Valmont Industries' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.21.14 | About: Valmont Industries, (VMI)

Valmont Industries, Inc. (NYSE:VMI)

Q4 2013 Earnings Conference Call

February 20, 2014 09:00 am ET

Executives

Mogens Bay – Chief Executive Officer

Terry McClain – Executive Vice President & Chief Financial Officer

Mark Jaksich – Vice President & Corporate Controller

Jeffrey Laudin – Manager, Investor Relations

Analysts

Nathan Jones – Stifel Nicolaus

Arnie Ursaner – CJS Securities

Brent Thielman – D.A. Davidson

Brian Drab – William Blair

David Rose – Wedbush Securities

Charlie – Credit Suisse

Kevin Bennett – Sterne Agee

C. Schon Williams – BB&T Capital Markets

Jon Braatz – Kansas City Capital

Operator

Good morning. My name is Jody and I will be your conference Operator today. At this time I would like to welcome everyone to the Valmont Industries, Inc. Q4 Earnings Conference Call. (Operator instructions.) Thank you. I would now like to turn today’s conference over to Mr. Jeff Laudin, Manager Investor Relations. Please go ahead.

Jeff Laudin

Thank you, Jody. Welcome to Valmont Industries’ Q4 2013 Earnings Conference Call. With my today are Mogens Bay, Chairman and Chief Executive Officer; Terry McClain, Executive Vice President and Chief Financial Officer; and Mark Jaksich, Vice President and Corporate Controller.

Before we begin please note this conference call is subject to our disclosure on forward-looking statements which applies to today’s discussion and will be [realized fully] under this call. The instructions for accessing a replay of this call can be found in our press release.

I would now like to turn the call over to our Chairman and Chief Executive Officer, Mogens Bay.

Mogens Bay

Thank you, Jeff. Good morning everyone and thank you for joining us. I trust you have all read the press release.

The main drivers of increased sales in Q4 were the positive impact of acquisitions in the Engineered Infrastructure Products and Coatings segments combined with organic growth in the Engineered Infrastructure Products and Utilities segments. These more than offset the anticipated decline in the Irrigation segment.

Q4 operating income was slightly higher before the impact of a deconsolidation and asset impairment at Delta EMD in South Africa. In the Irrigation segment, despite volume deleverage and increased SG&A spending on growth initiatives, operating income was 16.5% of sales.

In the Utilities Support Structure segment weaker results in the international markets and an inventory write down more than offset a substantial increase in North American operating income. However, segment profitability was still a strong 17% of sales. Operating income increased in the Coatings segment from 20.5% to 21.2% of sales and Engineered Infrastructure Products’ operating income improved substantially to 10%.

I will now turn to the segment results for the quarter. In the Irrigation segment sales were down 6% from the same quarter in 2012. The decline was all in our North American markets where lower commodity prices led to lower activity levels. This fall we experienced a more normal selling season with harvests taking place later than the year before, and we also did not repeat the drought mentality as an additional driver of sales.

Operating income as a percentage of sales was a healthy 16.5% compared to 19.9% the previous year. Lower activity levels also means our customers could postpone placing orders without a concern regarding delivery before the spring planting season. As a result, the year-end backlog was less than half of the previous year’s level. This does not indicate that we expect a reduced sales level to that extent during the beginning of this year – it merely confirms a more normal selling season.

In the Utilities Support Structure segment revenue reached another record as a result of strong activity levels in North America. Our home market also delivered a substantial improvement in profitability. More than offsetting this were very weak results in our international markets. Revenues decreased substantially and the international businesses swung to a loss in the quarter from strong profits the year before. This included an inventory write down related to a project in north Africa.

This industry has added substantial capacity in the US over the last few years, and today we are probably seeing a better balance between capacity and demand than has been the case the last few years. As a result lead times have been reduced substantially and utility customers do not have to place orders as early as was the case when capacity was tighter. This is likely the reason for our backlog being down approximately $100 million from the year-end of 2012, not we believe an indication of a weakening market. Operating income for the segment declined 5%, at 17% of sales.

In the Engineered Infrastructure Products segment the contribution of the Locker acquisition in Australia and improvement in North American markets led to higher sales. Operating income as a percentage of sales was 10%. Cost management and productivity measures implemented in recent years led to a better performance despite continued weakness in many of our markets. The improved results are testament to the efforts of our team.

