Valmont Industries Inc

NYSE:VMI

Earnings Call Transcript 2022-Q1

[Operator]

Greetings, and welcome to the Valmont Industries, Inc. First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the conference over to your host, Renee Campbell, Senior Vice President, Investor Relations and Treasurer. Ms. Campbell, you may begin.

[Renee Campbell]

Thank you, and good morning. Welcome to Valmont Industries' First Quarter 2022 Earnings Call. With me today are Steve Kaniewski, President and Chief Executive Officer; Aaron Schapper, Group President of Infrastructure; Avner Applbaum, Executive Vice President and Chief Financial Officer; and Tim Francis, Senior Vice President and Corporate Controller. This morning, Steve will provide a brief summary of our first quarter results, commenting on our markets and long-term business strategy. Aaron will provide an overview of our new Infrastructure segment, and Avner will review our financial performance and provide our outlook and indications for 2022 with closing remarks from Steve. This will be followed by Q&A.

A live webcast of the presentation will accompany today's call and is available for download from the webcast or on the Investors page at valmont.com. A replay will be available on our website later this morning. Please note that this call is subject to our disclosures on forward-looking statements, which applies to today's discussion is outlined on Slide 2 of the presentation and will be read in full at the end of today's call.

I would now like to turn the call over to our President and Chief Executive Officer, Steve Kaniewski.

[Steve Kaniewski, President & Chief Executive Officer]

Thank you, Renee. Good morning, everyone, and thank you for joining us. We delivered record first quarter financial results, driven by effective price management and strong demand across our portfolio. Our pricing actions were helped by our strong operational and quality performance. Our team's continued focus on pricing and our ability to meet our customers' expectations has led to a strong start to the year. Once again, our 11,000 Valmont employees around the world demonstrated diligence and dedication by serving our customers with innovative and essential products and services. Through an unwavering commitment to our core values, they continue to operate with passion and integrity, driving continuous improvement and delivering exceptional results. I am thankful for and proud of their success.

Before reviewing our first quarter, I would like to acknowledge the devastating events that are happening in Ukraine. We recognize the profound effect these events are having on the world and everyone in the region whose lives have been disrupted and changed as a result. Historically, our sales to Russia and Ukraine represent less than 1% of our total revenue. Our thoughts are with those who are impacted by this growing humanitarian crisis. We wish for a quick resolution to this conflict and have returned to peace in the region.

Now, let me move to a brief first quarter overview, as shown on Slide 4. Net sales of $980.8 million, grew 27%, and adjusted operating income improved 28% year-over-year, due to continued strong end market demand and effective management of strategic pricing initiatives. Our Valmont culture and our core values empower a high-performance organization that drives us to execute and deliver results even amid a very dynamic market environment. Because of this, we are building momentum into 2022, navigating supply chain volatility, continuing to implement pricing strategies and realizing value for the innovation we bring to our customers.

Our price leadership has allowed us to successfully manage inflationary costs and we expect to continue to do so as the year goes forward. You will notice that we are now reporting our financial results in 2 segments as we announced in our April 6 release. I will share more about the strategic rationale for this new segment structure in a few minutes.

Moving to Infrastructure. Sales of $680.7 million, grew 24% year-over-year, with double-digit sales growth in nearly all product lines, led by considerably higher pricing and strong underlying demand from continued investments in critical infrastructure globally. Ongoing investments in grid hardening and resiliency and renewable energy development in utility markets, along with cross-regional strength in lighting and transportation markets, are contributing to increasing revenue across the segment. Additionally, telecommunications markets remained strong as capital spending by the major carriers is driving macro tower investments, while 5G deployments continue to ramp, as evidenced by sales growth of more than 30% in this product line.

