Lindsay Corp (LNN) Q3 2022 Earnings Call Transcript

Lindsay Corp (NYSE:LNN) Q3 2022 Earnings Call dated Jun. 30, 2022.

Corporate Participants:

Randy A. Wood — President & Chief Executive Officer

Brian L. Ketcham — Senior Vice President & Chief Financial Officer

Analysts:

Nathan Jones — Stifel — Analyst

Brian Drab — William Blair — Analyst

Brett Kearney — Gabelli Funds — Analyst

Jon Braatz — Kansas City Capital Associates — Analyst

Presentation:

Operator

Good morning. My name is Joe and I will be your conference operator for today. At this time I would like to welcome everyone to the Lindsay Corporation Third Quarter Fiscal Year 2022 Earnings Call. [Operator Instructions]

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 call over to Mr. Randy Wood, President and Chief Executive Officer.

Randy A. Wood — President & Chief Executive Officer

Thank you and good morning everyone. Welcome to our third quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer.

Our third quarter results reflect the ongoing commitment of our employees around the world to support our customers and dealers in a very dynamic environment. Our entire organization continues to effectively manage through supply chain challenges, logistics constraints and inflationary pressures, while our commercial teams have effectively managed pricing to preserve business quality. This teamwork, focus and one Lindsay [Phonetic] approach is evident in our results. Our third quarter revenue and operating income was the second highest in our company history, rivaling the highest quarter ever during the peak of the Ag cycle in 2013. We thank our teams around the world for all they’re doing to contribute to the success of our customers and our company.

In the area of innovation, our Smart Pivot program continues to progress forward and we’re getting great customer reviews from our new FieldNET user experience that will be released later this fall. We’re also seeing strong market acceptance for our new RoadConnect telemetry platform in the Infrastructure business and our relationship with Blyncsy continues to showcase the power of innovation that’s possible with strong industry partnerships. To date we have devices deployed in 27 states across the US with several international sites ready to deploy before the end of the fiscal year.

Turning to Irrigation market conditions. The market continues to see a combination of factors impacting customer sentiment and business growth. Global commodity prices remain high which is positive. However, this is somewhat tempered by increased input cost, which will keep US net farm income relatively flat on a year-over-year basis. This year’s crop will be one of the most expensive our customers have ever planted, so the positive yield and revenue benefit obtained with Irrigation to a center pivot should support market stability. Order demand in the quarter was consistent with prior year. We did see an increase in orders beginning in mid-May due to large storms in the Midwest. Some of this demand did ship in the quarter and some carried over into the fourth quarter.

In International Irrigation we see continued strength across most regions. In the mature markets, this is supported by high commodity prices and in the project-oriented or developing markets this is supported by more secular drivers. Brazil continues to be a bright spot where combination of volume and price realization more than doubled the business versus the prior year. The 2022-2023 crop plan was also released this week. Government financing incentives for irrigation investments were set at BRL1.95 billion, a 44% increase over the prior plan. This was the largest increase in resources amongst all investment programs highlighting the focus on expanding efficient irrigation in the region.

We also see continued inquiries for project business across the Europe, Africa, Middle East as concerns over food security and global grain supplies have been heightened by the ongoing conflict between Russia and Ukraine. We were pleased to attend the inauguration of the future of Egypt project site with President el-Sisi in May. This farm includes the 1,200 Zimmatic pivot that shipped earlier this fiscal year. There was also news this week that Egypt will receive $500 million from the World Bank to boost food security and a portion of this funding will go towards wheat storage which will support more localized grain production and a strong irrigation market.

Moving to Infrastructure. Our commercial teams have been able to return to near pre-pandemic travel schedules and this has helped to stimulate movement in our Road Zipper sales farm. Their diligence and perseverance has paid off and the two projects we have been anticipating in the second half of the year are now moving forward. Brian will provide additional details regarding each project in his financial update.

