Lindsay Corporation (NYSE: LNN) - Q2 2024 Earnings Call

Thank you and good morning everyone. Welcome to our fiscal 2024 second quarter earnings call. With me today is Brian Ketchum, our Chief Financial Officer. I'm pleased with the consolidated performance and resilience of our business through the first half of this fiscal year. While market conditions in South America have temporarily impacted activity across the agriculture industry, the performance of our North American irrigation business continues to be supported by steady demand amid tempered grower sentiment. Additionally, in our infrastructure business, the continued mix shift towards leasing for our leading Road Zipper system is delivering meaningful margin expansion. Overall, I'm encouraged by our ability to execute operationally and strategically in order to drive profitability across the organization, as well as the actions we've taken to navigate suboptimal market conditions in some regions. In North America, our irrigation business saw comparable whole goods demand versus the second quarter of last year, which was largely in line with expectations and supported by the carryover impact of solid farm profits from last year. While stable demand in North American end markets has supported our year-to-date revenue results, we are approaching the back half of the year with tempered expectations. The USDA recently released its initial 2024 net farm income projections, which were significantly below initial market forecasts and expectations. While this has the potential to negatively impact farmer sentiment and the deployment of investment dollars for new equipment in the near term, it's still very early in the season. Moving to international irrigation, where we continue to see a softening of demand. In particular, the Brazilian market has experienced reduced grower profitability, limited access to financing, and constrained investment capacity. While we're facing a challenging external operating environment in Brazil in the near term, we're still very confident in the mid to long-term opportunities in this market. Ongoing droughts in São Paulo, Mato Grosso do Sul, and Paraná have increased state level support for irrigation, and with low penetration levels and the ability to support up to three crops per year, these markets will continue to grow. Moving to infrastructure, as I mentioned in my opening remarks, our overall profitability continues to benefit from the strong growth of our Road Zipper system leasing business, an encouraging indicator as we move forward. Despite revenue that was comparable to the prior year period, we captured meaningful margin improvement that Brian will touch on later. We expect continued growth in our Road Zipper lease revenue in the back half of this year as we move into the heart of the road construction season, coupled with a strong backlog and sales pipeline for the overall infrastructure business. Additionally, as we mentioned in prior calls, we expect our infrastructure business to benefit over time as U.S. infrastructure spending ramps up as part of the Infrastructure Investment and Jobs Act. We've only recently begun to see that dynamic play out. We believe that we're in the early innings of a multi-year growth trajectory for infrastructure spending domestically. Turning to innovation and technology, as we announced yesterday, we've agreed to acquire a 49.9% interest in Pessl Instruments with an option to acquire the remainder of the company in the future. Pessl is a leading developer and distributor of in-field monitoring solutions for agricultural markets. The company deploys software and IoT hardware, including weather stations and environmental sensors, supporting agricultural decision-making including pest and disease control, crop management, and irrigation management. We believe this relationship further highlights our commitment to providing world-class water management solutions to growers around the globe. Our combined platforms and integrated technologies will allow users to monitor and adjust irrigation operations based on key atmospheric conditions while also enhancing overall predictive analytics capabilities. This further strengthens our digital water management portfolio, allowing us to reach a broader set of customers and service providers globally. Lastly, I'd like to address our recent announcement to expand and modernize our manufacturing facilities. In January, we announced our commitment to invest more than $50 million over the next two years to implement state-of-the-art technology that will greatly benefit our global operations. Our strategic plans for the modernization of our facilities include the implementation of Industry 4.0 technologies, data connectivity, analytics, artificial intelligence, and the addition of automation and robotics. Our renovated facility will also house new equipment and the latest advancements in galvanizing, a core process for manufacturing mechanized irrigation systems and road safety products. Additionally, we'll be expanding our Lindsay, Nebraska facility by 40,000 square feet to allow for increased manufacturing capacity and capabilities in metal forming. This investment is the largest in our company's history, and I look forward to updating you as we invest further into operational excellence and innovation. I'd like to turn the call over to Brian to discuss our second quarter financial results. Brian?

Yeah, good morning, Ryan. I'll take that one. There isn't any substantial shifts. I think obviously we're being cautious with spending, but in the areas of technology and innovation in particular, we continue to invest. So what you see there is really just timing and not a strategic shift or a drop in big picture spending. We have a lot of testing expenses in the infrastructure business that hit when we conduct those tests, so it's really again just timing.

