Valmont Industries Inc (VMI) 2011 Q3 法說會逐字稿

Good morning. My name is Steve, 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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Jeff Laudin, Manager of Investor Relations, you may begin your conference.

Thank you, Steve. And welcome to the Valmont Industries third-quarter 2011 earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer, Terry McClain, Senior Vice President and Chief Financial Officer, and Mark Jaksich, Vice President and Corporate Controller.

Before we begin, please note, this discussion is subject to our disclosure on forward-looking statements, which applies to today's talk and will be read in full at the end of the call. The instructions for accessing a replay of the call can be found in our press release. Today I'm going to turn the floor over to Terry McClain, Chief Financial Officer. Mogens is with us but is suffering with a very severe cold. Terry?

Thanks, Jeff. Good morning, and thank you for joining us. I assume you've all read the press release, so I will focus on some of the highlights for the quarter.

The main drivers of the third-quarter operating performance were significant sales increases in both the Irrigation and Utility Support Structures segments. Revenue gains in our other category further contributed to operating performance. Our biggest challenge during the quarter was in our Engineered Infrastructure Products segment. Constraints on government spending in most regions led to the weak market conditions, and a difficult pricing environment.

The Irrigation segment had a great quarter. A robust farm economy is a bright spot in an otherwise sluggish global economic landscape. Record farm incomes are expected in 2011, which is supporting increased investment in mechanized Irrigation equipment in all major markets. The higher sales volumes translated into good factory and SG&A leverage.

One question we often heard this summer was has the agricultural cycle peaked? This is a fair question, yet it minimizes a crucial driver of our business. We believe the long-term demand for feed grains has been altered significantly by the rise in middle class in countries such as India and China, as increased proportion of meats in the diets results in higher demand for feed grains. This demand will tax the production capacity of farmers. We believe this is a powerful driver, but it does not eliminate short-term cycles.

Recent forecasts suggest China will be forced to become a net importer, rather than exporter of corn, in order to support its growing live stock population. The Irrigation business will be subject to ups and downs, but we have certainly not yet reached the peak. Each time since 1952 when we have recovered from a short-term decline, demand has risen to even greater levels. The need to double food production while using less water in order to feed a growing world population supports a bullish outlook for mechanized irrigation equipment for many decades to come.

Moving to the Utility Support Structures segment, when we talked with you last, we said we expected operating income percent to improve in the second half of this year and to reach mid-teens in 2012. While we did not achieve operating leverage -- while we did achieve operating leverage, we did not attain the operating income percentage we had anticipated this quarter. Shipments out of backlog during the third quarter continued to reflect low margin orders, and the weak pricing environment from late last year and earlier this year. However, order intake and bid activity continued to increase meaningfully during the third quarter.

We believe the quality of Utility earnings will improve in the fourth quarter. In July, we told you we expected to be in the mid-teens operating income margins in 2012. We continue to expect that volume increases will lead to the operating leverage, and combined with the better pricing environment, a growth in operating income percent in 2012.

The size of the Utility opportunity in North America over the next few years reinforces the positive outlook on this business. A consequence of the economic recession, and limited access to capital in 2009, was Utilities scaling back their project activity in 2010. This trend reversed in 2011. Utilities are now accelerating work on large projects, and our recent order intake and bid inquiries point to significant growth in demand. To support this increasing demand, we plan to utilize our large -- our global large pole plant capacity to the fullest extent, to meet the rising requirements of our customers.

In the Engineered Infrastructure Products segment, those businesses with exposure to government funding continue to struggle. In North America, the lack of a multi-year highway bill, budgetary pressures and weak construction markets weighed on sales. In Europe, while sales grew modestly, the competitive pricing environment remains under pressure. We do not expect these conditions to change in the short-term. Our North American Coatings business benefited from improved internal demand from Valmont Irrigation and Utility businesses. International Coatings revenues and earnings were higher, led by improved activity levels in southeast Asia.

