Valmont Industries Inc (VMI) 2004 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Valmont Industry’s Fourth Quarter Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

Mr. Laudin, you may begin your conference.

Welcome to the Valmont Industries Fourth Quarter earnings Conference Call. With me today are Mogens Bay, Chairman and CEO; Terry McClain, SVP and CFO; Bob Meaney, SVP; and Mark Jaksich, VP and Corporate Controller.

Before we begin, please note that this discussion is subject to our disclosure on forward-looking statements which apply 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. I assume you’ve had the opportunity to read our earnings announcement.

Before I get to the highlights for the quarter, let me address the biggest challenge we faced in 2004. We faced an unprecedented increase in our steel costs and a disruption in our normal steel supply agreements. Our people responded quickly by appropriately raising prices. We were successful to various degrees, depending on the segment.

Our biggest challenges were with customers funded by government programs with long lease times, that did not allow for price adjustment for contracts. This presented challenges for the Engineered Support Structures segment. While some competitors were slow to respond, eventually the increase in steel costs gave them no choice. Our aggressive price actions may have temporarily cost us some market share, but we believe it was appropriate and prudent.

Our Tubing segment managed the environment of tight supplies and rapid steel cost increases very well. Our Coating segment suffered, as some of our industrial customers were unable to get the steel they needed.

In the Irrigation business, we raised prices rapidly. By the end of the year, prices had increased by as much as 25%, which we feel is one of the reasons we have seen demand slow recently. Overall, I’m pleased with the way our management team responded in this volatile environment.

In 2004, we completed several acquisitions. In mid-April, we acquired Newmark, a manufacturer of spun concrete and steel utility structures. The integration of Newmark is substantially complete. We have combined Newmark with Valmont’s Steel Utility businesses in North America under one management team in order to serve the market better.

We also made two small acquisitions in our Engineered Support Structure segment. [Wadley], a Denver-based manufacturer of fiberglass composite poles expands our presence in the high-end decorative light pole market. Our acquisition of Sigma Industries, a Delaware-based overhead sign structure manufacturer, expands our Sign Structure business on the East Coast. Each of these two small acquisitions have annual revenues in the $10 to $15 million range.

Concurrent with the Newmark acquisition in the second quarter, we refinanced our major long-term credit facilities, which included Valmont’s first public debt offering. We felt that the favorable debt market conditions presented an excellent opportunity to put in place effective and long-term capital structure. We placed $150 million of 6-7/8 senior subordinated notes due in 2014. As part of the refinancing, there was an after-tax prepayment expense of $6.1 million, which we took in the second quarter.

Despite the challenges we faced, we did improve our operating profit as a percentage of sales slightly. We’re not satisfied with our operating profit percentage, and our goal over the next few years is to earn a steady improvement in this metric.

Now, on to the fourth quarter highlights. First, net sales rose 26%, due to increased product pricing to recover higher steel costs, the acquisition of Newmark, and higher volumes in the Utility and Engineered Support Structure segments.

Second, operating income was up 46% due to improved performance in the Engineered Support Structure segment, better pricing and higher volumes in the Utility Support Structure segment, including Newmark, and the strong performance in the Tubing segment.

Third, while Irrigation sales and profitability were lower due to reduced North American demand, operating profit as a percent of sales remained about 10%.

Fourth, net earnings rose 52%. Apart from the drivers of improved operating income, we also benefited from reduced healthcare costs and a slightly lower effective tax rate.

Now, I’d like to review our fourth quarter performance by segment, beginning with the Engineered Support Structure segment. This segment includes lighting and traffic products, wireless structures and components, specialty structures worldwide, and certain international utility products.

Sales increased 24% to $115 million, and operating income increased 60% to $14 million. Total sales of lighting and traffic products were higher due to a combination of higher pricing to cover steel cost increases, improved market conditions in Europe, and the impact of the [Wadley] acquisition.

In North America, demand was fairly consistent, despite the lack of a new highway bill. However, some municipalities were reluctant to commit to long-term projects until a new bill is in place. We are hopeful that Congress will pass a new five or six-year highway bill during this session.

Sales of Wireless Communication products were higher in North America, mostly due to the price increases driven by steel costs. Consolidation among carriers is beginning to drive an increase in network expansion in the U.S.

We continue to expand our sales in the Sign Structures business, which includes our acquisition of Sigma.

In China, our Wireless Communication business slowed somewhat from the strong pace of the first half of the year. Utility sales, however, continue very strong in China, reflecting the increased demand for electric power to sustain economic growth.

