Renee Campbell - Valmont Industries, Inc. Stephen G. Kaniewski - Valmont Industries, Inc. Mark C. Jaksich - Valmont Industries, Inc..

Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc. Craig Bibb - CJS Securities, Inc. Brian P. Drab - William Blair & Co. LLC Brent Edward Thielman - D.A. Davidson & Co. Jon Braatz - Kansas City Capital Associates.

Greetings, and welcome to the Valmont Industries, Inc. Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Renee Campbell, Director, Investor Relations & Corporate Communications. Thank you. You may begin..

Thank you, Christine. Good morning, and welcome to the Valmont Industries' third quarter 2018 earnings conference call. With me today are Steve Kaniewski, President and Chief Executive Officer; Mark Jaksich, Executive Vice President and Chief Financial Officer; and Tim Francis, Vice President and Corporate Controller.

This morning, Steve will discuss highlights of our third quarter performance and provide a strategic overview of our business. Mark will then give a detailed review of our financial and operating results, and then we will open the call for Q&A.

Our press release was issued yesterday after market close and a supplemental slide presentation can be found on the Investors page at valmont.com. An archive of today's call will be available for the next seven days, and instructions for accessing the replay are included in our press release.

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 read in full at the end of this call. I would now like to turn the call over to our President and Chief Executive Officer, Steve Kaniewski..

Thank you, Renee. Good morning, everyone, and thank you for joining us. Before I begin, I want to mention a few third quarter highlights. First, we delivered on our commitment to improve Engineering Support Structures margins by achieving over 150 basis points of improvement. Second, in North America, Irrigation sales grew 16% compared to last year.

We also completed three acquisitions and announced a fourth. We completed share repurchases totaling $43 million, and we continued to execute on our operations transformation strategy which will be complete by the end of 2018. With that, I'd like to begin today's remarks by taking a few minutes to speak about capital management.

During the third quarter, we deployed nearly $188 million of capital, in part, to fund three acquisitions totaling $116 million and share repurchases of $43 million. As shown on slide 12 in the presentation, we have deployed a total of $287 million this year.

Balanced and strategic use of capital is a meaningful part of our growth strategy, and we hold ourselves accountable to our shareholders and our board in meeting these priorities. Turning to acquisitions, I'm excited to share a few more details about the three that we completed in the quarter.

In our Utility segment, we purchased the assets of Derit Infrastructure, fulfilling our commitment to enter into the lattice market. Derit is a state-of-the-art, 40,000-metric-ton lattice structures facility located in Vadodara, India.

The factory, which includes custom galvanizing services, provide lattice structure capacity to serve global markets, for both utility and the wireless communication structures. We can now provide our customers with a complete offering of utility structures across all voltage classes, and we have already shipped our first orders.

We're building backlog as we head into 2019 and expect margins to be in line with segment margins once factory efficiencies and approvals are realized. Also in our Utility segment, we purchased a 75% majority stake in Convert Italia, headquartered in Rome, Italy.

Convert designs highly engineered solar tracking solutions including their patented single-axis tracker known as the TRJ, positioning solar panels to track with the sun's rays, producing approximately 25% more energy for only about 10% additional cost.

The partnership with the Convert team uniquely positions us to supply every type of electrical grid structure within the utility market, a first in the industry. Eventually, we anticipate margins in this business to be slightly greater than segment margins as we achieve supply chain synergies.

Combining the single-axis tracker technology with our manufacturing capabilities and Utility customer base provides an integrated solution for our utility customers all over the world. As evidenced by the independent market data, the solar tracker industry is expected to grow at low- to mid-double digits and exceed $3 billion by the year 2022.

With this acquisition, we are now well-positioned to participate in this market growth. One synergy we have identified is leveraging our global Irrigation manufacturing footprint to make the structural components that support the trackers and panels.

As you might imagine, using this capability to offer a complete solar package that includes pivots, pumps and other items opens opportunities to explore on-field solutions in our global Irrigation business as well.

In the Engineered Support Structures segment we acquired the assets of Walpar, an industry-leading manufacturer of sign structures products in Birmingham, Alabama, strengthening our commitment to the growing signs structures market.

