Valmont Industries' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Jul.25.12 | About: Valmont Industries, (VMI)

Valmont Industries, Inc. (NYSE:VMI)

Q2 2012 Earnings Call

July 25, 2012 9:00 a.m. ET

Executives

Jeffrey S. Laudin - Investor Relations

Mogens C. Bay - Chairman and Chief Executive Officer

Mark C. Jaksich - Vice President and Controller

Terry McClain, Senior Vice President and Chief Financial Officer

Analysts

Schon Williams - BB&T Capital Markets

Carter Shoop – KeyBanc Capital Markets

Brent Thielman – D.A. Davidson

Arnold Ursaner – CJS Securities

Brian Drab – William Blair

Jeffrey Beach – Stifel Nicolaus

Jon Braatz – Kansas City Capital

Operator

Good morning. My name is Holly, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Valmont Industries, Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

I'll now turn the call over to Jeff Laudin. Please go ahead, sir.

Jeff Laudin

Thank you, Holly. Welcome to the Valmont Industries' Second 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 C. Bay

Thank you, Jeff and 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. The main driver of second quarter results was substantial increase of Utility Support Structure segment sales and operating income, record second quarter Irrigation segment sales and operating income, and record Coatings operating income.

The quality of our earning improved with operating income as percentage of sales increasing from 10.3% to 12.7%. We are pleased with this level of operating income particularly considering our largest segment, the Engineered Infrastructure Products segment continued to face very difficult market conditions in the Lighting and Traffic businesses, particularly in the US and in Europe.

Profitability in the Utility Support Structure segment more than doubled and were 12.5% operating income as a percentage of sales. We absorbed in the quarter a significant financial penalty in connection with one large order experiencing productivity and quality issues. Absent these costs, operating income as a percentage of sales would have been in the mid-teens, which is the level of operating income we’d expect for the balance of the year.

The outlook for our Utility business remains very strong, and we continue to get confirmation from the marketplace that this high level of activity will last for a number of years. We are adding capacity in Oklahoma, in Pennsylvania, in Texas, and in Mexico. These additions are all part of, or adjacent to current facilities. We will continue to rely on some of our overseas plants when economic considerations, such as exchange rates, freight costs, etc, allows us to do so.

Our Irrigation business had a great quarter exceeding last year’s record second quarter both as it relates to sales and operating income. In 2011, we had a later selling season than we experienced in 2012 where we benefited from favorable weather conditions in the first quarter of this year. Currently, summer sales are following a more usual pattern, less business from storm damage, but continued strong part sales as equipment is being utilized aggressively in this very dry environment in North America.

Sales in our International markets were also up as compared to the same period in 2011. In North America, we are experiencing very widespread drought conditions. Such an environment would typically indicate a strong fall selling season. At this time, it is too early to determine whether revenues in the second half of the year will match, or surpass last year's record performance. One concern would be if this drought continues for much longer, it could lead to water pumping restrictions in certain parts of the country.

Our Coatings businesses continue to operate very well. Sales increases in North America basically offset lower revenue in the Asia-Pacific markets. We are seeing a very high quality level of our earnings in this segment benefiting from moderating zinc prices and lower energy costs. Going forward, we expect strong performance from this segment for the rest of the year and we would be pleased if we could match the recent earnings quality.

We have commenced operations in India at our galvanizing facility there, which is built adjacent to our pole plant. And we expect to generate meaningful custom galvanizing in that country, but it will take time to build up volume.

The Engineered Infrastructure Products segment had increased revenue and operating income. In the US, we welcomed the passage of a two year Highway Bill. We would much prefer a longer bill enabling local governments more visibility, but is a start and demonstrates an understanding on both sides of the aisle of the importance of this funding. While the two-year bill reduces uncertainty and probably improves the mood of the market, we do not expect much benefit in the near-term.

Other areas of our North American Structures business improved. With the AT&T and T-Mobile merger off the table, our Wireless Communications and Components businesses saw a meaningful improvement in revenue and earnings. We also saw some improvement in the Commercial Lighting market and we added additional revenue from internal demand for utility structures.

