Valmont Industries Inc (VMI) 2015 Q3 法說會逐字稿

Good morning my name is Holly and I'll be your conference operator today. At this time I would like to welcome everyone to the Valmont Industries, Incorporated third-quarter earnings conference call.

(Operator Instructions)

I'll now turn the conference over to Mr. Jeff Laudin, Manager of Investor Relations. Please go ahead, sir.

Thank you Holly, welcome to the Valmont Industries third-quarter 2015 earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer, Mark Jaksich, Executive Vice President and Chief Financial Officer, Tim Francis Vice President and Corporate Controller and Steve Kaniewski, Group President, Utility Support Structures. 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 the call. The instructions for accessing a replay of the call can be found in your 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, and I trust you've all read the press release. Today I'm going to provide an update on our restructuring plan announced earlier this year, then review third-quarter Company results and segment performance before turning it over to Steve Kaniewski, who heads our Utility Support Structures Business. Steve will provide a deeper dive into this business. From time to time we will invite our segment presidents to join the call to discuss their businesses to provide additional insights and exposure to our operational management.

Mark will then provide context on our financial performance before we open it up to Q&A. With that, let's turn to our efforts during the third quarter. We made significant progress on executing our restructuring plan, which we began in earnest in April of this year. We are now estimating that the annual cost savings from restructuring and other cost reduction actions will be $30 million. Up significantly from our initial objective of $19 million. This cost alignment touches all areas of the Company.

At a high level, the focus has been on consolidating production into lower cost facilities, while maintaining the capacity to meet our customers' present and future needs. To recap, there have been several major actions taken today. In Asia and Australia, we consolidated production of seven facilities into our remaining ones. In North America, we consolidated concrete production into fewer plants. We also reallocated production from our Brenham, Texas plant to lower cost facilities and consolidated two composite structure plants. And did the same with galvanizing, moving production from three to two facilities in Canada.

Finally, we have reduced global headcount across the Company by approximately 700 so far this year. All told, we have significantly streamlined our footprint over the past six months, moving with an urgency to address the persistent macro headwinds.

Moving into third-quarter earnings, when comparing this year's third quarter to 2014, the notable items were: one, the negative effect of currency translation, particularly in internet infrastructure product and irrigation; two, the unusually positive impact of storm damage in the irrigation's numbers last year that did not repeat; three, the revenue impact of lower steel costs, particularly, in our utility revenue; and four, the decline in energy and mining investment. For our other businesses, lower steel costs were a modest tailwind.

Now, let me turn to comments on the third quarter by segment. In the engineered infrastructure product segment, results are tailored to sub-segments. In total the core pole businesses represent about 75% of annualized segment sales; in other words, about $0.75 billion. We expect this portion will deliver high single-digit operating income as a percentage of sales despite being in a very difficult market environment. The remaining 25% is tied to energy and mining and will have low single-digit operating income as a percentage of sales. Which is not surprising, given the collapse in energy and mining investments.

In the irrigation segment, the three main driver's of results were the global decline in farm incomes, the absence of approximately $25 million worth of storm damage in North America, that occurred during the third quarter of 2014, and significantly lower results internationally. For the most part, industry pricing remained discipline during this seasonally slow summer months. Results in the coding segments were a tale of two regions. In North America, businesses performed well, even after considering the reduced internal irrigation volumes and the benefit of an insurance recovery quoted last year. While zinc costs were lower than last year, industry pricing remained disciplined. We continue to be challenged in Australia, and have taken actions to reduce our footprint and increase productivity.

I will now turn the call over to Steve.

Thank you Mogens, and good morning everyone.

I will address our Utility Support Structures Business, including proactive measures taken to address continued headwinds, to best position us for the current environment, as well as an overview of the current industry landscape. During 2015, federal mandates directing utilities to reduce coal-fired generation has led to some capital deferrals, away from transmission CapEx. Meanwhile, a dramatic decline is steel costs resulted in a significant drop in revenue this quarter, compared with last year. And we continue to experience a greater mix of smaller projects and polls.

