Steve Kaniewski - President & CFO Jeff Laudin - Manager, IR Mogens Bay - Chairman & CEO Mark Jaksich - VP & Controller

Ryan Connors - Boenning & Scattergood Brian Drab - William Blair & Company Jon Braatz - Kansas City Capital Associates Brent Thielman - D.A. Davidson Craig Bibb - CJS Securities Julian Mitchell - Credit Suisse Nathan Jones - Stifel Nicolaus

At this time I would like to welcome everyone to the Valmont Industries Inc. Third Quarter Earnings Call. [Operator Instructions]. Thank you. I would now like to turn today's conference over to Mr. Jeff Laudin, Manager of Investor Relations. Please go ahead sir.

Thank you, Kayla. Welcome to the Valmont Industries third quarter 2016 earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer; Steve Kaniewski, President and Chief Operating Officer; Mark Jaksich, Executive Vice President and Chief Financial Officer; and Tim Francis, Vice President and Corporate Controller. Before we begin, please note that this 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 the call. The instructions for accessing a replay of the call can be found in our press release. We'd now like to turn the floor over to our Chairman and Chief Executive Officer, Mogens Bay.

Thank you, Jeff and good morning everyone. Thank you for joining us and I trust you've all read the press release. Today I will address highlights of the third quarter, then Steve will provide the update on segment performance. As you know earlier this fall the Board appointed Steve to the Chief Operating Officer position which is an important step in our succession process. Steve has been with Valmont for more than six years most recently serving as Group President of our Utility Support Structure segment and we're excited to have him in this new position. Next, Mark will provide an overview of the financial results and our capital deployment efforts. With that let me turn to this period's highlights. Revenue in the third quarter of $610.2 million was lower by 3 1/2% year over year. The primary drivers were lower demand in international utility and North American coatings. Let me first address the Coatings segment results which are clearly disappointing. We had unexpected operational issues at a couple of sites that resulted in downtime. However we were able to leverage our facilities network and execute our order from customers with no negative impact to them. The necessary repairs have been made and we have put these issues to rest. As well, we have proactively taken additional cost reduction actions to address the slower demand. The segment benefited from an accrual reversal which basically offset the expenses from the operational issues. We did experience an unexpected falloff in galvanizing demand largely related to the solar industry which Steve will address in further detail. It is this shortfall in Coatings segment demand that prompted us to adjust our guidance. With that let me turn to our broader restructuring efforts. In 2015 we set out to improve profitability for the Corporation without help from the market. This year our operating performance benefited from $17 million of cost savings that were realized from our restructuring efforts. In the third quarter we commenced additional restructuring initiatives associated with our Australia operations as we talked to you about in the last call. Turning to our other segments we're seeing a meaningful improvement in the Energy and Mining segment cost structure. This segment, however, continues to experience weakness in their markets. We're generating the expected margin enhancement in Utility Support Structures that we predicted. Combined with a solid performance in Engineered Support Structures and good performance in Irrigation during the seasonally low quarter, we delivered third quarter adjusted operating income as a percentage of sales of 6.9%. We continue to believe that our markets will remain soft and mixed over the near term with sales flat overall. However we anticipate continued better financial performance through improved operational efficiencies, cost takeouts and further market penetration. Growth initiatives will focus on new product development, geographic expansion and disciplined M&A. And I will now turn the call over to Steve who will review the segment performance.

