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

All right. Welcome to the Valmont presentation at the William Blair Conference. I'm Brian Drab, the industrial technology analyst covering Valmont. I've covered the company since 2009. And this, I think, is probably the most exciting time for the company that I've seen in the time that I've covered it in terms of all the end markets coming together. There are so many great long-term themes, and I'm excited for them to present today. So today, we have with us Steve Kaniewski, CEO; CFO, Avner Applbaum; Renee Campbell, who is the Treasurer and Head of -- Global Head of Investor Relations. And also we have in the audience, Aaron Schapper, who runs the infrastructure business. So he'll be available for Q&A as well. I should mention to you that you can find a full list of disclosures on our website, williamblair.com. And also the breakout session with Valmont will be upstairs in the Richardson room immediately following the presentation. So at this point, I'll get out of the way and turn it over to Steve. Thanks very much for being here, Steve.

Thank you, Brian. Okay. So thank you for joining us today. Just a quick one on our forward-looking disclosures and we get right into it. So Valmont as of the end of 2022 had grown to $4.3 billion in revenue. Right now, market cap about $5.6 billion. We do operate globally around the world. We have operations or manufacturing in 100 different countries, 84 facilities that do pure manufacturing, not just distribution or sales and over 11,000 employees. As you can see, our geography differences in revenue are really coming from where we find opportunity for the products that we have. We don't target a certain percentage of sales in the U.S. versus international. We go where infrastructure markets take us and where agriculture markets take us. And one of the themes that I'll touch on a little bit here is the fact that agriculture really is growing much more substantially internationally than it would be even in North America. And I'll reference that when I talk about some of our project business as well as our business in Brazil. Operating income, you'll see really is dominated by our infrastructure business. Although we started in the agriculture space, and it's been the kind of life blood of the company, the infrastructure really has had much more enduring drivers over a longer cycle and less cyclicality than our agriculture business. And thus, it has grown to include utility, telecom, lighting and transportation as well as our galvanizing businesses that roll up into that -- or product lines that roll up into that. Now what really does our business model consist of? And if you look at what we view as value creation, we really start with our core values of passion, integrity, continuous improvement and delivering results. So our people, the markets that we serve, we have a real passion for feeding the world, as an example, or making the world a safer, better, more productive place. You couldn't ask for better drivers in a business model today than those 2 big themes of feeding the world and making the world a better place. We take each of those core values very seriously. And when we talk about integrity, it's not just the integrity of following the law or making sure we report the right financials. It's really being able to look at and work with stakeholders around the world with very different cultures, very different ways of doing business and providing a value to them and to the company in a very above-board way, how we handle our suppliers, how we handle our customers and customer issues. We've been around for 78 years, and it's been because of these core values that come from our founder, Bob Daugherty, that we can perform in the way we do over a cycle -- multiple cycles of economic expansion and contraction in some cases. If you look at our real focus areas, we fit very nicely into the sustainability model. As I mentioned, we're helping to feed the world. We do it with a lot less resource, particularly around water. And now with our technology services around agronomy also with a lot less inputs into growing a crop. So we fit very nicely there. If you look at the electrification around the world, in our utility business, we're helping the world do that thing that is kind of heralded and maybe only recently as you look at the Wall Street Journal and Barron's, where you're starting to see about the grid and the importance of the grid, right? Without a grid, you can generate all the power in the world, i.e., Europe, but if you can't distribute it around a continent, it doesn't do you much good. And we're at the forefront there. That business is really doing extremely well. We expect at least a decade long run as it comes to the grid build-out. There's lots of projections that are out there, but think of 75,000 miles of grid capacity just in the U.S. that will be needed to meet just the 2035 renewable targets, which is only about 30% to 35% generation. If we went to 100%, we'll be talking about circling the globe 10x over with grid. That's how we fit into sustainability. From our growth capital allocation, we really have been focused on allocating capital to our