Valmont Industries, Inc. (VMI) Q4 2007 Earnings Report, Transcript and Summary

Good morning. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the Valmont Industries Fourth 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 would now like to turn the conference over to Mr. Jeff Laudin. Please go ahead.

Thank you Julianne. Welcome to the Valmont Industries' fourth quarter 2007 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 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 this call can be found in our press release. I would now like to turn the floor over to our Chairman and Chief Executive Officer, Mogens Bay.

Thank you Jeff and good morning everyone. Thank you for joining us. Let me begin with the fourth quarter highlights. First, we had record fourth quarter sales, operating income and net earnings. Second, operating income increased 45% and net earnings increased 44% on a 17% increase in sales. Third, fourth quarter year Irrigation results were very strong, where revenue is up 47% and operating income had nearly tripled. Fourth, Utility segment operating income increased 55% on a 7% increase in sales. Before turning to the performance by segment, I would like to make a few general comments. In 2007, we met our goal of 10% operating income as a percentage of sales, as we reached 10.4%, and our return on invested capital reached 14%. Both of these measurements were substantial improvement over our performance three years ago when we set these goals. We met these goals ahead of plan as we were helped by good market conditions worldwide in most of our businesses. We have been asked, if we are going to set a new goal and the answer is not at the present time and the reason for this is not that we don't feel we can continue to improve the quality of our earnings. We now have a good level of profitability and return on invested capital substantially above our cost of capital. We certainly subscribe for the economic value-added or EVA concept and we now have the flexibility to make trade-offs between revenue growth and maximizing margins, with a view of creating economic value-added. We will continue our efforts to improve our businesses through our journey to become a lean enterprise. This journey, as you know, is focused on a constant war on waste in everything we do and it includes our efforts to improve the engagement levels of our employees worldwide and continued focus on good pricing practices. During 2007, we made several capital investments to support growth. Construction began on a third pole plant in China in Qingdao, which will begin production during the third quarter of this year. In North America, we made major capacity additions in our Utility and Engineered Support Structure facilities. We also made several acquisitions. We purchased a galvanizing operation in Salina, Kansas and invested in a pole company in Finland. In early 2008, we purchased PennSummit Tubular in our Utility business and in our Engineered Support Structure businesses we made 70% investment in West Coast Engineering. We'll continue to pursue acquisition opportunities to support additional top line growth. In 2007 we also faced certain operational challenges. Our biggest challenge continued to be in our Specialty Structure businesses. During the fourth quarter, we addressed this issue by closing one facility and consolidating its operations into another location. In summary, 2007 was a good year for Valmont. We've continued progress in growing our businesses and improving our financial performance. Let us now review the fourth quarter results. I will begin with the Engineered Support Structure segments. Sales increased 9% to $159.4 million. Operating income decreased 2% to $13.4 million. Segment profitability was adversely impacted by the results in the Specialty Structures business and the cost associated with consolidating two facilities into one. In China sales of wireless communication products remain supported by the build-out of the wireless communication network there. Cell phones used in China is growing at a very fast pace, as users bypass landline infrastructure in favor of wireless connectivity. Sales of all Utility structures also increased in China, as additional generating capacity require investments in Utility structures for transmission. In Europe, sales were supported by a firm economy and municipal investments in lighting for safety as well as for beautification. In North America, lighting sales were about even over last year's fourth quarter. Sign structure sales were lower mostly due to consolidation of manufacturing operations. Our recent investment in West Coast Engineering is a great strategic fit. It expands our opportunities in the Northwestern part of the U.S, and enhances our exposure to a strong Canadian economy. Raini Habgood-Bailey, and her team have earned a significant market share in Canada and we are delighted that they have joined Valmont. In the Utility Support Structure segment, sales increased 7% to $79.3 million, largely as a result of increased volume and a better pricing environment. Operating income increased 55% to $12.8 million or 16.1% of sales. Our backlog continues to build as order rates are strong. The utility market is being driven by greater spending to improve the reliability of the transmission grid. The transmission grid has been operating under the stress of higher demands for many years, without the attendant investment in infrastructure to ensure reliability. The Energy Bill of 2005 recognizes this need and incorporated reliability standards and enforcement, recognizing the security of the grid as a national priority. We acquired PennSummit which is located in Pennsylvania. It is a perfect with our network of utility plans. It gives us a footprint in the important Northeastern part of the United States. Raj Pawar and his team had built a good business and we are excited that they have joined Valmont. In the Coating segment fourth quarter sales of $33.6 million were 10% higher than last year, due to improved industrial demand and higher volumes from Valmont's internal demand. Operating income rose 5% to $5.8 million or 17.4% of sales as a result of the improved volumes. In the Irrigation Segment, sales were 47% higher at $103.7 million. Irrigation segment operating income increased to $13.9 million, up from last year's level of $5.1 million and it was 13.4% of sales. While there has been much talk about the impact of ethanol production on farm commodity prices and net farm income, we believe there is a broader dynamic in place. Worldwide demand for grains continues to outpace supply and year-end inventories have declined over the last number of years. While bio-fuel demand certainly have had an impact, global economic growth is the driving increased... is driving increased use of food and fiber. As a result the global agricultural sector is very strong. Our current view is that these dynamics should continue. Turning to other financial measures, increased inventories and account receivables largely reflect higher activity levels. Depreciation and amortization for the year was $35.2 million and capital expenditures were $56.6 million. In 2008, depreciation and amortization is expected to be $35 million, and for 2008 we expect capital spending to exceed depreciation. The increase in the fourth quarter tax rate was primarily the result of changes in Mexican and Chinese copper tax loss that resulted in a net $1 million expense, relating to certain deferred tax assets. In 2008, we expect another record year. The drivers for our markets remain firm. In Engineered Support Structure ongoing highway spending in the United States and continued investment in international infrastructure market, should provide support to our structures businesses, tempered of course by the economic environment as it develops. It is too early to tell what impact the slowing U.S. economy and budget challenges both at the state and federal levels will have on our traffic and lighting businesses in this country. In our Utility business, we expect investments in the electrical transmission grid to continue to grow. In the Irrigation business, higher farm income should lend support to world markets along with water conservation and the other traditional drivers such as weather and farm policy. At the current time, we remain optimistic. In our Coatings businesses conditions in the industrial economy will largely dictate results. One area where we will continue to monitor is inflationary pressures on purchase materials. We will address inflationary challenges by attempting to raise prices in a timely and appropriate manner to recover those costs. In summary, we expect double-digit revenue growth and approximately another 1 point increase in operating income as a percentage of sales. This concludes the prepared portion of our remarks and I would now like to take your questions. Question And Answer

