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

All right. So we've got that third terrific Omaha-based company, Valmont with us today. Again, rejoining us. They've been a fixture here for many years. Again, I'm Chris Marangi, Co-CIO for Value at Gabelli Funds. And we're very pleased to be joined today by three individuals from that company, we've got Avner Applbaum, who is President and CEO. He's joined as CFO in 2020. Before that, he's been CFO of a number of private companies and some compounders like Ametek and Belden and TE connectivity; Tom Liguori on the end, who has been CFO since 2024. He was CFO at a number of public and private equity-backed companies as well; and Renee Campbell making us -- a visit with us. She not only handles IR but treasury for the company. So again, really glad to have them here.

Valmont has about 20 million shares. Stock is actually pretty strong today, at $308. And so it's about a $6 billion equity cap, about $500 million of net debt. So we heard earlier from one of your peers, Lindsay Corp. They talked about some of the megatrends impacting their irrigation and infrastructure business. Maybe you could just talk a little bit about what you do echo some of those mega trends and maybe even highlight some of the differences.

Thank you. First of all, thanks for having us and giving us the opportunity to share a little bit about Valmont. So we've been around for nearly 80 years, and we're kind of known as an ag-centric company, and that's true. Our roots are in agriculture. We're actually the leader and the founder of the mechanized -- the precision mechanized irrigation. But since 1946, we expanded tremendously. And in fact, now, 75% of our business is infrastructure. The way I kind of like to think about it, we started horizontal with the pivot and then we went vertical with our engineered structures. And when you think about infrastructure, you think about we engineer and manufacture engineered structures to support transmission, distribution of utility, lighting and transportation and communication. So starting -- just to give a little bit of background around infrastructure, and we're kind of behind the scenes, we impact every day's life, but it's not necessarily what you think about. And of course, a lot of what we do is to replace aging infrastructure but it also ties to growth. And maybe I'll just give a few examples to share a little more color. So if you think about population growth or just more and more communities creating -- leaving the cities, going to the suburbs for [ suburbs stroll ] or some cities that are growing. And as you see this growth -- you think about it. They need lighting, they have new streets. These streets need traffic signals. They need sign structures. These individuals, they need to connect to -- connect their mobile devices, so they need telecom solutions as well as, of course, provide power and energy to their homes. And then just to add all the infrastructure that comes with that around schools and hospitals and malls and parking lots. And again, we provide all the infrastructure around that. And maybe I'll just give one more example around infrastructure and utility and everybody talks about AI and data centers. And if you think of one of those hyperscale data centers, they're equivalent to 80,000 households. So there you go, there's another city that needs power. And what we do is not only do we do the transmission, we got to move the power, the distribution, the substations for those data centers. We do many more things. We provide lightings, sometimes private network is needed. We're galvanizing the parts. So that's just another example of what we do in the infrastructure space. Now let's turn to the agriculture space. So we have population growth. Start with that. Over the next decade, we should see 650 million, maybe 700 million more people on the planet. We need to feed the people. And not only we need to see the people are eating healthier, more protein. So you need a lot more grains and there is no more land. In fact, there's probably less and less land because land is used for other purposes. So our solution, the pivot irrigation provides how do we do more with less? How do we get the best yields using less input cost, if it's power, if it's labor, water, of course, and water is the #1 factor for the health of what you're growing. So overall, that is what we do with the agriculture. So overall, you think about it, think about food, energy, lighting, transportation, communication, those are the areas that we support.

And you're an AI play which, hopefully, everybody out there heard. Anyway, we'll come back to technology in a little bit. But Avner, you're coming up on your 2-year anniversary as CEO, you set out a number of priorities when you joined, obviously or, knowing the company well as CFO, how do you think you've executed on those? How have they changed?

First of all, I'm really grateful that I have the opportunity to lead this company that just has a legacy of success and so many opportunities ahead of us. So I'm really fortunate for that. So one of the first things I did when I came on as CEO was like, let's renew our focus on the core. Let's focus on what we're really good at. Like what does it mean focusing on the core is like how do we be more effective, more efficient and do things better? And I'll give you several examples. So one of them is around just commercial and operational excellence and bid debt, stronger into the business, provide value and we've been doing that in a meaningful way. Commercial excellence, how do we make sure we're strengthening our relationship with our customers? How do we provide them with strong ROIs, solving some of their biggest challenges and just driving pricing excellence in that front as well. Investing in our plan. So we've seen change in demand. One example is we see more in our energy space, in our utility space, we see more distribution in substations. So how do we add that flexibility into our plant. And we're investing in our plants as well to support the growth. And maybe one other area is we've been really focused on the organization, how do we have an organization that has less layers, better span of controls, create an organization that is more efficient, closer to our customers, closer to our employees, closer to the point of impact would be another example. And then as it relates to our financial metrics, I mean we've been driving a steady and strong increase on our #1 financial metric, which is ROIC. And the last point, maybe Tom can share a little bit about the financials. So we've been focused on the core and improving profitability and ROIC. And now the next phase which we're going into is growth. How do we accelerate our growth? How do we capitalize on a lot of these undeniable megatrends and strong secular demand drivers and investing in our plans to take our fair share of the growth. And maybe, Tom, do you want to just jump in, share a little bit?

