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Valmont Industries, inc (NYSE:VMI)
Q3 2021 Earnings Call
Oct 21, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Valmont Industries, Inc. Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host Renee Campbell, Vice President, Investor Relations and Corporate Communications. Ms. Campbell, you may begin.

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

Thank you, and good morning. Welcome to Valmont Industries Third Quarter 2021 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 third quarter results and comment on our strategy and long-term business outlook. Avner will review our financial performance and provide an outlook for the balance of 2021 with closing remarks from Steve. This will be followed by Q&A.

A live webcast of the 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 also note that this call is subject to our disclosure on forward-looking statements, which applies to today's discussion and is outlined on slide two of the presentation. It will also be read in full at the end of today's 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. Today, I would like to begin by sharing some opening comments and then provide a brief overview of the quarter. Before I do that, I want to take a moment to recognize the contributions of Walter Scott, Jr., who served on our Board for more than 40 years and passed away late last month. Walter was an incredible individual whose wisdom and leadership were critical to Valmont's success over the years. His loss is felt deeply by those who knew him and the entire Omaha community. Walter's counsel, kindness and mentorship will truly be missed by all of us at Valmont. Moving on to the business.

Our strong performance this quarter, once again, demonstrated the solid demand across our businesses and the consistent execution of our growth strategies, even amid a challenging global environment. Like most others, we have safety impacts of broad-based inflation, the COVID-19 Delta variant, and labor and supply chain disruptions.Government mandated lockdowns in Australia and workforce quarantines in North America, including Mexico and the Southeast United States, impacted certain utility and coatings facilities. Supply chain disruptions affect the timing of some shipments in our Irrigation and Solar businesses. Despite this, we delivered a strong quarter of growth and profitability. Our commercial and operations teams are managing exceptionally well through these unique dynamics of focus and perseverance, while continuing to prioritize employee safety and serve our customers. I'm extremely proud of our team's execution throughout this year.

Now let me move to a brief overview of our third quarter, summarized on slide four of the presentation. Record third quarter sales of $868.8 million increased more than 18% compared to last year. Sales growth was realized in all segments led by higher pricing and strong broad-based market demand with particularly substantial sales growth in Irrigation. Moving to the segments and starting with Utility. Sales of $276.5 million grew slightly compared to last year. A significantly higher pricing and higher volumes were mostly offset by renewable energy projects that did not repeat or that were pushed into future quarters due to customers' supply chain disruptions. North American utilities have been increasing their planned investments in transmission and distribution projects, even exceeding recent years of higher capital spending. Further, proposed capacity additions in the renewable energy sector are favorable demand drivers across our Utility business.

We see strong demand continuing, as both utilities and developers have been increasing their forecast of additional projects over the next several years to comply with mandates to increase renewable energy generation. Moving to Engineered Support Structures. Sales of $281.1 million increased 10% year-over-year, led by favorable pricing in all markets and sales growth of more than 25% in wireless communication products and components. Pricing improvements across all product lines continued this quarter, and international markets are benefiting from higher stimulus and infrastructure investments, especially in Australia. 5G build-outs and significant investments by the major carriers are driving demand in our wireless communications business, providing a good line of sight into 2022.

Turning to Coatings. Sales of $96.7 million grew 10% year-over-year, driven by higher pricing, improved general end market demand and sales from our greenfield facility in Pittsburgh. Moving to Irrigation. Global sales of $240.3 million grew more than 72% year-over-year, with sales growth in all regions and higher sales of technology solutions. In North America, sales grew nearly 55%, as strong market fundamentals and improved net farm income projections continue to positively impact farmer sentiment, generating very strong order flow. International sales doubled year-over-year, led by solid demand in the Middle East and Africa, including the ongoing deliveries of the Egypt project and another record quarter of sales in Brazil.

