Lindsay Corp (LNN) Q3 2020 Earnings Call Transcript

Good morning. My name is Eric, and I will be your conference operator for today. At this time, I'd like to welcome everybody to Lindsay Corporation Third Quarter Fiscal Year 2020 Earnings Call. All participants today will be in a listen-only mode. 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. I'd now like to turn the conference over to Mr. Tim Hassinger, President and Chief Executive Officer. Please go ahead.

Good morning, and thank you for joining our call. With me on today's call is Brian Ketcham, our Chief Financial Officer. I will start with addressing the impact of COVID-19 on our employees and business. Our highest priority continues to be our employee health and safety. To the best of our knowledge, we have had nine employees globally with confirmed cases of COVID-19. Fortunately, I can report that eight of these employees have recovered and one was just diagnosed. We continue to proactively implement health and safety measures according to health organization recommendations and local government regulations. At our sites, key actions that we've taken include ensuring employees are practicing social distancing according to guidelines, the use of face coverings, enhanced cleaning and sanitation efforts, and staggered production schedules. Our company continues to work from home for roles that can be done outside of the Lindsay site. Our businesses continue to be classified as business essential, and as a result of that, all nine manufacturing plants are operational and running according to the local demand level. In terms of business impact related to COVID-19 in the third quarter, the primary impact has been some project delays, but not cancellations. We continue to operate the rapid response team structure across the company that was put in place to address COVID-19-related issues, and to mitigate potential risks to the business going forward. Before I provide an update on each of the businesses, I'd like to take this opportunity to thank our employees, who continue to deliver our commitments to our customers in this new environment. The third quarter in the domestic irrigation business had an earlier spring in most of our key regions. At the end of the quarter, the USDA corn planted acreage estimate was 93% complete versus 64% the prior year. This past quarter has seen several unfavorable factors such as reduced ethanol use that has driven commodity prices to a lower level. Even though we have seen farmer sentiment reflect this significant decline in commodity prices, our year-to-date sales in the domestic business are on par with the prior year. In last quarter's earnings call, I mentioned that our year-to-date new device growth for FieldNET was up over 50% versus the prior year. Since then, we have continued to advance the pivot watch strategy with an offering through Amazon, targeted towards the do-it-yourself market segment. Another important action this quarter was the acquisition of Net Irrigate. Net Irrigate has coverage in 37 states and two Canadian provinces, with an installed base share of the U.S. remote monitoring market of approximately 5%. This acquisition aligns with our strategy, and it strengthens the market leadership position Lindsay has in the IoT space, specifically as it relates to remote monitoring capabilities. In combining Net Irrigate's market share with the organic growth Lindsay has generated, year-to-date growth in new devices is 200% versus the prior year. In the international irrigation business, the global project market remains active. The delays we were experiencing in this market that I mentioned in the last quarter's earnings call have improved. Although some restrictions that need to be managed are still in place, in general, we saw the international borders open during this quarter, primarily in Africa and the Middle East. There has been an increase in new project inquiries driven by food security concerns. In Brazil, we continue to see growth, and our recent investments to enhance our commercial capabilities have been instrumental in achieving this increase. For infrastructure, the Highways England project for the supply of a movable barrier system for use in Kent, United Kingdom is currently being fulfilled. We have successfully leveraged our global manufacturing footprint to mitigate risk, and because of this action, our delivery of product is on schedule. Overall, we continue to see good progress being made in our infrastructure business. However, we did see some project delays that are connected to COVID-19. Approximately $12 million in sales that were expected to occur in quarter three have been delayed for this reason. Regarding our foundation for growth initiative, we continue to see that the margin improvement projects we implemented are delivering as expected. I'd now like to turn the call over to Brian to review our third quarter results.

