Valmont Industries Inc (VMI) 2010 Q1 法說會逐字稿

Good morning. My name is Brooke 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)

I will now turn the conference over to Mr. Jeff Laudin, Manager of Investor Relations. Thank you, Mr. Laudin. You may begin your conference.

Thank you, Brooke. Welcome to the Valmont Industries first quarter 2010 earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer, Terry McClain, Senior Vice President and Chief Financial Officer, and Mark Jaksich, Vice President and Corporate Controller. Before we begin, please note that this discussion is subject to our disclosure on forward-looking statements which applies to today's talk, and will be read in full at the end of 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 and Chief Executive Officer, Mogens Bay.

Thank you, Jeff and good morning everybody and thank you again for joining us. Let me begin with first quarter highlights. Sales decreased 19% and net earnings declined 54%. Second, operating income in the Utility Support Structure segment decreased 64% on a 38% decline in sales. Third, results in the Engineered Support Structures segment were weaker, impacted by slow global markets. Fourth, global irrigation results were somewhat improved and fifth, unusually harsh weather conditions throughout the Northern hemisphere interfered with production, shipping and the ability of our customers to install products. Sixth, the after tax expense associated with the Delta acquisition was approximately $3.3 million for the quarter.

Before turning to the quarterly performance by segment, I'd like to make a few comments about our proposed offer for Delta PLC in the UK. To recap the rational for the acquisition, their product lines either fit perfectly with ours, such as galvanizing and poles, or our potential new growth platforms in adjacent spaces, such as highway safety products and access systems. We also like the fact that they operate in the fast-growing Southeast Asian economies and the resource-driven Australian economy where our footprints today are limited. In support of this transaction, we last week issued $300 million of senior unsecured notes, with a 10 year maturity and a 6 5/8 coupon. Delta's Board has properly stated that Valmont's offer represents the most attractive opportunity for their shareholders to realize value of their investment. Since we remain in the offer period, we are limited in what we can say about the transaction and must abide by the regulatory disclosure rules. Any further details about the transaction can be found in the offer document which is posted on Valmont and Delta's websites.

Let's now review the first quarter results. I'll begin with the Utility Support Structures segment where sales decreased 38% to $113 million, and operating income fell 64% to $14.7 million, or 13% of sales. As we discussed in the fourth quarter conference call, this year's Utility business stands in sharp contrast to last year. This time last year, we had a record backlog, that included large project orders. We were in a favorable pricing environment and raw material costs were declining. This year our backlog is roughly one half of what it was last year. We have fewer project orders, more competitive pricing environment and rising steel costs. Some Utilities in the face of declining revenues have cut back capital investments for 2010 and moved projects slated for 2010 into 2011 and beyond. In our discussion with Utility customers, they affirmed their commitment to continue the necessary investments to build and upgrade the North American transmission grid. The projects on the drawing board should be implemented and are merely delayed. Nothing has changed in the necessity to improve the capacity and reliability of the grid.

In our international market sales we're up significantly from last year. We've been fulfilling shipments on project orders for Africa from some of our plants in Europe and China and sales within China were higher than last year. Economic growth cannot take place without reliable supply of electricity. Valmont's global Utility business is favorably positioned to participate in the build out in developing economies and upgrades to the transmission infrastructure in developed economies. As of the beginning of this year, our Utility division made the transition into a global division. This will allow our Utility management to put more focus on the significant international opportunities that exist in transmission, substation and distribution support structures.

In the Engineered Support Structures segment, sales decreased 21% to $107 million. Operating income declined 59% to $2.6 million, and was 2.4% of segment sales, mainly due to lower volume, i.e. deleverage. In North America, lighting and traffic sales were lower. State budgets are under stress from lower tax revenues. This constrains a state's ability to access federal matching funds for their roadway projects. The lack of a multi-year highway bill leads to a reluctance to begin larger multi-year projects. The recent extension of the 2005 highway bill until the end of this year will help, though. The annual funding is significant, and Congress' commitment to infrastructure tied to job growth is a positive sign for our industry.

Commercial lighting sales remained under pressure by weak construction markets. Our markets in the Northern hemisphere suffered from an unusually harsh winter. European markets were also mostly lower, impacted by economic weakness. Global wireless structure sales were lower. In North America carrier investments in structure is down year-to-date and in China partly due to the reorganization of their country's wireless industry there's been a delay in letting bids this year that will likely lead to a smaller total market size for that product line in China in 2010.

