Valmont Industries' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Feb.15.12 | About: Valmont Industries, (VMI)

Valmont Industries, Inc. (NYSE:VMI)

Q4 2011 Earnings Call

February 15, 2012 9:00 am ET

Executives

Jeff Laudin - Manager of IR

Mogens Bay - Chairman and CEO

Terry McClain - SVP and CFO

Mark Jaksich - VP and Corporate Controller

Analysts

Julian Mitchell - Credit Suisse

Arnie Ursaner - CJS Securities

Carter Shoop - KeyBanc

Schon Williams - BB&T Capital Markets

Brian Drab - William Blair

Jeff Beach - Stifel Nicolaus

Taryn Kuida - D. A. Davidson

Operator

At this time, I would like to welcome everyone to the Valmont Industries' fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Jeff Laudin, Manager of Investor Relations.

Jeff Laudin

Welcome to the Valmont Industries' fourth quarter earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer; Terry McClain, Senior Vice President and Chief Financial Officer; and Mark Jaksich, Vice President and Corporate Controller.

Before we begin please note, this discussion is subject to our disclosure on forward-looking statements, which applies to today's talk and will be read in full at the end of the call. The instructions for accessing a replay of this call can be found in our press release.

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

Mogens Bay

Good morning, everyone, and thank you for joining us. I trust you have all read the press release, so I will focus on some of the highlights for the quarter and for the year. The main drivers of fourth quarter operating results were significant sales increases in the irrigation and utility businesses and great operating leverage in the Utility Support Structures, Irrigation and Coatings segments.

One-time items previously discussed in December were noteworthy to our reported results. Excluding the one-time events, fourth quarter earnings per share were $1.83. In the Irrigation segment, positive momentum driven by a strong farm economy continued during the fourth quarter.

Favorable weather conditions and an early harvest in North America bolstered already strong farmer sentiment which further benefited sales. In international markets, the same drivers of firm commodity prices with high relative farm income supported our business and led to widespread demand in almost all of our major markets.

Positive comparisons in the Utility Support Structures segment resulted from increased volumes and operating leverage. The utility market continues to strengthen and grow. As a result, new players from other industries are entering the marketplace, and as consequence the pricing environment while improving remains challenging.

Sales in Engineered Infrastructure Product segment rose modestly. Operating margins, however, did not follow suit and remained unsatisfactory. They also reflect the previously mentioned one-time charges in the quarter.

Operating margins remain under pressure largely due to a continuation of weak demand and a difficult pricing environment. A bright spot in this segment is the positive contributions of the former delta businesses in Asia-Pacific, which are operating well.

Our North American Coatings business benefited from higher industrial demand, including demand from our other segments. International Coatings revenues and earnings improved, due to a favorable business environment in Australia and Asia.

Turing to other financial measures, you will notice that the corporate expenses were higher than last year. The major reason for this are increased incentive compensations, consulting cost related to the company's legal entity restructuring and normal adjustments that take place in the fourth quarter.

Going forward, we would expect corporate expenses to run around $12.5 million to $13.5 million for the quarter. The tax rate for the quarter were out of the one-time items, would have been approximately 33%, which is what we expect on a go-forward basis. Inventory increased compared to last year, due to the higher activity levels in Irrigation and Utility.

Depreciation and amortization for the quarter was $22 million and capital expenditures were $37 million, putting the annual depreciation at $75 million and total capital expenditures for the year at $83 million. At the current time we are expecting depreciation at $70 million and capital expenditures of $75 million in 2012.

The full year results reflect many of the same dynamics as the quarterly results. Irrigation market has strong fundamentals, good commodity prices and record farm income. Revenue in the Utility business grew over 30% driven by renewed investment in the North American transmission grid, somewhat offset by lower activity levels in international markets.

The Coating segment had good results over the year, reflecting stronger than expected industrial demand in our markets and improved internal demand. A full year of contribution from the former delta businesses further contributed to our results.

The biggest challenges we faced in 2011 was weak markets in our global lighting and traffic businesses, due to pressure on government funding for infrastructure. Pricing became very competitive and an increase in steel cost in the first part of 2011, put further pressure on profitability.

Yearend is a good time to reflect on the soundness of our strategy as a company. Nearly two decades ago, we put together Valmont's strategy. It has not changed since then. It has served us well, delivering approximately 15% compounded return to shareholders over that period of time.

