Valmont Industries Inc (VMI) 2006 Q1 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator 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 speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Mr. Laudin, you may begin your conference.

Thank you, Michelle. Welcome to the Valmont Industries first-quarter 2006 earnings conference call. With the today are Mogens Bay, Chairman and Chief Executive Officer, and Terry McClain, Senior Vice President and Chief Financial Officer, 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 discussion and will be read in full at the end of this call. 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.

Good morning, everyone, and thank you for joining us. Let me begin with first-quarter highlights. First, we had record quarterly sales and net earnings. Net earnings increased 92% on a 14% increase in sales. Second, operating income rose 46% to $23.6 million, which is 7.8% of sales, compared with 6.1% in the first quarter of 2005. It is a good step in the right direction, but not where we need to be. And third, operating income improvements were recorded in every segment of our business.

Before turning to the performance by segment, I would like to make a few general comments about the quarter. In our last conference call, we discussed several drivers and trends that were a support of our businesses -- the passage of the energy and highway bills last year, the improving demand for the structures in China and Europe, and a growing backlog in our utility business. These were all positives for our structural business. We had also detected more optimism among farmers in North America, which was supporting our Irrigation business.

These positive factors remained in effect during the first quarter and led to sales gains in every segment and solid gains in operating income, both in dollars and as a percentage of sales. We were very pleased to see good volume increases in all of our businesses.

We are continuing to drive improvements across business units through three corporate initiatives that we believe should lead to better operating income performance over time. We are examining and refining how we price our products, better matching the services we deliver with customers' expectations. We are emphasizing lean manufacturing techniques to further improve our manufacturing processes to gain efficiencies and reduce waste. We are examining our human resource practices, how everyone in the organization interacts with co-workers and supervisors, to find ways to improve employee engagement, which in turn will lead to better performance.

Let me now review our individual segments, beginning with the Engineered Support Structures segment. Sales increased 6.2% for $115.5 million and operating income increased 25% to $7 million. Global sales of Engineered Support Structures were higher, with most of the sales gains coming from Europe and China. In Europe, market conditions remain positive and acceptance of new products for the tramway market has been excellent.

In China, wireless communications product sales were particularly strong. To support growth in that region, we built a second pole plant in southern China. Manufacturing commenced in the new plant towards the end of the first quarter, as expected, and initial orders are slated to ship during the second quarter.

In North America, Specialty Structure sales improved due to increased demand for wireless communication products and for sign structures. Lighting and traffic structure sales in North America in this seasonally slow period were essentially flat. The improvement in segment profitability was primarily driven by the stronger results in China and in Europe.

In the Utility Support Structures segment, sales increased 12% to $66.2 million and operating income increased 81% to $8 million, reflecting improved operating leverage and a better sales mix. Our backlog continues to increase, driven by greater spending to improve the reliability of the transmission grid and some reconstruction of hurricane-stricken regions in the South.

We are detecting a change in the utility markets. Order sizes presently have increased and we are quoting for major transmission lines covering longer distances. We continue to build and strengthen key alliances with utility customers. Valmont's steel and concrete design and manufacturing capabilities offer the broadest structural productline for the utility industry.

In the Coatings segment, first-quarter sales of $25.3 million were 33% higher than last year, as we have seen an increase in galvanizing activity. Operating income of $2.4 million was three times last year's results. The improvements in sales and operating income were broad-based, as most of our operations contributed to the improvement in profitability.

Increased infrastructure spending combined with an improving industrial economy should lead to increased demand for coating services going forward. Record high zinc prices and potential availability concerns are issues we are keeping our eyes on.

In the Irrigation segment, sales were 25% higher at $86.9 million and operating income increased 56% to $11.3 million. Global sales rose due to improved markets in North America, Europe, and the Middle East. In North America, severe ice storms led to sales of replacement machines and related service parts.

New market expansion contributed most of the increase in the international markets. Valmont's development efforts in agricultural regions around the world combined with a heightened recognition of the need to conserve water are helping to drive international sales growth.

In the fourth quarter, we mentioned inflation and manufacturing input costs and the need to manage prices. Recovering most of these increases plus higher volumes led to improved operating leverage and profitability gains in the Irrigation segment.

In the Tubing segment, sales of $23.5 million were 6% higher than 2005. Improving conditions in the industrial economy and increased demand from agricultural equipment manufacturers contributed to the sales gains. Operating income increased 11.2% to $3.6 million, reflecting the higher sales and improved factory performance.

Turning to other financial measures, corporate expenses increased for a number of reasons -- expensing of stock options, increased incentive accruals tied to higher earnings, and we sold our office building in Omaha that houses our corporate headquarter. This removes a contingent liability from our balance sheet and there were some one-time legal and other expenses related to the sale. We are now leasing two floors in this complex.

