Lindsay Corporation (LNN) Q2 2022 Earnings Report, Transcript and Summary

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Second Quarter Fiscal 2022 Earnings Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. 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 and forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Randy Wood, President and Chief Executive Officer.

Thank you and good morning, everyone. Welcome to our second quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer. I'd like to open today's call by addressing the conflict and humanitarian crisis in Ukraine. We're deeply saddened by the unprovoked invasion of Ukraine and recognize the profound impact these events are having on many around the world. This crisis highlights the conflict between the role we play in feeding a growing world while also making decisions that align with our purpose and business results. On March 14, we announced that we've suspended business activity in Russia and Belarus and will not accept new machine orders for delivery to these markets. We also expect significant disruptions will persist in the Ukrainian market as we are not currently able to supply goods to this region. The combined revenue for both Russia and Ukraine has historically represented less than 5% of our total revenue. Our thoughts are with those impacted by this crisis and we hope peace comes to the region soon. The global pandemic continued to impact our business and create challenges in the quarter. All our facilities remained operational. However, we did see a significant disruption in labor availability in Nebraska in the December-January timeframe as the Omicron variant surged. At times, upwards of 15% of our workforce was absent due to a positive test or mandatory quarantine periods. This impacted our ability to produce and ship in the quarter. But we are pleased to report that the spike has subsided and we were back to normal staffing levels by quarter end. Based on the revised CDC guidelines, we have now lifted restrictions at all facilities in the United States and we officially returned to our offices under a hybrid work model on March 7. We again thank our employees and dealers around the world for their ongoing resilience and focus over the past two years. Turning to the current operating environment. Supply chain and logistics constraints have continued to impact the business. We've seen outside costs for freight, expediting fees and establishing an expanded supply base create additional headwinds that have been partially offset by increased pricing. We also had a nonrecurring maintenance expense and consulting fees that tied to the accelerated implementation of our lean manufacturing strategy at the Lindsay, Nebraska factory of approximately $1.8 million in the quarter. We continue to accelerate our lean journey and have begun implementation of several tools and processes that improve our ability to manage the manufacturing footprint and position us more effectively to respond to the seasonal and cyclical nature of our business. This includes a new enterprise resource planning system, supported by artificial intelligence tools that provide better planning and forecasting capabilities, allowing us to meet customer expectations while maximizing inventory and labor efficiency. Our ongoing lean strategy implementation and new digital tools will continue to expand our global capacity, allowing us to capitalize on growth opportunities around the world while reducing cost and increasing manufacturing safety and efficiency. In the area of innovation, we were pleased to announce our strategic partnership and minority investment in Blyncsy, an emerging leader in the utilization of artificial intelligence and machine learning for connected roadways. This strategic partnership will create a crash notification system that allows users to combine an alert received from Lindsay's RoadConnect platform with a crowd-sourced near real-time image received from the Blyncsy's Payver platform. In our market testing, this has already saved customers' time and reduce their cost by allowing them to remotely view roadside assets and gain visual confirmation of an impact before they respond with their maintenance groups. Our investment will support the creation of exclusive features that continue to differentiate RoadConnect in this emerging market. Turning to irrigation market conditions. Supply projections are currently impacted by dry weather in South and North America, where the U.S. job monitor indicates over 50% of the country is currently experiencing moderate to exceptional drought and the ongoing conflict in Ukraine and Russia, key suppliers to the global wheat and corn markets. The USDA released their 2022 net income projections in February. Net cash income is projected to increase by 1.4% to $136 billion. However, in inflation-adjusted dollars, 2022 net farm income is forecast to decrease by $9.7 billion or 7.9%. Increases in commodity prices are projected to be partially offset by significant increases in operating costs, including fuel and fertilizer. This could cap market optimism as customers who haven't locked in their inputs weigh their investment decisions going into the spring season. In International Irrigation, we see the same positive market drivers created by strong commodity prices, supporting growth in the developed regions, including Australia, New Zealand, Western Europe and Brazil, where we once again have set shipping records in the quarter. The developing project-oriented markets of Central and Eastern Europe, middle East and Africa are also showing signs of continued strength linked to food security and economic diversification. This includes Egypt, where we've concluded shipment of our $36 million project. We continue to be well positioned to compete for and win additional project business in this region. President Sisi announced in late February that his government plans to expand local wheat production by 1.75 million acres over the next two years in response to the food security risk caused by the conflict in Russia and Ukraine, two important markets for Egyptian wheat imports. Moving to infrastructure. On March 10, the first allocations of the infrastructure investment and Jobs Act Funds were approved with the signing of the 2022 Omnibus Appropriations bill. We expect to see the rate of projects increase at the state level as we approach the summer construction season. We are continuing to monitor the impact of inflation as well as supply and labor constraints in the roadway construction sector. Customers have commented their projects could be scaled back or rebid due to cost increases observed between bidding and funding. Overall, we see a positive tailwind but the upside could be constrained by inflation and labor availability. Consistent with our discussions last quarter, we did not see any significant Road Zipper projects exit the sales funnel in the second quarter. However, we do expect to see projects close and deliver in the second half of the year. The project funnel remains robust and projects that had slowed are now gaining speed as we get back to traveling and being present with the customers in the markets we serve. I'll now turn the call over to Brian to review our second quarter financial results. Brian?

