Valmont Industries Inc (VMI) 2004 Q1 法說會逐字稿

Good morning my name is Kishanta and I’ll be your conference facilitator today. At this time I’d like to welcome everyone to the Valmont Industry’s first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there’ll be a Q&A period. If you would like to ask a question during this time, if you press star then the number 1 on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you.

Mr. Lobens, you may begin your conference.

Thank you welcome to the Valmont Industry’s first quarter 2004 earnings conference call. With me today are Mogens Bay, Chairman and CEO, and Terry McClain, Senior VP and CFO and Mark Jaksich, VP and Corporate Controller.

Before we begin please note, this discussion is subject to our disclosure on forward looking statements which applies to today’s methods 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. But let me provide an overview of the quarter.

First net sales rose 4% mainly due to the effect of foreign currency translation. Second net earnings were off 25% primarily due to weak pricing in the utility market for structures and weakness in our coatings business. Third, we had an excellent performance in China, sales and earnings doubled as the demand for infrastructure products remain strong. And fourth we had excellent results in our irrigation business.

Now let me review our performance by segment, starting with the irrigation segment. Sales rose 6% and operating income went up 7% to 11.8M. Sales increases in most regions were driven by higher crop prices around the world which continue to be supportive of this business. Part of the sales increase reflects price increases due to higher steel costs and increase sales in our retail operations. Our irrigation people did a good job of passing on steel price increases.

In international market sales were higher in Brazil Europe and the Asia Pacific region. In Brazil the farm economy remain strong and government sponsors financing programs was supportive to sales. Sales declined in South Africa. In this region most of the water used for irrigation is sourced from reservoirs where levels are down due to lower than normal rainfalls.

We continue to pursue our strategy of growth in our international irrigation business. By supplying valley pivots in key growing regions from nearby manufacturing facilities, we can compete successfully with local manufacturers. Further by continuing to expand and train our excellent dealer network we can grow ourselves and develop new markets.

Most of the world still uses inefficient flood irrigation techniques and when compared to this form of irrigation our mechanized irrigation equipment enables growers to reduce labor, increase yield and conserve water at the same time.

In the (inaudible) of support structure segment, sales increase 8%, an operating income of 1.4M was down 65%. We’re not happy about this performance. Steel price increases happened very rapidly in the first quarter. In some cases hot roll steel price increased in excess of 60%.This hampered our ability to increase sales prices and particularly to renegotiate prices on backlog orders with longer lead times.

Pricing crisis continued in the utility market for steel structures. Even though utility sales were similar to last years level, the first quarter of 2003 benefited from a backlog of good margin orders taken in 2002, where this first quarter reflected a much less favorable pricing environment leading to poor profitability comparison.

We do not expect this situation to improve significantly in the near term and we plan to take measures to reduce our cost structure.

In our North American lighting and traffic business, sales were slightly lower. Profitability was impacted due to uncertainty surrounding a new federal highway bill, an unfavorable product mix along with rising steel prices.

Federal funding for highway and roadway construction drives a large part of our North American lighting and traffic business. The status of highway legislation is as follows. The current highway bill was extended until June of this year. As congress returns from recess the house and senate conference committee would begin work on reconciling the differences between the senates 318 billion, 6 year bill, and the houses 275 billion version.

The President has indicated that the administration would prefer bid on the amount of no more than 256 billion and has threatened to redo a larger bill. Regardless of the exact size of the final bill, ending the uncertainty should be supportive to the industry and our business. And all of these numbers are higher than the previous 6 year bill.

In Europe sales of lighting increased slightly in local currency. Activity levels picked up in France and our plant in Poland increased production to help meet the French demand. Profitability in Europe fell due to severance charges related to personnel reductions in France and start off expenses at our new operation in the UK.

Sales rose in our specialty structures in wireless business. We are beginning to see signs of improvement in the wireless communication market and our order rate and backlog are increasing. While this business lost money in the seasonally weak first quarter, the loss was cut in half compared to last years first quarter due to the effect of cost reductions measured implemented in 2003.

