Greetings and welcome to the Valmont Industries, Inc. Third Quarter 2021 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] Please note this conference is being recorded. I will now turn the conference over to your host Renee Campbell, Vice President Investor Relations and Corporate Communications. Ms. Campbell, you may begin.

Thank you and good morning. Welcome to Valmont Industries third quarter 2021 earnings call. With me on today's call are Steve Kaniewski, President and Chief Executive Officer; Avner Applbaum, Executive Vice President and Chief Financial Officer; and Tim Francis, Senior Vice President and Corporate Controller. This morning, Steve will provide a brief summary of our third quarter results and comment on our strategy and long-term business outlook. Avner will review our financial performance and provide an outlook for the balance of 2021 with closing remarks from Steve. This will be followed by Q&A. A live webcast of the presentation will accompany today's discussion and is available for download from the webcast or on the Investors page at valmont.com. A replay of today's call will be available for the next seven days. Please also note that this conference call is subject to our disclosure on forward-looking statements, which applies to today's discussion and is outlined on slide two of the presentation. It will also be read in full at the end of today’s 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. Today, I would like to begin by sharing some opening comments and then provide a brief overview of the quarter. Before I do that, I want to take a moment to recognize the contributions of Walter Scott Jr. He serves on our board for more than 40 years and passed away late last month. While there was an incredible individual, his wisdom and leadership are critical to Valmont's success over the years. His losses fell deeply by those who knew him and the entire Omaha community. Walter's council, kindness and mentorship will truly be missed by all of us at Valmont. Moving on to the business. Our strong performance this quarter once again demonstrated the solid demand across our businesses and the consistent execution of our growth strategy, even amid a challenging global environment. Like most others, we have faced the impacts of broad based inflation, the COVID-19 Delta variant and labor and supply chain disruptions. Government mandated lockdowns in Australia and workforce quarantines in North America, including Mexico and the Southeast United States impacted certain utility and Coatings facilities. Supply chain disruptions affect the timing of some shipments in our irrigation and solar business. Despite this, we've delivered a strong quarter of growth and profitability. Our commercial and operations teams are managing exceptionally well. So these unique dynamics, the focus of perseverance, while continuing to prioritize employee safety and serve our customers. I'm extremely proud of our team's execution throughout this year. Now, let me move to a brief overview of our third quarter summarized on slide four of the presentation. Record third quarter sales of $868.8 million increase more than 18% compared to last year. Sales growth is realized in all segment, led by higher pricing…

Thank you, Steve and good morning, everyone. Turning to Slide 7, in third quarter results, like comments will focus on the adjusted results as outlined in the press release and in the Reg G disclosure in the presentation appendix. Operating income of $80.4 million or 9.3% of sales grew 20% year-over-year driven by higher volumes in irrigation and favorable pricing, notably in engineered support structures. Diluted earnings per share of $2.57 grew 30% compared to last year primarily driven by higher operating income and a more favorable tax rate of 23.5%, which was realized through the execution of certain tax planning strategy. Turning to the segment. On Slide 8, in Utility Support Structures operating income of $24.6 million, or 8.9% of sales decreased a 170 basis points compared to last year. Raw material costs continued to increase during the quarter, impacting our ability to fully recover costs to our pricing mechanism, leading to lower than expected margin. Also, the impact of workforce quarantine in a few North American facilities lead to operational inefficiencies, which we do not expect to repeat. Moving to Slide 9, in Engineered Support Structures operating income increased to $34.4 million, or 12.2% of sales a third quarter record. The benefits of proactive pricing action have more than offset the impact of continued rapid cost inflation. Better fixed costs leverage, including SG&A also contributed to positive results. Turning to Slide 10, in the Coatings segment operating income of $12.5 million or 12.9% of sales decreased 270 basis points year-over-year. Profitability was impacted by a lag in pricing to recover higher inflation costs, including raw material and labor and startup costs at the Pittsburgh facility. Moving to slide 11, in the Irrigation segment, operating income of $32 million more than doubled compared to last year, and operating margin…

