Valmont Industries Inc (VMI) 2003 Q1 法說會逐字稿

Good morning. My name is Jeff, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Valmont Industries' first quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I would now like to turn the conference over to Mr. Jeff Laudin. You may begin your conference.

Thank you. Welcome to the Valmont Industries' first quarter 2003 earnings conference call.

With me today are Mogens Bay, Chairman and Chief Executive Officer; Terry McClain, Senior Vice President and Chief Financial Officer; Mark Jaksich, Vice President and Corporate Controller.

Before we begin, please note this discussion is subject to our discloser on forward-looking statements, which applies to today's message, and will be read in full at the end of this recording.

The instructions for accessing a replay of this call can be found in our press release.

I would now like to turn the call over to our Chairman, Mogens Bay.

Good morning, everyone, and thank you for joining us.

I trust that you have had an opportunity to read our earnings announcement.

Let me review some of the highlights for the quarter. First, Irrigation Segment sales rose 16 percent, which essentially offset weak seals of wireless communication and utility products.

Second, a positive contribution from our international activities helped balance the effect of a weak U.S. economy, and highlighting the importance of our geographic diversification strategy.

Third, our net earnings of 7.3 million increased eight percent over last year.

Let me review our performance by segment, starting with Poles. Sales declined nine percent, and operating income of five and a half million was down 26.9 percent. All of the sales decline can be attributable to weaker North American utility product sales.

Our Lighting and Traffic businesses remained quite strong. Three factors support our Lighting and Traffic Business: road construction programs, commercial construction and safety. We continue to benefit from the funding of the U.S. Highway Bill, as roadways get upgraded, widened or newly constructed. We also benefit from commercial construction to support urban growth and renewal. This includes: residential developments, shopping centers, schools and other public places, all of which need lighting.

Safety is also a strong driver, as people clearly feel more secure in well-lit areas. Of course, traffic signals, lights and signs improve traffic flow and visibility at night.

Longer term, a new federal highway bill will be debated this summer. Current expectations are for higher levels of funding, which will continue to support growth for our company.

In our Utility Business, sales and earnings were down from last year in North America. There are two reasons for the decline; the first relates to comparisons for last year. In the first quarter of 2002, we shipped a large order of utility poles to replace structures damaged by winter ice storms. That order enabled the factories to operate at high efficiency levels. The winter of 2003 did not provide a like opportunity, so we did not experience similar levels of operating efficiencies and leverage.

The second reason is a general decline in the utility market, resulting from a reduction in capital spending by public utilities and independent power companies. A combination of a weak U.S. economy, high debt levels of some utility companies, and uncertainty over future energy policies contributed to the slowdown.

The long-term outlook for our Utility Business remains solid. Our sales are driven by new generating capacity and expansion and upgrades to the electrical transmission grid. Power generation and transmission are essential to the economies of developing and developed nations alike.

Capacity additions support economic growth. For these reasons, the utility market continues to present good long-term opportunities for Valmont.

In our international Pole Businesses, lighting and traffic sales improved over 2002. In Europe, we increased our geographic market coverage, gaining new business. Pricing in Europe has improved. As a result of volume increases, factory performance also improved.

In China, lighting and utility sales were even with last year, and export sales declined slightly.

In summary, the Pole Segment benefited from improved results in lighting and traffic that were more than offset by weakness in utility. We believe the drivers of the Pole Businesses are enduring: the need for reliable power, the benefit lighting brings to improving traffic flow and safety, and the investments in infrastructure that are needed to sustain economic growth.

Even though we are the largest global support structures company, the market is very fragmented. Many competitors exist, which present plenty of growth opportunities for us.

In our Wireless Communication Business, sales were 11 million. That's 35.6 percent reduction from last year. Lower volumes and very competitive pricing pressures resulted in an operating loss of 3.2 million.

In the U.S., the market continues to weaken. Carriers are delaying network expansions until their financial condition and performance improves. Power companies are very restrained in capital spending and very selective in their investments. High debt levels and depressed telecom stock values have made it difficult for the industry to raise capital for expansion.