In Europe, the market continues very difficult with too much capacity chasing too little business, resulting in a very competitive pricing environment. In the Asia-Pacific region on the other hand, sales and operating profits were higher, led by increased sales of access systems. In China as the economic growth rate has slowed, we are refining our business model there to put additional focus on export opportunities to some of our International markets.

Those businesses categorized in Other had improved results led by our Tubing business, which benefited from improved industrial and agricultural market demands.

Turning to other financial measures, the tax rate for the quarter increased to 34.3%, reflecting a higher mix of US profits compared to the same period in 2011. Furthermore, last year we realized the one-time tax benefit in the second quarter. The impact of currency translation on operating income was a -$1.7 million as a result of a strengthening US currency.

Inventories increased compared to last year to support the higher sales level.

Depreciation and amortization for the quarter was $17 million and capital expenditures were $19 million. We expect depreciation at about $70 million and capital spending for the year to be around $100 million, which includes capacity additions.

Looking towards the remainder of the year, we continued strength in the Utility Support Structure segment. And the Engineered Infrastructure Segment part, we expect improvement in the Asia-Pacific region but continued weak markets in Europe and North America. In the Irrigation business, we will update you on our third quarter call on the expected impact of the drought in North America on the second half revenue.

We currently maintain our expectations for full year earnings to exceed $8 per share and believe that the existing market consensus is achievable. We will now take your questions.

Question-and-Answer Session

Operator

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

Unidentified Analyst

Hi, guys. It's actually Charlie for Julian. Just wondering, we saw really strong margins Coating segment. Obviously, you mentioned some lower energy costs and lower zinc prices. Just didn't know if you could quantify on the $19.5 million in operating profit up about $4million or $5 million year-over-year. I didn't know if you could put a dollar number on what the benefit was from lower zinc prices.

Mogens C. Bay

I don't think I can give you a dollar amount but I would say that the majority of the increase in the earnings quality in the quarter came from a better input environment.

Unidentified Analyst

Okay. Great. And then you had spoken before about lower priced orders kind of in your Utility backlog. One question on Utility is how much longer will that last? Obviously, you guys had a high earnings number, but just from an incremental standpoint it looked a little low. So how long will take for the low priced orders to kind of work through the P&L? And then also given the capacity additions and seeing new competitors emerge, how do you see the pricing environment? I know you guys had touched on that last quarter. Thanks.

Mogens C. Bay

Well, I must start by saying over the last number of quarters I have indicated that we would expect the earnings quality in the Utility business to be in the mid-teens on average in a good market environment and we are seeing a good market environment. I mentioned in my prepared remarks that absent the one-time costs in connection with a big order, we would have been at the mid-teens in the second quarter, and we expect third and fourth quarters to be in the mid-teens. So basically that doesn't mean that we'll never have a low priced order, but we think we are through the period of time where the low priced orders from ‘10 and ‘11 had such an impact that we could not reach the mid-teens.

Unidentified Analyst

Perfect. And then how about the pricing environment? I know that you had said normally in an environment where there was not enough capacity to supply the market that you would get kind of better pricing, but some of that you were not realizing just from new competitors. Has that changed?

Mogens C. Bay

Well, I think that as the market has continued to strengthened, we have seen a better pricing environment, which is what will take our operating income percentage to the mid-teens and hopefully stay there. Now in a market as buoyant as the one we see in Utility, we also continue to see new players entering the market, or players from other structural businesses try their hand in the Utility business. So there will be a competitive pricing environment going forward, but we expect that on balance and with a number of orders that probably better priced than others that on balance we will be around the mid-teens in operating income percentage.

Unidentified Analyst

Thanks a lot guys. I'll hop back in.

Mogens C. Bay

Thank you.

Operator

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

Schon Williams - BB&T Capital Markets

Hi, good morning.

Mogens C. Bay

Morning, Schon.

