Valmont Industries Inc (VMI) 2017 Q4 法說會逐字稿

Good afternoon. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valmont Industries, Inc. Fourth Quarter Earnings Conference Call. (Operator Instructions)

I would now like to turn today's conference over to Renee Campbell, Director, Investor Relations and Corporate Communications. Please go ahead.

Thank you, Maria. Welcome, everyone, to the continuation of our Valmont Industries Fourth Quarter 2017 Earnings Conference Call. We apologize for the many unexpected technical issues experienced during this morning's call and any resulting inconvenience. We appreciate your patience and flexibility.

With me this afternoon are Steve Kaniewski, President and Chief Executive Officer; Mark Jaksich, Executive Vice President and Chief Financial Officer; Tim Francis, Vice President and Corporate Controller; and Jeff Laudin, Manager of Investor Relations.

Before we begin, please note this conference call is subject to our disclosure on forward-looking statements, which applies to today's discussion and will be read in full at the end of this call.

The instructions for accessing a replay of this call are included in our press release, which can also be found on the Investor Relations page on our website. As management's prepared remarks were already presented during this morning's conference, I will now turn the call back over to the operator who will assemble the roster of questions.

(Operator Instructions) Our first question comes from the line of Craig Bibb of CJS Securities.

Sorry, I didn't get to hear any of the presentation, but I did look at the slides. The 7% topline growth in 2018, I get that, but there wasn't a lot of other detail about demand or what your expectations are for next year, so could you give us just the broad strokes and puts and takes for revenue by segment?

Yes. Sure, Craig. This is Mark. So first of all, of that 7%, that is taking out the Grinding Media business for 2017 and '18, so that 7% is based on that. There's about 2% of that 7% is related to foreign exchange translation based on current rates, and the rest of it is a combination of sales pricing and volume, and the largest share of the sales growth is coming from Utility and Irrigation, with Coatings and ESS growing modestly with respect to that.

Okay. And then with the reconstituted segments, could you give us, maybe, broad strokes on gross margin for those and SG&A either dollars or as a percentage?

Well, you'll see that for the total year, when the 10-K gets filed next week, but I would say that the Access Systems' impact on ESS, they're relatively similar gross profit margin profiles. And the offshore business is a pretty small component of the total Utility Structures segment, so it won't have that much of an impact at all.

It'll notch it down maybe a little bit just because it carries a little bit lower gross profit margin to it, but it shouldn't have a large impact based on the numbers you may have seen, for instance, at the end of the third quarter.

Our next question comes from the line of Michael Shlisky of Seaport Global.

Want to know if we can get a little more color on the restructuring you have planned for ESS. Is what you're doing just a footprint rationalization and cost structure reduction? Or are you exiting or divesting any actual businesses or products in that segment?

No. We're not divesting from the businesses themselves. We're just able to serve them in a better way with less footprint, with less overall structure in the marketplace. But in terms of where we compete, the products we compete with, we will continue along those lines.

Okay. And then as my follow-up, I, kind of, wanted to ask about other opportunities for a broader restructuring in the Other segments. I mean, I guess the one that comes to mind would be Irrigation. I mean, you've got -- sales are substantially down from where they were at a peak.

And similarly to that peak, at least with the price of corn and soybeans, might not ever happen or take a long time to ever come back to those levels, barring a drought which will be temporary, of course.

So I'm kind of wondering, in that segment or the Other segments, are there other opportunities that you're, kind of, looking at for further footprint reductions or big cost structure changes going forward?

Okay. So first off, the Irrigation business has always been a fairly cyclical business. It goes up and down based on commodity prices. And actually, one of the reasons that it's still even a good performer in a down market is because we do have a flexible cost structure.

And so we do the right things, when the business goes down, to take cost out of that business, and then it leverages very well when it goes back up. So we don't see any huge opportunities to -- that touch irrigation in that way.

In terms of the broader company statement, we've said before many times that we will always look for opportunities for rationalization, for cost takeout. And we may not do it as a broad restructuring program. Usually, it'll just be as a part of the run of the business if we find an opportunity to take out cost with a good payback structure.

So it's something we always look at. And our lean and agile approaches to the business, this just becomes commonplace for us.

Our next question comes from the line of Brian Drab of William Blair.

Can I just ask a clarification first? Mark, you just mentioned the Grinding business and how it affects the forecast, but in the release it says, "Any effects from the divestiture of that business have not been included in the earnings guidance."

And so I was reading that as we're just assuming it's still there? Or what is the -- how are we thinking about that? Is that closed at this point?

No. Two things, no. It is still subject to regulatory review. We hope to have better light on that by the end of the first quarter.

