Valmont Industries Inc (VMI) 2012 Q1 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, Inc. 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)

Thank you. I will now turn the call over to Jeff Laudin, Manager of Investor Relations. Please go ahead.

Thank you Steve. Welcome to the Valmont Industries first-quarter 2012 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 call 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 like to turn the floor over to our Chairman and Chief Executive Officer, Mogens Bay.

Thank you Jeff and good morning everyone. Thank you for joining us. I trust you've all read the press release, so I will focus on some of the highlights for the quarter. The main driver of first-quarter results was operating leverage across the board. The Irrigation and Utility businesses were particularly strong. The current markets for these two industries continued to show good strength and our factories operated well and productivity was high.

In the Irrigation segment the macro environment is probably as positive as we have ever seen it. The North American farm economy remains strong. Dry weather in the Midwest this winter raised concerns about soil moisture for spring planting and further spurred sales. An increase in the global demand for feed grains is being partly driven by the growing emerging middle class in Asia. Demand is keeping global commodity prices firm, farm income at high levels, and investment and productivity enhancing tools attractive for the farmer. When you look out decades from now global population growth will put enormous pressure on agriculture to grow enough food to meet demand. Layer on top of this basic demands, the dietary improvement that accompanies economic growth, then add society's desire for more energy from bio fuels, and you must conclude that it is clear that production agriculture faces challenges to continue to meet the demand. Add to this the competition for fresh water between the needs of agriculture, industry, and households, and you are left with a very compelling scenario to have a positive outlook for the long-term growth of our Irrigation business.

Having said that, cyclicality is probably not a thing of the past in agriculture. Short-term influences such as growing conditions, weather patterns, demand fluctuations, agriculture policy, and general economic conditions throughout the world will continue to dictate short-term results. Currently most aspects of that external environment are favorable. In the Utility Support Structure segment, large project shipments for the North American transmission grid grow results. The size of the opportunity in the Utility market continues to grow. It is estimated that thousands of miles of new transmission infrastructure will be added to the grid over the next 10 years. It comes as no surprise that this opportunity is attracting new competition and capacity. As a consequence, while the pricing environment is improving, it still remains competitive.

Internationally, we are investing to expand current and to develop new markets. We consider the global transmission and distribution line markets a significant long-term growth opportunity for our Company. Profitability in the engineered infrastructure product segment improved due to increased sales and the associated operating leverage further supported by moderating input costs. One of the challenges facing this segment remains lack of sponsorship for long-term highway investments in North America. At the state level there's simply not enough funding available for long-term projects without federal matching funds. In Europe, although volumes improved in our core businesses the markets remained challenging. Our industrial gratings and access systems and highway safety products businesses in the Asia Pacific region further contributed to the improvement in segment results. Significant investment in the mining industry in Australia are a strong driver of the industrial economy in the region. While we're not happy with the current level of profitability in this segment, we are encouraged by the improving performance and expect further improvement in the profitability of the Engineered Infrastructure Products segment as the year progresses.

Our North American Coatings business benefited from increased volume, good productivity and somewhat low input costs. International Coatings revenues and earnings improved due to favorable comparisons in Australia. Last year the Australian Coatings business was negatively impacted by severe weather during the first quarter. This segment continues to execute very well in an economy which is still very sluggish in many parts of the world. The performance of those businesses categorized in our other also improved compared with last year. Our tubing business in the US had a record quarter and the grinding media business in Australia also showed good improvement.

Turning to other financial measures, corporate expenses grew due to increased incentives and a $1.2 million stamp tax in Australia related to last year's legal entity reorganization. The tax rate for the quarter increased from 33.9% to 35.3% due to a higher mix of US earnings. Inventories increased compared to last year in line with the higher activity levels, particularly in Irrigation and Utility. Depreciation and amortization for the quarter was $17 million, and capital expenditures were $21 million. At the current time we expect depreciation at about $70 million for the year and our capital spending plans have increased, in part due to additional capacity needs for Utility. Therefore, we now expect capital spending of around $100 million in 2012.

In summary, our businesses are performing well. Where the markets are strong our people are responding well. Where we are facing more challenging market conditions we focus on the factors within our control. As we look towards the remainder of the year, we see continued strength in the Utility market, further improvement in the Engineered Infrastructure segment and continued strong performance in our Coatings business. As it relates to Irrigation, the drivers continue strong but the current selling season in North America is coming to a close. Over the summer months we will get a better feel for the new selling season. We had a very strong first quarter as we predicted last time we talked, and while we expect positive operating comparisons for the remainder of the year, we do not expect the comparisons for the last three-quarters to be of the same magnitude as we saw in the first quarter. We currently expect full-year earnings to exceed $8 per share. This concludes our prepared remarks, and we will now take your questions.

