Valmont Industries, Inc. (VMI) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Valmont Industries Second Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Renee Campbell, Director of Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you, Sherrie. Good morning, and welcome to the Valmont Industries' second quarter 2018 earnings conference call. With me today are Steve Kaniewski, President and Chief Executive Officer; Mark Jaksich, Executive Vice President and Chief Financial Officer; Tim Francis, Vice President and Corporate Controller; and Jeff Laudin, Manager of Investor Relations. This morning Steve will discuss highlights of our second quarter performance and provide a strategic overview of our business. Mark will then give a detailed review of our financial results, followed by Q&A. Our press release was issued yesterday after the market closed and we prepared a slide presentation to accompany our results both of which are available on the Investor Relations page at valmont.com. An archive of today's call will be available for the next 7 days and instructions for accessing the replay are included in our release. Before we begin, please note this conference call is subject to our disclosure on forward-looking statements, which applies to today's discussion and will be read in full at the end of this 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. First a few brief comments about our recent preannouncement. Several market events occurred during the second quarter that warranted timely disclosure. We believe these events were short term in nature as they mostly impacted second quarter results. Despite these temporary headwinds, we remain positive on the strength of the long-term market drivers across all of our businesses and remain committed to our long-term financial goals, which are designed to create value for our shareholders. As a reminder, these goals are to grow revenue between 5% and 10%, grow earnings per share more than 10%, deliver greater than 10% return on invested capital to achieve operating margins of more than 12% and to generate free cash flow of at least one times net earnings. Turning now to the second quarter results. Net sales were $682.4 million, a decrease of 4.3% compared to last year. On a GAAP basis, operating income for the company was $63.7 million, a decrease of 18.8% over last year. Adjusted operating income was $70.7 million, a decrease of 9.9%. Successful recovery of higher raw material costs through pricing actions were not enough to offset certain market challenges and lower volumes. I will now discuss segment highlights for the second quarter. Starting with the engineered support structures segment. Revenues grew nearly 6% over last year. Double-digit sales growth in North America lighting and traffic was driven by higher transportation market demand. While commercial lighting markets are firm, our actions as market leaders to fully recover price have taken some time, impacting volume during the quarter. Sales growth in Europe was driven by an increase in government infrastructure spending across the region. The wireless communication market in North America remains solid, as large carriers and tower companies begin site development preparations for 5G rollout. This should be a positive driver for the segment going forward, especially in our components business. Demand for new tower construction in the Asia-Pacific region was muted, particularly in China. The largest China telecom carrier, China Tower is preparing for an initial public offering. We believe this shifted their focus to co-location in lieu of new construction. Pricing to recover raw material increases on the lower market volume has also remained challenging. It is anticipated that the IPO should be completed later this year when we would expect a better market environment. Sales of highway safety products in Australia and India grew substantially year-over-year. The fundamental need for safer roads has led to growth in government led infrastructure investments, which continues to support demand in this business. Sales of Access Systems were slightly above last year in alignment with our strategy of taking growth into adjacent markets, sales increased for architectural product lines this quarter. One example of this is the receipt of our first detention system order and there is a solid pipeline of new opportunities in this area. We are encouraged with the need [ph] successes in reducing our dependence on our legacy end markets for this business. Turning to the Utility segment. Sales of $197.7 million dollars were 6.1% lower than last year. Higher fuel costs were recovered through pricing. However, product mix unfavorably impacted revenue this quarter. As mentioned before, the lumpiness of projects, as well as the mix of products within these projects can change in any given quarter and impact results. Frankly we should have seen these mix changes within the quarter sooner, but internal visibility was not good enough. We have subsequently completed actions that will address this issue and prevented from reoccurring. Sales of offshore wind structures in northern Europe were lower, as increased competition from China and a more challenging price environment muted sales. Market analysts have indicated an improved demand profile for Europe in the second half of 2019. As we transition to serve the European utility markets, the demand for around utility structures, particularly in Western Europe is expected to result in additional market opportunities for this business. During the quarter we shipped our first pre-packaged substation products. As mentioned at our