Valmont Industries Inc. (VMI 0.20%)
Q4Â 2018 Earnings
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Conference Call
Feb. 21, 2019, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Greetings, and welcome to the Valmont Industries Fourth Quarter and Full Year 2018 Conference Call. (Operator Instructions). As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Renee Campbell, Director of Investor Relations and Corporate Communications for Valmont Industries. Rene, please go ahead.
Renee Campbell -- Investor Relations and Corporate Communications
Thank you, Kevin. Good morning and welcome to Valmont Industries Fourth Quarter and Full Year 2018 Earnings Call. With me today are Steve Kaniewski, President and Chief Executive Officer; Mark Jaksich, Executive Vice President and Chief Financial Officer; and Tim Francis, Senior Vice President and Corporate Controller.
This morning, Steve will provide a summary of our fourth quarter and full year results. Mark will provide additional detail on financial performance and our outlook for 2019. We will conclude with Steve discussing the Valmont-Prospera partnership, we announced yesterday, followed by Q&A.
A copy of our press release and slide presentation is on the Investors page at valmont.com and an archive of today's call will be available for the next 7 days. Instructions for accessing the replay are included in the press release.
Also, please note that this conference call is subject to our disclosure on forward-looking statements, which applies to today's discussion and will be read in full at the end of this call.
I would now like to turn the call over to our President and Chief Executive Officer, Steve Kaniewski.
Stephen G. Kaniewski -- President And Chief Executive Officer
Thank you. Renee. Good morning everyone and thank you for joining us. I'd like to begin this morning by thanking our global team of over 10,000 associates for delivering another year of profitable growth in 2018. In what was a transformational year we made great progress on our 3-year growth strategy that we announced last March at our Investor Day.
With that let me turn to a recap of our fourth quarter, summarized on slide 3 of the presentation.
Net sales of $697.4 million were 2.5% below last year excluding revenues from the grinding Media business that was divested last April. Fourth quarter sales were flat this 2017. Sales growth from pricing actions across all segments and higher volumes in the Engineered Support Structures and Coatings segments were offset by lower project sales in both international irrigation and the Utility segment.
Foreign currency translation negatively impacted revenues by $13 million. Turning to the full year summary on slide 4, revenues of $2.8 billion, were slightly higher than last year. With higher volumes in the Engineered Support Structures and Coatings segments contributing to sales growth. In the Irrigation segment, North America sales grew more than 4%, lower volumes in international irrigation were mainly due to 2017 projects in emerging markets that did not repeat this year. In the Utility segment sales were impacted by lower volumes from continued demand for smaller structures and a competitive pricing environment in the North European offshore wind business.
Moving to the operations side of the business and slide 5 of the presentation, during 2018, we substantially completed our operations transformation which was a major part of our strategy to simplify operations, improve efficiencies in our supply chain and optimize our global business model.These actions primarily impacted our ESS segment. Specifically during the year, we closed 5 facilities, including 3 in China and are in the process of closing an additional 2 by the end of the second quarter, which led to the increase in pre-tax full-year restructuring expenses from $27 million to $42 million. We brought our composite facilities under the central wide operations management team, continuing our commitment to operational excellence and Lean deployment across our sites.
We expanded our shared service model for back-office functions and finance, procurement, logistics and supply chain. Completing several actions to streamline cost regional management teams. And we work to drive additional Lean and Agile methodologies throughout our business while streamlining and improving our internal processes. These actions position us well to capitalize on global growth opportunities, enabling us to deploy capital more strategically and to more quickly integrate our acquisitions, all of which would benefit our shareholders long term.
I would now like to turn the call over to Mark.
Mark C. Jaksich -- Executive Vice President and Chief Financial Officer
Thank you, Steve and good morning everyone. My comments regarding the fourth quarter and full year 2018 are based on the adjusted results as outlined at the end of the press release.
Turning to slide 6, despite fourth quarter sales decreasing 2.5% over 2017 operating income improved by 3.5% or 9.5% of sales. Improvement in operating income was achieved despite a higher LIFO expense of $1.5 million over 2017 as a result of continued progress on the pricing actions across our businesses and cost structure savings as a result of the restructuring actions taken earlier in 2018.