(Operator Instructions)

Julian Mitchell, Credit Suisse.

This is Jon Chaplin with Credit Suisse. I guess my first question, it seems like the weather had a significant impact this year and will continue to have an impact on the business. How can we quantify the impact the weather is having and think about it going forward for the remainder of the year?

Well, usually weather is only a potential negative in the first quarter, in the heavy winter months. And this year, particularly in North America, we had very favorable conditions. So we were able to ship without interruptions. We didn't have to close down plants because of blizzards, snow storms, and we didn't have the expense associated with cleaning them up. It's very difficult to quantify in this country how much that really added to the bottom line. I would guess that some shipments that normally would have been postponed into the second quarter because of weather delays did ship in the first quarter but it's tough to say exactly how much, and probably the same in the Irrigation business. We could get in the fields and install equipment that often is not the case.

Great. And then just an unrelated follow-up. It seems like you're getting really good volume outlook in the Utility business. Is pricing following, or are you seeing some weakness to a degree in pricing and expect that to improve, or how do you see pricing playing out in the Utility business?

Well, we see a generally slightly more favorable pricing environment, but what I said in my prepared remarks, this industry has attracted new interest from players that normally do not participate, and particularly on large projects and particularly on tender type projects we continue to see quite a bit of pricing. So the operating income levels can fluctuate from quarter to quarter depending on what projects get delivered in that quarter and at what price levels we secured those projects. I would still say that over time we are still expecting that business to deliver about mid teens operating income percentage, but it can move a couple of percentage, depending on projects in any given quarter.

Okay, thanks a lot. Congratulations on the quarter.

(Operator Instructions)

Arnie Ursaner, CJS Securities.

Congratulations. Can you comment on the directional trend of backlog, I know you only give actual numbers at the end of the year, but the directional trend of backlog and the margin of work you have in backlog? It sounds like you're working off some lower-margin things that had been put in backlog when things were even more competitive. If you could comment on both of those, please.

I presume you're referring to the Utility business.

Yes. I'm sorry, yes.

The Utility business backlog continues to increase, and we are seeing a generally more favorable pricing environment. However, we still decide to take projects at margins that are maybe less than what we would do for strategic reasons or because it's customer relationships we've had for a long time.

And isn't it again a fairly high degree of engineering content? Are other people not just building physical capacity but expanding their engineering content to be more competitive with you, or is that less of an issue these days?

No, I would say probably if you want to enter this industry you have to have both capacity and you have to have engineering capacity also. But some of the players that have already been in the industry, of course, are also adding capacity in this industry.

Okay. My final question is on the corporate expense and the intersegment. Intersegment had a very sizable jump and you had a much lower margin in Engineered, typically when you're really swamped in Irrigation and other businesses you shift some capacity work over. Was that the reason why intersegment was so high and one factor impacting the margin in Engineered Support?

Arnie, this is Mark Jaksich. I can't speak to the margins in Engineered Structures, but the big increase in intersegment sales were Utility structures coming out of one of our EIP plants in North America to Utility, so that's handled as intersegment sale. So in essence, it's an internal outsourcing if you will.

Got it. On the corporate expense line which was you mentioned you had a $1.2 million tax embedded in that and also higher incentives, you had been guiding to a lower number for the full year, so should we -- how should we think about the final three quarters of the year for corporate expense?

No, I think the guidance is generally in line with what we told you before. There was probably $2 million of incentives partly due to stock price appreciation. The stamp tax, stamp duty that was mentioned earlier, and also there was about $1 million movement in those deferred compensation liabilities, the offsetting benefit to that went through other income. That's why you see the increase in that particular line as well. So if you take those things into consideration, I think we're more or less in line with what the previous guidance was.

Thank you very much.

Carter Shoop, KeyBanc.

Can you discuss some of the factors that resulted in Irrigation's significant increase in operating margins from 4Q '10 levels?

If I understand you correctly, you're right, you're referring to the fairly high operating percentage in the Irrigation business in the first quarter. When that business gets very busy and the plants get very loaded and they operate the plants very efficiently and all of that happens we get good leverage in that business. So I would say that the higher operating income percentage in that business is not a result of improved pricing in general in the marketplace. It is a result of improved operational efficiencies in other words.

