Valmont Industries Inc (VMI) 2009 Q1 法說會逐字稿

Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the Valmont Industries first-quarter earnings 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 call.

Thank you, Christy. Welcome to the Valmont Industries first-quarter earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer; Terry McClain, Senior Vice President and Chief Financial Officer; and Mark Jaksich, Vice President and Corporate Controller.

Before we begin, please note this discussion is subject to our disclosure on forward-looking statements which applies to today's talk and will be read in full at the end of the call.

The instructions for accessing a replay of this call can be found in our press release.

I would now like to turn the floor over to our Chairman and Chief Executive Officer, Mogens Bay.

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

First, sales increased 8%; operating income increased 16% and was 12.8% of sales; and net earnings rose 21%. These are first-quarter records in each category. Second, first-quarter Utility Support Structures segment results were at record levels with revenues up 74% and operating income reaching 22% of segment sales. Third, Coating segment revenue and operating income declined. Operating income as a percent of sales increased despite a decline in revenue. Fourth, the Irrigation sales decreased 21% from record levels in 2008. Operating income for the Irrigation segment declined 46% yet maintained double-digit levels at 11.7% of sales.

Let's review the first-quarter results. I will begin with the Utility Support Structures segment, where sales increased 74% to $176 million. Operating income grew to nearly $39 million at 22% of sales, largely as a result of volume leverage.

We caution investors against annualizing quarterly trends since the size and timing of shipments can vary significantly in this business.

Driving the strong demand for utility structures is the need to upgrade and increase the capacity of electric utility grid. Due to a period of limited investment for many years, the nation's transmission grid is overloaded. The energy bill of 2005 sought to rectify the stress on the grid by incorporating reliability standards to spur new investment. Utilities have responded with significantly higher levels of capital spending, which we are benefiting from.

In our annual report, we describe Valmont's strategy to leverage our global capacity. The current environment in the North American utility market is a good example of this. We have been able to utilize two of our large coal plants in the North American traffic and lighting business and two plants in China to assist the Utility Structures segment meet their high demand currently.

We do expect a strong year in our North American utility business. We have not yet seen a pullback in our utility customers' capital spending. Our structure is a part of the transmission spent for utilities, which is only a small portion of total utility capital spending.

Additionally, our customer base is very broad and includes most major utilities. Some utilities may be reallocating budgets due to the economic and stimulus, particularly in regards to distribution and smart grid technologies. Our utility customers are going forward with already approved transmission projects, and in general, utilities appear to be very committed to strengthening the grid system in the US through prudent spending in their served areas.

Turning to the Engineered Support Structures segment, sales increased 6% to $158 million. Operating income decreased 20% to $8.1 million. Segment profitability was adversely impacted by a change in mix. As I mentioned earlier, a portion of the division's large coal capacity was used to support demand from the Utility Structures segment at inter-segment margins.

Sales to the lighting and traffic and commercial markets were lower globally. In North America, the reduction in commercial lighting sales reflects weakness in the real estate market.

Also, during the quarter, states and municipalities were focused on preparing shovel-ready projects for the stimulus package. Shovel-ready projects such as road repaving and resurfacing typically do not result in orders for our products.

We do anticipate the upcoming renewal of the US Highway Bill. Debate should begin on the bill this summer and aa timely pattern of the larger build would be beneficial for our structures business in the US.

The market for specialty structures was flat in North America. The acquisition in 2008 of Site Pro, a supplier of components to the utility or to the wireless industry, has made a meaningful contribution to this business and in increasing our market presence.

In China, sales of structures for the wireless industry were higher. Last year, the Chinese government reorganized the wireless communication carriers. Now that the reorganization is complete, the buildout has resumed. Sales of utility structures decreased slightly in China.

In Europe, lighting and traffic structure sales were sharply lower in France and Eastern Europe, reflecting weak economies there. This was offset by improved results in the rest of Europe despite weak economies and an acquisition in the UK in the fourth quarter of last year.

In the Irrigation segment, sales were 21% lower at $103 million. The Irrigation segment operating income decreased 46% to $12 million and was 11.7% of sales. Volume declines and deleverage of operating costs was the primary reason for the decline in profitability.