Thank you, Avner. Turning to Slide 17. The long-term drivers of our businesses remain solid, as evidenced by our record global backlog of more than $1.5 billion up 35% year-end 2020. These demand drivers are in place to sustain this momentum into 2022 and our business portfolio is well positioned for growth. We also continue to take pricing actions across our businesses where needed. Like others, we’re closely monitoring inflation, supply chain disruptions, and COVID. We’re ready to take additional appropriate actions to address these issues across all our businesses as needed. Meanwhile, our focus on following state and local regulations to keep our employees and customers safe is not waived. Turning to Slide 18. In summary, I'm very pleased with our strong third quarter results and our team's ability to navigate some challenging market dynamics. We've demonstrated our ability to grow sales through innovation and execution, while being flexible and responding quickly to meet customer needs. We've improved operating margins by executing on our pricing strategies, and advancing operational excellence across our footprint and we have invested in our employees and technology to drive new products and services and build upon the strength of our operations. Throughout 2021, we have been disciplined in allocating capital to high growth strategic investments, while also returning capital to shareholders through dividends and share repurchases. Looking ahead to 2022, we’re confident in our plan to deliver the outlook that we have communicated and remain focused on execution and our ESG principles to build upon our success, while creating additional stakeholder value and improving our return on invested capital. I will now turn the call back over to Renee.

Thank you, Steve. At this time, the operator will open up the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Hi, good morning. Thanks for taking my question. Could you just begin by quickly repeating that 2022 guide? I'm not sure I got all of it.

Yes, Brian, this is Steve, the 2022 guide was that we reaffirmed our sales growth of 7% to 12% and the EPS of 13% to 15%. So that was what we communicated at our Investor Day. And so we now feel pretty confident about how we look in 2022.

Got it. Okay. Yes, that's what I had written down and implying some operating margin expansion in 2022. Obviously there given the EPS growth is greater is s that right?

That's correct.

And, Steve, can you talk about what the assumption for fuel prices is going forward? And do you have enough lower price steel in stock such that this last leg up in steel prices won't weigh in margins materially?

Well, if you look at the DFS business, I think we've accounted for even the current inflation fairly well. There is still some inflation that we will see in the fourth quarter. In utility, we will still continue to see some inflation in the fourth quarter, albeit we will see margin improvement of about 150 basis points on a sequential basis. But it would take us right now with utility average went till about the second quarter to really be through with it, if steel just kind of stays where it is. In third quarter, we still saw about 23% overall steel inflation which was actually consistent with first and second quarters. So now that it is plateauing again all things being equal, as you look out if it doesn't continue, we'll have a little bit more drag in fourth quarter, first quarter a little bit less, and then by second quarter, we should be above.

Right, okay. And then just maybe like there's one more given, we're talking a little bit about 2022, in the utility outlook like what are some of the indicators that you're seeing from customers and other market reports that gives you confidence in growth in utility in 2022 and what kind of growth are you expecting in that segment if I can ask, I know you're not maybe guiding for the segments but thanks.

Just overall, the market continues to remain robust, the renewable energy mandates or generation from renewables is a positive driver in the marketplace, grid hardening has continued to be a positive momentum for us there. Some of the issues that you see in the solar generation area, particularly module availability, which kind of delayed some of the projects in ‘21 will get better in 2022, albeit, maybe not to where everybody wants it to be, but definitely better. And we actually have strong backlog in both the generation side and our traditional transmission and distribution side as we look into 2022. So everything we're hearing both from customers and from the order flow coming in suggests that the market will remain robust, there's not been any kind of issues where customers are cancelling orders because of the inflation. Again, I'll just bring it back up. We're such a small part of an overall project costs 10 to maybe 15% that even if our product inflates, there is other factors that really make or break whether a project moves forward.

Right. Okay. Thanks for the details. Appreciate it.

All right.

Thank you. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Hi, good morning, everyone.

Good morning, Nathan.

Wanted to start off, obviously, a lot of growth here. There's a lot of inflation. So a fair amount of that growth is coming from price. I think you've communicated pretty well that there's a lot of growth coming from volume here as well. Is there any color you can give us on price versus volume into growth? Love it by segment if you could do that. And are there any places where you're starting to see capacity constraints within your own manufacturing footprint where we might need to make some investments here going forward?

So if we go look at pricing volume, if I start off with -- if I look at utility as an example, we're definitely seeing a lot coming through pricing. Steve mentioned that a little earlier right with the steel inflation and the pricing mechanism where we do see pricing going in utility. On the volume side, we mentioned that on the global generation work we did have some project timing, so it did have some reduction there offset by increased volume on the other part of the utility businesses. If you look at EFS, again with our pricing actions and strategies around there, we're seeing significantly coming through pricing. You're seeing a lot of volume coming through the telecom business and a magnitude of 25% or so offset with some of the decline that you're seeing in the mining and traffic that we express early on the year and we expected that as well. Moving to the Coatings, right we're seeing opal there, we're seeing a lot of pricing coming through there. And some volume that we mentioned through our new facility as an example and then finally in irrigation I think our acquisitions do a pretty good mix. They're coming through both volume and pricing. I mean we've been planning throughout the year, we've taken a lot of pricing actions in all the businesses and volume, and overall we've seen that the order flow has been very good across all the businesses evidenced by our strong backlog and the strong sales we had in the quarter.

