Lindsay Q2 2024 Earnings Call Transcript

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April 4, 2024

There are 8 speakers on the call.

Operator

Hello, and welcome to the Lindsay Corporation Fiscal Second Quarter 20 24 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference is being recorded. I would now like to hand the call to Randy Wood, President and CEO.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to our fiscal 2024 Second Quarter Earnings Call. With me today is Brian Ketchum, our Chief Officer. I'm pleased with the consolidated performance and resilience of our business through the first half of this fiscal year. While market conditions in South America have temporarily impacted activity across the agriculture industry, the performance of our North American irrigation business continues to be supported by steady demand amid tempered grower sentiment.

Speaker 1

Additionally, in our infrastructure business, the continued mix shift towards leasing zipper system is delivering meaningful margin expansion. Overall, I'm encouraged by our ability to execute operationally and strategically in order to drive profitability across the organization as well as the actions we've taken to navigate suboptimal market conditions in some regions. In North America, our irrigation business saw comparable whole goods demand versus the Q2 of last year, which was largely in line with expectations and supported by the carryover impact of solid farm profits from last year. While stable demand in North American end markets has supported our year to date revenue results, we are approaching the back half of the year with tempered expectations. The USDA recently released its initial 2024 net farm income projections, which were significantly below initial market forecasts and expectations.

Speaker 1

While this has the potential to negatively impact farmer sentiment and the deployment of investment dollars for new equipment in the near term, it's still very early in the season. Moving to international irrigation, where we continue to see a softening of demand. In particular, the Brazilian market has experienced reduced grower profitability, limited access to financing and constrained investment capacity. While we're facing a challenging external operating environment in Brazil the near term, we're still very confident in the mid- to long term opportunities in this market. Ongoing droughts in Sao Paulo, Mato Grosso do Sul and Parana have increased state level support for irrigation and with low penetration levels and the ability to support up to 3 crops per year, these markets will continue to grow.

Speaker 1

Moving to infrastructure. As I mentioned in my opening remarks, our overall profitability continues to benefit from the strong growth of our Road Zipper System leasing business, an encouraging indicator as we move forward. Despite revenue that was comparable to the prior year period, we captured meaningful margin improvement that Brian will touch on later. We expect continued growth in our Road Zipper lease revenue in the back half of this year as we move into the heart of the road construction season, coupled with a strong backlog and sales pipeline for the overall infrastructure business. Additionally, as we mentioned in prior calls, we expect our infrastructure business to benefit over time as U.

Speaker 1

S. Infrastructure spending ramps up as part of the Infrastructure Investments and Jobs Act. We've only recently begun to see that dynamic play out and we believe that we're in the early innings of a multi year growth trajectory for infrastructure spending domestically. Turning to Innovation and Technology. As we announced yesterday, we've agreed to acquire a 49.9% interest in PESL Instruments with an option to acquire the remainder of the company in the future.

Speaker 1

PESL is a leading developer and distributor of Vinfield Monitoring Solutions for agricultural markets. The company deploys software and IoT hardware, including weather stations and environmental sensors, supporting agricultural decision making, including pest and disease control, crop management and irrigation management. We believe this relationship further highlights our commitment to providing world class water management solutions to growers around the globe. Our combined platforms and integrated technologies will allow users to monitor and adjust irrigation operations based on key atmospheric conditions, while also enhancing overall predictive analytics capabilities. This further strengthens our digital water management portfolio, allowing us to reach a broader set of customers and service providers globally.

Speaker 1

Lastly, I'd like to address our recent announcement to expand and modernize our manufacturing facilities. In January, we announced our commitment to invest more than $50,000,000 over the next 2 years to implement state of the art technology that will greatly benefit our global operations. Our strategic plans for the modernization of our facilities include the implementation of Industry 4.0 Technologies, data connectivity, analytics, artificial intelligence and the addition of automation and robotics. Our renovated facility will also house new equipment and the latest advancements in galvanizing, a core process for manufacturing mechanized irrigation systems and road safety products. Additionally, we'll be expanding our Lindsay, Nebraska facility by 40,000 square feet to allow for increased manufacturing capacity and capabilities in metal forming.

Speaker 1

This investment is the largest in our company's history and we look forward to updating you as we invest further into operational excellence and innovation. I'd like to turn the call over to Brian to discuss our Q2 financial results. Brian?

