Valmont Industries, Inc. (VMI) Q2 2020 Earnings Report, Transcript and Summary

Hello, and welcome to the Valmont Industries Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Its now my pleasure to introduce your host, Renee Campbell, Vice President, Investor Relations and Corporate Communication. Ms. Campbell, please go ahead.

Thank you, Kevin. Good morning, and welcome to Valmont Industries second quarter 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 second quarter results, a COVID-19 business update, and commentary on our strategy and long-term business outlook. Avner will review our second quarter financial performance, and provide an update on our third quarter outlook 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 two 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, Steve Kaniewski.

Thank you Renee. Good morning everyone and thank you for joining us. Before reviewing our strong second quarter results, I'd like to start with a couple of comments. Since the beginning of the COVID-19 pandemic, we have worked very hard to keep our employees safe and have leaned on our core values and resiliency as a company to guide us. I want to start by thanking our 10,000 employees globally for their extraordinary efforts this quarter. They've worked tirelessly during this pandemic to deliver solid operational and financial results. They've demonstrated agility by quickly adapting to new ways of working and communicating, indoor disruptions to their normal routines and remain flexible despite closures of some of our international facilities. I'm extremely proud of how our teams have been managing through this crisis, while taking care of our customers, themselves and their families. I'm also grateful to our global customers, suppliers and stakeholders for their ongoing flexibility and understanding during these unprecedented times. When we held our last earnings call three months ago, the challenges of the pandemic were just beginning to emerge. And we were aware of only a few positive cases in our workforce. Since then there have been additional cases. Although the current infection rate of our employees remains less than a half a percent of our total workforce. I'm happy to report that all those who have tested positive are either recovering or have fully recovered. Importantly, to-date, we've had no significant disruption to our operations directly attributed to the virus. With that, let me turn to a recap of our second quarter summarize on slide four of the presentation. Net sales of $688.8 million, decline $12 million or 1.7% compared to last year, excluding $13.7 million of unfavorable currency impacts, sales were flat. Strong growth in the utility support structure segment was more than offset by expected lower sales in the coding segment due to COVID-19 impacts weaker industrial demand. Overall, both revenue and profitability were better-than-expected across all segments, as we successfully manage pricing and operational performance. Turning to the segments and starting with engineered support structures, sales of $253.4 million, decline 2.1% compared to last year, and flat year-over-year and excluding unfavorable currency impacts. We delivered a solid quarter of sales growth of lighting and traffic products in North America, benefiting from ongoing investments by state and local governments that strengthen demand in transportation markets. Globally, wireless communication sales grew more than 7% compared to last year. Carrier spending continued to drive demand in North American markets, and our small cell products are beginning to gain traction as 5G build outs are starting to ramp. Project sales in Europe, mostly driven by a large 5G project in the UK also contribute to revenue. Sales of Access Systems products were lower compared to last year, primarily driven by our strategic decision to exit certain product lines, as well as impacts from pandemic led factory shutdowns. Turning to utility support structures, sales of $231.3 million grew 10.2% compared to last year. Sales of global transmission products increase significantly across all structured types, amid ongoing investments to strengthen the grid. Volume growth was also driven by strategic capacity additions in North American operations that we announced last year. Sales and international markets, including solar trackers and offshore wind structures were flat with last year. I'm pleased to highlight that the global backlog of nearly $650 million remains strong at the end of the quarter, and includes a large lattice structures order of approximately $17 billion for the North American market. A result of our partnership with Locweld, a Canadian market leader for steel lattice transmission towers. Our lattice manufacturing facility in India is an exclusive subcontractor for Locweld, and customers will benefit from both companies combined expertise to provide quality structures, greater supply flexibility and enhance service levels. Production for this order will commence in the fourth quarter of 2020 with most of the revenue recognized throughout 2021. Moving to coatings, sales of $80 million decreased 18.7% compared to last year as expected. External volumes were lower due to COVID-19 impacts to end customers and temporary facility closures. Moving to irrigation, segment sales of $150.6 million declined 3% compared to last year. Excluding unfavorable currency impacts, sales were flat. In North America, sales were down 3.7%, higher sales of irrigation products and pricing were more than offset by lower industrial tubing sales driven by lower steel costs. International sales grew organically across all regions offset by a negative currency impact. Very strong demand in Brazil led to another quarter of record sales and local currency. While impacts from COVID-19 have caused disruptions in Brazil, the agricultural market remains strong. This past May, we learned that Agrishow, the largest annual farm show in Brazil, which sees about 150,000 growers attend would be canceled due to the pandemic. As many of you know, this show has historically generated a significant