Schon Williams - BB&T Capital Markets

I wanted to focus here first on the EIP segment. You talked about the strength within the telecommunications structures. I'm just trying to get a sense how much of that was kind of pent up demand from the AT&T merger versus how much of that is sustainable going forward. Can you just give us some indications about your thoughts in terms of growth rates accelerating, decelerating maybe over the next couple of quarters?

Mogens C. Bay

I will say that we saw an improvement in the market conditions in the Wireless Communication part of our business and I think we had seen a contraction as everybody was waiting to see what happened in the merger between T-Mobile and AT&T. So I think we are reverting to a more sustainable level of business, so I don’t think we're just seeing a pent up demand that will go away. I think we have seen an improvement in the market condition that we think will continue.

Schon Williams - BB&T Capital Markets

Okay, thanks you. And then when I go back and look at the last time we got an extension of the Safety Lou [ph], the Highway Bill back in 2005, it looked like it took some time for that to truly flow through to your numbers. I mean you saw growth in 2006, but it wasn’t really until 2007 when growth really started to accelerate within that Lighting and Highway business. I'm just wondering could it be end of 2013, end of 2014 before we start to see some real movement from this Highway Bill, or could it be sooner than that?

Mogens C. Bay

I think your observation is correct, and I think I mentioned it in my prepared remarks that we do not expect any short-term benefit from the Highway Bill. It could easily last until the end of next year. I think the general mood in the market has improved and you may see local authorities start working on some of these projects, but this is a two-year bill. The time frame you referred to back in 2006 was a five-year bill and I think the market requires and deserves a five-year bill so that they can make longer term planning. We didn’t get that, but we got something. And to what extent we'll some improvements from that particular funding mechanism sometimes next year is yet to be seen.

Schon Williams - BB&T Capital Markets

Okay, thank you. And one last question if I could. Coatings business that obviously doing very well on margins there but I think you noted that in the release that the international side of that business offset some of your North American demand. Can you talk about in particular what countries would that be and does that concern you?

Mogens C. Bay

Well, I think part of it has been an impact in Australia where there's been some pressure on local industry as a result of the very strong Australian dollar, which has made imports into Australia more competitive and therefore has put some dampening effect on the local industry. We have seen an effect from that. Whether that will continue, I don't know. We had one customer in Australia that was pretty significant serving the mining industry that has had a softer year and we have not seen in general a softening in the mining industry so I think that will correct itself. I hope it is a temporary situation but we see did a reduction in volume in Southeast Asia, not only in Australia. And I hope that's something that will correct itself.

Schon Williams - BB&T Capital Markets

All right. Thank you very much and congrats on the quarter.

Mogens C. Bay

Thank you.

Operator

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

Carter Shoop – KeyBanc Capital Markets

Good morning and congratulations on a good quarter.

Mogens C. Bay

Thank you.

Carter Shoop – KeyBanc Capital Markets

I wanted to focus on the Irrigation segments and I appreciate the comments and the limited visibility you guys have thus far in regards to the drought. But I was hoping that we could dig into that a little bit deeper and maybe talk about what you're seeing right now and what you're hearing right now from dealers. And also maybe talk about how the drought in the US and the higher prices of crops is impacting you International business.

Mogens C. Bay

Let me start with the last part. I don’t think the drought directly is impacting our International business. Now commodities tend to be global in their pricing dynamics, so if commodity prices globally become stronger for corn, soil, beans, and other major crops, it will improve profitability of international farmers and therefore, it could translate into more business.

Reverting to North America, this is the time of the year where farmers are focused on growing a crop, not on putting in new equipment. As I said, in general, when you have dry conditions, it helps irrigated farmers because they benefit from having a crop and being able to sell it at higher prices. So that would indicate that we're going to have a strong fall season and that usually translate into also a strong season in the first couple of quarters of next year. To what extent that environment will translate into another record season is yet to be seen.

