Valmont Industries Inc (VMI) 2007 Q3 法說會逐字稿

Good morning. My name is Cynthia and I will be your conference operator today. At this time, I would like to welcome everyone to the Valmont Industries' third-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 would now like to turn today's call over to Jeff Laudin, Manager of Investor Relations. Please go ahead, sir.

Thank you, Cynthia. Welcome to Valmont Industries' third-quarter earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer; and 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.

Thank you, Jeff, and good morning, everyone. Thank you for joining us. Let me begin with third-quarter highlights.

First, sales increased 20%. Second, operating income rose 30% and net earnings increased 72%. Third, operating income as a percent of sales was 10.1%. And finally for the quarter, our effective tax rate fell to 22.1%.

Before turning to the performance by segment, I'd like to make a few general comments about the quarter. During this quarter, our businesses operated very well. The market drivers that support our businesses remain solidly in place. We benefited from an improved outlook in the agricultural economy worldwide, increased worldwide spending on infrastructure, strong spending on the electrical transmission grid in North America, and improved demand for our Tubing and Coatings businesses. Unit volume increases and the accompanying operating leverage were the major factors leading to the increase in operating income.

Below the operating income line, our results improved due to a positive comparison in the nonconsolidated subsidiary line due to a charge last year of $2.1 million and a reduction in the effective tax rate.

There were several items that occurred this quarter that caused our effective tax rate to be substantially lower than normal. The most significant item related to certain tax contingencies previously accrued for that were reversed due to the expiration of statutes of limitation. In addition, our mix of international profits taxed at relatively lower rates and higher tax credits earned this year also contributed to a lower income tax rate. Going forward with the current mix of international and North American profits, we expect an effective tax rate in the range of 32% to 34%.

Let me now review results in our individual segments, beginning with the Engineered Support Structure Segment. Sales increased 24% to $164.8 million. North American sales increased largely due to higher sales to lighting fixture manufacturers. A number of large original equipment manufacturers of lighting fixtures bundle our poles with their luminaires and deliver the combined packets to end-users. Our broad product offering, quality and customer service support support long-term relationships with key customers. Sales of commercial utility lighting and transportation products were slightly lower.

We have been asked if the situation in the subprime mortgage markets will impact our businesses. We have a relatively modest exposure to the housing markets in our lighting business and, to a lesser degree, commercial lighting for shopping centers. If new housing starts were to decline significantly, that portion of our business would be affected. However, at this time, it is too early to tell what short-term effect, if any, the situation will have on our lighting business.

As we have mentioned previously, there has been a slow ramp-up in highway spending. Municipalities and departments of transportation have to reduce project sizes due to inflation. There was also a delay in the final appropriation by Congress of highway funds this year. In spite of this, we believe the need for our structures will grow due to the increase in road miles traveled per capita and sensitivity to the deteriorating condition of U.S. infrastructure in general.

In Europe, continued strong municipal spending on infrastructure and beautification projects led to sales increases there. Sales in China remain strong, as infrastructure investments continue to support our wireless communication and utility structure businesses there.

Segment operating income increased 15% to $16.7 million and was 10.1% of sales. Segment profitability rose largely due to the improved results in Europe and China. While the Specialty Structures business continued to adversely impact profitability, we expect this business to achieve profitability during 2008.

In the Utility Support Structure Segment, sales increased 19% to $79 million. The increase in Utility sales is being driven by greater spending on the electrical transmission and distribution grids. The grid is operating above its rated capacity in many areas, taxing the system during times of peak uses. To improve reliability and relieve capacity constraints, electric utilities are operating and expanding the grid. Our order rates and backlog remain strong in this business. Segment operating income increased 50% to $10 million, or 12.7% of sales, as a result of the higher volumes and operating leverage.

In the Coatings Segment, third-quarter sales of $34.3 million were 15% higher than last year. The increase was due to higher tonnage, both from internal and external customers. While zinc prices have eased somewhat, they were still above last year's third-quarter levels. Operating income increased 3% to $6.1 million, or 17.8% of sales. The primary reason for the smaller increase in operating income compared to the increase in sales is due to the inclusion of a onetime $1 million gain on the sale of property in the third quarter of last year.