Speaker 2

Thank you, Randy, and good morning, everyone. Consolidated revenues for the Q2 of fiscal 2024 were $151,500,000 a decrease of 9% compared to $166,200,000 in the prior year. The decrease resulted from lower irrigation segment revenues as infrastructure revenues were comparable to the prior year Q2. Net earnings for the quarter were 18 point $1,000,000 or $1.64 per diluted share compared to net earnings of $18,100,000 or $1.63 per diluted share in the prior year. The impact of lower revenues and lower operating income was favorably offset by an increase in other income and a lower effective tax rate compared to the prior year 2nd quarter.

Speaker 2

Other income benefited from increased interest income and favorable foreign currency translation results compared to the prior year 2nd quarter. And income tax expense for the quarter was reduced by the realization of a one time tax benefit of $1,100,000 in Brazil. Turning to our segment results. Irrigation segment revenues for the quarter were $133,000,000 a decrease of 10% compared to $147,800,000 in the prior year. North America irrigation revenues of $82,800,000 decreased 8% compared to $90,400,000 in the prior year's Q2.

Speaker 2

Most of the decrease resulted from lower sales of replacement parts along with slightly lower average selling prices and the impact a less favorable mix of shorter machines compared to the prior year Q2. Sales of replacement parts in the prior year included a substantial number of modem and RTU upgrades connected to the sunsetting of 3 gs coverage that did not repeat this year. While overall selling prices in North America remained relatively stable during the quarter, we did see selective competitive discounting in some regions that we responded to. The impact of these revenue decreases was partially offset by moderately higher unit sales volume compared to the prior year Q2. In international irrigation markets, revenues of 50 point $2,000,000 decreased 13% compared to revenues of $57,400,000 in the prior year 2nd quarter.

Speaker 2

The decrease resulted primarily from lower revenues in Brazil and other Latin America markets compared to the prior year, while the impact of increases and decreases in other markets mainly offset one another. In Brazil, a 20% drop in cash soybean prices from December to February, coupled with lowered yield expectations is negatively impacting the outlook for grower profitability and available liquidity as growers are indicating an unwillingness to sell their crops at current price levels. This situation is also resulting in a more constrained credit environment, which is also limiting investment in irrigation equipment in the near term. Irrigation segment operating income for the quarter was $25,600,000 a decrease of 22% compared to the prior year, And operating margin was 19.3 percent of sales compared to 22.2% of sales in the prior year. Lower operating income and operating margin resulted primarily from lower revenues and the resulting impact from deleverage of fixed operating expenses.

Speaker 2

Infrastructure revenues for the quarter were $18,500,000 and were comparable overall to the prior year. An increase in Road Zipper System lease revenues was offset by lower Road Zipper System project sales and lower sales of road safety products compared to the prior year Q2. Infrastructure segment operating income for the quarter was $3,500,000 an increase of 74% compared to $2,000,000 in the prior year. Infrastructure operating margin for the quarter was 19% of sales compared to 10.9% of sales in the prior year. The increase in operating income and operating margin resulted from a more favorable margin mix of revenues with higher Road to Per System lease revenues compared to the prior year 2nd quarter.

Speaker 2

Turning to the balance sheet and liquidity. Our total available liquidity at the end of the second quarter was $200,600,000 which includes $150,600,000 in cash, cash equivalents and marketable securities and $50,000,000 available under our revolving credit facility. Year to date cash generated from operating activities has increased compared to the prior year. However, our free cash flow is being impacted by the increase in capital spending relating to the investments being made in our Lindsay, Nebraska operation. Our balance sheet remains strong and with ample access to liquid capital resources, we continue to be well positioned to execute our capital allocation strategy to create enhanced and sustained value for our shareholders.

Speaker 2

This concludes my remarks. And at this time, I'll turn the call over to the operator to take your questions.

Operator

Thank you very much. We will now begin the question and answer

Speaker 3

Got a few. The first is, you made some comments regarding pricing and some softness there. Can you elaborate on that at all, Randy, in terms of either quantification or any additional color you can give us on where that is and magnitude of that and how you expect how that's trended kind of as we move into the Q3 here?