faster-growing businesses. And I'll touch on this a little bit with our run, grow, transform framework is we want to get as much out of our traditional businesses, what we call our run businesses that give us unique access to these niche markets and channels that are very enviable. It's hard to break into agriculture. If you're a grower, you don't accept people just because they show up with the latest sizzle technology that exists. If you're not going to be around when the crop is growing or potentially burning up or not growing correctly, if you're not -- they don't have a balance sheet that is bankable for a utility, they're not just going to sign you up. And those happen to be good moats for us is that channel. We have 700 dealers worldwide in agriculture. We deal with every major utility in the U.S., many also outside the U.S., every telecom provider, tower company in the telecom space and virtually every city from a city engineering and planning perspective when it comes to lighting and transportation needs. These are those markets, those niche markets I was talking about. And our belief and the belief of many is that return on invested capital is the best proxy for shareholder value over time. And as such, we really have done a lot of work around self-help and improving our return on invested capital, leaning out operations, facilities where possible and making sure we allocate capital appropriately, right? And that's the single biggest way to improve return on invested capital to get better contracts, prepayments, cash-to-cash cycle, et cetera. And we've recently increased our target and Avner will talk about that a little bit to 18% over the next 5 years. I mentioned our unique position to win in both these infrastructure and agriculture markets. These markets are niche. They are unique and they're hard to penetrate, right? If you think about a city planner from those of you from Pennsylvania, PennDOT. To get an approval from PennDOT to put your traffic structure up or high mass lighting pole for any of those you drove in from Midway, you'll see those kinds of poles there. That doesn't happen overnight. It takes engineering capability and expertise and the utility space, you look at a transmission line and to the average public, it looks like all the same pole. They're all the same height. They look like they have the same arms. In fact, they're not. Under the ground, they could have an anchor bulk cage, another one could be direct embedded. One may be 3/8 of an inch thick of steel. Another one could be 5/8th of an inch thick of steel. One is on a corner. Therefore, takes a lot more weight. All each and every pole is designed and each and every utility approves the engineering for that specific poll, okay? So the transmission market, again, very unique. If you show up with a plant and say, "Hey, I have capacity available, we'll say thank you for telling us". And if you're lucky, it could take years to get that plant approved. It's not a low-cost business, it's not driven by cost factors specifically because there's so much that goes into what a transmission product is in the term of the whole scheme of things. Our products are roughly 10% of our projects cost in the utility space, but they drive the other 90% of cost, whether it's liquidated damages, not being on time, you have a lot of union labor waiting there, right-of-way charges to be on the right of way, et cetera. So even if you push us really hard on price, but then we say, go ahead and walk and go to a competitor, and that competitor is a couple of days late. That could mean millions for what it is to do the construction on that line. Again, very unique markets. We have this unparalleled global footprint, which is really a strength and showed its way in 2021 and 2022. We had hyperinflation of steel, and we got COVID, we had restrictions. We could move around our supply chain. In our agriculture space, we have proprietary AI, which has been around for a while, not new, where we can say we're going to deal a project in Iraq, actually where we received the recent award of about $18 million. And we can say we need it here by this date, we want it as the low cost and we want to avoid ex tariffs. Our AI supply chain can take care of that. We have a footprint that is in China, in Dubai, South America, Europe and the U.S. We talk about our multiyear drivers. This is where we feel very good about the business. And if you look at agriculture as an example, Ag had a tear in the last 2 years in North America. That same tear is really just starting outside in the rest of the world. Brazil specifically has incredible drivers around soy, corn and other types of crops. And it has the distinct advantage of being able to double or triple crop versus a North America single crop once a year. Ultimately, Brazil will be the North American farmer, not necessarily because of productivity, but simply because they can grow more. Now the thing that is great about Brazil is they care about water scarcity. They care about making sure that water is on the field at the right time because the only way you can get 3 crops is to make sure that you water specific times of the plant's life cycle. You can't leave it to chance to the