Valmont Industries Inc (VMI) 2008 Q1 法說會逐字稿

Good morning. My name is Wanda 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)

Thank you. I would now like to turn the call over to Mr. Jeff Laudin, Manager, Investor Relations. Please go ahead, sir.

Thank you, Wanda. Welcome to the Valmont Industries' first-quarter 2008 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 the call can be found in our press release.

I would now like to turn the floor over to Terry McClain, Senior Vice President and Chief Financial Officer. Mogens is here with a cold and has asked Terry to conduct the call.

Good morning and thank you 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 increased 51% and net earnings increased 59% on a 24% increase in sales.

First-quarter Irrigation results were very strong, with revenues up 41% and operating income increasing 83%. Sales in the Engineered Support Structures segment increased 19% and operating income rose 16%. Utility segment operating income increased 54% on a 26% increase in sales. The Coatings segment's sales increased 4% and operating income rose 26%.

Overall, the first quarter was a very strong quarter in terms of operating income performance.

Before I review the results by segment, I would like to make a few general comments about three important aspects of our business -- global infrastructure demand, the state of the agricultural market, and inflationary pressures.

Infrastructure investment plays an important role in the economy's development and health. Economies that invest heavily in infrastructure experience sustained GDP growth. Many countries have long-term plans to support infrastructure investment.

We're fortunate that Valmont's exposure to infrastructure investment is broad and diversified. We manufacture poles for lighting, traffic, and sign structures. We also manufacture steel and concrete structures for the utility industry, and we make wireless communication poles, towers, and components. We have facilities in North America, Mexico, Western and Eastern Europe, North Africa, and China.

This broad exposure reduces the impact of weakness in any one country or in any one market. We believe that over the long term, solid infrastructure spending is necessary for economic growth and a sustainable driver for our business.

In agricultural markets, the supply and demand characteristics for basic feed grains are tight. While competition between feed grains for food and biofuels is having some impact on grain demand, the greater driver is the increased size of the middle class in countries such as India and China. This new middle class is moving to a diet richer in meat-based protein.

To support this dietary improvement, more grains are fed to poultry and livestock, and this has led to increased feed grain demand. The long-term nature of this development has caused a shift in the way we think about our Irrigation business.

The shift from a global farm economy governed by supply to one driven by demand is significantly altering the economics of agriculture. Traditionally, commodity prices increased primarily because of supply interruptions. Today, the increased demand is driving down safety supplies, or what is called carryover stocks; and this has been true for the last number of years.

We believe that over time this change will lead to an increase in Valmont's Irrigation revenue growth characteristics from its historically single digit revenue growth profile.

On the inflationary front, the price of hot rolled steel increased over 20% during the first quarter, and further significant increases have been announced. In 2004, we faced similar steel price inflation and were able to successfully manage through it. The current environment, while similar in terms of speed and severity of the price increases, will have its own unique challenges. We're particularly concerned that the steel industry may not honor contractual agreements and pricing arrangements.

Overall, we believe we are well positioned to manage the current inflationary environment. Sharp and rapid increases in steel that cause prices to inhibit demand or impact availability, along with further deterioration of the economy, could alter our outlook.

Let's now review the first-quarter results by segment. I will begin with Engineered Support Structures. The driver of higher sales were a strong performance in our structural sales in China and an increase in activity in Europe and in our North American wireless communication business. China's future needs in infrastructure will be significant.

In North America, physical volumes were somewhat higher in our lighting and traffic business, and our investments in Tehomet in Finland and West Coast Engineering Group in Canada improved sales comparisons, since neither company's results were in last year's first-quarter numbers.

The integration of West Coast Engineering Group is on track. This joint venture should prove to be a very good investment for Valmont as well as a driver of expansion and growth for West Coast Engineering Group.

Recently, there has been interest from investors about Valmont's exposure to the housing sector and the impact of related state tax revenue reductions. Our exposure to the housing sector is related to two areas. One is the sale of lighting structures to electrical utilities for installations in new subdivisions; and the second is our commercial lighting business where we provide lighting products for strip malls and shopping centers. So while we do sell into these markets, these areas combined represent a small amount of total corporate revenues.