We do not know if this market has reached bottom. There are no signs that our customers are committing additional capital to resume building out in their network any time soon. In the meantime, we're taking steps to better utilize our resources and cut costs. During the second quarter, we will combine our Wireless Communication and Pole Division into one Engineered Support Structures Division.

Within the Wireless Communication Division, we have extremely talented people and great assets. While they have done a good job adapting to the changes in the industry, due to the collapse of the telecommunication market, we have not been able to utilize these talents to the fullest.

By combining the two divisions, we will leverage our strength. We will be better able to accelerate the pursuit of new markets and products for the wide variety of structures necessary for global infrastructure. Streamlining the organization would allow us to pursue growth in a more cost-effective manner. We already have developed sign structure designs and wind structures using our combined capabilities. By combining the divisions, we expect to reduce expenses by about four million dollars on an annualized basis.

In the Coatings Business, first quarter sales were 1.4 percent lower, and operating income dropped to 1.6 million. The decline in profitability is the result of a less favorable mix of services provided. Volumes in our galvanizing plants were lower due to the weakness in the utility and wireless communication market, and in the general industrial economy.

Increasing natural gas prices had only a small effect on costs compared with last year.

The Coatings Business continues to generate solid cash flow.

As we have experienced deleverage in this business as the economy slowed, we expect good leverage when volumes improve.

The Irrigation Segment, sales rose 16 percent for the quarter. Operating income rose 37.3 percent from a combination of a more favorable pricing environment, strength in the international markets, and improved operating leverage. The main reasons for the sales increase were last summer's dry weather and strong international sales. Higher crop prices, lower interest rates and certain conservations in the Farm Bill were additional supportive factors in this market, although funding for the conservation programs have been delayed.

Dry conditions in government conservation programs encouraged conversion from more water-intensive irrigation methods to the more efficient technology of Center Pivots.

Stronger international sales were driven by higher crop prices, supportive government programs and more favorable market conditions in Brazil, South Africa and Australia.

We continue to benefit from our strategy of local manufacturing. Having a local presence helps us compete with in-country manufacturers in the local currency. And our global sourcing capabilities often give us a competitive advantage. Geographic diversification has the additional benefit of helping to dampen the cyclical nature of the irrigation business.

In the Tubing Segment, both sales and profitability rose. Sales gains came mostly from higher internal volumes, which is why operating income only improved three and a half percent. Our Tubing Business continues to generate high returns on invested capital. The strategy of providing high levels and customer service and providing niche markets with specialty tubing continues to be successful. This strategy is our platform for growth in that segment.

That summarizes the quarter in terms of sales and earnings. Turning to the balance sheet, I would like to comment about a few of the numbers.

The increase in inventories is primarily the result of higher inventories in Europe, and the effect of currency translations on these inventories. A second factor is some opportunistic purchases of steel.

In terms of cash flow, the depreciation and amortization for the quarter was nine million dollars, and our capital expenditures for the quarter were five million dollars. Total debt is down $29 million from last year's first quarter.

Looking to the second quarter, in our Engineered Support Structures Businesses, we expect lighting and traffic sales to be higher, and utility and wireless communication product sales significantly lower.

In our Coatings Business, we anticipate flat sales.

The outlook for our Tubing Business is a modest improvement over 2002.

In the Irrigation Business, the combination of a substantially lower sales to the Middle Eastern region and lower sales in our North American retail operations should lead to lower second quarter sales than last year.

When we combine all of these factors for the corporation as a whole, our earnings outlook is for somewhat unfavorable comparisons for the second quarter. For the year, unless the economy improves, we anticipate lower sales and flat to slightly lower earnings per share.

From a corporate perspective, we will focus on improving returns and operating performance. We have capacity in place to grow our businesses without major capital expenditures when markets improve. We continue to look for acquisitions that leverage our products, markets and skills. With our cash flow, apart from possible acquisitions, we plan to continue to pay down debt and fund internal growth.

And that summarizes the results of the quarter. At this time, we will open up for any questions you may have.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad.

We'll pause for just a moment to comprise the Q&A roster.

Your first question comes from Joanna Shatney with Goldman Sachs.

