Valmont Industries, Inc. (VMI) Earnings Call Transcript & Summary

All right. Well, welcome to another presentation at the 40th Annual William Blair Growth Stock Conference. I'm Brian Drab, the analyst covering Valmont and industrial technology for William Blair. Today, we are lucky to have with us President and CEO of Valmont, Steve Kaniewski. We also have CFO, Avner Applbaum; and Mark Jaksich, who has recently stepped down from CFO; and Renee Campbell, who is Vice President of Investor Relations and Corporate Communications. So thank you, all of you, for being here today and I really appreciate it. And before we get started, I just have to mention quickly, you can find a full list of disclosures and potential conflicts of interest on our website, williamblair.com. And at this point, Steve, I'd like to turn it over to you. I know you have a few slides that you'd like to go through to kick it off.

Okay. Thank you very much. And our first slide, once it comes up here.

Looks good.

Snapshot here. Again, last year, about $2.7 billion in sales, roughly equal market cap, in 23 countries with 87 manufacturing sites. Whether you're in agriculture or infrastructure, oftentimes, you're local for local and that drives a lot of the sites that we have. If you look at our segment revenues, it's a diversified portfolio across 4 different segments. ESS consists of primarily traffic and lighting; telecom, so 5G type structures; as well as our Access Systems business. In Utility, we are in every structure type there is in the Utility space. So whether that's steel, concrete or fiberglass, whether that's round, broke or lattice, we cover all of those. In the Irrigation segment, this is our longest-standing business that we have. It's what put us in business over 73 years ago and -- as the founder of the center, pivot Irrigation machine. And so that business is a very global business and vital to both the conservation of water as well as improved crop yields, being that water is the number one way to increase the yield on a crop. And then in our Coatings business, this is primarily active galvanizing as well as some Anodizing and applied coatings. Again, about 37 locations of our 87 are in that particular space, very local-for-local type business. You can see the operating income also well diversified. And then from a geography standpoint, we tend to go [Audio Gap] high as 50-50. And last year was, in this case, about 32% from overseas. But that will shift over time. We don't have any stated targets related to that area. It's just where we see opportunities. Next slide. I'll just touch on briefly some focus areas here that we cover. And the first in the Engineered Support Structures, lighting and traffic structures and the wireless components and structures that go with them. The highest growth area as we see right now and into next year would be that wireless communication projects. Those will be things related to both the existing rollout of LTE, 4G as well as some of the smart solutions around 5G, that would be both smart polls that have multiple functions, single tower, single polls, building-mounted, the components that go with that. Obviously, this is an area of focus for a lot of people because of the growth that's there. We've been a player since the first G and have continued to play over since then, very good relationships with every tower company as well as the carriers themselves. In Utility Support Structures, a real lot of growth around substation and anything around the renewable generation support. Substations and grid reliability, last year was a very prominent year for some reliability issues, particularly on the West Coast. Previous to that, it was on the Gulf Coast. As those would provide very strong drivers as we look forward. And then renewables coming on to the grid as we've diversified our generation sources from one, let's say, 2 to 3, 4 gig type of plant to now maybe 200 to 400-megawatt type of construction. There's a lot more points that have to get on to the grid itself. So that is helping to provide a very good impetus to our business there. We also have a solar business, which we acquired last year and is now growing as well as wind tower business based in Northern Europe. In the Coatings segment, as I mentioned, a lot of this ties to industrial production, but we bring some very unique technology solutions in both the way we run the plant and how we interact with the customer. And then in the irrigation space, again, very much tech-driven as the growth engine as well as international. There's a lot of projects internationally to -- both from a food security perspective as well as just an ability to bring in dollars and feed the growing population around the world. The technology solutions are both to reduce input costs as well as improved yields. And we've been very successful, well over 100,000 active connections in the field. These are edge computing devices that are on a recurring revenue stream as well as now crop input algorithms with partnership with Prospera Technologies based out of Tel Aviv, Israel. Next Slide. Okay.

