Valmont Industries Inc (VMI) 2005 Q4 法說會逐字稿

Good morning, my name is Cynthia and I will be your conference operator today. At this time I would like to welcome everyone to Valmont Industries Fourth Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the conference over to Jeff Laudin, Manager of Investor Relations from Valmont Industries. Please go ahead sir.

Thank you Cindy. Welcome to the Valmont Industries Fourth Quarter 2005 Earnings Conference Call. With me today are Terry McClain, SVP 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 talk and will be read in full at the end of the call. 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 Terry McClain, SVP and CFO. Mr. Bay is in China today.

Good morning everyone. Thank you for joining us. I assume that you have had an opportunity to read our earnings announcement, but let me begin with by a brief review of the fourth quarter highlights.

First, we had record sales and net earnings with net sales increasing in all segments. Second, we had very strong results in Utility Support Structures and Coating segments. Third, the Engineered Support Structures segment achieved record operating income. Fourth, inflationary pressures and lower international volumes resulted in an earnings decline in the Irrigation segment. Fifth, income tax expense increased approximately 1.1 million due to the repatriation of foreign dividends. Sixth, cash flows from operations were strong for the quarter. And finally we repaid 32 million in debt during the fourth quarter, bringing our long-term debt to total capital ratio to 36.2%.

Before turning to the performance by segment I would like to make a few general comments about the year-end totals. In 2005 we initiated several programs that each target specific areas of performance improvement.

First, we have pricing initiatives that focus on establishing the best prices for our products in the markets we serve. Second, we have instituted waste and cost-reduction programs to refine lean manufacturing principles across the company. Third, there are continuing processes for improvements in measuring employee engagement and productivity. By working on these three initiatives we believe operating performance should improve over time regardless of the economic cycles of our businesses.

Operating income for the year improved more than 0.5 point to 7.5%. We believe we are making steady progress towards our goal improving operating income percent to 10% of net sales.

During 2004 our biggest challenge was rapidly escalating steel prices. In 2005 we faced rapid inflation in the prices of zinc, aluminum, and natural gas. For example, during the fourth quarter of 2005 zinc peaked at $0.87 per pound compared with 2004 fourth quarter highlight our highs of $0.54 per pound. Natural gas peaked at $15.31 in 2005 compared to $7.98 in 2004. These are significant increases that are challenging to deal with in a manufacturing environment.

Operating profits were further impacted by the following items. First, we incurred certain development expenses culminating in the installation of a new 65-meter wind energy tower designed for a commercial turban located in Northern Iowa. We have now moved our wind energy project from R&D to commercial operations. This business will eventually be managed and reported under our Engineered Support Structures segment, but in the short-term will be recorded in the Other segment.

Second, in the Engineered Support Structures segment, margins were affected by some mis-priced orders in the Signs Structures Business. When we were new in the business, we took some orders without fully understanding our costs and the required specifications of our customers.

Third, our selling, general, and administrative expenses were impacted by increased medical expenses compared to 2004 and start-up costs for our new Southern China plant.

Additionally, incentive compensation tied to company and stock price performance increase.

Finally, our net earnings were impacted by an additional 1.1 million income tax expense related to the foreign dividend situation, which was completed in the fourth quarter.

Looking forward, our outlook for the first quarter is positive. For the year 2006, market drivers for most of our businesses appear favorable and we look for positive earnings comparisons.

Let’s now review our individual segments beginning with the Engineered Support Structures segment. Sales increased 2.5% to 137.5 million and operating income increased 7% to 15.1 million. Global sales of Engineered Support Structures were higher. In North America, demand for transportation and commercial markets was similar to last year. Market conditions in Europe were firm and sales were strong for all product lines in China.

In our Specialty Structures Business, sign structure sales improved due to our presence in more states. Segment profitability was impacted by losses on certain fixed price sign orders and additional SG&A expenses in preparation for the startup of our new plant in Southern China. Overall, our Structures Business operated well in the fourth quarter. Steel prices were relatively stable and this year’s margins recovered compared to the fourth quarter of 2004.

We are encouraged by the steady improvement in our pole businesses in Europe and China. We have solid management teams in Europe and China who are focused on results.

In the Utility Support Structures segment, sales increased 2% to $69.2 million. Our backlog however has increased substantially, as the utility market is being driven by greater spending to improve the reliability of the transmission grid and reconstruction of hurricane-stricken regions in the South.

Operating income increased from 4.5 million to 7.8 million reflecting improved market conditions.

We have now operated the combined Valmont Newmark utility business for over a year. We are pleased with the integration of the two businesses. We have made progress with our new combination pole products and have strengthened key alliances with utility customers.

Valmont with its steel and concrete manufacturing capabilities offer the broadest structural product range to provide optimal solutions to the utility industry.