Investor Day, these are highly engineered preassembled structures built and assembled in the factory that are then easily overacted [ph] in the field. Preassembly reduces installation time, mitigates the risk of weather delays and helps streamline project planning. We design this solution in response to our customers needs and it has been very well received. This new product has the potential to become an important part of our business over the next few years. Turning to the coating segment. Sales of $91.6 million were 14.8% higher than last year. Broad based industrial demand across all regions drove revenue growth, along with price recovery of higher zinc costs. We are particularly pleased with the continued progress of our Australian operations to improve sales and operating margins. During the quarter, we introduced the Valmont Coatings Connector, a new industry leading technology solution that was first discussed at our Investor Day. This innovative communication tool allows industrial coatings customers to obtain real time visibility into orders that is in progress and to schedule pickups and deliveries. It can be accessed through most mobile phone and tablet platforms, as well as desktops. Developed directly from the voice of the customer feedback this technology will elevate customer service expectations across the industry, giving us a durable advantage position. In the irrigation segment. Global revenue of $162.4 million declined 13.5% compared with last year. In North America a sharp decrease in grain prices during the quarter specifically with corn and soybeans led farmers to take a wait and see approach to purchase decisions in an already challenged market. The uncertainty over tariff and trade policies continues to weigh on buying decisions. Additionally, a large project in North America that shift in 2017 did not repeat this year contributing to unfavorable quarterly comparisons. Positively the continued global adoption of our technology offerings that support efficient farm operations is helping mitigate the impacts of weak farm fundamentals. As we mentioned last quarter, over the past four years the number of Valmont connected - connected devices has grown at an annual rate of 20% and we lead the market with over 60,000 connected machines today. Annualize revenues for AgSense and BaseStation alone were over $20 million over the past 12 months with a 98% annual retention rate. A testament to the value our customers see in our technology products and solutions that are helping them be more profitable. International sales were lower due to shifts in project timing from second quarter to later in the year, as well as smaller projects sizes compared to last year. As mentioned in the pre announcement, the trucker strike in Brazil caused a significant disruption of business in the country. This led to an interruption of our operations in May and June negatively impacting sales and profitability. Subsequently growers are awaiting clarity of the political uncertainty surrounding the elections in Brazil later this year, coupled with delays in financing approvals that are impacting the timing of shipments. Fundamental market demand in Brazil is robust, as evidenced by strong grower interest at the April Agra show, the largest - the largest farm show in the country. However, some growers may remain sidelined until the political and financing prospects become clear. Moving to the operational side of our business, this quarter we broke ground at our new state of the art steel structures factory in Poland. We also began our plant expansion in the United Arab Emirates where we're investing and upgrading and streamlining our current irrigation facility to meet growing global market demand at a competitive cross structure. Classic lean principles are at the core of both facility investments that will enable us to more efficiently serve customer needs across several global markets. We expect production to begin in the first half of 2019 at both locations. We continue to identify opportunities to transform our operations and lean out the organization, as part of our strategic transformation that we outlined at our Investor Day. During the quarter we consolidated 3 access [ph] systems facilities in China into a single site for more efficient capacity utilization to better serve our customers across the Asia-Pacific region. We also completed the consolidation of our two Hazleton, Pennsylvania facilities in the utility sector. A recent assessment of local market conditions in the Asia-Pacific region has identified path to further improve supply chain and operational efficiencies to simplify our operations, while continuing to meet the needs of our customers. These combined actions will result in an increase from $10 million to $20 million in anticipated pre-tax full year expenses with the initial payback period of 12 to 18 months. We expect these initiatives to better align our operational footprint with our addressable market growth strategies, resulting in a more agile supply chain to better serve new and existing customers in these markets. Our strategy of moving toward a more global, central led operations organization is progressing better than expected. Having taken recent steps to streamline our logistics and supply chain organizations, positive outcome of these efforts include a more cohesive raw material purchasing strategy, improve rate utilization and concentration of manufacturing sites, all of which help protect margins in a inflationary cost environment and improve customer service and lead times. I would now like to turn the call over to Mark for the financial update.