number of orders. Upon learning of the cancellation, our local irrigation team creatively organize their own exclusive virtual show spanning nearly two weeks, including webinars and virtual roundtables. This was a first in the industry, leading to millions of and orders received. We believe this affirms our position as the market leader, demonstrating our commitment to serve customers and grow market share. Turning to slide five, as we have communicated over the past several years, acquisitions have been a strategic focus of ours. I would like to take a few minutes to highlight two recent small, but strategic acquisitions that advance our strategies of adjacent market growth and technology leadership. First, we purchased a majority stake in solbras, the unique provider of solar energy solutions for the Brazilian agricultural market. Our strategy to expand their services globally, through the strength of our Valley dealer network will provide us a first to market solar power offering for growers. Going to market as Valmont Solar solutions, we can now offer a distributed generation solution for powering pivots and other farm equipment to optimize the efficiency of growers operations, and provide data monitoring solutions that are unmatched in the industry. Expanding this product into Africa, the Middle East and other developing markets over time, allows us to offer innovative options where the electrical grid is lacking and/or generation sources are not viable. These solutions also play an important role in reducing environmental impacts and supporting communities, furthering our commitment to sustainability and ESG principles. We also acquired the assets of PrecisionKing, a subscription based Ag Tech company that provides remote sensing and monitoring solutions for the U.S. market. With this acquisition, our number of global connected devices is now approximately 102,000. And year to-date, technology sales grew to more than $32 million. We remain focused on acquisitions and investments that provide value to our customers through technology and data solutions. With an emphasis on bolt-ons that add to the larger Ag Tech ecosystem, we're in the process of building. I would like to welcome both of these teams to Valmont. In prior quarters, I've spoken with you about Valley Insights, our artificial Intelligence based crop monitoring and detection service. Using imagery to detect crop health issues, this advanced service alerts the grower to problem areas for remediation. Together with our partner Prospera Technologies, we recently expanded it to commercial growers in four states. And I'm excited to share that we have already reached our goal to monitor 5 million acres, six months ahead of schedule. More than 300 growers on 4800 fields are now benefiting from the service and feedback has been extremely positive. Recently, we began conducting field tests using sensors mounted on Valley irrigation machines, located just a few meters from the plant. These sensors collect high resolution images day and night, capturing significantly greater details than drone, aerial or satellite imagery can provide at a much lower cost profile. Examples are shown on slides 27 to 29 in the appendix of this presentation. These sensors are a key milestone in our strategic roadmap to transform the center pivot to an autonomous crop management machine. And we look forward to updating you more in future quarters. Importantly, and as we've said before, we attribute our success here to a very strong collaboration with our world class dealer network, which is critical to grower education and market adoption of these technology products. I will now turn to slide six for an update on the specific actions we've taken to help mitigate the business impacts of COVID-19. First and foremost, the safety of our employees continues to be our number one priority. We remain vigilant in adhering to safe distancing procedures and processes in all of our facilities and work areas. We have continued our remote work policy across our administration teams where possible to limit the number have individuals at our manufacturing facilities. We believe these measured steps have prevented our factories from becoming a vector point for infections, and are grateful for the health and well being of our employees who are the backbone of our company, servicing our customers and keeping our factories operational. Turning to slide seven, a reminder that our products and solutions are considered essential, as they support critical infrastructure sectors and food security as defined by many global government agencies. Most of our manufacturing facilities have continued regular operations since the pandemic began. And we are pleased to report that all facilities that were temporarily closed have resumed operations in pre pandemic levels. From a macro standpoint, we continue to expect stable input costs, improved labor availability and lower employee turnover. We recognize that there are potential longer term economic headwinds in the markets we serve that could impact our businesses in the future. And we continue to work with our global teams to closely monitor market conditions and customer patterns. Turning to slide eight, as we outlined last quarter, the COVID impacts to our business vary across the portfolio, and are the basis for which we continue to assess the balance of the year. The risk profiles of the segments have not changed since last quarter, and Avner will speak to our third quarter indications and assumptions later in the call. Across our footprint, we continue to closely manage discretionary spending and capital expenses until the impact from the pandemic is more clear. As our business portfolio is diversified with different business cycles, our experienced teams can withstand market challenges. We carefully plan for different scenarios and are confident in the actions and adjustments that need to be made and will execute accordingly as conditions dictate. With that, I will now turn the call over to Avner for a second quarter financial review and update to our third quarter outlook.

