Valmont Industries Inc. (VMI) Q4 2020 Earnings Call Transcript

Valmont Industries Inc. (VMI -1.45%)
Q4 2020 Earnings Call
Feb 18, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Valmont Industries Fourth Quarter and Full Year 2020 Earnings Call. [Operator Instructions] I would now like to turn the conference over to your host, Renee Campbell, Vice President of Investor Relations and Corporate Communications.

Renee L. Campbell -- Vice President of Investor Relations and Corporate Communications

Thank you, and good morning. Welcome to Valmont Industries Fourth Quarter and Full Year 2020 Earnings Call. With me on today's call are Steve Kaniewski, President and Chief Executive Officer; Avner Applbaum, Executive Vice President and Chief Financial Officer; and Tim Francis, Senior Vice President and Corporate Controller. This morning, Steve will provide a brief summary of our fourth quarter and full year results and comment on our strategy and long-term business outlook. Avner will review our financial performance and provide trends and key assumptions for 2021 with closing remarks from Steve. This will be followed by Q&A. A live webcast of the slide presentation will accompany today's discussion and is available for download from the webcast or on the Investors page at Valmont.com. A replay of today's call will be available for the next seven days. Please note that this conference call is subject to our disclosure on forward-looking statements, which applies to today's discussion and is outlined on slide 2 of the presentation. It will also 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, Stephen Kaniewski.

Stephen G. Kaniewski -- President and Chief Executive Officer

Thank you, Renee. Good morning everyone and thank you for joining us. Before reviewing our fourth quarter highlights, I want to acknowledge and thank our global team of over 10,000 associates for their noteworthy performance throughout this past year. I could not be more proud of their efforts, as they worked hard in the face of the pandemic to provide our customers with the essential products and services while prioritizing safety in our workplace and our communities. Our team’s dedication and focus has positioned us very well for success in the future. With that, let me turn to a brief recap of our fourth quarter summarized on slide 4 of the presentation.

Net sales of $798.4 million increased $115 million or 16.8% compared to last year, due to significantly higher sales in the Irrigation and Utility Support Structures segments. Starting with Utility, sales of $271 million, grew 16.9% year-over-year, led by significantly higher sales of global generation products, as expected. Strong demand for renewable energy generation is increasing and utilities continue to invest in a more resilient grid.

Moving to Engineered Support Structures, sales of $256.1 million were similar to last year. Favorable pricing and currency impacts were offset by lower volumes, primarily due to lower international sales as COVID-19 impacts continue to affect end market demand, mostly in France and India. Sales of transportation products were higher in North American markets, driven by states continued investments in road and construction projects. Wireless communication structures and components sales were similar to last year's record fourth quarter led by continued strong demand and favorable pricing in all regions.

Turning to Coatings, sales of $89.3 million, were similar to last year, but improved sequentially from the third quarter as demand continues to recover. In Irrigation, sales of $199.3 million, grew nearly 50% compared to last year with growth across all global regions. In North American markets, farmer sentiment has improved significantly as recent increases in agricultural commodity prices are leading to multi-year highs for soybeans, corn, cotton, and wheat. International sales growth was led by higher sales in the Middle East, European and South American markets, particularly in Brazil where we recognized another record quarter of sales and local currency. Deliveries of the multi-year project in Egypt also began during the quarter and we are pleased that how the project is progressing. This project and others like it are helping nations conserve water, strengthening their local economies, enhance food access and availability and support our commitment to improve life across the globe. During the quarter, we purchased the remaining 40% stake of Torrent Engineering and Equipment, a global designer integrator of high pressure water systems for the agricultural and industrial sectors. This acquisition supports our strategy to deliver full service engineered, turnkey water management solutions to our growers and is critical to large scale agricultural projects. Overall, sales and profitability were better than expected across all segments as we continue to successfully manage pricing and operational performance.

Turning to the full year summary on slide 5, net sales of $2.9 billion, grew 4.6% compared to last year and 5.4 % excluding currency impacts. Earlier in the year, visibility of the pandemic impacts on our global end markets was somewhat unclear; however, we exited the year with a more confident view of the tailwinds across the majority of our markets. I'm very pleased with our performance and our focused execution throughout the year.

