Valmont Industries, Inc. (VMI) Earnings Call Transcript

Hi, everyone. Welcome to the Valmont Industries presentation. I'm Garik Shmois. I'm an industrials analyst here at D.A. Davidson, and we're pleased to have the Valmont team with us. We have their CFO, John Schwietz. We have Renee Campbell, Senior Vice President, Capital Markets, Risk and Treasurer; and we have Casey Meyer, VP, Treasury and Investor Relations. They will do a presentation. And then afterwards, we have plenty of time for Q&A. So feel free if you have any questions, certainly, we'll offer audience participation. But if you do want to e-mail me questions, then I could read off. I'm at gshmois@dadco.com. With that, I'll turn it over to Renee, who will get us started.

Awesome. Thanks, Garik. Thank you very much, everyone, for having us today. Thanks, D.A. Davidson. I know that some of you that are joining us may not be as familiar with Valmont. So we wanted to just walk you through a brief presentation to help with that understanding. So quickly, a reminder that our presentation and discussion today is subject to our disclosure on forward-looking statements, which is outlined here on the slide. So with that, who is Valmont? I'll start by sharing that we are celebrating our 80th anniversary as a company this year. Valmont's story began in 1946 in Valley, Nebraska, which is just outside of Omaha, and it is still home to our largest facility in our manufacturing footprint today. In the early days, our founder, Robert Daugherty, saw an opportunity to help farmers become more productive. And in 1954, Valmont founded the mechanized irrigation industry with the center pivot, and we remain the market leader today. From there, we've really built on our expertise in steel forming and manufacturing. And in the '60s, we expanded irrigation tubing into tapered light poles, which really laid the foundation for what has now become a much bigger infrastructure business. We became a public company in 1968 and began expanding internationally, both organically and also through acquisitions that added new capabilities and geographic reach. And we think that history matters because the Valmont of today was really built around our core strengths and our core values. We excel at solving difficult problems for our customers. We also engineer products for very demanding applications, and we manufacture reliably at scale. And over time, those capabilities have really given us leading positions in irrigation and infrastructure markets with very durable demand drivers. So today, Valmont is about $4.1 billion in revenue. That was in 2025, and we're between $9 billion and $10 billion in market cap. The most important takeaway, I think, from this slide is the shape of the company and how well it really aligns with the opportunities in front of us. Infrastructure now represents about 75% of sales, and that segment generated adjusted operating margins of 17.3% last year. Agriculture represents the other 25% of sales. And while that market has been at a cyclical low for the past few years, we do hold a global leadership position with the Valley brand. And this really gives us a solid foundation to improve the consistency and quality of earnings through the cycle. At the enterprise level, North America is about 75% or 3/4 of our revenue, which gives us significant exposure to the strong utility investment cycle, which I'll touch on a little bit more in a few minutes. We really improved the earnings power of Valmont significantly over the past several years, and we believe we're still in the early stages of realizing our full potential. Our portfolio is aligned with durable global needs and secular growth drivers, such as more power, more connectivity, more resilient infrastructure and greater productivity from limited resources. So starting with power. After decades of pretty flat electricity demand, load growth is expected to more than double over the next 5 years and likely beyond that. Data centers and AI are certainly important drivers, but the demand is really broader than that. It also reflects onshoring, industrial expansion, electrification and the need to connect new sources of generation to the grid. So our transmission and distribution and substation solutions, along with our telecom solutions really help move that power and information where it needs to go. More than 70% of the U.S. grid is over 25 years old. And so utilities are also investing in resiliency and ways to replace those aging assets and improving reliability. So our engineered structures and coating solutions also support that work, and our lighting and transportation products help modernize other essential infrastructure. And then in agriculture, the challenge is really producing more food with the same amount of land and the same amount of water and energy and labor. Protein demand is expected to increase about 20% by 2035. So our irrigation systems, our center pivots and linears and our technology help growers improve yields while using fewer inputs. And it's clear that these markets provide a very strong backdrop, but we also know that demand alone does not create earnings. Our ability to execute is what we believe differentiates us, and we're highly focused to do just that. So how are we doing that? Well, our customers operate in pretty mission-critical environments