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

Great. Well, thank you. Happy to move on to our next presentation here with Valmont Industries, company I've covered for long time. And really excited to have Stephen Kaniewski, President and CEO here; and Avner Applbaum, Executive Vice President and CFO, both here to field some questions for me. We're going to treat this as we're treating others, more of an informal session. I know the materials, I believe, are available on the website to access just in terms of some of the background and financials of the company. But I thought we kind of go through some of the topics of mind, I think, that are around Valmont with investors right now, at least from what I hear.

So to kick that off and so many different pieces, Steve, to Valmont, but I thought I'd start with the Utility segment. You've got this extraordinary sort of backlog. And from everything we can tell to, utility customers just seem very committed to grid redevelopment expansion. The environment to me feels sort of similar to the late 2000s and early 2010s. The segment was generating pretty strong margins at that time. I guess there's kind of a 2-part question. One, are the opportunities today that you see in the market as good as they were then for the business? And then acknowledging, we've talked about this before, Steve, that the business has structurally changed a little bit, but what do you think the margin potential for this business is in a really good environment?

Yes. So the business is different in the sense that we've now added a solar arm to our business, and we still have the wind in Valmont-SM as a piece of the business. But if you take this historic North American piece, which is basically the transmission, distribution and substation, the margin environment has improved dramatically over the last couple of years. And with some of our operational enhancements that we've done plus pricing, if you look at that historic segment, it definitely is approaching those kinds of 15s that you would have seen before in the segment. The growth-y part is coming from, like you said, the grid redevelopment, the hardening and particularly all the changes in the generation sources. As you add in solar and wind and -- those tend to be much smaller than a typical power plant, and as a result, you have many more miles that are going in just to get those sources onto the grid. So that's the mix change that we've seen, much smaller projects, typically, but a lot of them. From an overall capacity in the marketplace, if you went back to the third and fourth quarter last year, we were seeing lead times almost a year. And so we added our 5% capacity addition plus we're working through productivity, and that's put us in a real good place in terms of the price, volume kind of equation. We've moved prices up and continue to move prices up in -- as every contract comes up and every bid comes up, and so I think you're seeing a lot more discipline around capacity additions too in the marketplace, knowing that there can be cycles to this. But we feel good about where that ultimately lies. And the solar will really provide a lot of growth in terms of revenue, albeit the margins will take longer to get to those transmission and distribution type margins, so they will pull back the segment margins a little bit there. And wind has improved pretty dramatically over the last, let's say, 1.5 years, but it still has a way to go to really get to a more accretive, let's say, segment-like margin. So overall, we're seeing growth, strong growth in North America, strong growth in solar, wind, consistent, and margin profiles that are definitely improving through pricing actions, through productivity and some basic, I say, market forces that are -- everyone is staying pretty disciplined along that front.

Okay. And that's probably a good segue to the solar business, Steve. The utility scale sort of solar power, it's been a big topic among contractors. We've seen a lot of growth in bookings and backlogs in the course of the last 12-plus months, a lot of companies really starting to shine there. And you've made a pretty good bet there. I guess I'd be curious kind of where you feel like you're at with the business. As you're moving into the U.S., what kind of traction are you getting with your utility customers? And where can that business be in a few years?

Yes. I mean it has grown pretty significantly as an industry. It competes with coal and even with natural gas pretty well. And so we bought a tracker business about 2 years ago at this point. It took us a while to get into the U.S. market. We have to do wind tunnel testing because of the stuff we have in the U.S., like hurricanes and tornadoes and such, but we're through that cycle, and we do have a number of orders at this point. A lot of our utility customers like us, know us very well from the project management side for large-scale projects. These are pretty large scale. But the scale with which we're doing in the U.S., there's a lot more DG, a lot more distributed generation, as opposed to just pure utility scale. And so you're seeing 3 megawatts, 10 megawatts, 50 megawatts go in, where some of the international projects we have delivered are more 300, 400 megawatts. So it will provide a nice consistency to the business. It has a high growth of about 15% CAGR from a marketplace perspective, and we're still gaining share. And so we feel like that business, we said it would be roughly for the year somewhere around $90 million to $100 million. But over growth of time, this should continue over the next 3 years at that kind of growth rate. So we feel like we're well poised. The product is impeccable. The contractors love the way that it assembles in the field. It's a big deal for them. A lot of tolerances so that as you get on uneven ground and just other construction challenges, it goes up well. So we're getting pull-through from a contractor perspective. We're getting our utility customers that really like the product itself, and the technology is really second to none. You don't have to flatten ground to put our SCADA system in and track the sun, and that's a big deal too from a cost perspective that you can now leave the ground basically untouched and makes environmental approvals easier, things like that. So we feel that this business, both domestically and internationally, will continue that growth pattern. So we should see some real nice -- both -- and then on the margin side, we're really putting in our supply chain now. We've come up with some more standard solutions that will really help us drive that margin. We're seeing consolidation in the industry, no surprise. And we stand well-poised simply because of the fact that our steel purchasing power, that steel is such a big component now of the cost of a solar park, the module cost has come down so much that that's where the real synergies kick in for us as an industrial in that space.

Great. Maybe turning to the communications products space, I mean a really fascinating area right now with everything that's being talked about with the telecom customers and seems to get even more and more compelling. What does that business look like over the next few years? And Steve, as I think about it, too, and how the architectures are changing, do you feel like you've got the right sort of product set in place within that business to sort of leverage this 5G build-out? And what's the urgency of customers to do it?