Turning to the segments, strong sales growth in the Utility Support Structures was led by continued robust demand driven by renewables and grid resiliency and higher sales of global generation products. In Engineered Support Structures, our pricing actions and improved operational performance benefited us throughout the year. In North America, strong demand in transportation markets and an increasing number of site build outs ahead of 5G rollouts offset lower international end market demand. Access Systems sales were down 23% compared to last year due to a strategic decision to exit certain product lines.

Turning to Coatings, sales were down 6.1% for the year, but improved sequentially in the second half of the year, tracking in line with improving industrial production levels.

Turning to irrigation, 2020 began as the sixth consecutive year of an off-cycle in North America. Low grain prices and food supply disruptions from COVID affected demand earlier in the year. But, strengthening demand during the second half of the year led to a strong finish to 2020. In Brazil, very strong demand led to record sales with sales in local currency, growing 32% year-over-year. Additionally, sales of advanced technology solutions globally grew nearly 20% year-over-year to $67 million. These proprietary solutions now connect over 110,000 of our growers machines helping them to maximize yields, improve water efficiency and optimize input costs.

Turning to slide 6, during 2020, we made significant progress in many key areas. We elevated our commitment to ESG throughout the organization and set a solid foundation to share more in 2021, of what we're doing to conserve resources and improve life. We accelerated innovation through new products and services including our Spun Concrete Distribution Poles and small cell solutions, as well as technology advancements in our Valley 365 platform for connected crop management and all segments benefited from disciplined pricing strategies throughout the year. We secured the largest irrigation order in the industry's history to supply $240 million of products, services and technology solutions to the Egypt market and we generated over $200 million in free cash flow through a continued intense focus on working capital management. We quickly responded to inflationary pressures, which occurred late in the year by implementing price increases in all four segments and have implemented additional increases in early 2021. We believe that a persistent focus on price and delivering customer value is the primary way to deliver strong operating performance and generate shareholder value.

Turning to slide 7, last month, we announced a collaboration with the Republic of Kazakhstan to develop the first In-Country Center-Pivot Manufacturing Facility that will take advantage of the region's growing agricultural potential. Working with our joint venture partner Kusto Group, this multi-year agreement is helping enhance mechanized precision agriculture, creating a network of farms that will accelerate efforts to address food security, resource conservation, and increasing export demand. Kusto Group is a recognized leader in agribusiness and the application of innovative technologies in the region. Together, we have committed to build a local facility with an annual production capacity of up to 1000 pivots. Groundbreaking is planned to begin in the second half of 2021 with production ramping by 2024. As the largest economy in the region, Kazakhstan is rapidly embracing agriculture as a key economic contributor with a national plan to more than double the number of irrigated acres over the next 10 years. Growing regional demand coupled with excellent infrastructure will allow us to quickly and efficiently serve the greater market, starting with the multi-year agreement to supply a minimum of 4000 pivots. We are excited for the partnership and potential growth in the region and we'll provide further updates on our progress in future quarters. With that, I will now turn the call over to Avner, for our 2020 financial review and 2021 outlook and key indications.

Avner M. Applbaum -- Executive Vice President and Chief Financial Officer

Thank you, Steve and good morning everyone. Turning to slide 9 and fourth quarter results, my comments will focus on the adjusted results as outlined in the press release and in the Reg G disclosure in the presentation appendix. Please also note that for comparison purposes, references to 2019 operating income and earnings per share exclude the LIFO method of accounting for inventory, which was discontinued at the beginning of fiscal 2020. Fourth quarter operating income of $68.8 million or 8.6% of sales, grew 180 basis points, or 36% compared to last year, driven by improved operational efficiency in all segments, higher volumes in Utility and Irrigation and the non-recurrence of last year's losses in the Access System product line.