In the Irrigation Segment, sales were 5% higher at $109 million. Irrigation Segment operating income at $15.4 million was 29% higher and was 14.2% of sales. In North America, farmer sentiment is somewhat improved compared to last year, but still cautious with capital investments. International irrigation markets were mixed, easing credit conditions and government stimulus programs benefited some of our markets. Others were negatively impacted by continued economic slowness. Last year during the first quarter, certain project orders were shipped that did not repeat this year. Our outlook for the long-term continues positive, mechanized irrigation has very strong and enduring market drivers. Population growth, expanding middle class, improving diets are all favorable industry trends. When coupled with concerns over water availability, and the inefficient use of water by some irrigation methods, mechanized irrigation equipment is a clear beneficiary.

In the Coatings Segment first quarter sales were $27.9 million, 7% lower than last year due to lower internal volumes, particularly Utility, and a decline in US manufacturing activity. One of our key input costs for galvanizing is zinc. Zinc cost rose faster than we could increase prices in the first quarter. Operating income decreased 24% to $4.5 million or 16.2% of sales, as a result of volume deleverage and the higher zinc cost.

Turning to other financial measures, inventories were down significantly compared to last year. Accounts receivable declined compared to last year reflecting lower sales activity. Cash and debt balances were up as we drew on the revolver for the cash requirements for the Delta bid. Depreciation and amortization for the quarter was $11.2 million, and capital expenditures were $4.6 million. Taxes are down in dollars, but the tax rate increased due to lower tax credits than last year, non-deductible expenses related to the acquisition and lower international profitability. We expect the tax rate for the year to be approximately 34%, not counting any tax impact relating to the planned Delta acquisition.

We still expect 2010 earnings to be approximately 25% lower than last year, not including any impact from Delta or acquisition expenses. We expect the seasonal uptick in our infrastructure businesses as the year progresses, and a continuation of a modest improvement in our irrigation businesses. Despite the uncertainty in economic conditions, there is certainty in the need for our products. Our lighting and traffic products enhance nighttime safety and help reduce traffic congestion. Our Utility Support Structures enable the transmission of electricity to support economic growth. And our irrigation products enhance farmers' productivity while helping conserve fresh water resources. These are great businesses to be in. Short-term we are dealing with the effects of a slow global economy, but are well positioned to participate in the events of global economic recovery. This concludes the prepared portion for our remarks and we would now like to take your questions.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Arnie Ursaner with CJS Securities.

Hi, good morning, Mogens.

Good morning, Arnie.

I think I have two quick questions for Terry on a bookkeeping basis. The Delta deal expenses, where should we take those? Are they in the segment or in the corporate?

Arnie, this is Mark Jaksich. Those are in corporate. The $2.2 million of acquisition related expenses are in there. The financing related costs are included in interest expense.

Okay. And my second question is again a mechanical one. Your Q2 guidance, higher than Q1. Is that excluding or including the deal expenses in Q1? Also since you did the deal for the debt in Q2, isn't it likely you'll have deal expenses in Q2 as well?

This is Mark again. That guidance does not include deal expenses related to Delta because the majority of those expenses are contingent on the closure of the transaction. So we're not projecting those until that becomes more certain.

Okay. Mogens, a question for you on the ESS margins. Obviously we've kept an eye on your Company for years. Even last year was materially lower than your normal margin in ESS because you were cranking out Utility poles. If I think about the 2.4% or so margin, and I know you do get some weather in that business that can impact things, if I were to think of a more normal margin, even at the lower end of historic, something in the 6% range for that business which might have affected -- might have been impacted by weather, that alone would add almost $0.10 a share to earnings. Is that sort of the magnitude of the weather hit you took and would it be primarily in that segment?

I would say that a big portion of the weather hit was in that segment because we have a great number of plants and some of them experienced shutdown as a result of the weather and all the products go to outside outdoor projects and therefore are also dependent on the weather. But I would say that a big portion of the disappointing operating income in that business also is lack of absorption because of the lower volume. And I would agree with you that we would expect that segment as the year progresses to get much closer to the double-digit operating income that that business should deliver.

If I could ask one more of you, Mogens. The irrigation margins were quite high relevant to my expectations and I think others, and frankly, completely different than your key competitor that reported a week or so ago where they talked about a lot of margin and pricing pressure. Was it just great execution on your part? Or are you seeing a different dynamic than your competitor?

