Earnings Call Transcript - LNN Q2 2022

Operator, Operator

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Second Quarter Fiscal 2022 Earnings Call. 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. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Randy Wood, President and Chief Executive Officer.

Randy Wood, CEO

Thank you and good morning, everyone. Welcome to our second quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer. I'd like to open today's call by addressing the conflict and humanitarian crisis in Ukraine. We're deeply saddened by the unprovoked invasion of Ukraine and recognize the profound impact these events are having on many around the world. This crisis highlights the conflict between the role we play in feeding a growing world while also making decisions that align with our purpose and business results. On March 14, we announced that we've suspended business activity in Russia and Belarus and will not accept new machine orders for delivery to these markets. We also expect significant disruptions will persist in the Ukrainian market as we are not currently able to supply goods to this region. The combined revenue for both Russia and Ukraine has historically represented less than 5% of our total revenue. Our thoughts are with those impacted by this crisis and we hope peace comes to the region soon. The global pandemic continued to impact our business and create challenges in the quarter. All our facilities remained operational. However, we did see a significant disruption in labor availability in Nebraska in the December-January timeframe as the Omicron variant surged. At times, upwards of 15% of our workforce was absent due to a positive test or mandatory quarantine periods. This impacted our ability to produce and ship in the quarter. But we are pleased to report that the spike has subsided and we were back to normal staffing levels by quarter end. Based on the revised CDC guidelines, we have now lifted restrictions at all facilities in the United States and we officially returned to our offices under a hybrid work model on March 7. We again thank our employees and dealers around the world for their ongoing resilience and focus over the past two years. Turning to the current operating environment. Supply chain and logistics constraints have continued to impact the business. We've seen outside costs for freight, expediting fees and establishing an expanded supply base create additional headwinds that have been partially offset by increased pricing. We also had a nonrecurring maintenance expense and consulting fees that tied to the accelerated implementation of our lean manufacturing strategy at the Lindsay, Nebraska factory of approximately $1.8 million in the quarter. We continue to accelerate our lean journey and have begun implementation of several tools and processes that improve our ability to manage the manufacturing footprint and position us more effectively to respond to the seasonal and cyclical nature of our business. This includes a new enterprise resource planning system, supported by artificial intelligence tools that provide better planning and forecasting capabilities, allowing us to meet customer expectations while maximizing inventory and labor efficiency. Our ongoing lean strategy implementation and new digital tools will continue to expand our global capacity, allowing us to capitalize on growth opportunities around the world while reducing cost and increasing manufacturing safety and efficiency. In the area of innovation, we were pleased to announce our strategic partnership and minority investment in Blyncsy, an emerging leader in the utilization of artificial intelligence and machine learning for connected roadways. This strategic partnership will create a crash notification system that allows users to combine an alert received from Lindsay's RoadConnect platform with a crowd-sourced near real-time image received from Blyncsy’s Payver platform. In our market testing, this has already saved customers time and reduced their cost by allowing them to remotely view roadside assets and gain visual confirmation of an impact before they respond with their maintenance groups. Our investment will support the creation of exclusive features that continue to differentiate RoadConnect in this emerging market. Turning to irrigation market conditions. Supply projections are currently impacted by dry weather in South and North America, where the U.S. job monitor indicates over 50% of the country is currently experiencing moderate to exceptional drought and the ongoing conflict in Ukraine and Russia, key suppliers to the global wheat and corn markets. The USDA released their 2022 net income projections in February. Net cash income is projected to increase by 1.4% to $136 billion. However, in inflation-adjusted dollars, 2022 net farm income is forecast to decrease by $9.7 billion or 7.9%. Increases in commodity prices are projected to be partially offset by significant increases in operating costs, including fuel and fertilizer. This could cap market optimism as customers who haven't locked in their inputs weigh their investment decisions going into the spring season. In International Irrigation, we see the same positive market drivers created by strong commodity prices, supporting growth in developed regions, including Australia, New Zealand, Western Europe and Brazil, where we once again have set shipping records in the quarter. The developing project-oriented markets of Central and Eastern Europe, the Middle East and Africa are also showing signs of continued strength linked to food security and economic diversification. This includes Egypt, where we've concluded shipment of our $36 million project. We continue to be well positioned to compete for and win additional project business in this region. President Sisi announced in late February that his government plans to expand local wheat production by 1.75 million acres over the next two years in response to the food security risk caused by the conflict in Russia and Ukraine, two important markets for Egyptian wheat imports. Moving to infrastructure. On March 10, the first allocations of the infrastructure investment and Jobs Act Funds were approved with the signing of the 2022 Omnibus Appropriations bill. We expect to see the rate of projects increase at the state level as we approach the summer construction season. We are continuing to monitor the impact of inflation as well as supply and labor constraints in the roadway construction sector. Customers have commented their projects could be scaled back or rebid due to cost increases observed between bidding and funding. Overall, we see a positive tailwind but the upside could be constrained by inflation and labor availability. Consistent with our discussions last quarter, we did not see any significant Road Zipper projects exit the sales funnel in the second quarter. However, we do expect to see projects close and deliver in the second half of the year. The project funnel remains robust and projects that had slowed are now gaining speed as we get back to traveling and being present with the customers in the markets we serve. I'll now turn the call over to Brian to review our second quarter financial results.

