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

Good afternoon. Welcome to the CJS Securities 24th Annual New Ideas Conference. Chris Moore from CJS. Very pleased to have with us the management team from Valmont Industries. Presenting from management is Avner Applbaum, CEO; Tim Francis, Interim CFO and Renee Campbell, Senior Vice President of Investor Relations. Just a quick reminder of the format, I'll hand it off to management momentarily for a 15-, 20-minute high-level overview. After that, it will be more of a fireside chat format. With that, Renee, why don't you get us going?

All right. Good afternoon, everyone, and thank you, Chris. So I just want to briefly start off by drawing your attention to Slide 2, which is our disclosure on forward-looking statements, which applies to today's presentation and to today's discussion. So with that, I will turn it over to Avner.

Thanks, Renee, and thanks, Chris, and thank you all for joining us today. I'm pleased to have the opportunity to share with you some of our key drivers for increasing our shareholder value. At Valmont, we have a strong foundation as evidenced by decades of growth and success. We'll continue to be laser-focused on our 2 core segments of infrastructure and agriculture, both of which have compelling growth opportunities across many parts of the economy in both North America and worldwide. I'll also be sharing with you some of the growth prospects and our competitive advantages. And finally, the emphasis and the work we're doing around optimizing our financial performance to be more efficient and more effective, both on the top and on the bottom line. So let's start with a quick snapshot of our size, our scale and our focus. For those of you that are new to our story, we're based out of Omaha, Nebraska. Our year-to-date sales through Q3 were about $3.2 billion. We operate in over 100 countries with more than 80 manufacturing facilities and 11,000 employees worldwide. And as I mentioned, we have 2 segments. Both of them have strong runway for growth. As you can see here, our sales are primarily in U.S. and Canada. We do, however, have strong presence in markets worldwide where we can meet both the desired profit and ROIC thresholds through our competitive advantages. A couple of examples here. If you look at agriculture, our local-for-local approach, we have plants in U.S., Dubai, Brazil, which can satisfy the regional demands and the requirements while we increase our resiliency, which has proven to be essential during global crises like COVID-19. Another example is we're also strategically positioned in low-cost regions like Mexico, Poland and India, which both drive cost efficiencies and they also offer us access to skilled talent. So as you can see, our geographic presence, it's intentional and it's purpose-built for driving shareholder return. One last thing on this slide. I'm sure you all know Valmont began as an agriculture company, but we evolved since then. And you can see here, the majority of our sales and profits actually come from the infrastructure segment. And I'll be sharing more with you on opportunities in both of these segments in a few minutes. So all in all, we believe our size, our presence and our capabilities will set the stage for many more decades of success. So if we take a look at -- evidenced by that success, if we take a look at our bottom line performance over the last four years. And as you can see, when we focus on the right kind of growth, and by that, what I mean is growth that is profitable, we will drive value over the long term. As some of you might know, before becoming a CEO last July, I was a CFO here. And before that, I held various operational position, full P&L responsibilities. And that diverse experience gives me a unique perspective. What I understand is from an operational standpoint, every decision we make every day can significantly impact our bottom line and our capacity to reinvest in the business for growth. So if we start with the operating margins, you look in 2019, we're around 8%. Since then, we took very deliberate actions to improve our margins, such as price leadership, productivity improvements. We optimize our product lines. We optimize our processes using lean, using technology, data insights to improve our margins. Unfortunately, some of those margins were impacted by COVID. And you can see in 2022, we were just over 10%. What we did see, though, in 2023 through the third quarter, we were able to achieve more than 11%. So finally, the fruit of our labor, we can see them on the P&L. One other measure I really like to pay close attention to is ROIC or return on invested capital. That metric, it's a fundamental metric for financial health and for performance. And without strong returns on capital, it's very difficult to sustain growth. Also in that area, we improved, and we intend to keep a relentless focus on this measurement as well as operating margin. Now not to say I don't view top line growth as vital. I most certainly do. It's both top line and bottom line for us here at Valmont. And with that mindset, we think we're well positioned to capitalize on a few market trends that are compelling. Now let me walk you through some of those market trends. So if we take a step back and look at the big picture as it relates to Valmont's growth prospects. We have opportunities across multiple sectors of the worldwide economy. Because as the world grows, think about it today, more than 8 billion population, with the increasing emphasis on climate resilience, the need for products and solution grows. Let's start with energy, energy transition or, in other words, moving to power sources that are more renewable. It's happening, and it's once-in-a-lifetime opportunity. So what does that mean for us for Valmont? There will be more demand for our products and solutions that enable renewable power sources. So one example is the mandate in the U.S. itself for 2035 would significantly outpace what is supported with current infrastructure. And that's just one example. We also have opportunity to provide solutions across critical infrastructure market where governments and private entities are spending significantly to build new and also to replace existing roads and other vital infrastructure elements. And then of course, there's 5G, and there's -- in telecom. The rollout is still in early innings. So the coverage was key upfront in the U.S. market, and now we move on to densification. But we do also have presence and relationship in markets outside of the U.S., such as Europe, U.K., Australia. And as those markets will be pushing connectivity, we'll benefit from them as well. Now if we switch to the agriculture segment, we continue to build on our legacy of helping to conserve precious resources and to feed a growing population. So many of those 8 billion people I just mentioned, they're also food insecure. And Valmont is part of meeting those needs in a way that's more sustainable, which is less water, less labor, using advanced agronomy services. All of this matters to growers, and the demand will continue to increase. So the need for products and solution is pretty clear. And now let me address why Valmont is well positioned. One of the things that strikes me about Valmont is our proven competitive advantages. When we focus on our core, we do well. And we're differentiated in a number of reasons. One is the high barriers to entry. If you think about that, it's cost, expertise, footprint, relationship, breadth of products offering. It's very hard to imagine this combination being replicated. In fact, I believe everything on this page sets Valmont apart from the competition in a very good way. Let me share with you an example of our breadth of expertise and offering. So just last month, I was in Houston, Texas, visiting some of