Thank you. [Operator Instructions]. Your first question is from the line of Arnie Ursaner with CJS Securities.

Good morning. Its Rob Labick backing up for Arnie Ursaner.

Good morning Rob.

Good morning. Congratulations for the strong quarter.

Thank you.

I wanted to start with the ESS segment. You mentioned that the plant consolidation and some charges in the quarter impacted the profitability. Is it possible for you to quantify the impact of the charges of the consolidations, so we can get a true measure of what the operating margins would have been in the quarter?

Well, probably, the direct charge associated with the close and there are probably a couple of pennies a share. But then of course that we had operational challenges also in that quarter, as we went through this and I can't quantify exactly what they are going to add up to.

Okay, but that's completely behind us now, so Q1 and beyond we should be back to the normalized margins you would expect?

Well in that... the plant we closed was the one we had the most difficulty with from a profitability standpoint. We are now incorporating most of those sales into a plant in Plymouth, Indiana. The one we closed was in Selbyville, Delaware.

Great. And then you touched on this, certainly, but your comment in the press release regarding the potential highway spending in traffic. Is that more of a cautionary plus anecdotal or are you beginning to actually see changes in ordering patterns at this point?

Well I would say that it's probably more on kind of what you hear and what you read about budget prices in states and budget problems on the federal level too. I would say that we may have seen a slowdown in a couple of states, but we haven't seen a broad based lowering of activity levels. But it's one of those things that we need to keep eye on.

Great. Okay and then last question and I will get back in queue. In the Irrigation segment, obviously the results were terrific. Could you just discuss, I guess do you have the capacity for the multiyear growth that you are expecting in this? Is there any need for additional infrastructure there and where you are in terms of utilization and margin expansion in that segment?

