Lindsay - Q1 2024
January 4, 2024
Transcript
Operator (participant)
Hello, and welcome to the Lindsay Corporation Fiscal First Quarter 2024 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 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then 1 on your telephone keypad. To withdraw from the question queue, please press Star, then 2. I would now like to hand the call to Randy Wood, President and CEO. Please go ahead.
Randy Wood (President and CEO)
Thank you, and good morning, everyone. Welcome to our fiscal 2024 first qu
arter earnings call. With me today is Brian Ketchum, our Chief Financial Officer. I'd like to start by once again recognizing our dealers, partners, and employees around the world for their contributions. Their focus on our customers and execution of our business strategies continues to generate positive results for our shareholders while supporting our purpose of conserving natural resources, expanding the world's potential, and improving quality of life. I continue to be very appreciative of the job they're doing. Our fiscal first quarter was highlighted by growth in our North American irrigation markets and improved operating income and margin capture in our infrastructure segment, driven primarily by growth in Road Zipper System leasing.
In North America, demand for irrigation equipment was improved over the prior year first quarter, as commodity prices and U.S. net farm income have continued to support stable demand in our North American end markets. We experienced increased order activity as grower profitability became more transparent following harvest season. This was expected and is consistent with the wait-and-see approach we discussed coming out of last year's spring selling season. Moving to international irrigation. Our key end markets remain healthy, although revenues for the quarter were lower in South America, particularly Brazil. Despite being down year-over-year, our results remain quite solid, particularly when compared to the record-setting international revenues captured last year. Specific to Brazil, the FINAME financing program offered by BNDES was modified this year to distribute funding in quarterly increments.
Ultimately, this caused some short-term disruption to our order confirmations in the period, and while this impacted our quarterly results, we do not believe this will have significant impact to our full-year results in the region. Moving to infrastructure. While we are still very much in the early stages of deployment, we are beginning to see the positive impact of IIJA-driven U.S. infrastructure spending. We continue to see solid growth in Road Zipper System leasing and sales of our road safety products in the quarter, which largely offset the softer Road Zipper System sales and project activity in the period. As a reminder, last year's fiscal first quarter carried the tail end of revenues from the large project in Massachusetts. Road Zipper lease revenue continues to represent a greater proportion of our consolidated infrastructure segment revenues. This sales mix remains accretive to Lindsay's overall margin profile.
We also continue to actively manage projects through our Road Zipper sales project funnel. However, timing and project implementation remains challenging to forecast. In the area of technology and innovation, I'd like to highlight a few key items this quarter. The integration of the FieldWise acquisition is going very well, and we're pleased that we've continued to add dealers to our distribution channel. This is a key element of our technology growth strategy, and it expands our access to the installed base of competitive brands. We're also pleased to record our first commercial sale of our new RoadConnect platform in the quarter. This roadside asset monitoring technology has been well received by the market, and we expect to see growth in both device and subscription revenue going forward. I'd now like to turn the call over to Brian to discuss our first quarter financial results. Brian?
Brian Ketcham (CFO)
Thank you, Randy, and good morning, everyone. Consolidated revenues for the first quarter of fiscal 2024 were $161.4 million, a decrease of 8% compared to $176.2 million in the first quarter last year. Net earnings for the quarter were $15 million, or $1.36 per diluted share, compared to net earnings of $18.2 million or $1.65 per diluted share in the first quarter last year. Turning to our segment results. Irrigation segment revenues for the quarter were $140.2 million, a decrease of 8% compared to $152.1 million in the first quarter last year.
North America irrigation revenues increased 7% to $89.4 million, compared to $83.9 million in the first quarter last year. The increase in North America irrigation revenues resulted primarily from higher unit sales volume that was partially offset by the impact of a less favorable mix of shorter machines compared to the prior year first quarter. Average selling prices remained stable and were comparable with the first quarter last year. In international irrigation markets, revenues of $50.8 million decreased 25% compared to record revenues of $68.1 million in the first quarter last year. The decrease resulted primarily from lower sales in Brazil and Argentina compared to record sales in those markets in the first quarter last year.
