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spk07: And welcome to the Lindsay Corporation's second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. And to withdraw your question, you press star, then 2. Please note this event is being recorded. And again, this is Lindsay Corporation's second quarter 2023 earnings conference call. I would now like to turn the conference over to Randy Wood, President and Chief Executive Officer of Lindsay Corporation. Please go ahead.
spk00: Thank you and good morning, everyone. Welcome to our fiscal 2023 second quarter earnings call. With me today is Brian Ketchum, our chief financial officer. With the first half of our fiscal year complete, I'm pleased with the performance of our business and encouraged by our ability to execute operationally and strategically to drive improved profitability across the organization amidst a volatile macroeconomic environment. While we have been faced with broader economic headwinds and strong year-over-year comparisons that have created pressure on the top line during the quarter, our organization continues to prove its resilience as demonstrated by the strong operating income results. Looking at the macro environment. During the quarter, we continued to observe constraints across the supply chain, most notably in electronics. Our teams are working hard to mitigate these issues, and we maintain our expectation that we'll see continued improvement throughout the second half of the fiscal year. Compared to the prior year period, inflationary pressures have subsided moderately. Having said that, we're still taking a cautious approach to managing costs, and this helped drive expansion in our operating margins during the quarter. Additionally, strong price realization contributed to improved operating income across the business. Shifting to technology and business development. We continue to make progress on implementing our innovation strategy. Last quarter we announced a strategic partnership with Cirrus Imagery, a leading provider of high resolution imagery and analytics that will expand the capabilities of our FieldNet platform. This partnership will provide valuable insights into crop health in alignment with our SmartPivot roadmap, while giving customers a choice in the imagery platform that best suits their unique needs. During the quarter, we also introduced the TAO XR to our crash cushion lineup in our infrastructure business. This easy-to-install crash cushion expands our offering, increases safety, and reduces maintenance labor in the field. We also recently appointed Brian Magnuson as our Senior Vice President of Strategy and Business Development. Brian's role will be focused on accelerating growth and creating value for all stakeholders through synergistic partnerships as well as strategic M&A. This is going to be a critical role for the organization as we continue to strengthen our position in the market, drive deeper penetration, and position Lindsay for stable top and bottom line growth. Touching on irrigation market conditions, the North American market continues to demonstrate stable demand trends. Our outlook remains positive despite the anticipated reduction of net farm income in 2023. In February, the USDA released its updated forecast for the year, indicating that net farm income is expected to decrease nearly 16% versus 2022 in nominal dollars. Net farm income is still expected to be more than 26% above its 20-year average when adjusted for inflation. Strong commodity prices and net farm income should support market stability, and an investment in irrigated agriculture and water management technology will generate a positive return for our customers. Regarding drought conditions, we have seen relief to some of the harsher conditions in California and other parts of the West. However, drought conditions have persisted and in some instances continue to worsen in the Midwest, including Kansas and Nebraska. This will likely drive an early start to the irrigation season and highlight the importance of efficient water and energy management with tools like FieldNet and FieldNet Advisor. Fundamentals in the international markets remain strong. Mature markets continue to be supported by high commodity prices, and the developing markets are supported by increased focus on food security. The irrigation business did experience some delays in sales activity in Brazil during the quarter due to the transition in federal government following the presidential election at the end of 2022. We do not expect these delays to material impact the full year results. Project revenue in Egypt was elevated in the second quarter of fiscal 2022, This, along with sales in Ukraine and Russia in the prior year, added a challenge on year-over-year comparisons in the quarter. Looking ahead, there are additional opportunities in the international markets that we are well positioned to capitalize on. Moving to infrastructure. As government spending increases in response to the Infrastructure Investments and Jobs Act, states should see additional funding flow from the federal programs. We are well positioned in the market to supply state and local government programs as the construction season starts this spring. We're encouraged by what we've seen in the success of our road zipper program and the strength of our sales and lease funnel. Going forward, we'll continue to actively manage the funnel to drive continued infrastructure segment growth. I'll now turn the call over to Brian to review our second quarter financial results. Brian. Thank you, Randy, and good morning, everyone.
