Valmont Industries Inc (VMI) 2007 Q2 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 second-quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn today's call over to Jeff Laudin, Manager of Investor Relations. Please go ahead, sir.

Thank you, Cynthia. Welcome to Valmont Industries' second-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 that 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 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 floor over to our Chairman and Chief Executive Officer, Mogens Bay.

Thank you, Jeff, and good morning, everyone, and thank you for joining us. Let me begin with second-quarter highlights.

First, we had a record second-quarter sales, operating income and net earnings. Second, operating income rose 49%, and net earnings increased 56% on a 19% increase in sales. Third, operating income as a percent of sales gained over 2 percentage points to 11.1, and fourth, in every segment sales and operating income improved.

Before turning to the performance by segment, I would like to make a few general comments about the quarter. We clearly had a good quarter with strength across all segments. When we talked to you in April during the first-quarter conference call, we predicted good performance. Our businesses continued to strengthen as the quarter progressed. Good volume, good leverage.

We were particularly impressed with the results in our irrigation business in North America. We had responded to a perceived increased pricing pressure on our irrigation dealers in the first quarter, an action that resulted in significant increase in order flow. Our factories rose to the challenge and delivered impressive leverage, leading to significantly improved financial performance despite the pricing action we took.

While I'm highlighting the irrigation performance, I must say that I'm impressed with how well each and every one of our segments performed. Our divisional presidents and their teams have done an excellent job of not only securing additional volume in good markets but also delivering significantly better quality of earnings.

Overall sale gains for the Company as a whole were broad-based and reflected volume improvements as well as better pricing. Our businesses achieved strong leverage on the increased volume. In other words, a combination of favorable market conditions, disciplined pricing, productivity programs and leverage accounts for the improvement in earnings.

Let us now review results in our individual segments, beginning with the Engineered Support Structures segment. Sales increased 17% to $160.6 million. North American sales increased largely due to better markets for commercial and decorative lighting. Sales of lighting and traffic products for the transportation markets were at similar levels to last year.

As we have mentioned previously, the slow ramp-up in highway spending appears to be an industrywide condition. We remain confident, though, that due to higher funding levels in the current highway bill, sales will improve over time.

In Europe increased municipal spending on infrastructure and beautification projects drove sales higher. In China sales continued to grow both for wireless communication and utility structures. China is in the midst of a major wireless communications buildout, and utility spending is also on the rise.

This strong infrastructure growth in China is helping to fill our current manufacturing facilities, and we expect our third pole plant in that country to be online sometime in the second half of next year.

Segment operating income increased 51% to $16.7 million. Profitability was boosted by significantly improved results in North America and Europe with very strong performance in China and somewhat offset by North American specialty structures performance.

In the utility support structure segment, sales increased 18% to $89.7 million. The increase in utility sales is being driven by greater spending on the transmission grid. The 2005 energy bill gave utility companies greater incentives to improve the reliability of the grid as well as increasing the authority of FERC to enforce energy policy.

The size of the projects we are being asked to participate in has increased significantly over the last couple of years. Segment operating income increased 48% to $12 million or 13.4% of sales as a result of higher volumes, operating leverage and a more favorable pricing environment.

In the Coatings Segment, second-quarter sales of $35.4 million were 30% higher than last year. The increase was a mix of demand-driven volumes and increased pricing to recover higher zinc costs. During the quarter we took a $650,000 charge to dispose of some production equipment at one of our sites. Operating income increased 21% to $5.9 million or 16.7% of sales.

The irrigation segment sales were 22% higher at $107.6 million. North American markets were primarily driven by higher grain prices and expectations for increased farm income. In international markets sales increased over last year, largely due to higher world grain prices leading to solid demand in our core markets.

Operating income increased 51% to $16.7 million due to or resulting from significantly improved factory performance as a result of the higher volume.

In the tubing segment, sales increased 12% to $26.5 million. Industrial demand was stronger and so was demand from agricultural equipment manufacturers for grain handling equipment. A favorable sales mix, higher volumes and good leverage led to a 40% increase in operating income to $5.2 million.

