Valmont Industries Inc Q3 FY2022 Earnings Call

Greetings, and welcome to Valmont Industries Inc. Third Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. Please note this conference is being recorded. I will now turn the conference over to your host, Renee Campbell, Senior Vice President, Investor Relations and Treasurer. Ms. Campbell, you may begin.

Thank you and good morning. Welcome to Valmont Industries third quarter 2022 earnings call. With me today are Steve Kaniewski, President and Chief Executive Officer; Avner Applbaum, Executive Vice President and Chief Financial Officer; and Tim Francis, Senior Vice President and Corporate Controller. This morning, Steve will provide a brief summary of our third quarter results, commenting on our market and long-term business strategy. Avner will review our financial performance and provide our outlook and indications for 2022 and preliminary indications for 2023, with closing remarks from Steve. This will be followed by Q&A. A live webcast of the presentation will accompany today's call and is available for download from the webcast or on the Investors page at valmont.com. A replay will be available on our website later this morning. Please note that this call is subject to our disclosure on forward-looking statements, which applies to today's discussion, is outlined on slide two of the presentation and will be read in full at the end of today's 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. On behalf of the entire Valmont team, I would like to start today's call by offering our thoughts to those impacted by the devastation caused by Hurricane Ian last month, which impacted seven of our facilities in Florida and the Carolinas. We are saddened by the loss of life and destruction we have witnessed and wish our team members, their families and the people in the affected regions a swift recovery from this historic storm. This storm serves as a tragic reminder as to why we speak a lot about grid hardening and grid resiliency. Utilities and other infrastructure companies have invested and continue to invest in structures that will better withstand natural catastrophes. In the case of Ian, recovery efforts were sped along by having a more resilient infrastructure in place, allowing electricity and communication services to be restored very quickly, which is helping the region return to normalcy faster. The industry has done a tremendous job of improving the grid by considering the intensity of recent storms. However, there are still a significant amount of grid hardening yet to be done, specifically in areas susceptible to natural disasters. As an industry leader, we continue to innovate to provide better solutions, and we are proud to work with our customers globally to improve the resiliency of the grid. Turning to slide four and a recap of our third quarter. Demand remains elevated across all of our end markets despite macroeconomic volatility, reflecting the ongoing investments in global infrastructure and agriculture and our customers' preferences for our products. We achieved another quarter of record sales and earnings per share, driven by strong demand and the outstanding contributions of the entire Valmont team as they live out our core values. Our businesses have focused on technology-driven solutions to help our customers operate more sustainably. I am very proud of what we were able to accomplish this quarter. In addition to our team's flexibility and responsiveness to meet customer demand, we remain disciplined in our pricing strategy to ensure we are capturing the full value added by our distinct offerings, as well as staying ahead of inflation, specifically wage, energy and administration expenses such as healthcare and insurance. It's important to note that our approach to pricing is not to simply adjust for variations in cost, but to also lean into the value we offer through our highly engineered solutions, superior shipped complete on time, and unmatched support for our customers. Moving to third quarter results. Sales of $1.1 billion grew 26% year-over-year, driven by a combination of sustainable pricing and mid single digit volume growth, resulting in the eighth consecutive quarter of double-digit year-over-year sales growth. Infrastructure sales of $778.4 million grew 23% year-over-year, with strong sales across all product lines. Investments in grid resiliency and renewable energy sources, upgrades to aging infrastructure, and ongoing 5G buildouts continue to drive broad-based market strength globally for our products and solutions. Additionally, funding from the Infrastructure Investment and Jobs Act is being deployed, and we expect the Inflation Reduction Act to be appropriated during 2023, along with other government spending initiatives across global markets. We believe these are long-term tailwinds for our businesses. Agriculture sales of $327.3 million grew 36% year-over-year. The combination of strong global demand for increased food production, along with widespread drought conditions is keeping farmer sentiment favorable, encouraging irrigation and technology investments. As we had expected, the impact of our typical third quarter seasonality was less pronounced this year, as we successfully delivered backlog from the second quarter. Ag market fundamentals and positive farmer sentiment have also contributed to our robust project pipeline, notably in the Middle East and Africa. Severe drought conditions are persisting across many key global markets, putting pressure on crop yields and expected stock levels, keeping global commodity prices elevated. Turning to slide five. We have been executing on our three strategic pillars of pursuing operational excellence with ESG focus, expanding the markets we serve, and using technology to drive productive disruption across all our organization. We are seeing the benefits of our strategic approach as we build a more resilient business. As an example, we have grown our ag tech sales with attractive margins to approximately $83 million year-to-date, an increase of 15% over last year, on track for full year sales to exceed $100 million. Another example is our focus on high growth opportunities in end markets with favorable and global long-term demand trends. We have done this through targeted investments and organic growth and strategic acquisitions such as our recent purchase of ConcealFab in the telecommunications market. On slide six is an example of our sustainable solutions and a testament to our strategy and disciplined capital allocation framework. Over the past four years, we have successfully entered and grown our solar market presence, both in infrastructure and agriculture through acquisition and investment. The acquisition of Convert Italia in 2018, later rebranded as Valmont Solar, marked our entrance into utility solar markets. Over time, we have solidified our strategic focus on distributed generation projects that offer a more attractive margin profile, less raw material risk, and faster completion than large scale utility projects. Our key international markets of Europe, North Africa and Brazil have more pronounced barriers to entry and favorable legislation that helps drive demand. At the same time, we have been successfully expanding our presence in the U.S. and are targeting additional growth as we move forward. Our competitive advantages of manufacturing capabilities and a global supply chain are enhanced by our deep relationship with developers and utilities. This year, we expect to nearly double our sales to approximately $120 million and anticipate continued robust growth in 2023. In 2020, within the Agriculture segment, we acquired the majority stake in Solbras. Their services have since been integrated with our world class Valley dealer network to provide global ag solar solutions. With the Solbras investment, we became the sole global player in this underserved market, which has tremendous growth potential, allowing farmers to enjoy our scale for projects that are typically much smaller than utility or distributed generation. Also unique, our dealer network offers unparalleled service and support in every region of the world, positioning us to be the partner of choice for a variety of applications. Whether the grower is looking to meet Scope 3 emission goals, realize tax credits and energy savings or produce alternative power generation, our Valley dealers are there to help. We expect continued strong growth in this business. Since entering the market, we are on track to exceed $100 million in ag solar sales by the end of this year. We are very pleased with the execution and performance of both solar teams as meaningful demand of renewable energy sources is expected to continue. In summary, we performed well during the third quarter, building on our momentum from the first half of the year. We are on track to deliver our best full year earnings per share in the history of the company. Demand for our infrastructure and agricultural products remains robust, and our team is demonstrating our core values, while providing outstanding customer service. Our focus on operational excellence is helping us to navigate external challenges, reinforcing our confidence that we are on the right path to deliver even greater value to our customers and to our shareholders in 2023 and beyond. With that, I will now turn the call over to Avner for the third quarter financial review and updated outlook.