We have added a Utility Support Structure segment to our financial reporting. This segment consist of Valmont’s North American Steel Utility business, with the Newmark Concrete and Steel Utility businesses added. Sales of $67 million were sharply higher than last year. Operating income of $4.5 million was substantially improved, reflecting the return to profitability in the steel utility business and the addition of Newmark.

We believe that this new segment provides the utility market with the broadest product offering, and 13 regional manufacturing facilities in North America to provide the best service. We can offer both steel and concrete poles to meet customer needs. We can also offer hybrid poles, which are combinations of concrete bases with steel upper sections. Hybrid poles are a unique solution in certain applications.

Market conditions are improving in the utility industry. It appears that utilities have increased their capital budgets and spending to upgrade the reliability and capacity of the transmission width. The competitive environment has improved, and pricing levels have recovered somewhat.

In the Coating segment, fourth quarter sales of $19.4 million were 29% lower than last year, resulting in an operating loss of $300,000. Most of the sales and profitability declines were in our anodizing business, due to the loss of volume at a large customer. Galvanizing sales were slightly lower. Increased workers compensation costs in California contributed to the loss. The galvanizing business has experienced uneven demand as some industrial customers struggled with increased steel costs and availability, as well as the sluggish recovery in the industrial economy.

In the Irrigation business, sales were 9% lower at $67.7 million, due to a decline in North American sales. Operating income for the segment of $7.1 million was 22% lower. In the international irrigation market, sales were comparable with last year. Lower cost prices and rising energy and fertilizer costs, as well as increased mechanized equipment costs are slowing global demand. Despite the current market level, our Irrigation business continued to perform well, with operating income as a percent of sales of 10% in the quarter.

Our international strategy of locating manufacturing facilities in key markets around the world allows Valmont to maintain a competitive presence in local markets. For farmers everywhere, water conservation continues to gain an importance. Farmers also appreciate the productivity enhancing aspects of mechanized irrigation.

The strength of our global dealer network played a significant role in our ability to successfully raise equipment prices as steel costs increased. They have once again proven to me that they have the best dealer network in the world.

In the Tubing segment, sales of $19.9 million were 43% higher than 2003. Operating income rose to $3.8 million from $1.5 million last year. The sales increase was due to higher pricing, reflecting increased steel costs. Profitability improved due to a better pricing environment and an unfavorable inventory adjustment made in 2003.

There were two additional items that impacted results in the quarter. First, Valmont’s self-insured employee healthcare costs. Our claims experience reflected fewer large claims, resulting in lower costs of approximately $2 million. Additionally, certain foreign income tax benefits lowered the effective tax rate by approximately 1%.

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 higher sales and the Newmark acquisition. Inventories have increased $70 million over the last year for a number of reasons. First is the inflation in steel costs. Second was our decision to bolster stocks due to a lack of long-term supply contracts. Lastly was the impact of our acquisitions. It should be noted that our inventory levels dropped approximately $11 million during the fourth quarter, and we expect them to continue to fall over the next two quarters as availability seems to be less of an issue.

The depreciation and amortization for the quarter was $10 million, and our capital expenditures for the quarter was $4.9 million.

As we look ahead to the year 2005, we expect another strong year. In the Engineered Support Structure business, we look for growth in both sales and earnings. Pricing in our Utility business is improving and the competitive environment is better. Relative stability in steel prices is a positive for both of these businesses. It allows us to better budget and forecast costs on a long lead time order.

In the Coatings business, we have lowered our cost structure. Even if sales do not improve, profitability should increase. In our Irrigation business, the new season is starting slow, due to concerns by our customers’ overall crop prices and higher fuel costs and equipment costs. We believe that, under current market conditions, our 2005 Irrigation results will not exceed 2004 levels.

Overall, we believe that we will show sales growth in the 5% to 10% range, and solid, favorable net earnings comparisons for the year.

This concludes the prepared portion of our remarks and I will now like to take your questions.

(OPERATOR INSTRUCTIONS) James Gentile, Sidoti & Company.

I have a couple of questions. First of all, I was wondering, you didn’t address foreign currency translation and the dollar’s quite weak. And I was wondering if you can perhaps give us some of the effect of the weaker dollar on your operations.

This is Mark Jaksich. We did, as you mentioned, the dollar did weaken somewhat. We did get a little kick to earnings out of that in the neighborhood of $300,000 to $500,000.

Nothing dramatic.

No.

