Valmont Industries Inc (VMI) 2007 Q4 法說會逐字稿

Good morning. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the Valmont Industries fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the conference over to Mr. Jeff Laudin. Please go ahead.

Thank you, Julianne. Welcome to the Valmont Industries fourth-quarter earnings conference call. With me today is 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 apply 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.

Thank you, Jeff, and good morning, everyone. Thank you for joining us. Let me begin with the fourth quarter highlights. First, we had record fourth quarter sales, operating income, and net earnings. Second, operating income increased 45% and net earnings increased 44% on a 17% increase in sales. Fourth quarter Irrigation results were very strong with revenues up 47% and operating income that nearly tripled. Fourth, Utility segment operating income increased 55% on a 7% increase in sales. Before turning to the performance by segment, I would like to make a few general comments.

In 2007, we met our goal of 10% operating income as a percentage of sales as we reached 10.4%, and our return on investment capital reached 14%. Both of these measurements were substantial improvement over our performance three years ago when we set these goals. We met these goals ahead of plan as we were helped by good market conditions worldwide in most of our businesses. We have been asked if we are going to set a new goal, and the answer is not at the present time and the reason for this is not that we don't feel we can continue to improve the quality of our earnings. We now have a good level of profitability and return on invested capital substantially above our cost per capital. We certainly subscribe to the economic value added or EVA concept and we now have the flexibility to make trade-offs between revenue growth and maximizing margins with a view of creating economic value added.

We will continue our efforts to improve our businesses through our journey to become a lean enterprise. This journey, as you know, is focused on a constant war on waste in everything we do, and it includes our efforts to improve the engagement levels of our employees worldwide and continued focus on good pricing practices. During 2007, we made several capital investments to support growth. Construction began on a third pole plant in China in [Chindou] which will begin production during third quarter of this year. In North America we made major capacity additions in our Utility and Engineered support facilities. We also made several acquisitions. We protest the galvanizing operation in Salina, Kansas and invested in a pole company in Finland. Early 2008, we purchased [Pensoma] Tubular in our Utility businesses and in our Engineered support structure businesses we made a 70% investment in West Coast engineering. We will continue to pursue acquisition opportunities to support additional top-line growth.

In 2007, we also faced certain operational challenges. Our biggest challenge continued to be in our specialty structures businesses. During the fourth quarter, we addressed this issue by closing one facility and consolidating its operations into another location. In summary, 2007 was a good year for Valmont with continued progress and growing our businesses and improving our financial performance.

Let us now review the fourth quarter results. I will begin with the Engineered Support Structure Segment. Sales increase 9% to $159.4 million. Operating income decreased 2% to 13.4 million. Segment profitability was adversely impacted by the results in the specialty structures business and the cost associated with consolidating two facilities into one. In China, sales of wireless communication products remain supported by the buildout of the wireless communication network there. Cell phones used in China is growing at a very fast pace as users bypass land line infrastructure in favor of wireless connectivity. Sales of our utility structure also increased in China with additional generating capacity require investments, utility structures for transmission.

In Europe, sales were supported by a firm economy and municipal investments in lighting for safety as well as for beautification. In North America, lighting sales were about even with last year's fourth quarter. (inaudible) structure sales were lower, mostly due to consolidation of manufacturing operations. Our recent investment in West Coast engineering is a great strategic fit. It expands our opportunities in the northwestern part of the U.S. and enhances our exposure to a strong Canadian economy. (inaudible) Bailey and her team have earned a significant market share in Canada and we are delighted that they have joined Valmont.

In the utility support structure segment, sales increased 7% to $79.3 million, largely as a result of increased volume and a better pricing environment. Operating income increased 55% to 12.8 million or 16.1% of sales. Our backlog continues to build as order rates are strong. The utility market is being driven by greater spending to improve the reliability of the transmission grid. The transmission grid has been operating under the stress of higher demands for many years without the intended investment in infrastructure to ensure reliability.