What -- it is in the 2018 numbers for a very short period of time, but what I really meant by that comment was any gain or loss that may come out of that business is not included in the guidance, because the transaction is not completed yet, and we'll disclose all of the details of that sale when the time comes and it's completed.

Okay. Does the 7% revenue growth get -- I mean, should I even think about that business in -- with respect to the 7% revenue growth? Or is it immaterial in terms of year-over-year growth?

Yes. You can see in the numbers, the sales figures are pretty small in the context of whole company, so if you take it out of both years, and you think about the 7% on the adjusted 2017 numbers that do not include Grinding Media, that's where you should be thinking.

I got it. Okay. And then on the 7% growth forecast, you mentioned 2 points roughly for FX and then the other 5 points break down how roughly between price and volume?

It's about half and half, so about half is price recovery for raw material inflation and then half on volume, so we actually believe it's more like 3.5% is true volume increase.

Okay. And then just quickly, the Grinding Media business, is that operating at a loss?

It did in the fourth quarter, that's correct. So if you look at the -- that other category in the segment disclosure at the back of the release, that is the Grinding Media business.

Got it. So if we sell that then it's not a headwind to the $8 EPS figure?

No, not really. I think even for the total year, there was a very small profit in that business, so it wouldn't have a large impact on comparatives.

Our next question comes from the line of Jon Braatz of Kansas City Capital.

Commodities are going up and price of steel and zinc and so on, and you're raising prices. I guess my question is, are you seeing competitors follow suit? Or are there some competitors out there trying to take market share and constraining your ability a little bit to raise prices fully to offset the rising cost?

Yes. John, I think what you saw is as the first couple of price increases went through, there's been 6 on steel, let's say hot-rolled steel since October, of almost $200 a ton.

Early on, you saw people probably trying to hold back and not raise price, take market share, keep their factories full. But as this thing progresses, we believe it's going to force people to have to move, but there is still some irrational pricing across all the segments. Most in the ESS space, because the competitive nature is still very tough and market is not as buoyant as some of the other segments.

So we tend to see the majority of the pressure there and followed by Irrigation would be the other one. The Utility group and the Coatings group all have been fairly successful at moving those along.

You mentioned Irrigation segment. Generally speaking, I thought the Irrigation segment was -- Irrigation industry was rather rational and prices reflect the cost. Is something changing -- any of the dynamics changing within the Irrigation business?

No. I think what we've said before is when you get into a multisystem order, it tends to still be very highly competitive and in those circumstances where we would expect, maybe, pricing to be a little bit stronger, it's not quite yet.

And I think as we roll into the season, there's still people that want to make sure they don't lose any advantage going into the early part of the season. But again, pricing increasing like it is for steel, I think, will force the hand of most.

Okay. Is that true in the international segment as well as the domestic segment?

In the ESS side, it's still true that people are fairly irrational. China had a -- quite an increase in the fourth quarter which kind of changed global pricing a little bit. On the international Irrigation side, it's always been a competitive environment and it really is a value play. The raw materials do get passed along, over time. But it's just -- you have to be able to bring value to the market in order to win.

And John, this is Mark. Also in the international markets, there's always local and regional competitors that we typically don't see in the U.S. So that's -- it's a little bit of a different competitive profile, but still, it's always been a competitive business, especially for projects.

Our next question comes from the line of Adam Farley of Stifel.

The press release calls out increased freight costs for 2018. Could you provide a little more color there? Maybe what end markets are being most stressed by increased freight costs? Is it North America versus international? Just a little more detail there.

Sure. What you've seen in particularly the U.S. market, Canada as well, is just trucker availability has really tightened up as the general economy has improved. We tend to ship Flatbed and/or Conestoga which is even a smaller segment of the market. And in those areas, they're moving a record number of loads per driver.

So as you would expect, freight is starting to move in a northward direction. Again, that's something that through price increases and productivity, we hope to get most of that back, but it's not something you can do in every circumstance.

And it varies across our customer base. There is times, the customers pay freight. Other times, we pay freight. Your inbound material costs are affected by that as well. So it's just a factor that we've called out, because we believe it's more meaningful than it has been over the past couple of years.

Our next question comes from the line of Craig Bibb of CJS Securities.

Could you talk about the new product initiatives you have in Irrigation? And I assume it's too early for the Trimble JV product.

Yes. So we released a number of new products this year. The ICON that I called out and, Craig, you didn't have the benefit of hearing about that this morning.

The ICON digital panel has done extremely well. It exceeded our internal forecast for the product and is being adopted readily by the irrigation community.

We launched later in the year, the X-Tec which is continuous drive pivot. That has started to gain some traction, but again, it was a latter year release, and so we would expect more traction as we get into the North American selling season. And that's designed specifically for some specialty crops where you want to get around the field twice as fast as you would otherwise.