Brian Ketcham, CFO

Thank you, Randy and good morning, everyone. Total revenues for the second quarter of fiscal 2022 increased 39% to $200.1 million compared to $143.6 million in the prior year quarter. Net earnings for the quarter increased 23% to $14.6 million or $1.32 per diluted share compared to net earnings of $11.9 million or $1.08 per diluted share in the prior year quarter. Irrigation segment revenues for the second quarter increased 52% to $180.8 million compared to $118.6 million in the prior year quarter. North America irrigation revenues of $100.7 million increased 26% compared to the prior year quarter. The increase in North America irrigation revenues resulted primarily from higher average selling prices, while unit sales volume was lower year-over-year due to the impact of the Omicron-related employee absences on production and shipping capabilities in our Nebraska facility. Without the disruption caused by increased employee absences, unit sales volume in the quarter would have been similar to the prior year. In the international irrigation markets, revenues of $80 million increased 108% compared to the prior year quarter. The increase in international irrigation revenues resulted primarily from higher unit sales volumes along with higher selling prices. Revenues in Brazil more than tripled compared to the prior year second quarter and we also completed final deliveries of a large project in Egypt. Total irrigation segment operating income for the second quarter was $24.7 million, an increase of 37% compared to the prior year quarter. And operating margin was 13.7% of sales compared to 15.2% of sales in the prior year. The impact of higher irrigation sales volume was partially offset by the impact of higher input costs that were not fully recovered by higher pricing. Second quarter operating results were also reduced by approximately $2.8 million, resulting from the impact of the LIFO method of accounting for inventory, under which more recent and more expensive raw material costs are recognized in cost of goods sold rather than in ending inventory values. Also impacting the quarter was approximately $1.8 million of nonrecurring expenses related to factory maintenance and outside consulting services that Randy referred to earlier. Infrastructure segment revenues for the second quarter were $19.4 million, a decrease of 23% compared to $25 million in the prior year quarter. The decrease resulted from lower Road Zipper System sales and lease revenue due to delayed projects. This decrease was partially offset by higher sales of road safety products compared to the prior year quarter. Infrastructure segment operating income for the second quarter was $300,000 compared to $6.3 million in the prior year quarter. Current year results reflect lower revenues from higher-margin Road Zipper projects and under absorbed overhead costs. Turning to the balance sheet and liquidity. Our total available liquidity at the end of the second quarter was $143.9 million, with $93.9 million in cash, cash equivalents and marketable securities and $50 million available under our revolving credit facility. Our total debt was $116 million, almost all of which matures in 2030. At the end of the second quarter, we were well within the financial covenants of our borrowing facilities, including a gross funded debt-to-EBITDA leverage ratio of 1.37 compared to a covenant limit of 3.0. At this time, I'd like to turn the call over to the operator to take your questions.

Operator, Operator

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

Brian Drab, Analyst

Hi, good morning. Thanks for taking my questions. First, I just wanted to start with infrastructure. So in terms of Road Zipper projects, it sounds like that still was on pause in the second quarter. What kind of confidence do you have in that picking up? Is that picking up in the second half of this fiscal year or how should we think about that?

Brian Ketcham, CFO

Yes, this is Brian. What I can say is we've got line of sight to a couple of projects. One, I would say, of medium size. And another one, a larger project that we feel have continued to make progress as we've gone through the year. And at this point, I would say we're pretty optimistic that we'll see both of those come through in the second half of the year.

Brian Drab, Analyst

Okay, got it. Okay. And any visibility beyond that for larger projects in fiscal '23?

