Valmont Industries - Q2 2023

Transcript

Operator (participant)

Greetings, welcome to Valmont Industries Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. We ask that you please limit yourself to one question and one brief follow-up question and return to the queue. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

Renee Campbell (SVP of Investor Relations and Treasurer)

Thank you. Good morning. Welcome to Valmont Industries Q2 2023 earnings call. With me today are Avner Applbaum, President and Chief Executive Officer, Tim Francis, Interim Chief Financial Officer, and Jean Padgett, Senior Vice President and Chief Accounting Officer. This morning, Avner will provide a brief summary of our Q2 results, commenting on our markets and long-term business strategy. Following that, Tim will review our financial performance and provide our current outlook and indications for 2023, with closing remarks from Avner. 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 site 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. Finally, if you would like to be notified when Valmont publishes news releases and other information, please sign up for email alerts through our investors site. We also encourage investors and others interested in our company to follow Valmont and our brands on the social media channels listed on our website. With that, I would now like to turn the call over to our President and Chief Executive Officer, Avner Applbaum.

Avner Applbaum (President and CEO)

Thank you, Renee. Good morning, everyone, and thank you for joining us. Before discussing the results of the quarter and current market dynamics, I would like to spend a few minutes on my recent CEO appointment. First, I am extremely humbled and honored to be addressing you today as the CEO of Valmont. This is a great company that delivers products and solutions our customers need to solve their most pressing challenges. Our global team is dedicated to our purpose and united by our core values to achieve our goals. The people at Valmont are one of the primary reasons I joined the company in 2020, and I could not be more proud to be part of this outstanding team. Having worked closely with the entire leadership team to develop and implement our strategy over the past three plus years, I understand what is required of this role.

The executive team and board of directors are aligned around our long-term strategy to accelerate our journey towards becoming a leading industrial technology company. This strategic framework, which I will discuss in a few minutes, is the right approach to continuing the momentum we have built and provides a clear path to achieving our long-term financial targets. As CFO, I led the transformation of the finance organization using data, advanced technology, and processes to drive better business decisions and value. This focus has led to a more disciplined approach across the organization in using data and analytics to achieve our financial goals with an emphasis on ROIC. As CEO, I look forward to leading Valmont along the strategic path we have been on over the past several years, driving strong financial performance for the company and our shareholders while remaining committed to our sustainability journey.

Finally, I want to thank Tim Francis for stepping into the role of Interim CFO. I am confident in his ability to lead our finance organization and contribute to the executive leadership team until we are prepared to name a permanent CFO. Turning to slide five for a review of Q2 financials and key messages. Our results in this quarter were strong, achieving adjusted operating margin of 13.2%. Adjusted diluted earnings per share grew to a record $4.37, building on the momentum from 2022 and the Q1 of this year. I am very pleased with our growth and profitability and proud of the entire Valmont team for what we have accomplished. Infrastructure demand globally remains robust, benefiting from several secular long-term growth drivers, including the global energy transition and ongoing investment in grid hardening.

We are seeing strong demand across nearly all our markets. Global agriculture market fundamentals are being influenced by uncertainty in North America as farmer sentiment is muted pending the outcome of this year's harvest, which I will expand on shortly. We continue to be excited about the long-term growth potential of agriculture and our ability to transform the industry with disruptive technology that improves land productivity and enables growers to do more with less. In both segments, our discipline and strategic pricing has ensured we are capturing the value we add to our customers, which has driven margin expansion amid lower sales and ongoing inflation. Wrapping up our key messages, we are executing our Run, Grow, Transform strategic framework that we outlined at our recent Investor Day.

Earlier this month, we announced an agreement to acquire HR Products, a strategic bolt-on that expands our irrigation aftermarket part capabilities and drives international expansion. This is an excellent example of harnessing our strong balance sheet to further our strategic initiatives. Moving to slide six for an update on current market conditions, starting with infrastructure and utility markets. Utilities have increased their CapEx spending to support grid hardening initiatives and an evolving electricity generation portfolio. Transmission demand is outpacing market capacity, as indicated by industry lead times that exceed 40 weeks. We are strategically adding capacity to meet the strong multiyear demand. In lighting and transportation, transportation market demand is being supported by increasing investment in road construction, and we continue to see some increased coating activity related to IIJA funding.

