partnership with Farmers Edge our mutual customers can access high resolution daily satellite images, enabling anomaly and stress detection. Images are imported directly into the FieldNET platform where they are available to users as part of their FieldNET Advisor subscription. With all these improvements that have been introduced, the interest in FieldNET Advisor continues to build as we had a 78% increase in the number of year-over-year subscriptions. Lastly, regarding our Foundation for Growth initiative, we have previously stated that we expect to realize $13 million to $18 million in margin improvement from the four work streams that have been highlighted. Since the beginning of this transformational journey, our goal has been to have these margin improvement projects implemented as we enter fiscal year 2020. While we recognize the market conditions will have an impact on our ability to achieve our goal of 11% to 12% operating income, I can confirm that these margin improvement projects have been implemented. What is clear to us, our Foundation for Growth initiatives has led to a transformational change for Lindsay. So now let's move to our Q4 results. And for that, I will turn the call over to Brian.

Thank you, Tim. And good morning, everyone. To begin, I would like to cover two items that impacted our reported results for the quarter. First, we incurred expense of $1.9 million for professional consulting fees in connection with our Foundation for Growth initiative, which represent the final expenses for this engagement that was completed August 31st. Second, we incurred a one-time non-cash expense of $2.8 million in connection with evaluation adjustment applied to indirect tax credits carried in a foreign jurisdiction. The after-tax impact of these two items amounted to $4.3 million, or $0.40 per diluted share. The remainder of my comments regarding the fourth quarter and full year results are based on comparisons of adjusted results, which exclude Foundation for Growth costs and evaluation adjustment and are detailed in the Regulation G disclosure at the end of the press release. Total revenues for the fourth quarter of fiscal 2019 were $101.9 million, a decrease of $21.4 million or 17% compared to the same quarter last year. Net earnings for the quarter were $5.8 million, or $0.54 per diluted share compared to net earnings of $4.5 million or $0.42 per diluted share in the prior year. The previously announced business divestitures accounted for approximately $18.7 million of the decrease in revenues, with a net earnings impact of $1.2 million, or $0.11 per diluted share. Total revenues for the full year of fiscal 2019 were $444.1 million, a decrease of $103.6 million, or 19% compared to the prior fiscal year. Net earnings for fiscal 2019 were $15.6 million or $1.45 per diluted share, compared to net earnings of $31.6 million, or $2.94 per diluted share in the prior fiscal year. The business divestitures accounted for approximately $78.1 million of the decline in revenues with a net earnings impact of $2.0 million or $0.19 per diluted share. Irrigation segment revenues for the fourth quarter were $69.5 million, a decrease of $26.7 million, or 28% compared to the same quarter last year. Excluding the impact of the divestitures, North America irrigation revenues of $41.5 million were relatively flat compared to the prior year. Higher revenue from engineering project services and the impact of higher average selling prices were offset by lower irrigation equipment unit volume. Demand for irrigation equipment is at a seasonal low point during our fourth quarter, and is primarily driven by replacement activity. In the international markets, revenues of $28 million decreased $7.6 million, or 21%, compared to last year's fourth quarter. Sales activity was lower in several markets, including Brazil, which as Tim mentioned, was impacted by delays in farmers receiving government financing approvals. Revenues were also negatively impacted by approximately $1 million from differences in foreign currency translation rates compared to the prior year. Total irrigation segment operating income for the fourth quarter was $6.3 million, a decrease of $2.1 million - or $2.2 million compared to the same quarter last year. And operating margin was 9.0% of sales compared to 8.8% of sales in the prior year. The divestitures accounted for approximately $1.7 million of the decrease in operating income, while the impact of lower irrigation equipment sales volume was partially offset by improved costs and pricing performance. For the full fiscal year, total irrigation segment revenues were $351.5 million, a decrease of $88.4 million or 20% compared to the prior fiscal year. Excluding the impact of the divestitures, North America irrigation revenues of $218.6 million increased 1% compared to the prior fiscal year. International irrigation revenues of $132.9 million decreased 9% compared to the prior fiscal year, with approximately 5% of the decrease attributable to differences in foreign currency translation rates. Irrigation operating income for the full fiscal year was $33.3 million, or 9.5% of sales compared to $46.9 million, or 10.7% of sales in the prior fiscal year. Infrastructure segment revenues for the fourth quarter were $32.4 million, an increase of $5.3 million, or 20% compared to the same quarter last year. The increase resulted primarily from higher Road Zipper system sales and lease revenue, while sales of road safety and other products were slightly lower compared to the prior year. Infrastructure segment operating income for the fourth quarter was $9.3 million, an increase $4.9 million compared to the prior year. Infrastructure operating margin for the quarter was 28.8% of sales compared to 16.6% of sales in the prior year. This increase resulted from higher revenue, a more favorable revenue mix and lower operating expenses compared to the prior year. For the full fiscal year, infrastructure segment revenues were $92.6 million, a decrease of 14% compared to the prior year. Infrastructure operating income for the fiscal year was $16.8 million, a decrease of 32% compared to the prior year, and operating margin was 18.1% of sales, compared to 22.9% of sales in the prior year. Record results in fiscal 2018 were driven by large Road Zipper projects that did not repeat in fiscal 2019. Cash and cash equivalents were $127.2 million at the end of the quarter compared to $160.8 million at the end of the prior fiscal year. No share repurchases were made during the quarter, and 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. Your first question comes from Brian Drab with William Blair. Please go ahead.