In the Road Safety business, we’re also seeing signs of a restart and normalize design and procurement processes at the state DOT level. The funding support provided by the infrastructure bill has been positive, but we do see some headwinds in this segment caused by inflation and labor availability. Our number of project bids submitted months ago are being impacted by cost increases that have resulted in project delays or scope reduction. Overall, we remain optimistic regarding growth opportunities for this business based on the quality of our sales funnel and increasing commercial activity.

I’ll now turn the call over to Brian to review our third quarter financial results. Brian?

Brian L. Ketcham — Senior Vice President & Chief Financial Officer

Thank you, Randy, and good morning everyone. Total revenues for the third quarter of fiscal 2022 increased 32% to $214.3 million, compared to $161.9 million in the prior year quarter. Net earnings for the quarter increased 41% to $25.1 million or $2.28 per diluted share compared to net earnings of $17.8 million or $1.61 per diluted share in the prior year quarter.

Irrigation segment revenues for the third quarter increased 35% to $188.7 million, compared to $140.2 million in the prior year quarter. North America irrigation revenues of $96.2 million increased 10% compared to the prior year quarter. The increase in North America irrigation revenues resulted from higher average selling prices, while unit sales volume was lower year-over-year. As Randy indicated, order rates during the third quarter were similar to last year, however, we entered last year’s third quarter with a larger backlog of orders as frequent and significant price increases at that time pulled orders forward, while an increase in storm damage replacement [Phonetic] orders beginning late in the quarter provided some additional volume for this year’s third quarter, most of this increased volume from storm damage replacement will be realized in our fourth quarter.

In the International Irrigation market — markets, revenues of $92.5 million increased 75% compared to the prior year quarter. This increase resulted from a combination of higher average selling prices and higher unit sales volumes in most international markets with the most significant increase in Brazil. Also contributing to the revenue increase was the favorable effect of a net foreign currency translation gain of approximately $2.5 million compared to the prior year quarter. Total irrigation segment operating income for the third quarter was $39.6 million, an increase of 65% compared to the prior year quarter and operating margin was 21% of sales compared to 17.1% of sales in the prior year. Improved operating margin resulted from improved price realization and additional volume leverage, which more than offset the impact of inflationary cost increases.

Infrastructure segment revenues for the third quarter were $25.6 million, an increase of 17% compared to the prior year quarter. The increase resulted from higher sales of Road Safety products and Road Zipper System project sales which were partially offset by lower Road Zipper System lease revenue. Lower lease revenue resulted from the completion of certain lease projects along with the — with delays in the start-up of new lease projects.

During the quarter we began delivery of the Road Zipper project in Australia. The total value of this project is approximate — approximately $9 million, with about half of the value representing the sale of barriers and the other half representing the lease of two machines over a 30-month period. We delivered about half of the barrier in the third quarter and expect to deliver the remainder of the barrier in our fourth quarter. This is our first lease project in Australia and we are optimistic about the future project potential in this market.

Infrastructure segment operating income for the third quarter was $3.8 million which was comparable to the prior year quarter. Current year results reflect a less favorable margin mix of revenues compared to the prior year as well as certain under-absorbed fixed overhead costs. Another one of the projects that we have been expecting in the second half of our year is a barrier replacement project in Massachusetts. This project has now been approved and is expected to be awarded in our fourth quarter. The value of our portion of this project is approximately $24 million and we anticipate being able to deliver about two-thirds of this project in the fourth quarter and the remainder delivering in the first quarter of fiscal 2023.

Turning to the balance sheet and liquidity. Our total available liquidity at the end of the third quarter was $145.7 million with $95.7 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 and at the end of the third quarter we were well within the financial covenants of our borrowing facilities, including a gross funded debt to EBITDA leverage ratio of 1.2 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.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Nathan Jones with Stifel. Please go ahead.

Nathan Jones — Stifel — Analyst

Good morning, everyone.

Randy A. Wood — President & Chief Executive Officer

Good morning, Nathan.

