Greetings, and welcome to the Valmont Industries Fourth Quarter and Full Year 2019 Earnings Conference 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 Investor Relations and Corporate Communications. Please go ahead.

Thank you, Kevin. Good morning, everyone, and welcome to Valmont Industries fourth quarter and full year 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 brief summary our fourth quarter and full year results and Mark will provide additional details on financial performance as well as our outlook for 2020 followed by Q&A. A slide presentation will accompany today's discussion and is available for download on the Investors page of our website at valmont.com. A replay of today's call will be available for the next 7 days, and instructions for accessing it are included in the press release, which was distributed yesterday and also located on the Investors page of 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'd like to begin this morning by thanking our global team of nearly 10,000 associates for their performance this past year. While our full year results did not meet all of our goals, we made significant progress in many areas in 2019 and achieved sales growth in three of our four segments. We elevated our commitment to drive lean and agile throughout the organization and accelerated innovation through new products and services. We also generated over $200 million in free cash flow through a heightened focus on working capital improvement. And we quickly responded to the impacts of a historic flooding event last spring, minimizing customer and business disruptions during a period of very strong infrastructure market demand. All of these accomplishments are a real testament to the operational excellence of all of our global teams. With that, let me turn to a brief recap of our fourth quarter summarized on slide 3 of the presentation. Net sales of $683.6 million declined 2% compared to last year primarily due to significantly lower sales in two areas of our business: Access Systems and International Irrigation. Sales in North American markets were higher across all segments despite a challenging agricultural market environment and reduced U.S. industrial production levels. The higher sales were led by strong demand in wireless communication and transportation markets, higher irrigation technology sales, revenue from recent acquisitions and sustained pricing discipline. During the fourth quarter, we finalized the agreement to purchase the remaining 49% stake in AgSense for $44 million, a significant milestone in our technology strategy. Its profitable recurring revenue model has provided a growth platform for technology sales over the past five years and has accelerated our technology leadership position in the field. We are…

Thank you, Steve, and good morning, everyone. My comments on the fourth quarter of 2019 are based on comparisons to 2018's adjusted results as outlined in the press release. Turning to slide 6. Fourth quarter operating income of $55 million or 8.1% of sales was 16.8% below last year largely driven by the poor sales and margin performance in the Access Systems product line, which impacted Engineered Support Structures segment results. In the Utility Support Structures segment profitability was comparable to 2018 as improved performance in North America was offset by unfavorable comparisons in our international businesses primarily driven by lower sales volumes and timing of large projects. In the Irrigation segment, profitability was below 2018 due to a lack of international project sales this year. Coatings profitability was down as well due to some weaker demand from external customers and some unfavorable productivity associated with recent acquisitions. Lower raw material prices led to a favorable LIFO expense in 2019 as a decrease of $8.6 million compared to 2018 was realized. The increase in net corporate expense was mainly due to higher deferred compensation expense, which has offset the income statement by higher investment income. Fourth quarter diluted earnings per share of $1.66, decreased 11.2% compared to $1.87 in 2018. The fourth quarter tax rate of 21.2% was lower than 2018 due to differences in the geographic mix of earnings. Moving to full results on slide 7, operating income of $237.7 million decreased 11.8% compared to last year. Operating income was 8.6% of sales, which includes a 20 basis point headwind due to increased deferred compensation expense. As previously mentioned this has offset the income statement by investment income. In addition, corporate incentive expense decreased by $2.9 million. The main impacts to operating income this year were $26 million lower…

Thank you, Mark. Last quarter, we celebrated the grand opening of our new steel structures manufacturing facility, in Poland. I was excited to personally attend the celebration with our management teams and local employees. And we were honored to host several local officials and dignitaries, as well as the Poland Minister of Energy. Building this facility as a true center of excellence, positions us well to best serve our customers, in global infrastructure markets. Moving to slide 11 and looking ahead to 2020. We are off to a solid start to the year. Engineered Support Structures has entered the year, with a solid global backlog. Growth in transportation markets is being driven by continued government investments, in infrastructure development. We expect continued growth of wireless communication products and components. And anticipate carriers, investments in 5G to accelerate, in the second half of the year. We expect 2020 sales growth to approach 10% this year, considering our record growth in 2019, and expected market delays due to the T-Mobile-Sprint merger. As we have previously said, carrier spending can be lumpy from quarter-to-quarter, which can have a meaningful impact on sales and profitability. The significant underperformance of our Access Systems business in Australia and uncertainty of market recovery associated with the 10-year low in construction levels, has led us to reevaluate our market strategy there. As a result, we are accelerating the strategic analysis of this product line. This may require forgoing revenue opportunities, to identify a path to profitability and an attractive return on invested capital profile that aligns with our stated financial goals. We are also currently reviewing other opportunities to improve ROIC, across our businesses. And we'll be sharing more details with you next quarter. In the Utility segment, we are starting 2020 with a record year-end global backlog…

Thank you, Steve. Kevin at this time you may open up the call for questions.

