Valmont Industries Inc (VMI) 2003 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Valmont Industries fourth quarter earnings release 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. (OPERATOR INSTRUCTIONS). Mr. Laudin, you may begin your conference.

Welcome to the Valmont Industries fourth quarter 2003 earnings call. With me today are Mogens Bay, Chairman and Chief Executive Officer; and Terry McClain, Senior Vice President, 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 call and will be read in full at the end of the 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 again. I trust that you have had an opportunity to read our earnings announcement. Before I review the fourth-quarter results, I would like to make some comments about the full year. In the year 2003, we continued to focus on our strategies for global growth and increased returns. Our results were mixed. Our strategy for growth is a simple one; the key word is leverage. We attempt to leverage our products, our markets and our capabilities. This year we expanded our geographic coverage in Europe to sell more structures as an example of leveraging a product. We added new decorative products to our lighting and traffic markets. That is an example of leveraging our market knowledge. And we entered new markets using the talent of the wireless communication engineers to develop new products for our lighting and traffic group. That is an example of leveraging our capabilities. These are just a few examples of our leverage strategy at work.

We are disappointed that the economic environment did not allow us to deliver better financial results, though. Many of our businesses are cyclical and our task is to manage through the down cycles. When the cycles turn up, we should benefit from cost reduction and productivity efforts as volume and margin increase. This year, we faced increased competition and depressed pricing in our utility market. (indiscernible) participants in the weak wireless communication market continued to enter the utility market, using mainly price to gain a foothold. In our coatings business, we delevered as internal volumes fell and weakness in the business conditions for our customer base persisted.

On the other hand, it was an excellent year for our Irrigation business. Despite an almost nonexistent market in the Middle East, which used to be an important part of our business, we had record sales in international markets and achieved record operating profit for the business. We also were successful in combining our Wireless Communication and Pole division to create the Engineered Structures Division. This move allowed us to expand our productline and enter new markets. It also led to a lower cost structure and a more streamlined organization that better leverages our manufacturing capacity and the talent of our sales and engineering professionals.

Now let me review some of the highlights for the quarter. First, net sales rose 5.3 percent. Second, net earnings were off 4.8 percent, primarily due to lower pricing and weaker markets in our utility business and lower comparisons in our coatings business. Third, we had very good results in our Irrigation business; profits were up 41 percent. Most of the profitability gains here came from higher equipment and (indiscernible) sales in North America, favorable currency translations and lower selling, general and administrative costs.

Let me review our performance by segment, starting with the Engineered Support Structure Segment. Sales increased 11 percent and operating income of $5.6 million was down 34 percent. Our performance suffered mostly because of pricing pressure in the utility market; while volumes were up, margins remained very depressed. I would like to take a few moments to discuss the utility market. In recent years, two trends have temporarily impacted the competitive landscape of our utility business. The downturn in the wireless communication market that started in 2001 severely affected many of our communication competitors. Several have operated under one form of bankruptcy protection or another. To survive the downturn in the wireless market, some competitors aggressively entered the utility market. While this temporarily depresses the market, we believe that in the long-term these pricing levels will be difficult to sustain. We believe that Valmont with multiple plants and global presence should have a competitive cost advantage in this market. We believe that the current pricing environment is not sustainable, but we are not predicting any short-term relief.

At the same time that the wireless communication market weakened, capital investment in the utility market declined, particularly as it relates to substations. Since more competitors were left chasing a smaller piece of the pie in both the wireless and utility markets, business suffered. The blackout in the Northeast in August of last year should serve as a warning that continued underinvestment in utility infrastructure cannot be sustained without stresses to the system. We believe that in time, utilities will accelerate investments in transmission and distribution infrastructure to improve reliability and expand capacity. We are confident, therefore, that the utility market will emerge from its cyclical downturn in the next few years. When it does, we believe we will be well-positioned for the upturn because of our higher customer service levels, our capacity and our design and engineering capabilities.

Returning now to our quarterly performance, results were mixed in our Lighting and Traffic business. Sales and profits were higher in North America, whereas European sales were higher but profits lower. Funding for the highway and roadway construction drives a large part of our North American Lighting and Traffic business. During the quarter, our business remained strong as the current highway bill was extended until this month. Additionally, our ability to work with our OEM customers has been a competitive advantage in our Commercial Lighting business. Congress is debating a new highway bill. Current proposals indicate higher levels of funding for the next six-year bill. The degree of increase is uncertain. The administration is calling for a modest increase and Congress is proposing large increases. The absence of a final highway bill could lead to uneven order flow over the next few months. However, once the bill is passed, we should see stability and an upturn in the marketplace.

In our Specialty Structures and Wireless Business, sales rose modestly. The Specialty Structures Business was profitable for the quarter due to cost-cutting measures implemented over the past year. By combining the Pole and Wireless Communication Business, we have realized approximately a $4 million annual cost saving as predicted. In our Structures business in China, we had a very strong quarter. We have had good success in expanding our utility productline this year in China. The wireless communication market in China also remains brisk, as China's service providers build out their networks. And our Lighting and Traffic Business performed well. Overall, we continue to be very pleased with our progress in China. We started with a modest investment in the mid-90s and it has grown to a business generating approximately $35 million in revenue and growing. We now have had seven years of improved performance in a difficult environment.

