Good day, and welcome to the Lindsay Corporation Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Randy Wood, President and Chief Executive Officer. Please go ahead.

Thank you, and good morning, everyone. Welcome to our fiscal 2023 third quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer. I'd like to start by looking at market conditions in North American irrigation where we're really seeing two themes playing off one another. Firstly, market fundamentals remain strong. And although net farm income is projected to decline versus last year, it's still well above historical averages and will represent the third highest income level over the past 10 years. Commodity prices have also seen support recently due to crop quality concerns caused by the drought. While some parts of the country have received much needed precipitation, we have seen drought spread across the Midwest driving the USDA to announce earlier this month that 64% of the U.S. corn crop was currently impacted by drought. This market tailwind has been partially offset by tepid customer sentiment that has been driven by inflation, interest rates, general economic uncertainty and commodity prices still below last year's highs. In our view, the short-term uncertainties have influenced customer behavior and caused an unexpected shift in seasonal order patterns. While market feedback indicated quotation volume remained generally consistent with the prior year, our order volume was impacted by customers who've taken a more cautious wait-and-see approach for the near term. For us, this means some of the spring volume we anticipated will shift into the fall installation season. Our operational focus, pricing discipline and spending efficiencies in the quarter did allow us to expand operating margins and maintain business quality in spite of the deleveraging driven by lighter volumes. Moving on to International irrigation. We continue to see strong project demand connected to global food security and shifting climate patterns. We recently confirmed 250 project units in the Middle East and…

Thank you, Randy, and good morning, everyone. Total revenues for the third quarter of fiscal 2023 were $164.6 million compared to $214.3 million in the same quarter last year. Most of the decline in consolidated revenues came from the Irrigation segment as Infrastructure revenues were down slightly compared to the prior year. Operating income for the quarter was $27 million compared to $35.2 million in the same quarter last year. Operating margin for the quarter was 16.4% of sales consistent with the prior year quarter. This solid operating margin performance was supported by gross margin improvement exhibited in both business segments, while operating expenses were comparable to the prior year. Net earnings for the quarter were $16.9 million or $1.53 per diluted share compared to net earnings of $25.1 million or $2.28 per diluted share in the prior year. Lower net earnings resulted largely from lower operating income. Earnings performance was also impacted by foreign currency transaction losses in the current year compared to gains in the prior year and from a higher effective income tax rate compared to the prior year. This increase in the effective tax rate reflected a greater proportion of earnings in higher rate foreign jurisdictions, primarily Brazil, compared to the prior year. Moving on to the Irrigation segment performance for the quarter. Irrigation segment revenues for the third quarter were $142.6 million compared to $188.7 million in the same quarter last year. North America irrigation revenues were $75 million compared to $96.2 million in the same quarter last year. The decline in revenues resulted primarily from lower unit sales volumes, while average selling prices were comparable to the prior year. Lower unit sales volumes resulted primarily from farmers delaying capital investment decisions for the reasons Randy cited earlier. We believe this will result in farmers…

Thank you. [Operator Instructions] The first question comes from Nathan Jones with Stifel. Please go ahead.

Good morning, everyone.

Good morning, Nathan.

Hi, Nathan.

I would like to start off on the commentary that you made about farmer uncertainty shifting demand from what's normally a spring selling season into the fall. I think that's maybe the first time ever I've heard an irrigation supplier talk about demand shifting into the fall where you're typically seeing the crop grow and people aren't out there, generally installing equipment on top of that crop. Can you just give us some more detail on the dynamics around that? And why it is that you think that demand shift into the fall? I would have thought that if it was shifting, it would have probably shifted into next spring.

Yes, I can take that one, Nathan. And it really comes down to what we've seen historically in terms of behavior. And you understand the seasonality of our business. We have installations going into spring and then season of use through summer, fall harvest and then we have a fall selling and installation season. And we really still believe firmly in the fundamentals of the ag market. And if you look at net farm income, as we said in our comments, this is going to be the third highest net cash farm income in the last 10 years. There's going to be a lot of profits in the segment. And customers in the spring, where we're active in quoting, they were looking at specific fields, specific machines, they just weren't ready to pull the trigger, and we've confirmed that over and over again our time -- with our time in the market. So our view is there's a lot of machines in the funnel, if you will, that are ready to go. And as customers wrap up harvest and they finalize their tax situation, there's going to be more of that fall to December 31 type of business that they're going to be willing to invest in. So to me, again, when this segment is profitable, they've proven historically, they're going to make investments and an investment in irrigation system is one of the best ROI investments they can make and our belief is that business will shift to the fall.

