Q3 2021 Lindsay Corp Earnings Call
Good morning.
My name is Betsy and I will be your conference operator today.
At this time I would like to welcome everyone to the Lindsay Corporation third quarter fiscal year 'twenty 'twenty 1 earnings call.
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During this call management may make forward looking statements that are subject to risks and uncertainties, which reflect management's current beliefs estimates for 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 for 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 call over to Mr. Randy Wood, President and Chief Executive Officer.
Thank you and good morning, everyone welcome to our third quarter earnings call with me today is Brian Ketcham, our Chief Financial Officer.
I'll share some opening comments on our key initiatives and market outlook before turning it over to Brian to review, our third quarter results.
I'd like to acknowledge and thank our employees and channel partners around the world for their continued support of our customers and end users through the global pandemic, particularly those on our manufacturing teams that are keeping our factories running every day.
We have maintained our work from home option for roles that can be performed remotely.
And we continue to be pleased with the productivity of our employees under extraordinary circumstances.
We have created an employee led returned to work committee to help define our work structure going forward.
Future plans will ensure the safety of our employees, while recognizing the importance of culture in person collaboration productivity and the potential for a more flexible office environment.
Moving to manufacturing.
We continue to make strategic investments on our global operations function to improve safety productivity and capacity.
Material increases and supply chain constraints continue to impact the business, we have been able to leverage our sourcing talent and global footprint to maintain production and take advantage of a strong market demand.
Labor availability in the USA and historically low unemployment rates in Nebraska in particular have driven some wage inflation and increased competition for labor, we continue to pass through cost increases and see a rational pricing environment in the market.
In the area of innovation.
Were seeing positive customer feedback from the pilot launch of our road connected platform and the infrastructure segment. This leverages hardware and software from our industry, leading fuel map platform to create a monitoring network for roadway assets that improve safety and serviceability for currently deployed or have commitments for more than 50% of the department of transformation.
Districts across the U S.
In the environmental social and governance or ESG space, we continue to make good progress on many of our initiatives our diversity equity and include your conclusion strategies focused on training and organization development recruiting and talent management community involvement and expanding our global reach has created significant energy and purpose inside.
For the organization.
This summer, we welcomed our largest and most diverse group of individuals into our internship program over 40% of our 2021 class are female and more than 40% are ethnically diverse. This is a great proof point in our effort to increase representation of all genders and underrepresented groups across our businesses, we're very optimistic about the future of our.
Company and our industry with the quality of talent, we've been able to attract.
Turning to the market environment.
North American irrigation remains strong through the key spring selling season commodity prices on net farm income projections remained high and the market remains very active.
Storm activity has been light this year and although dropped conditions across portions of the country have created some supply uncertainty recent rains across the Midwest and western corn belt have provided some temporary relief on <unk>.
I'll start with the growers on the west and northern Plains for drilling with extreme and very difficult drought conditions right now.
In the international irrigation markets, we continue to see sustained strength in both the mature and developing markets and as mentioned earlier, we're making strategic investments on our global footprint to increase capacity that supports current and projected market demand additional investments in Brazil, Turkey, and China, specifically will support opportunities for growth.
Brazil continues to be a very active market, where shipments more than doubled in the quarter versus prior year with a strong backlog going into Q4. This has been a very competitive market and we see some of the same rapid cost escalation here that we've seen in the U S. We continue to manage capacity and pricing actions to support business quality.
Transitioning to the Europe Middle East Africa region.
We have been awarded a $36 million project in Egypt that began shipping in June with deliveries expected to conclude in the second quarter of fiscal 2022.
We are leveraging our global footprint to meet the timing and volume expectations of our customer we see strong long term growth potential in this market and are positioned well geographically on strategically in the region to compete for and win this competitive project business.
Moving to infrastructure.
Following a record year last year, the infrastructure business has experienced a temporary slowdown in project activity as government entities shift priorities to coronavirus response efforts as previously communicated we've had approximately $11 million in anticipated road zipper projects move out of fiscal year 2021, due to COVID-19 related delays.
These projects are still very active and we expect to see those projects closed in fiscal 2022.