Moving to full year results. Sales were slightly higher than 2017. The net impact of acquisitions and divestitures on sales was minimal as the sales contribution from the 2018 acquisitions was essentially offset by lower sales in the grinding media business, which was sold in April 2018. Adjusted operating income of $269.4 million or 9.8% of sales was comparable to 2017 . We are pleased that despite a very volatile steel cost environment this past year, we successfully recovered inflation over the year through effective supply chain operational and pricing actions.
Turning now to the cash flow highlights on page 7, operating cash flows through the end of 2018, or $153 million compared to $133.1 million last year and $68.1 million through the third quarter of 2018. A strong finish to the year and cash flows was driven by improvements in working capital and a more stable raw material pricing environment.
Turning to capital deployment. A summary of our accomplishments is shown on slide 8. Capital spending for the year was $72 million, up from $55 million in 2017, driven by investments in a new steel structures facility in Poland and expansion of our Irrigation facility in the United Arab Emirates and the new Utility concrete structures facility in Fort Meade, Florida all in support of market growth opportunities. We deployed $143 million toward 6 acquisitions in 2018 and returned $149 million of capital to shareholders through share repurchases and dividends, ending the year with just over $313 million of cash.
Our adjusted effective tax rate for the year was 23.6%, slightly lower than our expectation of 25% due to our geographic mix of earnings.
Now let me now turn to slide 9 to talk about our 2019 outlook. We expect full year diluted earnings per share to be in the range of $8.10 to $8.90. We have expanded our earnings per share range this year to reflect the growing levels of project business in our international irrigation market. Revenue growth of 7% to 8% about evenly divided between organic growth and acquisitions, inclusive of the Larsen and United Galvanizing acquisitions completed this year and net of the 2018 grinding media divestiture. Foreign currency translation effects, based on current rates is expected to be unfavorable by about $27 million or 1% of sales, our revenue outlook does not include other potential acquisitions during the year.
We expect a 20 basis point to 50 basis point improvement in operating margins with average raw material costs including freight expected to be relatively flat in the aggregate to slightly deflationary in 2019 as compared with 2018. Full year free cash flow given the raw material cost stability outlook is expected to approximate 1x net earnings. Capital expenditures of $90 million to $100 million include the completion of the expansion project started in 2018, as well as ongoing Lean and Agile investments to enhance productivity in both the factories and offices. We expect our after-tax return on invested capital to exceed 10%. Our tax rate is expected to be approximately 25% based on current tax laws and our estimated geographic mix of pre-tax income. With respect to the first quarter of 2018, there are a couple of tough comp items that we'd like to highlight. First, specifically for international irrigation. We will not have the same level of large project sales this year that we had in the first quarter of 2018. But we do expect project opportunities to commence over the balance of the year. Second, specific to the Utility business, a large project related to Hurricane replacement work in the first quarter of last year will not repeat in the first quarter of 2019.
But our strong global backlog in that segment supports of revenue growth through the balance of the year. The benefits of our 2018 operations transformation plan will accelerate throughout the year with expected total savings in 2019 of about $11 million. And with that I will now turn the call back over to Steve.
Stephen G. Kaniewski -- President And Chief Executive Officer
Thank you, Mark. Looking ahead to 2019, we have a positive outlook for sales and earnings growth in all segments. And general sentiment across our served markets is also positive. Turning to the segments, Engineered Support Structures growth is being led by continued government investments in infrastructure development, specifically lighting and traffic and 5G wireless communication site preparation. In North America, we are seeing solid demand in our transportation markets. We are encouraged to see lead times of 10 weeks to 12 weeks, nearly double the average supported by 50% higher backlog, which is the highest since 2014. We expect market demand in Europe and Australia to be similar to 2018.
In the India market, we expect accelerated sales growth throughout the year, driven by improved wireless communications demand and general infrastructure growth. In China, wireless communication demand will remain challenged ahead of substantial 5G rollout. We expect sales to be similar to 2018. In Utility, we expect strong market demand from ongoing investments in grid hardening and record levels of U.S. investment in renewable energy sources. As we all know projects shifts can occur each quarter, but our current global backlog of approximately $370 million supports a positive outlook for 2019. First quarter profitability will be challenged by a less favorable project mix compared to 2018.
