Greetings and welcome to the Valmont Industries First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. We ask you to ask one question and one follow-up then return to the queue at that time. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Renee Campbell. Please go ahead.

Thank you, Kevin. Good morning and welcome to Valmont Industries first quarter 2020 earnings call. With me on today's are Steve Kaniewski, President and Chief Executive Officer; Avner Applbaum, Executive Vice President and Chief Financial Officer; Mark Jaksich, Vice President of Finance; and Tim Francis, Senior Vice President and Corporate Controller. This morning, Steve will provide a brief summary of our first quarter results, a COVID-19 business update, and commentary on our strategy and long-term business outlook. Mark will review our first quarter financial performance, provide an update our second quarter outlook, and our assumptions for the remainder of 2020. Avner will give additional segment commentary for the second quarter 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, instructions are included in the press release that was distributed yesterday. 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 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.

Thank you Renee. Good morning everyone and thank you for joining us. Before reviewing our first quarter results I would like to start with a couple of comments. First, I want to say thank you to our 10,000 plus employees and their families for their enduring spirit and perseverance as we have been adapting to new ways of working and communicating through the COVID-19 pandemic. Every week I am inspired by the responses I get from each of you following my email and video updates. In these communications I speak often of our core values, resiliency, and ability to come together as a team. Since our company was founded nearly 75 years ago Valmont has met the challenges that we faced head-on. We continue to do so now through the talent of our teams and our focus on lean and standard work which are so critical during times of crisis. We will get through this situation together. I also want to thank our customers, suppliers, and the shareholder and analyst community for their flexibility and understanding during these unprecedented circumstances. Now I would like to take a moment to introduce and welcome Avner Applbaum to the Valmont team. Avner joined Valmont as Chief Financial Officer about three weeks ago. I am excited to have him on our management team and look forward to his contributions. I will now turn the call over to him for a brief introduction.

Thank you Steve and good morning everyone. I am very excited to join the Valmont team. I was drawn to Valmont for its people, culture, and growth potential and it has been great getting to know many of my passionate colleagues and teams over the past few weeks. I look forward to driving continued financial improvements for the company and our stakeholders and look forward to speaking with our analysts and investors over the coming quarter.

Thank you Avner. I would also like to thank Mark Jaksich for extending his retirement date to the end of the year to provide support and assure a seamless transition. With that let me turn to a brief recap of our first quarter summarized on Slide 3 of the presentation. Net sales of $674.2 million declined $18 million or 2.6% compared to last year. This decrease was in line with our expectations as we had indicated last quarter that we expected revenue in the international utility business to be approximately 30 million below last year. Unfavorable currency translation impact of approximately $10 million also impact sales this quarter. We were very pleased with the strong North American sales across most of our businesses. Turning to the segments and starting with the engineered support structures, sales of $230.7 million were flat with last year. We had a solid quarter of sales growth in North America of lighting and traffic products. While we expected a favorable comparison given last year's spring flooding event, continued investments by state and local government strengthened demand in transportation markets. Globally wireless communication sales were lower as expected in part due to a very strong first quarter last year. Sales were also impacted by a slowdown in carrier spending ahead of the T-Mobile/Sprint merger. Impacts from the government mandated facility closures in China related to COVID-19 contributed to approximately $2 million of the sales decline. Sales of Access Systems products were also lower primarily due to a continued challenging construction environment in Australia. Turning to utility support structures sales of $225.5 million decreased 7.6% compared to last year as we expected primarily due to lower sales in the international business as mentioned earlier. In North American markets sales were higher driven by continued strong market demand across…

Thank you Steve and good morning everyone. Before I start please 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. Turning to Slide 8, first quarter operating income of $66.9 million or 9.9% of sales was 22.5% higher than last year on comparable sales values with all reportable segments contributing to the improvement. The main driver was a 370 basis point improvement in gross profit margin due to improved sales volumes and operational performance in North American businesses as well as lower material costs. As you may recall we recognize the impact of $0.18 per diluted share in the first quarter of 2019 due to the effects of the Midwest flooding event last March. Government directed closures of certain international operations due to COVID-19 led to a 2020 first quarter estimated operating income headwind of $1 million approximately. First quarter diluted earnings per share of a $1.99 increased 21.3% compared to a $1.64 and the first quarter tax rate of 25.2% was comparable last year. Turning to the segments, on Slide 9 in the engineer support structure segment operating income was $15.9 million or 6.9% of sales, an increase of 150 basis points over last year. Stronger quality of earnings was driven by continued sales and margin strength in North American markets which began improving in the second half of 2019. Lower profitability in international markets was primarily due to an unfavorable comparison in Access Systems and the effects of government mandated site closures of some Valmont facilities in Asia Pacific and Europe. In Access System first quarter losses were substantially less than what we recorded in the fourth quarter of 2019 due to improved cost and operational…

