Greetings, and welcome to the Valmont Industries, Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Renee Campbell, Vice President of Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you, Jesse. Good morning, and welcome to Valmont Industries second quarter 2019 earnings call. With me today are Steve Kaniewski, President and Chief Executive Officer; Mark Jaksich, Executive Vice President and Chief Financial Officer; and Tim Francis, Senior Vice President and Corporate Controller. This morning, Steve will provide a summary of our second quarter results and Mark will provide additional details on financial performance. A slide presentation will accompany today’s discussion and a link to access the document is located on the home page of our website at valmont.com. Please download the slide deck to follow along with today's call. A replay will be available for the next seven days, and instructions for accessing it are included in the press release, which is also located on our website. Please note that 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. I would like to start with slide three and a recap of our second quarter. Net sales of $700.9 million were 2.7% higher than last year. Excluding currency impacts and revenue from last year's divested grinding media business, sales would have grown 5.5%. This growth was led by robust transportation and wireless communication demand in the Engineered Support Structure segment and continued pricing discipline across all four segments. Moving to segment highlights. Starting with the Engineered Support Structure segment. First quarter sales of $258.7 million increased 3.2% over last year. We continued to benefit from very strong order flow, particularly in North American transportation and wireless communication market. This demand has resulted in higher backlog, improved pricing and extended lead times across the industry. Effects from the severe Midwest flooding that occurred in late March and resulted in the one-week closure of our Valley, Nebraska facility, continued to impact this segment in the second quarter. While our teams have worked very hard to return to regular production and shipment schedules, continued strong order flow created a buildup of shipments, causing factory inefficiencies and delayed shipments. By adding resources and implementing process changes in our shipping area, these constraints are expected to be resolved during the third quarter. I want to thank all of our customers for their understanding during this time and all of that worked with us to remedy the situation. Mark will speak in more detail on the flood recovery in his remarks. Globally, sales of wireless communication structures and components grew 20% over last year, supported by robust demand, particularly in North America. Carriers continued to invest in 4G and first net expansions and momentum for small cell structures in advance of 5G buildout is…

Thank you, Steve, and good morning, everyone. My comments regarding the second quarter of 2019 are based on comparisons to the 2018 adjusted results, as outlined at the end of the press release. Turning to slide four. Second quarter operating income of $63.7 million or 9.1% of sales was 10% below last year, largely due to approximately $6 million of nonrecurring expenses this year that occurred in the Utility and the Coatings segments. Otherwise, profitability improvements in Engineered Support Structures and Coatings segments, and a favorable LIFO comparison were offset by lower operating income in the Irrigation segment and the international portion of the Utility segment. I’d also like to note that net interest expense compared to the second quarter of last year was down over $1 million due to the debt refinancing we completed in the third quarter of 2018. Second quarter diluted earnings per share of $1.90 decreased 4% compared to adjusted EPS of a $1.98 in 2018. Without the impact of nonrecurring expenses of $0.20 per share, EPS for the quarter would have increased 6.1%. Operational efficiency continued to be hampered somewhat during the second quarter by the March flooding event in Valley, Nebraska. Efforts to settle the insurance claim from property and business interruption losses are ongoing, and we expect to recognize those recovery benefits in the second half of this year. Turning now to segment operating income results in slide five. The Engineered Support Structures segment operating income increased 14% over 2018. The improvement resulted from strong market conditions and disciplined pricing in the lighting and telecom markets in North America along with cost savings associated with capacity reductions we took in the Asia-Pacific region last year. Turning to slide six. In the Utility Support Structures segment, operating income decreased 28% from the second of…