Nathan Jones — Stifel — Analyst

Maybe starting on some of these barrier projects. I mean you guys have been talking for the last couple of quarters about two going — two of these projects going in the back half of the year and have been spot on with the guidance there. Maybe you can talk a little bit about what that pipeline looks like for ’23 and ’24 and confidence in conversion of those growth we should be expecting in that business, the impact of that infrastructure bill stimulus just any kind of outlook you can give us on the project environment there?

Brian L. Ketcham — Senior Vice President & Chief Financial Officer

Yes, Nathan, this is Brian. Yes, we’ve been saying all along, we have pretty good confidence in our sales funnel. We’ve talked about that and the challenge has been in the last couple of years in the COVID environment with travel restrictions and things like that. Moving some of these projects through the funnel, but we had these two projects that we had line of sight earlier really late last year already that we felt would be coming through the funnel this year, and we’re seeing that realize now.

Looking forward, I would say with being able to engage with the customers and as things kind of return to normal, we would anticipate continuing to see some of these projects move through the funnel. I’d also mention on the leasing side of the business, we’re seeing good interest in including Road Zipper as part of the overall construction programs in a number of states. And the one that we have started to deliver in Australia is actually a construction related program that I mentioned a 30-month lease there. And we — and once we prove what Road Zipper can do, I think we’ve demonstrated add-on business as a result of some of that. So again pretty — we remain optimistic on where we’re at and the growth potential of that business.

Nathan Jones — Stifel — Analyst

Thanks. I’m going to ask a question on inflation/potential deflation just to see what kind of thoughts you can get on that — we can get from you on that. You’ve obviously had big revenue tailwinds over the last couple of years from inflation, which has been negative for margins, but probably positive for earnings. We’ve seen hot-rolled coil prices in the US come down quite a bit. That is clearly focused on inflation. I’d just like to get any thoughts you have on the potential reversal here and then how that could impact your business if we saw steel prices revert back to where they were a few years ago, have you guys done the math to figure out, I guess how much earnings you would lose from price and going back to where it was. Do you think you can maintain some of that pricing. Just any thoughts you can give us as investors that clearly focused on what might happen here with the freight that continuing to time [Phonetic] policy?

Brian L. Ketcham — Senior Vice President & Chief Financial Officer

Yes. Again, this is Brian. Just to put things in perspective. I mean, we do see the hot-rolled coil prices softening, it’s roughly 15% or so of our cost of goods sold, but we still see structural steel, which is another 15% or so of our cost of goods sold that continues to actually increase slightly. We see zinc, some other input costs, logistics more recently increasing. So the overall inflationary environment I would say is still there. I say it’s moderated obviously from what it had been, let’s say a year ago. So again, depending on what the what steel does going forward, if there is a recession and demand falls off, we would expect it to continue to soften. In that case, we are always just as we were on the way up focused on protecting our margins and as prices begin to come down, if that happens, we would tend to lag as much as we can to retain the value that we kind of sacrifice on the way up. But at some point, obviously, we’d have to respond to competitive movements in price, but our objective would be to maintain margins.

Nathan Jones — Stifel — Analyst

Okay, thanks for that commentary. I’ll pass it on.

Operator

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

Brian Drab — William Blair — Analyst

Hi, good morning. Thanks for taking the questions. I wanted to start just by asking about drought conditions and how that’s either positively or negatively impacting demand at the moment in the US and abroad?

Randy A. Wood — President & Chief Executive Officer

Yes, good morning, Brian. This is Randy. I’ll cover that one. We obviously watch the drought monitor and you see some significant drought, particularly in the West. We’ve seen that now creep into Western Texas and Panhandle Texas and getting a lot closer to some of the core pivot irrigation markets. So it does a couple of things, I probably provide some price support in the market, if the market feels that there is going to be some diminished yield potential in those areas and that will impact certain commodities differently. It’s certainly could promote more efficient use of water, if somebody’s irrigating with something that’s not a center pivot and they want to stretch their water application out then switching to a center pivot which would be more efficient could be an option for them. But you also get to a point where there is not enough water to finish a crop and unfortunately, there are some regions and they may not be in the core pivot irrigation markets or some of the regions might be reaching a point now where they don’t have enough water to finish a crop and that’s a very difficult situation for those customers.