[Operator Instructions] Our first question today is coming from Chris Moore from CJS Securities. Your line is now live.

Hey, good morning, guys. Good morning. Just a couple of questions on the operating margins. So given the uncertainty in Access Systems, can you talk a little bit about what your 2020 ESS overall operating margin looks like in relation to the kind of the Valmont operating margin guidance?

Yeah, Chris, this is Mark. I would say first of all, if you remember in the third quarter we had the charge we took on those detention system orders which will not reoccur since we're out of that business now. So that would certainly help, but we called that out. But I would say that, overall the margins should be pretty solid in North America. And although, I think we're going to have some headwind – continued headwind in Access Systems, probably through the first half of the year it depends. As we start to develop, our restructuring plans we expect that to certainly stabilize as the year goes along.

And at present, the current rate of where Access Systems is taken into account in our guidance range. And so restructuring should help improve from that point forward.

Got it. The other question on the margins. In terms of the USS ramp is – we're talking about 5% for the year you still – it's probably going to take you another quarter or so to get full capacity there. Is there much of a margin impact in the first half on USS? Just trying to understand that ramp there.

Yeah. There's obviously some volume that we called out that, we said it will take more to the second half of the year based on both the solar projects and some of the improved pricing in our SM business. Then, it's really the North American capacity adds, which will add the 5% of volume as we go through the year. So North America we'll still see a very strong, or a very nice gross margin operating margin as we kind of ramp through the year there. So really you're going to see a first half of the year, maybe be a little more depressed than the second half of the year, as a combination of both the capacity as well as just the timing of the volume.

Got it. I appreciate guys.

Thank you. Our next question is coming from Brian Drab from William Blair. Your line is now live.

Hey, good morning. Thanks for taking my questions. First, one I just wanted to be clear on the capacity additions that you made for the Utility segment that you're making. Are those in place to the point where you're able to handle the large order – larger orders that are coming through now? And what's the lead time at this point?

Yeah. So we had done some things in the fourth quarter, particularly related to just personnel that you saw as one of the reasons that we could deliver around $27 million more sequentially from the third quarter. That will obviously continue as we go through the year. There was some additional capacity additions that we put in -- that are starting to come online now slowly and ramping through the first quarter and then into the second quarter. We would expect really things to be in place at the end of the second quarter, so really third and fourth quarter will be at run rates.

Okay. And are you shipping that large order at this point, or what's the timing on the beginning of those shipments?

Yes, we've been shipping that actually since the third quarter and it was one of the reasons that the third quarter productivity was hit so hard. But we have been shipping and have ramped shipments of that product and that project all along. So that has been going and we've been delivering that project as we speak.

Okay got it. And then you mentioned the solar business. I'm just wondering, can you give a little more detail on that business now? What's the -- are you still expecting strong double-digit growth going forward in that business? And what are the margins there relative to the corporate average margin? And just how big is that business at this point?

Sure. So what we had said is the business was approximately $80 million when we picked it up. And this year and let's say in 2019, we saw a decline based on the project timing to the tune of about maybe $25 million based on that. We do expect it to be over $100 million as we look into this year. And from a margins perspective, we said that would ramp over the course of three years as we built some supply chain synergies, some common specifications as opposed to very specific. And so from -- as it relates to segment margins, it's a little decretive in the sense of segment margins. But we would expect really by -- say mid 2021 that it would be at segment margins.

Okay. And then I know this is always a little sensitive because of course competition is listening. But I'm just wondering as you continue to highlight the connected solutions and the technology that you're injecting continually into the irrigation system and that segment. Are you seeing any changes in share, or do you feel like that's improving your share position in the U.S. or internationally?

I think long-term we always say that the U.S. market the share doesn't really change significantly from a pivot systems perspective. What we are seeing is our installed base more revenue opportunities. And so with the connection and the AgSense unit really bringing real productivity for the grower as well as lower input costs that adoption rate has been strong. It has -- the retention rate has been exceptionally strong. And so it's really -- yes obviously its share is a total of everything you go after. So from that sense because we have more revenue opportunity, we believe we're picking it up that way. Internationally, it's definitely providing a door particularly in markets like Brazil and Europe where labor is a big component that we're seeing really good opportunities there as far as our selling opportunities to continue to increase the connected market across those markets. So there's 250,000 of our machines 250,000 of our competitive machines. All of them can take an AgSense unit on them. And so we do believe there's still quite a bit of runway in that market.

