Valmont Industries Inc (VMI) 2012 Q3 法說會逐字稿

Good morning. My name is Holly and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Valmont Industries Incorporated 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)

I would now like to turn today's conference over to Mr. Jeff Laudin. You may begin your conference.

Thank you Holly. Welcome to the Valmont Industries third-quarter 2012 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 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 now 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 that you have all read the press release so I will focus on some of the highlights for the quarter.

The main drivers of third-quarter results were the substantial increase in Utility Support Structure segment sales and record quarterly sales in all reportable segments. The quality of earnings improved, operating income as a percentage of sales increased from 10.7% to 12.4%, mostly due to the strong profitability in the Utility segment, along with contributions from the Irrigation, Coatings, and Engineered Infrastructure product segments.

The demand trends in our Utilities Support Structure segment continues to strengthen. Capacity in the industry is tightening and our customers inquiries for orders are extending further into the future, and discussions with our customers only increase our confidence in the strength and longevity of this trend. The buildout of the nation's grid is a substantial undertaking that will require many years of investments. In international markets, the environment in China for Utility Structures has become more competitive, thus we are more actively pursuing export opportunities from China, particularly to Australia's growing market.

In summary, the Utility market is very strong. Our biggest challenge is how to continue to serve our customers well. We are addressing capacity with new construction, expansion of existing facilities, and utilizing capacity at our global facilities where feasible.

Turning to Irrigation, demand picked up as the quarter progressed. Irrigation delivered improved performance compared to a very strong third quarter in 2011. Growers who irrigated this year should do very well compared to dryland farmers and provide a solid base of business for the upcoming selling season. Dry land farmers with access to water will certainly weigh the benefits of installing pivots in light of the summer drought in North America. And with farm income historically high, we're optimistic for a solid season ahead of us.

It is important to note that the irrigation industry can de-couple from general farm machinery industry in situations like this. Our target market is mainly growers who farm the 20% of land in this country that is irrigated. Many dryland farmers suffered crop losses and financial hardships because of the drought.

Our global Coatings businesses continue to operate very well. Sales increased in North America and were flat in the Asia Pacific markets. We are seeing high quality of earnings in this segment. Moderating zinc prices and productivity improvements led to improved profitability.

Sales in the Engineered Infrastructure Products segment also increased. In the lighting market, conditions have not changed. Governments around the world are under budgetary pressures and spending is restrained. While the two-year highway bill lifts some of the cloud over the North American business, in Europe a difficult market with slack demand is hurt by government austerity programs. It will take some time for the global lighting and traffic industry to recover, but as leaders in this industry, we are well positioned to leverage our position when it occurs.

An encouraging part of this segment has been wireless communication structures and components in North America. The market has improved but credit also is due to our teams who undertook to make this business operate more efficiently and at lower cost. Wireless carriers are upgrading and building out their networks to support the rollout of 4G, and this too is having a positive impact on our business.

In the Asia Pacific region sales are stable in most markets with increased activity in our access system businesses. Operating income for the segment was up, mostly boosted by the results in wireless communication.

Turning to other financial measures, the tax rate for the quarter was 33.3%, in line with our expectation for tax rates between 33% and 34%. The impact of currency translation on operating income was a negative $1.7 million as a result of a strengthening US currency. Inventories increased compared to last year to support the higher sales levels. Depreciation and amortization for the quarter was $18 million, and capital expenditures were $19.5 million. We expect depreciation of about $70 million and capital spending for the year to be around $100 million.

Let me address a question from some analysts. The improvement in other income is largely attributed to improved investment performance in our deferred compensation plan assets. This is offset by the same amount of increased SG&A expense for the quarter and has no impact on earnings.

Looking towards the remainder of the year and into next we expect continued strength in the Utility Support Structure segment. In the Irrigation market the historically high levels of farm income and the impact of the drought points to a solid demand for the current North America selling season. In the Engineered Infrastructure products and Coatings segments we do not expect much change in the current levels of demand.

So we expect a strong finish to the year and another strong year in 2013. This concludes our prepared remarks. We'll now take your questions.

(Operator Instructions)

Arnie Ursaner, CJS Securities.

I'm sure you will get a lot of questions on Utilities so I'm going to try to ask a couple on EIP. We've got some pretty important changes that could impact 2013. The TIFIA highway impact could drive demand. You mentioned the wireless buildout, which is accelerating. We also have the possible exploration of wind credits which would again more affect the Utility piece. When you think of these macro drivers, how are you thinking about the EIP piece for the balance of this year into next year?