We see continued strengthening in the U S Road safety business as we enter the construction season and more regions are returning to pre COVID-19 demand levels, although slower vaccination progress in the international markets continue to limit growth potential in many parts of the world.
There have been several developments and infrastructure policy and federal investment plans last week. It was announced that a bipartisan agreement had been reached on on infrastructure framework valued at over $1.2 trillion dollars.
The potential packaging growth more than $120 billion above the baseline funding for roads bridges major projects and roadway safety day.
By partisan framework, we will focus on climate change mitigation resilience equity and safety for all users, including cyclists and pedestrians and it represents the single largest dedicated bridge investments since the construction of the Interstate Highway system. While there is still work to do we expect this package will create a positive tailwind for the infrastructure business.
<unk> Road Zipper Road safety, and our new technology products.
I'll now turn the call over to Brian to review, our third quarter financial results.
Thank you Randy and good morning, everyone.
Total revenues for the third quarter of fiscal 2021 of $161.9 million increased $38.8 million or 32% compared to $123.1 million in the same quarter last year.
Net earnings for the quarter were $17.8 million or $1.61 per.
Per diluted share compared to net earnings of $10.1 million or <unk> 93 per diluted share in the prior year.
Irrigation segment revenues for the third quarter of $142 million increased $44.7 million or 47% compared to the same quarter last year.
North America irrigation revenues of $87.4 million increased $24.5 million or 39% compared to the same quarter last year.
The increase resulted from a combination of higher irrigation equipment sales volume and higher average selling prices.
This increase was partially offset by lower engineering services revenue of approximately $4.5 million relate.
Related to our project in the prior year that did not repeat.
In the international irrigation markets revenues of $52.8 million increased $20.2 million or 62% compared to the same quarter last year.
The increase resulted primarily from higher irrigation equipment sales volumes in most international markets.
There was also a favorable foreign currency translation impact of $2.3 million compared to the prior year.
Total irrigation segment operating income for the third quarter was $23.9 million, an increase of $8.5 million or <unk>, 55% compared to the same quarter last year.
And operating margin improved to 17, 1% of sales compared to 16, 1% of sales in the prior year.
The improved margins were supported by higher irrigation equipment sales volume and was partially offset by the continuing impact of higher raw material and other costs.
In North America margin headwinds are diminishing as multiple price increases implemented over the past several months are being realized.
However, as Randy mentioned, we have also experienced significant cost increases in Brazil that have compressed margins and we'll continue to do so as we worked through a large backlog of orders.
We expect this margin pressure to continue through the first quarter of fiscal 2022 until price increases on a fully realized.
Infrastructure.
<unk> segment revenues for the third quarter of $21.8 million decreased $5.8 million or 21% compared to the same quarter last year.
The decrease resulted from lower road zipper system sales, which were partially offset by higher road zipper lease revenue and increased sales of road safety products.
The current quarter did not have any significant road zipper sales while the prior year included over $9 million in revenue related to the highways, England project in Japan order.
Infrastructure segment operating income for the third quarter was $3.8 million compared to $8.2 million on the same quarter last year.
And operating margin for the quarter was 17, 3% of sales compared to 29, 5% of sales in the prior year.
Current year results reflect lower revenues, coupled with a less favorable margin mix compared to the prior year.
At this time I would like to turn the call over to the operator to take your questions.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Ryan Connors with falling and Scattergood. Please go ahead.
Great Thanks, and good morning.
Good morning, Brian.
I wonder if.
If you could actually expand on issue you touched on on your prepared remarks, you talked a little bit about.
The wage pressures and then sort of the labor related issues I know that that's an issue that's received a lot of attention.
National agents.
Manufacturing sector, having a hard time.
Kind of keeping keeping good people and so forth can you just expand a little bit and give a little more detail on what youre seeing.
On that front.
Yes, Brian this is Brian.
Early on.
Net demand picked up last fall.
We adapt our adapted with increased overtime and also.
Bringing in workers from outside of the area to help.
Help with the demand on more recently.
I think what we're as we've mentioned.
