Q4 2022 Valmont Industries Inc Earnings Call

Yes.

Greetings and welcome to the Valmont Industries, Inc, fourth quarter and full year 2022 earnings conference call.

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<unk> and answer session will follow the formal presentation.

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I will now turn the conference over to your host Renee Campbell Senior Vice President Investor Relations and Treasurer Ms. Campbell you may begin.

Thank you and good morning.

I'll come to Galvan industries fourth quarter and full year 2022 earnings call.

With me today are Steve Kaniewski, President and Chief Executive Officer.

Of note Apple, Bob Executive Vice President and Chief Financial Officer.

Jean Paget, who joined <unk> as senior Vice President and Chief Accounting Officer. This past October .

This morning, Steve will provide a brief summary of our fourth quarter and full year results, commenting on our markets and long term business strategy.

<unk> 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 page at <unk> Dot 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.

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

Thank you Renee.

Good morning, everyone and thank you for joining us.

Our fourth quarter was a great finish to what has been one of the best years in Belmont system.

I'm very pleased with our tremendous performance and delivering a record year of sales and profitability as we improve margins and achieve key milestones across our business.

And it's certainly a great time to be a part of bell.

During our discussion. This morning, we will mentioned many factors that contributed to our results.

At the very top of that list is our global team of more than 11000 employees.

I want to deeply thank them for their hard work and dedication throughout this volatile year.

Notably our production teams around the world worked tirelessly in the face of supply chain challenges and the effect of lingering COVID-19 restrictions.

They persevere and perform vital work day after day to ensure we continue serving our customers.

Truly believe that our global by my team is the most important factor contributing to our outstanding results.

In addition, we have a business model rooted in our core values.

It's intensely on areas that create value.

This differentiated approach drives operational excellence across the organization.

That provides a level of resiliency that enables us to better navigate a challenging environment.

It's also necessary to have an optimal organizational structure to help us reach our profession.

This past year, we realigned our business segments from four to two.

Infrastructure and agriculture.

This is more than a change in how we report results.

It's an organizational strategy to drive efficient capital and resource allocation across the company.

It also supports our goal to institute a culture of positive change by fostering collaboration encouraging enterprise wide innovation.

And leveraging technology to enhance productivity and accelerate business growth.

In addition, as noted in our press release during the fourth quarter, we announced and completed the divestiture of the offshore wind energy structures business Belmont S F.

Which had been reported in the renewable energy product line in the <unk>.

Infrastructure segment and is now reported as other.

This past year, we benefited from robust end market demand, even in the face of challenging macroeconomic conditions, including higher inflation and labor constraints.

As we have mentioned in the past our strategy is to essentially grow our business and markets with long term drivers that are supported by multi year demand and growth trends.

The resiliency of these end markets, coupled with our focus on operational excellence and serving our customers contributed to our fourth quarter performance and will continue to propel our business forward.

Now let.

Let me move to a brief fourth quarter overview summarized on slide five.

Record fourth quarter sales of $1 $1 billion grew 17, 5% driven by sustainable pricing and mid single digit volume growth.

Resulting in our ninth consecutive quarter of double digit year over year sales growth.

Moving to the segments infrastructure sales of $771 $3 million grew 15% year over year with double digit sales growth across all product lines led by strong underlying market demand and favorable pricing.

We believe the broad infrastructure buildout accelerating around the world is a multi year event that will continue at least over the next three to five year period.

We are seeing demand across our infrastructure portfolio being driven by the benefit of broad based stimulus programs continued <unk> build outs and densification efforts and the energy transition to renewables.

Utilities developers and governments around the world continues to deploy an increasing amount of capital on infrastructure hardening and resiliency initiatives as evidenced by the current lead times for our large transmission structures, which have extended to more than 40 weeks.

As such we are continuing to make strategic investments in capacity and technology solutions to meet customer demand.

Moving to agriculture.

Sales of $335 $1 million grew 21, 1% year over year.

Led by sustained pricing and volume.

Primarily driven by market strength in North America and Brazil.

Farmer sentiment remains positive.

Supported by net farm income expected to exceed $160 billion for 2022.

Nearly 14% higher than 2020 one's record.

1023, net farm income levels are projected to remain elevated and certain core input cost such as fertilizer fuel and pesticides.

