Lindsay (LNN) Q2 2019 Earnings Call Transcript

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Lindsay (NYSE: LNN) Q2 2019 Earnings CallApril 9, 2019 11:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Chad, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation second-quarter 2019 earnings call. [Operator instructions] Please note, this event is being recorded.

During this call, management may make forward-looking statements that are subject to risks and uncertainties, which reflect management's current beliefs, estimates of future economic circumstances, industry conditions, company performance, and financial results. Forward-looking statements include the information concerning possible or assume 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. I would now like to turn the conference over to Mr.

Tim Hassinger, president and chief executive officer. Please go ahead, sir.

Tim Hassinger -- President and Chief Executive Officer

Good morning, and thank you for joining our call. With me on today's call is Brian Ketcham, chief financial officer; and Lori Zarkowski, our chief accounting officer. The objective of this call is to discuss our quarter 2 results. Before we go to that overview, I will make a few introductory comments.

The ag market conditions this past quarter were very challenging, given the continued lower commodity prices and decreased farmer sentiment compared to the prior quarter and versus the prior year. A recent farmer confidence chart, produced by DTN, best reflects our view of the market this past quarter, as it showed a sudden and dramatic downturn in farmer sentiment post harvest. This worsening market environment meant that we saw a reduction in our irrigation sales versus same quarter prior year. For the infrastructure business, the higher-margin Road Zipper system sales were lower than prior year.

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Last year was a record sales year for Road Zipper that included large projects that have not been duplicated this fiscal year. This overall challenging environment and the fact that our Foundation for Growth initiatives were not far enough along yet to generate meaningful contributions to our earnings meant our quarter results fell well short of expectations. Our disappointing quarter 2 results do not impact our objective to improve operating margin in the trough of the market. Our 2020 objective of 11% to 12% operating margin was based on our view that the fiscal year 2017 represented the trough of the market.

While current market conditions have been negatively impacted by tariffs and unresolved trade conflicts, we do not believe this is a sustained market environment. Of course, the challenge is knowing when the timing of these factors will be resolved. We remain committed to our goal of improving our operating margin performance by 300 to 400 basis points. And Page 9 of the slide deck provides the line of sight to where that improvement is expected to be delivered by workstream.

Our Foundation for Growth initiative continues to progress and is creating positive change for Lindsay. We are meeting the milestones that we laid out more than one year ago. In our last earnings call, I referred to the direction we have taken as simplify, then grow. We spent most of the 2018 calendar year focused on simplifying the organization.

We have achieved a lot in this area, and these actions have put us in a position to focus more on growth, and specifically, how we strengthen our technology, leadership position. On this topic, you have heard me discuss our intent to grow FieldNET Advisor and Road Zipper, given their differentiation in the market. I'm very pleased to say that we made progress this past quarter toward achieving these goals. For FieldNET Advisor, we announced commercial partnerships with Nutrien Ag Solutions and The Climate Corporation, a subsidiary of Bayer, to help improve our demand creation capabilities.

Nutrien Ag Solutions, the world's largest provider of crop inputs and services. And Lindsay Corporation announced a partnership that will enable Nutrien Ag Solutions crop consultants, which number over 3,500, to leverage Lindsay's remote irrigation management and scheduling platform to supplement Nutrien Ag Solutions offers. The Climate Corporation and Lindsay announced a platform agreement that will establish data connectivity between Climate FieldView digital agricultural platform and Lindsay's FieldNET platform. These two agreements with leading companies in the agronomic space that offer digital solutions are aligned with our strategy to increase the use of FieldNET Advisor. Regarding Road Zipper, we recognize the need to address the lumpiness of this business.

Our position is to address this need through growing the business and increasing the leasing percent of the total sales. An action we have taken to increase our capability to grow this business is the agreement between Lindsay and Iteris that was recently announced. By utilizing Iteris' software analytics capability, it's our desire to identify congestion issues and measure the impact of utilizing the Road Zipper system. This agreement is matched well with our shift-left strategy to get more involved in the planning and design stage of projects where Road Zipper can be potentially utilized.

I'm encouraged by the early signs of success resulting from the strategy. These initiatives represent the change that is occurring at Lindsay. Action is being taken to create more innovation and more differentiation. So now let's move to our Q2 results.

For that, I'll turn the call over to Brian.

Brian Ketcham -- Chief Financial Officer

Thank you, Tim, and good morning, everyone. To begin, I would like to cover the costs incurred in the second quarter related to our Foundation for Growth initiative, which were reported in corporate expense. Total pre-tax costs of $5.3 million were incurred in the quarter, of which $4.8 million represents professional consulting fees. These fees are performance based and correspond to workstream projects that have advanced through a stage-gate process to the implementation stage.