Thank you, Mark. On behalf of all of Valmont and myself, I want to thank you for your years of hard work and dedication. During your tenure, you have epitomized our core values, leaving a strong legacy of professionalism and class. Thank you again. Turning to slide 12. Last quarter, we introduced Valley Insights Prospera and the launch of Anomaly Detection as the first critical milestone on the path to autonomous crop management. As a part of that launch, we set an initial goal to monitor 1 million acres by 2020. I’m excited to say that even in limited release, we have already exceeded this goal, proving that customers are clearly excited about the technology. In fact, one dealer was able to demonstrate to a grower how Valley Insights detected issues in his field up to 30 and 60 days before NDVI could. This momentum has elevated our market presence in the technology space, and we will continue updating you on our roadmap on future calls. Turning to slide 13. To summarize the balance of the year, the revisions to our financial outlook are driven by lower project demand in international irrigation markets, the impact of nonrecurring expenses recognized this quarter and foreign currency impact. While recent improvements in commodity prices have provided a small tailwind in the Irrigation segment, we are not yet seeing a meaningful turnaround in demand, although this should become clear with the outcome of the growing season. We expect continued sales growth of our technology offerings, especially with higher labor costs as these solutions will lead to better returns for the grower. We expect margin improvement in our infrastructure businesses in the second half of 2019. In ESS, strong demand, particularly in North America markets, plus the benefits of our 2018 operations transformation and a more stable raw material cost environment will drive higher margins. Record backlog in our Utility business, and incremental demand from grid hardening efforts across U.S. are supporting improved segment performance there. As I’ve always said, we remain committed to pricing discipline and leadership within all segments, in the markets we serve. And we will continue to performance against our stated capital allocation goals while generating strong cash flows. I will now turn the call back over to Renee.

Thank you, Steve. At this time, Jesse, you may open up the call for questions.

Thank you. [Operator instructions] Our first question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Congratulation to Mark. I just want to start at a high level here. I mean, you guys had $0.20 of nonrecurring charges here and you cut the guidance by $0.20. You are also talking about lower international irrigation project demand, and then that $0.13 of FX impact, negative FX impact. Should we be thinking that you are trending towards the lower end of guidance or stable? I know, we've talked about some of the pricing tailwinds in ESS in the spot market, in USS. Are there offsetting things that have improved over the last quarter that offset those kind of other two negatives outside of the nonrecurring expenses?

Nathan, the international irrigation piece, we kind of called out before in the first quarter and said that that was kind of baked into our guidance. But, if you look at the way that irrigation has trended from our expectations from the beginning of the year, it’s probably a safe assumption to say that moving towards the bottom end of the range is more stable position than it would be. We do still have a lot of potential upside to that but those are still yet to develop.

And then, so maybe you could talk about the puts and takes that would get you towards the top end or towards the bottom end of that guidance range?

Yes. That would be -- there is a number of projects on the international irrigation front, which are still to come through. There was the -- in the Utility segment, particularly in North America, with the way that lead times have pushed out, if we can gain some additional capacity, both here in North America and for our ability to do some jobs in China, that also would be a help to get us there. And if steel frankly continues to abate, that’s probably not fully baked into our guidance at this point. So, we're just going based on where steel has kind of been. And so, there are some potential tailwinds, as much as there are some headwinds that we’ve faced in the early part of the year here.

Okay. And then, maybe just one on ESS. You talked about the disruption from the flooding at the Nebraska Campus there. Can you quantify the impact that that had on results in the second quarter? I think, you said it's supposed to be sorted out during the third quarter. Should -- do we expect any impact there? I know, you guys have been targeting to get to double digit margins in ESS. Is that still something that's in range for the back half of the year, or does this kind of being pushed that off a little bit?

There is probably about $10 million of revenue that we were just unable to really kind of get through the system for the second quarter. So, that would really kind of move over into the third quarter. And in terms of double-digit for the segment, yes, it’s definitely within the range, based on what we're seeing, both in backlog, cost controls and price.

Thank you. Our next question is from Chris Moore with CJS Securities. Please proceed with your question.

Maybe just on the utility side, can you maybe just talk a little bit further on the international operating margin weakness and kind of why you believe it’s going to improve second half of this year and into 2020?