Second to stabilize or potentially decline.

In addition, the long term market drivers of water conservation global population growth and ongoing security concerns are supporting solid demand globally.

Encouraging irrigation and technology investments.

These strong AG market fundamentals are also contributing to our robust international project pipeline.

As evidenced by the new projects in Africa.

Last month.

I will speak more about in a few minutes.

Severe drought conditions persisting across many key global markets, putting pressure on crop yields unexpected stock levels, keeping global commodity prices above historical norms.

We expect all of these market drivers to continue throughout 2023.

Finally as reported in other offshore wind energy structure sales of $33 $3 million grew 44, 1% year over year.

As mentioned the divestiture of this business was completed at the end of 2022.

Turning to the full year summary on slide six sales grew 24, 1% year over year to a record $4 3 billion driven.

Driven by deliberate pricing strategies strong markets across our businesses and focused execution by our teams.

No team considerable growth across the portfolio.

Successfully added incremental volume within our existing facilities strategic capacity expansions improved operational efficiencies and lean methodologies, while successfully navigating through difficult labor market constraints and lingering pandemic impacts earlier in the year.

Turning to the segments infrastructure sales grew 23, 5% year over year to a record $2 9 billion.

With strong sales growth across all product lines.

In agriculture sales grew 31, 3% year over year to a record $1 3 billion with strong sales globally, including another record year of sales in Brazil.

Agriculture technology sales grew 17, 6% to $115 million in line with our expectations.

In 2022, we focused heavily on integrating the prospera technologies team.

Our market, leading irrigation and agronomy services.

I am very pleased with the progress towards our strategy to provide growers with technology solutions that makes it far more efficient and increase land productivity.

While improving sustainability and reducing input costs.

Turning to slide seven I'd like to take a few minutes to highlight an example of how sustainability is ingrained in our fundamentals our agriculture business.

The number of people suffering from food and security around the world has been rising due to the pandemic and geopolitical tensions.

We partner with countries to increase increase their local food production, which reduces our dependence on grain imports and create self sufficiency and supplying food to their growing populations.

Supporting our agriculture growth strategies, and the UN sustainable development goals of zero hunger, we continued to expand our international irrigation presence.

Last month, we secured an $85 million quarter for multiple projects in Africa.

These projects will supply the region with irrigation equipment and advanced technology solutions to help meet the escalating demand for increased land productivity and reliable food production.

Utilizing our industry, leading technologies that provide remote monitoring and controls together. These projects will become one of the largest installations in the world of connected pivots.

Enabling our customers to maximize crop yields while reducing input costs.

Our international project pipeline supported by growing demand across many regions for irrigation technology and AG solar solutions as well as our global operations team and local dealer presence.

In summary, we achieved another great quarter and 2022 was another great year.

End market demand for our infrastructure and agriculture solutions looks to be positive well into 2023.

We entered the year with great momentum and confidence.

Before I turn the call over to Avner I would like to highlight two important events that we are looking forward to this year.

First we plan to release, our 2023 sustainability report in late April .

Over the past year, we have continued to make remarkable strides to minimize our environmental impact.

While delivering increasingly efficient and sustainable solutions for our customers that support critical ESG principles.

This year's report will feature even more examples.

Of how we are conserving resources.

And improving life for our stakeholders.

Later this year, we plan to host a conference call to highlight our accomplishments and share more about our ESG journey at Belmont.

Second I'm excited to announce that we will be holding an investor day on Tuesday May 23 at the New York Stock Exchange.

This will be an opportunity to connect with many of you face to face and present, an updated look at our long term strategy and financial targets.

We'll be providing detail soon.

I hope you are able to join us.

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

Thank you, Steve and good morning, everyone.

Turning to slide nine and fourth quarter results.

Comments will focus on the adjusted results.

The press release and in the Reg G disclosure in the presentation appendix.

Operating income grew 33% on sales growth of 17, 5% with operating margins, increasing to 10, 1%, reflecting execution of our disciplined pricing strategy.

Volume and improved fixed cost leverage.

Diluted earnings per share grew 31% to $3 57.

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 segment operating income increased to $99 6 million or 13% of sales.