We also supply structures for the transportation infrastructure industry. In North America, the principal source of funding for this market is the United States Federal Highway Bill. At the federal level, gasoline taxes provide some of the funding for the Bill. States are somewhat dependent on the Highway Bill funding, but also pay for highway projects from their general and other funds.

Currently, some states are proposing reduced spending, which may lead to pockets of weakness. However, since we do business across North America, we have not experienced a decline in orders or quotations for our transportation business to date.

In the Utility Support Structures segment, sales increased 26% to $101.2 million. Increased volume, the additional sales from PennSummit, operating leverage, and improved pricing led to operating income increases of 54% to $14.7 million or 14.5% of sales.

Our utility business continues to deliver outstanding results. Throughout the decade of the '90s and during the first part of this decade, investment in the transmission grid did not keep pace with growth in the economy. Both regulators and the utility industry recognize that there is a shortfall in transmission infrastructure that can impact the reliability of the system. As a result, there have been great strides made since the passing of the 2005 Energy Bill to narrow this gap.

To further increase reliability and promote movement of electricity between states and utilities, additional transmission capacity still must be added. This is the dynamic largely at work sustaining the increased demand we see in our utility business. In discussing the future with our utility customers, we believe there remains substantial investment yet to be made.

In the Coatings segment, first-quarter sales of $35.1 million were 4% higher than last year, due to the strong demand from our internal customers and improved industrial demand. Higher activity in the agricultural machinery sector is also driving demand for our coatings services. Operating income rose 26% to $6.6 million or 18.6% of sales as a result of improved volumes and manufacturing efficiencies.

In the Irrigation segment, sales were 41% higher at $130.8 million. We had a good first-quarter selling season in North America following a very strong fourth-quarter performance.

Irrigation segment operating income increased 83% to $22.4 million and was 17.1% of sales. Our Irrigation business is very robust. Higher farm income and the need to increase farm productivity, while at the same time conserving water, is leading to increased sales of our efficient Irrigation equipment.

Turning to other financial measures, increased inventories and accounts receivable largely reflect higher activity levels, inflation's impact on inventory valuation, and currency translation. Additionally, the investments in PennSummit Tubular and West Coast Engineering Group led to higher inventory and accounts receivable.

Depreciation and amortization for the quarter was $9.5 million, and capital expenditures were $10.9 million. In 2008, depreciation and amortization is expected to be between $35 million and $38 million. We expect capital spending to be between $60 million and $70 million.

In summary, our outlook for this year is quite positive. In our Structures business, increased investment in infrastructure around the world should provide solid support. In our Utility business, we expect investment in the electrical transmission grid to continue to grow. In our coatings business, conditions in the industrial economy will largely dictate results.

In the Irrigation business we are very optimistic, based upon the need for farmers to improve the productivity of limited land for peak grain production. Agriculture already uses two-thirds of the world's fresh water; and as production increases, water consumption will become even more important. We believe that no other investment can have as great an impact on improving farmland productivity in the short term as mechanical move irrigation technology.

Our challenge this year will be on managing capacity, labor availability, and inflation. While inflationary pressures or weakening economic conditions could temper short-term demand, the long-term trends in our business are firm.

Valmont's position in the marketplace is unique. We are broadly diversified across both geographic regions and product lines. This diversification reduces our exposure to any one segment of the economy.

Our products are lined up well with strong global markets. The global agricultural economy is strong and supporting our Irrigation business. Increased global roadway, communication, and utility spending on infrastructure is driving demand for our Structural products.

In summary, at this time these factors lead as to expect revenue growth in the high teens; and we expect slightly more than a 1 percentage point increase in operating income as a percentage of sales for the year.

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

Jon Braatz with Kansas City Capital.

Morning, Terry. A little -- could we get a little bit more color on the revenue? Revenues were up 24%. Of course, there was some acquisition revenue in there and, by my guess, maybe internal revenue or organic revenue was up about 17%, 18%.

