Valmont Industries Inc (VMI) 2006 Q3 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 the Valmont Industries' third-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). I would now like to turn today's conference call over to Mr. Jeff Laudin. Please go ahead, sir.

Welcome to the Valmont Industries' third-quarter 2006 earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer, and Terry McClain, Senior Vice President, 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 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 our Chairman and Chief Executive Officer, Mogens Bay.

Good morning, everyone, and thank you again for joining us. Let me begin with third-quarter highlights. First, net earnings increased 48% on a 17% increase in sales. Second, operating income rose 32% to $29.1 million and this represents 9.3% of sales compared with 8.3% in the third quarter of 2005. Third, solid sales increases were recorded in every segment. And forth, we had a strong performance in our international operations. Last year we set a goal to get operating income to 10% of sales over a three- to five-year period; we are making good progress towards this goal and are pleased with our results so far.

Before turning to the performance by segment I would like to make a few general comments. There were two one-time events that affected results for the quarter; the first was a $700,000 after-tax gain related to the sale of land as a result of the consolidation of two coatings facilities. The second item was an after-tax charge of $2.1 million related to the valuation of receivables and inventory in our nonconsolidated joint venture in Monterey, Mexico. While performing due diligence prior to buying the remaining 51% interest from our joint venture partner, we identified certain accounting irregularities that led to the charge. Buying out our joint venture partner will give us additional capacity to serve the North American utility markets.

You will also notice a reduction in our effective tax rate; this is due to a higher percentage of international learning which are taxed at a lower rate and certain tax credits this quarter. Taken together the gain on the land sale, the valuation charge and the lower tax rate largely offset each other in our results for the quarter.

This quarter we continued to deal with inflation and volatility in the prices of some of our input costs; most notable was zinc which fluctuated in a wide band at historically high levels. This led to operational and pricing challenges. Our Coatings Segment is recovering most of these higher costs through price increases; however, since many of our products are galvanized, higher galvanizing costs must also be recovered through price increases in our other businesses.

We are frequently asked what will be the impact of expanding ethanol production in our irrigation business. Clearly increased ethanol production should drive higher demand therefore higher prices for corn and higher crop prices translate into better overall farm income enabling greater capital investment on the part of farmers. Long-term it is difficult to measure to which degree the ethanol industry will be supportive to our business, but it is certainly a plus.

Let me now review our individual segments beginning with the Engineered Support Structures. Sales increased 8% to $135.9 million and operating income increased 10% to $14.5 million. In North America most of the sales increase was in our commercial lighting market; commercial lighting represents sales for parking and pedestrian area lighting in malls, shopping centers and other public places. We have also seen a growing interest in our decorative lighting products as lighting and landscape designers drive the beautification of urban areas.

In the transportation market we have seen order rates and backlog steadily increase compared to last year. Since our products are typically installed at the end of a project we would expect continued sales growth going forward as a result of the federal highway bill passed last year. In specialty structures sales were slightly lower for wireless communications structures. Sign structure sales were also lower compared to last year when a large order was shipped in the third quarter.

In Europe sales remain strong as municipalities continue to invest in beautification projects. In China sales of wireless communication and utility products for export were higher. Our recent capacity addition is positioning us to better support China's growing infrastructure needs as well as export sales. Segment profitability reflects stronger international and North American lighting results partially offset by poor profitability in specialty structures.

In the Utility Support Structures Segment sales increased 29% to $66.3 million; operating income increased 37% to $6.7 million reflecting the higher volume and improved SG&A leverage. While demand for concrete structures remains strong, most of the sales increase came from our steel support structures. Utilities are purchasing support structures to increase the reliability and capacity of electrical transmission grids. Many market participants currently expect this trend to be sustained over a substantial period of time. Our backlog continues to grow and we are adding capacity at three of our utility segments' manufacturing facilities. These additions will take place in Tennessee, Oklahoma and California representing a broad geographic range.