Thank you, Tim, and good morning, everyone. My comments regarding third quarter comparisons will refer to adjusted results for the prior year, which omit the impact of foundation for growth costs that were incurred in that period. Adjusted results for the prior year are detailed in the Regulation G disclosure at the end of the press release. No adjustments were made to current period results. Total revenues for the third quarter of fiscal 2020 increased 2% to $123.1 million, compared to $121.1 million in the same quarter last year. Net earnings for the quarter were $10.1 million or $0.93 per diluted share, compared to net earnings of $5.5 million or $0.50 per diluted share in the same quarter last year. During the third quarter of fiscal 2020, shipment and project delays related to COVID-19 impacted consolidated revenues by approximately $14 million. In addition, higher production costs were partially offset by lower costs in other areas, such as travel and entertainment. The impact on net earnings for the quarter regarding these items is estimated to be approximately $4.5 million or $0.42 per diluted share. Irrigation segment revenues for the third quarter of fiscal 2020 were $93.5 million, compared to $98.6 million in the same quarter last year. North American irrigation revenues were $60.9 million compared to $63 million in the same quarter last year. The decrease resulted primarily from lower irrigation equipment unit volume, which was partially offset by the impact of higher average selling prices. A portion of the reduction in unit volume was the result of fewer storm damage replacement orders compared to the prior year. In the international irrigation markets, revenues were $32.6 million compared to $35.6 million in the same quarter last year. Higher volumes in Brazil and certain other regions were more than offset by unfavorable effects of foreign currency translation of approximately $3.5 million, and COVID-19-related shipment delays of approximately $2 million. We expect the revenue from these delayed orders to be realized in the fourth quarter. Total irrigation segment operating income for the third quarter of $15 million was $3.4 million higher than the prior year, and operating margin improved to 16.1% compared to 11.7% in the prior year. Operating income and margin improvement resulted primarily from improved costs and pricing performance attributed to the foundation for growth initiative, as well as from increased margin contribution from technology products and services. Infrastructure segment revenues for the third quarter of fiscal 2020 were $29.6 million, an increase of $7.1 million or 32% compared to the same quarter last year. The increase resulted from higher Road Zipper system sales and lease revenues, which were partially offset by lower sales of road safety products in Europe. In addition, sales of approximately $12 million were impacted by COVID-19-related project delays. We expect at least a portion of this revenue to be realized in the fourth quarter, with the potential of some of it moving to fiscal 2021. Infrastructure segment operating income for the third quarter of $8.6 million was $5 million higher than the prior year, and operating margin improved to 28.9% compared to 16% in the prior year. Operating income and margin improvement resulted primarily from increased sales and higher margin product lines, and improved costs and pricing performance. Turning to the balance sheet and liquidity, Lindsay is well-positioned with a strong balance sheet and sufficient liquidity, as we face the uncertainty and challenges presented by the global coronavirus pandemic. Our total available liquidity at the end of the third quarter was $171.5 million with $121.5 million in cash, cash equivalents and marketable securities, and $50 million available under our revolving credit facility. Our total debt was $116.4 million at the end of the third quarter, and of that amount, $115 million matures in 2030. At the end of the quarter, we were well within the financial covenants of our borrowing facilities, including a funded debt to EBITDA leverage ratio of 1.8, compared to a covenant limit of 3.5. At this time, I'd like to turn the call over to the operator to take your questions.

Your first question comes from Nathan Jones with Stifel. Please proceed with your question.

Good morning, everyone.

Good morning, Nathan.

Let's start with this $12 million of deferred revenue on the Road Zipper projects. Can you talk about how concentrated this is? Is it one project, a few projects, a whole bunch? Would you expect those to catch up in the fourth quarter? Does the fact that part of the shipment has been delayed then delay further shipments so maybe things move out of fourth quarter into next year? Just any color you can give us on how you expect that to play out and catch up?

Yes. Nathan, this is Tim. To answer your first question, the $12 million comprises one medium-sized project, and then several smaller ones in relation to your later question. At this point, we don't know of any other delays. But I do want to say that, in this environment, there's always that risk that exists. But we think, as we see these particular delays, most of that delay will occur in the fourth quarter, but there could be some spillover into our first quarter of '21.

So, the way we should think about it, though, is the plan is that you'll catch-up that $12 million in the fourth quarter. You're not anticipating things slipping out into the next fiscal year, but it's possible that they will?

It's possible some of it will, yes.

Okay, fair enough. I think that helps.

And Nathan, if I may add a little bit of color to that. Most of this delay is in the U.S. with projects. The procurement departments for state and local governments were directed, their priorities were focused on procuring medical supplies. So, getting the right approvals for some of these projects got delayed as a result of that. But that situation has improved as we ended the quarter.

Okay. Then I wanted to ask about the funnel of new project opportunities and new business opportunities, specifically on the infrastructure side, on the Road Zipper side. Are you seeing those progress at the same kind of pace, or are you seeing some of those delays impact when you would expect to book new work? Are there any delays in orders that we might see from those kinds of things?