With the advancement of intelligent roads and highways, smart city development, and driverless vehicles, we expect annualized growth rates that are higher than the general North American transportation market.

We're excited to expand our participation in this market and expect margins to be higher than current segment margins as we build on synergies. In addition to these three acquisitions, during the quarter, we entered into a definitive agreement to acquire CSP Coatings Systems, further expanding our geographic footprint in the New Zealand market.

The transaction closed during the fourth quarter on October 18, and we expect margins to be in line with segment margins. All four transactions advance our strategy of entering or strengthening adjacent market positions that we outlined at our Investor Day.

As referenced on page 13 of the slide deck, we have implemented a formalized M&A process including a standard work playbook for integration. Regular reviews will be held with our management teams and board to track progress, and we look forward to providing updates on future calls. With that, let me now turn to our third quarter results.

Net sales of $678.7 million were down slightly from prior year. Excluding last year's third quarter revenue from the grinding media business, which was divested earlier this year, sales grew 2.7%. Adjusted operating income increased by 5.2% to $63.2 million, and adjusted earnings per share was $1.82, an increase of 17.4% over last year.

Foreign currency translation unfavorably impacted third quarter EPS by $0.04, primarily from our Latin America operations. Turning to our segment highlights and starting with the Engineered Support Structure segment. Revenues grew more than 2% over last year. In North America, transportation product volumes were higher, driven by a strong U.S.

economy and states enacting legislation to increase transportation funding. In fact, over the past few years, over 30 states have increased fuel taxes to support infrastructure investment. Pricing actions taken earlier this year also contributed to sales growth.

In Europe, market demand has continued to show signs of improvement, and we are encouraged by the outlook. Sales of commercial lighting grew this quarter, also benefiting from pricing actions taken earlier this year. We led the market in price recovery.

And sales volumes have remained steady, supported by strong service levels that we provide to our customers. In the Asia Pacific region, sales of highway safety products were higher, and we believe governments will continue to support safe road initiatives and infrastructure in the region.

Wireless communications sales were lower compared to prior year as carriers temporarily paused new spending to focus on 5G site preparations. The recent ruling by the FCC to streamline small cell fee regulations should provide clarity to carriers who may have suspended decisions on project spending.

We continue to see significantly lower volumes in the Asia Pacific region. China Tower, our largest customer in China, completed their IPO during the third quarter. We expect this market to be muted until we can gain more clarity on their bidding programs that will be forthcoming. Moving to the Utility Support Structures segment.

Sales of $218.3 million were 6.6% higher than last year. In North America, pricing to recover steel cost increases was partially offset by a less favorable product mix caused by continued market demand for smaller structures. Sales of offshore wind structures in Northern Europe were lower compared to last year.

As we stated last quarter, increased competition from China has led to a significantly more challenging price environment in the region. In the Coatings segment, sales of $90.4 million grew 9.5% over last year, about evenly split between volume and price from continued strong industrial demand across all regions.

Our Asia Pacific operations continued to perform well from improved end market demand. Turning to the Irrigation business. Global sales of $140.2 million were 4.9% below last year.

While uncertainty of tariffs and trade policy and pressure on net farm income levels continue to cloud the outlook, third quarter sales in North America grew by more than 16%. While independent market share analysis does not exist for the North America market, we are confident that we gain short-term market share.

International sales were 23% lower compared to 2017 due to lower project volumes and unfavorable currency translation. Excluding impacts from currency, sales were down 17%.

Sales in Brazil were also lower, as order releases continued to be delayed due to extended approvals of government-sponsored finance programs and uncertainty regarding the impact from the presidential election.

As we have consistently highlighted, long-term growth in the Irrigation business will come from international markets and advanced technology.

Last week, we hosted a first-of-its-kind Israeli AgTech Summit at our Valley, Nebraska campus which showcased how ag technology solutions are critical to the future of water sustainability and total crop management. U.S.

and Israeli government representatives and policymakers, as well as the global drip irrigation company, Netafim, spoke on the importance of agriculture and global trade. In addition, nine Israeli agtech companies presented how their businesses are expanding the use of technology on a global scale.