And a continued competitive pricing environment in the offshore wind business. With respect to the offshore wind business, we have a good backlog in terms of volume. But margins will continue to be pressured and average selling prices are lower compared to prior years. Over the past several months, 3 major competitors in the Northern European region have announced insolvency or have fallen under state ownership. In light of this change, we are continuing our strategic review in 2019 and we'll provide updates each quarter as needed. Moving to irrigation, we expect North America markets to continue to be muted by low projected net farm income and low commodity prices. We have a good line of sight to a strong pipeline of projects in the Eurasia and Middle East markets, which are expected to accelerate beginning in the second quarter.
As always, financing delays can impact timing, but the underlying demand in emerging markets is strong. We also expect an improved market environment in Brazil this year. Subject to trade show and government supported tsunami financing programs outcomes. Moving the Coatings, global economic growth is expected to drive higher sales. Profitability accretion from last week's acquisition of United Galvanizing will be realized over time. After consideration of costs associated with the transition from our Brennan, Texas facility. Turning to slide 10, in summary, we expect sales improvements across all our segments in 2019, benefiting from the acquisitions completed over the past year. The associated actions taken this year to transform our global operations have simplified and strengthen our businesses, positioning us for long-term profitable growth.
These benefits will accelerate as the year progresses. Long-term drivers for our business in both infrastructure and agriculture remain strong and we are committed to price leadership throughout 2019. Finally, we continue to drive Lean and Agile deeper into our business. Increasing profitabilities and shareholder return over time. Yesterday afternoon, we announced a new global partnership with Prospera Technologies. Before we open the call for questions. I would like to take a few minutes to talk about this exciting collaboration as the first step in developing a roadmap to autonomous crop management. Turning to slide 11, the exclusive partnership between Valmont and Prospera is truly the first of its kind specific to mechanized irrigation. Together, our two companies are charting the course to provide growers with autonomous crop management solutions that will generate greater returns by using fewer crop production inputs and resources.
Valley irrigation currently leads the industry with more than 60,000 connected global devices. The intelligence shared between these connections and the pivot along with the integration of data science, machine learning and artificial intelligence, will drive the development of real-time crop diagnosis and recommendations. Ultimately reducing costs for the grower and increasing yields. Turning to slide 12, Prospera is an award-winning machine vision and artificial intelligence company founded in 2014, specializing in ag data and analytics. They are committed to bringing advanced machine learning technology to the agriculture sector, helping growers control and optimize our production. With offices in Tel Aviv, Israel and San Jose, California, the Prospera team has successfully solved crop production issues through their advanced integrated systems and products, backed by strategic investors including Cisco, Qualcomm and Bessemer. The team has developed unique analytics and algorithms to provide irrigation and crop growth recommendations to farmers and their advisors. As we know the pressure of a growing world population demands higher crop yields and continued constraints on fresh water resources also require greater irrigation efficiency. Water will remain our focus at it is still the number one determinant of crop yields. Our strategy is to lead the transformation of the center pivot from an irrigation machine to an autonomous crop management tool. Growers and their agronomists will be able to understand more specific crop conditions in the field and ultimately address the needs of each individual plant on a mass scale.
This will lead to the pivot becoming a self-learning machine, using crop inputs in the field and grower to deliver appropriate amounts of water, fertigation and chemigation. An overview of how this technology works can be found on slide 13 and the critical takeaway is that this technology not only has the ability to acquire and analyze data using proven analytics, algorithms and data layering. It will also send recommendations directly to the field prompting the grower to take specific actions, which is a first in the industry. As the global leader in mechanized irrigation, we are investing additional resources to support this strategy. We now have a dedicated team of technology territory managers and sales associates to support and educate growers and our dealer network. We have also appointed a Vice President of Global Technology strategy whose team is responsible to grow our portfolio of advanced solutions. And we have committed to invest an additional $4 million in Research and Development in 2019 toward this specific effort.
Beyond our customary R&D spend of approximately $5 million in the segment. The first milestone on our road map will be Anomaly Detection, which is launching this spring. Anomaly Detection provides visual detection of various issues in the field through satellite, drones and additional connected inputs that a grower may already have. There will be available through a subscription-based model for all brands of pivots. Launching specific technology product to the market like Anomaly Detection and driving product adoption to our world-class global dealer network, our two critical steps on the journey toward autonomous crop management. Through these efforts, we are targeting to reach 1 million acres with machine learning technology by 2020. As the market leader, our partnership with Prospera is a critical step in furthering our strategy of addressable market growth, to the development of commercially viable advanced integrated technology solutions. We look forward to updating you more on the development of our roadmap and specific product launches in the coming quarters. I will now turn the call back to Renee.