Thank you, Randy and good morning, everyone. Total revenues for the second quarter of fiscal 2022 increased 39% to $200.1 million compared to $143.6 million in the prior year quarter. Net earnings for the quarter increased 23% to $14.6 million or $1.32 per diluted share compared to net earnings of $11.9 million or $1.08 per diluted share in the prior year quarter. Irrigation segment revenues for the second quarter increased 52% to $180.8 million compared to $118.6 million in the prior year quarter. North America irrigation revenues of $100.7 million increased 26% compared to the prior year quarter. The increase in North America irrigation revenues resulted primarily from higher average selling prices, while unit sales volume was lower year-over-year due to the impact of the Omicron-related employee absences on production and shipping capabilities in our Nebraska facility. Without the disruption caused by increased employee absences, unit sales volume in the quarter would have been similar to the prior year. In the international irrigation markets, revenues of $80 million increased 108% compared to the prior year quarter. The increase in international irrigation revenues resulted primarily from higher unit sales volumes along with higher selling prices. Revenues in Brazil more than tripled compared to the prior year second quarter and we also completed final deliveries of a large project in Egypt. Total irrigation segment operating income for the second quarter was $24.7 million, an increase of 37% compared to the prior year quarter. And operating margin was 13.7% of sales compared to 15.2% of sales in the prior year. The impact of higher irrigation sales volume was partially offset by the impact of higher input costs that were not fully recovered by higher pricing. Second quarter operating results were also reduced by approximately $2.8 million, resulting from the impact of the LIFO method of accounting for inventory, under which more recent and more expensive raw material costs are recognized in cost of goods sold rather than in ending inventory values. Also impacting the quarter was approximately $1.8 million of nonrecurring expenses related to factory maintenance and outside consulting services that Randy referred to earlier. Infrastructure segment revenues for the second quarter were $19.4 million, a decrease of 23% compared to $25 million in the prior year quarter. The decrease resulted from lower Road Zipper System sales and lease revenue due to delayed projects. This decrease was partially offset by higher sales of road safety products compared to the prior year quarter. Infrastructure segment operating income for the second quarter was $300,000 compared to $6.3 million in the prior year quarter. Current year results reflect lower revenues from higher-margin Road Zipper projects and under absorbed overhead costs. Turning to the balance sheet and liquidity. Our total available liquidity at the end of the second quarter was $143.9 million, with $93.9 million in cash, cash equivalents and marketable securities and $50 million available under our revolving credit facility. Our total debt was $116 million, almost all of which matures in 2030. At the end of the second quarter, we were well within the financial covenants of our borrowing facilities, including a gross funded debt-to-EBITDA leverage ratio of 1.37 compared to a covenant limit of 3.0. At this time, I'd like to turn the call over to the operator to take your questions.

[Operator Instructions] Our first question comes from Brian Drab with William Blair. Please go ahead.

Hi, good morning. Thanks for taking my questions. First, I just wanted to start with infrastructure. So in terms of Road Zipper projects, it sounds like that still was on pause in the second quarter. What kind of confidence do you have in that picking up? Is that picking up in the second half of this fiscal year or how should we think about that?

Yes, this is Brian. What I can say is we've got line of sight to a couple of projects. One, I would say, of medium size. And another one, a larger project that, that we feel have continued to make progress as we've gone through the year. And at this point, I would say we're pretty optimistic that we'll see both of those come through in the second half of the year.

Okay, got it. Okay. And any visibility beyond that for larger projects in fiscal '23?