Coating sales increased mainly due to the contribution of our Canadian acquisition in Q4 of the previous year, and operating income as a percentage of sales in this segment increased to 21.2%.

When recapping our full-year results, two observations stand out: first, the Utilities Structures industry was capacity constrained when supplying large [transformation] structures. Our network of plants and a favorable pricing environment enabled us to achieve a higher operating income of 18.2% on record sales.

Second, in our Irrigation business the drought in 2012 in North America drove commodity prices and farm incomes to very high levels and helped us deliver a 17.5% top line growth and operating income as a percentage of sales of 19.4%. These are exceptional results.

In all our business acquisitions and organic growth helped Engineered Infrastructure Products sales to exceed $1 billion in revenue. Operating improvements led to an increase in operating income as a percentage of sales from 5.8% to 8.7% in 2013. Coatings had modest revenue growth and their operating income as a percentage of sales reached 20.9% for the year.

Operating income as a percent of sales for the company grew from 12.6% to 14.3% and adjusted earnings per share was $10.97 before the impact of the Delta EMD events previously disclosed – a record for the company by a significant margin.

Turning to other financial measures, depreciation and amortization for the year was $77 million. Capital expenditures were $107 million. For 2014 we expect depreciation and amortization of about $75 million and capital spending of approximately $100 million.

We generated cash flow of around $226 million during the year net of capital spending and acquisitions. Our ending cash balance was $614 million. Now that Delta EMD is recorded as an investment on our balance sheet we will mark its value to market at each quarter’s end based upon the value of the stock in the public market in South Africa.

Looking towards 2014 we expect a significant unfavorable comparison for Q1. We expect a meaningful decline in the North American Irrigation business as a result of lower commodity prices and the resulting impact on farm income. Hardly offsetting this decline we anticipate further growth in international Irrigation markets.

In the Utility Support Structures segment we are planning for increased sales in North America for the quarter being offset by substantially lower sales in international markets. The severe weather in this country in Q1 has resulted in numerous plant closing, productivity challenges and transport difficulties. This combined with some pricing pressure will lead to lower profitability in this segment despite good volume.

For the full year our current outlook for the company is for a slight decline from the $10.97 adjusted earnings per share of 2013. We will now take your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions.) Your first question comes from the line of Nathan Jones with Stifel.

Nathan Jones – Stifel Nicolaus

Good morning, everyone. Mogens, I guess I’ll start with the obvious question in irrigation. Now that we’re most of the way through Q1 can you give us some more color on what your expectations are for the decline both in the quarter and in the full year?

Mogens Bay

Well, first of all the full year I can’t give you much on because as you know the summer growing season and ensuing commodity prices and growing conditions will dictate how the fall season will turn out, and it’s too early to talk about that. For the first half of the year we expect a substantial softening compared to record levels in the first two quarters of last year. We are only in the middle of February and I’m not prepared to give you any percentages but it is a meaningful decline we expect both in Q1 and Q2 in North America. On the other hand we expect our international businesses to continue to grow. Now, they are not big enough to offset the decline in North America.

Nathan Jones – Stifel Nicolaus

And could you talk a little bit about what kind of deleverage you’re looking at at least in the first half in the Irrigation business, in terms of what your expected margin may be for the first half is?

Mogens Bay

Well, I’ll give you a general response in the sense that as I’ve said numerous times, when the market strengthens we get great leverage on the way up and we get the same deleverage on the way down. So to a great extent our SG&A expenses are pretty much fixed. That doesn’t mean we’re not going to take a look at it and see what we can do to lower our cost structure. But in general we’ll see deleverage more in the range of the gross profit margin.

Nathan Jones – Stifel Nicolaus

Okay, that’s helpful. Thanks very much.

Operator

Your next question comes from the line of Arnie Ursaner from CJS Securities.

Arnie Ursaner – CJS Securities

Hi, good morning. Maybe Terry can give us a lot more specific numbers on the Utility piece and what happened in international. So you mentioned in your prepared remarks, Mogens, you went from a significant profit to a loss – maybe we can get a quantification of that; a quantification or magnitude of the inventory write down with the goal being a better sense of the adjusted margin in Utility in Q4.

Mogens Bay

Arnie, I know that Terry has that information but I’m going to answer your question. First of all the swing in international profits was multi-million dollars. We had a very strong quarter the year before and as I said, we swung to a loss in 2013. The inventory write down for the north African project I would say was around $2 million, maybe a little higher than $2 million.