This summit is one example of how Valmont and Valley Irrigation are leading global advancements in irrigation technology. As evidenced by the attendance at the summit, we continue to advance our strategy of delivering integrated technology solutions to the market.

We believe growers benefit from these offerings even during challenging market conditions. Last month, we expanded the release of our Valley Scheduling software to the North America market.

We are excited to offer this innovative total crop management solution to even more growers, enabling them to make real-time, data-driven decisions on when, where, and how much to water. This field-proven technology has been refined over the past 10 years and is being fully utilized on more than 5 million acres in 12 countries and 47 different crops.

Moving to the operations side of our business. Additional actions were taken during the quarter to improve efficiencies in our supply chain and optimize our global footprint. We completed the consolidation of three Access Systems facilities in China into a single location in the Shanghai province.

We also closed an Engineered Support Structures manufacturing facility in the Shandong province.

Ongoing evaluations of local market conditions, plus additional costs from the Shandong facility closure, have resulted in an increase in anticipated pre-tax full-year restructuring expenses from $20 million to a new estimate of $27 million, of which $19 million is cash expense.

We believe that these strategic actions combined with the others taken throughout the year will align our operational footprint with our stated market growth strategies by the end of 2018. I would now like to turn the call over to Mark for the financial update..

Thank you, Steve, and good morning everyone. Before I cover the financial results for the quarter, I would like to touch on the more significant non-recurring events affecting our Q3 financials.

First, we completed our debt refinancing by retiring our 6.625% bonds due in 2020 incurring a $14.8 million make-whole expense or $11 million after-tax, equivalent to $0.49 per share. As mentioned last quarter, we refinanced the existing debt at fixed attractive rates and extended our debt maturities to 2044 and 2054.

Second, we recorded $6.3 million of restructuring charges this quarter as we continue to refine our desired future state manufacturing footprint. This mainly included the costs of reducing our China capacity in the ESS segment.

Third, we recorded a $15.8 million non-cash impairment of goodwill and other intangible assets in our offshore structures business in Northern Europe. Significant adverse challenges in the wind energy market in that region and a lack of protective tariffs had led to an extremely competitive pricing environment.

As we completed our annual goodwill impairment testing, the resulting lower near-term financial projections led to the impairment charge. Fourth, we closed on three acquisitions this quarter. The impact on Q3 results included $2.9 million of transaction costs which are expensed as incurred.

As we move into the quarterly financial results, please refer to the adjusted results as outlined in the Reg G disclosure and press release in page 6 in the slide deck. In the third quarter, sales were comparable with 2017. Sales pricing and mix was favorable by 4.5% while volumes were down 2.5%, and currency translation was an unfavorable 2%.

Acquisitions net of divestitures had a negligible impact on the top line for the quarter. On a segment basis, the volume decreases were primarily in the Irrigation and ESS segments. But in both segments, North America sales increased while international sales were down compared with 2017.

Each of our four segments realized improved pricing over last year and helped in recovering higher raw material cost. Q3 adjusted operating profit increased 5.2% and operating margins from continuing operations were 9.3%, 50 basis points higher than 2017.

We are pleased that despite an inflationary cost environment, we manage this well through effective supply chain, operational and pricing actions. FX translation effects had a $1.2 million negative impact on operating income or $0.04 per share as compared to 2017.

Our income tax rate for the quarter on an adjusted basis was 22.4% lower than Q3 2017 due to a combination of improved tax credits related to research and development activities and the effects of lower U.S. income taxes this year. 2018 adjusted earnings per share was $1.82, an increase of 17.4% from $1.55 in Q3 2017.

Turning now to segment operating income results. In the Engineered Support Structures segment, operating income increased 34% with – from 2017 with adjusted operating margins 220 basis points higher than last year.

Aside from solid sales demand in most markets, particularly in North America, Q3 reflected the realization of pricing actions taken this year, benefits from restructuring actions, despite a weak China market. In the Utility Support Structure segment, operating income was down 12% from 2017.

Segment results were negatively impacted by a less favorable product and order mix and the extremely challenging market conditions in the offshore business. In the Coatings segment, operating income was flat with last year and in line on a sequential basis. Turning to the Irrigation segment.