Turning to other financial measures, increased inventories largely reflect higher sales levels and higher inventories of zinc and steel. In terms of cash flow, the depreciation and amortization for the quarter was $8.5 million, and capital expenditures were $14.5 million. The increase in capital spending mainly reflects capacity expansions in the Engineered and Utility Support Structure segments. We also invested $12.3 million for a 70% share in a finished pole manufacturer.

For all of 2007, capital expenditures are now expected to be between 55 and $60 million as we continue to build additional capacity in the Structures businesses to meet increased customer demand. Our expected depreciation and amortization should be about $35 million.

Corporate expenses increased significantly, mainly as a result of accruals for incentive programs, especially long-term incentive plans tied to Valmont's stock performance. For the year we would expect the effective tax rate to be between 34 and 36%.

In summary, we had an excellent quarter. Currently we expect the balance of 2007 to deliver strong quarterly comparisons in sales, operating income and earnings, although on a percentage basis not to the degree we realized in the first half of the year.

As you know, one of our stated goals was to improve operating income as a percent of sales to 10% for the Corporation. Last year we finished that 8.6% up from 7.5% in 2005. In the first quarter, we achieved 9.8% and 11.1% in the second quarter. It is likely that we will achieve our 10% goal this year.

We now expect revenue increase for the year in low double digits and approximately 1.5 percentage point increase in operating income percentage.

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

(OPERATOR INSTRUCTIONS). Arnold Ursaner, CJS Securities.

Good morning and congratulations on a spectacular quarter. Can you perhaps quantify some of the onetime items embedded in corporate? I know you mentioned the long-term incentives for share -- for compensation plan. Were there any other onetime items in there that perhaps might have impacted that line?

There is Terry. Basically most of it is incentives. There are some onetime items in that quarterly number in the sense that we did some expenses related to some consulting, etc. But the significant portion of that was really the long-term incentives and short-term incentives.

The second question relates to kind of your general business and your guidance for the balance of the year, which looks pretty conservative. As you think about your business by segment, normally there's a seasonal pattern on things like Engineered Support and Utility Support which tend to do better in the second half of the year. I am a little unclear on the cautiousness of your guidance. Would it really relate to the lack of visibility or backlog in Coatings and Tubing, or is there any other factor in Engineered Support or Utility Support that would be causing you to be perhaps a little more cautious?

Well, let me take a stab at it. First of all, as you mentioned, there is not as much visibility in the Coatings business and in the Tubing business. So although we are operating in a good market environment right now, you never know what may happen.

Also remember that the third quarter is not a very strong quarter in the irrigation side of the business. There results are very dependent on maybe weather-related sales during that quarter. We are fairly optimistic that we will have a strong fourth quarter in irrigation, but order flows there will only start coming in as farmers get a better feel for their crops and pricing at that point in time.

In the Engineered Support Structures segments, we have better visibility and we have good backlogs. We had a very strong quarter. Sometimes you see major projects move from quarter to quarter, particularly in the Utility business, and we are not in complete control exactly as to when customers are ready to take some of those shipments.

And getting into the fourth quarter, you may run into weather-related problems and construction season issues. So basically we feel pretty good where we are. We feel pretty good about the market conditions and the market we operate in, but there's still a lot of uncertainty as to exactly when products will ship and what happens in some of the businesses with shorter or less visibility.

My final question relates to the Engineered Support Structures. You had had some manufacturing issues that held back margins in Q4 and in Q1. Can you tell us whether they did have an impact in the current quarter in your margin and whether, in fact, you had resolved the various manufacturing issues you had there?

Well, I think what you're referring to is some of the results in our Specialty Structures, part of the Engineered Support Structures segment, which (multiple speakers) with Wireless Communication and Sign Structures. I would say we're making progress, but we have certainly not resolved to our satisfaction the performance issues in that business yet.

So we still could see some margin improvement as that is resolved?

I would hope so.

Ned Borland, Next Generation Equity.

Great quarter. I just had a question here on the irrigation growth. If you could assign the growth to the certain buckets that you mentioned here, the spring sales incentives, the overall North American economy and international, I mean can you give me what was the strongest driver of those three categories?