Thank you Mogens and good morning everyone. In the Engineered Support Structures segment, overall sales were slightly higher. Drilling down, in North America the lighting and traffic markets grew mostly due to improved nonresidential construction demand. While last year's highway bill extension has lead to increased sales inquiries, it has not yet resulted in a meaningful increase in revenue. As a reminder, lighting goes in last in roadway expansion projects and we anticipate any upside from these inquiries and the highway bill to begin in 2017. In the North America wireless communication market weakness is due to reduced capital spend by the major players. Industry participants link the weakness to carriers taking to the sidelines in advance of the recent FCC spectrum auction. In the Asia-Pacific region wireless communication sales remained firm. In EMEA, sales were similar to last year. Low levels of government infrastructure investment in Europe were offset by new product introductions in Middle East infrastructure markets. We continue to leverage our unique capabilities in this region which is currently experiencing solid infrastructure investment. In Utility Support Structures, sales declined 9% year-over-year. Most of the decline reflects lower international project sales and the impact of lower steel costs on revenue. A sizable project order in Europe was pushed out and is now expected to ship in the fourth quarter. In North America overall volumes increased. We're seeing increased market lead times which support our view of tightening industry capacity. The quality of segment earnings remains double-digit at 10.6%. Our biggest challenge for the quarter was the performance of the Coatings segment which over the long term has been a very solid and predictable performer. As Mogens noted North American sales fell associated with significantly lower demand from the solar industry. Specifically, Coatings demand had been supported by an urgency to complete solar projects before expiring investment tax credits which did not come to pass. This highlights the challenges of forecasting and managing a business with no backlog. Sudden swings in demand can lead to fixed cost and labor leverage and deleverage until the cost structure is rebalanced. As you know we serve outside customers and our own segments in Coatings. In addition to lower external sales, internal volumes were also meaningfully lower specifically in utility which produced a greater mix of weathering steel, a material that does not require galvanizing. The benefit of the earnout and the impact of the operational issues largely offset each other. The major factor affecting Coating's operating income was volume deleverage from lower sales. In the Energy and Mining segment, improved performance was driven by strong grinding media profitability and improved operating performance in access systems benefiting from last year's restructuring. The access systems team has made progress towards reducing the reliance on energy and mining end-markets through diversification. In the Irrigation segment, low crop prices weighed on the seasonally slowed North America markets and plentiful rain in the corn belt lessened the need to irrigate and consequently reduced part sales. The pricing environment remains mostly unchanged. Our international sales improved mostly driven by better markets in Brazil, where government financing arrangements remain attractive to growers. In Africa sales rose due to increased project activity in the sub-Saharan region. Tubing was impacted by week agricultural markets and slack demand from steel service centers. Despite lower tubing profitability, segment operating income was flat in the irrigation segment. Let me take a moment to discuss steel. Average steel index prices rose in the second quarter and declined in the third quarter. Third quarter prices were above last year. When steel prices increased in the second quarter, our segments were successful in recovering increases in the market. The decline in steel prices during the third quarter offset the rise in the second quarter. As a result there was no material impact on margins for the Company. Now I will turn the call over to Mark.

Thank you, Steve and hello everyone. Starting with earnings per share, EPS before restructuring charges and the UK tax rate change which I will address in a moment, were $1.48 per share, up from $1.39 in 2015. The effective currency translation on the Q3 results was not significant. Before reviewing the elements of the income statement, I would like to note that the figures for 2016 and 2015 are before restructuring and impairment charges. As an update on our corporate-wide 2015 restructuring, we still expect to provide $30 million of annualized savings, approximately $8 million of which was realized in FY '15. We realized approximately $17 million of cost savings through the first three quarters of 2016. In addition to our 2015 restructuring, our 2016 Australia restructuring plan discussed in our second quarter earnings release is estimated to cost approximately $4.7 million. The lower cost structure realized through these activities will provide approximately $5 million of annualized savings, the majority of which will be realized in FY '17. Gross profit margin was 26.7% in 2016, virtually unchanged from 2015 despite very volatile steel prices and absorbing increased LIFO expense in 2016. We're pleased to have maintained gross margins in this environment, due to a combination of efforts to improve our supply chain, opportunistic purchases of steel when prices were lower and the effects of restructuring efforts started in 2015. SG&A spending was down from 2015, mainly associated with cost savings related to restructuring and the write back of the aforementioned contingent purchase price accrual related to a Coatings acquisition. Net corporate expense increased primarily due to a $3.2 million increase in deferred compensation expense. This is offset in the income statement by an increase in investment income which is below the operating income line. Operating income before charges was $58.3 million in 2016 compared with $61 million in 2015. It should be noted that after taking into account the movement in deferred compensation mentioned above, operating income for 2016 would have been $61.5 million. Let me take a moment to comment on our income tax rate. Our reported rate for the quarter was 32.6% which included a charge of $1.9 million related to a UK tax rate reduction. This event required us to reduce our net deferred tax assets and gave rise to the expense. Our tax rate for the quarter without this expense would have been 28.3% which is lower than historical rates, due to a stronger mix of foreign earnings and certain tax contingencies that were removed due to statute expirations. Over the longer term, based on current tax rates, expected geographic mix of income and tax planning strategies in process, we expect our effective tax rate to be around 31%. Operating cash flows for the year to date in 2016 were $127 million and capital spending is at $42 million. Our free cash flow as a percent of net earnings is about 80% so far this year, below our stated corporate goal of 100%. However we expect working capital to improve by year end bringing us much closer to our stated goal. During the quarter we repurchased 138,000 shares at an average price of around $129 per share. Under the current authorization which does not have an expiration date, we have $138 million remaining. Our balance sheet remains strong with a leverage of 2.6 times EBITDA which is appropriate for the cyclical nature of our businesses and provides flexibility to pursue growth investments in our core businesses and/or M&A. Cash at the end of the quarter was $349 million, the majority of which is outside the United States and net debt of $408 million. We had no borrowings under our revolving credit agreement at the end of the quarter and we remain fully committed to maintaining an investment grade credit rating which was reaffirmed this quarter by Moody's and S&P. Our cash priorities are unchanged. That is to support our current businesses through working capital and capital spending as needed, acquiring companies that strengthen or are closely adjacent to our existing businesses, pay dividends at 15% of net earnings over time and opportunistically repurchase shares. I will now turn the call back over to Mogens.