Sure. And for everybody, I joined Valmont, and I'm honored to be here. I joined in Labor Day of last year. So thank you, Avner, for having me to be part of the team. ROIC, it's really important. And what I've learned at Valmont is really embedded in the culture. If you go to any plant, any department, people are talking about how to use capital more effectively. Last year, our ROIC was 16.4%, I believe it was. And the "I" part is really important as we go forward, and Avner just talked about growth. Well, when we look at how are we going to deploy our capital and what are we investing in going forward. It's really about investing in revenue growth and margin expansion. And with revenue growth, today, the utility infrastructure market is booming and really can't meet the demand. In fact, like our backlog keeps getting larger and larger. So we're on a 3-year program to invest in capacity to expand our plants, which will grow our revenues. We've said that for the next three years, we'll be investing about $100 million of CapEx just in growth. And we know if we invest $100 million of CapEx, we'll get over $100 million annual new revenue and we'll get over a 20% operating margin from that. And on a cash basis, we actually get a $30 million or more from that. But it's also about investing in people and processes, what Avner touched on. If you came into one of our factories, we're a metal company. We're diversified industrial. We take plate, we cut it, we bend it, we weld it, we put attachments, and that's a utility structure. So when you think about capacity and throughput, yes, it is about adding press brakes and welding stations, but it's also about getting more throughput from the factories that we have today. So we're investing in people, in AI and scheduling. And the whole concept is very simple. If we can always have material at the right time, right place, more poles are going to be going through our factories and we'll get a lower cost per unit. The second thing we're investing in is for margin expansion. So very simply, right, invest in your higher-margin products. [ Randy and Brian ] talked earlier about technology, Avner touched on it. We're investing quite heavily in the technology in our company, and it's both ag and infrastructure. On the ag side, Randy and Brian talked about controlling your pivot from your phone. But it's really much more than that, that we're going down the stream. We're investing in e-commerce. Why is that? I'm a farmer, I'm in the field, my pivot is down. I need a [ part ], I need to get it up immediately. Well, we have an e-commerce site where now they can go on their phone, they can see the part they need. They can see if it's in stock, they can order and they'll have it there the next day. Really, the third thing we're investing in is just simply our value proposition, right? Like how do we invest so that we're more important to customers. And the best example is our telecom business. Our telecom business grew 30% year-over-year last quarter. It's really one of our highest margin businesses. And the reason it is, is because we put capital behind the inventory and the distribution system. Our telecom business, we are supplying a lot of the smaller parts that might be at a 5G tower that you'll see down station. And our value proposition is, guess what, we can get you the parts in two to three days. And because of that, people are willing to pay more. So ROIC is really important. We have a great track record, but really, our investments going forward are going to have revenue growth, margin expansion, which will further improve our ROIC.

Right. You've identified a number of megatrends, obviously, that are independent of what happens in Washington or the state capitals. But obviously, you are somewhat impacted by government spending, particularly in the infrastructure business. Maybe you could talk a little about areas where you're seeing strength, where the opportunity is, where you're focusing your attention?

Yes. So we -- our businesses are impacted by some government spending, and we talk about IIJA and others. So they do help our business, they do provide tailwinds as countries invest in infrastructure. But a lot of what we do really ties to the secular demand drivers that I mentioned around population growth, the increase in energy, 5G, et cetera. So to give a little bit more color, first of all, we're a global company. 1/3 of our business is global. And there are many trends that are providing support. So for instance, I touched on 5G and telecom. So maybe half of the population now, say, around 50% is on 5G. But over by 2030, they're talking about 85%. Well, that is driven by carriers and not necessarily by government. If we look at utility and energy, in fact, there was actually a report this week that said that we're seeing in the U.S. the highest growth that we've seen since World War II. So we're seeing a lot of growth, and that growth is projected to be over single -- mid- high single digits, in fact, 6% to 8% growth over the next several years, and that investment is driven by carriers. So a lot of these drivers are strong secular demand. We talked about food, right? So it's the growth in the population, it's eating healthier but there's also the elements around the food security, how countries want to provide food for their people. So yes, government stimulus helps, but our business is driven by many more drivers that are sustainable and like I said, they are undeniable.