Commercial street lighting product demand globally is muted due to impacts of inflation and higher interest rates, leading to softness in single-family housing and commercial construction markets. In telecom markets, we are seeing CapEx spending by wireless carriers more aligned with historical trends following record level of investment. At the onset of 5G, the industry predicted this rollout to be more rapid than previous generations. In reality, the build-out timing is proving to be similar to past experiences, as pauses in CapEx spending are common during network expansions. Major carriers will continue to invest in wireless networks to meet nationwide coverage and capacity commitments after having spent over $120 billion on 5G spectrum. Our wireless communication structure and components business remains well positioned to meet this demand. Our coatings business tracks industrial production levels and has seen near-term strength from utility and transportation markets.

Turning to solar. Domestic content guidelines related to the Inflation Reduction Act have been released. Even though the industry is awaiting clarity on the manufacturing tax credit details, IRA support is expected to provide strong market tailwinds for the next several years. Globally, renewable energy investments in markets such as Italy and Brazil are supporting demand in those regions. Valmont has a competitive advantage in the distributed generation solar market, and we prioritize that niche market due to its attractive growth rates and accretive quality of earnings. Turning to agriculture and starting with North America. Demand this quarter was less robust than we and the industry originally anticipated. While US net farm income is projected to decline year-over-year, it will still represent the third-highest income level over the past 10 years. Additionally, recent USDA data suggests improving drought conditions from much-needed rain across key growing regions.

Many areas of the country remain at severe or extreme drought levels. We view these market tailwinds as positive, but growers have maintained a wait-and-see approach in purchasing decisions. This is supported by recent Purdue University reports, which highlight farmer uncertainties around higher interest rates and volatile commodity prices. We believe these uncertainties may continue to weigh on sentiment through this year's growing season and expect the outcome of this year's harvest to provide more clarity on order patterns for the remainder of the year. Moving to international markets. We continue to see strength in Brazil, supported by the Finame financing program that was announced in late June. The Brazilian government demonstrated their strong support of agriculture markets with an increase in irrigation funding of nearly 25% over last year, with approximately 2.4 billion Brazilian real available to growers.

The terms of these loans are extremely favorable, making this program an attractive option to support continued irrigation investment. In other international markets, our project pipeline remains robust, not only driven by ongoing food security concerns, but also the ability to produce goods for export, which can help reduce trade imbalances and currency fluctuation. In more developed regions, the demand for increased resource conservation to further enhance land productivity has been a demand catalyst for our products and technology solutions. Project sales in the EMEA region this quarter were lower compared to last year. We expected shipments of the previously announced $85 million Egypt project to begin in Q2. There was a slight delay, and the project began shipping this month. We anticipate shipments will continue into 2024.

We have intentionally and strategically built exposure to diverse infrastructure end markets and a growing pipeline of international agriculture projects. This helps us to better manage softness in any one end market across the portfolio, delivering more consistent financial results. I am pleased with our Q2 performance and proud of our entire team's achievements. Moving to slide seven. In May, many of you joined us either virtually or in person at the New York Stock Exchange for our Investor Day. I would like to take a few minutes to elaborate on our new Run, Grow, Transform strategic framework I mentioned earlier. This framework will move us forward as we evolve into higher quality and more dynamic organization, delivering shareholder value that is less dependent on cycles of any one end market. It guides our allocation of resources, capital, time, and effort.

Our framework begins with the Run, which is the idea that we are built for sustainable outperformance. This solid foundation allows us to operate well, confirmed by a proven ability to deliver results and drive profitable growth, even when economic cycles are volatile and uncertain. Our commitment to operational excellence, the Valmont Business Model, and a continuous improvement mindset are critical to maintaining the Run. With an established Run foundation, we can drive growth across our businesses that exceeds expected market growth rates. This can be achieved through geographic expansion, such as our robust pipeline of international irrigation projects, or through optimizing our best-in-class distribution channel by creating additional touch points to serve our global customer base. When we speak to Transform, it's making sure that we are being great stewards of the company long term.