Well from a capacity standpoint, I think we are well covered in North America. I mean the challenge we are going to have is ramping up shop suppliers and make sure that we get components in. It's a question of getting people added at the right time. But from a PP&E standpoint, we are in good shape. We are also in good shape outside the United States. We have actually over the last couple of years, probably put an additional burden on our North American plants because of the weak value of the dollar, which has allowed us to be more competitive exporting out of here. And I would say, I think our irrigation business has done a good job of passing on inflationary increases, but most of the improvement in profitability is really great leverage when you have this kind of volume growing through very efficient plans.

Terrific, thanks very much.

Your next question is from the line of James Gentile with Newland [ph].

Hi guys. How are you doing?

Good, how are you.

Very good Mogens, thanks for taking my question. You guys just continue to outperform. I just wanted to again go through the efficiency measures that you took in the Specialty Structures business in the Q4 period, which its seems like that they were some other inefficiencies that affected the margins in addition to the absolute charge that you took to close the plant. So the figure you got two pennies plus and then you had higher a tax rate by about $1 million. So technically, I mean your EPS... fully diluted EPS for the quarter wasn't the reported $0.88, but if you break out some of these little one-timers, we saw solidly $.93, $0.94 quarter?

Are you telling or asking.

I'm asking.

Well.

What am I missing in my math?

Well I don't necessarily think you are missing anything. I mean, we took a couple of pennies and you can translate the $1 million into $0.04 and we probably had some expenses as we were getting rid of backlogs in an inefficient plant.

I mean, absolutely. And then you look at the absolutely very strong agriculture. If you look at the leverage in the McCook plant versus a competitor who will remain nameless, which is also experiencing some strong top line... your operating profit tripled in the quarter, versus your competitors which perhaps nearly doubled. So really speaks the power of way the quality of your product. Now if you look at the guidance that you've given double-digit growth, are we to perhaps normalized growth in the Ag business for 2008 to kind of a mid double-digit type of trend that you're seeing right now, given the backlog that you have in place?

Well as, you have been following us and therefore the Ag business for many years and we had a very good quarter. We had good order flow. The external environment in the agricultural business is probably as good as we have seen it for decades. But, buying patterns can change quickly in the fine economy. So we are... we think we are ready. We are trying to be ready for good season. But this is still agriculture.

Right, absolutely but the efficiency or your plan will certainly suggest incremental operating leverage, compared to your other segments and competitors out there. And then if I drop the numbers double-digit top line growth through 2008, and 100 basis points of margin expansion all of equal... the consensus here right now shows on Thompson at $4.14 and I get anywhere between $4.35 and $4.50, just given the guidance that you've given us. that's a quite attractive EPS growth trajectory continuing through 2008.

Well we will stick with what we told you and you can draw the conclusions you want to draw.

Well it's just a number, isn't that spreadsheet telling me what I... what the EPS estimates are. But you guys continue to execute very strongly and I look forward to see more lean efficiencies in the structures business in 08. Take care.

Thank you sir.

Your next question is from the line of James Bank with Sidoti and Company. James Bank - Sidoti & Company: Hi, good morning.

Hi Jim, how are you? James Bank - Sidoti & Company: Yes, I'm sorry, I might have missed the first line of questioning. I am not certain if that was in regard to the Utility Structure segment. I was just wondering if you might be able to quantify the 16.1% up margin in that segment, between the volume and the factory productivity improvement.

Well I think it's a combination of a good pricing environment and productivity. Volume or sales were up 7%. So we got lots of leverage and probably are in a better pricing environment than we were a year ago. James Bank - Sidoti & Company: Okay, because that 16.1% is just the best I've seen in that segment for five year, six years and I am just wondering if that sort of a new run rate we might be using it forward.

I wouldn't use that as a run rate. James Bank - Sidoti & Company: Okay. Okay, that's helpful. And then moving to Coatings, 17.4% given the fact that same prices have come down I think you have to give some of that margin back to your customers. Is this now sort of an area we should be looking at for modeling purposes?

