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

Okay. Next up, we have Valmont Industries. Valmont is a diversified producer of parts and services for infrastructure and agricultural markets. The company operates through the 4 segments of Utility Support Structures, Irrigation, Engineered Support Structures and Coatings. Joining us today from Valmont is CEO, Steve Kaniewski; CFO, Avner Applbaum; and Treasurer and Senior Vice President of Investor Relations, Renee Campbell. Steve was named CEO of Valmont in December 2017 after serving as COO. He first joined the company in 2010 from Belden, where he was Vice President of Operations for the Specialty division. Avner joined Valmont as CFO in March 2020 after previously serving as CFO and COO of Double E Company, a private equity-backed equipment manufacturer and also held senior financial and operational roles at Ametek, Belden and TE Connectivity. Renee was appointed Treasurer and Senior Vice President of Investor Relations last month after first joining Valmont in September 2017 as Director of Investor Relations. She previously served as Director of Corporate Treasury at Intrado formerly West Corporation; and Vice President of Global Cash Operations at ACI Worldwide. Valmont has 21.3 million shares outstanding, stock trades around $213, $4.5 billion market cap, $788 million of net debt, $5.4 billion total enterprise value. Steve, Avner and Renee, thank you very much for joining us. I'll turn it over to you before we move into the fireside chat.