Arnie Ursaner – CJS Securities

So how should we think about the adjusted margin in the Utility segment in Q4 when you build all that in?

Mogens Bay

Well if you look for North America, the margins in the North American business were still in the high end of the band I’ve constantly given you – between 15% and 20% OP.

Arnie Ursaner – CJS Securities

Mm-hmm, okay. And then my other question relates to your Q1 outlook. Obviously there are many moving parts, everyone seems to be focused on Irrigation but perhaps you could comment more on the impact of weather, the way you see it impacting Q1; how much of the shortfall in Q1 might be more broadly impacted by weather? And also the pricing issue in Utility, how that might impact the North American market in Utility.

Mogens Bay

In North America we expect in Q1 to have increased revenue and lower profitability. Part of it is some pricing pressure which I won’t quantify exactly, but a good portion also is the weather-related challenges we’ve had. It’s very difficult to get your arms around exactly how much does it cost you when you have plants closed for a day or two, when you can’t get trucks in or you can’t get trucks out; or utility customers are not ready to take it because of ice storms or whatever else may happen.

So it’s probably going to be a little messy in Q1 quantifying exactly what comes from what, but in general I’ll take this opportunity to talk a little bit about how I look at the utility market. I think the utility market, and our Utility Team think the utility market will continue to be strong this year also compared to 2013. The volume is going to be there. What will happen is that we have seen capacity now probably catch up with demand in this business so the big question is pricing discipline – what’s going to happen in the marketplace?

You will remember in 2010 when the market weakened, we saw a lot of pressure on pricing. This time around it’s a different challenge but I think it’s going to be the same issue. Now we have capacity probably meeting market demand and the question is how disciplined is the industry going to remain on pricing?

Arnie Ursaner – CJS Securities

Thank you very much.

Operator

Your next question comes from the line of Brent Thielman of D.A. Davidson.

Brent Thielman – D.A. Davidson

Hi, good morning. Mogens, is the confident in improved results after Q1 to kind of get you back to that or near to that $11.00 EPS level, is it more on the Utility side or is there some expectation that you see some stabilization on the Irrigation side as well?

Mogens Bay

Well, I think it’s a little bit of both. I think Utility will have a difficult Q1 and also internationally. Internationally it doesn’t happen very often – we kind of had two quarters back-to-back with very difficult results. And even though the international business as an overall percentage is not that big, when it doesn’t get business it de-levers very badly. And that’s what we saw in Q4 and what we’ll see in Q1. So I do think that as you go into Q2 you’re going to see an improvement in the general Utility business.

On the Irrigation side I think it’s mostly the very difficult comparisons compared to the first half of last year, so therefore we think again, subject to what happens during the summer season, that the comparisons in the second half of the year are going to be much easier than in the first half. And that’s why we say that we’ll probably see, as we have predicted, a very unfavorable comparison in Q1 and as the year goes on that picture will improve.

Brent Thielman – D.A. Davidson

Sure. And then can you give us a sense of the business development costs in Irrigation, to what degree that was a drag in the quarter? And do those continue here in the first half?

Mogens Bay

In the overall scheme of things it didn’t move the needle a lot, but as I said before as we get into a situation now where we see a softening in the business we will look at every aspect of our cost structure to see what we can lower. We didn’t add a lot of SG&A going up in the Irrigation business so there’s not a lot to take out, but there’s always something.

Brent Thielman – D.A. Davidson

Sure, okay. Thank you.

Operator

Your next question comes from the line of Brian Drab with William Blair.

Brian Drab – William Blair

Hi, good morning. In the Utility market can you give us a better sense for roughly what percent of revenues is coming from outside North America recently? And then also related questions: were the challenges that you saw in the international markets, I guess outside of the north African markets a bit of a surprise in Q4? And then also what kind of project activity are you seeing in Canada?

Mogens Bay

Three questions. Number one, in the international Utility compared to the North American Utility, it’s still in the 5% to 7% range of total revenue in Utility. I wouldn’t say that Q4 and Q1necessarily is a surprise to us. When I talk about international Utility I’ve always said that is very project-oriented. They come in bigger lumps and you don’t know exactly when they come. So I wouldn’t say that we’re surprised. We’re not happy with the fact that there were very few projects in Q4 and Q1 but in total it’s about the 5% to 7% range of overall revenue.