And I was wondering if you can perhaps be more specific as to why you’re forecasting operating profit improvements in Coatings. You know, what are you doing? Are you closing some galvanizing areas where demand is particular weak, or is it more headcount or what have you? What’s happening there, because it doesn’t seem like we’re getting much volumes through that system.

It is mostly headcount reduction and it is focused on the anodizing side of the business. We do expect that the galvanizing business will get better, but the one facility in the anodizing side in California have been a drag on earnings. And we have done two things there. We have raised pricing successfully to a number of our customers in the California area, and we have lowered manpower levels also in California. We have also had significant costs associated with workers comp in California. And their recent changes in rules and regulations relating to that should give us some relief also.

To the tune of about $1 million, do you think, Mogens?

I can’t comment on the exact tune.

I’ve gotcha. And then just finally, more specifically, this is the second quarter in a row that we saw pretty strong growth and operating profit improvement in the Tubings business. I was wondering what in particular is driving that demand?

Well, I think during the year, our Tubing people have done a very good job of aggressively raising prices as they saw steel prices come up rapidly. I also think we really benefited from the fact that, because of our close relationship with a great number of steel suppliers, we had steel available when some of our competitors may not have had steel available, and that gave us some pricing power. So, I don’t think going into next year we should expect results in that business at quite the level we saw this year.

Understood. So there’s no incremental customer acquisition there that drove some of the--no sustainable kind of long-term contract manufacturing business that--?

Well, there are always moves in and out from customers, and 2004 was no different. But, the main reason for the stellar performance was what I just mentioned.

Arnie Ursaner, CJS Securities.

On Sigma Industries, I think you mentioned its got expected revenues of $10 to $15 million. Can you comment on the margin on that versus your other structures business?

I can comment that the operating margin in that business is [inaudible].

Going to the Irrigation sector, you mentioned that the U.S. was weak and somewhat disappointing. What is happening in Brazil and other international markets that have been a key part of your growth?

Well, our total revenues and earnings internationally for the quarter were level with last year. My prediction would be that we are going to see tougher market conditions in the two markets you mentioned going into 2005, and I think for some of the same reasons as you have seen it here. Commodity prices have gone down, energy prices are up. It has made Brazil less competitive. In South Africa, you have a fairly strong local currency, which also makes export out of South Africa less competitive and less profitable.

Finally, in the Utilities business, you mentioned three factors that are causing some improvement. It sounds like there’s increasing demand, a little less competition, and a little better pricing environment. Could you expand on each of those three points and perhaps give us some of the things you’re focused on to lead to this increased optimism on your part?

Well, you know, it’s not that the utilities have been announcing what their exact plans are. But, through our strategic alliances, we get a good feel for the activity levels that the various utilities are expecting, and those activity levels are up. I also think that, if you go back a few years, a number of utilities had invested somewhat in the fiber optic side of the telecommunications side of the business. And that, I think, is behind them and more cash flow is available now for increased investments in the grids.

I think that pricing in the utility business became very, very competitive, if you go back a year and two years. And part of that was the result of the collapse in the telecommunication business, and some of the competitors in that business entering the utility business. I think some of that has been modified over the last year and there’s been more pricing discipline in that marketplace.

Okay. Final question, if I may. Another one hit me. Most of the business you had in Q4 I assume was booked when steel was at a lower price, because we had unprecedented rises. Can you give us a better feel for how the business you’re booking today and the margin it may have versus the business you completed in Q4?

Well, the business we shipped in Q4, yes, it was booked earlier in the year. But, most of the steel price increases, the rapid increases, were earlier in the year. And we got a pretty good feel for how that would continue in the third and fourth quarter. So, I think we got pretty much ahead of the curve. I do think going into the current year, with more stable steel prices, we’ll be able to do a little catching up. And we do expect better profitability in the steel side of our utility business.

So, to sum up what I think you’re saying, you’re going to have pretty good volume growth, increased gross margin and, as you reduce expense, even further improved operating margin? Is that a fair assessment?

I think it’s a fair assessment that we expect an improved operating margin in that business.

Jon Braatz, Kansas City Capital.

A couple questions. Number one, obviously, 2004 was a very difficult year in terms of having to invest in working capital. As you look at 2005, what do you think--do you think you can get back to more of a normal free cash flow number, a generation of free cash flow in 2005? Or, even sort of a pickup in 2005 because of what you had to invest in 2004?

I was going to answer that. Jon, this is Terry. I think the answer to both of those is yes. When we get back to more normal, we’ll do some pickup as we reduce the inventory level. The inventory level issue is going to be related to the steel companies and their ability to keep consistent supply, which is the case right now.