Fourth quarter diluted earnings per share of $2.20, grew 46% compared to last year, driven by higher net earnings and non-recurrence of losses in the Access Systems business and a more favorable tax rate. Fourth quarter tax rate was 24.4% on an adjusted basis. This excludes a non-recurring $1 million benefit or $0.05 per share from the adoption of US Tax Regulation finalized in 2020 which allows for more favorable treatment of tax payments by our foreign subsidiaries.

Turning to the Segments, on slide 10, in Utility Support Structures operating income of $28 million or 10.3% of sales decreased 110 basis points compared to last year. While strong volumes and improved operational performance drove higher profits, quality of earnings was impacted by higher mix of offshore and other complex deal structures. Moving to slide 11, in Engineered Support Structures, operating income of $24.4 million or 9.5% of sales increased 540 basis points over the last year. Overall, we were very pleased with the results from the actions we took to enhance pricing strategies and improved operational performance, which helped offset lower volumes in international markets as COVID-19 impacted market demand mainly in France and India.

Turning to slide 12, in the Coatings Segment, operating income of $11.8 million or 13.2% of sales was similar to last year. Higher volumes primarily in Australia, New Zealand and a continued focus on operational excellence and standard work, offset lower external volumes in North American markets. Moving to slide 13, in the Irrigation Segment, operating income of $25.3 million or 12.7% of sales, was 380 basis points higher, compared to last year. Strong volumes across all global markets and improved operational efficiency were partially offset by higher R&D expense for strategic technology growth investments.

Turning to cash flow on slide 14, our rigorous focus on working capital management helped us deliver solid operating cash flow of $316.3 million this year, an improvement over last year's strong performance and despite an early payment of approximately $18 million for the required 2021 Annual UK Pension Plan contribution. Turning to capital deployment, the full year summary is shown on slide 15. Capital spending for 2020 was $107 million, which includes approximately $42 million of investment in strategic growth opportunities and approximately $60 million of maintenance capital in line with historical levels. Growth investments include expansion of existing North American infrastructure operations to meet strong market demand, a new start-up coatings facility in Pittsburgh expected to come online at the end of first quarter 2021 and technology investments in our factory and our products. As mentioned last quarter, we resumed our share repurchase program in September returning approximately $93.4 million of capital to shareholders through dividends and share repurchases in 2020, ending the year with approximately $400 million of cash. We continue to have an active acquisition pipeline and are prioritizing strategic investments in higher growth products and markets and business solutions that align with ESG principles while meeting our return on investment capital goals.

Moving now to slide 16, for balance sheet highlights. Our balance sheet remains strong with no significant long-term debt maturities until 2044. Our leverage ratio of total debt to adjusted EBITDA of 2.2 times remains within our desired range of 1.5 to 2.5 times and our net debt to adjusted EBITDA is at one time. Let me now turning to slide 17 for an update to our 2021 financial outlook, including key metrics and assumptions for first quarter and full year. For the first quarter, we estimate net sales to be between $740 million and $765 million and operating income margins between 9% to 10% of net sales. For the full year, net sales are estimated to increase 9% to 14% year-over-year, which assumes a foreign currency translation benefit of 2% of net sales. Earnings per share is estimated to be between $9 and $9.70, excluding any restructuring activities. Other metrics and key assumptions supporting this outlook are summarized on the slide and in the press release. Before we move to the segments, let me briefly comment on operating margins for the first half of 2021. With unprecedented raw material cost increases and higher freight costs, we have taken quick deliberate steps to implement pricing across all our segments. In some cases we have implemented multiple increases since the beginning of 2021 and are maintaining these strategies across our served markets.

Turning to our Segment outlook on slide 18, in Utility Support Structures, our strong global backlog is providing good visibility. As mentioned, we have been aggressively adjusting prices due to rapidly escalating raw material costs. A reminder that pricing actions in response to rapid inflation in this segment historically take one to two quarters to recover, so we expect unfavorable gross margin comparisons of approximately 220 basis points in the first half of the year when compared to 2020. However; we do expect gross profit contribution for the full year to be favorable year-over-year as higher steel cost indices are reflected in selling prices.