Thank you, Steve. And good morning, everyone. As I begin my commentary on the second quarter, please refer to the table at the beginning of the press release and the Reg-G disclosure at the end of the press release. My comments will focus on adjusted results as outlined in the Reg-G disclosures. In the second quarter reported sales were down 4.3% from 2017, more than half of which was due to 2018 divestiture of the grinding media business. Excluding grinding media the sales decreased from 2017 was 2%. 2% percent decrease includes an 8% decrease in volumes offset in part by 4% percent of improved price and sales mix, a 1% increase from acquisitions and a 1% increase in favorable currency translation. On a segment basis, the volume decreases mainly were on the utility support structures and irrigation segments. Each of our four segments realized improved pricing over 2017 mainly to successfully recover higher raw material costs. Excluding grinding media results from 2017 to 2018, Q2 adjusted operating profit decreased 7% in line with the 8% sales volume decrease. Adjusted operating margins for continuing operations were 60 basis points lower than 2017 at 19.5%. On balance, the lower operating margins resulted from the decrease in sales volumes and associated operating deleverage of fixed cost. Please note M&A due diligence costs of about $1.5 million in the quarter also impacted profitability. We are pleased that despite increases in raw material costs over the last year we have successfully recovered inflation through effective supply chain, operational and pricing actions. Our income tax rate for the quarter on an adjusted basis was 25.3% in line with our expectations. 2018 earnings per share was a $1.98 down slightly from $2.01 in Q2 2017. Turning now to segment operating income results, in the Engineered Support Structure segment, operating income was down about 10% from 2017 despite the increase to sales. As mentioned last quarter, we expected unfavorable quarterly comparisons due to market weakness in China wireless telecom and the gradual recovery of margins through pricing action in the lighting and traffic business. The SS [ph] team has made good progress in recovering price in the lighting and traffic business without sacrificing sales volumes and we expect ESS to report favorable quarterly comparisons for the balance of the year. In the Utility Support Structure segment, operating income was essentially equal to last year. The effect on profitability due to lower sales volumes was largely offset by improved project mix. In the coating segment, operating income grew 22% over last year attributed to margin recovery of higher zinc costs and improved volume. Favorable operational performance was helped by the implementation of our proprietary GalvTrac operating system across our global locations. Turning to the Irrigation segment, operating income decreased from 2017 due mainly to lower sales volumes, particularly in the international markets. Despite higher raw material prices the segment was able to make [ph] very good operating margins through effective sales price management and ongoing operational and supply chain initiatives. Turning to cash flows. Year-to-date operating cash flows were $53.7 million in 2018 compared with $55.7 million last year. Capital spending was $31.8 million, as compared with $26.2 million in 2017. Our 2018 cash flows were lower than expected due to the timing of shipments and higher inventories from steel purchases to help protect margins in light of raw material inflation. Cash flows tend to be stronger in the second half of the year and we anticipate free cash flows to approximate net earnings for the year. Moving to the balance sheet. In June we issued $255 million of bonds which were added to our existing tranches due in 2044 and 2054. The proceeds from the issuance were $238.2 million and were used to finance the redemption of the 6 and 5, 8 [ph] percentage bonds due in April 2020. The issuance resulted in an increase in cash and long-term debt at the end of the quarter and the 2020 bonds were redeemed in July for $266 million in cash. Long-term debt after the redemption is approximately $740 million. The pre-tax charge of $14.7 million relating to the redemption were $11 million after tax or $0.49 per diluted share will be recorded in the third quarter of this year. We are pleased to have completed this refinancing at long-term rates that are lower than historical averages, resulting in an interest expense decrease going forward of about $2.5 million per annum. Turning to capital deployment. We expect capital spending levels this year to be approximately $70 million compared to $55 million in 2017. As Steve mentioned in his remarks, the increase in this year includes the investments in our new modern poll manufacturing facility in Poland and the increasing of our manufacturing capabilities and our irrigation plant in the United Arab Emirates. We purchased about 204,000 shares of company stock for $29.2 million during the quarter at an average price of 143.28 per share. At the end of Q2, $88 million remained under the current stock repurchase authorization. Let me now turn to our outlook for the balance of 2018. Sales for the total fiscal year of 2018, excluding the effects of the grinding media business, are expected to grow 4% over 2017 to approximately $2.8 billion. In the ESS [ph] segment, we expect to see improved sales and operating profit comparisons from the balance of the year due to strength in the North American markets and steady improvement in Europe, net of market headwinds in the Asia-Pacific region. In Utility Support Structures, North America profits - projects shifting into 2018, while backfill with other projects have tempered our profitability outlook for the balance of the year, but with expected positive impacts for 2019, lower [ph] sales are expected in offshore wind. Segment profitability with the balance of 2018 is expected to be comparable to 2017. In the irrigation segment, the balance of the year North America has depended on the outcome of the growing season and the macro drivers in the ag economy. We expect sales of our value adding technology offerings to continue to grow. Timing of project sales in the international markets and in Brazil could also impact sales for the balance of the year. Continued economic growth is expected to drive sales in the coating segment and we expect second half 2018 performance to be similar to the first half. We also expect raw material cost to remain relatively elevated, but relatively stable over the short run. The impacts of trade policy uncertainties and raw material prices and our markets are hard to predict. Nonetheless, we have managed these risks well and will strive to continue to do so through pricing actions, as well supply chain and operational actions. As mentioned in on July 12 preannouncement, our adjusted EPS guidance for 2018 is now $7.55 to $7.65 down from $$8 to $8.10. Excluded from adjusted EPS are the effects of the restructuring actions, the net income effect from the sale of the grinding media business and the cost of the bond refinancing. We expect full year free cash flow to approximate one times earnings and after tax return on invested capital to exceed 10%. We have manageable leverage and expect a solid cash flow to support M&A and another capital deployment activities. Our cash priorities have not changed and they include the supporting of our existing businesses, to necessary working capital and capital spending. Executing on acquisitions that meet our long-term return on capital, market and product leverage criteria and returning cash to shareholders in the form of dividends and opportunistic share repurchases. We remain committed to maintaining an investment grade credit rating. And with that, I will now turn the call back to Steve for closing remarks.