Thank you, Steve and good morning, everyone. Turning to slide eight and third quarter results, my comments will focus on the adjusted results as outlined in the press release and in the Reg G disclosure in the presentation appendix. Operating income of $114.1 million grew 42% and sales growth of 26% with operating margins increasing to 10.4%, reflecting higher volume, improved fixed cost leverage, and continued execution of our disciplined pricing strategy. Diluted earnings per share grew 36% to $3.49, attributable to higher operating income, partially offset by a higher tax expense due to a change in the geographic mix of earnings compared to last year. Turning to slide nine. Operating income for the Infrastructure segment increased to $93.6 million or 12.1% of sales, driven by favorable pricing and volume growth. Moving to slide 10. Agriculture segment operating income increased to $47.4 million or 14.6% of sales. The benefits of higher average selling prices and additional volume leverage were partially offset by higher SG&A, including incremental R&D expense for technology investments. Turning to cash flow on slide 11. Year-to-date free cash flow of $117 million reflects a meaningful sequential improvement driven by diligent working capital management, including a reduction in inventory. We expect full year operating cash flows to be in line with net earnings in 2022. Turning to slide 12 for a summary of capital deployment. We continue to maintain a balanced approach to capital allocation or reinvesting in our businesses, which enables us to grow organically and inorganically while returning cash to shareholders. Third quarter capital spending was $17 million and we returned $22 million to shareholders through dividends and share repurchases, ending the quarter with approximately $166 million of cash. Moving to slide 13. The strong cash generation this quarter allowed us to reduce total borrowing by approximately $60 million, further strengthening our balance sheet. Total debt to adjusted EBITDA of 1.5 times remains within our desired range of 1.5 times to 2.5 times. I would now like to review our updated 2022 outlook as shown on slide 14. We are increasing our expected sales growth due to strong third quarter results. We now expect full year 2022 net sales to grow 22% to approximately $4.3 billion, which includes an unfavorable foreign currency impact of approximately 2%. We are also tightening the range of expected adjusted earnings per share to $13.65 and $14. We are confident in our outlook for the balance of the year based on the execution of our operations, our robust backlog and strong project pipeline. A reminder that project timing in many of our businesses can be hard to predict and that changes in our geographic mix of earnings may have a more pronounced impact on our effective tax rate. Turning to slide 15. In addition to updating our 2022 outlook, we are providing preliminary indicative guidance for 2023. Building on Steve's earlier comment regarding global demand trends and maintaining our pricing discipline, we expect 2023 year-over-year sales growth of 6% to 9% and EPS growth of 11% to 15%. This assumes steady market demand, stabilized raw material cost, inflation in line with global central bank expectation, and continued growth in R&D investments. Other assumptions are provided on the slide. We continue to leverage our scale and global footprint to improve margins and mitigate supply chain challenges. Strong cash generation is enabling us to support our capital allocation framework, putting us on the path to achieve our long-term financial targets and drive sustainable shareholder value. With that, I will now turn the call back over to Steve.

