Valmont Industries, Inc. (NYSE:VMI) Q3 2023 Earnings Call Transcript

Valmont Industries, Inc. (NYSE:VMI) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Greetings. Welcome to Valmont Industries Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. I will 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 Third Quarter 2023 Earnings Call. With me today are Avner Applbaum, President and Chief Executive Officer; Tim Francis, Interim Chief Financial Officer; and Eugene Padgett, Senior Vice President and Chief Accounting Officer. This morning, Avner will provide a brief summary of our third quarter results commenting on our markets and long-term business strategy. Following that, Tim will review our financial performance and provide our current outlook and indications for 2023 with closing remarks from Avner. 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 site at valmont.com.

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A replay will be available on our website later this morning. Please note that this call is subject to our disclosure 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. Finally, if you would like to be notified when Valmont publishes news releases and other information, please sign up for e-mail alerts through our investor site. We also encourage investors and others interested in our company to follow Valmont and our brands on the social media channels listed on our website. With that, I would now like to turn the call over to our President and Chief Executive Officer, Avner Applbaum.

Avner Applbaum: Thank you, Renee. Good morning, everyone, and thank you for joining us. I want to first say how proud I am of our global Valmont team as they navigate a dynamic demand environment and demonstrate their unwavering support to our mission and core values. It is the team’s customer-centric culture, driving innovation and delivering results that ultimately gives me confidence of our success now and into the future. During my first quarter as CEO, I made it a priority to hear directly from our employees, customers, dealers and shareholders. These conversations were valuable and insightful and I am appreciative of all the people I have had the opportunity to meet. Before moving forward with our quarterly review, I would like to briefly comment on the recent tragic events in Israel.

The safety and well-being of our Valmont colleagues in Israel is our primary concern. I’m thankful to report all of our employees and their families, they are safe. including my own, as both my wife and I have family in our home country. The loss of innocent lives during this escalating violence has been staggering and our hearts go out to all those affected by this senseless tragedy. Now let me return to our third quarter results and key messages shown on Slide 4. Our Valmont team continues to perform extremely well across both segments, delivering solid third quarter results. Adjusted operating margins and adjusted diluted earnings per share improved significantly year-over-year while navigating a dynamic market demand environment that is pressuring top line growth.

We also generated strong operating cash flow as we manage working capital, allowing us to support our balanced capital deployment strategy and return cash to shareholders. Infrastructure demand remains robust globally as nearly all of our end markets are experiencing multiyear secular growth drivers and global agriculture market fundamentals remain relatively strong. I will say more about our end markets in a few moments. The strong performance of our global operations team and pricing strategies in both segments have ensured we are driving margin expansion amid lower sales and ongoing inflation while capturing the value we add to our customers. And finally, we have announced necessary actions to position Valmont for long-term success including an organizational realignment program and executive leadership changes.

These actions improve our ability to support our business, streamline decision-making and improve efficiency. Turning to Slide 5 for an update on our markets. Within infrastructure, utility demand remains robust as utilities continue to increase CapEx spending to support a safe secure and reliable grid system. North America’s Power Grid is benefiting from several demand drivers, including the need to increase grid of resiliency and reliability support power load growth, and capitalize unfavorable government policies designed to accelerate the energy transition. The IRA is expected to provide tailwinds to our solar business as the industry obtained clarity on manufacturing tax credit details. Meanwhile, global solar demand remained strong due to the extension of the 10-year investment tax credit in the U.S. and favorable international renewable energy policy.

Road construction investment continues to support transportation demand globally. The release of IIJA funding has been slower than anticipated, as inflation, higher interest rates and labor constraints are delaying some projects. Although we are not yet seeing orders from this program, our transportation products are typically purchased 9 to 12 months following funding appropriations. Commercial lighting markets are experiencing some near-term softness from the impacts of higher interest rates inflation and declining single-family housing starts. Telecom remains muted as carrier reduced CapEx spending following record levels of investment. While some of our markets are faced with near-term macroeconomic challenges, broad-based infrastructure demand remains strong with several long-term drivers.

