Valmont Industries Inc (VMI) 2004 Q3 法說會逐字稿

Welcome everyone to the Valmont Industries third quarter earnings conference call. (OPERATOR INSTRUCTIONS). I will now turn the conference over to Mr. Jeff Laudin. Please go ahead sir.

Welcome to the Valmont Industries third quarter 2004 earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer; Terry McClain, Senior Vice President, Chief Financial Officer; Rob 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 this recording. The instructions for accessing a replay of the call can be found in our press release. I would now like to turn the call over to our Chairman, Mogens Bay.

Thank you Jeff and good morning everyone. Thank you for joining us and I presume that you have had an opportunity to read our earnings announcement. Before I get to the highlights, let me begin by making a general comment about the performance of the quarter. Throughout the year, we have faced dramatic increases in steel prices and during the third quarter, the rate of steel price increase has slowed as there was only one major increase early in the quarter. Generally speaking, we were able to increase prices to cover inflation, although, not always to the full extent of the cost increases which did put some pressure on margins. Another aspect of the tight steel market was its effect on our inventories because availability was an issue and steel vendors were unwilling to give firm pricing on a long-term basis. As a result, we increased our inventory levels to cover our backlogs. Inventory also increased approximately $20 million from last year due to acquisitions. If what we currently see in the steel market holds true -- that is some stability in price and better availability, we believe that we will be able to work down on our inventory over the next 90 to 120 days. As most of Valmont's North American operations use the LIFO method of inventory evaluation, the record increase in steel pricing during 2004 have required an increase in the LIFO reserve of approximately $20 million for the first 3 quarters.

Now going for the highlights. First, net sales rose 30 percent due to the acquisition of Newmark, higher volumes in the Engineered Support Structure Segment and increased product pricing to recover higher steel cost. Second, operating income was up 61percent due to the acquisition of Newmark, strong performance in the tubing business, and an improvement in the utility and wireless communication markets. Third, irrigation sales rose slightly due to higher pricing to recover increased steel cost; however, margins were under pressure world-wide and fourth, net earnings rose 74 percent as a result of the acquisition of Newmark and the higher sales and improving profitability in the wireless communication and utility product lines which were weak last year.

Now let me review our performance by segment, starting with the irrigation segment. Sales rose 6 percent with increases in both North American and international markets mostly due to price increases. Margins were under some pressure as we were not able to fully recover higher costs with price increases. As a result, the operating margin declined slightly by 5 percent. Early in the year, crop prices were stronger and growers were ordering ahead of price increases. The third quarter is seasonally our slowest as growers generally do not install pivots on already planted fields. As the quarter progressed, the growing conditions were favorable and the prospects of a large crop became apparent, this put pressure on crop prices. Typically, after the harvest is complete, we can better gauge the upcoming season based on activity at our dealers. As a result of lower commodity prices, a late harvest, higher selling price of our equipment, and rising fuel costs, demand early in the season is lower than at the start of the season last year.

In the Tubing segment sales of 22 million was 65 percent higher than 2003. Operating income more than doubled to $4.1 million from $1.6 million last year. The sales increases were due to volume growth and higher pricing, reflecting increased steel cost. Steel availability was an issue in the competitive market. While some of our competitors were unable to sought all the steel they needed, Valmont had supply available in the tight market. The increase in volume had a direct impact on improving manufacturing efficiencies and good factory utilization. In the Engineered Support Structures segment sales increased 27 percent, an operating income of $7.8 million, was up 48 percent. Global sales of lighting and traffic were higher due to a combination of higher pricing to cover field cost and generally improved market conditions.

In North America, demand was higher from our commercial and transportation customers. As of early last week, 1998 highway bill was extended for another 8 months, until May 31, 2005. There has been an unprecedented delay in the passage of a new highway bill, but as a result of the extension, order flow is steadier than in prior periods, between highway bills. We do need a new highway bill though and expect that when we get the election behind us and Congress gets back to work, that we should have one by early next year. Sales of wireless communication product improved. In North America, the wireless carriers continued to expand their networks with new sites and by co-locating on existing sites. We benefit as new sites require structures and components and co-location requires often engineering services and components.