Last year was very strong both towards the end of 2011 and into the beginning of 2012. What I can say is that if we get an opportunity to sell more than we did last year, we'll be ready for it, but we need some traction in the marketplace later this fall to get a better feel for it. The mood in the D log [ph] organization is good, the mood in the D log organization was good last year so it's a question of to what degree does it translate into a strong business.

Carter Shoop – KeyBanc Capital Markets

That's helpful. In regards to margins in Irrigation, first half of the year you're at about 19.5%. That compares to previous peak levels in the mid-17 range. Can you talk about if these types of margins are sustainable? I’d imagine you see a little bit of a decline in the second half just to due to normal seasonality, but is this kind of a reasonable way to think about margins where there's some one-time benefits going on that we should know about?

Mogens C. Bay

Well, I don't think there are one-time benefits going on, but we had moderating input costs, particularly in steel. We had a fairly good pricing environment and we get leverage when the plants are busy. So in the third quarter, the plants won’t be as busy. That's a seasonal lower quarter, but if we have another quarter like the last two with moderating input costs and busy plants, then we would expect to have the same margin.

Carter Shoop – KeyBanc Capital Markets

And just a quick follow-up in regards to steel prices. How much of a benefit did you see in 2Q from that versus how much of the even that we see in 3Q. How quickly are you able to realize the benefits and are you seeing any competitors lowering their prices, particularly for center pivots given the lower steel prices.

Mogens C. Bay

No, I don’t think the steel price change has been that significant. It's just been- we haven't seen the strengthening in the second quarter that we saw in the previous couple of years, so it's not that important. We have not seen changes in the market pricing driven by steel pricing, and I don’t think we're going to see any difference in quality of earnings as it relates to steel between the second and the third quarter. We will see a difference as it relates to leverage.

Carter Shoop – KeyBanc Capital Markets

Great. thank you very much.

Mogens C. Bay

Thank you.

Operator

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

Brent Thielman – D.A. Davidson

Hi, good morning.

Mogens C. Bay

Good morning.

Brent Thielman – D.A. Davidson

The question on the Coating segment, how much of your North American revenues are now tied to the Utility business?

Mogens C. Bay

I can't put a percentage on it. I wouldn't say that it's significant in the overall scheme of things. We have good internal loading in some of our galvanizing plants. But you saw revenue in North America was up somewhat and some of that came from internal Utility business and we expect that business to stay strong for a number of years going forward, but it's not like 40% or 50% of the Coatings business.

Terry McClain

Brett, probably of the 17 facilities, there are probably two or three that are impacted by utility cuts.

Brent Thielman – D.A. Davidson

Okay. So the rest is sort of driven by general industrial activity? Okay. And then, I guess in terms of your utility backlog, how far out does your visibility extend at this point?

Mogens C. Bay

Well, of all the businesses, utility has the best visibility, and I would say that currently it extends out through the end of the year.

Brent Thielman – D.A. Davidson

Okay. Great. Thanks.

Operator

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

Arnold Ursaner – CJS Securities

Hi, good morning. Two quick questions for Terry, if I can? Terry, can you quantify the impact of the one-time hit in utility in dollars and also give us a better explanation of the $2 million miscellaneous hit to earnings?

Terry McClain

I’ll let Mark handle miscellaneous, but the utility second quarter was about $5.7 million.

Mark C. Jaksich

Arnie, this is Mark. The miscellaneous expense that hit us in the second quarter was–the lion’s share of that was foreign exchange losses. As the dollar strengthened, we had a number of locations that had US-dollar-based liabilities that weren’t completely covered. Subsequent to the end of the quarter, we’ve corrected a number of those situations, so I would not expect that to reoccur going forward, but that was the lion’s share of what that expense was.

Arnold Ursaner – CJS Securities

Okay. And Mogens, most of the investors are looking towards 2013. I think you’ve very broadly spoken about your view of utilities, of coatings, of irrigation, perhaps you could sum up your views of all of those? Again, what’s kind of your big picture of how you think you are entering 2013 and how we should think about 2013?