But what can you tell us about the impact on price increases versus volume increases on that -- let's say I'm correct -- at about that 17%, 18% organic growth rate?

Well, the bulk of the increase is organic growth, Jon.

Volume growth?

Volume related, yes.

Okay. But that is going to change a little bit going forward?

Well, at this point, I think it somewhat depends on what happens to steel prices in terms of pricing changes. But I would say it is going to continue forward with volume as we see it right now.

Okay, okay. I was looking at a couple earnings releases, other earnings releases today; and sort of the common thread is how we're going to deal with these steel prices. At this moment, given what you see, do you envision any issues with regards to availability?

We haven't seen availability issues to date. There is concern that as the steel industry moves around with the pricing and some of their -- particularly issues related to mills being down, and some of the raw material availability that they have for input into their products, there is a little concern about availability.

Right now I would not say it is a high concern, but there is a nervousness.

Okay, go ahead.

Well, you have seen that in some of the releases from the steel companies, where they have talked about availability of their raw materials.

Okay, okay. One last question and then I will get off. Interest expense this quarter was $4.4 million versus $4.2 million. Yet debt was up and you made a couple acquisitions. Why in view of that was interest expense only up modestly?

Well, the interest rates haven't changed. We did have acquisitions, and we did kick up our debt slightly. The interest rates really haven't changed a lot and actually are down somewhat from last year.

Okay, so it is an interest rate factor.

Yes.

Okay, all right. Thank you much.

Arnie Ursaner, CJS Capital.

First question I have relates to the Irrigation segment. Can you give us a breakdown of the percent of revenues from international versus domestic, and the growth rate on international versus domestic?

We don't break down those percentages specifically. But the growth rates were substantial in both sides, and actually higher in the international side.

Okay. Second question I have relates to the Engineered Support segment. Last -- the margin in the quarter was pretty disappointing, particularly on a year-over-year basis. Last year you had several facilities shut for days. You also had problems with Specialty Structures.

So trying to get a little better understanding of the margin issue. You have Canadian -- Chinese steel and the timing of that.

The biggest difference, Arnie, was in China; and it related to the steel price increases and the fact that they had a lot of fixed-price contracts. That was the biggest change.

The rest of the margin improvement -- the margin improvement was across the board, except in China.

Can you attempt to quantify how much that harmed your margin?

I won't right now.

Okay. My final question is sort of a follow-on related to your revenue growth guidance. I don't think you have given specific revenue numbers for either PennSummit Tubular or West Coast. But our sense is they had roughly $90 million or so of revenue.

That is roughly correct.

If I look at your high teens growth rate excluding acquisitions, you're applying something like 10%, 11% organic revenue growth for the upcoming year?

That is probably appropriate, yes.

Okay. My final question is -- you have said before that very well-run industrial companies can approach 15% operating income margins. You obviously continue to make 100 basis points or so improvement. And seasonally Q2, 3, and 4 are usually your better seasons for margin.

Are we getting closer towards your willingness to speak to a 15% operating income margin goal?

Well, Arnie, I think we said on the last call that we aren't really going to talk about like a 15% operating income percentage, because so much of the discussion on percentages also relates to the capital that you put into a business.

We may not want to just drive everything to 15% if we can get very, very good returns on capital with businesses at -- let's say, I will use that as an example -- our 11% operating income.

So one of the reasons we don't firmly talk about -- we will continue to improve and push for improvement in all of our margins across the Company. But to go to a 15% goal could actually be counterproductive long-term for the shareholder.

Okay. Very quick financial question, Terry. You had a $1.3 million charge. What was that?

Arnie, I will cover that. This is Mark Jaksich. We have a nonqualified deferred comp plan for people who get maxed out on the 401(k) because of IRS regulations. There is a corresponding asset and offsetting liability on the balance sheet that relates to that plan, because those assets belong to the Company.

In the first quarter, we had about $1 dollars of investment losses because those funds are invested in mutual funds and things like that. So the drop in the market had a loss. The corresponding reduction in the deferred compensation liability goes to the SG&A line; but the loss, the investment losses go below the line.