It is a mindset where we look to be a disruptor in our markets. We operate in capital good markets, where high barriers to entry are common. Leveraging our industry-leading position, including extensive distribution networks and trusted reputation, we bring innovative technologies to our customers and are focused on creating more stable and high-value revenue through recurring revenue streams, while delivering proven ROI to our customers. Earlier this month, we demonstrated our commitment to making investments that align with our growth strategy with an announcement to acquire HR Products, summarized on slide eight. This Australian-based wholesale supplier of irrigation products provides geographic footprint expansion in this key agriculture market, while enabling us to better serve our customers through expanded irrigation parts offering.

With our large installed machine base in the region, we have a path to grow recurring, stable, high-value revenue streams, perfectly aligned with our Grow and Transform objectives. We expect the transaction to close in the Q3 and look forward to this great business joining our portfolio. With that, I will now turn the call over to Tim for our Q2 financial review and updated outlook.

Timothy Francis (Interim CFO)

Thank you, Avner, and good morning, everyone. Before I begin, I would like to express my appreciation and excitement to be working with Avner and the rest of the Valmont team. By way of background, I have been with Valmont for over nine years, first as the senior vice president and corporate controller, and most recently as the finance business partner, global operations. During that time, I worked closely with all of our lines of business, segment leadership, and our audit committee. We have an excellent global finance team, and I am honored to serve in this role during this transition period. Turning to slide 10 and the Q2 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.

Q2 net sales of $1 billion decreased 7.9%, as sales growth in infrastructure was more than offset by lower agriculture sales. Accounting for the 2022 divestiture of the Offshore Wind business, reported in the other segments, sales decreased by 0.7% year-over-year. Despite lower sales, operating income grew 12% to $137.6 million, with operating margin increasing to 13.2%, surpassing our previous long-term goal of 12%, and on the path to our new long-term target of 14%. Operating margin improvement reflects continued benefits from value-based pricing, cost optimization, and operational efficiencies in both segments. Diluted earnings per share grew 18.1% to a record $4.37.

Turning to the segments in slide 11, infrastructure sales of $770.6 million grew 4.2% year-over-year due to favorable pricing globally, higher volumes in the solar and TD&S product lines, and sales from the ConcealFab acquisition, partially offset by lower volumes in telecommunications. Operating income increased to $116 million, resulting in strong operating margin of 15.1% of net sales. Delivered actions to improve cost of goods sold and a favorable sales mix drove the margin improvement. Moving to slide 12, agriculture sales of $279.9 million decreased 25.9% year-over-year. The benefit of higher average selling prices of the irrigation equipment globally was more than offset by lower volumes.

In North America, sales were lower as the Q2 of 2022 benefited from the ongoing delivery of record year-end backlog, and growers delayed capital investment decisions in the spring of 2023. International sales were lower, as sales growth in Brazil was more than offset by project delays in the EMEA region. The lower volume of irrigation equipment affected sales of agriculture technology products and services, leading to a decline year-over-year. Operating income decreased to $53.2 million, or 19.1% of net sales. Higher average selling prices and focused activities to improve cost of goods sold drove operating margin expansion despite lower sales. Turning to cash flows on slide 13. Q2 operating cash flows of $88.3 million were driven by strong earnings and diligent working capital management.

Turning to slide 14, for a summary of Q2 capital deployment, CapEx was $23 million as we continue to invest in strategic capacity expansions. Through our balanced capital deployment framework, we are focused on enhancing shareholder value. In the Q2, we returned approximately $37 million to shareholders through dividends and share repurchases, ending the quarter with $167 million in cash. Moving to slide 15. Total debt to adjusted EBITDA of 1.6x was within our desired range of 1.5x-2.5x. Our cash balance, available credit, and flexible balance sheet provide us with ample liquidity to execute our capital allocation strategy. I would now like to review our updated 2023 outlook, as shown on slide 16.