So trade remains the elephant in the room. There was a lot of consternation a month ago about how American steel sent to Mexico for assembly and sent back across the border would be treated. I think you surprised some people last week with just how well you've come out so far and your belief that you can be cost neutral with the current set of tariffs. Take us behind the curtain, how are you managing the business in this time of uncertainty and maybe elaborate more a little bit on your tariff exposure?

Tom, do you want to take that?

Yes. So we did come out -- we said cost neutral, earnings neutral. Valmont team did a great job of mitigating tariffs. We have a few advantages. First of all, we are global but the supply chains are localized. So if you're in EMEA, we're making parts in EMEA for the EMEA market. If you're in APAC, we're making product in APAC for APAC. In the U.S., the vast majority of the products that are going to our U.S. customers are from 1 of our 24 plants. So we're very well set up. I think what people got worried with us is we have a facility in Monterrey, but what everybody -- Monterrey, Mexico, what everybody needs to understand is that, that is our most cost-effective plant that we have. And we are actually investing in it. And we got good news last week. We think we're going to get 10% more revenue out of it this year, and we want that because if we can keep improving Monterrey, we can get to a point that even if there was a tariff, we'll be cost neutral coming into the U.S. But what the Valmont team did was when we first looked at this, it was $80 million expense potentially in the year. And the commercial teams working with our customers, we have products that are in demand. This is utility structures, hardening of the grid, people need our product. Our commercial teams worked with our customers to have fair price increases. And fair is really important. We're a partner to all of their customers, but we're passing them on. In agriculture, we had price increase. Again, people want our pivot and not to take anything away from what Brian and Randy said but -- and they followed us with a price increase. But more importantly, like really the work was on the supply chain and making sure that we can get even more localized. So I'll give you a few examples. You mentioned U.S. Steel. As long as your steel and your product is -- the term is U.S. poured and melted, it will not be tariffed when it comes back. So our supply chain teams worked with all of our steel suppliers, and we now buy U.S. poured or melted steel. We ship it over to Monterrey. We make the structure, it comes back. our Monterrey facility is USMCA compliant. That's United States, Mexico, Canada Agreement Compliant. There's no tariff. But there were also things that we were buying like base plates on these tariffs. And we just -- we changed the sourcing. So the team has been really -- showed a lot of agility, really showed a lot of capability in managing this. And we feel very confident that this year that we're going to be earnings neutral and we really think will surprise people in the second half of the year of how we come out of this. Once the economy we get a little more certainty in our customers and macro.

And I'll add just a little bit -- thank you, Tom, a little bit of flavor on that is first of all, I think the team did an amazing job managing tariffs. And if you think about it, we're a global company. We've been dealing with tariffs for decades. So our team knows how to deal with that. And if you also -- if you just think about it, we manufacture very heavy stuff. Think of our poles. So we're not in the business of moving heavy stuff around the world. So by almost inherently, we're very close to our plants, to our customers. And like I said, really nice job managing through this.

Well, we look forward to that and look forward just more stability in the economy. Avner, when you and I spoke when you became CEO, I was struck by how numerous and explicitly returns driven you are. Maybe that's your Ametek training. You've got a lot of private equity experience amongst you. Talk a bit about your capital allocation procedures and whether that's changing given what's happened with rates.

Sure. So overall, the best way we can provide value to our shareholders and provide ROIC is really with a very disciplined focus on ROIC, and that is what we do as a company. So being really disciplined, and Tom mentioned the example of every employee knows what ROIC means and how you could impact ours. So walk to any one of our plants and grab any one of our employees, and he should be able to tell you how he could impact our company. Now when we look specifically at capital allocation, the number one is, we believe in ourselves. We think the best investment we can do is invest in them. And that's what we do. And we talked about today, we're investing a lot of capital to support this growth. And this growth is going to be around for a while. So we are making sure we have a dedicated task force that is investing in capital, which will provide the highest ROIC. And then we're going to look at acquisitions, where we're going to be very selective. That is the second part is we need to make sure it adds -- it either add capabilities, products, markets, but it's going to be very close to what we do very well. And after we make sure we're investing in the business, then we will go ahead and return to our shareholders via dividends and share repurchase. And in fact, we just recently announced, maybe Tom, you want to cover our -- what we've...

