Valmont Industries Inc (VMI) 2003 Q3 法說會逐字稿

Good morning. My name is Tina and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Valmont Industries third-quarter earnings conference call. (OPERATOR INSTRUCTIONS). Mr. Laudin, you may begin your conference.

Thank you Tina, and welcome to the Valmont Industries third-quarter earnings message. With me today are Mogens Bay, Chairman and Chief Executive Officer; Terry McClain, Senior Vice President and Chief Financial Officer; Robert Meaney, Senior Vice President; and Mark Jaksich, Vice President and Corporate Controller.

Before we begin, please note -- this discussion is subject to our disclosure on forward-looking statements, which applies to today's message and will be read in full at the end of this reporting. The instructions for accessing a replay of this message 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. Before I reviewed the details of the quarter, let me begin by saying that we are clearly not pleased with the results. Although our performance this quarter was hurt somewhat by the continued weak industrial economy, it was largely the extremely-competitive environment in the utility market, including weakness in the substation market, that affected our results.

The fact is competitors -- some previously focused on the now-weak wireless communications market -- have shifted their focus to the utility market over the last couple of years, using pricing as a tool to try to make inroads. Rohn, who had been a major player in the wireless communication market, filed for bankruptcy protection not too long ago, and IUSI -- International Utility Structures, Inc. -- a major Canadian competitor in the global utility market, with factories in Europe and North America, filed for bankruptcy protection just last week. These major changes in the competitive landscape bring turbulence, at least in the short-term. But they also bring opportunities for Valmont to further strengthen our leadership position in a market with significant growth opportunities, going forward.

We did not lead pricing lower (ph), but we do need to protection our share and maintain our leadership position in this important marketplace. Therefore, margined suffered.

Now, let me review some of the highlights of the quarter. Sales were down 1.5 percent; net earnings were off 49 percent, primarily due to lower pricing and weaker markets in the utilities business. We had very good results in our irrigation business. Profits were up 37 percent on a 9 percent sales increase. Sales were higher in North America, and despite a decline in sales in the Middle East, our international irrigation profits rose, led by strong performance in Brazil.

Now, let me review our performance by segment, starting with the engineer and support structure segment. Sales declined 5 percent, but operating income of 3.9 million was down 59 percent. Our performance here was primarily hurt by our results in the utility markets. Margins were lower, due to severe pricing pressures and lower substation volumes, as I talked about in my introduction.

The utility market has gotten a lot of attention, as to this summer's blackout. Much of the focus has been on the reliability of the transmission grid. Before deregulation, a traditional utility was responsible for generation, transmission, and distribution. Through a rate-based mechanism, they have compensated to maintain and upgrade the transmission grid. With a move towards deregulation, most new investment has been in the more-profitable generation side of the business. Under the current form of deregulation, there is less incentives to invest in transmission.

Valmont is a vendor to utility companies who are either expanding or upgrading their transmission networks. We also sell to independent power companies who add merchant power plants and need to connect to the grid. With the decline in generating capacity additions over the past my couple of years, we have experienced a decline in our substation markets. Utilities continue to invest in the transmission network, although at a rate that is below the growth in electricity consumption.

Currently, Congresses is in the process of debating an energy bill. A key feature of the bill -- one that has been the subject of much contention -- is determining the amount of authority the Federal Energy Regulatory Commission, or FERC, will have. This will determine the extent to which FERC will be charged with maintaining the reliability of the grid.

Also, it is not clear how market participants who invest in transmission in a deregulated environment will be compensated for their investment. One of the shortcomings of the current deregulation model is that the market base mechanism has not spurred enough investment in the grid. Over the past decade, while there's been a 30 percent increase in the investments in generation, the investment in transmission infrastructure has not kept pace.

Aside from that, there is still the issue of the continuing increase in the demand for electricity that should lead to increased investment in both generating capacity and transmission and distribution infrastructure. While there is no consensus, there is a belief by many industry participants that beginning in 2005, the demand for electricity begins to outstrip the supply. For this reason, and because upgrades to the transmission grid will have to take place at some point in time, we remain very positive on the prospects of our participation in the utility industry.