Thank you, Steve. And good morning, everyone. Before I begin, I want to make a few opening remarks about my first quarter as CFO for Valmont. Over the past 90 days, I've been spending time learning the organization getting up to speed on the business drivers, meeting with the finance and IT teams, the executive management team in digitally connecting with colleagues. It's clear that Valmont has a very knowledgeable, experienced and talented team. And I'm excited to lead our finance organization to becoming a true strategic partner to our businesses. We have a lot of strength, as well as opportunities, including around optimizing working capital, maximizing free cash and improving return on invested capital. I believe that with a combination of robust shared services, utilizing advanced technology, data and lean practices, we can transform the finance function to business partners and strategic enablers, developing centers of excellence and accelerating initiatives to drive shareholder value. I'm excited for our future and look forward to sharing more details with you in the coming quarters. Moving to second quarter results. My comments will focus on the adjusted results as outlined in 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. Turning to slide 10. Second quarter operating income of $65.7 million, or 9.5% of sales, grew 3% compared to last year on comparable sales, solid performance and our three largest segments offset lower profitability in the coding segment. Second quarter, diluted earnings per share of $2 grew approximately 10% compared to last year. During the quarter, we incurred incremental expenses related to COVID-19 impacts, which on a net basis totaled approximately $2.4 million or $0.09 per share. Second quarter tax rate on an adjusted basis of 25% was comparable to last year. Turning to the segment. On slide 11 in engineered support structures, operating income of $22.9 million, or 9% of sales increased 90 basis points over last year. Overall, we were very pleased with the continued pricing discipline and strong volumes in North American markets. In international markets, the effects of Valmont facility closures, primarily in France and India impacted margins. This quarter we executed on planned restructuring actions across the companies and the details are noted on slide 38 in the presentation. Specifically in Access System, we recorded non cash, goodwill and trade name impairment charges of $16.6 million and incurred an other expenses associated with exiting the non-core supply and install product offering, which will reduce operating costs going forward. Excluding these charges, second quarter profitability was comparable to the first quarter and improved compared to the second half of 2019. Moving to slide 12. In the utility support structure segment, operating income of $25.3 million, or 11% of sales increased 340 basis points over last year. Stronger volumes, improved operational performance, and a better quality of earnings into international businesses drove the profitability improvement. Turning to slide 13. In the coding segment, operating income of $10.4 million, or 13% of sales was 240 basis points lower than last year. As expected lower volumes from economic impacts and temporary facility closures associated with COVID, led to operating deleverage. Moving to slide 14. In the irrigation segment, operating income of $22.4 million, or 14.8% of sales increased 90 basis points compared to last year. Profitability improvement was led by pricing and higher sales volume. Turning to cash flow on slide 15. We delivered solid operating cash flow of $88.2 million this quarter, leading to a 33% improvement in year to-date operating cash flows compared to last year. Our relentless focus on working capital management is delivering results, especially during these uncertain times, along with a more stable raw material cost environment. As I mentioned in my opening remarks, optimizing free cash flow will be an even greater focus going forward. Turning to capital deployment. The year to-date summary is shown in slide 16. Capital spending this quarter was $24 million and we remained focused on strategically investing in future growth opportunities, while ensuring optimal liquidity. During the quarter, we deployed $7 million for two strategic acquisitions, and return approximately $10 billion of capital to shareholders through dividends, ending this quarter with approximately $353 million of cash. Moving now to slide 17 for balance sheet highlights. We recalibrated our capital spending plans for 2020, which are expected to range between $80 million to $90 million. We continue to aggressively manage spend and prioritize strategic investments internally. Early in second quarter, we drew down $75 million on our $600 million revolving credit facility to ensure sufficient liquidity amid the uncertainty of the pandemic. As a result of strong cash flow and favorable business performance, we repaid this amount in full during the quarter. Our balance sheet is strong with no significant long term debt maturities until 2044. In our leverage ratio of total debt to adjusted EBITDA of 2.3 times remain within our desired range of one and a half to two and a half time. Let me now turn to slide 18 for an update to our outlook, including key financial metric and assumptions for this quarter. Net sales are estimated to be between $680 million and $700 million with operating income margins between 8% to 9% of net sales, excluding any restructuring activities. Key assumptions supporting this outlook are summarized on this slide. Turning to slide 19. In engineered support structures, our current backlog is yielding good visibility to third quarter lighting and traffic sales. The long term market trends for both transportation and wireless communication structures and components in North America remain solid. However, visibility beyond this quarter is less clear given the combination of state's lower tax receipts and recent decision to reverse reopening in some states, both of which could impact order timing. Further, wireless communication sales within the quarter are harder to predict due to the timing of shipments. Sales and international markets are expected to be down slightly compared to last year due to ongoing economic effects from the pandemic and a strong U.S. dollar. Access System revenues are expected to be similar to the first two quarters of this year, but lower than 2019 as we continue to right size that business for future market condition. Third quarter profitability for this product line is expected to gradually improve compared to second quarter 2020 adjusted results, and this has been accounted for in our outlook. Moving to the utility support structure segment, our strong backlog and the benefit of capacity additions are providing good visibility to the third quarter. Segment revenue is expected to increase approximately 20% compared to prior year, which includes the large transmission order in Northern Europe received last quarter, and higher solar project sales. In coding, we expect demand to remain muted due to current global economic activity levels. Coding sales tend to correlate to industrial production level, and the operations will lever and deliver the most with changes to volume. Moving to irrigation. Continued weakness in agriculture commodity prices is expected, especially corn and soybeans. net farm income levels are not expected to improve in the near term, and this metric has historically been the best indicator of demand for this segment. But continue challenging ethanol market, strong U.S. dollar and uncertainty around the timing of international projects can all impact quarterly sales. A reminder, that third quarter is lower sales quarter compared to the rest of the year due to normal business seasonality. Finally, we expect solid third quarter cash flow driven by additional emphasis on working capital management. The deferment of estimated U.S. tax payments into third quarter are included in our operating cash flow estimates. With that, I will now turn the call back over to Steve.

