Q2 2022 Lindsay Corp Earnings Call
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.
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Please note. This event is being recorded I would now like to turn the conference over to Mr. Randy White, President and Chief Executive Officer.
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, we're 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 14th we announced that we 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 is 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 piece comes to the region.
The global pandemic continue to impact our business and create challenges in the quarter all of our facilities remained operational however, we did see a significant disruption and labor availability in Nebraska and the December January timeframe is the AMR crime variant searched.
At times upwards of 15% of our workforce was absolutely due to our positive test or mandatory quarantine periods. This.
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 seven.
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 tied to the accelerated implementation of our lean manufacturing strategy.
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 our 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.
Our ongoing lean strategy implementation of new digital tools will continue to expand our global capacity, allowing us to capitalize on growth opportunities around the world, while reducing costs and increasing manufacturing safety and efficiency.
In the area of innovation, we were pleased to announce our strategic partnership and minority investment in blank C and emerging leader and 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 Wednesday's broke connect platform with the crowd sourced near real time image received from the <unk> payroll platform.
And our market testing this is already save customers time, and reduce their cost by allowing them to remotely view roadside assets and gain visual confirmation of an impact before they respond with their maintenance crews are investment will support the creation of exclusive features that continue to differentiate road connects 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. Drought 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 one 4% to $136 billion. However in inflation. Adjusted dollars 2022 net farm income is forecast to decrease by $9 7 billion or seven 9%.
Increases in commodity prices are projected to be partially offset by significant increases in operating cost, including fuel and fertilizer.
This current cap market optimism as customers, who haven't walked into your inputs way their investment decisions going into the spring season.
And international irrigation, we see the same positive market drivers created by strong commodity prices supporting growth in the developed regions, including Australia, New Zealand, Western Europe , and Brazil, where we once again have set shipping records in the quarter the.
The developing project oriented markets of central and Eastern Europe 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.
<unk> Cc announced in late February that his government plans to expand local wheat production by 175 million acres over the next two years in response to the food security risks caused by the conflict in Russia, and Ukraine, two important markets for Egyptian with imports.
Moving to infrastructure.
On March 10th 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 increased 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 that 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.
Project funnel remains robust and projects. The head slow are now gaining speed as we get back to traveling and being president with the customers and the markets we serve.
I'll now turn the call over to Brian to review, our second quarter financial results Brian .
Thank you Randy and good morning, everyone.
Total revenues for the second quarter of fiscal 2022 increased 39% to $201 million.
Compared to $143 6 million in.
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 <unk> per diluted share in the prior year quarter.
Irrigation segment revenues for the second quarter increased 52%.
$180 8 million compared.
Compared to $118 6 million in the prior year quarter.
North America irrigation revenues of $107 million increased 26% compared to the prior year quarter the.
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 the 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.
<unk> 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 an 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 road safety products compared to the prior year quarter.
Infrastructure segment operating income for the second quarter was $300000 compared to $6 $3 million in the prior year quarter.
Current year results reflect lower revenues 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 in 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 our gross funded debt to EBITDA leverage ratio of 137 compared to a covenant limit of 3.0.
At this time I would like to turn the call over to the operator to take your questions.
Thank you.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble the roster.
Our first question comes from Brian Drab with William Blair. Please go ahead.
Hi, good morning, Thanks for taking my questions.
First I just wanted to start with it infrastructure.
In terms of road zipper projects it sounds it sounds like that's 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.
Yeah. 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 debt 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.
Okay got it.
Okay, and any visibility beyond that for larger projects in fiscal 'twenty three.
Yeah. Good morning, Brian . This is Randy we do have visibility of projects are moving through the funnel that are 23 $24 25, one of the advantages of the shift left strategy that we've implemented here is better long term visibility in there.
The tricky part is always win than you've seen these projects move through the funnel historically some are faster than others. I think now that we've got some stability in the infrastructure Act. We've got some decisions being made we're able to be at the table again with customers that are making these decisions and working through appropriations. So we do have good long line of sight.