Great. Thanks. And then can I just ask one last quick clarifying question. Back to my first question. That large order that began to ramp -- began to ship late last year. But the size of those shipments I guess is kind of what I was wondering. Does that start to ramp materially, or is this kind of run rate per quarter related to that project? Have we already seen that in the numbers now in the fourth quarter?

Yes, the way the orders were taken and to be delivered was roughly about $100 million per year. So that's the way that you have to think about those big orders.

Okay. All right. Thanks very much.

Thanks. Our next question is coming from Jon Braatz from Kansas City Capital. Your line is now live.

Good morning, Steve, good morning, Mark.

Thanks, Jon.

In the Coatings segment recently we've seen zinc prices come down sharply. And I guess my question Mark might be, are we going to see some improvement in the Coatings margin as a result of the fall in zinc prices, or are you having to pass that on?

Well, I think, for sure on the internal business that we do there's a pricing mechanism that passes that along. But in the external markets no, I think, we're making every attempt to hang on to pricing as best we can. And that kind of drives from the Valmont Coatings Connector where we -- as we continue to drive value for the customer hopefully that that's what we were hoping to get out of it. It's a little bit of stickiness in pricing as long as we have good performance and so forth. So no we're not -- in some cases you do get back a little bit here and there. But -- and generally speaking we've generally been able to hang on to pricing with fluctuations.

Okay, okay. And maybe I misunderstood I didn't hear. In terms of, sort of, the expectations for 2020 in terms of volume and revenues did you give any, any guidelines there for the Coatings segment?

Yes, Jon this is Mark too. We're expecting it to be relatively flat. I don't think the growth rate in industrial production is particularly robust right now. And that's probably the best indicator across that Coatings business that we watch.

Okay. Okay. Steve a question on the coronavirus. We're hearing some -- that maybe there are some logistical challenges emerging in China. In addition to let's say, the direct impact that companies are feeling. Are you seeing any difficulties in moving product to the ports or any delays or anything in terms of logistical issues as a result of the coronavirus?

Yes. In terms of moving to the ports no, because we're in provinces that are on the coast. It's where we have to get steel if it comes from a different province. As it stands right now it's the interprovince shipments that are most affected because the trucker then have to go into quarantine. So that's the only place where we really see the logistics issues occurring. Now in our case with steel there's enough steel within provinces that we can secure. It just -- it interrupts the supply a little bit from who we're getting it from and when but we can still get it at least at this point. We've also heard that the government is well aware of the issues as it pertains to getting supplies moved around and is contemplating loosening some of those restrictions. That would be helpful. But to-date we really have not seen a dramatic impact. Our South plant was the latest to get going. And we do have still maybe a handful of people that are not able to come back into the plant until their quarantine is finished as they were coming from the Hubei province. But generally as Mark called out, right now we see it maybe as a top of maybe $4 million of revenue impact in the quarter. And again all this is subject to how this thing develops, but that's where we're at right now.

Yeah. All right. Thank you very much.

Thank you. [Operator Instructions] Our next question is coming from Brent Thielman from D.A. Davidson. Your line is now live.

Great. Thanks. Good morning. I apologize, I got on a bit late here. And I really just had one. Steve I guess just given these challenges in Australia following some of the issues you've had in the offshore business in Europe. I guess taking a step back how do you think about the portfolio you have today? And what should be really core and the focus of Valmont going forward?

Well, if I take Access Systems, we really do have an internal compare and contrast. Our Access Systems business in Asia does very well, but it is structured differently it carries a different overhead profile and so it's able to withstand the movements of revenue on that project work kind of over time. So we just believe that we have to go and basically look at the overhead structure within the Australian business as a way to really kind of get that back. It has been hit by again like I said about a 10-year recession in construction. So it's just at a very depressed level right now. The offshore wind business we've talked to you over time about that. There was a movement to get utility orders put in there as well for utility masts. We actually have been successful and have obtained a fairly sizable order that will ship later at the end of this year and into 2021. And so keeping that business there at a very tight kind of profile we are seeing improved margins. We called that out and we do see that coming through towards again the tail end of the year and into 2021. There's very long lead times. We just got on the bidding process. And we're successful because of the bankruptcies that occurred with our competitors there. So they fit with our portfolio of going to market to utilities and/or infrastructure development. We just have to make sure that they are sized appropriately from an overhead standpoint for the project business that they can take in.

Okay. And then again I apologize if this has been asked, but I guess on the utility side I mean phenomenal backlog here going into the New Year. As you look at the pipeline out there and obviously this would be a tough level to build off of, but do you think there's enough out there to sustain this sort of backlog through the year?

