Valmont Industries Inc (VMI) 2008 Q4 法說會逐字稿

Good morning. Welcome to the Valmont Industries fourth quarter 2008 earnings call. My name is Barbara and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). At this time, I would like to turn the event over to Mr. Jeff Laudin, Manager of Investor Relations. Sir, please go ahead.

Thank you, Barbara. Welcome to the Valmont Industries fourth quarter 2008 conference call. With me is Mogens Bay, Chairman and Chief Executive Officer, Terry McClain, Senior Vice President and Chief Financial Officer and Mark Jaksich, Vice President and Corporate Controller. Before we begin, please note this discussion is subject to our disclosure on forward-looking statements which applies to today's talk and will be read in full at the end of the call. The instructions for accessing a replay of the call can be found in our press release. I would now like to turn the floor over to our Chairman and Chief Executive Officer Mogens Bay.

Thank you, Jeff. Good morning, everyone. Thank you for joining us. Let me begin with fourth quarter highlights. We had record fourth quarter sales operating income and net earnings. Operating income increased 32% and net earnings increased 23% on a 28% increase in sales. Fourth quarter utilities support structure segment was also very strong with revenues up 63% and operating income increasing 69%. Irrigation Segment sales increased 18%. For the year, total revenues increased 27%, operating income rose 47% and net earnings increased 40%.

I'll now review the fourth quarter. I'll begin with the Utility Support Structure Segment where sales increased 63% to $129 million. Operating income increased 69% to $21.6 million or 16.8% of sales, largely as a result of volume levels and pricing to recover steel costs. Our backlog continued to build and is at record levels. The utility market is being driven by greater investment in the transmission grid. The transmission grid has been operating under some stress of higher demand for many years without sufficient investment in the infrastructure. The Energy Bill of 2005 recognized this and incorporated reliability standards and penalties to spur new investment in the grid and utilities have responded with higher levels of capital investment.

In the Engineer Support Structure Segment, sales increased 34% to $213 million. Operating income decreased 12% to $11.8 million. Segment profitability was adversely impacted by a change in mix with more intersales of large poles to the Utility Support Structure Segment. Another factor that had a negative impact on profitability, was reduced factory performance on a couple of occasions. Additionally, we have various contracts partially funded by the federal government at fixed prices that do not allow renegotiation to recover higher input costs such as steel.

In the North America lighting and traffic market, sales were slightly higher. As expected, our commercial sales were lower. The weak economy impacts the need for more lighting due to reduced real estate development for commercial construction, housing and shopping centers. In Europe, sales in most markets improved save for France, where a weakening economy led to a decline in sales. In our specialty structure markets, which are primarily the markets for wireless communication poles, towers and components, North American sales were significantly higher.

In China, sales of wireless communication products were also higher, supported by a continued build-out of their wireless communication network. Sales of utility structures increased in China, as additions to generating capacity require investments in utility structures for transmission. Our new pole plant in northern China continued to increase activity levels during the quarter. We expect China, even in the current economic climate, to continue to invest in infrastructure to spur economic development and growth.

Irrigation Segment sales were 18% higher at $121.8 million. Irrigation Segment operating income decreased 16.5% to $11.6 million and was 9.5% of sales. Lower factory utilization in North America and the negative effect of a stronger US dollar resulted in a lower profitability. A stronger dollar make us less competitive in a number of export markets and price shares margins as we often compete with local competitors. Increased sales in North America were largely a result of higher pricing to recover inflation in material costs. Unit volume sales in north America fell as the farmer reacted to a late harvest, declining crop prices and prospects of high input costs for the outcoming growing season. Whereas during last year's fall season, customers were concerned about buying ahead of inflationary price increases, this year the customer had no urgency to commit to a purchase decision early in the '09 selling season.

In our international market, sales and volumes were higher. In the Coatings Segment, fourth quarter sales of $32.3 million were 4% lower than last year largely as a result of lower pricing due to lower zinc costs. Volumes were higher due to better industrial demand and higher volumes from Valmont internal demand. Operating income rose 18% to $6.9 million or 21.3% of sales.