What type of CapEx level do you envision for 2005?

We do have some--I think the CapEx level is going to be in the neighborhood of where it has been. We do have some systems that we are putting in this year that will be probably raising it slightly. And of course, we had some acquisitions that we put in the hopper so that they will take some capital in that business. But, nowhere near depreciation and amortization.

So you think we can maybe--well, I won’t hesitate. I was going to say $50 or $60 million in free cash flow this year?

I’d probably think that if I were you.

All right. One other question. Actually, two other questions. Your earnings in non-consolidated subsidiaries really had a significant turnaround this year, basically $1.4, $1.5 million. Can you give us a little color? Refresh my memory as to what operations those are and what we’re seeing there?

Jon, it’s Mark Jaksich. Those are two operations. One is the joint venture we have in the pole structures in Mexico. And the other one is a minority ownership we have in an irrigation distributor in Argentina. In both of those cases, those operations have made some good improvements over last year, particularly in Argentina. It seems like the market’s picked up somewhat. We’ve gotten some things straightened around and we’re having a little bit of success there.

Would it be safe to characterize that we can see--we should expect continued improvement, or we’re sort of where we’re at in terms of let’s say the level of operating income?

I would hope we’d see continuous improvement. But, keep in mind, these are two markets. It’s very difficult to predict Argentina and Mexico.

All right. Then finally, the tax rate. It came down in the quarter. Is that permanent, or it’ll bounce back up as we go forward?

Jon, that was a one time item that we took related to some tax loss carry forwards. We had one of our foreign operations that we had a valuation allowance against it. That operation’s picked up over the last couple of years, and so we determined that we are going to be able to use those.

Tom Klamka, CSFB.

In the Irrigation segment, volume’s down there 9%. I didn’t hear if you excluded the steel prices. I think you said your pricing might have been up as high as 25%. What was the actual relative volume decline in that business?

I can’t give you the exact number. But, if sales were down 9% and we have higher prices, clearly volume was down more than that.

Right. And I think you threw out a--I thought you said prices were up 25%. I don’t know if that was just price increases or that was actually realized, and that would obviously put you at a 35% kind of volume decline.

That would be at the retail level, Tom, the 25%. That’s what the farmer would see. But, our volumes were down. We can get that number for you.

Okay, but ballpark, then it’s obviously down high double digits, I guess.

I would agree with that.

Yes.

And how much of that irrigation business is in the U.S. versus overseas?

About one-third, two-thirds.

Okay. And overseas, I guess you said it was flatter type revenues.

Yes. Pretty flat revenue and earnings on the international side of the business.

And for the company overall in the quarter, how much of that, you know, 26% sales growth, would have been steel related?

You know, it’s very, very difficult to get your arms completely around it, because each product would have a different number there. And if I were going to guess, I would say half and half. Maybe a little more on half steel products and a little less half.

Okay. And then in your outlook for next year, it’s a pretty broad range. Part of that, I’m assuming--are you assuming continued price increases in your ’05 sales estimates?

No. We are basically assuming pretty flat steel prices at current levels. So, I would say that the increase is a combination of volume and full year impact of some of the acquisitions.

All right. And then on the acquisitions, what else--sort of, what’s the next step here? What’s the acquisition strategy? More tuck-ins or what kind of things are you looking at?

More tuck-ins. And there’s nothing on the drawing board right now we can talk about. Our focus is going to be to continue to improve the operating performance of the businesses we do have. But, we always look for businesses that click right in to one of our major platforms.

And then last question. Can you give us the balance on the revolver and what the availability was at year-end?

The revolver had a balance of about $70 million. And it has a max of $150 million and we have the remainder of that $150 available to us.

At this time there are no further questions.

This concludes our call and we thank you for joining us today. This call will be available for playback on the internet or by phone for the next week. We look forward to speaking to you again next quarter. And at this time, Angela will read our disclosure on forward-looking statements.

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 in the industries in which Valmont operates, as well as management's perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. As you listen to and consider these comments, you should understand that these statements are not guarantees of 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 reports to the Securities and Exchange Commission, as well as future economic and market circumstances, industry conditions, company performance and financial results, operating efficiencies, availability and price of raw material, availability and market acceptance of new products, product pricing, domestic and international competitive environments, and actions and policy changes of domestic and foreign governments. The Company cautions that any forward-looking statement included in this discussion is made as of the date of this discussion, and the Company does not undertake to update any forward-looking statement.

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