But again, I don’t know if that’s going to be a significant impact for us. And if you look globally, it really depends where you are. I saw something about Australia getting too much water right now, really the opposite of a drought impact didn’t several regions, but this time of year is where the market. So whether it rains, it doesn’t, if the drought improves or gets worse, I think it does have an impact on commodity prices in particular in customer sentiment. So it is something we watch, but I wouldn’t say there is a significant impact on our demand up or down right now.

Brian Drab — William Blair — Analyst

Okay, got it. Thank — thank you. And then, gross margin impacts from the barrier projects is my next question. How should we think about maybe even just roughly directionally, gross margin, because the company overall given the significant barrier revenue that you’re going to recognize and just Road Zipper revenue in general in the fourth quarter?

Randy A. Wood — President & Chief Executive Officer

Yes, Brian, as we’ve spoken before, higher margins on barrier versus machines and so in this case the project in Massachusetts is all barrier. So that would tend to be a higher than average margin. So I would say it’s going to be similar to what we’ve realized in the past on some of the larger projects, Japan being a good example of a year or two ago, when we had barrier sales there.

Brian Drab — William Blair — Analyst

And you may have said it, but what was the total for barrier revenue or I should say Road Zipper revenue in the third quarter?

Randy A. Wood — President & Chief Executive Officer

Our total Road Zipper revenue and this is just the sale not necessarily the leasing would have been, it’s really — it is really the Australia project, so roughly $2.5 million of sale and lease I don’t have that number broken out, but relatively light in the third quarter for Road Zipper.

Brian Drab — William Blair — Analyst

Okay. Got it. And so that wasn’t a major contributor then to the significant increase that you saw sequentially in gross margin, the Road Zipper or infrastructure in general?

Randy A. Wood — President & Chief Executive Officer

No, absolutely not. Infrastructure side, it was actually a negative gross margin just because of the lease revenue which is generally higher than either the — even the barrier and the machine sale. So, not having the — a reduction in lease revenue offset by an increase in the Road Zipper sales and Road Safety products. We were flat in operating income year-over-year.

Brian Drab — William Blair — Analyst

Okay. And then the main driver of that 700 basis point increase in gross margin sequentially in the third quarter was what?

Randy A. Wood — President & Chief Executive Officer

It’s going to be Irrigation and it’s going to be both North America and International.

Brian Drab — William Blair — Analyst

Volume leverage and…

Randy A. Wood — President & Chief Executive Officer

Yes, I would say it’s price realizations by the single biggest factor. And then the volume and we’re seeing that in both the price and volume impacts in international to wear [Phonetic] that. I think historically, we’ve talked about international being lower overall operating margin compared to North America. What we saw in the third quarter is that it’s become similar to what we have in North America. So that was a real positive for us as well.

Brian Drab — William Blair — Analyst

Okay, thanks very much. I’ll pass it on.

Operator

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

Brett Kearney — Gabelli Funds — Analyst

Hi guys, good morning and thanks for taking my question.

Randy A. Wood — President & Chief Executive Officer

Good morning, Brett.

Brett Kearney — Gabelli Funds — Analyst

Curious what kind of internal investments and capex projects you’ve lined up, neither capacity or productivity side with the balance sheet in great shape. Anything you have lined up kind of internal investments and thoughts on potentially any other uses of capital?

Randy A. Wood — President & Chief Executive Officer

Yes, I would say, Brett, we’re currently more in an evaluation phase in terms of looking at our International business and where we need to add capacity. And I think two areas would be Brazil and Turkey as we see the growth in that project market increase, which is primarily serviced out of Turkey and then the Brazil market. We’ve done a lot of things to increase capacity without a whole lot of capex up to this point, but that would be an area that we would consider spending some money from a capex standpoint. I would say the other area is adding to our lease fleet on the infrastructure side with some of the delays that we’ve seen in some of the lease projects, we’ve kind of delayed the capex associated with that as well, but going forward, there would be another source where we see good returns from additional capex.