our facilities. So in one afternoon, in one market, I was able to see several of our capabilities. So I started off with our steel structure facility, and I saw products supporting solar, 5G, EV charging, sign structures and utility markets. Then I visited our concrete structure facility, which serves the utility markets, helping with the hardening efforts. And then finally, I visit our coating facility which uses zinc galvanizing, powder coatings, all to ensure our infrastructure product life. So underpinning all of this is our scale and our customer relationship, and we see that as unmatched. We've earned that trust over decades, and we'll work hard every day to build on that trust and to grow new opportunities. And now let's look at our most recent quarterly results. Now so far, I've been talking, making broad strokes on our opportunities and positioning. To shift gears a bit and look specifically at how we perform over the last quarter, and we performed well. You can see we navigated mixed demand with infrastructure demand being robust overall. So we achieved strong adjusted operating margins and adjusted EPS, and both have improved significantly year-over-year. We also generated strong operating cash flow, and we also returned capital to shareholders through dividends and share repurchases. Now as we look into the future, we'll continue our balanced approach to capital allocation. So our disciplined capital allocation policy is a key strength of ours that supports our strategy, and we balance between investing in growth, preserving our balance sheet and returning capital to shareholders. Year-to-date, we deployed roughly $300 million of capital with about 2/3 return to our shareholders and 1/3 reinvested in the business. So our top priority is to invest in the business for organic growth. And over the last several years, we made some meaningful investments, some such as Brazil and Dubai. We've increased our irrigation capacity, the local-for-local approach I recently just mentioned. And we're also increasing our U.S. pull operation capacity by roughly 10%. Next priority is acquisitions, and we have a strong pipeline which we assess with both strategic filters, such as portfolio enhancement, addressable market expansion and also financial criteria of beating cost of capital by year 3. And then we utilize a rigorous due diligence and integration process to ensure we meet our desired returns. And then finally, we'll reward our shareholders through growing dividend and opportunistic share repurchases based on cash flow generation and intrinsic valuation assessment. Now I'd like to address a few additional topics of interest to shareholders, including our performance and the future. So on the next slide, I'll hit some of those topics. One thing I've routinely been asked about over the last 6 months as CEO of Valmont is, what's different? What's changing? How does my philosophy or my perspective differ from where Valmont headed before? Well, I think it's important to note that there are a lot of things that are not changing, and let me sum up a couple of them for you. First, I respect and appreciate the legacy of success that Valmont built over almost 8 decades. I have a relentless focus on creating value to shareholders, and I believe Valmont is in a great position to continue its legacy in a sustainable way. Now second, even though I most recently was a CFO, my previous operational leadership positions gives me a strong appreciation for both top and bottom line. And the compelling thing about Valmont is we know what we do well. And when we focus on our competitive advantages, we focus on profitable growth, we use our strong balance sheet, we will continue to succeed. Now I won't be genuine if I didn't share with you a couple of differences in approach, so here's a few things for you to think about. First, if you probably already gathered from my comments, I very much believe in focusing on our core segments, on what we do well and when we have proven opportunities for profitable growth. We leverage the technology, we're constantly innovating, and we're always enhancing our engineering expertise, but we're not going to be chasing technology just for the sake of it. Second, we're focused on meeting customer needs that are clear and that are present with an eye on what the next decade may bring, tremendous opportunities for us around the world, both near term and beyond 2030. And we're going to stick with our model of providing solutions with products that the world needs. There are many ways to get repeat businesses, and I believe we're well positioned to do that with our trusted relationship and with the competitive advantages I've just shared. Pursuing unproven models, especially when the market hasn't asked for it, it's not additive to either top or bottom line at this time. Now we also announced an organization realignment, so we can simplify and drive efficiencies throughout the company, so we can make quicker decisions and we can drive greater accountability. Now regarding the 2023 performance versus earlier expectations for the year, a couple of areas impacted this. In agriculture, we did predict that -- the market stability, and we relied on projections of elevated net farm income. Historically, that driven robust pivot sales. However, what we've seen is that the farmer sentiment remained muted throughout the year due to higher interest rates and lower commodity prices. Also, the timing of some of the international projects impacted the annual performance. If you look at infrastructure, we saw an abrupt pullback in telecom, resulting from decreased CapEx spending by wireless carriers. Now if we dig further into the AgTech impairment, so during the third quarter, as we do every year, we conducted our annual impairment testing for goodwill, and we concluded that impairment of about $137 million was warranted. The factors that contributed to this impairment charge were the recent decline in the North America market, the higher weighted cost of capital due to the increased interest rates and the significantly slower growth adoption rates for Prospera agronomy technology solutions. I will point out, though, that we do have strong confidence in our technology solutions, and now both Prospera and Valley teams are integrated, and we're streamlining our commercial strategy to better serve our customers. And finally, regarding our long-term targets. We intend to provide an update on our targets in the upcoming months. We recognize that several factors will influence these targets, including the cycle in both agriculture and telecom. We will continue to invest in innovating across our businesses, and we're also looking at growth initiatives with greater focus on how we can best serve our customers' near-term needs while we deliver profitable growth. And as I highlighted in the earlier slide, we have demonstrated operating margin improvement and have made substantial progress on ROIC over the last few years. We anticipate to continue this improvement on both metrics going forward. And we will remain committed to delivering a compelling value proposition to our customers and to leverage our competitive advantage. Okay. So to wrap up my comments, I'd like to make a few key points. We're working hard to maximize our financial performance, and we've taken definitive steps in streamlining our operations to create both efficiency and effectiveness. We're very much excited about the opportunities. And with our capabilities, with our portfolio and with the market demand, we believe there's a long runway for growth for Valmont. Finally, our discipline and focus on innovation for a reason, innovation that meets demand, we believe we will drive shareholder value. With that, I'll turn it back over to Chris, and I look forward to answering some of your questions.

