Valmont Industries : Stifel 2024 Cross Sector Insight Conference Transcript

Company Name: Valmont Industries, Inc. (VMI)

Event: Stifel 2024 Cross Sector Insight Conference

Date: June 4, 2024

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All right. Good afternoon, everybody. Thanks for coming along to Valmont's presentation here. Very pleased to be joined by Tim Francis, who is Chief Accounting Officer and Interim Chief Financial Officer; and Renee Campbell, who is Vice President of Investor Relations and Treasury. As with all of these presentations, I'm going to present three bear cases, Tim and Renee are going to tell me why I'm stupid. Then I'm going to present three bull cases, and they're going to tell me why I'm a genius.

So starting off with the first bear case, there is no end insight to the agriculture market downturn. 2024 is going to be down from 2023. And it's not clear that there will be a return to growth in 2025 with waning expectations for rate cuts, persistent inflation and generally declining crop prices.

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Well, thank you for the opportunity to address this. I'll start by saying that Ag markets always have a cycle. They always have been cycling for decades, especially in the more developed markets. And those cycles have been driven by supply and demand factors, right, whether it's a weather event, whether it's a political event in an Ag producing country, anything that can impact the stocks-to-use ratio can impact the price of the main grain commodities like corn and soybeans. We always say that even when a market is down for Ag, it's a really good business for us. And when the market is up, it's a fantastic business for us. So we know how to address these cycles.

And we also know we can't control the market timing. So I can't tell you if there will be a return to growth in 2025. But we're focused on, as we always are, what it is that we can control. And we also know that different markets have different drivers. So our U.S. business has historically been correlated to net farm income levels. And you all know that 2024 net farm income is projected to be down roughly 24% versus 2023, and that's all coming off of a record year in 2022.

The pivot is still though a very compelling investment for the grower, and especially with the technology that's available today. So growers are always looking for ways to make the land that they own more productive. That means increasing yield. And a key component of yield is the amount of water - the right amount of water at the right time. And weather conditions, as I mentioned earlier, can really play a factor in that.

Removing that unpredictability or that volatility that we can sometimes see with weather patterns is a key component of the return on investment that the grower can get with a pivot irrigation system. So that still remains a very compelling investment for them. Part of our strategy has also been to really focus our efforts on our strategic account programs, both inside or within the U.S. and also internationally. Those are very large growers, in some cases, large Ag companies that are less sensitive to, say, the price of corn and soybeans at any given time.

And then generally speaking, growers balance sheets are still fairly healthy. Land prices have held up quite well. And so while they're down from those their highs, corn is still right around $4, $4.5, soybean is hovering right around $12, and again, we focus on what we can control and helping to educate the grower on what that investment and that return on investment is.

And we also focus on our technology investments. We know that everything from the monitor and control component of a pivot, which helps a grower manage his or her fleet of machines through their cell phone or iPad or what have you, is a key component of reducing labor costs and preventing from having to drive out to the field in every machine to make sure that things are running as they can.

And the other area that we control, in addition to innovation and continuous innovation is also we focus on our price strategies. So we are always looking at that right balance of price and volume. We are the price leader, and we maintain our market share strategies through very strategic pricing actions, while also controlling costs to help manage our margin better than in prior down cycles. So we've talked about that in some of our earnings calls and that's a real focus of ours right now.

And I would say we're also - we have tremendous opportunities in markets outside of the U.S. International project markets are - they have different drivers as well. There's a large pipeline of projects at any given time in many developing markets. We've talked about a couple of Egypt projects that we've had in the past. We just recently announced another roughly $50 million of new projects in the Middle East market and food security is a big driver in those markets, and again, independent somewhat of the rest of the developing - or excuse me, the developed market cyclicality. And then maybe the last region that I'll mention is Brazil.

So we are seeing a softer market this year as are a lot of other players in the Ag space. That market is and tends to be more correlated to the price of soybeans, but for the long term, it is a tremendous market. There's still a lot of land there that has yet to be developed into agriculture, yet alone irrigated land. And so the long-term drivers there are very compelling for us. And again, I'll just close with saying that we're focused on what we can control. And we've managed through these markets before and we'll continue to do so going forward.