Good morning.

Good morning.

Can you just -- I want to just spend a little bit more time on the Irrigation Segment. Can we break out how much international was actually up, and how much was volume versus currency?

Volume versus ...

Currency.

Let me see here.

I would guess in rough numbers that half of the increase in international sales came from currency and half came from increases in volume.

OK. And was international up more in the U.S.?

I would say in a percentage they were up percent; maybe a little more.

OK. Can you guys comment at all about what's going on with the government financing in Brazil? There was one piece of it that did put into place in -- you know, had kind of replaced for January, and it's been going since then. And it sounds like the second piece that's more equipment-focused actually came in at some point in February, but I can't really confirm that. Do you guys have any insight on that?

Well, I can just tell you that our Brazilian operations are very busy. We actually have our plant running at capacity in Brazil at the present time, and I think we expect that for the next several months.

OK. Great. Thanks.

Your next question comes from James Sanders with Standard and Poor's.

Hi. Good morning.

A quick question for the restructuring -- well, maybe it's not restructuring, but is there gonna be a charge associated with merging the two groups; the Poles and the -- forgive me -- the infrastructure markets.

No, there's not gonna be a charge. We're gonna incur some severance pays that are gonna take place here during the current quarter. So, the benefit of some of this cost take-out we'll probably only see in the third and fourth quarter.

Third and fourth quarter, OK.

Yeah.

And then, the second question is with regards to your utility and wireless communications. Is that gonna be more driven by the wireless communications downturn? Is that what you're talking about there?

No, I ...

Going forward, I'm sorry.

Yeah, going forward -- well, you know, practically, wireless communication can't drop much more and still be a business. I think that the utility business is continuing to soften, and I think part of it is -- we talked about the high debt levels on some utilities, but I also think the industry is waiting for the Energy Bill that's being debated in Congress. So, we expect that business to: one, continue to soften for a while; and two, experience some pricing pressure as a result of partly, some of the companies that we're addressing -- the Wireless Communication Business is looking for new markets.

OK. And then finally, you just mentioned funding has been delayed for the conservation programs. Can you give a little more description about that?

Part of the Farm Bill -- there's some substantial funding for conservation initiatives, and Center Pivots qualify for that. And, actually, getting the funding available has been delayed as the funding is approved in Congress. But it is part of the Farm Bill and we expect that funding to become available; I can't tell you exactly when.

OK. Thank you very much.

Your next question comes from Arnold with Securities.

Hi, guys. This is actually Will for Arnie.

Can you guys actually quantify what cost savings you think you can get by combining wireless and poles?

Well, direct savings -- we expect to take out about four million dollars in cost on an annualized basis.

I think more important that the cost savings is the opportunity to utilize the skill sets and the assets we have in the Wireless Communication Division to go after product opportunities that have been identified within our Poles Group. One good opportunity is sign structures, where the Wireless Communication Division has already been subcontracting for the Poles Business. But, by putting the two businesses together, we'll find more opportunities where what we already had in place in Plymouth and Salem will be able to benefit the overall Structures Business.

OK. And now, when you guys are thing about your -- talking about this year's EPS being flat to slightly down, is that cost savings and new opportunities in the combined business kind of factored into that thinking?

Well, only about half of it, which we expect to get in the second half of the year. And when we look out, you know, we have a couple of big question marks. One is what's gonna happen to the general economy? One business that would benefit very quickly from any upturn is the Coatings side of the business, which deleverages quite significantly when volume goes down, and on the other side, leverages very well when volume goes up. And secondly, as we always have this time of the year, we have very little knowledge of what's gonna happen in the Irrigation Business in the second half of the year. So much is dependent on growing conditions, crop prices, weather conditions during the summertime. So that that part of the business, which is still a significant part of our overall business, can fluctuate quite a bit in the second half of the year.

All right. And kind of going on that, you should be pretty well into your spring orders for the Irrigation Business for this quarter. Can you comment at all how that's shaping up and what type of backlog you all are seeing in there?

Well, actually, you know, you're quickly approaching kind of the end of the spring season.

Yup.