Given our Q2 results and continued near-term softness in North America, agriculture, and telecommunication markets, we now expect sales growth of 0%-2%. We expect improved year-over-year operating margin in 2023, given our pricing strategies, strength in certain markets, and our ongoing continuous improvement initiatives. Strong Q2 results, combined with an improved operating margin, supports maintaining the full year earnings per share range while updating the sales outlook. Turning to the segments. Continued strength across infrastructure markets supports our expectation for higher sales this year. We expect telecommunication sales to be lower, more than offset by higher sales across the rest of the segment portfolio. The spike in steel costs during the first four months of the year is expected to slightly reduce our infrastructure operating income margin for the H2 of the year compared to the strong Q2 results.

Turning to agriculture. We expect North America sales to be modestly lower in the H2 of the year as compared to the H1. Our assumption is that growers continue to delay capital investment decisions until they have more clarity on their crop yields and overall commodity prices. A reminder that the Q3 is typically a lower North America sales quarter compared to the rest of the year. We expect much stronger international sales, led by higher project sales and sales growth in Brazil, to more than offset the North America seasonality impact. A higher mix of international projects will reduce agriculture segment profitability in Q3 as compared to last year. To summarize, our expectation for diluted earnings per share growth has not changed.

We are confident in our outlook and believe that it demonstrates the strength of our portfolio, favorable trends across most of our end markets, and our strong competitive position in the marketplace. We are leveraging our global scale to improve margins and drive strong cash generation, enabling us to support our growth strategies and achieve our long-term financial targets, driving sustainable shareholder value. With that, I will now turn the call back over to Avner.

Avner Applbaum (President and CEO)

Thank you, Tim. Continuing my comments on slide 17. We have built on the competitive advantages that uniquely position us to win in infrastructure and agriculture. We have a flexible and broad global footprint that allows us to efficiently manufacture products that our customers need while optimizing our supply chain to avoid unnecessary disruptions. Our breadth of product offering, which is always expanding, enables us to solve the various challenges our customers face. Together, these factors contribute to making Valmont the trusted partner of choice. Not only do we have strong competitive advantages, we are also in great markets with multi-year demand drivers. Infrastructure and agriculture both have mega trends that will extend well into the future. We are in great position to proactively capitalize on these trends and exceed market growth expectations. Turning to slide 18.

As announced during our Investor Day, we established new five-year financial targets based on a positive end market outlook and our ability to execute on the Run, Grow, Transform framework. Today, we remain committed to achieving these financial goals. In summary, I'm extremely proud of our team's ability to execute our strategy and drive strong results while navigating near-term softness in some markets. While recognizing broad macroeconomic challenges, we are encouraged by ongoing demand strength across our end markets and remain focused on the things we can control. I'm confident that we are positioned for success, and we continue to accelerate growth through investment in innovation and technology with a focus on disciplined capital allocation. We have acted decisively to position our business for growth, building momentum to drive long-term stakeholder value through the H2 of 2023 and beyond. I will now turn the call back over to Renee.

Renee Campbell (SVP of Investor Relations and Treasurer)

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

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, please limit yourself to one question and one follow-up. One moment, please, while we pull for questions. Thank you. Our first question comes from Brian Drab with William Blair. Please proceed with your question.

Brian Drab (Partner and Equity Research Analyst)

Hey, good morning. Thanks for taking my questions. The first question is a minor one, I think, but on slide 16, is this a cut and paste error with the EPS guidance that says $15.90 is the high end? I think there's no change to the guidance, right, for EPS?

Avner Applbaum (President and CEO)

That's correct.

Renee Campbell (SVP of Investor Relations and Treasurer)

Yeah. Correct, Brian. Yeah, no change, no change to the guidance.

Brian Drab (Partner and Equity Research Analyst)

Okay, that's just an error on the slide, right?

Timothy Francis (Interim CFO)

Yes, it must be.

Renee Campbell (SVP of Investor Relations and Treasurer)

Yeah.