Oh, yeah. We definitely are seeing the work continue. If you recall the two large orders we have there's three more potentials as you go forward. This year will be another $100 million plus order that will be tendered. The reliability issues in California and Florida are continuing unabated. And we're also seeing other utilities really outlawing wood used in selected states. And so that will continue to drive the market very strongly. And renewables is just going to continue to disperse the generation sources, meaning they need both substations and transmission lines to get them back to where the electricity is used. So there's nothing out there between 2020 or even frankly 2021 at this point that would suggest they would move anywhere but where it is right now.

Okay. Thank you.

Thanks, Brent.

Thank you. Our next question is coming from Adam Farley from Stifel. Your line is now live.

Yeah, good morning. This is Adam Farley on for Nathan Jones.

Adam.

Turning back to ESS, even excluding the loss in Access System, margins are still relatively light. You guys highlighted pricing discipline in North America. So is there any mix impact in the quarter? And then looking at your backlog, what should we expect on margins ex Access System to the core ESS business?

Yes, Adam. This is Mark. I'll start off and then Steve can jump in as well. But in North America, we really -- we had some timing issues with some deliveries at the end of the year that would have affected the revenue. But that's more of a carryover into next year. Telecom was still good, but the rate of growth we have over between that and 2018 had tapered down a bit and we expected some of that. So I think that played into it. And then collectively the international businesses were down a bit as well. So I think it was really -- North America was pretty solid for the most part. And then, of course, we had Access and then the rest of the international businesses were actually comparatively down a tick, not substantially, which contributed to the overall margin comparison between 2018 and 2019.

Yeah, if you kind of normalize for the Access loss, we probably -- margins were about on par with last year. And as Mark mentioned there were some timing issues, getting some orders out and just a lower mix of telecom in the fourth quarter as compared to the rest of the year. So those were the big highlights there.

Okay. That's helpful. And then looking at your backlog, how are pricing levels within that? I mean, do you expect favorable pricing there?

Yeah. As we said that raw materials being stable for the time period that they have been stable really allows you to work on pricing actions. And so that has generated some good backlog and some good margins in that backlog itself. And so we remain optimistic of the margin profile ESS again as we fix Access Systems that we can get that business over 10% as we go into 2021.

Okay. That's helpful. And then just shifting to International Irrigation. These larger projects in emerging markets seem to keep getting pushed. Any more color there on what's driving that? Do you still have visibility to your pipeline on projects? Is it mainly timing?

Yeah. It's mainly timing. And what you have is the dollar as many know have strengthened against a lot of these currencies in developing markets. That usually slows down our ability to get paid, and therefore to ship. So that part of it is still in the process of kind of moving through. We still have a good pipeline across Africa, across the Middle East and Central Asia. And so we feel that albeit the timing is tough, that's there. Our guidance really has minimized the impact of the international projects so that if we were to get them, it would be more of an upside than a down -- not having them as a downside. So we took a more conservative approach.

That's great. Thanks for taking my questions.

Thanks, Adam.

Thank you. Our next question is a follow-up from Brian Drab from William Blair. Your line is now live.

Hi. Thanks for taking the follow-up. Sorry, if there's a little noise in the background here. I'm just trying to draw the conclusion here like kind of outline of the bigger picture and just wanted to get your feedback on this. I mean, it seems like utility we've talked a lot about the record backlog and potentially great momentum there if we had some larger projects. But where -- if you kind of rank order the other growth opportunities that you have over the next one to two years really, where are you most -- where are you expecting to get that growth from? What are you most excited about? Is it the 5G opportunity? Is it solar? Is it some of the International Irrigation projects? Where else is the growth going to come from over the next one to two years? Thanks.

Sure. Yes. Utility, we've obviously -- we're offering a brand-new suite of products. We have a spun concrete distribution pole, we have preassembled substations in addition to just general strong market dynamics that are there. So we feel utility has the highest growth potential as we look over the near to medium-term. The telecom 5G, if you recall we said we would see a little bit of it in the fourth quarter we did. We said that it would be slow to ramp or is starting to ramp through 2020, that's what it looks like. And that 2021 would be the real growth opportunity in 5G. And all industry prognosticators still kind of handicap it that way. That would be our second one. And then, yes, third is International Irrigation. Those projects when they do come through are -- tend to be large they tend to be sizable. And they really do as you know irrigation itself drives our profitability pretty substantially. So, as we get any kind of -- even if markets were just flattened to move up slightly, Irrigation would have a lot of earnings power behind it, as we move forward. So those are kind of the way we rank them internally here.

Okay. Thanks very much.

Yeah. Brian, this is Mark.

Yeah.

Just to add the telecom opportunity is a global trend. So we do have an exposure or we do have a presence in Asia Pac. But as we continue to build off of that we think there's some opportunity as well in other geographies as well, but we don't do really do quite as much telecom today.

Right. Okay. Thank you very much.

Thank you. We reached our question-and-answer session. I'd like to turn the floor back over to Renee.

Thanks 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. Thank you.

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 statement. This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation today.