Valmont Industries Inc (VMI) 2011 Q2 法說會逐字稿

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valmont Industries second-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). Jeff Laudin, Manager of Investor Relations, you may begin your conference.

Thank you, Jessica. Welcome to the Valmont Industries second quarter 2011 earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer; and 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 this 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.

Thank you, Jeff and good morning, everyone, and thank you for joining us. I trust you have all read the press release, so I will focus on some of the highlights for the quarter.

The main drivers of second quarter operating performance were substantial improvement in the Irrigation segment sales and profitability and the contribution of the Delta acquisition for an additional about half of a quarter's time.

In our Structural businesses, the market challenges of overcapacity and difficult pricing that I mentioned last quarter continued to pressure margins. During the quarter we acquired the remaining 40% minority stake in Donhad that we did not own. Donhad is the grinding media business in Australia. We also refinanced $150 million worth of debt.

The opportunity to assume 100% ownership of Donhad arose from a change in Donhad's minority partner. OneSteel inherited a 40% stake in Donhad when they acquired another large grinding media company. As a result, the Australian regulator mandated they divest their share in Donhad.

As owners during the last year, we have found Donhad's operating characteristics and capital returns attractive. Its exposure to the mining industry is appealing. They are a leading competitor in their market, and we are convinced it's a good opportunity at an attractive price.

Below the operating income line, three nonrecurring items had an impact on net earnings. First was a tax benefit associated with our increased investment in Donhad. Second was a benefit related to tax contingency items for Delta, and third were the transaction expenses for the debt refinancing. The net benefit of these three items contributed $0.14 per share to net earnings for the quarter.

The refinancing enabled us to take advantage of the current historically low interest rate environment while extending the maturity from 2014 to 2020. Our all-in interest rate on the new debt is 5.65%, and the expected interest expense savings for this transaction will outweigh the redemption costs.

What do we do with our cash? Our first priority remains to grow our businesses. In the global markets for -- our global markets for our products are large and growing. Within our existing businesses and as a result of our corporate development efforts, we see great potential for continued growth. Acquisition timing is, of course, unpredictable. We are comfortable to keep our powder dry while waiting for the right opportunities. We expect to continue our dividend policy of paying out a modest portion of earnings.

The Irrigation segment had a record quarter. The sales gains were broad-based with both North America and international regions logging strong increases. Farmers' optimism was boosted by the prospect of record net farm income, and they increased their investment to become even more productive. We benefited from that. Since 2008 our Irrigation business has made great progress in their lean transformation. As a result, we were much better prepared for a strong uptick in volume in the current environment, which translated into great operating leverage.

In the Utilities Support Structure segment, North American volumes were substantially higher. International sales were lower than last year due to a lack of large project business. Despite the overall volume gains, the operating income quality did not improve because we are working through the backlog of orders taken when the pricing environment was very difficult.

Order intake and bid activity continued to improve. Our backlog is building. We expect the quality of earnings to improve in this business in the second half, and if the current trend continues we would expect to be at mid-teens operating income margin for this business in 2012.

In the Engineered Infrastructure Products segment, the higher revenue number was mainly the result of the Delta acquisition. In the North American lighting and traffic business, the lack of a multi-year highway bill, state and local budgetary pressures and weakness in the Canadian markets lowered sales. This is still and will continue for some time to be a very tough market.

Wireless communication sales improved in North America. In Europe, sales rose with some regions benefiting from stimulus programs while others faced fiscal restraint.

Globally, margins were pressured by material cost increases combined with pricing pressure.

Our North American Coatings business benefited from improved industrial demand, exposure to the agricultural economy and higher internal volumes. International Coatings sales and earnings were also higher.

Turning to other financial measures, movements in the balance sheet mostly reflect the increased business volumes. Inventories increased compared to last year due to increased activity levels in Irrigation and seasonal buildup in the Structural businesses. Depreciation and amortization for the quarter was $19 million, and capital expenditures were $13 million.

At the current time, we are expecting 2011 capital spending of $60 million to $70 million, which includes our new plant in China.

