Valmont Industries Inc (VMI) 2010 Q3 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 third-quarter earnings conference call.

(Operator Instructions). Mr. Jeff Laudin -- I would now like to hand the program over to Mr. Jeff Laudin, Manager of Investor Relations.

Thank you, Christy. Welcome to the Valmont Industries' third-quarter 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 our Chairman and Chief Executive Officer, Mogens Bay.

Thank you, Jeff. Good morning, everyone and thank you again for joining us. In the past, as part of my prepared remarks, I've repeated a substantial portion of what was in our press release. We are going to do it a little differently this time. I will assume that you have all read the press release, and I will focus on the major issues in our businesses.

The significant driver of third-quarter results was a substantial decline in Utility revenue and operating margins. 2009 was an exceptional year for our Utility business, and this year has seen a significant change in excess capacity chasing a much weaker market, leading to significant pricing pressure.

Two things to consider -- first, while comparisons with our record performance last year are weak, the business is performing very well under much less favorable market conditions. We expect the Utility segment to show significant improvement in the fourth quarter and to deliver double-digit operating income for the year in a very tough environment.

Second, the decline is the reflection of the current economic condition, not a change in strategy for our customers.

In our discussions with utilities and other industry participants, we do not hear of projects being canceled. We do hear that a number of projects have been delayed to defer capital spending until the economic recovery is more certain. I want to remind you that electric consumption in this country declined during the last twp calendar years as a result of the economic recession.

In our Irrigation segment, we are pleased to see significant improvement. The third quarter is typically a very weak quarter in the Northern Hemisphere as crops are in the field, but in the Southern Hemisphere this is not the case. We have seen very good improvement in our international Irrigation volume.

The closest correlation to our Irrigation volume, short-term, is net farm cash income. Recent improvement in crop commodity prices and the prospects for higher net farm income in 2010 provide a positive backdrop for the upcoming selling season in this country.

I want to put one qualifier into the general optimism surrounding the near-term prospects for the Irrigation business. Our customers read the same newspaper and listen to the same news regarding the general anemic growth in the economy, and that could lead to some hesitation.

Our Coatings business is performing very well, both from a volume standpoint and a quality of earnings standpoint. This is encouraging to me in this weak economy. It is a result of the very diverse customer base we have in this segment enabling us to benefit from pockets of our economy that are strengthening.

Our Tubing business, which is reported in the Other segment, is also performing very well, benefiting from a pick-up in demand from agricultural implement manufactures and their very diverse industrial customer base.

The Delta integration is on schedule, and those businesses are in the Delta segment for the period of the current year we owned them. Going into next year, we will re-segment our businesses. We continue to be pleased with the way the Delta businesses are being managed and in the aggregate, they are performing to our expectations. We are impressed with their management teams and are confident that the cultural fit with our company is good.

Our Engineered Support Structures segment, which serves the lighting, traffic and wireless communication industries globally, may be faced with the toughest environment. These are the businesses most dependent on government or public funding. For more than a year, we have been without a multiyear highway bill in the US, which is not helpful to our business. Our international markets are similarly impacted by downward pressure on government spending.

We cannot count on much improvement in our market for lighting and traffic structures in the near-term. We have implemented cost reduction and seen good productivity improvements in these businesses over the last several quarters, but those have been offset by or overwhelmed by pricing and volume pressures.

We will continue to pursue productivity improvements, but we are also currently examining our global cost structure to see if we can improve the profitability of these businesses absent an improved marketplace. We have to balance the need to improve the quality of our earnings in this segment with ensuring that we can take advantage of increased opportunities when our markets improve.

It is premature today to quantify potential savings or improvement and to estimate any one-time charge in this connection. We will report back to you on our progress in future calls.

Turning to other financial measures, movements in the balance sheet mostly reflect the addition of the Delta accounts. During the quarter, we paid down $35 million on our revolver and have plenty of liquidity. Depreciation and amortization for the quarter was $17 million and capital expenditures were $9 million.

We will now take your questions. Thank you.

(Operator Instructions). Brent Thielman, D.A. Davidson.

I guess, just on the Utility business, you saw a sequential improvement in terms of sales but obviously operating earnings were under a little bit of pressure. Is that a function of just some of the pricing pressures you are seeing in the market?