We expect this business to return to profitability this year. Our entry into the overhead sign structures business is going well and sales and backlogs are growing.

Our structures business in China had a very strong quarter. We continue to enjoy success getting our utility product line accepted across the country. We believe we’re well proficient there. China had the huge demand for energy as they industrialize their economy. Chinese utilities recognized Valmont engineering and manufacturing expertise for sub station and large transmission and distribution structures. We expect continued growth in that business. China’s demands for electricity have been increasing at an average of 9% per year. Even though they are the second largest electricity producer in the world after the United States, they have only one-third of the installed generating capacity yet 4 times the population.

And wireless communication market also remains brisk in China as their service providers spilled off network. Our lighting and traffic business remain solid there also. In the coating segment first quarter sales was 17% lower and operating income dropped 78% to 446,000. Over the past 18 months we’ve experience considerable de-leverage in our coatings business. We believe that as the industrial economy improves so should our volume. This should translate into up-side leverage and a return to good profitability.

Sales declined in our iodizing business due to a model change roll out by one of our customers and the galvanizing business sales declined as some application customers were unable to get the steel they needed for their products. In addition to the volume declined zinc prices rose also impacting profitability.

One of the issues we’ve been dealing in our coating business in California has been the high cost and widening cost of workers comp expenses. Over the last couple of years expenses have gone up more than $1m per year which translates into 25 cents per share. So we are encouraged by the fact the California legislator had approved a work of comp overhaul. How fast we’ll see the benefit of that remains to be seen. But we think that we will start seeing better control over workers comps. In the rest of our organization we have good experience in our management of workers comp expenses.

In the tubing segment sales of 17.3m were 5% higher largely due to the past through of higher steel prices. Operating income rose 12% to 2.1m due to improved manufacturing efficiency. In this period of rapidly rise in the steel prices, steel availability has become an issue for the industry. Our tubing group did a good job of managing in this difficult environment to meet the needs of our customers.

That summarizes the quarter in terms of sales and earnings. Turning to the balance sheet I would like to comment on a few of the numbers. The increase in accounts receivable is primarily a result of the effect of currency translations on international receivables. Inventories are up both with higher steel cost and increased amount of steel on hand. In terms of cash flow the depreciation and amortization for the quarter was 8.5m and our capital expenditures for the quarter were 3.4m.

Last Friday we closed the acquisition, as you know Newmark is a manufacture of pre-stress strong concrete poles for the utility industry. This acquisition strengthens Valmont’s competitive position in the utility market. Concrete is an alternative to steel yet concrete poles have distinct advantage in corrosive environment and aggressive soil.

Yet concrete poles have distinct advantages in corrosive environments and (indiscernible) soils. Also certain US utilities prefer concrete structures to steel or wood. The competitive pricing environment is less aggressive for pre-stress bond concrete poles than it is for steel. As they have not seen the number of new entrants we have seen in steel.

Higher steel prices also will further support the competitive position of concrete products. Newmark is the leader in the concrete pole market. We have known the Newmark organization for a long time and have come to appreciate their technology and know how. We intend to leverage the newly patented hybrid pole which is a combination of concrete bases and steel top sections.

I will now ask Terry McClain to comment on our plan to restructure our balance sheets. Terry.

Thank you Mogens. In connection with the Newmark acquisition we evaluated our capital structure and with interest rates at historic low levels we determined that now would be an ideal time to restructure our debt financing for the long term. We determined that we could increase our debt capacity at reasonable cost. We have decided to refinance most of our long term debt.

Our new financial structure will include a $375m (indiscernible) of credit facilities and other debt. This new financial structure should give Valmont the flexibility and capacity necessary to finance growth at very reasonable costs over the next five to ten years. Under the new structure our long term debt to total capital ratio will move from its current ratio of below 30% to the mid 40% range.