The Energy Bill of 2005 recognized this need and incorporated reliability standards and enforcement, recognizing the security of the grid as a national priority. We acquired Penn Summit, which is located in Pennsylvania. It is a perfect fit with our network of utility plans. It gives us a footprint in the important northeastern part of the United States. Ross Power and his team have built a good business and we are excited that they have joined Valmont. In the Coating Segment, fourth quarter sales of 33.6 million were 10% higher than last year due to improved industrial demand and higher volumes from Valmont's internal demand. Operating income rose 5% to 5.8 million, or 17.4% of sales, as a result of the improved volumes. In the Irrigation Segment, sales were 47% higher at 103.7 million.

The Irrigation Segment operating income increased to 13.9 million, up from last year's level of 5.1 million and it was 13.4% of sales. While there has been much talk about the impact of ethanol production on farm commodity prices and net farm income, we believe there is a broader dynamic in place. Worldwide demand for grains continues to outpace supply, and year-end inventories have declined over the last number of years. While bio fuel demand certainly has had an impact, global economic growth is the driving increase -- is driving increased use of food and fiber. As a result, the global agriculture sector is very strong. Our current view is that these dynamics should continue.

Turning to other financial measures. Increased inventories and accounts receivables largely reflect higher activity levels. Depreciation and amortization for the year was 35.2 million and capital expenditures were 56.6 million. In 2008, depreciation and amortization is expected to be 35 million and for 2008 we expect capital spending to exceed depreciations. The increase in the fourth quarter tax rate was primarily the result of changes in Mexican and Chinese corporate tax laws that resulted in a net $1 million expense relating to certain deferred tax assets.

In 2008, we expect another record year. The drivers for our markets remain firm. Engineered support structures, ongoing highway spending in the United States and continued investment in international infrastructure should provide support to our structured business tempered, of course, by the economic environment as it develops. It is too early to tell what impact the slowing U.S. economy and budget challenges both at the State and Federal levels will have on our traffic and lighting businesses in this country.

In our utility business, we expect investment in the electrical transmission grid to continue to grow. In the irrigation business, higher farm income should lend support to world markets along with water conservation and the other traditional drivers such as weather and farm policy. At the current time, we remain optimistic. In our coatings businesses, conditions in the industrial economy will largely dictate results. One area where we will continue to monitor is inflationary pressures on purchased materials. We will address inflationary challenges by attempting to raise prices in a timely and appropriate manner to recover those costs. In summary, we expect double digit revenue growth and another 1 point increase in operating income as a percentage of sales. This concludes the prepared portion of our remarks, and now I would like to take your questions.

Thank you. (OPERATOR INSTRUCTIONS)Your first question is from the line of Arnie Ursaner with CJS Securities.

Good morning. It is Bob [Labick] backing up for Arnie Ursander.

Good morning, Bob.

Good morning. Congratulations on a strong quarter.

Thank you.

I want to start with the ESS segment. You mentioned the plant consolidation and some charges in the quarter impacted the profitability. Is it possible for you to quantify the impact of the charges or of the consolidation to get a truer measure of what the operating margins would have been in the quarter?

Well, probably the direct charge associated with the closing is probably a couple of pennies this year, but then of course had operational challenges in that quarter as we went through this and I can't quantify exactly what they would add up to.

Okay. But that's completely behind us now, so Q1 and beyond we should be back to the normalized margins would you expect?

Well in that -- the plant we closed was the one we had the most difficulty with from a profitability standpoint. We are now incorporating most of those sales into a plant in Plymouth, Indiana. The one we closed was in Selbyville, Delaware.

Great. And then you touched on this certainly, but your comments in the press release regarding the potential highway spending and traffic. Is that more of a cautionary/anecdotal or are you beginning to actually see changes in ordering patterns a this point?

Well, I would say it is probably more on kind of what you hear and what you read about budgetary pressures in states and budget problems on the Federal level too. I would say that we may have seen a slow down in a couple of states, but haven't seen a broad-based lowering of activity levels. It is one of those things we need to keep our eye on.