Yes, as I mentioned just a couple of minutes ago, we expect a significant improvement in the quality of the earnings in Utility going into the fourth quarter. So I think what you see is it depends on which projects are shipped in which quarter, and some are at lower margins than others, as we have been in a very competitive pricing environment. So, I think what you saw this quarter was a particular collection of projects in a very tough building environment.

Okay, so more of a mix issue then?

Yes.

Okay. Then have you seen a meaningful change I guess in backlog for the Utility business, or at least a sequential change in backlog for that Utility business quarter-over-quarter?

Yes, our backlog is increasing in the Utility business and by year-end, we will give you the exact numbers.

Okay. And then I guess just on the Delta business, can you provide what the manganese business contributed at Delta just so we can get sort of a better feel of contributions ex that business going forward?

Yes, I'm going to have Terry answer the number question on that, but I just want to put it in context that, when we acquired Delta, we basically put no value on the South African businesses because they were in the process of divesting of them. They are still in that process and we don't know exactly what we are going to benefit from that. But since we closed the Delta acquisition, we have received, net of taxes from South Africa, $20 million that are now sitting in London, partly normal dividend payments and partly proceeds from land sales that were part of those businesses.

I will turn it over to Terry to talk about the general performance.

Yes, the EMD business, the public business, was breakeven for this period, and there was a slight profit in the minority-owned businesses.

Okay great. I appreciate it. I will jump back in queue.

Ned Borland, Hudson Securities.

Sticking with Utility, you said the backlog is going to be growing. I was just wondering what your average order size is now? You were doing some really large projects last year, and I'm just wondering are we going to continue to see sort of these small production runs, or at what point do you think some of these larger projects get unleashed here?

Well, it is a very difficult question to give you an exact answer to, but I can tell you that, this year, average order size is down substantially from last year. When we look at what the utilities have on the drawing board going forward over the next several years, there are a number of very large projects again. We have had some larger projects in our backlog this year and we expect, as the economy improves, that more and more of these projects will be released. I think a lot depends on when the general economy gets some traction as to the exact timing of when it is going to happen.

I think it is fair to say that our Utility businesses expect an improvement in their volume in 2011 compared to this year. They still expect a tough pricing environment until capacity in the industry is better utilized. But as I told you before, even in this year's tough environment, they are going to deliver double-digit operating income.

Okay. Then your comments about 4Q being better than a year ago, again, you said that there may be some operating income improvement in Utility. But the year-over-year improvement, is that more a commentary on strength you may be seeing here in Irrigation and Coatings?

I think we are expecting an improvement in Utility. We are going to expect continued strength in the smaller business, Coatings and Tubing. I think we're going to see some improvement in the Irrigation business. We are going to see the benefit of Delta earnings. That is basically the highlights for the improvement in the fourth quarter.

Okay. Then last question -- pricing in Irrigation, how is it looking? I mean, are you able to get any price in this environment here?

Well, you saw that our operating income for the quarter globally was 12%, and that compares to last year's operating income of a little more than 7%. Part of that, the biggest portion of it, is good volume. We have not had to go out and get a lot a price because we have not seen many movements or much movement in raw material prices. So I would say that the pricing environment and the competitive environment is probably pretty much unchanged.

Brian Drab, William Blair.

The first question, just around your guidance for 2011, when you say further improvement in 2011 volumes, are you talking about further improvement from what we are seeing in the fourth quarter of 2010, or just that 2011 will be better than full-year 2010?

What we are saying is 2011currently we see better than 2010.

Okay. Then regarding the $4 million in incremental amortization expense from Delta, that seems higher than what I was expecting. I think I was expecting something closer to $2 million per quarter in amortization and $500,000 in depreciation. Could you help me understand what is in that $4 million number?

I'm going to let Mark Jaksich answer the question.

Yes. What that is, Brian, is about $2 million of depreciation and amortization for the quarter. Then there is about $1.6 million, give or take, of inventory when we did the purchase price accounting. We wrote up the inventory. That goes through the income statement fairly quickly, and so that diminishes in the fourth quarter. Then there is about $400,000 or $500,000 of pension. So that is how you get to the $4 million.

But on an ongoing run rate, depreciation and amortization, if you were looking into next year, would be in that neighborhood of $2 million per quarter, depending on exchange rates.

Okay, thanks. It we just look at the comment that you made on the fourth-quarter earnings being better year-over-year, it sounded like, from one of your previous answers, that includes Delta. But if you excluded Delta from the business, could you make the same comment?

I cannot answer that right now. Probably not.