Well, I wouldn't think we are seeing a different dynamic. I think that our irrigation people have executed well and I also think that when you have the comparison with last year, last year we were stuck with some high priced inventory going into the first quarter that compressed the margins at that time relative to what we otherwise would have expected. And, therefore, the comparison this year where we don't have that additional burden makes it look better. So I think we have executed well, but I don't think there's any major change in how we behaved in the marketplace.

Thank you very much.

Your next question comes from Brent Thielman with DA Davidson.

Hi, good morning.

Good morning.

Yes, just with respect to the ESS segment, I guess now with a more material extension of the highway bill in place, have you seen any pickup in terms of orders or anything to suggest sort of sentiment or confidence has improved among the states?

I wouldn't say that, and whereas it clearly is good news that funding has been put in place for this year, it is still not very good news because in order for states to plan projects that ultimately we will benefit from, they really need to know the rules of the game going out further than now another nine months. So a high priority for us is to do whatever we can and that isn't much, I realize. That a multi-year highway bill is going to be put in place, because unless the states know what they have to deal with over a longer time horizon than just nine months, they're going to be very reluctant to make commitments.

Sure. And then I guess on the Utility business, and I'm just trying to understand the numbers here, but obviously difficult comparisons year-over-year, but you did see a pretty sharp drop in margins just on a sequential basis on what I call sort of a less dramatic decline in sales. Can you kind of help me understand why there was such a sharp drop there just relative to Q4?

Yes, I would say there are several reasons. One is lower absorption rates. We get a lot of leverage when the plants run full. Secondly, last year we really did not add SG&A to get that additional sales and, therefore, we had a tremendous SG&A leverage that obviously then went away. Further, the competitive pricing environment in the marketplace was much better last year when we had a very strong market. The same players are now going after a much lower activity level and that puts some pressure on margins. Last year steel prices were declining and now they are again increasing. That may, short-term, put some pressure on margins also. So it's not one thing but it's a combination of them and when we dig through the numbers, that is the explanation why we are seeing what we normally would call very acceptable for this level operating income performance as a percentage of sales, but not what we got used to in 2009.

Got it. I understand, definitely. On irrigation, just to clarify, did you see year over year growth in both the domestic and international regions?

I think most of the growth came in North America and I think international was about flat. And part of that was that we saw growth in several regions, but it was offset by the lack of a major project order that we had in the first quarter of last year that did not repeat this year.

Okay. Thank you very much.

You're welcome.

Your next question comes from James Bank with Sidoti & Company.

Hi, good morning.

Good morning, James.

My organic questions have been answered. I'd like to just ask something on Delta if I could and I'll be careful with the questions or I'll try to, Mogens.

I'll be careful with the answer.

Delta has done roughly $500 million American in 2008 and 2009. Operating margins at about 15%, and after tax margin about 9%. On a hypothetical, going out to 2011, looks like the majority of their sales are coming from Southeast Asia and Australia. Is there any reason to think that they couldn't do such a number and keep those margins? Because what I'm getting at is $50 million in operating income on 26 million of your shares outstanding is a very big number.

Let me answer it this way. First of all, if you go to Delta's website, you will see there what they call trading forecast for the year and if I recall correctly, they expect no major change in the market conditions where they operate and I have not heard of any major change in the profitability levels either. But do also keep in mind that in their numbers, they have a substantial impact from Delta EMD in South Africa, and their minority interest in MMC in South Africa, all in the manganese business, which they are in the process of disposing of. So not only do you have the uncertainty in those businesses where profitability may move around more than they do in the businesses we are interested in, you also have the uncertainty as to timing as to when that business will be disposed of, and what they will collect for the business.

Okay. And at that point I think earlier you said if this deal closes and manganese is still there, it's yours but if not it's not. Is that still your same --

We have said we support their process of selling those businesses and if they're not sold, if we complete this transaction, we will continue that process.

Okay. Well, the remaining businesses are great and that's great news. I hope the deal closes. Thank you, Mogens.

Thank you.

Your next question comes from Ned Borland with Hudson Securities.

Good morning.

Good morning, Ned.

Couple ones here. On the Utility business, in your conversations with your customers what is the sense that these projects that have been pushed into 2011, what's the risk that those get deferred further?