Thank you, Mark. While we are disappointed by the need to reduce to 2018 guidance, we are confident about our revised outlook for the year. The long-term growth drivers for infrastructure and agriculture have not changed and remain strong. We are continuing to initiate new avenues for growth and our new product pipeline is increasing the momentum. Our acquisition funnel is robust and aligned with the growth strategies that we have laid out. We are confident that as we execute on our transformational opportunities within supply chain and operations we will continue to generate good free cash flow with smart capital deployment. Even our anticipated performance across all segments for the second half of the year, we expect to deliver on our earnings growth commitments. In further support of our confidence, we are also committing to a 150 basis point margin improvement in the Engineered Support Structure segment in the second half of the year, as compared to the second half of 2017 results. We also fully expect to be in the latter’s [ph] market by the end of the third quarter in our Utility segment. And look forward to updating you on these commitments next quarter. I will now turn the call back over to Renee.

Thank you, Steve. At this time, we are ready to take your questions. Operator, please go ahead.

Thank you. [Operator Instructions] Our first question is from Nathan Jones with Stifel. Please proceed with your question.

Morning, everyone.

Morning, Nathan,

Lots to talk about today, I guess I'll start with irrigation quarters download [ph] change, it sounds like a lot of the headwinds were contained in probably mostly in June, a little bit in late May. Can you give us any more color on kind of what the magnitude of the drop off was late in the quarter? I understand the Brazilian trucker strike is over, but there's still considerable uncertainty for the domestic producers here and why you would expect that to get any better or if there's no resolution to these trade issues at the moment?