Okay. Then could you give us a little detail on how the recent moves in steel prices have affected your margins? specifically in the third quarter with your margins down I think more than most were expecting in Utility, was that mainly pricing? I would have thought that the declining steel prices might have offset the difficult pricing environment somewhat. Could you talk about that dynamic?

Yes, I don't think steel prices this quarter had any significant impact. I think particularly when you talk about utilities, that was all a pricing issue.

Jeff Beach, Stifel Nicolaus.

One more time back on the Utility business -- the way I picture your business is a few large projects and a lot of smaller projects. I don't know if that is correct or not. But when you look at this third quarter at lower margins because of a few projects, can you give us an idea when these projects were bid that you delivered in the third quarter? Then the fourth quarter, if it is going to be a lot better from a few projects, when were those projects bid in the market?

Well, let me say in general that the Utility business of all our businesses is probably the business with the longest backlog. So I would say that everything that is being shipped in the fourth quarter, by and large, is already in the backlog. When we entered the third quarter, everything being shipped in the third quarter would already have been, by and large, in the backlog.

Okay. Outside of this mix where a few good projects get better pricing in the fourth quarter, if you look maybe at the bidding on the smaller projects, is the bidding or the pricing stabilized in the market, from the best you can see?

Well, it depends on -- I'm not sure if I say stabilized, that means it would stay there, and I hope that is not the case. I think that we have probably seen the toughest pricing environment we are going to see if we expect, as we do, that the utilities will be more active in their letting of projects or smaller orders going into next year. As we see more capacity being absorbed in the industry, I think we are going to see an improved pricing environment.

Thank you. On the Irrigation sales, can you give us an idea of when the order flows begin to come in for the upcoming selling season? And then again, about how long does it take to ship in that segment?

Well, in the Irrigation business, the backlogs tend to turn faster than in some of our other businesses. But basically the selling season starts pretty soon. Now, when the farmers get out of the fields in the Northern Hemisphere, finalizing their harvest, that is when we are going to see more activity in this part of the world, particularly in the US. So over the next couple, three months is when we are going to have a very good feel for what this selling season looks like.

Now, since we're going into the winter season, the actual delivery depends on when farmers can get the equipment installed in their fields since we ship directly to field, not to dealer inventories. And we just need to make sure that everything is installed and up and going by next spring's planting season.

Okay, appreciate it. One last thing -- on the -- since it has not been sold yet, back on the manganese dioxide operations, what is the key variable there to look at for these big swings in profitability?

Well, the key variables is the general strength of the market which, to a great extent, also follows the general strength of the economy, but also the exchange rate between the South African rand and the export market. So as the South African rand strengthens, it makes them less competitive. In this last quarter, they had a strike they had to deal with and some production problems. So this was probably an unusual quarter. You should not expect these businesses to continue to perform at the level we saw in the third quarter.

Okay thanks. That was very helpful.

Jon Braatz, Kansas City Capital.

Returning to the Utility business, your natural gas prices are very low. I was reading a number of articles the other day that they might -- excuse me, the low natural gas prices might be putting pressure on wind farms, wind turbines and so on and so forth. They are just not as economical, as competitive, as natural gas turbines.

When you look at your transmission business and maybe the outlook a year or two years ahead and maybe even in the backlog, how dependent upon wind farm construction is your transmission business? Is there any way -- how can you -- can you tell whether the business is related to wind farm development?

Well, let me say that -- let me separate Texas from the rest of the country. In Texas, we have benefited quite a bit with large orders relating to connecting the wind farms in the northwestern part of Texas with the big consumption in the southeastern part. A lot of those projects have already been let, but there are still more to be had. So if we separate Texas, while I don't think we are going to see a slowdown because these projects are already being designed and approved, in the rest of the country, as wind power grows, we will benefit from it. But it is not a significant part of our transmission or distribution business in the rest of the country.

Okay, okay. Then secondly, when you look at the upcoming irrigation season, obviously things are in place for a good year. Have you changed your production schedule on McCook? Are you adding people in anticipation of maybe a better season, or do you wait until you start seeing the order flow from your dealers?

Well, we are preparing ourselves for a better season. We are not waiting for order flow per se, but we are in constant communication with our dealers to see what their moves are and what their prospects are.

