Earnings Call Transcript - LNN Q1 2023

Operator, Operator

Good morning. My name is Joe, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Fiscal Year 2023 First Quarter Earnings Call. All participants will be in a listen-only mode today. 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 and 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 for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Please do note that today the event is being recorded. I would now like to turn the call over to Mr. Randy Wood, President and Chief Executive Officer.

Randy Wood, President and CEO

Thank you, and good morning, everyone. Welcome to our fiscal 2023 first quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer. We were pleased to start our fiscal year strong, delivering revenue growth and earnings that more than doubled compared to last year’s first quarter. I’d like to thank our employees, dealers, and suppliers around the world for their contributions. The relentless focus on our customers and execution of our business strategies continues to generate positive results for our shareholders and supports our mission of conserving natural resources, expanding the world’s potential and improving quality of life. I continue to be very proud and appreciative of the job they are doing. Looking at the macro environment, we continue to see supply chain constraints impacting certain areas of our business. Our teams have done a great job mitigating the impact of these challenges and we expect to see continuous improvement in the situation as the year progresses. Overall inflationary pressure on raw materials and other input costs have moderated. Price realization remains strong and even in a competitive market, we remain disciplined in our approach to passing cost increases through to the market. In the area of technology and innovation, we were pleased to recently announce our strategic partnership with Ceres Imaging. This addition to FieldNET expands our Smart Pivot platform and provides our customers additional choices and sources of high-resolution imagery and analytics to help them make the best agronomic decisions for their crops. Allowing flexibility in customer choice is a fundamental part of our imagery strategy and we anticipate additional strategic partnerships in the future. Turning to irrigation market conditions, we continue to see strong market fundamentals in the North American market, including high commodity prices leading to record net cash farm income in 2022. Drought conditions have eased somewhat in the far west, but we are seeing conditions worsen year-over-year in the core Midwest markets, including Nebraska and Kansas. This highlights the importance of irrigated agriculture and should be supportive of a strong market. Customer sentiment is cautious at this stage due mainly to future concerns about profitability of the 2023 crop and rising interest rates. This may temper market upside, but we don’t expect this to create a significant headwind at this time. In the international regions, we see the same strong market fundamentals connected to global commodity prices and farm income having a positive impact in the developed markets, particularly in Brazil. The presidential transition in Brazil has resulted in some market latency that may delay second quarter deliveries, but we don’t expect it to impact our full year results. Project activity and visibility across Central Asia and the Middle East continues to be strong, the timing of execution is difficult to predict, but we are pleased with what we see in the market and our ability to leverage our global footprint to compete for and win these projects. Moving to infrastructure, we expect to see the positive impact of the Infrastructure Investment and Jobs Act in the Road Safety business. November year-to-date state and local government contract awards for highway and payment projects are up 24% compared to a year ago, supporting an increase in construction activity in the second half of our fiscal year. The full impact of this increase is being somewhat offset by inflation in construction costs. We continue to actively manage the Road Zipper sales funnel and completed shipment of our large project in Massachusetts in the first quarter. Our global teams continue to identify applications for the Road Zipper in both permanent installations and temporary lease applications to help mitigate traffic congestion and provide positive protection during roadway construction. I will now turn the call over to Brian to review our first quarter financial results.