The following comments relate to our results for the year. One of the most significant challenges of the year was rapid and dramatic inflation in steel costs in the first three quarters, followed by a reversal in the fourth quarter as the global economy recession led to a lower demand for steel. This created a big challenge for us in managing inventory and margins. During the run-up in prices, lead times extended and we placed orders to protect ourselves and we were still receiving inventory in the fourth quarter that we ordered early in the year. We also faced some internal challenges with productivity issues at two of our pole plants and absorbed startup expenses for new capacity added in North America and China. Fluctuations in the price of the US dollar and widening liquidity crisis in the banking system added to the list of issues we had to deal with.

Most of our markets were strong during the year. As a result, in 2008, we had a substantial improvement in two metrics we use to measure our performance. Operating income as a percentage of sales increased to 12% compared to 10.4% last year. Our return on invested capital after tax, weighed 16% compared to 14% in 2007. Turning now to the drivers of our business results. The North American utility market was strong as utilities continued to invest in upgrading the electrical transmission grid. We ended the year with record backlogs to give us a good start to 2009. In the Engineer Support Structure Segment local sales, global sales increased largely due to price increases to recover higher steel costs and the impact of acquisitions made during the year. Unit volumes were higher than last year's level. Profitability for the segment was slightly higher primarily due to the positive impact of acquisitions and the improvement in the American specialties structures operations. This was, to a great extent, offset by diminished productivity in a couple of the North American pole plants, startup expenses and capacity additions, both in North America and China and higher SG&A expenses.

Global sales in the Irrigation Segment were substantially higher. The first three quarter sales benefited from strong farm income resulting from higher world crop prices. Operating income increased significantly for the year because of the higher volumes and the benefit of manufacturing and SG&A leverage. In the Coatings business, sales increased. Valmont's unique ability to baseload many of our Coatings locations with internal products along with bed iron industrial demand, led to the sales increase. Operating income improved due to manufacturing levels on higher volume and lower input costs.

During 2008, we made several acquisitions to enhance our competitive position. Let me highlight a couple of the larger acquisitions. Our investment in West Coast Engineering, a pole manufacturer headquartered in British Columbia strengthen our position in the important Canadian economy and northwestern portion of the US. PennSummit, a structures manufacturer in Hazelton, Pennsylvania, improves our position in the utility market, adding expanded coverage in the northeastern part of the US. Site Pro, a wireless communication components company , improves our ability to serve our wireless communication customers with a broad wireless communication component product line and world-class distribution expertise.

In our international markets, the acquisition of Stainton, the UK's largest pole company, fills a gap in this important European region. A joint venture will meet us in Turkey brings access to markets in the Middle East, Central Asia and Africa. Going forward, we will continue to pursue acquisition opportunities that fit into our existing portfolio. Turning to other financial measures. You will have noticed an approximately $5 million reduction in fourth quarter corporate expense which is primarily a result of a reduction of bonus accruals for our long-term programs with a tie to Valmont stock price. We also had an approximately $5 million offsetting increase in miscellaneous expenses as a result of investment losses in the assets of our deferred compensation plans and currency translation losses. Increased inventories and accounts receivable reflect higher prices, the impact of acquisitions and additional purchases to protect supply. Inventory levels are higher than we would like and we are actually working to reduce them. Account receivable turns on line with our historical values. Long-term debt is higher as a consequence of our acquisitions activity during 2008. Depreciation and amortization for the year was $39.6 million and capital expenditures were $50.8 million. In 2009, depreciation and amortization is expected to be between $40 million and $42 million and for 2009, all budgeted capital spending is under review. For your models at this time, you can plan for capital expenditures at last year's levels. We will update you with our plans on a quarterly basis.

Global economic uncertainties currently make our outlook for 2009 hard to quantify. For the first quarter, when we balance the pluses and minuses, we expect that increased utility revenue will more than offset declines in global irrigation revenue. We currently expect total revenue to be higher for the quarter and we expect earnings to be similar to the record first quarter of 2008. This depends on product makes and factory utilization. We will continue to update our outlook on a quarterly basis throughout the year.

Valmont has many characteristics, we believe, that enable us to better weather the cyclical nature of our markets. We have the unique capability to allocate capacity to the markets that have the greatest opportunities. In the current environment, this allows us to utilize our large pole capacity in the Engineer Support Structure Segment in North America, and to some extent in China, to provide added capacity to the Utility Support Structure Segment without any further capital or labor investment. Our balance sheet is comfortably leveraged with long-term debt as a percent of investment capital at 31.7%. With $280 million five year revolving line of credit we recently put in place, we have access to additional foreign capacity.