Given our cash flow characteristics we should be able to reduce our long term debt levels over the next twelve to eighteen months to our normal operating range of 40%. When we pay off the existing promissory notes there will be a prepayment premium which is estimated today to be $11m pretax or 29 or 31 cents per diluted share. This charge will be taken when the financing is completed, which is likely to be in the second quarter of this year. I will turn the call back o Mogens.

Thank you Terry. Looking to the second quarter, we expect favorable comparisons in both sales and earnings. In the (indiscernible) our results should be similar to 2003. We expect better results in the North American marketplace, offset by a decline in our decline in our international market from last year’s record levels.

In our infrastructure businesses we look for better results overall. While we face uncertainties in the timing of the highway Bills as well the volatile steel markets we believe that on balance we should experience higher sales and earnings in lighting and traffic and specialty structures. Also, our utility volume and results should compare favorably with the second quarter of 2003. At this time our coatings business looks to be comparable to last year and our tubing business should show positive comparison.

From a corporate perspective we will focus on improving returns and operating performance. So to remain competitive we have to control costs and drive productivity improvement. As I said before we are looking at the cost structure specifically in our engineer support structure segment with a focus on the utility business. This concludes the prepared portion of our remarks. And I would now like to take your questions.

As we wait for the first question I just want to make one comment regarding China. We mentioned that our profitability doubled in the first quarter and I don’t want people to be under the impression that we are under one rate of doubling our profitability in China. That’s not the case. We expect improved profitability in China yet again. But first quarter is seasonably (indiscernible) a low quarter very much affected by Chinese New Year and weather. And this year we were less affected by these events and had a strong shipment throughout the first quarter which translated into very very good performance. So we will wait for the first question.

At this time I would like to remind everyone that in order to ask a question, please press star then the number one on your telephone keypad. I will pause for just a moment to compile the q and a roster.

Your first question comes from Will Sudan of CGS Securities.

Good morning gentlemen. Can you tell us what the value of your lighting and traffic sales were in dollar terms?

Just one second.

In essence they were flat in the quarter. I know you showed pretty strong growth in 2003. Can you just give us a little information on what’s behind that flat growth and what’s (indiscernible) up the industry too?

Well I think one of the things that I’d already mentioned is that normally when you’re between two highways bills and they each line about six years, it creates some uncertainty in the market place and it slows down the implementation in some new projects. It’s very difficult to put a number on what effect does that exactly have on our overall sales volume.

We have seen good increases overtime in the traffic and lightning businesses over many years and we continue to expect to improve that business. Specifically our lightning and traffic sales were about $58m in the turn quarter compared to about $57m in the same quarter last year.

Got it thank you and can you give us your dollar value of sales for China? I know you’d mentioned you’re getting a strong growth there, but on what dollar basis is that?

Well I think in total for the year we would expect to have our China sales in the $40m to $45m range.

What were they last year?

Last year they were in the mid-$30m range.

Okay thank you and finally can you---you mentioned that you took a severance charge of Europe in the quarter can you give us any confirmation of what that was?

I don’t have the specific number but it was several hundred thousand euros.

Okay thank you very much.

Well I would say in dollars about $1/2m.

And would you expect to take any further charges through the year or do you think that’s about it?

Well that depends on how our evaluation of the overall structure of our organization comes to pass and I would expect that we would take more charges through the year. I’m not referring now to Europe particularly but in general.

Okay thanks very much.

Your next question comes from James Sanders of Stanwick and Ford.

Hi guys I’m just trying to square a couple of things through, you’re saying that engineering and support for infrastructure market and your export was up 80% and the rest was looked down and then. How much is China involved with the increase in (indiscernible) support and is that primarily where the (indiscernible) profitability is coming from?

Did you refer to China?

Yes

Well China is where the doubling of profitability took place and China’s volume

Right.

And China’s volume in the in the first quarter was up and about doubled also.

Okay and how much does the make up of the infrastructure markets?

Well in the first quarter China’s sales were about $10m.

