Valmont Industries Inc (VMI) 2008 Q3 法說會逐字稿

Good morning. My name is Rachel and I will be your conference operator today. At this time I would like to welcome everyone to the Valmont Industries third quarter 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. Mr. Laudin, you may begin your conference.

Thank you Rachel. Welcome to the Valmont Industries third-quarter 2008 earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer, Terry McLain, 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 our Chairman, Mogens Bay.

Thank you Jeff and good morning everybody, and thank you for joining us. Let me begin with third-quarter highlights. First, sales were at record third quarter levels, increasing 33%, with each segment achieving third-quarter sales records. Second, operating income increased 64% and was 12.5% of sales. Third, net earnings increased 43%. Fourth, the Company's backlog is at record levels. Before I review the results by segment, I would like to make a few general comments about the current credit tightness and how it might impact Valmont.

We will start with our Engineered Support Structures segment. A large part of the North American business consists of highway projects. These projects are funded primarily through the highway bill at the federal level, with secondary funding on the state level. The source of these funds is a combination of state and federal gasoline taxes.

While some states may currently face budgetary issues, historically highway spending continues to be funded because of the crucial need to maintain and upgrade highway infrastructure. Another benefit of highway funding has been to preserve the many jobs that infrastructure construction supports at the local level.

In the utility business, utilities have historically had very good credit ratings and ready access to credit. They can recover their investments through usage rates. A solid transmission grid is a must to support economic activity worldwide. We expect continued strong levels of utility investment in transmission and distribution infrastructure.

In the Irrigation business in North America, the balance sheets of farmers are generally stronger. Land values have increased and the farmer is not highly leveraged. To buy our equipment, most farmers borrow from their local banks or finance companies specializing in lending for irrigation equipment. In conversations with ag bankers, they indicate that they would actually rather make loans for irrigation equipment than for other farm machinery, because pivots increase productivity and help ensure other costly inputs such as fertilizer and seed bear fruit.

Our international customers also have healthy balance sheets and for the most part financing for pivots is available.

For our Coatings customers, galvanizing represents a small percent of the final product cost. Our costumers value the benefits of corrosion protection. We have a diverse customer base that participates in many industries with a heavy emphasis on infrastructure. It is difficult to determine exactly how tight credit will impact our Coatings customers; we do know that our Coatings business is correlated with the industrial economy and infrastructure, which at the current time remain fairly firm.

The other side of the credit issue is the impact on our distribution system and suppliers. In addition to our normal checks and balances, we're closely following developments and as best as possible monitoring the financial strength of customers and suppliers. So far, we have not had any agent, dealer, vendor or supplier tell us that they could not conduct business because of tight credit.

Now, let's review the third quarter results by segment. I will begin with the Engineered Support Structures segment, where sales increased 13% to $187.1 million. Operating income increased 2.7% to $16.3 million or 8.7% of sales.

The decrease in operating income is the result of costs associated with the startup of a new plant in China, reduced factory performance in a North American plant, and increased marketing development expenses for international markets. This was partly offset by the favorable impact of acquisitions and improved North American Specialty Structures performance.

Increased SG&A spending in our international business relates to initiatives to expand into new territories and open new markets.

In North America sales of commercial lighting were slightly lower due to softer activity in the commercial construction markets. Sales of lighting and traffic products for the transportation markets increased, particularly sales of projects funded by the US Federal Highway Bill. The current highway bill will expire in September 2009.

Each successive highway bill has been larger than the previous one. In the past, if there is a delay in signing a new bill, funding has been provided by Congress of the expiring bill's run rate. We would expect the same scenario this coming year.

In international, markets in addition to higher volumes, positive currency translation contributed to higher sales in US dollars. Europe saw good improvements, particularly in northern Europe.

In China, sales were higher despite transportation interruptions during the Olympic Games. Our new facility in the Shandong province started production in August. We have a strong and seasoned management team in China and view China as both a challenging and exciting place to do business. It should continue to be a growth market for our Company as that country builds out their infrastructure in rapidly growing coastal cities as well as inland.

In the Utility Support Structures segment sales increased 43% to $113 million due to the additional sales from PennSummit and improved pricing. Operating income increased 45% to $14.5 million or 12.9% of sales as a result of the PennSummit acquisition, the recovery of material costs and better factory performance.

The North American utility market is strong. Following decades of limited investment in transmission and distribution infrastructure, utility companies are investing heavily to upgrade the grid. We expect continued investment to improve reliability and support increased transmission of electricity across state borders.

In ongoing discussions with utility customers we hear no indications of a slowdown. We're experiencing good order flow. We have record backlogs at this time and are pursuing numerous very large projects.