Our lighting and traffic results were mixed; sales and profits were lower in North America, whereas in Europe, sales were higher, profits lower. This business has very strong drivers, and we continue to see many opportunities for growth. Safety is an enduring driver for lighting because people feel more secure in well-lit public places. Better lighting signals and signs enhance traffic safety. Roadway improvements in construction programs drive the demand for street lighting and traffic signals. The construction of residential development, shopping centers, schools and other public places drive the demand for area lighting. These are the factors that should continue to underpin Valmont's growth in this business.

A major source of funding for highway and roadway construction is state spending and federal funding for the highway bill. State budgetary shortfalls are a concern, although they have not impacted our sales in a material effect today. The current status of the highway bill is that Congress adjourned its first session without passing a new bill. However, a five-month extension until February of next year was granted to the current bill, which expires on September 30. Congress is expected to take up a new bill following the start of the second session in January. Current proposals indicate higher levels of funding in the next six-year highway bill.

In our wireless and specialty structures business, the market remains at low levels in North America. The specialty structures division was profitable this quarter, due to cost-cutting measures in North America implemented over the last year, and higher volumes and good profitability in China.

Earlier this year, when we combined the poll and wireless divisions, our goal was to cut costs and leverage our manufacturing, engineering, and distribution. We've made good progress. New products have been developed by our specialty structure team and introduced to the market, using the distribution channel of our poles group. We have a growing backlog of sign structures and additional products are under development.

Our business in China is doing very well. We have expanded our product offering in the utility market with good success. The wireless communication market in China remains brisk, as China's service providers build out their networks. We are pleased with our success in China. We have a strong and loyal management team, who are good at finding new market opportunities and ways for Valmont to expand its business. Our latest initiative in China is a global sourcing group, focused on lowering the cost of our purchase components in all businesses.

In the coating segment, third quarter sales were 9 percent lower, with operating income dropping to 1.5 million. Custom galvanizing and anodizing sales are down, due to the continued weakness in the industrial economy. Internal volumes are lower, due to the weakness in the utility and wireless communication markets. We have experienced considerable deleverage in this business as the economy slows. When the economy turns around, on the other hand, we expect to quickly benefit with higher volumes and improved leverage.

In the irrigation segment, sales rose 9 percent for the quarter, and operating income rose 37 percent. In North America, dry weather and an improvement in crop prices were supportive to the market. Replacement of storm damage irrigation equipment also contributed to sales.

International sales were flat, but earnings were higher. Despite sharply-lower sales to the Middle East. In Brazil, higher crop prices and supportive government programs drove significant sales increases. In South Africa and Australia, continued dry conditions and higher crop prices have boosted sales.

In the tubing segment, sales of 13 million were 2 percent lower, due to weakness in the U.S. economy and lower pricing. Operating income declined 10 percent to 1.4 million. Because of its focus on providing high levels of customer service to niche markets, the tubing segment remains solidly profitable. Its operating income, as a percentage of sales, remains at double-digit levels.

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 accounts receivable is primarily the result of the effects of currency translations, and a larger portion of international receivables. The increase in inventories is also larger due to the effect of currency translations as the dollar has weakened. In terms of cash flow, the depreciation and amortization for the quarter was $8.6 million, and our capital expenditures for the quarter was $3 million. Total debt is down 21 million from last year's third quarter.

Looking to the fourth quarter, we expect higher sales in our infrastructure businesses. In the irrigation business, we expect higher profitability, but lower sales, as last year's sales response to the Middle East during the fourth quarter. We expect the irrigation's improved profitability to partially (ph) offset lower profitability in our infrastructure businesses. In total, we expect earnings per share to be about flat with last year's fourth quarter, which included a onetime impairment charge.

From a corporate perspective, the good news is that we have weather an extended difficult economic environment with pretty good performance. We will continue to focus on improving returns and operating performance. We do have the capacity in place to grow our businesses without major capital expenditures. We continue to look for positions that leverage our products, leverage our markets, and leverage our skills at the right value. Besides acquisitions, we plan to continue to pay down debt and fund internal growth with our cash flows.