where delays or failures can be extremely costly. And they need confidence or trust that a supplier or a partner can really solve either the engineering challenge or the manufacturing at scale challenge and deliver a quality product when promised. And that's really a lot of the value that Valmont provides. And it starts with our commercial relationships. So one example in infrastructure, we have really deep technical expertise and long-standing partnerships with many of the leading utilities. And those relationships also help give us early visibility into projects and standards and changing requirements. In agriculture, we have a network of more than 600 dealer locations, and that really gives us unmatched proximity to growers and also supports the equipment throughout its life. Engineering is a very -- another very important differentiator. We have more than 40 years of utility structures engineering experience. Every project can involve different soil conditions, different wind loads, resiliency requirements, choices of material like steel or concrete. And our teams really know how to work through that complexity and develop the right solution in an efficient way. And finally, we do have a scaled global manufacturing footprint and also integrated capabilities that are difficult to replicate at scale. And it supports cost efficiency, but it also allows us to reliably deliver these large complex projects because we have that flexibility. So when you put it all together, it's our commercial teams that are understanding the need of our customers, our engineers are solving for it and our operations deliver at scale. And it really is that whole system that helps us win in the marketplace. And the result of that is trust, and trust is really central to how we do win and grow. So I just want to touch briefly on this slide. This kind of shows how those capabilities that I just described really translate across our portfolio. So within infrastructure, North America utility is our largest business, with nearly $1.5 billion of sales in 2025, and it is our primary growth engine over the next several years. And we just had an Investor Day back in June, where we outlined the path to that. We serve transmission, distribution and substation applications, and that really places us at the center of the grid investment cycle. And then our coatings business also participates in that growth opportunity. It was about $236 million of revenue last year. That's really just custom sales. Our coatings business also supports our internal needs as well. And both of those businesses really are benefiting from similar market drivers like grid investment, data centers, et cetera. And then the rest of infrastructure provides diversification and opportunities to improve performance. So North America Lighting and Transportation, about $500 million of sales last year, Telecom just under $300 million. And then we have about a $600 million international infrastructure business that kind of encompasses all of the products that we offer. And then agriculture was about $1 billion, just under $1 billion of sales last year. So that business, again, is primarily center pivots, linear, corners, but we also have a strong aftermarket parts business. We also have tubing products and then a growing portfolio of technology solutions. So this overall diversification, we believe, has really served us well over the years and helped us remain resilient through market cycles. And at the same time, we're very clear about the direction that we want to take each of these businesses. We're investing to capture growth in utility. We're applying greater commercial and operating discipline across both segments to improve margins and returns. So before I turn it over to John, I just kind of go a little double-click deeper on the utility opportunity in front of us. Here is where you can really see the scale and visibility of that opportunity. Utilities in this country expect to invest about $1.4 trillion through 2030. And nearly half of that spending relates to transmission, distribution and substations, which, as I said, are the areas where we play. Within that broader capital plan, we estimate a cumulative $53 billion serviceable market for the structures and solutions that we provide. We then narrow that to a $6.7 billion Valmont-specific pipeline through 2029. This pipeline is really informed to us by our customers. They have long planning cycles. We have that visibility that they share with us through our alliance relationships and partnerships. And we work with customers very early in the engineering and planning process, which again helps us understand what they expect to build and what they will need. And it's that pipeline that helps give us confidence in the opportunity ahead. So coupled with our very deep customer relationships, we expect this demand to support North America utility sales of about $2.5 billion by the end of 2029. That represents about a 13% annual growth rate, about $1 billion of incremental revenue from where we are in 2025. And I think just the last important point that I will make is these drivers really go beyond 2030. Some of the drivers that I mentioned earlier really do create a long runway for continued investment over time. So with that, I will turn it over to John to walk us through the financials.