Turning to other financial measures, the tax rate for the quarter increased a couple of points, mostly reflecting the final reconciliation of 2010 taxes. On an ongoing basis we expect the effective tax rate to be between 33% and 34%. The impact of foreign currency translation was positive, with approximately a $30 million benefit to sales and a $3 million benefit to operating income, compared with last year's third quarter. Based on exchange rates today, we would not expect to see as big a benefit in the fourth quarter as compared to the fourth quarter of 2010.

Inventory increased, compared to last year, due the higher activity levels in Irrigation and Utility. Depreciation and amortization for the quarter was $17.7 million, and capital expenditures were $18.5 million. At the current time we are expecting 2011 capital spending of $70 million to $75 million, which includes our new plant in India.

Looking to the fourth quarter, we previously expected year-end reported earnings per share to be in the range of $5.70 to $5.90. Due to a deteriorating outlook for the economy, particularly in Europe, we believe results will be in the mid to lower end of that range. Our outlook going into next year is positive. Demand is increasing in our Utility business. The constructive fundamentals in the ag economy support a positive outlook for Irrigation demand, a general trend towards economic growth in Asia-Pacific region is supportive of our businesses there. These positive drivers should more than offset the challenges of some of our other businesses.

In the Engineered Infrastructure Products segment, we do not expect much help from the markets. Therefore, operational improvements need to drive any improvement in the quality of earnings. Our Coatings business is currently operating well. We expect it to continue to do well. However, this is our business with the least amount of visibility.

In summary, we had a third quarter and our outlook going forward is positive. Valmont benefits from a diverse mix of businesses that for the most part are resilient in times of economic stress. They are broadly diversified across the world. The 2 major markets we serve, mechanized irrigation for agriculture and highly engineered products for infrastructure have endured our global demand. That concludes our prepared remarks. We would now like to take your questions.

(Operator Instructions). Your first question comes from the line of C Schon Williams with BB&T Capital. Your line is open.

Hi, good morning. This is actually Aaron Reeves standing in for Schon today. Good morning. Just had a few questions for you. First, I noticed in the release that you mentioned that we should sort of focus our attention or maybe expect toward the mid to low end of range of your guidance. I guess our question is, what are some of the biggest concerns or maybe headwinds you see confronting the Company, at least in the fourth quarter and maybe into early 2012?

I think one of the biggest issues confronting the Company is just working through number one, backlogs at relatively low prices, as far as operating income improvements. And that continued pressure that you're seeing from just the whole government-related spending. There's continued price pressure, material costs have leveled off somewhat, but again, it's going to be an environment that's going to be difficult to make significant improvements in.

And just a follow-up on that. I know there's a lot of weakness in Europe right now, and we were curious if you think it could at least be conceivable that engineered infrastructure could actually maybe contract in the next quarter or 2. Do you think that that's conceivable or something that maybe we shouldn't be as concerned about?

I don't know that we see contraction. You may see contraction in select markets. But I think what you will just see continually is very, very weak demand, and very, very tight pricing conditions.

And one final follow-up. Do you know what percentage of the segment revenues actually come from Europe? I'm thinking about engineered infrastructure.

We don't really disclose that formally. But Europe is not a huge piece of the infrastructure -- Engineered Infrastructure Products segment.

Okay. Thank you.

Your next question comes from the line of Brian Drab with William Blair. Your line is open.

Good morning. I think my question's actually similar, my key question is similar to the one that was asked just now. I don't really feel like I understand the answer yet. What I'm trying to reconcile is that, in your commentary, it sounds like Utility is good and getting better, Irrigation, you feel like you haven't hit the peak, you're optimistic about 2012, but you're also worried about the deteriorating economic environment, particularly in Europe. Can you just reconcile those things? I think what we need to understand better is if Utility is getting better and Irrigation is still strong, what specifically -- which segments are going to be driving the implied sequential decline in earnings in the fourth quarter?

You say decline, we are just reaffirming the range that we had and we're still looking at a strong fourth quarter, but we wanted to keep people focused on the total year performance and I don't think we implied that there's a decline. There may be a decline from some of the estimates that people had in their models, but for all practical purposes, as we go into the fourth quarter -- first of all, let's put it all in perspective. As you go into the fourth quarter, you're getting into the decline of the construction season in general.