We maintained pricing discipline in the bid market. While we may be foregoing a nominal amount of business in that bid market, we are filling our plants with business that is more attractive for us over the long term, and it will drive improved earnings quality. The major driver of long-term demand for our transmission poles and substation products, is the regulatory emphasis on improving grid reliability. Secondary drivers are the interconnection of regional transmission grids, and the integration of new generation sources, including renewables.

While the influence of the massive policy-driven projects of the past, such as CRES and CapX 2020 has waned, we believe there is significant investment remaining to be made in the North American transmission grid. This is confirmed by industry specialists. There has been a lot of discussion about FERC rule 1000, which allows nonincumbent utility investors to compete in a local utilities home territory. The regulators' goal is to make investment and transmission infrastructure more competitive. Our initial reaction to this rule is that the increased complexity of the competitive process could favor Valmont's capabilities in project management, engineering, and product design and materials.

Meanwhile, there has been some concern that pressure on allowed rates and utility returns on investment, might lead to lower investment in transmission infrastructure. I would point out that the average ROEs requested by utility has been in a downward trend since 1990. And nonetheless, investment in the grid has increased substantially since then. Even at slightly lower ROEs, transmission investments remain attractive, and are drawing new investors into the space.

One of the key actions my team is executing to enhance profitability in the current environment, is to centralize the production planning process. We are now allocating production to the best and lowest cost sites for each individual job. This has the secondary effect of engendering friendly competition between sites to reduce costs and surface best practices. Our global footprint allows us to distribute production to optimally utilize our lowest cost plants.

We have now shifted from a profit center to a cost center focus at the plant level. This is a change from when business was stronger, and individual plants were profit centers, which worked particularly well for the that environment. I am pleased with our progress so far. Critical to successful production planning, is also material procurement, which is now also centralized to aggregate purchases and achieve more favorable costs.

Regarding our capacity, the initiatives we are implementing as a part of the restructuring have allowed us to achieve cost savings without a loss of market position or a reduction in total machine capacity. We are utilizing all of our equipment, and can meet additional demand by adding ships. When we measure hours worked across our plant network, they are similar even to 2013 levels. But the mix has been weighted more towards smaller structures and substation products. Given the restructuring and cost alignment activities that Mogens previously discussed, we have a road map to achieve the 200 basis point improvement in earnings quality in 2016.

I believe Valmont is very competitively positioned in the market with the broadest product offering of transmission, distribution and substation structures. That includes steel, concrete and hybrids. I am also proud of our manufacturing capabilities, Geographic footprint, including lower cost global locations, and our engineering resources on a global scale. We have made the necessary moves to further strengthen our position.

With that, I'll now turn the call over to Mark, who will cover the financial review.

Thank you Steve, and good morning everyone.

There were a lot of moving parts in this quarter, which included restructuring and impairment charges. I'll take moment to review these items and then comment on the financials in general for the quarter. Included in this quarter's results were intangible asset impairments totaling $15.2 million on a pretax basis. The largest of these was a $9.1 million impairment of goodwill in our Asia-Pacific's coatings business unit. We also recorded $6.1 million of trade name impairments related to our Asia-Pacific coatings and access systems business units. The impairments were the result of difficulties in these markets over the last couple of years, and the general state of the mining and energy investment in the Asia-Pacific region.

The restructuring charges during the quarter totaled $8.8 million. These charges related mostly to actions we disclosed earlier this year, and which are now being recognized in the income statement as incurred. Most of the cash charges of $5.5 million were related to severance expenses for workforce reductions. In addition, $3.3 million of fixed asset impairment charges were recorded. On the whole, the restructuring actions are progressing as planned. And we believe these difficult but necessary actions will position us to take full advantage when core markets begin to improve.

We continue to see negative effects through currency translation, as the US dollar is much stronger against most global currencies this year. The effect on sales and operating income in the third quarter was about $58 million and $6 million respectively.