It's easy to communicate and focused strategy is one of leverage. We leverage what we do well. We take products we know well to new markets. We add new products to markets we know well and we take capabilities and build businesses along them. We focus on two major markets, agriculture and infrastructure, which have strong, global and enduring drivers and we have established strong leadership positions.

Our outlook for 2012 is positive. We are off to a very strong start to the year. The Irrigation business continues strong in the current selling season and we have strength in the Utility and Coatings businesses. A weak spot continues to be the lighting and traffic businesses. We should have a very strong first quarter. For the year, we expect to see revenue increase around 10% and earnings per share to be in the range of $7.30 to $7.60.

One final note, as you noticed, Terry, our CFO was introduced at the beginning of this call. We continue our recruiting efforts for Terry's successor. It's a very important position at Valmont. There's no urgency to the search, as Terry is happy to continue in his role until we find the right candidate. We started our search early and we will continue to search for candidate that is the right fit for Valmont's culture.

We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Julian Mitchell from Credit Suisse.

Julian Mitchell - Credit Suisse

I guess my first question was on your Utility business. You mentioned that pricing was tough due to new competitive sort of through the year, but it sounded if there was an improvement towards the end. Is there any way you could quantify that? Maybe talk about how much of the backlog growth from December-to-December came from price versus volume? And have you seen pricing change, if it has in quotation activity and bookings of when that might feed through into your billings?

Mogens Bay

Overall, first of all the increased revenue in utility is all of it is volume-related. When we talk pricing seeing in it difficult from project to project, some projects we have apprising, some we have to be more aggressive but at the end of the day, it may move the operating income to cover the percentages one way or the other.

And the Utility business because of its project nature is kind of lumpy as to when these projects come through and we will expect from quarter-to-quarter to not have an exact profitability being at the same level for they will go a little bit up and down. And we still we haven't the backlog. Some projects that were taken last year at more competitive pricing that we normally would like. But by in large, we're expecting the quality of the earnings for utility in 2012 to be improved over 2011.

Julian Mitchell - Credit Suisse

And then secondly, just on the EIP segment, you talked about it sounds if that should be up overall in sales and EBIT in 2012 versus 2011 despite that you say that government been a financial constraint, you talked about in the release. And also I guess despite the fact that the telecom market sourcing is pretty soft. You talked about U.S. being flat and China being lower in Q4. So could you give a little bit more color within EIP and what your expectations are for 2012, the different pieces inside it?

Mogens Bay

I think we currently expect some improvement in revenue not a lot. It looks like pricing which is not at a level we like but at least it looks like it has stabilized. We have done quite a bit in cost takeouts. As we have talked about before in Europe we have taken cost out of several units there. We have closed our Italian operations. We are exiting or we have exited our Turkish joint venture.

So what we have tried to focus on is, one, keep our markets share in the tough pricing environment, taking out cost and improving profitability. So we expect going into '12 that as a result of what we have been able to do from a productivity standpoint and cost-take out standpoint, everything else is even. We will see an improved profitability.

Julian Mitchell - Credit Suisse

But are you expecting sort of access systems, communications and lighting and traffic all of those should be up in '12 versus '11?

Mogens Bay

We expect most of the sub units to be up in '12 compared to '11. Yes, and I agree with you communication continues to particularly in North America to be fairly soft. The big merger between AT&T and T-mobile did not happen. So we would expect that each of those two companies will revert to the plans they had prior to announcing the merger.

Operator

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

Arnie Ursaner - CJS Securities

Want to focus first one the Utility business, your backlog has improved quite dramatically. I know you only give it to year end but could you also broadly comment on trench changes you've seen in the last month or two, as it continuing to expand. And then I have a more specific follow-up on that.

Mogens Bay

The activity levels in utility continues to expand.

Arnie Ursaner - CJS Securities

So in the past when you've had this much backlog, you sometimes shift some manufacturing to your Engineered Support Structures. We are in environment of where that could occur and frankly, the last time you had this kind of backlog your margin end of business was north of 20%. In the competitive environment we're at now, I assume that's not a achievable goal but maybe you could comment on what you do thing is achievable?

Mogens Bay

Let me start with the capacity question you first asked. Yes, we are using capacity outside the traditional Utility plants. We have added capacity at or we are in the process of adding capacity at our Brenham, Texas lighting and traffic plant, which actually added some expenses that were up soft in that business unit in the third and fourth quarter last year as we hired and trained new people.

