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

All right. Welcome, everyone, to the Valmont presentation. I'm Brian Drab, the Industrial Technology Analyst at William Blair covering Valmont. And first, before we get started, I have to let you know that you can find a full list of research disclosures on our website, williamblair.com. Today, we are very happy to have with us CEO of Valmont, Avner Applbaum; and Interim Chief Financial Officer, Tim Francis. So thank you both for being here. I'll just say a couple of words. I've covered Valmont since 2010. And most of you are familiar, this is a company that is a leader in the electricity transmission structures market in North America. They're a leader in poles for all sorts of applications, including highway, transportation in general, all sorts of commercial applications. They're the world leader in mechanized irrigation, and they're in some other business lines as well. I'd find myself talking too much in these introductions. No one's here to hear me. So I'm going to turn it over to Avner. Thanks again for being here.

Thanks, Brian, and thank you for having us, and hi, everyone. It's great to see everybody here, and I am looking forward to update you on all the exciting things that are going on right now at Valmont. We're seeing strength in our markets, and we're executing on our strategy. So I think we just jump right into it. And before I start, I will just point out that our disclosure on forward-looking statements, which applies to today's presentation and discussion are included on Slide 3. So why don't we start with a quick snapshot of our size, scale and focus. So for those of you who are not -- who are new to our story, we were founded nearly 80 years ago in Valley, Nebraska. We founded the mechanized irrigation industry by buying the patent to the center-pivot irrigation machine and we remain the industry leader in that space. Today, we're headquartered in Omaha, Nebraska, you can see our sales around -- 2023, around $4.2 billion. We have over 100 -- we operate in over 100 countries and have more than 80 manufacturing sites globally with 11,000 employees. We have 2 segments, Infrastructure and Agriculture. Both of them have a strong runway for growth, and we'll show you that in a couple of slides. As you can see, our sales are primarily in U.S. and Canada, but we do have strong presence in market worldwide, where we can meet and exceed our desired profit and ROIC threshold through our competitive examples -- through our competitive advantages. So for example, one of our strategies is local for local. So we would have plans in Brazil, Dubai, in the U.S. to support our Agriculture segment, where we could address the local requirements, regulation for those areas while we increase our resiliency, which we've all seen how important and critical that was during the pandemic as an example. We also have plans strategically in low-cost regions like Poland, Mexico, India, which both gives us cost efficiencies and access to great talent. So in other words, our geographic presence is intentional, its purpose-based and it supports our overall strategy. So all in all, we believe our size, scale and capability set the stage for many decades for success. And maybe just one last point on the slide. As you can see, the majority of our sales and profit come from infrastructure while we started off and established as an agriculture and irrigation, right now, the majority of our sales and profit come from the Infrastructure segment. Moving on to our strategic vision. So conserving resources, improving life. That has been the core of what we've done since we were established nearly 80 years ago. I'm honored to have the opportunity to lead this company. And I've been at the role for nearly a year, and I'm very impressed with the knowledge, the expertise, the dedication, the passion of the employees in this -- in the company. I've been spending most of my time with a lot of our stakeholders, our employees, our plans to understand and learn the details of the business to ensure we can optimize our performance and our financials. So throughout the presentation, we'll touch on some key points of our strategic vision, including our Valmont business model and our disciplined capital allocation framework. Looking at our strategic priorities. So they are grounded in the Valmont business model, which is a foundation for value creation. And each one of these priorities ties back to our key focus areas. So if we start off with our people, as you know, we had a very strong first quarter, and these accomplishments really underscore the high performance culture that we're building, one that drives market leadership, it drives innovation. And we continue to live our core values of passion, integrity, continuous improvement as we focus on delivering results. The next one is our return on invested capital. So we are sharpening our focus on our core competencies to ensure we can enhance ROIC. It ensures we maintain our competitive edge. We allocated resources where we can get the highest bang for the buck return to create value creation. And then finally, sustainability. It's embedded in everything that we do and the innovative solution we offer to our customers. So if we start off with Infrastructure, I'll give an example here, as a trusted leader across our markets, we're advancing sustainable products that can endure changing climate, conserve resources and loss -- last long into the future. So the example is our concrete utility pole. We recently built it in Bristol, Indiana. And it demonstrates this commitment. It produces transmission and distribution poles using low-carbon processes and materials to support growing needs for utility customers while aligning with their own sustainability goals. On top of that, we added a 500-kilowatt solar array with our award-winning Solar Tracker and it was built to fully offset the utility usage from the plant. In Agriculture, technology enhances efficiencies on the farm by reducing inputs, increasing land productivity and lowering labor costs. Our fully integrated tech teams developed a road map to deliver exceptional value to our customers, and we're actively engaging our core engineering teams with AI and machine learning capabilities to embed predictive analytics into our products. The strategic integration positions Valley technology at the forefront of the industry, delivering distinct competitive edge by enabling smarter, more efficient irrigation solutions. And I'm very pleased with the progress we have made so far. Switching to some of the megatrends. And let's dive a little bit deeper into the sector and the