Great. As a follow-up question, can you provide an update on the acquisition pipeline?

I can just say that we continue to look. There's nothing on the drawing board right now of any significance. There's lots in the pipeline, but nothing that we are ready to talk about. So we continue to look at acquisitions, and the key is to find them at a value where they will beat our cost of capital.

Thank you.

Schon Williams, BB&T Capital Markets.

This is Aaron Reid sitting in for Schon. I just had a few questions. The first one was really about guidance. I know you had a healthy upper division in your guidance for the full year looking at EPS. Just given what we consider to be a fairly large jump in guidance what were some of the factors that maybe have caused you to want to raise that number especially since you just issued guidance maybe a couple months ago? What are the big things that move the needle there?

Well, I would say that normally when you have a portfolio of businesses you see better traction in some than in others. And in this quarter we saw pretty good improvement across the board. And when we look out towards the rest of the year, we think we are going to continue to see some of the same pattern. Now, when we talk about the guidance, and we are now saying that we expect earnings in excess of $8, part of that guidance also includes at least for now, expecting a little softening in the Irrigation business for the second half. So, in other words, when we look at our current guidance, we expect third- and fourth-quarter Irrigation numbers to be softer than last year's numbers. We don't know yet whether that's going to come to pass or not. We're not expecting a drastic reduction in the Irrigation activity, but we are expecting some softening compared to last year's very strong second half.

All right. Thanks. I also wanted to mention, too, you had very, very high incremental margins in Irrigation and Coatings in the quarter. And I was just curious, to what extent do you believe those are sustainable, and was there anything that happened in this quarter that maybe really benefited you in the first quarter that we might not see follow through into subsequent quarters?

Well, mostly it has to do with volume, and you can also have some impact on material costs, like last year in the first quarter we had increasing steel prices, and we really didn't see the same pattern in the first quarter of this year, but mostly I would say when our plants are busy and they operate well, we get good leverage. So I would watch volume more than anything else in relationship to that additional operating income quality.

All right. Then just one final follow-up on that. I know that zinc costs have fallen a fair amount in the last month or two. I was curious, to what extent are we already seeing that reflected in your margins and is there any benefit that we could see maybe in the next quarter or two?

Well, I would say that to a certain extent zinc fluctuations in certain markets get passed back into the marketplace, in some markets it does not, but I would not expect a further improvement in the operating performance quality in the Coatings business but I would expect them to continue to operate at very solid level.

All right. Thanks for the color and congratulations on the quarter.

Brent Thielman, D.A. Davidson.

Echo the comments on that great quarter. Mogens, just kind of looking back at the Irrigation business it seems like pretty consistently we've seen an uptick in contributions in Q2 versus Q1. Other than you having an outstanding first quarter here, anything that you're seeing that might lead you to believe we won't see that effect in Q2 in terms of pull forward or things like that?

You were talking about normally having a stronger second quarter than first quarter?

That's right.

Yes, I would probably at the current time -- my expectation is that some business moved from the second quarter into the first quarter, so if I had to predict right now, it would be more of a flattish quarter than a typical increase in the second quarter compared to the first quarter. We really had very good weather conditions, particularly in North America, and it was not only a question of being able to produce efficiently and ship efficiently but also the fields were basically with no snow. So installation crews could get out and install equipment.

Okay. Thanks. That's helpful. And then when you talk about the plus $8 a share number this year, and I appreciate you framing what you think about the Irrigation, what you see there, but looking at maybe the Engineered Infrastructure Product segment, where some areas may not have very much visibility, could you frame your expectations there for the year?

Well, if I could frame it better than we did in the press release, I would have done that. It would be very tough to put a specific number on it this early in the year, particularly with uncertainty regarding the Irrigation business in the second half. But I would say that we feel comfortable with the guidance we gave.

Okay. Fair enough. If I could just sneak one quick one in, on the Engineered Infrastructure Products segment, you mentioned some continued growth in the commercial lighting area. Is there a significant difference in margins in commercial lighting versus transportation lighting? I know when you get into decorative products it's different, but --

I'd say otherwise not. But I'd say that when you look at this business this is not a homogeneous business worldwide. We have lack of highway bill in North America which creates competitive pressures and volume issues in the US. We have improved the conditions we are seeing in Canada, so our business has improved there. We've had a slight volume increase in Europe, but still a very difficult pricing environment, and as you know, European governments are not exactly flush in cash. But in Southeast Asia we're seeing good improvement across those businesses including our highway safety businesses and including our access systems. So the bright spot I say going forward for the rest of the year is probably to a certain extent going to be Southeast Asia.