Changes in the timing of funding under the financing program in Brazil that Randy mentioned, and the government transition in Argentina following the recent presidential election, both contributed to lower sales in the quarter. Total irrigation segment operating income for the quarter was $25.3 million, a decrease of 12% compared to the first quarter last year, and operating margin was 18.1% of sales, compared to 18.8% of sales in the first quarter last year. Lower operating income and operating margin resulted primarily from lower international irrigation revenues and the resulting impact from deleverage of fixed operating expenses. Gross margin remained consistent with the first quarter last year. Infrastructure segment revenues for the quarter were $21.2 million, a decrease of 12% compared to $24.1 million in the first quarter last year.
The decrease resulted from lower Road Zipper System sales, with the prior year first quarter including $8 million of project sales that did not repeat. The impact of lower Road Zipper System sales was largely offset by growth in Road Zipper System lease revenue and higher sales of road safety products compared to the first quarter last year. Infrastructure segment operating income for the quarter was $3.6 million, an increase of 7% compared to $3.4 million in the first quarter last year. Infrastructure operating margin for the quarter was 17.1% of sales, compared to 14% of sales in the first quarter last year. The increase in operating income and margin resulted primarily from a more favorable margin mix of revenue, with higher lease revenue compared to the first quarter last year. Turning to the balance sheet and liquidity.
Our total available liquidity at the end of the first quarter was $225.7 million, which includes $175.7 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 will continue to serve as a strategic advantage for Lindsay as we continue to execute our capital allocation strategy to create enhanced and sustained value for our shareholders. That concludes my remarks, and at this time, I'd like to turn the call over to the operator to take your questions.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Brian Drab with William Blair. Please go ahead.
Tyler Hutin (Senior Equity Research Associate)
Hey, good morning. This is Tyler Hutin on for Brian Drab. Thank you for taking my questions.
Brian Ketcham (CFO)
Morning. Morning, Tyler.
Tyler Hutin (Senior Equity Research Associate)
Yeah, I just want to start. I appreciate the color on the South America irrigation situation. Has there been any other impact on international irrigation shipments, you know, due to geopolitical tensions or other factors?
Brian Ketcham (CFO)
If we look at a year-over-year basis, Tyler, I wouldn't say there's anything that's moved the needle significantly one way or the other. If we focus on the quarter, the big shift was really in South America for the reasons that we've cited.
Tyler Hutin (Senior Equity Research Associate)
Got it. And then on the previous call, you mentioned that, you know, some irrigation projects could be dilutive, dilutive and infrastructure projects could be accretive. Can you just give some details on how those scenarios typically could play out in the future?
Brian Ketcham (CFO)
Yeah, I mean, I think, on the infrastructure side, I'll start there. You know, the Road Zipper project side, which we've, you know, we haven't had, any significant projects since we had the first quarter last year. But those are typically, you know, going to be higher margin kinds of projects. And I would say, you know, we've-- what we've commented on before there is, you know, post-pandemic, once we've been able to reengage with some of the, you know, municipalities, government entities that are in charge of these projects, you know, it's taken some time to get reengaged with them. And, you know, I'd say our commercial team, over the last few quarters, has made some really good progress, and we've got line of sight, you know, to moving some of these projects forward.
You know, on the international irrigation side, again, line of sight to a lot of projects. It's been an active market, a lot of quoting activity. The challenge there is part of it is access to capital, access to U.S. dollars in some of the markets, but we still remain confident that we'll see project activity coming out of both irrigation and infrastructure.
Tyler Hutin (Senior Equity Research Associate)
Yeah, thank you for the color on that. Just a final question, just when it comes to data analytics in the field, I saw some articles about farmers maybe having, like, too much data or information overload. Just how do you and the dealers approach farmers like that and convince them that these solutions are optimal for their operations? That's all I have today. Thank you.