In summary, 2008 was a good year. We enter 2009 prepared to meet the challenges of uncertain markets in a weakening global economy. We have a long history of operating in cyclical businesses and we will thrive to maximize our results in whatever economic environment we face. One thing is certain, the global drivers for our business have not changed. The world must be fed, water resources must be protected, and infrastructure must be upgraded and expanded. This concludes the prepared portion of our remarks and I would like to take your

(Operator Instructions). Your first question comes from Arnie Ursaner from CJS.

My first question relates to the Engineered Support Structure Segment margin. I've gone back five years and you have been nowhere near the 5.5% level in margin anywhere in that time frame except for one quarter where--still was just exploding on the upside. Can you walk us through some of the items that have impacted that in a little more detail, which of those you fixed? So we can get a better feel what maybe normalized margins would have been without these items?

In general, if we start with the internal issues we have been dealing with, we had some significant operational challenges in two of our North American plants. We have made changes in management and we expect that the fixes we are putting in place will improve the business that these two plants support. An important portion of, maybe, the declining margins also, is the fact that because of the very high demand in utility and a somewhat soft demand in the lighting and traffic business for large pole structures, we have allocated some of the capacity that belongs in the North American Engineer Structure Segment to produce products for utility and that is transferred at margins that are made just a little better than break even. So those are the two major elements. As the North American structural businesses over time will strengthen again, they will get better margins from utilizing their plants more themselves and hopefully the fixes we are putting in place to address some of the operational issues will also help them improve the margins.

Again, maybe dwell on it a little more because 400 basis points a margin there is $0.28 of earnings so it is really important to understand this. The utility, or work for highways, if you will, being transferred to utilities is likely going to continue given demand, but the problems you have had at two specific plants are likely to be fixed. Can you separate those two issues out in a little more detail to help us?

Well, given specific numbers, my feel would be that the operational improvements we are going to see internally in the North American structural businesses probably have a bigger impact than the inner company sales, so, the utility business. So, in other words, some of the operational issues we are dealing with should add more to that business reverting to more traditional margins. My second question is more of a technical one. You mentioned in your prepared remarks, that the miscellaneous of $5 million had two major components. One was currency and one was related to assets in your pension fund? No, deferred compensation plan.

Deferred compensation plan. Can you split the $5 million between those two and the reason I'm asking is on currency, wouldn't that have run through your operating margin by segment?

Yeah, Arnie, let me address the --

This is Mark Jaksich.

--the deferred compensation plan. In the long-term assets on the balance sheet, there are assets that belong to the Company related to the deferred comp plan. There is a corresponding long-term liability, which is the amounts that we owe the participants. As the assets go up and down in value because of investment gains and losses, it will increase the assets and the corresponding liability or vice versa. So as we wrote down the assets in the plan because of market losses in the investments, that went through miscellaneous income. That was about $2.5 million. There was a corresponding reduction in the SG&A that goes through corporate that's related to the corresponding reduction in the long-term liability that goes along with that. The second item that's affecting that, is the corporate expense, is the valuation of the long-term incentives. That was in the neighborhood of around $5 million and then what balances the rest of that out is miscellaneous year end, cleanup items and cleaning up accruals and self-insurance and stuff like that.

Hello?

Yes, can you hear me still?

Now we can.

It sounds like you were buying steel at relatively high prices going into the fourth quarter relative to what you've imbedded in your cost structure when you gave the prices to your customers. How much more inventory -- remind us of your inventory returns on your business and how quickly we can reverse this problem and have your inventory in line with more current costs in the market?

Well, historically, Arnie -- this is Mark again. Historically, our returns on a company basis are somewhere in the neighborhood of five turns based on cost of sales. We are probably, from our estimation, we are probably about $40 million to $50 million high company-wide across the board. Now, when you look at part of the increases we had in inventory related utility, that business has a growing backlog, and to a large extent, that inventory is covered by existing orders and the same thing goes, to a certain extent, in the Engineer Support Structure side. And so while, yes, we do have some inventory on hand at higher prices at this point in time, a decent amount of that is covered by existing orders in the backlog or stuff that's going through the system at this time.

I have one last real tiny question. 3G licenses at China were awarded at year end. Obviously you're only reporting on the fourth quarter, but post the year end, have you seen a pickup in your wireless tower business in China related to 3G?