Well I would hope that we'll continue to see good performance in the Coatings business. Coatings business performance is very much volume-driven. When we get the volumes, we get good profitability. Since it's a high fixed asset business, if you get a lot through tanks you will leverage there well and if you don't get anything through you de-leverage badly. You don't have the option of lowering the sink level or turning down the temperature. So, if we get the volume, it will continue to be a well performing business. James Bank - Sidoti & Company: Okay. And now moving to your Engineered Structure segment, in terms of the delay in appropriations, I think speaking with you guys in the past, past cycles have proven that it's really been nothing more than just a delay, and ultimately stay through operating structural deficits in regard to the highway spend. So, maybe we'll see some fluctuation or some lumpiness in that segment, but ultimately the spend will be there. Am I thinking about this in a right way?

What historically, you are right, that's what has happened. I think one other things that maybe a little different this time is that the Highway Trust Fund is being depleted somewhat because as gas prices have gone up, the gas tax... the federal gas tax has not been increased and people are driving less and inflation has made construction more expensive. So therefore you get fewer dollars into the Trust Fund and you can do less with them that you could before. But having said that usually infrastructure spending and with all the talk there has been about the quality of in our infrastructure and the need to upgrade it, I would hope that you are right that federal and local money will be spent in that direction. James Bank - Sidoti & Company: Okay. And lastly, segment backlog, I didn't see that you broke that out. Don't you normally do that at the end of the year?

No we don't. James Bank - Sidoti & Company: You don't.

I think in the 10-K it will come. James Bank - Sidoti & Company: When it is filed. Okay.

Yes. James Bank - Sidoti & Company: Okay. You would share the numbers with us now or afterward?

I guess you have to wait.

Well it is not for our lack of willingness, we do for something we have them right here... James Bank - Sidoti & Company: Okay.

They will come out. James Bank - Sidoti & Company: Okay, well thank you very much. That's all I have.

Thank you.

[Operator Instructions]. Your next question is from the line of Steven Gambuzza with Longbow Capital.

Good morning.

Good morning Steve.

I was wondering if you could comment on what the expected contribution to revenues in 2008 might be from the acquisitions you completed in 2007, as well as the capacity additions that you mentioned that are coming on line in 2008, where that came on in 2007. If you can just give us some broad parameters of how these main drivers in 08 offers --

Let me give you just one number, around a $100 million.

In total for the, for all those things?

Well the capacity depends on when it comes on line et cetera, et cetera. But I would say from the acquisition stand point about a $100 million and then we will get some organic growth also.

Okay so a $100 million for acquisitions and the majority of the capacity incremented as you stated that will come from China?

Some will come from China and we have also made some additions in North America in Utility business we added capacity last year that's on line and we are working on that midsize tube facility here at our Valley facility. So over time some of that will become and some is replacement of our capacity and some is net additions. But as we continue to grow the base business organic growth, we will continue to add capacity. But as you also know that it comes in fairly small chunks. It's not big capital commitments; we can do it for relatively modest amounts.

And how was your second pole plant in China. Is that essentially running close to capacity right now?

No, it's not, but it is ramping up and we have our main plant... our first plant in Shanghai is basically operating at capacity. The South China plant is ramping up. The Qingdao plant will take some capacity lowered off Shanghai, because Shanghai has been in operation now for 10 years and we have to do some probably major upgrading at the Shanghai facility. So as the Qingdao facility comes on board, we'll move some capacity around that will allow us to do that.

Okay, and the third plant is going to have roughly the same amount capacity as the second plan, is that correct?

Roughly.

Okay. And I was wondering if you might be able to comment just on... when look at the irrigation results in the quarter, if you might just comment on kind of the domestic, versus international contribution to those results.

Very strong in both sides.

Okay, is it roughly equivalent of volume growth. It wasn't like it was one driving substantially over the other.

I will say percentage wise about the same.

Okay, thank you very much for your time.

Thank you.

There are no further questions at this time. I would turn the conference over back to Mr. Laudin.

Thank you Julianne. This concludes our call. We thank you for joining us today. This message will be available for playback on the Internet or by phone for the next week. We look forward to speaking to you again next quarter. I will now ask Julianne to read our forward-looking statements.

Thank you. Included in this discussion, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made, in light of experience in the industries in which Valmont operates, as well as management's perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. As you listen to and consider these comments, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties; some of which are beyond Valmont's control and assumptions. Although management believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include among other things, risk factors described from time to time in Valmont's 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.