Okay, Second question is regarding the debt refinancing, the available borrowing capacity is increasing substantially can you prioritize what you’re looking at when you (indiscernible) that going forward is it going to opposition related or is it going to increase the dividend, is it going to be share buy back? Where are you going with that?

Well as we noted before our first priority is to fund our existing businesses (indiscernible). Our second priority is to look at acquisitions at that click into the business, very similar to Newmark type of acquisitions, then we reduce that to let’s say debt reduction would be a high priority and the last thing we would consider would be what we do with our dividend grade or what we might do with share repurchasing. At this time we plan no share repurchasing.

Okay is there anything that you guys are looking at on the horizon at in the near term in terms of acquisition?

There are a number of things to look at but you never know when that get so are we actively looking, yes. Is there anything intimate right now? No, and then the next step we are looking at is relatively small.

Okay and then the final question is the price increases that you put through for the increasedsteel cost can you quantify how much in the field price increase you were able to recapture with new price increases?

Well I think in total going forward we basically have pulled through most of the steel price increases. In the tubing business I’d say pretty much all of it and in irrigation pretty much all of it, we may have some backlog in the pole businesses and we’re going to see a little compression in margins but by and large overtime steel price increases will be pushed through. I mean all our competitors have the same issue as we do and the public knowledge of what is happening in the Steel industry is clearly widespread, so I don’t expect some major problems in going forward in (indiscernible) price increases.

Okay thanks guys

Thank you

The next question comes from James Gentile of Sidoti and Company

Good morning gentlemen, how are you doing? You mentioned that you are going to be looking at some cost restructuring in your structures business and if I remember correctly last year, you kind of went through the same process by integrating your wireless manufacturing into your support structures business. And now as you’re experiencing weakness in your utility area you are revisiting that, was the utility area essentially untouched from the last year’s shift in cost or …

We, it is essentially untouched from what you referred to when you we incorporated the wireless business into the structural business. We did do some reduction in costs in the utility business all the way back in the fourth quarter of 2002.

But with the current environment in the utility business and the extreme competitive pressures in steel. In my opinion we have no option but to act like if that is not going to be much better in the near future and therefore revisit that structure.

I see. But you know in a sense it is kind of safe to say that the raw material scenario as it does pertains to steel will probably subside a little bit. I have been reading some industry pieces saying that while we have peaked, while hot rolls and cold rolls have been up 60%, we have seen that peak kind of come off a little bit. Is it just going to be a reactionary kind of view of how you source your materials or is it more headcount or asset shuffles that you can do to save cost? Where are pulling the levers to..

Well actually, the steel prices have very little to do with the severe pricing issues in the utilities business. I think it has more to do with new competitive entries that came out of the wireless business as that business collapsed a few years ago and that has made steel much more competitive. A number of those companies have been sued chapter 11, some have re-emerged, some have not but I think that we should plan that the environment should stay tough in the steel utility business and therefore we have to act accordingly. And what we will be visiting is the overall structure. Are we structured in the most efficient way to build a market and where can we reduce the cost of that structure and we are in the middle of doing that.

Ok thank you.

The next question comes from John Bratt of Kansas City Capital

Good morning everyone.

Good morning John.

Couple of questions. Terry, on the debt refinancing, can you be a little more specific for us in terms of maybe fixed versus floating and what the average rate might be in the savings and so on.

Well generally, I will just give you generalizations John. Generally if you have a mix of about 50/50 fixed to floating that’s probably a pretty good balance. I think in this environment, it might be prudent to go a little bit more fixed percentage wise. And as far as the overall savings, I think its just based on what’s going on in the current market right now and if we can restructure the priority of the debt a little bit, we might get some advantages, long term in the spread.

Right now, what we are looking at is the market is so good it has moved up a little bit but it is so good compared to historical times that we think it is time to take advantage of it.

I know it can change but is there a number that you would throw out in terms of what the average rate might be. The blended rate?

I would rather not do that right now. But I think in a short period of time we should be to give you some indication of that.