Operating income increased 17% from 2017 on the strength of North America sales growth and margin management through operational supply chain initiatives along with market pricing actions in light of higher raw material prices.

Segment operating margin for the quarter was 15.2%, very solid considering Q3 is the seasonal demand low point in North America. Turning to cash flows. Operating cash flows to the first nine months of 2018 were $68.1 million, compared with $121.8 million last year. Capital spending was $48.9 million compared with $39.9 million in 2017.

Our operating cash flows this year were lower due to the make-whole expenses related to the bond redemption, an increased order specific finished goods inventory, and to a lesser degree, ESS.

In these segments, we have seen a higher than normal amount of shipment delays due to factors such as project timing and weather events as evidenced by the hurricanes in the U.S. These delays have had a short-term impact on cash flows.

While shipping schedules are fluid, we are remaining close to our customers to ensure product gets delivered to their job sites when needed.

Going forward, we are taking certain actions to improve our working capital performance including supply chain financing programs and fixing certain raw material prices contractually to protect margins without taking on material earlier than necessary. Moving to the balance sheet.

As mentioned earlier, this quarter, we redeemed our 6.625% Senior Notes due in 2020 for $269 million of cash, reducing our long-term debt to $740 million with maturities in 2044 and 2054. We are pleased to have completed our refinancing at long-term rates that are lower than historical averages, providing a very attractive long-dated debt profile.

As a result, along with cross-currency swaps completed during Q3, we expect our annual interest expense going forward to be around $40 million or $4 million less than our annual interest expense before the refinancing. Turning to capital deployment, summary of our accomplishments this year are on slide 12 of the presentation.

We continue to execute on our stated goals of supporting our current businesses through investments in working capital with fixed assets. Secondly, acquisitions that align with our strategic goals and drive shareholder value through returns that exceed our cost of capital over time. Three, returning cash to shareholders through dividends.

And four, executing on opportunistic share repurchases. Capital spending this year will be $65 million to $70 million compared to $55 million in 2017. This includes our planned investments in Poland in the ESS segment and an expansion of our irrigation facility in the United Arab Emirates to support market growth opportunities in both regions.

As previously mentioned, we deployed $116 million in cash for three acquisitions this quarter, in addition to the divestiture of our non-core grinding media business in the second quarter, provided cash to help fund these acquisitions and as part of our overall capital allocation strategy and actions this year.

As Steve mentioned in his remarks, during the quarter we repurchased approximately 309,000 shares of company stock for $42.9 million at an average price of $138.81 per share. At the end of Q3, $45 million remained on the current authorization as shown on page 12 of the slide deck.

We have been able to effectively deploy capital in each of these areas this year without incurring additional debt. Let me now turn to our outlook for the balance of 2018. Sales for the year are expected to be in the range of $2.75 billion to $2.8 billion.

In the ESS segment, we expect positive comparisons for the balance of the year continuing the momentum generated in the third quarter.

In the Utility Support Structures segment, we will have unfavorable comparisons mainly due to a very difficult market and competitive environment in offshore structures, and a much less favorable sales mix than in 2017 in North America. In the Coatings segment, good economic growth in the U.S.

is expected to result in solid demand and results with normal seasonal impacts in Q4. In Irrigation business, global sales are expected to be similar to last year.

The North American market is expected to continue to be somewhat muted from low net farm income and commodity prices and the international sales, as always, can be impacted by project timing. We expect raw materials, including freight, to remain elevated but relatively stable in the short run.

And for the year, we expect our full year free cash flow to approximately 60% to 65% of net earnings and after-tax on return on invested capital to exceed 10%.

We have revised our adjusted EPS guidance for 2018 to reflect anticipated impacts from incremental LIFO inventory expense resulting from raw material inflation trends and inventory levels as well as impacts from currency translation.

We now expect full year adjusted EPS to be in the range of $7.50 to $7.65 per share, updated from the previous range of $7.55 to $7.65. This excludes the effects of restructuring actions, net income effect from the sale of the grinding media business, cost of the bond refinancing, and other one-time M&A-related costs.