Yes. Thanks. Thanks, Steve. So I'd like to direct your attention to the left side of the slide. Our balance sheet and liquidity remained very strong, and we're continuing to generate positive cash flow. Our current cash is approximately $400 million, which includes $75 million we drew from the revolver earlier this quarter. We have not drawn on the revolver since then, and cash from the revolver also was not used. So our total available liquidity is approximately $871 million. Positive cash flow was driven by ongoing efforts to improve our working capital. We took strategic actions to improve accounts receivable turnover, including negotiating some certain customer contracts. We're considering factoring selected receivables, supported by companies with strong financials. We're optimizing our payment terms through the supply chain finance program, and we're also actively managing our inventory levels. Last quarter, we reduced our 2020 capital expenditure forecast from a range of $100 million to $125 million to a range of $75 million to $90 million, and we've halted our share repurchases out of an abundance of caution until the impact of COVID are more clear. Turning to the debt and EBITDA section of the slide. We have no significant long-term debt maturities until 2044. We closed the first quarter with net debt to adjusted EBITDA of approximately 1.5. And for the past several years, our total debt-to-EBITDA has been within the target of 1.5% to 2.5%, which supports the cyclical nature of the businesses. The segments can run in independent cycles, but have and can't cycle in the same direction at the same time. So overall, our capital allocation strategy has not changed. Primary focus is to maintain liquidity, to support operation and maintain capability to take advantage of opportunities. We're committed to investment-grade credit rating, which provides reliable and cost-effective access to capital. I'll now turn the presentation back to Steve to speak on the next slide.

Thank you, Avner. Next -- you see, these are our long-term financial targets, again, focused on growth. So revenue of 5% to 10%, EPS greater than 10%, return on invested capital greater than 10%. Free cash flow over the cycle of 1x net earnings. And so the operating margin of around 12%. Some of these targets are based on mid-cycle for the businesses, but generally, goals that we strive to hit at any time in the cycle. Last slide. Why Valmont? First and foremost, we have an addressable market both in the agriculture and infrastructure space that will continue to grow over time. There's durable long-term drivers in these markets, albeit with cycles up and down. But if you look at the trends, whether you're a developing country or a developed country, you need to renew your infrastructure. And with a growing population and improving diets, it's necessary to bring our technologies to bear for food production. Our management team has been very strong in shaping the organization for growth over the last couple of years. We -- between both acquisitions and new products and technologies that we're now bringing to those products, we believe we have a very strong team that will help us with that. We have the long-term drivers that I mentioned and the incorporation of technology that I touched on is occurring in all of our segments. Even in the Utility space, we're now working on things that can look under the right of way and tell the operator what is going on within the right of way, doing the same ESS space like traffic and roads and vital piece of a smart city application. And then lastly, a sensible allocation and return on invested capital focus. We're not going to do things to financially engineer the company. We're not going to look and just buy growth. We want to make sure that we can beat our cost of capital, which is roughly 8.5% over time. When we look at acquisitions or any kind of typical investments internally, that's about an 8.5% return rate within 3 years. And then most of all, we just have a very good team. We serve very good markets, and the long-term prospects of those markets are strong. Even after COVID, there has been no major disruption to any of the businesses, more just short-term issues. So with that, I'll turn it back to Brian for questions.

All right. Thanks a lot, Steve, for going through that. So we have about 20 minutes for Q&A. Unfortunately for you, you have to go through all the Q&A just with me. So this first question is not meant to be a hard-hitting question really, but I think, Steve, you and I had a great discussion about growth and margins a couple of weeks ago. And you showed the goal of 5% to 10% with 5% organic revenue growth as the target. And that's been the target for some time, but the market environment has been such that the result -- if you look at 2016 to 2019 period, it was about 1% organic. So what happened? Can you talk about the environment, the challenges in Utility and Irrigation, Industrial and general, et cetera? And then what's going to change in your view? And how long will it take for those changes to happen to get to that 5%? How realistic is that? And of course, I think the investors online are getting tired of the COVID update. Everyone's tired of COVID, in general. So if you can kind of -- maybe answer it in the context of -- let's think about 2021 and imagine a world where we're getting back to work and closer back to normal.