Correct. So from a North American perspective, I'll start with there, in North America the drop off was significant in the June timeframe, a little bit towards the end of May, but more significantly through June, as the season tends to wind down, but even there it was more than anticipated. And right now barring a change in confidence through a change in grain prices the outlook is probably about where you would expect it to be which is pretty soft. In Brazil, we are expecting the delay to really continue basically throughout the rest of the year. So the strike itself was 11 days. It impacted us for well over 30 days to get things back on line and so that really has been loss in terms of capacity perspective. The question is around the government came as a result of the strike and then also the financing delays are also about a month of time period. And so while we had really strong interest, the Brazilian growers really look at an opportunity, of what's going on in the U.S. market is an opportunity for them, but they'll remain probably cautious at this point. We have orders and we don't believe that they will be canceled as a result of these slowdowns. It's just really getting it through the financing backlog to move it forward.

You talked there about and in your prepared remarks about a slowdown in the approvals from financing out of Brazil. Are you seeing those continue to move forward, are they completely stalled or is it delayed for a month, two months, three months. What are you seeing in terms of those debt financing still being made available or not to farmers in Brazil?

Yes, it's not stalled. It's really about 30 days longer than it was in the past. So there are projects moving forward. It's just that it has muted our ability to ship in the near term here and then we'll get back to what we believe will be a new normal with the election in October. That also should clear up some uncertainty in the market as well.

Okay. I'll jump back in queue.

Our next question is from Craig Bibb with CJS Securities. Please proceed with your question.

All right. I realize that you guys had a ton of cash at the end of the quarter because of the timing on the refinancing. And the cash come in from the sale of grinding media. But still even adjusting for that it's a lot of cash. The buyback look pretty modest relative to your cash pile. Can we expect more in Q3 or is the loudest [ph] acquisition that it sounds like you have set up bigger than we're likely to appreciate?

I'll answer that Craig. So we do have obviously a lot of cash, the buyback we will continue to look opportunistically based on our intrinsic value calculations. We do have as indicated through how much we've spent on acquisition due diligence costs, a number of acquisitions not just a single one that we are evaluating through the process. And so, as we've said before if we can't find a reasonable home for that cash, and as we look forward then we owe it to the shareholder to work with the board to find a way to get that back. But right now, we believe we can put a fair amount of that cash to work and provide a return for the shareholders.

Okay. And then in the press release and in the preannouncement you guys called out wind power structure which is not one of the products going to talk about, not often. But if you can just explain the change, I'm surprised we're getting competition from China given the size of the structure?

Yes, it is really competition. They do barge's them over from China into northern Europe and that is where the competition has set in and what that has done for us is that -- that was already a market force that was taking place, but it's really made the competitive landscape for what's left to be sourced in Europe even more competitive. And that's why we call that out because it had a more significant impact based on some tenders that occurred during late May with the results that came through later on. So that that's why our outlook as we look for the second half of this year and frankly into the first half of next year, we expect to be a little bit muted. But are working diligently to move them more towards the utility structures plant over time, along with the wind to bring more balance to that operation.

If the plant installs for offshore wind in Europe are I think up more than 15% in 2019…

Yes, most of that is - most of that is back end loaded in the second half of ‘19 and those tenders are not yet out there on the market, they will be coming up probably towards the end of this year.

Right. Thanks, guys.

Our next question is from Brian Drab with William Blair and Company. Please proceed.

Thanks. Just first follow up on that last question, what percentage of the USS [ph] segment is related to wind structures at this point?

Yes, Brian, this is Mark. That the sales in that business are around somewhere between $80 million and $100 million. It's in the segment – its in the segment put down as part as part of sales breakout by product line.

Okay, thanks. Thanks. And then looking at ESS segment, you talked about the pricing actions and it sounds like with the 50 basis points improvement expected, 150 basis points improvement in the second half of ’18?

That's correct. When you compare the second half of ’18 to the second half of ’17, it's 150 basis points.

Okay, good. I missed really there. Okay. So I guess that means that these pricing actions are - you're seeing them catch in July and expecting that to really drive a lot of that improvement in the second half of the year?

Yes, as we as we laid out after the first quarter call, we knew we would have some drag in the second quarter in term - because of DLT [ph] work and some other things that prevent us from moving it through. But our actions have been very solid and accepted by the market. We've seen our competitors move on those too. And so we expect that to really have a nice effect for us as we look at ESS for the balance of the year and into next year.