We continue to execute on a balanced approach to capital allocation while remaining committed to an investment-grade credit rating. With that, I will now turn the call back over to Steve for closing remarks..

domestic, international, and technology sales with technology as a subset of the global sales. Our Engineered Support Structures business is supported by firm markets, and we will benefit from the restructuring and pricing efforts completed this year. Our Utility business will benefit from continued strong demand in North America and acquisitions.

Performance in our Coatings business will be supported by strong industrial demand, and ongoing benefit we derive from GalvTrac and the Valmont Coatings Connector. The wind market environment in Northern Europe remains challenged for the reasons we stated earlier.

In addition to the goodwill impairment this quarter, we are undergoing a significant operational and financial review of this business and will provide additional updates next quarter. Continued long-term growth drivers for infrastructure and agriculture remains strong, and we are encouraged by growth opportunities across all our segments.

We are continuing to initiate new pathways to growth and our acquisition funnel continues to be robust, aligned with our growth strategies. As we execute on our transformational opportunities within our supply chain and operations, we are confident that we will continue to generate good free cash flow and smart capital deployment.

I will now turn the call back over to Renee..

Thank you, Steve. At this time, we are ready to take your questions. Christine, please go ahead..

Thank you. We will now be conducting a question-and-answer session. We ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may re-queue and those questions will be addressed time permitting. One moment please while we poll for questions. Thank you.

Our first question comes from the line of Nathan Jones with Stifel. Please proceed with your question..

Good morning, everyone..

Good morning, Nathan..

Hi, Nathan..

Can we start on the debt (00:28:41) free cash flow? Obviously, a cut there (00:28:43).

Could you first clarify that the 60% to 65% on adjusted net income rather than GAAP net income? And then, it looks like a lot of the headwinds here come out of working capital, you've got about $60 million, I think, consumed on primary working capital and – or $67 million, so far this year.

And then, prepaid expenses, another $60 million so far this year.

Can you talk about payables, receivables, inventory, all consumed cash, just the different pieces of that? What's led to the consumption of that cash this year? What the timing is of getting that cash back out? And specifically, on the prepaid expenses, what's driving that up?.

Okay. Nathan, this is Mark. There's several questions in that one, but let me try to address everything. The 60% to 65%, if you think about it in dollar terms, it would be in that neighborhood of $85 million to $90 million. So, that way, we don't have to get between adjusted and GAAP net earnings and so forth.

Now, what's happening with us, first of all, let me step through the – some of the individual pieces (00:29:54). Receivable turns are very consistent with where we've been historically, so there's no real big shift in that over the course of time. With respect to inventories, there's an inflationary impact of that as well.

Since raw materials and other inventory costs are up on a unit basis, that's going to drive some level of increase in the inventory level. Just because if you have the same things on hand, the inflation drives up the number.

Really what's happening in the prepaid expenses is really the costs and earnings in excess of billings that we see that we're picking up on a percentage of completion basis, we're recognizing the revenue and the gross profit related to that, but the cash conversion cycle really has not changed, and that's based on shipments.

And we are seeing a lot more delays with respect to shipments than we would normally see which is making it challenging to forecast the cash flows. So, those are really the major items, I would say, that are really impacting the cash flow items.

And right now, our projected – what we're seeing as far as shipments for the fourth quarter – support what our projection is, but of course, that the actual timing of the shipments is going to determine where the numbers actually turn up. We're watching on a regular daily, weekly basis..

Do you think that 2019 looks like it can be a year where you get back to that target of 100% conversion? Are you expecting continued delays or anything else in there that could continue to drag on that cash conversions outlook?.

Yes, I believe so wholeheartedly. I think some of these items will level out over the course of time, regarding the timing of shipments. Plus, we're just starting some work around supply chain finance programs and some things around raw material price hedging that doesn't involve taking material on.

I think those three things all together will contribute to better cash flows in 2019 as measured against net earnings, no doubt..

Okay. And then, my follow-up, Steve, thanks for the initial outlook on 2019. You said 7% to 8% revenue growth. I'm wondering if you can give us any color on how that breaks out, either what's price versus volume or any color you might be willing to share on what the ranges are expected to be for any of the segments..