Great. Okay. Last question and I will get back in queue. In the Irrigation segment, obviously the results were terrific. Can you just discuss, I guess, do you have the capacity for the multiyear growth that you are expecting in this? Is there any need for additional infrastructure there and where you are in terms of utilization and margin expansion in that segment.

From a capacity standpoint, I think we are well covered in North America. The challenge we are going to have is ramping up sub suppliers and make sure we get components in. It's a question of getting people added at the right time, but from a PP&E standpoint, we are in good shape. We are in good shape outside the United States. We have actually, over the last couple of years, probably put an additional burden on our North American plants because of the weak value of the dollar which is more competitive exporting out of here. I would say, I think our Irrigation business has done a good job of passing on inflationary increases, but most of the improvement and profitability is really great leverage when you have this kind of volume going through very efficient plants.

Terrific. Thanks very much.

Your next question is from the line of James [Gentile] with [Newland].

How are you doing?

Good. How are you?

Very good, Mogens. Thanks for taking my question. You guys just continue to outperform. I just wanted to again go through the efficiency measures that you took in the specialty structures business in the Q4 period, which it seems like there were other inefficiencies that affected the margins in addition to the absolute charge to close the plant. You figure you got two pennies plus, and then a higher tax rate by a million dollars. So technically your EPS, fully diluted EPS for the quarter wasn't the reported 88, but if you break out some of these little one-timers we saw $0.93 or $0.94 quarter.

Are you telling or asking?

I am asking. What am I missing in my math?

I don't necessarily think you are missing anything. We took a couple of pennies and you can translate the $1 million into four pennies and we probably had some expenses as we were getting rid of backlogs in an inefficient plant.

Absolutely. You look at the absolutely very strong agriculture. If you look at the leverage in the [McCook] plant versus a competitor that will remain nameless, which is also experiencing some strong top-line -- your operating profit tripled in the quarter versus your competitors which perhaps nearly doubled. It really speaks to the power of, A, the quality of your -- of your product. Now, if you look at the guidance you have given, double-digit growth, are we to perhaps normalize growth in the AG business for 2008 to kind of a mid double-digit type of trend that you're seeing right now given the backlog they have in place?

Well, as you know, you have been following us and, therefore, the AG business for many years. We had a very good quarter. We have good auto flow. The external environment in the agricultural business is probably as good as we have seen it for decades. But buying patterns can change quickly.

Very quickly.

In the farm economy. We think we are ready. We are trying to be ready for good season, but this is still agriculture.

Right. Absolutely. But the efficiency in your plant will certainly suggest incremental operating leverage compared to your other segments and competitors out there. And then if I drop the numbers double-digit top-line growth through 2008 and 100 basis points of margin expansion, all else equal, the consensus view right now shows on Thompson at $4.14 and I get anywhere between $4.35 and $4.50, just given the guidance you have given us. That's -- that's quite an attractive EPS growth trajectory continuing through 2008.

Well, we will stick with what we told you. You can draw the conclusions you want to draw.

Well, those are just the numbers in my spreadsheet telling me what -- what the EPS estimates are, but you guys continue to execute very strongly and I look forward to seeing more lean efficiencies in the structures business in '08. Take care.

Thank you, sir.

Your next question is from the lane of James Bank with Sidoti & Company.

Hi, good morning.

Hi, Jim, how are you?

I am sorry I might have missed the first line of questioning. I am not certain if that was in regard to the utility structure segment. I was wondering if you could quantify the 16.1% margin in that segment between the volume and the factory productivity improvement.

Well, I think it is a combination a good pricing environment and productivity. Volume and sales were up 7%. So we got lots of leverage and probably are in a better pricing environment than we were a year ago.

Okay because that 16.1% is the best I have seen in that segment for five, six years and I am just wondering if that is sort of a new run rate we are using to go forward.

I wouldn't use that as a run rate.

Okay. That's helpful. And then moving to Coatings, 17.4%. Given the fact that prices have come down, I think you had to give some of that margin back to your customers. Is this now sort of an area we should be looking at for modeling purposes?