Turning to Agriculture. Sales of $306.6 million, grew 33% year-over-year, due to higher average selling prices of irrigation equipment globally and higher technology sales. In North America, sales grew 54%, led by considerable increases in pricing and higher volumes. International sales grew 8% year-over-year, led by higher price, partially offset by lower project sales, primarily related to the large Egypt project. As we mentioned last quarter, the pace of local infrastructure development for this project has slowed in recent months. And in response, we have aligned our shipments accordingly to match our customers' expectations. We also recognized another record quarter in Brazil, where sales grew more than 70%. In addition to the continued positive trends in farmer sentiment, grain commodity prices remain at elevated levels, fueled by strong global import demand and tightening stocks in major exporting countries.

Further, the events in Ukraine have disrupted exports in that region, pushing grain prices higher. Technology sales grew more than 27% year-over-year, driven by growers increasing demand for connected crop management and advanced analytics to reduce input costs, increase land productivity and minimize farm labor costs.

Turning to Slide 5. We released our 2022 Sustainability Report last month and held a dedicated conference call to discuss the report and answer questions. If you have not yet done so, I strongly encourage you to listen to the archived webcast on our website. In the report and on our call, we discussed the progress we have made on our ESG journey. For Valmont, our approach to sustainability begins with our tagline, conserving resources, improving life. It's at the core of everything we do. This year, we recommitted to reaching our 2025 environmental and diversity goals and identified and committed to 4 United Nations Sustainable Development Goals that the business naturally aligns. I am proud of what we accomplished and excited about the trajectory of our ESG journey. As seen in the Sustainability Report, we have shared detailed case studies, which demonstrate the value we add to customers in meeting their own ESG priorities and how we responsibly manage key resources.

A recent example of this is the completion of a 3-megawatt Ag Solar project in Brazil. Brazil continues to be a strong market for our solar solutions. And new government legislation has enhanced Ag Solar opportunities in the region. This [indiscernible] farm and its complex engineering requirements showcase the value we add and the incredible execution of our teams in delivering sustainable solutions to our customers.

Valmont's exclusive software monitor sustainability and return on investment in real time, allowing users to track power generation and efficiency of their solar installation. Our world-class dealer network is fully embracing our complementary solar products, which is leading to considerable growth in the region year-over-year. Valmont is truly paving the way for Ag Solar solutions by offering unparalleled service and support while sustainably meeting customer needs and supporting ESG efforts globally.

Earlier in this call, I referenced our new segment reporting structure. Turning to Slide 6. I would like to discuss this new framework within the context of our long-term strategy. As we stated in our April 6 press release, we are experiencing a transformative time in Valmont's history. Our goal as a company is to institute a culture of positive change that will foster collaboration, advance productivity and optimize talent and technology to accelerate enterprise-wide innovation. Recalling our 3 strategic pillars that we introduced during our 2021 Investor Day, the new structure aligns with and supports the successful execution of each pillar. It also reflects how our businesses are managed in a way that we have been moving towards organizationally for the past 4 years. During that time, we have been executing a transformation plan in our operations, accelerating lean standard work and driving performance through improved productivity and quality metrics.

Our commercial teams have leaned in on the voice of the customer, developing new products to drive solutions to some of the more critical problems. We've built pathways to growth, focusing on strategic technology investments to generate operating efficiency and increase revenue. This organizational structure allows us to further elevate our focus on capital allocation, technology development and market growth strategies across our leadership teams. We are centralizing operations of all of our global manufacturing footprint across both segments to better focus on improving productivity, increasing output and driving a more efficient use of capital. We believe these actions position us to achieve our 3- to 5-year financial targets, including operating margins greater than 12%. Combining the previous Utility Support Structures, Engineered Support Structures and Coatings segments into 1 Infrastructure segment fosters a more efficient and collaborative environment across our global commercial markets, while enhancing operational excellence initiatives.

I have asked Aaron Schapper, Group President of our new Infrastructure segment, to join us today and discuss the benefits of this structure. I feel it is important to spend time on our earnings calls discussing relevant items that are critical to understanding our culture and strategy and to hear directly from our team. Aaron's participation today is an excellent example of this, and we may look to highlight key topics with other members of our executive team on future calls.

