Lindsay Corporation (NYSE:LNN) Q2 2023 Earnings Call Transcript

Lindsay Corporation (NYSE:LNN) Q2 2023 Earnings Call Transcript April 4, 2023

Operator: Good day and welcome to the Lindsay Corporation’s Second Quarter 2023 Earnings Conference Call. Please note this event is being recorded. And again this is Lindsay Corporation’s second quarter 2023 earnings conference call. I would now like to turn the conference over to Randy Wood, President and Chief Executive Officer of Lindsay Corporation. Please go ahead.

Randy Wood: Thank you and good morning, everyone. Welcome to our fiscal 2023 second quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer. With the first half of our fiscal year complete, I am pleased with the performance of our business and encouraged by our ability to execute operationally and strategically to drive improved profitability across the organization amidst a volatile macroeconomic environment. While we have been faced with broader economic headwinds and strong year-over-year comparisons that have created pressure on the top line during the quarter, our organization continues to prove its resilience as demonstrated by the strong operating income results. Looking at the macro environment.

During the quarter, we continued to observe constraints across the supply chain, most notably in electronics. Our teams are working hard to mitigate these issues and we maintain our expectation that we will see continued improvement throughout the second half of the fiscal year. Compared to the prior year period, inflationary pressures have subsided moderately. Having said that, we are still taking a cautious approach to managing costs and this helped drive expansion in our operating margins during the quarter. Additionally, strong price realization contributed to improved operating income across the business. Shifting to technology and business development. We continue to make progress on implementing our innovation strategy. Last quarter, we announced a strategic partnership with Ceres Imaging, a leading provider of high-resolution imagery and analytics that will expand the capabilities of our FieldNET platform.

This partnership will provide valuable insights into crop health in alignment with our smart pivot roadmap, while giving customers a choice in the imagery platform that best suits their unique needs. During the quarter, we also introduced the TAU-XR to our MASH Crash Cushion Lineup in our infrastructure business. This easy-to-install crash cushion expands our offering, increases safety and reduces maintenance labor in the field. We also recently appointed Brian Magnusson as our Senior Vice President of Strategy and Business Development. Brian’s role will be focused on accelerating growth and creating value for all stakeholders through synergistic partnerships as well as strategic M&A. This is going to be a critical role for the organization as we continue to strengthen our position in the market, drive deeper penetration and position Lindsay for stable top and bottom line growth.

Touching on irrigation market conditions. The North American market continues to demonstrate stable demand trends. Our outlook remains positive despite the anticipated reduction in net farm income in 2023. In February, the USDA released its updated forecast for the year, indicating that net farm income is expected to decrease nearly 16% versus 2022 in nominal dollars. Net farm income is still expected to be more than 26% above its 20-year average when adjusted for inflation. Strong commodity prices and net farm income should support market stability and an investment in irrigated agriculture and water management technology will generate a positive return for our customers. Regarding drought conditions, we have seen relief to some of the harsher conditions in California and other parts of the West.

However, drought conditions have persisted and in some instances continue to worsen in the Midwest, including Kansas and Nebraska. This will likely drive an early start to the irrigation season and highlight the importance of efficient water and energy management with tools like FieldNET and FieldNET Advisor. Fundamentals in the international markets remain strong. Mature markets continue to be supported by high commodity prices and the developing markets are supported by increased focus on food security. The irrigation business did experience some delays in sales activity in Brazil during the quarter due to the transition in federal government following the Presidential election at the end of 2022. We do not expect these delays to materially impact the full year results.

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Project revenue in Egypt was elevated in the second quarter of fiscal 2022. This, along with sales in Ukraine and Russia in the prior year added a challenge on year-over-year comparisons in the quarter. Looking ahead, there are additional opportunities in the international markets that we are well positioned to capitalize on. Moving to infrastructure. As government spending increases in response to the Infrastructure Investments and Jobs Act, states should see additional funding flow from the federal programs. We are well positioned in the market to supply state and local government programs as the construction season starts this spring. We are encouraged by what we have seen in the success of our Road Zipper program and the strength of our sales and lease funnel.

Going forward, we will continue to actively manage the funnel to drive continued infrastructure segment growth. I will now turn the call over to Brian to review our second quarter financial results. Brian?

Brian Ketcham: Thank you, Randy and good morning everyone. Total revenues for the second quarter of fiscal 2023 were $166.2 million compared to $200.1 million in the same quarter last year. The decline in consolidated revenues came mainly from the Irrigation segment as infrastructure revenues showed only a slight decline. The lower revenue generation in our Irrigation segment compared to the prior year quarter resulted in part from differences in market timing as well as from international project volume in the prior year that did not repeat. Operating income for the quarter was $27.3 million, an increase of 49% compared to $18.3 million in the same quarter last year. Strong operating income results helped drive improved operating margins of 16.4%, up meaningfully compared to 9.2% in the prior year.

Strong gross margin improvement in both irrigation and infrastructure drove the expansion in total operating margin. This increase was partially offset by higher operating expenses compared to prior year, which resulted primarily from higher employee compensation costs and increased investments in new product development. Net earnings for the quarter were $18.1 million or $1.63 per diluted share compared to net earnings of $14.6 million or $1.32 per diluted share in the prior year. The 24% increase in net earnings resulted from the increased operating income and was partially offset by foreign currency transaction losses in the current year compared to gains in the prior year and from higher income tax expense. The increase in the effective tax rate reflected a greater proportion of earnings in higher rate foreign jurisdictions, primarily Brazil compared to the same quarter last year.

