Valmont Industries Inc (VMI) 2007 Q1 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 fourth-quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn today's conference over to Jeff Laudin, Manager of Investor Relations for Valmont Industries.

Thank you, Cynthia, and welcome to the Valmont Industries first-quarter 2007 earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer; 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 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 floor over to our Chairman and Chief Executive Officer, Mogens Bay.

Good morning, everyone, and thank you again for joining us. Let me begin with the first-quarter highlights.

First we had record first-quarter sales, operating income and net earnings. Second, operating income rose 42%, net earnings 43%, [on] 12% increase in revenue. Third, operating income as a percentage of sales gained 2 full percentage points to 9.8%. And fourth, in every segment, sales and operating income improved.

Before turning to the performance by segment, I'd like to make a few general comments about the quarter. When we look at the financial results of the quarter, the recurring theme is one of good operating leverage in most of our businesses and higher volumes, along with improved pricing in many of our businesses. Most of our businesses enjoyed favorable market conditions and experienced solid sales growth. Revenue grew in Coatings last year due to the higher pricing to recover increased zinc costs, and growth was excellent in Utility, mostly due to volume. Our structural businesses performed well in all markets, with the exception of the North American specialty structures segment.

Within North American specialty structures, while improvements are being made, results are still below last year's first-quarter performance. Our Irrigation business turned in a good performance, the market was slow to develop, and competitive pressures from our dealers started to increase. To protect our leadership positions, we responded with a targeted market action that resulted in increased order flow, sales and backlog. Lastly, our Tubing business had excellent results.

As you know, one of our goals is to improve operating income as a percentage of sales to 10% for the Corporation. Last year, we had a 1 percentage point improvement over the previous year, and in the first quarter we had a 2% improvements. We remain on track towards reaching our goal and for the year we now expect about a 1 percentage point improvement in operating profit as a percentage of sales.

Recently, our Board approved plans for a third power plant in China. We built our first plant there about ten years ago. We opened the second plant in southern China just last year and it is filling fast. Based on our expectations for long-term strong investment infrastructure by China, we will start construction of a third plant to come online during the second half of 2008.

Let's now review results in our individual segments, beginning with the Engineered Support Structures segment. Sales increased 8% to $125.2 million. North American sales increased largely due to better markets for commercial lighting, higher traffic and lighting sales in the transportation market, and improved pricing.

Since the current federal Highway Bill is larger than the prior one, faster sales growth might have been expected. In our conversations with market participants, the slow ramp-up appears to be an industry-wide condition. There was a delay at the Congressional level in appropriating this year's increase in funding for the Highway Bill over last year's levels. This had a trickle-down effect on states budgeting for highway projects. The appropriation bill was just recently signed, at the higher level called for under the new Highway Bill, and we remain confident that due to these higher funding levels, sales will move up accordingly over time.

North American specialty structures sales were largely due to weather-related shipping delays.

In Europe, sales were comparable to last year. Last year fulfilled a major tramway project which did not reoccur this year, which led to a change in the sales mix.

In China, sales remained strong, both for the utility and wireless communication structures. China continues to build out its wireless communication networks. And utilities spending is also on the rise in China, where power plants are located near the fuel supply, creating a demand for transmission structures to transport the energy to metropolitan areas.

Export sales from China also remained strong. Operating income in this segment increased 24% to $8.7 million. Second, profitability was boosted by the strong performance in China, significantly improved results in North America's lighting and traffic businesses, somewhat offset by decreased profitability in Europe due to a less favorable sales mix, and poor operating performance in the North American specialty structures.

In the Utility Support Structures segment, sales increased 22% to $80.5 million. The increase in Utility sales is being driven by greater spending on the transmission grid. The Energy Bill of 2005 gave utility companies greater incentives to improve their reliability on the transmission grid. The Federal Regulatory Energy Commission, or FERC, also received increased authority to enforce energy policy, including the ability to ease barriers to interconnectivity, such as long delays in site permitting, and restrictive right-of-ways. These new rules appear to be gaining traction. We believe that some of the increased spending by utilities [is to] comply with these new provisions on reliability and interconnectivity in the Energy Bill.

Segment operating income increased 20% to $9.6 million or 11.9% of sales as a result of the higher volumes. Operating income was negatively impacted by several days of plant shutdowns due to winter storms in the Midwest. In the Coatings segment, first-quarter sales of $33.6 million were 33% higher than last year, largely reflecting increased pricing to recover zinc costs. Operating income more than doubled to $5.2 million. You may remember that last year in the first quarter, zinc costs escalated rapidly, and our pricing actions could not keep pace with the cost increases. This year, pricing better reflected costs, resulting in strong operating income comparisons.