Okay. And then I know this has been in a footnote also in the past, but what percentage of the ESS segment is related to telecom currently?

Yes. Brian this is marketing. I that number is around about 100 – its about $170 million last year.

Okay.

That’s worldwide, majority of that’s U.S, that’s also includes Asia Pacific.

Okay. Got it. So a relatively smaller portion of that is China, but the China business is kind of paused almost completely right now is that how to think about that?

Yes, that's the way - it's not completely paused, we're still bidding and winning bids. It's just that the pie has shrunk fairly significantly as China Telecom really has cut back on new locations ahead of their IPO.

Okay. And then can you just clarify, - I’ll get back in line. All right, sorry. Thank you.

Our next question is from Brent Thielman with D.A. Davidson. Please proceed.

Yes, thanks. On the utility segment, and as I guess as the comments in this release would suggest, that business should grow in 3Q due to the structures in North America. But the preannouncement seemed like a little bit of a different tune with respect to push-outs in the 2019, is there is there a significant hole in for 4Q, is that how we should kind of think about the trajectory of the business for this year?

I think the way to view it and just for clarity sake, is we had a significant tens of millions of dollars of backlog that moved out of the year into ‘19. And because the market is fairly vibrant, we were able to go out and backfill that from a revenue perspective. But even though we backfill that from a revenue perspective the margin profile is not quite as attractive as would otherwise have been there.

And that's because these are smaller projects, Steve?

Yes, it's just different project mix and customer mix that affected it.

Okay. And then I guess my second question. The ESS segment, is the back half - in the back half you are you expecting China to sort of stay headwind or do you see a return to normal there such that it isn't as much a risk?

We did not forecast in any recovery in China for the second half of the year just because the IPO was attempted by China Telecom one time previously end up getting pulled off. So we're just being cautious at this point. If and when it does go then that should be a positive driver for us.

Okay. Thank you.

Our next question is from Mike Shlisky with Seaport Global Securities. Please proceed.

Good morning, everybody.

Morning, Mike.

So could you just assist us in more detail on why the strike in Brazil [ph] was such an impact, I mean I thought that was in May and by June and some of the wheeled equipment guys like tractors and combines [ph] I mean we saw shipments up 25% in tractors, 65% in combine have they catch up month it appears, I'm kind of curious as to why irrigation didn't have the kind of catch up that perhaps the other guys may have had?

Yes, so as was late May when this started and continued into early June part of it was just getting operations back up for us was a contributing factor. We had a lot of delays in raw materials and things like that. Additionally, it really kind of stalled our approvals through the phenomena [ph] financing which were timed fairly close. So it could be that the other guys just had financing already lined up versus our equipment. But just knowing where we were it really started to set us back on approved orders that could then ship under phenomena [ph].

Okay. Okay, got you. And then just kind of secondly more broadly across the company, domestically were there any issues in the quarter with a pending free capacity or having to pay up for that. I didn't hear that or missed it in the opening comments?

Now, we tended to see more of the inflationary part of that in the first quarter and I've gone back and through pricing and other mechanisms been able to get most of that - that back is necessary. In terms of availability, there are always spotty kind of availability issues depending on the types of products that were moving, but we've not seen anything on a large scale that is delaying or impacting operations.

Got you. Perfect. Thank you so much.

Thanks.

Our next question is from Jon Braatz with Kansas City Capital. Please proceed.

Morning, Steve, Mark.

Morning, Jon.

Steve, in the preannouncement you mentioned in regards to China that you saw some weakness across all product lines. But today you're talking a little bit more specifically about telecommunications. We've been reading about economic growth slowing in China. I guess what I'm wondering is how pervasive is the weakness in China and is it really just isolated to the wireless sector?

No, it's not. We called that out today specifically as it pertains to telecom market. But as we've talked about and then in the restructuring you would have seen where the access systems plans we combine three into one. So there is another area where we saw a slowdown in those products within the China area and then some of our normal lighting and traffic types of products were also slow. So it was broad based, probably just more acute in the telecom area at this point. Tax systems had seen a slowdown previous to this year.