Our flexible manufacturing footprint and strong commercial partnership uniquely positions us to deliver value to our customers and drive profitable growth well into the future. Turning to agriculture. In North American markets, the latest USDA projections reaffirmed that 2023 Net farm income levels are expected to be at historically high levels. While farmer economics remain healthy, sentiment remains so muted coming off the substantial profit margins that were recognized in 2021 and 2022. We are seeing signs of positive trends this quarter as order levels for irrigation systems are tracking ahead of last year. International agriculture fundamentals remain robust. Brazil has been strong this year and we achieved another record quarter of sales as the market continues to experience increasing level of production and expansion of irrigated acres.

Brazil is expected to be the fastest-growing Ag market in the world, and it remains a key part of our long-term growth strategy. In other regions, our leadership position and project pipeline support ongoing demand and shipments of the large Egypt project are expected to continue through 2024. In summary, global agriculture markets are still in a position of relative strength. Our value proposition and the long-term demand trends set us up for continued profitable growth. Turning to Slide 6. Today, we are announcing specific actions to better align our organization to our strategy and improve our cost structure. After evaluating the administrative support within each business segment and corporate we have taken actions to create synergies and optimize our structure.

We are simplifying reporting lines, improving our visibility across the organization and driving accountability to achieve results. These are net positives that help us scale the organization to efficiently focus on our priorities and drive strategy to improve profitability. We don’t take these actions lightly, but they are necessary to set us up for long-term success. Next, while Tim will provide more details later in the call, I’d like to briefly address the impairment charges to goodwill and intangible assets in the agriculture technology reporting unit. These charges reflect a much lower adoption rate of Prospera’s agronomy technology solutions compared to original assumptions. Going forward, our go-to-market approach is to ensure innovation is introduced with the purpose of meeting the immediate needs of our irrigation customers.

As the market leader in advanced irrigation technology solutions, we’re excited about the growth and partnership opportunities, our investment creates for us to deliver additional crop and water management solutions to our growers. We’re committed to harnessing the power of evolving AI and machine learning technologies, and we’ll continue investing in R&D. Moving to Slide 7. I now would like to share an update on our executive leadership team, our strategic priorities and forward expectations. Aaron Shafer has been named Group President of Agriculture and our Chief Strategy Officer, which is a new role for the organization. Aaron previously had numerous leadership roles within our irrigation business and most recently served as Group President Infrastructure.

As Chief Strategy Officer, Aaron will develop opportunities to leverage commercial and technology strategies and create a strategic road map for growth across the company. Tim Donahue has backfilled Aaron’s role as Group President, Infrastructure. In this role, he will lead commercial growth strategies and foster collaboration across all infrastructure’s product lines to deliver value-add solution to our customers that drive profitability and ROIC improvements. Tim was most recently EVP Corporate Business Development and previously was the President of the former ESS segment. Diane Larkin remains our EVP of Global Operations, leading strategy to support capacity growth, including meaningful productivity enhancement across our businesses through operational excellence.

Our entire executive team will lead the respective areas with a sharp focus on data back decision-making and tight processes around investment decisions. I am confident this is the right team to help us achieve our strategic objectives. A few weeks ago, the leadership team and I met to discuss our strategy in light of my transition into the CEO role. The most important outcome from those meetings that I wanted us to achieve was to affirm that our core strategic priorities remain intact. At the same time, as is common when there are changes in leadership, as CEO, I started prioritizing certain aspects of our strategy differently than my predecessor. At our Investor Day, we highlighted a initiatives that delivered profitable growth based on leveraging our competitive advantages.