In the Irrigation segment, sales were 7% higher at $93 million. In my opening comments, I discussed conditions in the North American market. In the international market, sales increased over last year's record first-quarter levels, largely due to higher world grain prices and our success in establishing markets for proficient Irrigation in some emerging economies.

Operating income increased 10% to $12.3 million, or 13.2% of revenue due to improved factory performance as a result of the higher volumes. In the Tubing segment, sales increased 11% to $26 million. And operating income was 17.4% for segment sales. Demand was stronger from agricultural equipment manufacturers, primarily for grain handling equipment, as well as for structural steel tubing. A favorable sales mix and higher volumes led to an increase in operating income of 25% to $4.5 million.

Turning to other financial measures, increased inventories largely reflect higher utility and structural backlogs and increased zinc inventory and costs. We have two planned [kettle] change-outs as part of our preventive maintenance scheduled in the Coatings segment. In zinc, we have already acquired in preparation for these change-outs is carried in the inventory.

In terms of cash flow, the depreciation and amortization for the quarter was $8.5 million and cash flow expenditures were $12.5 million. The increase in capital spending reflects our capacity expansions in the Engineered and Utility Support Structures segment. For all of 2007, capital expenditures are expected to be between 50 and $55 million, as we add capacity in the structures businesses to meet increased customer demand. These investments were communicated to you previously.

Depreciation and amortization we expect to be around $35 million. The slightly lower tax rate in the first quarter was the result of the mix of international earnings at lower tax rates. For the year we would expect the effective tax rate to be between 34% and 36%.

As we look forward to the rest of the year, we expect continued good performance. We're starting the year with a very strong first quarter. At the current time we expect the continuation of favorable market conditions in our businesses. For the year in total, we expect a high single-digit percentage increase in revenue compared to 2006, and about a 1 percentage point increase in operating income for the year.

The drivers of our markets remain firm, and we stay focused on improving our operational performance with a focus on receiving the proper value for our products and services, reducing costs and improving responsiveness to our customers using lean disciplines and improving employee engagement.

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

(OPERATOR INSTRUCTIONS). Jon Braatz, Kansas City Capital.

Good morning. I've got a question with regards to your operating margins. If you look back through the year since 2000, your operating margins in the first quarter were almost always the lowest for the year. And this year we're at 9.8% already. Yet you're sort of suggesting that operating margin for the full year will only be up 1 percentage point, which would take us up to about 9.6. That would suggest to me, obviously, that the second, third, fourth quarter are going to be below that 9.8%, which is really sort of contradictory to what we've seen historically since 2000. How do you -- can you help reconcile that? Was there something unusual in the first quarter that helped margins above and beyond what might have been expected, or why are we going to be a little bit less than the second, third and fourth?

That's a good question. It's unusual for us to see the kind of improvement in operating margin that we saw in the first quarter a full 2 points. And it's tough to put your finger on any particularly reason for it. In general, we had good margins and even though we experienced some weather delays, particularly in the Utility business and specialty structures, we had pretty good shipments throughout the quarter. And our international operations also did pretty well, particularly in China. From quarter to quarter, this could move around. Currently, we say that we'll probably be up about a full point for the year, and as we go through the year, we'll give you by quarter how we're doing.

Thank you very much.

Ned Borland, Next Generation Equity.

A couple of small ones first. What was the cumulative effect of both shutdowns related to weather in Utility, and the impact of weather on the shipment delays in Engineered Support?

It's very difficult to calculate that as you know because you try to make up the delay time with overtime, etc. We really haven't calculated it. We just know that some of our plants were down for 1.5 to 2.5 days.

And then in utilities, a nice strong revenue growth there. Are you starting to see larger transmission projects, or is this just a broader base of customers that are coming to you for your products?

We're seeing an increased number of larger projects that run over several quarters and some several years.

So your backlog growth is more due to the larger projects that you still have to deliver product on or --?

I would say that the mix between small projects and larger projects have probably swung more towards the larger projects in our backlog.

And then switching over to Coatings for a second, zinc -- where zinc prices are right now, they've come down from the sort of $2 level. Is demand sufficient with your customers that you've been able to kind of hang onto price as zinc prices have come down?

Yes, I would say so.

And do you have a total for international growth? I may have missed that; I got onto the call late.

International growth in sales and earnings? (multiple speakers) we don't break that out on a quarterly basis.

That's all I have; thanks.

James Gentile, BB&T Capital Markets.

Just kind of following up on Jon Braatz's question with regard to the next three quarters in relation to some of the margin comparisons there. With regard in particular to Coatings, this was the last "easy comparison." Could you perhaps give us some directional guidance on the operating line that basically could help us with our model over the next three quarters in Coatings? Because this is a very volatile business, and you mentioned over the last few quarters that this level of profitability is generally not that sustainable. So --

On the Coatings side, that business is very dependent on volume. It leverages very well, and it deleverages equally significant. And as long as we get the volume, I would expect us to save stay solid double-digit operating income in that business. And there's no sign out there that volume is softening.