Brian Drab (Partner and Equity Research Analyst)

Yeah. Okay. The gross margin, I feel like should be discussed a little more, given it was about 400 basis points above what the street was expecting. I know a lot of that is, you know, pricing coming through and other, you know, actions that you're taking. Can you talk about why we were above 31% in gross margin, and how sustainable is that going into the back half of the year? Thanks.

Timothy Francis (Interim CFO)

Hey, good morning, Brian. This is Tim, and I'll take that question. First off, we are very pleased with the Q3 margins. It was a result of the actions taken by our teams for value-based pricing and operational excellent activities. Over the long term, these activities will drive an improvement to our average historical gross profit margins. Some of these activities were professionalizing our sourcing group, which has been really focused on leveraging the size and spend of consolidated Valmont, as well as operational efficiencies, starting with the activities on our plant floors, such as getting those cost benefits we expect from our automation investments, as well as better labor and overhead management.

With that said, we do not expect to sustain a 30% gross profit margin in the H2 of the year. It's really for two primary reasons. One, as we talked about in our prepared remarks, we're going to see a sales mix more towards international projects in the agriculture segment. That is typically at a lower profitability profile to the overall segment. Secondarily, in the first four months of the year, we saw a meaningful increase in the cost of steel, specifically hot-rolled coil. With the timing lag, meaning how that cost of steel goes through our income statement, our average cost of steel will be higher during the H2 of the year than what we saw in the Q2.

Avner Applbaum (President and CEO)

Yeah, Brian, this is Avner. I'll just add to that. Like, we're really pleased with what's happening with our gross profit, the improvement in Q1, improvement in Q2. It's never going to be a linear line up, but we're, you know, on the track to 12%. Really happy about that. From that, we'll get to our stated goal right now, 14%. Overall, it's never going to be linear, but really excited about that improvement we're seeing in our margin.

Brian Drab (Partner and Equity Research Analyst)

Yeah, I mean, obviously, you guys have, we've talked a lot about this, and you've done an incredible job of managing through the volatility in steel prices over the last few years, and gross margin's been, you know, really stable and moving up. Can you comment, Avner, at all? Like, is, like, the H2, should we expect gross margin more like the Q1, or was the Q1 unusually high also?

Avner Applbaum (President and CEO)

More in line with.

Brian Drab (Partner and Equity Research Analyst)

29%. 29% possible?

Timothy Francis (Interim CFO)

Yeah, it's approaching 29%, Brian. That's how I'd answer it.

Brian Drab (Partner and Equity Research Analyst)

For the H2?

Timothy Francis (Interim CFO)

For the H2, correct.

Brian Drab (Partner and Equity Research Analyst)

Okay. Okay, I'll pass it on for now. Thank you.

Operator (participant)

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

Brent Thielman (Managing Director and Senior Research Analyst)

Hey, great. Thanks. Good morning. Hey, I guess, Avner, maybe just a question for you as you move into the new role, just your perspectives on, you know, M&A, any different view from you on what Valmont should be focused on relative to some of the things the company's pursued and completed over the last few years? I, I think just sort of similarly with that, you know, do you, do you take a different focus in terms of investing internally in the business, maybe relative to what the company's done over the last few years? Just love to get maybe any broader view on capital allocation philosophy from you.

Avner Applbaum (President and CEO)

Sure. Well, thank you for that. Well, you know, over the last three years, I've been an integral part of the leadership team and working really closely with the board of directors on establishing the capital allocation philosophy and our strategy. That really has not changed. That will remain the same, with really, how could we drive the highest ROIC and value to our shareholders? Still, the number one is to invest in the business, and with the strong markets that we're seeing across our portfolio, we have significant opportunities to invest in the business, as we shared during Investor Day. Some of our large pole operations where we shared was one example. We will continue to invest in the business. Now, as it relates to M&A, we will continue with the same approach.

Actually, we have a very strong pipeline. I do bring a lot of experience to that area from my background and prior areas that I worked with in public companies and private equity. There will continue to be a strong emphasis on acquisitions, which can really help propel our growth. There will be, you know, there will be cost of capital within three years and will support our overall strategic goals. Short answer is, you know, not expecting any changes, but continued focus on driving value through acquisitions as well.