Wage rate increases we have implemented a wage rate increase in our Lindsay plant.
Part of this is an effort to both recruit and retain people, but also we'd like to be able to reduce our overtime levels.
I would say labor has clearly been at.
Ongoing challenge.
As it is for a lot of other companies.
Okay.
And then my other question just has to do with I think there is.
<unk> is the obvious question I mean, you've got secular growth drivers, but obviously the cyclical dynamics in AG commodities are important.
It just seems like from 1 week for the next there is varying opinions on where we are with the commodities.
And so I'm just curious for your opinion of what kind of staying power you think the cycle has especially.
As it relates to coming off of such a deep and protracted downturn I mean is there enough pent up demand.
To keep things going even if commodities settle down a little bit just your kind of view on on that cyclical dynamic would be helpful.
You bet. Good morning, Ryan This is Randy and I really try to simplify this assessment. This is obviously a question we ask ourselves a lot our investors yourselves ask us I really try and simplify it down to what we see in supply and demand and that's what's really going to support price and net farm income there's a lot of really stable.
<unk> demand drivers right now and we don't project a lot of significant shifts in any of those demand drivers maybe some.
Renewable fuel standard ethanol movement that may not be significant but we've got good stability on the demand side. The only question right now is on supply and then there were some surprises from the USDA acreage report yesterday that took corn and soybeans in on Europe limit upper limit up yesterday also the only potential disruption we've seen the short term.
Is supply going to be shorter than expectations and if it is that's going to sustain a higher crop prices through that through the new crop season, as we get into harvest. This fall. So our line of sight to the fall in profits in the ground today, I think does build confidence going into into the fall selling season, and then we're going to turn right back to what it is.
Spring planting intentions and next year's crop supply situation look like so on the short term I think we can have a lot of competency work on market indicators are telling us beyond that it's going to be tough to know.
This will be on a multiyear run or not we'll have to continue watching both of those supply and demand indicators to make that assessment.
Okay. Okay, and then 1 last 1 just just regionally.
In the U S. I think you did touch on this briefly as well, but can you just kind of give us some more color on.
Kind of where regionally in the U S. You're seeing the real strength or is it just a uniform across the border.
Any granularity there.
There arent a lot of patterns in the data right now that we would say are interesting at all Ryan. We've got we've got strength are almost across the board domestically and internationally right now so it's a unique position to be and we feel very fortunate but there is there is nothing interesting in the data that we can share.
Got it okay. Thanks for your time.
Thank you.
The next question comes from Brian Drab with William Blair. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Good morning.
Hey, good morning, So first on Egypt can you say, who the customer is in Egypt. It seems like there's obviously a lot of.
On a focus on on food.
Food security in Egypt, following the pandemic.
Yes, Youre right, we do see that being a certainly a positive market driver in the region and.
Some confidentiality from a customer's perspective, Brian So yeah, we can't share that with you are we can say it wasn't into the private sector.
But we can't name the specific client.
And you can you say, whether it's the same customer or is that it's not the same customer that belmond.
Serving.
Let me comment on Ken.
I cannot unfortunately.
Okay did you can you say whether you won.
<unk> from a competitor or is this a new completely new project, but we can say that this was a market tender that was a published tender in the market that we were we were victorious on.
Okay.
Okay. Thanks.
And then.
I think I know the answer to this 1 but I'd love to just get any comment on it.
<unk> incremental operating margin was about 20% year over year, 27% sequentially and it's a little lower than historical I guess is that.
Just obviously related to the huge increase in steel prices or any other factors to consider there.
Yes, Brian.
I would say in North America.
During the quarter, we we got close to what we would expect on the incremental margin side I think.
On.
What really where we're seeing more of the dilution right now is on the international side and as we mentioned, particularly in Brazil.
If you look at it on a Q2 day Q2 to Q3.
Basis, I think incremental margins were in that 25% range on a quarterly.
Look or actually a little bit of up to 27%.
So we're making progress in the U S.
Capturing that price realization.
And Brazil is it.
Sorry, if you said, but is it primarily steel or is it wages or all of the above.
It's all of the above obviously steel is the big thing and the other unique thing about Brazil.