Ok. Couple of other questions. In terms of Newmark. I think when you made the announcement of the acquisition you suggested that Newmark would be a accretive to numbers this year given the problems in the utility industry I know that you have indicated that Newmark is somewhat insulated from that but have you changed your thoughts on the accretion from Newmark this year?

No we haven’t. Newmark is off to a good year. They had good backlogs. They are performing well but I want to make sure that we understand that whatever charts it is involved in recent. We financing our whole balance sheet is not taken into consideration when I talk about …

Right I understand.

Yep. But no we expect a good year from Newmark.

Ok. And then in this release you mentioned about the second quarter numbers looking better and so on and so forth. Are you looking at the operations ex Newmark or inclusive of Newmark during this period.

We are looking at it both ways.

Ok

And but again, excluding the charge for refinancing.

Ok well excluding Newmark then, how would you characterize, the quote on quote, the core business in terms of your commentary for the second quarter that it would be up?

Like I talked to it. I think that (indiscernible) will stay about flat to last year which was a very strong year.

I am sorry Mogens, I was thinking more of the infrastructure business.

And the infrastructure businesses, we also calmly expect a good improvement in the infrastructure businesses and some improvement in the utility results and quite a bit of improvement especially, structures, which is the combination of overhead time structure and wireless. Significant improvement.

Then lastly, if you look at the numbers for first quarter, the gross margin was, I had it, it was 23.8% versus 25.5%. You know, how much of that decline can be attributed to the steel price situation.

Ahh… I can’t give you a specific amount. I would say the biggest portion of the decline is pricing in the utility market.

Ok.

So I hope that helps.

Ok thank you.

Once again, I would like to remind everyone that in order to ask a question please press start then the number one on your telephone keypad. Your next question comes from Terry Letveder of Freetman Investments.

This is a question for Mogens. Kind of follow up on your comment that you want to assume that the utility situation is not going to change and that’s why you are proceeding with some belt tightening. I am curious though, you know, what has, I don’t want to say changed your position but my interpretation before was that it was a wait and see that you know maybe the (indiscernible) would go away. But that seems not to be your posture on the situation now and I am a little surprised at that, especially since wireless is improving so much.

Well, a couple of things. We had a couple of new entries that actually went through bankruptcy. We have seen some of those come back out of bankruptcy. Now if wireless continues to strengthen as we have seen the indications of now, maybe those companies will be less active in the utilities market. But in my opinion that is not what we should hope for. If it happens that’s great but in any case we should try and sharpen our pencil in getting cost out of the structure.

I see, I see. Well that’s helpful. Well my second question is, in the coating segment, whenever you typically see industrial upturns, at what point in the cycle of upturns does the coating segment start to benefit? Is it, does it improve with general industrial improvement or is there a lag of some sort?

I would say it all depends on the product. You know in the coatings business, we coat a lot of different products. If you think about a boat trailer, you know we will see that business come in as soon as people start spending money again on boats. If it comes to infrastructure issues you are fairly late in the product cycle because typically some of the last things being installed maybe galvanized products going into infrastructure so its all over the map but we lag going into the slowdown in the US economy and therefore I think we also lag in going back out.

But we probably also have had a situation that we’re quite sure that our smaller fabricators who are our customers that bring in the fabricated steel products did get hurt by the sudden ramp up in steel prices. Either they did not feel that they could pass that cost on to their customer or they had an availability problem. And that was probably also moved this quarter out a little bit from normal.

Alight. Ok well thank you.

You’re welcome

At this time there are no further questions.

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 of domestic and international governments and other risks described from time to time in our reports to the Security and Exchange Commission. Any changes in such assumptions or factors could produce significantly different results.

In addition, the prepared material has been copyrighted by Valmont Industries Incorporated and contains information that is protected by law and 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 message will be available for playback on the internet or by phone for the next week and we look forward to speaking to you again next quarter.

This concludes Valmont Industries first quarter conference call you may now disconnect.