Your change in the fourth quarter relates to a large degree whether or not you get decent weather all the way through that fourth quarter and the situation related to Irrigation is all about whether farmers buy a little bit earlier, whether they buy normally in their first quarter pattern in North America. I didn't want to imply that there's -- it's just not going to be strong in the engineered infrastructure products piece for some time to come. We do not see a change in government spending in Europe or government spending in the US, and so we're not going to see any significant pickups over time.

That fourth quarter, we're just talking literally about maintaining within that range and it's not a decline, per se. And I would always caution people to be careful with sequential quarter-to-quarter kinds of comparisons because we do have a cyclical businesses and we have very seasonal businesses.

That's really actually what I was trying to draw out. That makes sense. The seasonality in the construction, seasonality in the Irrigation in the fourth quarter, it's just I'm trying to get a sense for those, and also just to be clear, when I say the implied sequential decline in earnings, just now that we have 3 quarters in the books and you have full year guidance, using the guidance that you gave us and kind of focusing in on the lower end of the range implies earnings of $1.45 to $1.50 in the fourth quarter after you did $1.59 this quarter. That's all I was trying to mention.

I understand.

Okay. And so it sounds like seasonality really is the -- would be the key driver of a sequential -- possible sequential decline in earnings.

Yes.

You're more cautious. But is it fair to say that you still feel confident that Utility is going to be better in the fourth quarter than it was in the third?

Yes.

Okay.

And at the end of the year, as you know we announce our backlog once a year, I think you will see the kinds of things we're talking about, about order flow, et cetera. And again, Utility's very, very seasonal in terms of its construction season.

Okay. And then I'll get back in line, but can you make a comment just on how -- when we talk about Engineered Infrastructure Products now, a large component of that is the Delta businesses that have been inserted into that segment. Can you talk a little bit about those businesses? I don't think people fully understand the dynamics that are driving those businesses and how they're performing.

The Delta businesses obviously are significantly influenced by the Australian economy and the markets that we participate in there as well as the whole Asia-Pacific region. And the Delta businesses have held up pretty well and again, it's related to the economies for which they are drawing the business from. We feel good about the Delta businesses overall, although earlier this year, if you remember Australia had some softness and there's also some seasonality issues related to Delta businesses. But those whole -- that whole set of businesses is in a really good place for us long term.

Okay. Thank you.

Your next question comes from the line of Brent Thielman with DA Davidson. Your line is open.

Good morning, all. Question on the Utility segment. Terry, you guys provided some commentary, seeing order activity pick up. I'm just curious, have you seen any signs, I guess Utilities are reacting to recent events in the last few months, whether that be in the bidding environment, have any projects been sidelined, anything along those lines.

We have not seen that. Utilities generally speaking I don't think react to very, very short-term events. They have their plans put in place. If the general economy obviously pulled back substantially, you would see probably some slowness in the future, but we haven't seen it at all.

Okay. And then just second question, do you think you've worked through most of those lower margin projects in Utility at this point?

I think we have some of these longer tail projects we still have to work through. But I would say the bulk of those businesses, as we look at new order flow, we're not seeing quite the same pricing pressure but it's still -- you just have to understand pricing pressure in general in this marketplace is still there.

Okay. That's fair. I guess not to pick at this too much, but do you feel like Q3 in Utility in terms of margins is probably a low point?

I believe that's the case at this stage, yes.

Okay. Thanks, Terry.

Your next question comes from the line of Carter Shoop with KeyBanc. Your line is now open.

Yes, hi. Just wanted to try to better understand the reason that we're lowering the midpoint of guidance here. You raised guidance in July. We've seen macroeconomic weakness in Europe. Corn prices have been volatile, but still relatively healthy, strong sales in Irrigation, you're saying no slowdown in Utility. Help us understand what has been the biggest change in your outlook from July until today for third quarter and fourth quarter.