The last few years, we experienced tremendous growth, which drove the ability to explore several investment opportunities. While we continue prioritizing growth initiatives, looking ahead, we will invest with discipline and proactively make decisions in conjunction with market cycles. We remain focused on new products and solutions that solve our customers’ most pressing challenges while specifically strengthening our core businesses and prioritizing high-value revenue. Through this lens, the pace of some of our initiatives may change. For example, the bottom line impact from our agriculture growth initiatives will be more measured than our previous commentary may have indicated and will be more realistic about anticipated rate of change to our business.

We still hold an unshakable belief that we can and should bring advanced solutions to our customers. Our innovation funnel includes a mix of projects with longer payback horizons and others with more immediate impacts such as a robust solar business and our newly launched eco-friendly concrete utility pulse. In summary, our management team and organization are united around our strategic priorities with a focus on initiatives that deliver compelling value proposition to our customers. I’m excited about Valmont’s journey as a company that maximizes financial performance through the cycles made possible by an unwavering discipline on capital allocation and ROIC. Now I’ll turn it over to Tim for our third quarter financial review and updated outlook.

Timothy Francis: Thank you, Avner, and good morning, everyone. Turning to Slide 9 and third 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. Third quarter net sales of $1.1 billion decreased 4.3% as infrastructure sales were comparable to last year, offset by lower agriculture sales. Accounting for the 2022 divestiture of the Offshore Wind business reported in the Other segment, sales decreased 2.3% year-over-year. Despite lower sales, operating income increased 5.9% to $120.8 million and operating margins increased to 11.5%, reflecting higher pricing that was not linked to steel commodity costs and delivered actions to improve overall cost of goods sold.

Diluted earnings per share grew 18.1% to $4.12, a third quarter record. A favorable tax rate driven by recent legislation regarding usage of foreign tax credits generated in Brazil and benefits from R&D expenses, along with ongoing actions to improve profitability, drove the EPS improvement. As Avner mentioned earlier, we initiated an organizational realignment program to drive cost optimization simplify our operating structure and strengthen our shared service model. We estimate 2023 cash expense in the range of $33 million to $36 million. Approximately $16 million will be recognized within the Infrastructure segment, with the remainder split evenly between the Agriculture segment and corporate. These cash charges are expected to be recovered through lower operating costs within 12 months.

Turning to the segments on Slide 10. Infrastructure sales of $755.1 million were comparable to last year, driven by higher volumes, notably in the solar, L&T and TD & S product lines. Lower telecommunication volumes and lower pricing associated with the reduced cost of steel in the TDS product line more than offset higher pricing across the rest of the portfolio. Operating income increased to $108 million or 14.3% of net sales. Delivered actions to improve cost of goods sold drove the margin improvement. Moving to Slide 11. Agriculture sales of $298.5 million decreased 8.8% year-over-year. Higher international volumes were more than offset by lower North America volumes and a slightly less favorable product mix. In North America, sales were lower as farmer sentiment remained somewhat muted and the third quarter of 2022 benefited from the ongoing delivery of elevated backlog.

International sales were higher due to higher project sales in the EMEA region and growth in Brazil. Additionally, sales of agriculture technology products and services were similar to last year. Operating income decreased to $38.5 million or 13% of net sales. Improvement in gross profit margins, partially attributed to deflation in the cost of steel, was more than offset by higher SG&A. As Avner mentioned earlier, during the third quarter, we performed our annual impairment testing of goodwill and other intangible assets and concluded that the carrying value of the agriculture technology reporting unit exceeded its market value, leading to an impairment of approximately $137 million. The impairment test considers several factors, the most important of which are projected operational cash flows and the after-tax discount rate.

Significantly slower growth and grower adoption rates in Prospera’s agronomy Technology Solutions resulted in much lower financial projections than originally modeled. Other contributing factors to the impairment charge were the recent decline in the North American agriculture market and a higher discount rate attributed to higher interest rates. Turning to cash flows on Slide 12. Third quarter operating cash flows of $81 million were driven by diligent working capital management, primarily reductions in inventory. Turning to Slide 13 for a summary of year-to-date capital deployment. In the third quarter, capital expenditures were $26 million as we continue to invest in strategic capacity expansions. Through our balanced capital allocation framework, we are focused on enhancing shareholder value.