Speaker 2

Yes, Ryan. This is Brian Ketchum. I'll take that one. You know, as I mentioned in my remarks, I think what we've seen during the quarter is I'd say it's more regional, you know some selective discounting that we've seen and when it affects protecting our market share, we've said before that we'll protect our market share and match that on an as need basis. But I would say overall, we haven't reduced our overall prices.

Speaker 2

Our general prices remain steady. I would say looking outside the U. S. And in Brazil with the softness that we've seen in that market, I would say the competitive pricing pressures there have probably been while they have been more significant than what we've seen in the U. S.

Speaker 2

But I would say in the U. S, when you look at just the North America margins, I would say a minimal impact overall on the revenue.

Speaker 3

Got it. Okay. I appreciate that, Brian. And then another one on the P and L there. The gross margin really held up pretty well here, I think, despite we're stacking 2 years of double digit negative revenue declines now.

Speaker 3

It seems like the gross margins have held up pretty well. What's the view there? Are we sort of in a new normal? I know you've done some things on the manufacturing side, efficiencies and so forth. Is this sort of a new level that we're going to be at kind of irregardless of what happens in the top line revenue situation going forward?

Speaker 2

Yes, I would say when you look at overall, obviously there's some benefit that we got from on the infrastructure side. North America irrigation gross margins, I would say, were at or even slightly above last year through in the Q2. I think where we're seeing some of the gross margin pressures in international with the decline that we've seen in volume, particularly in Brazil, that's having a deleverage impact there. But I think some of the things that we've done over the last couple of years with from a price management standpoint as well as just operational efficiencies that we've gained both in the U. S.

Speaker 2

And internationally. I think to your point, I think we do feel like we've got a more stable gross margin environment going forward that it's sustainable. Obviously, you're going to have the impact of the volume leverage and deleverage. And at the present time, I think pricing is holding up. Raw material costs, if anything, have stabilized.

Speaker 2

Last couple of months, steel has softened just a bit, but we view raw materials to be stable going forward. So I think that supports where we're at from a margin level.

Speaker 3

Got it. And then one last one if I could. Smaller item on the P and L, but I was a little surprised to see R and D declined year over year by almost 15% and dipped below $4,000,000 for the first time in a while. Because I know that's an area that you've been focused on, on a precision technology side. And what are we to read into that?

Speaker 3

Was that is that just some efficiencies like some synergies from Fieldwise or why would we be seeing a decline there?

Speaker 1

Yes. Good morning, Ryan. This is Randy. I'll take that one. And there isn't any substantial shifts.

Speaker 1

I think obviously we're being cautious with spending. But in the areas of technology and innovation in particular, we continue to invest. So what you see there is really just timing and not a strategic shift or drop in big picture spending. We have a lot of testing expenses in the infrastructure business that hit when we conduct those tests. So, it's really again just timing.

Speaker 3

Got it. Thanks for your time.

Operator

The next question is from Brian Drab with William Blair.

Speaker 4

Hey, good morning. This is Tyler Hittman on for Brian. Thanks for taking my question. It was mentioned that about $20,000,000 worth of orders in your backlog not expected to be fulfilled within the next 12 months. I'm just wondering what those orders are mostly related to?

Speaker 4

Yes.

Speaker 2

I'd say the increase year over year in that category is roughly $15,000,000 and that is primarily related to a multiyear lease that we've signed on the Coats of Versailles, the renewal of a lease that we've had in Texas. It was a multiyear lease.

Speaker 4

Okay. Thank you. And what's driving the lower sales of road safety products in the international markets?

Speaker 2

That's really you know again in Europe being the winter months, things like weather can impact the timing of that. We did see an increase in the U. S. And again supported by additional federal funding in U. S.

Speaker 2

Road construction. We expected to see road safety products grow in the U. S. But that I would say more or less in Europe in the quarter it was more timing and weather related.

Speaker 4

Got it. And just a couple more. I understand the timing of roads that persistent projects are to predict. Do you just have any details on how that pipeline is evolving?

Speaker 2

Yes. I do think as we've moved into the fiscal year now, we do have improved line of sight to projects moving forward in that funnel and we do feel good that we'll see some projects recognized in fiscal 2024, most likely in Q4 at point. I think timing will dictate how much of that gets into our fiscal 2024 versus how much spills into 2025. But as Randy mentioned in his comments, we feel good about the growth prospects for this year, but also the next few years based on our project sales

Speaker 4

funnel. Thank you. And then lastly, just in a tough environment, kind of following on one of your previous questions. So you had operating margin above 14% in the quarter. Is it probably pretty safe to say that you have finished the fiscal year above 14% despite some of the near term headwinds and development in international irrigation?