I think the biggest issue is the continued traffic in lighting business on a global basis. That market is under pressure and with the government spending overall, we continue to see that it will be under pressure. We have, I think overall, not changed our view about any of the other businesses and as most of you know who follow us, the fourth quarter in Irrigation can be a dynamic quarter in the sense that if the farmers don't buy early, they'll buy later, and I think a lots of people that we've talked to, that Jeff and I talk to on the road assume that farmers are really going to spend a lot of money in the fourth quarter and over and above normal, and we're not necessarily sure that will happen. It's fundamentally that traffic in lighting business and margin pressure that we're banking on and we're not putting any dynamic into a change in farmer buying patterns in the fourth quarter, which I know some of the analysts are. That's a seasonal issue for all practical purposes.

Okay. So traffic and lighting in a global basis, but as you highlighted earlier predominantly in Europe. And is that -- is this about, what, 5% of total sales for the Company, traffic and lighting in Europe?

Well, in Europe?

Just the traffic and lighting business in Europe as a percentage of corporate-wide sales.

Well, again, we don't break that out but the whole traffic and lighting business is less than 15% of our sales in the total scheme of things. But it's a nice profit business.

Pretty significant turndown there than what you guys were expecting. On Utility for 2012, you had previously talked about kind of mid-teens operating margins. Sounded like you had to back away from that a little bit. Is that the right way to read it right now?

I don't think we're backing away from mid-teens in 2012. What we were talking about is getting to that mid-teen level and how quickly we are getting there.

Okay. So at some point in 2012, we'll get to the mid-teens on a quarterly basis but not necessarily for the full year?

That's correct.

Okay. Great. Thank you very much.

Your next question comes from the line of Julian Mitchell with Credit Suisse. Your line is open.

Thanks a lot. We heard a lot about the Utility and Irrigation and so on. I just had a question on your Coatings business. Obviously, it's the one that's most sensitive to sort of short-term changes in industrial production and demand. Could you talk a little bit more about what you've seen sort of in recent months, if there's been any major changes month-to-month or certain end markets where customer behavior has concerned you or surprised you in a positive direction.

Julian, obviously that's a business that doesn't have a backlog, but our management in general has not detected anything that would indicate a major change in demand. But again, keep in mind, they are getting orders and getting people bringing products through their plants on a 2 and 3-week type basis and we don't have much visibility at all. But there's no feedback that would say there's a major shift in demand in many of our regions. So at this stage, it looks like industrial production that we service is quite solid. Again, the reason we are always cautious is that we will not be able to anticipate changes very, very quickly. It will happen overnight, but we're not hearing that from our management group and that's true in the US and it's also true in the Asia region, primarily Australia.

Thank you. And just the other segment I guess is your telecom business, which hasn't really been discussed. What's going on there?

In telecom business, one thing you are seeing, particularly in the US, as carriers consolidate, you do see there's many times pauses in select markets. So you'll have a consolidation happening and they will -- the carriers will stop and assess their networks and decide how they proceed forward. We are seeing those kinds of slowdowns at times. But overall, the communication business has been an okay market for us. It's just you do see these blips in demand depending on what's going on in select markets.

Thanks. And just finally, obviously asset prices generally have sort of been volatile, and mostly down in the last 6 months. What's your view on sort of capital allocation in terms of M&A or other things you might look to do with your balance sheet?

Well, we have an active program of looking at businesses that fit our Company. I don't know whether or not it's being the change in, quote, asset values is changing prices that people are asking for businesses, et cetera. We obviously don't disclose all of the activities going on. I would say there's good activity, pricing-wise, as far as whether the asset values are coming down, I'm not so sure that's the case yet.

Okay. Thanks.

Your next question comes from the line of Jeff Beach with Stifel Nicolaus. Your line is open.

Yes, good morning, Terry. Great quarter. A couple of things. First, on the transmission, I know the orders have been ramping up, backlog's ramping up. Can you give us an idea as you -- as the industry focuses more towards these large projects, are you -- is that building in lumpiness or more lumpiness into the timing of shipments of this business? In other words, if you're winning supply of a major project, are you going to have a large shipment into a specific project that can impact that quarter? Or are the flows kind of coming steadily over a period of time?

I think the volume of flows are quite large, so in the big picture, there's an increasing volume of flows. But the lumpiness -- we will experience lumpiness, Jeff, depending on how we take an order and how it ships out. So we're not going to escape lumpiness from quarter to quarter, but in the big picture of Utility orders, there's a flow that's moving, I think up and quite solid.