Okay, thanks. Best of luck in the quarter.

Brian Drab, William Blair.

Congratulations on a great quarter. In the Engineered Infrastructure Products segment you're talking about improvement through the balance of the year. Is that in terms of sales volume and margin, and is it driven do you think primarily by seasonal factors or a couple of segments in particular?

All three. Increased revenue, therefore we are going to see some better leverage, and of course the weakest quarter in that segment is typically the first quarter, and that's no different this year.

Okay. And in terms of particular segments within -- or businesses within that segment, any that stand out as having big potential in the second half of the year, in the balance of the year?

It depends how you define big potential. I would say that we're not expecting any market improvements as anything related to the highway bill. We're not expecting any market improvements in Europe. We are expecting that we're not going to see any further deterioration in pricing, and therefore we're going to see some of the benefits of the cost take-outs and the productivity improvements we have put in place over the last couple of years. I think we'll see continued strength in Canada, and I think we'll see continued strength in Southeast Asia.

Okay. And if I could get maybe a little more detail on the other segment you mentioned that the tubing business was strong, grinding media business was strong. That other segment now, it looked like in the quarter accounted for over 15% of operating income. So I think it would be good to get a little bit better feel for those businesses specifically in the outlook.

Well, most of the profitability from that other segment comes from the grinding media business and the tubing business. We expect continued strong performance in that segment for the remainder of the year.

Sequentially improving?

I can't tell you that.

Okay. Thanks, Mogens.

Jeff Beach, Stifel Nicolaus.

Great quarter, Mogens. I've got two questions. The first one is, aside from the volume you've mentioned several times, in the press release you mentioned productivity across I think every operation, every segment. Can you talk a little bit about some of the synergies between the businesses and the common, I guess, metal bending tubing type operations and go a little bit into the productivity gains that you're getting in the Company kind of company-wide?

Well, let me start by saying that we are focusing very much of our lean transformation of our businesses in total, so we had good levels of efforts surrounding lean in each of our operations, and I think that's part of what you see. The best example of that is actually in the Irrigation business where back in '08 when we had a big increase in volume in the Irrigation business, we didn't get quite the operational leverage that we are seeing now, and we put a lot of effort into the lean transformation in the next couple of years. And the Irrigation business has basically executed flawlessly over this current selling season, starting last summer. So they have been able to absorb tremendous increase in volume without missing a beat.

They expected it, that it would come. They prepared for it. They lined up their supplier chain, and they just did an outstanding job. When you talk about synergies between the businesses, it all depends on the various engineering skills necessary in the various businesses. If you look at the pole businesses, particularly for large poles, you have some opportunities to trade capacity, which is what we have seen between high-mass lighting in North America and the Utility business. We have been able to utilize some of the international plants to support the North American Utility market. Otherwise we see some synergies in co-locating plants and taking advantage of back room office leverage as we have seen in China where we put our Irrigation plant in the same campus in one of our pole plants. So we continue to look for that. But I would say the biggest improvements we are seeing is probably as a result of our focus on lean.

All right, thank you. And the second question is a hopeful question. Can you describe in any way how much capacity you are shifting over from EIS to USS, even if it's a word like small or large?

I would say in relationship to Utility sales, it's not that significant.

All right, thank you.

(Operator Instructions)

There appears to be no further questions in queue.

Thank you, Steve. 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 during the next quarter. At this time Steve will read our forward-looking statement.

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 these statements are not guarantees of performance or results. They've involved risks, uncertainties, some of which are beyond Valmont's control, and assumptions.

Although Management believes that these forward-looking statements are based on reasonable assumptions you should be aware that many factors could affect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include among other things risk factors described from time to time in Valmont's reports to the Securities and Exchange Commission as well as future economic and market circumstances, industry conditions, Company performance and financial results, operating efficiencies, availability and price of raw material, availability and market acceptance of new products, product pricing, domestic and international competitive environments, and actions and policy changes of domestic and foreign governments. The Company cautions that any forward-looking statement included in this discussion is made as of the date of this discussion and the Company does not undertake to update any forward-looking statement. This concludes today's conference call. You may now disconnect.