In the Irrigation Segment, sales were 25% higher at $84.8 million. North American markets were primarily driven by the outlook for higher farm income and improved agricultural economy. The level of sales gain was encouraging, as the third quarter is the time of year when farmers have their attention focused on final crop conditions and the upcoming harvest. Sales were also higher for replacement parts. Crop conditions in many growing regions led to increased use of irrigation equipment and the need to replace parts.

Higher world grain prices and solid demand in our core markets led to increased sales in our international irrigation markets. Our local manufacturing and extensive distribution network internationally are supporting our successful growth around the world. For the Irrigation Segment, operating income increased 59% to $8.9 million due to higher volumes and improved factory performance.

In the Tubing Segment, sales increased 5% to $24.1 million. Demand was stronger for Specialty Tubing sizes and from agricultural equipment manufacturers for grain storage and handling equipment. A favorable sales mix and higher volumes led to a 13% increase in operating income to $4.3 million, or 17.9% of sales.

Turning to other financial measures, increased inventories and Accounts Receivable largely reflected higher sales levels. In terms of cash flow, the depreciation and amortization for the quarter was $8.8 million, and capital expenditures were $15.9 million. The increase in capital spending mainly reflects capacity expansions in the Engineered and Utility Support Structure Segments.

For all of 2007, capital expenditures are expected to be between $55 million and $60 million, as we build additional capacity in the structures businesses to meet increasing demand. Our expected depreciation and amortization should be about $35 million.

In summary, we had an excellent quarter. Sales gains were broad-based and reflected volume improvements as well as favorable pricing. And we got strong leverage on increased volumes. Our current outlook for the fourth quarter is for favorable comparisons in sales, operating income and earnings.

This concludes the prepared portion of our remarks. I'd like to take your questions now.

(OPERATOR INSTRUCTIONS) Arnie Ursaner with CJS Securities.

Good morning and congratulations on a very good quarter. First question I have is in the Irrigation business, you had a particularly good -- you mentioned in your prepared remarks you had greater sales of replacement parts. Normally those are much higher margin. Could you comment a little bit on how that may have impacted the overall margin in the segment and your view going into the upcoming next six-month period, where the farmers will be placing orders?

Well, yes, we had stronger replacement part sales and, yes, they tend to have higher margins. But in relationship to the overall sales, it is still not very significant. Maybe more so in the third quarter than in general.

And going forward, we see the main drivers, at least short-term, for the business to be positive. Net farm income is expected to be up significantly in this country and commodity prices worldwide support a positive outlook for that business.

Okay. Shifting gears a little bit to the Tubing Segment, you mentioned that you had an increased need for grain handling and storage equipment and highlighted the large harvest season. Is some of that positive trend onetime, in your opinion?

Well, it has been a trend we have seen the last couple of years, but at some point of time, that is going to flatten out. There is only so much you can increase production; therefore, the need for storage. So, yes, I would say that over time, that mix will probably change.

Okay. My final question would be your view of margin trends for the overall company as you look towards 2008. Obviously not a specific projection. But in the past, you've spoken about rates of gain you hope to achieve. And given your budgeting process and your view of next year, what sort of margin improvement might we look for as we into next year on the operating line?

Well, we are in the middle of our budgeting time here. And we did indicate that we were comfortable that we would meet our goal of 10% operating income as a percentage of sales in 2007. Now, if we continue to get good leverage opportunities in our plants as volumes hopefully will continue to increase, we ought to be able to see some further gains. To what extent we will see that depends on the kind of leverage opportunities we see and also the kind of decisions we make as to overall pricing in the marketplace. So that is kind of our outlook going into next year.

I will jump back in queue. Thank you very much.

Ned Borland with Next Generation.

Good morning, guys. Just a question on the international business. I mean, as it is reflected in the tax rate, it being kind of artificially low, you had some onetime gains in there. But are we looking at a picture where the international business was materially better than the domestic business, or how does that play out with regard to the tax rate?

No, the international business I wouldn't say is materially better than the domestic business. But as our international business continues to grow -- and in many areas international we have a lower tax rate than we have in North America -- to that extent, that will blend down our overall combined tax rate.