Mogens C. Bay

Well, you kind of summarized it as well. The Utility business, we expect to continue to strengthen, and we are adding capacity to support that. The Irrigation business’ current environment, which would mean that the Irrigation business should continue strong, at least in North America and probably also around the world. The Coatings business is very dependent on the general economy, but if the general economy continues to improve ever so slightly, I think we’ll continue to see good results there.

In the Infrastructure Products segment, I suspect that our businesses in Southeast Asia will continue to do well. We will continue to see a difficult environment in North America as it relates to Traffic and Highway business. I think we’ll continue to see a tough, maybe even tougher, environment in Europe because of the financial problems that they are dealing with currently.

But, on balance, if all this comes to pass, we should have another record year in 2013.

Arnold Ursaner – CJS Securities

Perfect. Thank you very much.

Operator

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

Brian Drab – William Blair

Good morning, guys.

Mogens C. Bay

Good morning, Brian.

Brian Drab – William Blair

First question, Mogens, last conference call you said that you expected Irrigation to be modestly down in the second half, if I remember it correctly. And you language today was we are not sure whether we are going to match or exceed first half Irrigation results in the second half of this year. First of all, is my memory correct, and second –

Mogens C. Bay

No, that’s not what I said. I said I am not sure whether we’ll match or exceed last year’s second half in the second half of this year.

Brian Drab – William Blair

Okay. Okay. Is my memory correct regarding what you said on the first quarter call though? That you expected that - I guess, so in the first quarter call you said that you thought maybe the second half of 2012 will be down from the first half of 2012. Is that correct?

Mogens C. Bay

I said that we, at that time, we currently expected the second half of 2012 to be slightly below the second half of 2011.

Brian Drab – William Blair

Right. Right. I think that’s what I meant to say. So now, is your expectation improved or changed, or you think that being down year-over-year in the second half of 2012 is not likely?

Mogens C. Bay

Well, I would say my hope for next half has changed. I am hoping that we’ll see a little more activity as a result of the current drought, but it’s too early to say my expectations have changed.

Brian Drab – William Blair

Okay. Got it. Okay. And then, the Utility business has just been so strong over the last several quarters, but over the last three quarters, it’s hovered right around $200 million in revenue. Is this a business that could do $300 million a quarter in revenue, or where are we in terms of capacity utilization and the potential for this business?

Mogens C. Bay

Let me put it this way. We think it’s going to get stronger next year. We are adding capacity, and we are adding it because we think we can fill it. So I think that will translate into more than $200 million a quarter.

Brian Drab – William Blair

Okay. Can you give us any sense, and maybe you need to just remind me, where are we in terms of capacity utilization and how much are you adding, roughly?

Mogens C. Bay

I would put it this way. We are very high in capacity utilization. I would say if you take the average capacity available in 2012, and our projected average capacity for 2013, add 100 million.

Brian Drab – William Blair

Add 100 million annually?

Mogens C. Bay

Yes.

Brian Drab – William Blair

Okay. Okay. That’s all I have for now. Thank you.

Mogens C. Bay

Thank you.

Operator

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

Jeffrey Beach – Stifel Nicolaus

Good morning, Mogens.

Mogens C. Bay

Good morning.

Jeffrey Beach – Stifel Nicolaus

Engineered infrastructure products, the margin picked up somewhat. Is that a combination of cost reductions? I know you focused on that, as well as volume. And then, can you describe the relative profitability among the regions: North America, Europe, and Asia? And then, plans to move those margins up in hopefully all regions?

Mogens C. Bay

Let me start with the regions. The weakest region from a profitability standpoint is Europe. It’s also the smallest region. I do not expect much improvement in European profitability until we see a changed marketplace in Europe.

In North America the profitability level is higher than in Europe. It is profitable business. I think the improvement in profitability is more a result of better margin management or better mix than it is a different market environment.

The highest profitability in this segment is in Southeast Asia. And they are operating at acceptable good profit levels.

