Valmont Industries Inc (VMI) 2005 Q1 法說會逐字稿

Good morning, my name is Michelle and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Valmont Industries First Quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Jeff Laudin. Please go ahead sir.

Thank you Michelle. Welcome to the Valmont Industries First Quarter earnings conference call. With me today are Mogens Bay Valmont’s Chairman and CEO; Terry McClain, SVP and CFO; Bob Meaney, SVP; and Mark Jaksich, VP and Corporate Controller.

Before we begin, please note, this discussion is subject to out disclosure on forward-looking statements which apply to today’s call, and will be read in full at the end of this message. 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.

Thank you Jeff and good morning everyone. Thank you for joining us. I presume that you have had an opportunity to read our earnings announcement. This quarter’s results is a good reflection of the benefit of our diversification across product lines and geographically. We did absorb a significant softness in our Irrigation business and still [indiscernible] the improved results for the corporation.

Now, on to the First Quarter highlights. First, net sales rose 23% and operating income rose 37% mainly due to improved performance in the community support structure segment, better support in the engineered support segment, a strong performance in the tubing segment, the impact of 2004 acquisitions, and improved operating income in the coding sector.

Second, while irrigation sales and profitability were lower due to reduced global demand, operating profit as a percent of sales remained above 10%.

Third, net earning growth 24%. Cash flows from operations were 33.8 million driven by the stronger earnings and working capital reduction. Debt declined 29 million from year end to 303 million.

I would like to review our First Quarter performance by segment beginning with Engineered Support Segment. Sales in this segment increased 24% to $109 million and operating income increased 54% to 5.6 million.

Global sales of Lighting and Traffic Products were higher due to a combination of higher steel pricing reflected in our selling price and include performance in Europe and the impact of the Newmark acquisition. In North America demand was supported by the latest extension of the highway bill. We believe that some municipalities will remain reluctant to commit to long-term project until we have a new long-term highway bill in place. During the month of March, leaders from both the House and the Senate stated that they would like to pass a new bill rather than grant another extension. We are hopeful, therefore, that Congress will pass a new 5 or 6 year highway bill before the current extension expires, which will happen on May 31st. In our Specialty Structured Business, the Sign Structure sales rose to increased market penetration and the acquisition last year of Sigma. Sales of wireless communication products were higher in North America, mostly due to price increases driven by steel costs.

In China, Wireless Communication sales were below last year’s outstanding strong pace. Utility sales remain strong in China, reflecting the increased demand for energy to sustain economic growth. We do anticipate that over time Wireless Communication Product sales will decline in China as networks near completion, but we expect our Utility and Lighting businesses to more than offset this decline and provide the platform for continued growth in China.

We remain very optimistic about the long-term outlook for our Engineered Support Structure products. The drivers of increased public safety through better lighting and traffic control, as well as government funding to infrastructure development, are global and enduring. The profitability for the Segment rose primarily due to stronger results in North America and in Europe, which more than offset a decline in profitability in China.

The decline in China’s profits is due to the volumes running below last year’s First Quarter’s very strong pace, and the competitive environment that has made it difficult to pass on the full extent of steel cost increases as of yet.

In the Utility Support Structure Segment, sales were $59 million. The sharp increase over last year resulted from the acquisition of Newmark, higher sales of steel utility structures, and higher pricing to cover increased steel costs. Operating income of $4.4 million was a substantial improvement reflecting the return for profitability in the Steel Utility business and the addition of Newmark. Utilities continue to upgrade both through reliability and capacity of the transmission grid. Going forward we expect to see continued spending on electrical distribution and transmission structures as increased energy demand will drive ongoing improvements of the electrical grid.

In the Coating Segment, First Quarter sales of $19 million were 16% lower than last year’s. Operating income increased to $800,000 from $500,000 last year. The sales decline was in our anodizing business due to the continued loss of volume from one large customer. Galvanizing sales were higher as demand improved. Profitability for the segment increased despite higher Zinc and natural gas costs due to reduced SG&A spending and operational leverage.