Looking towards the rest of the year, the main drivers of improvement will be strengthening utility demand and our expectation for continued robust Irrigation markets. Additionally, in the Engineered Infrastructure Products segment, we expect that the combination of some volume increases and operational improvements should result in a meaningful increase in the quality of their earnings. We now expect reported earnings per share in the range of $5.70 to $5.90.

Despite the current challenges of raw material inflation, a competitive pricing environment and reduced government funding for infrastructure in many parts of the world, we are clearly benefiting from our broad geographic and product line diversification within infrastructure and agriculture. We are exposed to the positive market conditions in our Irrigation, Utility and Coatings businesses, and we have good exposure to international markets, especially Asian and Australian economies.

Long-term, a growing world population and economic growth provide excellent support for a positive outlook for sustainable growth of the consolidated businesses.

We thank you for your attention, and we will now take your questions.

(Operator instructions) Arnie Ursaner, CJS Securities.

First is just a technical question. Embedded in your guidance, what tax rate are you assuming, please?

What's in the guidance for the rest of the year is a 34% tax rate. I think, if you take those two items that affected us in the second quarter and back those out, I think the effective rate comes out to about 33% in total. So we are expecting that to return to where we were before.

Thank you. Mogens, my question relates to the Utilities segment. You clearly had a pause a year or so ago when Utilities were looking at declining trends in utility -- in electric consumption. And it seems like we've got quite a meaningful change underway in the business.

You mentioned margins were impacted by work that you took on when pricing was particularly unfavorable. Can you remind us how quickly you move your backlog out? And the work that you are signing in Q2 and Q3 -- when do you expect that work to begin? And since you gave a margin view for next year, obviously you've got a pretty good idea the margins are poised for improvement.

Yes. Maybe the best way to answer it in the aggregate is that, for the first half of this year, we have been operating at about 10% operating income margin. We expect, for the second half of this year, to move, I would say, about halfway from 10% to mid-teens. And I expect us next year, for the year, to operate at mid-teens.

Okay. And, again, just remind us, the work you are doing, how quickly it gets completed from backlog, because my sense is you're looking at much larger, almost multi-year projects.

Well, in some projects it's multi-year. Some projects are out a quarter or two, and some projects are over the next three or four quarters. It all depends on the project. But of all our businesses, Utility is the one we probably have the best visibility to.

Okay.

I would say, on average, the backlog probably goes through in five or six months.

Thank you very much.

Schon Williams, BB&T Capital Markets.

Great quarter here. I wanted to go through a couple of pieces, though. Within Coatings, could you guys talk a little bit about what you are seeing in terms of the competitive environment, especially on the zinc pricing? And then maybe talk a little bit also in terms of what we could maybe expect in terms of volume levels in the back half of the year. I know that, obviously, that is being skewed by the Delta acquisition. But organic rates kind of low-double digits -- is that plausible for the back half of this year?

Well, I would say that in general the environment in the Coatings business has been pretty positive. The pricing environment has been not unattractive, and the operating income presented, as you can see, has been pretty good. I think, for the second half, we should expect more of the same. I think we are going to see the second half hopefully reflect what we saw in the first half, including the Delta businesses.

We have seen good improvement also in Asia-Pacific area in the Coatings business. So I would say, by and large, more of the same.

When should we actually see year-over-year improvements in operating margins within Coatings? Are we going to have to anniversary the Delta acquisitions before we start to see some leverage there? Or do you see that margin potentially kind of flat-lining for the next couple quarters?

Well, I would say, first of all, there is not leverage opportunities within the coatings industry -- within our Coatings business, in the sense that you don't move products around very much. Each geographic area has its own characteristics when it comes to volume and pricing. Now, we may see some opportunities of improving profitability as a result of sharing best practices across the North American units and also between North America and international units.

But I don't think that we should expect operating income in that business to continuously go from 20, to 21, to 22. This is a business that is operating, I think, at very good margins. And you may see some small changes up or down over time, mainly as a result of pricing and maybe transfer of best practices. But don't expect any big change in the profitability of this business.