Brian Ketcham (CFO)
Sure, and I'll take that one, Tyler. I would agree that there's a lot of data available to our customers, and being able to convert that data into insights that they can use to manage their operation is really important. And we really focus on our core, and our core is irrigation and water management. So our tools are very deliberate, very focused, and purpose-built to help them manage water and energy to deliver water in the most efficient means possible. So we're not going, you know, outside of our core to try and bring more to our customers. We're really focusing on that irrigation and water management core. And the feedback we're getting from customers is that's exactly what they need.
When we look at the retention of our digital tools at north of 97%, I've had customers say once they start with our platform, they couldn't farm, they couldn't irrigate without it. So I think the direction that our teams are heading are the right direction, and I think that's confirmed with customer feedback and growth we continue to see in those technology platforms.
Tyler Hutin (Senior Equity Research Associate)
Sounds good. Thank you, and I'll pass it along.
Operator (participant)
Thank you. The next question is from Nathan Jones with Stifel. Please go ahead.
Nathan Jones (Managing Director and Senior Equity Analyst)
Good morning, everyone.
Randy Wood (President and CEO)
Morning, Nathan.
Brian Ketcham (CFO)
Morning.
Nathan Jones (Managing Director and Senior Equity Analyst)
And Happy New Year! I want to go to Brazil, Argentina. You've had some challenges in, I mean, particularly Brazil, government changeover. There was FINAME financing that wasn't available for a while. Now they're shifting around the way that's happened. It seems like Brazil's been down pretty significantly, at least three of the last four quarters. So you should have some pretty easy comps coming up. Does that lead to the expectation that we should see, you know, pretty significant year-over-year growth for the next few quarters out of Brazil, especially, or is there, you know, enough uncertainty in the way the FINAME financing is gonna come out for you to not be confident enough to say that?
Randy Wood (President and CEO)
Yeah, I think, obviously, the last, you said three out of four quarters, we did have a, yeah, strong fourth quarter in Brazil once that FINAME financing became available for the first quarter. But, you know, financing continues to kind of keep a lid on the demand there in some respects. There's a lot of dependence on that government program because of the difference in the rates, compared to the commercial rates. But having said that, what we've seen, the last four or five months is the, central bank rates in Brazil have come down about 200 basis points. They're expected to come down another 50 basis points in January. So, you know, we're seeing more, availability of commercial financing through, you know, commercial banks outside of FINAME, which I think is another positive.
But, you know, the demand environment in Brazil is still strong. I would say it's just, you know, the financing plays a key in some of the timing, and, you know, we're seeing that, you know, in the first quarter of this year.
Nathan Jones (Managing Director and Senior Equity Analyst)
Obviously, some issues in Argentina. What's the relative size, for you guys between Brazil and Argentina? Is Brazil significantly bigger?
Randy Wood (President and CEO)
We, we haven't broken that out specifically, Nathan, but your, your instinct is, is correct. Brazil would be significantly more impactful to us than, than Argentina in terms of market size.
Nathan Jones (Managing Director and Senior Equity Analyst)
Got it. And then I just wanted to go back to the domestic business. I thought that, you know, growth at year-over-year in the first quarter was pretty encouraging. Crop prices have been on the decline through 2023, which, you know, all else equal would suggest that farm income will be lower in 2024 than it was in 2023. There's obviously some offsets with that, with crop inputs and financing costs and all those kinds of things. Is it reasonable to think that, you know, farm income's down in 2024, and that should probably lead to domestic irrigation down in 2024, or is that not the way you're thinking about it at this point?
Randy Wood (President and CEO)
I think at a macro level, obviously, I think your logic walks based on history, Nathan. I think the anomaly this coming year in 2024, if you think back to where we were, you know, Q2, Q3 of last year, we talked a lot about customers taking that wait-and-see approach, that they were waiting for interest rates to come down, waiting for inflation to stabilize, waiting for, you know, pivot prices to come down. Right now we see a lot more stability.