Okay. So what you're saying is not that it shifts to during the growing season, you're saying it shifts after the harvest, so late fall kind of late in your fiscal first quarter or early into your fiscal second quarter?

Exactly. It would probably be in that fiscal year first quarter for us. That will be post-harvest installations. You got it.

Got it. That makes more sense. And then my follow-up question was on gross margins. Obviously, they've been pretty volatile over the last couple of years, we've followed the price changes in steel. They've started to settle down here a bit more into kind of that low 30%s area. Is that an area where you think gross margins are sustainable? Does the drop in demand here in '23 give you any pause for concern on pricing that might put the pressure on gross margin? Or just any more commentary you can give us around that.

Yes, Nathan, this is Brian. Yes, I think first of all, on gross margin, it can vary quarter-to-quarter just due to the seasonality of the business and also can go up and down depending on the project activity. But I would say, over the last few quarters as the inflationary environment has stabilized, our gross margin, we've seen enhancement as we've gotten the full price realization. I think this most recent quarter reflected more improvement actually in our International business as some of that price realization was a little bit later to curve than what we had seen in North America. But if you look at it across the course of the year, I think gross margins in that 30% to 31% range would be expected. Again, depending on level of project activity in one quarter or another. If you had a project on the Infrastructure side, obviously, that would drive higher margins. A large project on the Irrigation side might be somewhat dilutive.

Ye, makes a difference. All right, thanks very much for taking my questions. I'll pass it on.

Our next question comes from Brian Drab with William Blair. Please go ahead.

Hi, thanks for taking my questions. Can I just follow on to Nathan's question there on gross margin, just to be clear. The comment that you just made on gross margin, which I think you just said like 30%, 31% range over a year. Is that something sustainable going forward like into fiscal '24, fiscal '25? Is this the idea -- is it above where the Street expectation is and has been?

Yes, Brian, our expectation would be, we would be able to maintain that. I think as we've come through this inflationary environment, we have -- and with demand levels picking up, particularly internationally, we've seen the margins improve, gross margin and operating margins. So our expectation is that it would carry forward into next year.

Okay. And then just on margins still. You mentioned that some of this demand could end up shifting into the early fall in the Irrigation segment. And does that potentially help your capacity absorption in that period relative to a normal year where margin could be supported in your fiscal fourth quarter as a result of that or maybe early part of fiscal '24?

Yes. I would think from a margin standpoint, again, with our first quarter, starting in September, somewhat pre-harvest yet. There would be definitely some support if volumes are higher and more likely into the second quarter.

Okay. And then just -- I mean, I guess, last question, just on the headline really here, which is that your Irrigation down more than 20% in the quarter. Just could you just go back -- you've talked about some of the dynamics here. But could you go back just to be really clear, that some of the factors and maybe rank order them for me, just so I understand, like what do you think is the biggest challenges? And I'm just thinking about like is it macro uncertainty, steel, farmers getting late to the field, weather conditions? What's the most important factor in kind of down the list rank order?

Yes. Brian, I can take that one. And I think the headline is really about customer sentiment and profit certainty. And I think a lot of the customers, and I spent a lot of time with them this growing season. The sentiment is, you know what, I'm pretty sure I'm going to be profitable this year. I'm not sure how profitable. And I won't know more until I lock in more of my crop. I get closer to fall harvest and see what yields are going to do. This drought that's kind of moving into Iowa, Illinois, the Eastern Corn Belt right now, that provided some strong short-term support for pricing. If it rains or has rains, the market responds, and you lose a little bit of price. If it gets dry again, you're going to gain a bit of price. So there's so many moving pieces right now if you're a grower, figuring out how to market and sell your crop and what your ultimate profitability is going to be. I think in that environment, those are the big drivers. And I think interest rates, general economic uncertainty, there's a lot of other noise in the market that I don't think contributes directly to the decision, but it's more about that profitability. And I'll wait until the fall when I know I've got my grain sold, I know when my financial position is going to be, I maybe even completed my taxes and know I've got some room to make investments, that's really what we believe we're seeing.

Okay. Thanks very much.

You bet.

Our next question comes from Ryan Connors with Northcoast Research Partners. Please go ahead.

Good morning. Thanks for taking the call. My question was on the issue of -- can you frame for us the issue of price relative to volume? And to what extent they're a function of one another? In other words, I understand your desire to want to maintain the pricing discipline. But do you think maintaining price as the environment gets more uncertain contributes to maybe some volume pressure? Or -- just curious your take on that.