Thank you, Avner. Moving to slide 20. As we stated last quarter, the fundamental market drivers of our business remain intact. In engineering support structures, government investment in infrastructure development across lighting and transportation markets is expected on some level as past recessions and associated stimulus funding initiatives have shown. We are encouraged that 17 states have already implemented or proposed fuel tax increases in 2020, which are generally used to fund road and highway projects. In Europe, recent announcements of infrastructure stimulus packages will drive additional market demand there. Growth in wireless communication structures and components, particularly in 5G are expected to accelerate into 2021, as carriers investments are supporting an increasing number of work, and school-at-home environments. The current pandemic has elevated the critical need for wireless connectivity in rural areas. I'm excited to announce that Valmont recently joined the American Connection Project Broadband Coalition. This group brings together nearly 50 diverse stakeholders advocating for public and private sector investment to bring high speed internet infrastructure to all households, businesses and farms and rural areas. As a provider of both wireless communication products, and irrigation technology solutions, this initiative will greatly benefit many communities that need this investment. In utility, our robust backlog demonstrates the ongoing demand and necessity for grid hardening and renewable energy solution independent of general economic trends. Our coatings business closely follows industrial production trends and general economic activity. The drivers remain solid, as over the long term preservation of critical infrastructure and the increasing number of economies that are actively fighting the cost of corrosion will drive the need to extend the life of steel products globally. And in irrigation. Our products and technology helped meet the demand for increased food production to support growing populations around the world. The sustainable management of water resources and optimization of farm inputs and supporting growers conservation efforts are just a few of the long term drivers that support demand for our business. In international markets, government's increasing needs for food security and agricultural land development, including infrastructure for power generation and supplying water to farms creates opportunities for large projects. We continue to have a very strong pipeline of project business. But as we always say timing of shipments can be hard to predict based on local factors. In summary, on slide 21, our strong performance through the first half of this year is a testament to the agility of our team, and our ability to manage well through uncertainty and change. We anticipated challenges and responded quickly in playing alternate work arrangements, implementing health and safety protocols to ensure the protection of our employees and communities and reinforcing our supply chains. At Valmont, one of the keys to our success is the diversity of our global workforce. We operate in 22 countries with many different cultures, traditions and languages. Our core value of integrity means we will do the right thing every day, even when no one is watching. We continue to build upon our commitment to environmental and social excellence, including demonstrating the value that we bring to our community, and our commitment to be an inclusive and diverse workforce. While the disruptions from COVID-19 continue to create short term business challenges, the long term enduring drivers of our businesses have not changed, and are not expected to change once we get through the current crisis. I will now turn the call back over to Renee.