It's really just a combination of all of the efforts, the commercial efforts whether that is through volume growth, pricing, or acquisitions being baked into that number as well. Most of the pricing actions, let's say the heavy lifting of the pricing actions, were taken in 2018 and particularly in the first and second quarter of this year.

So, what you'll see as you look at 2019 will be still some pricing actions but not nearly to the extent. And really, it's more volume and acquisition and growth based where we see the opportunities..

Do you guys want to give us the number that's from acquisitions just so we know what the organic number is?.

Not specifically, Nathan. But I – what I will tell you is that if you look at the acquisitions overall, they probably – the couple that we announced again, Derit was negligible, almost nothing for this year because we have a business – ,basically we're buying assets.

The Walpar and Convert, let's say, between the two of them probably are somewhere in the range, for the year – again, this is not in our 2018, but – of around $80 million of revenue between those two acquisitions. So, then it would be the normal CAGRs and growth rates that we announced at that point.

So, hopefully, that gives a little bit more clarity..

Okay. Thanks. I'll pass it on..

Our next question comes from the line of Craig Bibb with CJS Securities. Please proceed with your question..

Hi. Just a quick two clarifications.

The USS volume in North America was up how much year-over-year, and then that kind of same question for ESS?.

So, the North American volume in ESS – or you started with USS, was up – sorry, Craig, let me get back to it. We said that that would be – so, sales were up total 6.6% for the segment, and that was against some unfavorability in the offshore wind for the third quarter.

There's more unfavorable comparisons in the fourth quarter related to offshore wind. And so, that was from just a pure volume kind of perspective at that point.

It's again in lower or smaller structures, so we're expending roughly the same number of production hours but not getting the same kinds of OP dollars and/or revenue dollars off of that production.

And that is, as you look at a lot of the grid hardening that's going on, it typically is done at the lower voltage classes as opposed to load growth which would be at higher voltage classes overall..

Okay. I'm sorry. I'm....

And then in – sorry..

Go ahead..

And then in ESS, we saw a good volume growth particularly in North America, in the North American market, offset by the decline in China. And that's kind of the way you would look at it, and with Australia and India being kind of flat at that point. So, North America, seeing growth. China, again, we've stepped out of some of that.

China telecom business and the business itself has remained at a low level while they went through their IPO..

Okay.

Well, again, I'm just trying to get at the underlying volume growth in North America for both segments, it sounds like it's kind of mid-single digits, somewhere in there, but your mix is hurting USS, is that...?.

That would be correct..

Okay.

And then, with the IPO in China, your largest customer, does that mean the end is in sight for weakness in wireless in China?.

Well, we're still waiting to see how the bidding programs in 5G factor into that. As you're aware, the – 5G is a lot of sites but they tend to be smaller sites. And we're building a very strong capability around delivering small sites. But until we get some clarity on their CapEx spending, it's hard to know exactly when that will come back in.

But we're still bidding work and we're still seeing work, just not to the extent of pre-IPO. So, more to come..

Okay. And then, in Europe, offshore wind, obviously, extremely weak again.

You're already evolving your European business more towards onshore in USS and ESS, can you give us maybe an update on the rest of the EU?.

Yeah. So, when it comes to just the wind business, we have now a management structure that is really looking at opportunities for alternative energy construction. That would be things like a woodchip plant. We have a series of round utility structures, markets that we're approaching out of that business as well.

And then, from the wind business itself, there is some next-generation kind of turbines that will require new structures. As the markets prognosticate, it really looks like it's back half of 2019 into 2020 is when you start to see a market rebound. We're not going to wait until then. We're going to start to take actions now.

There's a number of competitive companies that are actually in a much more acute position than us including filing for restructuring and/or looking to be sold. So, it's a challenging market overall.

When it comes to our just traffic and lighting business in Europe, we've seen a modest increase over last year, and we believe it's been a sustainable trend that we've seen throughout the year. And as we look forward, we think it will continue.

It won't be – it'll be kind of low-single digits but compared to where Europe has been contracting for a number of years, it's still a positive outlook..

Great. All right. Thank you very much..

Our next question comes from line of Brian Drab with William Blair. Please proceed with your question..

