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

My name is Pete Kalemkerian. I'm an associate here at Baird Research covering machinery and diversified industrials alongside Mig Dobre. It's my pleasure to welcome to the stage alongside me this afternoon, Avner Applbaum, Chief Executive Officer; Renee Campbell, Senior Vice President of Capital Markets and Risk; and Casey Meyer, Vice President of Treasury and Investor Relations. So with that, we will get Valmont's presentation started.

Awesome. Thanks, Pete. Good afternoon, everyone, and thanks to Baird for having us here today. So as Pete mentioned, I'm here with Avner, and today, we're going to talk about Valmont's next chapter. It's the utility opportunity, capabilities that allow us to capture it and the work across the rest of our portfolio to turn that opportunity into earnings, cash and returns. So just briefly, a reminder that today's discussion includes forward-looking statements about Valmont's expectations, plans and future performance. Actual results may differ materially from those proposed expressed or implied. Important factors that could cause those differences are described here on Slide 2 and in the risk disclosures in our Forms 10-K and subsequent Forms 10-Q available on our IR website at sec.gov. And then we'll also refer to adjusted financial results today with the respective reconciliations in the appendix. So Avner, I will you to kick us off by turning the overview of Valmont.

Thank you, Renee. Thank you for hosting us. I'm really excited about the opportunity to share our story. So if you see Valmont today, we're a $4.1 billion company with leadership positions in both infrastructure and agriculture. What's important on this slide, I'm just going to point out a few things. If you just look at the company, it's roughly 3/4 infrastructure and roughly 3/4 North America. And why that is important, because that's where we see the largest growth opportunity ahead of us in the -- specifically in the North America Utility business. Agriculture remains a key leadership position for us. We have leadership positions in the irrigation, technology and aftermarket. You can also see our financial [indiscernible] our customers. So we can execute better and create better accountability around the portfolio. And third, we're allocating our capital and resources to the highest return opportunities and allowing us to make faster decisions. What's really important here is we increased our earnings, which continued through the third quarter of 2026 pretty much in a flat line environment prior to 2026. And what that means is that we created leverage. And as we grow now, we're going to see a higher quality earnings coming through our financials. So then let me just share a little bit and connect this foundation to the businesses that we own. So as I mentioned, we have 2 segments, Infrastructure and Agriculture. The largest one is North America Utility. That is going to be our growth engine for the next several years. We also have coatings that supports durability and resiliency, and that is also benefiting from some of the market dynamics that we're seeing today. The rest of infrastructure around lighting and transportation, telecom and international, that's where we have opportunities for growth, for margin improvement and for better execution. And then Agriculture includes our irrigation aftermarket and technology. [ Sobral ], as you can see, we have a broad portfolio, which gives us multiple avenues for profitable growth. And then I want to talk a little bit about our strategy. And we have a pretty simple, but effective strategy around our value drivers of capture, strengthen and enable. So if we look at -- if we start with capture, it's how do we accelerate above-market growth within our utility. It's the clearest, it's the largest opportunity that we have ahead of us with $1 billion in sales and $10 of EPS through 2029. And then we have strengthen, how do we strengthen the rest of our portfolio? How do we improve our businesses around infrastructure and agriculture? It's around targeted growth, it's better mix, its productivity and overall execution. And then enable, which ensures we're putting our resources and capital behind the areas that matter most, where we can drive the strongest benefit. This bridge also includes $2 of EPS through share repurchases. This is how we focus our company. This is how we decide where resources go, and we turn these opportunities into earnings, cash flows and returns as well. Combined, this gets us to $5.4 billion and $35 of EPS by 2029. I'd like to share now the markets that we serve, which create the opportunities for us. So there are clear threads across the businesses that we support. The world needs more power, it needs more resilient infrastructure, and we need to get more productivity from existing resources. I'll start with the energy. For many years, the energy -- the U.S. power demand was relatively flat. We had greater efficiencies of lighting, construction, appliances, which help offset the growth. Well, that has changed now. We're seeing growth driven by data centers and AI, but that's not the whole story. We're seeing industrial expansion. We're seeing electrification, onshoring. All of these are putting pressure on the grid. And what we need to do, this power that we need to provide, it needs to move, and that's where we play a critical role with our transmission, distribution and substation products. The second need is stronger infrastructure. If I look at the grid, 70% of the grid is more than 25 years old. And we're relying on that grid that was built in the '60s and '70s to support the 21st century. And on top of that, we have other aging infrastructure like roads and bridges. They all need to be replaced. When they replace, that's when a lot of our products are needed to turn the lighting and transportation products. And then we look at productivity and resource efficiency. Our farmers need to be more productive. As we see income rising across the world, there's more demand for protein. And that's where we see that by 2035, you're going to need 20% more protein, which means you don't need more feed grain. Which means that our farmers need to be more productive and get more out of the resources that they have, such as their land, water, labor and energy. And that's where our solutions around irrigation, aftermarket and technology solutions help support the farmers. But the markets, they're not what create the earnings. What creates earnings is execution. So how does Valmont execute against these markets? So it's important to understand that in the markets that we serve, the customers operate in a mission-critical environment. Failure is extremely expensive. And a lot of these projects, they're large, they're complex, and they start well before anything is manufactured. So what our customers need, they need certainty, they need quality, they need reliability, they need to know that the job gets done right. And that's where our capabilities come together. It's not 1 capability. It's a system, an integrated system of capabilities around our customer relationship, our engineering capabilities and our manufacturing scale. And I'll touch about each 1 of them just a little bit. We're deeply embedded with our customers. So let's talk about utility for a minute. We have long-standing relationships that have been built over decades with our alliance agreements with our customers. We have our engineering collaboration that are also embedded with our customers. If you look at agriculture, we have more than 600 dealer locations, the largest in the network. And if I touch on the engineering, we've been working for more than 40 years with these customers. There is not a problem or a situation that we have not seen before. And these are complex