Lindsay Corporation (LNN) Q4 2021 Earnings Report, Transcript and Summary

Good morning, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Fourth Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions] All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note today's 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, 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. Please note today's event is being recorded. And I'd like to turn the conference call over to Mr. Randy Wood, President and Chief Executive Officer. Sir please go ahead.

Thank you and good morning everyone. Welcome to our fourth quarter earnings call. With me today is Brian Ketcham our Chief Financial Officer. Fiscal 2021 was an extraordinary year. We prioritized the health and safety of our employees while maintaining business continuity through transformational actions taken over the past several years, we were well-positioned to capitalize on market tailwinds in irrigation, while navigating persistent headwinds presented by the COVID-19 pandemic. We operated from a position of strength and set shipment records in several businesses due to the commitment and resiliency of our people. We have great teams around the world that continue to execute well, meeting commitments to our customers, and driving growth in our business. I thank them for all they're doing to make Lindsay successful. That's particularly true on the factory floor where we continue to operate our global footprint safely and efficiently, material cost increases, labor shortages, supply chain disruption, and logistics availability continue to impact the business and we continue to make decisions and prioritize investments that mitigate this impact on our company and our customers. Capacity and efficiency investments in Brazil, China, Turkey, and the US have allowed us to satisfy demand and leverage our global footprint. Our innovation pipeline continues to advance with the development of the Smart Pivot platform in irrigation and the Road Connect platform and infrastructure. Both products share a common architecture and are moving through our voice of the customer new product development process and initial field trials. Feedback from users and our strategic partners is helping us further refine the tools and we're very pleased with the feedback we're receiving. We're also pleased to congratulate our Technology Product Manager, Reece Andrews who was recently recognized by the Irrigation Association as the recipient of the 2021 Innovator Award for his significant intangible contributions to the industry. Reece has played an important role in our field net and innovation work since the inception of the platform and we're very proud to see this recognition for his work. In the environmental, social, and governance or ESG space, we continue to move our strategies forward. In July, we published the third edition of our sustainability report where we outlined our five-point focus on investing in sustainable technologies, improving our operational footprint, empowering our people, engaging in our local communities, and operating with integrity. Turning to market conditions. The domestic irrigation market entered the seasonally low fourth quarter with strong commodity and farm income projections. Although commodities have receded slightly, they're still well above historical norms observed through the ag down cycle. Net farm income is projected to increase another 19.5% in 2021 after growing by approximately 19.6% in 2020. Year-over-year price increases have been unprecedented in North America. We've made progress on price realization, but still see some latency due to the significant backlog as customers pulled forward purchases to get ahead of projected price increases. Recent external market surveys indicate farmer sentiment may be waning due to inflationary cost pressures they're experiencing in all of their business. We continue to see strength across most mature and developing markets in the international irrigation business. Shipment records have been set in both Turkey and Brazil where activity has more than doubled in each business on a year-over-year basis. We've also seen shipment records from our facility in France and increased exports from our facility in South Africa in order to meet global demand. In Brazil, we're benefiting from strong market fundamentals and investments in the dealer channel that have allowed us to grow our presence in mature and emerging regions within the country. This continues to be a very competitive market and we see some of the same cost escalation that we've seen in the US that's added pressure to margins. We continue to manage production and pricing actions to maintain business quality. In the Europe, Africa and Middle East region, we continue to ship a large project into Egypt without disruption by leveraging our global footprint. We expect those shipments will continue early into the second quarter of our 2022 fiscal year. We see additional opportunities in this market and are well-positioned strategically to compete for this project business. Moving to infrastructure. The Road Zipper business continues to experience headwinds caused by the global pandemic. While our strong project sales funnel remains at pre-COVID levels, our team has noted that prioritization of COVID response plans and travel restrictions limiting face-to-face meetings have impacted the pace of movement through the farm. These headwinds are beginning to subside as business and travel activity return to normal levels. However, we do not see project exits from the sales funnel until the second half of the fiscal year. The Fixing America's Surface Transportation or FAST Act expired temporarily on September 30. The Senate has approved a short-term extension, which provides funding for an additional 30 days. This creates a window for the infrastructure bill to pass. If an agreement cannot be reached we do expect another extension could be negotiated. The pending infrastructure bill continues to make its way through the approval process in Washington D.C. President has been working to pass both the $1.2 trillion bipartisan Infrastructure Investment and Jobs Act and the $3.5 trillion Build Back Better Act. We're optimistic that some form of infrastructure bill will ultimately pass due to the bipartisan support it has received. However, the timing and size remain uncertain. This may keep some projects in a holding pattern while states wait for certainty on the incremental funding availability. When passed, we expect this legislation will provide a positive tailwind for the infrastructure business including Road Zipper, road safety and our technology products. I'll now turn the call over to Brian to review our fourth quarter and full year financial results. Brian?