I would now like to turn the call back over to Jeff.

Thank you, Mogens. At this time, we will entertain questions.

(OPERATOR INSTRUCTIONS). William Sidden (ph), CJS Securities.

In the second quarter, you mentioned that your utility sales were down about 50 percent. Can you comment on, relative to that quarter, how those sales faired in Q3? And how much was pricing and how much was volume?

Yes. Our utility business, in the third quarter, was not down more than probably -- less than 20 percent. And the biggest impact on the profitability was from pricing pressures, as I talked about at the beginning.

Okay. And now, the strength that you saw in wireless -- it seems like your wireless sales jumped pretty big from Q2. Can you comment on -- is that continuing into Q4?

First of all, seasonally, the third quarter is traditionally a very strong quarter in a relative sense for the wireless business. At the same time, I would guess that we are benefiting from some of the turbulence in the business with Rohn filing for Chapter 11. So, I think the biggest benefit regarding this quarter in wireless was more seasonal than a sustained improvement in the marketplace, in general.

Got it. Okay. And then looking at '04 -- can you just give us a little comment on what you are seeing shaping up for utilities spending?

Well, I think that the utilities spending in the transmissions side will probably remain at about level to what we have seen so far. Now, if an energy bill gets passed, that may change the outlook. But, even in that case, you know, it takes a while from an energy bill is passed and unfilled (ph) projects are actually being implemented. But, there is no doubt that there has been under-investment in the transmissions side of the grid in North America, and that, over time, we are going to see that being fixed.

I do expect to continue to see pricing pressures, as this shakes out. You know, as I talk about, we have had competitors filing for bankruptcy. And, as people are struggling to stay alive in this business, it can bring with it some unpleasant pricing environment.

Great. Thank you very much.

James Sanders, Standard & Poor's.

Just a quick question -- you talk about 2005 demand outstripping capacity and then you have the energy bill going on. I mean, in dollar terms, what kind of money are we talking about in general possibly coming towards that market?

Let me start by saying that -- you know, I cannot give you specific numbers. But, let's talk about two different issues. One is the pent-up demand in the sense that we have clearly seen under-investment in the transmission side of the business and distribution side of the business, over a number of years. A new energy bill may improve on that situation, depending on how the final version looks. If the Federal Energy Regulatory Commission gets more power to put transmission lines in place, we will see more investment. If the returns allowed in the transmission side of the business get improved, we will see more investments. And I think the blackout in the Northeast clearly indicated to people that it is something we have to address. That is one side of it. And, I think that will be the main driver for maybe a significant improvement in that market condition, going forward.

On the other side, it's just the ongoing additions required as this country requires more and more energy. So there are two different issues.

Okay. And then on a side note-- in terms of revenue contribution, how much came out of China this quarter? For year-to-date (indiscernible).

I would say, in total, China is probably not more than 5 percent (multiple speakers)

5 percent.

5 percent of total revenue, but the profitability in China is very solid.

And year-over-year, what was it last year?

Last year -- China is probably off (ph) about 35 percent.

35 percent? Just a housekeeping item -- I'm looking at your balance sheet here and total assets isn't equaling liabilities and equity. What is the difference there?

Just hold on one second.

It's minority interest, I'm assuming.

There is some minority interest in there. I am looking. (silence).

Why don't we take the next question, James? And we'll look at it her hear and get back to --

Sure.

Rick Duquesne (ph), Columbia Management.

It is obvious in this quarter that there is pretty substantial operating leverage. It obviously works both ways, but in this quarter worked against us, implying high fixed costs. What can be done from here on the variable cost side to sort of bring -- you know, to the extent you can control expenses down in line with where revenues are going? (multiple speakers) What specifically are your targeting in that regard?

Well, in general, we have seen significant deleverage, both in the coatings business and in other businesses where high fixed cost. What we have adjusted fairly rapidly is the variable costs; the direct labor side of the business, particularly in coatings. Going forward, as we continue to see weakness in some of these businesses, we will have to take another look at what can we do on the SG&A side of the issue.