And the last part of your question was Canada. There’s quite a lot of opportunities in Canada and we have started to get better traction in the Canadian market. So we expect the Canadian business to grow this year compared to last year.

Brian Drab – William Blair

Okay, and the 5% to 7% international doesn’t include Canada just to be clear, is that right? International is defined as outside of North America or outside of the US?

Mogens Bay

It’s outside North America.

Brian Drab – William Blair

Okay, and then I don’t know if you can put a finer point on this but given this rebalancing of capacity and demand in Utility can you make any comment as to whether Utility margins might be higher or lower in 2014 compared with 2013?

Mogens Bay

I wish I could. Right now it’s a moving target but my feeling is that margins are going to be lower in ’14 compared to ’13 as a result of more capacity in place – the extent depends on the pricing discipline in this market. And as we go through the year we’ll get a better feel for that. So two months from now when we talk to you at the Q1 announcement we’ll have a better feel than we do today.

Brian Drab – William Blair

Right, thanks very much.

Operator

Your next question comes from the line of David Rose with Wedbush Indsutries.

David Rose – Wedbush Securities

Hey, good morning. I was wondering if I can follow up on a couple questions on the Utility side. If you could, help me reconcile the backlog decline with your expectations that you had, and I’m assuming they’re the same as Q4, that that business will be up in 2014-15. I understand there are shorter lead times but how do you get comfort and how do we get comfort that that business will be up versus the 23% year-over-year decline?\

Mogens Bay

The way we look at the Utility market is our Utility Team, they track the projects that are taking place across the country as they dialog with the utilities. And the activity level for large projects is at worst flat for 2014 compared to ’13, and the activity levels for ’15 looks like up from the current levels. Now, does that mean that utilities have locked that in? No, that’s their planning. If something happens in the general economy or interest rates spike or something like that that can change the environment.

But over the last number of years that is how we have tracked how this business has grown, and it has worked year over year. And therefore we have no reason to expect that it wouldn’t be a good way to look at the business also now. So I’m actually not so concerned about the market size; in other words, I think volume is going to be there. Pricing will dictate how attractive that business is going to be.

David Rose – Wedbush Securities

So when we think about the expansion that you’ve made in the Utility Support Structures side in large part to be more competitive, closer to where you see your customers, has that competitive landscape improved given the expansion that your competitors have had? Or would you say it’s about even or worse? And then a follow-up is does that improve your on-time delivery or expectations for delivery times?

Mogens Bay

Well clearly having more capacity and having a broader geographic footprint helps us to respond faster to customer demand. And if customers demand delivery faster than they did when capacity was an issue it’s going to help or at least retain our competitive position.

David Rose – Wedbush Securities

Okay. So really there’s no sense of they’ve gotten more competitive or that’s changed at all.

Mogens Bay

No, I don’t think so. I think the balance in capacity… I will say that between our capacity addition and the rest of the industry’s capacity addition the balance between the two probably hasn’t changed much.

David Rose – Wedbush Securities

Okay, that’s helpful. And then lastly if I may, in terms of the guidance what really affects or at least in your view what can you see affecting the top or bottom end of your expectations? So what would drive your numbers below the $10.97 number and what would drive it above, and how realistic could those be?

Mogens Bay

Well, I haven’t talked about currently driving it above, but I think the big question mark is the pricing discipline in Utility. Now Irrigation you can kind of put aside because that’s an unknown as to market demand, but in the Utility business it’s pricing discipline – because if you think about it, if it’s about a $1 billion business for us, 1% of price softening is $10 million in operating income.

Now, having said that the last few years our focus in that industry has been to add capacity, make sure we could grow our business as fast as we could grow it over the last actually ten years. We will now have enough capacity in place to take us through this year and certainly also 2015. So our focus now has to switch over to how do we make that capacity more productive? How do we address our cost structure in the Utility business?

When you grow as fast as we’ve grown I’m sure there are ways, things we have done that are not as efficient as they could be. So I will make the parallel to our Engineered Infrastructure businesses – when they went into a tough market situation several years ago they switched a lot of their focus to what they can control internally. Some of that is going to happen in the utility business, too, and so we will, if you will, switch our focus to be more efficient in what we do, more cost-effective in what we do if we have to deal with a more difficult pricing environment.

David Rose – Wedbush Securities

Have you identified specific initiatives?

Mogens Bay

Yes and we are in the process of it.

David Rose – Wedbush Securities

Okay, thank you.

