Q3 2024 Lindsay Corp Earnings Call

Participants

Randy Wood; President, Chief Executive Officer, Director; Lindsay Corp

Brian Ketcham; Chief Financial Officer, Senior Vice President; Lindsay Corp

Ryan Connors; Analyst; Northcoast Research

Jon Braatz; Analyst; Kansas City Capital Associates

Adam Farley; Analyst; Stifel Nicolaus

Brett Kearney; Analyst; American Rebirth Opportunity Partners LLC

Presentation

Operator

Hello, and welcome to the Lindsay Corporation fiscal third-quarter 2024 earnings conference call. (Operator Instructions)
As a reminder, this event is being recorded. I would now like to turn the conference over to Randy Wood President and CEO of Lindsay Corporation. Please go ahead.

Randy Wood

Thank you, and good morning, everyone, and welcome to our fiscal 2024 third quarter earnings call. With me today is Brian Ketcham our Chief Financial Officer.
Our fiscal third quarter was highlighted by steady execution, which resulted in strong operational performance. Despite market headwinds that impacted top-line revenue, we announced a key project win in irrigation and continue to be pleased with the growth of our Road Zipper sales and lease business and infrastructure. I'm proud of our teams and their execution.
Turning to our key end markets. In North America, irrigation market conditions continue to weigh on farmer sentiment, resulting in overall demand softness. High precipitation levels and wet field conditions across the Midwest contributed to lower year-over-year sales of irrigation equipment and replacement parts in that region. While we experienced volume growth in the West and Northeast regions.
We did see higher than expected storm damage activity that hit the Midwest in late April and early May. However, delays in insurance approvals and wet field conditions shifted most of that demand into our fiscal fourth quarter. In international irrigation we've continued to see a decline in Brazil due to suppressed commodity prices and limited access to capital, ultimately tempering overall demand in the short term, tragic flooding in the south has also hindered order activity in that region.
We did see strong customer turnout and quotation activity at recent farm shows and expect to see this year's crop plan in early July. That will set funding levels and finance rates for this coming season. Brazil and other key South American agriculture markets remain dramatically underpenetrated for mechanized irrigation and the value created by irrigated agriculture will support long-term growth in this region.
We are pleased to host a delegation of farmers and government officials from [Matagrosa Grosso] state in the quarter. They're one of several regions in the country that continue to investigate ways to improve production and efficiency with center pivot, irrigation and irrigation technologies like FieldNET.
In the Mid East North Africa region, we were pleased to announce we've been awarded a contract valued at over $100 million, the largest in our company's history. This will provide efficient water management and technology solutions that maximize production, conserve valuable and scarce resources and expand the region's potential.
This project executed with the repeat customer builds upon our track record in the region and serves as a great example of Lindsay's ability to execute large-scale and complex projects that address the critical needs of our customers. While timing's difficult to predict, we're still managing an active funnel of opportunities and expect these types of projects will be an important part of our growth strategy moving forward.
Moving to infrastructure, as I mentioned in my opening remarks, we are encouraged by the growing strength and momentum in this business. Our overall profitability continues to benefit from the strong growth of our Road Zipper System sales and leasing revenues, a positive outcome resulting from our shift left strategy as discussed previously, we anticipate our infrastructure business will benefit over time as US infrastructure spending increases under the infrastructure investments and jobs act.
We will have only recently seen this funding flow to the market and believe we're in the early stages of a multiyear growth trajectory for domestic infrastructure spending with additional promising opportunities globally.
Turning to innovation and technology. In May, we released significant enhancements to our industry-leading FieldNET. Our Global Voice of the Customer process was used to collect feedback on features and the customer experience. This resulted in an upgraded platform that provides growers with additional insights to optimize their planning and conserve energy and water resources while maximizing yield.
We were also pleased to be part of a generative AI pilot developed by Bayer. This will allow growers to seamlessly integrate their data from FieldNET with the Bayer platform. The pilot also accelerates the development of digital tools that conserve water resources and highlights the importance of including water management in these AI driven agronomic tools.
I'm very proud of our team's efforts to support more sustainable farming practices by enhancing our capabilities and expanding our partnerships to maximize the value of our mechanized irrigation solutions.
Shifting to our operational footprint. Earlier this year, we announced our intention to invest over $50 million to modernize our facility in Lindsay, Nebraska as part of our operational excellence strategy that work has started, and we look forward to updating you on our continued progress.
I'd now like to turn the call over to Brian to discuss our third quarter financial results. Brian.