Different in the U S is just the <unk>.
<unk> time from quote to delivery.
Because of the government subsidized financing we can quote a project it doesn't go into backlog until it gets the approved financing in.
That whole process can take 6 months from when we quote it.
When it's delivered we obviously try to anticipate where costs are going to be at delivery time, but.
Again with the rapid increase in costs that we've seen that.
And just the large order volume that we're experiencing Brazil in Brazil.
Causing similar margin compression and then as.
What we saw on the first couple of quarters in North America.
Okay, and then can.
Can you.
Comment on how much price contributed to the.
47% growth in irrigation, how many points of growth for associated with price.
Yes, roughly around.
Around 10% year over year.
Okay, and then last Brian do you mind, giving me just the dry land conversion replacement figures yes.
Yeah on the quarter.
Yes for the quarter dry land was up to 33%.
There's about a 500 basis point increase over last year.
Conversion was 28 and replacement 39.
Okay I'll get back on line. Thanks, a lot.
Yeah.
The next question comes from Jon Braatz, with Kansas City Capital. Please go ahead.
Good morning, Randy Bryan.
Good morning, John.
On the international side of the business for Brazil was obviously strong you've got a nice order from Egypt, but can you talk a little bit about the relative strength of.
Other other markets versus sort of Brazil.
And do you see the funding.
Financing remaining in place to extend those gains that we've seen this year into next year and maybe maybe beyond do you see that.
The ability of.
International International growth to sustain itself and sort of the non Brazil markets.
Yes.
Yeah, I'll take that 1 John we really seen and we mentioned it in our comments there arent a lot of trend differences when we look at our international business around the world and we often look at this between the mature and developing or the mature and project oriented markets and there are significant trends in the data that show that 1.
And is driving growth more than the other.
Again, we're not we're in a unique position where all markets are riding growth trends and it's for different reasons for food security population growth issue. Some of those longer term drivers are certainly impacted most developing markets strong commodity prices are impacting those mature markets like Australia, New Zealand on Brazil, and Western Europe. So we don't see.
A lot of differences that are that are interesting right now and for different reasons again, where we're seeing growth in all of those.
How long it sustains itself and are those growth rates going to sustain or increase we continue to see good long term market drivers in those markets. So predicting whether the rate for the slope of the line will increase decrease is maybe difficult to do right now, but we do believe in the long term growth and potential in <unk>.
The mature and developing markets internationally, okay. Okay. Thank you Brian.
Excuse me.
Backlog is up.
Rather significantly mentioned some supply chain issues and so on.
How much of an influence or how much.
Did those those issues impact.
The backlog number.
Is it significant.
I wouldn't say because of <unk>.
Delivery constraints or anything like that John.
Lead times, obviously is extended but.
Both domestic and international backlogs are up obviously.
Biggest increase is related to the 36 million.
<unk> project, but.
If you look at Brazil that backlog is up more than double what it was a year ago, but it's the backlog is up in all of the international regions in North America.
At the end of the spring selling season, but the backlog is still up year over year.
Okay.
Extended all the lead times on all versus maybe a year ago.
In the U S I think.
The volume seasonal volume drops off I think the lead times are getting shorter again.
Kind of more in the.
Traditional.
Let's say 3.3 to 4 weeks type of timeframe are okay, but.
Brazil, obviously as I mentioned some of the.
Longer lead times, there you could go 5 or 6 months.
So it varies.
From different parts of the world.
Alright, Brian Thank you very much.
Thank you.
The next question is from Nathan Jones with Stifel. Please go ahead.
Hey, Good morning, this is Adam Farley on for Nathan.
Good morning, Adam.
I was wondering if you could help us with the cadence of the Egypt project.
Is it going to ramp up once you start shipping in June or should it be more evenly split.
Yes. This is Brian I would think about it this way $36 million project.
Really spread over the next 3 quarters.
Weighted probably more heavily to the fourth quarter first quarter of <unk>.
<unk> 2022.
With the remainder going for the second quarter.
Okay. Thanks, and then shifting over to the infrastructure business.