.Sure. The single biggest issue we've had over that time frame has come really from our Irrigation segment. So only being at 1%, we're down, and we're now the seventh year of decline in the Irrigation segment. And that is primarily coming due to net farm income levels and then the corresponding investment that farmers will utilize on our products. That is why we've really looked at growing and expanding internationally. There's a series of projects and markets there. We had some unfortunate things with Australia, which is a big market for us in '19, but look to be up this year. Brazil has benefited, as we have said, from the trade wars, and actually had record revenues in local currency. So we do have the green shoots there. We just need to turn around the ultimate macro market from an Irrigation perspective. And that will have an outsized effect both on the revenues and the operating margins that we're experiencing. Utility is seeing an uptick in revenue and operating profit. We had some small -- or some issues last year in the third and fourth quarter around productivity. Those were not completely unexpected because it was to meet 10% growth in the market. And so that market has grown. And now with the addition of solar and particularly of getting that product certified here in the U.S. and we're now winning some awards here in the U.S. in addition to the international projects that are out there. You will see that in the back half of this year, both solar and wind will grow as compared to the first half of the year. And then, obviously, from a year-over-year perspective, that will show growth. So that's some of the things that will help us there. In ESS, traffic and lighting, particularly with the crisis, could see some effect due to the tax receipt nature of funding sources for traffic and lighting. But there are some positives. We correlate very closely with single-family home starts. And so if there's a real push outside of the cities, then that will be a benefit to us, hopefully, offsetting some of maybe [Audio Gap] the highway spend. That stimulus bill in the U.S., it would have -- an outsized impact on our business would be helpful. It was increased from the FAST Act that's in place right now. More than likely, you'll see a FAST Act renewal that will be an extension of the existing one. And then after the election, there'll be more of a debate about true stimulus of infrastructure. We have seen some signs in Europe already. Most notably, Finland and the Netherlands who have spent money on stimulus, 100% of it going to infrastructure. So we feel like -- still a little opaque, but we still see some potentials there for that to move to the upside. And obviously, 5G and telecom, we're not the only ones talking about this and many -- CEO at the carriers has reaffirmed their CapEx guidance related to this area. And so when we look at some other people in the space, like MasTec or Quanta, they've also reaffirmed that position that there'll be growth there. So we feel like we're positioned well. We've actually added some capital and some capacity expansion related to the 5G space that's in line and ready to go. And so we did that a little bit earlier in the cycle than we did, let's say, with our utility capacity expansion. We wanted to make sure the market is truly there with utility based on some of the issues we faced in the last '13, '14 time frame. And then Coatings is an acquisitive growth. So we typically don't see a lot of organic growth in there other than GDP and really industrial production being the #1 source of that. We have put money even in the downturn towards new products across all the segments. We're working on technology, which is much more margin accretive across all the segments. And we have a good pipeline of potentials for both products and markets. As an example, we are now taking our telecom expertise to Europe. And so that is providing upside for us there. We've never serviced the market. And so it's really taking our domain expertise and getting it global and now in a much better position with our plant structure and with the focus that our teams have around these particular metrics.

All right. So maybe we could just go back to the first segment that you talked about, Irrigation. And Irrigation, as you mentioned, has been a long road here over the last -- you said 7 years. And what turns that around? I guess, I know you said there's some green shoots, and you mentioned the international markets. I know there's -- that that's been going a little bit better, but farm net income is still about half of what it was at the peak. Do you need corn prices, commodity prices to be up materially? I mean, corn seems to kind of just be stuck here at $3.70 for the last 7 years. So...

Yes. So corn and soy as a percent of our business -- if you go back to '13, it was about 65% of our business. It's now about 50%. And so we've intentionally diversified on the other crops. So as an example, when potatoes were really spiking through last year, it was a help to the business. So the diversification of other crops, sugarcanes, or horticulture, potatoes, carrots, some of our product development that we did in that space allows for the pivot to run constantly and much quicker [indiscernible] solution. And that will help us to get new growth even though the market itself around corn and soy may be depressed for a while. Around corn and soy, it's always going to come to we need to grow of it right now. Use-to-stock ratios are pretty close, but they've been in favor of supply over demand for a while here. It will only take one drought and then things will turn around from that perspective. But the technology pieces we're bringing to control input costs could be game changing. We went from -- to get on -- from no acres to 1 million to 5 million acres. And we're well on task to do just that. And so those will be things that will benefit the farming in the input side, which we believe will lead to growth in demand. We're also rolling that out internationally with over 100,000 connections now. When we first started reporting that statistic, it was around 40,000. So we've really seen the growth. We went from roughly $43 million to about $57 million in technology sales year-over-year. So we're working on the things that really will help drive growth in that area. The international side of the business within the next couple of years will be 50% of our business. And it really is the activity levels around food security are, for sure, going to help us. And then on the macro level, the ESG requirements of food growers to prove what types of inputs they're using and how much they're using, we also believe will be a benefit to the business as we look forward. Major food producers, most of them today, don't really even understand water intensity, which is a big piece of the ESG story as well as fertigation, chemigation type requirements. So there are some things in the macro space. And obviously, if we go through an upturn, we will have higher margins in the next cycle than we did before because of that mix of product.