Last quarter, we highlighted our acquisition of Prospera Technologies. Integration is going well, and we are making substantial progress building on our new strategy to grow recurring revenue services. We are on track to meet the financial targets that we shared last quarter and look forward to sharing progress toward these goals in the future. In Irrigation, we have a unique market advantage due to our global footprint and highly differentiated AI solutions, both are critical components of our growth strategy. Over the past year, we have been increasing opportunities for local manufacturing in the markets we serve, especially in light of the challenging supply chain environment, labor availability and higher freight costs. For example, we recently localized some of our electronics assembly in Dubai facility and are increasing the total capacity in our Brazil factory by 50%, positioning us for long-term international market growth, while we continue enhancing service to our dealers and customers.

We are also very pleased that our Irrigation backlog at the end of the third quarter was $388 million, up 26% year-over-year. Turning to slide five we've said before, ESG is embedded into the core of our company's purpose, and there are many ways of products and services to serve resources and improve life. One recent example of this is using Solar solutions to transform the Sudan desert into a prosperous and sustainable region for agricultural production. Sudan is the third largest country in the African continent. Agriculture is quickly becoming its primary economic driver, accounting for 40% of the nation's GDP and employing close to 80% of the local workforce. But arid conditions and a lack of direct access to electricity in the region are hindering its expansion.

To help overcome these challenges, our Valmont Solar team recently installed a PV plant to bring power to center pivots. Sunlight is captured and transformed immediately into electricity, eliminating the need for a battery or secondary energy source. We're proud to have initiated this project powering pivots by solar energy, 100% independent from the grid. Our innovative solutions are leading the way, precision agriculture in Sudan, opening doors to other solutions that will enhance productivity, empower local communities to solve food security issues, and help build a more sustainable world.

With that, I will now turn the call over to Avner for our third quarter financial review and 2021 outlook.

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

Thank you, Steve, and good morning, everyone. Turning to slide seven, and third 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. Operating income of $80.4 million or 9.3% of sales grew 20% year-over-year, driven by higher volumes in Irrigation and favorable pricing, notably in Engineered Support Structures. Diluted earnings per share of $2.57 grew 30% compared to last year, primarily driven by higher operating income and a more favorable tax rate of 23.5%, which was realized through the execution of certain tax planning strategies. Turning to the segments. On slide eight, in Utility Support Structures, operating income of $24.6 million or 8.9% of sales decreased 170 basis points compared to last year.

Raw material costs continued to increase during the quarter, impacting our ability to fully recover cost to our pricing mechanism, leading to lower-than-expected margin. Also the impact of workforce quarantine in a few North American facilities led to operational inefficiencies, which we do not expect to repeat. Moving to slide nine. In Engineered Support Structures, operating income increased to $34.4 million or 12.2% of sales, a third quarter record. The benefits of proactive pricing actions have more than offset the impact of continued rapid cost inflation, better fixed cost leverage, including SG&A, also contributed to positive results. Turning to slide 10. In the Coatings segment, operating income of $12.5 million or 12.9% of sales decreased 270 basis points year-over-year. Profitability was impacted by a lag in pricing to recover higher inflation costs, including raw material and labor and start-up costs at the Pittsburgh facility.

Moving to slide 11. In the Irrigation segment, operating income of $32 million, more than doubled compared to last year, and operating margin of 13.3% of sales improved 270 basis points year-over-year. Significantly higher volumes and favorable pricing were partially offset by higher SG&A expenses from the recent Prospera acquisition. We're also extremely pleased with the profitability of our industrial tubing business and international margin improvement led by consistent and proactive pricing actions taken by our global team. Turning to cash flow on slide 12. Year-to-date, we have delivered operating cash flows of $62 million, with the use of cash this quarter of $8.4 million that reflects higher working capital levels to support strong sales growth.

As we stated in our prior quarters, rapid raw material inflation creates short-term impact on cash flow. For the balance of the year, we expect inventory levels to remain elevated to help mitigate supply chain disruption and strategically secures raw material availability to support strong sales growth. Accounts receivable will also increase in line with sales growth. As our historical results have shown, we will see improvements in working capital as inflation subsides. Turning to slide 13 for a summary of capital deployment. Year-to-date capital spending of $81 million includes $33 million for strategic growth investments and $55 million of capital was returned to shareholders through dividends and share repurchases, ending the quarter with approximately $170 million of cash. Moving on to slide 14.

