Good morning. My name is Joe, and I will be your conference operator for today. At this time, I would like to welcome everyone to The Lindsay Corporation Third Quarter Fiscal Year 2022 Earnings Call. All participants will be in a listen-only mode. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star and then two. Do please note that 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 assumed 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 call over to Mr. Randy Wood, President and Chief Executive Officer.
Thank you and good morning, everyone. Welcome to our third quarter earnings call. With me today is Brian Ketcham, our Chief Financial Officer. Our third quarter results reflect the ongoing commitment of our employees around the world to support our customers and dealers in a very dynamic environment. Our entire organization continues to effectively manage through supply chain challenges, logistics constraints, and inflationary pressures, while our commercial teams have effectively managed pricing to preserve business quality. This teamwork, focus, and one Lindsay approach is evident in our results. Our third quarter revenue and operating income was the second highest in our company history, rivaling the highest quarter ever during the peak of the ag cycle in 2013. We thank our teams around the world for all they're doing to contribute to the success of our customers and our company.
In the area of innovation, our Smart Pivot program continues to progress forward, and we're getting great customer reviews from our new FieldNET user experience that will be released later this fall. We're also seeing strong market acceptance for our new RoadConnect telemetry platform in the infrastructure business, and our relationship with Blyncsy continues to showcase the power of innovation that's possible with strong industry partnerships. To date, we have devices deployed in 27 states across the U.S. with several international sites ready to deploy before the end of the fiscal year. Turning to irrigation market conditions. The market continues to see a combination of factors impacting customer sentiment and business growth. Global commodity prices remain high, which is positive.
However, this is somewhat tempered by increased input costs, which will keep U.S. net farm income relatively flat on a year-over-year basis. This year's crop will be one of the most expensive our customers have ever planted, so the positive yield and revenue benefit attained with irrigation through our center pivot should support market stability. Order demand in the quarter was consistent with prior year.
We did see an increase in orders beginning in mid-May due to large storms in the Midwest. Some of this demand did ship in the quarter and some carried over into the fourth quarter. In international irrigation, we see continued strength across most regions. In the mature markets, this is supported by high commodity prices, and in the project-oriented or developing markets, this is supported by more secular drivers. Brazil continues to be a bright spot where a combination of volume and price realization more than doubled the business versus the prior year. The 2022/2023 crop plan was also released this week.
Government financing incentives for irrigation investments were set at BRL 1.95 billion, a 44% increase over the prior plan. This was the largest increase in resources amongst all investment programs, highlighting the focus on expanding efficient irrigation in the region. We also see continued inquiries for project business across Europe, Africa, Middle East, as concerns over food security and global grain supplies have been heightened by the ongoing conflict between Russia and Ukraine. We were pleased to attend the inauguration of the Future of Egypt project site with President Abdel Fattah el-Sisi in May. This farm includes the 1,200 Zimmatic pivots that shipped earlier this fiscal year.
There was also news this week that Egypt will receive $500 million from the World Bank to boost food security, and a portion of this funding will go towards wheat storage, which will support more localized grain production and a strong irrigation market. Moving to infrastructure. Our commercial teams have been able to return to near pre-pandemic travel schedules, and this has helped to stimulate movement in our Road Zipper sales funnel. Their diligence and perseverance has paid off, and the two projects we have been anticipating in the second half of the year are now moving forward. Brian will provide additional details regarding each project in this financial update. In the road safety business, we're also seeing signs of a restart and normalized design and procurement processes at the state DOT level.
The funding support provided by the infrastructure bill has been positive, but we do see some headwinds in this segment caused by inflation and labor availability. A number of project bids submitted months ago are being impacted by cost increases that have resulted in project delays or scope reduction. Overall, we remain optimistic regarding growth opportunities for this business based on the quality of our sales funnel and increasing commercial activity. I'll now turn the call over to Brian to review our third quarter financial results. Brian?
Thank you, Randy, and good morning, everyone. Total revenues for the third quarter of fiscal 2022 increased 32% to $214.3 million compared to $161.9 million in the prior year quarter. Net earnings for the quarter increased 41% to $25.1 million, or $2.28 per diluted share, compared to net earnings of $17.8 million or $1.61 per diluted share in the prior year quarter. Irrigation segment revenues for the third quarter increased 35% to $188.7 million compared to $140.2 million in the prior year quarter. North America irrigation revenues of $96.2 million increased 10% compared to the prior year quarter.