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People often ask me what's the average length of an irrigation cycle or an Ag cycle, and I tell them one year, depends what the weather is this summer. So we'll see what next year holds. You guys did maintain the irrigation guidance at the end of the first quarter, but you said U.S. domestic was a little bit better and the rest of the world was a little bit worse. So maybe you can just comment on the changes that you saw during the first quarter?

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Yeah. So when we came out in February, we projected the Ag business to be down about 15% to 20% versus 2023. Now part of that was because we were shipping a lot of backlog in the U.S. market last year, and we were shipping a fair amount of backlog in the Brazil market. We've seen

order trends on a much more normalized basis this year. And this business typically does not have a backlog. So with all of that said and with net farm income projection is expected to be down 24%, our best estimate for the year was that 15% to 20% down.

Now in the first quarter, when we announced the Middle East projects that we had won around $50 million, that was the main driver of why we improved our overall outlook for ag. Now we're saying down 10% to 15% versus the 15% to 20% down. And in North America, we have seen order rates slightly better or improved versus last year, which is a great sign. We'll see how that plays out the rest of the year, but that does help us remain relatively optimistic that maybe this year, depending on what farm income levels end up doing is maybe a bit of a - maybe not as dire as we originally projected. So we'll see how the year plays out.

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Okay. I'll go into the second one. Valmont has put through a lot of price over the last three plus years. And as Ag communication and commercial markets are in decline, and steel prices have seen deflation, the company and the industries are going to have to give back price, which will lead to earnings dilution.

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Sure, I'll take that one. We - I want to start out with saying we recognize the importance of commercial excellence and price leadership, whether it's the center pivot irrigation equipment that Renee just did a really nice job explaining why it's got such a lucrative ROI to our customer, all the way to our telecom components that we sell through our Site Pro business, we understand the strong value proposition that our products provide to our customers, and we price according to that. So the answer to this question is, no. We would not expect to have to broadly give back price to our customers.

With that said, we will defend our overall market share and at times that will require some specific targeted pricing actions. As an example of that, there might be various specific regions here in the United States, where there's a little bit more competitive - competition in the center pivot irrigation world. In those instances, we might offer an additional rebate. If one of our dealers comes, again, due to some of the competitive pressure and says, hey, I can land a bigger order, meaning multiple pivots at one time, we might offer a bigger discount there, but we would not and we don't anticipate taking down the list price of our products.

And I'll just conclude by saying we plan to continue to innovate and find ways for our products to enhance the value derived by our customers. I think Renee kind of hit on that too with her answer to question number one about the Ag cycle.

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So I'll ask a couple of follow-ups on price. I know there is some contractual price that passes back in parts of the utility business with the service - master service agreements that you've got with some utilities. Outside of that, can you talk about pricing in the spot business in utility and whether

or not you're seeing any pricing pressure there? Or I mean demand in that side of the business has been pretty good. You're able to still hold price there?

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Yes. Demand has been very strong in the TD&S product line within infrastructure. What we saw in the first quarter, and we frankly expect to see for the rest of the year is we're seeing a demand profile more towards the smaller structures. That could mean smaller transmission structures, but it also means distribution structures and substation structures. And right now, because of that strong demand profile, we are not seeing any pressure on the pricing we're trying to drive in that market. And we continue to see our backlogs at healthy levels, which is about six months in duration.

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And then historically, there has been less than rational competitor when the market gets low in the irrigation business. Can you just talk about what you're seeing from competitive behavior from some of the competitors in irrigation, particularly in the U.S?

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Yeah. I mean, I would say, by and large, the pricing has been relatively rational. There is always going to be opportunities for others to maintain their own market share strategies and a couple of players in the market do really drive home or really focus in on either maintaining or growing share by really pulling down price. I would tell you that that is not our philosophy whatsoever kind of back to what Tim was saying earlier. We are the leader in the market in the Ag space.