Our balance sheet remains strong. Based on our recently amended revolving credit facility, our net debt-to-adjusted EBITDA of 1.85 times remains within our desired range of 1.5 to 2.5 times. Let me now turn to slide 15 for an update to our 2021 outlook, including a few key metrics and assumptions. We're increasing our earnings expectations for fiscal 2021 by narrowing the EPS guidance range to $10.60 to $11.10. This reflects strong market demand and our solid execution this year and our confidence in our ability to continue this performance. Other metrics and assumptions from the tax rate and currency impacts are summarized on this slide and in the press release. Turning to our segment outlook on slide 16.

In Utility Support Structures, we expect operating margins to improve sequentially as pricing becomes more aligned with steel cost inflation. Moving to Engineered Support Structures. We expect continued stable market condition in North American transportation market and order rates are beginning to improve. Demand for wireless communication products and components remains very strong, and we are on track to grow sales 15% to 20%, in line with expected market growth. Moving to Coatings. We remained focused on pricing actions and providing value to our customers. Moving to Irrigation.

We now expect sales to grow 50% to 53% this year based on strength in global underlying ag fundamentals and a strong global backlog. Looking ahead to 2022, strong market demand across our businesses, the strength and flexibility of our global teams and our continued pricing strategies give us confidence in achieving sales growth of 7% to 12%, and earnings-per-share growth of 13% to 15% in line with the three- to five-year growth targets that we have communicated at our Investor Day in May.

With that, I will now turn the call back over to Steve.

Stephen G. Kaniewski -- President and Chief Executive Officer

Thank you, Avner. Turning to slide 17. The long-term drivers of our businesses remain solid as evidenced by our record global backlog of more than $1.5 billion, up 35% from year-end 2020. These demand drivers are in place to sustain this momentum into 2022, and our business portfolio is well positioned for growth. We also continue to take pricing actions across our businesses where needed. Like others, we are closely monitoring inflation, supply chain disruptions and COVID. We are ready to take additional appropriate actions to address these issues across all our businesses, as needed.

Meanwhile, our focus on following state and local regulations to keep our employees and customers safe is not wavered. Turning to slide 18. In summary, I'm very pleased with our strong third quarter results and our team's ability to navigate through challenging market dynamics. We've demonstrated our ability to grow sales through innovation and execution, while being flexible and responding quickly to meet customer needs. We've improved operating margins by executing on our pricing strategies and advancing operational excellence across our footprint. And we have invested in our employees and technology to drive new products and services and build upon the strength of our operations.

Throughout 2021, we have been disciplined in allocating capital to high-growth strategic investments, while also returning capital to shareholders through dividends and share repurchases. Looking ahead to 2022, we are confident in our plan to deliver the outlook that we have communicated and remain focused on execution and our ESG principles to build upon our success, while creating additional stakeholder value and improving a return on investor capital. 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

Thank you. [Operator Instructions] Our first question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Brian Drab -- William Blair -- Analyst

Hi. Good morning. Thanks for taking my question. Could you just begin by quickly repeating that 2022 guide. I'm not sure I got all of it.

Stephen G. Kaniewski -- President and Chief Executive Officer

Yes. Brian, this is Steve. The 2022 guide was that we reaffirmed our shares of 7% to 12% and the EPS of 13% to 15%. So now as well, we communicated at our Investor Day and so we now feel pretty confident about how we'd look in 2022.

Brian Drab -- William Blair -- Analyst

Got it. Okay. Yes, that's what I had written down. And so just implying some operating margin expansion in 2022, obviously, there given the EPS growth is greater, is that right?

Stephen G. Kaniewski -- President and Chief Executive Officer

That's correct.