In China, our wireless communication business slowed somewhat from the extreme strong pace of the first half of the year. We geographically expand our sign structures business. We purchased Sigma Industries, a sign structure company, located in Selbyville, Delaware. Sigma has annual sales of approximately $13 million. The acquisition broadens our reach interest several eastern States and brings additional manufacturing capacity and design expertise to Valmont. We will slow down in wireless communication over the past few years. We view sign structures as an opportunity to leverage our engineering and manufacturing assets, previously only dedicated to the wireless products. Sign structures complement our existing Engineered Support Structures product lines very well. We are pleased with the way this product line has developed and Sigma now tails well with this strategy.

Sales of steel utility structures rose. There has been noticeable improvement in the competitive environment and demand improved. It appeared that utilities have increased their capital budgets and spending to improve the reliability of the transmission grid. In China, we are on track for record year on utility sales. In the third quarter, the pace slowed a little bit, presumably as a result of the Central Government's effort, they have to prove the economy. China has growing industrial economy overall, needs more energy and our Shanghai facility is helping to satisfy this growing need with, both structures and with substations.

The concrete structures business, with the acquisition of Newmark earlier this year, had record third quarter sales. Demand for concrete structures remains strong for the same reason cited earlier of the steel. Investors have asked about our participation in the restoration efforts after this swarm of hurricanes. From a short-term perspective, the hurricanes actually pulled resources away from scheduled projects to focus on restoring power in the affected areas. So, on balance, there was really no meaningful impact on our financial results for the quarter as a result of hurricanes.

Valmont and Newmark structures performed very well in the severe conditions inflicted by 4 hurricanes in Florida. And on a long-term basis, our products are critical to the restoration and upgrading of the electrical grid in storm prone regions. The storms did not significantly damage our facilities in the region. Valmont is proud of our employees in Florida, Georgia, and Alabama who suffered through the storms and rallied to support the rebuilding efforts. Our support and appreciation goes out to them and to their families. In the coding segment, third quarter sales were 22.5 million, were 12 percent lower than last year and operating income declined 21 percent to $1.5 million. Galvanizing sales were higher due to increased internal demand and an improvement in the industrial economy. We saw good upside leverage in the galvanizing operations for these higher volumes. Performance in the segment suffered from decline in anodizing volumes, and increased workers compensation costs in California. Recent reforms in the workers' compensation program there should moderate these issues as we go forward. 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 receivables is primarily the result of the higher volumes and the Newmark acquisition. We've already discussed the increases in inventories. In terms of cash flow, the depreciation and amortization for the quarter was $9.9 million and our capital expenditures for the quarter was $6.2 million. We expect positive cash flow in the fourth quarter as we wrote down inventories. Looking to the fourth quarter, we expect favorable comparison in both sales and earnings, although not to the same degree as we saw in the third quarter. Steel prices were high, appear to be stable for the time being overall. There are still shortages of the raw materials needed to make steel, and China continues to have a large appetite for import of steel. Consequently, we do not expect steel to fall in the near future.

In our Irrigation business, the new season is starting slow, most likely due to the late harvest and fall in crop prices. We'll get a better view of the new season later in the fourth quarter. Based upon what we've seen so far, we would expect the fourth quarter Irrigation comparisons to be slightly lower than last year. In our Engineered Support Structures business, we look for better results in all product lines. Demand is higher for our steel utility and wireless communication product lines and funding remains in place for transportation spending programs, which should support our lighting and traffic product lines. We anticipate continued good performance in our Concrete Support Structures segment, and our Tubing business should also continue to perform well supported by demand from agricultural and industrial equipment manufacturers. This concludes the prepared portion of our remarks, and I would like to take your questions.

(OPERATOR INSTRUCTIONS). Arnold Ursaner, CJS Securities.

Quick question. I ask you on the adjustment, can you remind us how often you make these adjustments and do you use either internal or external price in the industries to make your decision?

This is Mark Jaksich. The calculations are made every quarter, and are based on the internal figures, what we deal with is some of the inventory based on beginning in end-of-year pricing.

And again focusing on inventory, quarter-over-quarter you had $38 million jump and, unless I am mistaken, and you had no acquisition other than Sigma in the quarter. Can you give us a little better feel for the breakdown of that incremental $38 million of inventory quarter over quarter?