So I think I heard this, but I just want to make sure. Where do you stand now on the commitment to 11% to 12% operating margin in fiscal 2020. Is that still on the table?

Hey Brian, it's Tim. And yes, we are still targeting for that. Obviously, project foundation, the Foundation for Growth initiative that we have laid out was a key driver for that. And the growth initiatives, as we mentioned are being implemented. We have hit the milestones that we laid out one and a half years ago. And the financial results are starting to take hold related to that. A good example is the shift-left Road Zipper strategy. So the key actions that we have been continuing to update you are truly - are taking hold. Having said that, we have been real clear on this throughout the journey here is that we need a market similar to 2017 in terms of market conditions there. So that is the status of where we are at right now.

And then Tim, can you give any sort of granularity of detail around some of the other specific initiatives like how - I know, sourcing was a big component of getting to that 11% to 12%. How has that progressed over the last few quarters? And where are you with the G&A reduction? And you also mentioned - and maybe you can comment on, what are you doing in terms of the commercial channel optimization? What does that mean exactly?

Yes. So let me just highlight some of the key achievements along the way here, Brian that we have had. We have had the one infrastructure plant closing. We have had four business divestments. We had a shared service integration moving from several locations to centralized here in Omaha. We created as you just mentioned a centralized sourcing team. And there has been several cost reduction and sales growth initiatives also underway. On the infrastructure commercial team, there has been several projects. I would say the big highlight is that I have mentioned is the ship-left. We are really pleased with the Road Zipper, what has happening there, and the fact that, that strategy is taking hold. On the irrigation, it has been more channel management and all of those actions are in process of being implemented right now for the fiscal year 2020 season.

There is no way that you would be able to put any dollar amounts in savings around any of these, like the sourcing that is been accomplished. Is there - and I don't want to press you too much on that, but that is kind of what I was looking for is, are you hitting the financial cost cutting targets that you talked about previously?

Yes, Brian, this is Brian Ketcham. Yes, I think we have seen some of that take a hold during the year. I think we saw some of that impact our Q4 results. I would say in Q4 what we saw was some of the operational initiatives as well as sourcing initiatives that helped improve margins, not only in irrigation, but also in infrastructure. And as Tim had mentioned earlier, all of that projects that we had identified to get us to that target have reached the implementation stage by the end of the year. And of course now realization is the next step and sourcing being an example that starts to get realization when you burn through existing inventories and those kinds of things.

I got it. Okay. And then just the last one, and then I will turn it over. Just a housekeeping sort of question. What is the breakdown in the in the fourth quarter within regulation of dry land conversion replacement?

Yes, so in fourth quarter this year it was 15% dry land 23% conversion and 62% replacement. Fourth quarter is typically a higher percentage of the placement than other quarters.