A long line of sight on several key projects that we do feel we'll be in that 'twenty three 'twenty four and forward looking periods. So fuel I feel good about the funnel and some of the long term opportunities for road zipper.
Okay got it and then.
Just one more topic I want to stick on FERC or go back to here is the infrastructure margins can you just explain it a little more detail what what is the what's causing the pressure there and just the timing of those factors and maybe try to help us model that for the second half of the year because I.
We didn't model it very well for the second quarter.
Yes, Brian I think.
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 is at.
Pretty high margins last year.
During the quarter, we did have.
Some business with our customer in Japan, which we don't have this year so.
Yes.
The single biggest issue without any significant.
<unk> business in the quarter, but.
I would say.
Over the course of the year I would say margins in this business operating margins have been above 20% and that's still our our view going forward, where we would normally be operating.
Our next question comes from Brett Kearney with Gabelli. Please go ahead.
Hi, guys. Good morning, Thanks for taking my question.
Just wanted to ask on the partnership with Blink see.
Kind of the evolution of that collaboration and kind of long term the opportunities do you think.
That partnership opens up for both of you on them.
We really look to expand innovation and technology in this space and when we came across their offering it seem like a natural fit and you can imagine if you're running a control center at a department of transportation monitoring roads and you see that you have an impact on our roadside asset right now you've got to send somebody.
To look at that and that's cost than you might have two or three trips out to view that asset to look at it to take some parts back also the ability to pull in or an image.
Was there an incredibly powerful addition to the platform. So now you see the impact you can pull up an image and these we call them near real time images. They are pulled from ridesharing services that are driving by on these highways all of our all day all my long so the ability to pull that image in near real time pull it into the platform and now the person, making the decision on who I'm going.
Deploy what I'm going to deploy they've got a lot more information available to them. So it seemed like a natural extension of the product line a good strategic fit and we were excited enough by what we saw that we wanted to have a stake in the game. So the investment will allow us to get some some exclusive features it'll drive development in some pretty important areas for that.
Platform. So it's a relationship we're proud of and one that we think is going to be very good for customers and shareholders.
Terrific. Thanks, so much Randy.
You bet.
<unk>.
Our next question comes from Nathan Jones with Stifel. Please go ahead.
Good morning, This is Adam Farley on for Nathan.
Good morning, Adam.
Okay.
Related to your North America irrigation.
Could you quantify.
The deliveries.
We're able to be made in the.
The first quarter from the omni con ways and do you expect that to be made up in.
Fiscal 'twenty two.
Yes. This is Brian .
Yes that was.
We said roughly 5% down in the quarter.
And if you quantified it as probably $4 million to $5 million.
Is what.
That translates into and we would expect that those orders will be fulfilled in the third quarter.
Okay. Thank you.
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.
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 her opening comments. The presidency. She has been very visible and deliberate about their willingness to invest in reproduction and if youre a country like Egypt, 70% of the week you need comes from Ukraine or Russia.
Right now and it puts them in a procured is positioned so I think Egypt, specifically, we are going to see some ongoing investments. It's just a matter of timing theres other projects in the region that we've got visibility of that we're competing for right now.
But it's timing when when do they actually get closed funded and products start shipping. So we could see a bit of a vacuum on the backend of Egypt project $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 our NGL that gap going forward, just a matter of our win.
Our next question comes from Jon Braatz, with Kansas City Capital. Please go ahead.
Good morning, Randy Bryan.
Couple of questions.
Those sort of a not undone.
Unquote nonrecurring costs that you incurred in the quarter.
For maintenance and other.
Other other thing other items.
Do you expect that to continue into the second half.
Yes, John we were not both of those were one time nonrecurring events that we would not expect to carry forward. Okay. Okay. Good okay and can you.
Brian can you tell us what the what the.
Contribution from the Egypt contract was in the quarter.
Yes, it was.