We expect to incur additional consulting fees in our third quarter as additional projects advance through the process to implementation. Other costs during the quarter related to Foundation for Growth were severance costs of approximately $500,000 related to the centralization of shared services activities. The remainder of my comments regarding the second quarter are based on adjusted results, which are detailed in the Regulation G disclosure at the end of the press release. Total revenues for the second quarter of fiscal 2019 were $109.2 million, a decrease of $21.2 million or 16% over the same quarter last year.

Net earnings for the quarter were $200,000 or $0.02 per diluted share, compared to net earnings of $6 million or $0.56 per diluted share in the same quarter last year. Approximately $19.6 million of the decline in revenues is the result of the previously announced business divestitures, while the net earnings impact of these divestitures on a year-over-year comparison was minimal. Irrigation segment revenues for the second quarter were $95.8 million, a decrease of $16.1 million or 14% compared to the same quarter last year. Excluding the impact of the divestitures, North America irrigation revenues decreased $1.6 million or 3% compared to the prior year.

Irrigation equipment sales were lower than expected, as the unresolved U.S. China trade dispute contributed to a further decline in farmer sentiment toward investment. The impact of lower sales volume was partially offset by higher average selling prices and higher revenue from engineering project services. Average selling prices declined during the quarter because of the pass-through of lower steel cost to customers.

However, they remain higher compared to the same quarter last year. Higher revenue from engineering project services in the quarter are connected to a new irrigation development project in the Pacific Northwest converting timberland to grow crops. In the international irrigation markets, revenues increased $5.1 million or 15% compared to last year's second quarter. Revenues were negatively impacted by $2.3 million from differences in foreign currency translation rates compared to the prior year.

Excluding the impact of foreign currency translation, international irrigation revenues increased $7.4 million or 22% compared to the prior year. The increase resulted primarily from a higher level of project sales in developing markets compared to the prior year, while revenues in established international markets were relatively flat overall in comparison. Total irrigation segment operating income for the second quarter was $7.5 million, compared to $12.5 million in the prior year and operating margin was 7.9%, compared to 11.2% in the prior year. Operating margin was negatively impacted in the quarter by negative margin mix from lower equipment sales volumes in North America, higher warranty costs, and operational inefficiencies.

Infrastructure segment revenues for the second quarter were $13.4 million, a decrease of $5.1 million or 27% compared to the same quarter last year. The decrease resulted primarily from Lower Road Zipper system sales, along with slightly lower sales of road safety projects. With the second quarter being the lowest seasonal quarter of the year and without the benefit of the large Road Zipper project, the infrastructure segment incurred an operating loss of $400,000 in the quarter compared to operating income of $2.5 million in the prior year. Cash and cash equivalents were $102.8 million at the end of the quarter, compared to $160.8 at the end of the prior fiscal year.

Cash was utilized in the quarter to fund working capital increases, as well as capital expenditures and dividend payments. No share repurchases were made during the quarter. However, a total of $63.7 million remains available under our share repurchase authorization. At this time, I'd like to turn the call over to the operator to take your questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] The first question will come today from Nathan Jones with Stifel. Please go ahead.

Adam Farley -- Stifel Financial Corp. -- Analyst

Yes. Hi. Good morning. This is Adam Farley on for Nathan.

My first question is on irrigation margins. There's a bunch of moving pieces, sales mix, lower volumes in North America, warranty costs. I was wondering if you could maybe bucket or kind of highlight what's most important as we think about for the rest of the year. I know you said average selling prices also came down for steel pass-through.

So maybe just some color on that would be very helpful.

Brian Ketcham -- Chief Financial Officer

Yes, this is Brian. Just to address the average selling prices. Average selling prices for the quarter year over year were up probably mid-single digits compared to last quarter when we, at our call, we spoke of being up about mid-teens, so gives you a sense of how steel prices have come down and how we pass that along in our average selling prices. The volume in North America was down about, I would say, upper teens compared to last year.

Obviously, we spoke to the market conditions being part of that. Also, last year, we had a very strong second quarter, highest second quarter in the last three or four years. So there's a little bit of a comparison year over year in the volume aspect of it. Getting to margins, I would say, overall, selling margins remained fairly stable, although pricing has gotten more competitive.

But I think the mix with the drop in North America equipment volume being replaced with incrementally lower margins from the international sales, as well as the engineering sales had a big part of the drop, as well as the higher warranty costs and some of the operating inefficiencies that we experienced as we planned for a stronger quarter operationally, and these were not able to reduce the costs quick enough to adapt to that environment.