Moving to Engineered Support Structures, we have entered the year with a solid global backlog of $247 million. We anticipate some short-term softness in transportation markets as state and local tax revenues have been impacted by COVID, along with delays in approving the FAST Act extension. We expect demand for wireless communication products and components remains strong and anticipate curious investment in 5G to accelerate throughout 2021, with sales expected to grow approximately 15% this year.

Moving to Coatings, end market demand tends to correlate closely to industrial production levels and we expect to see modest sequential growth as the economy continues to improve. Moving to Irrigation, we are providing additional details on our expected sales growth in this segment based on estimated timing of deliveries of the large Egypt project, strong net farm income driving positive farmer sentiment and a robust Brazilian market. Full year sales are expected to substantially increase 27% to 30% year-over-year. We expect another quarter of solid operating cash flows driven by continued emphasis on working capital management and ongoing footprint initiatives. Raw material inflation can also create short-term impacts on cash flows and as previously mentioned, we have enacted strategies to manage these impacts, including some raw material financial hedges to cover backlog. Finally, as part of our ongoing strategic portfolio review, we have decided to divest the access System product line, which generated $88 million of sales in 2020 and serves the Australia and Asia-Pacific markets. We do not see a path for this business to fit our long-term strategy of global product expansion and it will further reduce our exposure to mining and oil and gas end markets. Further updates will be provided in future quarters. With that, I will now turn the call back over to Steve.

Stephen G. Kaniewski -- President and Chief Executive Officer

Thank you, Avner. Moving to slide 19, as we have consistently stated over the past year, the fundamental market drivers of our business remain intact and we are seeing a solid set up for 2021 across all end markets as evidenced by our record, $1.1 billion backlog at the end of the year. In Utility, our strong year-end backlog of nearly $565 million remains at elevated levels and demonstrates the ongoing demand and necessity for renewable energy solutions and grid hardening. We are pleased to announce that in the first quarter, we were awarded the third purchase order of approximately $70 million for the large project in the Southeast U.S., confirming our customers' confidence in our execution, quality and value.

We are well positioned to be a preferred strategic partner with utilities and developers for the renewable energy goals and the expanding ESG focus in the Utility Industry is providing us with market opportunities. In Engineered Support Structures, we expect a solid year, with some short-term market softness in transportation as delays in last year's FAST Act renewal begin to flow through state budgets. We have been getting many questions about the impact of an infrastructure bill. If one is past, this segment will experience upside growth approximately 9 to 12 months after an enactment. The long-term market trends for both transportation and wireless communication structures and components remain solid and the critical need for infrastructure investment provides very good economic stimulus for nations. Given the record purchase price of the recent 5G spectrum auction in the US, we expect growth in wireless communication structures and components to accelerate in 2021.

Carriers' investments are increasingly supporting work and school at home and macro build outs and suburban and rural communities, aligning with recent favorable trends in residential construction. Our Coatings business closely follows industrial production trends and general economic activity. The drivers remain solid and the preservation of critical infrastructure and extending the life of steel fits well within our ESG principles. And in Irrigation, recent improvements in net farm income have improve grower sentiment and tighter ending stocks have driven corn and soybean prices to 6 and 7 year highs. This improved demand along with strength across international markets and the large-scale multi-year project in Egypt is providing a good line of sight for 2021 as evidenced by our year-end global backlog of $328 million, an increase of 5 times the level from one year ago.

Our investments in Technology remain a priority and this past year, we expanded our Valley Insights anomaly detection solution into more regions across North America. As we entered the third year of offering this innovative solution, I'm excited to share that the number of monitored acres more than doubled to $5 million in 2020 leading to twice as many growers using the service as compared to 2019. This critical milestone on the path to autonomous crop management is expected to double again in 2021 and we look forward to sharing more of this exciting journey with you later this year.

Turning to slide 20, when analyzing the demand drivers across our business portfolio, one of the early findings of our ESG task force is how well our products and solutions align with ESG principles and themes. Altogether, I am very proud that approximately 90% of Valmonts net sales supports ESG efforts. As the world continues to transition to a clean energy economy, approximately 90% of our Utility Support Structures sales are tied to ESG, including 45% to renewable energy initiatives and 45% to grid resiliency and critical reliability efforts. Approximately 90% of Engineered Support Structures sales are also attributable to ESG. Valmont’s products improved traffic flow within roads and cities, while promoting public safety through our lighting solutions.