Okay. And then on the capacity addition projects that you had, some of it was going in this year; I think some of it was going in next year in structures -- the China plant opening up next year. How are those progressing?

They are progressing well. We had maybe three major areas of capacity being added. One is in the Utility business where we're adding some capacity in Tulsa, Oklahoma, some in Jasper, Tennessee; and we finalized some addition in California. They will pretty much be online by the end of this year, and that would allow us to serve the market going into '08.

In the Engineered Support Structure side, we are building a medium-size coal plant here in Nebraska, and that will probably come online by the middle of next year. And we expect the third China plant to be opened during the third quarter of 2008. All of these projects are basically on track.

Okay. And then on Irrigation, obviously it is an impressive quarter and you had kind of a soft seasonal quarter, as you said. Are farmers perhaps maybe because they are so confident about the farm income in North America, with crop prices being where they are, are they maybe buying a little bit earlier. Is any of this volume that you saw maybe perhaps pulled forward from the fourth quarter, when they traditionally start to jump in?

You know, it is a question that is hard to answer precisely, but let me say that we have indications that that is the case. And personally, I don't believe that is the case.

The closest correlation, short-term, between our Irrigation business results -- or to our Irrigation business result is net farm cash income. And this year, that is predicted to be very strong. So, I think we have good conditions going into the fourth quarter, and I don't think that we have seen a significant move forward of business from later in the season to the current quarter.

Okay. That is all I have. Thanks.

Jon Braatz with Kansas City Capital.

Good morning, Mogens, Terry. A couple issues -- or questions, I should say. Mogens, you talked a little bit about the margin and the growth in the margins and so on. And you mentioned there might be some pricing opportunities and so on. Are you -- things seem to be very good. Are you able to -- have you been able to increase prices anywhere, or are you thinking more about price increases as we move into 2008?

Well, I think we have been pretty successful in taking pricing actions over the last couple of years. We have gotten some benefit from better leverage in the manufacturing plants as we have gotten more volume through. But I would say that a not insignificant portion of our improved performance has come from pricing actions. And as you know, it is one of the areas that we are spending quite a bit of time on to try and become better in how we price, better in understanding the value we deliver, not only by productline, but by customer -- and adjust our pricing to that.

Okay, okay. I guess my question is do you think there might be more opportunity next year?

Yes, I think there are always opportunities in looking at pricing. And there are a lot of factors that influence our ability to do so that we have no control over -- the general size of the market, reaction from competitors, marketshare considerations, etc., etc. So it is not something we look at in a vacuum, but it is one of the tools we look at to try and maximize our overall performance, which is a balance between volume and pricing, etc.

Okay. Secondly, in the Irrigation business, I know Nebraska is -- and this is getting pretty specific -- Nebraska is a big market for you. The growers in Nebraska had a phenomenal year. Can Nebraska itself, in the Irrigation business, really move the needle significantly? I know there has been a lot of movement from gravity to center pivot irrigation. But is there still a big opportunity, and given the farm income that the Nebraska farmers are seeing this year, can we see a big increase in sales out of Nebraska?

Well, I wouldn't tie the future performance of our Irrigation Segment too much to Nebraska. Nebraska is an important market, and Nebraska will continue to be an important market, but so are a number of other states and countries around the world. We have had -- I'm sure the Nebraska farmers, as you say, will have a very good year. But so will farmers in other parts of the country and other parts of the world. And we have some water issues in Nebraska that may actually move in the other direction some of the opportunities for additional irrigation here.

But I would say when we look at our Irrigation Segment, it really is driven by worldwide commodity prices. And that is what commodity prices are -- they are not specific to one geographic area. And we think that when you look out towards the near-term future, the drivers are very positive worldwide. And it is not just tied to one particular, maybe, subject like ethanol. Ethanol is one part of the overall puzzle.

But if you look at global grain consumption over the last few years compared to grain production, there has been more consumption than production. And as a result of that, we have ending inventories of the major grain groups, such as corn and soybeans and wheat, at levels as low as we haven't seen them maybe for decades. That is what puts the main pressure on commodity prices and on farming industry worldwide.