Total sales were lower as the farmer deliberated over economic uncertainty, declining crop prices and mixed signals over input costs for the upcoming growing season. In addition, tight credit conditions in some international markets reduced demand.

In the Coatings segment, first-quarter sales of $30 million were 15% lower than last year, largely as a result of lower demand from agricultural machinery manufacturers and weakness in the outdoor recreational equipment market. Operating income dollars were lower yet due to good cost management, operating income as a percentage of sales increased to 19.9% of sales.

Turning to other financial measures, increased inventories and Accounts Receivable reflect higher prices and the impact of acquisitions. Account Receivable turns are lower than our historical levels, reflecting the current mix of business and the economy. We are vigilantly watching the credit exposures to our customers but to date we have not seen any degradation of credit statistics.

Inventory levels are substantially higher than we would like. However, for the quarter, inventory was lower for all divisions except utility. We have action plans in place to achieve a meaningful reduction in inventory by year-end.

Long-term debt is higher as a consequence of our acquisition activity during 2008. Depreciation and amortization for the quarter was $10.8 million, and capital expenditures were $14 million.

We are cautious about our outlook for the balance of 2009. In the North American utility market, we expect higher annual revenues in the Engineered Support Structures segment. The immediate stimulus and North America is not targeted at projects that would impact Valmont revenue, and the European markets remain weak. The bigger long-term driver for the Engineered Support Structures segment in North American markets will be the anticipated renewal of the US Federal Highway Bill due this fall.

In the Coatings segment, we expect revenue declines to reflect weakness in the industrial markets. In the Irrigation segment, we expect continued weakness throughout the year with significant unfavorable comparisons with last year's record performance.

On balance, at this time, we expect total revenues and net earnings for 2009 to be only modestly lower than 2008 levels, mainly driven by our expectation that our Utility segment results will mostly offset the decline in our Irrigation results.

Operationally, we are reducing our cost on a prudent basis to match the size of our business to current market conditions. We have recently consolidated our North American and international engineered structures management under one group president. We have significantly reduced our temporary workforce and have had to selectively reduce both production and administrative positions as well.

In closing, our broad geographic and industry diversification has so far helped us navigate through these very difficult economic times. But most importantly, our long-term drivers have not changed at all. Economic growth will require investment in new and improved infrastructure, and the demands on world agriculture to increase production with limited water resources is the perfect driver for our irrigation business.

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

(Operator Instructions). Arnie Ursaner, CJS Securities.

Congratulations on a very good quarter.

Can you focus a little bit on the Utility Support Structures? In your prepared written remarks, you spoke about shipments of some very large orders. Can you give us a feel for quantifying some of these orders and how much it may have impacted your results in the quarter?

Well, large orders are becoming more and more typical in the utility industry, compared to what happened several years ago. We had some that shipped in the first quarter, and we had a very, very strong first quarter. I caution about taking those results for the year, but we do expect favorable comparisons also for the rest of the year, just not to the extent we saw in the first quarter.

Okay, so if you were to look at your backlog in that segment, look out over the next three quarters, how much backlog do you have at the moment? In other words, you didn't run down a backlog through shifting to a particular customer I would assume. Do you have fairly good visibility with orders in-hand for most of the rest of the year?

The answer to that is yes.

Okay. The follow-up to that, if I can, is that you also indicated you use some of your capacity in Engineered Support structures to meet some of this very strong demand. To do that is somewhat inefficient. Can you quantify how much of your intersegment sales might have been caused directly from that? How much that might have harmed the margin in the ESS part portion of your business?

Of the intersegment sales, I would guess the majority of the intersegment sales in the first quarter is from North American structures to the utility business. We transfer at about a 10% transfer pricing from one division to another.

When you say 10% transfer of pricing, that's not 10% margin I assume.

No.

How low are the margins on the intersegment, typically?

Well, they will probably run between 5% and 7%, something like that.

I'm sure you're going to get asked a number of questions about irrigation, so I will try to ask one fairly specific one. You mentioned significant unfavorable second and third-quarter comparisons versus last year. Do you expect Q2 and Q3 to be worse in terms of the rate of decline, the rate we saw in Q1?