Brian Ketcham, Chief Financial Officer

Thank you, Randy, and good morning, everyone. Total revenues for the first quarter of fiscal 2023 increased 6% to $176.2 million, compared to $166.2 million in the same quarter last year. Net earnings for the quarter were $18.2 million or $1.65 per diluted share, compared to net earnings of $7.9 million or $0.72 per diluted share in the prior year. Irrigation segment revenues for the first quarter increased 4% to $152.1 million, compared to $145.9 million in the same quarter last year. North America irrigation revenues of $83.9 million increased 6% compared to last year’s first quarter. The increase in North America irrigation revenues resulted primarily from higher average selling prices as unit sales volume was comparable to the prior year. In the international irrigation markets, revenues of $68.1 million increased 2% compared to last year’s first quarter, including unfavorable effects of foreign currency translation differences of approximately $1.6 million. Higher sales in Brazil and other markets more than offset the impact of lower sales in Ukraine and Russia, as well as Egypt project sales of $9 million in the prior year that did not repeat. Total irrigation segment operating income for the first quarter was $28.6 million, an increase of 66% compared to the prior year first quarter and operating margin was 18.8% of sales, compared to 11.8% of sales in the prior year first quarter. 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 first quarter. The prior year first quarter included LIFO expense of $5 million, while the current year LIFO impact was minimal. Infrastructure segment revenues for the first quarter increased 19% to $24.1 million, compared to $20.2 million in the same quarter last year. The increase resulted from higher Road Zipper System project sales, which were partially offset by lower Road Zipper lease revenue and lower sales of Road Safety products compared to the prior year. During the quarter, we delivered the remaining $8 million of the $24 million barrier replacement project in Massachusetts that began in our fiscal fourth quarter last year. Infrastructure segment operating income for the first quarter increased 22% to $3.4 million, compared to $2.8 million in the same quarter last year. Infrastructure operating margin for the quarter was 14% of sales, compared to 13.7% of sales in the prior year. Improved current year results resulted primarily from higher revenues and less inflationary impact on input costs compared to the prior year first quarter. This increase was partially offset by a less favorable margin mix of revenues compared to the prior year first quarter, because of lower Road Zipper lease revenue. Turning to the balance sheet and liquidity, our balance sheet remains solid and our total available liquidity at the end of the quarter was $160.6 million, with $110.6 million in cash, cash equivalents and marketable securities, and $50 million available under our revolving credit facility. Through an ongoing focus on working capital management, we expect to improve our free cash flow generation in fiscal 2023 and further enhance our position to invest in growth opportunities that create value for our shareholders. At this time, I would like to turn the call over to the operator to take your questions.

Operator, Operator

And our first question will come from Tyler Hutin with William Blair. Please go ahead.

Tyler Hutin, Analyst

Hey. Good morning. Thanks for taking my question.

Randy Wood, President and CEO

Hi, Tyler.

Tyler Hutin, Analyst

I was just wondering if you could start off with any updates on larger projects internationally in irrigation and then I have one more follow-up.

Randy Wood, President and CEO

Sure. I will cover that one, Tyler. As we said in the script, the timing of confirmation, the timing of execution is always difficult to predict. So really we focus on the number of opportunities that we see and right now there is a robust funnel linked to food security and population growth. We have talked at different times. The pandemic really accelerated a lot of discussions in different parts of the world on improving food security for many governments and countries around the world. So we are pleased with what we see in the funnel, but it is difficult again to predict when we are going to see those confirmed and start delivering, but the funnel is strong.

Tyler Hutin, Analyst

Right. Thank you for confirming that. And then in infrastructure, with the number of small- to mid-sized projects for fiscal 2023, how would that stack up against that one large project in Massachusetts for fiscal 2022? Thank you.

Brian Ketcham, Chief Financial Officer

Yeah. Tyler, this is Brian. I would say, what we see is an increase in the leasing part of our business in probably the second half of the year as the construction season gets underway and then as we said before, some smaller and medium-sized projects on the Road Zipper projects side of the business. In total, Road Safety products, we expect some growth, so year-over-year, we expect to be able to offset that Massachusetts project with growth from some of the other areas.

Tyler Hutin, Analyst

Okay. Thank you for the color on that. That’s all I had for today. Thanks.

Operator, Operator

And our next question will come from Ryan Connors with Northcoast Research. Please go ahead.

Ryan Connors, Analyst

Good morning and congrats on super results there to everyone on the team. So, it looks like what we saw here is pricing really holding up very well as some of the inflation moderates. So I guess my question is that jump in the gross margin, how should we be thinking about that going forward, obviously, you never want to be on a call like this telegraphing any kind of negative price. But how should we think about price cost and sustainability as inflation moderates and we are up at this kind of margin level?