That's a good question. I don't have an answer for it, but I would say that to the extent economic growth returns to this country and, therefore, the consumption of electricity will revert to an upward trend, that will determine the timing for some of these projects. Over the last couple of years, I am led to believe that electric consumption has actually declined slightly in this country, which has given the utilities an opportunity to take a breather, if you will, on some of these projects. So I would say that the implementation of those projects, if I should guess, would be somewhat dependent on the economic recovery in the US.

Okay, fair enough. Then on irrigation, internationally, particularly in Mexico, you alluded to government support programs. I guess there was one in Mexico, according to your competitor that reported a couple weeks ago and the deadline was March 15th. I'm just wondering on the international landscape where there are consistent government support programs or things that can -- areas of opportunity, if you will, internationally in irrigation?

Well, let me answer it this way, that they are in many markets programs that sometimes are short-term in nature to stimulate activity, and we participated in this additional opportunity in Mexico, as did I'm sure the other businesses -- the other companies in our industry. But our international business is so diverse geographically and we participate in so many markets that we don't see major shifts in the overall activity level driven by government support or intervention. By and large, it's the economics facing the farmers in relationship to investment in this kind of equipment.

All right. And then finally, in coatings, I should say, your pending acquisition with Delta plus a major competitor of yours is -- actually, two competitors of yours are going to be consolidating it looks like shortly. What are your thoughts on the pricing in galvanizing going forward? I know it's a very regional business, but can you help us think about how pricing looks, post the closing of these two deals?

Well, let me pick off of the statement that you made which is very correct that this is a regional business. So whereas often when you have consolidation of industries you go this will create more pricing power. That's not necessarily the case in the galvanizing business because a galvanizing facility can only serve a certain geographic area. Having said that, the more you have companies that have pricing discipline participating in an industry, yes, it is more likely that you will have more discipline in pricing and I think that the Company that's also consolidating in this industry, I think they have a pretty good reputation for being a disciplined player.

All right. Thank you.

(Operator Instructions) Your next question comes from Jon Braatz with Kansas City Capital.

Good morning, Mogens.

Good morning, Jon.

Couple questions. With your operations sort of below par at the moment, do you see any need for any meaningful or structural, or a significant structural changes in your operating facilities, plant consolidations or things like that? I know you're not happy with the margins, but given the environment do you see any need to change any things?

We constantly evaluate within the various business groups how we are structured. And particularly in ESS over the last year or so, we have made substantial changes. We are not contemplating any overall structural change as to how we operate and we are at the current time not contemplating mothballing a plant or anything like that. We have the opportunity to do that if we think that is a better overall use of our assets, but by and large we do react within each business units to their business conditions, but structurally we're not contemplating any changes.

Okay. You also made a couple remarks about rising steel costs and zinc cost. Would you expect to be caught up here in the second quarter or is that more of a second half catch-up?

Well, it depends on what happens with steel prices. In the general weak global economy, it is somewhat surprising that steel prices have been moving as far and as fast as they have, but part of that is more discipline in the steel industry.

Sure.

They've been very good at taking capacity out when the demand is not there and I don't blame them for doing that. So it really depends on what happens through the rest of the year. Rising steel prices provides a couple of challenges for us. One is making sure we get ahead of the curve or follow getting the pricing out in the marketplace. Big driver for steel price increases now is that the market went away from one year contracts for iron ore and there's more spot market contracts and iron ore prices have been going up a lot. We also have internally a big portion of our inventory in North America on LIFO and therefore as steel prices go up, not only do we have to be fast in the marketplace, but we also have to probably build our LIFO inventory. As you know the whole purpose behind LIFO is to delay earnings in inflationary times.

Okay. Same thing with zinc?

Zinc, a little bit different. Right now, there's really no underlying reason why zinc prices should have gone up the way they did. There's nothing in inventories that would dictate that. There's probably financial speculation in those markets and our galvanizers have been pretty good at passing on zinc price increases. I'm less worried about zinc.

Thank you, Mogens.

Your next question comes from Steven Gambuzza with Longbow Capital.

Good morning.

Good morning, Steve.

Just a question on the comments you made about the margin profile in the Utility segment where you noted some pricing pressure and weaker demand. At the same time it sounds like your outlook is calling for a sequential improvement as orders have improved a bit. Given your outlook for earnings for the year, should we expect kind of a sequential improvement in margins over the rest of the year? Do you expect Q1 margins will kind of drop or might things dip down before improving?

