Lindsay Corporation (LNN) Earnings Call Transcript & Summary

Good morning, and welcome to the Lindsay Corporation Fiscal Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Randy Wood, President and CEO. Please go ahead.

Thank you, and good morning, everyone. Welcome to our fiscal 2026 third quarter earnings call. With me today is Sam Hinrichsen, our Chief Financial Officer. Starting with our third quarter results. I'm proud of our team's continued execution and resilience through what's been a difficult environment amid a cyclical bottom in agricultural markets. Trade uncertainty, high input costs and weak farmer sentiment continue to weigh on our business. We remain focused on the levers within our control, including pricing, cost management and operational efficiency while continuing to invest strategically to position the business for long-term growth. In North America, our irrigation customers continue to delay large capital purchases given current farm economics, which resulted in lower unit sales volumes in the quarter. Demand remained soft, consistent with our expectations. While commodity prices showed some improvement and government support programs have provided modest relief to growers, neither has significantly impacted demand. In our international business, revenues were down slightly year-over-year driven by lower sales volumes in Brazil due to the high interest rate environment and limited access to credit, which continues to constrain growers' ability to finance capital equipment purchases. Our infrastructure business continued to grow year-over-year. Third quarter revenues increased 8%, driven by higher road safety product revenues, marking 3 consecutive quarters of growth. Road Zipper lease revenues were similar to the prior year. As we said previously, we don't anticipate a large Road Zipper project this fiscal year. Turning to our market outlook. The U.S. irrigation market remains soft as growers await further trade certainty and improvement in profitability. Current USDA projections indicate cost of production will exceed commodity prices for several key commodities this year, a continuation of a multiyear trend. We do expect a meaningful -- we do not expect a meaningful near-term recovery in North American demand until these economics improve. In Brazil, we continue to view the market as one of the most attractive long-term growth opportunities in global irrigation. Customer engagement at recent agricultural trade shows, including Agrishow, was encouraging with strong traffic, high levels of grower interest and robust quoting activity. These interactions reinforce our view that growers increasingly recognize the productivity, water efficiency and profitability benefits that mechanized irrigation can deliver. These underlying demand drivers in Brazil remain compelling, including the ability to increase yields, improve crop consistency and support multiyear growing cycles per year. We are also pleased to see the financing rate under Brazil's 2026-2027 crop plan declined from 12.5% to 11.5%. Lower financing costs are a positive development for growers and should improve the affordability and return on investment of irrigation systems. This rate certainty should drive customers who have been taking a wait-and-see approach to enter the market. Historically, access to attractive financing programs has been an important catalyst for irrigation adoption and the reduction in rates is directionally supportive for future demand. At the same time, we believe it's important to remain measured in our outlook. While financing rates improve, the total funding allocated to irrigation within the [ FINAME ] program has been reduced from approximately BRL 2.75 billion to BRL 1.7 billion. As a result, the availability of credit remains a constraint and could limit the pace of market expansion in the near term. And our view with the lower interest rate improves the economics of irrigation investments but the reduced size of the funding pool effectively places a ceiling on near-term market growth and tempers our enthusiasm for rapid recovery and demand. This dynamic is consistent with what we've been discussing for several quarters, where strong customer interest has been offset by credit availability and financing constraints. As a result, we remain cautiously optimistic in the short term while maintaining a high degree of confidence in the long-term growth opportunity in Brazil. In the MENA region, we will continue delivery of the large irrigation project through our fiscal fourth quarter, and we remain encouraged by the overall outlook for future growth in our international markets, particularly in regions focused on improving food security and water resource management. As always, the timing of project wins and deliveries is difficult to predict but our proven track record on project execution, technology strength and local presence positions us well in the region. Our leadership position in irrigation technology and innovation continues to accelerate adoption across our FieldNET and FieldWise platforms reinforcing the strength of our connected equipment strategy. Our new tower watch feature within the Smart Pivot platform is improving machine diagnostics and reducing downtime, directly enhancing grower economics and increasing the stickiness of our technology. This performance further validates our view that technology is a core competitive advantage, expanding our recurring revenue base, improving margin mix and strengthening long-term customer retention. We expect these dynamics to support sustained double-digit technology revenue growth in fiscal 2026. In Infrastructure, we anticipate continued growth in road safety product sales globally. The Road Zipper pipeline remains strong. And while we continue to actively manage a robust set of opportunities, the timing of these projects is difficult to predict. The House Transportation and Infrastructure Committee has advanced the Build America 250 Act, a bipartisan 5-year reauthorization totaling $580 billion, establishing a framework ahead of the September 2026 deadline. The bill prioritizes core highway and bridge investments, strengthens funding to states and introduces new highway trust fund revenue providing long-term funding stability. Operationally, our new tube mill has been successfully commissioned and is now in full production in Lindsay, Nebraska. This is a core operation for us, and we now have industry-leading automation and technology that increases safety, efficiency and throughput. It also gives us the ability to rapidly respond to short-term shifts in demand, ultimately preparing us to operate successfully through the market cycles. As we've discussed in the past, we will need market recovery in order to fully capture the impact of the productivity gains. Our new galvanizing facility remains on schedule, and we expect that to be turned over to production in early 2027. This will further expand our galvanizing capabilities while improving quality and opening new opportunities for growth. While market conditions across portions of our agricultural end markets remain challenging, we believe it's important to position the business for the realities of the current cycle while preserving the capability to capitalize on future growth opportunities. We have taken the initiative to restructure and rightsize portions of our organization and optimize our operating cost structure. These actions are focused on improving efficiency, eliminating complexity and better aligning resources with anticipated market demand. This initiative is about creating a stronger and more agile company in support of our long-term strategy. Importantly, this initiative does not alter our commitment to investing in our core strategic priorities, including innovation, digital solutions, manufacturing capabilities and growth opportunities across our businesses. We expect savings to begin in fiscal 2027. I'd like to now turn the call over to Sam to discuss our fiscal third quarter financial results. Sam?