spk01: Total revenues for the second quarter of fiscal 2023 were $166.2 million, compared to $200.1 million in the same quarter last year. The decline in consolidated revenues came mainly from the irrigation segment, as infrastructure revenues showed only a slight decline. The lower revenue generation in our irrigation segment compared to the prior year quarter resulted in part from differences in market timing as well as from international project volume in the prior year that did not repeat. Operating income for the quarter was $27.3 million, an increase of 49% compared to $18.3 million in the same quarter last year. Strong operating income results helped drive improved operating margins of 16.4%, up meaningfully compared to 9.2% in the prior year. Strong gross margin improvement in both irrigation and infrastructure drove the expansion in total operating margin. This increase was partially offset by higher operating expenses compared to prior year, which resulted primarily from higher employee compensation costs and increased investments in new product development. Net earnings for the quarter were $18.1 million, or $1.63 per diluted share. compared to net earnings of $14.6 million, or $1.32 per diluted share in the prior year. The 24% increase in net earnings resulted from the increased operating income and was partially offset by foreign currency transaction losses in the current year compared to gains in the prior year and from higher income tax expense. The increase in the effective tax rate reflected a greater proportion of earnings in higher rate foreign jurisdictions, primarily Brazil, compared to the same quarter last year. Moving on to the irrigation segment performance for the quarter. Irrigation segment revenues for the second quarter were $147.8 million, compared to $180.7 million in the same quarter last year. North America irrigation revenues were $90.4 million, compared to $100.7 million in the same quarter last year. A decline in unit sales volume was partially offset by the impact of higher average selling prices. Prior year unit volume was bolstered by a pull forward of orders in advance of announced selling price increases. Current year unit volume reflected a return to a more traditional seasonal demand cadence as selling prices have stabilized over the past few quarters. In the international irrigation markets, revenues were $57.4 million compared to $80 million in the same quarter last year. This decrease resulted primarily from the completion of a large Egypt project in the prior year that did not repeat, and from lower sales volumes in Brazil, Ukraine, and Russia compared to the prior year. As Randy mentioned in his opening comments, sales and order activity in Brazil were temporarily reduced as a result of the federal government transition following the October 2022 presidential election. We expect the reduced order activity will have some impact on year-over-year comparisons in our third quarter. However, our full-year outlook for Brazil remains unchanged. Total irrigation segment operating income for the second quarter was $32.8 million, an increase of 33% compared to the prior year, despite the year-over-year decline in segment revenues. Operating margin represented 22.2 percent of sales, expanding meaningfully compared to 13.7 percent of sales in the prior year. 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. The prior year second quarter included additional cost of sales of approximately $2.8 million related to the LIFO method of accounting for inventory, while current year cost of sales were reduced to approximately $1.5 million. Additionally, the prior year included non-recurring costs of approximately $1.8 million related to factory maintenance and outside consulting services. Turning to the infrastructure segment, infrastructure segment revenues for the second quarter were $18.5 million compared to $19.4 million in the same quarter last year. Lower sales of road safety products were partially offset by an increase in road zipper system lease revenue, while road zipper project sales were similar to the prior year period. Infrastructure segment operating income for the second quarter was $2 million compared to $300,000 in the same quarter last year. This increase in operating income helped improve operating margin for the quarter, which was 10.9 percent of sales compared to 1.7 percent of sales in the prior year. These improved current year results reflect improved price realization, a more favorable margin mix of revenue, and lower inflationary impact on input costs compared to the prior year. Turning to the balance sheet and liquidity, our balance sheet remains solid, and our total available liquidity at the end of the quarter was $156.4 million, with $106.4 million in cash, cash equivalents and marketable securities, and undrawn capacity on our revolving credit facility of $50 million. Through improved operating income performance and an ongoing focus on working capital management, we expect to see enhanced free cash flow generation in the balance of fiscal 2023. This stronger cash flow will be strategically beneficial as it will further enhance our ability to invest in growth opportunities and create value for our shareholders. At this time, I'd like to turn the call back over to the operator to take your questions.
spk07: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Thank you. Our first question comes from Ryan Connors from North Coast Research. Ryan, please go ahead.
spk02: Hey, thanks for taking my question. I wanted to ask about the issue of these international projects, Brian. You said there was a project that did not repeat from last year, and you mentioned that pretty prominently as a positive mixed driver. I know you've never really quantified that the exact magnitude of the margin differential on those projects relative to the other business. But it sounds like that margin differential might be expanding. I mean, has that business gotten more competitive, or am I reading too much into that?
