Good day, and welcome to the Lindsay Corporation Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

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. 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 projects 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?

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.

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

Good morning, everyone.

Good morning, Nathan.

Hi, Nathan.

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 shifts into the fall? I would have thought that if it was shifting, it would have probably shifted into next spring.

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 the 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. 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, 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 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.

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?

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

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.

Yes, Nathan, this is Brian. Yes, I think first of all, on gross margin, it can vary quarter-to-quarter just due to the seasonality of the business and also can go up and down depending on the project activity. But I would say, over the last few quarters, as the inflationary environment has stabilized, we've seen enhancement as we've gotten the full price realization. I think this most recent quarter reflected more improvement actually in our International business as some of that price realization was a little bit later to curve than what we had seen in North America. But if you look at it across the course of the year, I think gross margins in that 30% to 31% range would be expected. Again, depending on the level of project activity in one quarter or another. If you had a project on the Infrastructure side, obviously, that would drive higher margins. A large project on the Irrigation side might be somewhat dilutive.

Yes, makes a difference. All right, thanks very much for taking my questions. I'll pass it on.

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

Hi, thank you for taking my questions. I would like to follow up on Nathan's question regarding gross margin to clarify. You mentioned that gross margin is in the 30% to 31% range over the past year. Is this sustainable moving forward into fiscal '24 and fiscal '25? Is this above the expectations of analysts?

Yes, Brian, we expect to maintain that. As we've navigated through the inflationary environment and with demand levels increasing, especially internationally, we have observed improvements in both gross and operating margins. Therefore, we anticipate that this trend will continue into next year.

Okay. And then just on margins still. You mentioned that some of this demand could end up shifting into the early fall in the Irrigation segment. And does that potentially help your capacity absorption in that period relative to a normal year where margin could be supported in your fiscal fourth quarter as a result of that or maybe early part of fiscal '24?

Yes. I would think from a margin standpoint, again, with our first quarter, starting in September, somewhat pre-harvest yet. There would be definitely some support if volumes are higher and more likely into the second quarter.

Okay. I have one last question regarding the fact that your irrigation is down more than 20% in the quarter. Could you clarify the factors contributing to this decline and rank them for me? I want to understand what you consider the biggest challenges. I'm thinking about aspects like macroeconomic uncertainty, steel prices, farmers getting a late start, and weather conditions. What do you believe is the most significant factor and how would you rank the others?

Yes. Brian, I can take that one. And I think the headline is really about customer sentiment and profit certainty. And I think a lot of the customers, and I spent a lot of time with them this growing season. The sentiment is, you know what, I'm pretty sure I'm going to be profitable this year. I'm not sure how profitable. And I won't know more until I lock in more of my crop. I get closer to fall harvest and see what yields are going to do. This drought that's kind of moving into Iowa, Illinois, the Eastern Corn Belt right now, that provided some strong short-term support for pricing. If it rains or has rains, the market responds, and you lose a little bit of price. If it gets dry again, you're going to gain a bit of price. So there's so many moving pieces right now if you're a grower, figuring out how to market and sell your crop and what your ultimate profitability is going to be. I think in that environment, those are the big drivers. And I think interest rates, general economic uncertainty, there's a lot of other noise in the market that I don't think contributes directly to the decision, but it's more about that profitability. And I'll wait until the fall when I know I've got my grain sold, I know when my financial position is going to be, I maybe even completed my taxes and know I've got some room to make investments, that's really what we believe we're seeing.

Okay. Thanks very much.

You bet.

Our next question comes from Ryan Connors with Northcoast Research Partners. Please go ahead.

Good morning. Thank you for joining the call. My question is about the relationship between price and volume. Could you elaborate on how they influence each other? I understand that you want to maintain pricing discipline, but do you believe that keeping prices steady in an uncertain environment could lead to some pressure on volume? I'm interested in your perspective on this.

Yes, this is Brian. In the current market environment, price has not been the primary topic of discussion. As Randy pointed out, the uncertainty in the market means that lowering prices won't persuade farmers to make purchases right now. We have been disciplined in our pricing strategy. Regarding Brazil, the delays we’re experiencing with the government transition are largely due to waiting for the announcement of a new financing program. In this scenario, reducing prices will not increase sales, as buyers are holding off until they understand the details of the financing program, which heavily affects their purchasing decisions. Therefore, this is not an environment where price adjustments will lead to higher volume, and we remain committed to maintaining our prices. Additionally, the wait-and-see approach could stem from the hope that prices may decrease if steel costs go down, but we don’t anticipate that happening, given that steel mills are managing their capacity effectively. Thus, we do not expect a significant drop in steel costs in the near future.