Thank you, Randy, and good morning, everyone. Total revenues for the third quarter of fiscal 2026 were $160.8 million a decrease of 5% compared to $169.5 million in the prior year. Decline in revenues reflects continued softness in our Irrigation segment, consistent with the challenging agricultural environment we have been navigating this fiscal year. This was partially offset by growth in our Infrastructure segment. Operating income for the third quarter was $18.5 million compared to $23.8 million in the prior year, and operating margin was 11.5% of sales compared to 14% of sales last year. The decrease in operating income was mainly driven by lower revenues and the impact of fixed cost deleverage in the Irrigation segment, was partially offset by growth in the Infrastructure segment and reduction of corporate expenses. Despite the challenging environment, we delivered double-digit operating margins. Third quarter results include a onetime benefit related to tariff refunds. This represents a partial reversal of tariff costs incurred to date. We have seen input costs escalate during the fiscal year and our pricing actions still need to catch up. Net earnings for the quarter were $15.8 million or $1.53 per diluted share compared to $19.5 million or $1.78 per diluted share in the prior year. The year-over-year decrease reflected the impact of lower operating income, which was partially offset by an increase in other income and a lower effective tax rate. Turning to segment results. Irrigation segment revenues for the third quarter were $133 million, a decrease of 7% compared to $143.7 million in the prior year. Results were largely in line with our expectations given the challenging environment. North America irrigation revenues were $61.3 million, a decrease of 11% compared to $69.1 million in the prior year. The decrease resulted primarily from lower unit sales volume, which was partially offset by higher average selling prices. International irrigation revenues were $71.7 million, a decrease of 4% compared to $74.7 million in the prior year. The decrease was driven by lower sales volume in Brazil, which was partially offset by growth in other international markets. Irrigation segment operating income for the quarter was $20.3 million compared to $27.2 million in the prior year, and operating margin was 15.3% of sales compared to 18.9% of sales last year. The decrease in operating income was due to lower unit sales volume, higher input costs and the impact of fixed cost deleverage. In our Infrastructure segment, revenues for the quarter increased 8% to $27.7 million compared to $25.7 million in the prior year. The increase was driven by higher road safety product revenues, while road safety revenues were below the prior year. Infrastructure segment operating income was $5.4 million comparable to the prior year, and operating margin was 19.5% of sales compared to 21.1% of sales last year. The decrease in operating margin was a result of less favorable mix due to lower road safety revenues. Turning to the balance sheet and liquidity. At the end of the third quarter, our total available liquidity was $204.8 million, which includes $154.8 million in cash and cash equivalents and $50 million available under our revolving credit facility. Capital expenditures for the first 9 months of the fiscal year were $35.5 million, reflecting our ongoing strategic investments at the Lindsay, Nebraska site. We continue to execute against our capital allocation priorities and deployed $25.2 million towards share repurchases during the quarter. During the first 9 months of the fiscal year, we have returned $80.7 million to shareholders through share repurchases. We remain confident in the strength of our balance sheet and our ability to prepare the business for future profitable growth. This concludes my remarks. At this time, I will turn the call over to the operator to take your questions.

[Operator Instructions] Our first question today is from Ryan Connors with North Coast Research.

I wanted to start on the Middle East projects. Great news that the major order was not disrupted by the conflict. But Randy, could you kind of expand on the outlook there and the project cadence going forward? Has there been any sign of that, that impacts the pipeline going forward? Obviously, this big order will be completing mostly this year, as you noted. So any update on kind of the pipeline in the Middle East would be helpful.

Yes. The pipeline, Ryan, when you look at all of the public proclamations that [indiscernible] has made specifically, but not only in Egypt, if you look at Northern Africa and then across the Middle East, I think there's a lot of very public statements from leaders looking to continue investing in domestic ag production for food security purposes. And we haven't seen any significant shift in the total market opportunity. There's still, in our view, a lot more business out there. We're in the early innings. I think we are watching how quickly water infrastructure is developed, the electrical infrastructure is developed. Some of those things could speed up or slow down over time. When we look at kind of a macro level, there still is a lot more opportunity there. And I'd say we're in the early to mid innings with more growth to come.