Brett Kearney — Gabelli Funds — Analyst

Okay, terrific. Thanks so much.

Operator

[Operator Instructions] Our next question will come from Jon Braatz with KCCA. Please go ahead.

Jon Braatz — Kansas City Capital Associates — Analyst

Good morning, Randy, Brian.

Randy A. Wood — President & Chief Executive Officer

Good morning, Jon.

Brian L. Ketcham — Senior Vice President & Chief Financial Officer

Good morning, Jon.

Jon Braatz — Kansas City Capital Associates — Analyst

Brian in the first two quarters you had some significant LIFO hedges and you’ve talked about recovering those charges recovering them. Are we actually seeing that in the third quarter results?

Brian L. Ketcham — Senior Vice President & Chief Financial Officer

No, Jon, we really haven’t. I would say there was even a slight LIFO impact — negative impact in the quarter. I’d say maybe around $1 million. I think the big thing there is, if you look at where our inventory levels were at the end of the quarter, similar to where they were at the end of the second quarter. And so really no benefit from LIFO in the quarter. I think where we see the benefit is just the impact of the price realization starting to really take hold. So, we again expect to see some of that LIFO benefit as we see inventory levels come back.

Jon Braatz — Kansas City Capital Associates — Analyst

Okay. Okay. Brian also the Turkish lira has been very, very weak. Does that — what kind of role does that have on your margins and your profitability in your Turkish facility?

Brian L. Ketcham — Senior Vice President & Chief Financial Officer

Yes, Jon, the functional currency for our Turkey business is US dollar, is it’s really exporting. So a lot of those markets and a lot of the input costs are based in US dollars as well. I’d say the one area that we’ve seen the impact is obviously on our employee compensation and some of the local expenses there. We’ve seen the impact of the devaluation and inflation where we’ve had to adjust some of the compensation of our employees. But overall, I would say not a significant, not much of an impact on our overall profitability there.

Jon Braatz — Kansas City Capital Associates — Analyst

Okay. Okay, good. And then lastly, obviously, there has been a sizable working capital build this year. Of course now you’re entering the seasonally strong period in Brazil in the southern hemisphere, but how do you see that working capital maybe disinvestment in the next few quarters. Should we see that investment coming down?

Brian L. Ketcham — Senior Vice President & Chief Financial Officer

I would say, I would expect a reduction in North America, particularly in receivables as some of those get collected in the fourth quarter. On the international side, I think what we’re seeing is, we’re supporting the growth in Brazil, also in Turkey, South Africa where we have active project activity going on. We’re carrying more inventory than we normally would just so that we can respond. These projects, we talk about them for quite a while. We’ve got line of sight to them. And then when they actually happen they expect delivery pretty quickly. So I would say that’s the one area that’s a little bit of an uncertainty is, we’re maintaining that the inventory of the international business to be able to respond to the project business.

Jon Braatz — Kansas City Capital Associates — Analyst

Okay. Okay, all right. Brian, thank you very much.

Operator

There are no further questions at this time. This will conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Randy Wood for any closing remarks.

Randy A. Wood — President & Chief Executive Officer

Thank you for your interest and participation today. Our Infrastructure segment continues to be supported by the incremental funding provided by the infrastructure investments and Jobs Act and a return to more traditional travel capabilities that improve funnel managements and Road Zipper project sales. This is tempered slightly by the impact of inflation and potential project delays caused by rising costs and labor availability. The Irrigation segment of our business continues to see strong drivers connected to high commodity prices in international project demand, offset slightly by rising input costs that net farm income. We do believe the positive ROI provided by an investment in irrigated agricultural will continue to support a stable market. Both segments benefit from ongoing investments in technology and innovation that allow our customers to operate more sustainably and more profitably.

This concludes our third quarter earnings call. We look forward to updating you on our continued progress following the close of our fiscal 2023 fourth quarter. Thanks for joining us.

Operator

[Operator Closing Remarks]