Renee Campbell -- Investor Relations and Corporate Communications
Thank you, Steve. At this time. Kevin, you may open up the call for questions.
Questions and Answers:
Operator
Certainly, we'll now be conducting your question-and-answer session. (Operator Instructions) Our first question today is coming from Craig Bibb from CJS Securities. Your line is now live
Craig Bibb -- CJS Securities -- Analyst
Hi guys. Maybe right -- ended with Prospera, we could start there. What kind of the time frame for adding that to your product offering. And then from the way you're describing their product, you're going to be gathering a lot of intelligence about improving yields for farmers. But your products kind of only address one part of that. I know it's the most important one, which is water, but does this create an opportunity to move toward herbicides, the fertilizer and another things that would help improve yields?
Stephen G. Kaniewski -- President And Chief Executive Officer
Yes, Craig. So our first product will be launched this spring and that's the Anomaly Detection and then we will roll out a series of products thereafter in subsequent quarters, we'll update the market each quarter as to how those are developing. We see the pivot has the unique item that is already in the field that doesn't have further crop destruction, and if you go out and actually have to remediate the crop.
So it'll be gathering a very unique data set on the field. There's not a data set today that is really this active from a field level where the pivot can look at what's out there in the field and look at a specific crop particularly damage or bugs or other things. And it is our intention, as we move forward to transform the pivot to do more than just water.
So the chemigation, fertigation, we already have some partners in that sphere, but a lot of our R&D spend going forward will be on that transformation.
Craig Bibb -- CJS Securities -- Analyst
Okay. And then on the guidance for next year you're baking in pretty 20 bps to 50 bps EBIT margin gain that seems pretty small relative to the tailwind you could get from lower steel prices. So last year serial reps starting higher starting in Q1 peaked in August has come back down tremendously, you guys -- your guidance is assuming flat steel. Is that conservatism or?
Stephen G. Kaniewski -- President And Chief Executive Officer
No, Craig, i will answer it this way, what you've seen the most priced deflation with is hot-rolled steel and then, but ply specifically has gone up to very high levels, and so if you look at the mix of our products between what you displayed and uses hot-rolled coil, it balances out to about that flattish kind of market outlook and much of what we did in 2018 was simply to gain back the price inflation.
So this would be really looking at more true margin enhancements of productivity, pricing and other actions as opposed to relying solely on steel to give us tailwinds
Operator
Thank you. Our next question today is coming from Nathan Jones from Stifel. Your line is now live
Nathan Jones -- Stifel -- Analyst
Good morning, everyone. Just following up on some of the steel commentary here. If we do end up with that 2019 environment where your overall steel price is flat, which I know is probably not what we'll end up paying. Are you guys caught up on the price cost side? Do you still have more pricing actions that you need to take to catch up those steel price? Is there any commentary you can give us on where you're at in terms of price cost?
Stephen G. Kaniewski -- President And Chief Executive Officer
We believe at this point, Nathan that we have recovered across all of our segments. Raw material and/or freight inflation across all the different segments. So it took a while for some of the backlog to come through, which is particularly why we had guided third and fourth quarter still being somewhat challenged particularly in ESS because some of that backlog was fixed backlog that we could not reprice.
But at this point, Utility, ESS, Coatings and our Irrigation segments of all put through the price increases necessary to recover that.
Nathan Jones -- Stifel -- Analyst
You mentioned there some lower-priced or lower margin I guess backlog in ESS, was that what was responsible for the sequential dip in ESS margins in the fourth quarter or is it something else there?
Stephen G. Kaniewski -- President And Chief Executive Officer
Yeah, fourth quarter is different than third quarter, but when you do look at it sequentially, we did have about a $900,000 plant expense related to fixing a roof that we had to expense in the quarter. So that was part of it and then really if you look at where our geography of improvement came from, a lot of it came from emerging markets, which tend to have a little bit less of a margin than our North American business, which is typically the quality of earnings are better, that was really where that differential came from.
Operator
Thank you. Our next question is coming from Brian Drab from William Blair & Company. Your line is now live.