Terrific. That was awesome. Thank you, Avner. Maybe we'll just start with kind of general visibility. Now versus this time last year, more or less confident? And what are the potential unknowns or wild cards for 2024?

Okay. So thanks for the question. Let me start off with, we're more confident going into 2024 versus going into '23 and for 2 main reasons, I'd say. One, the new leadership team. We took time, we dove into the businesses, we dove into the markets, which gives us a stronger confidence in our forecast and our goals. We're going to take -- we're taking a very realistic approach. And so that's one area of the actions we're taking. Also looking ahead, I am expecting a more stable environment. There's less unknowns going into the year. If you look at some of our businesses, TD&S, there's good visibility into that part of the business, so have better visibility. There's still -- as always, there's unknowns with the ag market. Just there's always less visibility into the future. When -- you asked me about the wild cards for 2024. I'd say there are a few. So when I look at the Brazil market for one, I'd say that with the gross access to capital, looking at how the FINAME financing is going through and the grain prices, which always have an impact, and we have seen some decline in some of the grain prices and soybean, which has a big impact on Brazil, so we are very well positioned in that market. And with the growing seasons in Brazil, that is a strong market for us, but there's still, I'd say, some unknowns as related to that market. Another unknown would be telecom. We've seen some slowdown in spending in 2023. We expect it to keep to be soft over the first half year or so and hoping it will recover in the latter part. And maybe finally, on a positive side, the transportation spending, the IRA, the IIJA money, when does that start flowing into the businesses, which could provide an uplift for us.