The increases in those inventories took place really between Tubing, and our Structure's business, and Irrigation, collectively in all of those businesses.

Is the majority of it raw steel?

Yes. Majority of it's raw.

Okay. And again, would it be fair to assume that a good portion of that will work its way down over that 90 to 120-day period?

Yes. That would be fair to assume. This is Mogens. And one of the things that we benefited from over the last few quarters has been the fact that we did get steel in a very tight market, and therefore we were available to take advantage of that. That did also reflect then in higher inventories. But as said in my prepared remarks, we expect steel prices to maybe stabilize more at about the level it is now. And as a result of that, we may be able to get back for longer-term commitments with our suppliers and when we get those in place that will ease the requirement on our part to have the inventories on hand.

And can you walk us through how the -- how this works its way through the cost of goods sold? How much of it hit in the current quarter and how much will hit going forward?

I don't know -- I don't think -- I don't know what you mean about going forward?

But did you take a hit in the quarter in your cost of goods, as you worked it -- is the inventory item through?

Well, the LIFO adjustment was taken during the first three quarters of the year, year to-date we have increased those reserves by $20 million.

What was the impact in Q3?

I don't have that number with me, we have to get back to you on that.

My final question for Mogens if I could, you indicated, obviously, a very nice pickup that appears to be underway in the electric utility market. Can you explain a little bit on what you are seeing that indicates our capital spending improvement and what you described as a better competitive environment, could you expand a little bit on that?

Well, you would recall, particularly last year during 2003, we basically had a collapse in the profitability in the utility business as two things happened -- one, there was -- the market was weaker than the previous year, but may be more importantly as a result of the wireless communication collapse, we had a number of new competitors getting into the utility side of the business. What we've seen this year is 2 things -- one, increased demand and the increased demand must come from better budgets at the utilities, but at the same time we have also seen better pricing discipline in the market. And I think part of that is probably a result of, again steel availability and uncertainty about what's going to happen to the price? But the whole environment is better this year, and I think what we also said was that we have had some recovery in the utility business, but it is still not operating at the levels we think it can operate at and we expect further improvement going into 2005.

Two more book keeping questions, if I may, where there any revenues in the quarter?

Yes, there was approximately $2 million, I believe in sales.

And what segment would that go in?

That would be in the engineered support structure segment.

Final question on China, you were down in the quarter, can you perhaps remind us or guide us on what you think your revenues for the full year '04 would be out of China?

The full year revenues are going to be probably between 45 and 50 million.

(OPERATOR INSTRUCTIONS) Jeffrey Brown(ph), Credit Suisse First Boston.

I just wanted to stay with steel again, I know he talked a lot about it, but I guess, overall, I guess you can say on a gross or net basis, whatever you, you know, whatever is easiest for you guys, what is -- what was the cost in the quarter and same question as far as price increases, you can give it overall or by segment, whatever, generally, that you are kind of imposing on the different products that you guys have?

Let me try to take a shot at that. In terms of the price increase, I think we indicated that our price increases do not totally cover the cost increases of steel. In general, we did in fact on our backlog type businesses -- the pole businesses, structures businesses primarily. That is where we built most of the inventory to cover backlogs that build into that business. I don't think we have -- we can get back to you after we have a specific breakdown on the impact for the quarter. The specific question you asked for, we can get back to you on that.

As far the steel grows from that -- would it probably cost, it would cost at least a couple of million dollars in the quarter and that estimate is after pricing. After, I mean, after prices increase on your side?

That would probably be a fair number. But let's get back to you on that.

Okay and steel again, if you were to look at steel year-over-year, how much of -- is your cost up, I mean is it 50 percent, 80 percent, 20 percent and can I get sequentially what the change is as well.

All right, it's varies by grade of steel and type of steel. But some of the steel products that we have are more than double what they were a year ago. Others are up, maybe 60 percent, probably the lowest increase we have had is 20 to 25 percent. Maybe to give you an example of how it works out in the market place, I would say that in our irrigation business, the price to all our dealers for the irrigation system is probably up about 25 percent, compared to what it was a year ago. And that is all, it was all from increased steel pricing and we steel may go up a little more because we have seen a slight compression in margins there.