The largest impacts for us were related to the Australian dollar, the Brazilian real, and the euro. Based on current rates, we do not expect the effect to be quite as large in the fourth quarter, as the US dollar started to appreciate in the fourth quarter of 2014.

Aside from currency translation effects, the decrease in sales was largely due to lower sales volumes, the largest of which was in the irrigation segment. Gross margins before restructuring charges were slightly below last year, mainly related to some factory spending deleverage associated with lower sales volumes. On a positive note, SG&A, before restructuring impairments, currency translation, and other items affecting comparability, was lower by approximately $6 million last year.

The effective tax rate on reported earnings for the quarter was 47%, mainly because there's no tax effect on the $9.1 million goodwill impairment charge. The effective tax rate, after factoring out all the impairments and restructuring charges was about 33%. Historically our tax rate has been around 34%.

We are exploring actions to reduce our effective tax rate over time. This will enable us to remain flexible in our cash balances globally, to take advantage of opportunities as they arise, and to manage the tax effects of cash movements. We generated cash flow from operations of around $64 million during the quarter, with capital expenditures totaling about $10 million.

Capital spending for the year is now estimated at about $50 million. Regarding capital deployment activities, we completed the American galvanizing acquisition on October 1, for a purchase price of approximately $13 million. We also continued our share repurchase program, buying 247,000 shares for $27 million during the quarter. We have $207 million remaining on our February 2015 authorizations.

Our balance sheet remains strong, with an appropriate amount of leverage for the cyclical nature of our businesses. While providing us room to pursue investments and growth of our core businesses through either internal investments in new product development, or through acquisitions. Our ending cash balance was $313 million, most of which is located outside the United States. We had no borrowing under our revolving credit agreement at the end of the quarter.

We have demonstrated the ability to generate good cash flows in good, as well as difficult times. And we intend to maintain our investment grade credit rating. Our cash priorities remain unchanged. We will use cash to one, support our current businesses through working capital and capital spending as needed. Two, make acquisitions that strengthen, or are closely adjacent to our existing businesses. Three, pay dividends at 15% of net earnings over time. And four, repurchase shares.

I will now turn the call back over to Mogens.

Thank you Mark.

2015 has been a difficult, but busy year. We remain squarely focused on executing what is within our control, and we'll have most of the restructuring behind us by year end. We look forward to delivering improved earnings next year as result of our actions taken this year.

We are also currently assessing how we may improve our communication with the financial community and new understanding of our business' strategy and markets. Today we took the first step with the introduction of Steve Kaniewski, and as I previously noted, we'll continue to have our divisional management participate from time to time on future calls.

As well, we will host an investor day in New York City on February 25 of 2016. Our group presidents and senior management will participate, and we look forward to seeing you there. And that was February 25 of 2016. Thank you and at this time we will take your questions.

(Operator Instructions)

Schon Williams, BB&T Capital Markets.

Hi; good morning.

Good morning.

Mogens, I wonder -- and maybe this is good timing on the utility side -- but I just wanted to maybe address some of the concerns in the marketplace on the volume of projects that are out there. We've seen two of the large contractors in that space come out this past quarter, and basically say they've seen a pretty significant slowdown in projects, and looking at more smaller projects versus larger projects. I just want to get a sense of how much of that is essentially what you've already been experiencing for the last 6 to 9 months? And how much of that is maybe some kind of an incremental concern about where the next six months lie on the utility side?

I'm going to ask Steve to answer your questions.

Good morning Schon.

This is something that we've already seen in the marketplace, and actually have guided on in previous discussions. So, we don't anticipate any new risk from what you've heard from the two contractors. We've already seen that in our business over the past year, frankly. There's a couple of large projects in 2016; there's a few more in 2017. But the general mix of smaller poles and smaller projects is something that we've already been dealing with.

Okay, that's very helpful; thanks.

Maybe if we could just touch on the pricing strategy. Last quarter, Mogens introduced an initiative -- essentially it sounds like you're going to be walking away from some of the lower-margin business. As you look out -- does that mean we should be seeing a scenario as we move into 2016, where volumes are probably still going to be down in utility as you walk away from business, but we could actually see the margin profile improve? Is that plausible?