Randy Wood, CEO

Yes, this is Randy. We can see projects progressing through the pipeline for 2023, 2024, and 2025. One benefit of the shift-left strategy we've implemented is enhanced long-term visibility. The challenge remains timing. Historically, the pace of projects moving through the funnel varies. Now that we have some stability with the Infrastructure Act and decisions are being made, we are once again engaging with customers involved in these decisions and working on appropriations. We have a clear outlook on multiple key projects that we believe will progress into 2023, 2024, and beyond. We feel positive about the pipeline and the long-term prospects for Road Zipper.

Brian Drab, Analyst

Okay, understood. I’d like to revisit the topic of infrastructure margins. Can you explain in more detail what is causing the pressure there and the timing of those factors? Also, could you help us forecast that for the second half of the year? I didn't model it very well for the second quarter.

Brian Ketcham, CFO

Yes. Brian, I think the single biggest driver is going to be the lack of Road Zipper projects during the quarter. So Road Zipper revenue down roughly $8 million in the quarter and that's pretty high margins. So last year, during the quarter, we did have some business with our customer in Japan which we don't have this year. So that's the single biggest issue without any significant Road Zipper business in the quarter. But I would say over the course of the year, I would say the margins in this business, operating margins have been above 20%. And that's still our view going forward, where we would normally be operating.

Operator, Operator

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

Brett Kearney, Analyst

Hi guys, good morning. Thanks for taking my questions. Just wanted to ask the partnership with Blyncsy, kind of the evolution of that collaboration and kind of long term, the opportunities you think that partnership opens up for both you and them?

Randy Wood, CEO

We are focused on enhancing innovative technology in this area. When we discovered their offering, it appeared to be a perfect match. If you are managing a control center at a Department of Transportation and monitoring roads, encountering an issue with a roadside asset typically requires sending someone out, which incurs costs. This may involve two or three trips to assess the asset and potentially retrieve parts. The ability to access an image is a significant benefit to the platform. Now, when you observe the situation, you can retrieve near real-time images sourced from ridesharing services that continuously travel these highways. This capability allows decision-makers to have much more information when deciding whom to deploy and what to send. It was a logical extension of our product line and a strategic fit that excited us enough to get involved. This investment will provide us with exclusive features and facilitate development in key areas for the platform. We are proud of this partnership and believe it will greatly benefit our customers and shareholders.

Brett Kearney, Analyst

Terrific. Thanks.

Operator, Operator

Our next question comes from Nathan Jones with Stifel. Please go ahead.

Adam Farley, Analyst

Good morning. This is Adam Farley on for Nathan.

Randy Wood, CEO

Good morning, Adam.

Adam Farley, Analyst

Could you quantify the deliveries made in the first quarter related to your North America irrigation from the Omicron wave? And do you expect that to be made up in fiscal 3Q '22?

Brian Ketcham, CFO

Yes, this is Brian. We noted an approximate 5% decline in the quarter, which translates to about $4 million to $5 million. We anticipate that these orders will be fulfilled in the third quarter.

Adam Farley, Analyst

And then on international, with the conclusion of the Egypt projects, are there any immediate projects that you would expect to replace this business? Or should we expect to see negative revenue comparisons over the next 12 months?

Randy Wood, CEO

Yes. I think the key part of your question there is probably the definition of immediate. And I think there are several opportunities. We mentioned in our opening comments that President Sisi has been very visible and deliberate about their willingness to invest in wheat production. And if you're a country like Egypt, 70% of the wheat you need comes from Ukraine or Russia right now and it puts them in a precarious position. So I think Egypt specifically, we are going to see some ongoing investments. It's just a matter of timing. There's other projects in the region that we've got visibility of, that we're competing for right now but it's timing. When do they actually get closed, funded and products start shipping. So we could see a bit of a vacuum on the back end of the Egypt project, a $36 million project is going to be tough to replace. So we could see a bit of a drag there. But we do expect longer term, we are going to see more of those projects come through the irrigation sales funnel and fill that gap going forward. Just a matter of when.

Operator, Operator

Our next question comes from Jon Braatz with Kansas City Capital. Please go ahead.

Jon Braatz, Analyst

Good morning, Randy, Brian. I have a couple of questions about the non-recurring costs you incurred this quarter for maintenance and other items. Do you anticipate that these costs will continue into the second half?

Randy Wood, CEO

Yes. Jon, we were not. Both of those were onetime nonrecurring events that we would not expect to carry forward.