I think when we talked about improvement in orders in the Utility business, we were really talking about some of the larger orders that are only going to be delivered in 2011 and onwards. I think we will see in the Utility business this year probably margins around what we saw in the first quarter.

Okay.

If the order situation improves a little, if steel prices increases modify, it can move a couple of points but it certainly is not going to move to the high teens or into twenty.

I just get concerned that given some of the dynamics you talked about, rising steel prices, weak demand, that the steel prices are going to keep rising and the rest of the picture might not change all that much over the next two quarters. Is your kind of guidance for 25% earnings decline, does that take into account -- is there enough kind of risk factor around the steel price risk issue on the Utility side, in your opinion?

Well, I would say that the 25% guidance which is unchanged from our last conference call is based on what we know today and what we see happening in the marketplace.

Okay. And how did coatings perform relative to your expectations in the quarter? You had some margin weakness there on zinc. Was that pretty much in line with what you were expecting and should we expect --

Yes, they're pretty much performing according to what we planned for the year. They had a little pressure on margin in the first quarter but they still hung on to more than 16% operating income, which is very good in a weak economy and fast rising zinc costs. I think they operated very well.

Okay. All right. Thanks very much. I appreciate it.

Thank you.

Your next question comes from Michael Coleman with Sterne Agee.

Thank you. My questions have been answered.

Thank you.

Your next question comes from Arnie Ursaner with CJS Securities.

Hi. Regarding the corporate expense, you mentioned the $2.2 million or so is one-time expense. Your run rate of around $8 million is well below where you've been. Is that what we should be thinking for the balance of the year or were there some bonus accrual reversals or some one-time other items in corporate expense?

I will let Mark answer it in detail, but clearly incentive pay, we -- as you know, we operate in a way that if we do well, we'll make bonuses and if we don't, they disappear and right now it looks like they may disappear.

No, Arnie, that's true. The incentive accruals at the corporate level and throughout a number of the business units are down compared to last year in line with lower earnings. And there is some additional discretionary expenses that went down, but the lion's share is incentives.

Assuming you can achieve your guidance for the year, how should we think about the corporate expense line for the balance of the year? What's embedded in that for you in terms of corporate expense?

I believe that it's really going to be pretty similar to what you've seen in the first quarter, assuming everything plays out the way the first quarter did.

The other big variables, Arnie, get to be things like healthcare, workers' compensation expenses, et cetera. At this stage, though, I think Mark has given you our best estimate of what's going on.

On the PP&L contract that you won, I think if it's not the largest, it's certainly one of the largest you've achieved. When you have to take a contract that you're probably not going to deliver the product, the $70 million of revenue or so until 2012, how do you structure a contract like that to deal with rising costs and other variables? What commitment have you made in terms of the contractual agreement?

Let me start by saying I don't know the details of the contract and it is one of the largest ones we have had, not the largest. But knowing how our Utility business operates, there will be indexes that deals with steel costs so that the overall size of the contract can move up or down, depending on what happens to steel costs at the time.

Your view is even though it's going to be -- will not be delivered for quite a while, you believe you structured it to prevent you from having fixed price contracts that could be problematic that we should keep an eye on?

I do.

Okay. Three more questions on Delta. One is I believe the final remaining regulatory hurdle is the Australian commission and that -- could you update us on that?

That has been cleared.

So is it fair to say you no longer have regulatory hurdles in the way of the transaction?

That's correct.

Two more then about Delta on the assumption it will close. When US companies acquire other companies and acquire inventory we tend to write them up and you have a margin hit when that occurs. Would a similar thing be likely with Delta?

Yes, Arnie, this is Mark. That's true and I think in actually if I recall in the prospectus on the bond deal, there was a number that was kicked out there of about $3.5 million. We don't know for sure what that's going to be because we haven't been through any detailed purchase price allocation work, but that's our best estimate at this time.

Okay. And, Mogens, obviously China's been a critical market for you, but you didn't have certain Utility or weren't as well positioned in certain Utility oriented products in China. Does Delta have a better capability for you and is that an opportunity that you can exploit?

No.

Okay. Thank you.

At this time, there are no further questions. Gentlemen, do you have any closing remarks?

Yes, Brooke. 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 and at this time Brooke will read our statement on forward-looking disclosures.

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 the 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 materials, 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. The Company does not undertake any update to forward-looking statements. Thank you. You may now disconnect.