growth. So let's start with the Infrastructure. I'm sure everybody heard here and you hear a lot about in the news and everywhere else about the energy transition. How resources are transitioning towards renewable. And it's still early innings. And if you look at the mandate to switch to renewable energy. We have aging infrastructure in this country and around the world. So there's a lot of concern around the grid -- hardening the grid, addressing weather. And on top of that, we're seeing growth for the first time in many years, we're seeing growth in the need for power. We see driven by electrification of the grid. Cars, we see a lot of AI for electrification of houses. We're building more in this country. We have plants that are built for chips, vehicles and so on. So we're actually seeing increase in electricity. And actually, the latest data come out was the projections have actually been doubled since the -- for the next 5 years of electricity uses. So this growth, which is driven by everything that I just mentioned, it fits very well into what we do with Valmont. We have the right solutions, the right products that support the high demand in this area. Now if we look at Agriculture, farmers are always challenged to increase land productivity with fewer inputs. And we have technology that can support that. So if you look at some of the -- what the growers are faced today. So they need to -- we're dealing with climate change, water scarcity, there's sustainability consideration. You add to that, there's food security population growth, all of that supports the need to add for irrigation solutions. And what we can offer being the leader in that market is to provide the solution to help these growers with these trends that we're seeing. So very strong secular demand across Infrastructure and Agriculture. And we believe that we are capable and we will outgrow these markets based on our capabilities and core competencies, which I'll talk to in a minute. So moving on to our long-term financial targets. So starting off with our sales growth of above mid-single-digit growth. So in each one of our segments, we expect to grow higher than mid-single-digit growth. As I just mentioned, we see strong secular demands across both Infrastructure, in Agriculture. And with our core competency, starting off with our manufacturing capabilities, our engineering expertise, our channel to the market, our flexibility of our footprint, innovation, our financial backing, we have the ingredients to grow higher than the market and above mid-single digits. When we look at the operating margin approaching mid-teens, we'll capitalize on the growth I just mentioned, we will maintain our pricing leadership, pricing to the value that we provide to our customers. On top of that, we have just recently streamlined our organization, which also reduced our cost structure, but also allows us, and more importantly, it allows us to focus and make quicker decisions, quicker access to the market to help drive efficiency as well. And on top of all this, of course, we continue with our journey towards operation with operational excellence. And with all those combined, we will be able to increase our margins to the mid-teens. And when I talk about disciplined capital allocation, which will enable us to grow to our return on invested capital to the high teens, we're being very disciplined around our capital allocation strategy. We're going to continue to invest organically and inorganically in areas that we know very well. We have strong capabilities in those markets, making sure every one of those decisions goes through a filter of both financial and strategic to make sure we can beat our cost of capital and increase our returns. So overall, a very focused approach on driving ROIC. And then finally, net earnings, free cash flow conversion, goal remains at 100% and we have a strong track record of generating strong cash flow and have been over the past several years. And we will continue to improve our capital efficiencies, which will help us fuel our growth for the upcoming years. So overall, we came out with these targets a little while ago. We're very confident in our ability to achieve these targets. So overall, before I turn it over to Tim, what I can point out is, we're very excited on where we are today. So when I kind of take a step back and I look at the markets that we're in, these markets have very strong secular demand. So if I think about the Infrastructure, which I mentioned. So with this energy transition, I don't see anything at this point that is going to stop the need to keep on building energy, strengthening the grid in this country, addressing some of these mandates for renewable energy. When I look at the overall Infrastructure, the roads, the need to replace a lot of the Infrastructure here. And again, in that area, we have the solutions, broad solutions anywhere from our poles, which come in many different options, anything from steel to concrete to composite to hybrid poles. We have other structures that support transportation, anywhere from traffic to sign to lighting. So when I look at the Infrastructure side, it's very exciting to see that growth. And we're seeing that strength in the market even before we see a lot of the stimulus in the IIJA kind of hitting us at this point. And when I sum up and look at Agriculture, the need to do more with less and water being available. And we see all these extreme weathers, and we see droughts and we see rains and floods, and we see population growth and how do people eat healthier, how do we provide for food security after crisis with COVID, Russia-Ukraine, companies want, countries want to take care of their people. And so when I look at all the markets and I look at our -- what we can provide in our core competencies with our global footprint, our flexibility, able to manage in different geographies, innovation, which we've been doing for many, many years, our engineering expertise, second to none, our manufacturing footprint. So it's a very exciting time for us. We're executing on our strategy. We're in the right spot at the right time and with very high focus internally on the business on these financial metrics and the return on invested capital, making sure we're allocating and focusing our resources on these great opportunities and what gives me a lot of excitement. So we have the right people in this company to execute on our strategy. So the future is bright for us. I will turn it over to Tim to kind of go over our Q1 results and provide some financial information, and I'm looking forward to having a discussion with you after this presentation. Thank you.