Thank you Mark. Turning to Slide 17, in engineered support structures the market drivers for transportation and wireless communication structures and components in North America are solid. Our current backlog provides us with good visibility to second quarter lighting and traffic sales. Wireless communication sales within the quarter can be somewhat uncertain due to the timing of shipments. International sales are expected to be down compared to last year as COVID-19 measures have impacted demand within the quarter. In the utility support structure segment our strong backlog and the benefit of capacity additions are providing good visibility to the second quarter in North America. As always, project timing can impact sales during the quarter. In international markets we expect our businesses to be in line with recent market trends. In coating we expect weaker demand driven by current global economic trends and lower expected industrial production levels. A reminder, that coating sales tend to be highly correlated to industrial production levels and will lever and delever the most with changes to volume. Moving to irrigation, continued weakness in agriculture commodity prices is expected especially corn and soybeans which are the largest crops grown under mechanized irrigation. Net farm income levels are not expected to improve this quarter and this metric has historically been the best indicator of demand for the segment. In addition food supply chain disruptions, a bleak outlook in ethanol markets, and a strengthening U.S. dollar lead us to expect second quarter sales to be lower compared to last year. With that I will now turn the call back over to Steve.

Thank you Avner. Moving to Slide 18, the fundamental market drivers of our business have not changed nor do we anticipate them changing over the long-term. Engineered support structures, continued government investments and infrastructure development across lighting and transportation markets is expected as past recessions and associated stimulus funding initiatives have shown. Growth in wireless communication products and components particularly in 5G are expected to accelerate and the current working and schooling at home environment is supporting that strategy. In utility our record backlog is evidence of the ongoing demand and necessity for grid hardening and renewable. Strong returns on equity for both public and private utilities support this growth. As we mentioned earlier, our coatings business closely follows industrial production trends. Over the long-term preservation of critical infrastructure and the increasing number of economies that are actively fighting cost of corrosion will drive the need to extend the life of steel products globally. And in irrigation our products and technology are critical to help meet demand for increased food production and security around the world. The optimization of water usage and other farm inputs, mitigation of increased labor costs, and the support of growers conservation efforts are just a few of the drivers that support demand for our business over the long-term. In international markets the drivers can differ slightly particularly in developing countries where government's increasing needs for food security and agriculture land development can create opportunities for large projects. Our pipeline of project business continues to be very strong but as we always say timing of shipments can be hard to predict based on local factors Turning to slide 19, in summary we know that these are unprecedented times for all of us. The resilience of our people, our business portfolio, and our processes give us confidence…

Thanks Steve. Kevin at this time you may open up the call for questions.

[Operator Instructions]. Our first question today is coming from Chris Moore from CJS Securities. Your line is now live.

Hey, good morning guys.

Good morning Chris.

Good morning. Maybe just talk a little bit about the ramp and USS capacity, kind of how that's going and how that is being impacted by the COVID-19?

Yes, so we had talked about a 5% volume ramp going back in the fourth quarter and then again in February. That is proceeding as planned and actually our productivity is probably a little bit better than we thought at this time. So we believe that we will be on track as we said before by the end of the second quarter to be fully ramped to that rate. COVID-19 has not had an impact on that at all. Most of the things were in process, hiring was well along and it was really just a training curve. And as we noted the lower turnover and probably less absenteeism really at the end of the day have contributed to a better productivity level than we probably anticipated originally.

Terrific. Just one of the things you had talked about long-term lighting, traffic structures demand could be impacted by a change to transportation budgets caused by COVID-19. Anything specific that you are hearing or seeing there or maybe just expand that a little bit?

Yeah, now there's nothing specific at this time but it just stands to reason that as tax receipts go down, as you get into further budget cycles you could have allocation of funds issues whether they go towards social programs or infrastructure. Now infrastructure tends to be a fairly popular one but we just put it out there on the horizon as a caution. If there's any kind of stimulus or changes in gas taxes like there was in 2015 then that could continue at current levels. But we're just putting it out there as a caution and the realistic potential based on how budgets work at the state levels.