Well, I would hope that -- that we will continue to see good performance in the -- in the Coatings business. Coatings business performance is very much volume driven. When we get the volume, we get good profitability. Since it is a high fixed asset business -- if you get a lot through the tanks you leverage very well. If you don't get anything through, you deleverage badly. You don't have the option of lowering the sync level or turning down the temperature. If we get the volume, it will continue be too well-performing business.

Okay. Moving to your engineered structure segment. In terms of delay in appropriations, I think speaking with you guys in the past, past cycles have proven that it has been nothing more than just a delay and ultimately states will operate structural deficits in regard to a highway spend. Maybe we will see fluctuation or lumpiness in that segment but ultimately the spend will be there. Am I thinking about this in the rate way?

Historically you are right. That is what happened. I think one of the things that may be a little different this time is that the highway trust fund is being depleted somewhat because the -- as gas prices have gone up, the gas tax, the Federal gas tax has not been increased, and people are driving less and inflation has made construction more expensive so, therefore, you get fewer dollars into the trust fund and you can do less with them than you could before. But having said that, usually infrastructure spending and with all the talk there has been about the quality of our infrastructure and the need to upgrade it, I would hope their right that Federal and local money will be -- will be spent in that direction.

Okay. And lastly, segment backlog. I didn't see that you broke that out. Don't you usually do that at the end of the year?

No, we don't.

You don't?

In the 10K it will come.

When it is filed. Okay. Would you share those numbers with us now or no? We will have to wait? I guess we will have to wait.

Well, it is not for a lack of willingness, I don't think we have them right here.

Okay.

They will come out.

Okay. Thank you very much. That's all I have.

Thank you, Thank you.

(OPERATOR INSTRUCTIONS) Your next question is from the line of Steven Gambuza with Longbow Capital.

Good morning.

Good morning, Steve.

I was wondering if you can comment on the contribution to revenues in 2008 might be from the -- from the acquisitions you completed in 2007, as well as the capacity additions that you mentioned that are coming online in 2008 or that came on in 2007. If you can just give us some broad parameters of how these -- how these drive in '08.

Let me just give you one number. Around $100 million.

In total for all of those things?

Well, the capacity depends on when it comes on line, but I would say from the acquisition standpoint about $100 million and get some organic growth also.

Okay. The $100 million for acquisitions and the majority of the capacity increment. That will come from -- from China?

Some will come from China and we have also made some additions in North America and the utilities business. We added capacity last year that is online. And we are working on mid-sized two facility here at our Valley facility. So over time, some of that -- some is replacement of other capacity and some is net -- net additions. But as we continue to grow the base business organic growth, we will continue to add capacity, but as you also know that it comes in fairly small chunks. It is not big capital commitments. We can do it for relatively modest amounts.

How is your second pole plant in China. Is that essentially running close to capacity right now?

No, it is not. But it is ramping up. We have -- our main plant-- our first plant in Shanghai is basically operating at capacity. The South China plant is ramping up. The [Chingdow] plant will take some capacity load off Shanghai because Shanghai has been in operation now for ten years and we will do major upgrading at the Shanghai facilities. So as the [Chingdow] comes on board, we will move some capacity around that will allow us to do that.

Okay. And the third plant is going to have roughly the same amount of capacity as the second plant, is that correct?

Roughly.

I was wondering if you might be able to comment just on -- when you look at the Irrigation results in the quarter. If you might just comment on kind of the domestic versus International contribution to those results.

Very strong on both sides.

Okay. It is roughly -- roughly equivalent or volume growth. It wasn't like it was one driving it substantially more than the other?

I would say percentage wise about same.

Thank you very much for your time.

Thank you.

There are no further questions at this time. I will turn the conference over back to Mr. Laudin.

Thank you, [Julianne]. This concludes our call. We thank you for joining us today. This message will be available for play back on the Internet or by phone for the next week. We look forward to speaking with you again next quarter. I will ask Julianne to read our forward-looking statements

Thank you. Included in this discussion are forward-looking statements within the meaning of the Private Securities and 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 effect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statement. 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 policies 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.