Thank you Mark. With the third quarter review complete, let me address the remainder of the year. Our fourth quarter outlook is for strong positive year-over-year and sequential comparisons in the Utility Support Structure segment, good year-over-year improvement in the Energy and Mining and modest in the Engineered Support Structure segments. The Coatings segment is expected to have negative year-over-year comparisons as a result of anticipated lower sales volume. In the Irrigation segment, by this early stage in the selling season farmers are focused on harvest. Based on current order flow we expect lower North American and higher international revenues. As a result of the recent market weakness in Coatings we're modifying our 2016 adjusted EPS guidance to between $6.23 and $6.35 from $6.31 to $6.49. This still meets our goal of greater than 10% adjusted EPS growth communicated at our February 2016 investor day in New York. And with that I would like to turn this over to the operator and take your questions. Thank you.

Kayla, we will go for the Q&A roster.

[Operator Instructions]. And our first question comes from the line of Nathan Jones from Stifel.

Mogens, I wonder if we could just start in the utility segment. You have got some fairly positive commentary there on lead time stretching out which is implying tightening capacity. Historically that has resulted in improved pricing in that market. Have you seen any improvement in pricing in that market and what are your expectations there over say the next 6 to 12 months?

I can answer your question but even more qualified to answer is Steve, so I will turn it over to him.

Yes we have seen improved pricing particularly in the bid market as you know we have a mix of alliance and bid customers. And so the alliance customers are fairly fixed over the period of the term adjusting for steel. But in the bid market we're seeing now improved margins and expect that to continue as we go into 2017.

Is there any quantification you can put around that for us?

No it is marginally better. It is not significantly better but it is starting to move in the right direction.

Okay. I guess then could you talk about how the pipeline of utility projects looks out over I would say the next 6 to 12 months to give us an idea of whether capacity is likely to tighten further, pricing is likely to get any better?

So we're seeing a good pipeline of both project work and just our normal utility customers with additional O&M spend. And so overall from a market perspective we see the market improving by about 5% in terms of total opportunities that are out there for next year.

And just talk a little bit more about the coatings business, you know it sounds like some equipment failure kind of thing. How comfortable are you that you know the rest of the fleet in coatings and throughout Valmont has had sufficient maintenance CapEx spending on it? Have you audited these kind of things recently to make sure that we don't run into these kinds of problems again?

Nathan after Steve answers this question we'd ask you to get back in queue and limit the questions to two.

The issues that we had were specifically around kettles. We had one kettle in Asia that as we were going through the normal maintenance process there was a failure in the startup procedure and we end up warping the tank and had to put a new tank back in. So that was during the course of normal maintenance. We also had another one at a North American facility. We were a week away from the replacement cycle and got by this. In terms of the overall maintenance that we're doing out there we don't anticipate any additional CapEx. We have a very robust preventative maintenance program. It was just some errors and some bad luck there. We don't anticipate anything going forward.

Our next question comes from the line of Craig Bibb from CJS Securities.

The coatings, the $12 million in EBITDA coatings, did that exclude or include the $2.6 million earnout reversal?

Yes it does include it. As it got mentioned in the prepared remarks, the positive impact of that was largely offset by the negative effects related to the operational issues.

Okay and then in your guidance for more or less flat quarter-to quarter includes that benefit so it is flat revenue, flat EBIT?

No I think in the prepared remarks we indicated that our quarter-to quarter basis, fourth quarter was expected to be down from last year because of movement in the demand side of the equation.

Our next question comes from the line of Ryan Connors from Boenning & Scattergood.

I've got a big pressure question on the irrigation side and I recognize you cannot give any definitive answer to this, but just wanted to get your perspective so the commodity price environment has really weekend in the last few months and we have seen some of the benchmark commodities, most notably corn, hitting new lows and actually going below $3 a bushel which people had not predicted even the bears. And I think one of the key debates going on is, are we're already at a kind of a baseline repair and replacement level of demand in irrigation where even that kind of a negative scenario in the commodities does not drive a whole lot of downside and we're just kind of flat or do you believe that there's the potential for a further decline in demand if in fact that lower commodity level holds and has a knock on effect on farm CapEx?