An additional source of growth for Valmont's utility business is the trend towards more wind power. Each wind farm needs to be connected to the grid through new transmission lines, providing opportunities for us whether structures of steel, concrete or a combination of both. Valmont offers the broadest range of materials to match the needs of our utility customers.

In the Irrigation segment, sales were 77% higher at $150 million in what is traditionally a very slow quarter. Global demand for irrigation equipment and products was high. Additionally, summer storms in North America contributed to sales growth through the replacement and repair of damaged machines early in the quarter.

International markets were particularly strong in Brazil, the Middle East and Australia. The Irrigation segment operating income nearly tripled. It increased 185% to $25.2 million and was 17% of sales.

This year our Irrigation business has achieved record results. The main drivers have been on the demand side of the equation. As diet improvements, particularly in China and India, drive protein consumption it increases the demand for feed grains and is supportive of crop prices. The emergence of biofuels creates an additional source of demand. Increased demand leads to investment by growers in mechanized irrigation equipment. The combination of further demand on production agriculture and the scarcity of fresh water worldwide create excellent growth opportunities for our Irrigation business going forward.

In the Coatings segment, third quarter sales of $35.9 million was 5% higher than last year. Volume increases reflect good demand from our external as well as internal customers. Operating income rose 52% to $9.3 million or 25.9% of sales as a result of lower costs, higher volumes and manufacturing efficiencies.

Turning to other financial measures, increased inventories and accounts receivables largely reflect higher sales and backlogs, inflation's impact on inventory valuation and acquisitions. While we continue to experience the impact of inflation in steel, during the third quarter steel costs have recently moderated.

Accounts receivable turns are consistent with historical levels. Depreciation and amortization for the quarter was $10 million and capital expenditures were $13.5 million. For the quarter, cash flows from operations were an inflow of $17.2 million. [Investing] cash flow were an outflow of $41.4 million and financing cash flows [one] inflow of $28.6 million.

For the year, depreciation and amortization is expected to be between $38 million and $40 million, and capital spending is estimated at between $55 million and $60 million. Our third quarter tax rate was 34% compared to last year's third quarter rate of 22%.

Our outlook for the balance of the year is positive and we expect a good close to the year. For the year, we expect revenue growth percentages in the mid-20s and now expect operating income as a percent of sales to increase about 1.5% percentage point.

When we look at 2009 and beyond, trends in most of Valmont's businesses are favorable worldwide. These are unusual times with unsettled conditions in the financial markets. The current credit crisis worldwide will have some impact on our businesses. Exactly where and when we will see it is difficult to determine at this time.

However, when we step back and look at long-term drivers, they are strong. Infrastructure spending will continue to be necessary to support economic growth and agriculture will continue to be faced with increased demand to support population growth worldwide and the need for more food and fuel. Recently we have seen a decrease in commodity prices so far without a corresponding decrease in input costs, which could negatively impact order flow in the short term.

In summary, we believe Valmont is well positioned for 2009 and beyond. We are well diversified along product lines and markets. We are also diversified geographically with operations throughout the world. We believe this diversification leaves us well positioned to benefit from global infrastructure development, agriculture's challenge to keep up with global grain demand and pressures to reduce the amount of water that is used in the production of food and fiber.

This concludes be prepared portions of our remarks and we will now like to take your questions.

(Operator Instructions) Arnie Ursaner.

Hi good morning. I guess my first question relates to the transmission and distribution piece of your business. Can you give us a little better feel for the types of orders you are seeing, the types of dialogue you're having and how much of your '09 expectations do you hope to have in place before you begin the year '09?

Let me start with conversations. I have actually this week met with two companies that are involved either on the engineering side of transmission lines or the construction side, and both companies confirmed our view that the investments in the grid in North America with continue to be very strong. Our backlog is at record high and I would guess that when we enter 2009 about half of the year would be in the backlog.

My second question relates generally to irrigation and your view going into the selling season in January and February and March. You mentioned, obviously, some detailed comment regarding input costs not coming down yet. Can you clarify a little bit about what they are? Because it looks like potash and some other things have come down a fair amount. At what price levels do you expect farmers to be the impacted in their orders?

First of all, when I talk input costs I talk input costs like fertilizers, which I don't think farmers have seen come down corresponding to what we have seen in commodity prices at the retail level. I think fuel costs will come down as we have seen prices at the gas pumps come down.

And I don't think -- if we see a slowdown short term, it is no different from what we have seen in the past that when there may been an imbalance and farmers are a little concerned short term, they may postpone some of their purchases. I would expect that we will maybe see more of a compressed selling season, then, because the farmers don't really need the equipment in place until planting next spring.

And I think that if we see a slowdown it has nothing to do with credit, which is what we read about in the papers every day as the main worldwide problem. I think it is just the farmers looking at commodity prices being reduced 20 to 30% and just the emotional impact that has on short term buying decisions.