Okay. And then, as a follow-up on your comments, you continued to focus cash on growing the business. Can you just talk about what you are seeing in terms of the acquisition pipeline, the number of deals, the valuation that you are seeing? And then also maybe just remind us where you are currently targeting it. In the past, I think that has been within EIP. Has that continued to be the focus? Maybe just some additional color there would be helpful.

Well, I would say that we continue to build the pipeline. We continue to identify and look at potential acquisition candidates. I would say it's a broad look. It is in the pole businesses, it's in the Coatings business, it's in the new platforms that we acquired through Delta, highway safety and access systems.

But I would say it is not something where I'd say, by next quarter, we will have something interesting to report on. We are building the pipeline. We have lots of conversations going. But, as you know, you can never predict when and how these things will evolve.

All right, thanks, guys.

Brian Drab, William Blair.

Good morning, congratulations on a great quarter. First question is just, Mogens, could you update your comments that you have made on the last two conference calls? On the first quarter conference call you mentioned that you saw $200 million in orders in the utility business that are moving into the backlog. Can you update us on where that is today, any color on the backlog?

Yes, I can give you color but not numbers. Well, I could give you numbers, but I'm not going to do that. We are usually giving backlog numbers by year end. But I can tell you that the backlog in the utility business continues to move in the right direction. So it's a stronger backlog today than when we talked at the end of the first quarter.

Okay. And are you seeing strength in particular regions within North America, in different geographies stronger than others?

No. These projects can be from -- they are from various parts of North America. I would say we are seeing more strength in North America than we are in the international businesses. So most of the improvement in that business is going to come from North America over the foreseeable future.

Any uptick, given the weather-related events in the South, first half of this year?

Nothing meaningful.

Okay, I'll get back in line, thanks.

Jon Braatz, Kansas City Capital.

Typically, the Irrigation business sort of shuts down in May. Obviously, it has been a strong quarter for Irrigation. What are you seeing domestically in terms of sustained activity as we go through the seasonally slow period? How much stronger is it than it typically is?

Well, you are right that the season this year probably got extended beyond what we normally see because of the strong activity levels. I would also say that we have had, compared to last year, more storm damage and parts business later in the season. As you know, a whole brand-new season starts early in the fall as they are getting ready to harvest.

But, based on the current environment of commodity prices and general farm income, there is really nothing out there that would say that the markets would weaken. We expect also, in our guidance for the rest of the year, continued strong irrigation comparisons for the rest of the year. And that would include the traditionally slow third quarter.

Okay. Do you think maybe the indecision or the uncertainty surrounding the ultimate fate of ethanol subsidies might have an impact on some purchasing decisions as we move through the latter part of this year?

Probably, but it is very difficult to determine to what extent. You know, depending on who you talk to, you can get a lot of different opinions as to what may happen with ethanol. But I would say, in the overall scheme of global agriculture, it is not overly significant.

Okay. And then one last thing -- internationally, how much stronger or weaker internationally is the Irrigation business versus domestic business?

Oh, I would say we have seen robust growth both internationally and in North America. And I would say early on, when we started seeing the uptick, I think North America was a little ahead of international, but international is catching up.

Okay, thank you, Mogens.

Ryan Connors, Janney Montgomery Scott.

I wanted to stay on the Irrigation business, if we could, and just get your longer-term take on the cyclicality of that business going forward. Given that the business has contributed about half of the operating income of the Company so far in 2011, I think a key issue looking into 2012 is, what does Irrigation look like? Is it still a cyclical business in your view that ultimately will see a decline before it moves higher over time? Or do you think we should be extrapolating this basic run rate of sales indefinitely?

You know, the Irrigation business has always been a cyclical business because agriculture is a cyclical business. If you take our history and you go back 40 and 50 years, the Irrigation business basically has run in 10-year cycles. And if those cycles continue, we are not through the up cycle now.