The increase in North America irrigation revenues resulted from higher average selling prices while unit sales volume was lower year-over-year. As Randy indicated, order rates during the third quarter were similar to last year. However, we entered last year's third quarter with a larger backlog of orders as frequent and significant price increases at the time pulled orders forward. While an increase in storm damage replacement orders beginning late in the quarter provided some additional volume for this year's third quarter, most of this increased volume from storm damage replacement will be realized in our fourth quarter. In the international irrigation markets, revenues of $92.5 million increased 75% compared to the prior year quarter.
This increase resulted from a combination of higher average selling prices and higher unit sales volumes in most international markets, with the most significant increase in Brazil. Also contributing to the revenue increase was the favorable effect of a net foreign currency translation gain of approximately $2.5 million compared to the prior year quarter. Total irrigation segment operating income for the third quarter was $39.6 million, an increase of 65% compared to the prior year quarter, and operating margin was 21% of sales compared to 17.1% of sales in the prior year.
Improved operating margin resulted from improved price realization and additional volume leverage, which more than offset the impact of inflationary cost increases. Infrastructure segment revenues for the third quarter were $25.6 million, an increase of 17% compared to the prior year quarter. The increase resulted from higher sales of road safety products and Road Zipper System Project sales, which were partially offset by lower Road Zipper system lease revenue.
Lower lease revenue resulted from the completion of certain lease projects, along with delays in the startup of new lease projects. During the quarter, we began delivery of a Road Zipper Project in Australia. The total value of this project is approximately $9 million, with about half of the value representing the sale of barriers and the other half representing the lease of 2 machines over a 30-month period. We delivered about half of the barrier in the third quarter and expect to deliver the remainder of the barrier in our fourth quarter. This is our first lease project in Australia, and we are optimistic about the future project potential in this market. Infrastructure segment operating income for the third quarter was $3.8 million, which was comparable to the prior year quarter.
Current year results reflect a less favorable margin mix of revenues compared to the prior year, as well as certain under-absorbed fixed overhead costs. Another one of the projects that we have been expecting in the second half of our year is a barrier replacement project in Massachusetts. This project has now been approved and is expected to be awarded in our fourth quarter. The value of our portion of this project is approximately $24 million, and we anticipate being able to deliver about two-thirds of this project in the fourth quarter and the remainder delivering in the first quarter of fiscal 2023.
Turning to the balance sheet and liquidity, our total available liquidity at the end of the third quarter was $145.7 million, with $95.7 million in cash equivalents, and marketable securities, and $50 million available under our revolving credit facility. Our total debt was $116 million, almost all of which matures in 2030. At the end of the third quarter, we were well within the financial covenants of our borrowing facilities, including a gross funded debt to EBITDA leverage ratio of 1.2 compared to a covenant limit of 3.0. At this time, I'd like to turn the call over to the operator to take your questions.
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 and then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Nathan Jones with Stifel. Please go ahead.
Good morning, everyone.
Morning.
Maybe starting on some of these barrier projects. I mean, you guys have been talking for the last couple of quarters about 2 of these projects going in the back half of the year and have been spot on with the guidance there. Maybe you can talk a little bit about what that pipeline looks like for 2023 and 2024 and confidence in conversion of those, growth we should be, you know, expecting in that business, the impact of the infrastructure bill stimulus, just any kind of outlook you can give us on the project environment there.
Yeah, Nathan, this is Brian. Yeah, we've been saying all along, you know, we have pretty good confidence in our sales funnel. We've talked about that. You know, the challenge has been in the last couple of years in the COVID environment with travel restrictions and things like that, moving some of these projects through the funnel. We had these two projects that we had line of sight earlier, really late last year already that we felt would be coming through the funnel this year, and we're seeing that realized now. You know, looking forward, I would say with you know, being able to engage with the customers and as things kind of return to normal, we would anticipate continuing to see some of these projects move through the funnel.
I'd also mention on the leasing side of the business, we're seeing good interest in including Road Zipper as part of the overall construction programs in you know, a number of states. The one that we started to deliver in Australia is actually a construction related program that I mentioned a 30-month lease there. Once we you know, prove what Road Zipper can do, I think we've demonstrated add-on business as a result of some of that. We remain optimistic on where we're at and you know, the growth potential of that business.
Thanks. I'm gonna ask a question on inflation or potential deflation, just to see what kind of thoughts you can get on that, or we can get from you on that. You've obviously had, you know, big revenue tailwinds over the last couple of years from inflation, which has been, you know, negative for margins, but probably positive for earnings. We've seen hot rolled coil prices in the U.S. come down quite a bit. The Fed is clearly focused on inflation. I'd just like to get any thoughts you have on, you know, the potential reversal here and how that could impact your business.