Let me put it this way, our sales incentive program was in the tail end of the first quarter. So, therefore, we enter the second quarter with a larger backlog than we normally see. But how much business moves forward or moves from quarter to quarter is very difficult to say. In a relative basis, we had more strength in North America than we did in international. But we had favorable comparisons in both parts of the business.

Okay. And then on the Engineered Support business with the transportation-related business being basically flat with last year, I know your products are more late cycle in the whole highway construction side of it, but when do you start -- are there projects out there that you're associated with where we might start to see that actually grow?

Our expectations -- getting project-specific probably is very difficult to do. But you're right that our products tend to come in at the tail end of infrastructure projects. In general, we look at the highway bill as kind of the platform for activity. As long as we see increased funding for one highway bill succeeding another, we have traditionally seen that translate to increased sales for us.

Exactly when it is going to happen, it is nearly impossible to predict because another unknown is state-by-state how do they come up with the matching funding for the federal dollars and how are federal dollars being released? You can spend a lot of time trying to figure out exactly when things will happen. We are ready when it does happen. We have improved the profitability of those businesses, even though they did not have a lot of volume increase year-over-year. But we expect over time that we will see sales in that portion of our business also continue to improve.

So there is no real like rule of thumb lag time? It is more --?

No, because it also depends on what funding spills over from one highway bill to another. Sometimes you have some tail on a previous bill that we may benefit from. But we really don't spend a lot of time trying to microanalyze exactly when it comes and from where.

Okay. And then on the capacity additions, what portion of your CapEx this year is associated with that in Utility and Engineered Support?

I would say it probably approaches half of our overall capital expenditure. As you know, we announced an extension of our additional capacity in our Tulsa, Oklahoma plant. We are expanding our facilities in Valley, Nebraska. We're expanding our facilities in California on the Utility side of the business and also in Jasper, Tennessee.

(OPERATOR INSTRUCTIONS). James Bank, Sidoti & Co.

A quick question on the outlook that you gave. It is now low double-digit from the high single digit. I just want to be clear that you're not seeing any deceleration in your end markets or in the backlog. It is just slide uncertainty because of the visibility that you have?

Yes, that is probably a good way to summarize it, but also remember that third quarter does not have much irrigation business in it, and fourth quarter can be affected to a great extent by weather. But in general your comment is correct, that we are not seeing a softening in our business, but it does have some seasonality to it.

Okay, I understand. And also which cost reductions you achieved in this quarter are sustainable? I'm just trying to break that out with the improvement in leverage you got from the high product volume.

I probably cannot give you a good answer to that. It is clear that our plants have done a great job of getting leverage from increased volume. As long as the volume continues to run through our plants, we will continue to expect good leverage. But try and separate specific cost reduction or lean initiatives from general leverage, I cannot give you that.

Okay. And I think what Ned was getting at in irrigation, I am going to kind of piggyback on that one. Is there any way you might be able to separate what was the heavier driver in the irrigation segment for the quarter in regard to former optimism versus the selling incentives you had in the first quarter?

What I would say in general when I look at the agricultural markets right now, there's quite a bit of optimism. And you will recall that last year, even though grain prices had gone up quite a bit, we were not overly enthused because we were concerned that a lot of farmers had forward contracted their crops at not these high prices. And I think that turned out to be correct.

This year I think we had more optimism going into the new season because the increased commodity prices will translate into better net farm income.

So again, order flow we will only see as we get into the season, which will start in September. But looking at the environment today, we are more optimistic about the irrigation business in the coming season than we were last year at the same time.

Okay. And any trepidation from the expiring Farm Act Bill and I guess the new one that is supposed to come out on October 1?

Well, there is not a lot of talk about the Farm Bill, and I think the reason is that commodity prices are so high that they are above what the support price levels would be from the Farm Bill. So right now it is not I think very high on the radar screen of farmers. Time will show how the new Farm Bill will look.