We are benefiting from the advancement of our growth strategy and deliberate focus on products and services that generate higher returns and deliver exceptional value to our customers.

Moving to slide 11.

Agriculture segment operating income increased to $44 5 million or 13, 4% of sales.

The benefit of higher average selling prices and additional volume leverage partially offset by higher SG&A, including incremental R&D expense for technology investments.

Finally.

As reported in the other operating income for the offshore wind energy structures business was $1 4 million or four 3% of sales.

Turning to cash flows by 12.

Full year operating cash flows or $326 million.

A meaningful improvement compared to last year, driven by diligent working capital management, and a more stable raw material cost environment.

Turning to slide 13 for a summary of full year capital deployment.

Total spending for the year with $93 $3 million, and we returned $86 $3 million of capital to shareholders through dividend and share repurchases ending the quarter with approximately $185 million of cash.

We continue to maintain a balanced approach to capital allocation of reinvesting in our businesses, which enabled us to grow organically and inorganically, while returning cash to shareholders.

Additionally, return on invested capital grew to 13, 3%, a meaningful 160 basis point improvement compared to last year led by strategic capital allocation.

Proved working capital performance.

Moving to slide 14 strong cash generation this quarter allowed us to reduce total borrowings.

So at least $66 million.

Further strengthening our balance sheet.

Total debt to adjusted EBITDA from one and a half times remains within our desired range of one and a half to two and a half time.

I will now review, our 2023 outlook as shown on slide 15.

We expect sales growth of 4% to 7%, which is in line with a positive preliminary outlook that we communicated last quarter after reflecting the divestiture of the offshore wind energy structures business.

We expect mid to high single digit volume growth and price growth in the low single digit partially offset by the effect of fixed pricing mechanism in certain product lines.

Adjusted diluted earnings per share is expected to grow 11% to 15% compared to 2022.

To a range of $15 35.

The $15 97 in line with the expectation that we communicated last quarter.

SG&A expense is expected to increase in 2023, reflecting higher labor costs and higher investments in innovation and R&D to support strong sales growth and digital transformation initiatives.

We expect operating margin expansion led by strong market demand improved operating efficiencies.

Your supply chain disruption and our continued pricing strategy.

Further.

Our outlook assumes continued elevated inflation with stabilizing raw material cost including steel.

As such we also expect a more normalized year for free cash flow and continued progress towards our stated goal of one times net earnings.

We are making strategic and significant investments into our business with an expected increase in capital investment this year of $105 million to $125 million.

Growth is the cornerstone to our long term financial success, and we're continuing to build upon the strength of our operation as we invest in our employees R&D and innovation to drive opportunities that support our growth strategy.

Our effective tax rate is expected to be between 28, and 29% primarily driven by our.

Geographic mix of earnings.

Finally for modeling other expense purposes. Prior interest rate in 2023 will lead to higher interest expense and a much lower pension benefit compared to 2022.

To summarize we are confident in achieving our sales and earnings per share targets. This year based on our robust backlog of approximately $1 $7 billion the execution of our operation and strong project pipeline.

We're leveraging our scale and global footprint to improve margin and mitigate supply chain challenges.

Strong cash generation is enabling us to support our capital allocation framework, putting us on the path to achieve our long term financial target.

Drive sustainable shareholder value with that I will now turn the call back over to Steve.

Thank you avner.

The fundamental market drivers for our segment share.

On slide 16 have remained strong over the last several quarters.

We expect them to remain consistent as we look to 2023 and beyond.

Driven by secular long term end market fundamentals.

Through a combination of great market dynamics and outstanding execution, we have build a foundation for strong performance in the future.

Our commercial teams are working closely with our partners to understand their needs. Our technology development teams are creating innovative solutions to solve customer challenges and our operations teams are improving productivity to meet strong demand and expand margins.

We remain focused on aligning our businesses with the fundamental drivers to provide the best chance for success.

Turning to slide 17 in summary, while we expect the broader economy to be challenged in 2023, our end market demand is proving to be resilient.

We are doing a great job of winning business being flexible and delivering on our commitments to our customers.

In parallel we are strategically investing in our employees and technology to ensure we stay at the forefront of innovation and continues to drive operational excellence initiatives across the organization to improve productivity.

This leads to growth and profitability and cash flow.