We are pleased to see increased demand for galvanizing services as this business is largely dependent on the state of the industrial economy. As this economy improves, we expect the Coatings business to grow profitability through volume and operating leverage.

In the Irrigation Segment, sales were 13% lower, at $69.9 million due to an approximately 25% volume decline worldwide, partially offset by higher selling prices. Operating income of $7.2 million for the Segment was 39% lower, reflecting de-leverage as volumes declined.

Internationally, Irrigation Segment sales were comparable to last year. Lower crop prices, rising energy and fertilizer costs, as well as increased mechanized equipment costs are dampening global demand. Despite the current soft market, our Irrigation business continues to perform well with operating income as a percentage of sales regularly 10%.

Recently, we had a number of questions from investors asking why our sales are not tracking the strength in some of the other fine implement manufacturers. We believe it lies in the difference in our customer base. Farmers who do not irrigate, or dry land farmers, had outstanding growing conditions last year which resulted in an improved yields, and higher income. That excellent crop is driving high farm equipment sales. Irrigating farmers also did well, but as mechanized irrigation tends to deliver consistent yields year after year, the relative performance was less dramatic than for the dry land farmer.

In the Tubing Segment, sales of $22.1 million were 27% higher than 2004. Operating income rose to $3.3 million, a 56% increase from last year, reflecting higher sales levels and improved operations.

Turning to the balance sheet I’d 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. Inventory has increased $44 million over last year for several reasons. First, is the inflation in steel costs; second, was our decision last year to bolster safety stocks due to a lack of long-term supply contracts; and lastly, was the impact of our acquisitions.

It should be noted, however, that our inventory levels dropped approximately $10 million during the First Quarter. As a result of higher safety stocks, inventory turns have slowed by almost 1 turn. As we work down inventory levels we expect inventory turns to rebound to more typical levels.

In terms of cash flow, the depreciation and amortization for the quarter was $9.8 million and our capital expenditures for the quarter was $4 million. Capital expenditures for the year are again expected to be lower than depreciation and amortization.

Capital projects for the remainder of the year include a second pole plant in China, an expansion of our manufacturing facility in Poland, upgrades to our information systems, and we are in the process of replacing our existing corporate aircraft with one better suited to meet our international demands. We are also in the process of increasing our ownership in our pavilion irrigation operation from 70% to 90%.

As we look ahead for the rest of 2005, we expect favorable sales and earnings comparisons for the year. Steel prices have stabilized in North America and availability is less of a concern than last year. In the Engineered Support Structure businesses, we look for solid gains over 2004. Pricing in our Utility Support Structure businesses has improved. In the Coatings business a lower cost structure should lead to improved profitability. In the Irrigation business, concerns by our customers are lower crop prices and higher farm [inaudible] costs have slowed demand. Our Tubing business should post results more in line with historical performance levels.

We expect to generate strong cash flows and we plan to use our cash flows to reduce debt to our targeted debt-to-capital ratio of 40% or less.

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

[OPERATOR INSTRUCTIONS] Your first question comes from John Braatz with Kansas City Capital.

Good morning, Mogens. Question- A lot of moving parts in the quarter, steel prices moving up, and you made some acquisitions. I’m wondering if you could maybe summarize what you believe the real revenue trends were if you x out the acquisitions, x out the steel prices increases, so what is the organic rate that we saw, especially in the Structures business?

I would say that basically the Utility business, organically, was up. Europe was up. And I would say the rest of the Structured businesses more reflect the additional pricing as a result of increased steel costs.

Secondly, Newmark. It seems to me that Newmark is doing very well, is it in fact doing better than what maybe you would have anticipated at the time of the acquisition? Are you generating better growth there than you would have forecasted a year ago at this time?

I wouldn’t say that. I would say Newmark is doing exactly what we projected at the time we acquired Newmark. I still am of the opinion that I expect after time that the combination of Newmark and our steel utility business will create opportunities to accelerate the benefits, but as of now, 1 year into the acquisition, the number was pretty much what we expected.