rain, okay? Arable land is increasing tremendously in Brazil and not Rainforest. This is a land to the West in Mono Grosso, specifically. But great drivers there, biodiesel now using soy, also has provided a nice floor on bean prices. And our advanced technology solutions particularly through our Prospera offering have really allowed us to go after agronomy. Agronomy is the most recession-proof piece of agriculture there is. If you got $2 corn, you're still hiring an agronomist. And if you can use less inputs, that's where a farmer -- that's their magic bell, not necessarily more yield, even though yield is important. But if you can use less inputs, you're saving them bottom line money. In infrastructure, the energy transition is just starting really. And as I mentioned, there will be thousands and thousands of miles of grid and again, I can refer you to the Barron's, the Wall Street Journal articles, the articles now, virtually every day talking about the grid. The returns on equity for the transmission companies are still at 10% to 13%, great returns. Financing has not been an issue for these projects. The main issue you have is permitting and right-of-way use. And the Biden Administration is still even kicking in now. FERC is going to redo a lot of things around right of way, because it's a known constraint. Recent articles out there about housing developments that because they don't have electricity. Everything else is built, they don't have electricity, and you can't bring these neighborhoods online. Electricity will be the next major constraint to the economy, and we are extremely well positioned. We are the largest in the space for steel monopole, concrete monopoles, hybrid, fiberglass, concrete type of constructions. Critical infrastructure, road infrastructure will continue to be done across the board. You'll see a rapid acceleration of telecom, not just in the U.S. where they put the brakes on this year. I always equate telecom. And for those of you who followed it, like a California traffic jam, 80 miles an hour, come to a dead stop for a second, rubber necking because they're looking at an accident on the other side, and then we go again. And that's the 5G build-out. It will be a traditional build-out probably over 5 to 7 years, not 3 to 5 like they had hoped. But globally, you're seeing 5G deployments in Europe. You're seeing 5G deployments in Australia. Again, markets we're already in and serve. And through our partnership with Ericsson, our JV that we have with them, we're in a very unique position to bring a lot of that infrastructure around the world through a single provider. I touch briefly on Run/Grow/Transform. And Run/Grow/Transform is really the framework with which we look at our allocation of resource -- resources, whether capital, human capital, technology, et cetera. We've been running the business well over the last 5 years, right? We had a lot of self-help we had to do. Lean manufacturing helped us tremendously to get more productivity out of our existing brick-and-mortars. And really, the last $2 billion in sales, growth has been done without adding much more in the way of brick-and-mortar. It's just been making our factories more productive. It's really looking at, are we maximizing price and price elasticity in the marketplace, right? We believe in the pricing advantage. We know that we are usually the largest in the market and people are just going to keep spreads to us. So if that's the case, let's figure out where that magic point is. And I mentioned lead times. If you take our utility business, we're up to 46 weeks lead time. This continued to increase. So even though -- and you'll hear some people say, well, steel's down, zinc's down. Yes, but supply/demand, what it is, there is absolutely no reason to be lowering price anywhere across the markets. Grow is really being able to adjust our resources in markets that typically we're already in. So telecom, how can we grow it in Australia? How can we grow it in Europe faster? How can we get more agriculture products into Africa, right? And thinking about the ways and the strategies across the company to help us to gain traction in markets that we have not served or have not served to the same level and extent. And that has provided growth. If you think of in our distribution products within the utility space, we sold lots and lots of transmission and yet we have a distribution market that's well over $2 billion a year, typically served through wood poles. We've now innovated new products into their that are as light as wood and 6x stronger. And so when you think about California wildfires or you're thinking about hurricanes, we now have a product that can last tremendously longer, but not require fleets of trucks to be redone in order to install them, not have to change the way the construction crews work out in the field. And because we know that with our customers, we can bring these innovative products. That's another example of growth -- or excuse me, grow philosophy within the company. Lastly, on transformation, is we do also look at what bets we have to take long term so that we're the disruptor to the market and not the disruptee. And so when we went into Prospera, as