Yes, this is Brian. I would say in the market environment that we're in today, price has not become -- price has not been the main point of discussion. As Randy mentioned, a lot of the just the uncertainty in the environment, lowering price isn't going to convince a farmer to buy right now. And so, we've been disciplined on that. When you look at Brazil and the delay that we've seen there with the government transition, a lot of that was tied to waiting for this new financing program to be announced. Again, lowering price is not going to drive volume in that situation. They're going to wait until they know what the financing program is all about because it's -- a lot of the purchases are highly dependent on that. So in this environment, it's not been a price environment that's going to drive additional volume. So we've been disciplined on maintaining our prices. I think the -- another thing that could contribute to the wait-and-see approach is just maybe prices will fall and if steel costs soften, but that's not our view today, either as we've seen the steel mills really be disciplined on their capacity. And so we're not expecting any precipitous drop in steel costs going forward either.

Got it. Okay. And then I take from that, Brian, that's -- that you're not aware of any others that have not taken the same approach to maintain discipline on pricing. In other words, if that's not going to be an effective strategy, I assume the market's been [indiscernible] in terms of that.

Yes, we're not getting any feedback from our dealers or regional sales people that we're losing orders based on price. We obviously have the ability to respond if that were the case, but that's not been the case.

Got it. Okay. And then my other one just was a quick one on Infrastructure. Especially the leasing revenue again sort of outpacing the actual product sales. Is leasing just a future for Road Zipper now? Is that just a model that seems to be really gaining traction with more customers? Or is that more of a -- is that something that will ebb and flow going forward?

Hey, Ryan, this is Randy. I'll take that one. And there is going to be some ebb and flow, and we've really had a focused effort on lease because lease can be a little more predictable in terms of revenue stream. And when we work on those large sales projects for permanent installation on a bridge like Golden Gate as an example, there's a pretty long gestation period there, but leasing is really connected to the construction season. That's going to come every summer in markets where we can start to develop those leasing programs. So I think in terms of revenue mix, we're going to see more opportunities in growth in that lease funnel. It's been a very specific area of strategic focus for us, and we do expect that to continue growing. But again, quarter-to-quarter, period-to-period, we could see more of that mix one way or the other depending on what's exiting the funnel at any given time. But leasing should certainly make it a little more smoothing out and make a little more predictable.

Got it. Thanks for your time.

Thanks, Ryan.

Our next question comes from Brian Wright with ROTH MKM. Please go ahead.

Thanks for the question. I wanted to know, you mentioned again about the investment opportunity in the capital position. And just kind of given the current environment, is that creating maybe more opportunity as far as sellers and buyers kind of getting closer to pricing kind of levels? Or we're still in the earlier stages of just looking at the landscape of what's out there?

This is Brian. I'll take that. I don't think it's having necessarily an impact on valuations or pricing. We've indicated before, we see a lot of opportunities in this environment, just coming off of a couple of strong years in the ag market and where we're focused on is in the area of technology and areas that we can continue to build on our capabilities with our technology and increase market penetration of our technology. So the increased level of focus that we've put on it with having Brian Magnusson move into a full-time role in this area, I think that's what creates optimism from our standpoint that we'll see some activity in that area.

Great. Thank you so much.

[Operator Instructions] Our next question comes from Brett Kearney with Gabelli Fund. Please go ahead.

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

Good morning, Brett.

You guys touched on this a bit already, but just curious, the latest update on how the drought conditions particularly in North America kind of impacting and your expectations going forward customers thinking opportunities, I guess, on that scale of -- it's an incremental opportunity for Lindsay versus getting to the level where potentially too severe going forward?

Sure, Brett. I'll take that one. This is Randy. If you look at the drought maps, you really see Eastern Nebraska, Kansas, just lit up with extreme drought. There's pockets in Iowa and heading now into Illinois, Indiana. And we don't have a large installed base in that Eastern Corn Belt. It's a market that traditionally gets timely precipitation. We do have some seed corn growers that are mandated, heavy irrigation we see there. So the bigger impact is likely on supply disruption. And when we see supply disruption, then we'll see commodity price support. And if you're an irrigator, you've got good yield because you know you've been able to water when you needed it. Now you've got good price support. So in general, what we're seeing now in terms of drought is, in our view, going to be supportive for the business because it's going to be supportive of price. I don't know in my view that I would predict that Eastern Corn Belt market heats up for us. We did see some of that business back in that '12, '13 period during that historic drought in that part of the world. I'm not sure that it's going to get severe enough that it will drive results in the short term, but I correlate it back to strong commodity prices, irrigators are going to have strong yields. That combination is going to prop up farm income, and we feel could be very supportive for the business.

Excellent. And maybe if I could just sneak in one additional one on the infrastructure side. You definitely have heard from a number of other folks on kind of the various constraints that transportation projects have had kind of moving forward. I know you guys interact at a few levels with states departments, transportation. So just curious kind of the data points you're hearing and the feedback, whether it's labor or construction crews, materials or kind of what -- some of the major bottlenecks on the road safety product side.