$10 million in revenue.
<unk>.
Book during the quarter, Okay. Okay. Good.
And then Randy a little bit on the on the Brazil.
<unk>.
Obviously, Brazil scene.
They're very strong growth, what kind of penetration to center pivot irrigation have in that country and you know maybe you can if you can describe it relative to the U S.
If you can you can help us out with that.
I don't have an exact number or <unk> number I can share with you John but I can tell you when we look at growth potential we do see Brazil is one of the key markets in the world for us in terms of availability of water. Good productive soil are mature distribution systems I know, Brian and I were both there are a couple of weeks ago working.
Where some of our larger dealers and their larger customers and it's definitely one I can't put a number or percentage and quantify it for you. Unfortunately right now, but it is one where we continue to make significant investments in our capacity and in our teams to make sure. We can capitalize on that opportunity because we do see that continuing for the foreseeable future. Okay. Thank you very.
<unk>.
You bet.
Again, if you'd like to ask a question. Please press Star then one at this time.
Our next question comes from Chris Shaw with Credit Suisse. Please go ahead.
Morning, everybody.
Alright, Alright, I was curious about the LIFO charges in the quarter they seem to come in less than expected.
Is that true and then if so is that because of the lower volumes or was it because steel prices came back down a bit.
Yes, it's really driven by the inventory levels, Chris and.
We were building inventory fourth quarter first quarter still built inventory in North America, and our second quarter, but that's really it.
That inventory build is because those higher costs are being flushed through cost of goods sold whereas.
We were under FIFO that would be capitalized as part of the inventory costs. So we should see as inventory levels come down in the third quarter, we should see.
Some of that come back to US is it's always difficult to predict.
How much and when the LIFO benefit comes back it should over time.
Got it and then.
Curious.
For irrigation.
<unk> had to take pricing.
I'm curious two things I guess, one what what's the average cost of our system gone up maybe over the pivots system over.
Past couple of years, and then has it or are you getting any sense of sticker shock yet from customers or is it I mean I know.
They're all aware of that.
Inflation is pretty rapid across all things so their condition.
In addition to that have you seen any sort of I guess people getting.
Cold feet and buying a system because it's gotten more expensive.
Yes, I'll take the first part of that.
If you go back to I think it was November of 2020 as win.
Our prices went up in relation to the rapid increase in steel costs in <unk>.
Ben.
Prices have gone up I would say, 60% plus in terms of the cost of the pivot.
The same thing is true on some of the ancillary items that as debt.
That would.
Take place if you were to install a pivot for the first time so.
Underground pipe PVC all of those kinds of things.
Obviously everything has had inflation over the last couple of years.
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 a refrigerator a favorite attractor or crop inputs, they're seeing inflation on everything so we don't necessarily standout.
For for having increased prices the payback on our favorite if you do the math on the yield lift combined with the high commodity prices. The payback period for an investment in irrigation really hasnt shifted significantly even though prices have increased quite a bit and again, we're fortunate that crop prices and commodity farm income is really kind of followed the <unk>.
Mary pressures are.
Now 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 were too high I don't think we're quite there yet, but we do see some preliminary indicators and some of the external.
Sentiment readings and indexes that there are they are really looking at every every investment decision that they make quite closely and again I think we're in a fortunate position that our payback is our is as good as it's ever been.
That makes sense and then a quick question on the infrastructure the.
The projects you mentioned that would be a potentially coming soon.
For road Zipper are those did you mention or can you tell me if those are would be least project or a sale.
Equipment.
Yes that 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.
Got it thanks, so much.
At this time there appear to be no more questions. Mr. <unk> I'll turn the call back to you for closing remarks.
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 a global pandemic, but there are signs of recovery connected.
To infrastructure spending and the resumption of travel that will support Roger for growth in the second half of the fiscal year.
Both segments benefited from continued investments in technology and innovation that creates smart machine platforms designed to increase recurring revenue and differentiation that supports customer attraction 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.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.