an example, we saw that there was a wide open space for agronomy in the middle. Most dislocated part of agriculture is agronomy. There's tens of thousands of agronomists around the world. Scouts is another term you'll hear. And how do they do it today. They may be walk into the field a little. If they're lucky enough, they'll fly a drone, but if they're taking too many pictures, they have no time to analyze those pictures. And of course, they have no machine learning to analyze. And so we use that as our platform in order to transform agriculture. And because we have a channel and we're respected by the farmer and we're not a fly-by-night company. We're not looking for to sell ourselves. They will listen to us and try our services. We're doing the same in infrastructure with drone services and what we can do there. There's a lot of drone companies. Very few have the AI and the machine learning that we do as the welders and the people who construct the equipment to begin with. We're also in a unique position as an OEM. If we inspect it, we can make the warranty longer. And to PUCs and to cities around the world, that's meaningful, gives us a distinct advantage there. I talked a lot about things in this slide, so I'll kind of go through it. You can read it for yourselves big macroeconomic drivers that are helping us in both infrastructure and agriculture. A little bit about how we view ourselves in going through the transition to an industrial tech company. I talked about our technology sales, literally sales to customers, recurring revenue, which we happened to double last year through some real focused efforts, using data science to leverage our own internal data to do more predictive and kind of smooth out those curves that we see in our business, really embedding technology across all of our people and processes internally to drive more innovation, more efficiency and obviously, new ways of working. The chatGPT-ing of the world, we've already been experimenting with for a very long time, as I mentioned, with our supply chain AI that we did in 2013. We've also used it for designing poles and structures. And we look at it in even in finance areas for forecasting and FP&A work. I'll close before turning it over to Avner talking about really our ESG leadership. This is not something we had to be kicked into doing. As I mentioned earlier, it's something we do every day. And we've done since the onset of the company and our tagline of conserving resources, improving life is not something new. It's been with the company since its existence. And so all we're doing is capitalizing and promoting the things that we do every day, whether it's to our people, from our social responsibility to the way we're governed with our Board of Directors, everything has been done with a passion that I mentioned from our core values. Obviously, now, this helps us with both shareholders. It helps us with recruiting employees, retaining employees, and as I mentioned, with that global footprint, even in places like Europe, where this is even a more heightened concern, we've really been able to address this very soundly for our shareholders and for all of our stakeholders. And you could read some of the examples that we have here of what we've been able to do just organically by having that come from me. With that, I'll turn it over to Avner for some financials.

Thank you, Steve. Good morning, everyone. Turning over to our historical performance over the last 4 years, we have a proven ability to grow in all economic scenarios. And we're poised to continue, as you heard from Steve, this sustainable profitable growth. Since 2019, you can see we increased our sales by over 50%. We expanded our margins, and we doubled our earnings per share and we've done all this through significant macro challenges, which you're all aware of, such as COVID lockdowns, supply chain disruptions, labor scarcity and hyperinflation. How did we achieve those through many areas such as our organizational structure, our disciplined business model, decisive actions around pricing, Steve mentioned that as well, operational excellence and our deep commitment to our core values. Going forward, we'll continue to rely on these guiding principles to enable us to continue this sustainable growth. Looking at our capital allocation policy, which is actually our strength. It underlines our growth strategy, and we aim to create a balance between investing for growth, preserving our balance sheet and our liquidity position and to return capital to our shareholders. Over the last 3 years, we deployed approximately $1.1 billion of capital, approximately 2/3 reinvested in the business and 1/3 returned to our shareholders. Our highest priority is to invest in the business, followed by acquisitions, which drives the highest value creation in our mind, followed by share repurchases and dividend. On the capital side, we're actually planning to increase our capital expenditure over the next several years, mostly in the technology area to support the high-growth markets, to accelerate innovation and to improve productivity and address labor scarcity. Acquisitions. We continue to augment our growth strategy with acquisitions, to expand