Thank you very much. Well, good afternoon, everyone. My name is Renee Campbell, Senior VP of IR and Treasurer. We recognize some of you may not be familiar with Valmont, so we wanted to share an overview with you today. So next slide. And this is our safe -- sorry, go back to the other one. This is our safe harbor statement and disclosure which you're familiar with. You can read through. It just serves as a reminder that today's presentation is subject to our disclosure on forward-looking statements as outlined on the slide. So moving to the next slide and the next one. Thank you. So in 2021, we celebrated our 75th anniversary as a company. 75 years ago, we founded the mechanized irrigation industry. And from there, we expanded into many products and solutions and geographies. And today, we are organized into 4 reportable segments that support 2 macro megatrend markets, infrastructure and agriculture. We have the Utility Support Structures segment, which supports grid resiliency and renewable energy generation; Engineered Support Structures, which supports infrastructure renewal, lighting and transportation markets, telecom, 5G build-out and connectivity and smart city solutions; Coatings, which is mostly hot dip galvanizing and that helps protect critical steel infrastructure; and also Irrigation, which supports food security and resource conservation through irrigation equipment, which we brand as Valley Water, and digital crop management solutions, which we brand as Valley Technology. In 2021, we had revenues of $3.5 billion, and I would draw your attention to the adjusted operating income figures on the right. We had solid operating performance across all of our segments this past year. We also believe that one of our key strategic advantages as a company is our global footprint. We have 85 manufacturing facilities in 22 countries, serving a broad spectrum of end markets. And this allows us to not only source local for local, but also to be flexible with our manufacturing capabilities, which we believe are key competitive advantages. We aim to be the #1 or the #2 player in all the markets that we serve, and we serve customers in more than 100 countries. Next slide. So this past May, we hosted a virtual Investor Day, and we outlined our strategy for sustainable, long-term profitable growth. And it's through executing on these 3 strategic pillars, which I'll touch on briefly in the next few slides. So if we go to Slide 6. The first one is ESG. Our company tagline that has been in place for many, many years is conserving resources, improving life. We like to say that Valmont was ESG before it was cool because it really is a natural extension of our company's purpose. We published our first sustainability report in 2014. And since that time, we have significantly elevated our commitments and our disclosures, particularly over the last 12 to 18 months. In mid-2020, we formed an ESG task force that was led by our CEO, Steve, and it's made up of senior and executive leadership. We're operationalizing ESG really throughout all of our businesses and teams. So just a couple of quick highlights on the environmental side, in addition to compliance and resource optimization, demonstrating how really all of our products and services and solutions are aligned with a sustainable world. And we really feel that, that is a true differentiator, and it's what's moving us forward as a purpose-driven organization. In fact, about 90% of our net sales support ESG principles in some way. On the social side, we've initiated new diversity targets with goals for 2025 and 2030. We've launched several employee resource groups within the past 2 years. And we're also working across our entire supply chain to not only be a strategic ESG partner to our customers, but also expecting the same from our suppliers and other business partners. On the governance side, we've increased diversity of our Board over the past couple of years and recently formed a Board-level ESG Committee. And I also want to mention that our restated credit agreement that we signed this past October includes sustainability pricing adjustments, which are tied to metrics for carbon intensity and electricity usage. We are launching or releasing our 2022 sustainability report in about a month, and we'll be hosting an investor call to share more detail about that. Next slide. The second strategic pillar is expanding our future addressable market. So as we look across our portfolio, we are in a unique position to take advantage of market growth, whether it's organic growth, new products and services or geographic expansion. The key drivers in our business remain strong, both legacy drivers, along with some of the new ones, such as demand for renewable generation, grid hardening, better connectivity around the world and -- excuse me, and food security and the reduction of inputs. Our key technology drivers are around smart technologies. Not only are we focused on tech in the ag space, but we're also across our infrastructure businesses as well, which leads right to the next slide. So we're accelerating technology growth everywhere you look. As you drive down the road, you'll see a lot of Valmont products along the road, in the field. We're uniquely positioned to take existing structures and move them into a digital gateway. So we can bring smart city and smart grids to integrate those with, say, the needs of a municipality [Audio Gap] we focused on the terms data science, computer vision, machine learning. Last year, we acquired Prospera Technologies, which was the second-largest acquisition that Valmont has ever done. And together with Prospera, we have created the largest integrated AI company in all of agriculture. And what really sets us apart from all other companies who are focused on precision ag is that there is a lot of data that is really focused around the beginning and the end of the grow season, but not a lot of in-season data. And it's what this -- this in-season data is what makes the algorithm stronger, it's what makes decisions or agronomy decisions more relevant. And no one else in the industry is doing this. So we are building a recurring revenue stream. We're helping the grower reduce inputs and increase yields and will benefit from technology type of margins. And it's also really well aligned with our ESG principles. And as a company, we're also focusing on automation across our factories through Industry 4.0 and the connected factory, which is especially important as we look at labor constraints and capacity optimization. Next slide. So looking back at our performance over the last 10 years, we have clearly demonstrated our resilience and ability to execute through the cycles. Even during the down cycles, we've been able to maximize profitability while still investing for growth with disciplined and balanced capital allocation strategy. Next slide. So looking at cash flow, our long-term goal is a cash flow conversion of 1x net earnings. And that's going to fluctuate year-over-year due to things like project timing and rapid cost inflation, which we really saw this past year in 2021. But you can see in 2019 and in 2020, we had very strong cash flow. And we have stated before that when we do experience very rapid raw material inflation, it does impact our cash flows in the short term. It also leads to higher working capital levels. We have strategically bought raw material to support our customers, mitigate supply chain volatility this past year, and we had just strong sales growth. And as history has shown, we will see improvements in working capital as inflation starts to stabilize. And for 2022, we do expect free cash flow to meaningfully exceed net earnings. Next slide. Our balance sheet and liquidity is -- we have a very strong balance sheet. We have no significant long-term debt maturities until 2024 -- or 2044, excuse me. Our leverage ratio of currently 1.9x remains well within our range of 1.5 to 2.5x, which we desire. And we have ample available liquidity, as you can see, to support our long-term strategic goals. Next slide. So when we think about capital allocation, our policy has been that we take a balanced approach, really between investing for growth and returning capital to our shareholders across the cycles. Our highest priority is to reinvest in ourselves to drive organic growth and then that will be followed by acquisitions. And we believe that this will -- the combination of the 2 will really drive the highest returns for our shareholders. We had -- over the past 3 years, you can see that about 75% of our allocated capital has been towards reinvesting in the business through these ways and then about 1/4 has been towards share repurchases and dividends. For 2022, we expect CapEx to be between $110 million and $120 million, about $40 million to $45 million of that will go towards supporting strategic growth initiatives. And we do prioritize projects that have a high return on invested capital. We have a good pipeline of acquisitions that are mainly focused on expanding our addressable market. Many of these will be through technology acceleration like Prospera with this past year and also investments in global businesses and high-growth businesses. And we'll continue to return cash to shareholders through dividends. We just -- our Board just approved a 10% dividend increase earlier this week, and we approach share repurchases opportunistically. Next slide. Our goal is to grow revenues over the next 3 to 5 years, at least 7% organically, around 12% if we include acquisitions. And we believe investments in R&D and acquisitions will help to drive revenue but also EPS growth and also margin expansion and improved ROIC. So we are looking at EPS growth between 13% and 15% over the next few years, on average, with margins of more than 12%. We have strategic working capital initiatives to enhance strong cash flow, as we were talking about earlier. And that gives us good confidence that we can generate the free cash flow more than 1x net earnings over time, as mentioned, and also a goal of ROIC above 11%. Next slide. So why invest in Valmont? Well, first and foremost, we are building a strong ESG foundation across the company. We're also accelerating growth across the entire portfolio. We're infusing technology within the portfolio, both through our products and services as well as internally in our operations. And we're advancing operational excellence across our factories through Industry 4.0, and we're using Lean and Agile to continuously deliver results. So in closing, I would say we're executing a clear strategy across the portfolio for growth and for profitability, while generating strong return on invested capital to increase shareholder value.