Thank you, Randy, and good morning, everyone. Total revenues for the fourth quarter of fiscal 2021 increased 20% to $153.6 million, compared to $128.4 million in the same quarter last year. Net earnings for the quarter were $5.8 million or $0.53 per diluted share, compared to net earnings of $14.7 million or $1.35 per diluted share in the prior year. Net earnings for the quarter were reduced by an after-tax LIFO impact of approximately $4.5 million or $0.41 per diluted share. Total revenues for the full fiscal year 2021 increased 20% to $567.6 million compared to $474.7 million in the prior year. Net earnings for fiscal 2021 were $42.6 million or $3.88 per share compared to net earnings of $38.6 million or $3.56 per diluted share in the prior year. Irrigation segment revenues for the fourth quarter increased 63% to $125.3 million, compared to $77 million in the same quarter last year. North America irrigation revenues of $53.5 million increased 30% compared to last year's fourth quarter. The increase in North America irrigation revenues resulted from a combination of higher irrigation equipment unit sales volume and higher average selling prices. In the international irrigation markets, revenues of $71.7 million increased 100% compared to last year's fourth quarter. The increase in international irrigation revenues resulted primarily from higher unit sales volumes along with higher selling prices and a favorable foreign currency translation impact of $2.8 million. The largest sales volume increases were in the Brazil and Middle East markets. Total irrigation segment operating income for the fourth quarter was $10.6 million, an increase of 78% compared to the prior year fourth quarter. And operating margin was 8.4% of sales compared to 7.8% of sales in the prior year fourth quarter. The impact of higher irrigation system unit volume was partially offset by the impact of higher raw material and other costs. We continue to face some margin headwind as the realization of pricing actions lags the impact of cost increases. Fourth quarter operating results were also reduced by approximately $5 million resulting from the impact of the LIFO method of accounting for inventory, under which higher raw material costs are recognized in cost of goods sold rather than in ending inventory values. During the quarter, we added additional inventory as a buffer against supply chain uncertainty, expected cost increases and as part of a build ahead plan in connection with the temporary shutdown at the Lindsay, Nebraska facility to install productivity upgrades. We expect to realize some benefit of this fourth quarter LIFO impact in future periods as inventory quantities decline. For the full fiscal year, total irrigation segment revenues increased 35% to $471.4 million compared to $349.3 million in the prior year. North America irrigation revenues of $273.9 million increased 22% compared to the prior year and international irrigation revenues of $197.5 million increased 59% compared to the prior year. Irrigation segment operating income for the full fiscal year was $63.2 million, an increase of 53% compared to the prior year and operating margin was 13.4% of sales, compared to 11.8% of sales in the prior fiscal year. Infrastructure segment revenues for the fourth quarter decreased 45% to $28.4 million compared to $51.4 million in the same quarter last year. The decrease resulted primarily from lower Road Zipper system sales compared to the prior year. Revenues in the prior year included a large project in the United Kingdom that did not repeat in the current year. And in the current year we've continued to see the timing of certain projects impacted by coronavirus-related delays. Infrastructure segment operating income for the fourth quarter was $5.8 million compared to $19.9 million in the same quarter last year. And Infrastructure operating margin for the quarter was 20.5% of sales, compared to 38.8% of sales in the prior year. Current year results reflect lower revenues and the less favorable margin mix of revenues compared to the prior year fourth quarter and were also reduced by approximately $1 million resulting from the impact of LIFO. For the full fiscal year, infrastructure segment revenues decreased 23% to $96.3 million compared to $125.3 million in the prior year. Infrastructure operating income for the full fiscal year was $20.2 million, compared to $42.7 million in the prior year. And operating margin for the year was 21.0% of sales compared to 34.1% of sales in the prior year. Turning to the balance sheet and liquidity. Our total available liquidity at the end of the fiscal year was $196.7 million with $146.7 million in cash, cash equivalents and marketable securities and $50 million available under our revolving credit facility. Our total debt was $115.7 million almost all of which matures in 2030. At the end of the fiscal year we were well within our financial covenants of our borrowing facilities, including a gross funded debt-to-EBITDA leverage ratio of 1.4 compared to a covenant limit of 3.0. We are well positioned going forward to invest in growth opportunities that create value for our shareholders. At this time, I would like to turn the call back over to the operator to take your questions.

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. [Operator Instructions] Our first question comes from Adam Farley from Stifel. Please go ahead with your question.

Hey, guys. This is Nathan. I'll start off with a question just on LIFO. I mean this is obviously caveated by assuming that raw materials stay where they are which obviously won't happen. But is there an expectation for more LIFO charges in fiscal 2022? Do you expect some of that to come back as you bleed down inventory. So maybe does it a LIFO benefit in 2022? Just any way you can – any guidance you can give us on that?