Sure, Chris, and welcome. The international side of the business is kind of a developing piece of our business, the wind part, we had moved previously from ESS over to Utility. The wind was anticipated to be weaker this year quarter-over-quarter and year-over-year. And that really played out as kind of expected. The Convert Italia, the solar tracker part of the business really what has taken place there, we have some orders that as we did the acquisition, came over. We didn’t really have a chance to optimize the supply chain, like we would have on newer coated orders as we go forward. So that was why we anticipated some drawback there. We also had a couple of project-related costs that were anticipated, some of our South America projects and generally having to get the supply chain synergies in line. It’s taking a little bit longer than we would have liked. So, if you look at the wind part of the business, wind, particularly in North Europe, is anticipated to see an increase in demand in 2020 and 2021. And the pricing environment we believe will improve, one, as a result of that plus the bankruptcies of the competitors that have taken place there. In Convert, and the solar business, as we gain more orders and geographies, we can get better supply chain optimization. And then as we come into North America, later this week, we really have the ability to source things like steel and do production in our irrigation facilities and do much more of it within our own control. So, those are some of the factors that we feel will start to turn us around more in 2020 than this year but we should see second half be an improvement over the first half thus far too.

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

I just wanted to first start on Utility. And, can you just help reconcile what we saw in the quarter with your comments that the lead times are extending and demand is up, because the revenue level for Utility in the quarter was below as it’s been about a year. So, is that demand and backlog kind of -- does that build in the second half of the quarter? And can you just help reconcile that? Thanks.

Some of that, Brian, was booked two quarters previously; some of the mix that came through was very heavy in substation and distribution pools as opposed to transmission and some larger structures. There was also, at least initially an expectation, and we had talked about this last year, we thought North America will be down slight. So, some of our capacity that we had adjusted to, we also had pulled down. And now, we're having to kind of pull that back up. So, it’s a little bit capacity-related and a little bit market-related as to why North America is a little bit softer in Q2. What we're seeing now and why we're ramping the production hours in existing facilities is simply to meet this new market demand, again coming primarily from the grid hardening efforts in the west and in southeast. So, we’ve been, like I said, pleasantly surprised as to how robust it’s actually been and some of the money that’s been spent in those areas. So, as we look into 2020, we expect that to continue, as well as the normal drivers for the business in terms of grid hardening, replacement of lines and again that substation part of the business should continue. So, that’s kind of how we feel about North America and then obviously my answer to Chris on the international side.

Right. Okay, thank you. And then, you talked a little bit about Convert Italia. I’m just wondering if you could give us a little more detail around how you would grade these acquisitions, Convert, Walpar, Derit, Larson. But, can you maybe just give us some comments on each of those? And like Walpar, you expected $0.12 of accretion in the first year, and we're about a year into it now. Can you maybe grade yourself on -- or grade each of these acquisitions and just give us an update on how you think you are doing?

Sure, Convert Italia is definitely meeting our expectations in terms of market growth, the technology of the product, the ability for us to come into North America and being invited in there, and really just having to build, despite seeing synergy threats, as expected. We knew it would take a year. So, maybe we're a quarter to a quarter and a half behind in really kind of building some of those synergies. The Larson acquisition has been very strong acquisition. We're seeing the case actually stronger because people want to camouflage. And with our existing telecom customers, it’s going very, very well. The Walpar acquisition is behind kind of where we thought it would be, and that’s primarily coming from a DoT spend in the southeast that was little bit abated during 2019. But, we see and already have good backlog, as we look into 2020 with that acquisition. So, probably just a little bit of a delay in where we thought it would come in. We talked about the Coatings acquisitions, both United and CSP are doing very well and to our expectations and frankly exceeding slightly. And then, the Derit, [ph] which was the acquisition in India on -- we said it was a coatings and both utility kind of acquisition. The coatings side has done very, very well and the utility side is taking us a little bit longer to get some of the customer approvals than we’d like. But, we’ve been able to direct the capacity to domestic India or Middle East customers. And so, that’s tracking. And frankly with the trackers, that will become a very critical solar facility for us as we move forward. So, that’s kind of the runaround the different acquisitions.

Thank you. The next question is from Ryan Connors with Boenning and Scattergood. Please proceed with your question.