Terrific. Thank you, Renee.

Thank you.

That was a great background. I wanted to start by diving into some of those macro drivers you mentioned for your business, particularly on the Utility Support Structures side, and around grid hardening and renewable energy mandates, how you're seeing that translate into orders, pipeline of new opportunities for that business both this year and beyond?

Thank you.

Go ahead.

Over to you.

Go ahead. Sorry.

Yes. So I'll start and then, Steve, feel free to jump in. So looking at our infrastructure and our utility business specifically, the market outlook continues to be extremely strong, and that's actually evident if you look at our backlog of over $774 million. So very strong backlog going into the year. So the driver is, first of all, aging infrastructure, as we mentioned, with years of lack of investments and actually the increased electrical consumption outpace the transmission investment pretty much over the past decade. So that's going to be a strong driver for us. We've seen a lot of natural disasters. You can see wildfires, hurricanes, et cetera. So replacing the aging wood structures is another key driver and, of course, to enhance reliability as well. Another main driver is the renewable energy. The shift towards renewable energy will have actually an impact on investment in the new generation. It requires connection to the electrical grid utilizing such station, transmission structures, et cetera, which supports that as well. So when you kind of put that all together, you look at the lack of the investment, the industry drivers, it will require a substantial investment. And we're positioned very well with our substation packages, with our type of structures between steel, concrete, composite, et cetera. And that will all continue for the foreseeable future and continue to support our business.

Terrific. And looking at the Engineered Support Structures side, do you expect continued tailwinds to that business from the ongoing 5G build-outs by some of your major wireless carrier customers?

Yes, sure. I'll -- I can start there as well. So yes, absolutely. Even though it started a little slower than it was anticipated, there's significant build-outs over next 5 years or so of close to $300 billion. So there's significant investment going into this area. And even though there was a slower-than-anticipated build-out, our group business actually grew 26% year-over-year to about $240 million. So we had a really strong year there. So when you look at all these new generations, when you look at the 3G, the 4G, the 5G, each one of these generations, which will require this additional densification, as you need more antennas, more poles, structures, et cetera, so that will continue to drive a lot of growth for our businesses. And when you look at the phases, the initial phase of the 5G, we need additional macro towers. We have a business that supports that very well. And when you move into the second phase, on the more of the network densification, future small cell activities, so we support that business as well. And maybe one more point which was really more apparent or intensified by COVID, a real push towards build-out of connectivity, closing the digital divide, more towers and poles to cover suburb and rural areas, all those really position us really strong for -- to continue to grow 15% -- 10%, 15%, 20% over the next few years.