Could you point to specific end markets that you're seeing --

We do a lot of coating of products that go into infrastructure. As you know, we are benefiting from an increased focus on and investment in infrastructure. And our Coatings business will benefit from that also. (multiple speakers)

Any sort of customer concentration?

No, there's not.

With regard to the Irrigation margin, you did suggest that you gave some customer incentives on the pricing part of the equation, in the later portion of the Q1 period. Are we to expect that more aggressive pricing stance for the balance of this year as demand maybe wasn't as strong as perhaps some folks have realized?

I would say that we are towards the end of the season. And, therefore, the actions we took towards the end of the first quarter was really in response to -- we try and keep a close eye on market share, win and loss, and we stay close to our dealer organization. We got the feeling that where we had tried to pass on all cost increases to the fullest, that that was not necessarily what was happening in the marketplace, and we reacted to it. The scenario will be a complete different scenario going into the next season, which will start in August/September. And we will look at what is the dynamic of the marketplace at that point of time. But we're not forecasting a compression in margins in the Irrigation business.

But the chance -- I guess the opportunity for incremental acceleration, if you will, on the margin line in Irrigation is likely not going to come to fruition in '07?

I -- let me put it this way. Last year, towards the end of the year, a lot of people expected a boom in the Irrigation business because corn was selling at close to $4 and all this talk about ethanol. We were never as excited about that as some of the people we were talking to. One of the reasons was that a lot of farmers had forward contract of their corn at $2.75 or something like that so they were not seeing that income.

Now this year, that scenario is probably different, where a lot of farmers probably have forward contract of their corn at much higher prices. So farm income should be very strong.

It's tough to predict the psychology of how farmers will spend their money. If they're convinced that this ethanol issue is a long-term issue and that may make them make more investments. We come from the standpoint that we're not forecasting it, but we're ready for it. We have the capacity to react to what may happen in the marketplace and we will do that when it happens. But we're not painting an overly optimistic picture, because our history in the Irrigation has told us that's very difficult to do.

Sure. The price concession was in no way an indication of a higher inventory?

No, not at all.

Okay, I was just curious, because there were some other competitors that put up some very sizable increases in inventory.

Just one last final question, you did suggest that the sign structures business on the margin side was still a little bit weak. Could you kind of maybe give us a little bit of timing with regard to some of the recent changes you have made with regard to management and things and how that will eventually translate into improved results in that (multiple speakers) [piece]?

First of all, I think you're kind by saying a little bit weak. Secondly, we did put in new management last year, and they are doing all the right things. But it's like changing the direction of an aircraft carrier. It takes a while; backlogs have to be cleaned out, etc., etc. But we expect as we go through the year, we will start seeing better performance in that business.

Just order of magnitude, it's about $105-ish, million ,$110-ish million segment of your larger Engineered Support Structures segment. Was this losing 5 to $7 million last year?

I'm not quite sure. What segment are you talking about now?

That sign structures piece of the business.

That's not as big as you indicate there. But it was not losing 5 or $7 million, no.

Okay, I was just curious, just trying to get a sense of the order of magnitude there. Thank you.

(OPERATOR INSTRUCTIONS). Jon Braatz, Kansas City Capital.

Mogens, when you look at the Irrigation business, obviously, it was 10 years ago, 15 years ago, it was much more volatile. You had much bigger swings. Do you see, when you look at the market, that maybe the industry is becoming more consistent and that we're not going to see the wider swings, and that from a management standpoint, it's just that much -- it will be easier for you to manage the business?

Well, I hope that's the case. I'm not quite sure. If you see a drastic change in farm economics and farm income, you will see big swings in that business. We are benefiting from the fact that we have much better geographic diversification, not only between North America and international, but also new markets in North America compared to the strong markets in the central part of the country. So I think we may see on average less swings in that business, but I would not rule out a major change in farm income or farm mood changes drastically.

Now whether it's easier to manage, this is not a business where we build to inventory. We build every system based on a dealer order for a specific field. And we don't do any floor planning. So it's really not that difficult of a business to manage. We can adjust demand levels up and down; we have sufficient capacity in place to take a big upturn; and we have the ability to shut some of that down if we see a big down term. From a management standpoint, I don't think it's a big challenge. Does that answer your question?

Yes. I may have forgotten, is all your domestic production -- all your production in McCook?

No, it's both in Valley and McCook. Most of the domestic production is in McCook.

How much capacity do you have there, in McCook?

Plenty.

Thank you very much.

At this time, there are no further questions. Management, are there any closing remarks?

This concludes our call. We thank you all 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 disclosure.

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 end 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 statements included in this discussion is made as of the date of the discussion and the Company does not undertake to update any forward-looking statements.

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