Valmont Industries, Inc. (NYSE:VMI) Q1 2023 Earnings Call Transcript

Valmont Industries, Inc. (NYSE:VMI) Q1 2023 Earnings Call Transcript April 21, 2023

Valmont Industries, Inc. beats earnings expectations. Reported EPS is $3.61, expectations were $3.33.

Operator Greetings and welcome to the Valmont Industries’ First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.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’ first quarter 2023 earnings call. With me today are Steve Kaniewski, President and Chief Executive Officer; Avner Applbaum, Executive Vice President and Chief Financial Officer; and Gene Padgett, Senior Vice President and Chief Accounting Officer.This morning, Steve will provide a brief summary of our first quarter results, commenting on our market and long-term business strategy.

Avner will review our financial performance and provide our current outlook and indications for 2023 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 site at valmont.com. 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 two 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 investors site.

We also encourage investors and others interested in our company to follow Valmont and our brand on the social media channels listed on our website.I will now turn the call over to our President and Chief Executive Officer, Steve Kaniewski.Steve Kaniewski Thank you, Renee. Good morning everyone and thank you for joining us. We delivered another quarter of great results despite an economic environment that continues to be challenging.Our performance reflects the effective execution of our growth strategies and our deliberate actions to increase profitability. We have a great team and we are positioned to achieve another year of great results.Turning to slide four, there are a few highlights we want to share with you today. First, we’ve had a tremendous start to the year with record first quarter sales, operating income, and earnings per share.Net sales increased 8.3% with solid growth in both Infrastructure and Agriculture.

Adjusted operating margin improved to 11.5%, reflecting benefits from strategic pricing, our ability to manage costs, and improved operational efficiencies that led to better factory performance. Adjusted earnings per share grew to $3.61.Avner will provide more details in a few moments, but I am extremely pleased with our results and proud of the entire Valmont team for these accomplishments. Demand for our products remains robust, and we are in markets and sectors that tend to be independent of the general economy and less correlated to macroeconomic cycles.Our participation in these markets is not by chance, but the result of a deliberate investment strategy. We have targeted expanding niche markets where we can add the greatest value through our recognized product leadership, flexible global footprint, and innovative technology to help solve customers’ challenges.In both segments, our disciplined approach to strategic pricing helps ensure that we are capturing the value we deliver to our customers, while expanding margins.

This helps offset inflationary pressures that are still present in our supply chain, notably the recent increases in steel costs.We remain vigilant in monitoring and responding to cost increases and we’ll take actions when necessary to maintain the margins we have worked hard to achieve. In a few minutes, Avner will speak to our capital deployment framework and update you on the latest actions to drive shareholder value. This is an important part of our strategy and enhances our value creation initiatives.Turning to a market update on slide five and starting with Infrastructure, our markets are benefiting from several secular long-term growth drivers including the global energy transition. The infrastructure investment required to support the transition is in its early innings and utilities are increasing their spending to support grid hardening initiatives and an evolving generation portfolio.Recent reports from utilities indicate 2023 CapEx spending is expected to increase 10% over last year and total spending over the next three years is expected to continue growing.

Overall, utility spending initiatives continued to show resilience to a higher cost of capital environment, inflation and general economic concerns.Our solar business is benefiting from the renewable energy transition and order rates have been increasing, leading to a record global backlog that is three times higher than one year ago. We expect further demand to come from US markets once the industry receives more clarity on how critical elements of the Inflation Reduction Act will be implemented.During the quarter, we continued to see solid order flow from transportation markets and additional quoting activity related to the Infrastructure Investment and Jobs Act. As a reminder, our lighting and transportation products are typically purchased nine to 12 months after funding appropriations are completed.

So, we expect to benefit from this incremental demand beginning in 2024.In telecom markets, underlying multiyear demand for 5G deployment remains strong. We have seen some pullback in carriers’ CapEx this year to more normalized levels. These spending patterns are typical within the industry as we’ve seen with previous generation rollouts.We remain well-positioned to help carriers achieve their 5G and densification goals. Across the Infrastructure segment, we continue to make strategic investments in capacity and technology solutions to meet strong multiyear demand.Turning to Agriculture. Underlying global market fundamentals remain positive, providing stability to overall demand trends. International ag markets remain very strong, led by Brazil and a robust project pipeline elsewhere.The Brazil market has continued to strengthen as the value of agricultural exports have expanded approximately 10% annually for the past 20 years, most recently to support lower expected yields in the EU and the Ukraine.Irrigated land acres in Brazil have increased over 40% annually over just the past three years.