Operator

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

Charlie – Credit Suisse

Hey guys, it’s Charlie for Julian. Mogens, the cash balance is pretty big now – I just was wondering if you can give us an update on capital allocation.

Mogens Bay

Yes, the cash balance is pretty good. Most of it I would remind you is offshore. And as I’ve always said about cash allocation, our priorities have not changed. We know that if we cannot find good opportunities either in acquisitions or growing our business to use our cash or to efficiently use our balance sheet then it’s our obligation to return it to shareholders, either in the form of stock buyback or in the form of increased dividends.

Our Board deals with capital allocation nearly at every Board meeting and we will again talk about it next week. So they will evaluate the acquisition pipeline and they will evaluate the alternatives. We as managers are completely lined up in driving efficient use of capital because our long-term bonus programs are tied to return on invested capital, including the cash we have on our balance sheet. So we are in the same boat as our shareholders.

We also need to make sure that we stay disciplined on acquisitions. There’s a lot of money out there today, there’s a lot of private equity activity. But we still have to stay disciplined, and when we buy a company we better beat our cost of capital within a pretty short period of time. So we are not looking at acquisitions to see if they can just be EPS accretive because of low borrowing costs. We are looking at will it really beat our cost of capital? So we stay disciplined and we know we have to look at the alternatives also.

Charlie – Credit Suisse

Thanks, and then just a follow-up. With earnings down 25% or so in Q1 you realized maybe a tough comp from last year but what gives you some confidence that that’ll kind of rebound for earnings for the year to just be down slightly? Is it weather helping out or if you can just maybe highlight a couple of the big points.

Mogens Bay

Well, to start with the last part of your question I sure hope weather will help out. I can’t imagine another three months of the disastrous weather we have seen throughout North America for the first couple of months of this year. But really part of it is the comparisons to the previous year. I’ll start with the Irrigation business.

The Irrigation business had a very, very strong first half of 2013 and that is not going to repeat itself. And the second half of the year we may settle into a more normal Irrigation season and therefore the comparisons will be better. We continue to expect improvement in our Engineered Infrastructure Products segment. I have said repeatedly that I don’t think they can get to 10% operating margin for a year without a new long-term highway bill in North America and other help from the marketplace. I may be proven wrong.

So I think we’re going to see further improvement in EIP. I think our Coatings business will continue to have strong quality of earnings, and to the extent that we can find acquisitions in that business like we did in Canada at the end of last year with Pure Metal which has been integrated very efficiently into our Coatings business. So to the extent we find these opportunities that will help, and other opportunities on the acquisition side may also help. So I think that the toughest comparison we’re going to have is going to be in Q1 for a whole bunch of reasons.

Charlie – Credit Suisse

Thanks.

Operator

Your next question comes from the line of Kevin Bennett of Sterne Agee.

Kevin Bennett – Sterne Agee

Hey guys, good morning. One question, Mogens, on the Engineered Infrastructure business: can you talk about how you see the year playing out? I mean obviously Q1 will be weaker just due to seasonality but what about the rest of the year? And then do you think we can hit that 10% margin goal in ’14?

Mogens Bay

As I just said I may be proven wrong. I think we’ll get close. I think Q1 in EIP is always a more difficult quarter, it just seems to be a bit more difficult because of weather in North America. But I think we’re going to see positive comparisons in the EIP segment both from an operating income dollars standpoint and a quality of earnings standpoint every quarter through the year maybe with the exception of Q4 where we had it very strong.

Kevin Bennett – Sterne Agee

Yeah. And then what do you see driving that? Is it the highway business in the US? Is that the international business? Is it the communication or all of the above?

Mogens Bay

I don’t think it’s necessarily the highway business in North America but our communications business in North America was substantially stronger in 2013 compared to 2012. But I think it’s kind of broad effects worldwide. In Asia-Pacific our biggest market is in Australia, and not only do we have to improve the size and the quality of our business there in local currency; we also have to overcome a weakening Australian currency. And that’s the wildcard. If the Australian Dollar continues to weaken then we will focus on how does the local management team manage in their local currency as opposed to our trying to use US dollars.

Kevin Bennett – Sterne Agee

Gotcha, thank you so much.

Operator

Your next question comes from the line of Schon Williams with BB&T Capital.

