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

Okay. Good afternoon. I'm Brian Drab, the William Blair analyst covering Valmont. And welcome to the Valmont presentation. Today, we're lucky to have with us CEO, Steve Kaniewski; and CFO, Avner Applbaum. Before we get started, I need to tell you that you can find a full list of research disclosures on our website, williamblair.com. Today, the format will be, I will ask Steve and Avner to step through a few slides, and then we'll shift to fireside chat. [Operator Instructions] But at this point, let me turn it over to you, Steve. Thanks for being here.

All right. Thank you, Brian, and let's go to the next slide. So just a quick snapshot on who Valmont is. In 2020, we had about approximately $2.9 billion in sales. Our market cap recently is $5.4 billion. We have over 10,000 employees in 22 countries, and we're broken up into 4 segments. Our utility support structures segment, which is assisting in generation, transmission around the world of electricity; our Engineered Support Structures segment, which really is broken down into traffic and lighting; and our Telecom Structures business, irrigation, which is -- the center pivot irrigation machine, and coatings, which is primarily our industrial galvanizing capabilities. You could see that the revenue breakout amongst the segments and then the operating income differentiation between the segments as well, with our irrigation group providing the most margin on the sales that they have. Ultimately, we support 2 big areas, agriculture and infrastructure development. Next slide. So what are some of the things that are going on in the markets right now? And what are some of the key drivers? Ultimately, aging infrastructure or new infrastructure is a big priority around the globe. So as you know from the proposed bills that are here in the U.S., as well as stimulus infrastructure spending in places like Australia, New Zealand and Europe, that's one of the most significant drivers for us. High demand for renewables and renewable generation and transmission. You have to generate the power, and then you have to get it to the grid or get it to the city centers. Oftentimes, these renewable projects are where land is cheaper and more available. And thus, it helps us on both ends, from the generation, whether that's our wind structures or our solar structures business, to then transmitting and distributing it in cities. And 5G, without going into too much detail, obviously, has really kicked into gear, especially coming off of the spectrum auctions towards the end of last year. Overall, food security and ag productivity are big areas right now, and especially COVID highlighting the need for food security. There's a lot of inflation in this area. Crop prices are up, and they provide drivers for net farm income, ultimately, which translates into sales for us. But also looking at ESG as a big component amongst large food growers [ are ] food companies, pushing it down to the supply chain. And then in our Coatings business, obviously the spend that you'll see in the infrastructure area, not just there but primarily there, is we want to make sure that the products are galvanized and can withstand a much longer time period as opposed to simply painting a product and then having to paint it over and over again during its lifetime. On the technology front, we're really working to provide a smart gateway on the infrastructure side of our business, as many of our products are ubiquitous through city, suburban and rural areas. And then on the irrigation side, it's really to provide a critical in-season look at the product -- excuse me, the plants and then what you can do about them subsequently to address both the yield and the input side, which is what makes it a much more unique solution in the marketplace. Next slide. So we recently completed an acquisition of a start-up company named Prospera Technologies based out of Tel Aviv. That company specializes in computer vision and machine learning. Came with about 89 people that we -- now are part of the Valmont family. It's a group we've been working with for 2.5 years. So we had very good traction in the marketplace from our solutions, Valley Insights being 1 of them. We now have on-pivot camera systems so that the strength of the algorithm is enhanced by the sheer amount of data that we can collect. And the resolution of that data, obviously off the pivot, is superior to other sources. The nice thing about Prospera is it's not dependent upon the pivot for the data source or the image. And thus, it will allow us to expand our total market that we serve to the other 96% of acres that are not underneath [ of a ] pivot. And so that is one of the differentiators, as well as the fact that it's a fully integrated AI company. There's many companies in AI that specialize in analytics, image detection, but very few that can take from the image through the anomaly and then suggest the changes that are needed to fix the issue. And then in our case, if it's under pivot, also make this not just a suggestion, but be able to follow through on that suggestion. It's a world-class team that we've pulled in, a very highly sought-after property in the AI space. Again, for us, it's a natural extension of our conserving resources, improving life as well as the fact that our cultures, which we could gauge over 2.5 years of working together, fit very well. They have the same passion, same integrity, the continuous improvement and the delivering results that we see in our own business. And so we're very excited. You'll hear a lot more about Prospera in our second quarter earnings call, and then ongoing going forward. With that, I'll turn it over to Avner.