And this year, a second consecutive year of record corn output is expected there.Last year, we began investing in additional factory capacity within the country, which we fully expect to come online this year, allowing us to meet the increased market demand, while enhancing customer service levels. Additionally, our robust project pipeline is providing a multiyear line of sight, and we are well-positioned to benefit from these opportunities in 2023 and beyond.Turning to North America. As the first quarter progressed, we recognized some changes to typical order patterns as growers took a wait-and-see approach to buying decisions amid general economic uncertainty and a late planting season due to abnormal weather conditions.We also recognized a difficult comparison to first quarter 2022 when we delivered against an exceptionally elevated backlog.

We expect the second half of the year to return to a more normalized order flow as commodity prices have remained resilient and projected 2023 net farm income levels are expected to remain above historical averages.Moving to slide six. Earlier this month, we were excited to host a Media Day event at our global headquarters to celebrate the commencement of our 2023 AgTech Tour. The half-day event included networking for media, community leaders and our expert Valley and Prospera staff; a fireside chat with Daniel Koppel, President of AgTech, and myself; as well as a roundtable of customer and dealer panelists that have experienced a tremendous return on investment from our technology solutions. We were honored to have Nebraska Governor, Jim Pillen speak at the event.Over the next six months, our team will travel the country, showcasing our suite of technology offerings, including remote control solutions, machine health diagnostics, and our featured release of plant insights to monitor crop health.With more than 60 plant stops across 20 states, growers are invited to have open discussions to learn how our technology solutions can provide unparalleled farm agronomy data and insights to maximize land productivity.Adoption rates of our AgTech solutions have been increasing and our investments in technology have uniquely positioned us in the market, while setting our agriculture business up for success through the cycles.Turning to slide seven.

Next week, we will publish our 2023 sustainability report. For Valmont, sustainability is embedded in everything we do. Our tagline, Conserving Resources, Improving Life, is a testament to the work we do to help our customers do more with less.In the report, you will see an update on our ESG progress and commitment and multiple examples demonstrating that ESG is a part of our strategy, operations, and a competitive advantage.On the slide, we highlight our Champion Green team in Acacia Ridge, Australia. This team was selected from our more than 80 global green teams for the annual award to recognize the work they have done towards our ESG philosophy.I was proud to be able to acknowledge the achievements of this team and appreciate everything our global team does every day to demonstrate our commitment to sustainability.I encourage you to take the time to read the report when it is published.

We also plan to host a dedicated ESG conference call later this year to expand on the key elements of the report and respond to your questions.With that, I will now turn the call over to Avner for our first quarter financial review and updated outlook.Avner Applbaum Thank you, Steve, and good morning, everyone. Turning to slide nine 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.As mentioned last quarter, the divested offshore wind business is now being reported separately in other. My comments today will focus primarily on our two reportable segments; Infrastructure and Agriculture.First quarter total net sales of $1.1 billion grew 8.3%, driven by sustainable pricing and volume growth in both segments.

Excluding the Other segment, sales grew 10.4% year-over-year.Operating income grew 23.4% to $122.1 million, with operating margins increasing to 11.5%, approaching our long-term goal of 12% and reflecting execution of our disciplined pricing strategy, higher volumes, and improved fixed cost leverage.Diluted earnings per share grew 17.6% to $3.61, attributable to higher operating income, partially offset by a higher tax expense due to a change in the geographic mix of earnings compared to last year.Turning to slide 10, Infrastructure net sales of $736.1 million grew 11.2% year-over-year with sales growth across all product lines, including a record quarter for TDNS and double-digit growth in solar, which is the renamed renewable energy product line.Segment sales growth was led by higher pricing and strong underlying market demand.

We continue to realize the benefits of our strategic capacity expansion and have responded to this demand through new product innovation and footprint optimization to drive volume increases across the segment.Operating income increased to $94.4 million or 12.9% of sales, driven by sustained pricing and volume growth.Moving to slide 11. In Agriculture, net sales of $332.2 million grew 8.3% year-over-year, led by sustained pricing, volume growth and higher sales of technology solutions.Strong growth in international markets, including another record sales quarter in Brazil, where volumes grew nearly 50% year-over-year and higher middle e-sales more than offset lower volumes in North America as first quarter 2022 benefited from the delivery of record year-end backlog.Operating income increased to $57 million or 17.2% of sales.