Thank you, Renee. So at Valmont, we see a clear and achievable path towards delivering $35 in EPS by the end of 2029. As compared to earnings per share in 2025, that represents a compound annual growth rate of 16.4%. This outlook is based only on organic initiatives that are already underway. The underlying drivers in our businesses are very durable. And although the projection goes through 2029, as Renee mentioned, the opportunity horizon stretches far into the next decade. Each of Valmont's businesses has a role to drive value creation in this path to $35 of EPS. Our primary driver is capturing above-market growth in the utility business. We see approximately $1 billion of incremental sales potential by capturing the demand in this utility super cycle. We consider this growth driver to be our most significant opportunity, and this contributes approximately $10 of incremental EPS to our outlook. Although relatively smaller, the coatings business is also in this value driver. Our second value driver is strengthened to unlock efficiency and performance. This includes opportunities in our broader infrastructure portfolio, which includes lighting, traffic, telecommunications and international businesses. Here, we intend to build a stronger and more scalable business through strategic commercial initiatives and cost reductions. In agriculture, we are driving aftermarket parts growth, increasing technology product penetration and developing emerging markets. Altogether, we expect these strengthened efforts to contribute $300 million of incremental sales. That's about $200 million of incremental sales from the broader infrastructure portfolio and $100 million of incremental sales from agriculture. After taking into account an unfavorable tax normalization impact of $1 of EPS, we expect a net $4 of incremental EPS in this value driver. And finally, our third value driver is Enable through disciplined resource allocation, which is optimization of capital and resources to the highest return opportunities, including advancing disciplined share repurchases. We expect a further $2 of incremental EPS from these Enable initiatives. Collectively, these initiatives support our long-term outlook of approximately $5.4 billion in sales and $35 of EPS by the end of 2029. Altogether, we believe Valmont is exceptionally well positioned for long-term value creation. By the end of 2029, we expect approximately $5.4 billion in sales, operating margins of 17%, earnings per share of roughly $35 and ROIC expanding to approximately 21%. Those targets reflect our strong confidence in both the underlying market opportunities and our ability to execute operationally. What gives us conviction is the combination of strong utility market fundamentals, disciplined capital allocation, robust cash generation and a strong balance sheet. Our capital allocation framework remains highly disciplined and balanced. At a high level, we are allocating operating cash flow across 2 broad priorities: growing the business and returning cash to shareholders. Last year, we allocated capital equally between both priorities. Looking ahead, our primary focus is investing in high-return organic opportunities. We are increasing capital expenditures because we see highly attractive opportunities to expand utility capacity and throughput. In this business, we are seeing over $1 of annualized revenue for every $1 of CapEx deployed. We're seeing strong returns on invested capital and accelerated payback time horizons. Our second priority is returning excess capital to shareholders through programmatic share repurchases. We are continuing to execute on our most recent $700 million repurchase authorization. Finally, M&A continues to be important for us. We pursue acquisition opportunities, which have a clear and strategic fit, targets that are within our core businesses or in adjacencies where we have clear and established rights to win. Any M&A must meet strict financial criteria, including EPS accretion and attractive ROIC thresholds. We expect to generate substantial financial capacity between 2026 and 2029 that will provide us with strategic flexibility. We project approximately $2.5 billion of operating cash flow generation over that period. We anticipate investing approximately $1 billion into capital expenditures, primarily for capacity expansion in utility manufacturing. After accounting for these capital expenditures, we expect to generate around $1.5 billion of free cash flow throughout this period. Combined with our existing debt capacity, this creates approximately $2.7 billion of capital deployment capacity. That capacity supports multiple priorities simultaneously, growth investments, shareholder returns and strategic flexibility. We expect strong earnings growth and strong cash generation to reinforce each other to create a powerful compounding effect for our shareholders. Today, you've heard why Valmont is -- why the opportunity at Valmont is meaningful. Most importantly, how Valmont converts durable demand into shareholder value. We have leadership positions in essential markets. We have cultivated strong customer relationships, relationships built over decades. We have deep engineering capabilities while operating at scale to deliver when reliability matters to the customers. Our capture, strengthen and Enable framework allows us to maximize those advantages. This is the system behind our path to $35 of EPS by 2029 and our ability to keep compounding well beyond this. And this remains our primary objective, creating durable long-term shareholder value. Thank you for your time, and we're happy to take questions.

Great. Thank you for that wonderful presentation. I guess I'll kick it off. A big theme in a number of the meetings I've been sitting in on is cost, given what's happening with freight and raw materials. Wondering if you could speak to your ability to absorb costs, what are some levers that you have? And what is the typical ability to price against costs?