Got it, helpful, I will jump back in line. Thanks guys.

Thanks. Our next question is coming from Nathan Jones from Stifel. Your line is now live.

Good morning everyone.

Good morning Nathan.

Maybe I will just start with a couple questions on the 2Q outlook. It would seem to me that you have pretty good visibility to USS and pretty good visibility into ESS, maybe a little bit less visibility into irrigation and probably a lot less visibility into the coatings business. Can you talk about how you got to this 645 million to 655 million, how you got to 5 to 10 down in irrigation 20 to 25 down in coatings, just any color you can give us around what you're seeing in the market currently, what your assumptions are, did things get worse in May and worse in June, same in May same in June, any color you can give us around those assumptions that you have got in there?

So you're right with USS and ESS we have pretty good visibility so those two we feel pretty confident of the outlook and where our production levels are going. In irrigation we had a pretty good real first quarter order rate was pretty nice and then in the last few weeks we saw a drop off. And so we're taking that kind of order rate over these last two to three weeks and basically surmising that for North America over the rest of the quarter. In international order rates actually are holding up much better and actually have done pretty well all things considered. Coatings has the most potential variability with it, there's no backlog, it's only a couple days out, and what we've seen there is our custom order rates have dropped by about 20% and so we factored that in as well to that range. So the one variable of why it's $20 million in range really comes from the fact that we had over 10 facilities globally that we are restarting in May or late April-May. And we just don't know how all the backlog is going to be re-phased on a customer level. So that's how we basically came up with the range that we came up with, good visibility in the infrastructure businesses, irrigation taking our last order rates, and then coatings assuming at least 20% custom volume down.

Okay, so the assumptions for irrigation and coatings center that order rates kind of continue at the same level that they're at now, they don’t get any worse, they don’t get any better?

That's correct.

Okay, just a question on the liquidity side here and the 75 million drawdown on the revolver. I mean you guys have a very strong balance sheet, you have a lot of cash on the balance sheet to begin with, can you just talk about why 75 million and why now, just in terms of bringing on that liquidity?

Yeah sure Nathan, this is Mark. If you look at the first quarter we did spend a fair amount of money in the buyout of AgSense and increase of ownership interest in Convert Italia. But then really as we look at things there's a certain amount of caution that we're watching and managing very closely things like receivables because we do -- I do hear that from other people I talk to regarding slowdowns and payment terms. So it's really more of a matter of an abundance of caution and I would say that if cash flows turn out to be as well as we hope they're going to be and we are cautiously expecting it to be, we always have the flexibility at a later date to pay down the debt because it's on the revolver and it could be drawn down or paid back at any given point in time. Plus the cost is very economical and so it's not a big drag on the income statement. So it's really more of a matter of caution than anything else.

Makes sense. Thank you all, I will pass it on.

Thank you. Next question is coming from Brian Drab from William Blair. Your line is now live.

Hey, good morning. Thanks for taking my questions and it's impressive how you guys are managing through this tough time. Mark I also wanted to say you're looking smarter than ever for establishing 30 and 40 year maturities on your debt. $100.00.

It is better to be…

So just if you could maybe talk about the margin improvement a little bit and give maybe a little bit more granularity in terms of maybe a breakdown of the factors that are contributing to the great margin performance in the quarter and how much is the lower price of steel and raws aiding that versus the volume leverage versus the other components if you can kind of give us proportionally how each of those is affecting it?

Yeah Brian, the number one factor really was the improved operational performance. You know the efficiency in our factories we really had little to no hick ups. We were able to produce steadily through January and February. March we did have some headwind but still we were able to overcome it because we started to see the shutdowns at that point. I think that's the number one factor on a global basis is we just had really good productivity levels. Then you look at raw materials and pricing in combination, is even though raw materials were dropping, zinc was dropping, aluminum was dropping we were able to hold on to that through the price discipline and the pricing advantage concepts that we really adhered to. So that was probably the second biggest one. And then just really overall volumes were -- we had some currency and we had the expected utility order but our volumes in plants where we were open was just higher across the board in those particular plants. And so that also helped the overall margin levels there.

Okay thanks. And it's hard to choose just one more question here but I am curious about this utility project in Europe that you called out the size of that, the timing of the delivery there, and then could you maybe just update us on how your -- what the outlook is for utility in Europe and like how your share of the market there compares to the North American market and how that's maybe changed over time?