And we will continue that. That's one of the advantages we have is that we can take capacity from maybe a weaker segment lighting and traffic right now. And help the Utility segment. The same we're using international capacity. We are using significant capacity at the Utility plant in Mexico but also we are trying to use capacity out of our China operations.

When it comes to profitability, several years ago we had 20% overwriting income of that business and as I have talked about several times it was the perfect storm. We took business at the end of the year before that when still prices were very high and those that were not tight to still prices with escalators and deescalators were delivered when steel prices were as comparatively low. That added tremendously to the profitability opportunity. And yes, we should not expect that going forward.

I would expect overtime that the Utility business in a strong environment were settled in around 15% operating income. Some quarters a little less, maybe some quarters a little more. But in general around mid-double digits is what we should expect.

Arnie Ursaner - CJS Securities

Is 2012 a year we should expect that?

Mogens Bay

We should expect in 2012, some quarters it's a little bit less, maybe quarter is a little bit more, but we should be moving towards that target.

Arnie Ursaner - CJS Securities

And then I have a clarification question if I can on the EIP product segment outlook for 2012. You mentioned you expect increased sales and profitability and you mentioned specifically some improvement in revenue. But my question on profitability is you had a $4 million one-time item that hit Q4 in that segment.

When you speak about improved profitability, are you referring to that on a reported basis, which included that $4 million hit or on an adjusted basis, which would eliminate that $4 million hit? Well, again, the more important one would be on the adjusted basis. So you are talking about a pretty noticeable improvement in profitability even in a flat environment?

Mogens Bay

Yes, I mean, we are not only talking about offsetting the $4 million charge we took in the fourth quarter. We are talking about profitability even on an adjusted basis improvement.

Operator

Your next question comes from the line Carter Shoop from KeyBanc.

Carter Shoop - KeyBanc

For the first question, can you give us a little bit more color about your expectations for the first quarter at a corporate level?

Mogens Bay

Yes. I can tell you that we are off to a very strong start in the first quarter and we expect a strong favorable comparison to first quarter of last year. It is partly a result of continued strength in this selling season in the Irrigation business, good levels of activity in Utility and Coatings. And we have been faced with very favorable weather conditions in the first quarter.

As you will recall in the past, sometimes we have had issues in the first quarter, battling snow storms or blizzards. And in the first quarter of this year that certainly is going to be an explanation.

Carter Shoop - KeyBanc

So we shouldn't expect the same type of sequential decline that we've seen in the past two years, in the first quarter, is that safe to assume?

Mogens Bay

I don't understand your question.

Terry McClain

You said sequential, Carter?

Carter Shoop - KeyBanc

Yes.

Terry McClain

Again, as we've always cautioned people in this kind of a seasonal and cyclical business, sequential quarters is not the way we really approach it. We usually compare it against a year ago. So you still have the beginning of the construction season in North America in that first quarter.

Carter Shoop - KeyBanc

So if you look at earnings per share growth in fourth quarter on a year-over-year basis is about 39%. It sounds like we should be expecting that to accelerate that on a year-over-year basis in the first quarter?

Mogens Bay

I think we've given you as much guidance on this first quarter we're going to give you. It's going to be strong first quarter.

Carter Shoop - KeyBanc

Can we shift over to the Irrigation business, the margins there were a little bit below what I was expecting. While healthy it was the lowest margin for the full year relative to the other quarters. Is there something going on there in that quarter that drove margins a little bit below planned? And do you expect that to rebound in kind of 15% to 16% range, a good number to think about as you go into 2012?

Mogens Bay

Well, let me first say that, of all the questions I could anticipate, one about concern about Irrigation profitability was not one of them. But specifically addressing your question, again if you compare fourth quarter Irrigation this year to fourth quarter Irrigation last year, the quality of the earnings were up nearly 1% is fund in operating income.

And expecting this kind of profitability in this environment is what we'll expect again. If you move a few percent of points above, but I'm depending on how well things move through the plans and where on the world we're getting the business. So they are many things that impacted. But I can only say that I am very pleased with how the Irrigation business is performing.

Carter Shoop - KeyBanc

In the third quarter the year-over-year margins improved by about 380 basis points and then fourth quarter its closer to 60 basis points. I wasn't sure if anything is happening there, but I think I understand your position on that now. That's helpful. And then lastly, when you look at the charges in the quarter, excluding the tax items, were those in the cogs line or in the SG&A line at a corporate level?