Brian Ketcham

Thank you, Randy, and good morning, everyone. Consolidated revenues for the third quarter of fiscal 2024 were $139.2 million, a decrease of 15% compared to $164.6 million in the prior year third quarter and increase in Infrastructure segment revenues was more than offset by lower Irrigation segment revenues.
Net earnings for the quarter were $20.4 million or $1.85 per diluted share compared to net earnings of $16.9 million or $1.53 per diluted share in the prior year. The impact of lower revenues and lower operating income was favorably offset by an increase in interest income and favorable foreign currency translation results compared to the prior year, along with the recognition of an income tax credit in Brazil of $4.8 million in the current year.
Turning to our segment results, irrigation segment revenues for the quarter were $114.8 million, a decrease of 19% compared to $142.6 million in the prior year. North America irrigation revenues of $68.2 million decreased 9% compared to $75 million in the prior year.
The decrease resulted from a combination of lower unit sales, volume of irrigation equipment, lower sales of replacement parts and a slightly lower average selling price compared to the prior year.
In international irrigation markets, revenues of $46.6 million decreased 31% compared to revenues of $67.5 million in the prior year. The decrease resulted primarily from lower revenues in Brazil and other Latin American markets, while demand in other international markets remained stable overall compared to the prior year.
In Brazil, order activity remains constrained due to the impact of lower commodity due to the impact, lower commodity prices have on grower profitability and available liquidity, which is reducing growers' ability to invest in irrigation equipment in the near term.
Irrigation Segment operating income for the quarter was $19.5 million, a decrease of 36% compared to the prior year, and operating margin was 17% of sales compared to 21.6% of sales in the prior year. Lower operating income and operating margin resulted mainly from lower revenues and the resulting impact from deleverage of fixed operating expenses.
Infrastructure segment revenues for the quarter were $24.4 million, an increase of 11% compared to $22 million in the prior year. The increase resulted from higher Road Zipper System sales and higher lease revenues compared to the prior year.
The impact of higher sales of road safety products in the US was offset by lower sales in international markets compared to the prior year.
Infrastructure segment operating income for the quarter was $6.3 million, an increase of 76% compared to $3.6 million in the prior year. Infrastructure operating margin for the quarter was 25.8% of sales compared to 16.2% of sales in the prior year.
The increase in operating income and operating margin resulted from higher revenues and a more favorable margin mix of revenues with higher Road Zipper System sales and lease revenues compared to the prior year.
Turning to the balance sheet and liquidity, our total available liquidity at the end of the third quarter was $202.7 million which includes $152.7 million in cash, cash equivalents and marketable securities and $50 million available under our revolving credit facility.
Our strong balance sheet and our ample access to liquid capital resources continue to serve as a strategic asset for Lindsay as we execute our capital allocation strategy to create enhanced and sustained value for our shareholders.
During the quarter, we completed share repurchases of $17.9 million. Going forward, we will continue to be opportunistic in regard to capital deployment, balancing organic and inorganic investments, along with returning capital to our shareholders.
This concludes my remarks. And at this time, I'll turn the call over to the operator to take your questions.

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions)
Ryan Connors, Northcoast Research. Please go ahead.

Ryan Connors

Good morning

Randy Wood

Good morning, Ryan.

Ryan Connors

Ron, I wanted to start off with discussing the top line a little bit in irrigation. And is there any breakdown you can give us on both North America and international with regard to volume versus pricing, was all that decline really on the volume side? Or are there some dynamics to be aware of there on the pricing side as well?