Adam Farley -- Stifel Financial Corp. -- Analyst

OK. That's helpful. And then just turning to the Road Zipper systems quickly. Was there any movement to the right maybe related to the San Rafael project? Was there any weather in there that maybe affected that?

Brian Ketcham -- Chief Financial Officer

No -- this is Brian, again. San Rafael, we had recorded majority of that in the first quarter. We still have some left to record. It's now in our fourth quarter, and that's really driven more toward the customer readiness to deploy the Road Zipper on the bridge.

Adam Farley -- Stifel Financial Corp. -- Analyst

That's great. Thank you, guys.

Operator

The next question will come from Brian Drab with William Blair. Please go ahead.

Joe Aiken -- William Blair -- Analyst

Morning. This is actually Joe Aiken on for Brian Drab today. I was wondering if you could just touch on the international irrigation segment. What areas are showing strength there? I know you've talked about Brazil in the past.

Maybe if you could expand a little on what the environment is like there. And you also mentioned on the last call a project in the Middle East potentially. I was wondering if that is something you might be able to touch on.

Tim Hassinger -- President and Chief Executive Officer

Yes, Joe. This is Tim. So let me give you an overview on the international, and then at the very end, let me just focus then on Brazil. Given the size of that market, we'll go a little more detail on that.

Overall, international revenue for us increased versus prior year. To your point, for the project market, we mentioned in our last quarter's call that we have been granted a large order in the Middle East. Those sales were realized this quarter. We continue to have a good pipeline of projects in place.

The opportunities are identified. I can say, in all of these cases, Lindsay leadership has met with the key decision-makers for these projects. The needed efforts to finalize those deals are well under way. So we'll continue to update you on how that's progressing.

On the traditional markets, overall, we would say, our business was flat. We saw a decrease in the APAC region that was driven heavily by a severe drought in Australia that negatively impacted farmer sentiment. On the other side, we've seen good growth in the western Europe region and Brazil. For Western Europe, commodity prices are up year over year, which has driven a more favorable positive farmer sentiment situation.

I'll come back to Brazil in just a second here. In the developing markets, we continue to see strong demand in the CIS region. I would describe this demand as being directly linked to food security and investments being made to rehabilitate the irrigation infrastructure that has been in place going back many years to actually the Soviet Union era time frame. On Brazil, specifically, we -- the early drought that was being talked about impacted the soybean yield, but there was some late season rains that we believe helped limit the losses.

So right now, we would align to the estimate that production is expected to drop approximately 4% versus the prior year. So it hasn't really impacted in any significant way farmer sentiment. The second corn crop, safrinha, was planted early due to an early soybean harvest, so they're off to a favorable growing season. In the area of financing, the environment there remains positive for irrigation sales.

Applications for the modern infra program, which we all know is important for irrigation financing, was up 18% versus prior year through February. We did see some approval delays described between the December-February time frame, but they seem to all be cleared up now. We continue to be optimistic on this market. This market is benefiting from the U.S.-China trade dispute.

And from the Lindsay side, we consider ourselves positioned well for the growth that can occur there, given the fact that we have a manufacturing locally there. So hopefully, it helps give you at least a little color on what we're seeing across the international business.

Joe Aiken -- William Blair -- Analyst

Yes, that's great. Thank you. And then just quickly turning to domestic, I was just wondering on the farmer sentiment. With net farm income forecast increase 10% in 2019 I think it is right now, do you see that potentially being able to turn farmer sentiment in the near term at all? Or have you seen -- do you think that has potential to expect to turn soon?

Tim Hassinger -- President and Chief Executive Officer

Well, I wouldn't give you an estimate of when that's going to turn. We, obviously, see the same estimate. We did not see that environment so far through this calendar year. Actually, from our standpoint, we're continuing to see the lower commodity prices put downward pressure on the market.

To your point there, we did see farmer sentiment decrease this quarter, driven by the continued lower commodity prices, but also the steel tariffs and the uncertainty surrounding the trade agreements, so the key one being the U.S.-China trade conflict. I saw an article this morning that really caught my attention for this call. The title was the trade war almost couldn't have come at a worst time for the agricultural industry. And with all that going on, we have seen in the domestic market what I would describe as a wait-and-see buying attitude for irrigation.

There are many farmers believing or hoping that steel costs will come down and delaying their purchase, wanting more certainty around the trade conflicts and others just waiting for some sign or some increase in the commodity prices to happen before spring. We would describe the overall domestic market this quarter down in the mid to upper teens versus same quarter prior year.

Joe Aiken -- William Blair -- Analyst

Got it. Thank you. Thanks for taking my questions.

Tim Hassinger -- President and Chief Executive Officer

Thank you.

