Greetings, and welcome to the Valmont Industries Q2, 2023 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Renee Campbell, Senior Vice President, Investor Relations and Treasurer. Ms. Campbell, you may begin.

Thank you, and good morning. Welcome to Valmont Industries Second Quarter 2023 Earnings Call. With me today are Avner Applbaum, President and Chief Executive Officer; Tim Francis, Interim Chief Financial Officer; and Eugene Padgett, Senior Vice President and Chief Accounting Officer. This morning, Avner will provide a brief summary of our second quarter results, commenting on our markets and long-term business strategy. Following that, Tim will review our financial performance and provide our current outlook and indications for 2023 with closing remarks from Avner. This will be followed by Q&A. A live webcast of the presentation will accompany today's call and is available for download from the webcast or on the investors site at valmont.com. A replay will be available on our website later this morning. Please note that this call is subject to our disclosure on forward-looking statements, which applies to today's discussion is outlined on Slide 2 of the presentation and will be read in full at the end of today's call. Finally, if you would like to be notified when Valmont publishes news releases and other information, please sign up for e-mail alerts through our investors site. We also encourage investors and others interested in our company to follow Valmont and our brands on the social media channels listed on our website. With that, I would now like to turn the call over to our President and Chief Executive Officer, Avner Applbaum.

Thank you, Renee. Good morning, everyone, and thank you for joining us. Before discussing the results of the quarter and current market dynamics, I would like to spend a few minutes on my recent CEO appointment. First, I'm extremely humbled and honored to be addressing you today as the CEO of Valmont. This is a great company that delivers products and solutions our customers need to solve their most pressing challenges. Our global team is dedicated to our purpose and united by our core values to achieve our goals. The people at Valmont are one of the primary reasons I joined the company in 2020, and I could not be more proud to be part of this outstanding team. Having worked closely with the entire leadership team to develop and implement our strategy over the past 3-plus years, I understand what is required of this role. The executive team and Board of Directors are aligned around our long-term strategy to accelerate our journey towards becoming a leading industrial technology company. This strategic framework, which I will discuss in a few minutes is the right approach to continuing the momentum we have built and provides a clear path to achieving our long-term financial targets. As CFO, I led the transformation of the finance organization using data, advanced technology and processes to drive better business decisions and value. This focus has led to a more disciplined approach across the organization in using data and analytics to achieve our financial goals with an emphasis on ROIC. As CEO, I look forward to leading Valmont along the strategic path we have been on over the past several years, driving strong financial performance for the company and our shareholders, while remaining committed to our sustainability journey. Finally, I want to thank Tim Francis for stepping…

Thank you, Avner, and good morning, everyone. Before I begin, I would like to express my appreciation and excitement to be working with Avner and the rest of the Valmont team. By way of background, I have been with Valmont for over 9 years. First as the Senior Vice President and Corporate Controller; and most recently as the Finance Business Partner Global Operations. During that time, I worked closely with all of our lines of business, segment leadership and our Audit Committee. We have an excellent global finance team, and I'm honored to serve in this role during this transition period. Turning to Slide 10 and the second quarter results. My comments will focus on the adjusted results as outlined in the press release and in the Reg G disclosure in the presentation appendix. Second quarter net sales of $1 billion decreased 7.9% as sales growth in infrastructure was more than offset by lower agriculture sales. Accounting for the 2022 divestiture of the Offshore One business reported in the other segments, sales decreased 5.7% year-over-year. Despite lower sales, operating income grew 12% to $137.6 million, with operating margin increasing to 13.2% and surpassing our previous long-term goal of 12% and on the path to our new long-term target of 14%. Operating margin improvement reflects continued benefits from value-based pricing cost optimization and operational efficiencies in both segments. Diluted earnings per share grew 18.1% to a record $4.37. The -- turning to the segments on Slide 11. Infrastructure sales of $770.6 million grew 4.2% year-over-year due to favorable pricing globally higher volumes in the solar and TD & S product lines and sales from the conceal fab acquisition, partially offset by lower volumes in telecommunications. Operating income increased to $116 million resulting in strong operating margin of 15.1% of net sales,…

Thank you, Tim. Continuing my comments on Slide 17. The -- we have built on the competitive advantages that uniquely position us to win an infrastructure and agriculture. We have a flexible and broad global footprint that allows us to efficiently manufacture products that our customers need while optimizing our supply chain to avoid unnecessary disruptions. And our breadth of product offering, which is always expanding, enables us to solve the various challenges our customers face. Together, these factors contribute to making Belmont, the trusted partner of choice. Not only do we have strong competitive advantages, we are also in great markets with multiyear demand drivers. Infrastructure and agriculture both have megatrends that will extend well into the future. We are in a great position to proactively capitalize on these trends and exceed market growth expectations. Turning to Slide 18. As announced during our Investor Day, we established new 5-year financial targets based on a positive end market outlook and our ability to execute on the run growth transform frame Today, we remain committed to achieving these financial goals. In summary, I'm extremely proud of our team's ability to execute our strategy and drive strong results while navigating near-term softness in some markets. While recognizing broad macroeconomic challenges, we are encouraged by ongoing demand strength across our end markets and remain focused on the things we can control. I'm confident that we are positioned for success, and we continue to accelerate growth through investments in innovation and technology with a focus on disciplined capital allocation. We have acted decisively to position our business for growth, building momentum to drive long-term stakeholder value through the second half of 2023 and beyond. I will now turn the call back over to Renee.