I think what you'll see is that it will be flat. The markets really out there at this point are projected to be flat. And most of any erosion in business that we've already had has taken place going back into the early part of this quarter and second quarter. So, you will see the improved margin on our orders. But ultimately we should not see any further big degradation on the top line.

All right. Thanks, guys, very helpful. And I get back in the queue.

Tim Mulrooney, William Blair

Hello?

Go ahead, sir

Hello?

You're live.

Okay. Good morning.

In the irrigation business, I think the fourth quarter is typically stronger than the third quarter. But last year, actually, the fourth quarter took a step down from the third quarter. And I'm just wondering, from what you're hearing from dealers so far through October, do you expect sequential improvement in the fourth quarter? Or do you expect it to take another step down like last year?

Well, last year, the reason you saw a step down in the fourth quarter was really because of the storm damage in the first quarter. If you just looked at the non-storm damage sales in the third quarter of 2014, you would've seen a sequential improvement in the fourth quarter. This year, we did not have the storm damage in the third quarter. And you will probably see a sequential improvement in the fourth quarter. Keeping in mind, though, that the markets are soft, net farm income is going down. So I think you'll see an improvement, but I wouldn't expect a large improvement.

That's very helpful; thank you, Mogens.

And then, just one more on acquisitions. How much did acquisitions add to revenue in the quarter on an absolute basis? I think it would just be Shakespeare and [Axon]?

About $17 million.

$17 million. Okay, thank you.

And maybe if I could just fit in one more about your corporate expense? I think the run rate was about $13 million to $13.5 million per quarter, if you go back a number of quarters. But it was only $9 million this quarter. I'm just wondering what the reason was for that? And maybe what we should think about for modeling corporate expense going forward? Thank you.

Yes, this is Mark.

And there's really a couple things that really drove the change in corporate expense. One, of course, is incentives. Because I think probably the time period you were talking about were years where incentives were relatively strong. And of course, with where we are this year, the incentives are going to be pretty small. That's the first thing.

The second thing is that we do have some adjustments that take place related to our deferred compensation plan. And that's something, in this quarter gave us a benefit to corporate expense of about $1.9 million. But that was offset by other expense, [that would be] in the area below operating income.

Those are the two main things. But on a go forward basis, we would expect to see the corporate expense to run around $8.5 million to $9 million per quarter. Or about $35 million or so per year.

Nathan Jones, Stifel.

Good morning, everyone.

Good morning, Nathan.

I guess I'll start on utility, Mogens. We are seeing non-consecutive quarters of the margin declining sequentially in utility, up until this quarter, where we have now seen that turn the corner and increase. I know it's still a lot lower than you would like it to be. Do you feel like we've passed the bottom on pricing there? Have you seen pricing get any better or not get any worse? Or how should we be thinking about that going forward?

I'll give you a couple of comments and then I'll turn it over to Steve.

I wouldn't say the pricing is getting better, but our costs are going down. And that's what's driving the margin improvement. And as Steve pointed out, we think that if you take the average of the operating income of utility this year, and you will take the average a year from now for next year, that's where they expect to deliver the 200 basis points in improved margins -- without expecting any improvement in the pricing environment, but be more selective in the jobs we take. And I'll have Steve elaborate on that or confirm it.

Yes, Nathan. What we're seeing overall is the market is staying still highly competitive. Pricing discipline is still over the [board or] and not necessarily the same project to project. There are still people trying to take business to fill plants. We've decided to take a disciplined approach, to look at, operationally can we deliver the results to the 200 basis points before we quote the job itself. So, there's not really any pricing stability per se. The market, though remaining flat, I think you'll start to see the other players in the market beside -- where at least a level can be set. But it still remains to be seen.

Is there an opportunity to close or to at least idle one or more plants in the utility business while you're looking at finding the bottom here in the demand level?