our addressable market through tech and capability expansion, to continue to invest in global and high-growth businesses. As it relates to dividends, we're committed on continuing to increasing it over time as a function of earning growth, which aligns with our strategy of steadily returning capital to our shareholders. On share repurchases, we maintain an opportunistic approach based on cash flow generation, assessment of our intrinsic valuation versus other investment opportunities to maximize our risk-adjusted return. Summary, we maintain our capital -- we maintain our disciplined balanced capital allocation policy, which is driven by return on invested capital with the ultimate objective of value creation. Looking at our strong balance sheet and liquidity, we are on very solid financial foundation, and our balance sheet demonstrates the resiliency and the execution of our strategy. As you can see here, our debt to adjusted EBITDA is at 1.7, which is at the lower end of our desired range of 1.5 to 2.5x. We have no significant long-term debt maturities until 2044, which provides us with a near-term flexibility. And we're also highly focused on investment-grade credit rating. In summary, a strong balance sheet and ample liquidity supports our strategic goals, and flexibility and resiliency to withstand future challenges. Turning over to our cash flow. Our goal is to achieve 1x of net earnings or free cash flow through the cycle, which will continue to fund our growing transform initiative and will drive long-term shareholder value. Over the last 4 years, we generated approximately $650 million. You can see mostly in 2021, it was impacted by COVID, mostly due to supply chain constraints and hyperinflation. But over the period, we're able to achieve these results through inventory optimization, supply chain management, our digital business platform, automation solutions, which all drive working capital improvement. On top of that, our digital solutions are less working capital intensive. As we continue to execute on our strategy, we're confident that we can continue to drive strong cash flow to fund our growth. Looking at the last 15 years, here's a strong track record of our stock performance, where we're generating strong shareholder value, especially in the last 3 years, through our shareholder value creation model and decisive execution of our strategy, and we're continuing to focus to continue to drive shareholder value. Turning to our 5-year financial targets. Based on the positive outlook of the end market that Steve shared earlier and our ability to execute against our growing transform, we're focused on execution of our 5-year financial targets, which is 5% to 8% of organic growth, which demonstrates the strength of the markets we're in. And we are acknowledging the influence of the ag cycle. However, with a strong tailwinds we're getting in the infrastructure and global ag, we will be able to mitigate significant of the impact. That 5% to 8%, we're going to generate 12% to 15% of EPS growth and operating margin of 14% growth. We've actually done significant improvement over the last quarter, the last few years. We had significant tailwinds from COVID, but now we've kind of raise it from 10% to 11.5%, and we have a good line of sight to 14% based on all the initiatives that we're putting in place in our portfolio momentum, which is driving growth. All the strategic initiatives we have on working capital will support our cash flow conversion of 1x net earnings and return on invested capital of 18%, which we've actually also increased it significantly from 10% to 13%, and we're able to get it from 13% to 18% based on the operating margin expansion that I just shared through a lot of these transformation initiatives that have less working capital intensive and our focus on our working capital and capital optimization. We have line of sight to achieve these goals. So to summarize, we're confident in our ability to achieve these long-term goals based on all the initiatives we have in place, our run growth transform initiatives, and to be able to continue to provide shareholder value in years to come. And then I'll turn it back over to Steve for his closing remarks.

Thank you, again, for listening to us today. Just as a key -- a couple of key takeaways here. Very strong enduring business, solid foundation of the company, really a compounder kind of company over time, and we've been able to show that and demonstrate that. We have our run grow transform framework, which will really help us with the allocation of our capital, our human resources and our talent. We're leveraging technology across the board, whether that's to generate more revenue with lower capital requirements or to utilize things better and operate more efficiently, provide better customer service, ultimately to our customer base. We are aligned fully with ESG principles. It's not something that we have to be kicked into or that we have high risk in doing and it's just something that comes very organically and naturally to us. And lastly, we can deliver reliable growth with strong returns in markets that can mitigate cycles around the world. Thank you for today, and I appreciate your time.