I agree with you that, under normal circumstances, this environment with fairly good yields, increased commodity prices, should put farmers in a very good frame of mind. But I still want to qualify it with the fact that they do get exposed to the same less-than-optimistic views as to what the economy is doing in general. I don't know and I cannot quantify what effect, if any, that will have on what we will see. But we will be ready.

Sure. Is there a number you could -- sort of a capacity utilization number you could give us for the McCook facility during this past irrigation season?

I can tell you that we will have plenty of capacity at McCook.

Michael Coleman, Sterne, Agee.

You talk about an improvement in your Utility business. I was wondering if you could parse North America versus International in terms of that improvement?

I'm talking about an improvement in the Utility business in the fourth quarter compared to the third quarter, and I'm talking of an improvement in volume in 2011 compared to 2010. When I talk about the fourth quarter compared to the third quarter, most of that improvement is coming in North America.

Okay. On the potential restructuring in the ESS segment, are you looking at more than one geography? Are you looking at Europe as well as North America?

We are looking globally. We are in the middle of these evaluations, and we are going to find ways to get some cost out of those businesses so they can improve, absent an improved market. Whether that means mothballing or shutting a plant or so, it is way too early to say, and we are careful not to get ourselves in a position that we can't react when markets resume. We have scars from decisions we made many years ago. I recall about ten years ago, we closed a plant and six months later we wished we had not. So, we are careful that we have the right balance between trying to maximize our performance in a difficult environment and yet not cutting away our ability to respond.

Okay. Could you address the corporate expense in the quarter that was down $7 million year over year in terms of what should be a normalized -- or if that is normalized, or what you would expect that to be in the fourth quarter?

Yes I can, but Mark Jaksich can do a better job, so I will turn it over to him.

Okay, thanks. I think we said before that, with a reasonable amount, let's say, of incentives, that the run-rate would be in the neighborhood of $7.5 million to $8 million on a quarterly basis. This year's number is particularly low, number one because incentives are virtually nil this year as far as what we have been recording. The other item is there were some discretionary spending that we did last year that we have shut off for this year, so that has contributed to it as well. Those are the two biggest things. But on a normalized -- from a modeling perspective, if you were looking at $7.5 million to $8 million a quarter, that would be a fair number.

Steven Gambuzza, Longbow.

The Delta business, can you just discuss the seasonality in that business in terms of how we should think about the quarterly performance as kind of the first real clean quarter we had to look at? I'm just curious. Is this -- how we should think about the contribution of the quarters, Q3 relative to Q4, in the first half of the year?

I will say that, first of all, there are quite a number of separate businesses within the Delta group. But I would say that, by and large, they have less seasonality than our other businesses. Part of it is that, particularly in Europe and in North America, our pole businesses are very dependent on construction season and we can have tough winters, etc. Delta's businesses are basically in Southeast Asia and Australia, New Zealand where we don't have the same weather problems. So I would say you can model that Delta performance as more even, not completely even but more even than our other businesses.

Okay. Given the -- I realize it is a complex portfolio of businesses that touch a diverse set of geographies and end markets. Do you expect improved performance in 2011 versus the run-rate you were at in the third quarter for Delta?

Yes, yes.

Okay. On the dip in -- if I think about the sequential change in Utility profitability on relatively stable sales in Q3 versus Q2, is it fair to say that -- because I know you called out weak pricing last quarter -- that the dip in margins was primarily due to mix and that there was no real sequential deterioration in pricing?

Yes.

So it was really all about mix?

Yes, it was mix, not product mix but order mix.

Order mix.

So we probably had a particularly unprofitable mix of orders to be shipped in this quarter.

Okay. In terms of Irrigation, I think you indicated that the next couple of months are going to be very important in terms of shaping the outlook for 2011. I was just curious if you could offer a view as to whether you think -- if you could just offer some preliminary views on the direction of demand next year in the US and internationally?

I can. I expect that the demand will be stronger. Not to nitpick your comment, but it will give us a good feel for the outlook for the first half of next year. The irrigation season is basically from late fall to late spring. Then everything changes in our big market, which is the US, going into the fall of next year, depending on commodity prices, etc., at that point in time. But the environment that we normally follow and pay attention to would indicate that we are going to see strength in that business going into the North American selling season, which is over the next few months. The qualifier I still put in is will there be hesitation as a result of the general uncertainty as to our economy in total?

Are things like water restrictions, or issues like that, does that weigh on demand right now or is it more just pure economics domestically?

It weighs on demand longer-term and it weighs on demand globally, but short-term, the correlation is really net farm cash income.