As I mentioned in our opening comments, we have already consolidated production into a number of facilities. The hours that we're producing right now, in total production hours, is very similar to the 2013 levels, and almost equal to the 2014 levels. So I can't really close another facility and continue to deliver even what we have right now. It's just that the mix of product and project size, which Quanta and some others have mentioned, is just gotten smaller. So we're doing smaller poles and smaller projects overall. But they still consume a number of hours to produce them.

Julian Mitchell, Credit Suisse.

Hey guys.

This is Ronnie Weiss on for Julian. I just want to touch on the restructuring plan. What type of macro background is this predicated on? And, if you guys do see some even worsening of the macro environment, is there more cost able to come out and bigger opportunity there?

Well, in general, we increased our restructuring benefits by continuing to look at places to take our costs from $19 million that we talked to you about earlier this year to now $30 million. And it is predicated on the headwinds we are seeing between currency and mining and energy investment and low agricultural commodity prices and limited investment by public entities, and infrastructure development not getting any better. Do we expect it to get worse?

I wouldn't say that. There's no reason today to say a quarter or two quarters from now this is really going to turn around. It may. But if it does, our leaner operation and more focus on productivity will give us good leverage. So, the macro environment has not changed. And we will continue to look at ways to get more productive.

Okay, great.

And then, just on the M&A. Maybe a little more focus on where the focus is between the segments? If one has priority over the other? And what kind of metrics you guys look at? Is there a minimum [right] target you guys aim for when looking at some potential deals?

Well, first of all, I'd say it all comes down to what kind of deals will give us the best return on invested capital. And I wouldn't say that we favor one segment over the other. What it really comes down to, beating our cost to capital within a fairly short period of time. And we are kind of an EVA type Company, we look at how fast can we have positive EVA. We are not looking at just EPS accretion, because in today's dead environment that is not difficult. We are staying disciplined and making sure that we will be our blended cost per capital going forward. We did accomplish or finalize one this quarter. We have a pipeline that is pretty significant. But often we lose out to, in many cases, private equity that would pay a higher price than we can.

Great; thank you.

(Operator Instructions)

Ryan Connors, Boenning & Scattergood.

Thanks for taking my call.

I wanted to focus on the irrigation business, if we could, for a moment. Obviously, the commodity price pressures are a big part of the headwind here. But also, it's been a very wet season and there's a lot of flooding issues this year. So I wonder if there's any way you can isolate the impact of that on your business in the third quarter and year to date? To what extent weather contributes to the declines? And hence, if all else equal, if we get a more normalized weather environment next year, you in theory would get some of that business back?

It's difficult to do the one thing where weather -- and in this case, good wet growing conditions early on -- have hurt the parts business. Because the pivots have not been operating in this country as much as they usually do. What I would say, the closest correlation short term to our short-term business is net farm cash income. And if you look at the expectation that farm income will drop anywhere from 30%-some to close to 40% this year, it's a lot like what we've seen in the irrigation business.

So, at the current time, when we plan for next year, we do not plan for an improvement in the irrigation business. There are no indicators out there that would say it's going to get better. There are some indication that ending stock in corn may be slightly less than what it was last year. But we haven't finished the corn harvest yet. And here in the Midwest, for sure, the weather has been good for harvesting. So, I don't see anything out there that will say irrigation will get better next year.

Now, having said that, it is a very unpredictable business. If you have difficult growing conditions somewhere in the world, or you have a demand change, it will change commodity prices fast. But at the current time, for planning purposes, we are not planning on it, but we will be ready for it.

Got it. Well that's very helpful. Thank you for that.

My follow-up is also related to irrigation. Just on the margin side of that business, it seems like margins there had held up pretty well, but then took a bit of a leg down in the third quarter. And in the press release there were relatively minor one-time adjustments to that number. So, can you just talk about what happened there from a margin standpoint in the quarter? And the outlook on that side going forward?

This is really a volume-driven and therefore absorption decline in the margin. We have not seen a major decline in pricing. On multiple system deals, things are more competitive than they otherwise are. But in general, pricing discipline has stayed pretty good in this business in North America.