Terry McClain

They were largely in the SG&A line.

Operator

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

Schon Williams - BB&T Capital Markets

I wanted to maybe look a little bit further out. Obviously, you continue to be very bullish on the Irrigation side of the business. And I think that I certainly would echo those thoughts. I think that we've got at least another kind of 12 to 18 months of good solid growth there.

But I'm wondering if, is it inevitable that as we move into 2013 and 2014, and most of the macro level forecast are for ag commodities to start to decline, maybe farm income start to tick lower. Is it inevitable that as we move into 2013 that you start to see sales declines in that division or in your mind do you have additional catalyst that can maybe offset some of those macro headwinds? I'd like to get your thoughts there kind of more long-term?

Mogens Bay

Well, first of all, in the Irrigation business having been in it for 30 some years. Nothing is inevitable. But I would say that I do not expect that from a macro standpoint and long-term we're gong to see headwinds in general. That doesn't mean that we can't see headwinds in shorter terms. This has been a cyclical business. It will probably continue to be a cyclical business.

But every time you exit a cycle, the next peak is higher than the previous. And when you get into a down cycle, the bottom always is higher than the previous bottom. But when you look at what's happening globally in the demand for grain, it continues to go up. It's driven on one hand by population growth or probably even more important by improved diets in countries like China and India or when people move out of property and into a middle class, the first thing they do is improve their diets, which puts much more pressure on grain productions.

So I do not have a crystal ball that would tell me what 2013 is going to be. I don't even have a crystal ball that will tell me what the second half of this year will be. The current selling season look strong. It finishes in late spring. In early fall we start the next one.

Currently, there's nothing out there that would indicate that headwinds would hit us, but during the summer time depending on growing conditions not only in this country, but around the world that would dictate commodity prices and in turn commodity prices will dictate farm income. And the closest correlation to short-term sales is net farm cash income.

So cyclicality has not disappeared from the Irrigation business. But predicting the cyclicality is very, very difficult. And long-term, the drivers are strong, as I have ever seen them. I just came back from a North American dealer conference earlier last month, and I have never seen the dealers more optimistic than they are right now. But again they don't have a crystal ball that's any clearer than the rest of us.

Schon Williams - BB&T Capital Markets

And then maybe to switch gears and I'll follow-up on one of Arnie's questions. The Utility segment, again, the last time that we saw backlog at this type of level was 2008. And subsequently in 2009, I want to say, you put up sales growth in that division in closer to 50%. And I want to talk about, is there something different about where we are today versus where you were in of exiting 2008. But said that, that 50% type sales growth, is there anything that says you could not achieve that type of number as we move into the 2012?

Mogens Bay

We are all ready right now at substantially higher volume. Pricing is not what it was at the end of 2008, when we took orders at very high steel prices and steel prices to a great extent dictate what the eventual revenue number is going to be. So speaking of 50% increase in our revenue for the Utility segment in 2012 over 2011, I can tell you is out of the question.

Operator

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

Brian Drab - William Blair

Just how delta has performed overall since the acquisition, if we could just measure the performance and growth there? And however, you can layout a scorecard for us that would be really helpful?

Mogens Bay

I did mention in my prepared remarks that we are very pleased with the performance of the former delta businesses in the Asia-Pacific region. We are also pleased with the performance of the delta galvanizing units in North America. So all-in-all in total, we probably couldn't be more pleased with how the delta businesses settled into Valmont. They are meeting the expectations we had at the time of the acquisition and we are pleased.

Brian Drab - William Blair

Can you give me any sense though in terms of how they've grown? What those expectations were or these businesses going at low-single digit, high-single digit rate overall?

Mogens Bay

In total the businesses we are in and the markets we are in have not exactly been in general very blunt, because of the low economic growth around the world. But these businesses have been growing and they continue to deliver operating income at double digits.

Brian Drab - William Blair

And any particularly strong business that's outperformed your expectations, any specifics on the Donhad business maybe or the industrial access systems business? Any more specifics you can give us? The reason I'm asking this follow up is just because it's such a big part of your business now and investors typically are largely focused on Utility and lighting and traffic. And this is a substantial part of your business that I feel like I don't have enough understanding.