engineering products. Every project is different. It's different soil, it's different environment, it's different loads, it's different resiliency needs, different regulatory environment, I could probably go on and on. And since we've done this for so many years, we know how to solve for them optimally and efficiently. And then we have the high-value manufacturing capabilities across a scaled global footprint, which gives us operation flexibility and the ability to deliver large complex projects. So if I put it together, our commercial team understands the customer need, our engineering develop the solutions and our operation team deliver at scale, speed, quality and certainty. So if you look at competition, a new competitor could come in, he can install equipment. What he can't do is he doesn't have the experience and the trust from the customers. And they're not buying just the product, they're buying trust that the job gets done and it gets done right. And a lot of these CEOs and these utility companies, they are paid not to take risk, and that's why they come to Valmont. I don't believe there's any competitive in the industry that has these type of capabilities. It's -- my view, it's unmatched. So given the size of the opportunity, I want to spend just a few more minutes around the utility business. So this is a long-term utility opportunity. And it's aligned with what we do very well: helping customers build and strengthen the infrastructure that delivers reliable power. So I talked a little bit about the history. And the history here is important because if you look from, call it, mid-2000s to 2020 or so, utilities continue to invest even in an environment that was no load growth. They continue to invest in replacing aging assets, improve reliability, connect new generations and make better use of existing network. And that was well before the acceleration that we're seeing today. So even when their load was offset with all these initiatives to driving efficiency, they continue to invest. Now as we look ahead, not only do we have the load growth driven by data center and AI, we have industrial expansion, we have electrification, changes in where power is generated and consumed. We have onshoring, we have population, relocation. All those are drivers that will continue to drive the need for power in this country. So we discussed this at Investor Day, and we shared that these demand goes beyond 2029. We look here even through 2035. Now this chart does have generation and we support more of the transmission, and that's where our opportunity is with our transmission, distribution and substation solutions. Now the pace can change. And as you can see here, we had the governors on the slide, where we don't expect everything to go smoothly. There's equipment availability constraint in the industry. There's labor, there's permitting, there's affordability. And we baked that all in. And we assumed that this is factored into our model. So while we know AI is going to be part of it -- and it's been in the news for quite a while. But even if you strip out the AI, this grows at mid-single digits. This industry continues to grow due to all those reasons that I mentioned ahead of us. This is what gives us a lot of confidence in our plan. So our role is we stay close to our customers. We understand the priorities. We've been the right engineering and manufacturing solutions. And those relationships, our experience and ability to deliver, that strong position gives us the confidence. So let's bring it back to our utility business and the progress that we're making. So this is where we're heading. $2.5 billion in sales with about $1 billion increase from 2025 base. We have a $6.7 billion high visible project pipeline. These are the projects that our alliance customers are working today. And we know we're going to get our portion of this business. And through third quarter, we see the continued -- that pipeline continues to strengthen. Our backlog in infrastructure, which a majority of that is utility, has grown to $1.8 billion. So we are making good progress against our goals. We're also seeing that our coatings that supports this industry as well, it's also grown more than 14% in the quarter. So we're getting really good momentum here. We're investing in capacity to support this growth. We took a brownfield option here to make sure it has much higher ROIs. It's quicker to market and helps us solve our customers' needs. And as you can see from the slide, the utility plan gives us about $10 of EPS, and that is a major contributor. But we have other ways to drive value. And if we look at the rest of the infrastructure, this is part of our strength and strategy. We're taking the same discipline I mentioned earlier that we took across the company to improve our earnings profile, we're taking it deeper into the organization. We're going into the product line, we're going into regions, we're going to customer choices and the day-to-day execution. Now market conditions are mixed today. We're seeing areas where we have strength like transportation and areas we have weakness like lighting and telecom. But what we're focusing is how do we improve our execution, our choices around these businesses, our capabilities. So how do we -- that's what our focus here is to drive better returns across this part of the portfolio. And this gives us about $3 of EPS. Taking a similar approach in agriculture. As we know, this market is challenged today based on where the farmers are. Long-term, it's very appealing for us in a lot of the regions. We do know, as I mentioned, farmers will need to do more. So we can't control the market. What we can control is what we're doing with this business. And we're focusing on how do we make our farmers more profitable, how do we support our dealer network with our aftermarket, with our technology, making it easier for them to order using AI to give them better optionality as they want to get their pivot up and running and ordering parts from us, as an example. And that's where we're focusing today. And even in this environment, we can continue to strengthen. It's still a mid-teen profit business. We didn't assume that this market will rebound through this period, so we took a pretty conservative approach. And we're still making progress. We just announced in the third quarter that we won a $100 million project in North Africa, even in this challenging environment. We continue to focus on the areas where we could drive earnings for our shareholders as well as profitability for our customers. This one gives us about $2 of EPS for our bottom line. So if I bring all these businesses together, this is what we're seeing for our 2029 goals. We see $5.4 billion in sales, which is about 7.1% growth throughout the period, $35 of EPS, 17% of operating margin and 21% ROIC. We presented this in Investor Day in June. Since then, we've made good progress. The pipeline has strengthened. We're converting it into top line. We invested in capacity, where we -- 20%, we increased our capacity of around 20% by third quarter. So we're right on track to adding capital to get us to support the top line. We are -- still have work ahead of us, but we're making -- we feel really good about where we're heading. This is a plan that we built with a high confidence based on the pipeline we have, based on the fact that we didn't assume markets are going to grow or recover throughout this period. And this is within our control. And that's why we're really excited because it's within a very capable company with 11,000 passionate employees. Our priority is to make sure our capital, our talent are focusing on this plan. And that's how we're going to drive the results that you're seeing here. So I'm not going to tell -- let Renee now just connect this to some of our financial metrics here.