And at least I'd like to ask, was there scheduled shipments in the third quarter to projects that were pushed into the fourth quarter?

Not significantly. We didn't have a lot of movements that -- where projects moved out. There may be a project or 2 but we probably had a number of projects that moved into the quarter also.

All right. The other question, the EIP segment showed 12.5% organic growth over last year. And combining, putting those Delta operations in makes it a little hard to figure out. The 12.5% is really good growth. Can you kind of help us a little bit on the growth trends in that 12.5% between the old Valmont business and maybe the Delta business, is all of that coming from Delta now?

I would say that has added to it. We do have currency issues in there, so also, keep in mind you have a currency movement, particularly in those stronger economies during that quarter.

Any differential between Delta and the old Valmont, aside from currency? Is Delta growing faster?

Maybe a little faster, maybe just a little bit faster. Again, a lot of this has to do with pricing. You get into the pricing aspect of what happened in the pole business. When you talk about the old Valmont businesses, the pricing has been very, very depressed in those businesses and I don't know that you've had the same pricing issues related to the Delta business types.

(Operator Instructions). Your next question comes from the line of Arnie Ursaner from CJS Securities. Your line is open.

Hi, good morning. My first question relates to corporate expense which was much lower than we had thought. Are there any one-time items that impacted that and how should we think about Q4?

Yes, Arnie, this is Mark Jaksich. There's 2 things, 2 major things that impacted the corporate expense number this quarter. The first one is related to our deferred compensation plan, where we have an asset on the books and a corresponding liability. When the market went down, we had investment losses, if you will, in those assets and that's what's hitting the other income line, below OP. And then there's a corresponding decrease to the liability that goes along with those assets and that actually reduced the corporate expense. That was about $1.2 million of that.

And the other item of significance is that we had relatively good experience with some of our insurance -- self-insurance programs from what we had experienced last year. So I think if you put those 2 items together, the spending was in the neighborhood of around $12 million, $12.5 million or so on a running basis which is kind of what we've told you before, what we thought our ongoing run rate over time would be $12 million, $12.5 million to $13 million a quarter.

Okay. Thank you.

Those are a little -- those are kind of the major differences that bridges that gap.

I wanted to go back to the Utility segment. No one seems to be harping on the fact that you actually had a decline in margin from Q2 and from Q1, so can you give us a little better feel of what is causing that? And to the extent you're going to return to mid-teens margins in 2012, hopefully whatever one-time items or bad contracts you have to be worked off fairly quickly.

I think that's a fair assessment, that they'll be moved fairly quickly. But we did have some obviously very tough pricing situation for most of this early part of the year, as capacity built in that industry and we did have a number of orders that are moved -- that we knew at the time would be low margin orders that are moving through the system now.

Do you expect to get to double-digit margin in Utility support for the year? That would imply a very robust improvement in Q4.

For the year?

For the year.

We should be able to get there, yes.

So you're talking a 12%, 13% -- I haven't done the math but it's got to be a 12% to 13% margin in Q4 to get to a double-digit margin for the year. Is that correct?

I think everything else being equal, that's -- you're correct.

Okay. Just want to harp on this question, hopefully a very quick answer. You highlighted the deteriorating outlook for the European economy as your reason for the middle to lower end of the range. Is it the macro view that everyone is reading in the press, or is it more specific things you're seeing as a Company.

I think it's a macro view and directly related to government spending.

Thank you.

There appears to be no further questions. I'll turn it back for any closing comments.

Thank you, Steve. This concludes our call. We thank you for joining us today. This message will be available for play back on the Internet or by phone for the next week. We look forward to speaking to you again next quarter. At this time, Steve will read our forward-looking statements.

Included in this discussion are forward-looking statements within the meaning of a Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that Management has made in light of experience in industries in which Valmont Industries Inc 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 risks, other things, risk factors described from time to time in Valmont's reports with the Securities and Exchange Commission, as well as future economic and market circumstances, industry conditions, Company performance and financial results, operating efficiencies, availability and price of raw material, availability and market acceptance of new products, product pricing, domestic and international competitive environments, and actions and policy changes in 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.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.