You know, if we saw steel prices revert back to where they were a few years ago, have you guys done the math to figure out, I guess, how much earnings you would lose from, you know, pricing going back to where it was? Do you think you could maintain some of that pricing? Just any thoughts you can give us as, you know, investors are clearly focused on what might happen here with the Fed continuing to tighten policy.
Yeah. Again, this is Brian. Just to put things in perspective, I mean, we do see the hot rolled coil prices softening. You know, it's roughly 15% or so of our cost of goods sold, but we still see structural steel, you know, which is another 15% or so of our cost of goods sold. That continues to actually increase slightly. We see zinc, you know, some other input costs, logistics more recently, you know, increasing. The overall inflationary environment, I would say is still there. I'd say it's moderated, obviously, from what it had been, you know, let's say a year ago. You know, again, depending on what steel does going forward, you know, if there's a recession and demand falls off, you know, we would expect it to continue to soften.
You know, in that case, you know, we're always, just as we were on the way up, focused on protecting our margins. You know, as prices begin to come down, if that happens, you know, we would tend to lag as much as we can to retain the value that we, you know, kinda sacrificed on the way up. At some point, obviously, we'd have to respond to competitive movements in price. Our objective would be to maintain margins.
Okay. Thanks for that commentary. I'll pass it on.
Our next question will come from Brian Drab with William Blair. Please go ahead.
Hi. Good morning. Thanks for taking the questions. I wanted to start just by asking about drought conditions and how that's either positively or negatively impacting demand at the moment in the U.S. and abroad?
Yeah. Good morning, Brian. This is Randy. I'll cover that one. We obviously watch the drought monitor and then you see some significant drought, particularly in the West. We've seen that now creep into Western Texas and the Panhandle of Texas and getting a lot closer to some of the core pivot irrigation markets. It does a couple of things. It probably provides some price support in the market if the market feels that there's gonna be some diminished yield potential in those areas, and that will impact certain commodities differently. It certainly could promote more efficient use of water. If somebody's irrigating with something that's not a center pivot and they wanna stretch their water application out, then switching to a center pivot, which would be more efficient, could be an option for them.
You also get to a point where there's not enough water to finish a crop. Unfortunately, there are some regions, and they may not be in the core pivot irrigation markets, but some of the regions might be reaching a point now where they don't have enough water to finish a crop. That's a very difficult situation for those customers. Again, I don't know if there's gonna be a significant impact for us. If you look globally, it really depends where you are. You know, I saw something about, you know, Australia getting too much water right now, really the opposite of a drought impact in several regions. This time of year is a weather market.
Whether it rains, it doesn't, if the drought improves or gets worse, I think it does have an impact on commodity prices in particular, and customer sentiment. It is something we watch, but I wouldn't say there's a significant impact on our demand up or down right now.
Okay. Got it. Thank you. Gross margin impact from the barrier projects is my next question. How should we think about maybe even just roughly directionally gross margin for the company overall, given the significant barrier revenue that you're gonna recognize and just Road Zipper revenue in general in the fourth quarter?
Yeah. Brian, you know, as we've spoken before, you know, higher margins on barriers versus, you know, machines and, you know. In this case, the project in Massachusetts is all barriers, so that would, you know, tend to be at higher than average margin. I would say it's gonna be similar to what we've realized in the past on some of the larger projects, you know, Japan being a good example of a year or two ago when we had barrier sales there.
You may have said it, but what was the total for barrier revenue or, I should say, Road Zipper revenue in the third quarter?
Our total Road Zipper revenue, and this is just the sale, not necessarily the leasing, you know, would have been. It's really, it was really the Australia project, so, you know, roughly $2.5 million of sale. You know, lease, I don't have that number broken out, but relatively light, you know, in the third quarter for Road Zipper.
Okay. Got it. That wasn't a major contributor then to the significant increase that you saw sequentially in gross margin, the Road Zipper or infrastructure in general?
No, I would say.
In the quarter.
Infrastructure side, it was actually a negative gross margin just because of the, you know, lease revenue, which is generally higher than even the barrier and the machine sales. Not having, you know, a reduction in lease revenue offset by an increase in some of the Road Zipper sales and road safety products, you know, we were flat in operating income year-over-year.
Okay. Just the main driver of the 700 basis points increase in gross margin sequentially in the third quarter was what?
It's gonna be irrigation, and it's gonna be both North America and international.
Just volume leverage and, I mean.
Yeah. I would say it's price realization is probably the single, you know, biggest factor.