Brent Thielman (Managing Director and Senior Research Analyst)

Okay, thanks for that, Avner. Maybe just, I guess, my second question, understand the implications of, you know, kind of steel costs flowing through in the H2 of the year. It seems like within the infrastructure segment, it sort of feels like you're experiencing kind of some mixed demand trends in some respects, at least on a short-term basis, telecommunications, lighting, transportation, a little bit softer relative to utility, solar, et cetera. What are the implications to margins for that business segment, just as you're seeing a little bit of a, maybe a shift in kind of contributions from these sub verticals?

Timothy Francis (Interim CFO)

Yeah, I'll take that one. This is Tim. You are correct. Our sales forecast expects a reduction in telecommunications, and as Avner said in his prepared remarks, commercial lighting is a bit muted. With that said, still good margins for the infrastructure segment. We expect them to be closer to what we saw in the Q1 versus the near record results we saw in the Q2.

Avner Applbaum (President and CEO)

I'll add to that is, you know, overall, the strength of our portfolio. While you might see some softness in one area, like we mentioned, the commercial lighting, we have very strong demand on in the TD&S business. We're able to use our plants and our capacity to support that business, which helps us continue keeping our plants busy, driving business that has very strong margins. As we mentioned, the a lot of our businesses has backlog of over 40 weeks, we're able to proactively manage our portfolio to make sure we both support our customers, but drive high-margin business as well. Overall, we will, you know, continue to see strength in those businesses and keep on driving margin improvement.

Brent Thielman (Managing Director and Senior Research Analyst)

Okay, thank you.

Operator (participant)

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

Brian Wright (Managing Director)

Thanks. Good morning. First of all, congratulations, Avner. Secondly, you know, just wanted to think about, are there, you know, coming from the CFO position, right, not having the final say in things, but being a valued member, but are there any areas of, like, cost improvement opportunities that, you know, coming from your vantage point, that might be on the table that have kind of been held off up until now?

Avner Applbaum (President and CEO)

Thanks for your question. You know, over the last several years, we've been lockstep here as a leadership team with the board, really moving towards our strategy, which we presented during Investor Day, with those financial goals. We put together the strategy together, the framework, and, you know, coming from the CFO role, I use a lot of, you know, data, analytics, technology to really drive value, focused a lot in the finance area. I'll bring that, you know, larger to the organization so we can both drive improvements internally and drive, you know, additional revenue to our customers.

Overall, we continue working on quality of earnings, and as we've seen the improvement in these couple of quarters, continuing in this year and driving to our goals of 14%. Quality of earnings is something that is highly important for us, our shareholders, and we'll continue looking at every opportunity to streamline processes, improve the profitability of the company and overall, ultimately, drive shareholder value. The answer is yes. They'll continue to be focused on driving profitability for the company.

Brian Wright (Managing Director)

Great, thanks. I just wanted to get a little more color on the EMEA. Is that the rebound that you're kind of expecting there, is that pretty much the reference to the Egypt project coming on in July, or was there anything else beyond that?

Avner Applbaum (President and CEO)

That is the vast majority of, you know, not different than any other projects. It's typical. Projects have movements, and so it wasn't surprising necessarily. It just moved down from June to July. We have started shipping already, and our pipeline is very strong in that region. So we're going to expect to see continued strength in that region based on all the long-term market drivers that support that region specifically.

Brian Wright (Managing Director)

Great, thanks. Just one last one, if I could. One of your peers has kind of postulated, you know, kind of similar to on the irrigation side in North America, that, if the harvest comes out, you know, as expected here, that the fourth quarter could be a strong quarter. I know, yeah, given what we've seen, it doesn't make sense to forecast that. Just, you know, conceptually, you know, with the tax, you know, tax advantages of ordering in the fourth quarter, to just, you know, how would you kind of view that?

Avner Applbaum (President and CEO)

Yeah. That is actually our expectation, and a lot of it will depend on the actual harvest, which is always the case, and we will have a lot more visibility as we get closer to September to see the yields, et cetera. The market drivers are strong. If you kind of look at the net farm income, as we mentioned, it will be the third highest we've seen in the last 10 years. Corn prices at $6, five and a half do support high ROI. At the end of the years, the growers are kind of going to look at their financials, and as they do their tax planning, they will look at opportunities to invest in capital, and our pivots have one of the highest ROIs.