C. Schon Williams – BB&T Capital Markets

Hi, good morning. I wonder if we could just address the results on Delta here. I understand it’s a small piece of the overall company and you know you deconsolidated it here. But I’m just wondering, it looks like they lost a significant North American customer here recently. Is this a business that has any… As we look out into 2014 we should assume that it will continue to be unprofitable? I’m just wondering, is there a worst case scenario here where this is actually a going concern problem? If you can just kind of give us some sense of where this business goes over the next twelve to 18 months?

Mogens Bay

Okay, let me take you back to when we made the Delta acquisition – let’s start with that. We had a couple of businesses in South Africa – MMC and Delta EMD. Delta EMD – we consolidated MMC, we had a minority interest. At the time we said we didn’t put a value on those businesses as it relates to the total acquisition price for Delta but of course we had to put on the balance sheets our, put a value on our balance sheet. Since then we have received substantial cash out of those businesses in dividends or asset sales, and early last year we sold our minority position in MMC.

Delta EMD is a public company. It is now deconsolidated. On our balance sheet will be the value in the South African market of the shares we own in that company. To the extent the company will perform worse than it has and the share price will decline we will take that either plus or minus at the end of every quarter on our balance sheet and it will go through the P&L. It is a noncash issue. We’re not in the situation where there may be a capital pour from us into that business. This is a public company and we are merely an investor in it. To the extent we’ll get value out of this ownership we have today time will show, but we never expected to get nay value out of it.

C. Schon Williams – BB&T Capital Markets

Okay, I guess maybe to ask this a different way, Mogens, so you’ve reduced your ownership in the business. Is it your goal to over the next twelve to 18 months, I mean you would like to reduce that to zero essentially?

Mogens Bay

That’s correct.

C. Schon Williams – BB&T Capital Markets

Okay.

Mogens Bay

We would like to reduce our ownership there to zero.

C. Schon Williams – BB&T Capital Markets

Okay, that’s helpful. Then separately I wanted to maybe challenge your ideas around the Irrigation business and just the international side of the business. One of your competitors has noted that even though I guess international markets had held up better than North America the thought is that inevitably international will turn down if North America turns down. And I just wanted to get your thoughts on can the penetration of the technology and just increased mechanization, do you feel confident that that can fully offset just the macro environment and the lower farm income that international customers face? Again, I just want to kind of get a sense of why you feel that international market can hold up in the face of a declining North American market?

Mogens Bay

Are we talking about 2014?

C. Schon Williams – BB&T Capital Markets

We’re talking about 2014, yes.

Mogens Bay

The answer is yes, I think the international markets will improve over last year’s international results in 2014. I think the markets internationally are so geographically diverse, there’s so many different drivers in those markets that despite commodity price softening on a global basis I think our international business this year will be bigger and more profitable than it was in 2014. Now, I also want to make sure that everybody understands it is not of a size where it will offset the softening in the North American market. But your question was specific on the international market.

C. Schon Williams – BB&T Capital Markets

That’s very helpful, and maybe one more if I could squeeze it in here just on the Coatings business – the organic Coatings business, maybe just focusing on the US: we’ve certainly seen some leading indicators approve across industrial production starting to accelerate a bit here. Is there a bit of a delay effect to when that would start to see that improvement hit the Coatings business? I’m just trying to get your thoughts on when should we expect the organic piece of Coatings start to pick up? Is it late Q1? Is it more of a second half recovery? Just your thoughts on when organic can start to pick up there?

Mogens Bay

I would say in general the Coatings businesses are tied to the general economy. So if the general economy accelerates we’ll probably see an acceleration of the Coatings business. If a project is being implemented in infrastructure, one of the last things you do before you put it together is galvanize the steel structures that go into that project. So in that sense we’ll be late in the cycle, but I don’t think that organic growth in the Coatings segment is going to be very significant.

I think our long-term opportunities in the Coatings segment is continue to operate them very efficiently, continue to share best practices to improve the quality of earnings, and to have greenfield startups and acquisitions in that business as we have seen in the past. That’s where the growth in Coatings is going to come from, less from organic growth.

C. Schon Williams – BB&T Capital Markets

Okay perfect, thank you. I’ll get back in queue.

Operator

Your next question comes from the line of Jon Braatz with Kansas City Capital.

Jon Braatz – Kansas City Capital

Good morning, Mogens. Going back to the Utility sector, you mentioned that you expect the second half of the year in the international area to improve. Are you seeing projects out there now that you’re working on that gives you that confidence that the second half will be better?