Brian Drab -- William Blair & Company -- Analyst
Hi, good morning. Thanks. I just wanted to first ask about the vendor quality issue that was discussed in the press release and I think it was $5 million. Can you just talk about what that was and how, as it is mentioned in the release, cost will be recovered going forward and then if costs are recovered will the positives going forward be adjusted out just like the negative was adjusted out in the fourth quarter results? Thanks.
Stephen G. Kaniewski -- President And Chief Executive Officer
Yeah, I'll talk first about what the issue is and then Tim can talk a little bit about the accounting. What we had was a third party quality issue not just ourselves but others in the industry. Many others in the industry buy from this particular vendor. The issue we had at the field level and all of us had to make good to the customer on fixing the issue, which we have done and which is behind us at this point.
Then in terms of recoverability we've worked with the vendor and we believe very strongly at this point that will be fully recovered but it will be done over time through discounts on product as we move forward and so it's dependent, it's variable, but that is how the majority of the industry players have worked with this particular vendor in order to get the recovery. And Tim, I'll turn it to you.
Timothy P. Francis -- Vice President and Corporate Controller
Sure. Thanks, Steve. Brian, what I'd add to that is, as Steve said, as we work through resolving this with the vendor. We're expecting them to put a specific discount on every invoice they send to us and then from an accounting perspective, we will track those discounts and if there is a quarter or certainly a year where the discount is meaningful. We will talk about it, but right now we believe it will take a few years to recover all of the $5 million.
So we're not exactly sure how long it will take to recover just yet.
Brian Drab -- William Blair & Company -- Analyst
Okay. So can you say what segment this was in and can you also say you know at anything -- more about whether -- specifically about whether you would adjust for that going forward? It sounds like you wouldn't adjust for that going forward?
Stephen G. Kaniewski -- President And Chief Executive Officer
Brian, the majority of it was in our Utility segment, there was a small piece of it in our ESS segment and we would not adjust, but as Tim said, we would call out if it was meaningful being that it's going to be over time, it probably won't be meaningful any one given year through the agreement.
Timothy P. Francis -- Vice President and Corporate Controller
Okay, thanks. I'm not sure if I am out of questions that I'm curious on the guidance, effects/impacts for 2019 and price impact on 2019 revenue would be great. Thanks a lot.
Mark C. Jaksich -- Executive Vice President and Chief Financial Officer
Yeah, Brian, this is Mark. On the effects side, we mentioned the revenue side of it and I, we're expecting to see based on current rates about $0.06 to $0.07 of headwind on EPS as a result of that. Then as far as the pricing, a little bit of positive effect on pricing, but really organically it's -- when we talk about organically it's combination of volume and price. Price is a hard one to model at this time of the year. Since a lot of work hasn't developed yet.
Operator
Thank you. Our next question is coming from Brent Thielman from D.A. Davidson. Your line is now live.
Brent Thielman -- D.A. Davidson -- Analyst
Great, thanks. Good morning, Steve. As the expectations changed it all for the various transactions you've done through the year, should we still kind of assume the same accretion. I guess any sort of update, I know few of these look to inject some capital to expand kind of where you are with that?
Stephen G. Kaniewski -- President And Chief Executive Officer
Yeah. So when we look across the completed acquisitions in 2018. I would say that all of them are within our parameters for where we thought they would be particularly in the short term. The Convert Italia, the solar tracking acquisition has the most potential from a volume perspective in terms of growth. The Galvanizing acquisition in New Zealand is going very well.
The Derit Infrastructure acquisition, which is really an asset acquisition is proceeding as we expected because we had to put money in, thereafter the gain welding certifications and the like. So our Walpar acquisition had a little bit of slowness in some of the core markets, but as we look at the, the back half of this year. We believe that those are in good shape.
And so when you look across the balance of them the kind of where we believe they would be there's integration work, the integrations have gone very well. And then on the two that we just announced United and Larsen. United is a solid backlog fill or let's say business filled galvanizers. So we expect that accretion to be as you expect any galvanizer devoid of some of the costs in the first quarter.
And Larson has also proved to be a strong start, particularly as you get 5G site readiness. I forgot to mention Torrent in 2018. Torrent was a great acquisition for us in that pump space designing a pump because that's become much more critical to the international irrigation coating activity is almost a mandatory to have a pump solution along with the pivot.
So for the amount of capital we deploy. We were careful. We integrated I think very quickly and strongly with the new operational model that we have and no major issues with any of them.