Hi. Good morning. Thanks for taking my questions.

First one, why do you think that you're outperforming your competitors in North America in the irrigation market recently? And what's driving that? And are there any particular regions where you think that you picked up some share in the near-term?.

Yeah. As we've said, kind of repeatedly, there are markets where we tend to have a stronger position than other competitors. And quarter-by-quarter, you can see fluctuations related to the strength in those particular markets.

So, we believe that when we look at really the market for the quarter, parts overall were actually down, and it was unit sales that drove much of the increase. So, it was just a good solid mix coming from our more traditional strength areas that we also believe is being driven by the technology solutions.

The pivot always has and always will have a great payback.

And now, with the technology solutions that we can apply to it from a cost to maintain the pivots to a cost to administer and from just a quality of life perspective, we think that those are helping the market in its entirety to help people make those decisions in a somewhat stressed situation when it comes in net farm income.

If they see real payback, people will move forward. And so, that's what we attribute much of the increase to this quarter..

Would you be willing to put a finer point in the strength areas that you're referring to?.

It's just our traditional areas, Brian. So, we wouldn't break out any particular region per se, but....

All right..

We have our strengths and they have – others have their strengths..

Yeah. Okay. And then, just one more for now, I guess.

Can you elaborate maybe on the synergy between Convert Italia and Irrigation? I think what I was hearing is that you hope that there's the opportunity for growers potentially to use the solar power to maybe power pumps and irrigation systems, is that part of the play?.

Yeah. In the near term, it's to utilize the supply chain. Because this is angle that is punched and pressed and gearboxes, exact same thing that pivots are. So, a solar tracking solution and pivot are of the same ilk but just utilized in a different way.

So, that will allow us to utilize the Irrigation footprint all over the globe to quote (00:41:29) all over the globe. And because we can buy directly from mills, as opposed to service centers, it really should give us strong supply chain synergies. And we're working on those things aggressively right now, and they will build over time.

In the more intermediate term, we know that power and the remoteness of growing regions, particularly in developing markets, will lead people to want to utilize solar power as a way to power pumps, pivots and other farm equipment.

And so, the fact that Convert already works on small grids in the kind of low-megawatts kind of areas as well as the large-scale projects, we believe that particularly large growers or government-supported growing regions, instead of running utility lines hundreds of kilometers may just put in a microgrid to support the farming in that area.

And so, those are things that we're very excited from, from a product offering perspective that we'll be able to bring to the market, again, over the intermediate term..

Okay. Got it. Thank you..

Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question..

Great. Thanks.

Steve, on the Utility business, what's the visibility on large projects in North America now? Should that normalize or return in 2019? And then, assuming the wind business is going to be a headwind or sustained headwind in the next year but you get the large project business back, can you get that segment back to the kind of 12% to 14% margins it's been known to do?.

So, the visibility we have going into 2019 suggests that the project work will continue in a fairly (00:43:26) robust way. Our backlogs are actually pretty good, but it will remain on the small side.

So, for us to get additional margin – and this is something we've already been working on aggressively this year, we believe it will bear more fruit next year, is the planning, the operational efficiencies, and even to an extent the manufacturing capability, we have to do that more effectively is what we're going to have to focus on to improve margins on the small structures.

When it comes to the wind business, we're going to have to look at obviously all the costs associated with the business. And really, on the commercial side, being able to capitalize on some of the non-traditional wind business kinds of opportunities.

But as that then develops into 2020, especially with weak players out in the market that may – I would venture to assume that you're going to see some consolidation in the market, which should help the competitive environment but, again, more in 2020. So, we believe that we can work to get back to the margins we've seen.

It's going to be probably built over the year. It won't be right upfront in Q1. But as we kind of move through the quarters, we still – we should really see improved margins overall there..

Okay. Great. And then, it doesn't really sound like you're incorporating any material uplift in Brazil through the rest of this year. You've mentioned the election seems to be holding or maybe holding back some activity.

Does that start to unlock in 2019 just based on what you hear from your customers?.

Yeah. So, fourth quarter, we don't anticipate any kind of rebound, to just confirm your point there. If the frontrunner is elected and seated in January, we believe he will be supportive to the agricultural economy. It will take a while to get it kind of steamed back up again.