Supporting our capital allocation framework, and enabling additional investments and profitable growth.

I will now turn the call back over to Rene.

Thank you Steve at this time, the operator will open up the call for questions.

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One moment, please while we poll for questions.

Thank you and our first question is from Chris Moore with CJS Securities. Please proceed with your question.

Good morning, guys. Thanks for taking a couple of questions great quarter, great year.

Maybe we'll just start with with backlog so backlog of $1 7 billion up a little bit year over year down from around that record level of $2 billion in Q3.

Maybe you could talk about the areas that have had the biggest decline is that more a function of lead time shortening or demand in certain areas you know not quite as strong.

Hi, Thanks for your question. This is on your I'll start off with the largest impact is from the divestiture of the offshore wind business with had which had approximately $250 million of backlog, but at the end of Q3, but the margin the largest.

Area.

Top of that we did have a lot of shipments in the AG business shipping some of our related private project.

Project work.

So that also drove some of the reduction in Q4.

Got it very helpful.

And maybe just one on the 12% operating target so you know.

Obviously government operates in and a lot of cyclical markets you've talked to today of what some of that is kind of.

Improving a bit but I'm looking at 12% target as you might be able to reach.

That will most of the end markets are strong but not necessarily.

Long term sustainable number am I looking at that fairly or are you thinking of 12%.

And and it stays at that level moving forward.

I'll start off well, we definitely see that as long term sustainable.

Target, we're planning to make significant.

Progress in 2023, driven by a lot of the.

Leveraging volume some of the pricing a lot of productivity improvement, we're going to see in 2023, if we have lesser supply chain disruptions for our cost aligned with.

Our pricing so we will see significant progress in 2023, as we move into 2024 clear line of sight as we communicated in the prior Investor day.

And that will be sustainable should be sustainable over the long term and Chris I would add there.

My comments about the infrastructure segments.

<unk>.

We don't see any kind of down cyclicality at a minimum over the next three to five years I mean, there is enough out there that one could argue for 10 years between utility telecom.

Traffic and lighting et cetera. So.

The AG markets are still strong and our technology initiatives and our AG solar initiatives really with you.

But I will say if you go back in time, our typical cyclicality there. So we see a good line of sight to 12.

Perfect I'll leave it there thanks guys.

Thank you and our next question is from Brian Drab with William Blair. Please proceed with your question.

Hi, good morning, Thanks for taking my questions I thought I would start just for some pricing.

You've mentioned pricing kind of qualitatively throughout the call today, but I was wondering if you could talk about.

What you expect to see in terms of pricing within utility business. This year.

The highway.

Infrastructure business, and just kind of take it.

Take us through the business lines and tell us what you're expecting.

Yeah, Brian .

If you look first and foremost that utility.

And the lead times are ramping up to over 40 weeks.

Most of the the demand was understated from most of the reports that were out there and in our appendix.

We actually put in a graph showing kind of how the real market played out so with everything going on with electrification load growth grid hardening.

There's really no reason that should back off.

And price should remain very strong.

In the telecom market. It is our highest priced area and although there is a little bit of inventory pullback.

Early here in the year, we're not even into the Densification efforts around <unk> and so there is no reason there that you should see price move.

T work, although we are just starting to see some of the highway.

Infrastructure, Bill kind of quotes and orders come through the states, we're going full full bore so.

Lead times.

The orders and quotes and lighting and traffic remained very strong. So again no reason to move.

The coatings business.

<unk> continued to move up price and we'll continue to move up price.

And then the agriculture side there is no reason to move backwards anywhere there either so we feel very strong.

That's the price that was gained over the last couple of years will hold just based on the market.

Nymex of supply and demand.

Got it thanks and then.

Shifting to solar can you.

Talk a little bit more about them.

Where did you end the year in terms of revenue for the solar tracker business and and then in terms of revenue in the year.

In the AG solar business and what do you expect for those two businesses in 2023.

Yeah right.

Phil.

So first of all in the.

Solar and the infrastructure part of the business, we more than doubled our revenue to over $120 million.

So really strong results there and continue we're expecting to continue.

High growth this year as well based on all the market demand.

On the AG side of the business, we had and also in that area, we had a strong.

Performance strong growth in that area as well.