Thank you, Steve, and good afternoon, everyone. During the last Investor Day, we announced our 3- to 5-year financial targets, which you can see on this slide. And our strategy, which includes operational excellence, expanding markets, accelerating innovation, which are all supported by our finance, operational and digital transformation, it's working really well. And we remain focused on execution, and we're confident in our ability to achieve these targets. Our goal on the revenue side is to grow at least 7% organically, and with acquisitions more in the higher end, around 12%. Really, the investment in R&D and value-enhancing acquisitions are contributing to the overall EPS growth, our margin expansion and the improved ROIC. [ Our ] entire company is focused on achieving EPS growth between 13% and 15% and margins -- operating margins of greater than 10%. Overall, the increase in the operating margins will be driven by pricing, the volume leverage which is supported by our markets we are in now, product line optimization as well as cost reduction and mix of higher profitable products. Our strategic initiatives on the working capital side is really enhancing our strong cash flow, which also gives us confidence we can generate free cash flow of greater than 1x of net earnings over time and drive ROIC in excess of 11% by reinvesting in our businesses for growth. So overall, in summary, we're pretty focused and confident that we can achieve these financial goals. And with that, I'll turn it back over to Steve.

Okay. And so why should you invest with us? First and foremost, we're building a very strong ESG foundation. Not just the fact that we've had products all along that do that conserving resources and improving life, but setting really ambitious goals for ourselves in this area. There's a task force that reports to me. We have initiated it for well over a year now, and it's really producing strong results there. We're accelerating growth through innovation and looking at higher product growth areas. So that's obviously where our capital is flowing. Prospera is 1 example, our telecom business is another. And we're working on innovation and technology within the infrastructure businesses as well. That's being infused all across the business, whether internal or external. So internally, things like Industry 4.0, autonomous welding robots, really first in the market with that. Many robots in the past [ tended ] to be programs and [ then went ] into 1 type of construction. So we now have partnerships and alliances with companies that really allow us to do that much more autonomously than ever before. Lean and Agile are the backbone of operational excellence, in being able to do more with our footprint in our facilities than we could, let's say, organically otherwise. We would have to add more brick-and-mortar. We've been able to expand capacity and meet this growth without significant brick-and-mortar or machine enhancements. And then, obviously, a clear strategy to both address our customers' needs and critical global development wherever it takes place. We don't set targets on revenue or operating income from regions. We look at where opportunities are, at both the short term and the long term. And then we take advantage of those; as an example, a recent investment in Kazakhstan. Kazakhstan will serve to be the next breadbasket of the world, with very strong government support and in a unique position to export to China, Russia, Southeast Asia and elsewhere around the central Asian area. This is where we look for investment that will pay off in years to come. And so looking at both the short-term of the business, the long-term of the business in order to create a healthy value creation for our shareholders. All right. And with that, Brian, I'll turn it back to you.

All right. Thanks, Steve. Just to follow up on a couple of things that you mentioned in your presentation, just maybe working my way backwards. Kazakhstan, you mentioned, how big is that project? Can you size that? I think the last time we -- this is our third fireside chat of the year. So I'm looking at my notes from the second one, and we talked about, I think, something like 4,000 pivots over maybe a 10-year period in Kazakhstan.

Yes, that's kind of what we expect from a base level of business. So if you look at the way we would use that to justify what we're doing, what the government has committed to, this is what the government itself committed to purchasing and distributing to its farmers in the area. Now we believe that the total market above that is much more substantial. And the government itself is giving a subsidy of 50% for the power, the pump, well and the pivot. And really looking at it in their point of view, from a policy perspective, as a diversification from oil and gas. And what other resources do they have: land, water, sunshine, and the trade routes that go through the Silk Road there. So we think there's a lot more to be grown on top of that as well as the fact that, that is just the Kazakhstan number. When you think about Uzbekistan, cotton and rice, other products we do there, as well as going into Russia, Eastern Europe and elsewhere. So we think it's a great long-term investment. It will take some time to build. We have about a 2-year cycle to build the plant and get all the permits, get everything going. But feel very encouraged, and we're already seeing an uptick in business in the region that we're servicing through other facilities right now.

Just to be clear, that 4,000 pivot number and the plan by the government to purchase that many pivots is -- they're committed to buying those from Valmont?

That's correct.

Okay. And how -- can you give us some frame of reference for how big a project that is relative to other projects in the past? I find -- in my research, I think that I found -- and I don't know that you've said this, but that the Egypt project totals around 3,000 pivots. I mean is that -- are there any projects that have been this big?

Well, no. I mean, now this is over a 10-year cycle. So it's a little bit protracted. But you're talking somewhere there north of $300 million that will come from this over a period [ of time ]. And so our investment, we can see the returns very quickly based on this guarantee from the government. So it will help build a market to serve the growing population, particularly in Asia. And it's relative size, yes, there's not much bigger than this elsewhere in the world, with the exception of Egypt, approaching.

Got it. And you mentioned Uzbekistan, are there other projects -- I always ask you this question. Everyone is always asking me this question. How is the pipeline of larger projects internationally? Because I think a major theme that people have picked up on with Valmont, that you've talked about, is food security that was highlighted by the pandemic.