Thanks, Avner. I would like to start with a brief overview of our first quarter results. We were very pleased with the strong start to 2024. Avner just did a nice job giving an overview of the Valmont business system and the high-performance culture we're trying to drive, and we believe that those were big contributors to our first quarter results. So looking at it at a consolidated level, we were able to expand our operating margins 240 basis points, and increased diluted EPS, 25% on 8% lower sales. Our focus on commercial execution, operational excellence and reduced SG&A has allowed us to improve profitability in an environment of lower demand from some of our end markets. Turning to the segments. Infrastructure sales were down slightly as strong utility demand and favorable pricing across the portfolio were more than offset by significantly lower telecommunication volumes. In Agriculture, our sales were down year-over-year, in North America, we continue to see soft but stable demand. In Brazil, another one of our major markets, we see muted grower sentiment as lower crop prices are weighing on growers' profitability, causing them to defer certain capital investments, including their irrigation equipment. Turning to cash flow and liquidity. We have a very strong and flexible balance sheet. In the first quarter, we were able to generate $23 million of net cash flow from operating activities, and we ended the quarter with $169 million of cash. Our total debt to adjusted EBITDA was just slightly over 1.8x, well within our desired range of 1.5 to 2.5x. Our cash balances, available credit and the flexible balance sheet provide us with ample liquidity to execute our capital allocation strategy. As a reminder, during downturns in our business, particularly Agriculture, we tend to generate strong cash flows and expect that to be the case here in 2024 through earnings growth and diligent working capital management. So let's look at the last 4 years for Valmont. If you look back at 2020, we generated adjusted operating income of $268 million and an operating margin of 9.3%. Through some deliberate actions by our team, including a relentless focus on price leadership, productivity improvements in our factories and plants and an ongoing focus on optimizing our product lines, we have seen an improvement in that operating margin ending fiscal 2023 at 11.3% and generating $470 million of operating income. Another measure that Avner just talked about that we prioritize is return on invested capital. It's a fundamental metric for the financial health and performance, and without strong return on capital, it's very difficult to sustain growth. So you can see in 2020, we had an adjusted return on invested capital of 10.3% and we finished last year at 14%. Next, let's talk about our disciplined approach to capital allocation for the full year of 2023. First and foremost, we want to invest in growing our business. In 2023, we spent $97 million on capital expenditures. We continue to invest in strategic capacity expansions to increase output and enhance our manufacturing flexibility. From an acquisition perspective, we're focused on our core businesses or acquisitions that tie well to the markets that we currently serve. A good example of that is HR products. It's an Australian business that sells aftermarket irrigation parts, and we completed that in the third quarter of 2023, spending $33 million. We want to balance the investments in growing our business with returning cash to our shareholders, and we did that by spending almost $400 million in 2023, $50 million through our quarterly dividends and then $345 million through our share repurchase activities, and we continue to approach share repurchases with an opportunistic lens. So in summary, Valmont is performing well in a dynamic market. We are actively managing what we can control through commercial excellence and focusing on our core competencies. We are proactively taking steps across our global operations, investing in our footprint to support growth, enhance productivity while driving strong cash flow generation. The strength across our portfolio demonstrates a level of resilience that was not achieved in previous agriculture cycles. And you can see that through the increased margins we saw in the first quarter even though we had softer demand in both Agriculture and Telecommunications. With these ongoing actions, we are primed to further expand margins, and as volume recovers in both Agriculture and telecommunications, we expect to meet our long-term financial targets and deliver lasting value to our shareholders. Thank you for your time today. And Brian, with that, I'll turn it back over to you.

Okay. Thank you very much, both of you. We have 7.5 minutes for a little Q&A here. I have two things that I'd like to start the Q&A with. First of all -- well, the second question is going to be what's going on in Egypt, so just so you can start thinking about that one. But the first question is AI, data centers, this is such a hot topic obviously. There's a -- you mentioned it briefly in the prepared remarks, the strain that that's putting on the grid is well-publicized. We had [ Generac ] here yesterday and they were talking about forecast for annual load growth increases to maybe be 4% plus going forward, like through the next decade. And it's been flat basically for the last 20 years. So how do you see that impacting demand for your electricity transmission structures over the next 5-plus years?