Yes, Avner. Capital allocation is to invest in the highest return opportunities. And right after putting it into our factories is our share price. We think we have a very great opportunity over the next few years to get our earnings per share, our ROIC, our revenue and therefore, the board approved for us the $700 million share repurchase authorization, which is a little bit over 10% of our market cap. So this is going to be programmatic over 3, 4, maybe 5 years. We're going to be leaning in when we think our share price is undervalue, but it will be a regular return of capital to shareholders. So we kicked it off in Q1. We [indiscernible] on our Q2 call because our share price is down, we did lean in. And in the first two or three weeks, we already purchased $75 million of our stock and more to come, and this is our plan. But also our dividend. I like the way Jennifer described it, she had a 17% CAGR on her dividend. That's fantastic. We thought ours was good. So if you look at our dividend over the last 5 years, we had a 10% CAGR, but it wasn't every year. So Avner and I and Renee, we gave this a lot of thought. And when we announced our updated capital allocation a couple of months ago, with our dividend, we did increase at 13%. And we said, we're a company that generates a lot of cash. And what we want to do is every first quarter increase our dividend, and we think we're off to a good start. So capital allocation, equally balanced and put it back in the business but also return it to shareholders.

And maybe just one more point to add, which when I mentioned before, focusing on the core and we're talking about capital allocation, one area I should have mentioned as well is -- we continue to invest in innovation. And you might think of -- you see a utility pool, you don't imagine how much innovation goes into these -- I mean, to the load growth to the soil, to the wind impact. So we continue to invest in innovation in all aspects of the business. If it's just the poles, it's different types of poles, it could be steel, it could be concrete. It could be some kind of hybrid to make sure we could support every customer with what they need. We talked about data centers and substations. So we're using different material composites. How do we do our SafeFence solution to make sure we could keep hazards away is another example. So we continue to innovate and all in, and Tom talked a little bit about agriculture and irrigation and about technology. But there's a lot that goes into -- there was a question before about is it dumb steel? It's far from that. And yes, you manage it from far, which we talked about, but giving a lot more intelligence to the grower. And I'll give another example. If you're driving your car and you hit a nail, you lose -- you'll get a flat tire. Well, on the steel, it's very differently. The tire will lose pressure over a long period of time. Well, we give the farmer, again, using AI tools saying, you want to go out there to your pivot before you lose the pressure, and you don't want to be in a situation where your pivot is not running when you need it the most. So continue to invest in technology and innovation, so we could support our customers' needs.

These are some great examples. I think we have time for a few questions. You raise your hand and give your name. We'll have a mic come to you. Looks like we got one in the back here.

My name is [ Steve Friedberg ] from Nebraska. Do you have any excess industrial capacity that -- do you see any benefit in the onshoring of industry for Valmont from the onshoring with your excess capacity if you have any?

Yes. So as it relates to onshore, we are continuing to invest in our facilities. And there's a lot of implications that go into a lot more onshoring. Of course, we're benefiting at Valmont as we're bringing more production and manufacturing into this country, of course, it creates more need for additional energy, more infrastructure, like I mentioned earlier, that ties directly to us. We are investing in our capacity in the U.S. to make sure we could do -- continue to do local for local. We continue to invest in our plants. We have plans going on right now in our Tulsa, Oklahoma facility. We're doing a significant expansion in Brenham, Texas. We have others going on right now in Florida and in Kansas. We are investing in this country to support all the needs that we're seeing, including our facility here in Valley, Nebraska as well. We continue to invest there.

Are you having any issues with labor, like welders or engineers as far as employee -- your labor base?

Yes. So as it relates to labor, we actually -- welding are very important part of our workforce. In fact, we have nearly 2,000 welders across our portfolio. We have welding schools in our facilities to make sure we can train, we can educate, we can get the next generation of welders into the industry. So we do that. Of course, we have automation, and is it hard to find -- and in fact, in one of our facilities, there's a waiting list to join our company because it's a great workforce. So there are pockets, but we are -- right now, I feel we're in a very good shape. And across our portfolio, we have the right amount of people we do. And part of that is what our core values at Valmont, it's all around our employees and what we do. So we're fortunate to have this great company that's been around for nearly 80 years and attracts the very strong workforce that we're all proud to have in our company.

So with the stock at $307, $308, whatever it is, at this moment, still undervalued in my view, at least. What do you think is least well appreciated? Or what is -- what do you want to -- misconceptions you want to correct in the market today?

I don't know if it's necessarily how I look at that. I would look at it as there is so much opportunity for Valmont going forward. I'm very excited about the future. We're a global company. So we have a lot that goes out. We talk about the North America farmer, which will be challenged in the near future, but then we got a strong presence in Brazil. We have strong presence in Middle East, Africa with different drivers. We have -- a third of our business is outside of the U.S. There are strong drivers there as well. So to me, it's really just being excited about what we can do, a company that has potential of growing that mid-single-digit plus over the next several years, driving strong ROIC in the high teens operating margins getting close to 15%. So it's in our hands, and we have the right talent, the right leadership, the right capabilities, competencies, footprint. We're ready to erupt and have a great run ahead of us, and we're ready to execute. So to me, it's very exciting, the road ahead, and we're ready to execute.

Well we're ready to watch and participate in that growth. So again, really appreciate you joining us again this year. It was a great overview. Thank you.