Is that driven more just by that typical seasonality that you just mentioned or was there any specific weather related driver there as well?

No its typically the seasonality and a lot of that being driven after the crops are planted by storm replacement, I would say our level of storm activity this year was lower than it was last year.

Got it. Okay. Thank you very much.

Thanks Brian.

Thank you. Your next question comes from Nathan Jones with Stifel. Please go ahead.

Good morning everyone.

Good morning Nathan.

Just following up to a couple of Brian's questions there. Firstly on the 11% to 12% operating margin targets and you guys have been clear since the start that you needed a market pretty similar to 2017. Clearly through 2019 volumes in irrigation are down on a - revenues are pretty flat. But I think a lot of that comes from price infrastructure revenues through 2019 are about 10%, lower than they were in 2017. So it doesn't seem like 2020 is actually going to be a market that is similar to 2017. So would you be able to help level set expectations for where you think margins can get to in 2020, given the current market conditions?

Yes, Nathan, this is Brian. I think, just to the point on the market conditions, I think clearly infrastructure business was lower as you pointed out. I think our outlook for infrastructure would be that we would get back to at least 2017, potentially 2018 type level with infrastructure. So that is a headwind that we feel pretty good that we have addressed. I think it comes back to the irrigation side. And, I think without the market, similar to last year it creates additional headwind you get to the 11. If we see a recovery, clearly, we still got minus high to the 11. But I don't want to speculate on what without the market help, obviously, chances are fall short of that. But I don't want to give you a firm number on what that might be because nobody knows what exactly the market is going to do.

Yes, irrigation is fairly hard to predict and sounds like there is some uncertainty potentially on when those international projects might ship later in your fiscal 2020 or you know possibly to fiscal 2021.

Yes, Nathan this is Tim. We would continue to say that we are seeing good prospects out there. There is a good profile of projects. However, just as you mentioned, there has been some delays. And that always brings more risk when there is delays, but there is still active projects and we are encouraged by the potential, but obviously the uncertainty is a factor.

So are those projects kind of at the point where you have won the project, been awarded the project, but the owner doesn't have committed financing in place yet and that is kind of what we are waiting on in order for it to be released and go into production for you?

Nathan, there isn't the one answer I could give you. There is a wide range of different scenarios here from in tender and final decision making, dates haven't been finalized or tender is in process, but uncertain when the company that is selected when the start date would be. So there is a wide range of different scenarios here.

Okay. And then maybe I'm just talking a little bit more about the shift-left strategy on the Road Zipper business. Clearly, 3Q or 4Q here in 2019 for you guys, was a strong quarter for that business. Are you to the point with those initiatives now where we should see a more consistent level of revenue quarter-to-quarter and year-to-year rather than the lumpy up and down kind of stuff that we have had over the last few years or is it still a significant amount of work to do to try and smooth that kind of business up?

Yes, Nathan we viewed last - this past year is our launch year for the ship-less strategy and we continue to see increased interest in Road Zipper on a global basis for projects and leasing opportunities. We are finding opportunities earlier in the buying process that we have talked a lot about. I announced success in last quarter's earnings call that there was a strong proof point that the ship-less strategy is advancing in a positive direction. I think there large order in Japan that was also mentioned has begun to be fulfilled. So most of the sales occurring throughout fiscal year 2020 and that one is also a strong proof point that the new strategy is working. So just as you referenced, our focus is to increase the overall demand and specifically increase our lease sales. There is a couple points here I want to make that are really critical, when I look at our sales funnel for fiscal year 2020 and beyond, we continue to see good progress in both areas. We have more machines being leased than ever before and our sales funnel is the best it's ever been. That is why I have optimism for Road Zipper going forward.

And then the comment that you made about the regulation being removed of using Federal funds to buy patented intellectual property, how meaningful could that be to that to the business there?

I can't give you a number yet, Nathan on how much that is, but it's just the barrier that has existed and that is now been repealed. So we see only upside potential with this. But we are not far enough along to be able to frame it for years how big of an opportunity that will be.

Okay. Thanks very much for the help. I will pass it on.