In revenue, yes.

Worse or lower, or a more sharp rate of decline?

In the first quarter, we saw a 21% decline in revenue. Our current outlook would be that that would declines would expand in the second and third quarter. The third quarter in particular was unusually strong last year, even for a buoyant market, because apart from a very strong market and having some business from the second quarter move into the third quarter because of capacity constraints, we also had a great number of summer storms last year that added additional to third quarter, which is typically a very weak quarter.

Now, I can't predict the extent of summer storm business we will get, but currently I would say that the decline in revenue, at least in the second and third quarter, will be larger than what we saw in the first quarter.

Thank you for that clarification.

Ned Borland, Next Generation Equity.

Good morning, guys. Great quarter.

Sticking with irrigation, as we talk about seasonality, are you going to see more of a muted seasonal build in irrigation, given that the farmer is kind of on the sidelines here?

Well, I think that it is likely that there won't be as strong of an uptick in the second quarter than we normally see because I think there's still a lot of uncertainty out there. We always say a new season, at least in North America, starts in the early fall, and whatever happens to growing conditions during the summer, commodity prices and general economic outlook can certainly change farmers' feel about their economic future. Therefore, we could see an uptick in the second half of the year that we are not planning for currently, but it could happen.

Okay. Would you quantify or characterize your irrigation sales more heavily weighted towards replacement than conversion for new farmland?

No, I don't think we've seen a major change in the split between replacement, conversion, or new land being put into production, at least not to the current time.

Okay, so irrigation sales -- if farmers are uncertain now, it does kind of lend a little bit to pent-up demand later on?

I would hope so, but I don't know. I can't answer that in the affirmative.

Okay. Then with Coatings, the decline -- is that more to do with price cutting in the markets in some of the territories you serve or is it (multiple speakers)?

No, no, I would say it is mostly volume driven right now.

Okay, that's all I've got. Thanks.

Brent Thielman, D.A. Davidson.

Congratulations on a great quarter. Can you guys provide what acquisitions contributed during the quarter for both ESS and USS segments?

Yes, Brent, this is Mark Jaksich. There were five acquisitions that took place after the first quarter last year. There was a components business in ESS that we purchased in July. There was a UK company that we bought in November that is in the lighting business. We formed a joint venture in Turkey, and that was in the third quarter. Those were the ones. I'm trying to think. I think that was pretty much it.

I think, collectively, there was about $16 million or $17 million in revenue growth that came from acquisitions.

Is that just for the ESS?

Yes, there was one small coatings acquisition, and there was one small acquisition in utility, but the lion's share of that $16 million really came through ESS.

Okay, that's perfect. Thank you. Then on the irrigation business, you did see some better margins. at least on a sequential basis. Is that seasonal, or can you just expand a little bit on what happened there?

Are you referring to the fact that we have gone to double-digit operating income in the first quarter?

That's correct.

I wouldn't say it is seasonal. I think that our irrigation people did a good job of adjusting their costs and operated their plants pretty efficiently, even with lower volume.

Okay. Then on just the commentary on the stimulus package and how that sort of works through the Engineered Support Structures segment, when say you don't expect a sort of immediate impact, are you just referring to the shovel-ready projects? I guess as you look at some of the larger projects down the road as it relates to that stimulus package, do you see some potential benefit there?

I would actually say that I don't know if there is that much real money in the stimulus package for infrastructure. A lot of it will go toward what we call shovel-ready projects.

I think, by far, the biggest impact we are going to have on our structural business in the North America going forward is to have Congress agree on a new US highway bill. The current one expires in September, I think. If Congress will be timely in putting a new plan together or extend funding formerly for the current plan until they do, that is what is going to give us much more basis going forward. I think there's more talk than reality in the actual infrastructure part of the stimulus package.

Okay, thanks a lot, guys.

Michael Coleman, Sterne Agee.

Good morning. On your USS segment, putting aside the transfer -- or you mentioned volume and caution against extrapolating, but given the sales velocity, what kind of a magnitude or benefit did you see from lower input prices in that segment?

Are you talking about ESS or Utility?

I am talking about Utility.