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

Certainly. We'll now be conducting your question and answer session. [Operator Instructions] One moment please while we pull for questions. Our first question today is coming from Chris Moore from CJS Securities. Your line is now live.

Hey, good morning, guys. Congratulations.

Chris, good morning.

Good morning. Yes, maybe just start with operating margins. Adjusted margin, operating margin in Q2 is 9.5%. Midpoint for Q3 is 8.5%. Maybe you could just talk a bit about where the margins are likely to be lower in Q3?

Yes. Chris this is Steve. Just to kind of put some color to that. When we looked at the models, this is historically a low point in the year for irrigation. And as such that is our number one profit driver. So that was one of the factors that we took into consideration. The other is the fact that the coatings market which is our second most profitable segment also has some still -- some traction to gain back steam from the economic slowdown. And then in utility, there is more of our revenue coming from international markets this quarter. And that tends to have a little bit lower margin profile than just the North American market.

Got it. Very helpful. And just maybe switch gears. The $17 million lattice structure order, I'm just with Locweld. Maybe can talk a little bit more about that partnership moving forward? Does it have any impact on margins when you partner with them or kind of how you I see that moving forward?

Yes. So Locweld is based in the Quebec Province of Canada, which tends to be one of the largest lattice structure markets in the world. And so, it's a real good combination for us to work with them. We can bring a lower cost alternative out of India. And that helps them to serve as their customer base. And they have the relationships there that are not always the easiest otherwise to break into. So from a margin profile, it should provide relatively good lattice type margins, which are not necessarily as good as the monopole margins. But again, as we look globally to expand the lattice market, 95% of all structures around the world are lattice. So it provides a real good growth avenue for us and high utilization of our plant in India that we purchased a couple years ago.

Got it. Very helpful. I'll jump back in queue. Thanks, guys.

Thanks.

Thank you. Our next question today is coming from Brent Thielman from D.A. Davidson. Your line is now live.