The expectation is that in the Q4, they will be a typical ordering patterns as we've seen in prior cycles. Again, we'll just have to wait for the yields and see how that plays out. As you know, that's very difficult or impossible to predict. So, we're just going to see how that all plays out.

Brian Wright (Managing Director)

Great. Thanks again. Thank you.

Operator (participant)

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

Adam Farley (Associate Analyst)

Good morning. This is Adam Farley on for Nathan Jones. I wanted to start on the agricultural margins. You showed really strong margin expansion despite the revenue headwind. How were these margins possible, given the volume declines? Is it mainly just lower steel prices running through PMF?

Timothy Francis (Interim CFO)

Hi, this is Tim. Good morning. I'll take that question. I would tell you it's multifaceted, right? As we continue to talk about, we're doing a good job on pricing. I talked about how we are really focused on operational efficiency. You know, that is contributing to the stronger margins in Q2. Thirdly, you see in our, in our deck that the change in international sales, and in our prepared remarks, we talked about less projects in the Q2. Less projects helped us see an overall better operating income margin.

Avner Applbaum (President and CEO)

Overall, I'll add, but I'll just add all the initiatives that we've been taking over the last couple of years, right, were masked by COVID. As we came out, we're just getting much better productivity through our plan, better labor utilization, a lot of the operational excellence that we've done. As you mentioned, it's multifaceted, with the pricing, the operational excellence, we'll continue to drive stronger margins.

Adam Farley (Associate Analyst)

Okay. Then following up on pricing within agriculture, mainly within the North America market, is there any risk to pricing given the lower demand? Have you seen any evidence of aggressive pricing in the industry? If there is, how would Valmont react to that?

Avner Applbaum (President and CEO)

Well, I think by now you kind of know our philosophy around pricing and, you know, we continue to take pricing leadership, and it's all based on the value we provide to the growers, and it has a very strong value proposition. There's really no intention on reducing pricing. There's no reason to reduce pricing when we provide a very strong value and ROI, and the industry is kind of following the same path. There should not be any expectations on reducing pricing.

Adam Farley (Associate Analyst)

Okay. Thank you for taking my questions.

Operator (participant)

Thank you. Our next question comes from Jonathan Braatz with Kansas City Capital Associates. Please proceed with your question.

Jonathan Braatz (Partner and Senior Equity Analyst)

Good morning, everyone. Avner, could you characterize the Brazilian market in the 2nd quarter? You said there was sales growth in Brazil.

There was a period of slowness as the farmers awaited financing. Was it sort of weak in the H1 of the quarter and the volume has picked up in the Q2, I mean, H2 of the quarter?

Avner Applbaum (President and CEO)

Yeah. Thanks for that question. You know, going into the quarter, going into the year, we know we also additional factor that we had is, you know, we had backlog going into the year, which supported a lot of our sales throughout the H1. But as the financing comes through, that provides significant tailwinds for the business. As we mentioned, the interest rate is very favorable compared to what other options are. There are some other benefits of some of these this program. For instance, a couple of years before you actually repay back the loan, it will provide strong tailwinds. Again, I would really focus on the long term, right? The Brazilian market is very strong.

It is a very important part of the overall GDP and economy of Brazil, and all those strong market demands with growth, population, and land productivity, et cetera. We're really excited about our Brazil market, and we do expect to see continued strength to support our long-term goals.

Jonathan Braatz (Partner and Senior Equity Analyst)

Do the sales in Brazil typically come with all the sort of, you know, technology bells and whistles, or are they more plain vanilla?

Avner Applbaum (President and CEO)

Well, you know, when I look at overall, right, we, you know, we're in the journey of adding technology to our overall irrigation sales. If you look at the growers in Brazil, they're actually, for the most part, they're actually, their age profile, they're younger. They're really more open to adopting technology, and the adoption rate is actually pretty high. As we continue our journey of really adding productivity to the grower with remote monitor and control, irrigation optimization, agronomic insights, when you kind of look at the suite that we're providing, there's a pretty good level of adoption. The Brazil market, I'm pretty excited about the level of adoption we're expecting to see there.