You bet. Thanks Nathan.

Thank you. Your next question comes from Jon Braatz with Kansas City Capital. Please go ahead.

Good morning everyone.

Hi Jon.

Hi Jon.

Tim, steel prices have come down a little bit. What do you see for 2020 in terms of pricing independent of any competitive issues, but what do you see for pricing in the irrigation segment for next year?

Yes. So Jon, you are correct, steel prices have decreased specifically the past few months. However, tariffs associated with purchase materials from other than steel are still in place. So our goal continue to be to pass on these cost increases to the market. As we have discussed in prior calls, we led the industry and the implementation of the surcharge to address their needs. So our intention is to continue with the strategy. And of course, we have got to remain competitive at the same time. So it is all about finding that balance, but our intention as tariffs still are in place on these materials other than steel we are attempting to pass that on.

Okay. Alright. Thank you. Secondly, geographically speaking here within the United States, obviously, there was some markets that were fairly strong, I think maybe out West and maybe Southeast. I may be wrong. But when you look at those geographical markets that were strong last year, any reason why that would not be the case again this year, any changes have you seen in those specific markets?

Well if you look West potatoes is one crop that definitely jumps out. And we are seeing strong demand, in the U.S., Japan trade agreement is supportive for that. So overall, we would say if I were to give two extremes, I would say potatoes market looks encouraging and on the other extreme on the cotton growers are the one that seems to be right now in the more difficult situation in the South, Southeast.

Okay, okay. Alright. Thank you, Tim.

You bet. Thanks.

Thank you. [Operator instructions] Your next question comes from Chris Shaw with Monness Crispi. Please go ahead.

Hey good morning, everyone. How you are doing?

Good morning.

Hey, Chris.

My first question. I had a question about the inventories and the balance sheet. I mean, year-over-year they are up 16% I think it is. Is that just, what we were just talking about before that sort of cost inflation or is there something else happening there. And so how is it going to flow through later on the into the income statement?

Yes, Chris, this is Brian. Yes, I would say inflation has a part of it. But that is not the biggest part. I think, probably one of the bigger things is around infrastructure and support for the Road Zipper activity that we are seeing particularly in the barriers, so there is a lot of components that are brought into to build the barriers for the projects that we have got in front of us. I would say the other area is in irrigation, domestic inventory levels in irrigation. Some of that is to support export. But I think, we have been challenged with some supply chain issues with tariffs and some of the components coming from China. So we probably carried a little bit more inventory as a result of that. So, I expect inventory levels for irrigation to come down. I think what is unknown at this point is inventory related to infrastructure as you know as the Road Zipper projects continue to develop.

That makes sense. And I was curious in international irrigation for similarly to infrastructure is lumpy, I think it was up double-digits, down double-digits, down double-digit kind of thing this year. Is there an opportunity there to convert customers to leasing as well or is that something that wouldn’t work in that market?

And, Chris, are you just talking on the Zipper or are you talking on the international irrigation?

No international irrigation. Because it's pretty lumpy as well. And it's similar to infrastructure.

It is more lumpy than domestic that is driven obviously, by the large project driven markets. So I think that is - I would describe that more as just a dynamic of that market. I think it is going to be difficult to smooth that out, just given the fact that these projects tend to be large, whether you win or lose them.

Is there no anywhere in the world sort of leasing of irrigation equipment that every model for either domestic or international, that you have seen?

There is certain countries where we have done some leasing, it is not a very big piece of the business. I think, just the nature of these installations being more or less permanent once you put them on a field. But, it is an area that like I said, we have done some in some countries, but not something that we look at as a large opportunity overall.

And then just for the irrigation and breakdown, the dry land, replacement and all, do you have that on the annual basis, I knew give us the fourth quarter, but I was not here the full-year.

Full-year is about 22% dry land. 39% conversion and 38% replacement.

Alright. Thanks.

Thank you. There appears to be no more questions at this time. Mr. Hassinger, I will turn the call back to you for closing remarks.

Well, we appreciate the interest. So this concludes our fourth quarter earnings call. Thank you for your interest and participation in today's call.