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

Greetings. Welcome to Valmont Industries, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Renee Campbell, Senior Vice President, Capital Markets and Risk. Ms. Campbell, you may begin.

Good morning, everyone, and thank you for joining us. With me today are Avner Applbaum, President and Chief Executive Officer; John Schwietz, Executive Vice President and Chief Financial Officer; and Eric Johnson, Chief Accounting Officer. Earlier this morning, we issued a press release announcing our second quarter 2026 results. Both the release and the presentation for today's webcast are available on the Investors page of our website at valmont.com. A replay of the webcast will be available later this morning. To stay updated with Valmont's latest news releases and information, please sign up for e-mail alerts on our Investor site. We'll begin today's call with prepared remarks and then open it up for questions. Please note that this call is subject to our disclosure on forward-looking statements, which is outlined on Slide 2 of the presentation and will be read in full after Q&A. With that, I'd now like to turn the call over to Avner.

Thank you, Renee. Good morning, everyone, and thank you for joining us. Turning to Slide 4. We delivered a strong second quarter that reflects the dedication of the global Valmont team and the execution of our strategy. Net sales increased 6.5%, adjusted operating margins expanded 130 basis points and adjusted earnings per share grew 25.8%. Based on this performance, we are raising our full year sales and earnings outlook. Infrastructure delivered another high-quality quarter, led by 34% growth in North America Utility and 17% growth in coatings. Commercial execution, pricing discipline and ongoing investments in capacity and throughput continue to translate durable customer demand into profitable growth. Agriculture also performed well despite challenging market conditions. While sales remained under pressure, disciplined pricing and cost management drove another quarter of operating margin improvement, demonstrating the resilience of the business through the cycle. Overall, our results demonstrate that the investments we are making, the operational improvements we're implementing and our capital allocation strategy are driving stronger financial performance and positioning the business for sustainable, profitable growth. Turning to Slide 5. The quarter we just delivered is a good example of how these value drivers are translating into stronger financial performance. We're investing where we see the greatest opportunities to create value, especially in utility where capacity expansion and throughput improvements are supporting profitable growth. Across the rest of the portfolio, we're focused on improving commercial execution and operational performance to enhance returns through the cycle. At the same time, our approach to capital allocation ensures we're investing behind our highest return opportunities while maintaining financial flexibility to create long-term shareholder value. These value drivers are embedded in how we operate the business every day, and you'll hear examples of each as we walk through our markets and financial results. Turning to Slide 6. I'd like to review the current market environment and how our infrastructure businesses are performing within it, beginning with North America Utility. The favorable outlook for our business is being driven by a robust market environment. Demand continues to be supported by investment in grid modernization, power demand, data centers and electrification. Our conversations with customers reinforce that this is the early stages of a multiyear investment cycle. We are focused on delivering value through differentiated customer support, industry-leading innovation and continued improvements in system throughput. North America Coatings is benefiting from the same infrastructure investments, driving our utility business. With one of the industry's largest galvanizing networks, we improve the durability, reliability and life cycle performance of steel infrastructure. This business is benefiting from higher internal volumes and growing third-party infrastructure demand. In North America Lighting and Transportation, Transportation markets remain healthy, while Lighting is impacted by softer residential and commercial construction activity. Our priority is improving on-time delivery for our customers and manufacturing reliability. In North America Telecom, customer investment activity has moderated as carrier take a more selective approach to capital spending following the peak of the 5G deployment cycle. We expect these conditions to persist through the balance of 2026. Our strategy is designed to strengthen performance across the portfolio, and telecom is a good example of that in action. Even with lower sales, we've maintained strong profitability through commercial execution, operational improvements and disciplined cost management. Over time, we remain confident that increasing data consumption, spectrum deployment and the need to expand network capacity will support future investments in the wireless infrastructure. Turning to international, we continue to leverage our local manufacturing footprint, engineering expertise and long-standing customer relationships to participate in infrastructure investment across our global markets. We are also executing on our strategic initiative to strengthen these businesses. While it is still early in the process, we're encouraged by the progress we're seeing and expect these initiatives to continue supporting improved performance through the balance of the year. Turning to Slide 7. Global agriculture market conditions remain challenged. In North America, tighter farm economics remain a constraint on capital spending and are contributing to cautious grower sentiment. In Brazil, the recently announced government crop plan, reduced financing rate for irrigation equipment, although overall funding allocated to irrigation is below last year's level. We are managing the business with discipline and remain confident in the long-term fundamentals of the Brazilian market. In the Middle East, the primary business impacts are timing delays of certain customer projects as a result of the ongoing conflict in the region. While the underlying dynamics differ across regions, we expect the overall operating environment for agriculture to persist through the balance of the year. We are managing the business with discipline while investing in higher value opportunities, including aftermarket and technology solutions that enhance grow productivity. That strategy is strengthening the quality and resilience of the business with aftermarket part sales growing approximately 6% and technology services increasing 7% in the second quarter despite softer equipment demand. I'll now turn the call over to John to review our second quarter financial results and updated 2026 outlook.