The Trimble agreement that we have there is still nascent, and we are still moving through -- working through just all the channel issues and making sure that we have a good, strong product to the market. But we believe it'll pay dividends in the future. It just -- it takes a little while to get those things. Because it is specifically the GPS portion on our corner units.

And then as my not really a follow-up, second question, you guys said, China wireless structure demand was weak. They've been, kind of, at a overcapacity. Is it like falling off a cliff weak or just slightly weak?

Okay. In the fourth quarter we actually saw a pretty substantial drop. That was -- it was twofold. It was, one, related to the government mandates to shut down industry. So China Telecom, which is one of our larger customers, had to stop actually erecting towers.

And then secondarily, with what volume was left and the obvious competitive nature of China as it is, we had increasing steel costs. We decided to sit out or not be as aggressive on some pricing, because it wouldn't have been good business to do so.

We believe that as we come out of the first quarter, maybe back into the second quarter, that that should get back onto a more natural rhythm at that point.

Our next question comes from the line of Brian Drab of William Blair.

Just 1 follow-up and clarification -- another clarification that -- you said in the release, adjusted EPS forecast for approximately $8 does not include the impact of the 2018 restructuring plan, and you also said that that pretax charge of $10 million -- the restructuring would be a pretax charge of about $10 million, and that's a little more than $0.30 in EPS.

So I'm just wondering is that restructuring expense something that will be adjusted out for your non-GAAP EPS that you report?

Yes. It will.

(Operator Instructions) And we have a follow-up question from the line of Michael Shlisky of Seaport Global.

Just wanted to ask quickly about the ESS restructuring, sorry. I think you had mentioned, they can get paid back in 12 to 18 months. So it sounds like there's a cost -- hello?

Go ahead, Mike.

Oh, sorry. It sounds like you can get a 6 -- a 12 to 18 month payback on your upfront cost from the ESS restructuring. So it sounds like maybe it's a $6 million to $8 million per year annualized savings or is there some sort of long-run cost savings that you can, kind of, point to perhaps after 2018, 2019 from this action?

Yes, Mike, this is Mark. Yes, if you think about a $10 million restructuring and you recover it within about a year or a little bit after that tells you, on an ongoing run-rate basis, it would be somewhere between maybe let's say $7.5 million and $10 million per year as it goes forward.

And Mike, just to clarify, it'll be 12 to 18 months from the time we completed the action. So some of those actions will occur during the year and not all upfront, let's say, in first quarter. But we'll keep everyone abreast of how we are moving on that on a quarterly basis.

Our next question is a follow-up from John Braatz of Kansas City Capital.

Steve, Mark, certainly, there's some talk about the steel tariffs down the road and who knows what's going to happen, but is there any way that you, as you bid on business, can protect yourself from a possible imposition of steel tariffs? Is there anything you can write into contracts like I said, that will protect you?

Yes, John, this is Mark. There's a couple things. First of all, in a lot of our businesses, if you think about Irrigation, that's a pretty short-cycle business, so the backlogs don't tend to stretch out over long periods of time, so you can still be pretty nimble with pricing.

In Utility, there, in many of our contracts, are pricing mechanisms in place, escalators and de-escalators, so you do, over the longer run, get some -- get certainly protection from steel. There may be some dislocations, if you will, if there's a lot of volatility.

The bigger question probably is more on the ESS side, especially for, let's say, Department of Transportation work where we have fixed-price contracts, and you cannot have escalators and de-escalators in there.

So in those cases, we either try that we get to procure the material after we land the order or things like quotations have a limited shelf life. So if it goes out beyond, let's say, 30 or 45 days or something, that order has to be rebid, because things could've changed in that time period. So you try to, at least, not take long commitments out with fixed-price contracts unless we have it covered.

(Operator Instructions) And I'm showing no further questions at this time.

Okay. Thank you, Maria. This concludes our call. We thank you for joining us today. I will let you know that the transcript of this morning's call is now available online. And this message, along with this morning's message, will be available later today as one playback on our website or by phone over the next week. We look forward to speaking with you again next quarter, and Maria will now read the forward-looking statement.

Included in this discussion are forward-looking statements within the meanings 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 these circumstances.

As you listen to and consider these comments, you should understand that these statements are not guarantees of performance or results.

They involve risks, uncertainties, some of which are beyond Valmont's control and assumptions. Although management believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements.

These factors include, among other things, risk factors described from time to time in Valmont's reports to the Securities and Exchange Commission as well as future economic and market circumstances, industry conditions, company performance and financial results, operating efficiencies, availability and price of raw 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 discussion is made as of the date of this discussion, and the company does not undertake to update any forward-looking statement.