I can't answer that question. I can get it to you later, but I have not followed the wireless order flow specifically in China in the first six weeks of this year but we can get back to you on that.

Great. I will jump back in the queue. Thank you.

Your next question is from Brent Thielman of D.A. Davidson.

Good morning. Congratulations on the quarter. On the Utilities Support Structure business, you obviously saw a noticeable uptick in margins in the fourth quarter. Should we anticipate those returns back in lower-double digit levels or mid-teens margins sustainable in that business?

Well, sustainable over what period of time? I think we are going to have another very strong quarter in the first quarter.

Okay. Then on the backlog for that business, I think you mentioned was sort of near record levels or at record levels. Can you talk about the level of risk associated with that backlog, particularly maybe some exposure to wind-related projects just given some concerns out there and delays or cancellations or constructions of new farms?

Wind related.

I think that short term, we continue to see good activity on transmission lines to hook up wind farms that have already been financed and are under construction and transmission kind of comes toward the tail-end of that. So short term, I don't see anything there. You're right in the sense that right now, there is a disconnect between the rhetoric we hear about wind power development and the desirability of it in the country, and what's happening in that industry as we speak. The latter is tied to the credit crunch we see worldwide and the lack of liquidity. So there may be a couple of quarters or a year where sometime in the future there is going to be a slowdown in that particular side of the utility business. That's too early to determine but in order for this business to re-engage to levels we have seen before, liquidity has to be available.

Sure.

And I can't predict when that's going to happen. Okay. Then just on the irrigation business. Maybe could you just talk about a little bit of what you're seeing on the pricing side for irrigation machines, if you're seeing any significant pressures there? I don't think we have seen lots of pressure on the pricing side. I mean, we have clearly seen a reduction in volume but not a lot of pricing. I think there has been pretty good pricing discipline.

Okay. Thanks very much.

You're welcome.

Your next question is from Ned Borland of Next Generation Equity.

Good morning, guys. Great quarter. Just a follow-up there on irrigation. One of your competitors recently detailed a pretty alarming decline in irrigation equipment. I was just wondering if you could characterize the sort of quoting activity at the dealer level and what you guys are seeing?

Well, currently we are also seeing a significant reduction in order flow but I think one of the reasons for that is that there is no urgency for farmers right now to place orders. I think they are having a wait and see attitude. Now, that urgency will come quickly when we get into the March and April time frame so they can get their equipment installed in time for planting and that's the period where we will see the strength of the spring selling season. If you look at the farmer's balance sheet, if you look at their access to capital, they are in good shape. This is a question of their mood. They read the same newspapers we do and they may continue to have a wait and see attitude for a while. One of the things I learned from 30 years in our irrigation business is I can't predict it. I can predict it long-term but I can't predict it short term. That's kind of the scenario. Not much has to change in the general mood for that business to kind of break loose again and if nothing changes, I think it will sit there for a while.

Okay. Thank you.

Your next question comes from Bob Franklin of Prudential Financial.

I didn't catch the Cap-Ex number that you gave in your prepared comments?

We are planning about the same level from last year which was about $50.8 million.

$50.8 million. Okay. Can you tell us in the bank how much is revolver and how much is term outstanding right now?

It is all revolver at this point in time.

Okay. So your term debt is gone?

Term debt is gone.

Of the $280 revolver, how much is out right now?

We have about $100 and -- $169, yes.

Can I just do simple math for the availability, take that from $280 or is there something else in there?

Availability.

Availability. Over $100. Yes, that's $111 plus there is an accordion feature inside that agreement that we could expand that facility by another $100 million.

Okay. Would it be your intention to use free cash flow at least in the short term to repay the revolver?

Yes.

Okay.

But also, if we find opportunities to acquire in this environment we will do that.

Understood. How about covenance with the revolver?

There's two covenances, a leverage covenant and there is a coverage covenant. Under the leverage covenant, technically we could get our total debt up to $900 million or something like that.

Okay. Can you tell me what the leverage test is?

3.75.

3.75 times --

EBITDA.

Right. And is that through the life of the revolver or does it step down?

No, through the life of the revolver.

And coverage?

2.5

2.5

And this matures in 2013. What month in 2013?

2013 and I think probably September or October.

Okay. You can tell I'm from the fixed income side. All right. Thanks very much.