Great, thanks. Good morning. And congratulations, Mark, on your retirement; also congratulations to you, Renee, on your recent promotion there. I want to talk about these two -- these $6 million in nonrecurring cost. Can you just give us a little more detail? I mean, both are little bit cryptic in terms of the description, the legal matter and also this customer combination in USS. So, can you just kind of give us a little more background on exactly what happened in each of those cases?

Yes. I’ll touch on the one, Ryan. The customer accommodation, if you recall back in 2015, we had extremely large customer where we decided to go into an inspection regime. And we, at the time, I think called out a $15 million number related to that inspection regime. We had gone through -- it was a multiyear agreement. We’ve work through that. And in order to speed it up and to complete it, we decided to settle some things with them ahead of time where that program would have gone into next year. On the Coatings side, that was a litigation matter in Australia that we had that frankly probably wouldn't have been settled until sometime, maybe second quarter next year, but there was an opportunity to get some certainty around that litigation. Australia can be a very fickle place. And so, we decided that the ability to settle it now, gave us a better financial proposition than potentially risking going further into next year.

Okay. That’s very helpful to get the background there. And my other question was bigger picture kind of strategic in nature. You talked about adding capacity, and I guess my question is, you walk us through the decision process on why add capacity here. I mean, why not just sort of auction off the production slots? The Company and I guess the industry has kind of had some -- been bitten by late cycle capacity expansion in the past. So, just interested, given some of the macro uncertainty out there, like why add capacity at this stage rather than just price it?

It’s a great question, Ryan. And I was a part of bringing the capacity down on the last time related to this. What we're doing really is looking at capacity from our existing facilities’ perspective. So, it’s not a very capital intensive kind of capacity add, nor would it be difficult to pull the capacity out, based on market conditions. And so, really, looking more and more like our Irrigation segment that has capacity, can build up or go down with the market, we’re looking for that kind of flex capacity there. So, we're not adding any bricks and mortar, and it's really just looking at if we have Jasper, we have Tulsa, we have Monterey, Valley and Columbus that we can do more within those existing facilities as it is. There is also an element of this that’s simply just automation. And the automation front makes sense for us long-term anyway, really just kind of pulling it forward. As we look at the long-term capacity planning, we’re definitely very aware of the market and how the market can be fickle and change pretty quick. So, we're going to very cautious as we approach any kind of long-term capacity builds. Right now, this is just -- it's very important for us to meet this from a market perspective because of the alliances that we have with our customers. So, we have to come through for our customers in that regard.

Thank you. Our next question comes from Zane Karimi with D.A. Davidson. Please proceed with your question.

Good morning, guys. First question kind of on that 20% growth highlighted in communication, how much of it was driven by the acquisitions and how should we think about organic growth there in the near term?

Good morning. This is Mark. The acquisition of Connect-It Wireless is a fairly small business, it didn’t have much impact. The lion's share of that growth really came out of North America, both in and components and in structures. The international side of that is mostly Asia Pacific, and that was fairly muted and it continues to be so. But, the real engine there has been North America.

Okay, great. And then, switching little bit to Irrigation more so. When should the big lift in orders in Brazil begin to materialize into sales for Irrigation, and how should we be thinking about that as well?

Yes. I would say that -- this is Mark again, that will take place most likely throughout the next few quarters. A lot of these are dependent on getting all the financing in place. And so, to some degree, you’re a little bit -- it’s dependent on how quickly the financial institutions and the government moves as far as getting the approvals done. But usually those cycle through within probably two to three quarters typically. So, we certainly expect to see that through the balance of this year and maybe some into next year as well.

[Operator instructions] We do have a follow-up question from the line of Nathan Jones with Stifel. Please proceed with your question.

I just want to follow up with a couple questions on the pricing dynamics in the market here. I mean, you guys are talking about very robust demand in ESS, lead time stretching out; very robust demand in USS, lead time stretching out, adding capacity to make that demand. Can you talk a little bit about the pricing dynamics that that's creating for you guys? Your ability to cover more than raw material inflation, or as still deflating here, your ability to hold onto those pricing levels, your willingness to use price to gain share or not, just some color there on those concept dynamics?