So it's a mast order so it's around utility structure order that we can make out of Valmont SM. And it's north of $30 million so it's a pretty significant utility order for that area of the world. It's really to bring power from the North Sea into deeper parts of Europe. There's a few of these that are out there so there's some subsequent tenders that we're also bidding on and it does help margins overall and it will be -- it is still not the dominant structure type from Europe perspective that's still lattice. And we are participating in some areas in Europe on that but in terms of the mast orders we're in a very good position and there's really only maybe two other manufacturers that have the capability to make the size of structures and round like that. So it puts us in a nice competitive situation. We expect more of these, it's a focus for us. We have done a couple of these orders in the past but we see a much more regular cadence as they move. I think it's a 365 line overall that will be utilized. So, again as Europe has gone through a lot more renewables generation both offshore and solar they need to distribute that power and this is a part of those programs.

Okay, thanks very much.

Thanks. The next question is coming from Brent Thielman from D.A. Davidson. Your line is now live.

Great, thanks. Good morning.

Good morning Brent.

On the communications business I know that's historically been little more profitable element for the ESS segment, understand some of the cross currents here in the short run but anymore clarity in terms of -- sort of have clarity on the second half at all in anything, but how customers are thinking about spending there to maintain or upgrade their networks, it seems like some of the bigger participants there are at least committing to their CAPEX plan, but love to get any thoughts there?

Yeah, T-Mobile/Sprint was the obvious delay or laggard in kind of getting through the merger and then when the states hit it again so that kind of slowed things down. We're hearing that that will now accelerate as we look at basically second quarter and beyond. Verizon and their CEO have committed to expediting their spend to move into 5G, again very choppy. All these carriers tend to go up and down. You have to look at the trend line more than the quarter by quarter but it looks like it will be strong. The other thing that we're hearing which may cause a small pause in their planning is the fact that the work from home and the school from home have really tested the capacity of some of the towers in suburban areas where 5G was anticipated to be a downtown event a lot more. If work becomes more distributed they have to think about how they're going to do that. And so the site planning is kind of going through a little bit of a rephase amongst all the carriers as a result of looking at their most recent traffic. But all of them are committing to basically second quarter and beyond and we always said that this would be a build year and really the run rate pre-COVID was 2021. So at this point that's still looks to be the way it will run is, it's still going to be a build year. Second quarter will still be a little bit choppy third and fourth quarter the plans are in place it's just a matter of them executing upon that and having no significant changes to their CAPEX outlooks.

Okay. And the outlook for the solar tracker work, is that more susceptible sort of COVID related issues given all the international exposure or do you see changes in the outlook there?

It's more of a rephasement so some of the projects we had in the first half of the year look to be moving through the second half of the year. We're not hearing anything on projects being canceled as a result of COVID or that somehow natural gas or oil being as cheap as it is will effect that. It really is with the mandates to go to carbon free. Those seem to be overriding some of the other economics that potentially could come into the mix. So at present we don't see anything that's going to inhibit both solar or the wind. We had said SM and their order volume in the second half of this year would pick up, that's true is the way we see it right now. And then as we build into 2021 there's really good win profiles there. So, it'll be a lot of talk at least about whether they should change generation sources. But I think renewables are here to stay.

Yes, okay, thank you.

Thanks. The next question is coming from Ryan Connors from Boenning & Scattergood. Your line is now live.

Good morning Ryan.

Good morning. So I appreciate the comments on second quarter and second half but I think for us obviously you play in some very late cycle markets where ultimately this is whether or not this has an impact is really a story of 2021, even 2022. That you've got backlog for a certain period but the question is the next generation of projects and I understand you guys don't have any more of a crystal ball than anyone else but I think the real decision to point about whether this is an opportunity in the stock is kind of based on the scenario analysis out there 2021 and 2022. So I wanted to kind of just probe what you guys are thinking in terms of scenarios and I'll use the example of USS for example, I mean you mentioned strong ROEs but utilities are going to base those decisions on load growth expectations and those are coming in which could push some projects out and things like that. So as we look at -- you talked about state and local USS kind of obviously not going to quantify anything but what is the range scenario of expectations you're thinking about beyond 2020 because I think really that's where the rubber is going to meet the road here?