You know, we're at the beginning of our journey, and I do expect that we'll continue to add the technology suite to our other irrigation products.

Jonathan Braatz (Partner and Senior Equity Analyst)

Okay, one last question. The acquisition HR in Australia, is that type of business that they're in, is that something that you're looking for elsewhere, globally, whether it be domestically or other countries, that similar type of business?

Avner Applbaum (President and CEO)

Overall, aftermarket is a big part of our overall strategy for Valmont, and we shared some information on that during the Investor Day. What we like about the aftermarket parts is, you know, it's complementary to our other irrigation business, where we could provide more to our dealers and the growers overall. It has more of a recurring base nature, which we like as well, to offset some cyclicality, and it actually also has a high margin profile. We're really excited about aftermarket opportunities across actually both of our segments. We have a very strong part business in telecom as well.

Overall, I would say we're really excited about this acquisition, and we'll continue kind of focusing on aftermarket as part of our overall strategy.

Jonathan Braatz (Partner and Senior Equity Analyst)

Thank you.

Operator (participant)

Thank you. Our next question is from Christopher Moore with CJS Securities. Please proceed with your question.

Christopher Moore (Senior Research Analyst)

Good morning. Thanks for taking the question too. I know you don't always give backlog on a quarterly basis. You did after Q1, and maybe just directionally, can you talk about, you know, where it was at the end of the Q2?

Avner Applbaum (President and CEO)

Yeah. Our backlog was at $1.5 billion. Actually, we did put it on the.

Christopher Moore (Senior Research Analyst)

You said it. I missed it. Got it.

Avner Applbaum (President and CEO)

Yeah. No, no problem. Strong backlog overall, right? It really supporting kind of what we're seeing in our businesses. Majority of that is in the infrastructure part of the business. It's, you know, see what we're seeing, kind of mostly in the, you know, TD&S part of our portfolio, which has very strong market drivers and strong market demand.

Christopher Moore (Senior Research Analyst)

Got it. Helpful. Maybe my second, just on the, on the telecom. Obviously, the growth that you're looking for now, you know, previously talked in that 20% range. Now, the carriers are slowing down. Just a little bit longer-term thoughts there. You expect it to be flat, you know, slightly down, perhaps, you know, over the next 12 to 18 months? Just kind of get a feel for what you're thinking there.

Avner Applbaum (President and CEO)

Yeah. Well, the long-term drivers, you know, really didn't change, right? If you kind of look at the real macro level, we see continuously increased data consumption. When you look at specifically the 5G network, and you look at it at a global basis, we're expecting, you know, 85% of the world population to be covered by 5G over the next, what, five, six years or so. Yeah, there is. They're pausing. Initially, we thought this network rollout would be a little different. It turns out to be the same, all investors spectrum, they're going to take a pause. They're going to look at the consumer, you know, how much they adopt the network.

They'll look at their ROI. That was impacted as well by inflation and interest rates, which had a pretty large impact on some of the carriers. When you actually look at the AT&T and Verizon earnings, which they just reported earlier this week, it kinda supports exactly that, that we will continue the build-out. They spend money on the spectrum. Now they need to get their ROI, so they will continue to invest on densification. A little slower than we thought, expecting it kinda go back to a more of a normal cadence, and we'll start seeing more of that, you know, double-digit growth over the next several years. Overall, very positive.

Just a little bit of a hiccup there on kind of how they slow down a little bit, but really excited about telecom and the fact that it will continue growing.

Brian Drab (Partner and Equity Research Analyst)

Got it. I'll leave it there. I appreciate it.

Operator (participant)

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

Renee Campbell (SVP of Investor Relations and Treasurer)

Thank you all for joining us today. As mentioned, today's call will be available for playback on our website or by phone for the next seven days. We look forward to speaking with you again next quarter.

Operator (participant)

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, 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. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.