Now, there is debate going on as to whether the change in the balance between world food production and demand has changed enough so that you will see less cyclicality. Now, I can make an academic determination that that could be the case. But I have been in the Irrigation business long enough not to overthink it. There are so many things affecting the farmers' decision-making, and some of them are directly related to their income levels and what happens in commodity prices, but some are also the economy in general.

Two years ago, when the Irrigation business had a down cycle, it was mainly because of the economic financial crisis that just also impacted farmers' appetite for new investment. So it's a very difficult question to answer with any certainty. I don't think agriculture will completely start to be cyclical, but I think that the long-term drivers of water conservation and the world's capability to continue to increase its production of agricultural products in line with the increased demand may dampen the cycles. That's as well as I can do.

Well, it's interesting to get your take on it; I appreciate that. And my second question had to do with procurement. Do you procure raw materials, most importantly steel, as a consolidated entity, or do some of the segments and business lines procure independently on those things?

In general, we have a corporate purchasing organization that is very knowledgeable of and specialized on steel, and they assist our business units worldwide in their steel purchases.

Okay. And then just to follow on to that -- are you able to disclose, if you are able to, are there any significant steel contracts, say, rolling off in the near-term in any of the specific business lines?

Oh, I wouldn't say that. I would say after a couple of quarters of increased steel costs, the general feeling is that steel prices will moderate over the next couple of quarters. And that's what our expectations are.

Maybe I could clarify a little. In general, we look out a quarter and work with our steel vendors on a quarter basis. You referred to contracts, and we really don't have -- we have agreements, maybe, for a year in terms of basic tonnage and basic direction. But most of the negotiation is on a quarterly basis.

Okay, super. Thanks for your time and congratulations on a fine quarter.

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

Can you put any color, either qualitative or quantitative, around your backlog in EIP? And is the better operational performance you are expecting a function of what you're doing internally or demand or some leveling in raw material prices? Maybe a little more color there.

Yes, I can give you some color. I would say that our businesses, particularly North American traffic and lighting businesses, have made significant progress internally in driving down cost and driving up productivity. We are getting into -- we should get into a seasonal uptick in volume that would benefit throughput and therefore will get some leverage. I do not expect that we'll see any improved pricing, but I do expect that the leveling off of steel prices will ease some of the pressure. And the combination of those three things is what leads us to believe that we will see a meaningful improvement in the quality of earnings of that segment in the third and fourth quarter.

Is low double-digit margins still out of the question, just given the environment?

I would say that we need help from the marketplace to get to double-digit operating income, but we should see a meaningful improvement based on what we are -- compared to what we have seen in the first and second quarter.

Sure. And then just a second question -- on international utility orders, are you seeing any new opportunities there? And can you remind me sort of what the margin profile looks like on those international utility projects?

Well, I would say that internationally, since the business is substantially, in total, smaller than North America, it is more of a lumpy business because some of them are sizable projects. And you can't predict when they will actually happen. And I think we're going to see more of the same.

I think we will see probably, over time, continuous improvement in the activity levels international. But compared to the North American activity levels in this business, it's still not at a very high percentage.

Thank you.

Jeff Beach, Stifel Nicolaus.

Can you give us some color on the other operations? You had a nice operating income uptick there in some of the different businesses that go into that category.

Yes. You know, in the other category you have our tubing business, which continues to operate very well. It has good quality of earnings, also around 20% operating income, and they have benefited particularly from the strong agricultural economy which they serve. The Donhad businesses are in that area, too, and they have been performing satisfactorily. Those are the two main businesses in other.

Then we have the smaller manganese businesses in South Africa, where we are still in the process of divesting of Delta EMD. And that process is moving forward. When it's going to happen is difficult to predict. But it's not a business that makes a big impact one way or the other in the corporate profitability.

And just as a follow-up on Donhad, you have owned it -- increasing your equity ownership probably didn't require or didn't cause any fees or anything like that in the quarter. But are you going through any integration, anything in Donhad that would lead to margin improvement over the next -- let's say through 2012?