As we have seen, the deleverage -- when volume is not here, particularly in the coatings business -- When the economy does strengthen, we expect to see similar very significant leverage what we go back up. But, it is really direct labor, and it is SG&A that we can address -- and will address.

Is there something -- there is specific targets that you are looking to address right now? Or is it wait-and-see?

No, it is not wait-and-see. We're just going in to preparation of the annual operating plans for next year. And that is when we will go through and detail where can we take SG&A levels to? And where are the areas where we can cut expenses as we wait for the economy to strengthen.

Okay. Thank you.

John Braatz, Kansas City Capital.

In terms of the utility business, you mentioned that Rohn and -- is it UIS, I think it is?

IUIS.

IUIS. Whatever.

Yes, whatever -- (laughter) International Utility Structures.

They both filed for bankruptcy. Is it those two companies that are really causing the headaches within the pricing atmosphere of the utility sector?

There have been other companies that have come in over the last couple of years. One of them was in bankruptcy and got bought back out of bankruptcy. But the players that have traditionally been the big players in the utility industry, apart from Valmont, has been Thomas and Betts --(multiple speakers). And they -- the traditional players, I can say, have not been the reason for the price decline; it has been some of the new players.

How significant of a market share position does like a Rohn and IUSI have within that sector?

Not significant.

But, they are causing --?

But, they are causing the price declines because, to a great extent, this is a tender business, and you have to prevent them from becoming significant players in this business.

Within the utility sector, is it mostly the pressure on the distribution poles and the substation, as opposed to the transmission towers?

Let me take it one by one -- on the substation side of the business, it is a weakness in the marketplace (multiple speakers) There, volume is much lower. As you know, generating capacity additions are not what they used to be and you have seen it reflected in what happens in General Electrics turbine business, etc. -- so that is one side of it. There, we have a weak market. I don't think -- it is not really pricing pressures as much as a weak market.

But, in the tender-driven business, as well as transmission or distribution, it becomes a pricing issue, actually, more than a volume issue.

Okay. Is the substation market weaker than you have seen it in years?

Yes.

I guess a question -- how quickly can that turn around? Or do you have any ability to forecast a turnaround in that sector?

I think there are a lot of unknowns. One is -- what happens with the energy bill? And two is -- what happens with the balance between supply and demand?

Okay.

So I cannot give you a good forecast. But that business was very, very strong in the '99, 2000, 2001 environment, and then it started weakening.

Okay. One final question -- given Rohn's position and the IUS, is there any interest in your part to acquire those assets -- although I'm sure you can't say -- but, I mean, is there any reason that you would be willing to take out a competitor and take advantage of that situation?

Well, I actually think that the industry, in total, probably has overcapacity.

Okay.

I would rather -- but I never say never -- there may be an instance where you want to take out some capacity. But, in general, we like to gain our position through just better competition in the marketplace. We would rather earn our increased market share than buying it.

All right. Thanks, Mogens.

Thank you.

(OPERATOR INSTRUCTIONS)

James, we have an answer for you on the balance sheet. Terry will take the question.

Yes, James, there are three items that make up the fundamental differences. There is a change in minority interest, which we do have; the deferred income tax liability; and the change in the value on the deferred compensation programs that is structured -- that has been there -- what we call a restoration in directors' comp. -- just the market value changes.

Does that answer your question?

Tina are there any more questions?

You do have a question from James Genteel (ph), Sidoti & Company.

A couple of quarters ago you mentioned the restructuring of the engineering support services, offering $4 million in annual cost savings. This quarter, if you look at the SG&A line, it is pretty much flat with the year-ago quarter. When are we going to start to see that incremental 4 million bucks and less expenses hitting the P&L?

James, to a large degree, we are seeing it in that particular business.

Okay. (multiple speakers) So, what is absorbing it, then?

Well, you are seeing higher levels of SG&A in some cases in the irrigation business because of increased volumes. You know, you are seeing some switches around, but as far as that particular business where we -- we are on track to get those cost savings.

And building on that, in the (indiscernible) business, we are taking out the $4 million we talked about. There are a couple of investments we are also making that you will see in SG&A. I talked about the procurement group in China, which I think is an important initiative that will provide great returns for that investment. But, as we set it up, we are spending money on it.