Brian Drab -- William Blair -- Analyst

And Steve, can you talk about what the assumption for steel prices is going forward? And do you have enough lower-priced steel in stock, such that this last leg up in steel prices won't weigh on margins materially?

Stephen G. Kaniewski -- President and Chief Executive Officer

Well, if you look at the ESS business, I think we've accounted for even the current inflation fairly well. There is still some inflation that we will see in the fourth quarter. In Utility, we will still continue to see some inflation in the fourth quarter, albeit we will see margin improvement of about 150 basis points on a sequential basis. But it would take us, right now, if Utility average went until about the second quarter to really be through with it if steel just kind of stays where it is. In the third quarter, we still saw about -- was 23%, overall, steel inflation, which was actually consistent with first and second quarter. So now that it is plateauing, again, all things being equal as you look out as -- if it doesn't continue, we'll have a little bit more drag in fourth quarter, first quarter a little bit less. And then by second quarter, we should be good.

Brian Drab -- William Blair -- Analyst

Right. Okay. And then just maybe if I could ask one more, given we're talking a little bit about 2022, what -- in the Utility outlook, like what are some of the indicators that you're seeing from customers and other market reports that give you confidence in growth in Utility in 2022? And what kind of growth are you expecting in that segment? If I can ask. I know you're not maybe guiding for the segments, but...

Stephen G. Kaniewski -- President and Chief Executive Officer

Just overall that the market continues to remain robust. The renewable energy mandates or generation from renewables is a positive driver in the marketplace. Grid hardening has continued to be a positive momentum for us there. Some of the issues that you see in the Solar generation area, particularly module availability, which kind of delayed some of the projects in '21 is -- will get better in 2022, albeit maybe not to where everybody wants it to be, but definitely better.

And we actually have strong backlog in both the generation side and our traditional transmission and distribution side as we look into 2022. So everything we're hearing, both from customers and from the order flow coming in, suggests that the market will remain robust. There's not been any kind of issues where customers are canceling orders because of the inflation. And again, I'll just bring it back up. We're such a small part of an overall project cost, 10% to maybe 15%, that even if our product inflates, there's other factors that really make or break when the project moves forward.

Brian Drab -- William Blair -- Analyst

Right. Okay. Thanks for the detail.

Stephen G. Kaniewski -- President and Chief Executive Officer

Okay.

Operator

Thank you. Our next question comes from the line of Nathan Jones with Stifel.

Nathan Jones -- Stifel -- Analyst

Good morning everyone.

Stephen G. Kaniewski -- President and Chief Executive Officer

Good morning Nathan.

Nathan Jones -- Stifel -- Analyst

Wanted to start off -- obviously, a lot of growth here. There's a lot of inflation. So a fair amount of that growth is coming from price. I think you've communicated pretty well that there's a lot of growth coming from volume here as well. Is there any color you can give us on price versus volume and the growth, a lot of it by segment, if you could do that? And are there any places where you're starting to see capacity constraints within your own manufacturing footprint where we might make some investments here going forward?

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

Nathan. So if we don't look at pricing volume, if I start off with -- if I look at the Utility, as an example, we're definitely seeing a lot coming through pricing. Steve mentioned that a little earlier, right? With the steel inflation and the pricing mechanism where we do see pricing going in Utility. On the volume side, we mentioned that on the global generation we did have some project timing, so you did have some reduction there offset by increased value on the other part of the Utility businesses. If you look at ESS, again, with our pricing actions and strategies around there, we're seeing significantly coming through pricing. You're seeing a lot of volume coming through the telecom business on the magnitude of 25% or so, offset with some of the decline that you're seeing in the lighting and traffic that we expressed earlier in the year and we expected that as well.

Moving to Coatings, what we're seeing also there, we're seeing a lot of pricing coming through there. And some volume that we mentioned through Brenham facility as an example. And then, finally, in Irrigation. I think Irrigation is a pretty good mix there coming through both volume and pricing. And we've been -- it's been throughout the year, we've taken a lot of pricing actions in all the businesses and volume. And overall, we've seen that the order flow has been very good across all the businesses, evident by our strong backlog and the strong sales we had in the quarter.