spk00: Yeah, good morning, Ryan. This is Randy. I'll take that one. And I think it's always been more competitive. just due to the size and the magnitude of those projects. And I wouldn't say with certainty that it's expanding versus where it's been historically. I just think some of those projects are potentially larger than maybe they've been historically. So you do see some of that drawdown with a little more significance. But I wouldn't say, again, with confidence that that gap is getting any larger.
spk02: Okay. Okay. And then in terms of the backlog, you know, it's noted in the press release that the backlog is, is down in irrigation. But can you talk about the composition of backlog? Any color there you can give us on international versus North America within that irrigation backlog?
spk01: Yeah, this is Brian. I would say both international irrigation and North America backlogs would be lower than last year. And I think similar dynamics driving that. I think, again, a year ago, Coming into the quarter, both international and North America, we had stronger backlogs as, you know, that pull ahead in orders to try to beat the price increases was going on. And we've seen the prices stabilize in both markets. So I'd say Brazil, you know, backlog year over year is down. But, you know, from a seasonal standpoint, you know, nothing there other than, you know, just the difference in timing of orders. But, you know, as we've commented in the past, backlog is not necessarily always the best indicator, especially in shorter lead time situations, you know, where there's, you know, industry capacity and, you know, nothing really going on of any significance on the pricing side.
spk02: Got it. Okay. And then just one last housekeeping, Brian. You mentioned the tax rate and the shift there and the reasons behind that, but is that something – From a modeling standpoint, we should expect that to remain elevated, or will that jump right back down in 3Q?
spk01: Yeah, I think last quarter I had mentioned 27.5 for the year. I think that still remains the case. And if you look back over the last couple of years, I think the biggest driver in the increasing effective tax rate is just the greater proportion of earnings coming from Brazil, which has a higher statutory tax rate.
spk02: Got it. Okay. Thanks so much.
spk07: We now have a question from Brian Wright from Roth Capital. Brian, please go ahead.
spk06: Thanks. Good morning. I was wondering, is it possible to maybe try and quantify the demand pull forward from the irrigation in the year-ago quarter to kind of get to kind of a normalized
spk01: Yeah, I guess I'll put it in some context. If you look at the last, let's say, nine or ten years, generally our strongest quarter is going to be the third quarter as we get closer to planting season. Last year was one of two years, I think, that second quarter was our strongest quarter. And so that's what... And again, going into the second quarter last year is when we had the higher backlogs being driven by the order pull ahead. So I think the overall demand environment is fairly stable with the year ago. I think it is just a little bit of that shift from last year being more pulled forward into more of the traditional seasonal demand this year. But difficult to put an exact number on it because there's other variables that come into play in terms of, you know, regional differences across the U.S.
spk06: Okay. No, no, that's very helpful. I was also wondering, on slide six of the presentation, you kind of break out the revenue from conversion volumes and dry land volumes. And I was just hoping you could, you know, help us on how those are defined.
spk01: Yeah, and that's tracked with every order that we take, depending on what the application is, if it's a replacement machine or if it's dry land, which would be irrigation for the first time or conversion. And that can vary from quarter to quarter. Again, it can vary from region to region, but that's something that we have tracked for some period of time.
spk06: And then, I guess, just given the conditions in Nebraska and in Kansas in particular, and a little bit in Oklahoma as well, just how to think about that from a historical perspective and how that could impact demand.
spk00: You're right. Right now, Brian, we'd say that the drought is at a point that it's probably positive for demand in general, and there's a couple reasons for that. We do believe that there could be an earlier start to the irrigation season. If there's not a lot of natural spring precipitation to germinate a crop, start a crop, then the pivots might start a little earlier. I know talking with customers across Kansas and Nebraska, that's kind of their mindset right now. It could also accelerate some machine replacements. If they think they're going to put more hours on a machine this year, it could drive machine replacement. It could drive more parts upgrade programs as well. We've often talked about drought being a positive demand driver to a point, but when you run out of water to finish a crop and the machines stop, then it stops becoming a positive demand driver. We don't see a lot of that severity this early in the season, but it's something that we're going to monitor very closely as we move into the core summer months here.
spk06: Okay, great. Thank you.
spk07: Our next question comes from Nathan Jones. from Stifel. Nathan, please go ahead.