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

[Operator Instructions]. Our first question comes from Brian Drab with William Blair.

The first question is a minor one, I think. But on Slide 16, is this a cut and paste error with the EPS guidance that says [indiscernible] the high end. I think there's no change to the guidance, right, for EPS? That's correct. .

No change to the guidance.

Okay. So that's just an error on the slide, right? .

Yes, it must be Yes.

Yes. Okay. So the gross margin, I feel like it should be discussed a little more, just given it was about like 400 basis points above what -- the Street was expecting. I know a lot of that is pricing coming through and other actions that you're taking. But can you talk about why we were above 31% in gross margin? And how sustainable is that going into the back half of the year? .

Brian, this is Tim, and I'll take that question. First off, -- we are very pleased with the third quarter margins. It was a result of the actions taken by our teams for value-based pricing and operational excellent activities. Over the long term, these activities will drive an improvement to our average historical gross profit margins. Some of these activities were professionalizing our sourcing group which has been really focused on leveraging the size and spend of consolidated Valmont as well as operational efficiencies, starting with the activities on our [indiscernible] such as getting those cost benefits we expect from our automation investments as well as better labor and overhead management. With that said, -- we do not expect to sustain a 30% gross profit margin in the second half of the year, and it's really for 2 primary reasons. One, as we talked about in our prepared remarks, we're going to see a sales mix more towards international projects in the agriculture segment, that is typically at a lower profitability profile to the overall segment. And then secondarily, in the first 4 months of the year, we saw a meaningful increase in the cost of steel, specifically hot-rolled coil. With the timing lag, meaning how that cost of steel goes through our income statement, our average cost of steel will be higher during the second half of the year than what we saw in the second quarter.

And Brian, this is Avner. I'll just add to that. We're really pleased with what's happening with our gross profit. The improvement in Q1 on Q2, it's never going to be a linear line up but we are on the track to 12%, really happy about that. And from that, we'll get to our stated goal right now 14%. So overall, it's never going to be linear, but really excited about that improvement we're seeing in our margins.

Yes. I mean, obviously, you guys have -- we've talked a lot about this, and you've done an incredible job of managing through the volatility in steel prices over the last few years and gross margin has been really stable and moving up. And can you comment, Avner at all? Like is like the second half, should we expect gross margin more like the first quarter? Or was the first quarter unusually high also. 29% possible? .

Yes, approaching 29%, Brian. That's how I answer it.

For the second half. .

Our next question comes from Brent Thielman with D.A. Davidson.

Great. I guess, Avner, maybe just a question for you as you move in the new role, just your perspectives on M&A, any different view from you on what Valmont should be focused on relative to some of the things the company has pursued and completed over the last few years. And I think just sort of similarly with that, do you take a different focus in terms of investing internally in the business maybe relative to what the company has done over the last few years? Just love to get any broader view on capital allocation philosophy from you?

Sure. Well, thank you for that. Well, over the last 3 years, I've been an integral part of the leadership team and working really closely with the Board of Directors on establishing the capital allocation philosophy and our strategy. And that really has not changed. That will remain the same with really how could we drive the highest ROIC and value to our shareholders. still the #1 is to invest in the business. And with the strong markets that we're seeing across our portfolio, we have significant opportunities to invest in the business as we shared during Investor Day, some of our large pole operations where we shared was 1 example. So we will continue to invest in the business. Now as it relates to M&A -- we will continue with the same approach. Actually, we have a very strong pipeline. I do bring a lot of experience to that area from my background in prior areas that I worked with in public companies and private equity. So there will be -- continue to be a strong emphasis on acquisitions, which can really help propel our growth. There will be cost of capital within 3 years and will support our overall strategic goals. So short answer is not expecting any changes but continued focus on driving value through acquisitions as well.

Okay. Maybe just, I guess, my second question, I understand the implications kind of steel costs flowing through in the second half of the year. It seems like within the infrastructure segment, it sort of feels like you're experiencing kind of some mixed demand trends in some respects, at least on a short-term basis, telecommunications, lighting transportation, a little bit softer relative to utility solar, et cetera. What are the implications to margins for that business segment just as you're seeing a little bit of a -- maybe a shift in kind of contributions from these subverticals?