To manage our risk, we initially built only one facility in China. With that facility, we have established Valmont as the market leader in several market segments, including Decorative Lighting and monopoles for wireless communications. We are gradually adding capacity in China now in order to satisfy the growing demand for our products. Our Shanghai facility has become an important part also of our global manufacturing network and a platform for export from China.

In the Coatings Segment, fourth-quarter sales were 6 percent lower and operating income dropped 67 percent -- two-thirds -- to 1.1 million. Sales are down due to weak conditions in the industrial markets we participate; internal volumes are lower due to the slower utility and wireless communication market. Profitability comparisons for the quarter also reflect last year's gain on the asset sale of 1.2 million. Higher worker's compensation costs in California also impacted profitability. In our experience, the Coatings business somewhat lags the economy; as the economy slowed, we experienced considerable deleverage. Conversely, with a pickup in the industrial economy, we eventually expect higher volumes and, significantly, increases in profitability.

In the Irrigation Segment, sales were about even for the quarter and operating income rose 41 percent. Our North American business was supported by higher volumes and increased part sales. Higher sales in Brazil and Australia somewhat offset lower sales within the Middle East. Profitability for the segment was higher due to higher part sale in North America, increased international profitability, favorable currency translations and lower SG&A expenses.

Since we made our first investment in local (ph) manufacturing and distribution over 20 years ago, we have systematically built our international irrigation business. We now manufacture in Spain, South Africa, Brazil and the United Arab Emirates, in addition to our two U.S. plants. It takes many years to build such a successful organization. Valmont has over 300 dealers located in key agricultural markets around the world. While we have tough competitors wherever we are, the Valley brand continues to excel with leading technology and unmatched durability and reliability. An industry-leading product, a well-trained dealer network and local manufacturing and distribution create a winning combination and a successful global irrigation business.

In the Tubing Segment, sales of 14 million were 3 percent lower due to continued weakness in the U.S. economy and lower pricing. Operating income declined 25 percent to 1.3 million, primarily due to an inventory adjustment. Our Tubing business remains solidly profitable and our strategy for this business is continue to find niche markets that require high levels of engineering and manufacturing skill and then provide exceptional customer service. We have no interest in becoming a commodity tubing supplier, which could lead to rapidly increasing revenue, but I'm afraid also rapidly declining returns

That summarizes the quarter in terms of sale and earnings. Turning to the balance sheet, I would like to comment on a few of the numbers. Our cash balance increased as we generate more cash in our international businesses without offsetting debt. Most of our cash balance is in international locations and we are repatriating it to maximize tax efficiency. The increase in accounts receivable is primarily a result of the effects of currency translation and a larger portion of international receivables, as that business continues to grow. International sales generally carry longer terms.

Inventory declined, as we reduced inventory in the Wireless Communication business and had less raw material inventory on hand. In terms of cash flow, the depreciation and amortization for the quarter was $8.5 million and our capital expenditure for the quarter was $4 million. Total debt is down $14 million from last year's fourth quarter, resulting in a long-term debt to capital ratio now below 30 percent.

Looking to the full year ahead of us, 2004, we expect improved performance. In the Irrigation business, our result should be similar to 2003. The North American market looks solid. Rising corn, soybean and cotton prices should be supportive to farm income. In our international market, we do not expect a recovery in the Middle East, and our other markets may not quite achieve the record levels seen in 2003. In our infrastructure businesses, we look for better results in total. While we face uncertainties in steel and the timing of the highway bill, we believe that on balance we should experience higher sale and earnings. Our Coatings business should eventually improve, following an improvement in the industrial economy; and our Tubing business is off to a good, solid start for 2004.

There are two issues facing our Company that could impact our outlook. Short-term, the weather. Weather disruptions have already had an impact on our first quarter with manufacturing, transportation and information delays. This, coupled with continued softness in our utility markets, leads us to anticipate a slightly unfavorable first quarter comparison. Another issue facing Valmont and its competitors in 2004 is steel pricing and availability. China is aggressively expanding its steel production. This has caused the demand for raw materials to rise. With these materials in short supply, our domestic mills have started to allocate steel among their customers. The frenzy to secure availability has driven prices up sharply. To date, we have been able to secure a steady supply of steel. We are a major buyer of steel and we have good relations with our steel suppliers. To adjust for our increased field cost, we must in turn pass our pricing increases on to the marketplace as quickly as possible.

From a corporate perspective, we will focus on improving returns and operating performance. We have to control costs and drive productivity improvements in this environment. We have capacity in place worldwide to grow our businesses without major capital expenditures. We continue to look for acquisitions that leverage our products, markets and skills at the right value. With our cash flow, we plan to continue to pay down debt, fund internal growth and fund acquisitions. I would now like to turn the call back over to Jeff Laudin.