This is Mogens, let me address that. I would not rule out further downward pressure on the business. As we have said time and again net farm income is a close approximator to short term revenue. So as we talk about here in the fourth quarter, we expect North American revenue could be down but we expect international revenue to offset and being up. But in general this environment is not going to change until we either have a demand change somewhere in the world or we have a production problem somewhere in the world. There is no other drivers that would improve commodity prices and therefore net farm income. Now even with low prices of course it looks like yields will be pretty good so farm income is a multiplication of yields and price. But I will not rule out that this could get softer.

Okay.

But I am not ruling it out.

My follow-up would be you know you have given pretty good commentary about the North American pricing situation but I wondered if you could discuss the international pricing dynamics and competitive environment in irrigation? Obviously there's a more fragmented market globally than it is in North America, so any color you may be able to give us there might be helpful.

I would say that in general international pricing tends to be more competitive than North American pricing, but it varies from country to country. The profitability picture from various regions could be very different. Project business is more typical for international opportunities than individual sales often and that creates more pricing pressure. But we have not seen anything different than what we have seen in previous year in international, but a lot of them are virgin markets and a lot of them are markets where competitors, not only North American competitors, but local competitors are trying to get established. But I would say that even in that environment because of our broad global footprint our ability to maximize profitability by sourcing from various of our plants depending on transportation cost and capabilities and exchange rates et cetera, et cetera, our international business has continued to improve its quality of earnings and quantity of earnings.

Our next question comes from the line of Julian Mitchell from Credit Suisse.

My first question would just be around the utility segment again, your comments are pretty positive on the sort of older pipeline. I just wondered if you could clarify maybe you know on that point when you thinking about U.S. versus international what are the trends or the divergence in trends between the two and also what you're view was on the pricing outlook? You know there was a lot of excess industry capacity I guess in utility 3 to 5 years ago. Do you think that is still the case or there's actually been a lot of rationalization that's taken place.

I think on the broad utility market and this is including both poles and lattice towers, you are starting to see a fair amount of rationalization. There are a number of players who are either exiting the market or have closed facilities like we did earlier in the 2015. So I think all of that is bringing capacity back to more of a rational viewpoint. I still think there is excess capacity in the market. So it's kind of muting some of the ability to raise price. As I mentioned earlier we're seeing some opportunities to do that but it's not a broad-based recovery like 2013. From an international perspective the main issue there is that it is primarily concrete poles and lattice towers and those are opportunities for us to play much better. We do have significant pole projects that come along from time to time that we can participate in, but were looking at expanding further into those markets. Utility as a whole globally still has very good drivers behind it with the electrification of developing countries and just the improvement in reliability in developed countries. And so we see at least for the next three 3 to 5 years very good market outlook in total.

Then my second question would just be around the commodity costs. So obviously not a particularly big impact in the third quarter when you take commodity cost in aggregate where they are today, should we expect a similar sort of neither a headwind nor a tailwind when you're looking out over the next 6 to 9 months for Valmont overall?

Specifically in steel and in zinc I would say that largely the short increase we saw in second quarter was erased in the third quarter and so we tend to view it as neutral and again our markets are pretty resilient in passing through any changes in commodity prices if and when they do occur. So I think we're in good shape as we look into 2017.

Our next question comes from the line of Brian Drab from William Blair & Company.

I was wondering Steve if we could just stay on that line of thinking here with the utility segment and the comment you just made of three 3 to 5 year outlook is good. That's in line with the comments I think you've made regarding the segment over the last couple of years and it's been relatively flat terms of volume. Can you just maybe try to quantify for us a little bit more, does a good outlook mean flat outlook and you're going to be generating a lot of cash in this business and things will hold up well? Or are you expecting a return to growth in utility?

We do expect a return to growth. As I mentioned earlier we see the overall market growing by about 5%. And that is, again we came off of 2013 which were historically record levels to settle back down to levels that are historically above the 10 or 20 year average in this market plate. So they are at good levels but there are still good drivers and good return on equity for the players in the market to go after more transmission projects and in the distribution market to replace older structures. So you're starting to see both the replacement cycle kick in as well as new investment.

And then within ESS you look at the highway opportunity you mentioned that you're seeing, I think you phrased it as increased quoting activity or sales activity, can you quantify in any way how much greater that activity is currently compared with how it was a year ago? And, you know, trying to get a sense for the impact of the highway bill and that business in 2017.