Inventories have increased by approximately $14 million from the end of the fourth quarter, reflecting the seasonal increase in Irrigation volumes and higher backlogs in our Structures businesses. Accounts Payable increased in step with inventories and due to higher income tax payable.

In terms of cash flow for the quarter, capital expenditures were $6.7 million and depreciation and amortization, $9.4 million. We further reduced debt by $3.6 million. In the first quarter typically we do not build up as much cash as we use working capital for the seasonal growth in our Irrigation and Structural businesses. For 2006 as a whole, capital expenditures are expected to be between $25 million and $30 million, and depreciation and amortization between $35 million and $40 million.

As we look ahead to the rest of the year, we expect many of the factors that led to the strong first-quarter performance to remain in place. Our Engineered Support Structures segment should be supported by federal and state highway spending and the improving general economy. Our utility business should be supported by continued spending on the electrical transmission bridge.

Our international structure markets look firm. We should continue to experience good results in Europe and in China. The Coatings and Tubing businesses should find support from an improved industrial economy and increased spending on infrastructure. The Irrigation business will soon wind down its spring selling season. Results later in the year will be dependent on growing conditions and crop prices.

There are some challenges we will have to manage in the short-term, including inflationary prices. Zinc prices are at record highs and there is upward pressure on steel, copper, and energy prices. We will keep a close eye on these.

In summary, for the balance of 2006 we have a positive outlook. We caution, however, against extrapolating the rate of improvement in the first quarter's results across the entire year. On balance, we expect top-line growth for the year of around 8 to 10% and we would like to see an improvement of about 1 percentage point in operating income percentage for the year.

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

(OPERATOR INSTRUCTIONS) Arnold Ursaner, CJS Securities.

Mogens, a very quick, specific question, if I can. You mentioned in your prepared remarks and in your press release on your goals for '06, you speak to the issue you would like to see an improvement of about 1 percentage point for the full year in margin. Would you view that as a goal or would you view that as financial guidance, meaning should we be building models with 100 basis point improvement in margin?

Both.

Okay. The other thing I'd like you to spend perhaps an extra minute or two on is on the utility business. You mentioned in your comments that the order size is increasing and you're bidding on bigger contracts. Can you expand a little bit on that, perhaps give us your view of what is driving this change? And if you can, perhaps give us an example or two of some of the potential contracts you're bidding on just so we can get a feel for the magnitude.

I think what is driving the increased activity for larger transmission lines is the energy bill that was passed last year that lends more support than what we have seen in the past for investments in operating and expanding the transmission infrastructure. So I think that is basically the platform from which we are seeing this.

We have seen examples of quotation and orders now in the $10 million to $30 million or $40 million range throughout North America, but I would stay away from specific examples of either projects or orders.

What would have been the more typical order size for these types of awards?

Well, I think order sizes would have been the same, but there were fewer opportunities of that size then.

And from a competitive point of view, at various times over the last few years, you've had others come in who had capacity bidding against you at prices that were not attractive. What is the competitive environment today on these orders?

Well, I think that you are referring to the time earlier in this decade when -- just after the wireless communication business collapsed and a lot of capacity was redirected towards utility. I think a lot of that has kind of settled down and I think most participants are operating at a fairly high activity level and a fairly high capacity level, and that usually creates a more favorable environment.

Final question for me on Irrigation sales in North America, you mentioned replacement sales for storm damaged equipment. Can you give us some sense of the magnitude of that? And I am assuming replacement sales are generally much higher margin than your normal business.

Well, parts sales are usually higher margins than our normal sales. We did have a couple of ice storms here in the Midwest that gave us some additional volume, but I would refrain from giving either a dollar number or number of systems.

Okay. Thank you.

[Fritz von Carp], Sage Capital.

I think Arnie covered it pretty well. I guess I was just calling for little bit more color on the demand. You said you have seen a change in the utility market. Could you give a little more color on what types of project these are, how big they are, for whom, something like that?

As I just said, I think that there is a new focus on investments in operating transmission lines and, in some of the hurricane-stricken areas, in strengthening both the transmission and distribution lines. And the energy bill that was passed last year gives FERC more power when it comes to right-of-ways used or placing transmission lines, and there is more financial support both in years of depreciation and in ways to recover costs in expanding transmission lines in that energy bill. And I think all of that combined is leading to more activity.

On a different topic, how would you describe pricing for your products in the power poles? And I don't mean just versus last quarter or whatever, but sort of over a longer time horizon. Is pricing still depressed from the bad years after the telecom bubble burst or is that not the case?

I think price levels have returned and margin levels to what was more typical for this industry, and I don't see any major change in that going forward. But as we see activity pick up, we get more leverage, and that to a great extent is what is driving our improvement in profitability.

How should we think about -- if I were to ask you about your incremental margin -- if you have an incremental dollar of sales, how much of that dollar would you expect to fall to the bottom line typically?