Mogens Bay

So let me give you in general, the access systems have done well. They have done very well compared to exactly what we expected. Donhad is doing well. The galvanizing business is doing well. And the structure of businesses Utility is doing well. And the lighting and traffic businesses have been faced with the same kind of headwinds that we have seen elsewhere in the world.

Brian Drab - William Blair

I think that people are very excited about the opportunity in the Utility market. But I take so many calls from industrialists indicating that people have a lot of difficulty understanding exactly what in the near term is driving the Utility growth? And I think it's clear in the long-term, the grid needs to be improved and reliability needs to be improved. But it would be helpful for people to hear in your words, the shorter term factor, so that the recent factors that are driving Utility, changes with the American FERC and the energy act and why are we seeing the growth now?

Mogens Bay

It's the same growth in my opinion that started several years ago. And it's the same drivers of improving reliability, improving the grids, connecting alternative energy such as wind and solar to the main grids. That's the long-term drivers, but they are also now the short-term drivers.

We had a dip in 2010, but that I think was mostly driven by the fact that liquidity drive up and access to dip drive up. A year later, that started settling down and the utilities have access to money to finance their projects and they have plenty of projects on the drawing board. And when we look at what are on the drawing board of the utilities for this year and next year, and even starting looking into 2014, we see continued strength in their business.

Operator

Your next question comes from the line of Jeff Beach from Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

Because it's the area of interest for me, I wanted to see if I could get a little bit more information on the utility structures. The revenues were so strong in the fourth quarter, is that you would view as representative of the demand or where there some large shipments instead may have boosted in and made that fourth quarter look as strong as it was?

Mogens Bay

I would say that in general it's a reflection of demand. As I have said earlier, some of these projects are large and some of the shipments can be lumpy and move from one quarter to the other. But in general what we have seen in the last couple of quarters in the utility is the reflection of the continued strength and growth in that market.

Jeff Beach - Stifel Nicolaus

And then this will be my stretch question but can you give us a sense as to the magnitude of capacity increases as you convert your lighting lines over and the timing of when capacity will come on streaming in 2012 and whether some capacity has already come up on stream?

Mogens Bay

Some capacity has already come on stream. With that capacity available and some plants around the world that we hope we will utilize. And lot of that also depends on the product mix. It's not just seeing a lighting plant can be converted to a utility. A large pole facility that has been serving maybe high mast lighting or sports lighting can be converted. And it's not really a question of conversion. It's just a question of producing products for the Utility industry instead. But you can't convert a small pole line to suddenly be a large pole utility line. But we will continue to find opportunities to stretch capacity and to add capacity.

Jeff Beach - Stifel Nicolaus

And there is more plant capacity coming on stream for this year?

Mogens Bay

Yes.

Operator

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

Taryn Kuida - D. A. Davidson

This is Taryn Kuida filing in for Brent. Most of my questions have been answered. But I just had a couple of follow-ups. In regards to the Australian flooding has your business been destructed or has there been any material destructions?

Mogens Bay

We've had some effects of the Australian flooding particularly in the Queensland area that had some impact on some of our business but not in a material way. Last year that was not the case.

Taryn Kuida - D. A. Davidson

In regards to the coating business, there has been strong improvement in that segment. I was wondering what the leading drivers were for that and if you've been seeing any price increasing?

Mogens Bay

Well, actually, mostly what we have seen in that business is probably more strength what we would expect from industry in general, both in Southeast Asia and in North America. We have seen more throughput from our other segments that's been the good pricing discipline in that area. And as you add volume you get very good leverage.

Operator

Your next question comes from the line of Carter Shoop from KeyBanc.

Carter Shoop - KeyBanc

Just a few more housekeeping questions. When you retool an Engineered Infrastructure facility to start handling the Utility products, how does that impact divisional operating profitability? You mentioned that there's a tooling charge in the fourth quarter, is that impacting the Utility business or the Engineered Infrastructure facility? And then as that capacity comes on mind is that going to be benefiting more in Utility or Engineered Infrastructure, or both?

Mogens Bay

Let me start by saying, we don't necessarily retool, we transfer from one product line to another using the equipment we already have. In the fourth quarter, we were in the middle of adding capacity to our Brenham, Texas plant, which is going to be allocated through Utility, but it fits in the Engineered Infrastructure segment. They absorb the cost in getting best additional capacity ready. Whenever the capacity starts getting used, there is a transfer price mechanism between the Engineered Infrastructure business and the Utility business.