Further, the need for a connected world is now as pressing as ever before, whether it's expanding wireless connectivity to rural communities or strengthening the smart city of the future, our wireless communication product support these initiatives. In coatings, nearly 100% of our sales helps preserve and extend the life of metals up to 3 times longer. Zinc and steel are both 100% recyclable and hot-dip galvanizing is a proven corrosion protection system and has one of the lowest carbon footprints of any coatings application. And in Irrigation, nearly all of our sales are tied to sustainability and conservation. The warming climate drives the need for a more efficient use of freshwater and the need to produce more food for our growing global population using sustainable farming techniques, it is critical imperative and is highly supported by our business.

In terms of our own sustainability efforts, I'm very pleased that at the end of 2020, we exceeded our global electricity conservation goal set in 2018, resulting in a 14% reduction in normalized electricity consumption, well ahead of our 8% goal. As a further benefit, we also reduced our scope to carbon footprint by approximately 10,000 metric tons in 2020, a notable accomplishment by our green teams. We recognized the increasing focus by many of our stakeholders on addressing ESG and climate change. Next month, we will publish our annual sustainability report highlighting the ESG benefits of our products and solutions, additional metrics, employee well-being and our goals and leadership in key ESG elements. We're excited to highlight our commitments throughout the organization along with our plans to conserve resources and improve life in 2021 and beyond.

Turning to slide 21, in summary, we are expecting solid operating performance and strong EPS accretion and are encouraged the sales growth is expected to exceed our stated long-term financial goal. We are focused on profitable growth and return on invested capital improvement while keeping our employees and communities safe and investing in our business for growth. Our strategic framework remains fully intact as we position Valmont for success, now and in the future. Finally, we are excited to announce our plans to host a Virtual Investor Day in May 2021 and we'll share more details in the coming weeks. As we prepare to celebrate our 75th anniversary as a company in March, I want to again recognize our 10,000 global employees. It is because of your dedication and hard work that we are able to exceed our commitments in 2020 and why I remain confident in our ability to create long-term shareholder value and deliver on our expectations moving forward. I will now turn the call back over to Renee.

Renee L. Campbell -- Vice President of Investor Relations and Corporate Communications

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

Questions and Answers:

Operator

[Operator Instructions] Our first question today is from Brian Drab of William Blair. Please proceed with your question.

Brian Drab -- William Blair. -- Analyst

Hi, good morning. Thanks for taking my questions. First, just wanted to ask about operating margin and the guidance for 2021. You said that operating margin should be in the 9% to 10% range in the first quarter and I'm just wondering if the assumption that that improves in the second half of the year, which it sounds like it does given the steel headwind, if that gets better as we move through the year? I'm just struggling a little bit with the reconciliation of the revenue, operating margin, EPS herewith -- I'm putting in my model right now midpoint of the range for revenue and 10% operating margin and it's spitting out something north of, a little bit north of $10. And I'm just wondering is there, how do you expect operating margin to trend throughout the year and what might I be missing that putting in the kind of the midpoint of the range for revenue and modestly improving operating margin would give me something above your EPS range?

Avner M. Applbaum -- Executive Vice President and Chief Financial Officer

Yeah, hi, this is Avner. Let me take that one. So, right. So first of all, yes, right. We are, as we said, we are getting pinch during the first half of the year and we are going to recover throughout the year with the incremental gross profit. When you do kind of look at your modeling, right, you're taking into consideration right that our growth, we have the 2% FX and then we do have the price component, but if you want to model, I'd say between 2% to 4% of the growth is coming from pricing and a lot of that will actually be pass through. So, definitely take that into consideration, right, and some of the growth is coming from Egypt and as we mentioned in Irrigation. As we mentioned that has more of the international type of margins factoring some of the other growth that could come from areas like solar as well. So I think you just factor all that in, hopefully that kind of helps you get there.