Thank you, Avner. Looking at the fundamental market drivers for our segments on slide 16. The trends that have supported us over the last several quarters appear set to continue, providing future growth opportunities. We are delivering great results due to robust demand drivers and our ability to increase output to meet this demand. While these end market drivers remain strong, we acknowledge that growing economic uncertainty is creating headwinds for certain sectors of the economy. Demand for our products is less sensitive to general economic factors. Our backlog solidifies our confidence in our revenue projections. We are investing in capabilities, technologies, and strategic capacity improvements to better enable us to deliver on our long-term goals. Turning to slide 17. In summary, we have demonstrated an ability to grow sales through innovation and execution, bringing unique solutions to solve the complex needs of our customers. We are doing this by advancing operational excellence across our global footprint, supported by a strong and flexible financial foundation, enabling us to invest in our employees and technology. Our disciplined approach to capital allocation has served us well, and we remain committed to making strategic investments to facilitate the achievement of our long-term goals that we believe will result in greater value creation for our shareholders. I will now turn the call back over to Renee.

Thank you, Steve. At this time, the operator will open up the call for questions.

At this time, we will be conducting a question-and-answer session. Thank you. Our first question is from Chris Moore with CJS Securities. Please proceed with your question.

Hey. Good morning, guys. Thanks for taking a couple questions. Well, just when you think about visibility for 2023, which sub-segments are likely least impacted by a further rise in interest rates or modest recession?

Hey, Chris. This is Steve. We've been examining all of our end markets, and the overall conditions are very favorable. Regarding interest rates, we are currently not significantly affected by potential increases. The utility capital expenditure model was recently introduced, indicating a growth range of 6% to 8%. Last week, the CEOs of AT&T and Verizon confirmed their capital expenditures for next year. Agriculture remains largely unaffected by general recession discussions and continues to progress. The lighting and transportation sectors are supported by the Inflation Reduction Act and the Infrastructure and Jobs Act, providing strong growth drivers across the board. Even coatings, which usually correlate with GDP and recession talks, will benefit our business. With the positive market outlook, we anticipate growth in these areas and are not currently vulnerable to a general economic slowdown.