Stephen G. Kaniewski -- President and Chief Executive Officer

And from the capacity side, Nathan, I think we're in good shape in Irrigation. If you recall, going back to the last big peak in 2013, we were producing a lot more just in the U.S. facilities, we've increased a lot of the international facilities to be much more self-sufficient, so it's not coming out of here. And North American order volume flow is still stronger back then than it is now.

So we have to watch for people and supply team, but from a brick-and-mortar perspective, we're in good shape. Coatings is, obviously, good shape. ESS, we're in good shape to meet the growth. And in Utility, we're really pushing the operational excellence, automation with some of the AI welding that we're doing. We will always look at our footprint and look at what we have to do from a timing perspective to add capacity. We want to be very cognizant of the capacity to pricing in the market. And if we need to do something from a brick-and-mortar perspective, we obviously have the ability to do so, nothing imminent at this point.

Nathan Jones -- Stifel -- Analyst

Okay. A question on Irrigation. Our channel checks there are indicating very strong demand and extended lead times domestically. Do you feel like these could drive an early start to the selling season this year for customers to try and order ahead of these longer lead times maybe better than typical seasonality, as we get into 4Q and 1Q next year?

Stephen G. Kaniewski -- President and Chief Executive Officer

It has, Nathan. We saw order flow even over the past months is very robust, even though there's thought in fields harvesting. I think between supply chain constraints that they're hearing about in the news, it doesn't take -- all the farm journals are predicting long lead times. So I think people are trying to get ahead of that and anticipated price increases. People really are trying to make sure that they are in a good position for the plan to use it next year. So as I mentioned, we have seen good order flows straight through in the October time frame, which we typically wouldn't see until more late November. So I think that the assumption is correct.

Nathan Jones -- Stifel -- Analyst

So it sounds like all these price increases are not having a negative impact on demand in the Irrigation market yet either?

Stephen G. Kaniewski -- President and Chief Executive Officer

No. I think if you look at particularly our products, if we say you typically get a three-year payback in a regular market at one in high commodity price environment, what we're pushing through is not going to cause any kind of market degradation. So far, everything is moving through. We recently announced another price increase, and that is moving through as well. So it's going to be our sixth price increase, but these are necessary to make sure we're going to have labor and the supply chain issues that are out there and continue to address them. So it's going well.

Nathan Jones -- Stifel -- Analyst

Great. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed with your question.

Jon Braatz -- Kansas City Capital -- Analyst

Good morning, Steve.

Stephen G. Kaniewski -- President and Chief Executive Officer

Good morning, Jon.

Jon Braatz -- Kansas City Capital -- Analyst

Returning to the international Irrigation piece of the business. On the international side, outside of Brazil, is the market as robust and as strong as it has been? Have you seen any change in demand in those markets outside of Brazil?

Stephen G. Kaniewski -- President and Chief Executive Officer

No. Every market right now is experiencing growth, Jon. And in particular, I would say, Eastern Europe, Central Asia, even the Australia market has rebounded quite nicely. And Africa, obviously, we called that out pretty frequently. Africa continues to see more and more growth. So really, as you look around, Brazil just happens to be exceptional with the growth that we've seen there. But the other markets are performing very well.

Jon Braatz -- Kansas City Capital -- Analyst

Okay. Okay. And then secondly -- and on the Sudan project, the Solar project, did you do the entire EPC piece of the project? Or did you just provide Solar tracker? What was your -- the extent of your work on that project?

Stephen G. Kaniewski -- President and Chief Executive Officer

Yes. So we worked with the local customer, who -- they did some of the work as they have some engineering and design capabilities and then we did a good portion of the work as well.

So I would say, it was kind of a combined EPC type of project because it was kind of the first of its kind in that sense. So we did more than we would traditionally do, but not as much as a true EPC.

Jon Braatz -- Kansas City Capital -- Analyst

Okay. Is that something where your capabilities -- those capabilities, can be applied elsewhere? And can we see more of that in the future?