But when you have -- the third quarter is usually a very weak quarter from a volume standpoint, because that's when farmers are growing their crops; they're not installing pivots. The exception is, when you have a lot of storm damage. So last year, you saw a tremendous leverage from having a busy third quarter. And this year you saw the deleverage. So when volume goes back, which it will in quarters that are seasonally stronger, or if the market environment changes, you will see the other side of that -- you will see good leverage.

Okay, that's great. We'll see you in February in New York. That should be very timely. Thanks for setting that up. Take care.

Thank you.

David Rose, Wedbush Securities.

Good morning; thank you for taking my call.

Good morning.

Couple questions.

Just to go on the restructuring side. It sounds -- you obviously had a little bit more traction than you expected. And I guess that's all part of the process. Can we expect more actions in 2016? Some incremental actions?

I would say, probably yes, but not to the extent that we saw this year. There are a couple geographies where we are looking at further actions that we may be able to take. But nothing to the level of what we did this year.

So part of the [lien] process is you go through this; as we discussed many times, it's a journey. So I'm assuming that you've all of a sudden you're starting to build a nice funnel of product activity, too? Have you been able to quantify your final of projects for cost takeouts or productivity?

Yes.

Can you give us a range on that?

We've given you the range that we think that the cost takeouts are going to be now in the neighborhood of $30 million. Now, we hope that, depending on volume, that we'll also see some improvements as more volume goes through fewer plants.

Okay. And the cost takeouts if largely we haven't discussed in the irrigation side. And your point is that net farm income is down in the mid to high 30%s percent -- at least estimated net farm income. So, is there an opportunity to improve productivity on the irrigation side? Or reduce the structural costs as well?

Well, actually, the irrigation business is pretty good at doing that. And already starting last year, the irrigation was downsizing their cost structure. Now you have to weigh that also against what kind of investments do you need to make in technology or other parts of product development to be ready for when this cycle changes again.

We've been in this business for 60-plus years, and the cycles always change. And every time we get into a down cycle it ends higher than the previous one. And the tip of the cycle or the top of the cycle ends higher than the previous one. So we try to balance between maximizing profitability by taking out cost where we can, but not hurting the future of the business by cutting out investments in product development that are necessary to continue to stay the leader in this business.

Okay. No, I understand it's a cyclical business. And you want to be able to flex up when you can.

Last question is on the cash flow. You had some really nice progress. Is there anything structural that improved on the free cash flow? Or was it simply a timing issue?

David, this is Mark.

I don't know if there was anything really structural. I would say, though, that we're probably carrying a little more inventory than we would probably normally carry at this time. But I think to some degree, that's a consequence of some of our mill direct programs, and utility where we've got longer lead times. But one of the things we are paying a lot of attention to is our cash flows on a monthly and quarterly basis, so that we can really understand where we will be from the cash position, so we can execute on our capital allocation objectives.

Okay, thank you, Mark. Appreciate it.

Jon Braatz, Kansas City Capital.

Good morning, guys.

Good morning.

Mark, I've a question.

Obviously currency has been a tremendous headwind this year. And I'm not going to ask you to try and be a currency trader, but if the currencies stabilize at this level, for 2016 will currency be still a headwind or pretty much neutral?

I'm trying to think here for a second. I would say, if they stabilize from where they are right now, I think it will be -- there may be a little bit of a headwind. But not nearly to the extent we saw this year. Because I think the dollar did get a little bit stronger during the year, but now it's kind of --.

Okay.

Retreated a little bit as well. So I wouldn't expect to see a big FX impact when you go into next year, comparing 2015 and 2016.

Okay. Can you refresh my memory? How much of an impact so far we've seen this year on currency? Do you have that number?

I want to say it's in the neighborhood of about $13 million or $14 million at the operating profit level so far this year, year to date.

Okay, all right. Okay.

And Mogens, a follow-up question, the $30 million in restructuring benefits, cost savings -- will they be fully realized in 2016? Or will they extend into 2017? Can you give us a timeframe there?