Got it. Very helpful. As a follow-up, you mentioned that telecom CapEx has been reaffirmed, and telco sales were quite strong at $92.8 million in Q3. Is this level likely to be sustainable, or do you expect it to fluctuate over the next year?

Historically, telecom was extremely lumpy. It would be up, it would down, it would be up, it would down. But that was when, I would say, carrier investments had other priorities. If you think of AT&T in the past putting money toward satellite and taking it from telecom, the general consensus now is that even in a recession, nobody's going to turn their phones off. They may cut cable. They may cut satellite. So, we think it'll be a smoother rollout, plus with the mandates for coverage that are out there kind of feeds the impetus to move forward. Not to say that quarter-to-quarter, we won't see some ebbs and flows, but we don't anticipate any kind of a massive pullback.

Got it. I appreciate it. I will leave it there.

Thank you. Our next question comes from Brent Thielman with D.A. Davidson. Please proceed with your question.

Thank you, and congratulations on a strong quarter. My first question is for either Steve or Avner. With steel prices adjusting, where do you think you can maintain pricing, and where do you anticipate quicker pushback from customers, especially considering the strong demand across all your product lines?

Yeah. Hey, this is Avner. I'll start off. So, overall, we are seeing some moderation or reduction in steel prices, particularly hot-rolled coil. However, our usage of plate remains very elevated. Additionally, we are experiencing widespread inflation in various areas, as mentioned earlier in the call, including energy and labor costs. Despite this, we are maintaining our pricing discipline. We continue to raise prices where necessary and have not found the need to lower them, as evidenced by our strong demand and backlog. At this point, I can say that we are committed to our pricing strategy and do not foresee any need to reduce prices.

Yeah. And I would add, Brent, that in utility, as you know, there's already mechanisms to give back any kind of reductions or increases in raw materials. And so, that's been accounted for in our projections as we look forward. So, that's probably the biggest area that would be susceptible to it. Again, market fundamentals, what they are of supply and demand, we're looking at the value that we bring in that kind of environment and making sure that just because some headline costs move, there's other costs that have not or have continued to elevate and we'll keep a close tab on our factory outputs and hit rates and things like that.

Yeah. Okay. I appreciate that. And then my follow up would just be, Steve, you touched on it in your opening remarks, but maybe just your thoughts on the timing and the positive implications of the Inflation Reduction Act on your various businesses and also whether any of the infrastructure bill is beginning to have any influence on the business today.

Yeah. So, I'll start with the infrastructure bill. That was the earlier approved bill that came through. We said it would take at least until the end of 2022 to start really seeing anything, we are. We're coating jobs now. Some of the appropriations have gotten through the states to work on highways and lighting areas. And so that now is really starting to, I'll say, factor in to some of the demand profile we see into next year. With the Inflation Reduction Act, there's a lot of good favorables in there, particularly around energy. So, whether it's solar or the transmission sector, there's some real nice benefits for us. We'll see some of it start in early 2023 in terms of the solar markets, because it kind of changes the project financials for the developers pretty quickly. But really for us, again, to get through appropriations and things like that, it will be later in 2023 kind of event. But it provides good tailwinds as we look at like 2024 at that point.

Yeah. Perfect. Okay. Thanks, guys.

Thank you. Our next question comes from Nathan Jones with Stifel. Please proceed with your question.

Good morning, everyone.

Good morning, Nathan.

We have started to see a lot of companies start to see inventory corrections from – in the channel and from their distributors. I don't imagine that that has much of an impact for you in that you don't have much inventory sitting out there that might need to be cleared. But can you just talk about any places where that might exist or doesn't exist, and what kind of impact that might have for you?

Yeah, Nathan, the only area where we have any inventory in the channel is in agriculture with our dealer network, and they have had very low inventory levels throughout the summer. So, there's no overhang or correction there. In utilities and direct customer sales, there is minimal inventory. In telecom, particularly with the Site Pro 1 components, there’s a little bit of inventory, but still no overhang. We're aiming to meet demand in those areas. The lighting and transportation sectors typically go through our rep organizations, which do not carry inventory. Overall, I would say there isn’t much of an inventory correction in the industries we serve.