I’ll touch on it a little differently between Utility and ESS. On the Utility market, our alliance customers, those are pricing arrangements, they are big part of our volume. And therefore, they benefit in these kinds of time periods from having locked in with us earlier from a capacity prospective. However, there is still a bid market out there and we have to fill that bid market. And we’ve been, I’d say, ultra selective in the types of orders that we're taking from a bid perspective, and we’ve really been able to push up pricing in extremely meaningful way, 400 or 500 basis points of this pushing that up and we continue to push it up as capacity becomes more constrained. The adding of capacity really is to help alleviate, as I mentioned in the earlier question, our alliance customers and satisfying their needs. In ESS, we're really seeing a nice environment overall develop in terms of declining steel prices but robust demand. So, not only are we able to hold the line on pricing, we’re still pushing up pricing. And so, we're still looking at areas where we can do that based on capacity constraints, based on just market conditions, supply-demand. And over the last year, we’ve done four price increases in the ESS segment, the last two of which are nothing to do with material inflation or deflation. Right? So, it’s simply the ability to pass along additional price, which is why we feel confident with the backlog that we have in the second half of the year that we will be able to perform. And that should be a good tailwind going into 2020 as well. In Coatings, even thought zinc has debated, again, we’ve maintained a pricing discipline there, based on volumes, and really have been able to hold price extremely well in the Coatings segment. And even in Irrigation, we did a small price increase early in the first quarter that we've been able to get to stick and then maintain our pricing discipline across the rest of the market. So, pricing is a big thing for us here and something we talk about very regularly as a management group. So, we're encouraged by the overall pricing environment and the capacity. Taking out the capacity that we did in the ESS also has really allowed us to not have to just try and fill a factory.

Maybe one -- maybe a bit more for Mark on that front. You talked about raising prices and declining steel and zinc prices. Maybe, Mark, you can talk a little bit about how that flows through the P&L, what kind of lower inventory costs you are going to see flowing out in the back half, relative to the first half and also the pricing levels, second half versus first half?

Right. Let me address the cost side of the equation first. Raw material prices have -- as you stated, have been moderating. We’ve seen more of that decrease during the second quarter. If you think about it in terms of inventory turns on FIFO basis, you would expect that to start to manifest self in the P&Ls, starting in the third quarter and then more so even in the fourth quarter. And then, so, there is always about a three or four-month time lag, just in general terms. And the pricing depends somewhat on the backlogs as well. So, I think usually, it's about the same time period, particularly I would say in utility a little bit longer because the back logs are longer and with ESS as well it’d be a few months and so forth. Irrigation on the other hand pretty short-cycle business, you will see pricing actions show up more quickly in the P&L just because you don’t deal with large backlogs typically.

Also on LIFO -- our LIFO will probably accelerate as we go into the third and fourth quarter as well.

So, I think the bottom line here is that you guys are expecting to have better pricing across the majority of the business and lower input costs coming out through inventory across the majority of the businesses in the second half of the year?

That’s true statement.

Thank you. Ladies and gentleman, we have reached the end of our question-and-answer session. So, I'd like to pass the floor back over to Ms. Campbell for any additional concluding comments.

Thanks, Jesse, and thanks to everyone for joining us today. As mentioned, today's call will be available for playback on our website or by phone for the next seven days. We look forward to speaking with you, again, next quarter.

Included in this discussion are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made in light of experience in the industries in which Valmont operates as well as management's perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. As you listen to and consider these comments, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties, some of which are beyond Valmont's control and assumptions. Although management believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include, among other things, risk factors described from time to time in Valmont's reports to the Securities and Exchange Commission as well as future economic and market circumstances, industry conditions, company performance and financial results, operating efficiencies, availability and price of raw material, availability and market acceptance of new products, product pricing, domestic and international competitive environments and actions and policy changes of domestic and foreign governments. The Company cautions that any forward-looking statement included in this discussion is made as of the date of this discussion and the Company does not undertake to update any forward-looking statements. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.