In Utility, you know, in the Utility, our contracts are to a great extent tied to steel prices, so value will move up and down with that. So, I don't think that we should say that our profitability in that business is tied to lower input costs of steel to a great extent, but a lot to the efficient utilization of plants. So volume leverage makes a huge difference.

Okay, good. The second question is, the ESS segment, putting aside the transfer pricing, the 5% operating margin, if we do get a new, significantly larger highway bill, do we have kind of a roadmap to bring this segment back to the 9% operating margin that it achieved in 2005 to fully capitalize on a new highway bill?

I think the answer to that is yes.

Okay, thank you.

(Operator Instructions). James Bank, Sidoti & Company.

Thank you. Good morning. Comparing your Irrigation performance to Lindsay's when they reported April 2, you guys clearly outperformed what they did domestically. I think theirs was off a little over 30%. Was there possibly taking share going on in the quarter?

Well, I always caution against measuring share in the irrigation business on a quarter-by-quarter basis. I think, over time, there really hasn't been much of a share shift between the major players in the North American market. Some quarters, we may pick up a little; some quarters, they may pick up a little. So I wouldn't put too much into that.

Okay, fair enough. Historically, when the farmers are in this excellent financial health, have they ever disappeared longer than, let's just say, 12 months?

[laughter] That's a good question! I can't give you an example of when they have or when they haven't, and I don't think that history necessarily would predict the future. I think, when farmers feel comfortable about the environment they work in and the kind of money they can make on their investments, they will invest. I cannot predict in the current environment when that will happen. I want to repeat certainly historical behavior should not predict what happens going forward.

Okay, fair enough. Firm-wide, I was just wondering if you could elaborate a little bit more on your bookings. Earlier in the call, you discussed utilities a little bit and pretty much the sense was that it's very, very good. I was just wondering if you might be able to run through the Engineered group, the Coatings, and then I guess on the Irrigation would probably (inaudible) if you could just elaborate on the bookings in the quarter for Engineering and Coatings that would be terrific.

Well, I think, in general, when they look out to the rest of the year, I've already mentioned that the irrigation business, we expect that business to continue weak until we see clear indications that anything is going to change.

I think, in the utility business, we will see favorable comparisons for the last three quarters in the aggregate. As I said quarter by quarter, things can move around. But if you take the last three quarters of last year in the utility business and compare to what we expect this year, you are going to see favorable comparisons, at least that is our current view.

When it comes to North American ESS, we expect revenue for the year to be up from last year. When it comes to the smaller segments like Coatings, I think we are going to continue to have somewhat unfavorable comparisons on the revenue side because of the general weakness in some of the markets we serve.

Okay. Mogens, I'm sorry. You said you expected the Engineering group to be up year-over-year?

In revenue.

Okay. Now, quickly shifting to the guidance, I won't ask you to define "modestly," but I am just wondering. Should we assume something more of a V-shaped type performance this year with the discussion you had on irrigation being extraordinarily weak in both the second and third quarters -- so possibly the fourth quarter would be sequentially better than the third quarter? Is that fair to say?

Not necessarily. I won't put a specific number on "modestly", but when we look at the year, we think that is how we would like to express what we think about it today without getting into which quarter may do exactly what. The external economy is too uncertain to do that.

Right, okay. Lastly, on the cost controls, I think, in your remarks, you discussed consolidating Engineered Structure management. I think you mentioned something on the temporary workforce, but if you could just confirm that for me, also maybe even elaborate on further cost controls you have for this year.

Well, business unit by business unit, we try and size, to the fullest extent possible, our expenses to current market development without cutting into what is important to be ready to grow our businesses also in the future. We have a wide spectrum of what that really means, depending on the businesses we are in.

Of course, the irrigation business is the one where we have seen the biggest decline. Conversely, in the utility business, we continue to grow that organization.

Okay, great. Thank you.

(Operator Instructions). We have no further questions. I now turn the call back over to you for any closing remarks.

Thank you, Christy. 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, Christy will read our forward-looking statements.

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; 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 this discussion and the Company does not undertake to update any forward-looking statement.

This concludes our call for today. You may now disconnect your lines.