And we're certainly seeing that in the marketplace. And I would have expected to see more activity in the market still here in the middle or late April than what we are seeing, and I have a feeling that some of it could be people sitting on the sideline waiting for some of that equip funding, which is the conservation funding out of the Farm Bill.

Also, you know, our farm customers read the same newspapers and have been following the war and have had the same concerns as to the overall economy, as all the customers we have.

So, would you say that that's more in this country? How about something in the Middle East? I know you commented a little bit on that in your press release.

Well, in our international business, the Irrigation Business in total has stayed strong, and is running ahead of last year. The exception is the Middle East, where, as you can imagine, there's basically activity at the current time. But both Southern Africa, South America, Australia, New Zealand, and to a certain extent, Western Europe, have stayed pretty strong in the international marketplace.

OK.

Also, in North America, one area where we typically have a lot of business that has been soft this year is the Northwest. That's, to a great extent, driven by potatoes. And the potato pricing environment is not as favorable this year as it was last year and the year before.

Um-hmm. OK. And now, you all have built out pretty considerable in China. Have you seen any impact in Asia in general from SARS and other concerns there like that?

We have not seen any business, in fact, on SARS. But we have had some impact on our traveling. We don't have people going to the Hong Kong or China area at the current time, but we are well set up with video conferencing facilities, so it's not slowing down our business activities.

OK. And finally, the last question is, it appears that you all bought back stock in the quarter. You've kind of talked about buying back debt. I just wanted to see if this is a bit of a shift in priority with your cash flow; if you plan to continue buying back stock through the rest of the year?

This is Terry McClain.

Basically, stock buy-back is usually if there's a block available, or if the price is right for a given day. We've just been executing what we've had authorization for up to this point.

OK. All right. That's it. Thanks, guys.

Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad.

Your next question comes from Tam Adler of JP Morgan.

Hi. I think basically my questions have been answered. I just wanted to double check; when you implied sort of a flattish to slightly down earnings outlook for the full year, does that also imply that basically your consolidated operating profit is definitely going to be down year-over-year for the entire year, because the benefit of fixed interest expense, or declining interest expense will be what drives whatever earnings growth you do get?

Basically, Tam -- this is Terry -- that's correct. I think we're looking at vaguely flat kinds of total profit. And it's the operating income side that we're concerned with on the leverage on the volumes we're seeing, as we've said, in communication and utility that have us looking with a little caution in the second half of the year.

OK. You know, now that the -- I guess the quarter is sort of over and done with, you know, I'd like it if Mogens could just sort of characterize, I guess, you know, how he felt the selling season went for Irrigation, given kind of the conditions that are out there sort of on the surface in terms of drought, commodity prices, age of the installed base, et cetera.

I would summarize it this way: first of all, we had a pretty strong sales season till now. As I expressed a little earlier, I think the season is coming to a close faster and earlier that what I would have expected. If I go back through the 20-plus years I've been involved in the Irrigation Business with Valmont, I would have expected the market to be even stronger. It was strong, but I would have expected more activity when you look at a strong Farm Bill, low interest rates, improving commodity prices, although not high commodity prices. But I think influencing the buying behavior we have had, the general economic weakness in this country, and the whole set of question marks surrounding events in the Middle East in general, and Iraq in particular.

So, that's kind of how I would summarize where we have been.

OK. Thank you.

At this time, there are no further questions.

Thank you, Jeff.

Included in today's discussion were forward-looking statements that involved risks and uncertainties, including operating efficiencies, availability and price of raw materials, availability and market acceptance of new products, product pricing, domestic and international competitive environments, actions and policy changes of international governments, and other risks described from time to time in our reports to the Securities and Exchange Commission. Any changes in such assumptions or factors could produce significantly different results. In addition, the prepared materials have been copyrighted by Valmont Industries, and contain information that is protected by law. Any reproduction or re-transmission of this conference call without written permission will be a violation of the applicable laws.

This concludes our call. We thank you for joining us today. The call will be available for playback on the internet or by phone for the next week.

We look forward to speaking to you again next quarter.

This concludes today's conference call. You may now disconnect.