The next question comes from the line of Isa Salarenta of Ice Capital Global.

Hello, guys.

Hello, there.

Thanks for another solid year's work. I have a question about China and what you are seeing there at the moment in comparison to the past few years? What's happening in China at the moment? What can we expect in the first couple of quarters from your business point of view?

Well, I just returned from China and we have not seen any decline in our activity levels in China. We are operating at the annual operating plan level we put in place late last fall. Now, that doesn't mean that China isn't feeling part of the economic problems. In China, they may see a reduction in their growth rate from 10% to 6% and they feel pretty bad about that and the rest of the world would kill for 6% growth rate. So everything is relative but I think the industries in China that are really being affected are those that are in consumer products and exports. I think that, as you probably know, the Chinese government have announced also a stimulus plan and that includes a lot of infrastructure spending and in general, unless the global economy deteriorates much further, I'm pretty optimistic that our China operations will deliver yet another record year.

Okay. Thanks a lot, guys and have another good year.

Thank you.

The next question comes from the line of Jon Braatz of Kansas City Capital.

Good morning, gentlemen. In the fourth quarter, your irrigation were up nicely and margins were off considerably. As we head into fiscal -- head into this year, obviously it looks like volumes will be off from last year's levels. What are you doing, and I know you laid off some people in your McCook facility. What else can be done and how should we think about margins in the irrigation segment this year when buy-ins are likely to be down in that segment?

Well, I think you would see a compression in operating income margins. No doubt about it. This is a business that leverages very well when volumes go through our plants, not only in the big plants in North America but also in the smaller plants internationally. We will see deleverage as we see volume decline so the question is, to what extent will volume decline and as I said before, I can't predict that. And therefore, that's why we made the statement that on the other hand. on the utilities side. we think at least for the first quarter that the utility business will more than offset the declines we will see in the irrigation business.

Is there any way that we can relate your fourth quarter operating margin in the irrigation business to what it might be assuming margins--assuming volume is off 20% or something to that extent? You indeed have taken some costs out of that business, have you not?

Yes, and we are also watching very carefully SG&A expenses. But I would say that if the volumes come in as we expect them currently, we should see operating margins approximately at the same level as you saw in the fourth quarter.

Okay. Secondly, I believe the big Texas wind project is ready for construction. Now I know it is going to last--construction might last three, four, five years, or whatever, but there are 4000 miles of transmission lines supposedly going to be built. Can that project in and of itself keep you guys busy assuming you get your fair share and have you received any orders for that project at this moment?

Well, there are several projects but what you're referring to is the big drive to establish wind power in the western part of Texas to transport the electricity to the big cities in the eastern part of Texas and just last week, some major contracts were being let to the former THU, to a joint venture between mid-American and AEP, and they were to the tune of at least $10 billion.

Right.

And none of these contracts have been let yet. That doesn't mean we don't have significant contracts in Texas related to wind power, but not to that particular project and we expect to get our fair share of that business going forward also. Now if that's the only business we get, that clearly would put some pressure on our overall utility business since we have a very broad footprint on where we get our business throughout North America but we don't expect the rest of the US to discontinue --

Right. Any thoughts as to the timetable of some of these contracts and when they might be let?

There's some pressure on it and on it and some of the contracts should be let this year.

Okay.

So that's going to provide a platform for the businesses going into 2010 and 2011.

Thank you very much.

The next question is from the line of Steve Gambuzza from Longbow Capital.

Good morning.

Good morning.

I wanted to ask about the seasonal progression in the business as you see it in 2009. If you look back over the past couple years, we have been in a fairly powerful immigration up cycle. There has been kind of a consistent seasonal pattern in the consolidated earnings. And with the second quarter being the strongest and the first quarter, second quarter, third quarter progression has been consistent. Do you see that changing this year relative to the last couple of years?

Without being specific, if you say that for '08, we were close to $2 billion and it was pretty much split not exactly close to $500 million a quarter but I don't see a big change in that. I mean, if the irrigation business is relatively slow in what is typically a very strong second quarter, it would move it a little bit but in the overall scheme of things I don't think it will move a lot.

Okay. But I guess from a top line--from an earnings standpoint, you've seen kind of over the last couple of years fairly substantial pickup in the second quarter versus the first quarter relatively flat in the third quarter versus the second quarter. That has been the pattern.