Do you think some of the weakness in China is related to the maybe the trade disputes and that if we have a resolution in that regard that China bounces back a little bit?

We tend to serve a lot more of a local for local market and we think these are more China specific related kinds of things as opposed to the export base that would be more tariff related. So there's been a - u know the Chinese government has really looked at how much financing people have and how much debt they have. So those probably are bigger macro drivers in our business than would be the tariff issue.

Okay. All right. Thanks, Steve.

We now have a follow up question from Nathan Jones of Stifel. Please proceed.

Good morning, again, everyone. On the utility support structures business, are these – or they coming largely from concentrated group of utility, single utility. What's the dynamic there with the push-outs and what's the rationale from customers around the push-outs?

So Nathan its a handful of customers. It's not broad based. They happen to be significant customers of ours that have made the movements and there is really two reasons. One is that the normal what you get which is permitting and the go forwards on some of these projects where they thought they had things in line and they end up having to move. The other is a change in the way some of the work is being constructed. And so as you get more movement to EPC’s those EPCs buying patterns tend to be different than the utility, the legacy utility that is outsourcing the work. And so that's where we're seeing the two areas come from.

Okay. And then you had talked about the market being relatively strong. But if I look back at the last couple of quarters you've got negative volume in slightly 4Q last year, a negative volume in the first quarter of 2008, a negative volume in the second quarter of ‘18. Where is the strength in the market coming from relative to that that opinion of you is that the market here is strong if we're seeing actual volume declining here?

Yes. So it's really in the size of the structures. So what we're seeing is a lot more weighting towards smaller structures. And so we're having to expend the same number of hours to construct those poles. And not so the volume in the tonnage, but not necessarily in the hours that are going through our shops. And so the market is very strong in those smaller voltage classes right now. So it's a product mix issue.

Okay. And you've said you've said backfilled some of the larger projects with some smaller projects in the second half. Typically those large projects are high margin from you. So should we continue to expect in the back half of ‘18 some margin pressure from mix?

I think what we've done is tried to factor everything from the first half of the year with what we have for mix in the second half of the year and that's why we say profitability is really comparable to last year. Okay. And I think it is…

Okay. Just one more on the restructuring, the increased restructuring that you're doing here, is this – is any of this a result of any of these volume challenges that you're seeing in any of the markets out here at the moment or is this just an addition to plans that you are already doing. You've gone through more of a review of different stuff and come up with more areas of saving?

Much more of the latter and to a small degree there is a little bit of volume, but it's much more of latter.

Okay. Thanks very much.

Our next follow up is from Craig Bibb with CJS Securities. Please proceed.

I just want to follow up on international irrigation outside of Brazil. It sound said like, I think the bidding for large international projects has been pretty decent. Are you getting those? Or maybe just probably describe what international demand or way for Brazil look like?

The demand itself is actually not bad. It's pretty good as you look elsewhere outside of Brazil. The challenge is that you get and the reason there's a lot more lumpiness in those projects tends to center around financing and getting the appropriate financing to support the project moving forward. And so that's what we've tended to see much more of, but the areas that we've called out previously in Eastern Europe, Middle East and Africa have still proven to have a lot of good government supported projects. It's now just financing issues.

Okay. And then you haven't in the call, you haven't spoken too much about the rollout of 5G in the U.S. and in other markets maybe give us a little your outlook there and will you be ready to participate in that and Europe also?

Yes, and we call that that we're participating in site preparation. So a lot of sites are being retrofitted to handle 5G from the LTE. As mentioned in prior discussions, the antennas are bigger and so people are retrofitting the mouse and things around the towers are the sites right now. And that's why we've called out the components business specifically as being able to participate in that. What most people anticipate is that the 5G itself will start to roll out next year. And so that's the prognosis where you achieve end poles towers, increase at that point. But it's still a good market and component's is kind of leading the way for us in that regard.

And are you going to be ready to participate in that market in Europe?

