Lindsay Corporation (NYSE:LNN) Q3 2023 Earnings Call Transcript

Lindsay Corporation (NYSE:LNN) Q3 2023 Earnings Call Transcript June 29, 2023

Lindsay Corporation beats earnings expectations. Reported EPS is $2.28, expectations were $2.15.

Operator: Good day, and welcome to the Lindsay Corporation Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Randy Wood, President and Chief Executive Officer. Please go ahead.

Randy Wood: Thank you, and good morning, everyone. Welcome to our fiscal 2023 third quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer. I’d like to start by looking at market conditions in North American irrigation where we’re really seeing two themes playing off one another. Firstly, market fundamentals remain strong. And although net farm income is projected to decline versus last year, it’s still well above historical averages and will represent the third highest income level over the past 10 years. Commodity prices have also seen support recently due to crop quality concerns caused by the drought. While some parts of the country have received much needed precipitation, we have seen drought spread across the Midwest driving the USDA to announce earlier this month that 64% of the U.S. corn crop was currently impacted by drought.

This market tailwind has been partially offset by tepid customer sentiment that has been driven by inflation, interest rates, general economic uncertainty and commodity prices still below last year’s highs. In our view, the short-term uncertainties have influenced customer behavior and caused an unexpected shift in seasonal order patterns. While market feedback indicated quotation volume remained generally consistent with the prior year, our order volume was impacted by customers who’ve taken a more cautious wait-and-see approach for the near term. For us, this means some of the spring volume we anticipated will shift into the fall installation season. Our operational focus, pricing discipline and spending efficiencies in the quarter did allow us to expand operating margins and maintain business quality in spite of the deleveraging driven by lighter volumes.

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Moving on to International irrigation. We continue to see strong project demand connected to global food security and shifting climate patterns. We recently confirmed 250 project units in the Middle East and there are also several additional large projects in the Europe, Middle East and Africa region that are actively being designed and quoted. Our global footprint, differentiated technology and strong project experience position us to be confident in our ability to identify and win these competitive projects. Brazil continues to be a strong market, and we were pleased with customer interest at the recent Agrishow, which is a large selling show in the region. This market will be further supported by an aggressive government financing program that was released this week for the upcoming season.

Total program funding for irrigation investments was increased approximately 25%, making over BRL2.3 billion available for irrigators. The interest rate on these loans was maintained at 10.5%, which makes them attractive options to support continued investment. We were also honored to host a delegation from the Mato Grosso State in our global headquarters last month. This important growing region in Brazil has over 29.6 million acres of production, but less than 1.5% of that land is irrigated, representing a significant opportunity for development. Irrigation also creates the potential to grow three crops per year, which accelerates the payback of the irrigation investment. And as mentioned, we’re confident in our strategic value add with growers and our ability to win competitive projects in this growth market.

Turning to innovation and technology. We were pleased to announce our partnership with Pessl Instruments in the quarter. In conjunction with our FieldNET platform, growers will now be able to access Pessl field monitoring systems, including weather stations and soil moisture probes, providing real-time insights into crop water needs. Additionally, growers utilizing FieldNET adviser will be able to utilize Pessl’s field monitoring systems to enhance the predictive analytics provided by the platform. Moving to Infrastructure. We continue to see positive mid- and long-term market fundamentals, driven by aging infrastructure and funding provided by the Infrastructure Investment and Jobs Act. This funding will support incremental investments in roadway infrastructure, but like many other companies in this space, we’re seeing delays in how quickly that funding is getting to the market.

We believe this funding will have more significant impact in the 2024 construction season with steady growth through 2025 and 2026. Even with the IIJA delays, overall transportation and construction contract awards leading into the spring have encouragingly increased over the prior year. This serves as a leading indicator for sales activity and continues to show signs of strengthening. The Road Zipper sales funnel remains steady. And although we do not currently expect any large project will be delivered in our fourth quarter, we do see incremental growth in our lease portfolio due to additional projects in new states. This should drive a stronger backlog going into fiscal year ’24. I’d now like to turn the call over to Brian to discuss our third quarter financial results.

Brian?

Brian Ketcham: Thank you, Randy, and good morning, everyone. Total revenues for the third quarter of fiscal 2023 were $164.6 million compared to $214.3 million in the same quarter last year. Most of the decline in consolidated revenues came from the Irrigation segment as Infrastructure revenues were down slightly compared to the prior year. Operating income for the quarter was $27 million compared to $35.2 million in the same quarter last year. Operating margin for the quarter was 16.4% of sales consistent with the prior year quarter. This solid operating margin performance was supported by gross margin improvement exhibited in both business segments, while operating expenses were comparable to the prior year. Net earnings for the quarter were $16.9 million or $1.53 per diluted share compared to net earnings of $25.1 million or $2.28 per diluted share in the prior year.