Arnie, I will address Utility, then I will turn over to Terry your specific question on the highway bill. In the Utility business, yes, the current production tax credits are expiring. Our Utility people do not see that having any meaningful effect on the overall activity level in the Utility business. And on the highway bill, Terry --

On the highway bill, Arnie, as you know, first of all, we expect that to be impacting in 2013 somewhat. The fact that we have a two-year highway bill. As we understand the TIFIA piece, which allows some additional financial incentives for the states, our people don't see that that will make a major difference. Many of those projects are already in place -- that that will make a major difference in demand, but we do see better support just because of the two-year commitment on highway funding.

Okay. My second question, if I can, can you update us on your Indy facility and how that's ramping.

Actually, we have two facilities on one campus. We have a coal plant that can do both small poles and large poles, and we have now the largest galvanizing bath in India. Both have started up. Both are seeing increased activity levels, I'm being told. I'll be there next week, so I can give you a first hand impression after that. But we're seeing those facilities ramp up according to plan. But again, keep in mind this is one new plant and one new market, so it will be awhile before you will have any meaningful impact on our overall results from that.

Okay. Thank you.

Brent Thielman, DA Davidson.

First on the Utility segment. You mentioned improved sales mix and (inaudible) margins in the quarter. Can you just update us from where you are at with some of the less profitable contracts you're working on?

First of all, yes, you notice that we have improved quality of earnings in that business in the quarter. We continue that. We expect that trend to continue. And we are seeing a very high level of activity with record backlog.

And to follow up, we are still seeing some previous business that was rolling through that, taken into 2010, 2011 from a margin perspective, some of the if you will lower margin business is still part of that mix.

Okay, thanks for that. And then I guess just on the cash levels here sitting at pretty strong levels, can you just kind of update us what you're looking to do here? As it jumps to $16 a share.

As usual, we want funding organic growth. Two, we are constantly looking at acquisitions. As you know, you can't time when they happen, but we have a lot of active initiatives and conversations going. Currently we will be continuing to build cash, and hopefully we'll find the place to invest it with good returns for shareholders.

Any areas in particular you're looking at that there?

No, I wouldn't say so. I would say that we don't have a priority geographically. We don't say we must invest this internationally as opposed to North America. We don't have a business unit. It all comes down to what kind of returns will we find with the acquisitions we look at.

Julian Mitchell, Credit Suisse.

It's actually Charlie for Julian. Just had a question. I've seen some announcements about new pole production capacity just in the news lately. Was just wondering if those were incremental to the plans you guys had already discussed, or if those are part of existing plans.

Well, we are building a brand-new plant in Tulsa, Oklahoma, in addition to the large plant we already have in Tulsa, and it is not on the same campus. Then we are adding capacity at various facilities. Monterrey, Mexico, Hazelton, Pennsylvania, Brenham, Texas, and Jasper, Tennessee.

Assuming that you guys are operating at almost 100% capacity in these, is there any way you could tell us, based on the current plans for capacity expansion, what the -- kind of what the top level of business you could do on a run rate basis, kind of heading out of the end of next year?

What we have said at previous calls is that we are adding about $100 million a year for the last couple of years in capacity, and we expect to add another $100 million for next year.

Okay, great. And then obviously, you've been talking about opportunities with M&A, and other things that you could do with the balance sheet. Is there a leverage level that you guys are comfortable with that might kind of put a cap on how much you would be willing to spend?

We've always said that we like to not go beyond 40% of long-term debt to total capital, except if we can see a way to quickly get back on to that ratio. Obviously we are way, way, way below that right now. So we have plenty of capacity.

Right. Okay. Great. I'll hop back in the queue.

Brian Drab, William Blair.

My first question is just on -- well, there's so many things that are going well for you. I wanted to see if we can talk about maybe one thing that looks like it didn't go so well in the quarter, the other segment. And I know it's only 9% or 10% of revenue, but can we dig into that a little bit and talk about why it was down almost 20% sequentially and year over year, and what should we expect going forward?

We can. In that segment you have the mining and grinding media business in Australia. You have the Manganese facilities in South Africa and you have the tubing business in North America.

The tubing business in North America is doing very well. No change there. The Australian mining grinding media business is doing fine. Revenue was down a little bit in that business. Revenue was down quite a bit in the South African Manganese business. Those are the businesses that we are still in the process of finding another home for, the South African assets.