First of all, the orders outside of this $12 million that we discussed are continuing to deliver. In terms of the funnel, Nathan, we've said this before, and we still feel this way. The key point is we're seeing more machines being leased than ever before. We have potential projects in our sales funnel that represent more country representation than ever before. We still claim this is the best sales funnel we've ever seen. So at this point, we still feel optimistic looking forward related to the Road Zipper potential.

And then just one more housekeeping one. You had about $0.20 worth of earnings hit on the other income line, below the line expense there. Can you just talk about what that was? And if we’re likely to see numbers like that again?

Yes, this is Brian. The increase resulted from higher foreign currency translation losses, particularly related to intercompany transactions with the foreign subsidiary. So, I would say the majority of that relates to Brazil, but all foreign currencies weakened against the dollar during the quarter. This has impacted us, on a year-to-date basis as well.

Okay. That's helpful. I'll pass it on. Thank you.

Thanks, Nathan.

Your next question comes from Joseph Mondillo of Sidoti & Co. Please go ahead with your question.

Good morning, Tim, Brian.

Good morning, Joe.

Good morning, Joe.

First question just to sort of, I guess, jump on infrastructure since we were on that topic. How much of the $28 million relative to the Highways England and the $10 million related to the Japan follow-on hit in 3Q, and how are you thinking about that for 4Q and 1Q?

Yes. Joe, this is Brian. So, first of all, with the Japan order, which was $10 million, we saw just over a million of that in the third quarter. And we would expect the majority of that to be delivered in the fourth quarter. On the Highways England project, an $28 million project, about $8 million was approximately delivered in the third quarter. What we had said previously was it's about a $5 million a month kind of run rate. So we would expect about $15 million in the fourth quarter and the remaining $5 million in Q1.

Okay, great. And then just shifting to irrigation, the margins there surprised me to the upside, the year-over-year expansion better than even we've seen in the past couple quarters. You mentioned improvements to cost and pricing, as well as the benefits of your growth in technology were factors. Should we expect that sort of year-over-year benefit or incremental improvement that we saw in 3Q to continue? Was there anything sort of abnormal in the quarter that maybe made the margins a little stronger than what they really sort of should be on a normalized basis?

Yes. First of all, we would attribute most of that increase to the foundation for growth, probably roughly about $4 million for the quarter, and probably at least two-thirds of that being sourcing. So as volume increased in the third quarter, which is our highest volume quarter in domestic irrigation, that was higher than what we have seen in the first couple of quarters, and will be higher than what we see in the fourth quarter. The North American sales volume being down was offsetting part of that, and we attributed some of the margin improvement to margin coming from basically the technology sales and services.

Okay. And last question for me, just on the international irrigation side, also, better than I was expecting here, especially given the macro challenges. In the last conference call, you mentioned that you were potentially seeing some delays in Middle Eastern projects, as well as some challenges with South Africa. What drove the quarter? Did you see those delays in the Middle East? How did South Africa transition? And what's the outlook? It sounds like it's not extremely strong in the near-term, meaning the fourth quarter, but maybe you see some improvement next year. Could you just expand on all that?

Yes, Joe, this is Brian. In the third quarter, we experienced some project delays, and the opening of borders mentioned by Tim occurred later in the quarter. Therefore, we anticipate that some of these projects may begin shipping in the fourth quarter. I want to highlight Brazil, which has been a positive market for us throughout the year, showing growth. We also noticed improvement in Australia and New Zealand. Overall, South Africa remained relatively stable year-over-year. The CIS region is active, and despite the impacts of COVID, we were pleased with the performance of the international irrigation segment, which was significant in the international market as well.

And just to follow-up there. With corn prices and crop prices being where they are, is it surprising to see volumes up 1%? Is that indicative of what you think of the international markets at this time?

Yes, I don't know that it was a surprise. I think it is indicative of where those markets are. Brazil is sitting very favorably with their lower currency, and their farmers there are doing very well. Weather conditions also play a role. Food security is becoming a bigger topic now because of COVID. So, there are many dynamics at play in the international markets.

Okay. Alright, thanks for taking my questions. I appreciate it.

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

You nailed my last name. So, good morning. That's the first time in 15 years that's happened. I'm just looking at the margins in irrigation. I just want to follow-up on that. Looking at the second quarter and the third quarter for irrigation, revenue was essentially flat from second quarter to third quarter, and then that adjusted operating margin went from about 10% to 16%. I know, Brian, you just said it was $4 million in foundation for growth. But were there foundation for growth benefits in the second quarter? Or did that all just really start to show up in the third quarter? Why such a significant step function increase from quarter-to-quarter?