So to answer your question, both segments will benefit. The Engineered Infrastructure segment will benefit of being able to utilize capacity that they would maybe not be able to utilize, because of their weak market conditions. And Utility will benefit from not having to add additional capital to build the plant exclusively for them. They will have to in a way split some of the margin. But in our opinion, both segments benefit.

Carter Shoop - KeyBanc

And then, below the operating income line there interest expense jumped a little bit sequentially. And then other expenses are a little bit higher than we're expecting? Anything going on there worth talking about, at this point?

Mark Jaksich

Carter, this is Mark Jaksich. You get to realize also that the fourth quarter of this year was a 14-week quarter as opposed to last year it was just 13 weeks, again extra week of interest across the system. But in other income there were really two items. Part of it was foreign exchange transaction losses that we incurred and about $1.5 million of expense related to translation losses as we are unwinding our joint venture in Turkey. And that particular item is part of the one-item adjustments that we referred to in the opening remarks.

Operator

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

Julian Mitchell - Credit Suisse

I had a question on the various businesses, fasteners, (inaudible) metal products and so inside. Others EBIT last year was sort of higher than EIP. So it's becoming a pretty important driver. Could you just give an update on the trends and I guess longer-term the strategy? I mean, is there an ambition by M&A or something else to focus on two or three units inside rather and build into it a sort of a discreet normal kind of fifth lag or how are you thinking about it?

Mark Jaksich

That other category includes basically three businesses. The largest piece of that is the grinding media business that we referred to as Donhad. It also includes our tubing business and it also includes the manganese dioxide business that we own a majority of.

And I want to share that is, is the grinding media and as we mention that that business is operating well. The tubing business is the next largest in terms of size and they had a very good year as well. They continue to perform very well in good markets and they're kind of fifth lag a little bit by the agricultural market as well. So those are businesses that really don't fit in any of the other segments.

Mogens Bay

And you had a strategy aspect to your question too. There's no strategy to create another segment based on what fits in others right now. They fit in others, because they don't fit in the other segments and they are not big enough to be a segment of their own.

Julian Mitchell - Credit Suisse

And then just a follow-up, obviously, in your backlog across the board is up strongly. You talked about some capacity additions in Utility, I mean your overall CapEx budget though is down sort of just under 10% in '12 versus '11. So could you maybe clarify is there just one or two big projects that are coming to an end and that's why?

Mogens Bay

Well, a part of the capital expenditures in 2011 is our new plant in India. And that plant is being commissioned and getting ready to go right now, so that we will not have this year. And the capacity expansion particularly in the Utility business as we're expanding to current plants is really not that capital intensive.

Operator

Your next question comes from the line of Jeff Beach from Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

Considering the potential for strong sales through '12 and end of '13 in Irrigation and the transmission structures, these are both the big users of your galvanizing. Do you have enough capacity currently to meet strong market demand in '12 and into '13, without adding new capacity? And then as this volume grows and a lot of it is internal, does that have continued positive margin implications?

Mogens Bay

On the galvanizing question, yes, we have plenty of capacity. And to put in perspective, our total galvanizing revenue, less than 20% is internal volume, and that's in North America and even less than that percent is in Southeast Asia. So capacity in the galvanizing business is not going to be a problem.

Jeff Beach - Stifel Nicolaus

And is there leverage from again continued growth, if the revenues continue to ramp higher. Is there leverage that helps the average margin move higher year-to-year?

Mogens Bay

What you have seen in the Coatings business that the quality of the earnings over the last few years have been increasing. And it is a result of better leverage. These facilities levers well when volume comes through.

Operator

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

Arnie Ursaner - CJS Securities

Just did want to follow-up on one, your Irrigation backlog almost doubled year-over-year. Can you just give us a better sense of how we should think about when you ship your backlog there? Wouldn't the majority of that hit in Q1?

Mogens Bay

Yes. The backlog were not quite a bit towards the end of the year, part of that was probably tax considerations and because of the good weather patterns, the season maybe a little earlier. And yes, probably all of that backlog will be shipped in the first quarter.

Arnie Ursaner - CJS Securities

So again, knowing from a manufacturing point of view, which is always one of the challenges. How do you schedule the manufacturing of pipe and ship pipe, given that you went into the quarter with the backlog? Wouldn't you expect pretty noticeable positive margin performance from that segment in Q1?