Well, the leverage in the irrigation business has very much helped the second quarter and if that doesn't happen this year you'll maybe see a damping there.

So, we could see a different pattern this year?

Yes, depending on what happens in the irrigation business. The rest of the business, I don't think you'll see any change.

Not a lot of difference.

No.

Okay. In terms of, you mentioned inventories are a little bit higher than what you would like. Do you have kind of a working--it still seems like the business is growing, the portfolio overall is generally growing. Do you have kind of a working capital target for the year in terms of do you expect to pull cash out of working capital or do you think that it will continue to grow as your underlying businesses grow?

I think if, and we don't know that yet, but in the first quarter, we say we don't have increased revenue but we say for the year, we may have flat revenues, we will take working capital out and it will mainly come from the inventory side.

Okay. I know you haven't offered a full year revenue forecast as you did last year. Do you have any thoughts on--based on your current view of the markets as to where the full year, just order of magnitude may come out?

Many thoughts but no knowledge.

Okay. On the tax rate, could you tell me what that might be, what you would expect for the full year 2009?

Overall, I think probably 34% is a decent rate to use. That's kind of where we were in 2008. That depends, of course, on the mix of profitability on domestic an international and changes in tax rates and things like that. 34% is probably a decent number to use.

When you look at the performance of the utility business last year it really was a very impressive top line growth, even when you exclude the acquisition. And it was the organic growth you demonstrated in that business was a multiple of what your largest competitor was able to do. Do you have any thoughts on why that is, why you so outperformed them on the top line? And in terms of the fundability of your capacity, is it fair to say there are substantial, additional flexibility to continue to produce more towers if the demand is there?

Let me start with your last question. Yes, there's capacity and flexibility to produce more towers. So the first part of your question, without commenting on Thomas and Bett's business. We committed several years ago to expanded capacity in the utility business to a broader network of plants in North America as we expected, as a result of the '05 Energy Bill, that utilities would step up their investment in transmission and distribution. That proved to be correct.

Thank you very much and congratulations.

Thank you.

Next is from, again, the line of Arnie Ursaner from CJS.

I want to try and follow up on the irrigation side because that's where we get the most questions. You, I think, said that your operating margin might be similar to what you had in the fourth quarter in irrigation. Is that what you intended to say?

In the first quarter.

Because normally in the first quarter, you have a pick up in margin and in the second quarter, obviously margins are dramatically hard so I just want to be very clear. You're not suggesting the 9% type margin you showed in the fourth quarter is what we should expect for all of 2009, is that correct?

I can't tell you. It all depends on what volume we are getting in the irrigation business. As you know, it leverages very well when volume is there and it deleverages when volume is not there. So it all depends on the kind of volume we are going to see and we will get a good indication, I would say, a month, six weeks from now, as to how the spring is going to look but we don't know yet. And as you know, the fall we won't get a good feel for until you're getting well into the third quarter.

But in that same regard ,if I think about, you had 17% revenue growth. I assume some of that was volume in the quarter and yet --

There was no volume growth in the quarter in North America. There was some volume growth internationally.

Okay, but you also had a 400 basis point decline in margin year-over-year with volume growth, so what held your margin back that materially?

Deleverage in North American plants. And also some currency translation issues as the dollar strengthened towards the end of the year.

Okay. So can you again walk us through how you envision--maybe take it on a five or sixth month basis--how you envision irrigation business coming together? Looks like in hindsight, last year was unusually strong in irrigation in the noncritical winter months, the November, December, January, February period appear to be, with hindsight, last year was unusually strong. Can you walk us through, perhaps, the declines we are seeing so far? You mentioned we shouldn't see a very strong indication of the season for another several weeks. Can you walk us through--what are the things you are focusing on managing this business and how are you managing your inventories since you have to manufacture in anticipation of whatever final demand will be in a very short period?