Thanks, Avner. So our financial strength really gives us the capacity to execute on the plans that Avner outlined for us. Through the third quarter this year, we generated $352 million of operating cash flow. We've invested $116 million in capital expenditures, and we've returned $343 million to shareholders through repurchases and dividends. We ended the quarter at the end of the third quarter with $122 million in cash, and our net leverage is about 0.9x adjusted EBITDA. Our first priority, as you have heard Avner talk about today, remains investing in attractive growth opportunities, particularly utility and coatings. And you see that through the CapEx plans that we've talked about for both this year and then the doubling of growth CapEx that we plan to do in 2027 to support that demand. And as Avner said, it is really aligned with visible pipeline system demand and within our Investor Day framework. We also remain very disciplined on acquisitions. So we're looking opportunities that are a strategic fit and an adjacency at the right price. And then, of course, continuing repurchases and dividends. As growth and higher material costs have been increasing working capital needs, improving cash conversion also remains a priority. Our focus is on delivering attractive returns while preserving our financial flexibility. So I think this slide really puts that flexibility into a multiyear perspective. So from 2026 through 2029, we expect about $2.5 billion of operating cash flow. After about $1 billion of maintenance and growth capital investment, that leaves about $1.5 billion of free cash flow. Combined with about $1.2 billion of available debt capacity, this represents $2.7 billion of potential capital deployment capacity. And the key point is that our path to $35 in earnings per share does not require acquisitions. It does not require additional leverage. The organic investments supporting that plan are already included in this framework. And this gives us the flexibility to fund that growth, return capital to shareholders and also pursue other attractive opportunities while remaining very disciplined on risk and returns. So I just want to close today with 3 takeaways. First is that we serve essential markets with very substantial multiyear investment needs. Utility is our largest growth engine, as you heard today, supported by grid modernization and reliability and growing the electricity brand. And those are needs that extend well beyond 2029. Second, we have the capabilities to capture that opportunity. We have market leadership, we have long-standing customer relationships, we have engineering expertise, and we have a manufacturing footprint that -- a network that customers depend on rely on for reliable delivery and other commitments. And then our strategy really brings all of those things together. We can capture above-market growth in utility, we can strengthen performance across portfolio, as Avner mentioned, and we've enabled execution through disciplined capital allocation. So all of this supports our path to $35 by the end of 2029, stronger margins, stronger returns and positions us for continued growth beyond that horizon. So with that, Avner, Casey and I are happy to take your questions here.