I would say that the inquiries are up meaningfully. So we see that there's a lot more work and the upfront quoting process. We do not yet see anything from a revenue perspective. I think it is early on and as the highway bill has come into play, you know states over the last couple of years have really found some creative ways to fund infrastructure projects within their areas because they needed to do road and bridge projects. And now with the federal funding I think everybody is just try to assess where is the funding going to come from. Is it going to come from the feds or is it going to come from the state? And I think they will work through those issues and then you'll start to see in 2017 where we expect to see some good impacts from that overall.

Our next question comes from the line of Brent Thielman from D.A. Davidson & Co.

On the coatings, I know the visibility is pretty low for the business, but outside of solar how are the other end markets faring and how do you feel like you've captured that in the new outlook?

Well we obviously service ourselves as well as being in the Midwest so agriculture type products are down. In addition to the solar, oil and gas has been muted over the both 2015 and 2016 time period. The segment really does service a number of end market verticals and so where we see down we see up in others. And so it is well diversified. Outside of solar we don't see any dramatic shifts in market, other end markets at this point.

Okay and then stepping back and kind of thinking about the Company in total, you know some of your markets today seem to be doing a little better than maybe where you were last February, obviously still challenging and you guys have been able to certainly improve earnings through this. How are you guys thinking about your ability to get something in excess of 10% growth kind of beyond this year? Are you more confident about it?

I would say to get beyond 10% topline growth and that's neutralized the effect of steel which could have a major impact depending on where that goes. We'll have trial acquisitions also. You know our markets by themselves will not develop those opportunities even if we expand our geographic product footprint and add maybe additional product lines. And when it comes to acquisitions, what you've noticed over the last year or so we've spent a very significant amount of time and our managers have, to take cost out, reorganize how we do business and improve productivity. That pendulum is now switching also towards looking at, more at acquisitions, working on the acquisition pipeline and opportunities with new market niches within our current businesses and new products introductions to the marketplace. So getting back to your 10% in your question that would also require precisions which of course are very difficult to predict and again as we state all the time when we look at acquisitions we're not looking at EPS accretion we're looking at a way to beat our cost per capital.

Our next question comes from the line of Jon Braatz from Kansas City Capital Associates.

Mogens going back to sort of the last question, you've taken out a lot of cost in your business and someday the macro environment will improve. And I'm just curious as I think about your incremental margins on each business how much -- when do you have to start adding cost if volumes begin to improve? Given your cost structure right now, I was just curious as to what kind of sales level you think that can support before you start adding some additional cost?

I would say we can add significant additional revenue without changing our cost structure. We have plenty of capacity even though we have streamlined a lot of our operations utility is a good example where yes we exited a couple of facilities but we do not exit the equipment necessary to ramp up capacity and so you would see very limited additional capacity capital even if markets turnaround when they turn around. So we should see very good leverage.

How about on the labor front then?

Actually the biggest challenge when you ramp up is getting labor in and get them trained fast enough. Irrigation I don't think will be a problem. We have been through that now for 60 years. But frankly in the utility business our challenge is since volume is not down, our challenge is to continue to bring on people, welders et cetera and get them trained and up and going. Our bottleneck in adding revenue is not equipment or facilities it is getting the right people on board fast enough.

And we now have a follow-up question which will be our final question for today from Craig Bibb from CJS Securities.

Could you talk about the pickup in international sales, presumably Brazil and Africa are in their buying season now, does that continue into Q4 and maybe 2017 outlook for them also?

You know we highlighted sub-Saharan Africa which is kind of project business which is difficult to predict. Brazil is more an established market and despite everything you read about and I was there earlier this year, the one portion of their economy that has actually continued to do better than I thought it would is the agriculture and irrigation business it is driven by FINAME financing which is still very attractive for farmers and it is not at the record levels we saw several years ago, but it is substantially better than I thought it would be. So if FINAME financing stays in place and the general political situation is stabilizing somewhat in Brazil, we will continue to expect improvement in the market also going into next year. You know they will have an election in 2018 and that will probably be the next step in their normalizing their political environment from impeachment et cetera, et cetera.

That was the end of the question and answer session. I hand the call back over to you, presenters.

Thank you. This concludes our call and we thank you for joining us today. The message will be available for playback on the internet or by phone for the next week. And we look forward to speaking to you again next quarter. At this time Kayla will read the forward-looking statements.

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 or 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, 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 of the date of this discussion and the Company does not undertake to update any forward-looking statements. This is the end of today's presentation. You may now disconnect your line.