Ohm yes. We're already working with all the market participants on that as we speak.

Right. Thanks a lot.

Our next follow up is from Brian Drab with William Blair. Please proceed.

If I slightly annoyed your earlier, I apologize, but I think I'm going to further that right now at this question given the back and forth we've had on this topic. But AFC 606 I just want to ask if you look at the first quarter that materially affected the first quarter results in utility and I think pulled some revenue that you would have recognized in the second quarter into the first quarter. So I'm wondering if AFC 606 never happened with the second quarter and utility actually looked - have looked a little stronger. How would that have impacted?

Hey, Brian it's Tim Francis, I'll make a stab at it in your question. You are correct in that we had a disclosure in the first quarter 10-Q, obligated per the guidance to try to estimate how much revenue in operating income I would have reported under the old revenue recognition method. I'm going to give you quickly year to date results. So this is for the first six months of the year. The effect on sales from AFC 6 06 adoption is about $22 million and the effect on operating income is $2 million. So those figures are less than what you saw in the first quarter 10-Q. And that's really attributed to the fact that we had a number of structures that were produced. But for a variety of reasons some of our customers couldn't take delivery of those in the first quarter. So under our new revenue recognition model where we're recognizing revenue as we're manufacturing structures. But under our old method we recorded revenue as we delivered structures. So in Q2 all of -- doing a comparison I actually would have had more revenue and slightly more operating income under the old methods. And again the reason we haven't talked a lot about this is by the time we get to the year end we don't think this is going to be very significant because then you're really comparing considering your December production at 2018 versus your December production in 2017. And remember that December 2017 production went to equities as a credit to retained earnings. So really you have to compare the periods of time and by year end we don't think this is going to be very significant.

Yes, that all makes sense. And I think what - I heard you gave me those numbers those numbers you gave are six month numbers and they are lower than the numbers that were for the first quarter, right. So that means and so that I understand that the second quarter it wasn't that big an impact it actually would have been a swing the other way in the second quarter. So I think I've got it all. And then...

This is Mark, the do one thing I want add to that, is if you think about it over the course of time the amount of revenue we recorded the amount of profit record is really the same under both methods. It's just a matter of timing on when the revenue and profitability is reported in the pre end [ph] statements.

Yes. Understand, you need to clarify that 100% understand that. And just the last question is just this steel price assumption that you have embedded in your 4-10 [ph]?

Yes, I would say right now where prices are today, I think for all the different grades of steel are about where they've been, it's really stabilized over the last several weeks. We we're not expecting to see a lot of volatility between the end of the year, it seems like things have settled down a little bit. But that remains to be seen I guess as far as how trade things evolve with everything, but that's the best we have at this point.

And Paul, a follow up on that Brian, sometimes you achieve fourth quarter steel prices tend to drop a little bit. We don't anticipate that this year. And so our pricing is commensurate to what we believe the market will be through the balance of the year.

Okay. Thanks for answering all my questions and good luck.

Thanks, Brian.

Our next question is from Mike Solecki with Seaport Global Securities. Please proceed.

Hey, guys. I just want to follow up on your comments earlier about irrigation in Europe. There's been some very dry conditions in areas of Europe like Scandinavia, Ireland, UK, now looks parts of the northern and eastern Europe area. I know it's tough for those farmers today but do you think there might be an opportunity to get some sales in that region. What's your presence there today and is there any kind of plan to kind of do additional marketing and that kind of part of the world?

Yes. So we have a sales office out of Madrid. We used to have a manufacturing location that we closed last year. We have a dealer network particularly strong in Spain and France, but the market opportunities while there are fairly limited just based on field side, the fields tend to be much smaller very compact or even terrain and, you don't see a lot of pivots and a lot of those different kinds of fields. We have seen a slight uptick in business in Western Europe but it wouldn't move the needle for the overall irrigation segment.

Okay, fair enough. Thank you so much.

Thanks, Mike.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the floor back over to management for closing remarks.

Thank you, Sherry. This concludes our call. We thank you 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 to you again next quarter. Thank you.