In the third quarter, we returned approximately $44 million to shareholders through dividends and share repurchases, ending the quarter with approximately $173 million in cash. Moving to Slide 14. Total debt to adjusted EBITDA of 1.5x was within our desired range of 1.5 to 2.5x. Our cash balances, available credit and flexible balance sheet provide us with ample liquidity to execute our capital allocation strategy. I would now like to review our updated 2023 outlook, as shown on Slide 15. Given the timing of international agriculture project shipments and continued near-term softness in telecommunications markets, we now expect full year sales to decrease between 3% to 4% compared to last year. Despite lower volumes, we expect operating margin improvement year-over-year, and our strong third quarter results carried forward into our full year EPS growth expectations.

I’d also like to note that the previous adjusted EPS outlook has been updated to remove adjustments associated with the Prospera technology intangible asset amortization and stock-based compensation totaling approximately $0.65 per share. We believe these revisions provide better transparency to investors going forward, and they became less meaningful to separately disclose as operating income has grown. Turning to the segments. Continued strength across infrastructure markets support our expectations for higher sales this year. In agriculture, we expect fourth quarter international sales to be higher compared to prior year. This will be more than offset by lower North America sales as 2022 benefited from shipment of elevated backlog, a higher sales mix of international projects will slightly reduce agriculture segment profitability in the fourth quarter as compared to last year.

As a reminder, the timing of international project shipments can be hard to predict from quarter-to-quarter. We assume a full year adjusted effective tax rate of 26% to 26.5% when considering the favorable tax legislation in the third quarter that I previously mentioned. To summarize, we are leveraging our global scale to improve margins, drive strong cash generation and generate sustainable shareholder value. With that, I will now turn the call back over to Avner.

Avner Applbaum: Thank you, Tim. Continuing my comments on Slide 16. I am proud of our team’s ability to execute our strategy, driving solid results while navigating current market dynamics. We remain focused on controlling the things we can control to hit our financial targets and improve our quality of earnings. We’re taking actions to enable a more efficient and effective organizational structure to fully realize the benefits of ongoing strategic initiatives with a continued focus on delivering high-value solutions through investments and innovation. We are confident our diversified portfolio with compelling long-term drivers and our focused strategy positions Valmont for success now and into the future. I will now turn the call back over to Renee.

Renee Campbell: Thank you, Avner. At this time, the operator will open up the call for questions.

Operator: [Operator Instructions]. Our first question is from Nathan Jones with Stifel.

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Q&A Session

Nathan Jones: I guess I’ll start off, Avner, you made some comments about some at least minor changes, if not major changes in the strategy here going forward. So I guess the question first is, can you expand on those kinds of things? What are some more details on what the changes to the strategy are. And then the financial targets that Valmont laid out in May, do those still hold? I mean, it sounds like maybe a bit more measured pace on investments. So maybe the growth numbers are towards the lower end, but the realignment adds to margins and maybe the margin at the higher end? Just any more color you can give us on kind of what’s changing strategically within the business.

Avner Applbaum: Okay. Thank you, Nathan, for the question. Okay. Let me start off with the strategy. And as I mentioned, we really evaluated our strategy. And conclusion was is we have a robust and very targeted strategy around our core competencies. We have very strong markets going forward in both infrastructure and agriculture, and we will really continue to focus on the areas where we could focus on our customers’ most challenging and pressing needs, and we will continue to support those areas and growing in both of those segments. If I need to give you some specific examples, maybe I could touch to for instance, the drone services. We actually just put a press release a few days ago. One area that we found that is really compelling to us, for instance, is telecom, right?