Jeffrey Beach – Stifel Nicolaus

And are there actions you are taking? It sounds like Europe, you have to wait on the market, but actions to move your margins up in North America and Asia - internally?

Mogens C. Bay

The Asia business is a good business and there are ongoing efforts through Lean, etc. to continue to improve our profitability. In North America, we would want some help from the marketplace to see a major change in this part of the world. And in Europe, you know, as I said, it’s a question of too much capacity chasing too little business, so the price levels in the European market is the biggest impact on profitability there.

And it’s very tough to predict from quarter to quarter how that pricing environment is going to be. It’s not a business where you have a lot of visibility. If you have one quarter visibility, you are pleased.

Jeffrey Beach – Stifel Nicolaus

All right. My second question is on capacity addition in Utility. You mentioned expansion at four different states or four different plants. Last year, I think at this time in July, you announced you were expanding capacity. Has additional capacity already kind of come on stream, and what you are talking about today is more capacity? And can you talk about conversion of maybe EIP lines versus added bricks and mortar?

Mogens C. Bay

Let me say that I think out of EIP we are using the capacity that we probably can out of that business. We are adding capacity in several utility plants. And I made the comment that they are all either inside or adjacent to current facilities, which allows us to leverage our SG&A better than building a new plant in a new geographic facility. I also mentioned that in total we expect that the average capacity available from 2012 into 2013, we will add $100 million. So we are adding capacity beyond the capacity we have talked about in the past. The biggest capacity addition is a new plant adjacent to a shipping facility in Tulsa, Oklahoma.

Jeffrey Beach – Stifel Nicolaus

All right. Thanks for the color.

Mogens C. Bay

Thank you.

Operator

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

Jon Braatz – Kansas City Capital

Morning, Mogens.

Mogens C. Bay

Morning, Jon.

Jon Braatz – Kansas City Capital

A couple of questions on the irrigation sector. When we have such a severe drought like this–and I know it goes back, the last one was really 1988–but do you see maybe new markets open up that maybe weren’t typically irrigated acres? I don’t know, maybe like Iowa, Southern Illinois, or places like that, do you see greater interest from farmers in the non-typical areas?

Mogens C. Bay

I would say yes, but it’s a development we have seen over a period of time as commodity prices have been pretty strong. We have seen more business from newly developed irrigated acres than we saw in the past.

Now one premise to have that happen is availability of underground water or water from streams. And therefore, I think we may see more new development in the Southeast than we will, for instance, in Iowa and Illinois where there is probably more availability of underground water.

Jon Braatz – Kansas City Capital

Okay. Going back to the water issue, I read where I think some spots in Nebraska, some farmers had to actually, if I understand this correctly, had to turn off their irrigation system for lack of water, or maybe restrict it. Any thoughts about or are you hearing anything about that being extended to other areas of Nebraska and elsewhere.

Mogens C. Bay

That was one of the points that I made that one concern I have is that if the drought gets too severe, it could impact pumping of water. There will be restrictions on it. Not only from a water issue, but we’ve seen it also in part of Nebraska from an availability of electricity because of all the air conditioning running. And farmers have been asked not to run their pivots as much.

Jon Braatz – Kansas City Capital

Okay. I wasn’t aware of that. All right. Thank you very much, Mogens.

Mogens C. Bay

Thank you.

Operator

(Operator instructions) And your next question comes from the line of Ryan Connors with Janney Montgomery Scott.

Unidentified Analyst

Hi, good morning. This is actually Tim (inaudible) filling in for Ryan.

Mogens C. Bay

Good morning.

Unidentified Analyst

My first question is just on Irrigation. I was curious to get your color on how big of a role you guys think the increasing availability and usage in crop insurance could play in the adoption of irrigation systems? Do you think that as crop insurance starts being used more, this could be a headwind for, you know, sales of pivot systems as farmers kind of rely on that for protection against a drought, instead of installing an irrigation system? Or are the drivers of irrigations sales really related to just improving productivity?