Brent Thielman -- D.A. Davidson -- Analyst
Okay, great. And then on Utility and particularly in the North America side, continue to see with really high levels of bookings in the transmission world least among the service providers. Are you starting to see that show up -- larger projects in your order book yet?
Stephen G. Kaniewski -- President And Chief Executive Officer
We've seen some larger bids recently that are more toward the back half of '19 and into early '20. I wouldn't say that it's a trend though at this point, but there are a couple of nice pieces of work out there for the back half of the year. Much of what we have right now is being driven by obviously people who understand the issues in California, the grid hardening between Florida and there is driving part of our growth, the solar and wind. Increases and generation in the U.S. specifically are driving both the smaller structures as well as substations and our substation products like the controlled environment construction are doing very well. And then obviously on the global front that Solar and Lattice is really opening up new markets for us outside of our traditional markets and we feel very good about that going forward.
Operator
Thank you. Our next question today is coming from Jon Braatz from Kansas City Capital. Your line is now live.
Jon Braatz -- Kansas City Capital -- Analyst
Morning, everyone. Steve, can you help me out, how does the Prospera partnership -- how is that integrated with AgSense? Is it going to stand-alone product that will be additional subscription? Can you help me out there?
Stephen G. Kaniewski -- President And Chief Executive Officer
I'm sorry. We will utilize AgSense and base station as the delivery mechanism and compute on the field for the Prospera relationship. So AgSense is integrated into the offering and it will be a subscription, that's an additional one to the AgSense itself or a bulk point (ph) AgSense depending if the person already has AgSense in there. So the data acquisition part will be new.
That will either be through various sources and/or cameras on pivots and then we will upload to the cloud come back with recommendations and then send them back out through the AgSense unit itself.
Jon Braatz -- Kansas City Capital -- Analyst
Okay. And then secondly, as we look at the Irrigation business this year, here in North America. When you look at the drought map for the U.S., there is plentiful water east of the Rockies. Lot of snowfall, lot of precipitation. Will that influence any decisions that might be made by growers here this spring? Could that be a negative for the North American business?
Stephen G. Kaniewski -- President And Chief Executive Officer
I won't say that it won't, but the likelihood that it will is -- there's still going to have to wait to actual growing conditions take place. It will just help with germination. At this point, you know that the larger tone that we're hearing from our dealers and from our growers is still around projected net farm income being low and the commodity prices being low and that seemed to have much more of an influence at this point on the purchasing decisions.
So that's why we just expect muted demand, at least particularly the U.S. Again now internationally, Brazil definitely has an optimism around it. We are seeing good order rates coming out of there and the international projects are substantial and they are numerous. So we think that that's really where the growth is going to come from this year in the Irrigation segment.
Jon Braatz -- Kansas City Capital -- Analyst
Okay, thank you, Steve.
Stephen G. Kaniewski -- President And Chief Executive Officer
Thank you, Jon.
Operator
Thank you. Our next question is a follow-up from Craig Bibb from CJS Securities. Your line is now live.
Craig Bibb -- CJS Securities -- Analyst
I maybe just stick on Irrigation here for a second, your backlog in irrigation is down 40%. It sounds like as I said you're optimistic about the quantity and the size of the international projects that are out there, but presumably, none of that's in backlog now or very little.
Stephen G. Kaniewski -- President And Chief Executive Officer
Yeah, that's correct. We came out of the fourth quarter into the first quarter with lower backlog that's almost all international irrigation. And our optimism is we have very clear line of sight on projects, but we're very conservative when we put it into backlog.
We want to make sure that the financing payment not just the PO is in hand first. And that's when we tend to put it in backlog and that's the part that takes time in these projects to obtain the financing particularly in developing economies.
Craig Bibb -- CJS Securities -- Analyst
In the U.S., we've all seen our stories on increased forum foreclosures (ph) year at the beginning of the selling season. Can you give us kind of insight on what you guys are seeing so far?
Stephen G. Kaniewski -- President And Chief Executive Officer
There's not much in the way of the selling season really beginning. We're kind of still coming off of end of year planning by most of the farmers and purchases there. In the next few weeks is really, when the season will kick in. The bankruptcy piece, there is obviously some increases in that, but that tends to be still on the small farms.
The farms that are larger than thousand acres have been in relatively good shape and they look long term in their capital investment plans. And so I don't think it necessarily changes their calculus any and they are fairly well capitalized.