The climbers have — these companies need climbers. They need to claim towers, there’s shortage of people. We could with our drone services really supplement them to be more safe and solve their problem. Now there are a lot of other areas we’re focusing on, Jones, for instance, and some of them was really cool technology around the utility area, we could really help them clean their polls, but it’s not really their pressing needs today and usually it could fall to the back of the line when they look at their O&M spend. So we’re going to really focus on how can we help them solve their pressing needs either in the utility space, or in the telecom space and really go after those areas where we could help solve our customers’ most pressing needs.

But overall, , this strategy is solid. We’re confident in our ability to continue to drive significant growth in both of our segments. Now specifically to the 5-year targets that we provided during investment our Investor Day and your points are valid there. As you go into any long-term strategy and financial projections, right? You look at the market, you look at the initiatives. And as I look at them today, as we start off our first year into this 5 years is weaker than we anticipated. And of course, our starting point is going to be a little bit lower. Of course, we would assume a cycle, and we have, but the timing of some of our growth could be a little different and that could impact our long-term growth. Now specifically, as it relates to some of these initiatives, yes, specifically, we talked about Prospera, we had some forecast in there for our growth, and it’s not going to be as high as we expected.

And we try to balance in every outlook, anywhere between — you always have the optimism versus the realism as you go into a strategic plan. And some of these initiatives have more — on more on the optimistic side. And we’re going to take a more measured approach to a lot of these initiatives, again, to make sure we’re really focusing on the core, supporting our customers and really how do we drive the strongest value both to our customers and to our shareholders. So that’s kind of on the sales side. Very — feel really good about the [indiscernible] of the financial targets, we’re making good progress on our operating margin, quality of improvement. We continue to show progress quarter after quarter, including in Q3. So making great progress on the operating margin, making great progress on the ROIC as we have the focus on driving our capital efficiencies, improve profitability and so on.

So overall, at a very high level, very excited about our outlook out for the next 5 years. We got good tailwinds in our markets. The secular drivers are very strong, and we’re planning to execute on our plan to drive shareholder value.

Nathan Jones: I guess my follow-up question is going to be on pricing. You’re obviously seeing some headwinds in pricing on the utility [indiscernible] business, where you contractually have to pass the steel pricing back through. And we obviously saw a lag on the way up, and so we’ll see it catch up on the way down here. Can you just talk about the aggregate pricing impact we’re looking at maybe in the fourth quarter? And as you look into next year, we obviously some headwinds in the utility business. Do you still see pricing opportunities in other parts of the business? And then if you’re seeing any pricing pressure in the ag business as demand is a bit weaker there in the U.S. along with the lower steel prices?

Timothy Francis: Nathan, it’s Tim. I’ll take that one. So we are — let me start off, we’re very pleased across the infrastructure business in terms of what we’ve been able to do with pricing when it’s in our businesses that don’t have that contractual mechanism tied to steel cost indices. As you alluded to, there’s been tremendous volatility in the cost of steel. It’s been as low as $670 all the way up to $1,200 kind of in the middle of second quarter. That dynamic is probably going to continue, right? We got the United Auto Workers strike that might get resolved before today, it might not. But we could — we expect to see that continued volatility in the cost of steel, but we expect to be able to maintain good margins in those contracts where we have that mechanism tied to the steel indices.

But then there’s the other part, of course, of our utility business, which is the bid market, and there, I’d also like to comment that we continue to see strong pricing as we try to get more orders there. Turning to agriculture, we see no change in our philosophy of being a leader on price.

Avner Applbaum: And let me add to that, Nathan, just several weeks ago, I went out to our dealer conference out in [indiscernible], Idaho and spend time with some of our dealers out there. And really, there was no discussion around pricing. They’re very happy with the value they get from our pivot. They were very happy with our — with the value proposition, with our technology offering, and we continue to maintain that strong partnership with our dealers and help drive value to our growers. So we keep on maintaining our leadership position in that market and evaluate the situation as we move forward.

Operator: Our next question is from Chris Moore with CJS Securities.