Mogens C. Bay

Let me say it’s a good question. I hadn’t thought about; and therefore, if I tried to answer it, I’d tell you more than I know. But I would say, in general, that productivity and just the security of having a crop is the main driver for our business. I have not heard from our irrigation people a concern about crop insurance being a damper potentially on our business.

Unidentified Analyst

Okay. And then, my next question, also in irrigation, just curious if there was a dip in sales in the second half of this year, do you think that would be short-lived just given the financial health of the ag sector as a whole?

Mogens C. Bay

I would say that the external environment for agriculture worldwide, and therefore, for irrigation, is probably as strong as we’ve seen it for a long time. Commodity prices continue to be high. The demand on food production as a result of improved diets around the world; the recognition around the world by governments of the importance of stretching their fresh water and protecting the quality of the fresh water; all those drivers of our business continue strong.

So, as I’ve always said, weather patterns, commodity prices, local conditions can create either peaks or valleys short term. But, in total, the drivers are as strong as we’ve seen them.

Terry McClain

Tim, maybe I can add again, when we talked about potential down from a year ago, the year ago was the abnormal year. We had a season that continued into the third quarter. We had storm damage. We had a lot of things going on. The relative down that we talk about potentially, as we were talking after the first quarter call, was relative to an outstanding, record year for all kinds of reasons.

So back to the question that Mogens answered, I think you are seeing just a better situation for farmers in a normal pattern.

Unidentified Analyst

Right. So some of the decline would just be on tougher comps rather anything fundamentally?

Terry McClain

Yeah, exactly. Exactly.

Unidentified Analyst

Okay, guys. Thanks for taking the question.

Terry McClain

Holly, are there any further questions?

Operator

Yes, sir. Your next question comes is a follow-up from the line of Carter Shoop with KeyBanc.

Carter Shoop – Keybanc Capital Markets

Hi. Two quick follow-ups if I may? On the Utility business, are we talking about a net capacity increase of 100 million, or is that assuming some business comes out of the EIP division to fill the new facilities?

Mogens C. Bay

Net. And some of that capacity was built adjacent to or part of a lighting and traffic facility.

Carter Shoop – Keybanc Capital Markets

Help me understand the reasoning behind building new capacity for Utility versus just absorbing some of the more existing capacity in the EIP business in North America. Is it more just you need to get the right facilities, some of the existing EIP facilities aren’t big enough to handle some of the higher voltage, bigger towers, or how do you guys think about that tradeoff?

Mogens C. Bay

We have already absorbed the capacity available in the North America lighting plants. Because it’s only the part of the EIP plants in North America that can build large structures that we can leverage into the utility business. Small pole facilities, or degradative pole facilities, cannot be leveraged into utility. So, we have already probably maximized what we can get from the Lighting and Traffic businesses.

Carter Shoop – Keybanc Capital Markets

That’s helpful. Lastly, Europe in the EIP division, should we expect some additional restructuring initiatives to improve the margin profile there?

Mogens C. Bay

Depends on what we see in the marketplace, but I would say that is not likely.

Carter Shoop – Keybanc Capital Markets

Great. Thank you.

Operator

At this time, there are no further questions. I’d now like to turn the conference call back over to Jeff Laudin for closing remarks.

Jeffrey Laudin

Thank you, Holly. 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 to you again during the next quarter. And at this time, Holly 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 these statements are not guarantees of performance or results. They involve risks, uncertainties, some of which are beyond Valmont's control and assumptions. Although management believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements.

These factors include among other things, risk factors described from time-to-time in Valmont's reports to the Securities and Exchange Commission, as well as future economic and market circumstances, industry conditions, company performance and financial results, operating efficiencies, availability and price of raw material, availability and market acceptance of new products, product pricing, domestic and international competitive environments, and actions and policy changes of domestic and foreign governments.

The Company cautions that any forward-looking statement included in this discussion is made as of the date of this discussion and the company does not undertake to update any forward-looking statement. Thank you.

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