We price for the value that we bring to the grower. We price for the technology that we have on the machine and the durability of the machine as well as the dealer network, which we believe is the best in the industry. So that noise is always there, I guess. But even - and I'll go back to my original comment from the first bear case, the Ag cycles all the time. And so we maintain our focus on what we can control and pricing very strategically for the value that we bring to the grower is one of those areas that we can control.

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Okay. I'll go on to the last one. Valmont's capital allocation strategy the past few years, including the company's largest ever acquisition, which was in agricultural technology, has destroyed shareholder value and called management's credibility into question.

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I'll answer that one. So at the highest level, our capital allocation philosophy is to invest in our businesses so that they can grow while balancing returning capital to our shareholders. So in terms of, I think, the direction of this question, I want to spend a little bit of time talking about our approach on acquisitions.

So as we assess acquisitions, we will tie them to our core products and expand our served markets. We'll look at a number of criteria when doing that. But the core one from a financial perspective that we're focused on, is we expect any acquisition to beat our internal cost of capital within year three. So we are looking at it with a very rigorous sort of financial lens. So acquisitions will be - will align to our core businesses, meaning we will see how it quickly expands our customer offerings.

So one example I could briefly talk about was we bought a company called ConcealFab a few years ago. And it's in the telecommunication market. Ericsson is a minority owner in that business. But what it offered us was a PIM solution, which is this interference - helps to reduce the interference between two carriers in a certain geography. That was not a product that we had at the time, but it was a product that we knew our customers were looking for.

So again, that is how we're thinking about acquisitions is something that really ties to the core business. Same can be said if we start doing capital expenditures tied to innovation. We expect those to meet the immediate needs of our customers. So overall, I would say our capital allocation philosophy is grounded. We want to first invest in ourselves, and we are very optimistic with the opportunities we see right now to expand and put in new machinery into our existing footprint. But we always do that being balanced with paying out a quarterly dividend and being opportunistic in terms of repurchasing of our shares.

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So I think the follow-up there is, you talked about M&A being close to the core. And the Ag tech acquisition that was largely written off was probably not close to the core. So can you talk about how you ended up with an acquisition that was maybe not so close to the core, maybe not within your lines and why we should be confident that something like that's not going to repeat.

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Sure. So let's start out with it. So the acquisition's name was Prospera. With Prospera came over 90 close to 100 people that specialize in artificial intelligence and machine learning based out of Israel. We are still excited about the capabilities that group brings to our total portfolio. And more importantly, we're excited about how we can now - how we are now transitioning them to focus more on the precision irrigation that we strive to bring through our center pivot irrigation. But that acquisition was, in our words, transformational. Right now, we would not be looking at transformational acquisitions. We would be looking at acquisitions that tie to our core or that we can easily understand because we are close to our customer and it solves a problem that our customer has been describing to us.

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Okay. Thanks for taking those questions; we'll move on to the phone lines now. Valmont is a big beneficiary of global infrastructure spending, particularly in the U.S., money from the IIJA and

IRA has barely started to flow into the market yet. Infrastructure businesses will benefit for many years from these investments?

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So the short answer is, yes, thank you for the point, Nathan. What gets us really excited is really the megatrends that we see - multi-year megatrends that we see driving our infrastructure businesses. Everything from the energy transition to grid resiliency needs to aging infrastructure, data consumption. You hear every day about data centers that are coming online. I think globally, one every three days we're seeing a new data center coming online. Transportation evolution, smart cities, all of those things are very strong megadrivers for pretty much all of what we do in our infrastructure business, and that's what gets us really excited even outside of just stimulus such as the IIJA and IRA. And even the global market for street and roadway lighting is estimated to be $16.5 billion, I think, by 2030, which is an annual CAGR of about 5.5%. So the runway ahead of us is very, very positive.

And you're correct, Nathan. We've not yet seen money from IIJA and IRA really affecting our business yet. That's okay. We know that it's coming; some of the delays with that have been around

• honestly, a big part of it has been labor. It's finding enough people to be able to build and build the projects that this money is going towards. Some of it is just complexity in the release of the funds and the allocation and the acceptance of the funds. The states have a matching program that they have to put up. So all of this is just taking longer than I think anyone expected it to take.