And it is not only grain for food production, but there is an increasing amount of pressure also put on by production of grain for biofuels. And in certain countries, it may be corn; in others, it maybe sugar cane, etc., etc. But the drivers are by and large positive worldwide.

Okay. One final question. I know this will be eventually in the 10-K, but you have been talking about the international growth. It looks like maybe sales revenue this year might be up 17, 18%, or something like that. Can you give us any idea at this point in time what international sales growth has been versus domestic?

I don't have the exact numbers here. But I would be surprised if international sales has outgrown North American sales to any great extent.

Okay.

I think we have had good sales and volume growth in this country and internationally.

Okay. All right, Mogens. Thank you very much.

[Steven Gambuza] with Longbow Capital.

Good morning. I had a question on the Engineered Support Structure Segment. It looks like you put up 24% revenue growth year-over-year there, but the operating margin declined 70 basis points year-over-year. I was wondering why you didn't get better leverage on incremental sales there.

The specialty structure is part of the Engineered Support Structure. Our lighting business is performing very well. Our Specialty Structures is not. And we are taking a number of actions to improve that performance. And as I said in my prepared remarks, we expect that business to turn profitable during 2008. So, I would say that, in summary, that is where the problem has been and that is why you did not see the leverage in that business as you saw in the other businesses.

Okay. I guess I just wanted to clarify that point about getting profitability there. Does that actually imply that the business is actually losing money or it is just not achieving your targeted operating margins?

The former.

Okay. And given the negative comparison year-over-year, is it fair to say that it actually deteriorated versus the third quarter of 2006?

Let me just make sure -- maybe slightly.

Slightly, okay. On the Irrigation front, where you put up really strong results and had tremendous leverage on incremental sales, around 35%, I was just wondering if you could comment on -- it looks like of the $17 million increase in revenue, if you could just give us some approximate sense for kind of how much of that was driven internationally and how much of that was kind of price versus volume.

I would say most of it was probably volume, and therefore it was favorable leverage in the manufacturing plants. And I would say from a volume standpoint, it was about 50-50 growth internationally and North America.

One of your key competitors recently reported results and indicated that their North American sales really didn't show much unit growth, and it was really price that helped them on the revenue front. Do you feel like you might be picking up some share in domestic?

Well, if you look at the increase in volume between the two companies -- if I guess the one you are referring to -- I don't think you'd come to that conclusion.

Okay --

(Multiple speakers) Maybe I misunderstood your question. You mean that we picked up share?

Yes. It looks like -- because they are basically saying they didn't grow unit volumes in North America.

Yes, I think for the quarter, that is probably the case. But, you know, you can have movements between quarters, etc., etc. So I wouldn't put too much into that.

Okay. And then finally, on the Utility Support Structure Segment I was wondering if you could comment -- obviously very strong results, strong revenue growth, good incremental margins and a very favorable backdrop. I was wondering if you could just comment on if there is any single, large transmission projects -- which we're hearing about many multi-hundred-mile projects that are driving these strong gains -- or if it's -- right now, it's just kind of more of a kind of maintenance-level spending that is driving the increases.

I think it is a combination of both. Over the last few years, we have seen a tendency towards more very large projects. And I would say when we look over it the next couple of years, that is still the case -- the kind of projects you just talked about. Which can also create, if you will, lumpiness in revenues between quarters, because some of these large projects may affect that. But I would say that we have a healthy balance between what you would call maybe more maintenance business and major new lines. But the long-term trend has been towards larger projects.

Okay. Do you have a rough sense just about in total what currency benefit was for the quarter in terms of revenues?

I wouldn't think very much. I mean, the dollar declined maybe a few percentage points during the quarter. And since we have a good portion of our business in Europe, we would have picked up a little benefit there. We have a good portion of our business in China, and the change in exchange rate there was basically nothing. So I wouldn't say it is a very important part.

Okay. Thank you very much for your time.

[Tom Whitecap] with [Value Holding].

Good morning. I'm just trying to reconcile the profitability problems in the Specialty segment. Is that coming from the North America side or is that coming from the Chinese side?