So just the fact that we think we won't see that those delayed purchase decisions, just a more normalized seasonal order pattern next year, will offset some of that market softness and maybe some of those end-of-year machines and first quarter machines that we saw this year, we're gonna see that more naturally in the second and third quarter next year. But I think it would be difficult to predict some significant upside in the market just because those fundamentals related to farm income and crop prices and their impact on customer sentiment. It'd be tough to see a line of sight to significant growth, but I think, again, with the comps that we have, particularly year-over-year for Q2 and Q3, we don't see the market falling apart either. And farmers are profitable.
Nathan Jones (Managing Director and Senior Equity Analyst)
Uh, thanks.
Randy Wood (President and CEO)
Invest.
Nathan Jones (Managing Director and Senior Equity Analyst)
Yeah, thanks. I'll pass it on.
Operator (participant)
Thank you. The next question comes from Brian Wright with Roth MKM. Please go ahead.
Brian Wright (Managing Director and Senior Research Analyst)
Thanks. Good morning, and thanks for the question. Just wanted to... One more on the Brazil situation. You know, given the dryness in Mato Grosso and hearing that it could be a game time decision, you know, come February, March for the Safrinha season as far as planting hectares, like, should we be thinking about that as a positive backdrop, as far as to control and your commentary on the strong kind of quoting, you know, quoting levels that you're seeing?
Randy Wood (President and CEO)
I think the weather there, and that's gonna be obviously the biggest market for that Safrinha second season crop. And if there is some risk to germinating a crop, maturing a crop, irrigation obviously is gonna offset some of that risk. So we would view that as a potential tailwind to the continued market opportunity in Brazil. But as Brian mentioned earlier, it's gonna be about access to capital. And then, have they sold the first crop, giving them the cash flow they need to go into the second and potentially the third crops in some parts of the country? So there's certainly some good macro tailwind there, but they still have to get access to funding. And again, the FINAME program is gonna be supportive.
We're seeing the central bank rate continue to drop, and that's gonna be supportive of financing. So we do see that as some potential upside.
Brian Wright (Managing Director and Senior Research Analyst)
Okay, thank you. Then I guess, you know, a follow-up. There has been talk in Brazil about putting together an incentive program for the conversion of pasture land to cropland. Just, is there kinda any headwind or headway that's been made on the regulatory or legislative front on that, you know, in the past quarter or two?
Brian Ketcham (CFO)
In our view, not a lot that would be actionable in the near term.
Brian Wright (Managing Director and Senior Research Analyst)
Okay. Okay, great. And then just a real quick, you know, balance sheet question. Marketable securities were up pretty nicely sequentially, you know, up to over $10 million in the quarter. Just, you know, what kind of securities are you buying there?
Brian Ketcham (CFO)
These would be high grade commercial paper and other things where... And generally, it's gonna be, you know, it'll be beyond 90 days, but, you know, 6-month maturities or so. But an opportunity to get some additional rate, you know, interest income. So it's just a little bit of an allocation of cash from, you know, compared to where we were at the end of the calendar year.
Brian Wright (Managing Director and Senior Research Analyst)
Okay, great. And then I guess one last one, if I could. Inventory picked up a bit, sequentially in the quarter. Just, you know, thoughts on that?
Brian Ketcham (CFO)
I would say it's mostly gonna be a seasonal kind of a thing as we get into the main selling season in North America. That's probably the biggest driver of the increase. And, you know, if you go back to 2023, we over the course of the year, we've reduced overall inventories about $40 million. So a slight uptick in the first quarter is really more of the seasonal nature of the business.
Brian Wright (Managing Director and Senior Research Analyst)
Okay, great. Got it. That bodes well for North America in the next quarter. So that's great. That's all I've got. Thank you so much for the questions.