So Steve, I'm just looking at my model here too. Within the irrigation segment, you're generating $600 million in sales in this segment. What portion of that is the higher growth technology that you talked about and how fast is that growing?

Yes. So the -- it was roughly $56 million in 2019.

Yes.

And that grew 20% year-over-year for the past 3 years.

Got it. Okay.

So it's definitely been accretive. And it's a technology that has been renewed, as mostly a recurring revenue model, well over 90%. So it's obviously bringing value to the grower in these tough times that they would still be willing to spend additional monies for these services.

Right. They're subscribing to that service paying -- for the most part, the revenue coming there is an annual subscription.

That's correct. And it can be single year to multiyear.

Got it. All right. Shifting -- we've got 10 minutes -- in the Utility segment. How is the visibility there? I know there's -- at least there's one very large project. There's some other large projects in the pipeline. I think the overall expectation for the utility structures industry is that -- and correct me, please, if I'm wrong, but is that we've moved up to a higher level recently, but the expectation isn't for another step function up, but maybe to kind of stay at this relatively higher level for the next -- I don't know how good the visibility is for 2021.

The visibility is out about 2, 3 years.

Okay.

And that statement is true for North America. So North America, transmission, distribution and substation. We'll stay at these elevated levels, again, being driven by renewable generation sources being added into the grid as well as the reliability statements. So that is what -- not just us, C3, EEI kind of confirm that. And then if you look at other players in the space, particularly on the EPC front, MYR, Quanta and other competitors, we all have a similar prognosis for how that will roll out. We've not seen any effect from COVID on construction and on projects on justifications. So we think that, that stays pretty strong. Our growth there will come primarily internationally and through solar. Solar has a very high CAGR, about 18% to 20%, depending on the source. [indiscernible] media is a good one. And with our approvals now in the U.S., we expect to continue to land projects with the customer base that we already service today. And so we have a lot of good synergies to bring to that market there. And then one of the things we did with wind, wind had a very tough time in North Europe last year. Seven competitors went bankrupt. We thankfully weren't one of them. But we've now played hardball on price and we've been able to get that price. So third and fourth quarter, we should start to see that pick up. And the prognosis for wind in '21 is very short. And so there will be a very good demand profile, which will lead to both the volume and margin enhancement. So utility... [Audio Gap] years to enjoy some good demand profiles.

And you mentioned the growth internationally. How the contribution from the lattice structure business that you acquired?

Yes, lattice, we -- ideally, we wanted to go into this space with the larger acquisition that didn't work out, where we can get their capital. We did buy a facility in India, and that now has -- we're now getting orders around that and it's contributing nicely internationally. And so we have a couple of things with some alliances with some North American lattice producers to give supply from India as well as quoting in Europe and Africa. And so it's taken us a little longer than we would like it to, but we're starting to get some traction around the business.

Okay. And now maybe we can talk about margins. I'm going to read this question because I wrote out a couple of sentences here. So what needs to happen to get to that greater than 12% operating margin target? Adjusted operating margin was 10% in 2016. And up to 8 -- sorry, and it was actually 8.6% in 2019. So 2016 Analyst Day, if we go back there, the margin walk included 2/3 of the margin improvement coming from volume leverage and price and 1/3 from cost reductions. I know that, that was before you were running things, but what are the key things you attribute the lack of margin expansion to? I know the volume leverage is a big one, but what needs to happen at this point to get us to above 12%?