So it's still a potential risk and we have to pay attention to it, but nothing that's over influencing the market at this point.
Craig Bibb -- CJS Securities -- Analyst
Alright. Thanks.
Operator
Thank you. Our next question is coming from Nathan Jones from Stifel. Your line is now live.
Nathan Jones -- Stifel -- Analyst
Hi guys. Just on free cash flow. I know you guys have targeted 100% conversion in net earnings. I think probably that free cash flow through unadjusted (ph) is the right metric to look at to normalize that some of the restructuring expense that you've experienced 67% in 2017, 86% in 2018.
I know you certainly had some headwinds that suck up working capital in terms of the inflation that you've seen in 2018. Fourth quarter cash conversion was much better and better than we hope for. Can you talk about your confidence at hitting a 100% in 2019? Maybe, is there any upside to the 100% as you catch up some of that on some of those raw materials or just how we should we think about that free cash flow conversion and anything you guys have deployed to ensure that you can get to that 100% number going forward.
Stephen G. Kaniewski -- President And Chief Executive Officer
Right. So I would say that if you look there's a slide within at the appendix, the talks about our how our cash flows superimpose across things like raw material inflation.
So with the assumption, if raw material prices stay relatively flat there will be no need to take on the inventory in advance to protect margins. So certainly in that respect I would expect to see the cash flow conversion to be better than it was in 2018.
In addition to that we are embarking on some strategies around being able to a lock in raw material prices before we have actually taken physically through some hedging activities, we had a little bit of a benefit out of that.This past year will probably continue to do that if it makes sense with respect to backlogs and we are starting some activities with our vendors through one of our banking partners to help us get a little better payment terms from our suppliers. So there are some things doing on self-help side but absence and a big run-up in raw material prices. We fully expect to see cash flow conversion to be stronger than it was in 2018.
Jon Braatz -- Kansas City Capital -- Analyst
Okay, thanks for the color.
Operator
Thank you. (Operator Instruction). Our next question is a follow-up from Brian Drab with William Blair. You line is open.
Brian Drab -- William Blair & Company -- Analyst
Just give a little more color on irrigation margins and looking at the third quarter revenue levels comparable with the fourth quarter, the margin step down from 500 basis points, why was that?
Stephen G. Kaniewski -- President And Chief Executive Officer
A part of that is just some of the mix that we international and domestic and so, international -- compared to North America and even get product mix within North America. It could be the number of spends, it could be the type of machine that's out there, but no significant trends and in fact we announced a price increase in January, which I have gone through (technical difficulty) not just in irrigation, but also in our ESS business as well due to the stronger backlog that's there. So we think that the margins will always approximate a range. Mark, any further color there?
Mark C. Jaksich -- Executive Vice President and Chief Financial Officer
I would say that's the case and and you also get a certain amount of mix between parts and systems to sell, but nothing in there in particular that would be considered (technical difficulty) it's very situational.
Jon Braatz -- Kansas City Capital -- Analyst
What's the difference roughly on average? I know there's a big range for all these things, but what's the difference on average for margins internationally versus domestically? Thanks.
Stephen G. Kaniewski -- President And Chief Executive Officer
Well, I would say that the margin, the operating margins internationally in Irrigation are not quite as strong as they are in North America, bu they are certainly ended well into double-digit territory and I have been improving quite a bit over time. Largely as a result of our footprint, investments in operational activities.
Operator
Thank you. We reach end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.
Renee Campbell -- Investor Relations and Corporate Communications
Thank you, Kevin. Thank you everyone for joining us today. As mentioned, today's call will be available for playback on our website or by phone for the next 7 days and we look forward to speaking with you again next quarter. Thank you.
Operator
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 day of this discussion, and the company does not undertake to update any forward-looking statements.
This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation today.
Duration: 44 minutes
Call participants:
Renee Campbell -- Investor Relations and Corporate Communications
Stephen G. Kaniewski -- President And Chief Executive Officer
Mark C. Jaksich -- Executive Vice President and Chief Financial Officer
Craig Bibb -- CJS Securities -- Analyst
Nathan Jones -- Stifel -- Analyst
Brian Drab -- William Blair & Company -- Analyst
Timothy P. Francis -- Vice President and Corporate Controller
Brent Thielman -- D.A. Davidson -- Analyst
Jon Braatz -- Kansas City Capital -- Analyst
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