So that is why that other expense is high. There is no impact on net earnings or pretax earnings. It is just geographically how it is presented in the P&L.

Okay, so it is not an impact in SG&A or the operating trends at all.

Well, it does -- in this case it did reduce SG&A spending by about $900,000 or so. That was a reduction in SG&A spending and a corresponding increase in miscellaneous expense.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Ned Borland with Next Generation Equities.

Good morning, guys. Following up on a previous question on the Engineered Support margins, the China steel issue, is that -- are we going to see margins, I guess, in this segment rebound to the more traditional levels given that you have had improvements everywhere else in that segment?

We would expect over time, yes, Ned.

Okay, so this is kind of a temporary issue?

Yes.

Okay, all right. Then on Utilities -- or I guess the pole plant in China, that comes online in the second half of the year. Is that -- are you still getting like $50 million to $60 million of revenue out of those plants, the other two plants that you have over there?

Yes, those facilities -- you can think about it as $50 million to $60 million each.

Okay. I suspect that the demand for the -- is strong enough for this plant to fill up pretty quickly once it is up and running.

That is what we're planning. You know, it takes time to fill these plants even in China with the growth.

Okay. Then final question on Coatings. Looks like the margins improved year-over-year. Has pricing held up in Coatings, given the drop that we've seen in zinc?

Pricing in general has held up pretty well in that business, and volumes have helped get some operating efficiencies.

Okay. To your outside customers, have you seen any slippage in demand in that business?

We have not yet seen slippage in demand. As you know, that business though is not a backlog business. It is literally a month by month business.

Okay, but things are still pretty steady there?

Things are looking pretty steady.

Okay, that's great. That's all I had.

James Bank, Sidoti & Company.

Good morning. I apologize; I actually was dealing with another release so I might have missed your earlier comments, Terry. But I think I got -- you are not going to break down your Irrigation sales in terms of mix?

That's correct.

Okay, and there -- okay, forget it then. The debt looks like it was a $43 million increase in between the quarters. What precisely was that?

We had two acquisitions, if you remember, James, during this period related to those.

Okay. If you could give me the net sales for each segment versus gross that was on the press release?

Yes, we will have that off-line for you.

Okay. That is all I have. Great quarter. Thank you.

Thank you.

Jon Braatz with Kansas City Capital.

Maybe just a follow-up. Obviously in the agricultural business they always say the best -- the cure for high prices is high prices. What do you see as an opportunity long-term in China as these grain prices continue to rise?

I would assume there is a greater incentive for, let's say, China to continue to produce more and more at home. Obviously, that is going to require large-scale agriculture and presumably irrigation. Are we seeing some movement on that front?

Secondly, do you envision an Irrigation facility, for example, in China someday? Or can you use your pole facilities to make your Irrigation equipment? If you could touch on that subject just a little bit.

Two things, Jon. You're right, I think, that the demand for grain in China is increasing. They also have substantial water issues that need to be addressed over time. As you know, as we look at the marketplaces over time, we have put facilities in place in these growth markets when it was appropriate.

To answer your question -- can we use the pole facilities to do Irrigation manufacturing? Probably on a very, very limited basis. We would probably longer-term say that there would be an individual Irrigation plant. But we will assess that based upon what is going on in the marketplace and what is going on with our ability to supply from some of our other plants.

At this time, would you say that an Irrigation facility is not appropriate yet? Are we three years away? Five years away?

Well, it's not appropriate yet, probably; and probably to three to five years is the time frame where we would look at this.

Okay.

We've been in China for many, many years, and China has got great agricultural potential. But the reality is they haven't really yet taken the next step into their agricultural base to really allow what I call the conditions for large-scale agriculture with mechanical move irrigation. That may be changing.

Yes, okay. Thank you, Terry.

(OPERATOR INSTRUCTIONS) Arnie Ursaner with CJS Securities.

I'm sorry, I had my phone muted. Going back to the Utility Support Structures segment, in the past there have been problems when rising steel costs have impacted contracted work you have with utilities.

The sense I had is you had kind of realized that two, three years ago; and when you structured your contracts had the ability to pass through dramatically higher steel costs in your contracted work since it is relatively a long cycle.