For us, we tend to - there's a lag effect or a little bit more late cycle. So even though we haven't necessarily seen it start to flow into our business yet, we will, and typically from the time a project actually starts, so say like when the money is awarded and they sort of kick it off, it can be a couple of years before we actually see the benefit from that.

And if you think about it, there - if there's a traffic intersection going in or a highway that's being build, the light structures or the traffic signal structures or overhang sign structures are one of the last things to go into that project. So we will see the benefit from the time we get a quote prospect to the time we fulfill that order, it could be maybe nine to 12 months. All that is to say that as IIJA starts to flow through, we will see just an extension of that time frame as we start to see it benefit us beyond say, 2026 when that program is technically reached its end point.

I mentioned again, the lack of labor or the difficulty in finding people. IIJA unfortunately doesn't have a lot of dollars dedicated to training programs. So that may continue to be a bit of a constraint or a bottleneck. However, recent data that came out from the American Road and Transportation Builders Association does show that there seems to be in the last month or so, an uptick in money that seems to be starting to finally flow through and projects are starting to kick-off. And that would be in states like Texas, Florida, California, many of these states we have a nice presence in, in terms of market share. And we are one of a few, if not the only company that has the ability to engineer in all 50 states, so that gives us a nice advantage to be able to go wherever the funds are flowing.

And again, I mentioned that we tend to be more late cycle. So as we see those money start to flow through, there will be a benefit from us or for us, mostly probably on the transportation side. Utility markets are kind of self-funding themselves. You hear about utility CapEx going up incrementally about 10% from a budget standpoint year-over-year. So IIJA for us, we believe, will be more on the transportation side. We're already seeing good demand coming from transportation as states and cities are still spending money that they have. So even without IIJA, we're seeing a good year for transportation.

Commercial lighting is a little bit softer for us. That tends to follow single-family housing starts. And again, with that lag effect, so we start to see housing starts start to improve or begin to improve, nine, 12, 15 months later, we should start to see the benefits of that.

And then maybe the last thing I'll just touch on is the IRA that probably will benefit our solar tracker business the most. That lack of clarity though in terms of how the tax benefits come through and who benefits and how all that gets split up is still not real clear. But at the end of the day, we do expect to see some demand benefit coming from them.

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Do you want to slow down the spending of money, put the government in charge? Every time anybody says data centers or AI, your multiple goes up a couple of times, so I'll say it for you. There's certainly talk in the market about load growth increases and at least partially driven by the increased investment in data centers and how much power they consume. That benefits Valmont. So maybe talk about the - I've been doing this job for 17 years, and this is like the first time anybody has talked about load growth in that period of time. Talk about how data centers AI, electrification of everything, et cetera, benefits your business?

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Yeah. So the result of all of that or what needs to happen because of all of that is there's a number of new transmission lines that need to be put up and/or somehow able to be retrofitted to accommodate this load growth, Nathan, that you mentioned. The renewable energy mandates that are coming on board and the shift again the energy transition that I mentioned earlier, all that is also driving increased need for transmission lines to be able to accommodate all of that as well as distribution. Specific to - and before I move off of that point, that is what we do. We produce steel, concrete structures for transmission markets, for distribution markets as well as substation.

And to that point data centers is what's really driving substation growth for our business as well. These data centers again are coming online very quickly. And they are requiring an immense amount of energy and power. And we did an acquisition a few years ago in the substation space that has really allowed us to be a differentiator in the market where we have the ability to do almost like a prefab type of substation where we can put it together in the factory, load it on to a couple of trailers and take it directly to the job site, and it doesn't require nearly as much labor as it would if you were starting completely from scratch.

Substation structures are similar in terms of transmission structures. They're very big, and they tend to be made out of steel, and that's what we do very well. And the flexibility that we've put into our footprint and the ability to shift between transmission, distribution, substation, lighting et cetera, is something that we've been working very hard on the past few years. And I think you're starting to see that benefiting through our financials as evidenced by our Q1 results where we talked about that.