Perfect. Very helpful. Yes, maybe just on the interest rate side, where specifically did the higher interest rate environment have the greatest impact on you guys for the first 9 months of '23?

It's Tim Francis, and I'll take that one. It's really primarily in 2 product lines. We talked about in third quarter earnings release that we have seen slightly weaker demand in our residential and commercial lighting business. And we'd attribute a lot of that to the increase in the interest rates. Secondarily, a lot of farmers, especially here in the United States, have an operating line of credit that they need to utilize to fund their operations. And we believe that the higher interest rates have been a factor in the -- partial factor in the weaker demand we're seeing for pivots.

Got it. Appreciate it. One of the goals that Valmont has talked about is making the business less cyclical. Can you talk a little bit more about those efforts, where you are in the process?

Sure. So part of our business is absolutely cyclical, will continue to be cyclical. And areas we're taking to improve, if you will, the cyclicality is expanding our portfolio, our product offering and markets. And let me touch on them quickly. So if we look at going into new markets, such as our investment in solar that we made several years ago, and it's getting tremendous momentum, growth in that area is supporting that initiative. If you look at the geographic presence as another example, so I mentioned telecom, and that was impacted by what happened with the North American carriers. But we do have strong relationships through the ConcealFab acquisition with Ericsson as an example. We have strong presence in areas in Europe, U.K., Australia, et cetera. So being in different parts of the cycle, the global cycle helps. And the product offering we have in telecom suite, so we support all parts of the rollout of 5G is another example. So we have those specific initiatives. Now when you look at some of the mega trends, and I'll touch again on TD&S, with those market drivers for the next several decades, which is becoming a more meaningful part of our portfolio, that also supports some of the fact that we will be less cyclical. And maybe one last point I'll touch on. In agriculture, we recently bought the HR Products company out in Australia. That's more on the component side, supporting agriculture. Those businesses by nature are less cyclical. So as we take these actions, there will be less impact on cyclicality of Valmont.

Got it. Appreciate that. Maybe just shift gears to talk a little bit. I know you referenced and talked about Prospera a little bit in the opening remarks. You took obviously the $137 million impairment, a loss on goodwill, certain intangibles in Q3, primarily reflecting slower growth of Prospera. At the time of the Prospera transaction, the goal was to create the largest global vertically integrated AI company in agriculture. Is that still the goal? Can you talk a little bit more about kind of how you see Prospera moving forward?

Yes. Our overall goal with technology around agriculture is really to give the farmer the strongest value proposition from a pivot. And we're going to use and leverage that technology to provide that value proposition. If you think about it, water is the #1 determinant of crop health. So if we can provide the growers with better insight and better tools to utilize the water more efficiently, that provides a strong ROI. So insights into irrigation, focusing more on the remote kind of the control -- monitor and control of the pivot, really working towards the autonomous pivot is overall where the strongest value proposition. Now there is other elements of the technology in AI that we're going to leverage as well, and that is on the agronomy side. And we're -- we bought a company which had minimal revenue. We're going into a space, agronomy, that was a new space for us. And as you do with -- typically, as you enter space, you're trying to figure out exactly, and you're right, the commercial approach, the channel approach. And now that we combined our sales teams, our marketing, our approach to the channel, utilizing the right channel is where I think we have an opportunity. And that is working with the ag retailers, more with the agronomy side, how can we partner with the agronomists to provide value to the growers at the best efficient manner. So excited about the technology, excited about the opportunities. We're refining our approach to the market in order to improve that value proposition.

Appreciate that. That's helpful. And just in terms of the overall state of the autonomous farming evolution that you've been talking about, has it progressed kind of faster or slower than you would have expected 2 or 3 years ago?