Brian Ketcham, Chief Financial Officer

Yeah, Ryan, this is Brian. At the end of the first quarter, we saw a significant year-over-year increase. A large part of that can be attributed to the negative LIFO impact we experienced last year, which was less significant this year. Even when excluding that and the dilutive effect of the Egypt project from last year, we still achieved strong incremental margin improvement. Since the third quarter of last year, we have been able to realize full pricing, even though there has been some noise related to inflation. However, in both North America and Brazil, we've experienced margin expansion due to strong demand as we’ve navigated through inflationary pressures. We're actively seeking additional opportunities to improve productivity and continue growing margins. Overall, we are quite pleased with our progress so far.

Ryan Connors, Analyst

Okay. My other question is about the situation in 2022, specifically looking at the fiscal year. You experienced a significant impact from storm damage and subsequent replacement demand. Can you explain how this will influence 2023, particularly how much it contributed in 2022 and if there's any way to quantify that? Additionally, I've heard discussions about some insurance carriers withdrawing coverage for pivots due to the increased frequency of claims stemming from storm damage. What are your thoughts on how this might affect customer purchasing decisions in the future?

Randy Wood, President and CEO

We can address both of those points, Ryan. When considering the impact of storm volume from last year, I’ll let Brian provide more detail after I finish. We are certainly facing a challenging comparison in our fiscal fourth quarter. Typically, we plan for some storm damage in our volume forecasting and supply chain and labor planning, but last year was particularly extraordinary, especially in the fourth quarter. I'll let Brian quantify that. As for insurance, we've been engaged in discussions with various insurers and reinsurers in the industry. There is a natural ebb and flow, similar to what we observe in the residential insurance market during disasters in certain regions. Currently, we believe there will always be a market with someone willing to provide necessary coverage. Even if the economics of insurance premiums change slightly, when we consider that as part of the total cost of ownership against the advantages of irrigated agriculture production, we may notice some hesitance, but we don't perceive it as a major headwind. Irrigation will continue to be essential in many areas of the country, and we do not see any additional insurance costs causing significant negative sentiment at this moment. Brian, could you provide your insights on storm quantification?

Brian Ketcham, Chief Financial Officer

Last year, in our fourth quarter, we noted that the exceptional storm damage resulted in around $15 million in revenue. This year, we expect to return to a more typical storm season. However, given the recent changes in weather, we are keeping an open mind about potential variations.

Ryan Connors, Analyst

Understood. Very helpful. Thanks for your time today.

Randy Wood, President and CEO

Thanks, Ryan.

Operator, Operator

And our next question will come from Brett Kearney with Gabelli Funds. Please go ahead.

Brett Kearney, Analyst

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

Randy Wood, President and CEO

Hi, Brett.

Brett Kearney, Analyst

With the new partnership with Ceres Imaging, I'm curious about the option you are offering to customers. I assume that will primarily be focused on the North American market at least initially. What are your thoughts on the longer-term opportunities? Do they have the capabilities to enter other developed irrigation markets internationally, such as Brazil and Western Europe? How does the demand in those regions compare to the North American market for a solution like this?

Randy Wood, President and CEO

Yeah. Brett, we would say that the initial opportunities are going to be largely focused on North America and when you look at technology adoption in general for irrigated acreage telemetry coverage, it’s certainly the penetration rates are higher in North America. So we do see that being a short-term opportunity. The good news on technology like this is it is incredibly scalable and I think the ability for us to leverage our channel, leverage our current installed base does create some significant opportunities. Imagery is really in the early innings in our view, and there are a lot of regional strengths even if you look at just the North American market that some companies are stronger in some parts of the country relative to others. So that’s really a key part of our strategy to offer choice for our customers and we are very excited about what Ceres is going to do for our customers and we do see some growth opportunities. But we will start in our view, with a strong base here in North America.