Got it. And then just a housekeeping on that specific project, $80 million. You mentioned and released $70 million in the current fiscal year. We do presume that the remaining $10 million is in the first quarter of fiscal '27?

You're right, Ryan. So $70 million is to the expectation to be recognized in fiscal '26. The remaining $10 million will spill into 2027. There could be minor timing changes, but it's going to be early in the fiscal year.

Got it. Okay. And then just switching gears to the capital projects. Randy, you mentioned the galvanizing facility is going to be up and running. But you said 2027, just to clarify, Were you referring to fiscal '27 or calendar '27 when that will go live?

That will be calendar '27, Ryan. Thanks for the clarity.

Calendar '27. Okay. And then just on that. So in terms of what that will do to the cadence of the CapEx as we -- once that goes live, if I'm recalling correctly, that's really the last of the major projects, no. And so we should see a downstep in CapEx once that project goes live?

That is correct, Ryan. So this is the final step of our strategic investments. Once the galvanizing goes live, you will see a return to normalized capital levels comprised of, of course, maintenance capital and investments in organic growth that have strong business cases behind them.

Yes, yes. And then just 1 last 1 on the big picture side. We're hearing a lot about AI in agriculture. But mostly, we're seeing cool stuff like targeted herbicides that can spray weeds, the AI sees what's the weed and what's not and things like drones and whatnot. But specifically the irrigation, is there anything exciting going on in terms of using AI to improve the capabilities of FieldNET. Just curious on the big picture AI impacts on the product set in the technology side.

Yes. It's an area that we're pretty excited about, and it's an area that we continue to put resources behind because we do see the potential impact on the profitability of our customers. And when you look at customers right now selling commodities for less and it cost them to grow them, we've got to find ways to enhance our profitability wherever we can. And with FieldNET Advisor specifically, we've really been deploying a lot of AI models to help with irrigation scheduling. And that generally is proven agronomic science. It just hasn't been simple. It hasn't been easy to deploy. So we're putting all of that intelligence in the pocket of our customers and they can wake up every morning and know exactly what water is required where based on historical weather, predicted weather, crop growth stage, soil type. So that tool from our view, is starting to get a lot of traction in the market because it makes it easier for customers to plan their water sustain their energy use and then really impacting the bottom line. The other side that I think is really interesting, and this again is kind of innovation and development is the Smart Pivot platform, where things like machine learning can allow us to pre-diagnose failures. And if you think about whether it's center drives or gearboxes, other mechanical portions of the machine, when they are approaching the point of imminent failure, they'll demonstrate characteristics that you can measure. And if you have machine learning capabilities to recognize what normal looks like, you can calculate what abnormal looks like and again, pre-diagnose some of those failures. So AI, again, very early innings, I think, in terms of how it applies to our equipment, but we do see some pretty exciting opportunities to once again change how customers interact and operate their mechanized irrigation equipment.

That's exciting stuff. We'll stay tuned.

The next question is from Brian Drab with William Blair.

In the press release, you mentioned that you expect Brazil to return to growth. In the transcript or in the prepared remarks here on the call, it sounded a little bit more cautious than that. So I'm wondering, can you just elaborate on that. Do you expect to return to growth, the timing? And given it's still a challenging environment, obviously, at the moment.

Yes. You bet, Ryan. So in Brazil, the release of the program, any program, we viewed it as good news. We know firsthand that there's a lot of customers working on specific projects, just waiting to see what the program was going to offer for them. So I think the market expectation locally was probably in high single digits. So the 11.5% is not as aggressive maybe as the market wanted. But it did go from 12.5% to 11.5%, and they have a program that they can jump on. So we would look at, call them shovel-ready-type projects are probably going to start working their way through the system now. We wouldn't expect a significant impact on our fourth quarter, which is going to end August 31, but some of those initial projects that will get through the funding mechanism that will get approved, that will roll out. We could see some of those early in first quarter fiscal year '27. The fact that the total program volume is a little lower than last year, I mean, a 38% reduction in total funding available, the good news is they hadn't fully appropriated 100% of the program funds in the past. So it does sound like a significant headwind maybe initially when you read the headline, but if they haven't allocated 100% of the money, a 38% reduction is probably going to be a little easier for the market to absorb. So we don't see an immediate spike in jump in Brazil, but we do know some of those projects that had been on hold are now going to progress through the system, and we'd hope to get our fair share of those likely not seeing that until first quarter of our next fiscal year.

Okay. And then just in general, on the irrigation business in terms of seasonality and how that impacts the revenue in the fourth quarter typically, and I don't know if you commented but any comment on what you're expecting in terms of any abnormalities related to seasonality in the fourth quarter?

So the fourth quarter, historically, obviously, is the lowest volume quarter for us. It's the one where we have the lowest amount of fixed overhead absorption. It had been generally a very light storm season. We did see the last week of May in the Midwest, a little bit of activity, but I would say that's down previous years. So we aren't currently projecting a lot of optimism relative to volume in the fourth quarter. It should look difficult to down relative to prior periods.

Okay. And year-over-year, are you making any comment on the fourth quarter? Or should we just sit down from the third quarter is what I would expect...