Thanks.

I think there's a few interesting areas that we've talked about. Obviously we detailed some new facilities really connected to capacity and capabilities. We're making some big investments modernizing galvanizing. We're increasing automation, robotics, improving material flow, and in the end, we think this is really going to position us to react faster and maybe more efficiently than we have in the past to market demand, whether that's up or down. Some of the new Industry 4.0 technologies that monitor the production equipment, and the way I like to think about it, we're really taking FieldNET and FieldNET Advisor and the tools that we've developed for our customers and we're leveraging those similar types of technologies inside of our factory. So we'll have better monitoring of machine performance, stay ahead of maintenance, those types of things. And of course, we're always very mindful of any opportunity to improve safety for the employees. So I think that flexibility in automation, the modernization, leveraging some new capabilities in both data and production equipment, we're excited about the investments. I can tell you we had a wonderful groundbreaking ceremony last week, and the people inside the facility, they're pretty energized and excited about it too.

I'll take that one, John. This is Randy. And that relationship actually has been formalized within the last year, so it's still relatively early. But when you look at the synergies of being able to move their hardware and software services through our channel, they're a global company, we're a global company, but we don't overlap in a lot of those areas, so we do see some immediate opportunities to help both companies. And I think the exciting part is really about the data and the digital opportunities that the investment creates. We can improve tools like FieldNET Advisor using input from field sensors; we can expand data analytics and the models that we have to provide better water management and guidance. And they've got over 80,000 installed devices around the world, and that creates tremendous revenue opportunities for annual recurring revenue and the broader integration with the FieldNET platform. So we feel we've got a great company, great founder and ownership, and we're really going to hit the ground running.

Yeah, I think their footprint, I would say, is weighted in Europe, but when you look at the map, they're everywhere. They're involved a little more in the specialty crops, orchards, vineyards, fruits and nuts, those types of things. So we see them in different areas of North America than our current footprint. But their equipment, their technology, the ability to integrate with FieldNET, FieldNET Advisor, and the other digital platforms, we think we can take them everywhere in the world with us.

Thank you.

Our view, Adam, Brazil's tricky in the short term. Some of the factors that Brian mentioned in his notes, we view all of those as being short-term headwinds in that market. Weather this year was tricky depending on whether you were in the north or the south. It was too wet or too dry. But a lot of what we see again is very short term. When we look at the mid to long-term outlook for that market, it's still in our view going to be one of the significant growth markets in the world. Just their ability to generate three crops. We've met with a lot of state officials here in Omaha over the past several months, we've got other visits planned over the next couple of weeks, and when you see the amount of land that they have, most of these large agricultural production states are less than 2%, less than 4% penetrated with irrigation. So we do see more interest from state-level governments and certainly continue to have support from federal government there. We've made a lot of investments in Brazil, some of our strongest team members are there, and we're bullish on Brazil in the long term, just navigating these short-term headwinds right now.

Sure. We commented on Brazil and South America because they are the big movers, the big needle movers when you look at international revenues. When you go around the rest of the world, there's a lot of puts and takes, and nothing that's up significantly, nothing that's down significantly, but a lot of the other markets kind of offset the minor ups and downs. The project demand in our view is still very strong, both near and long term. When we talk about project activity, we're talking about specific pieces of land, specific purchasers, specific designs that are being worked on. Depending on which project we talk about, the Middle East obviously is very strong, Eastern Europe, Northern and sub-Saharan Africa, some of those we're actively quoting along with several competitors. Depending on where we are in the world, some of those we're working through confirmed letters of credit and arranging financing and delivery details. Same disclaimer as always: timing is really tough to predict, but we do like what we see in the project funnel, both short and long-term project activity.

Thanks, Adam.

Well, thank you all for joining us today. We're very pleased with our results here to date, and I want to thank our global team for all of their efforts and accomplishments. Despite a tempered near-term outlook in a few of our international irrigation markets, we remain optimistic about the company's long-term prospects. We appreciate your interest in Lindsay and look forward to updating you on our continued progress following the close of our fiscal 2024 third quarter. Thanks for joining us.