Before passing the call over to Aaron, I would like to comment briefly on agriculture. Agriculture has experienced a more solid shift than infrastructure as we are simply renaming the Irrigation segment. Recognizing the journey we have been on to expand our focus on product and technology solutions globally beyond irrigated acres. The name change captures the evolving nature of technology to include non-irrigated farmland and detection of anomalies such as pest and disease to help farmers reduce input costs while increasing land productivity, which is quickly becoming a priority across global markets. The agriculture sector continues to evolve globally, and we are evolving with it to best serve our customers.

At this time, I will turn the call over to Aaron.

[Aaron Schapper, Group President of Infrastructure]

Thank you, Steve, and good morning, everyone. It's a pleasure to be with you today. As Steve said, I'm Group President of Infrastructure. I've been with Valmont 10 years with previous roles as Vice President and General Manager of International Irrigation and Group President of the Utility Support Structures segment. I'm excited to share with you how we are thinking about this new segment and why we believe this alignment will further our ability to serve customers and benefit our stakeholders.

Turning to Slide 8. With an increasing convergence of key market drivers and funding, the infrastructure realignment allows us to collaborate more effectively and generate greater customer focus as we create innovative smart infrastructure to bring to the market. The new structure enables the more efficient and strategic allocation of capital, so we can manage the portfolio with greater focus on opportunities that offer profitable growth, higher return on invested capital while accelerating innovation by optimizing our talent and technology. We are also optimizing our mix of products, focusing on product lines and geographies that generate higher returns and improved quality of earnings. I believe this will enable us to maximize long-term profitability for the larger segment as we execute our strategies more efficiently. Finally, the new segment structure leverages Valmont's size, scope and scale that has been developed over the last 75 years to position us as a leader.

Our strategic global footprint and market leadership allows us to do things other companies simply cannot, which is critical to our continued success moving forward. I'm very excited to see what we can accomplish together as the United Infrastructure segment, and I'm confident our organization will continue to deliver exceptional value to our customers.

With that, I will now turn the call over to Avner for our first quarter financial review and updated outlook.

[Avner Applbaum]

Thank you, Aaron, and good morning, everyone. Turning to Slide 10 and first quarter results. My comments will focus on the adjusted results, as outlined in the press release and in the Reg G disclosure in the presentation appendix. First quarter operating income of $99 million or 10.1% of sales, grew 28% year-over-year, driven by substantial pricing across the portfolio, leading to higher gross profit margins and improved fixed cost leverage, including SG&A. Diluted earnings per share grew 19.5% to $3.07 attributable to higher operating income, partially offset by a higher tax rate, which is primarily due to a change in the geographic mix of earnings compared to last year.

Turning to the segments and starting with Infrastructure on Slide 11. Operating income increased to $77.5 million or 11.4% of sales as we realized the benefits of pricing across all product lines, notably in transmission, distribution and substation and lighting and transportation, which we will refer to as TD&S and L&T, respectively, in future quarters.

Moving to Slide 12. In the Agriculture segment, operating income increased to $41.6 million or 13.7% of sales. Higher operating income was driven by favorable price management and higher North American volumes, partially offset by incremental SG&A from the Prospera acquisition and lower international projects there.

Turning to cash flow on Slide 13. We delivered operating cash flows of $2.7 million, reflecting higher working capital levels to support strong sales growth. As we've stated in prior quarters, we have taken decisive actions to strategically source raw materials throughout the year to help secure availability and meet strong demand. While we expect to continue these actions in second quarter, we also expect a notable improvement in cash generation and working capital levels in the second half of the year. As we've demonstrated in the past, we're confident that our actions will help us deliver strong cash flow, as supply chain and material costs stabilize with full year operating cash flows expected to considerably exceed net earnings in 2022.

Turning to Slide 14 for a summary of capital deployment. Capital spending was $27 million this quarter, including $10 million for strategic growth investments. Additionally, $11 million of capital was returned to shareholders through dividends, and we ended the quarter with approximately $150 million of cash. We continue to maintain a balanced approach to capital allocation that enables us to grow and reinvest in our businesses while returning cash to shareholders.