Secondly, we're making some geographic expansions in Europe. We're starting a new facility in the UK, and that is costing SG&A expenses as we are setting that up. So, it is kind of a mixture, but on the specific issue you talked about, that $4 million were identified and are being taken out. Now, having said that, as we grow the science side of that business, we will probably add SG&A as that business grows. And then, of course, we have had expenses in the wind powers side, as we continue to develop that. But, the changes there are minimal.

Okay. Have you ever seen such a difficult pricing environment in the utility space -- ?

No, we have not. We have not seen the utility pricing drop that drastically -- I don't think -- certainly not in the time I have been involved with Valmont. And I think what is different this time is the spillover from a marketplace that collapsed -- the wireless communication market. So there were a number of players that had capacity in place for poles, for wireless, and their market disappeared. So they are scrambling to find new opportunities. And, whereas it is difficult to enter some markets because of lack of distribution, etc., the utility market is one where they selectively can go after tender opportunities. And that is what we are seeing. And we simply cannot allow them to get a major foothold in that business.

So, then, I guess, to get any reprieve in terms of pricing in the utility business, you need a recovery in wireless communications -- is that --?

Not necessarily. You need a situation where some of these people will not survive in this business. Because, at the margins that they are taking business, I don't think they can survive. And the bankruptcy filings of (indiscernible) big players is a good indication that that is the process we're going through. (multiple speakers)

There are also a number of private players that are (indiscernible) bankruptcy or reorganization in this business. We mentioned the two public players, but there's other people out there that are really struggling. The question we always have is -- how much of that capacity really goes away or gets diverted?

Is there any sort of -- I mean, is it safe to assume that, you know, the worst is over? I mean, last quarter was pretty bad; but this quarter is even worse. Could there potentially be another (indiscernible)?

Well, I don't see the risk of pricing eroding much further, because pricing is as bad as we have seen it in a long, long time. So, I think -- I would like to say that the worst is over -- I may be able to say the worst is here. I don't know how long some of these players will hang in there.

And then one last question -- I'm sorry about the barrage -- You commented on your coatings business being sensitive to industrial production, domestically. Many of the domestic industrial companies have seen -- albeit maybe not necessary in the galvanizing end market, but there has been anecdotal evidence supporting an increasing volume, sequentially and year-over-year. Now, I guess, there has been some concern about the manufacturing economy in general. However, the numbers are coming on pretty strong in this quarter among some of the other industrial players, domestically. And I have not heard as much of a negative tone toward the current production environment, as you kind of dictated in your comments regarding the coatings business. Any comments?

Yes, let me talk a little more about it. If you look at the anodizing and powder coatings side of the business, we have seen an increase in quotation activity. So we're starting to see that at least there is more interest in getting quotations. Whether they will turn into additional volume, time will show.

In the galvanizing side of the business, even as the economy improves, since the galvanized products at the end of a project for infrastructure improvement where most of these products go into, we will probably tend to see that a little bit later than when you start seeing the general improvement in the economy.

Okay. So, are there any leading indicators that you're looking at in terms of looking at your coatings business over the next couple of quarters trending upward?

Well, in the anodizing side of the business, we have seen improved volumes of some of our industrial customers. And, in the galvanizing side, a big portion of the business is internal business from the utility side of the business and the wireless side of the business. And, even though pricing is down in the utility industry, we are seeing volumes, now, okay.

Backlogs are getting pretty firm at this point. I would not say they are up, but they are pretty firm with what we have seen. So, that is usually a good indication. But, it is slower than what we are hearing, anecdotally, and the marketplace -- as the same thing you are referring to.

Okay. Thank you.

Are there any more questions?

There are no further questions.

Okay. Thank you. Included in today's discussion were forward-looking statements that involve 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 (indiscernible) domestic and international government; 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 Inc., and contain information that is protected by law. Any reproduction or retransmission of this conference call, without written permission, will be a violation of the applicable law.

This concludes our call. We thank you for joining us today. This message will be available for playback of the Internet, or by phone for the next week. We look forward to speaking to you again next quarter.

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