In the Coating segment, fourth quarter sales of 24.7 million were 28% higher than last year, as we have seen an increase in galvanizing activities. Operating income was 2.9 million compared with last year’s small loss. In addition, improvement in our anodizing operations contributed to higher segment profitability, including reduced workers compensation costs in California.

The 2005 passage of the Highway and Energy Bill should drive increased infrastructure spending and demand for our coating services going forward.

In the Irrigation segment, sales were 3% higher at 69.5 million. The sales increase was all in North America. In International market sales declined due to lower crop prices, increased input costs and the impact of relative currency rates in key markets.

Operating income declined 26% to 5.2 million reflecting inflation in raw materials and reduced International volumes.

In North America the new selling season begins in September. There seems to be optimism in the field and our fall selling season was better than last year, however, it is too early to tell how the rest of the season will develop.

We are continuing to see inflation in non-steel items, and will have to monitor our costs and price structures as a result.

In the Tubing Segment, sales of 21.7 million were 8.5% higher than 2004. Operating income decreased 2.7% to 3.7 million due to the competitive pricing pressures and a less favorable sales mix.

Turning to our other financial measures. Inventories are down by approximately 6 million from the end of the third quarter. In terms of cash flow, the depreciation, amortization and capital expenditures for the quarter were 9.7 million and 5.1 million respectively. We further reduced debt by $32 million during the quarter, and a total of $90 million for all of 2005.

Looking forward to the first quarter, we expect strong results. For 2006 capital expenditures area expected to be between 25 and 30 million, depreciation and amortization between 35 and 40 million. We should experience good operating cash flows during the coming year, and we plan to further reduce debt.

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

[OPERATOR INSTRUCTIONS]. Your first question comes from Arnie Ursaner with CJS Securities.

It may be a little bit of a simple mechanical question, but in your description of the Engineered Support Structure segment, you mentioned profitability was impacted by backlog in place on December 31, 2005. Are you pre-taking some losses, or is there any – I am a little unclear how things in the backlog would have effected Q4.

Arnie, you are correct. We are looking at orders as they have now been engineered and will be produced, and have taken a charge against those. We just mis-priced a number of orders that were taken actually in 2003 and early 2004.

Okay. I know an issue that has been lingering a little bit and maybe you could comment further. I know you had taken on some work where your utilities customers were almost – would rather have you sitting with inventory until the spring versus them sitting with the inventory until spring. Could you comment on how that process unfolded in the quarter?

Well we had some utilities because of the hurricane storm situations that were unable to use all the inventory that they basically had ordered. So, that has pretty well been cleared out. We have worked with the utilities and they purchased the inventory, or we are yet to ship that inventory.

Okay. And again, just the revenue growth, particularly in the Engineered Support Structures was not very strong year-over-year. Could you comment a little bit more on any specific items that may have caused a relative modest rate of growth particularly given that still cost in other items are still much higher?

The volumes, Arnie, still aren’t in the Engineered Support Structures in the U.S. They still are not up very much. There is a lot of demand out there, but the volume growth, I think, is slower than we would have thought. We did get pricing so a lot of our sales increases were price related.

A final question from me. Obviously it is the time of year when the farmers are thinking about expenditures for the spring. Can you give us a little feel for what you are seeing at the dealer level for the upcoming spring season?

Well the dealer--We had an International sales meeting in January, and the dealers generally were upbeat. There is concern out there about crop prices yet and input costs, but I would say they were generally upbeat as a group. Now that does not necessarily always convert into actual sales activity, but they are more optimistic. It has also been relatively dry in North America through the whole winter months, so I would say that right now, it looks to be a better market probably at this time of the year, but it is still a little too early to know, and farmers are still concerned about their relative income, and of course now there is a lot of discussion relative to changes in the Farm Bill in 2007. So, there is a little apprehension there.

Final question from me, if you do not mind. Mogens on the last conference call talked about a 10% operating margin goal, and I think frankly my view, is that a lot of people may have overreacted to that statement. Would you care to expand a little bit, as CFO, how this would impact your view of the next 2 to 3 years? Is this a goal that you see in that type of time frame, or is it more as a stretch longer-term goal?

I think it is a goal over a 2 to 3 year period, probably more like 3 years, and the real issue there Arnie, is we’re trying to have the goal as we go through our various cycles. If we have up cycles in all of our businesses, we can move to 10% pretty quickly, but we are trying to emphasize that in spite of sales increases through our normal cycles, can we keep improving profitability, and we believe that we can. Whether it will get to exactly 10% in 3 years if our business is in a down cycle, maybe not, but it will be improved year-to-year.

Your next question comes from James Gentile with Sidoti & Co.

You commented about your Utility Structures backlog being quite strong going into 2006. I was wondering if you could perhaps quantify, perhaps, the 2006 view of Utilities Support revenue given the backlog in hand at this point.