Thank you, Avner. Good morning, everyone. Our second quarter results reflect solid execution across the business, led by strong performance in North America Utility and our focus on operational discipline. Before turning to the financials, my comments going forward will compare to the adjusted results for 2025 as outlined in the Reg G disclosures in the press release and presentation appendix. I'll begin with our consolidated results before discussing our segment performance and updated outlook. Turning to Slide 9. Net sales of $1.12 billion increased by 6.5% year-over-year, driven by sales growth in infrastructure, notably North America Utility. Operating income increased to $166.1 million and operating margin expanded 130 basis points to 14.8%, reflecting stronger operating performance across both segments. Our tax rate remained steady at approximately 26%. Diluted earnings per share was $6.14, a 25.8% increase from prior year. Moving to our segment results on Slide 10. Beginning with infrastructure. Sales of $879 million grew 14.8% year-over-year. North America Utility sales increased 33.9%, driven by higher pricing and volume growth supported by a robust market environment. Sales in North America lighting and transportation declined 2.4% due to lower volumes. North America Coatings sales increased 16.6%, supported by healthy infrastructure and data center demand. North America Telecom sales decreased 26.1%, reflecting lower carrier spending as customers shifted capital allocation priorities. International sales increased 7.4% due to favorable foreign exchange impacts and a slight increase in volume. Operating income increased to $154 million with operating margins expanding 130 basis points to 17.6%, driven by higher utility pricing and volumes. This strength was partially offset by higher inflationary input costs, primarily materials. Turning to Slide 11. Second quarter agriculture sales decreased 15.8% year-over-year to $244 million. North America sales declined 2.3% as reduced volumes were partially offset by favorable pricing. International sales decreased 28.9% driven primarily by lower Middle East volumes. Outside of the Middle East, sales across our international markets were relatively flat. Importantly, operating margin was 16.5% in the quarter, improving 90 basis points year-over-year, supported by disciplined cost and risk management. These actions to improve efficiency and performance position us to expand margins when ag markets recover. Moving to Slide 12 for cash liquidity and capital allocation. We delivered another quarter of healthy operating cash flow of $148 million. We ended the quarter with approximately $139 million of cash, while net debt leverage remained close to 1x. We are deploying capital in line with our balanced capital allocation strategy. During the quarter, we invested $36 million in capital expenditures, primarily to support utility capacity expansion. We repaid the remaining $60 million outstanding on our revolving credit facility, and returned $75 million to shareholders through $60 million of share repurchases and $15 million in dividends. At quarter end, approximately $451 million remained available under our current share repurchase authorization. This balanced deployment of capital reflects our focus on investing in the highest return growth opportunities, while maintaining financial flexibility and returning capital to shareholders. Turning to our 2026 outlook on Slide 13. We are increasing our full year guidance. Net sales are now projected to be between $4.3 billion and $4.45 billion. At the midpoint, this represents approximately 6.7% revenue growth for the year. We are increasing our infrastructure sales outlook to be between $3.4 billion to $3.5 billion, while maintaining our agriculture outlook. In infrastructure, the higher sales outlook is driven by continued strength in North America Utility and Coatings. We expect volume growth to remain healthy through the balance of the year. Pricing is expected to remain favorable. Although year-over-year contribution will moderate as prior contractual pricing actions are fully annualized. Our agriculture outlook remains unchanged, and continues to reflect the normal North America seasonal pattern of lower sales in the second half of the year. We are increasing our diluted earnings per share outlook to a range of $22.25 to $23.50. At the midpoint, this represents nearly 20% growth in adjusted EPS. The higher EPS outlook reflects continued strength in North America Utility and Coatings supported by volume growth and favorable pricing. While we expect raw material and freight costs to remain elevated to the balance of the year, pricing actions and operational execution are expected to support infrastructure operating margins at levels consistent with the first half of 2026. In agriculture, consistent with normal seasonality, we expect operating margins to moderate in the second half. Our capital expenditure outlook remains unchanged at $170 million to $200 million. Spending will be weighted towards the second half of the year as we continue investing in capacity expansion to support future growth. Moving to Slide 14. While it's only been a little more than a month since Investor Day, our second quarter results already provide tangible examples of the progress we're making against that road map. We are investing in our utility business through capacity expansion and operational improvements. Across the rest of the portfolio, we're advancing commercial initiatives, engineering excellence, and technology investments that improve productivity and support future growth. Combined with our capital allocation approach, our second quarter results demonstrate the early progress we're making against that road map. Turning to Slide 15. Our long-term financial framework outlines the outcomes we're working to achieve. Using 2025 as the baseline, we're targeting 7% annual sales growth, expansion of operating margins to 17%, double-digit annual EPS growth and a return on invested capital of 21% by the end of 2029. The progress we've discussed today gives us continued confidence in achieving these objectives and creating long-term value for our shareholders. With that, I will now turn the call over to Renee.