Yes, Nathan this is Brian. Yes assuming – let's assume inventory – or inflation stays stable from here on. Obviously, we wouldn't expect any additional LIFO headwinds. Based on the additional inventory we took in in the fourth quarter that, those higher prices went through cost of goods sold. So at the end of the year our inventory is valued at more historical prices, especially as it relates to steel. So as our steel quantities come down, we would expect to see some of that LIFO impact come back in future periods. Probably not in the first quarter as we're in the build for our fall selling season. But as quantities come down later in the year we'd expect to see some benefit come back.

Do you think the whole thing would reverse, or it's a partial return of the charge that you had in the fourth quarter?

It's really hard to say. It depends on the mix of inventory but I would say a fair amount of that should reverse if inventory quantities come down, which we would expect at some point they will.

Okay. Thanks. I wanted to ask a couple of questions about Road Zipper and the infrastructure business in general. I think Randy in your comments you stated that the funnel is about the same size but things are moving more slowly through it due to COVID, and you didn't expect to see much exit that funnel until the second half of 2022, which I assume means that we don't see revenue until 2023. Is that similar for the rest of the infrastructure business? Should we be expecting revenue in the overall infrastructure segment to be somewhere around flat plus price in 2022? Just any help you can give us with how to frame that.

Sure. You bet, Nathan. The comments were really specific to Road Zipper projects. And the reality is we're much closer to those projects. We've got much more visibility. We're at the table as implementation plans are discussed and negotiated. So it's given us a level of insight that we maybe haven't had historically. And the comments about the second half of our fiscal year 2022 is very specific projects that we know are making their way through the approval and implementation process. The rest of the infrastructure business isn't impacted in the same way. So in the non-Road Zipper proportion of that infrastructure revenue, we'd expect more traditional and historic revenue patterns.

So we should expect probably some growth in infrastructure this year primarily driven by the non-Road Zipper part of the business?

We see certainly price is going to support growth. And then we see good stimulus money potentially coming at a point in time but the demand drivers are still good in that business. So we would project some natural growth and pricing lift in the non-Road Zipper business for sure.

Great. That helps. Thanks very much. I’ll pass it on.

You bet.

Our next question comes from Brian Drab from William Blair. Please go ahead with your question.

Hi, good morning. Thanks for taking the question.

Good morning, Brian.

First just curious, if you could give any granularity on how much impact prices had in each of these segments? And it would be great to know fourth quarter and the full-year. I don't know if that was detailed yet. I just see that in the slides higher average selling prices. If you could quantify that that would be great?

Yes. Brian this is Brian Ketcham. If you look at just the North America Pivot business, we saw the biggest impact of price in our fourth quarter as the earlier pricing actions have really taken hold. So if you just look at the Pivot business, I would say price was above 30% in terms of the growth Pivots for the fourth quarter. And if you look at full year, it's into double-digits. But as you recall in the first couple of quarters, pricing was fairly flat year-over-year. On the infrastructure side, price has not been as big of an impact. I would say, it's probably approaching 10% overall, but that's a little bit different mix of particularly steel in the infrastructure business.

Okay. Okay. Got it. And is it fair to -- I guess it's fair to kind of use the 30% and the double-digit for the full year for the Pivot business as a proxy for the full irrigation segment, or it's probably a little bit below, whatever it is that you'd haircut it for the full segment I guess obviously you're getting the most pricing pivots?

If you're looking at North America and I assume you're talking about 2021?

Yeah. I was still looking about 2021 there yeah.

Yeah. So North America you would see for the full year double-digit price as part of the increase there. On the international side, the great majority of increase has been volume. We're starting to see obviously more price in the fourth quarter for international. But by and large, the increase in international for the year has been mostly volume.

Okay. Thanks. And then in the infrastructure segment there was a nice sequential increase just from the third quarter to the fourth quarter. Is that -- I mean, typically the third quarter and the fourth quarter are the stronger seasonally obviously. But is there anything specific that drove that sequential improvement? And then -- and were there any -- was there any revenue from -- there was not any revenue from larger Road Zipper projects, right? In the fourth quarter, there's no major projects in progress at this point, right?

Yeah. If you look at third quarter to fourth quarter, third quarter, we really didn't have any projects. Fourth quarter, I would say we had a few smaller projects. And then we still have year-over-year the leasing has been higher throughout the year. But that sequentially. And then road safety as you mentioned, road safety products are generally stronger in the fourth quarter.

So there's just generally that seasonality in the fourth quarter from the third to -- okay. And then just the last one. Do you mind giving that breakdown Brian that I was asked for the dryland replacement conversion in the irrigation segment?

Yeah. Yeah. So for our fourth quarter dryland was 25%, conversion 27% and replacement was 49%.