Yes. With Irrigation, we're more of a mid-cycle, let's say, another $100 million to $125 million in revenue. That would go a long way to getting us towards that goal. ESS has to be north of 10%, which, last year, particularly with our issues around Access Systems, which we now have negated, that contributed almost $10 million of decline in that segment. So that would be added back in. As well as the normal telecom growth we're projecting because telecom margins are accretive as compared to the margins around traffic and lighting for the segment. Coatings would have to be kind of where they're at that 15%, 16% range. And then the Utility Support Structure is assessed to continue to maintain their performance on the productivity enhancements. On the macro level, we spent a great deal of price or time and price across all 4 of the businesses. And I think we've done a very good job. We saw steel, aluminum and zinc all declined throughout the early part of this year, and we've been able to hold on to price. And if we have to forgo some volume in order to do that, we've been willing to do that. Whenever you change the pricing philosophy, it takes some time for it to get to the organization. And I believe we're now to the point where we have true adherence to the price advantage that really believe in the value of price. Obviously, the volume leverage is always a key part of that walk. We're seeing that now in the ESS/Utility space because we're utilizing more factories for both than we ever had before. So our practice in the past would have been while one plant is a little empty, let's keep it full. Let's go after some maybe marginal business. We don't have to do that now. We can actually say, let's give the hours over to the other segment, and that segment can now capitalize on their pricing in order to maintain and not have to reduce to get by. And so getting ourselves out of that trap has been a big piece of that. And then, obviously, we need new product growth as new products and the technology products themselves are more margin accretive. And so we had a good first quarter, even with some of the COVID issues. We've said from the second quarter that we think we're going to be more towards the high end of our guidance. And so things have panned out fairly well here, all things considered with COVID and plant shutdowns and additional costs that those have brought.

Great. So we're now down to less than 5 minutes. I want to bring Mark and Avner into the conversation. Make this worth their time as well. But can we talk about capital allocation and M&A? Are you more likely to acquire? Are there some businesses that you think you need to divest? And just talk generally about capital allocation.

Yes. I can jump in here. Mark, feel free to add. Well, first of all, our capital allocation strategy did not change, right? We keep on taking that deliberate and balanced approach. In the short term, we're focusing on our liquidity, right? There's a lot of uncertainty. But we definitely keep our eye open for acquisitions, right, the market, right? It's competitive. But what's really important for us, it's -- right, it's the strategic shift, right? You want to make the 1 plus 1 even more than 2. So there will be opportunities, and we will look at them very carefully, but the focus is it needs to be strategic. It needs to be additive where both parties bring to the table. So we definitely -- we'll keep on looking at that.

Is there anything that you -- go ahead, Mark.

I was just going to add to that along with Avner. I think in terms of when you look at the portfolio, there's always markets, product lines, business levels that we're reassessing, whether or not, if they're beating cost of capital and whether we think there's a path to it. And if that path we don't think exists, and we have to figure out either, a, how do we get there through self-help and internal and so forth. And then if not, then we have to think about other alternatives as well. Certainly, when you talk about invested capital, part of that's going to be if there's businesses that are dragging that down, you have to figure out how to either elevate them or figure out what other alternatives you may have.

So what's the benchmark now in terms of return on invested capital that you look at?

Well, the overall company cost of capital we use is 8.5%. It's probably a little bit less than that now just because interest rates are so low. But really, really, we want to be well beyond that. Our company goal is north of 10%. And really, you want to be even yet comfortably above that because you're going to run through cycles in every one of these businesses, where it's not going to be maybe fantastic every single year, but you want to be certainly north of 10% and well beyond where we think we can add economic value added, if you think about it through an EVA model.

Great. All right. Well, we're now down to about 30 seconds. So I just want to take a second to say thank you, all of you, for being here. Mark, congratulations on your decision to move on to the next stage. And...

Thank you.

Any parting comments for the world here you want to make, Mark? Like you're going to make a speech.

No. There'll be a few things I probably won't miss very much. There will be a lot of things that I am going to miss. But as an analyst or supporting our shareholders, you can be very confident and comfortable that I will do everything in my power to help Avner get situated around the company and certainly make him and the company be as successful as possible. I still own a lot of stock. So I want that to be good, too. So I'll need it going into retirement.

Right. All right. Well, congratulations, again. Thank you all for being here. And thank you, everyone, for tuning in.

Okay.

Thank you, Brian.

All right. Take care.

Bye.