Stephen G. Kaniewski -- President and Chief Executive Officer

And Brian, I'll just add that, you know, we don't know the extent to which when steel will actually abate, so we're taking a little bit of a conservative line around when steel will actually back off right now, features of hot-rolled, all the way through July are over 1,000. And so it will take some time for us to get some of the pricing through, but as Avner said 2% FX, 2% to 4% really price recovery or cost recovery leaving you with about I think 5% to 8% of "volume growth".

Brian Drab -- William Blair. -- Analyst

My follow-up then is, it will be a true follow-up on the same topic is margin expected to be -- is operating margin expected to be somewhat better in the second half of the year at this point and where do you expect, where do you hope to exit the year in terms of operating margin?

Avner M. Applbaum -- Executive Vice President and Chief Financial Officer

Yeah, so I mean we will see improvement. I mean just bear in mind, kind of take in mind that kind of the seasonality that hit us in Q3, especially when you kind of look at the, at the irrigation business. So, I would kind of take that into consideration as well.

Stephen G. Kaniewski -- President and Chief Executive Officer

Yeah, it will improve slightly as we go through the year and again irrigation has typically a softer third quarter because there is not really a lot of sales there, then recovering more in the fourth quarter.

Avner M. Applbaum -- Executive Vice President and Chief Financial Officer

Right. Assuming moderation of steel in the second half part of the year.

Brian Drab -- William Blair. -- Analyst

Okay, thanks. I'll follow up more later. Thank you.

Operator

The next question is from Chris Moore of CJS Securities. Please proceed with your question.

Chris Moore -- CJS Securities -- Analyst

Hey, good morning guys.

Stephen G. Kaniewski -- President and Chief Executive Officer

Yeah, good morning.

Chris Moore -- CJS Securities -- Analyst

Maybe just stay with the irrigation, so obviously looking at very strong growth, close to 30% for the year, just trying to get a feel on the North American irrigation side, does that imply kind of high single-digit growth in North American irrigation, low double-digit or how should I look at that?

Stephen G. Kaniewski -- President and Chief Executive Officer

Yeah. When you look at the, the growth we're assuming, about half comes from international, about half from domestic, so, the domestic number will be higher than the single-digits, more like 15%, 12% to 15% is what we've baked into our assumptions.

Chris Moore -- CJS Securities -- Analyst

Got it. Thank you. And just a quick question on the Access Systems. So, in terms of the, it could be a sale, it could be just kind of shut down parts of the business?

Avner M. Applbaum -- Executive Vice President and Chief Financial Officer

I was just going to say that the, we will likely sell the business. We've already taken the actions to exit some of the less profitable product lines all throughout 2020, again the business will make money for the year. And so, it's trending in a decent way, but it really just doesn't fit strategically. And so that's why we will look for a buyer, it's hard for us to grow outside of the regions that it's currently in as we speak, or to gain leverage through the rest of the portfolio with it. So that's our, our reason to, to look to divest of that.

Chris Moore -- CJS Securities -- Analyst

Got it. And is the sale of the business assumed at any point in your guidance?

Stephen G. Kaniewski -- President and Chief Executive Officer

No, not right now. So Access Systems is included in our full year guidance with not any sale. When that would come about, we would obviously do a separate release to discuss how that would impact us.

Chris Moore -- CJS Securities -- Analyst

Thanks much. I'll jump back in line.

Operator

The next question is from Nathan Jones of Stifel. Please proceed with your question.

Nathan Jones -- Stifel -- Analyst

Good morning, everyone. I'd just like to ask about the USS business and the gross profit, our gross margin headwinds that are expected in the first half. It's my understanding in that business, a lot of the contracts you have there have escalated and deescalated for steel price, so this must be coming out of the spot market. Did we have a situation here where you took some fixed price orders in the spot market still ran, I mean, we all know still ran very quickly in the second half of the year that kind of left you with some price cost mismatches here that you have to work through in the first half, before you can start running through more appropriately priced projects as we get into the second half?