Okay. I'll pass it on. Thanks very much.

[Operator Instructions] Our next question comes from Jon Braatz from Kansas City Capital. Please go ahead with your question.

Good morning, Randy, Brian.

Good morning, Jon.

Good morning, Jon.

The common theme we're hearing across these conference calls is rising costs and at some point, your customers or anybody's customers might reach a breaking point and say "enough is enough. I can't take it." And as they all say they care for high prices is high prices. And you mentioned that some of your -- some of the farmers have been pulling orders forward to take -- to avoid the higher prices coming. Do you sense any impending resistance to the higher prices and that there is going to be some demand destruction if this continues? Any thoughts on that?

Sure. You bet, John. This is Randy. Right now, we are seeing anecdotal comments around sticker shock and somebody that maybe hasn't bought a Pivot for a year or two years, so there's some comments on sticker shocker. Some external market surveys talking about input costs on fertilizer and tractors and almost everything that our customers are buying today obviously have been impacted by inflation. But when you look at the return on investment of a piece of irrigation equipment, the payback generated right now fortunately we're seeing the linear trend in cost increases matched by the linear trend in commodity prices. So from an income perspective, the relative payback on a pivot hasn't moved significantly. So while there's still some sticker shock, we haven't seen customers exit the market at this point and we don't think that that will have a significant headwind impact on volume demand provided we continue to see strong farm income support.

Okay. So the key is to keep an eye on the grain prices. And that's going to that's pretty much always the case. But any decline there is the return on investment obviously begins to decline.

That's correct.

Okay. All right. We'll watch that. I think that’s about it. Thanks very much Randy.

Great. Thank you, Jon.

And we have an additional question from Chris Shaw with Monness Crespi. Please go ahead with your question.

Yes, good morning everyone. How are you doing?

Good morning Chris.

Good morning Chris.

If I could first ask on the Road Zipper funnel. I guess it doesn't -- not specifically about the funnel actually. What percent of the projects that I guess maybe on the farm side that you're pretty sure of how is that breaking down between leasing and buying at this point? And how is that different than what historically has been?

Yes, Chris, this is Brian. I would say while leasing continues to increase incrementally it's still a smaller portion of the overall Road Zipper business. It's -- the project sales are the biggest portion of it.

Why do you think customers still prefer to buy or why certain, but -- what -- is there an advantage for buying? I'm trying to figure out that in my own mind?

Yes, I think a lot depends on the budgetary constraints at the government levels. But I think most of our Road Zipper installations are permanent installations. So, those would be -- have more of a tendency to be purchased where we see more of the leasing are on temporary construction type projects although we do have a couple of longer term leases, but most of the installations are permanent which would lend itself more to a purchase rather than a lease.

Okay, that makes sense. And if I can switch to irrigation. In North America, I often find -- I feel like farmers are on a good income here like this is that they're looking to minimize their tax burden at the end of the year they're looking to spend some of that money before they have to give it to the government. So -- and then this year too often that -- well usually it goes into the capital equipment. And this year it seems like tractors and combines are hard to find. Are you seeing any extra sort of demand as we maybe finish up the calendar year from that kind of sort of tax buying or the limited availability of other sort of large capital equipment purchases for the farmer, or is that just anecdotal?

I would say it's anecdotal, but there's going to be a lot more proof as we get through harvest and a lot of the flows are making tax-oriented purchase decisions. You're exactly right, there's not going to be a lot of capital goods that they're going to have access to invest the capital in. And we're in a great position right now with our global footprint our global capacity. We're going to have the ability to fill orders and ship orders before the end of the tax year. So, we're absolutely planning for some sort of an end of year bump, but I think more of that might come as they finish up in the combines as they finish up harvest and start looking at what their financial year looks like. So, we will prepared for that. Their line of sight and I think you've picked up on a trend that's going to have some impact as we finish the calendar year.

Got it. Thanks so much.

And ladies and gentlemen at this point, there appear to be no more questions. Mr. Wood I'll turn the call back over to you for closing remarks.

All right. Thank you for your interest and participation today everyone. In the past fiscal year, we continue to invest in innovation and technology differentiation to support our customers' need for more sustainable and efficient solutions. We leveraged our global footprint to meet rising global demand and continue to evolve our own sustainability journey with our enhanced ESG focus. We remain optimistic about the growth potential for our business segments tied largely to the needs of a growing population for safe and uncongested roadways, increased transportation capacity, food security, and the efficient utilization of water and energy resources. This concludes our fourth quarter earnings call. We look forward to updating you on our continued progress following the close of our fiscal 2022 first quarter. Thank you for joining us.

Ladies and gentlemen with that we'll conclude today's conference. We do thank you for attending. You may now disconnect your lines.