Well we are seeing a strong backlog, and we will – Utilities are a little easier to see out you know 6 and 7 months to a large degree, so I am not going to quantify it for you per se, but we should see a nice increase in the utility business. And again, a lot of that is based upon getting smooth shipments out the door. You can have great backlog sometimes and it does not necessarily smoothly go out the door, but at this point it looks like a nice increase in the utility business overall.

Okay. And then, the two largest expenses variances in the quarter were not necessarily allocated to your larger business segments. They were found in Other and also on the corporate line. Obviously you are commercializing the wind energy product, but I was surprised about the $2.1 million loss reported in the quarter. Could you give us insight into the relative profitability of this new effort into 2006?

Well in 2006 there is still going to be relative profitability. It is going to be going from larger losses to smaller losses, but the fact is, we do have in fact, in hand an actual order now for a wind structure and we have others pending. So, we will hopefully reduce our net loss in that business. And we have quite a few dollars worth of expenses in the fourth quarter as we installed that structure.

Without corresponding revenue recognized?

Without any revenue.

Okay.

It’s called a give-away, James.

Understood. You’re trying to build a business. And then the -- I guess there was a sequential $2.5 million variance on the corporate line? Could you --?

Sure. We had 2 major items, health care insurance comparison from 2004 to 2005 and incentives. Incentives, a big part of that is based on stock price changes and it affects a number of plans in the long-term nature of the corporate compensation plan.

Understood. Thanks.

Your next question comes from Fritz Von Carp with Sage Assets Management.

Let me ask you a question. How do you look at your utility business or the intentions of your customers using your product? Is there much replacement going on or you – or do you see also -- or is there a significant market for putting support structures in power lines in places they weren’t? How do you see the balance of the demand from your customers?

I don’t know that I have a real good breakdown of that. There’s obviously replacement when it comes to the hurricane areas and there’s replacement, in some cases, where we’re replacing water and concrete for -- excuse me, steel or concrete for wood. I do not have a good breakdown of the percentage mix of that. But I would say that a lot of these lines today are still part of the grid system rather than new generation capacity, okay? So, they are still basically working with the existing generation and adding channels into the grid versus new generation, which is clearly moot -- that’s new structures and new poles going in. There’s a mix in there of replacement and there’s also some new lines [inaudible].

[OPERATOR INSTRUCTIONS]. Your next question comes from Jon Braatz with Kansas City Capital.

A couple of questions. First of all, obviously you did a very good job this year on managing your working capital. What could we possibly see in 2006 in that regard?

Well, I think there’s always improvement to be had in inventory terms. I think we could improve those, even though our inventories were down, I do think we have some potential there. I think receivables -- I don’t see that you’re going to see a lot of improvement there. I think they’ve really been managed pretty well overall. So, I think you can get some "network improvement" in turns. But the fact is as the business grows now, it’s going to be harder to bring down the dollars invested in working capital.

Okay, okay. Secondly, and I know you might have spoke on this subject earlier on other conference calls, is stock option expenses of this year, what are you looking at for in terms of an impact there?

The impact for stock options is about $0.04 a share.

Okay. Thirdly, it looked like if I factor out that additional income tax expense, your tax rate was a little bit lower than what we would have normally expected in the fourth quarter. Is that just some reconciliation of some extraneous factors in --?

I’m going to let Mark Jaksich --.

Okay.

Yes, Jon, that’s true. When we get to a year-end you view a lot more detailed review of all the taxes and everything. I think if you look at the total year, I think the effective tax rate, if you back out that 1.1 million that we paid for emission tax is the effective tax rate is almost identical.

Okay, okay. Alright. And lastly, Terry, we don’t know exactly how everything’s going to fall out, but you know there is some discussion that maybe there’s some of these commodity prices might have peaked and might be coming down. Obviously, natural gas has done that and who knows about steel and some of these other things that you’re affected by, but should we see some deflationary moves in those commodities? Do you think you could maintain prices and see some improvement in margins as -- if these commodities come down or are you going to have to adjust prices accordingly, too?

Well, it somewhat depends on the market place. In general though, the customers are pretty astute and they will be pushing you for lower prices if they see commodities going down. Now natural gas is a good example of a commodity that did come down but zinc, for instance, we just mentioned in our talk that it was $0.87 and now I think it’s over $1.05. That kept going. So, I think it just depends on the commodity and the market and I’d say it’s harder to hold margins, or prices, I should say, maybe we can hold margins.

Yes, okay. Okay, thanks, Terry.

Okay. There are no more questions. I would now like to turn the conference back over to Mr. Laudin for any closing remark.

Thank you, Cindy. 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. And we look forward to speaking to you again next quarter. At this time, Cindy will read our forward-looking statement.

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 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 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 any obligation to update any forward-looking statements.

This concludes today's conference call. You may now disconnect.