Yes. First off, we've actually now set up a management team and a product development team specifically around that. So it's getting a lot of focus internally, which is helping us to go out to the customers and really address their concerns. We have really put together a good array of products around the 5G, so we have and always had a strong position in the towers and the monopoles that support the macro sites. And our components business, which has grown very rapidly over the last couple of years, is addressing, let's say, the micro site. So if you want to attach to a building, you want to just attach to an existing pole, we can do the engineering services. We can then give you all the components, the antenna mounts, climbing gear, all the contractor stuff you need for there. And then taking it further, the integrated poles will become much more of a piece of this as you get the intercity build-outs, where you need to have a light fixture, security camera and the antennas. And it's very different than the traditional business because you're putting this all together, you have thermodynamic kinds of issues on how do you cool a pole that has all of these things in it. And so we have new footprint in Mexico and in the U.S. that we're using to build the product out. There's a lot of wiring and harness work that we're doing inside of those poles. But again, because of our penetration and the traffic and lighting, the city approvals that come with the permitting process, we're very used to working with all of those city engineers, and that's something that our customers really see value in. Then you take the camouflage products that we have to camouflage the sites, and it builds out an entire kind of ecosystem around 5G. There definitely is a strong movement. T-Mobile/Sprint kind of held it up a little bit earlier in the year. The Spectrum auction did the same, but we are seeing order rates pick up as we kind of expected on the tail end of this year going into next year. And T-Mobile, for sure, is kind of having to lead the charge based on just the approvals that they got from the government. They have a certain build-out there. But the 4G build-out still continues pretty unabated as well, whether that's first net for the government or just these more rural suburban areas, they need better coverage. COVID was -- the one silver lining out of that was a recognition that if you're going to do work at home, school at home, that you really have to now start to give broadband access further out of the cities. And as a part of that, we're part of the broadband coalition that Land O'Lakes is leading. That will be done with macro sites. You're not going to run fiber-to-the-home in small towns. It's just not economically viable, but you can bring it via the towers and sites. So again, another part of the business that should have about a 15% CAGR over the next couple of years, and we have the product set to meet that with camouflage products, micro and macro sites and integrated poles. And interestingly, too, Brent, we're seeing even Western Europe really come to life on this, too. The thought was that many of the carriers wouldn't have the capital to do the same kind of build-out as in the U.S., and that's probably true on a country basis. But within the cities, it is a big priority, and we've had some nice orders out of the U.K. and the Netherlands, which are brand-new for us with that market penetration. We've always been in Australia, China and U.S., but Western Europe was a tough nut to crack, and now we're starting to see it based on our product offering.

Okay. So just to clarify, Steve, the micro site has been a pretty attractive kind of growth engine that we've been talking about. So it sounds like the macro site opportunity might be seeing sort of another leg up versus where we stood a year ago, kind of prior to this pandemic.

That's correct. We thought, for sure, it would be mostly micro and integrated, but the macro has held very steady because of the pandemic and this idea that you have to go more rural now. The carriers did have to reassess their networks after COVID because this concentration in cities all of a sudden was spread out again. And they pay attention to traffic pretty intently. And so they have a lot of fiber out there in the country side, so now it's just a matter of putting up sites.

Okay. Steve, I'll focus this question on Irrigation, but allow you to sort of take it however you want to take it in terms of the other segments. But I'm curious kind of how you think some of the technological investments you guys have made, particularly in Irrigation, but elsewhere, how are those helping you? How are those allowing you to gain some share? And we've talked about this recurring revenue opportunity in the past. Where can that go over time?

Well, it has seen 20% growth over the last 3 years. And we have doubled R&D spending over that same time period, specifically around the tech in Irrigation. We have always said that having that presence on the field for 365 days out of a year gives us a very unique position on the field. It also allows us to capture much more data than any other source at a much more economical fashion. So yes, you can do satellites. Yes, you can do claims. Yes, you can do drones. And all of those are good data sources, and we do utilize it. But the fact that we have now sensors on the pivot, that -- in camera systems that can look at the field on a large-scale agricultural basis and generate the type of data that we get off of it, is going to really provide a much richer AI around crop health, and that is what we're absolutely focused on. We can also convert that into action with the pivot. So yes, we've always historically given water, but we can also chemigate and fertigate through the pivot. We can have micro sprayers on the pivot itself, and so that is really what has generated the interest around our products. So before, we would maybe just advise about water and when you should water, and that service has been very well-accepted, and everybody who puts it in loves it. It is a recurring revenue stream, as you mentioned. The fact that you could turn it on and off remotely and check data and get utility data out of it fits the ESG story. So we're well now over 100,000 connections in the field that's provided mostly recurring revenue that goes with it. And that growth we do not see abating anytime soon. The value to the grower used to be simply about the time management on their farm, that they don't have to drive to each pivot, turn it on, turn it off, and that provided real money at the end of the day from a labor perspective. But now if you don't have to overwater, if you don't have to run the pivot longer than you need to, it saves on utilities, it saves on water. And so bigger firms and big food growers, especially on the ESG front, need that data to support their own ESG efforts. And if they can do all that, at the same time reducing chemical usage and water usage, signing up for our products and on a recurring revenue basis, makes absolute sense. It pays back for itself very quickly, which is why we see the high annual subscriptions be renewed. We see very little in the way of drops on that. Now it's a matter of getting it out internationally. And the more we get it out internationally, the more growth we'll have. So we feel like we're positioned very well, very uniquely, and the best algorithms have the most data. And so we feel like we're poised to do that.

Okay. Maybe on the broader Irrigation market, Steve, any feedback you're getting from customers and dealers? Just around the ag environment in general. Are they feeling any better today? And we recognized sentiment has been pretty poor in that market for a while, and I think we're all looking for an inflection point here.