Mogens Bay

We are working on a number of international projects and the activity internationally is stronger going further into the year. Where we’ll be successful in securing those projects, that’s too early to say.

Jon Braatz – Kansas City Capital

Okay. Is that primarily China?

Mogens Bay

No.

Jon Braatz – Kansas City Capital

Okay. Secondly, we’re hearing, I guess hearing and reading about a build-out in Canada, improvement in their grid. Do you have as much market share presence in Canada as you do here or a little bit less? And how are you working to strengthen your position in Canada?

Mogens Bay

Now, on the specific question of market share in Canada, I may tell you more than I know. But my feeling is that our market share in Canada is substantially less than what our market share is in the US. Now, we have stepped up our activity level in Canada from a sales and marketing standpoint and we are fully utilizing both our North American plants and our China plants to penetrate the Canadian market. And I agree with you – what we hear from our utility people is that activity levels in Canada are stepping up.

Jon Braatz – Kansas City Capital

Okay. You have a lower presence or a lower market share to Canadian companies or other US companies?

Mogens Bay

No, I would probably guess Canadian companies and maybe to other materials. In Canada there’s been a lot of utility lines going in over the years wood structures as opposed to steel. So part of it is trying to promote the change from wood to steel.

Jon Braatz – Kansas City Capital

I see, okay. Alright, Mogens, thank you very much.

Operator

(Operator instructions.) You have a follow-up question from the line of Arnie Ursaner with CJS Securities.

Arnie Ursaner – CJS Securities

Hi, so Mogens, if I add back the $5 million you were talking about in international your operating margin in Utility Support would have been 19% just in case you want the math.

Mogens Bay

I have the math. [laughter]

Arnie Ursaner – CJS Securities

What caused the write down of the north African project?

Mogens Bay

It’s not being delivered. I mean we have had that on our books for a number of quarters, and I won’t give you the specific country but it was a country that was caught up in, what we call in this country the Arab Spring. So uncertainty and unrest and internal strife, and it has just made it very difficult.

Arnie Ursaner – CJS Securities

So you had prepared that materials for that contract and then couldn’t deliver them or use them elsewhere?

Mogens Bay

That is correct because they are specialized products. We have some salvage value of these structures but the delta between what we thought we were going to get for these structures and the salvage value is what we wrote off.

Arnie Ursaner – CJS Securities

Okay. A couple of other quick follow-ups: I’m assuming that embedded in your guidance for the next year for the EIP piece, you’re not assuming any highway bill or major [TIFCA] funds impacting highway-related demand. I’m assuming that’s embedded in your views, correct?

Mogens Bay

That’s correct.

Arnie Ursaner – CJS Securities

Okay. Last conference call I think you mentioned people were pressing you on the capital allocation, that you had billions of opportunities in the pipeline. Is the pipeline essentially the same as you were looking at or has some material change occurred in the candidates you’re considering?

Mogens Bay

No, it’s essentially the same pipeline and we have ongoing, not only evaluation of the pipeline but talks with potential targets and you know, some of those are not ready to move; and some that are ready to move, were ready to move got a higher price than they would have gotten from us.

Arnie Ursaner – CJS Securities

Okay. Final question is Terry McClain’s wife asked me to ask you what the status of the CFO search is.

Mogens Bay

I think she’s going to be happy having him home pretty soon.

Arnie Ursaner – CJS Securities

Thank you very much.

Operator

Your next question comes from the line of David Rose with Wedbush Securities.

David Rose – Wedbush Securities

Yes, just a follow-up to the question about guidance for the remainder of the year. I think the first question was about what you expected to see the back half improve and just to be clear, you were talking about some optimism around acquisitions. You’re not including acquisitions in that guidance to see things better for the second half of the year – is that correct?

Mogens Bay

Not currently.

David Rose – Wedbush Securities

Okay great, thank you.

Jeffrey Laudin

Jody, are there any more questions in queue?

Operator

No, sir. There are no further questions.

Jeffrey Laudin

Thank you. At this time this concludes our call. We thank you for joining us today. This message will be available for playback on the internet or by phone for the next week. We look forward to speaking with you again next quarter, and at this time Jody will read our forward-looking disclosure statement.

Operator

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 materials; availability and market acceptance of new products; product pricing; domestic and international competitive environments; and functions of 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.

Thank you. That concludes today’s conference call. You may now disconnect.

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