Thank you, Renee. Thank you, Avner, for the presentation. I want to start with utility. That $1 billion in incremental revenues by '29, your bookings already extend, as you said, well into 2028. I guess, how much of that incremental revenue is supported by firm orders at this time versus alliance customer plans that have not yet converted? And are there any things to note with timing risk or anything throughout those next 3 years?

Great. Thank you. I'm going to start with that one. So the $6.7 billion pipeline was built using the forecast that we have from those alliance customers. So we have really strong partnerships with them, and they give us a lot of visibility into that. Now with that, once we looked at their CapEx plans, we took what we know is typically our share. So we have some alliance contracts that are sole-sourced. So we assumed we would get all of that. The rest where we share alliance, we only took our percentage. So that pipeline was built on capital that we have used to. So we did not assume anything from the bid market within that. We really stuck within what we see. Now from June -- so that number was as of June -- you did see a jump in our backlog. So we have converted that -- some of that to backlog, and those orders are very firm. So it is very rare for us to have cancellations because once an order goes into the backlog, it has had some engineering involved. It has had some work. So we don't see dual -- like dual ordering. That really doesn't exist in our space. And so that backlog is very firm and gives us a lot of confidence for '27 and then beyond.

Through the third quarter, you had installed and commissioned approximately 20% of that incremental utility steel production capacity needed for the 2029 plan. Is there a way we could walk through the commissioning cadence for the remaining 80%? Particularly, what comes online in '27 and the typical lag from that capacity being added to achieving targeted throughput?

Sure. So when you look at capacity, as I mentioned here, right, it's a whole system, right? So it's hiring engineers and drafting. It's adding equipment. It's hiring and training employees, welders, et cetera. So when we said 20%, it's really 20% of that equipment. And it is operational. It's not 100% efficient yet because we're still, as I mentioned, training employees. Next year, we did say that we're going to invest about double the growth CapEx in 2028. So we pretty much have what we need for 2027. We're in process of investing for 2028 and 2029. And as we go into each cycle, we're going into our 2027 budget cycling, and that's where we kind of reevaluate. Should we do more? Should we do less? What is the pacing? What areas should we invest? We have high confidence.we just got to make sure that we're investing at the right time at the right places. So we have a plan we're executing well. And as we get this capacity on board, we're going to start seeing also productivity improvement as these employees get onboarding trained and experienced.