spk03: Hey, good morning. This is Adam Farley on for Nathan. I wanted to start on the infrastructure segment. You know, what is your outlook for the infrastructure segment for the remainder of the year? You know, when does, what do you expect federal funding to improve the road safety business? And maybe, is there any notable timing related to the road zipper project funnel that we should be looking out for? Thanks.
spk01: Yeah, Adam. This is Brian. Yeah, what we have been saying, you know, the last couple of quarters is we do expect to see some of the IJA funding start to have an impact in the second half of our year. You know, as that gets to the states and then the states plan their projects, I think that's still the expectation. And one of the areas that we expect to see some growth in the second half of the year is in the road zipper leasing side of the business as road zipper gets involved with some of those construction projects. Timing can vary. I think the inflation that we've seen that's impacting some of the costs of some of these construction projects that have, in some cases, resulted in the projects going back and getting rebid, that kind of plays into some of the timing. You know, I think the other little bit of a wild card out there right now, too, is just, you know, you've seen the extreme weather in California. We do have projects that we were planning in California. So the question is, you know, with the priorities, do the priorities get shifted into, you know, repairing a road versus a road construction project? So, again, number of variables, but still positive, I would say, tailwind to the to the infrastructure business, you know, starting into the second half of 23, but really continuing on into 2024, probably a little bit more strongly.
spk03: Okay. Thanks for that. And then I wanted to shift gears to the increased investments in new products. What are the investments being made? What are the expected contributions to revenue from new products? Should we expect these expenses to be discreet or, Maybe should these new product development expenses continue at this level or higher?
spk00: Yeah, this is Randy Adam. I'll take that one. And we're seeing today a couple of things, an increase in total spending but also a shift in spending. And our focus has really moved towards technology and innovation. Tools like FieldNet, our strategic partnerships to kind of broaden our presence in our customer's ecosystem. So we're really seeing more money and a shift of our total spending portfolio going into technology and innovation. We'll see our smart pivot platform that we've got out on beta launch right now, full commercial availability later this fall. We'll see a new field net user interface that we've been working on pretty aggressively, getting a lot of tremendous customer feedback there. But those products are going to get to market before the end of this calendar year, be in our customers' hands for this fall season, and we think it'll do a lot in terms of customer loyalty and retention. We also think it's going to give us an upper hand on attracting new customers to the field in that space as well. As you know, we haven't broke out kind of the technology innovation sales as part of our mix. And when you look at the value of a hardware device and a subscription compared to the value of a machine, there really isn't. You can't compare those two with an acceptable ratio. So we do see it being an important part of long-term market share growth, our ability to attract and retain customers But we, again, haven't broken it out in terms of revenue percent. When it comes to spending rates, this is an area that we feel we need to differentiate. So we'll continue to see, in my view, spending at these levels. And if we see a great market opportunity that comes back to our voice of the customer process, we don't have any fear of increasing spending there. And there's really a meritocracy in many ways as we start to generate gross margin, operating income improvement, we're going to be more than willing to put that back into our new product innovation that we think will allow us to grow market share and retain and attract customers.
spk03: All right, great. Thank you for taking my questions.
spk00: Thanks, Adam.
spk07: Our next question comes from Nathan Jones. I'm sorry, from Brett Carney from Gabelli Funds. Brett, please go ahead.
spk04: Hi, guys. Good morning. Thanks for taking my question. Good morning, Brett. Hi, Brett. With the new TAUXR crash cushion, just wondering how that was received. I think you guys were recently out at a convention traffic expo. And also, I know you guys talked about strong funnel for the road zipper offering, and you've developed a lot of good relationships, you know, across the state and local Department of Transportation levels in the country. Are you able to kind of tie in some of your other, you know, road safety crash cushion projects to those conversations, or is it kind of a different sales cycle?
spk00: Yeah, Brett, I think the TOW XR was launched at ATSA, and that was, I think, very well received, and it really opens up our channel to have access to a different product segment that had been a gap for us. So I think it did generate a lot of excitement and allows our dealers and Lindsay to to participate in some of the bids and tenders in certain parts of the country where we maybe had to sit on the sidelines historically. So we do have big plans for that product line. In terms of the road zipper and the road safety products, there's some overlap there, but they're really targeting two different ends of the construction spectrum for the most part when we look at road zipper in a construction application at least. So there is some overlap, but we do view those as being fairly independent markets, and we categorize the market in those two market segments differently, different commercial teams focused on some of those activities. So we do our best to meet the customers where they want us to be for those product lines.