So I didn't know [ Generac ] was here. I have actually problems with their generator, but -- so with all the...

It's a webcasting, so control yourself.

And actually, it ties to our kind of weather events that we're seeing all around the country, which is obviously impacting utilities. But specifically to your question, so data centers is a very strong driver for us. So not only do you -- when you have the data centers, you need a lot of substations and that is one of our products and core competencies that we have. And not only do you need the substations, you also need to connect them to the grid, to the transmission distribution line. So it has actually been Q1. We've been very pleased with the amount of direct and indirect, the data centers and the actually power lines and don't see anything that's kind of stopping that and expecting that to continue over the next at least decade. So for us, it is one of the drivers. On top of the fact that it's driving electricity increase and load growth onto the grid. So overall, it's very -- it is one of our strong driver.

I guess I'm wondering to -- like specifically, are you hearing from some of the grid operators, you're having conversations where they're saying, this is going to be crazy. We don't know how we're going to build the grid out fast enough to meet all this demand and -- or is it just we're kind of reading all the same things you are, and we're not sure yet?

Well, we're definitely seeing -- I mean, I guess, it's twofold. One, we're definitely seeing the increased demand. Everybody is struggling with the fact is like how will we be able to support the electricity increase in this country in general. I think that's what you read and everybody sees is how we're going to be able to -- what are going to be the solutions to help drive and support the needed increase, and it's -- there will be constraints across the whole supply chain. It could be labor, it could be other components that you need for the grid. So I think it's a question that the industry is going to have to figure out. But overall, the demand at this point, the demand exceeded the supply, and that's why we're seeing very, very, very strong strength. So the market has been very strong for us.

All right. And then my other question was, what's going on in Egypt?

Yes. I'll take that one, Avner. So ever since the conflict in Ukraine and Russia, you see a real focus on food security. And what we're seeing throughout Middle East down to North Africa is a really good pipeline of potential projects as governments are realizing that they need to really focus on how they're going to feed their people. So we feel like we have the right dealership network there. We feel like we always get a good look at every project that comes about. And we have a lot of very specific financial criteria that we look at as we're assessing what projects we're going to bid on and of course, what price we're going to bid on a project. And we talked about in the first quarter, a project that we did secure in that region. And like I said, we're excited about the short term, midterm kind of outlook for that region, and we think there'll be more projects that we will have an opportunity to bid on.

So it seems like they've had, since the beginning of the year, I wrote this note, the challenges they're having, the currency devalued significantly and no access to U.S. dollars. That situation has gotten a little better, right? There's been a flux of capital, I guess, it was like a $35 billion investment from UAE. So they found some U.S. dollars, they can proceed with your project. There's a competing -- or a competitor that won some business this week. [indiscernible], I don't know why I'm being like secretive about it. Obviously, that's why I'm asking the question. But you said Tim, just now like there's more -- maybe more projects in Egypt. And they're doing more -- it's interesting. For those of you that don't know, the largest irrigation projects in the history of the world are happening in Egypt. The project that Valmont did, if you looked at the from an airplane. It was like a -- now I'm forgetting, but it's like 3,000 acres or something -- or 3,000 pivots, I think it's like a 10-mile by 10-mile swath of land that you would see with pivots, just 3,000. There's nothing like it ever in the history of the planet. And so there's more to come, you think in Egypt?

Yes. I said it more the whole broader region, right?

Region?

Yes, the region going to Middle East all the way down.

And I will point out that we're very aware of pretty much all the projects going out in the region. We're well connected. We've been there for decades, literally and have -- we have discussions with the regions, the customers. So we're aware of the products -- projects, but we make sure that every project that we win meets our financial criterias and fits into what we're looking for. So we're well aware of these projects, and we're going to make sure that every project we win, we can meet our financial and ROIC thresholds.

It was 500,000 acres by the way, 3,000 pivots. I think I said 3,000 acres. It's getting late in the day. Just the last question then we'll go to the breakout session. The IIJA impact on your highway business really hasn't happened yet. What's the -- just in 30 seconds, like what's the outlook?

So we're seeing right now a lot of activity. There's a lot of reports showing that the IIJAs is finally starting to flow, but we're at the later parts of the project. So if it starts flowing now, we'll start seeing benefits in our business in a year or 2 because we're always the last thing that goes in on these market.

More like 2025?

2025 and 2026, yes.

All right. With that, let's move to the breakout, and thank you for being here. It's a great presentation.