We are now ready for the question-and-answer section of our call.

(OPERATOR INSTRUCTIONS) Will Seddon of CJS Securities.

In the third quarter, I think you gave us a breakout of your energy and support circuit (ph) sales by wireless utility and lighting. Could you give us a similar breakout for this quarter?

Hold on a second.

While we're gathering that, did you have another question?

I did. It looks like your Coatings revenue, if I'm correct, it typically correlates somewhat in terms of at least direction of growth with your utility sales. It's tough to tell until I have that breakout, but I think Coatings were down a bit this quarter, while your overall Engineered Support Structures were up. Can you just comment a little bit on that divergence?

Our Coatings business, to a certain extent, follows what happens in our steel pole businesses, whether it is for lighting or utility, depending on which of our pole plants are the busiest. Not all of our steel poles are being galvanized by our own facilities; so therefore, there is not always a complete correlation. Also in our Coatings business, a big portion of the revenue comes from our anodizing business and you can have quite big swings from customers such as MagLite and Motorola that can impact our quarterly volumes. Returning to the question -- your first question, Terry McClain has --.

The Lighting business was 67.5 million, Utility 24.3, and Communications 23 (ph).

Great. Thank you. Talking about the weather delays that you have seen in this quarter, are those orders just simply pushed out of it, so we might see them flow into and give us a little more strength in Q2?

Usually what happens is that if we don't get the backlog we plan to get out in the first quarter because of either delays that are caused by weather in our plants or customers' inability to take delivery because of severe weather conditions, we expect those shipments to take place later in the year. Now, that doesn't mean that you can't affect the overall year's performance somewhat negatively if a customer doesn't have the capacity to continue to take as much as you otherwise planned. But I have no indications at the current that that will be the case.

Great, thank you very much.

(OPERATOR INSTRUCTIONS)

While we wait for the next question, I may want to elaborate a little bit on China. China is a country that we have had a great deal of interest in for a considerable period of time. I think we have been prudent in not overinvesting in China early on. We have basically, from an investment standpoint, been there for the last seven years. And we have built, in my opinion, a very good local organization. We only have one expatriot employee left in China, and in total I think we have more than 300 employees.

We have a busy plant in Shanghai; it is well utilized, and we are slowly adding capacity to continue to grow our businesses. What we are evaluating now is as the immediate capacity we have added has been in the general area of our main plant in Shanghai, where do we go next? It may in the (indiscernible) area in southern China. But we will clearly continue to push our leadership position in China, and at the same time make sure that we don't expand so fast that we can't build the organization to support it. That is really the biggest challenge we have in China, is to continue to build an organization that in turn can then build the business. Long-term, there is no doubt in my mind that all of our product lines, including Irrigation, have tremendous opportunities in China, and we will continue to expend executive resources and financial resources to find the best way to go after those opportunities. And I don't know if we have another question.

Terry Ledbetter (ph) of Friedberg (ph) Investment Management.

I wanted to ask you about just as far as the competition and the competitive environment goes in the Utility Structures business, you provided a lot of details last quarter about competitors that had recently filed for bankruptcy and that kind of thing. Has the environment changed at all in that? Have you seen any kind of improvement or suggestion of when you might experience change?

I would have to say no. We haven't seen any improvement. What I think could change the picture is the whole question of steel availability. I would think and hope that our relationship with steel suppliers and our size as a steel consumer would allow us to have preferential treatment if there is a tight supply situation.

I see. Okay, thank you.

Will Seddon of CJS Securities.

I just wanted to follow up. Your interest expense is down pretty substantially this quarter. Could you comment a little bit on what caused that. I know you paid down some debt, but it's still a pretty big drop.

The major switch is the fact that we paid down some long-term debt and refunded it with more short-term pricing.

Okay. On balance, is this roughly $2 million quarterly number a closer approximation for what we should see in '04?

Going forward, yes.

In terms of priority of free cash flow, you have your net debt to capital down well below your targeted 40 percent level. Can you just comment on a little bit of what you believe you'll do with free cash in 2004?

We still have the same priorities for free cash flow. One is to fund internal growth. Two is to pay down debt. Three is -- and we are now at a very comfortable level, as you pointed out. Three is to buy acquisitions that click well into our core businesses. We are constantly looking at opportunities that would be good fits within our main businesses; and again, it comes down to leverage. We want acquisitions where we can either leverage a productline, a marketplace or a capability. And predicting acquisitions, as you know, is probably impossible. But that is priority number three. And hopefully, we will find some opportunities. And the last one would be to return money to shareholders in the form of dividends, which we continue to pay, or buy back stock.

Could you just give us your CAPEX estimate for '04?

Our budgeted number is about 20 million for 2004.

Great. Thank you very much.

At this time, there are no further questions. Mr. Laudin, are there any closing remarks?

Yes, included in today's discussions 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 environment; actions in politic changes of domestic and 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 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 laws. This concludes our call. We thank you for joining us today. This call will be available for a playback on the Internet or by phone for the next week. We look forward to speaking to you again next quarter.

Thank you. You may now disconnect.