That's what I figured. I want to talk a little bit more about pricing and the sustainability and strategic value pricing that you guys have looked at. Historically, pricing and margins has been correlated to supply and demand. And when that's tight, you've been able to generate better margins and when it's not, margins are falling. So, it is cyclical and your businesses don't tend to correlate with the business cycle and we might be early in some of those cycles. Can you talk about any way where you think there's a difference? Obviously, supply and demand is tight now, and so you guys have a lot of pricing power. Do you think you can maintain that pricing even in the environment, which may be a few years down the track, where that balance is not as favorable here?

Yeah. Nathan, I would say that we had to develop a true pricing muscle. So, we're looking at it much more regularly. We have analysts that analyze it every day, every week. That's not a trait that we had in the past, and so now that's kind of embedded within the sales organizations. I'll say also what gives us confidence to hold it is our real push on operational excellence and building a supply chain team so that we see what's coming at us with a lot more visibility than we would have in the past. There's a materials council of senior executives in Valmont that get together on a regular basis to look at everything from hot-rolled, to plate, to zinc, to copper, you name it. We look at it and we look at what our positions are and what we should do. And so that's how we believe we'll be able to maintain a lot better pricing discipline as we go out. And I'll say lastly, from a capital allocation perspective, part of our problem in the past is overcapacity. And I think we're being much more diligent in our capacity additions to really make sure that we're not getting too far ahead of our skis, so to speak. And I think that in the markets we serve which are fairly nichey, can help keep things a lot more moderated than maybe in the past with some of the ups and downs.

Thanks for that. I just had one more. I wanted to talk a little bit more about that ag solar business and the history of it. I mean, getting up to $100 million out of that is a pretty significant chunk of the agriculture business now. Can you talk about where that's been historically, I don't think you've owned that business for very long, kind of what the growth rates have been and what you think the potential growth rates a few years might be?

We acquired it in November 2020 when it had only a couple of million dollars, all based in Brazil. Throughout 2021, we began to assemble a team for it and examined how to effectively approach the market and manage multiple projects at scale. Thus, 2021 was a foundational year for us, and it has proven beneficial. Sometimes luck plays a role, especially in Brazil where the legislation shifted to allow retail net metering, sparking a surge in solar adoption. We identified that agriculture particularly needs to be environmentally responsible, and many operations, no matter how remote, can transition to solar affordably. We have the capacity to purchase and produce at scale, allowing us to outperform local electrical contractors, which has contributed to our rapid growth. We anticipate growth rates of at least 15% to 20%, reflecting trends in the solar market, which remains relatively underserved. Our dealer network is essential as they already have the necessary equipment and expertise to implement these solutions. Additionally, our custom monitoring software enables customers to track their energy production, reinforcing our confidence in the growth prospects for both our agricultural solar segment and distributed energy initiatives.

Okay. Thanks very much for taking my questions.

Thank you. Our next question is from Brian Drab with William Blair. Please proceed with your question.

Hi, thanks for taking my question. Steve, regarding the last point, with agricultural solar expected to grow 15% to 20% in the long term, it seems impressive that you increased revenue from $0 million to $100 million in about a year and a half. Would a 15% growth in 2023 be seen as disappointing or at the lower end of your expectations? Is there a chance this business could potentially double again in 2023?

It definitely has the potential to do that, Brian. We're examining market figures as we look ahead. Of course, we allocate capital with a long-term perspective. As it gets off the ground and gains momentum, you'll see results. It's just the law of small numbers; we can double it fairly quickly. Currently, it's focused on scaling up. The only caution is that we need to build our sales or engineering teams and enhance our supply chain. In Brazil, we have a strong presence, but in other regions, we are still in the process of establishing that. We've completed some projects in places like Bulgaria and the Middle East, which will take time to further develop our team there. However, the fundamentals are strong, and we have a solid go-to-market strategy.