Lower net earnings resulted largely from lower operating income. Earnings performance was also impacted by foreign currency transaction losses in the current year compared to gains in the prior year and from a higher effective income tax rate compared to the prior year. This increase in the effective tax rate reflected a greater proportion of earnings in higher rate foreign jurisdictions, primarily Brazil, compared to the prior year. Moving on to the Irrigation segment performance for the quarter. Irrigation segment revenues for the third quarter were $142.6 million compared to $188.7 million in the same quarter last year. North America irrigation revenues were $75 million compared to $96.2 million in the same quarter last year. The decline in revenues resulted primarily from lower unit sales volumes, while average selling prices were comparable to the prior year.

Lower unit sales volumes resulted primarily from farmers delaying capital investment decisions for the reasons Randy cited earlier. We believe this will result in farmers deferring purchases to later in the calendar year when the profitability of the current crop year becomes more apparent. In the International irrigation markets, revenues were $67.5 million compared to $92.5 million in the same quarter last year. This decrease resulted primarily from lower sales volumes in Brazil, Australia, Ukraine and Russia compared to the prior year third quarter. We expect sales volumes in Brazil to increase in the fourth quarter, supported by the new subsidized government financing program that Randy mentioned. Total Irrigation segment operating income for the third quarter was $30.7 million compared to $39.6 million in the same quarter last year.

Operating margin represented 21.6% of sales, marking an increase from 21.0% of sales in the prior year. This increase in operating margin resulted from gross margin expansion, driven by improved price realization and operating performance compared to the prior year. Moving to the Infrastructure segment. Infrastructure segment revenues for the third quarter were $22 million compared to $25.6 million in the same quarter last year. An increase in Road Zipper lease revenue was more than offset by lower Road Zipper project sales and lower sales of road safety products compared to the prior year. Infrastructure segment operating income for the third quarter was $3.6 million compared to $3.8 million in the same quarter last year. Operating margin for the quarter was 16.2% of sales, which increased from 14.8% of sales in the prior year.

This improved operating margin performance resulted from gross margin expansion attributed to a more favorable margin mix of revenue and from improved price realization compared to the prior year. Turning to the balance sheet and liquidity. Our balance sheet remains very solid, and our total available liquidity at the end of the quarter was $194 million, with $144 million in cash, cash equivalents and marketable securities, with an additional $50 million of undrawn capacity on our revolving credit facility. Through solid operating performance and effective working capital management, we expect our improved free cash flow generation to continue for the balance of fiscal 2023. This stronger cash flow will be strategically beneficial as it will further enhance our ability to act opportunistically by investing in growth opportunities, creating meaningful value for our shareholders.

At this time, I’d like to turn the call over to the operator to take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Nathan Jones with Stifel. Please go ahead.

Nathan Jones: Good morning, everyone.

Randy Wood: Good morning, Nathan.

Brian Ketcham: Hi, Nathan.

Nathan Jones: I would like to start off on the commentary that you made about farmer uncertainty shifting demand from what’s normally a spring selling season into the fall. I think that’s maybe the first time ever I’ve heard an irrigation supplier talk about demand shifting into the fall where you’re typically seeing the crop grow and people aren’t out there, generally installing equipment on top of that crop. Can you just give us some more detail on the dynamics around that? And why it is that you think that demand shift into the fall? I would have thought that if it was shifting, it would have probably shifted into next spring.

Randy Wood: Yes, I can take that one, Nathan. And it really comes down to what we’ve seen historically in terms of behavior. And you understand the seasonality of our business. We have installations going into spring and then season of use through summer, fall harvest and then we have a fall selling and installation season. And we really still believe firmly in the fundamentals of the ag market. And if you look at net farm income, as we said in our comments, this is going to be the third highest net cash farm income in the last 10 years. There’s going to be a lot of profits in the segment. And customers in the spring, where we’re active in quoting, they were looking at specific fields, specific machines, they just weren’t ready to pull the trigger, and we’ve confirmed that over and over again our time — with our time in the market.

So our view is there’s a lot of machines in the funnel, if you will, that are ready to go. And as customers wrap up harvest and they finalize their tax situation, there’s going to be more of that fall to December 31 type of business that they’re going to be willing to invest in. So to me, again, when this segment is profitable, they’ve proven historically, they’re going to make investments and an investment in irrigation system is one of the best ROI investments they can make and our belief is that business will shift to the fall.

Nathan Jones: Okay. So what you’re saying is not that it shifts to during the growing season, you’re saying it shifts after the harvest, so late fall kind of late in your fiscal first quarter or early into your fiscal second quarter?

Randy Wood: Exactly. It would probably be in that fiscal year first quarter for us. That will be post-harvest installations. You got it.

Nathan Jones: Got it. That makes more sense. And then my follow-up question was on gross margins. Obviously, they’ve been pretty volatile over the last couple of years, we’ve followed the price changes in steel. They’ve started to settle down here a bit more into kind of that low 30%s area. Is that an area where you think gross margins are sustainable? Does the drop in demand here in ’23 give you any pause for concern on pricing that might put the pressure on gross margin? Or just any more commentary you can give us around that.