Brett Kearney, Analyst

Sure. Thanks. Thanks so much, Randy.

Randy Wood, President and CEO

You bet, Brett.

Operator, Operator

Our next question will come from Brian Wright with ROTH Capital. Please go ahead.

Brian Wright, Analyst

Yeah. Thanks. Good morning. I was just hoping you could provide a little more color on just the backlog and you said it was kind of impacted both segments. Is there a way to think about it, North America versus South America and then just magnitude kind of comparing the segments and the backlog changes?

Brian Ketcham, Chief Financial Officer

Yeah. Brian, when you look at the year-over-year comparison, I would say last year’s backlog, both in North America and in Brazil primarily were driven by still having some pretty significant price increases, which generally pulls volume forward into the backlog. I would say where we are at this year with more stability in inflation and in our prices, it's reverted more to the traditional kind of selling season and the timing of the backlog. So that’s the biggest thing year-over-year, which is affecting both North America and international backlog there. And on the infrastructure side, I think as we end our first quarter, we are into the winter, the construction season is really winding down. So that backlog is typically pretty low at the end of November. So nothing significant from our view and what that means for future results, which result, we have always said the backlog isn’t necessarily the strongest indicator of what the next couple of quarters are going to look like.

Brian Wright, Analyst

Great. Thank you so much for that clarification. Thank you.

Operator, Operator

Our next question will come from Chris Shaw with Monness Crespi and Hardt. Please go ahead.

Chris Shaw, Analyst

Hey. Good morning, everyone. In the irrigation segment, could you share the volume growth and pricing growth for the quarter?

Brian Ketcham, Chief Financial Officer

Yeah. So we said the volume was comparable to last year, so pretty much flat. I think that the pricing is probably in that 7% to 8% range and then there’s some other changes that brought the overall down to 6%.

Chris Shaw, Analyst

Got it. In infrastructure, regarding the new Road Zipper machine introduced this week, I noticed that you now have two machines available, named Gemini and Titan. I’m unsure about the specific differences between them, such as their applications or intended customers, and whether one is meant for leasing or purchasing. Could you provide more details on that?

Brian Ketcham, Chief Financial Officer

We have always offered different models of the Road Zipper based on the application. In a leasing situation, often part of a construction project, the model may not come with all the features that a permanent installation would have. From a branding perspective, we have introduced two brands as we revamped and redesigned the Road Zipper machine. However, we have always had multiple variants, including a specific model for Japan and another for Hawaii that can move the barrier between two lanes. So, this isn't new. The major update was the redesign and the addition of new features to the machine.

Chris Shaw, Analyst

The newer machine that’s not like, it doesn’t expand the market, you don’t have like a new customer base. It wasn’t anything like that. It was just sort of an iteration of the old one?

Brian Ketcham, Chief Financial Officer

Yeah. I would say primarily. I mean, I think, it’s something that we think from a marketing perspective might drive some additional interest, but nothing game changing, I don’t think.

Chris Shaw, Analyst

Great. Thanks a lot.

Operator, Operator

And with no further questions, we will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Randy Wood for any closing remarks.

Randy Wood, President and CEO

Thank you all for your interest and participation today. We are very pleased with our first quarter results and look forward to carrying that momentum through 2023. The Infrastructure segment continues to be supported by incremental funding provided by the Infrastructure Investments and Jobs Act. The irrigation segment continues to see strong near-term fundamentals due to elevated farm income and longer term secular drivers connected to food security and population growth. The positive ROI provided by an investment in irrigated agriculture will continue to support strong markets around the world. Both segments benefit from ongoing investments in innovative technologies that improve customer profitability while conserving resources and making our roadways safer. This concludes our first quarter earnings call. We look forward to updating you on our continued progress following the close of our fiscal 2023 second quarter. Thanks for joining us.

Operator, Operator

The conference has now concluded. Thank you very much for attending today’s presentation. You may now disconnect your lines.