Great. Yeah. The reason I think it's an important question, of course, is just that if you're able to add another $100 million, I mean, that accounts for a couple of points of your organic revenue growth for next year potentially from this business that has kind of popped up out of nowhere in the last year. But I'll just ask one more question for now. You gave us guidance for revenue growth for next year. I'm wondering if you could potentially give a little more granularity in terms of what your expectation is for volume, pricing. Is there any contribution from acquisitions in there or what's the expectation for FX in that expectation? Thanks.

Yeah. Sure. I'll take that one. So, we will provide additional data, of course, as we go into next quarter and finish through our budget process, et cetera. But at a very high level, we should continue to expect mid single digit growth in the volume. Pricing, we're not going to see anything nearly like we have this year. It gets more to a normalized and historical basis. On the currency, on the FX, right now, we're seeing about a negative 1% impact and that's kind of how we roll up pretty much 6% to 9%. And at this point, we're not taking in any new acquisitions into those numbers.

And just to be clear, you're assuming pricing?

That’s right.

Thank you very much.

Thank you. Our next question is from Ryan Connors with Northcoast. Please proceed with your question.

Thank you for taking my question. You've covered a lot, so I don't have anything new to add. I just wanted to clarify a couple of things from earlier. You mentioned, Steve, about price and cost a few questions back, and that for the orders already in, those costs are fixed. There's no impact when raw materials fluctuate. Is that true for the entire backlog? Can you explain that further? Is everything in the backlog purely based on cost escalation with no risk exposure, or is there a chance for variability?

No, there are definitely areas that things can move around. On hot-rolled, as an example, we can take positions, I think we can take positions. On fuel and energy, we can take positions. On plate, we can't. The markets are too thin. They have too much variation with them. And it's one of the reasons why you still see plate over $1,500 a ton when hot-rolled is around $700 a ton. So, it's double. There, it has to be good inventory management. It has to be the right timing to bring in raw materials. And so, earlier in this year, in the first and second quarter, we were still being pinched a little because of the stubbornly high kind of plate number, where the averages were starting to drop because of hot-rolled. And so we saw some of that. Now, there's been a lot of stabilization in that raw material. And, again, we've gotten much better not worrying about literally supply. When we first tried to buy it, it was hard to even get it in the marketplace. So, we kind of overdid it a little bit. That will help us as we go into particularly the first half of next year. But the backlog, the further it gets out is always a potential concern. But where we are at right now as compared to where we would have been a year ago, we're in just a tremendously better place when we look at that $2 billion of backlog and kind of knowing what kind of margins we can get out of it, how we can perform with the tight labor markets, all the supply chain disruptions that have occurred, et cetera.

Thank you for that information. I also wanted to inquire about pricing, specifically in agriculture and irrigation. Unlike the telecom and transmission sectors, agriculture does not operate on a bidding basis. Therefore, there is a more strategic approach regarding how various players will position themselves around pricing. I have noticed some early signals from tractor manufacturers regarding pricing for the upcoming year. Are you planning to take the lead in pricing, and can you share your strategy? There is considerable uncertainty for farmers, so what is your approach to pricing in this unpredictable environment as we approach the next major selling season?

We've always led with our pricing strategy. We're analyzing input costs and service levels, which are quite different from what they were during the last peak in 2013 when outsourcing production was much easier due to a more accessible supply chain. The current environment requires us to maintain a value-based pricing approach to support our efforts and ensure sustainability. Recently, we implemented a 3% price increase expected to take effect by the end of the year, considering the factors impacting our industry. With net farm income and crop prices where they currently stand, farmers report yields of 280 to 300 bushels of corn with irrigation and around 75 to 80 without. This creates a strong value proposition for them. Water is essential for crop production, and we aim to enhance our offerings over time. We are now integrating the Insights products from Prospera with our pivots and have started that process this quarter, which we believe will increase the overall value and help sustain our pricing strategy.

Got it. Okay. Hey, thanks for your time this morning.

Thanks Ryan.

Thank you. Our next question comes from Brian Wright with ROTH Capital Partners. Please proceed with your question.

Thanks. Good morning. Could you give us how to think about the potential impact of Hurricane Ian on the backlog for next quarter? Or maybe that's too early, but just how do you think about how that could build the backlog over the coming quarters maybe?