Yes, I'll take that one. This is Tim. The -- you are correct. Our sales forecast expects a reduction in telecommunications -- and as Avner said in his prepared remarks, commercial lighting is a bit muted. But with that said, still good margins for the Infrastructure segment. We expect them to be closer to what we saw in the first quarter versus the near record results we saw in the second quarter.

And I'll add to that is, overall, the strength of our portfolio. So while you might see some softness in 1 area like we mentioned, the commercial lighting, we have very strong demand on -- in the TD&S business. So we're able to use our plants and our capacity to support that business, which helps us continue keeping our plants busy driving business has had very strong margins. As we mentioned, the -- a lot of our businesses had backlog of over 40 weeks. So we're able to proactively manage our portfolio to make sure we both support our customers, but drive high-margin business as well. So overall, we will continue to see strength in those businesses and keep on driving margin improvement.

Our next question comes from Brian Wright with Ross MKS.

First of all, congratulations Avner. Secondly, just wanted to think about -- are there -- coming from the CFO position, right, not having the final say in things, but being a value member, but are there any areas of like cost improvement opportunities that coming from your vantage point that might be on the table that have kind of been held off up until now? .

Thanks for your question. So over the last several years, we've been a lockstep here as a leadership team, with the Board really moving towards our strategy, which we presented during Investor Day with those financial goals. So we put together the strategy together, the framework -- and it's coming from the CFO role, I'm very -- I use a lot of data, analytics, technology to really drive value. Focused a lot as a finance and the finance area. I'll bring that larger to the organization so we can both drive improvements internally and drive additional revenue to our customers. So overall, we continue working on quality of earnings. And as we've seen the improvement in these couple of quarters, continuing in this year and driving to our goal of 14%. So quality of earnings is something that is highly important for us and for our shareholders, and we'll continue looking at every opportunity to streamline processes, improve the profitability of the company and overall ultimately drive shareholder value. So the answer is, yes, they'll continue to be focused on driving profitability for the company.

Great. And then I just wanted to get a little more color on the EMEA. Is that the rebound that you're kind of expecting there? Is that pretty much the reference to the Eco project coming on and in July? Or was there anything else beyond that?

That is the vast majority of not different than any other projects. It's typical projects have movements and -- so it wasn't surprising necessarily. It just moved out from June to July. We have started shipping already. And our pipeline is very strong in that reform. So we're going to expect to see continued strength in that region based on all the long-term market drivers that support that region specifically.

Great. And just 1 last one, if I could. One of your peers has kind of postulated kind of similar to on the irrigation side in North America. -- that if the harvest comes out is expected here that the fourth quarter could be a strong quarter. And I know given what we've seen, it doesn't make sense to forecast that. But just conceptually with the tax advantages of ordering in the fourth quarter, just how would you kind of view that?

Yes. So that is actually our expectation. And a lot of it will depend on the actual harvest, which is always the case, and we will have a lot more visibility as we get closer to September to see the yields, et cetera. The market drivers are strong. If you kind of look at the net farm income, as we mentioned, it will be the third highest we've seen in the last 10 years, corn prices at 6%, 5.5% to support high ROI -- and at the end of the years, the growers are trying to going to look at their financials and as they do their tax planning, they will look at opportunities to invest in capital. and our pivots have 1 of the highest ROI. So the expectation is that in the Q4, there will be a typical order patterns as we've seen in prior cycles. But again, we'll just have to wait on the -- for the yield and see how that plays out. And as you know, that's very difficult or impossible to predict. So we're just going to seeing how that all plays out.

Our next question comes from Nathan Jones with Stifel. .

This is Adam Farley on for Nathan Jones. I wanted to start on the agricultural margins. You showed really strong margin expansion despite the revenue headwind -- so how are these margins possible given the volume declines? Is it mainly just lower steel prices running to the P&L? .

This is Tim. I'll take that question. I would tell you, it's multifaceted, right? As we continue to talk about, we're doing a good job on pricing I talked about how we are really focused on operational efficiency. That is contributing to the stronger margins in the second quarter. And then thirdly, you see in our deck that the change in international sales. And in our prepared remarks, we talked about less projects in the second quarter. Less projects helped us see an overall better operating income margin.

I'll just add all the initiatives that we've been taking over the last several years, right? We're masked by COVID. -- but as we came out, we're just getting much better productivity through our plan better labor utilization, a lot of the operational excellence that we've done. So as I mentioned, it's multifaceted with the pricing, the operational excellence will continue to drive stronger margin.

Okay. And then following up on pricing within agriculture, mainly within the North American market. Is there any risk to pricing given the lower demand? Have you seen any evidence of the gross in pricing in the industry? And if there is, how would Valmont react to that?