I understand. Would you be able to give us any feeling for what direction those businesses are going in the fourth quarter? Should we expect it to be more like the third quarter or the run rate that you had going into that quarter, somewhere in between?

That is a good question, and I would say that even in the fourth quarter we are probably going to see revenue down slightly in that segment.

Down from third quarter or down year over year?

Down year over year.

Okay, thanks. Then I may have missed it, but you haven't made any comment specifically regarding your EPS guidance which was, if I remember correctly, you said you would earn more than $8 per share in 2012. Is there any update to that?

Last quarter when we had a call we said we will conference over with market consensus. Market consensus today I think is $8.32 and you would probably immediately add the $0.07 outperform for the quarter and we would be comfortable with that.

Okay. That's helpful. Thanks.

Jon Braatz, Kansas City Capital Associates.

Mogens, in the Utility segment obviously things are red-hot there. What are you seeing in terms of competitors and what they're doing in terms of capacity and maybe pricing, maybe new competitors? Can you give us a little outlook -- or a look at the competitive situation?

Yes. I mean, obviously we're not the only ones that are seeing a great opportunity in the Utility business. I think we got ahead of most people seeing it earlier, our people did. But we're not the only ones adding capacity. So I would say that the market will grow and continue to grow for awhile, and I think that our market share will probably stay about where it is. Competitors will also increase their capacity. The pricing environment, as the capacity has become a main issue, has improved. And we expect to see that in the quality of earnings going forward.

Okay. All right, thank you. On the Irrigation side, are you seeing -- two things. Number one, are you seeing any new significant level of interest from dryland farmers in areas that were not typically irrigated because of the drought this year? Are you seeing any shift in that area? And then secondly, your margins were very strong in Irrigation this segment in this quarter, and it's obviously a seasonally low quarter. Are we going to see -- are we going to ratchet up a little bit higher as we go forward in the Irrigation side?

Let me start with the last part of your question. I think if we can continue to deliver mid-teens operating income levels in that business we will be happy. Quarter to quarter, depending on productivity and volume, et cetera, it may be a little higher than that, but I would be happy with the mid teens. When it comes to dryland farming, it's too early to say an effect from this year's drought, but over the last couple of years we have seen the percentage of our business in North America coming from new development go up.

We used to kind of talk one-third, one-third, one-third. New development, conversion, and replacement. And I think new developments for the last couple of years is probably approaching 50%. That's good news.

Absolutely. Terry, one last question. Debt levels were pretty much the same but interest expense was up about $1 million in the quarter sequentially. Why was it?

Jon, this is Mark. Part of that is, about 50% of that increase was related to unamortized debt issue costs that we had to expense when we redid the revolver. And the other part of it was just some happenstance increase in fees, and things like that. But interest expense in and of itself on the borrowing was pretty flat with last year.

Okay, thanks, Mark.

Schon Williams, BB&T Capital Markets.

I just wanted to maybe hone in a little bit on the lighting and traffic segment. You talked about I think Europe actually being down in that business. I want to say that's a minority of the business but how bad was Europe this quarter? Low-single digits? Double digits? Can you just give us an order of magnitude?

Europe this quarter was not particularly different from the same quarter of last year. It's a depressed market, but it's profitable. And we continue to adjust our cost basis in Europe. We are of the opinion that you could have at least a four or five-year period in Europe where things kind of just muddle along and we're not going to see any major changes.

So we just continue to hone in our cost structure to stay profitable at those levels. And I think our European team has done a good job of doing that. As you pointed out, it's a very minor portion of our overall business, fortunately.

Could we see additional gains on the margins there? Is there additional restructuring that still needs to take place, or are you happy with kind of this -- an annual number, kind of mid-single digits? Is that the right margin level to think about going forward in that environment that's maybe stable to slightly up?

Well, first of all, you're now moving away from Europe to total Engineered Infrastructure product, I take it.

Right. I'm talking about the group as a whole.

When you talk about Engineered Infrastructure Products, no, we're not happy with mid-single digits, and yes, I think with what we do internally and being more targeted in the customers we go after and further refining our businesses and their cost structure, I think we can move the profitability of that segment up. What I've said before is that before we get into solid double-digit operating income in that segment, we do need some help from the marketplace. But yes, we will move -- we will improve it, but not to the level we'll be happy with, of course.