Well, that's one of the reasons we have higher inventory in the irrigation business that we would like to have because as we purchased and prepared for this year, we expected a stronger year than we are seeing right now. So we will flex our production schedules to a great extent and to the extent we had to lower it, we are going to see deleverage. And again, right now the order flow we see on a daily basis does not tell us very much as to what the year's going to be because there's not a big urgency on the part of farmers to place orders right now. We will get a good feel for the second quarter in another six weeks. So when we talk to you in mid-April at the announcement of our first quarter results, we will probably be able to give you a pretty good indication as to how the current selling season will end but then all bets are off until we start the fall again and we will, of course, watch what happens with commodity prices during the summer, what happens with input costs. Input costs, in the form of fertilizers, skyrocketed last year and were slow in coming down with crude oil now, or energy at below $40 a barrel, we should see some declines in input costs and that will offset some of the pain from the dropping commodity prices. But, first of all, irrigation is only 25% of our business. It is a very important part of our business but it is the business that's most difficult to predict and in this case, we have been in the business for 60 years and we will react fast to what the market will tell us. Sometimes we will be right in our predictions, sometimes we will not but we will react.

The utility market. You mentioned your backlog is at record levels. How far out does that backlog stretch? Is that a year's worth of backlog? Can you give us some feel for how far out this will carry us? In a sense, does it baseload your entire utility business for the year?

I would say the current size of the backlog will baseload our utility plants for a good portion of the year well beyond six months. And the second half of the year, who knows what's going to happen at that point of time, but we feel very good about the backlog and the activity levels we see in the utility business still today.

Arnie, I think another thing to keep in mind, is you say backlog at the plants as we see the business today, but we can flex our capacity in the ESS group both North America and China if we see backlogs going even higher in the utility business so it's not a fixed capacity here, we are just talking relative to where we are today.

Shifting gears a little to the highway bill. Obviously, we are all counting on a sizeable highway bill being put into place. Remind us again what percent of your revenues you believe are tied to highway construction in North America and have youp, in fact, seen some deferrals as people are waiting for the next bill to come in?

I think about 15% of total Valmont revenues. And I think, people don't say we are not going to place an order right now because we are waiting to see how the stimulus package comes out but our impression is there are some wait and see situations in that part of the business and it is too early to say what will happen as a result of the stimulus bill but not only do I think we will benefit from whatever money that's specifically allocated to infrastructure development, I also think we will benefit from the billions of dollars that will go to help the states get more of a balanced budget because as you remember, states have to match federal dollars, and if they don't have anything to match it with, that's another problem. So I think we are going to benefit not only from what's directly earmarked for infrastructure but also what's earmarked to help the states that have the biggest budget deficits.

I think the capital spending--your capital spending is exceeding your D&A. It did last year. And your preliminary view of Cap-Ex would that it would again this year, but historically, your Cap-Ex has been much more in line with D&A. Given the capacity you've already built with China and other places, where is this incremental capacity going and give us a little better feel why it is exceeding your D&A by more than a rounding error?

When you look at the maintenance capital, that will probably be at the level we have seen over time. We do have some sizeable capital investment plans for Europe and those are some of those that we are currently reviewing in view of the general economic weakness that we see not only worldwide, but also in Europe.

What segments would they be for?

Poles.

Okay. Thank you.

(Operator Instructions). Your next question comes again from the line of Brent Thielman of D.A. Davidson.

Just a couple last-minute items. Just, Mogens, just wanted to get your perspective on how lower fuel prices might be impacting your business, if at all? And then also, if you have any sense of where you see your steel costs going short term?

I think the steel costs are coming down quite a bit and they may stay at the levels they are now for a while because I think they reflect the general economic environment but also, remember that steel companies are taking a lot of capacity out and accelerating maintenance activities, so this is a more coordinated steel industry we are dealing with than we used to five or ten years ago. When it comes to how lower fuel prices will benefit our business, that's a tough one. I don't think I can give you an answer that would be very meaningful.

Okay. Thank you.

Your next question is from the line of Bob Franklin of Prudential Financial.

Did you or could you provide cash flow operations for the year?

Cash flow for the year is $52.6 million.

$52.6 million. And your Cap-Ex was $50.8 million?

$50.8 million. $50.9 million. Something like that. Yes.

So pure free cash flow was about break even, then?

Yes.

Okay. Thanks.

There are no further questions in queue. I would now like to turn the call back over to Mr. Jeff Laudin.

Thank you. This concludes our call. We thank you for joining us today. This message will be available for playback on the Internet or by phone for the next week. We look forward to speaking to you again next quarter and at this time Barbara will read our forward-looking statements.

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 perception 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 actual financial results and could cause them to differ. 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 and economic 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 statements 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. This does conclude today's conference. You may now disconnect.