The benefits of higher average selling prices and additional volume leverage were partially offset by higher SG&A, including incremental R&D expense for technology investment.Turning to cash flow on slide 12. First quarter operating cash flow of $21 million was driven by diligent working capital management and a more stable price cost environment. We will continue to focus on effective working capital management as we look to move free cash flow equal to or greater than net earnings.Turning to slide 13 for a summary of first quarter capital deployment. CapEx was $22 million as we continue to invest in capacity to support sales growth. We further demonstrated our commitment to return cash to shareholders with an increase to our quarterly dividend and continued share repurchases.The additional $400 million repurchase authorization announced in February gives us additional capacity to repurchase shares, while the increase in our dividend is reflective of our confidence in sustained earnings growth and strong cash flow generation.Through our balanced capital deployment framework, we are focused on enhancing shareholder value as the strength of our business continues.

In the first quarter, we returned approximately $123 million to shareholders through dividends and share repurchases, ending the quarter with $173 million in cash. Going forward, we will continue our balanced capital allocation approach, although we expect a slower pace of repurchases for the remainder of the year.Moving to slide 14. Total debt to adjusted EBITDA of 1.7 times remains within our desired range of one and a half to two and a half times. Our cash balance, available credit and flexible balance sheet provides us with ample liquidity to execute our capital allocation strategy. During the quarter, Moody’s reaffirmed our BAA3 stable credit rating.I would now like to review our 2023 outlook as shown on slide 15. We expect sales growth to remain at 4% to 7%, which accounts for the divestiture of the offshore wind structure business and assumes mid to high single-digit volume growth, approximately 1% price growth and no material foreign currency impact.We expect operating margin expansion this year given strong market demand, our pricing strategy and ongoing continuous improvement initiatives.

We also assumed steady market demand, a more stabilized labor environment and continued growth in R&D investments. We expect continued strength across infrastructure markets this year as our healthy global backlog is providing good visibility.In Agriculture, as Steve mentioned earlier, underlying ag market fundamentals globally remain positive. International growth this year is expected to be very strong, driven by project sales in a robust Brazil market, where our backlog visibility extends into the second half of the year.Agrishow, the largest farm show in the region, will begin in a couple of weeks, giving us further confirmation of our full year expectations. We expect North America agriculture volumes in the second quarter to be similar to the first quarter due to difficult comparison to unusually high volumes in the second quarter of 2022 as we delivered an elevated backlog.

We expect international sales in the second quarter to be up approximately 10% compared to the first quarter.Finally, a reminder that the third quarter is typically a lower sales quarter compared to the rest of the year. However, strong international sales, led by our growth in Brazil where they can produce two or three crops per year and higher project sales, are likely to mitigate seasonality impacts. We now expect adjusted diluted earnings per share growth of 12% to 16% for a range of $15.45 to $16.While our previous outlook to assume a more stabilized inflation environment, we are seeing recent increases in raw material costs, notably steel. We expect these costs to align with current price projections for the remainder of the year.Our total backlog of $1.6 billion at the end of the quarter remains near record levels and at solid margin levels attributable to continued market strength across the portfolio and multiple new projects awards.As a reminder, our backlog is firm with committed projects and typically experiences a few cancellations.

We believe our backlog is an indicator of the strength of our core markets and the steady growing demand for products and solutions.To summarize, we are confident in our outlook and believe that it demonstrates the strength of our portfolio, favorable end market trends and strong competitive position in the marketplace.We are leveraging our global scale to improve margins and drive strong cash generation, enabling us to support our growth strategy and achieve our long-term financial targets driving sustainable shareholder value.With that, I will now turn the call back over to Steve.Steve Kaniewski Thank you, Avner. Turning to slide 16 and expanding on Avner summary, the fundamental long-term drivers of our markets remain resilient. Our end markets have true multiyear and, in some cases, multi-decade tailwinds, that set us up for a long runway of growth.Our Infrastructure business is supporting the global energy transition, critical infrastructure to support transportation markets, and mobile network upgrades.

In the Agriculture market, the combination of land productivity and resource conservation needs are driving investment globally.Additionally, both segments are experiencing technological transition and we are solving customer pain points by integrating value-added innovation that will continue to deepen our competitive advantage.In summary, on slide 17, I am extremely proud of our team’s strategic execution and ability to deliver sustained outperformance through challenging market dynamics. Our growing sales and strong backlog demonstrate our market leadership and we will continue to develop capabilities and centers of excellence across the organization to build on our momentum.We are investing in innovation, technology, and digitization that will accelerate our growth beyond market rates.

Our focus remains on controlling the things we can control to achieve our financial targets and deliver shareholder value. This is enabled by a strategic framework that positions Valmont for success now and in the future.Finally, I look forward to meeting with you next month at our Investor Day on May 23rd as we provide a more in-depth review of the company and business segments, including growth strategies, capital allocation priorities, and financial objectives.I will now turn the call back over to Renee.Renee Campbell Thank you, Steve. At this time, the operator will open up the call for questions.