Moving to Slide 15. Our balance sheet remains strong, and total debt to adjusted EBITDA of 1.9x remains within our desired range of 1.5 to 2.5x.

Let me now turn to Slide 16 for updated 2022 outlook. We are increasing the full year guidance metrics that we stated last quarter. Net sales are now expected to increase 11% to 17% year-over-year to a range of $3.9 billion to $4.1 billion, which assumes no foreign currency translation impact. Adjusted earnings per share is now estimated to increase 19% to 24% year-over-year to a range of $13 to $13.50, excluding any further restructuring activities. These metrics reflect strong market demand, the solid execution by our team and our confidence in our ability to continue this performance. We also assume that steel costs for the year have stabilized and expect a full year tax rate of approximately 26.5% due to our expected geographic mix of earnings. Other metrics and assumptions are summarized on the slide and in the press release. The strong market demand across our businesses, strength and flexibility of our global team and our continued pricing strategies give us confidence in achieving our sales and earnings per share targets.

Additionally, investments in technology and strategic growth initiatives across the portfolio remain a priority for us this year. Finally, for modeling purposes in the Agriculture segment, a reminder that the third quarter is a lower sales quarter in this segment compared to the rest of the year due to normal business seasonality.

With that, I will now turn the call back over to Steve.

[Steve Kaniewski, President & Chief Executive Officer]

Thank you, Avner. Turning to Slide 17. We are benefiting from the long-term secular drivers in all of our businesses, as evidenced by another record global backlog of more than $1.8 billion, an increase of 12.5% from year-end 2021. These demand drivers are providing momentum as we look ahead for the rest of 2022 and our business portfolio is well-positioned for growth. Like others, we are closely monitoring inflation, supply chain volatility and labor availability. We are ready to take additional actions to address these issues across all our businesses as needed.

Turning to Slide 18. In summary, I could not be more pleased with our collective efforts as a team over the past few years to advance our journey as a company. Together, we continue to demonstrate our ability to grow sales through innovation and execution. At the same time, we have increased profitability by executing on our pricing strategies and advancing operational excellence across our footprint. We have invested in our employees and technologies to drive new products and services to build upon the strength of our operations. We remain disciplined in allocating capital to high-growth strategic investments while also returning capital to shareholders through dividends and share repurchases.

We continue to focus on managing what we can control. Because of this, we are poised to grow and drive shareholder value well into the future. This playbook has served us well, and I am confident in our continued performance in 2022 and beyond.

I will now turn the call back over to Renee.

[Renee Campbell]

Thank you, Steve. At this time, the operator, we'll open up the call for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Chris Moore with CJS Securities.

[Chris Moore, CJS Securities]

Obviously, recognizing price was the big driver in Q1. Was volume growth stronger in either of the Infrastructure or Agriculture segments? And roughly kind of where was it in the mid-single digits? Or maybe just talk a little bit about volume at this point.

[Avner Applbaum]

This is Avner, I'll take that question. So for volume, what we've seen in Q1, if I break it by the 2 segments, for Infrastructure, it was around low single digits. And just as a reminder, early in the quarter, we did have impact from Omicron, which impacted mostly our Coatings business, which probably drove it down from the mid-single to the low single digits. If you look at the Agriculture, volume was also low single digits. But there, we did have the Egypt project that we mentioned. If you kind of normalize that, you would see double-digit volume growth in Agriculture, and the remainder was pricing.

[Chris Moore, CJS Securities]

Got it. That's helpful. So obviously, solar is an area that lots of promise. It seems like there's -- supply chain has kind of gotten more difficult again recently. Just can you maybe talk about what you're seeing on the solar front, particularly in North America and kind of how you see that playing out over the balance of the year?