Well, first of all, you know, having been the 60% owner, we already kind of controlled the management of that business. So all we did was buying out a minority owner at what we thought was an attractive price. The change in Donhad performance, hopefully, in a positive sense over the next couple of years is not a result of any integration issues. It's a result of taking advantage of the marketplace and focusing on improving their business internally.

All right, thank you.

The mining business is a good area to be in, in Australia. There are billions of dollars being invested in new mining development, and hopefully we will get an opportunity to improve our business as part of that.

All right, thank you.

Brian Drab, William Blair.

These might be questions for Mark, but just a couple of quick ones. Can you tell us what total Delta sales were in the second quarter of 2011?

Well, I can give you what the increase was compared to last year, and you will see that in the Q. It was about $85 million, point to point. And remember --

Last --

I'm sorry -- last year was basically half a quarter. So this year, because we have it for the full quarter, the increase of the figures in our consolidated number is about $85 million.

Okay, thank you. And cash flow in the quarter in terms of operating cash flow or free cash flow?

The cash flow is not yet completed, but the operating cash flow is going to be better than it was in the first quarter. There were a few cash outlays this quarter that would affect that. Firstly, we made our annual contribution to the Delta pension plan. And that was collectively, I believe, about $11 million, plus we had some interest payments that hit in the second quarter as well.

And then, of course, the Donhad purchase is investing cash flow, and that was about $25 million. But we are not quite completed with the cash flow yet, in particular in the details. But that's kind of a broad look at it.

And then, if I could, impact of foreign exchange in the quarter on the top line?

Yes; I don't have that directly. There was some positive effect because I think, in general, the overall average rates were generally a little stronger than those currencies vis-a-vis the US dollar. But I wouldn't consider it to be an overly material impact on the quarter.

Okay, thanks very much.

(Operator instructions) Arnie Ursaner, CJS Securities.

I've got a couple of follow-ups for Mark. Mark, what was the LIFO impact in the quarter?

The LIFO impact for the quarter was not a lot. I think it was maybe a little bit more than $1 million. We had a much larger impact in the first quarter, and second quarter steel prices in general point to point moderated, basically, with not a tremendous amount of change between the end of the first quarter and the end of the second quarter.

Okay. The corporate expense line was much higher than you thought it would be a quarter or so ago. Were there specific items in there you care to comment on? And how should we think about the rest of the year?

I think we told you last quarter, Arnie, it was about $12.5 million, I think, on a quarterly run rate, and the lion's share of that increase is incentives. As we have increased our projections and internal looks at the incentive plans, we have increased our provisions.

Okay, so you fully have captured the increased guidance, if you will? It's not that we're going to have a catch-up later in the year? You have caught up now, at this point?

Yes, the only wild card in there is the long-term plans and how that affects stock price. But we don't know what that is yet.

For the most part, Arnie, yes, we have captured it in the second quarter.

Okay. You mentioned your CapEx includes China. What is your status in India, where I know you are building a plant?

It was India.

Yes, our status there is that we expect startup in the first quarter of next year of the pole plant and the adjoining galvanizer.

Arnie, I think we stated $13 million as the capital expenditures. It was $17 million.

Got it. But that still does not include any contribution this year from India?

No. And you know, that's going to be a slow startup like we saw in China many years ago. We are planting a seed, and we are developing a business. But I would not count on meaningful contributions from India for a while.

Okay. And then the final question I have is, you obviously now have increased your ownership position in Donhad. What impact did that have on your guidance for the year? How is that going to impact the balance of the year?

That's correct. In terms of the minority interest, there was -- I think we certainly adjusted in our projections the impact of having 100% ownership in Donhad.

Is there any way you can quantify that?

I don't even have -- I'm not even sure what those numbers are. It would be hard for me to even guess, based on what I have in front of me right now.

Perhaps asking it a different way, is the majority of the increase in your guidance due to strength in utility and Irrigation, or is Donhad more of a factor?

Donhad is a minor factor. The vast majority of our increased projection for the year is utility and Irrigation.

Thank you very much.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you, Jessica. 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. And at this time, Jessica will read our disclosure on forward-looking statements. Thank you.

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 report 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 statements.

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