One final question, I know you won't give any formal views about next year until probably February, but also where you conducted a pretty extensive internal review of all of your business looking out over five years. As we look out over the next few years, how much margin improvement do you believe you still have left in your business model?

How much what improvement?

Operating margin improvement do you still think you can generate in your business model?

I can't answer that question because there are so many unknowns out there right now. But I can tell you that we are not slowing down in our efforts to continue to squeeze more quality out of our business as we have done in the past, but clearly we are not going to see the speed of improvements going forward like we saw over the last five years.

Thank you very much.

Ned Borland.

Good morning. First a question on steel costs, steel coming off about 25% in September. We do you expect to see some relief from steel given your backlogs [are out] and so forth?

Well, first of all, you have seen some spot prices come down. In general, you have not seen steel price decreases like you are talking about. And but -- if you look at a general economic slowdown, it should provide some opportunities for a better steel costs. I would though also say the consolidation in the steel industry over the last number of years have made them better prepared to face a slowdown in demand.

In the past, there was a lot of dumping of steel that took place. Recently we have seen if there is a slowdown in demand, they tend to take furnaces out for overhaul and maintenance, et cetera, et cetera. But in general, I think we are going to see the steel industry give back some of the price increases we saw last year. Exactly to the extent that will happen and the timing of it is still to be seen.

Okay, and then on Irrigation I know over the summer your lead times at the dealers were way out there. Given we have just come through this slow seasonal quarter, where do those lead times stand now relative to say last year or a couple of years ago?

They are back to normal.

And then the comments on the wind farms, I seem to remember you guys were working on a wind structure but you kind of shelved it. Is that what we are talking about now, these structures (multiple speakers)

No. That is not what we are talking about. We are talking about the effect wind farms will have on our transmission, distribution and substation business, because if you take Texas as an example, the wind does not blow where the consumption takes place for electricity. So they were built, wind farms in western Texas and had to transport the electricity to eastern Texas and to other parts of the country.

So each time you put in a wind farm, you have a major investment also in transmission and distribution lines to get it hooked up with the main grid.

Okay, just wanted to clarify that. Do you have an organic sales growth number for the utility segment?

Yes. But we are not sharing it.

Okay. That is all I have. Thanks.

John Braatz.

Good morning Mogens. A couple of questions. If you go back and look at Irrigation revenues in the third quarter as a percent of second-quarter Irrigation revenues over the past seven years, it has averaged about 74% of second-quarter revenues. This year it is about 100% almost. Is that mostly related to the international side of the business or was the North American side of the business exceptionally strong, and that might give you a little bit of pause and think that maybe you borrowed some sales from the fourth quarter or maybe for next season? How do you look at that -- the strength of the third quarter revenues?

We saw strength both internationally and in North America. North American sales in the third quarter were exceptionally strong. I don't think it was pulling forward from the fourth quarter. It was more probably an -- a result of the long lead times in the second quarter and therefore a late selling season.

Okay. Secondly, when you look at the -- we are sort of in a deflationary environment. Costs are coming down -- hopefully they will come down, steel, fuel and so on. Will you have to, when you look at 2009, begin to pass some of those cost savings on to your customers this year? This year you passed them on considerably and that enhanced your revenue growth. How do you look at the deflationary environment in the raw material area in terms of an impact on your selling prices going forward into 2009?

Well if you have deflation in our input costs, yes, we will eventually have to give some of that back to the marketplace. Hopefully it won't affect our earnings, but it certainly will reflect revenue.

When you look at the 2008 revenue forecasts of about 25%, something like that, how much of it might have been priced versus foreign exchange versus volume?

Well, I would guess that inflation may be half of it and the rest a combination of volume and acquisitions.

Okay. Thank you very much.

(Operator Instructions). Brent Thielman.

Good morning. Congratulations on the quarter. Just want to dig into the ESS margins a little bit. I know you mentioned some expenses that contributed to the lower margins year-over-year there. Was there any impact I guess related to the higher steel costs as well in those margins?

Yes there was. Because some of the backlog we have is funded by federal funds, quite a bit, and you cannot go back and renegotiate or have adjustments in your price depending on input costs. So, yes, we had a significant impact on the fact that input costs rose very rapidly and we had to fulfill a backlog at resulting compressed margins.

I guess as you see some relief or [expect] some relief in steel cost going forward, do you expect pricing to catch up at this point? Do you expect to see more margin depression here?

No. We will expect to get some relief and see margin expansion.

Okay. And then on the US segment I just wanted to be clear; did you see any unit volume growth in the quarter?

In what segment?