Then lastly, as you look at the Irrigation business, with the volume declines that we’ve seen domestically, do you see any factor that’s more permanent from a big picture standpoint things might have changed -- obviously you have a little short-term events that swing vines, but anything that would suggest that there’s more of a permanency to the decline, or it’s just short-term factors that are causing the falloff and the softness in demand?

[inaudible] involved with our litigation business for 27 years and I have stopped pretending to be able to forecast the farmer’s buying habits. But to get specifically to your question, I think that we are seeing the normal fiscality in this business where farmers in some years feel like spending more than they do in other years. If there’s one area that may have a longer term impact, and I can’t tell you how it’s going to impact the business over time, is that I tend to think that energy prices are going to stay at a fairly high level and not return to what we saw a couple of years ago. Now that’s a global phenomenal so it should result in commodity prices worldwide reflecting that. So I’m not so sure it’s going to have a negative impact over time, but I’m fairly certain that it had a negative impact short term.

Our next question comes from James Gentile with Sidoti & Company.

I was wondering if you could comment on the market share picture in the irrigation segment as it compares to your domestic competitors and then perhaps over seas as well.

I think that particularly the North American market. Market shares have not really moved around very much over time. They move a little maybe from quarter to quarter but I don’t see any major cases. On the international front, we have been very active internationally for 30 years now and we have a substantial market share and what we are up against depending on the geographic region is different from competitors, a lot of them local competitors. But I would say internationally our market shares are stable and we haven’t experienced any major change there either.

Great. Moving to the Engineered Support Structures [inaudible] make up, we spoke pretty much under basis point improvement in the operating margin for Engineered Support Structures for the quarter. Then as you go into a seasonally strong period, how do you think and what would have been some of the changes that have been made underlining that have yielded the incremental profit improvement in the quarter and should we be expecting improvement over the next three or four quarter to the same magnitude?

On the first part of your question I would say the biggest contributor to the improvements in our structure business is a little bit utility first has been the improvement in the pricing environment for Steel Utility Structures. When we look over in the Engineered Support Structure segment which is lighting and traffic products, Europe performed quite a bit better this year and we also saw better performance in North America. I can’t predict if we’re going to continue to see like improvements but as I expressed we expect for the year to see a solid comparison, compared to 2004. Our biggest challenge there has been and continues to be to move pricing up to fully reflect the additional costs that we’re getting from our steel vendors. Last year in total you will recall that our gross profits margin dropped by about one percentage point, it will certainly be our hope to get that back.

[OPERATOR INSTRUCTIONS] Your next question comes from Tom Klamka with Credit Swisse.

Actually it is Jeff Brown filling in for Tom. Good morning, just a couple of questions. You just the mentioned the pricing issue. On the structure business, how much of that business is – do you have new pricing and meaning that, are there any contracts in still in there still set at kind of low pricing and some from last year that you’re still going to get hit hard on the margin side or is a lot of that already rolled off?

There is one area of our Engineered Support Structure business where we are still suffering from pricing that we don’t like and that is in the spacing structure part of that business and I’m particularly referring to overhead Sign Structures. A lot of those go into projects funded by federal money and those projects tend to have long lead times. So we have orders on our books that were placed a year ago and some of them back in 2003 that are only being delivered this year and some of them the early part of next year that were fixed priced contracts. Some of our competitors walked away from similar contracts, but because of our overall participation to the lighting business also, we decided to not do that and we are delivering those contracts at the at the original pricing but of course absorbing today’s steel price and I think we will see the affect of that as we did in the First Quarter, we will see it through the rest of the year. But a year from now that should be out of the systems.

Okay and what has been the magnitude of the increases that – I mean are these kind of like 10%, 15%, 20% that you’ve been able to get? And are they putting you in a place where by this year, other than assuming steel stays flat and then go up significantly ,and these issues on this one sector of the business, are you positioned correctly in terms of pricing that will allow you not to be impacted too much by steel this year?