Yeah so I'll start with irrigation Ryan. Irrigation correlates to net farm income. And so however net farm income goes in North America so most likely will go our business. So those projections are the ones that will follow and model from a North America perspective. We do see growth in aftermarket parts, we do see growth in our technology sales that help us not correlate as closely so to speak on that. International has seen growth and will continue to see growth albeit it will be very chunky. But the project work that's out there will continue, it's based on population growth, and not necessarily the net farm income particularly in the developing countries. Coatings is usually pretty easy that correlates with industrial production. So however those forecast go we've modeled in scenarios that match going back to 2001 recession where we had a lot less plants. So I'd say we're being very conservative but the fact is that the amount of material that gets galvanized now has grown over time because of the corrosion prevention. In USS well you're right, they load growth. In fact, I've seen things that it's been down 5% to 7% during COVID. The grid hardening was a much stronger driver in the market and a lot of the rate cases that have gone to the PUCs have been around the hardening and replacement of existing infrastructure. That I don't think will tail off all that much albeit there could be some delays from one year to the next. The renewables, as I just mentioned should also continue because those mandates seem to be not backing off unless legislation comes in to change them. The growth in our international business for us is more of a market share issue and not necessarily just the…

Got it, okay. That's really helpful overview. My follow on was just as it relates to you talked about in the press release and in your prepared remarks about cost levers and looking at the discretionary spending and so forth. I mean, in a more negative scenario how much of the SG&A, for example is, do you feel like is that a -- would you be able to do to move into without cutting into bone, is it 5%, 10%, 20% percent, I mean, what kind of ability do you have to flex costs down in a more negative scenario just order of magnitude?

Well, it's hard to give a right off the cuff kind of answer, but I'll tell you this from commissions and sales perspective, that comes off very simply and easily. You know, could we take out 5% of our SG&A without even blinking an eye probably just based on the volume. You know, anything above and beyond that, we probably have to truly change the nature of the business a little bit, restructure a little bit. We did talk about looking at our product lines and the return on invested capital, that each product line not each business but each product line brings. And that's probably where the second lever would go to is, -- does our long term outlook for the return on invested capital change with this pandemic. And if so, we'll probably make some adjustments in organizational structure related to that.

Got it, okay. Well hey, that's great information. Thanks for your time.

Thank you. [Operator Instructions]. Our next question today is coming from Jon Braatz from Kansas City Capital. Your line is now live.

Good morning, Steve, Mark, and Avner and welcome aboard and look forward to working with you in the future.

Thank you.

Steve, one of the reasons or one of the reasons for the improved margins, you mentioned lower raw material prices and you were able to hold on to pricing. As you look forward, as the economy weakens and so on what's your thoughts on the ability to hold prices and retain the benefits of the lower raw material prices?

Well, I can tell you this, Jon, and all of my team knows this our default is we're holding the price. We do tend to be the price leader. So if we move, usually our competitors will move fairly close to us. So, knowing that there's a lot of turmoil, there's a lot of issues, there's a lot of competitors who may not actually make it with cash being king, we have no impetus or reason to have to chase volume at this point. The one thing that our restructuring over the last couple of years has done is really allowed us to make our cost structure a lot more variable. And so, being able to use, let's say, an infrastructure plan for both utility and engineer support structures, we're not having to chase one volume in one segment to keep it full. We can balance the load across the two. In irrigation we've always been able to pull out cost going back for a very long period of time. And because it's always been a cyclical, even during the year business. And in coatings, with temp labor, overtime, and then looking at shifts and cycle times, we feel that we can adjust those pretty simply. So we don't have to go to the price lever in order to get the kinds of returns we want to get.

Okay, great. And then secondly, Steve, are you seeing any movement in the big transmission projects that have been sort of on the drawing board, or is the business still mostly sort of a small to medium size work, any thoughts on the big transmission projects?

Yes. We've had -- we've enjoyed a couple of those big projects that have been out there. We do not see any change in those, at least from a schedule or timing perspective. But your question about the number of them is still about the same. They're mostly small to medium. When you talk about grid hardening and renewables those projects tend to be of those sizes to begin with. So we don't anticipate a lot of large transmission projects. Europe is one example where there is one. So as we participate outside the U.S., those will probably tend to be a little bit bigger in nature. But overall, they still are the smaller KV and the smaller structure types. So we anticipate our mix kind of staying where it has been even as we look out over the next two to three years.

Okay, alright thank you Steve.

Thanks, John.

Thank you. We reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

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

Included in this discussion is 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 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 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 it 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, operating efficiencies, availability and price of raw material, availability of 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. Thank you. It does conclude today's teleconference and webinar. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.