That all depends on the specific product line within the utility business and the specific plant and what kind of leverage we give. So a general answer is probably not appropriate.

Okay. For the overall company, for a mix, just to push you on that a little bit more, given that we have to make some guess at it, is there any help you can give me on that?

We basically said in our release that we expect sales for the year to be up 8 to 10%, and we expect a full 1 percentage point increase in operating income percentage, which would take it from 7.5 to 8.5. That will give you some indication.

Just two real quickly if you don't mind. For interest expense for the year, is there any reason I shouldn't just quadruple your first-quarter interest expense or is there some specific thing going on there?

No, there is no reason you shouldn't do that. This is Terry McClain.

Okay, thanks. And the tax rate in the quarter, is that about where you expect it to be for the year?

Yes.

Anything else below the line, the operating line, that I am not thinking of that I should put into a forecast, that you would anticipate of any size?

The one item that was mentioned in the press release was a one-time gain we had related to a retirement plan. That was a one-time deal and that would not be expected to reoccur.

That was $1 million.

Okay, great. Thanks very much, gentlemen.

(OPERATOR INSTRUCTIONS) A follow-up from Arnold Ursaner, CJS Securities.

I'm surprised there aren't more people on the call. A quick question on the Irrigation side. Post the quarter, you obviously had only two weeks more of April, but it is a critical season for Irrigation. You give us any feel for additional trends after the quarter in Irrigation?

No, we are not seeing anything out of the ordinary. I think we'll have a favorable comparison also in the second quarter, but it may not be to the extent that we saw it in the first quarter. And we do have a lot of people on the call, but we may not have a lot of questions on it.

Okay. On the highway bill impact, obviously it did not occur in the first quarter because of seasonality as a general comment. Can you comment about backlog and what you think will occur there in the course of the year?

Yes, we had in North America about flat sales in that part of business, but we had strong order inflow and we have a good increase in backlog, and we expect that business to accelerate as we go through the year.

Okay. And the incremental capacity that you built up in China, obviously you will have quite a bit more capacity. If I recall, both facilities were expected to run at about 50% of capacity when the new plant gets up and running. Can you update us on trends there and if there was a negative impact in the first quarter from the plant startup, what it might have cost you.

Well, we had some costs we absorbed in the first quarter in connection with plant startup, but they were not significant. From a capacity standpoint, round numbers, the Shanghai facility has a capacity about $50 million. The southern plant will have a capacity of about the same. So in total, we are going to have about $100 million of capacity.

We do not expect both of those plants, therefore, to run at 50% capacity. We expect to fill up the southern plant over the next couple of years.

Okay. And the lower utility and lighting sales, I assume that is nothing other than timing or seasonal?

That is correct.

Thank you.

John Braatz, (indiscernible) Capital.

Two questions. Terry, you mentioned about interest expense being sort of flat with the first quarter going through the remainder of the year. I was anticipating some debt repayment. Is that being offset by the higher rates?

That is making the assumption, John, that we don't do any accelerated payments on our term debt. But yes, the higher rates are an offsetting factor.

That is making assumption you don't do anything, but you do have some free cash flow?

Yes.

Okay. Should I make the assumption that you may pay back some debt?

You could make that assumption.

Secondly, on the Irrigation side of the business, Mogens, revenues are up nicely. Can you give us an idea about volume, how much prices were up versus volume?

I would say it is mostly volume. There was not much -- that's not true. There were some inflationary pressures outside steel, but most of it was a volume increase.

Okay. All right. Thank you very much.

[Robert Franklin], Prudential.

I was going to ask the same question about interest expense, but can you maybe give us some specifics about where you want to go with your balance sheet?

Well, over time, as we talked about, we're pretty well locked into the bonds at $150 million. We would like to operate our debt levels around -- in the 30 to 40% debt-to-capital at maximum; that is where we feel comfortable. And we'll just have to see what our opportunities are for investment.

Again, we're not factoring in any acquisitions right now. And as the growth of the business comes, we do have to support the working capital needs, which, depending on the product mix, can be 30 to 40% of the sales volume increase that has to be funded.

Right now, if I do the math right, you're at 40%. So I guess you're targeting to go below that.

We're at 35% debt-to-capital the way we measure it, which is down from 36 something. And normally without any acquisitions etc., you can expect that number to continue to go down.

Okay. I think you mentioned at one point that debt is $6 million lower than it was before. That is by -- I don't see that in the balance sheet versus the end of the fourth quarter.

Debt has not gone down much since the end of the fourth quarter because of the working capital increases, but it is down from a year ago.

Okay, from a year ago. Okay, great. Thank you.

(OPERATOR INSTRUCTIONS)

Since there are no more questions, this concludes our call. We thank you for joining us today. This message will be available for playback on the Internet or by phone for the next week. We look forward to speaking to you again next quarter. At this time, Michelle will read our 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 call. You may now disconnect.