Okay. Just lastly, while we're very happy to have Terry still on board, any update on the CFO search?

Not an update, but we are making progress.

Okay. Thank you, guys.

(Operator Instructions)

Arnie Ursaner, CJS Securities.

I want to come back to the Utility Support segment. In Q2 you had a one-time project that was a 270-basis-point hit, yet the margin this quarter was lower than the adjusted margin in Q2. What accounts for that?

I'm not so sure I understood your question. Could you repeat that, Arnie?

I'll make it pretty simple. If you adjusted the margin in Q2 for the one-time $5.7 million hit on the project, your adjusted margin in Utility Support would have been 15.3%, and the margin this quarter -- I'm sorry, in Utility Support, was 13.9%. What is causing it to be lower sequentially if trends are getting much better?

Oh, as Terry pointed out, we still have projects that are going through the system that we're taking at lower margins and probably a project or some projects in this quarter went through the systems. But when we look at our backlog and what is going to go through the system, we will continue to see improvement.

Was there a one-time that would you highlight or maybe two or three projects that you could highlight that specifically impacted the margin this quarter?

No. There may be, but not that I know.

Okay. Mogens, it's really important for the investment thesis, you've used the term increasing visibility in the Utility piece, you mentioned record backlogs. Maybe you could expand a little bit more of how far out your views are going, what is changing when you're having the dialogue with customers, and is in fact, the visibility pretty clear through '13, maybe even into '14? And maybe the margin profile of the business you're taking on.

That was a lot of questions in one, Arnie, but let me start by, when we meet with customers, and I have met with some of our largest customers over the last quarter, the feedback we get is the same from customer to customer. This buildout will continue for a long time.

Secondly, regarding visibility, our visibility for large projects is into 2014, and even some into 2015. And I will say that it will not be very long down the road before probably by and large 2013 for the industry is sold out.

Regarding margins, the backlog margin is better than what we have seen over the last year. The challenge now becomes how do you get it efficiently through your plants when you operate basically at 100%-plus capacity.

Well, again, you've talked about, in the past we had the perfect storm in Utility about 1.5 years, two years ago, three years ago, where you were earning 22% margin. I assume you don't expect a return to the perfect storm again.

You assume that correctly, because at that time it was not only a question of very high activity level, it was also a question where a lot of projects were taken at very high steel cost prices and were delivered at a period when steel cost was much less. Most contracts today have escalators and de-escalators regarding steel input. So, no, don't get your sights set on 20% operating income in that business.

Okay. Just a final question on the financial side. The inventories did have a fairly sizable jump, although you did have $100 million of cash flow in the quarter or so. Can you give us a feel what are these inventories? Are they perhaps Utility poles that will be shipped in Q4?

Two elements. One is, higher revenue levels require higher inventory. But we also have a pretty good feel for where steel prices are going, and sometimes we will make buys that will hurt inventory levels but hopefully help us improve our profitability going forward.

I might just add, Arnie, as the Utility business grows and you get the backlog at the firm commitment, you start to bring on the steel that you need for that also, and that's a big growth in that Utility industry, if you look at the sales growth.

Okay. Thank you.

Jon Braatz, Kansas City Capital Associates.

Just a little follow up. On the Coatings business I think your revenues were up 2% this quarter. Obviously you had a big international exposure there. Can you break that out a little bit between domestic and international, and I guess one of your large competitor here domestically last quarter showed a 20%, basically a 20% organic increase in revenue. Are you seeing that domestically, too?

We have seen revenue increases in North America and pretty flat in Southeast Asia, most of this year. From a quality of earnings standpoint, North America is higher than the international earnings. International is operating at fine operating income levels but North America is higher.

Okay. And a lot of that you're seeing a lot of demand from the solar energy industry, and would you see -- would you expect that to continue?

Yes, solar energy. But what we have seen from the ag side, actually a little decrease in demand as it relates to grain stores and stuff like that. But overall, we're operating at good volume levels, and we're operating in an input cost environment, both energy and zinc that has allowed us to improve the profitability.

Okay, alright. Thank you, Mogens.

At this time there are no further questions. I would like to turn the conference back over to Jeff Laudin for closing remarks.

Thank you Holly. This concludes our call. We thank you for joining us today. The 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 Holly will read our disclosure on forward-looking statements.

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 actually 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 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 any obligation to update any forward-looking statement. This concludes today's conference call. You may now disconnect.