And from the capacity side, Nathan I think we're good shape in irrigation. If you recall going back to the last big peak in 2013, we were producing a lot more just in the U.S. facilities, and we've increased a lot of the international facilities to be much more self-sufficient. So it's not coming out of here. And North American order volume flow is still stronger back then than it is now. So we have to watch on people in supply chain. But from a brick and mortar perspective, rented shape coatings obviously good shape EFS, we're in good shape to meet the growth. And in utility, we're really pushing the operational excellence automation with some of the AI welding that we're doing. We will always look at our footprint, and look at what we have to do from a timing perspective to add capacity, we want to be very cognizant of the capacity to pricing in the market. And if we need to do something from a brick and mortar perspective, we obviously have the ability to do so nothing imminent at this point.

Okay. Question on irrigation. Yes, channel checks are indicating very strong demand and extended lead times domestically, do you feel like this could drive an early start to the selling season this year for customers to try and order ahead of these longer lead times, maybe better than typical seasonality as we get into 4Q and 1Q next year?

It has Nathan. We saw order flow even over the past month is very robust, even though there's thought in the fields, harvesting, I think, between supply chain constraints that they're hearing about in the news, it doesn't take all the farm journals are predicting long lead time. So I think people are trying to get ahead of that. And anticipated price increases. People really are trying to make sure that they are in good position for plants use and next year. So as I mentioned, we have seen good order flow straight through in the October time frame, which we typically wouldn't see or more late November. I think that assumption is correct.

So it sounds like the old days price increases are not having a negative impact on demand in the irrigation market yet either?

Now, I think if you look at particularly our product, if we say you typically get a three year payback in a regular market one in high commodity price environment, well we're pushing through is not going to cause any kind of market degradation. So far everything is moving through. We recently announced another price increase and that is moving through as well. So that'll be I think your fixed price increase. But these are necessary to make sure we can have labor and supply chain issues that are out there, I continue to address. So it's going well.

Great. Thanks for taking my question.

Thank you. Our next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed with your question.

Good morning, Steve and Avner.

Good morning.

Good morning.

Returning to the international or irrigation piece of the business. On the international side, outside of Brazil, is the market as robust as and as strong as it has been, you seen any change in demand in those markets outside of Brazil?

Every market right now is experiencing growths on and in particular, I would say Eastern Europe, Central Asia, even the Australian market has rebounded quite nicely. And Africa, obviously, we've call that out pretty frequently Africa continues to see more and more growth. So really if you look around Brazil, this happens to be exceptional with the growth that we've seen there. But the other markets are performing very well.

Okay. And then secondly, in -- on the Sudan project, the solar project, did you do the entire EPC piece of a project or did you just provide solar tracker? What was your -- the extent of your work on that project?

Yes, so we worked with the local customer, who -- they did some of the work as they have some engineering and design capabilities. And then we did a good portion of the work as well. So I would say it was kind of a combined EPC type of project, because it was kind of the first of its kind in that sense. So we did more than we would traditionally do, but not as much as a true EPC.

Okay. Is that something where your capabilities, those capabilities can be applied elsewhere, and we see more of that in the future?

Absolutely. It's something that we showcase the Husker Harvest Days here in Nebraska last month. And that's something that we'll be expanding outside of that footprint. Right now, what it really is allowing us to do is to create new Tam in places that did not have grid power. And so that was kind of the proof of concept is can we put this out, there's no power, no gensets and really make a sustainable farm that kind of operate on its own. And so we've done it there. We're doing things like it in Brazil as well. And particularly as hydro power becomes more constrained. So we think this will be a significant market advantage for us as we move forward.

Okay. One last question here domestically. Solar tracker projects on utility size projects, are you -- have you been awarded any contracts?

Yes, we have some utility scale not -- also even front for utilities, they're not maybe 100 megawatts or 200 megawatts, but they're sizable enough. And we're still continuing on the developer market for the distributed generation quite well. And our backlog over the quarter did increase pretty nicely as compared to the second quarter.

Okay. Thank you, Steve.

Thank you. Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning. Yes, maybe just ask the price volume question a little bit differently. So guidance is 17% to 18% sales growth in fiscal '21. Kind of what's the rough breakdown between pricing and volume there?

Chris, just to give detail on. You're meaning for the whole year how much of that growth?

Yes, right. I'm just trying to get a picture for the year just in terms of. I assume most of it is on the pricing side. Just trying to get a sense is what volume driven irrigation is the big driver there. But kind of overall trying to understand better?

There may be…

Yes.