Yes. Brian, this is Randy. We do have visibility of projects moving through the funnel that are '23, '24, '25. One of the advantages of the shift-left strategy that we've implemented here, is better long-term visibility. And the tricky part is always when. And you've seen these projects move through the funnel, historically. Some are faster than others. I think now that we've got some stability in the Infrastructure Act. We've got some decisions being made. We're able to be at the table again with customers that are making these decisions and working through appropriations. So we do have good long line of sight -- a long line of sight on several key projects that we do feel we'll be in that '23, '24 and forward-looking periods. So feel good about the funnel and some of the long-term opportunities for Road Zipper.

Okay, got it. And then just one more topic I want to stick on for or go back to here is the infrastructure margins. Can you just explain in a little more detail what is the -- what's causing the pressure there and just the timing of those factors? And maybe try to help us model that for the second half of the year because I obviously didn't model it very well for the second quarter?

Yes. Brian, I think the single biggest driver is going to be the lack of Road Zipper projects during the quarter. So Road Zipper revenue down roughly $8 million in the quarter and that's pretty high margins. So last year, we -- during the quarter, we did have some business with our customer in Japan which we don't have this year. So that's the single biggest issue without any significant Road Zipper business in the quarter. But I would say -- over the course of the year, I would say the margins in this business, operating margins have been above 20%. And that's still our view going forward, where we would normally be operating.

Our next question comes from Brett Kearney with Gabelli Funds. Please go ahead.

Hi guys, good morning. Thanks for taking my questions. Just wanted to ask the partnership with Blyncsy, kind of the evolution of that collaboration and kind of long term, the opportunities you think that partnership opens up for both you and them?

We really look to expand innovation technology in this space. And when we came across their offering, it seemed like a natural fit. And you can imagine if you're running a control center at a Department of Transportation, monitoring roads and you see that you have an impact on a roadside asset. Right now, you've got to send somebody out to look at that and that's cost. And you might have two or three trips out to view that asset to look at it, to take some parts back. So the ability to pull in an image was an incredibly powerful addition to the platform. So now you see the impact. You can pull up an image in these -- we call them near real-time images. They're pulled from ridesharing services that are driving by on these highways all day, all night long. So the ability to pull that image in near real time, pull it into the platform and now the person making the decision on who I'm going to deploy, what I'm going to deploy. They've got a lot more information available to them. So it seemed like a natural extension of the product line, a good strategic fit and we were excited enough by what we saw that we wanted to have a stake in the game. So the investment will allow us to get some exclusive features. It will drive development in some pretty important areas for that platform. So it's a relationship we're proud of and one that we think is going to be very good for customers and shareholders.

Terrific. Thanks.

You bet.

Our next question comes from Nathan Jones with Stifel. Please go ahead.

Good morning. This is Adam Farley on for Nathan.

Good morning, Adam.

For -- related to your North America irrigation, could you quantify the deliveries that were able to be made in the first quarter from the Omicron wave? And do you expect that to be made up in fiscal 3Q '22?

Yes. This is Brian. Yes, that was -- we said roughly 5% down in the quarter. And if you quantified it, it's probably $4 million to $5 million is what that translates into. And we would expect that those orders will be fulfilled in the third quarter.

And then on international, with the conclusion of the Egypt projects, are there any immediate projects that you would expect to replace this business? Or should we expect to see negative revenue comparisons over the next 12 months?

Yes. I think the key part of your question there is probably the definition of immediate. And I think there are several opportunities. We mentioned in our opening comments that President Sisi has been very visible and deliberate about their willingness to invest in wheat production. And if you're a country like Egypt, 70% of the wheat you need comes from Ukraine or Russia right now and it puts them in a precarious position. So I think Egypt specifically, we are going to see some ongoing investments. It's just a matter of timing. There's other projects in the region that we've got visibility of, that we're competing for right now but it's timing. When do they actually get closed, funded and products start shipping. So we could see a bit of a vacuum on the back end of Egypt project, a $36 million project is going to be tough to replace. So we could see a bit of a drag there. But we do expect longer term, we are going to see more of those projects come through the irrigation sales funnel and fill that gap going forward. Just a matter of when.

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

Good morning, Randy, Brian. A couple of questions on the sort of the non-recurring cost that you incurred in the quarter for maintenance and other things -- other items. Do you expect that to continue into the second half?

Yes. Jon, we were not. Both of those were onetime nonrecurring events that we would not expect to carry forward.

Okay, good. Okay. And can you -- Brian, can you tell us what the contribution from the Egypt contract was in the quarter?