Yes. Right now, if you think of Africa as a whole, but we break it down by region, sub-Saharan Africa tends to be projects that are somewhere in that $5 million to $10 million range. There's many of them. If you go to Western Africa, like Nigeria, Ghana, those tend to be somewhere in that $10 million to $20 million range. There's a number of those. These are all private investments. And then the Nile, and the development along the Nile is probably the most significant. Obviously, Egypt, we have done Sudan in the past. And with the lifting of sanctions there, that should help accelerate, because the capital flows will be easier. And then Eastern Europe, we've had real good success in Eastern Europe. If you think of Hungary, Bulgaria, Slovakia, there's a real need there to grow crops more efficiently. And the blanket over all of that is that private food companies and large growers are, because of ESG and the need to conserve water and be able to report on what they put down onto a farm to grow the products, is accelerating that all over the world. And sometimes, those occur in 25 to 30, maybe 50 to 60. But again, a lot of them because that's why ourselves and others have commented that the pipeline for projects looks very good. So as we have significant ones, we'll call them out as we're awarded those. But the pipeline has not been this active really ever.

So yes, and that's what I'm just going to ask, if you could, say -- let's say, the pipeline on a scale of 1 to 10 international project, large project pipeline for the 2015 to '19 period was a 5. On a scale of 1 to 10, where are we now in terms of how healthy that pipeline is?

Yes, it's between 9 and 10. I mean, it's a very healthy pipeline. And you take the high commodity prices, it makes the paybacks on those projects that much stronger, right? And so that's what's really -- food security is what started it. And if you take Egypt as an example, they did it before the crop prices. They now look very smart. Because now the returns on these projects are much stronger than they would have been even a year [ ago ].

Right. And you mentioned payback periods. So that's something that we always talk about with respect to that pivot -- price of corn, $6 to $7, a much different payback period. I think it's around 2 years or maybe even less at that level. Whereas for years, we were at a $3 price of corn plus or minus and a 6-, 7-year payback period. So are those numbers kind of in the ballpark of where we are today?

That's correct. There's been obviously inflation, we raised price but the overall equation for the payback is, we say, 3 years on the outside, likely 2. And if you have a drought or you have any kind of grow issues, it's a year or less. So -- but the median in there would be around that 2-year time.

Okay. And that's with the price of corn where it is today, you're saying? With commodities where they are.

Right. As well as the inflation that's taking place being accounted. So the farmer sentiment is still very strong because they can see it. And as we know, growers hate taxes, and so when they have money, they spend money. And if they feel good, and their balance sheets are in relatively strong shape, especially with the government repayment [Technical Difficulty] last during the crisis itself. That really helped them with debt and making sure that their balance sheets were [ short enough ].

Got it. So let's just shift gears to, I'm sure, your favorite topic, the price of steel. We talked to you 2 weeks ago roughly at the Analyst Day, and I think hot-rolled coil is up another 10% approximately since then. At the time you raised guidance somewhat, it was $9 to $9.70, up to $9.30 to $10. I think steel is one of the big factors that results in that wide range, first of all, and has you hesitant to raise it more. Now with the recent move in steel, does that have you leaning toward maybe the lower -- does it make you feel like the low end of the range? Are you're happy that you kept the lower end at $9.30? How does that affect you in the second half of the year?

Well, the reason that we raised guidance really came from looking at -- we built more months of backlog off of the previous earnings call. And if you take utilities, you're talking 6 months, you now have visibility kind of until the end of the year. And in ESS, we're at 3 to 4 months. Again, that gives us some stability, and we understand that backlog margin. And then the real reason, though, was the durability of the ag recovery and around both looking at the Egypt shipping schedule and having more firmness around that, as well as the fact that order rates through the spring carried forth and commodity prices held up. If you go back to '19 and '18, there was a couple of false starts. Therefore, many in the industry were a little hesitant to just go too far out until they saw that there was a little more durability in that. Ultimately, our guidance range is looking at things like steel. It's looking at COVID in some of the regions that we operate in. And thus, we feel it's an appropriate range for where the business is trending right now. If we execute well, then you tend to move more towards the top end, getting price back is always -- it's not unknown in our business, we always do get it back. It's usually timing. And so even if we get a move now, when steel continues, we will get it. But then some of your margins could be affected for a little while until you get the full recovery. And thus, why the range feels good to us.

Is it fair to say, though, that this last move in steel over the last couple of weeks, that's not that material, then, in the second half, given kind of pricing is locked in, you already have a lot of inventory of steel, hedges in place, et cetera? Or should we be -- should investors be concerned about this latest movement in steel? Relative to your...