Well, I think by now you kind of know our philosophy around pricing. And we continue to take pricing leadership. And it's all based on the value we provide to the growers. And it has a very strong value proposition. And there's really no intention on reducing pricing. There's no reason to reduce pricing when we provide a very strong value in ROI and the industry is kind of following the same pad. So there should not be an expectation on reducing pricing.

Our next question comes from John Braatz with Kansas City Capital.

Avner, could you characterize the Brazilian market in the second quarter? You said there was sales growth in Brazil, but there was a period of slowness as the farmers awaited financing -- was it -- was it sort of weak in the first half of the quarter and -- and the volume has picked up in the second quarter -- I mean, second half of the quarter? .

Yes. So thanks for that question. Going into the quarter, going into the year, we also -- additional factor that we had is we had backlog going into the year, which supported a lot of our sales throughout the first half. But as the financing comes through, that provides significant tailwinds for the business. As we mentioned, the interest rate is very favorable compared to what other options are. And there are some other benefits of some of these -- this program, for instance, a couple of years before you actually repay back the loan. So we will provide strong tailwinds. And again, I would really focus on the long term, right? The Brazilian market is very strong. It is a very important part of the overall GDP and economy of Brazil. And all those strong market demands with growth population and land productivity, et cetera. So we're really excited about our Brazil market, and we do expect to see continued strength to support our long-term goals.

Do the sales in Brazil typically come with all the -- sorry, technology bells and whistles? Or are they more plain vanilla?

When I look at -- overall, we were in the journey of adding technology to our overall irrigation sales. Actually, if you look at the growers in Brazil, they're actually -- for the most part, they're actually -- their age profile, they're younger. They're really more open to adopting technology, and the adoption rate is actually pretty high. So as we continue our journey of really adding productivity to the grower with remote monitoring and control, irrigation optimization, agronomic insights. When you kind of look at the suite that we're providing, there's a pretty good level of adoption. And the Brazil market, I'm pretty excited about the level of adoption we're expecting to see there. So -- we're at the beginning of our journey, and I do expect that we'll continue to add the technology suite to our other irrigation products.

Okay. One last question. The acquisition HR in Australia, is that type of business that they're in, is that something that you can -- that you're looking for elsewhere globally, whether it be domestically or other countries? Is that similar type of business?

Overall, aftermarket is a big part of our overall strategy for Valmont. And we shared some information on that during the Investor Day. What we like about the aftermarket part is it's complementary to our other irrigation business, where we could provide more to our dealers and the growers overall. It has more of a recurring base nature, which we like as well. I can offset some cyclicality and it actually also has a high margin profile. So we're really excited about aftermarket opportunities across actually both of our segments. We have a very strong part business and telecom as well. So overall, I would say -- we're really excited about this acquisition, and we'll continue kind of focusing on aftermarket as part of our overall strategy.

Our next question is from Chris Moore with CJS Securities.

I know you don't always give backlog on a quarterly basis, you did after Q1. And maybe just directionally, can you talk about where it was at the end of the second quarter. .

Yes. So back log was at $1.5 billion. Actually, we did put it on the -- in the....

I missed it -- got it. .

So strong backlog overall, right, really supporting kind of what we're seeing in our businesses. Majority of that is in the infrastructure part of the business. And see what we're seeing kind of mostly in the TD&S part of our portfolio, which has very strong market drivers and strong market demand. .

Got it. Helpful. And maybe my second, just -- on the telecom, obviously, the growth that you're looking for now, previously talked in that 20% range. Now the carriers are slowing down. Just a little bit longer-term thoughts there. You expect it to be flat, slightly down perhaps over the next 12 to 18 months, just kind of get a feel for what you're thinking there.

Yes. Well, -- the long-term drivers really didn't change, right? If you kind of look at the real macro level, we see -- continue to see increased data consumption -- and when you look at specifically the 5G network and you look at it on a global basis, we're expecting 85% of the world population to be covered by 5G over the next 5, 6 years or so. So yes, there is they're pausing. We didn't -- initially, we thought this network rollout would be a little different. It turns out to be the same and always after the spectrum they're going to take a pause. They're going to look at the consumer, how much they adopt the network, they look at their ROI, and that was impacted as well by inflation and interest rate. It had a pretty large impact on some of the carriers. And when you actually look at the AT&T and Verizon earnings, which they just reported earlier this week, it kind of supports exactly that, that we will continue to build out. They spend money on the spectrum now they need to get their ROI. So they will continue to invest on densification. So a little slower than we thought. Expecting it will kind of go back to a more of a normal cadence, and we'll start seeing more of that double-digit growth over the next several years. So overall, very positive, just a little bit of a hiccup there on kind of how they slow down a little bit, but really excited about telecom and the fact that it will continue growing.

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 later this morning for playback on our website or by phone for the next seven days. We look forward to speaking with you again next quarter.