Yes. Well, thank you for the question, and thanks for having us. So costs are increasing across the board. So as we look for our -- at our key input costs, steel, HRC is up about 40% year-to-date. Zinc is up about 35% year-to-date. Diesel is up about 85% year-to-date. So this is not an uncommon dynamic for our business. So we're managing these fluctuations often. Within our pricing in our contracts with our alliance customers, we have escalators and de-escalators around these key inputs. We reprice based on these indices and these inputs on a quarterly basis. So we're pretty effective in being able to pass on the costs that we see increasing. That being said, there's a bit of a lag in timing. So we usually see costs impact the P&L or changes in costs impact the P&L about 2 quarters from now. And while the simultaneous improvement in pricing or change in pricing is usually about 4 quarters out. So there's about a 2-quarter lag. And in periods of increasing costs, that creates some short-term headwinds. And of course, the reverse is when costs are going down. So right now, we are managing through some short-term headwinds on the cost side, but this is not an uncommon dynamic. And for the long term, it's very positive.

Okay. You've spoken to a long-term planning horizon and even upside potential beyond '29 and the visibility that you have. I was wondering if you could maybe just unpack the visibility that you have in a little bit more detail, maybe both near term and long term, what you're hearing from customers.

Yes, sure. So our visibility, as you kind of heard me mention in the presentation, remains very strong. So you saw that $1.4 trillion number that utilities are investing. That's up from $1.1 trillion not that long ago. Another recent data point that I saw is that public utility CapEx for this year has increased 22% over last year, and that's on top of, I think, about a 20% increase from the prior year. So we have visibility to public information, investor-owned utility information. But I think more importantly, we also leverage that close relationship we have with so many of our customers. So you've heard us talk about our alliance customers, the alliance relationships that we have, working with those utilities and those customers really closely, understanding their multiyear plans. They are planning along with us or we're planning along with them, I'll say, working on engineering solutions even in advance to understand what they're going to need. These are projects in the tens of millions of dollars. So they may not be going into our backlog right away. But through those relationships that we have, we know that we have that visibility. We know that, that will be coming. And that's the beauty of those relationships. We can reserve a certain amount of capacity for that. They commit to a certain amount of volume as well. And all of that is being driven by what I described earlier. Certainly, data centers and AI are a piece of it. But as I mentioned, it's electrification in general that's driving load growth. And there's also this whole idea of resiliency with climate becoming so much more volatile, utilities, in some cases, even have separate CapEx budgets just dedicated for hardening. And we have steel, we have concrete. We have some composite solutions that can really help with that, and we see opportunity there. That alliance arrangement that I mentioned is also what gives us confidence to that $6.7 billion pipeline that I mentioned a few minutes ago, too. So we're really comfortable with the visibility across that planning period. We talk to our customers all the time. Those relationships really do help us understand what their priorities are. And then, of course, we do participate competitively in the bid market. And they -- all of those plans, we're again working with our close relationships with our customers to understand what their plans are. And coupled with all of that is really what gives us confidence that's driving the capacity increases that John mentioned.

Great. As utility continues to grow across different categories, transmission, distribution, substations. Just how are you thinking about the mix of the growth? And how does the mix variance perhaps influence margin expansion?

Yes. So I'll take the first part of that question with where we see the growth. So we do see the largest amount of growth coming from substation just because the size of substations continues to grow. So what we used to see as substations being in the couple of hundred thousand dollars per substation, those have jumped up into the millions. So it's not uncommon to see substations in the $1 million to $3 million per substation. As you get into those larger substations, there's just a lot less competition. So we're one of the few that can provide substations at that scale and complexity. Now switching from an absolute dollar perspective, transmission is the biggest piece of our portfolio in that space. So we do see the most dollars coming from transmission and expect to continue to maintain, if not grow our market share in that space and then followed by distribution. So it is the smallest piece of that portfolio, mostly because we compete against wood structures. So as utilities invest in resiliency, we expect to gain additional market share. But out of the 3, we expect smaller growth in that space. John, do you want to touch on the margin?

Sure. From a margin perspective. So we report margins at the infrastructure segment level. And we don't break it out by product line. But what I can say is that utility margins are certainly accretive to infrastructure margins. Right now, with the new capacity that we're bringing on, we're seeing mid-20s with regards to incremental margins, mid-20s operating profit margin. So -- and that's really powered by our brownfield expansion strategy, which is allowing us to leverage our capacity growth, leverage essentially existing infrastructure, existing teams, existing customer relationships and really be able to keep those fixed costs pretty low and ramp up pretty quickly. So we're seeing nice accretion with those projects, and we would expect that to continue throughout our -- the 2029 framework to support overall expansion of margins.