I mean there's a general expectation that commodity prices probably have moved to a higher level for quite a period of time. There is quite a bit of speculation that it is not purely driven by ethanol in North America. But globally consumption over the last few years have outstripped production, and that has put a good foundation on the commodity prices. But to the extent that biofuels will continue to increase worldwide, that will continue to also help put a platform on the commodity prices.

And switching quickly to the Coatings group, are you near or at full capacity with that Coatings Segment?

No.

No?

No.

Okay. Are you able to specify how much more room you have?

No.

Okay.

But we have quite a bit room there. As you have seen, it is a business that leverages very well.

Okay. I was just under the impression you are already running three shifts.

In some plants we are and in others we're not. Within a certainty graphic distance, you can move products around between our various facilities.

Okay, very good. And lastly in regard to China, you're constructing the third plant I guess now, which will be online next year. Could you just quickly remind us what percentage of revenues is coming from China?

Well, each plant probably has the capacity of 50 to $60 million in revenue.

Arnold Ursaner, CJS Securities.

A quick question. In the past you have discussed balance sheet objectives, and at the moment you're quite under-levered. Can you comment on your views of uses of cash flow, opportunities out there in the acquisition area, what you hope to do with your balance sheet and cash flow? Again, your under-levered balance sheet.

Well, our priorities for cash really have not changed. One is to fund the organic growth in on our business. Secondly is to look for acquisitions that fit right into our core businesses. We're constantly looking at them, and it becomes a question of can we buy them at the right price to get us the returns that we expect. And after that we will continue to pay down debt. And once a year we take a look at dividends and what we should return to shareholders in that form.

But our priorities have not changed. We had good levers and opportunities on our balance sheet. We are constantly looking at new opportunities, but we're not going to have our ability to raise the money, move us in a direction of not really keeping a keen eye on getting good value for what we buy.

But share repurchase is not one of your targeted uses of cash flow?

Well, we have authorization I think to buy a little more. Right now we have not been buying, we have not been buying any stock.

Two years ago -- I know you look at your business in multiyear cycles. You rarely look at it on quarters. And a couple of years ago you mentioned the longer-term margin goal back then of a 10% operating margin. Sitting here today when you do your two and three-year reviews, what sort of operating margin goal is the Company thinking about two years out or three years out?

Well, again it depends quite a bit on where you are on the cycle. Right now I say we have tailwinds in most of our businesses, and in that scenario we have a strong philosophy of continuous improvement. We think there are ways to squeeze more profitability out of our businesses. Whereas we are not ready to go out and say, here is a goal in the part of the cycle we're in right now, we are not struggling back the focus on continuously improving our returns.

Can you achieve a 100 basis points margin improvement over the next few years per year? Is that a reasonable goal for you?

That all -- I just told you that I was not going to talk about a goal right now. But let me just say that we are continuing to implement our lean initiatives. We are continuing to focus on improving the engagement levels of our people. We're continuing to be more scientific in how we actually do our pricing. If the markets continue to be as strong as they are now, we will expect to continue to improve our returns.

Okay. Focusing back on the utility business for a minute, you mentioned backlogs are strong. You've got a tremendously powerful market. You're seeing customers -- the size of projects increasing significantly. They are lengthening in the time cycle. When you bid that kind of business, which appears to now be in a sellers market rather than a buyers market, what sort of margin versus current margin are you building in? And because of prior issues with higher steel prices, are you building in clauses that will enable you to recover higher steel costs if they were to occur?

Well, we are not going to get into discussing our pricing strategy in the utility market. But, as you have seen, the quality of earnings in that business has improved over the last couple of years, and it is clearly as a result of a very strong marketplace. We are always trying to find ways with long leadtime products to make sure we are well covered when it comes to steel costs, etc. Since we're a very significant consumer of steel, as a result of that, we have good insight into what is happening in the steel business and we have good relationships with the steel companies. But we are fairly comfortable that we try and keep our arms around the cost side of it and not be too exposed to a fast run-up in steel prices.

At this time there are no further questions. I would like to turn it back to management for closing remarks.

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. And we look forward to speaking to you again next quarter. 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 the 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 them, 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; 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 the discussion, and the Company does not undertake to update any forward-looking statements.

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