Okay. Finally, just on the ESS segment and the statement that you are looking at, at potentially some cost reductions to improve profitability in a flat sales environment, I think you were at around an 8% margin in Q3, which was up nicely from the first-half levels. Do you -- I'm just curious what you think an acceptable level of margins and returns in this business are in terms of what you'd strive for?

First of all, I agree that they have improved. I think we have seen significant productivity improvements in those businesses, as we have talked about over the last several quarters. Unfortunately, those improvements, to a great extent, have been overwhelmed by pricing pressures and soft markets. But I would say that these businesses, they are great businesses and they are in good markets, and they should be delivering double-digit operating income. Now, whether we can get to that before we get some help from the marketplace is a question mark, but we are going to strive to get to double-digit.

Do you think that, given the challenges that you highlighted in the end markets, that it is reasonable to expect that sales in the segment could be flat next year, or do you think it is more likely that you will see declining sales next year, given the headwinds on the fiscal side?

I would say, currently, we will probably see flat sales going into next year. That is why we are looking for ways to improve the quality of the earnings, since we cannot count on improved market conditions until we have a highway bill in place in this country and some loosening up of government spending in other parts of the world.

(Operator Instructions). Brian Drab, William Blair.

Just a few more quick questions -- a follow-up on the corporate charge discussion. Given that the incentives are down this year, should we expect that the fourth quarter would be below the $7.5 million to $8 million run rate, or are we going to get back to that run rate as soon as the fourth quarter?

This is Mark Jaksich. That number will be, in the fourth quarter, will be somewhat below that run rate simply because there is not going to be any incentives, or not much in the way of incentives in that corporate expense number.

Okay great. Then regarding the manganese businesses, there are two of them. I just want to be clear. Are you looking to divest both of them or only one of them? That is the question.

Both of them. One is Delta EMD, which is a public company of which we own 56%, and that process is ongoing. The other one is MMC where we are a minority owner. The majority ownership has changed hands recently. My expectation will be that, at some point in time, the new majority owner would want to own 100% of it. But it is a good little business. It will provide cash flows and some earnings, so there is not a big rush to get out of it, but it is not a business that fits in our portfolio long-term.

Then last question -- in the Irrigation business, of course we had an excellent year in terms of volumes in 2008. Can you -- I get this question a lot. I would like to hear an answer to it. Do you think that there was any demand pulled forward from -- into 2008 that might temper future levels of demand, say, in 2011, even in the face of rising commodity costs?

No, I don't think so. There could have been some pulling forward from -- into 2008 from 2009, but no, we don't see those kind of patterns.

I guess, if you were a farmer in 2008 and you saw that spike, why wouldn't you have bought your irrigation system then? Can you talk a little bit more about that dynamic to clear that up?

Well, there is such a big pent-up demand when it comes to replacement. There are hundreds of thousands of these pieces of equipment out. When the economic environment is good, farmers may make that change, and the economic environment now is improving again. So when we look back over good commodity prices or other trends in the business, we don't see a pulling forward of demand normally that would hurt us in the following year, if commodity prices stayed as strong and if farm cash income stayed as strong. As commodity prices drop, then we will see a decline in demand.

If I could add just one thing, the only time you really see a pull-forward of any significance may be some tax law changes where they can get depreciation, or you might see it in a region where you have a situation where water regulation is changing from year to year, so you might see a pull-forward. But rarely do you see the pull-forward piece.

(multiple speakers)

Okay. Regarding those types of items or issues, are there any major ones from 2010 going into 2011 that you see?

Not that we are aware of.

(Operator Instructions). Jon Braatz, Kansas City Capital.

My question was just answered. Thanks.

Lee Jagoda, CJS Securities.

Just one bookkeeping question -- D&A looked like it jumped about $4 million in the quarter. I assume most of that is because of Delta. Could you just give us your view for Q4 and 2011 for D&A and CapEx?

That is right. This is Mark Jaksich, by the way. Second quarter, we had half of the quarter for Delta. The third quarter was a full quarter. And so really the third-quarter number of $17 million is what we would expect in the fourth quarter. That difference, if you will on it, last year, we ran about $11 million a quarter. The difference between the $11 million and $17 million is collectively all of the D&A related to Delta, including the purchase accounting.

There are no further questions at this time.

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 statement on 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, 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, and the Company does not undertake to update any forward-looking statement.