Hello, Brian. That's a great question. Typically, when a large natural disaster occurs in the utility sector, we need to reassess where our backlog is headed. This means we will have to create space in the fourth quarter for emergency orders that utilities in Florida may place. As a result, some existing orders will have to be pushed into the beginning of next year. This creates some immediate disruption, but it doesn't fundamentally change the overall volume; it just alters the mix of products coming from our factories. After some initial chaos, the utilities will evaluate what needs to be replaced and what kind of infrastructure will be used, leading to follow-up orders. The longer-term impact is that they will recognize the benefits of the grid enhancements made in South Florida and how quickly they were able to recover compared to past major storms. This understanding reinforces the need for grid hardening among regulators, government leaders, and utility executives, establishing a strong long-term demand driver. While there may be minor spikes in demand, we don’t typically see a massive surge. They had some inventory ready, and we have stock available for them. Overall, we expect 2023 to be a strong year due to these factors.

Great. I also wanted to follow up on another topic. With the total debt to adjusted EBITDA being at the lower end of the range, I’m curious about how you see that impacting future M&A activities, particularly in light of your success in ag solar. I’m not looking for specific areas of interest, but rather your thoughts considering your current capital position and potential M&A activity.

This is Avner, and I will address that question. First of all, we are very pleased with our ability to generate cash over the last quarter, which has strengthened our balance sheet. We now have significant resources available, putting us in a great position. Our strategy for capital allocation remains consistent. We have many internal opportunities to invest in our portfolio, including capital and automation. Additionally, we have a robust pipeline for acquisitions. We are focusing on areas where we can continue to drive growth, particularly in strong markets, similar to our recent acquisition of ConcealFab last quarter. Steve mentioned the solar sector, which is among the areas we are targeting for growth, synergies, and ultimately a solid return on invested capital. We plan to effectively utilize our balance sheet and, following that, we will return cash to shareholders through opportunistic share buybacks and dividends.

Great. Thank you so much.

Thank you. Our next question is from Jon Braatz with Kansas City Capital. Please proceed with your question.

Good morning, everyone. Steve, in your comments about Valmont Solar, you mentioned a focus on distributed energy. Does this indicate a decreasing interest in utility-scale projects?

No. In fact, we spent the last couple of years really building up our team to handle the utility scale, particularly on the U.S. basis. But we just want to be very disciplined about the kinds of projects that we take. When the raw material inflation occurred around steel and the modules were restricted, there were jobs out there that from a volume perspective looked very attractive but from an operating income perspective would have been a disaster for us. So, there's enough market growth out there that we'll be able to take utility scale, but we'll do it based on kind of the right value for us and for whoever the developer or utility happens to be. So, we do have some orders in the U.S. But in terms of the large scale bids, you will see us from time to time take those as we believe we can make money and lock in our risk around those orders.

Okay. And then secondly, what are the prospects for additional large-scale irrigation projects in Africa and the Middle East? I know you've had some recent projects, but how do the prospects look for additional business in those regions?

There are still several significant projects available, particularly in North Africa and the Middle East, with some being even larger than the projects we previously had in Egypt. Additionally, there's a robust pipeline of projects ranging from $10 million to $40 million. This demand is strongly influenced by factors such as food security, the need for increased local food production, reduced vulnerability to currency fluctuations, and the impacts of COVID-19, which have reinforced countries' goals to enhance market stability. These elements are beneficial for us and for the entire pivot industry.

Okay. Thank you.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the call over to Renee Campbell for any closing remarks.

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. And we look forward to speaking with you again next quarter.

Included in this discussion are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made in light of experience in the industries in which Valmont operates, as well as management's perceptions of historical trends, current conditions, expected future developments, and other factors believed to be appropriate under the circumstances. As you listen to and consider these comments, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties, some of which are beyond Valmont's control, and assumptions. Although, management believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include, among other things, the continuing and developing effects of COVID-19, including the effects of the outbreak on the general economy and the specific economic effects on the company's business and that of its customers and suppliers, 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.