[Steve Kaniewski, President & Chief Executive Officer]

Yes, Chris, this is Steve. I'll also ask Aaron to comment here. But modules, panel availability will be somewhat in question again, particularly with the government investigations proceeding. So the larger-scale utility projects will probably feel the most brunt of that. But as you know, we've been targeting much more of a distributed generation, utility scale mix, and that's allowing for us to not be as impacted by the delays because the DG projects tend to move much quicker through the system. And then I'll ask Aaron to talk a little bit about the international mix and how Brazil plays into that.

[Aaron Schapper, Group President of Infrastructure]

Yes. I mean a large portion of our business is international. So we really -- North America is just one of the markets for our solar product. Obviously, we have tremendous strength in Brazil. As far as our market position there, we feel good about where we're doing internationally. The U.S. climate will change. Obviously, it's a big priority for the administration to keep pushing green energy along. Right now, a lot of the projects, there will be some pause, but this is just in North America. So we've really primarily been internationally focused. It is a global product for us. So as a result, it doesn't have as much of the largest impact.

[Steve Kaniewski, President & Chief Executive Officer]

And in both our Infrastructure and Agriculture segments, we feel like our guidance is still relatively conservative, and we feel good about it.

[Chris Moore, CJS Securities]

Got it. Very helpful. Last one for me. Maybe just could you give a quick update in terms of Prospera, what your expectations are over the next 12 months?

[Steve Kaniewski, President & Chief Executive Officer]

Yes. Prospera is developing along quite nicely. I would say, from an integration perspective, we're pretty much done. We're also working a lot of the back-end office integration with the existing Irrigation group. And from a technology rollout perspective, I think we're really working on highly innovative big changes for the industry, and we're seeing good traction and pick up of what we have out there. The margins are coming in as we expected. The growth that 27% is there, kind of where we expected. And the SG&A a little bit, as we lap last year, it will start to normalize. Q1, we didn't have Prospera. And part of Q2, we didn't. So what you're seeing there mostly is just an addition of Prospera this year versus last year.

[Operator]

Our next question comes from the line of Nathan Jones with Stifel.

[Nathan Jones, Stifel]

Just wanted to pick up on the price volume. I mean, you guys beat 1Q '22 revenue numbers here by a long way. And you beat 4Q '21 numbers also by a long way. I would imagine you know how much growth you're going to get from pricing at the beginning of every quarter. And the difference has to be volume here. And I think, Avner, you said low single-digit Ag, mid-single-digit Infrastructure, which would imply that you must have been expecting something like down mid-single digits in volume in 1Q '22. So maybe you could just talk about what came in better than you were anticipating or whether disruptions you were expecting that didn't materialize? Or just the last couple of quarters, the revenue numbers have been much, much higher than it had been implied in guidance?

[Avner Applbaum]

Yes. So first of all, we're very pleased with our execution. We've been able to execute very well, get a lot of productivity through our plans, which obviously help drive volume. Pricing, we keep on taking pricing actions, right? It's not a one and done. We continue, we take actions and we're able to, in some areas, impact the -- within the quarter as well. So we've been able to execute and kind of outperform, which we'll expect to do kind of throughout the year. And we will get more of the mid-single-digit volume the remainder of the year. So we're looking forward to kind of keep on that momentum going.

[Steve Kaniewski, President & Chief Executive Officer]

And Nathan, I would add that I think the pricing elasticity was a little better than we thought as well across all markets. And we were able to -- because the muscle reflex is there now, that as an example, zinc went up, we were quicker into the market. As aluminum moved, we were quicker with pricing. And I think the -- over 2 years now of following metals, the newer inflation that's coming in around labor and health care and gas costs and freight costs, we're just handling that all a lot better. And I think that's a big piece of it. I'd also say that our solar business, particularly in Ag, is kind of outperforming our initial expectations, and we're accounting for that now into the balance of the year and into the increased guidance.

[Nathan Jones, Stifel]

Sure better than being picked on for being the other way around. I guess the second question I wanted to focus on with a comment by Aaron there on focus on product lines and geographies that are offering better growth in margins, which I'm sure is not something new. But maybe you could just talk a little bit about what the most promising areas for you to invest in growth in terms of the product lines and geographies might be?