Moving on to the Irrigation segment performance for the quarter. Irrigation segment revenues for the second quarter were $147.8 million compared to $180.7 million in the same quarter last year. North America irrigation revenues were $90.4 million compared to $100.7 million in the same quarter last year. A decline in unit sales volume was partially offset by the impact of higher average selling prices. Prior year unit volume was bolstered by a pull forward of orders in advance of announced selling price increases. Current year unit volume reflected a return to a more traditional seasonal demand cadence as selling prices have stabilized over the past few quarters. In the international irrigation markets, revenues were $57.4 million compared to $80 million in the same quarter last year.

This decrease resulted primarily from the completion of a large Egypt project in the prior year that did not repeat and from lower sales volumes in Brazil, Ukraine and Russia compared to the prior year. As Randy mentioned in his opening comments, sales and order activity in Brazil were temporarily reduced as a result of the federal government transition following the October 2022 Presidential election. We expect the reduced order activity will have some impact on year-over-year comparisons in our third quarter. However, our full year outlook for Brazil remains unchanged. Total irrigation segment operating income for the second quarter was $32.8 million, an increase of 33% compared to the prior year despite the year-over-year decline in segment revenues.

Operating margin represented 22.2% of sales, expanding meaningfully compared to 13.7% of sales in the prior year. The increase in operating income and operating margin resulted primarily from improved price realization, less inflationary impact on input costs and a more favorable margin mix of international irrigation revenues compared to the prior year. The prior year second quarter included additional cost of sales of approximately $2.8 million related to the LIFO method of accounting for inventory, while current year cost of sales, were reduced to approximately $1.5 million. Additionally, the prior year included non-recurring costs of approximately $1.8 million related to factory maintenance and outside consulting services. Turning to the Infrastructure segment.

Infrastructure segment revenues for the second quarter were $18.5 million compared to $19.4 million in the same quarter last year. Lower sales of road safety products were partially offset by an increase in Road Zipper system lease revenue, while Road Zipper project sales were similar to the prior year period. Infrastructure segment operating income for the second quarter was $2 million compared to $300,000 in the same quarter last year. This increase in operating income helped improve operating margin for the quarter, which was 10.9% of sales compared to 1.7% of sales in the prior year. These improved current year results reflect improved price realization, a more favorable margin mix of revenue and lower inflationary impact on input costs compared to the prior year.

Turning to the balance sheet and liquidity. Our balance sheet remains solid, and our total available liquidity at the end of the quarter was $156.4 million, with $106.4 million in cash, cash equivalents and marketable securities and undrawn capacity on our revolving credit facility of $50 million. Through improved operating income performance and an ongoing focus on working capital management, we expect to see enhanced free cash flow generation in the balance of fiscal 2023. This stronger cash flow will be strategically beneficial as it will further enhance our ability to invest in growth opportunities and create value for our shareholders. At this time, I’d like to turn the call back over to the operator to take your questions.

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Q&A Session

Operator: Our first question comes from Ryan Connors from Northcoast Research. Ryan, please go ahead.

Ryan Connors: Thanks for taking my question. I wanted to ask about the issue of these international projects, Brian, you said there was a project that did not repeat from last year. And you mentioned that pretty prominently as a positive mix driver. I know you’ve never really quantified that the exact magnitude of the margin differential on those projects relative to the other business. But it sounds like that margin differential might be expanding. I mean, is €“ has that business gotten more competitive? Or is that €“ am I reading too much into that?

Randy Wood: Yes, good morning. Ryan, this is Randy. I’ll take that one. And I think it’s always been more competitive just due to the size and the magnitude of those projects. And I wouldn’t say with certainty that it’s expanding versus where it’s been historically. I just think some of those projects are potentially larger than they have been historically. So you do see some of that draw down with a little more significance. But I wouldn’t say, again, with confidence that, that gap is getting any larger.

Ryan Connors: Okay. Okay. And then in terms of the backlog, as noted in the press release that the backlog is down in irrigation. But can you talk about the composition of backlog, any color there you can give us on international versus North America within that irrigation backlog.

Brian Ketcham: Yes, this is Brian. I would say both international, irrigation and North America backlogs would be lower than last year. And I think similar dynamics driving that. I think, again, a year ago coming into the quarter, both international and North America, we had stronger backlogs as that pull ahead in orders to try to beat the price increases was going on. And we’ve seen the prices stabilize in both markets. So I’d say Brazil, backlog year-over-year is down. But from a seasonal standpoint, nothing there other than just the difference in timing of orders. But as we’ve commented in the past, backlog is not necessarily always the best indicator, especially in shorter lead time situations where there is industry capacity and nothing really going on of any significance on the pricing side.

Ryan Connors: Got it. Okay. And then just one last housekeeping, Brian, you mentioned the tax rate and the shifts there and the reasons behind that. But is that something from a modeling standpoint, we should expect that to remain elevated or will that jump right back down in 3Q?

Brian Ketcham: Yes. I think last quarter, I had mentioned 27.5 for the year. I think that still remains the case. And if you look back over the last couple of years, I think the biggest driver in the increasing effective tax rate is just a greater proportion of earnings coming from Brazil, which has a higher statutory tax rate.

Ryan Connors: Got it. Okay, thanks so much.

Operator: We now have a question from Brian Wright from ROTH Capital. Brian, please go ahead.

Brian Wright: Thanks. Good morning. I was wondering, is it possible to maybe try and quantify the demand pull forward from the irrigation in the year ago quarter to kind of get to kind of a normalized?