It is all North America. Specialty Structures is only a North American business.

Okay, let me essentially rephrase this. Where within the Engineered Support Structures are the sales to the Chinese wireless market?

They are not -- they are in the global segment numbers, yes.

Can you -- so are we going to get more detail on that --?

The area of the Specialty Structure business where we have had severe problems, in my opinion, is the sign structure side, not really the wireless communication site. We may not completely like the profitability levels in the wireless communication side, but I think we have been pretty pleased with the progress we have made there.

The sign structure side is where we have encountered the most difficulties, and I would say most of those homemade. That it is internally, we have not done a good job of pricing. We have not done a good job -- as good a job as we could on engineering and understanding the cost structure in that business. So it is not, in my opinion, a market issue. This is an issue that we created ourselves and one we need to get out of.

But do you think assuming the funding for highway projects picks up next year that that is going to benefit profitability as well as internal steps you take?

Well, I think mostly it's going to be internal steps. I think our volume has been okay, but we have not managed that business as well as we should.

Okay. And also, staying stand on the Engineering and Support Structures, do you anticipate branching off into different markets? One of your competitors is making a big jump into the wind energy market. Is that something you see yourself doing?

Well, we actually spent quite of R&D money over the last number of years, ending early this year actually, in wind structures. And what we found was that, yes, we could design and manufacture a good structure for the larger wind turbines. But we did not see a way to get the kind of returns, both from an operating income side and from a return on invested capital side, that would encourage us to invest in that business compared to other opportunities we have.

It is a growing business. It is a business that in a way is in our sweet spot, as we are strong in support structures. But there may be some industries where volume is good, but profitability is not to the levels that we would like to see it. And maybe one day we will find the key to success also in that market, but so far, it has eluded us.

All right. Great. Thanks. Good luck next quarter.

James Gentile with Newland.

How is it going?

Wonderful. How are you, James?

Very good. Just going into the Q4 model a little bit, I know, looking at the prior Q4 period comparison-wise, Irrigation was weakest. In addition, Engineered Support Structures showed a sequential decline from the Q3 to Q4 period of '06. I was just wondering if we can expect that same trend into the Q4 period of '07.

Well, James, as you know, it is difficult to predict. Last year, we had on the ag side delayed harvests and other issues I don't know that we ever really totally understood. But everything else being equal, and if the weather holds, I think in general you wouldn't necessarily predict a decline. But it is a lot weather-related. That fourth quarter is very weather-related, as is the first part of the first quarter.

So your question is, can we see an uptick potentially from this quarter to the fourth quarter in those two areas? Yes, you could, if everything held on. But I think it is so dependent on weather, delayed harvest, etc., that it is hard [to] the statement, yes, we are going to see that.

Right. I mean, I would just say over the last five years that the Q4 period, from an operating profit perspective, was the smallest, right?

Yes.

Like four out of the last five years, approximately. And Engineered Support Structures, similarly kind of not as a consistent trend there in the Q4 period. But with regard to the continued weakness in your sign structures business and the potential recovery there, how could we understand the volume trends you indicated in the prepared remarks, Mogens, that some of the highway spending contracts have been a little bit slower to come to fruition due to price inflation. Just help us out there with that trend.

Well, I think, longer-term, as I said, we like the trends in our businesses --

Oh, no question.

When you talk specifically about the fourth quarter, it really comes down to our order flow is good, our backlogs are good. That should translate into a good, strong quarter. But what can happen when you get into November and December, you can get into snowstorms and all of our equipment goes to outside installations. And therefore, that becomes an unknown in any particular quarter; same in the first quarter.

Understood. So the major variations in margin Q4 over Q3 historically has been driven by milder or cooler weather issues?

Yes, right.

And then with regard to the additions to the Utility Support Structure Segment, how could we look at that business with regard to incremental volumes -- how much more volume are you adding to the system in Utility -- and how we can kind of understand the margin ramp of that new capacity?

Well, the Utility businesses at the current time are operating very well from a profitability standpoint --

Yes.

-- and they have added volume by year over the last few years, and we expect increased volume in that business also next year. We didn't build new plants; we added capacity --

Just capacity to existing plants.