[Aaron Schapper, Group President of Infrastructure]

Yes. So when we look at -- in terms of portfolio management, I really try to focus on the businesses that will have outside return as opposed to the individual products in those. So we look at those businesses and we look to make sure we maximize the right products within those businesses. So if you looked at utility market, there's obviously pieces and parts of utility that are more profitable. So we just make sure that we prioritize capital and be very disciplined about making sure that capital follows the biggest opportunities in those markets and businesses. And really, so from just a philosophy point of view, that's the way I look at that portfolio.

[Operator]

Our next question comes from the line of Brian Drab with William Blair.

[Brian Drab, William Blair]

There's been just so much volatility again in the price of steel, especially towards the end of March. It's really impressive the guide that you were able to provide given that what price of steel do you have incorporated into the guidance for the balance of the year? Or at least, directionally, what are you assuming in that guidance from here?

[Steve Kaniewski, President & Chief Executive Officer]

Yes, Brian, it's Steve. It's a balance because we don't have any one piece of steel that we buy. So it's indexed across the businesses differently. But I would just say what we did is we took kind of that mid-March, end of March steel costs, and that's what we've assumed as we look out the rest of the year.

[Brian Drab, William Blair]

So kind of taking the recent peak and projecting that forward, not forecasting a decline?

[Steve Kaniewski, President & Chief Executive Officer]

That's correct.

[Brian Drab, William Blair]

Okay. And then, Steve, you, about a year ago, gave the longer-term guidance that included getting to greater than 12% operating margin. And wondering, if you could just revisit that? And given what's happening with steel, I know that's become out of reach in the near-term, but what needs to happen to get to that level of operating margin?

[Avner Applbaum]

I'll start off with -- so first of all, right, that is one of our long-term kind of goal 3 to 5 years. Clearly, right, higher cost does impact your margin percentage, but we do have a road map to get there. And we have seen improvement in Q1. We will see Q2, which is one of our stronger quarters throughout the year, especially with the [ Ag ] markets, we'll continue to see improvement. So we will show improvement in our margins in 2022. In 2023 is when we can really show additional progress towards the goal. How we get there is through the actions that we've been taking through our pricing leadership, getting that pricing over inflation with what we're doing in all our operations, with our productivity, with our lean, with our Industry 4.0 automation, with focusing on those products that have a higher margin profile. Telecom would be a good example there. So I think everything that we're kind of doing given us a road map and confident that we can achieve our 12% operating margin goal.

[Steve Kaniewski, President & Chief Executive Officer]

And Brian, I would just add that the focus on the 2 segments also is really allowing us to drive that growth towards that operating income percentage. The demand drivers are pretty similar across Infrastructure. The demand drivers in Agriculture are there. It's really now developing and using this as an opportunity to continue to develop the organization and the management team to stay focused on exactly what Aaron just discussed. Go after growth, allocate capital to growth and then really work on the operational excellence piece on the backside to get as much cash out of the business to continue to fund things like Ag Solar, things like telecom, growth, et cetera.

[Operator]

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Campbell for any final comments.

[Renee Campbell]

Thank you for joining us today. As mentioned, today's call will be available for playback on our website or by phone for the next 7 days. We look forward to speaking with you again next quarter.

[Operator]

Included in this discussion are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made in light of experience in the industries in which Valmont operates as well as management's perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. As you listen to and consider these comments, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties, some of which are beyond Valmont's control and assumptions. Although management believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include, among other things, risk factors described from time to time in Valmont's reports to the Securities and Exchange Commission as well as future economic and market circumstances, industry conditions, company performance and financial results, operating efficiencies, availability and price of raw material, availability and market acceptance of new products, product pricing, domestic and international competitive environments and actions and policy changes of domestic and foreign governments. The company cautions that any forward-looking statement included in this discussion is made as of the date of this discussion, and the company does not undertake to update any forward-looking statements.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.