Randy Wood

Hi, Ryan, starting with North America irrigation, that 9% year over year decline, I would say probably 7% to 8% of that is a combination of pivot volume and parts volume and the rest of it would be price and mix. I'd say that the average selling price was driven somewhat too by the and we had a mix of these machines and we did have smaller machines.
So I would say price wasn't a big impact in domestic irrigation during the quarter. When you look at the international side, 31% down year over year. Brazil is going it was probably down just slightly more than that year over year. And I would say most of that is volume, but we are seeing in a more aggressive pricing in Brazil, just especially you want to on larger and project opportunities there. But most of that decline is volume.

Ryan Connors

Okay. And then when you say, aggressive pricing, is that more discounts being offered that are sort of short term in nature? Or are those actual like list price changes?

Randy Wood

Yeah, no list price changes. I would say it's just when you're quoting, let's say, a six or seven system project, we have seen aggressive pricing in those situations. And so in that case, we will respond obviously, but I wouldn't say it's widespread. But when you look at our total irrigation business, I'd say Brazil is where we're seeing the most aggressive pricing.

Ryan Connors

Understood. One more on for me. On the operational improvements in Lindsay, what is the return on those investments? In other words, what do we expect from a margin benefit standpoint in terms of both the timing and do you know, do we need the volume recovery to unlock that? Or should we see some margin benefit from those investments regardless of where volumes trend to the next 18 months.

Brian Ketcham

Yeah, I would say in the next 12 to 18 months is probably more pressure on margins, then actual improvement just as we deal with the some of the inefficiencies of working through the capital investments there, I would say in the midterm, a more of a stable margin situation because we've got a lot of the additional depreciation that will offset some of the productivity improvements.
But for us, I think that the biggest thing is the ability to react to market changes both up and down without really having to flex the labor like we have in the past and incur the additional headcount and overtime and things like that. So it just provides less reliance on, you know, on that labor through the additional automation and things like that.

Ryan Connors

Got it. Okay. Thanks for your time.

Operator

Jon Braatz, Kansas City Capital. Please go ahead.

Jon Braatz

Good morning, Randy and Brian. So if we sort of look ahead into 2025, in 2025 with this, with this big international order, we might see international revenue irrigation revenues in excess of domestic or North American revenues or irrigation revenues, how might that impact the margins of the operating margins for the irrigation segment? And in addition to that, how might that influence the tax rate as we look forward?

Brian Ketcham

Hi, Jon, this is Brian. As we've said in the past, a large project like the one we announced is generally going to be dilutive to margins just because of the competitive nature of that, I'd say setting that aside, the domestic and international operating margins have gotten a lot closer. So the international growth shouldn't have a dilutive effect but the project business would have some.

Jon Braatz

What about on the tax rate front with more international revenues?

Brian Ketcham

Yeah, tax is a bit of a mixed bag on the project business coming out of our facility in Turkey, which is in tax-free zone. So that definitely benefits the tax rate, anything that we have growth in Brazil or other markets going to be at a higher tax rate than what we have in the US.

Jon Braatz

Okay. And Brian, what was what was the nature of the income tax credit was upfront. What was behind that?

Brian Ketcham

Yes, that's not going to get into specifics just because of the complexity of the tax that you're pleased by the outcome. It was I would say it was a retroactive benefit as a result of a deduction that had there were some ins uncertainties regarding it in the past that were resolved during the quarter.

Jon Braatz

Okay.

Brian Ketcham

So it's really not anything that's going to be carried forward as more of a one-time issue during the quarter.

Jon Braatz

Okay. I guess one last question, Randy, you talked a little bit about farmer sentiment in Brazil. Obviously, there's some difficulties this year with lower prices and flooding and so on and on, you're seeing, I guess, are some farm shows at this point now in Brazil and do you think their sentiment for capital equipment purchases? Is it might improve over the near term or is the sentiment to just sort of depressed for a while.