Great. Moving to Irrigation, which has seen great growth recently. If we look at the international side of that business, from here, what does the pipeline of project opportunities look like there? And what type of investments is Valmont making to support some of the growth you might anticipate in those regions?

Okay. So the international pipeline is really being driven by the need for food security, especially coming out of COVID. You throw that with a rebound in economic demand across the globe, also contributing to that, and the natural long-term secular trend of population growth and a desire for more protein-based diet. And whether that is animal or plant protein, it has to be grown, either has to be fed or grown. And all of that together is what is really kind of pushing different countries around the world to move ahead with agricultural projects. Also, if you take ESG just as a general driver, there's a need to bring less land into production while doing that. And so to make land more productive, you typically irrigate it and you then want to monitor all the inputs and so that you can maximize the yield, and that's where our technology solutions also come in. So we see the international project pipeline really adopting technology even quicker. Think of landlines versus cellular phones going back ways, people just usurp right over. And that's what we're seeing there, along with the diversification off of typical oil and gas and other types of things would bring in foreign currency since most of these commodities are dollar-denominated commodities. And we're seeing strong growth, extremely strong growth in Brazil. We're seeing strong growth in the Middle East. Eastern Europe has been a very strong area there because it is a breadbasket. And Western Europe has seen a rebound over the last couple of years as commodity prices have moved up. So we have both the ongoing businesses as well as the project pipeline has remained very robust, and we anticipate more and more as the cycle builds, we're pretty early on in the cycle. And these are typically in the 7-year kind of run. And so right now, we're only in year 2.

Terrific. And specifically, can we talk about Valmont's solar tracker product where you're seeing the most interest in and adoption of that offering globally?

Sure. When we bought the business, it was primarily based in Italy, North Africa and then a small piece in Brazil. And what we knew from the time was obviously the U.S. market is the single-largest market that we could deploy trackers. And Brazil had tremendous opportunity just because of the distributed nature of the country and outside of hydro, not really having a lot of generation in other areas. So we've built a business there that is based on both utility scale and distributed generation. Some of our competitors tend to just stay in the utility space. We believe that there's a much less risk, easier execution and more margin, frankly, in the distributed generation space, think less than 100 megawatts as opposed to larger than 100 megawatts. So we have a balance between the 2. And being that we've been in the utility industry for over 40 years and deal with metal prices and supply chain shocks and things of that nature, we've gotten very good at knowing how to price this and procure the raw material so that we can ensure our profitability. So the U.S. will continue to be a growing market for us. Brazil is actually a booming market in not just the utility space, but also on the agricultural side. And so we have both an ag solar solution for large agricultural producers as well as the utility and distributed generation side. There's been some changes in the laws in Brazil where net metering will be locked in at today's rates. So even though it will get cheaper to produce, you can sell it back at a fixed rate based on today. So over the next 5 years, we see that as a tremendous opportunity for us. And with our Brazilian footprint, we're uniquely positioned to capitalize on that and expand it even further.

And Renee mentioned the Prospera acquisition recently. Curious if we can elaborate on how Prospera as well as the recent PivoTrac acquisition, fit into Valmont's growing ag tech offering and what you're seeing as well as your expectations for adoption of this part of your portfolio from here?