In the Coatings Segment, third-quarter sales of $29.9 million were 33% higher than last year largely due to higher pricing to recover substantial increases in zinc costs. Operating income of $5.9 million was more than two times last year's results including the gain on the land sale. Without this gain operating income improved 86%. Demand for coatings has increased over last year and we remain upbeat on the outlook for our galvanizing services.

In the Irrigation Segment sales were 22% higher at $67.8 million and operating income increased 15% to $5.6 million. North American shipment sales were higher than last year largely due to a hot, dry growing season. Recently the U.S. Department of Agriculture has lowered their forecast for the size of the current corn crop along with estimated global ending stocks. This has led to a strong rally in the price of corn. International sales were higher due to project sales in emerging markets and improved global market conditions.

The operating income percentage was slightly below last year due to a change in sales mix and inflation in materials and purchased components occurring faster than price increases to recover these additional costs. Rising concerns over water availability and the recognition of mechanized irrigation's role in reducing water usage is increasingly becoming the major driver for sales worldwide. Our established global dealer network and network of manufacturing facilities and our efforts at opening new markets are leading to an increasing percent of sub segment sales and profits being contributed by our international irrigation business.

In the Tubing Segment sales of $23 million were 13% higher than 2005. Increased demand from agricultural and industrial product manufacturers contributed to the sales gains. Operating income increased only 2.3% to two $3.8 million due to a shift in product mix.

Turning to other financial measures, corporate expenses increased mainly due to the expensing of stock options and incentive accruals as a result of higher earnings. Inventories increased reflecting material inflation and the higher sales level. The increase in accounts receivable is also due to the higher sales level as receivable turnover is comparable to historic levels. Our consolidated effective tax rate decreased reflecting a higher proportion of international profits taxed at lower rates and certain income tax credits. With our current mix of business we would expect our tax rate going forward to be only slightly below our historical rate of about 36.5%.

In terms of cash flow, capital expenditures were $7.4 million and depreciation and amortization $9.2 million. For 2006 capital expenditures are expected to be between 25 and $35 million and depreciation and amortization between 35 and $40 million. Operating cash flow year-to-date is $32 million.

As we look ahead to the fourth quarter many of the factors that led to strong results so far this year remain in place. We believe operating income as a percent of sales should increase about 1 point also in the fourth quarter on a modest revenue increase over last year's record fourth-quarter sales leading to strong earnings comparisons for the quarter. This concludes the prepared portion of our remarks and I would now like to take your questions.

(OPERATOR INSTRUCTIONS). Arnie Ursaner, CJS Securities.

Good morning and congratulations on a very good quarter. I'd like to focus a little bit on the additional capacity you're putting in place for utilities support. You mentioned your '06 capital spending which frankly I think is pretty similar to levels you've given us before. Will more of the spending occur in '07? When will this capacity come on stream? And what sort of additional revenue might you be able to support by putting this in?

Some of the capital to add the capacity will occur in '06 and some in '07. And in total we are not talking about a substantial amount of money since we are adding capacity to existing facilities. I may not have the number exactly correct, but about $7 million. And when that is fully in place it would add about $30 million in capacity to our current capacity in this country. Now as we said, we are also in the process of purchasing the 51% of our Mexican joint venture that we do not currently own and that will allow us to allocate more of the capacity out of Mexico to support the utility business in the U.S.

And what are you spending to buy the remaining 51% of the JV?

It's a few million dollars, I think it's about $5 million.

Okay. And taking a step back conceptually, focusing on FERC and the rules and attachment O and the impact that's having on utility spending at the moment, can you comment a little bit about how your backlog and trends in backlog are building in utilities and sort of what your outlook is for '07 and more structural issues, pardon the pun, that you're grappling with in the utility business for the next year or two?