Mogens Bay

Well, you know like in the other businesses if you have very strong volume going through, you tend to see some leverage opportunities. And our Irrigation business has done a very, very good job of reacting quickly to the increased demand in that business.

Our whole effort on lean and what we call The Valmont Way, has really gotten good traction within the Irrigation business. The last time the Irrigation business had a very strong year apart from '11 was back in '08. And at that time, we were less prepared to react quickly to that tremendous uptick in volume. Over this last 12-plus months, they have done an outstanding job in getting that done.

Arnie Ursaner - CJS Securities

Partly or briefly touched on it, but in your prepared remarks you spoke about the successful development in new markets, you mentioned clearly India. Can you speak about your outlook for these new markets, which ones you are in and how you're targeting making for the progress in these new markets?

Mogens Bay

Well, in general, we got into a number of new markets with the delta acquisition in Southeast Asia. We established a regional headquarter in Sydney, so we have a fulltime Group President for Asia-Pacific that lives in the region. And we have lots of activities going on in that area.

We had not done much in India except exporting into India over the years. And we decided early last year that that would be the next frontier for us in the Structural businesses and in the Coatings business. We approved and have now built a plant for lighting and utility structures in India. And we have built, I think the largest galvanizing plant in India, both of those will be up and running in the first quarter.

Now, it takes a while for those businesses to get the traction, so they are not going to have any meaningful impact on our overall earnings for a while. When you look at the Irrigation business, we have been global for a long, long time. But we are focusing a lot on the markets in the former Soviet Union, Russia, and (some of Sudan). And we are seeing good progress in those markets also.

Arnie Ursaner - CJS Securities

I think on Irrigation one more, second, again if order is free like it is in California, there's very little demand for people to shift from drip irrigation or flood irrigation. With the droughts we're seeing and with the pretty significant change in the views towards water. Are we seeing any legislative changes that are forcing people to approach water differently as opposed to a free commodity? And are you actually seeing impacts from droughts and perhaps legislation driving people towards center pivot?

Mogens Bay

Well, the answer is yes. Globally, you'll see in countries that have issues with the quantity of water they have available for food production, they are taking actions to restrict either the amount of water a farmer can use per acre or they may put a price on the water. And both of those will be drivers for our center pivot business.

I mean, the business we are really in is using water for large scale agriculture more efficiently than alternative ways of irrigating. So any movement anywhere in the world towards really paying attention to the amount of water available and how it's used will support our business.

Mark Jaksich

And Arnie, we've seen this for many, many years actually in the form of different kinds of regulation. In North America, it was state-by-state, in some cases district-by-district, where regulation was put on sometimes as a result of a drought, sometimes as a result of some other abnormal uses that were going on in an area. And that will continue. The pricing of water is not likely, but the regulation as a result of local conditions has been going on for many, many years.

Arnie Ursaner - CJS Securities

Back to your guidance review, that your run rate corporate expense would be $12.5 million to $13.5 million. That's well above what you have been running in the past, which was more $10 million, $11 million on a run rate basis. What is embedded in that, much higher bonus accruals or other factors that are causing a permanent shift in your base number if you will?

Terry McClain

Arnie, if you looked at the 2011 figures rather, the $60 million would suggest a $15 million run rate, reflects higher incentives than what's kind of embedded in that $12.5 million to $13.5 million figure. The incentives are higher than the kind of the base level due to the performance of the company.

And we had still continued to have some expenses that went through corporate related things like the delta legal entity restructuring, and some carry on things related to that. So really I think we've consistently said overtime that that quarterly run rate would be in the $12.5 million to $13.5 million rate based on a normal trend related to incentives.

Operator

And there are no further questions in queue.

Jeff Laudin

With no further questions. Sarah will now read our disclosure on forward-looking statements. We thank you for joining us and we look forward to our next call.

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 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 can cause them to differ materially from those anticipated in the forward-looking statements. These factors include among other things, risk factors described from time-to-time in Valmont's reports to the Securities and Exchange Commission, as well as future economic and market circumstances, industry conditions, Company performance and financial results, operating efficiencies, availability and price of raw material, availability and market acceptance of new products, product pricing, domestic and international competitive environments and actions and policy changes of domestic and foreign governments. The Company cautions that any forward-looking statement included in this discussion is made as of the date of this discussion and the Company does not undertake to update any forward-looking statement.

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