In the USS segment (multiple speakers) -- Utility Support sector, sorry.

Utility. I think that most of our growth came from price and from the acquisition of PennSummit.

Okay.

We needed additional capacity and that's what we got with the acquisition of PennSummit.

And then on Coatings I know you mentioned some pricing pressures there. Have you seen those pressures increase? Or I guess have you seen zinc costs pullback quite a bit, any sense on pricing going forward here?

It's -- we have seen zinc reduced quite a bit and we have not had to adjust pricing to that extent. Going forward I would guess that it is not realistic to expect operating income rates to continue in the mid-20s.

Okay, thanks very much guys. Congratulations again.

James Bank.

Good morning. I was wondering if I could dig into that Irrigation question a little bit deeper. Can I assume, then, that your Irrigation sales would be up in the fourth quarter since I guess it necessarily did not pull anything from the fourth quarter and didn't pull anything from maybe next year?

I don't necessarily think you can make that assumption because, as I pointed out in the [talk], I think there may be a little hesitation in the marketplace right now that is tied to the lower commodity prices as opposed to sales moving from quarter to quarter. In total for the Irrigation segment, though, I expect revenue to be up in this quarter compared to the fourth quarter of last year.

Fair enough. And the inefficiencies in one of the North American plants, is this sort of that same plant that has had the problem since the fourth quarter of '06?

No.

It's a different one?

We had one plant where kind of the wheels went off the track for a little while and we're getting that fixed. But it did have an impact.

Could you give more clarity on what went wrong and what is being done about it?

No. We had production issues, productivity issues in the plant and we made some changes and hopefully that will fix the issue.

Terrific. My other questions have been answered. Thank you very much.

Arnie Ursaner.

Can you give us a sense of the currency impact please in the quarter?

Hold on a second. I want to ask Mark.

The impact on currency for the quarter was about $1.5 million on the operating income side and I think about $8 million to $10 million on the sales side, give or take. Most of that was Brazil and to a lesser extent Europe and China.

Okay. And on steel inventories, we have been keeping an eye on your company for several years. Obviously when the prices were rising, it made sense to keep what I would call excess inventories of steel, particularly when there was uncertainty about supply. Given much greater availability and declining prices, should we -- I guess two specific questions. One is what was the tonnage increase you had in steel, and two, how much inventory would you be comfortable liquidating in this current environment?

I think we what we keep an eye on closely is the inventory turns and they really have not changed very much. So the higher inventories is a reflection on higher revenues, either through the current businesses and acquisitions. Now, in rapidly rising steel environments and an environment where we could have had supply issues, yes, we tend to be a little more conservative to make sure we're covered. And if the market heads the other way, we are going try and we always try and minimize inventories. There is no difference going forward.

How much was your tonnage volume up, let's say year-over-year?

I don't know that we have that answer right now. I might be able to get it. I would say very slightly, maybe, in terms of tonnage volume if you just look at the pure tonnage.

Thank you very much.

(Operator Instructions) Michael Coleman.

Good morning. Could you talk about -- and you have had significant margin improvement over the last couple of years from 7.5% or so, 400 or 500 basis points of margin improvement. You talked about unusual times and the environment is going to have an impact; when and where will be difficult to say. But if we do go through a down cycle in your end markets, could you talk on a broad level your ability to maintain the significant margin improvement you have made over the last couple of years?

It is probably difficult to give you a precise answer because it depends on the business unit. Some business units, if volume goes down, will delever significantly and some will not. It depends on what can you take out of cost in any given business unit. Let me use the Coatings business as an example. That deleverages pretty rapidly because you can't take zinc out of a kettle or lower the temperature. In other businesses you can lower your cost environment as volume goes down. But I do not expect us to revert to the kind of operating performance we had five years ago.

I was not suggesting that, but you could conceivably maintain a significant portion of what you have achieved over the last couple of years. Is that --

Unless the world falls apart, I would agree with you.

And I think you were recently -- you have some revolvers that you are renegotiating and so forth. Can you just update us on the status of that?

Yes. We have substantially completed our new revolving credit agreement. In fact it will be completed this week. So we have that process started. The revolver will be a $280 million revolver. That will be replacing about an $18 million term loan plus $150 million revolver.

Okay, thank you very much.

There are no further questions at this time.

Thank you Rachel. This concludes our call and we thank you for joining us today. This message will be available for playback on the Internet or by phone for the next week. We look forward to speaking to you again next quarter. At this time, Rachel 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 and market circumstances, industry conditions, Company performance and financial results, operating efficiencies, available and price of raw material, available and market acceptance of new products, product pricing, domestic and international competitive environments and action 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 this discussion and the Company does not undertake to update any forward-looking statement. This concludes today's conference call. You may now disconnect.