Yes, I think we have seen the major increases in steel prices as far as we can predict are behind us. Our pricing today reflects the current steel pricing. We expect steel pricing to stay pretty much where it is now for the next couple of quarters and it may soften a little or it may go up a little depending on where in the world we are talking about and what are specific products within our general steel purchases. But we do not expect any wild swings like we saw last year, and our pricing today is reflecting firm cost.

Right. Also, just one last question on the Structures business; given with what’s happening with the highway spending bill, have you seen any kind of unleashing of better spending or expect kind of better spending going forward?

Well no, to the first part of your question no. There has been no unleashing on spending because all we have had to work with is extensions on the last highway bill and the last extension – the current one is expiring at the end of May. Now when a new highway bill is passed and hopefully it will happen this spring, it will be at a level of $284 billion over the next five years which is up substantially from the previous highway bill. So it should translate into more opportunities for us. Now these projects are long lead time projects so it’s not something we’re going to see the day after the new highway bill, but I expect to see more planning and more projects taking form after we know what the rules are going to be for the next five years.

Al l right that makes sense, and lastly on the Irrigation business. You mentioned that in the quarter you kept your margins about 10% despite the decline in volume and tough pricing environment. Do you have any goals in terms of margin in that segment? Is that kind of your low water mark and you don’t want to go below that or is that kind of what the 10% represents?

Well, let me say that no, we would not like to go below it but we’re not exactly totally in control of that. We expect with current levels to stay at about that performance level for the year. It’s very much uncertain as to how the new irrigation season will take shape. As you know, the irrigation season is not a calendar year season, it starts in late summer and ends in late spring, and usually you can have the second half of your year being quite a bit different from the first half of your year. We know what we are dealing with now and through the Second Quarter. We do not know what we are going to deal with in the third and Fourth Quarter. What I’m trying to say on the profitability side is that our Irrigation business the management groups have done a very good job of managing through this. They have adjusted production levels, they have addressed spending, and I think they have maximized the performance in the current market condition.

And actually one last question. I’m not sure if you can answer this because the business economy are trying at this point, but and somebody kind of asked the question earlier on Newmark in the quarter can you give a sense as to how much that contributed to earnings or how much was the earnings growth year-over-year organic versus the Newmark. And I realize all the business probably intertwines now, but is there any chance that I can get what the organic earning score was year over year versus the Newmark edition?

It’s tough to give you a precise number, but I can tell you that the concrete side of the business performs about at the level we expected, which was not much different from last year from the same period before we acquired Newmark. The steel side of the business is where we saw the most improvement. Newmark also has some steel business or had some steel business, but most of that is steel volume coming out of the Valmont utility plants.

Your next question comes from Arnie Ursaner with CJS Securities.

Starting with the Utility business could you comment, last year you were able to pick up quite a bit of share when your competitors were unable to get enough steel and the utility customers reacted by moving business over to you. Now that steel is a little more available, are you seeing them come back in the market and once again be a competitive threat?

Let me start by saying that steel availability is not a big issue today. And if you go back a year, we had some orders we picked up because we had steel when certain competitors did not. But in the overall scheme of the utility market, it was not a big deal. So, I would say that the market share situation or the competitor situation really hasn’t changed much.

Your next question comes from John Braatz with Kansas City Capital.

Just a follow-up question. Terry, could you refresh my memory as to how much of your debt is prime-plus or subject to increases as interest rates go up?

Variable rate?

Yes, that’s the term.

We basically have banked that at $75 million and the revolver balance, for this purpose lets talk about $50 to $60 million, and then we have a few probably another $20 million worth of variable rate maybe.

Okay, so about close to $150 million maybe?

What’s that?

Close to $150 million then?

Yes.

At this time there are no further questions. I would now like to turn the call back over to management for closing remarks.

This concludes our call. 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, Michelle 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 guaranties of performance or results. They involve risks and 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 materials, 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 will conclude today’s conference call. You may now disconnect.