Thank you, John. At this time, the operator will open up the call for questions.

[Operator Instructions] Our first question is from Chris Moore with CJS Securities.

Congrats on another strong quarter. Maybe we just start with telecom. Obviously, a soft quarter. I'm just trying to understand a little bit better on visibility here. For example, in January of '26, could you see that Q2 would be soft? I know you talked about -- we're at the 5G peak, could you see that Q2 would be soft as of January?

Chris, thank you for the question. The answer is this is a business that has low visibility. It is a quick turn business, doesn't typically have a backlog, and what we've seen from the carrier is that they've actually shifted their spending. We know there have been some significant leadership changes within these carriers, and they are looking at their expenditures and they're navigating their financial situations as they're being disciplined around their spend. Now having said that, we are embedded with these customers, we have daily conversations with them, we're aligned with their programs, and we have a strong value proposition for these carriers around our engineering expertise and our quick turn. So the short answer is no, we did not see this. We actually, at this point, expecting to see this year down at the teens for the telecom business. We do know that the carriers will continue to spend. It will continue to build out the spectrum, and as they will continue with their build out, we'll continue to support them.

And maybe just my follow-up. Just in terms of ag in the Middle East, I know you have the Dubai facility that's more of a distribution facility that was operating at really minimal levels. Can you just talk a little bit more in terms of what's happening there? It sounds like more project timing, but anything else that you could talk about in terms of kind of expectations within the Middle East?