-- to three existing plants. And therefore, that should come onstream without having a negative effect on the overall margin, because we don't have to add SG&A, overheads, etc., etc.

And then with regard to some of the larger contracts that you have with your Utility customers, that you have some favorable longer-term contracts with these Utility customers that mitigate the cyclicality there. At what point, in your opinion, do you see some of that business moving to the spot market versus not? Or is it still primarily this Alliance business?

Well, I would say it is both. You know, the big project business is being put in place by all utilities, all the big utilities. Some are some of them are Alliance partners and some are not. And so these are projects that are not exclusive to our Alliance partners. We certainly participate also in the tender business, etc., for the rest of the utility industry, which is all important to our overall performance.

I got you. And then with regard to the absolute capacity that you have in the Irrigation Segment, you obviously see favorable crop issues today with regard to worldwide demand for grains and corn, etc. How can we understand the -- it has been said that the McCook facility could answer the worldwide demand for center pivot irrigation systems. Could you just comment on like the secular versus cyclical market growth of that business?

Well, first of all, on capacity, I would say that from a manufacturing standpoint, from an equipment standpoint, from a facility standpoint, we are not worried about capacity, even if we get a very strong uptick in the irrigation business, if that is what happens. My biggest concern there is actually getting sufficient people onboard and training them --

Right.

We are seeing issues with finding good, qualified welders and drafters, etc., etc. in our various businesses. And that, to me, is a bigger concern to address short-term opportunities in our markets than the actual physical facilities. At the same time, we do have a network of plants in the irrigation business in North America and around the world. So we have some flexibility. But a lot of the critical components, such as gear boxes and electrical controls, etc., are, for the most part, sourced out of the U.S.

Got you. And then finally, how can we understand -- I mean your Coatings business, from a profitability perspective, has probably surprised everyone from an earnings contribution perspective. Help us understand the cyclicality of that business from a pricing perspective. I mean, at what point, Mogens, do you see the ability for pricing to kind of pull in with regard to the zinc issues that you are finding from a raw material perspective?

Well, I would say that over time the Coatings business should operate at profitability levels like what we are seeing now. A few years ago, when there was a downturn in volume combined with very low zinc prices, we had some issues on profitability. We have been able to pass on the increasing prices and have those price increases stick. So I would hope and I expect that the profitability levels we are seeing now are more what we should expect and deserve in that business.

When it comes to growth in that business, it will mostly come from -- volume growth will mostly come from new facilities, either facilities we buy or build.

Right.

Each individual galvanized is sized for a certain volume.

Got you. Looking at -- and just looking at the Structural Coating -- your asset base in Coatings -- you have not taken any capacity off at this juncture, right?

No, we have not.

Okay, great. Congratulations, guys, on great execution.

Arnie Ursaner.

Hi. Going back to the ESS Segment first, if I can. In the Q4 conference call, you indicated that if the Specialty Structures had been flat, that would have added 70 basis points to consolidated operating margin. And in Q1, I think you indicated that the impact was even more severe. Given that you mentioned that you lost money this quarter, if it had not been in there, what would the overall impact on operating margin for the Company have been? Can you give us some sense of quantification on that?

No. I mean, we have it, but we don't break that out. But it is a business, as I've said repeatedly, that is not performing well and it has been losing money, and we expect it to turn profitable next year. And that clearly will have a positive impact on our overall margin, but it is a small part of the overall business and it is a small part of the ESS Segment worldwide. But any improvement there will improve our overall business.

Would it be fair to say that the magnitude was similar to Q4, where it was a 70 basis point impact on consolidated margin? Would it be similar or higher in fact?

I can't answer the question, because, first of all, I don't remember the 70 basis points in the quarter you referred to.

You indicated that in your Q4 conference call -- that if the ESS segment had just been flat, it would have added 70 basis points to consolidated operating margins, so --.

I'm trying to calculate quickly in my head here whether that is --

Arnie, I don't recall the number. It would indicate it was probably related to the Segment, not related to the consolidated, but (multiple speakers).

That would make more sense, yes. That it would add that profitability to the ESS segment.