I understand. So, Brian, I take it that you're not aware of any other companies that have not adopted a similar approach to maintaining pricing discipline. Essentially, if this strategy isn't effective, I assume the market has remained consistent regarding this matter.

Yes, we're not getting any feedback from our dealers or regional salespeople that we're losing orders based on price. We obviously have the ability to respond if that were the case, but that's not been the case.

Got it. Okay. My other question is about Infrastructure. It seems that leasing revenue is outpacing actual product sales. Is leasing the future for Road Zipper? Is this model gaining traction with more customers, or will it fluctuate over time?

Hey, Ryan, this is Randy. I'll take that one. And there is going to be some ebb and flow, and we've really had a focused effort on lease because lease can be a little more predictable in terms of revenue stream. And when we work on those large sales projects for permanent installation on a bridge like the Golden Gate as an example, there's a pretty long gestation period there, but leasing is really connected to the construction season. That's going to come every summer in markets where we can start to develop those leasing programs. So I think in terms of revenue mix, we're going to see more opportunities in growth in that lease funnel. It's been a very specific area of strategic focus for us, and we do expect that to continue growing. But again, quarter-to-quarter, period-to-period, we could see more of that mix one way or the other depending on what's exiting the funnel at any given time. But leasing should certainly make it a little more smoothing out and make a little more predictable.

Got it. Thanks for your time.

Thanks, Ryan.

Our next question comes from Brian Wright with ROTH MKM. Please go ahead.

Thanks for the question. I wanted to know, you mentioned again about the investment opportunity in the capital position. And just kind of given the current environment, is that creating maybe more opportunity as far as sellers and buyers kind of getting closer to pricing levels? Or we're still in the earlier stages of just looking at the landscape of what's out there?

This is Brian. I'll take that. I don't think it's having necessarily an impact on valuations or pricing. We've indicated before, we see a lot of opportunities in this environment, just coming off of a couple of strong years in the ag market and where we're focused on is in the area of technology and areas that we can continue to build on our capabilities with our technology and increase market penetration of our technology. So the increased level of focus that we've put on it with having Brian Magnusson move into a full-time role in this area, I think that's what creates optimism from our standpoint that we'll see some activity in that area.

Great. Thank you so much.

Our next question comes from Brett Kearney with Gabelli Fund. Please go ahead.

Hi, guys. Good morning. Thanks for taking the question.

Good morning, Brett.

You mentioned this briefly already, but I'm curious about the latest update on how the drought conditions, especially in North America, are affecting your expectations for customer opportunities. Is it more of an incremental opportunity for Lindsay, or might it become too severe in the future?

Sure, Brett. I'll take that one. This is Randy. If you look at the drought maps, you really see Eastern Nebraska, Kansas, just lit up with extreme drought. There's pockets in Iowa and heading now into Illinois, Indiana. And we don't have a large installed base in that Eastern Corn Belt. It's a market that traditionally gets timely precipitation. We do have some seed corn growers that are mandated, heavy irrigation we see there. So the bigger impact is likely on supply disruption. And when we see supply disruption, then we'll see commodity price support. And if you're an irrigator, you've got good yield because you know you've been able to water when you needed it. Now you've got good price support. So in general, what we're seeing now in terms of drought is, in our view, going to be supportive for the business because it's going to be supportive of price. I don't know in my view that I would predict that Eastern Corn Belt market heats up for us. We did see some of that business back in that '12, '13 period during that historic drought in that part of the world. I'm not sure that it's going to get severe enough that it will drive results in the short term, but I correlate it back to strong commodity prices, irrigators are going to have strong yields. That combination is going to prop up farm income, and we feel could be very supportive for the business.

Excellent. If I could add one more question about infrastructure, I know that you've heard from various sources about the challenges transportation projects are facing. I'm aware that you engage with state transportation departments at several levels. I'm curious about the data and feedback you're receiving regarding issues such as labor, construction crews, materials, and the significant bottlenecks related to road safety products.