Speaker 4

Thank you.

Speaker 2

I'm not sure I caught that question completely, Tyler.

Speaker 4

Hey, I'm just wondering, do you think you'll likely finish about 14% for operating margin in the fiscal year, kind of in line with your 5 year average target?

Speaker 2

Yes. I mean I think there's quarter to quarter there's definitely seasonality, Q4 being our lowest in the U. S. So I think we feel good about where we're at from a margin standpoint. I think that the impact of some of the volume decreases that we've seen particularly in Brazil will have an impact on us.

Speaker 2

And based on our ability to react to that from a spending standpoint, I mean our objective is to protect our operating margins. But I think we feel like we've done a pretty good job up to this point.

Speaker 4

Okay. Thank you. I'll pass it along.

Operator

Thank you very much. The next question is from Jon Braatz with Kansas City Capital. Please go ahead.

Speaker 5

Good morning, Randy. Good morning, Brian.

Speaker 1

Hi, Jon. Good morning, Jon.

Speaker 5

Randy, on $50,000,000 investment that you're making in your facility, obviously, you've done a good job over the past couple of years in improving margins and manufacturing margins. Incrementally, what will that $50,000,000 get you in the years ahead?

Speaker 1

I think there's a few interesting areas that we've talked about. Obviously, we detailed some new facilities really connected to capacity and capabilities. We're making some big investments, modernizing, galvanizing. We're increasing automation, robotics, improving material flow. And in the end, we think this is really going to position us to react faster and maybe more efficiently than we have in the past to market demand, whether that's up or down.

Speaker 1

Some of the new Industry 4.0 technologies that monitor the production equipment. And the way I like to think about it, we're really taking FieldNET and FieldNET Advisor and the tools that we've developed for our customers and we're leveraging those similar types of technologies inside of our factory. So we'll have better monitoring of machine performance, stay ahead of maintenance, those types of things. And of course, we're always very mindful of any opportunity to improve safety for the employees. So, I think that flexibility in automation, the modernization, leveraging some new capabilities in both data and production equipment.

Speaker 1

We're excited about the investments. And I can tell you we had a wonderful groundbreaking ceremony last week and the people inside the facility, they're pretty energized and excited about it too.

Speaker 5

So Randy, let's say over the cycle, your margin in that facility is X. With this $50,000,000 investment, what do you think you can how much do you think you could improve that margin over the cycle?

Speaker 2

Hey, John, this is Brian. I'll jump in on that one. I think what it does in near term is it gives us that ability to flex up and flex down without really having to add or remove a lot of labor.

Speaker 5

Okay.

Speaker 2

And so that's a big part of it. I think I would view it as more in the near term being more stabilizing for margins. I mean obviously you're going to have an increase in depreciation that offsets some of the productivity savings that we have. But I think as you let's say demand increases significantly like it did a couple of years ago, our ability to flex up, we should be able to pick up some margin just because of the less reliance on having to go out and find labor, which as you know in Nebraska is difficult with the low unemployment rate.

Speaker 5

Okay. Okay. Brian, about less than 2 years ago, you established a relationship with PESL. Am I pronouncing that correctly?

Speaker 1

PESL, yes.

Speaker 5

Okay. What have you seen in these past 2 years that resulted in you guys a 49.9 percent investment. What have you seen that has encouraged you?

Speaker 1

Yes. I'll take that one, John. This is Randy. And that relationship actually has been formalized within the last year. So it's still relatively early.

Speaker 1

But when you look at kind of the synergies of being able to move their hardware and software services through our channel, they're a global company. We're a global company, but we don't overlap in a lot of those areas. So we do see some immediate opportunities to help both companies. And I think the exciting part is really about the data and the digital opportunities that the acquisition, the investment creates and we can improve tools like FieldNET Advisor using input from field sensors. We can expand data analytics and the models that we have to provide better water management and guidance.

Speaker 1

And they've got over 80,000 installed devices around the world and that creates some tremendous revenue opportunities for annual recurring revenue and the broader integration with the Field Map platform. So we feel we've got a great company, great founder and ownership and we're really going to hit the ground running.