Great. Thank you. Good morning.

Good morning, Brent.

Steve, really kind of a more of a broader question that you just talk about your actions by competitors, maybe that you're seeing around the globe of your operations, just around pricing and discipline around it. Anything that causes you concern there?

It varies segment-to-segment. But what I would tell you is just from our own commitment is we will be the price leader. And we have seen at time some competitors that back off of that. They want to give back steel, let's say, some of the decrease in steel and zinc, even though the markets are robust. And so, we are going to stay disciplined around the fact that we're going to get a market based price and not a price that's based upon raw materials, because there's so many other inputs, there's so many other challenges in delivering, particularly our engineered products to the market, that seems to be very counterproductive. We've not seen anything on a large scale, of any kind of price erosion with the -- let's say, softer steel markets, the softer zinc markets. So we've seen pretty good discipline with the exception of a couple players here and there on a order-by-order basis tends to be that way. The larger the order, you tend to maybe get a little bit more discontinuity in the way people price. But generally, I think most of the market players are behaving.

Okay. Thanks for that. And then I guess maybe you could just talk about the outlook or prospects or any visibility you have around the kind of the larger international irrigation projects and what that sort of looks like to you over the next 12 months?

Yes. We have a very good pipeline of potential international orders. The strong U.S. dollar we've mentioned before, can impact the timing, because they have to raise capital in some of these markets in order to open up LCs with us. But the food security issue has really been a strong driver in project activity internationally. As we mentioned, we saw organic growth in all of our international markets, despite everything else that's going on, and Brazil particularly strong. So between just the organic nature of some of the developed markets, as well as the project base piece in, let's say, Eastern Europe, the Middle East and Africa, it looks pretty good as we look out over the next year. Again, the timing will be uncertain, but the project level is definitely increased.

Okay, great. Thank you.

Thanks Brent.

Thank you. Our next question today is coming from Joe Akin from William Blair. Your line is now live.

Hi. Good morning. This is Joe on for Brian Drab today. Thanks for taking my question.

Good morning, Joe.

First, I was just wondering on the lattice structures order, you touched on the Locweld partnership. I was wondering if you could just talk a little bit more broadly about that business and traction in that business, and kind of what your strategy is there?

Yes. The lattice business, being the predominant structure type globally, has been an emphasis for us over the last couple of years. We have purchased a facility in India, little over two years ago, and it takes time to build a portfolio in the lattice area. So one of the things that Locweld does for us is give us a nice large project, so called a library of structures that now we can use in bidding other lattice projects around the world and in North America. We're strategically located in India from a cost perspective. And India tends to be one of the -- it is the most dominant lattice providers outside of China for China itself. And so, we feel very good that the Locweld partnership will help them and help us, and, really provide a growth platform for us outside of just the monopole market.

Thanks. That's really helpful. And then switching gears on the large European transmission order. Did that order begin to ship at all that this quarter? Can you update us on what the timing for that is? And is there any potential for further work with that customer going forward?

Yes. So there was no shipments in the second quarter. We will be shipping on the back half of this year and into the first half of next year. It is a large customer. These are big projects for interconnections of alternative energy across Europe. And so there are some follow on potentials thereafter. So we feel with strong execution, good quality, good timing of our shipments, there's definitely the ability for us to have some follow on work.

Got it. Thanks for taking my questions.

Thank you.

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

Morning, Steve.

Good morning, John.

Steve, in the face of this COVID-19 a lot of companies really slashed their budgets and laid off people furloughed people and so on. That really wasn't the case at Valmont, was it? There weren't a lot of necessarily cost reductions because of COVID-19. Is that the case?