Yeah
the volume. You know, we're seeing that in both the you know the price and volume impacts in international to where that. You know, I think historically we've talked about international being lower overall operating margin compared to North America. What we saw in the third quarter is that it's become you know similar to what we have in North America. That was a real positive for us as well.
Okay. Thanks very much. I'll pass it on.
Our next question will come from Brett Kearney with Gabelli Funds. Please go ahead.
Hi, guys. Good morning. Thanks for taking my question.
Morning, Brett.
What kind of internal investments and CapEx projects you've lined up, you know, either capacity or productivity side, with the balance sheet in great shape, anything you have lined up, kind of internal investments, and thoughts on potentially any other uses of capital?
Yeah. I would say, Brett, we're currently more in an evaluation phase in terms of looking at our international business and where we need to add capacity. I think two areas would be, you know, Brazil and Turkey, as we see the growth in that project market increase, which is primarily serviced out of Turkey and then the Brazil market. We've done a lot of things to increase capacity without a whole lot of CapEx up to this point, but that would be an area that we would consider spending some money from a CapEx standpoint. I would say the other area is, you know, adding to our lease fleet on the infrastructure side.
You know, with some of the delays that we've seen in some of the lease projects, we've kind of delayed the CapEx associated with that as well. Going forward, that'd be another source where we see good returns from additional CapEx.
Okay. Terrific.
Okay.
Thanks so much.
Again, if you have a question, please press star and then one. Our next question will come from Jonathan Braatz with KCCA. Please go ahead.
Good morning, Randy, Brian.
Morning, Jonathan Braatz.
Morning, Jonathan Braatz.
Brian, in the first two quarters, you had some significant LIFO charges, and you've talked about recovering those charges, you know, quote-unquote, recovering them. Are we actually seeing that in the third quarter results?
No, John, we really haven't. I would say there was even a slight LIFO impact, negative impact in the quarter. You know, I'd say, you know, maybe around $1 million. I think the big thing there is, if you look at where our inventory levels were at the end of the quarter, similar to.
Yeah
where they were at the end of the second quarter. Really no benefit from LIFO in the quarter. I think where we see the benefit is just the, you know, the impact of the price realization.
Yeah.
Starting to really take hold.
Okay.
We, you know, again, expect to see some of that, LIFO benefit as we see inventory levels come down.
Okay. Brian, also the Turkish lira has been very weak. What kind of role does that have on your margins and your profitability in your Turkish facility?
Yeah. John, the functional currency for our Turkey business is U.S. dollar-
Right.
Because it's really exporting to a lot of those markets, and a lot of the input costs are based in US dollars as well. I'd say the one area that we've seen the impact is obviously on our employee compensation and some of the local expenses there. You know, we've seen the impact of the devaluation and inflation, where we've had to adjust some of the compensation of our employees. Overall, I would say not a significant, not much of an impact on our overall profitability there.
Okay. Okay, good. Lastly, you know, obviously there's been a sizable working capital build this year. Of course, now you're entering the, you know, the seasonally strong period in Brazil, in the southern hemisphere. How do you see that working capital, maybe disinvestment, in the next few quarters? Should we see that investment coming down?
I would say I would expect a reduction in North America.
Yep.
particularly in receivables, as some of those get collected in the fourth quarter. On the international side, I think what we're seeing is, you know, we're supporting the growth in Brazil.
Yep.
Also in Turkey, South Africa, where we you know we have active project activity going on. You know, we're carrying more inventory than we normally would just so that we can respond. You know, these projects, we talk about them for quite a while. We've got line of sight to them, and then when they actually happen, they expect delivery pretty quickly. You know, I would say that's the one area that's a little bit of an uncertainty is, you know, we're maintaining the inventory in the international business to be able to respond to that project business.
Okay. All right. Brian, thank you very much.
There are no further questions at this time. This will conclude our question and answer session. I would now like to turn the conference back over to Mr. Randy Wood for any closing remarks.
Thank you for your interest and participation today. Our infrastructure segment continues to be supported by the incremental funding provided by the Infrastructure Investment and Jobs Act, and a return to more traditional travel capabilities that improve funnel management and Road Zipper Project sales. This is tempered slightly by the impact of inflation and potential project delays caused by rising costs and labor availability. The irrigation segment of our business continues to see strong drivers connected to high commodity prices and international project demand, offset slightly by rising input costs that affect net farm income. We do believe the positive ROI provided by an investment in irrigated agriculture will continue to support a stable market. Both segments benefit from ongoing investments in technology and innovation that allow our customers to operate more sustainably and more profitably.
This concludes our third quarter earnings call. We look forward to updating you on our continued progress following the close of our fiscal 2023 fourth quarter. Thanks for joining us.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.