Stephen G. Kaniewski -- President and Chief Executive Officer

Yeah, there is definitely some spot orders that are included into that, but also even with our alliances, the steel move was so dramatic. If you take December alone on, I think on slide 26, we have a graph there. December alone moved up 45%. And so even work that we would have adjusters, the adjusters can't operate that quickly, they’re usually quarterly adjusters. And therefore even our physical hedges and financial hedges, couldn't cover what was there. So that is the pinch that we're predicting around 220 basis points for the first half of the year and then the cost indices will recalibrate themselves and we've modeled that and we've looked at it every which way that over the second half of the year between that and some of the financial instruments that we've put in place why we feel confident that gross margin dollars for the second half of the year will definitely increase to recover.

Nathan Jones -- Stifel -- Analyst

Okay, it would also seem to me that demand in that business is extremely strong at the moment and there shouldn’t really be an issue with having the market bear those price increases, and this is just a timing mismatch?

Stephen G. Kaniewski -- President and Chief Executive Officer

That's right. The volume is very strong. Obviously, with some of the issues that are going on as we speak in Texas and other places, it just again furthers the need for the grid resiliency and the renewables push will remain unabated. It's simply a matter of getting the cost recovery with the mechanisms that are in place. Again for reference, our products are only 10% of an overall project cost. So, even if they have seen a doubling of that, it's still a very small piece of the overall project cost.

Nathan Jones -- Stifel -- Analyst

Got it. And then, my follow-up on ASS, which is where I would have actually expected to hear you talk about some gross profit pinching there, as that business, excuse me, has typically had a little bit more difficulty passing through steel prices. So maybe you can discuss the price cost dynamics there and I guess maybe why you're not seeing some more price cost headwind in that business?

Stephen G. Kaniewski -- President and Chief Executive Officer

Yeah, there is a couple of reasons, First off our lead times in that area due to our operational improvements last year allowed us to not have to, let's say, book orders ahead of where we would actually have inventory. And so therefore, we've been able to rapidly increase price to not create the same mismatch that we would have had in the past. Additionally, some of our steel hedges and physical hedges there cover us through that lead time period. So, there is a nominal impact, but not one that’s significant enough as compared to the Utility industry where steel is such a dominant piece of the cost equation.

Avner M. Applbaum -- Executive Vice President and Chief Financial Officer

And maybe just one more point there right, ESS also has a lot more international presence and we're not seeing that much pressure in the other regions of the world.

Nathan Jones -- Stifel -- Analyst

Helpful. Thank you. I'll pass it on.

Operator

The next question is from Brent Thielman of D.A. Davidson. Please proceed with your question.

Brent Thielman -- D.A. Davidson Companies -- Analyst

Hey, thank you. Good morning and congrats on a great quarter.

Stephen G. Kaniewski -- President and Chief Executive Officer

Thanks, Brent.

Brent Thielman -- D.A. Davidson Companies -- Analyst

Hey, Steve, you talked about the really strong Utility backlog and then I guess coupled with this first quarter order sort of a two-parter and I'd just be curious what the pipeline looks like beyond that? And I guess, second is what's your capacity to take on more business here?

Stephen G. Kaniewski -- President and Chief Executive Officer

So, I'll answer the first part, the -- the pipeline itself remains very strong. There is a lot of pending projects out there. Not again to the size and scale of the one in the Southeast, but just a lot of grid resiliency and renewable projects. When we look at all the trade publications, when we talk to our customers and with those return on equities around transmission, it looks strong. From our capacity perspective, if you recall, we added capacity in the first half of 2020. That capacity is now even more efficient than it was as it came online. Our lean efforts allow us to to find "more hours" available for production and we've really looked at the way that we're utilizing our footprint for various parts of product lines underneath of that to allow us to be able to meet what is out there in the marketplace. So, right now we don't have any kind of capacity constraints. And, with the pipeline that's out there, we remain confident that we're striking the right balance of capacity versus price. We're, very careful to not repeat what occurred back off in 2013 into 2014 where the industry overbuilt.