Yes. The PivoTrac acquisition, just fit -- dovetail right into our normal AgSense business, also brought us a little bit of control in the flood space that we didn't have previously. And so it's a great recurring revenue model. This is something now that this part of tech to growers and farmers around the world is very well understood and really helps to conserve water, power and use less labor. Instead of having to drive around and turn these things on, you can do it all through remote telemetry. The good thing about that has been that, that instilled in the growers confidence that technology solutions that we offer will actually provide a payout and a payback. And so now when we throw Prospera into the mix, which is very unique and is in-season agronomy at the end of the day, on both not just pivot areas but also in dryland areas that growers are much more accepting of the technology and at least willing to take a look and experiment with it. We're rapidly moving forward in the product development phase to get on more crops in more geographies. We now can do imaging from any image source, whether that's satellite, drone or ground imagery. And so all of that has helped us really to move forward on our initiatives related to that area that is a fairly sizable niche, but a niche that has really been largely ignored by most of the agricultural world, which is during the in-season piece of this. A lot of people are focused on planting and harvesting, not as many are focused on that in-season piece. And so we've seen great uptick, 45% year-over-year. We expect that to get a little bit closer to the market as we -- as the business now is sized around $100 million and move to like a 20% to 25% range of growth as we go forward.

Great. And we have a question from the audience. Is Lean thinking still a strong push at Valmont? If yes, what are your main areas of focus?

Yes. So we actually believe that Lean has allowed us to do what we've done over the last few years. And so we've grown in the last 3 years, probably $1.3 billion without adding any real footprint. And that's because our utilization within our factories has gone up tremendously due to our Lean efforts and our Industry 4.0 efforts. And so right now, we always concentrate on flow, at single piece flow, in particular, because of the engineered nature of our products. And so we're going to continue to move down that path. We're adding robotics into operations that are very, I'll say, time-consuming and not something that a skilled tradesmen wants to do over and over. And so that's an area that we're uniquely positioned in with Path Robotics, where we're using an AI engine to actually control the robots. So you don't have to teach the robot in advance, the robot will take the drawings and do what it needs to do on large structures. Many people do this on smaller structures already today. But very few, if any, do it on these large, highly variable structures. And so that's another area that we're investing in as we go forward. And then we have obviously Lean coordinators throughout each of our plants that work on what may be specific to that plant. It could be TPM, if you think of cranes or galvanizing operations, it's a big emphasis for us. And so we look for areas of opportunity across the footprint. And so again, I believe it's the single strongest reason why we've been able to add this much revenue without adding footprint.

Yes. And maybe I'll just add one more point, right, that we -- I think a couple of quarters ago, we mentioned that we had actually very strong shift complete on time. Our SCOT metrics were very strong this year. Even with the supply chain constraints, even with the labor constraints, we still were able to really perform at the highest level and be able to produce our shipments on time, and I think that's also a testament to all the Lean efforts that we've been working on.

And maybe one last one. Obviously, a live and dynamic situation. But curious how you all approach and manage geopolitical risk across the organization?

Yes. It's something we've done since the inception of our company. Because agriculture is always global and where things are grown is not always the most stable. It's something that we keep a close tab on and a close eye on. And we're very prudent with where we go and where we set up shop, who we work with in regions across the world. And so we've had things in Libya, in Sudan. Obviously, we're doing Egypt, Kazakhstan recently, and now obviously, Ukraine in those areas. And the fact is that we always first take a look at, well, we're helping grow food. And primarily that is something that even the state department and others do not come in hard on a sanctions basis when it comes to food. We need food, we need to feed the world. And then from a supply chain risk perspective, that is exactly why we have a distributed nature of it. We have plants all throughout the world, and we're able to -- if something is taken offline for a week or 2 weeks, we're able to readjust the supply chain using a lot of algorithms to in order to get things there complete and on time. As it pertains to the immediate situation, it will affect wheat, it will affect corn globally. It is a big export out of Ukraine as well as Russia. And so I would expect those markets to tighten for a little while. And then other parts of the world, we'll have to step up to address that. But we're comprehensive. We make sure we get our money upfront in all these regions. Our plants are well insured. We have geopolitical risk insurance. We have an international Board who is very familiar with these issues. And so it's just something that we manage tightly often, and a lot of things in place to ensure we don't run into problems.

Great. That's very helpful. Steve, Avner and Renee, thank you so much for joining us today. We really appreciate it.

Thank you as well. Take care.

Thank you very much.

Thanks.

Have a great day.