Yes. The issues you've raised have been significant, particularly with how inflation has affected project flow early on. Some projects needed to be requoted and rebid due to rising costs caused by inflation. We've also noted challenges regarding access to labor and equipment, which have hindered our efforts to utilize funds effectively. Recently, the main hurdle has been the administrative processes and the paperwork required to ensure that money reaches bank accounts for spending. It's a mix of several factors. Like you, we're observing similar trends among public companies in this sector, and our interactions with the Association of Equipment Manufacturers and AED indicate that these challenges are widespread in the industry. The positive aspect is that any new funding is favorable for strong markets. We're prepared to be patient, and we see potential for long-term stability and benefits extending as far out as 2026.

Excellent. Very helpful. Thanks so much, Randy.

All right. Thank you, Brett.

Our next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

Yes. Good morning, and thanks for taking my questions. Initially, I was going to see what you're thinking now about the level of capital expenditure here in '23? And if you can, what's kind of the nature of the projects that are being focused on in that area?

Yes, Bill, it's Brian. For 2023, we're probably going to end up in that $15 million to $20 million range. I think we've been looking across our manufacturing footprint to look at where we can add productivity-type investments. You look at a market like Brazil and our facility in Turkey, where there could be a need for additional capacity expansion. But I would say as we go into 2024, the level of CapEx could pick up as we look at ways to continue to improve our overall efficiency. But this year, we should end up in that $15 million to $20 million range.

Thank you. Regarding the Infrastructure side, I know this has been discussed before, but it has been some time since we had an update. Can you provide an overview or details on how the project Road Zippers fits into the infrastructure programs? Are they meant for use in the early design of transportation systems, or will they be used on a permanent basis? What is the primary purpose of purchasing the Road Zippers?

Yes, no, it's a great question because Road Zipper can be used in a variety of different ways. We talked about the leasing being up, and that's generally going to be used during the construction program. It's a way that construction programs can be facilitated, providing worker safety during the project. So we're seeing an uptick in that, and that's kind of an early indicator of some of the money coming through with IIJA funding too is you'll see that first as the road construction starts. When it comes to a permanent installation, a couple of different things that we think we'll also see opportunities as more substantial projects get planned with expanding roadways, and especially going in and out of a city where you've got the flow of traffic, you could use Road Zipper in a permanent installation to provide flexible lanes. That's an option. And then, the other one has been solving existing congestion issues. The best example is on a bridge that's going into a city. So those are a few examples, and this is a global solution. We've had success in various countries around the world and continue to see opportunities.

Are you finding yourselves able to get in on the early design stage of these permanent projects, these projects that we're talking about here have a more permanent nature? I know that was one of your focuses to try to get on the early design where you get Road Zipper design into the project itself.

Yes, that was really part of that shift left strategy we implemented three years ago or so is really getting a seat at the table so that we could explain how Road Zipper can be used in a variety of different applications.

Is that working well? Is that working for you?

Yes, we're definitely seeing some traction from that.

Super. Okay. Very good. And lastly, just kind of a numbers question here. Can you provide any insight into the delta on the year-over-year on Russia and Ukraine as far as revenue decline? How much of revenue decline came out of those two areas?

We've talked about it in the last couple of quarters. And in the third quarter last year, we completed the backlog of orders that we had. And if you look at it on a year-to-date basis through the first three quarters, it's probably approaching $20 million.

Okay. Thank you very much.

All right. Thanks, Bill.

I would like to turn the conference back over to Randy Wood for any closing remarks.

Great, and thank you for your interest and participation in today's conference call. As mentioned, we're pleased with the underlying fundamentals of our Irrigation segment. And although the spring season did not materialize as projected, our business continues to demonstrate resiliency, as shown by our strong operating margins during the quarter. International project interest remains high, and we're actively quoting several of these opportunities in various regions around the world. We continue to create value with our technology partnership strategy. And we're very excited to see the value of the collaboration with Pessl flow through to our joint customers. The Infrastructure segment is also supported by strong market fundamentals and the incremental funding available through the IIJA. As that funding is released to the market, we believe we're well positioned to capitalize on market growth. This concludes our third quarter earnings call. We look forward to updating you on our continued progress at the end of our fiscal year. Thanks for joining us.

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