Stephen G. Kaniewski -- President and Chief Executive Officer

Absolutely. It's something that we showcased at Husker Harvest Days here in Nebraska last month, and that's something that we'll be expanding outside of that footprint. Right now, what it really is allowing us to do is to create new TAM in places that did not have grid power.

And so that was kind of the proof-of-concept is can we put this out, where there's no power, no gen sets. And really make a sustainable farm that can operate on its own. And so we've done it there.

We're doing things like it in Brazil as well and particularly as hydropower becomes more constrained. So we think this will be a significant market advantage for us as we move forward.

Jon Braatz -- Kansas City Capital -- Analyst

Okay. Okay. One last question, here domestically, Solar tracker projects and utility size projects, are you -- have you been awarded any contracts?

Stephen G. Kaniewski -- President and Chief Executive Officer

Yeah. We have some utility scale, but -- I'll say they're probably poor utilities. They're not -- maybe 100 megawatts or 200 megawatts, but they're sizable enough. And we're still continuing on the developer market for the distributed generation quite well. And our backlog over the quarter did increase pretty nicely, as compared to the second quarter.

Jon Braatz -- Kansas City Capital -- Analyst

Okay. Thank you, Steve.

Operator

Thank you. Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Chris Moore -- CJS Securities -- Analyst

Hey. Good morning. Yeah. Maybe just ask the price line question a little bit differently. So. guidance is 17% to 18% sales growth in fiscal 22021. Kind of what's the rough breakdown between pricing and volume there?

Stephen G. Kaniewski -- President and Chief Executive Officer

Chris, just to get the detail, you mean for the whole year, how much of that growth...

Chris Moore -- CJS Securities -- Analyst

Yes, right. I'm just trying to get a picture for the year just in terms of -- I assume most of it is on the pricing side. I'm just trying to get a sense, what's volume-driven. Irrigation is the big driver there, but kind of overall, just trying to understand better.

Stephen G. Kaniewski -- President and Chief Executive Officer

Tim, maybe you want to comment?

Timothy P. Francis -- Senior Vice President and Corporate Controller

Yeah. This is Tim Francis. I would tell you, through the first three quarters of the year, we're at a split. You got the 1% for currency, and then your split probably more 60-40 volume versus price. And I would tell you that's probably going to be closer to 50-50 for Q4. So it's probably going to average you back down to 55-45.

Chris Moore -- CJS Securities -- Analyst

55 volume?

Timothy P. Francis -- Senior Vice President and Corporate Controller

55 Volume, correct.

Chris Moore -- CJS Securities -- Analyst

Okay, got you. And other than Irrigation, is there any one segment that's really kind of driving the volume growth?

Stephen G. Kaniewski -- President and Chief Executive Officer

On a year-over-year basis, Coatings is seeing improvement because they had such COVID issues in the first half of last year.

ESS had Coatings, -- or, excuse me, COVID restrictions in the first half of the year. So, our first half is that way. The Telecom growth is -- the majority of that is volume. And then in utility, there is some volume, but mostly price.

Chris Moore -- CJS Securities -- Analyst

Got it, very helpful, and just on the Solar market, during Investor Day, you kind of -- we were talking about second half catch up. It sounds like there was supply chain issues are you seeing any improvement in pricing that you're hoping for? And is it reasonable to kind of expect that the market will be a little bit more rational?

Stephen G. Kaniewski -- President and Chief Executive Officer

Good question. Yes, we are seeing better pricing. I think the market, as a whole, has had to digest its field has changed the game. Obviously, module costs will be different than they were in the past. So we had said that the idea that you had a cost minus every year we think that, that paradigm is pretty much broke at this point in a good way for us. Our backlog that we're adding now is that pricing that we wanted. And if there was pricing that was not advantageous, then we were willing to lose those orders. So, our growth, at least for us, is at margins that we believe are appropriate where the business is right now.