Speaker 5

Okay. Brian, I assume it's going to be accounted for as an equity investment?

Speaker 2

Yes, that's correct.

Speaker 5

Okay. All right. Thank you.

Operator

Thank you. The next question comes from Brett Kearney with American Rebirth Opportunity Partners. Please go ahead.

Speaker 6

Hi, Randy, Brian, Alicia. Good morning. Thanks for taking my question.

Speaker 1

Congrats. Good morning, Brett.

Speaker 6

I just had a follow-up on the Pestle Instruments agreement. Congratulations. It seems like a great way to deepen

Speaker 4

the partnership

Speaker 6

there. Just curious, geographically, those 80,000 installed devices they have, would you say given where they're based, it's more geared towards Europe and opportunity. Obviously, Lindsay is strong globally, but more you're able to bring them into your existing relationships, North America, Brazil, and they have some customers maybe you're not as well penetrated in the European region?

Speaker 1

Yes. I think their footprint I would say is weighted in Europe. But when you look the map, they're everywhere. And they're involved a little more in the specialty crops, orchards, vineyards, fruits and nuts, those types of things. So we see them maybe in different areas of North America than our current footprint.

Speaker 1

But their equipment, their technology, the ability to integrate with FieldNET, FieldNET Advisor and then the other digital platforms, we think we can take them everywhere in the world with us, Brad.

Speaker 6

Excellent. Very helpful. Thank you, Randy.

Speaker 1

You bet.

Operator

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

Speaker 7

Good morning. This is Adam Farley on for Nathan. I want to start on Brazil. What is your expectation for the Brazilian market over the near term? Should we expect Brazil to maybe get incrementally worse?

Speaker 1

In our view, Adam, Brazil is tricky in the short term. And some of the factors that Brian mentioned in his notes, we view all of those really as being short term headwinds in that market. Weather this year was tricky depending on whether you were in the north or the south, it was too wet, it was too dry. But a lot of what we see again is it's very short term. So when we look at mid to long term outlook for that market, it's still in our view going to be one of the significant growth markets in the world.

Speaker 1

And just their ability to generate 3 crops. We've met with a lot of state officials here in Omaha over the past several months. We've got other visits planned over the next couple of weeks. And when you see the amount of land that they have, most of these large ag production states are less than 2%, less than 4% penetrated with irrigation. So, we do see more interest from state level governments and certainly continue to have support from federal government there.

Speaker 1

So, we do have we've made a lot of investments in Brazil. Some of our strongest team members are there and we're bullish on Brazil in the long term just navigating kind of the short term headwinds right now.

Speaker 7

All right. Thank you for that color. Maybe looking outside of Brazil, could you give us an update on demand fundamentals for the markets outside of Brazil and South America and maybe also the international project funnel?

Speaker 1

Sure. And then we comment on Brazil and South America because they really are the big movers now when big needle movers now when you look at international revenues. And when you go around the rest of the world, there's a lot of puts and takes and nothing that's up significantly, nothing that's down significantly, but a lot of the other markets kind of offset the minor ups and downs. The project demand that in our view is still very strong, both the near and the long term. And when we talk about project activity, we're talking about specific pieces of land, specific purchasers, specific designs that are being worked on.

Speaker 1

And depending on which projects we talk about, Middle East obviously is very strong, Eastern Europe, Northern and Sub Saharan Africa. Some of those we're actively quoting along with several competitors depending on where we are in the world. Some of those we're working through confirmed letters of credits and arranging financing and delivery details. Same disclaimer is always on those. The timing is really tough to predict, but we do like what we see in the project funnel and both short and long term project activity.

Speaker 7

Okay. Thank you for taking my questions.

Speaker 1

You bet. Thanks, Adam.

Operator

Thank you. This concludes our question and answer session. I would like to turn the call back over to Randy Wood for closing remarks.

Speaker 1

Well, thank you all for joining us today. We're very pleased with our results year to date, and I want to thank our global team for all of their efforts and accomplishments. Despite a tempered near term outlook in a few of our international irrigation markets, we remain optimistic about the company's long term prospects. We appreciate your interest in Lindsay look forward to updating you on our continued progress following the close of our fiscal 2024 Q3. Thanks for joining us.

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