Yes the $30 million will be fully realized in 2016. A small amount of it has probably already been realized, or will be realized during the second half of 2015. But we are not expecting any of the $30 million to have to wait to 2017 to see that.

Okay; all right. Thank you very much.

Jose Garza, Gabelli & Company.

Good morning, guys

Good morning.

Mogens, I was hoping you could add little bit more color in South America on the irrigation side, and the decline on the volumes. Maybe give a little bit more magnitude and country-specific.

Okay. In general, the biggest market in South America is Brazil, by far. It has been a very strong and very profitable market for us. You all know about what's happening in the Brazilian economy in general -- the political situation, and the increase in the interest rate charged by FINAME, which I think now is 7.5%.

So we have seen a significant drop in revenue in Brazil, particularly translated into US dollars, because the real has weakened substantially over the last year. So Brazil is kind of an unknown right now as to what's going to happen going forward. There is further talk now about FINAME financing being tied to the inflation rate in Brazil, and maybe changing on a more regular basis. Our businesses down there, they're doing a good job of managing through this. They're still nicely profitable, but not to the extent we saw last year.

Argentina is another area where lots of issues, both from a currency standpoint and from a political standpoint. But it is a country where our business is much smaller. So it doesn't have the impact that we would have from Brazil, or have had from Brazil.

Okay, thanks. And just switching gears into the coatings business.

You guys continue to perform pretty well there, and are adding to it with the American Galvanizing acquisition. What are the opportunities to grow the value in that business a little more? Considering there seems to be a little bit of value disconnect between it and its biggest peer.

Well, I think in North America we continue to operate those businesses well. We continue to drive for productivity improvements, fine-tuning zinc pick-up, et cetera. The problem, or the challenge we have in the coatings business, is mainly Australia and to a certain extent, Southeast Asia. And there we are looking at or will have already consolidated plants and taking out costs, so we plan to see improvement in the profitability of that business going forward.

We'll continue to look for acquisitions. But again, when you look for acquisitions in this business, these are not businesses that are high growth businesses. They basically grow with the general economy. So therefore, when you buy them you better buy them right. Or you will live with low returns for a long time. So we have to stay disciplined.

Would there be any opportunity for financial engineering with that business, potentially?

Could you expand on the question? Financial engineering?

You know -- potentially a spin off of that business as a sole entity?

Well, I don't think it would make much sense as a separate company. In theory, yes, it probably could. But I don't think that's on the drawing board here. We like the collection we have of businesses. We say that over time they are all to a certain extent cyclical, but they don't run in the same cycles. A couple of years ago, they were all in an up cycle -- or most of them. And right now they are all in a down cycle. But I think when we look at the future we will probably revert to having businesses that are not exactly running in the same cycle

Okay. Thanks very much

(Operator Instructions)

Schon Williams, BB&T Capital

Thanks for taking my follow-up.

Mogens, could you split out the $30 million among the divisions?

I could, but I don't have it here. But -- maybe we have it here. Hold on a second.

This is Tim.

I'm sorry, is your question the $30 million of savings? Or is your question the $30 million of restructuring cost that we are going to incur during the initial phase?

I guess, how are they different? I guess I was more concerned about the savings that are going to be realized -- how those are going to be split among the divisions

We don't have -- we have a list of the $30 million and at this time we don't want to share that. Because there's a lot of different inputs that are going into our estimates. I can tell you how the $30 million of costs are going to be incurred. And, from a utility perspective, it will be approximately $5 million; irrigation will be $1 million; coatings will be $5.5 million; EIP will be $14.5 million; and then corporate and our other segments will be the remaining $5 million. And again, those estimates are what we're going to incur in this initial phase of restructuring costs.

Why would the savings be substantially different than that allocation that you just laid out?

Some of this are active impairments. And the depreciation -- although we will save on depreciation run rates, we will save more in terms of what we're going to incur in cost savings versus fixed asset impairments.

Right; and the asset impairments would be mostly in the coatings and EIP division for Australia?

That's correct. Yes.

Okay; that's helpful. And then, if I could back up a little bit.