Can you update us on sort of how your contracts reflect the higher steel prices? Are you in fact able to pass them through to your customers?

Okay. In general, we really hadn't had that much problem in the utilities side, Arnie. It was more on the transportation side, where the Department of Transportation or lighting would not allow escalators in the contract. And that has not changed.

In the utility business, in general we're pretty well positioned to pass on increases in the contracts as well as by general agreement, and that continues on.

The Department of Transportation, though, for lighting and traffic was an area where we got some squeeze in '04. That really hasn't changed a lot, except I think everybody is more aware of when they are bidding what is going on with the steel situation.

If you remember in 2004, the steel industry actually reneged on some of their agreed-upon pricing. Not that that won't happen again, but that was also a significant factor in '04.

So as you bid on these multi-year, much more sizable contracts, how do you in fact bid to reflect the higher price of steel?

For the utilities particularly, you put in escalator clauses that are based upon steel prices of a certain type.

So you should be able to recover costs there without too much difficulty.

That's correct.

Okay. Shifting back to Irrigation, I think had we spoken sometime either midyear or even towards the end of the year, I think your question then was whether ethanol would be a bubble and how long that could impact the longer-term demand for Irrigation. Yet in your prepared remarks you indicate your view is more optimistic about 2008 and beyond.

Are you shifting your view about sort of whether ethanol created a bubble? Or maybe you could expand on why you now are more optimistic long-term about Irrigation.

I don't know that we shifted our view a lot. We said that ethanol could be a bubble, but it is not the primary driver for the demand that we are seeing long-term. Primary driver is increased population and changes in eating habits.

Ethanol obviously supports the farm economy and probably will continue. Whether it is the most economical and whether it will be the big driver in agriculture, we don't really think that it is the change that happened. It is a piece of it in the short run, particularly for the corn farmer.

Okay. Can you also expand a little bit on the Irrigation side about the normal seasonal patterns you see in the business? My sense is that the farmers really go to the showrooms and place orders more in mid-February time frame.

Can you give us a sense of typically how many of those are delivered in March; and how many of those might move into April; and sort of what trends are you seeing post the end of the March period?

Typically -- yes, if you go back typically, Arnie, the demand particularly in North America starts in the fall after the crop is in and the farmer has an idea of what their income situation is. Then it builds, depending on weather and conditions. It builds through the April time frame.

You are limited really on the other end by the fact that they have to put crops in the field; and after a point in time you can't put on any more irrigation. So the reality is the season comes to an end sometime in May or very early June, and then there is really not much farmers can do except in very rare occasions will they try to put in a piece of equipment after that.

The thing that has been uncertain over the last number of years is when do the farmers, as you say, come to the showroom? Is it going to be in November or is it going to be in January or February?

That got moved around a little, but typically just think of it as the crop is in; they know what their income is; they start planning for the next year in very, very late fall. And that is when the selling season starts.

Then they will buy their equipment based upon what their conditions are in their individual area. They may delay a year if it's really wet. They may delay a year because they can't get a permit to put in the well or whatever it may be. But generally speaking, it is the same pattern.

Okay. So again can you try to give us a little better feel for whether the majority of what you had in backlog shipped in March, or is there likely to continue to be pretty strong activity (multiple speakers)?

There's going to continue -- there will be continued strong through the first or the second quarter. Keep in mind, keep in mind that the bulk of the business still is in North America. There is also other demand outside the US that can change the seasonal pattern somewhat.

Okay. Very specifically, Australia has gotten a lot of press having its greatest drought, I guess, in its history. Did you see a noticeable pickup in your activity in Australia?

Yes, we have seen good improvement.

Okay, and similar trends in Latin America, Brazil, and markets like that?

I think those markets are also improving, yes.

Okay, thank you very much.

At this time there are no further questions.

Thank you, Wanda. 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, Wanda will read our disclosure of forward-looking statements.

Including 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 risk, uncertainties, some of which 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's condition, Company's 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 the date of this discussion; and the Company does not undertake to update any forward-looking statements.

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