Could you just provide an update on on the road Zipper project funnel.
And maybe any additional color on on when do you think some projects are going to begin to convert thanks.
You bet, we're still very pleased with the shift left strategy that we've deployed in road zipper and we continue to put projects into the funnel. We continue to manage projects through the funnel and in terms of total dollars, we see a lot of stability and slight growth overall.
The tricky part is exiting the funnel and as we commented in our opening we do have a couple of very specific ones that we had projected would exit in fiscal year 'twenty..1 that we now have confirmed will move to fiscal year 'twenty..2 so we view on 'twenty to US is an important year with gross project deferrals coming out and then any new business that we had been.
Rating and expect to deliver in 'twenty, 2 being there as well so 2022 will be there will be the key year for us.
Thanks for taking my questions.
You bet.
As a reminder.
If you have a question. Please press star then 1 to be joined to the queue.
The next question comes from Chris Shaw with <unk> Crespi. Please go ahead.
Hey, good morning, everyone. How are you doing.
Chris Good morning follow up on infrastructure I was going to ask about the road zippers, but the other.
On a piece of infrastructure I know sort of highlighting that it's been still sort of.
Slower because of.
Just getting back to construction projects getting back out for Covid and all.
So we would do you think I guess, you would expect that piece to grow as well in 2022, but I was curious.
Is there any sort of dynamic around when you get these infrastructure bills do.
The spending or the.
A decision on spending on decision on projects just take a back seat for a while until that bill actually or that law or funding gets passed and it's available on you know everybody's kind of wait and see or it does.
Our projects are in safety.
Infrastructure.
It's still going to be selling next year and that doesn't matter that much.
Yes, there is a combination of both and we've talked previously about the notion of the market freezing and if you know that there is some money program on coming along sometime in the future you might defer delay and hold off on some projects until that money is there, but our view.
Right now Chris is there is enough money in the funnel natural demand from construction season states returning to normal or conditions in terms of tenders being let and getting the work done getting people back to work. So there could be an element of market free is happening is that in.
Infrastructure plan makes its way through the approval process, but we don't view that as being a significantly impactful because there is enough for other funding and money.
In the system to fund the investments and the upgrades that need to be made right now so not a not a significant market freezes as you might assume that there'll be some activity in the market.
So you would anticipate both sides of the infrastructure business, both road zipper, Ed sort of safety products growing next year.
There is positive market drivers for both and obviously the road safety business and those projects are going to turn a little quicker and there is going to be more of those are road zipper. It. Our view is it's not going to speed up road zipper implementation those are still longer term and more complex projects, we do see a terrific fit for the infrastructure.
For your money on when they focus on safety for <unk> and cyclists, we've got an application for that when they focus on increasing capacity and safety and reducing carbon footprint, we've got a product or solution for that so we do view both for our road safety and road zipper impacting from for many increases in infrastructure spending.
On for different reasons on potentially on different timelines, but we do think it's obviously a good tailwind for the infrastructure business as a whole.
Great. Thank you well done.
You bet.
At this time there appears to be no more questions. Mr. Wood, I will turn the call back over to you for closing remarks.
Well. Thank you again for your interest and participation today, we remain optimistic about the growth potential in our global irrigation business strong commodity prices and farm income projections will continue to be a tailwind in the mature established markets and we expect food security concerns on population growth will continue to sustain the international project business.
<unk>.
We're uniquely positioned with a broad manufacturing and commercial footprint that provide strategic access to all global markets and a growing technology and innovation platform that allows growers to operate more sustainably efficiently and profitably for it.
For structure segment, we see a return to normal in the North American Road safety market with other international regions expected to show recovery in 2022, while road zipper projects have faced short term headwind due to specific project delays, we're still positioned very well with a highly differentiated solution that improves transportation safety and mitigation traffic congestion.
Lowering emissions and improving air quality.
New technology penetration opportunities and the pending infrastructure investment package create additional tailwind supporting the infrastructure business.
This concludes our third quarter earnings call. We look forward to updating you on our continued progress following the close of our fiscal 2021 fourth quarter. Thank you for joining us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.