spk04: Excellent. And then with the appointment of Brian to VP Strategy Business Development, do you guys feel the focus there will be primarily opportunities in the North America market and probably more skewed towards the irrigation side of the portfolio or also encompassing infrastructure?
spk00: I'd say right now that Bryan doesn't have a lot of obstacles. As a global company, I think we're more than capable and willing to look at the globe for good opportunities. We do see a lot of good opportunities for industry consolidation. We see a lot of good technology innovation opportunities, a lot of bolt-on opportunities. We see some transformational stuff. So I think Bryan's really not going to be limited and his ability to look around the world for anything that we think could grow Lindsay in both infrastructure or irrigation. Having said that, are some of the near-term opportunities easier to identify in irrigation? I think there's maybe a little more target-rich environment there, but Brian's got an open book to look at all opportunities that we think will create value for shareholders and our customers.
spk04: Excellent. Very helpful. Thanks so much, Randy.
spk00: Thanks, Brett.
spk07: And now let me remind you, if you would like to pose a question, please press star, then 1. We'll follow now with a question from Brian Brab from William Blair. Brian Brab, please go ahead.
spk05: Hi, good morning. This is Blake Keating on for Brian.
spk01: Hey, Blake. Good morning.
spk05: Just wanted to ask about the outlook for Brazil. I know you guys said it won't impact full-year revenue, but I was just curious, you know, how much revenue was delayed and timing of that revenue being recognized?
spk01: Yeah, I'll take the first part of the question, Blake. I think in terms of, you know, dollar amount, I won't quantify specifically, but we were, I would say we were down slightly year over year in Brazil in the second quarter. You know, if you compare that to the first quarter, we were up, I think it was 65%. So, I mean, it was a significant slowdown from, you know, what we would have expected. But, you know, this does traditionally happen when there's a transition. And in this particular case, probably more so just because of the amount of protesting and things like that that was going on. But what we are, you know, I think we've gotten past that now. And what we're hearing from our teams down there, there's been, This is kind of the season, March, April, where you traditionally have your agri-shows, and the feedback we're getting is quoting activity, order activity has kind of returned to where we would have expected it to be. Randy, if you want to add anything to that.
spk00: Yeah, I think that's the important part for us is the market fundamentals in Brazil are very strong. We only saw kind of a temporary lull in new order activity that obviously, as it works its way through the system, results in a temporary lull in shipments. But as Brian said, they're in their fall show season, which are key selling shows for our company, our dealers, and the feedback we're getting now is customers are back in the market, a lot of activity, and we expect that to really drive some opportunities in the second half of the year.
spk05: All right, thank you. And then just lastly, Any additional color on pricing? Do you expect pricing to come down for pivots? I think you guys have said you plan to hold on to it as long as you can. Just any color there?
spk01: Yeah, I think we'd said prices had stabilized. We'd seen, I would say, prior to about three months ago, steel hot roll coil prices had started to come down. I'd say what we've seen more recently is the steel mills pushing through price increases. So I think, you know, that certainly supported not lowering our price. I think what we're looking at now is if those steel cost increases continue, that we may have to increase price again, which, you know, we've said in the past, as costs go up, you know, we want to lead on the way up and protect our margins. So I would say overall right now, still stable, but with the where we could be increasing prices here if we see steel continue to go up.
spk05: Understood. Thank you. I'll pass it along.
spk07: And this concludes our question and answer session. I would like to turn the conference back over to Randy Wood, President and CEO, for any closing remarks.
spk00: Thank you for your interest and participation in today's conference call. We're pleased with our second quarter results and look forward to continued execution through 2023. The infrastructure segment continues to be supported by strong lease and sales demand, as well as funding from the Infrastructure Investments and Jobs Act. While the irrigation segment may be faced with a decline in U.S. farm income throughout 2023, we still see strong underlying fundamentals in both the mature and developing markets. And both segments continue to benefit from ongoing investments in technology and innovation to drive growth. This concludes our second quarter earnings call. We look forward to updating you on our continued progress following the close of our fiscal 2023 third quarter. Thanks for joining us.
spk07: Thank you for attending today's presentation. You may now disconnect.
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