Yes. It was $10 million in revenue is what we booked during the quarter.

Okay, good. And then, Randy, a little bit on Brazil. Obviously, Brazil has seen a very, very strong growth. What kind of penetration the center pivot irrigation have in that country? And maybe you can -- if you can describe it relative to the U.S.? If you can help us out with that.

Sure. And I don't have an exact number, a fact-based number, I can share with you, Jon. But I can tell you, when we look at growth potential, we do see Brazil as one of the key markets in the world for us. in terms of availability of water, good productive soil, mature distribution systems. I know Brian and I were both there a couple of weeks ago working with some of our larger dealers and larger customers and it's definitely one -- I can't put a number or percentage and quantify it for you, unfortunately, right now but it is one where we continue to make significant investments in our capacity and in our teams to make sure we can capitalize on that opportunity because we do see that continuing for the foreseeable future.

Okay. Thank you very much.

[Operator Instructions] Our next question comes from Chris Shaw with Crespi. Please go ahead.

Hey, good morning. Just curious about the LIFO charges in the quarter, they seem to come in less than expected. Is that true? And then if so, was that because of the lower volumes? Or was it because steel prices came back down a bit?

Yes. It's really driven by the inventory levels, Chris. And we were building inventory fourth quarter, first quarter. I mean still built inventory in North America in our second quarter but that's really -- that inventory build is because those higher costs are being flush through cost of goods sold, whereas if we were under FIFO, it would be capitalized as part of the inventory cost. So we should see, as inventory levels come down in the third quarter, we should see some of that come back to us. It's always difficult to predict how much and when the LIFO benefit comes back but it should over time.

Got it. And then curious for irrigation, you've had to take pricing. And I'm curious, two things. I guess, one, what's the average cost of the system gone up maybe over the Pivot system over the past couple of years? And then as -- are you getting any sense of sticker shock yet from customers? Or I mean I know they're all aware that inflation is pretty rampant across all of the things. So they're condition to a bit. Have you seen any sort of, I guess, people getting cold feet in buying a system because it's gotten more expensive?

Yes. I'll take the first part of that. If you go back to, I think it was November of 2020 is when our prices first went up in relation to the rapid increase in steel costs. And since then, prices have gone up, I would say, 60% plus in terms of the cost of a Pivot. The same thing is true on some of the ancillary items that would take place if you were to install a pivot for the first time. So underground pipe, PVC, all those kinds of things just -- obviously, everything has had inflation over the last couple of years.

In terms of customer perception, I think we're in a unique position where really everything that a customer is buying these days, whether it's a pickup truck or refrigerator or a pivot of tractor or crop inputs, they're seeing inflation on everything. So we don't necessarily stand out for having increased prices. The payback on a Pivot, if you do the math on the yield lift, combined with the high commodity prices, the payback period for an investment in irrigation really hasn't shifted significantly even though prices have increased quite a bit. And again, we're fortunate that crop prices and commodity farm income has really kind of followed the inflationary pressures of the other inputs. So I do think that customers are looking at every investment they make right now and whether they stop buying because we've reached a point at which they think the investments are too high. I don't think we're quite there yet but we do see some preliminary indicators in some of the external customer sentiment readings and then indexes that they're really looking at every investment decision that they make quite closely. And again, I think we're in a fortunate position that our payback is as good as it's ever been.

That makes sense. And then a quick question on infrastructure. The projects you mentioned that would be potentially coming soon for Road Zipper. Are those -- did you mention or can you tell me if those are -- would be a leased project or a sale of equipment?

Yes. The one project that I characterized as being kind of a medium size is a combination of lease and sale and then the other one is a sale at this point.

Got it. Thanks so much.

At this time, there appear to be no more questions. Mr. Wood, I'll turn the call back to you for closing remarks.

Well, thank you, everyone, for your interest and participation today. The irrigation segment of our business continues to be supported by strong commodity prices, farm income projections and project activity in the international markets. The infrastructure segment continues to be impacted by the sustained impact of the global pandemic but there are signs of recovery connected to infrastructure spending and the resumption of travel that will support Road Zipper growth in the second half of the fiscal year. Both segments benefit from continued investments in technology and innovation that create smart machine platforms designed to increase recurring revenue and differentiation that supports customer traction and retention. This concludes our second quarter earnings call. We look forward to updating you on our continued progress following the close of our fiscal 2022 third quarter. Thanks for joining us.

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