Randy Wood

Yeah, Jon, I think there's a lot of growers. They are really waiting to see what this year's crop plan looks like. And we do expect to see that in early July. I was optimistic based on some of the discussion and quotation activity that we saw the shows. But a lot of those customers they're going to be on the sidelines until they know what the government program looks like.
And if it operates as it has in previous years, there's going to be a big rush of applications that got to work themselves through the system. It's also a market. If we look at our fourth quarter last year, they set record revenue in the fourth quarter of last year.
I think it's going to be tough to match that or exceed that based on what we've seen kind of moving into the quarter. But I think we're seeing stability. I'm not sure that I see significant further decline in farmer sentiment or they're kind of bouncing along at the rate that we've maybe seen for the last quarters.
But for right now, it's really about what does that crop plan look like for this year? How much funding in total is going to be allocated? What's the finance rate? What's the gap between the Selic rate there from your public market rate and the program rate.
So we've got customers that we know are interested in investing in irrigation. We've got specific quotations and customers, pieces of land that we're working on. And I think it's a matter of how quickly that program money is available, how quickly it's consumed, but we'll know more as we kind of end our fiscal year here.

Jon Braatz

I think Randy, when you think the Brazilian funding program will be announced in June this year, I think it was last June last year?

Randy Wood

We expected and hopefully in the first half of July.

Jon Braatz

Okay. All right. Thank you.

Operator

Nathan Jones, Stifel. Please go ahead.

Adam Farley

Good morning. This is Adam Farley on for Nathan Jones. On infrastructure, could you provide an update on the Road Zipper system project sales pipeline?
It seems like that's trending up over time, do you expect any additional Road Zipper system project sales to convert in the near term?

Brian Ketcham

Yeah, Adam, this is Brian. As we've talked before, we do have better line of sight into some of those projects. And it's more active, I would say, and we see projects, I would say we see projects exiting the funnel over the next year, three, four quarters.

Adam Farley

Okay. And then the broader funding for road projects during the summer months, are you seeing an uptick in funding for roads? Are you seeing any IGA funding starting to flow?

Brian Ketcham

Yeah, we are. I think we kind of mentioned that in your opening comments, it took some time and, you know, talking to others in the same space involved in roadway construction. It has taken some time, but we are seeing it now. A significant portion of that, unfortunately is getting eaten up by inflation. We're hearing that from some of the customers. But from our perspective, even the lease growth that we're seeing in Road Zipper, that's a good early indication that road work is happening, usually that the road safety assets kind of come behind that as the project finishes up.
So we're pleased that the money is making it to market. It's maybe not as impactful as we would have hoped due to inflation, but it does give us some stability and predictability in that infrastructure revenue stream.

Adam Farley

Thank you for taking my questions.

Operator

Brian Drab, William Blair. Please go ahead.

Hi, good morning. This is Blake on for Brian. I just wanted to ask you mentioned the storm activity in the domestic and North America that had pushed demand into your next fiscal quarter.
Can you just remind us how storm activity typically impact your business from quarter to quarter and based on other from a top line perspective?

Randy Wood

It's really variable depending on the severity of the storm season. And I would say in North America, it was a I hate to describe it this way. It was a slow start to the storm season. So we didn't see anything significant worthy of mention. We did have those storms are kind of winter right around Oman and through Eastern, Nebraska and Kansas other parts of the Midwest.
So it was a little higher during that window than what we've seen in previous years. And it's really once the storm goes through. The dealers are working aggressively with the customers. The insurance companies and adjusters are out. So there is some and delay, but we did like our dealers' ability to get out there and get on a lot of those really early and get our customers up and work.
And so I think we'll have more clarity when we get through the fourth quarter, we can talk more specifically about what we saw in terms of trends up or down in storm activity.

Got it. Understood. And then just lastly for us, I wanted to ask about the pivots in the international projects and your attachment rate for FieldNET. And just trying to understand with these big projects, do they usually have FieldNET? Or are they just gone for the mechanized irrigation? Just how that works? And then maybe how it compares to domestic FieldNET that attachment rates?