That's correct. We kind of tried to quantify it there with the $2.5 million impact in the quarter. That was our additional costs. Some of that was retention bonuses for our frontline personnel. We'll probably have about a $0.5 million of drag per quarter as we look forward just for distancing, PP&E, some people being quarantined as they come in contact with others. But generally, we worked through majority of the quarter with the rare exception of about a handful of plants internationally that we had to shut down. So those, we didn't have the revenue, we didn't have the operating profit. We also didn't have the cost. So they kind of self-correct as everything comes back online. But we did not lay off anybody as a result of the pandemic. Our demand profiles were within let's say, our budgetary and kind of our forecast of where we expected to be. So there's some attrition, maybe that's not been replaced. But there's not been any need to have to slash costs.

Okay. Okay. And then secondly, as we approach the end of the year, the states, you mentioned it states, state budget, state and local budgets, probably you're going to get tighter and tighter. When do you think you might get a sense as to the impact that these tighter budgets might have on infrastructure spending, highway spending, and so on? When do you think we might get a better sense of what's going to happen next year and so on in that area?

Well, from a federal level, I would say that after the election, would really be the time that we would think about isn't going to be an infrastructure spend. How they're specific going to allocate money to the States, as a result of the effects of COVID. At the state level, it's still going to be kind of a patchwork based on budget cycles, based on the impact of COVID in states. Texas, as an example, is a large market for us. It was starting to reopen, and then boom, now they're going the other way. And so, it's still hard to see clarity there. California, Florida, these are real big transportation markets. And so, what we've seen on our order intake side as related to that is we may get a couple weeks that are down and then we get a couple weeks that are up. And it's really hard to tell if it's based on the fundamentals or simply that there's people now working that are approving projects and allocating the funds. So I think, obviously based on just duration as the third quarter goes on, and some things get settled between federal bailouts and some budgetary things at the state level, hopefully, we'll get to see a little bit more clarity around that. But I think it'll probably be into the first quarter of next year before we really have a good outlook of particularly transportation spend.

Yep. Okay. All right. Thank you, Steve.

Thank you. Our next question today is coming from Nathan Jones from Stifel. Your line is now live.

Good morning. This is Adam Farley on from Nathan.

Good morning, Adam.

Good morning. Following up on the -- that half million drag from social distancing, was there anything in addition to that, that may be impacted productivity in your manufacturing facilities? And then on the flip side, are you guys learning any ways to drive productivity? Are you getting any gains from like work from home or anything like that?

Yes. We definitely are seeing some productivity gains that just come from having to travel less, less time for people to have to spend in meetings, just some real things that it probably broaden macro across many different organizations. We've seen that. The half million that we would call out is really more around additional PP&E, some things around how we service food within the facilities, as well as just the quarantining of people that have to be there. So that number over time may decrease slightly, but it's a pretty good benchmark at least until the pandemic and vaccine comes out. But from a productivity perspective, we had a very productive quarter. And we've been seeing productivity gains both from first quarter to the second quarter and anticipating the same as we look at the third quarter. So not necessarily a pop in productivity, but just simple, blocking and tackling, lean and agile type of gains as we look forward.

Okay. And then, switching over to the 5G commentary. So I'm pretty positive. I think you mentioned work from home might be accelerating some spend, more people on cellular networks. If there anything you can quantified? Do you think it's pulling forward any investment there or any other color on 5G?

Yes. I wouldn't say that it's pulling forward any investment. These are mostly planned investments. What it has done is the carriers have had to kind of allocate their coverage. As people are not going into downtown areas. They're sticking more to the suburban areas. The work from home, the school at home has done exactly the same. And that would tend to help our business more than being concentrated in a city center, because it would tend to be done more on towers and polls. The rural broadband initiative is probably the only way that you bring 5G type speeds to rural areas, because you can't run fiber to the home to cover those kinds of connections. So in a way the pandemic will kind of change the demand profile of how 5G rolls out. But we think the investment itself will be around the same and we've seen that reaffirmed by most of the large players in the industry.

Thank you for taking my questions.

Thanks, Adam.

Thank you.

Thank you, we reached end of our question answer session. I'd like to turn the floor back over to management for any further or closing comments.

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.

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 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. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.