Yes. I think the ones you've mentioned, we've heard about inflation early on, really impacted project flow and then some projects had to get requoted and rebid because the costs they were quoted under had moved due to inflationary concerns. Access to labor, access to equipment, we've heard both of those things, and the ability to kind of get this money to the road. And I think most recently, it's really more about administration and just the paper flow and approval flow to get this money into the bank account, so it can be spent. So it's a combination of factors. But like you, Brett, we're following some of the public companies in the space, and we're hearing a lot of consistent stories working with, listening to the Association of Equipment Manufacturers, AED, those organizations. This does appear to be an industry phenomenon. But the good news is, and we'll talk a lot about, any additional funding is supportive for strong markets. And we're okay being patient, and we do see, again, some longer-term potential going as far out as 2026, where we think we're -- we'll have some long-term stability and benefit here.

Excellent. Very helpful. Thanks so much, Randy.

All right. Thank you, Brett.

Our next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

Yes. Good morning, and thanks for taking my questions. Initially, I was going to see what you're thinking now about the level of capital expenditure here in '23? And if you can, what's kind of the nature of the projects that are being focused on in that area?

Yes, Bill, it's Brian. For 2023, we're probably going to end up in that $15 million to $20 million range. I think we've been looking across our manufacturing footprint to look at where we can add productivity-type investments. You look at a market like Brazil and our facility in Turkey, where there could be a need for additional capacity expansion. But I would say as we go into 2024, the level of CapEx could pick up as we look at ways to continue to improve our overall efficiency. And -- but this year, we should end up in that $15 million to $20 million range.

Okay. Thank you. On the Infrastructure side, I know you've gone into this previously, but it's been a while since any commentary on it. Can you kind of give us a little bit of overview or specifics on where the project Road Zippers primarily fit into the infrastructure programs? Are those into the -- where you get into early design of transportation systems were they going to be used on a permanent continuous basis? Or exactly what is the nature of the primary usage on buying the Road Zippers?

Yes. No, it's a great question, because Road Zipper can be used in a variety of different ways. We talked about the leasing being up, and that's generally going to be used during the construction program. It's a way that construction programs can be facilitated, provides worker safety during the project. So we're seeing an uptick in that. And that's kind of an early indicator of some of the money coming through with IIJA funding too is you'll see that first as the road construction starts. When it comes to a permanent installation, a couple of different things that we think we'll also see opportunities as more substantial projects get planned with expanding roadways, and especially going in and out of a city where you've got the flow traffic, you could use Road Zipper in a permanent installation to provide flexible lanes. That's an option. And then, the other one has been solving existing congestion issues. And the best example is on a bridge that's going into a city. So those are a few examples, and this is a global solution. We've had success in various countries around the world and continue to see opportunities.

Are you finding yourselves able to get in on the early design stage of these permanent projects, these projects that we're talking about here have a more permanent nature? I know that was one of your focus is to try to get on the early design where you get Road Zipper design into the project itself.

Yes, that was really part of that shift left strategy we implemented three years ago or so is really getting a seat at the table so that we could explain how Road Zipper can be used in a variety of different applications.

Is that working well? Is that working for you?

Yes, we're definitely seeing some traction from that.

Super. Okay. Very good. And lastly, just kind of a numbers question here. Can you provide any insight into the delta on the year-over-year on Russia and Ukraine as far as revenue decline? How much of revenue decline came out of those two areas?

We've talked about it in the last couple of quarters. And in the third quarter last year, we completed the backlog of orders that we had. And if you look at it on a -- just on a year-to-date basis through the first three quarters, it's probably approaching $20 million.

Okay. Thank you very much.

All right. Thanks, Bill.

[Operator Instructions] Showing no further questions, I would like to turn the conference back over to Randy Wood for any closing remarks.

Great, and thank you for your interest and participation in today's conference call. As mentioned, we're pleased with the underlying fundamentals of our Irrigation segment. And although the spring season did not materialize as projected, our business continues to demonstrate resiliency as shown by our strong operating margins during the quarter. International project interest remains high, and we're actively quoting several of these opportunities in various regions around the world. We continue to create value with our technology partnership strategy. And we're very excited to see the value of the collaboration with Pessl flow through to our joint customers. The Infrastructure segment is also supported by strong market fundamentals and the incremental funding available through the IIJA. As that funding is released to the market, we believe we're well positioned to capitalize on market growth. This concludes our third quarter earnings call. We look forward to updating you on our continued progress at the end of our fiscal year. Thanks for joining us.

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