Operator

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

Jon Braatz -- Kansas City Capital -- Analyst

Good morning, Tim. Brian, you touched on some of the factors impacting the irrigation operating margin and you mentioned warranty costs. Was there anything significant to that, anything that might have some legs to it?

Brian Ketcham -- Chief Financial Officer

Jon, this was -- I would say, it was a limited number of machines that were identified, that certain components weren't performing to the customer expectations, and so we went ahead and replaced those components. It was limited, but the cost of the components was pretty expensive. So I think part of it too is the year-over-year comparison versus last year pretty low warranty cost for the same period. But we believe that we've taken care of the issue to the customers' satisfaction and wouldn't consider that -- can't say that it won't pop up again, but we don't believe that there's any other that we needed to address.

We think we have addressed them all in the quarter.

Jon Braatz -- Kansas City Capital -- Analyst

OK, OK. Thanks. The other question is, obviously, there's a lot of headwinds facing the farmer -- the U.S. farmer, and this March was a tough month, a lot of flooding.

And I know it's difficult to project the impact of the flooding issues on Lindsay. But I guess, my question is, are you -- have you seen the sentiment change at all so far here in your third quarter versus the second quarter because of the flooding? Has it worsened at all? Did you get a sense of that?

Tim Hassinger -- President and Chief Executive Officer

Jon, this is Tim, and I'll take a shot at it. And of course, the obvious answers depends on where you're at in terms of that weather impact you just saw. Have we seen the sentiment? There's some degree of -- the spring is just around the corner. So if you were delaying purchase, but you were planning on doing that purchase before planting, you're running out of time.

So there's that dynamic. But let's talk about the flooding because there's been a lot of discussion around that. One thing that's critical here is that, typically, floods do not require replacement of the entire machine as we would see often in a tornado damage, as an example. We do expect and you often see [ increase ] in part replacement as a result of flooding.

Specifically, motors and panels are the primary parts that you would anticipate are going to need to be replaced. The thing that is significant here with this recent flood is that we're seeing many acres may not be planted this year. So in that case, the needed repairs for the machines that are on those acres, that most likely will occur over an extended time frame, given the fact that some of these acres will not be planted. So in the short term, we see a downside in pivot sales in the areas that were impacted by the flooding, and we'll be able to still plant, but an increase in part sales, we think, will occur on those same acres.

And of course, the last comment here is that we're concerned about what we're seeing as a forecast of additional rains coming and can this get worse before it actually gets better. So that's where we're at right now related to the flooding and how we're seeing it.

Jon Braatz -- Kansas City Capital -- Analyst

What -- a resolution of the trade issues and some of these other concerns, tariffs, and so on. It's really too late -- let's say if they were resolved over the next week or so, it's really too late to have much of an impact as your selling season is closing down. Would that be a fair assessment?

Tim Hassinger -- President and Chief Executive Officer

Yes, the window is -- I mean, the window is still open, but, to your point, it's closing rapidly with planting just around the corner. So it would help. We would obviously welcome that. But Jon, to your point, I'd welcome it more for looking outward as opposed to just the immediate impact it would bring.

I believe and our view is that the tariffs and the trade conflicts is weighing on farmer sentiment at even a heavier rate than it would have been, say, a year ago.

Jon Braatz -- Kansas City Capital -- Analyst

OK. One last question, Brian. Foundation for Growth costs going forward, how do you see that in the third quarter and the fourth quarter?

Brian Ketcham -- Chief Financial Officer

Yes, Jon, I would -- our objective is to try to wrap up the additional initiatives that we've got working through the stage-gate process in the third quarter. If what we have in the pipeline now gets through that process, we probably have a similar level of consulting fees in the third quarter that would complete that phase of the project as we move into more of the implementation realization phase.

Jon Braatz -- Kansas City Capital -- Analyst

OK. All right, Brian. Thanks.

Brian Ketcham -- Chief Financial Officer

Thanks.

Operator

[Operator instructions] At this time, there appears to be no more questions. Mr. Hassinger, I'll turn the call back to you for any closing remarks.

Tim Hassinger -- President and Chief Executive Officer

Well, thank you for your interest and participation in today's call. This concludes our second-quarter earnings call. And I look forward to updating you on our continued progress in our quarter 3 fiscal '19 call. Thank you for joining.

Operator

[Operator signoff]

Duration: 28 minutes

Call Participants:

Tim Hassinger -- President and Chief Executive Officer

Brian Ketcham -- Chief Financial Officer

Adam Farley -- Stifel Financial Corp. -- Analyst

Joe Aiken -- William Blair -- Analyst

Jon Braatz -- Kansas City Capital -- Analyst

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