Of course. And just as a clarification, we actually do manufacture out of our Dubai facility. We do have a very solid, flexible model to ensure we can flex up and down as we need to scale up for projects. Right now, we're seeing very little activity in the region due to the conflict. The customers are delaying projects. We continue to be in touch with them, but at this point, our expectations are that this will remain for the short horizon, and we do believe these projects will take place. There is still a strong demand for food security in the region, so the long-term is very compelling, and we're well positioned within that region. But as of today, projects have being delayed. And of course, the cost to support these projects at this time is extremely expensive with the situation there. So our expectations for the year is to be minimal projects, and as things evolve, we'll update accordingly.

Our next question is from Nathan Jones with Stifel.

I'll follow-up on ag. Outside of the disruptions in the Middle East, I think you said other international markets were roughly flat. The domestic market was down low single digits, so I'm sure there's some price in that and the volumes may be a little bit worse. Is there any way where you're seeing any green shoots in terms of the ag market or potentially hitting a bottom here? Any signs of anything good happening in any of those businesses?

Yes. I think that the -- I wouldn't say that we're seeing any green shoots today, but we are seeing stabilization within these businesses. If you really look at outside of the Middle East, our businesses are pretty much flat, so we are seeing stabilization the grower economics are still strained, both in North America and Brazil based on where the grains are today, the input cost financing out in Brazil, so the market remains strain in the near term. What we're focusing is on our value proposition. We have the largest dealer network, we have a very large installed base to support our aftermarket and technology, and as I mentioned, we've actually seen single-digit growth in both our technology and aftermarket offering. We actually had a very good start to the year with our additional connections, technology connections, increasing our ecosystem with our growers. So we're -- yes, it looks like right now, it's been very stable for us, and we're continuing to focus on the areas that we can control and continue driving value for our growers. And as we all know, the long term looks extremely positive for this business.

I think you've clearly seen some improvement and made some progress on the margin side in the ag business this year despite the lack of volume. I guess the follow-up question is, can you talk about what you think a sustainable level of margin would be at this level of volume, and then given the improvements that you've made to the business, what kind of incremental margins that we should see in the ag business when we eventually see the next up cycle?

Thank you, Nathan. Good question. So we were pleased with the result in Q2 of 16.5%. And so those Q2 margins were reflective of actions that we've taken to take out structural costs but also to strengthen risk management. The year-over-year comparison, of course, benefited from the nonrecurrence of some bad debt expense in Brazil. To answer your question about the sustainability for Q2, for a Q2, we consider 16% to be sustainable. Now as we look ahead to the back half of the year, you're very familiar with this business, there is a seasonality component as the mix shifts away from North America, so we expect compression in our margins in the back half, we expect to be in the low teens in the back half of the year. To your question about what does this look like once there's a recovery, sort of a broader question, we did address this a bit at Investor Day, as you know, and we targeted about -- we thought about a 3-point growth in terms of a recovery for margins, so we would continue to hold that view.

Our next question is from Brian Drab with William Blair.

I just wanted to focus on the infrastructure business for a moment and the volume versus pricing that you saw, and if you can talk about the jump from first quarter infrastructure revenue closer to $800 million and then almost $880 million in the second quarter and just a very significant jump. I'm wondering how much of that was price versus volume. And then the follow-up -- or I'll just ask the follow-up now. The related question is, it seems like the -- if I'm doing the math right, that the incremental margins were a little bit lower than what -- on the sequential basis than they have been, so you got a big jump in revenue, but really not the commensurate operating margin that I would have expected, I guess, just a little bit lower. So I'm just wondering if there's anything going on there that you can talk about in that split between price and buying.

Thanks for the question, Brian. So we'll talk about this sequentially as you outlined in your question. So yes, we did have sequential growth. The sequential growth in infrastructure was driven mostly by price, but there was also a volume component there as well. The sequential incremental margins. I think what we're seeing here in terms of that bit of compression sequentially is the fact that we're seeing material cost inflation really accelerate, and we're seeing that that impact us in the short term here in Q2, and we expect that in Q3 as well, that is sequential. As you know, as you look at this from a year-over-year perspective, of course, incrementals are very strong and growth is very strong in both price and volume.