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The Irrigation business has strong secular growth drivers outside of the cyclicality in it. You've got to feed an increased population with the same or less water. Climate change causing increased volatility in rainfall, increased use of technology to increase yields and food security, all good drivers for your business?

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All good drivers for our business. And we continue to focus on those and have really for the last several years. Those drivers really haven't changed all that much. I'll mention food security a little bit later and maybe how that one is a little bit different than what we've seen in the past, but we are very uniquely positioned.

I'll start with the growing population to help solve that problem, if you will. The data shows that the world needs, I think, 70% more food by 2050 to address this factor. So land needs to be more productive, like I mentioned in my opening remarks and/or needs to be expanded. And mechanized irrigation is really a key part of helping the grower do that and plays an important role in that. Irrigated land globally represents 20% of the total cultivated acres, but it produces 40% of the world's food. So it's very important to continually focus on how we make that land more productive and increase yields, and again irrigation plays a big part in that.

Climate change, all you have to do is turn on the news and you're hearing about floods in Texas, flooding in Omaha recently, droughts, floods in Brazil, droughts all over the country, all over the world. I think we can all appreciate how weather has become so much more volatile. And the uncertainty and the unpredictability of rainfall, it never seems to happen exactly when you want it to happen. And if you don't get the right amount of rain at the right time, it can absolutely impact yield.

So again, back to what I mentioned earlier about this really being a positive driver because irrigation and especially the technology with what we can provide, helping the grower know how much to water, when to water and where to water and getting very prescriptive about that mitigates some of that uncertainty and volatility.

Technology, that's a nice segue. Our technology goes back to several years from the basic monitoring control all the way up to what Tim was describing earlier about AI and machine learning and getting very prescriptive at the plant level. About 50% of our machines in the U.S. are connected with technology and only about 10% outside the U.S. So the runway for increased adoption is very good for us. And we find that when growers do adopt our technology, the retention

rate is in the high-90 percentages, 98%, 99%. That helps improve not only yield, but it also reduces labor costs, as I mentioned earlier.

And so the future of technology for us is really at the end of the day, making the pivot and autonomous machine on the field. If you think about it's the only thing a grower owns that sits out in the field every day, all day long every day out of the year. And so that's what we're investing in, and we do see that as the future as part of even just selling more pivots.

And then last thing I would mention is food security. I think if anything, what COVID and the war in Russia-Ukraine really highlighted is countries; especially developing markets are really realizing the importance of how important it is to feed their own people. And we're seeing that in markets like Egypt, where they're literally taking desert and making it into farmland so that they don't have that consideration or that risk. So the FAO, there's a goal all the way up to the United Nations to achieve food security for everyone, and we play a key part of that by, again being able to help our customers, making land not only into irrigated land that is productive, but more productive and be able to produce more food over time.

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All right. We've got like 90 seconds for this one. Execution has been underappreciated by investors. Market headwinds resulted in revenue that was almost 10% below the original 2023 guidance. And Valmont still delivered core earnings that was at the midpoint of original guidance if I throw out the Prospera stuff. And expects another 100 basis points of margin expansion in 2024 on flattish revenue for the company?

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Sure. So we had a strong start to begin our 2024. We delivered 13.5% operating income margin for the first quarter. And I really attribute that to three factors: one, the focus on commercial excellence and price leadership. An example of that is the smaller structures we're seeing in TD&S; two, we're getting real benefit from the lean activities and our strategic sourcing group. We talked about it in our earnings call, but we were able to do an opportunistic purchase of steel that delivered very early in the first quarter for us; and then third, we were - we have lowered our SG&A. We have reduced our cost structure on a sustainable basis and are seeing a focused organization that is delivering financial results.

So what is that a testament to? It's a testament to the strength of our portfolio. Even with Ag and telecom volumes down, we were still able to improve our consolidated operating margins and what that means is as Ag and telecom volumes rebound it's how we expect to get to our long-term financial targets of realizing an operating income margin approaching mid-teens.

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Look at your timing, right. Absolutely dead on the button. All right. Well, thanks, everybody for joining us for Valmont. And thanks to Tim and Renee for joining us. Thank you very much.

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Thank you, Nathan. Thanks.