Okay. Percent of your revenues coming from China -- what is that number, please?

Well, I would say for this year, for the whole year, we are probably going to approach $100 million. And in total revenue, we approach $1.5 billion. So that is the relationship.

And your plant utilization, where do we stand now on that?

I would say in China with the current two plants, we are probably at maybe 70% or something like that.

Okay. Shifting gears -- I'm sorry.

That also depends on product mix, etc., etc. But round numbers, I would say that a plant should do 50 million out. And we have two plants in China, but the Shanghai plant has been able to generate more revenue than we originally thought in that facility. So I would say, all in all, probably about 70% utilization now.

Okay. Your inventories have stayed at pretty high levels. I know over the few years you have been concerned at various times about getting enough steel inventory. But last quarter specifically, you also had kept extra zinc inventories because you had two kettle rebuilds. Comment a little bit more on your goals or expectations on maintaining or reducing inventory over time.

Well, I would say in general, I'd like to see our inventory turns to improve over what it is. We have had some instances where we have had maybe what we thought favorable steel buys, and sometimes they turned out that way and sometimes not. But in general, I think we have done a better job on the P&L side of our business than the balance sheet side. I don't think we are doing a bad job, but I think that there is room for improvement on that side.

There was a legislative change in Brazil that could be impacting the irrigation business. Would you comment a little bit on that, please? Towards funding of irrigation work.

Well. Oh, the (inaudible) financing. I think the biggest issue in Brazil is the strong value of the Brazilian currency, the real, which has made Brazilian agricultural commodities less competitive on world markets. Now, with commodity prices moving up, that changes that picture somehow.

But I would say that our Brazilian business is not as strong as would like to see it. It is a good business, it's a profitable business. But if it wasn't for the sugar cane opportunities in Brazil over the last couple of years, that business would not have been performing very well. So I see a lot of upside in Brazil, but I think that it is somewhat dependent on the relationship between the Brazilian currency and the rest of the world, maybe more than local financing availability.

Okay. I have a question for Terry. Terry, your G&A at various times in Q4 is impacted by where your share price is. And obviously, the price has had a pretty good run this year. As you have gone through the year -- and I know you're leveraged too in multiples because of the way your bonus structure works.

Can you comment on whether you believe you've got adequate reserves set up for the G&A from an accrual point of view so we don't get hit with a major change in Q4?

We have adequate reserves, Arnie, at where we are today. Obviously, between now and year-end, if the stock price would move suddenly, quickly upward, we would have to take additional reserves. But we are adequately handled where we are.

Final question for Mogens. Mogens, you have talked about a debt-to-capital structure goal over an extended period of 40% or better, and you are below your desired levels and generating quite a bit of cash. Can you comment more broadly on your current view of your capital structure and what sort of opportunities you are considering, be they acquisitions, share repurchases? Where do think your priorities lie in the upcoming year for free cash and balance sheet?

First of all, your numbers are correct. We like to be below 40% and we are comfortably below 40%. We are constantly looking at acquisitions that click into our major businesses, and our intent is if we are successful in those negotiations, that they would probably be cash acquisitions. And that would utilize the debt capacity that we have and still stay comfortable within the reins we have indicated.

So, you know you can never predict acquisitions, but as I've said many times, we are looking for acquisitions that click into our major businesses. And probably the biggest opportunities are in the pole sight of the business, the structural side of the businesses worldwide.

Thank you very much.

Jon Braatz with Kansas City Capital.

Mogens, my question was already answered. Thank you.

Ladies and gentlemen, we have reached the allotted time for the question-and-answer session. I will turn the call back over to management for closing remarks.

Thank you, Cynthia. 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 next quarter, and at this time, Cynthia will read our forward-looking statements.

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 and historical trends, current conditions, expected future developments that (inaudible) believe 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, future economic and market circumstances; industry conditions; Company performance; financial results described from time to time in Valmont's reports to the Securities and Litigation Reform Act Exchange Commission; operating efficiencies, availability and price of raw materials; 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 statements.

Ladies and gentlemen, this concludes today's third-quarter conference call. You may now disconnect.