And based on the <unk>.

<unk> CAGR is there you know between 15% to 20% we should continue to see the strong growth in that area as well.

Okay I'll follow up more later thank you.

Thank you and our next question is from Jon Braatz with Kansas City Capital. Please proceed with your question good morning, everyone.

Steve You mentioned you talked early on.

And your commentary about some additional investments in the utility area because lead times are getting extended 40 weeks and I guess my question is maybe twofold number one.

How big of expansion physical I guess physical expansion and then secondly.

What do you see other your competitors doing in terms of physical expansion.

That regard too.

Yes so.

John we take a very measured approach to capacity additions.

And we look at labor.

Labor productivity first and foremost.

We look at our existing footprint and from a lean perspective, what more can we get out of them through <unk> and other types of exercises and then once we do that we then can assess where to actually add capital. So what we're doing and what's reflected in our capital plan for 2023.

Is kind of to the extent of expanding our capacity so it's not an over.

Here's a brand new facility is taking many of our existing facilities and further adding to that more leaning them out.

Waves so.

We're looking at that we'd like to have a target between 26, and maybe 34 weeks ultimately.

Within the utility area I think competitors have been rational.

As well as.

Everyone has really kind of added capacity.

In a very measured approach to meet kind of the market growth.

And so I think youll see that the long term drivers in utility are really being buttressed by kind of three factors right first and foremost there's load growth after two decades of low load growth.

You have the energy transition Thats taken place and then you have the grid hardening and so.

Those three factors really give a good line of sight to adding capacity and not necessarily doing it.

Ultra quick, but just to make sure that you can maintain that proper balance between supply and demand and obviously pricing that goes with it okay. Thank you very much.

Yes.

As a reminder, it is star one if you would like to ask a question.

Our next question comes from Nathan Jones with Stifel. Please proceed with your question.

Hey, Good morning, this is Adam Farley on for Nathan.

I wanted to start with the AG segment. So the USDA forecast is down this year, but it sounds like.

Underlying fundamentals are strong could you help us balance.

How are you thinking about farmer sentiment.

Maybe a potential delay to the start of the season.

Yeah, Adam Theres two factors when you look at the USDA projections.

Kind of like the under the covers piece of it.

They really didn't account for the decline in inputs, so as fertilizer prices drive transportation prices dropped.

Nitrogen prices dropped its not really reflected in there.

Been talking to a number of economists, but this is what they do all the time and they've set out to us and it's a good reference point.

The other is where the biggest drop in net farm income is going to take place and its not really with our growers.

It's more in the livestock.

And kind of finished areas, where theres more decline in net farm income and so what we're seeing and others in the industry have already kind of pointed out over the past couple of weeks is that there is still very strong underlying growth.

They still hate to pay taxes, they will make money.

And there's a good return, particularly with the drought conditions that have occurred across the globe for.

For our types of products so.

We feel that that really provides us stability in the market.

As we look through 2023.

That makes a lot of sense and then more broadly.

Can you provide more color on your supply chain are you expecting an improvement in the supply chain. What are you seeing today is it leveling out or is it getting better.

Yes, the supply chain has definitely improved over the last couple of quarters.

I'd say second quarter of last year was most acute most of the issues because we had the pandemic restrictions kind of early in Q1.

There is still a little bit of whack, a mole going on.

But it's not whack a whole bunch of malls. So it's things that I think our team is very capable of handling.

And we've really been able to kind of tune the supply chain for the new normal.

And really make some appropriate calls, whether it's inventory or forecasting et cetera.

As a part of that.

Okay. Thank you for taking my questions.

Yes.

We have reached the end of the question and answer session and I will now turn the call over to Renee Campbell for closing remarks.

Thank you everyone for joining us today as mentioned today's call will be available for playback on our website or by phone for the next seven days and we look forward to speaking with you again next quarter.

Included in this discussion are forward looking statements within the meaning of the private Securities Litigation Reform Act of 995.

These forward looking statements are based on assumptions that management has made in light of experience in the industries and with Zelman.

As well as management's perceptions of historical trends current conditions.

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.

Above risks uncertainties, some of which are beyond zelle months' 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 belmont 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 and as Al Moss 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 questions that any forward looking statements 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.

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