This is Tim Francis. I'd tell you, through the first three quarters of the year, we're at a split, we got the 1% for currency, and then your split probably more 60:40 volume versus price. And I would tell you, that's probably going to be closer to 50:50 for Q4. So that's probably going to average you back down to 55:45.

55 volume correct.

Okay. Got you. And other than irrigation, is there any one segment that's really kind of driving the volume growth?

On a year-over-year basis coatings is seeing improvement, because they had such COVID issues in the first half of last year. ESS had coating or excuse me, COVID restrictions in the first half of the year. And so our first half in that way. The telecom growth is the majority of that is volume. And then in utility, there is some volume, but mostly price.

Got it. Very helpful. And just on the solar market, don't invest today. You can -- we're talking about second half catch up, it sounds like there was supply chain issues. Are you seeing any improvement in pricing that that you were hoping for? And is it reasonable to kind of expect that that market will be a little bit more rational?

Good question. Yes, we are seeing better pricing. I think the market as a whole has had to digest that field has changed the game. Obviously marginal costs will be different than they were in the past. So we had said that the idea that you had cost minus every year. We think that that paradigm is pretty much broke at this point and a good way for us. Pardon, our backlog that we're adding now is that pricing that we wanted. And if there was pricing that was not advantageous, then we were willing to lose those orders. So our growth, at least for us is at margins that we believe are appropriate for where the business is right now.

Got it. I appreciate it. I'll leave it there.

Thanks, Chris.

Thank you. [Operator Instructions] Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

Thank you. Good morning.

Good morning, Brent.

I guess first question on the utility business, sort of looking into the future for margins or potential for margins, when you look at the mix backlog in that segment today, is there anything advantageous to that and beyond the pricing, the cost discussion, I'm thinking more about factory efficiencies, you can gain on the larger orders, things like that, that can represent a real tailwind for margins next year for that segment?

Brent, I think it's basically a traditional mix of what we've seen over the last few years, we still have obviously, the large order in the Southeast, which is advantageous to us. And I think that goes through part of 2023 at this point. So that plays nicely for us, but the mix of I’ll call it large poles or large orders versus small poles and many more of them. I think that is about where we see it that said we have been pushing pricing, not just for pure inflation recovery, but also because of the market robustness. So as contracts come up, we're looking at that and trying to move up price, change terms and conditions, do things that are more advantageous. I think, on the factory efficiency side, we probably have a lot more in there, because we've had this fits and starts of COVID and quarantines. We've had also the labor availability issue that has played in and so something that we're working on very hard there. So I would say those would be more the additional to the inflation recovery. But the inflation recovery will be significant. We see that in the backlog and we can see the average selling prices moving up. So there's no fundamental issues in utilities at this point.

And Steve, can you talk about the inroads you're making in the -- within the T&D the distribution side within that segment?

Yes, I think it's early on from the new products that we're bringing to market. So we have some things that we'll be introducing over the next year. The other things that I think will play into the improved margin and growth performance is around our services. And we're doing a lot more in the way of Inspection Services, drone services, we highlighted some of that at the Investor Day, we're seeing some nice orders now coming to the backlog. And it goes without saying those are very nice margins as compared to the historical products business. And so I think all of those things combined, really touched the D because you now start to look at the entire grid. And so the fiberglass market has continued to expand quite nicely, which matches cross arms, but even fiberglass poles, and we have some real lightweight concrete solutions that we think will really make us much more competitive against wood. So more to come on that.

Very good. One more on ESS, this seems to be the first quarter that I can recall. I guess a better outlook or improved outlook for transportation related volume. What do you see now and what does that mean, I guess to the overall segment that despite that, it's been doing quite well given that's been working against you?

Yes, we had anticipated the first two quarters the volume being down kind of played out that well, played out that way. And then we saw and what we've been seeing is much better order flow and order inquiries. And that's not just in the U.S., that's in the international markets as well. And so that is why we think we'll see continued volume expansion in ESS particularly as we look into 2022, a lot of, we always say this, the federal government supplies about 25% of the money in the U.S. towards Highway, it gets that 90% of the headlines. But the other 75% of spend is done by states. And I think particularly states coming out of COVID are seeing improved tax receipts plus the stimulus money that they had, most states balance sheets are in very good shape. And they want to spend on infrastructure to create jobs locally, and to show their constituents progress. So that's what we have more confidence in as we go forward. It's just infrastructure is a good thing to do. And really, it was for the last 18 months, or 20 months of COVID, most people couldn't get done everything they wanted to do. So there's a little bit of catch-up effect plus, the fact that I think financials are much better.

Very good, thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Renee Campbell for closing remarks.

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. 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.