But the sentiment in Brazil is still very strong and the prospects for agriculture there are good. And so, we believe we should see positive comparisons year-over-year in the Brazilian market..

Thank you..

Thanks, Brent..

Our next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed with your question..

Good morning, Steve and Mark..

Good morning, Jon..

Good morning, Jon..

Steve, in your commentary, you talked about the expectations for the margins and the acquisitions that you just – companies that you just acquired.

Some may take a little bit longer than others, but can you give me a – can you give us a little timeframe where you think the margins can get to where your – the expected levels that you're shooting for? Are they a year, two-year, three years? Can you give us a little color on that?.

Sure. So, if you take Derit, it's really a matter of building backlog and obtaining customer and/or weld approvals that we need. So, to get that to, let's say, Utility-type margins, I would say building over the course of next year. So, by the end of the year, we should be at those kinds of margins.

So, if you were (00:47:10) to go fourth quarter next year, we should be there. In Convert Italia, those margins already are about at par with our current margins.

And so, the synergies in building, particularly along the supply chain, also should be something in about a year that we should be able to realize better than current margins in that business. The Walpar sign structures business also is at a level that is probably slightly higher than our typical ESS margins.

And so, with that one, we would expect it also within about a year to improve the margin profile there. So, they're – none of these are multi-year kinds of synergy cases. On the commercial side, they fit in pretty easily because of the channels to market we have already.

And really, it's just an operational kind of synergy which is usually a lot easier to obtain than a commercial synergy. So, we feel good that they'll build pretty quickly..

Okay.

The acquisition in India, the lattice project or the lattice company, that was basically a greenfield startup, am I thinking of that correctly?.

Yeah. It's a plant that had been in operation for about five years. But because it had gone through a bankruptcy, really with – didn't have much of a backlog to speak of. And so, we view it as a greenfield from a commercial perspective of getting them back into the market.

Now, the fact is, we're already shipping orders, and we're already building backlog. We didn't have to build the factory. We didn't have to put the machinery in. We're able to capitalize on what was there already. And so, that's why we feel confident that maybe greenfields take a little longer.

This one's kind of already well in place and now it's just getting the book of business in there..

Okay. Secondly, in the Coatings business, zinc prices sort of hit a high back in the February timeframe and have come down significantly.

Should we begin seeing some tailwinds, if you want to call it, from lower zinc prices impacting – favorably impacting margins in the Coatings segment?.

We would hope so as we work off some of the inventory from before. But as always, the balancing act is how much does the average zinc price come down. If it comes down very significantly and very quickly, then you'll get customers that will push back and look for that.

If it comes down slowly and moderately, we're usually able to hang on to price pretty well. And I'll give credit to our team, they've been very focused on this with going out ahead of most people with the increases. We're not going to be the first to lower price either..

Well, prices have come down from, like, $1.75 to $1.20.

Is that too quick – too much to not allow you to keep them?.

So, that – it's moderated slightly recently. We have gotten some pressure. But we don't work to give it all back. So, luckily, I guess as you've had a look at it, more of the focus is on steel.

And the steel prices and things like tariffs and impacts tend to be getting more of people's focus in the purchasing realm than is zinc which is still a pretty small piece of the equation overall for their projects..

Okay. All right. Thank you..

Thanks, Jon..

Our next question is a follow-up question from Brent Thielman with D.A. Davidson. Please proceed with your question..

Thanks.

On Irrigation, in particular North America, could you flesh out the contributions of Torrent Engineering? Just trying to understand what, I guess, the core business did on an organic basis?.

Yeah. So, Torrent, out of the 16%, probably contributed about 6%. So, we were still up about 10% on the base business..

Okay. Great. That's all I had. Thank you..

Did I answer it?.

Yes..

All right. Thanks, Brent..

Thank you. We have no further questions at this time. Ms. Campbell, I would now like to turn the floor back over to you for closing comments..

Thank you, Christine. This concludes our call. We thank you for joining us today. As mentioned, today's call will be available for playback on our website or by phone for the next seven days. We look forward to speaking with you again next quarter. Have a good day..

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