In the press release, Mogens, you talked about there was commentary around North American Telecom being weak. Because of the absence of a carrier this quarter. Can you just tell me a little bit about what the situation is there? Telecom had been a source of strength within the EIP division the last couple of quarters. So I just wanted to see, has that dynamic changed; the communication products has -- it's been up on a year-over-year basis. I just want to get a sense of, is that market has changed?

Well, I would say that the big carrier that has been absent in North America for a while has actually been absent for more than a year now. We have had good strength in the wireless communication business in China over the last several quarters. And that still seems to be the case. And our components business has improved this year, despite the weakness with having a big carrier sitting on the sidelines for a while. So otherwise, I don't think there's any big change in the wireless communication business.

Would communication products -- would that be negative this quarter, then? On a year-over-year basis?

I don't think so.

You mean the negative comparison to last year, same quarter?

Yes, in terms of the growth rate year-over-year. I mean it had been positive in the first half of the year. Has that turned negative in Q3?

Hold on a second, and we will get you that.

Our sales for communication products are actually up year over year for third quarter. But you also have to remember that includes our China business. And as China's been building out its 4G network we've been getting some tailwind from that.

Okay, that's very helpful. And then one more if I may.

Mogens, hopefully this question is not too brash. But can you just talk a little bit about maybe what the lesson learned is from some of the Australian asset purchases? When you think back to the original thought process and acquiring some of those businesses, do you feel like to some extent the timing was just poor, given what we've seen in the commodity complex and what to the effect that, that's had on the Australian economy? Was it simply just a bad part of the cycle to be getting into that business? Was there -- I don't know, with pricing, in your mind was pricing not favorable when you entered that transaction? Can you just talk a little bit about maybe what you would have done differently given you had the benefit of hindsight? If you would have done anything differently?

Well first of all, it all goes back to the Delta acquisition, which was five years ago. And for the first several years those businesses performed very well. Then you had the mining decline, which affected the Australian economy. And to maybe an even bigger extent, the currency exchanges between the Australian dollar and the US dollar. So are those businesses going to be good businesses going forward? Yes, we think so. The biggest challenge in Australia is profitability in the coatings business. The other businesses are actually operating at fairly good profitability levels, but not to the extent we saw a couple of years ago.

Now to your general question: if we lived in a world of 20/20 hindsight there are a lot of things we would do differently. But do we think that long-term these businesses are not good businesses? No. We do think that they would be good businesses. We would have to, as we have done, restructure them in such a way that we can maximize profitability in a weak economy in Australia. But Australia's resources not going to be needed in the future? No, that's not the case. And we will continue to participate there. Does that answer your question?

Yes. I appreciate the insight. Thank you Mogens.

Nathan Jones, Stifel.

Yes, thanks.

If I could just go back to the corporate expense there for a minute. Mark, can you talk about how much incentive comp has come out of the corporate line over the last couple years? And if you look forward into 2016, how much of that you think is likely to come back in?

I would say, Nathan, for this year there's little, if any, in the base number. And if you look at target level incentives, that's in the neighborhood of about $4.5 million to $5 million on an annualized basis. And if you went back in 2013, that number was a lot higher than that, because we were above target. And then, of course, there's the share impact on the long-term plan. I don't have the 2013 figures at my fingertips at the moment.

So it's reasonable to assume that -- sorry, go ahead.

(Multiple speakers). I was going to say that was the largest impact; if you look between 2013 and 2015, [it] was the incentive side of it.

So, what would you expect if you perform at plan for 2016 in terms of incentive comp to come back into the cost structure?

It would be about that $4.5 million to $5 million.

Okay.

And that would be part of the $35 million corporate spending.

Okay, that's helpful. Thank you.

That will conclude the Q&A session of today's conference call. I'll turn the call back over to Mr. Laudin for closing remarks.

Thank you, Holly, and thank you for joining us on our third-quarter conference call. A replay will be available online for a week, and you can get the details for accessing that replay through our press release. And at this time, Holly will read our disclosure on forward-looking statements.

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