Yes. It definitely ramped up. We saw benefits in the first and second quarters, but it ramped up in the third quarter. I would say we've seen improvements both domestically and internationally. We focused on the international operations as well. I would say it's more of a ramp-up during the third quarter. Some of it is volume-related, but I would say as the projects were implemented, we expected to see some ramp-up like we saw in the third quarter.

Just to add onto what Brian is saying, we really feel confident when we say we've had improved pricing discipline during this year. The combination of both is what we would attribute to the margin improvement.

Okay. You gave the $4 million foundation for growth for the third quarter. Was that for the whole company, or just the irrigation segment?

That was just irrigation. We would say there was probably about $1 million in infrastructure, so $5 million for the quarter.

Okay. And what would those two numbers be for the second quarter?

We had said the first and second quarters were about $3 million each instead of $5 million, so we're at $11 million year-to-date.

Got it. Can you say anything about how much pricing contributed to revenue growth or what the impact of pricing was in a more quantified way for the third quarter?

Yes, I would say low single digits year-over-year.

Okay. And then just on these higher margin new technology products. Is there any way you can give us a sense for what percentage of revenue those account for now? And how much higher those margins are than the other products?

We haven't broken out the revenue. But on the margin side, I would think of it in terms of subscription revenue and margins associated with that type of revenue, so they're much higher than what the equipment margins would be. We're seeing with the growth in subscriptions that Tim had referred to impacting revenue but clearly very supportive of margins as well.

Okay. And then just two more housekeeping questions. The Japan order is a $10 million total order, and we did $1 million in the third quarter. Is that right? And the balance comes in the fourth quarter, so $9 million or above?

Yes, that's right.

That's right. Okay. And then, do you have the breakdown of how it looked in terms of dry land conversion replacement?

Yes. For the quarter dry land was 28%, conversion 37% and replacement 35%.

Got it. Okay. Alright. Thanks very much.

The next question will come from Chris Shaw with Monness Crespi. Please go ahead with your question.

Yes. Good morning, everyone. How are you doing?

Good, Chris.

Our first question is on the tax rate. I had 18% for the quarter, and I think last quarter was 20%. I feel like that's lower than I know typically what we'd expect for at least a full year for the effective rate. Has it changed at all in terms of what you guys expect? Or is it going to be lower going forward as well?

No, I would say the expectation is still around that 23.5%, which would probably be what we'd see in the fourth quarter. What impacted second and third quarters is part of it is a change in mix with the different tax jurisdictions, but a couple of other discrete items that affected the third quarter, some uncertain tax positions that expired.

And then, I know someone asked earlier about the other income, which you said had a lot to do with intercompany FX transfer. I'm just trying to get a little more color on that. What is being transferred? Why does that end up in other versus maybe the FX impacts not end up in the segments themselves? Can you explain that a little bit?

Yes, this is mostly related to intercompany balances. The U.S. supplies components to our international sites. The international sites have a payable back to the U.S. The balance on that is impacted by currency translation, treated as a transaction loss, which shows up below the line. Other impacts are with the net investment changes flowing through equity, but this flows through below the line.

Okay. That makes sense. And just as a quick one. It seems like just from what I've been reading, that Nebraska is pretty dry this year. I'm not sure if that's right, but you guys are there. But, I also wanted to ask how big Nebraska is as an irrigation market? I know it's pretty big for you guys. So, can you give a percentage in terms of the end market for you?

Chris, I don't have an exact percentage, but it's definitely one of the leading States in terms of pivot irrigation. It is critical for the business.

And has it been pretty dry there this year? It seems like it has.

Yes, throughout parts of the state. I would describe the U.S. as having favorable growing conditions overall, but, like always, you're going to have some variability. It has been very hot and dry in many parts of Nebraska over the last several weeks.

Got it. Thanks a lot.

Your next question will come from Jon Braatz of KCCA. Please go ahead with your question.

Good morning, Brian and Tim.

Good morning, Jon.

Tim, as you look out into next year, what about the incremental foundation for growth costs might we see or benefits, I should say, see in 2021? And then secondly, some of the costs, some of the spending that might be deferred or you might not have seen this year because of COVID-19. Will you begin to loosen up the purse strings as the economy opens up and maybe spend a little bit more on travel and entertainment? Do you see that happening in 2021?