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Question-and-Answer Session

Operator: Thank you. We will be conducting a question-and-answer session. [Operator Instructions]Our first question comes from the line of Chris Moore with CJS Securities.

Please proceed with your question.Chris Moore Hey, good morning guys. Thanks for taking a couple of questions. Yes, maybe we can just — you talked a lot about Brazil. Obviously, your remarks are very bullish. Kind of — I’ve been hearing mixed messages about the strength of demand, things like election-related risks, things like that.Can you maybe just talk to it a little bit further kind of the Valmont business model within Brazil? Are you doing anything unique or just taking advantage of what you’re seeing is to be kind of really strong growth there?Steve Kaniewski Good morning Chris. There has been a real deliberate effort over the past five years to increase our dealer network throughout the country of Brazil to add more local capacity so that we’re not as subject to some of the import issues with inventory.

To create aftermarket parts strategy, we’re testing a lot of our technology down there even as a leading technology proof-of-concept.So, I think when you look at that in its totality, our efforts are paying off for us. I think the other big thing as compared to, let’s say, North America or Europe is just the fact that you get two to three grow seasons. And you have corn really opening up in the West. And so because they’re on a replenishing aquifer in the West, corn, because they now have a really robust cattle industry, the byproducts of some of the ethanol production from corn, it can be used to feed cattle, that’s helping to drive business as well.And then obviously, FINAME has been very supportive in all growers participating in the market, which is why we see that if someone puts land in production, 40% of the time, they’re going to put a pivot right on it right away.And that is significantly higher than you see in other parts of the world, including the North America market.

So, Brazil is the market of the future and will really surpass our North American market in the not so distant future.Chris Moore That is incredibly helpful. Maybe just one more on a bigger picture on agriculture. Over the next 12 to 18 months, is there — when you look at the potential challenges, is there any difference by geography? I mean do you have more or less confidence in North America than international moving forward? And I guess, obviously, you ended by just saying how strong Brazil was so.Steve Kaniewski Yes, I mean, Brazil obviously, over the last three years, has doubled for us each of those last three years. So, we have a lot of confidence in Brazil. Even despite some of the government — change of the government and other things, ag brings in, I think, 23% of GDP down there.

So, it is a significant piece that they’re not going to mess with.The Middle East, we’ve talked about. Eastern Europe is also strong regions for us and will remain so both food security and just pure population growth. Australia and New Zealand has been a market that for the last couple of years was affected by some pretty severe weather events.But overall, ag fundamentals, when you have soy at $14.60 or north, corn above $6, well above $6 most of the time, I think as farmers have kind of settled in after a record net farm income, just human psychology, what it is, you come off of the best earnings you’ve ever had, you want to stop and take a look before you start to reinvest.And I think as people now get emergence, they can lock in some of their forward contracting at very favorable rates.

The soy markets of the world, obviously, Brazil being one of the biggest. With these kinds of soy prices, I think we’ll go get back into the game very quickly because of the old, I don’t like tax and I need my land productivity to keep my cost low.So, the fundamentals are there. But the past three seasons were not really indicative of what we would call a traditional ag market. It was COVID, then it was kind of hyperinflation in metals and supply chain issues, labor issues last year, so I think we are really starting to finally get back to a more normalized kind of ag market.Chris Moore That’s perfect. Thanks Steve. I’ll leave it there.Operator Thank you. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.Nathan Jones Good morning everyone.Steve Kaniewski Good morning Nathan.Nathan Jones I’ll go on the domestic ag market.

You guys said the revenue in the quarter was similar to last year. I’d assume you have a few points of pricing there. So volume was probably down a few points. Can you talk about the difference just in the seasonality? I know there was demand pulled forward earlier in the season last year. Does that account for all of the volume decline? Or is there a farmer sentiment in there?And how do you expect that to normalize as we go through the year? Should we expect maybe a better second quarter than you had last year demand shifting from one quarter to the other?Steve Kaniewski Nathan, it’s — there was definitely some pull forward and some negative farmer sentiment as we came into the year. I think that plus the fact that much of the, let’s say, West of the Mississippi was abnormal weather conditions and people really late to get out to the fields, we expect that really the second half of the year will be more normalized.And that second quarter, we’ll still have some pressures on it from the fact that — particularly in the April timeframe, it is still — we’re just starting to see now a pickup of order rates, an increase in farmer sentiment literally week-by-week.