Jon Braatz, Analyst

Okay, good. Can you tell us what the contribution from the Egypt contract was in the quarter?

Brian Ketcham, CFO

Yes. It was $10 million in revenue is what we booked during the quarter.

Jon Braatz, Analyst

Okay, good. Randy, can you provide some insights on Brazil? There has been remarkable growth in that market. How much market penetration does center pivot irrigation have in Brazil? Additionally, could you compare it to the U.S.? Your help on this would be appreciated.

Randy Wood, CEO

Sure. I can't provide a specific number, but I can say that Brazil is a crucial market for us due to its access to water, fertile soil, and established distribution networks. Brian and I recently visited and engaged with some of our larger dealers and customers there. While I can't quantify the potential at this moment, we are making significant investments in our capacity and teams to ensure we can take advantage of the opportunities in Brazil, which we believe will continue in the long term.

Jon Braatz, Analyst

Okay. Thank you very much.

Operator, Operator

Our next question comes from Chris Shaw with Crespi. Please go ahead.

Chris Shaw, Analyst

Hey, good morning. Just curious about the LIFO charges in the quarter, they seem to come in less than expected. Is that true? And then if so, was that because of the lower volumes? Or was it because steel prices came back down a bit?

Brian Ketcham, CFO

Yes, it's really driven by the inventory levels, Chris. We were building inventory in the fourth quarter and the first quarter. We also built inventory in North America in our second quarter, but that inventory build is due to higher costs being reflected in the cost of goods sold. If we were using FIFO, it would be added to the inventory cost. As inventory levels decrease in the third quarter, we should see some of that benefit return to us. It's always challenging to predict the timing and extent of the LIFO benefit, but it should come back over time.

Chris Shaw, Analyst

Got it. I'm curious about irrigation pricing. First, how much has the average cost of the system increased, particularly the Pivot system, over the past couple of years? Also, are you noticing any sticker shock from customers? I know they are aware that inflation is affecting prices across the board, so they might be somewhat prepared for that. Have you seen any hesitation from customers in purchasing a system due to the higher costs?

Brian Ketcham, CFO

Yes. I'll address the first part. If you look back to November 2020, that’s when we first increased our prices due to the sharp rise in steel costs. Since then, prices for a Pivot have risen by more than 60%. This increase also applies to some of the additional items needed for a first-time pivot installation. Components like underground pipe and PVC have all seen inflation over the past couple of years.

Randy Wood, CEO

In terms of customer perception, I think we're in a unique position where really everything that a customer is buying these days, whether it's a pickup truck or refrigerator or a pivot tractor or crop inputs, they're seeing inflation on everything. So we don't necessarily stand out for having increased prices. The payback on a Pivot, if you do the math on the yield lift combined with the high commodity prices, the payback period for an investment in irrigation really hasn't shifted significantly even though prices have increased quite a bit. And again, we're fortunate that crop prices and commodity farm income have really kind of followed the inflationary pressures of the other inputs. So I do think that customers are looking at every investment they make right now and whether they stop buying because we've reached a point at which they think the investments are too high. I don't think we're quite there yet but we do see some preliminary indicators in some of the external customer sentiment readings and then indexes that they're really looking at every investment decision that they make quite closely. And again, I think we're in a fortunate position that our payback is as good as it's ever been.

Chris Shaw, Analyst

That makes sense. I have a quick question about infrastructure. Regarding the projects for Road Zipper that you mentioned might be coming soon, can you let me know if those would be leased projects or equipment sales?

Brian Ketcham, CFO

Yes. The one project that I characterized as being kind of a medium size is a combination of lease and sale and then the other one is a sale at this point.

Operator, Operator

At this time, there appear to be no more questions. Mr. Wood, I'll turn the call back to you for closing remarks.

Randy Wood, CEO

Well, thank you, everyone, for your interest and participation today. The irrigation segment of our business continues to be supported by strong commodity prices, farm income projections and project activity in the international markets. The infrastructure segment continues to be impacted by the sustained impact of the global pandemic but there are signs of recovery connected to infrastructure spending and the resumption of travel that will support Road Zipper growth in the second half of the fiscal year. Both segments benefit from continued investments in technology and innovation that create smart machine platforms designed to increase recurring revenue and differentiation that supports customer traction and retention. This concludes our second quarter earnings call. We look forward to updating you on our continued progress following the close of our fiscal 2022 third quarter. Thanks for joining us.

Operator, Operator

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