Brent Thielman -- D.A. Davidson Companies -- Analyst

Got it. And then, it sounds like Communications outside of Irrigation could be one of your fastest growing product lines. I think you said 15% growth for the year. Honestly, we didn't see it here in this fourth quarter and understand the spectrum auctions are going on. What sort of visibility, any sort of background you can offer that supports that ramp up in 2021 and I would be really interested to hear that.

Stephen G. Kaniewski -- President and Chief Executive Officer

Sure. Even through the early part of the first quarter here, we've seen the order rates increase among all of our different customers. So as they finished the spectrum auction and obviously playing $80 billion, they have to put that $80 billion to use. And so, we've quickly been able to see both quote rates and our own order rates in their increase through the first part of the year and we've talked to many of our customers and they're all moving forward aggressively to address the 5G rollouts, whether that's our components business or even our small cell solutions, the order rates are very favorable.

Brent Thielman -- D.A. Davidson Companies -- Analyst

And that includes the macro towers?

Stephen G. Kaniewski -- President and Chief Executive Officer

Yeah, macro towers, they were a little slow at the end of last year, but we've seen them bounce back as well through the first part of the first quarter here.

Brent Thielman -- D.A. Davidson Companies -- Analyst

Okay, thank you.

Operator

[Operator Instructions] Our next question is from Jon Braatz of Oppenheimer. Please proceed with your question.

Jon Braatz -- Oppenheimer -- Analyst

Good morning, everyone.

Stephen G. Kaniewski -- President and Chief Executive Officer

Good Morning.

Jon Braatz -- Oppenheimer -- Analyst

Steve, in the press release, you mentioned that you saw significantly higher renewable energy product revenue. And I know, it's a small piece of the business and I think you might be referring to solar track. What can you tell us a little bit about developments in that area?

Stephen G. Kaniewski -- President and Chief Executive Officer

Yeah. Thanks, John. It was actually both parts of the generation. So, we saw more wind towers out of our SM facility in Denmark, as well as solar trackers, which is again a global product line and a lot of shipments in South America during the fourth quarter. And so, that was the increase that we were able to see. As we look into 2021, the pipeline was very strong, the CAGRs in that market are anywhere from 15% to 20% and we really are working on gearing up our North American part of that business as it was mostly in international business prior to that. So, everything there points to a multi-year kinds of build outs around renewables and obviously the Biden administration has some aggressive plans in that area as well, that if enacted will just continue that growth going forward.

Jon Braatz -- Oppenheimer -- Analyst

Steve, I think the wind tower business in Europe, I have been reading about a lot more activity and offshore wind, wind development, but I think in the past, there has been pressures from Chinese competitors, has that competitive environment changed at all?

Stephen G. Kaniewski -- President and Chief Executive Officer

No, it's not. It is still a very aggressive price market around the wind tower business. Again volume has picked up which is good, but pricing has yet to recover, simply because of the pressure from the Chinese and also the Koreans, coming into particularly North Europe.

Jon Braatz -- Oppenheimer -- Analyst

Okay, all right, thank you very much, Steve.

Stephen G. Kaniewski -- President and Chief Executive Officer

Thanks, John.

Operator

There are no additional questions at this time, I would like to turn the call back to Renee Campbell for closing remarks.

Renee L. Campbell -- Vice President of Investor Relations and Corporate Communications

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

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, the continuing and developing effects of COVID-19, including the effects of the outbreak on the general economy and the specific economic effects on the company's business and that of its customers and suppliers, risk factors described from time to time in Valmont's reports to the Securities and Exchange Commission, as well as future economic and market circumstances, industry conditions, company performance and financial results, operator 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 statements.

Duration: 48 minutes

Call participants:

Renee L. Campbell -- Vice President of Investor Relations and Corporate Communications

Stephen G. Kaniewski -- President and Chief Executive Officer

Avner M. Applbaum -- Executive Vice President and Chief Financial Officer

Brian Drab -- William Blair. -- Analyst

Chris Moore -- CJS Securities -- Analyst

Nathan Jones -- Stifel -- Analyst

Brent Thielman -- D.A. Davidson Companies -- Analyst

Jon Braatz -- Oppenheimer -- Analyst

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