Chris Moore -- CJS Securities -- Analyst

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

Stephen G. Kaniewski -- President and Chief Executive Officer

Thanks, Chris.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

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

Thank you. Good morning.

Stephen G. Kaniewski -- President and Chief Executive Officer

Good morning, Brent.

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

I guess first question on the Utility business, sort of looking into the future for margins or potential for margins. When you look at the mix backlog in that segment today, is there anything advantageous to that beyond the pricing and the cost discussion? I'm thinking more about factory efficiencies, as you can gain on the larger orders, things like that, that can represent a real tailwind for margins next year for that segment.

Stephen G. Kaniewski -- President and Chief Executive Officer

Brent, no, I think it's basically a traditional mix of what we've seen over the last few years. We still have, obviously, the large order in the Southeast, which is advantageous to us. And I think that goes through part of 2023 at this point. So that plays nicely for us. But the mix of, I'll call it, large poles or large orders versus smaller poles and many more of them, I think that is about where we see it. That said, we have been pushing pricing, not just for pure inflation recovery, but also because of the market robustness. So as contracts come up, we're looking at that and trying to move up price, change terms and conditions, do things that are more advantageous.

I think on the factory efficiency side, we probably have a lot more in there because we've had the fits and starts of COVID and quarantines. We've had also the labor availability issue that has played in, and so, something that we're working on very hard there. So obviously, those would be more the additional to the inflation recovery. But the inflation recovery will be significant. We see that in the backlog and we can see the average selling prices moving up. So, there's no fundamental issues in Utility at this point.

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

And Steve, can you talk about the inroads you're making in the D, within the T&D, the distribution side within that segment?

Stephen G. Kaniewski -- President and Chief Executive Officer

Yeah. I think it's early on from the new products that we're bringing to market. So we have some things that we'll be introducing over the next year. The other things that I think will play into the improved margin and growth performance is around our services. And we're doing a lot more in the way of inspection services, drone services. We highlighted some of that at the Investor Day. We're seeing some nice orders now coming to the backlog. And it goes without saying that those are at very nice margins as compared to the historical products business. And so, I think all of those things combined really touch the D, because you now start to look at the entire grid. And so the fiberglass market has continued to expand quite nicely, which not just cross arms, but even fiberglass poles. And we have some real lightweight concrete solutions that we think will really make us much more competitive against wood. So, more to come on that.

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

Very good. One more on ESS. This seems to be the first quarter that I can recall, I guess, a better outlook or improved outlook for transportation-related volume. What are you seeing now? And what does that mean, I guess, for the overall segment that -- despite that it's been doing quite well, given that's been working against you?

Stephen G. Kaniewski -- President and Chief Executive Officer

Yeah. We had anticipated the first two quarters with volume being down kind of played out that well or played out that way. And then we saw -- and what we've been seeing is much better order flow and order inquiries. And that's not just in the US, that's in the international markets as well. And so that is why we think we'll see continued volume expansion in ESS, particularly as we look into 2022. A lot of -- we always say this, the federal government supplies about 25% of the money in the US toward highway. It gets about 90% of the headlines. But the other 75% of spend is done by states. And I think particularly states coming out of COVID are seeing improved tax receipts plus the stimulus money that they've had. Most states balance sheets are in very good shape, and they want to spend on infrastructure to create jobs locally and to show their constituents progress.

So that's what we have more confidence in, as we go forward. It's -- infrastructure is a good thing to do. And really, it was -- for the last 18 months or 20 months of COVID, most people couldn't get done everything they wanted to. So there's a little bit of catch-up effect plus the fact that, I think financials are much better.

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

Very good. Thank you.

Operator

Ladies and gentlemen, 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 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, 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. [Operator Closing Remarks]

Duration: 44 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

Timothy P. Francis -- Senior Vice President and Corporate Controller

Brian Drab -- William Blair -- Analyst

Nathan Jones -- Stifel -- Analyst

Jon Braatz -- Kansas City Capital -- Analyst

Chris Moore -- CJS Securities -- Analyst

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

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