Randy Wood

Yeah. So in I'll start with domestic. Right now, every new pivot we ship is FieldNET ready. So every new machine goes with FieldNET with the first season, our complementary use and retention rate on that platforms it's north of 97%. And the customers we lose are really customers that start farming or had rented fields that are no longer in the rotation so that the attach rate is 100% when it leaves the factory and we're keeping more than 97% of those customers on the platform.
Internationally, we have seen, I would say a shift in recent years. And if you go back 5 or 10 years, a lot of those projects didn't include the technology. But I think they're really seeing now with the scope and scale and size of these projects.
It's really tough to manage hundreds or thousands of pivots without some form of automation being motivated by energy and water conservation has really changed the game and all those projects. So right now, we do see tools like FieldNET, FieldNET Advisor being applied in those projects. And again, once you start farming growing operating with that type of a tool that size, it's nearly impossible to give it back.
So I think it's a key differentiator for us in our ability to help our customers manage these large projects and we'd expect to see continued growth there.
Got it. I will pass it on. Thank you.

Operator

(Operator Instructions)
Brett Kearney, American Rebirth Opportunity Partners. Please go ahead.

Brett Kearney

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

Randy Wood

Hi, Brett.

Brett Kearney

Great to see the pickup, the IIJA funds starting to make their way through the system. Randy, I think you mentioned potential opportunities in some of the international infrastructure markets you participate in. Any comments you could provide on Road Zipper project funnel opportunities internationally as well as on the leasing side as well?

Randy Wood

Sure. And I think there's a couple of specific markets, and I'd maybe say you know, traffic congestion is traffic congestion and it doesn't matter where you are in the world. If you want to keep your workers safe in a construction zone and it doesn't matter where you are in the world.
So I think the value that we've seen from our long-standing penetration here in North America, that same value, those same benefits, I think, extend into the international markets. And now that we've placed key strategic resources in different parts of the world, we're able to be more visible spend more time with our customers and really talk about and demonstrate the value of what Road Zipper can do.
We talked about that the big project in the UK that got us a lot of visibility, and we've talked in different times, a big installation in Japan with a lot of their road and bridge management projects. So we're heavily penetrated there. We've got a lot of work going on now in Italy and in a lot of these markets, we start with that with a small pilot proof of concept.
And again, it's kind of like field that once the customers understand what the Road Zipper does, the safety improvements they can make the ability to manage traffic flow. It just grows from there. So we are pleased again, the resources we put internationally the success we've demonstrated internationally, that's going to be a big contributor to growth going forward.

Brett Kearney

Excellent. And then if I could sneak one last one in on, great to see the opportunistic share repurchasing share repurchases in the quarter. If you think about on the robust kind of multiyear opportunity in front of both your businesses and can you help me understand the hurdles that any potential M&A would have to clear relative to the value inherent in purchasing your own shares?

Brian Ketcham

Yeah. I'll just start, first of all, with the share repurchase that we did make during the quarter and we looked at where our share price had been trading and we look at our cash position and we look at other opportunities to deploy cash and we felt like it was really good buying opportunity for us.
So and we've got the obviously the balance sheet to be able to do. We execute all of our various capital allocation priorities. So as we go forward, I mean share repurchases is something that, again, as the opportunity presents itself, we would continue to do that.
But we also have an eye on what the organic growth opportunities present that Lindsay investment is one. And we've talked about investments in Brazil and Turkey in the past. But M&A is definitely an area that as part of our growth strategy, we don't anticipate backing off from that at all.

Brett Kearney

Great. Thanks very much, Brian.

Brian Ketcham

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Randy Wood for any closing remarks.

Randy Wood

Thank you all for joining us on today's call. We're pleased with our team's progress year to date and look forward to strong execution for the remainder of the year.
In irrigation, our project sales strategy is working and we're winning and delivering complex international projects being a global company is a strength, and this revenue is helping to offset softness in the North American and Latin American markets.
In infrastructure, we're actively managing our funnel of opportunities and see continued growth in our leasing business, contributing to margin performance in technology. Our strong balance sheet allows us to continue investing and growing, as evidenced by our recent acquisition of field wise and strategic investment in personal instruments.
Our ability to enhance shareholder returns has also been exemplified this quarter by our recent share buybacks.
This concludes our third quarter earnings call and we look forward to updating you on our continued progress following the close of our fiscal 2024 fourth quarter. Thanks for joining us.

Operator

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