Well, as you are well aware, we have seen a significant increase in activity in the utility business and our backlog today is substantially higher than it was a year ago at the same time. So that would bode well for the outlook in the utility business for 2007. And as I did mention, when we talk to people that focus on the utility industry -- analyzing the industry, they expect a considerable amount of time into the future we will see increased spending on the part of utilities.

Our challenge is going to be to keep up with capacity, but we have the opportunity, like the one I just outlined, to add to capacity in existing facilities and therefore do it at least with less expense than if you were going to build a greenfield startup and add the overhead structure to it.

Okay. Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS). Ned Borland, Next Generation.

Great quarter.

Thank you.

Just a couple questions here on pricing. I guess if you look at your raw material costs here, do you feel your pricing is at levels right now that's sufficient to cover future raw material price increases?

You know, it's a difficult question to answer because if increases come in a predictable way we have a pretty good track record of passing it on. But as I did mention here earlier this morning, in some of our businesses these price increases came fairly rapidly and therefore there was a slight delay between actually getting the pricing in the marketplace and us absorbing the cost; zinc was a good example where we saw a substantial run-up. But by and large over time have been able to pass on price increases because -- or cost increases in price because we are in no different position than anybody else -- if we see an increase in zinc over our competitors.

So in the Coatings Segment where you saw the zinc increase, can you characterize sort of the difference between volume and price, sort of the magnitude in that business --?

Well, in this last quarter price was probably three-fourths of the increase in sales, and maybe one-fourth came from volume.

Okay. In terms of the backlogs, just to follow-up on Arnie's question, where there some sort of significant projects I guess in some of the engineered support structure backlog and was there some projects that were sort of in there, some beautification projects?

Well, none that would kind of create a situation where we say this is just a bubble and we're not going to see strong order flow and backlog going forward. This is just a general strengthening of that business.

Okay. And on highway spending trends, you said that particularly with the transportation part of the engineered support business, you said that those products generally go in last on a highway spending project. When do you think -- as we ramp up here with the highway spending when do you start to see sort of the sweet spot in that business?

Well, I'm not so sure there is necessarily a sweet spot. I think we have seen some carryover from the last highway bill that was funded and where our typical lighting and signage and signal structures will be some of the last things installed in the new highway project on expansion of a current one. So we've seen some carryover I'm sure. The new highway bill is at a higher funding than the previous one, so I think we're just going to see a trend that will continue the one that we have seen in the past -- that our structural businesses will have good growth also going forward.

Okay, thanks.

You're welcome.

(OPERATOR INSTRUCTIONS). Terry Ledbetter, Friedberg Investment Management.

Good morning. I wanted to ask about the gain on the coatings property, was that above the operating income line?

Yes, and that's -- when I explained that in the coatings business operating income more than doubled in the segment, but if you exclude the gain on that piece of land operating income would have been up 86%.

Okay. And then with the irrigation business and general concerns about water availability, water is scarce and it seems to me that this is kind of a problem that's moving along at kind of a glacial rate as people realize it's an issue. Has there been a change or are you just seeing a continuation of an old trend?

I think you're probably describing it correctly; it's moving on at a glacial pace. But the fact of the matter is that water will over time become a bigger and bigger issue. Now that doesn't mean it's going to happen in December, but it is the long-term support of this business. It has been a good business over now 50 some years. It's a business that will continue in our mind to be a very solid performer for Valmont and particularly outside the United States we're seeing a number of new growth opportunities. But it's not a business that will grow double-digit year-in and year-out and it is still a cyclical business.

Okay, that's helpful to put it in context. Thanks.

You're welcome.

Thank you, at this time there are no further questions. Management, are there any closing remarks?

No. Thank you, Cynthia. This concludes our call and 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 and at this time Cynthia 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's perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under their 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 report to the Securities and Exchange Commission as well as future economic and market circumstances; industry conditions; company performance and financial results; operating efficiencies; availability of 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 statements included in this discussion is made as of the date of the discussion and the Company does not undertake to update or (technical difficulty) any forward-looking statements. This concludes today's conference. You may now disconnect.