Yes. So Jon, on the foundation for growth, one of the exciting things on a personal side here is we've been able to now move this into part of our culture. So what I mean by that is we're seeing projects coming through the stage gate process moving through again. It will continue into '21 and beyond. It's really part of the continuous improvement culture that we've been working to create in the company. We've had the initial projects come through and you're seeing benefits from that. We've got other projects that will be coming, and we want to continue with that. The second part of your question about the purse strings is that our work-from-home has gone better than we expected. I think there's going to be changes in how we approach business as a result of this. We will do more travel than today, but I don't see us going back to the full extent it was before. I think we've found a tool here that we could use more effectively than maybe we thought of prior.

When you look at all those changes that you see maybe forthcoming, how material are they? What kind of level of spending do you think you might be able to cut relative to before, just because of what you've been learning?

Yes. I would not put it into significant levels. If I'm comparing the two questions you've got here, Jon, clearly the bigger opportunity for us is continuing through the foundation for growth, finding cost savings in our manufacturing or through sourcing, as opposed to continuing to have a lower travel budget.

Okay. Alright. Thank you.

Your next question will come as a follow-up from Joseph Mondillo. Please go ahead.

Hi, guys. Thanks for taking my follow-up questions. Just a few. First, Tim, you sort of talked about how the planting season has been really efficient this year and very early. I missed your follow-on comments related to how that affects the early part of 4Q relative to maybe last year. Could you just repeat your thoughts there?

Well, it's an earlier planting season, which would lead you to anticipate an earlier fall as a result of that. We're seeing it's not as wet of a year this year, which implies the irrigation equipment is working more, which should create an opportunity for more part opportunities, where last year we had a lot of regions that the irrigation equipment just didn't run because there was more rainfall than even people wanted. Those would be the big differences comparing last year to this year.

Last year, the planting season started very late.

It was late and wet.

So I guess just in terms of lateness, do you have a tough comp in the early part of 4Q because the season was so late last year? Maybe some of the demand got pushed into early 4Q, is that a factor at all?

Yes. Joe, this is Brian. I would say it impacted activity more within the third quarter, whereas last year we saw a very strong May. I'd say this year was more balanced throughout the third quarter, but I wouldn't anticipate any of that impacting the fourth quarter at all.

Okay. And then I wanted to ask, just regarding the macro picture, USDA adjusted their estimates earlier this week. That was a big surprise to the markets. Corn prices shot up; soybean prices are back up to $9. What are your thoughts on that? And just generally about farming sentiment, how are you seeing things out there?

Yes. When we consider our domestic business, the recent rise in commodity prices is notable. However, we are currently facing a period of significant uncertainty. There are several unknowns, including the effects of COVID-19, the future of government support programs, and uncertainty surrounding the outcome of the U.S.-China Phase 1 trade deal. Taking these factors into account, we expect to encounter some challenges as we approach the fall selling season.

Okay. Lastly, I just wanted to follow-up on the acquisition that you made, sort of a small acquisition. Could you expand on the strategy there? Is that indicative of what you're thinking? In the past, you've talked about two strategies with M&A, which are technology on irrigation and then trying to leverage your roads around infrastructure. Just focusing on irrigation, it sounds like Net Irrigate is sort of a market share or foot-print play, where you can leverage into places where maybe you're not. Is that sort of the strategy, or are there other options to strategize in terms of M&A within irrigation?

Yes. So, Joe, we see Net Irrigate as an example of what we talked about, expanding technology, not only being able to help create technology, but also increase our position in the market. We think it aligns really well with that strategy. They bring us roughly a 5% market share. Our intent is to transition this business to the FieldNET platform. We really see it right within that category we have discussed, as one of the two sweet spots for us in M&A.

And just to follow on there. Do they have any technology that you do not? Or is it just purely a market share play?

It's a complementary story. They do have some things that we believe will help our offering, but the biggest value they bring to us is this market share that I talked about earlier.

Okay, great. Alright. Thanks a lot. Good luck.

Thank you.

Thanks, Joe.

At this time, there appears to be no further questions. Mr. Hassinger, I'll turn the conference back to you for any closing remarks.

Well, this concludes our third quarter earnings call. Thank you for your interest and participation.

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