Brian Ketcham (CFO)
Thanks, Brian.
Operator (participant)
Thank you. As a reminder, to ask a question, you may press star, then one. The next question comes from Jon Braatz with Kansas City Capital. Please go ahead.
Jon Braatz (Partner and Senior Equity Analyst)
Morning, Randy, Brian.
Brian Ketcham (CFO)
Morning, John.
Jon Braatz (Partner and Senior Equity Analyst)
On the domestic international front, domestic irrigation front, how does the demand profile vary per region? You know, Midwest versus maybe Southeast, Northwest, are you seeing any significant difference in sort of the demand picture by geography?
Brian Ketcham (CFO)
Yeah, John, this is Brian. You know, what we saw in our first quarter was really demand increase in almost all of our regions. You know, we're seeing in the Southeast and Midwest kind of that Great Lakes region, which, you know, Great Lakes region typically has been more of a supplemental irrigation market-
But we've seen nice growth there. We've seen it in the Corn Belt, you know, in the Midwest. So I'd say first quarter, you know, it's really been pretty broad across all the regions.
Jon Braatz (Partner and Senior Equity Analyst)
Okay. Is there something specific in the Great Lakes area that may be driving a different profile there from the past?
Brian Ketcham (CFO)
There's probably a couple things, John. It's a pretty big seed corn area.
And we see seed corn
Jon Braatz (Partner and Senior Equity Analyst)
acreage
Brian Ketcham (CFO)
growing there, and it's mandatory to irrigate that crop and really just, you know, shifting climate patterns. And we've talked a lot here about, you know, what customers have to invest in a crop to put it in the ground.
That's really sunk cost if they don't get water. I think just the risk management and the yield enhancement benefit of irrigation that is driving a lot of investment in that part of the world.
Jon Braatz (Partner and Senior Equity Analyst)
Okay, thanks. Brian, it looks like maybe your selling prices are sort of flattish year-over-year, and I suspect it might continue to be that way. But we're all seeing higher costs, maybe not as significant as we've seen in the past couple of years. But when you look at the cost pressures on your business, how is that do you think you'll be able to offset those cost pressures with productivity, or is there gonna be a little bit of impact on your margins because of some rising costs?
Brian Ketcham (CFO)
Yeah, I think, you know, we have seen steel from November to December, the CRU for Hot Rolled Coil has gone up 25%. I mean, it had softened a fair amount, you know, going back into 2023. So, you know, structural steel continues to maintain at a, you know, higher level. But, you know, I'd say where we're positioned now, I mean, I think steel's kind of the biggest variable. A lot of the other inflation has kind of abated a bit. But we expect, you know, I think if you go back to probably last quarter, I mean, maybe the view was, you know, we would have to give price back if raw materials softened. But, you know, we're not seeing that situation today.
I think where raw materials appear to be headed is, you know, would be supportive of maintaining price.
Jon Braatz (Partner and Senior Equity Analyst)
Okay. All right. Thank you very much.
Operator (participant)
Thank you. This concludes our question and answer session. I would now like to turn the call back to Randy Wood for closing remarks.
Randy Wood (President and CEO)
Thank you all for joining us on today's call. While current commodity prices and U.S. net farm income are down from recent highs, growers remain profitable. While they're investing cautiously, we feel this will continue to support stable demand for irrigation equipment in North America. The international project pipeline for irrigation investments remains robust and supportive to our long-term growth trajectory. These projects are driven by food security and stabilizing global grain supplies, and we're uniquely positioned to identify and win these project opportunities as we execute our strategy. We expect to continue the strong momentum we've seen from Road Zipper leasing, as well as solid growth from our road safety products, the combination of which will continue to drive a revenue mix, which is supportive to our consolidated margin capture in the segment and our consolidated returns. This concludes our first quarter earnings call.
We appreciate your interest in Lindsay, and look forward to updating you on our continued progress following the close of our fiscal 2024 second quarter. Thanks for joining us.