And just one last question on steel. I mean assuming that your pricing, all your pricings have had stock and steel is essentially flat throughout the year and assuming where you put your inventory levels, do you think you have kind of -- and again who knows where steel is going to go longer term. But, you think you had a point where -- you can, you know, steel is not going to be that impactual, because you've increased prices and you've got your inventory online, assuming things stay flat, you are going to be okay? (multiple speakers) And I guess just on the segment I guess overall, real quickly. On the topline, how much of that is pricing versus volume and again stripping out Newmark, how much of that -- I mean looks about 17 or 18 percent increase in sales excluding Newmark. How much of that 17 or 18 percent is pricing versus volumes?

I would say majority is price. And I can give you if it's 60 percent or 55 or 65, but a majority would be price.

Okay, and just on the irrigation segment is the -- volumes were good but not as good as kind of I was thinking, and you had mentioned in the press release talking about maintaining pricing discipline. And I see the manufacturing last week, but all numbers are pretty strong. Is there any share loss for those guys in terms of maybe they are cutting pricing more than you guys are trying to take share or anything of that nature?

Whenever you try to hold price in this kind of a market, there is probably some share loss. I think we've really tried to be disciplined on the price side knowing that this steel situation is more permanent than ever that we have seen in the last 10 years.

And I think, if you go back to the beginning of the year, when we saw what was happening with steel, we were very disciplined and aggressive early on and as a result our litigation numbers from a profitability stand point are really good, but I agree voluntarily that short term it may come in with the price of a slight decline in market share.

And on the structures business, of all these segments lighting, utility, and specialty are all pretty strong. Is there -- can you give me a sense of the magnitude of the increase? Is utility up somewhere like 40, 50 percent, and lighting up kind of 4, 5 percent, specialty lower? What's the magnitude of increase in those segments within the structures as well?

Well there is an increase in all of them, but the biggest increase is in the utility side of the business.

And is that a magnitude of high double digits kind of number?

High teens.

High teens. Okay. And you had mentioned anodizing on the coating business. How much -- is there any reason why it's so weak versus the galvanizing side?

While the galvanizing side is showing signs of improvement, the anodizing side is not, and in general, when you look at our coating business, the business that over the last few years has performed the best for us catching the galvanizing business. So as we go forward, we will focus more on building the galvanizing side of the coating business than we will be in the anodizing side. The anodizing side tends to be more competitive and in a weak economy, it gets even more so.

Okay. And I guess lastly on Newmark, does Newmark roughly an increase year over year? I mean is that something like it's a record number of that. What's the magnitude of increase there? Is that also kind of teens kind of numbers?

Yes, that's correct.

And sequentially to these guys in the fourth quarter, is that a low quarter for them or a high quarter for them like sequentially how is the business going to do?

It is a high quarter for them, the fourth quarter.

High quarter. And I guess lastly on looking into the fourth quarter overall, is the -- it sounds as that the base in your Newmark -- in general can you say that the base business would be relatively flat, may be up a little bit and kind of the upside from Newmark?

No, I don't think so, I think the whole structural side of the business will be up. And we are forecasting right now, we may have a slight unfavorable comparison in the irrigation business, but it is still early in the quarter and the harvest was late this year, and we don't know what's going to happen when the farmers get back in their offices and look at how they are going to spend the money.

At this time there are no further questions, sir's do you have any closing remarks?

So thank you again for joining us on the conference call and turn back over to Michelle to read the forward-looking disclosure.

Included in this discussion are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made in light of experience and industries in which Valmont operates, as well as managements presumptions of historical trends, current conditions, expected future developments, and other factors believed to be appropriate under the circumstances. As you listen to consider these comments, you should understand that these statements are not guaranteed that performance or results. They involve risks, uncertainties, some of which are beyond Valmont's control and assumptions. Although management believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include, among other things, risk factors described from time to time in Valmont's report to the Securities and Exchange Commission as well as future economic and market circumstances, industry conditions, Company's performance and financial results, operating efficiency, availability in parts of raw material, availability and market acceptance of new products, product pricing, domestic and international competitive environments and access in policy changes of domestic and foreign governments, because their cautions are any forward-looking statement included in this discussion is made as of the date of this discussion and the Company's not undertaking to update any forward-looking statement. This concludes today's conference call. You may now disconnect.