Valmont Industries Inc (VMI) 2014 Q1 法說會逐字稿

Good morning. My name is Jodi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valmont Industries Incorporated first-quarter earnings call.

(Operator Instructions)

Thank you. I would now like to turn over today's conference to Mr. Jeff Laudin, Manager, Investor Relations. Please go ahead, sir.

Thank you Jodi. Welcome to the Valmont Industries first-quarter 2014 earnings conference call. With me today are Mogens Bay, Chairman and Chief Executive Officer; and Mark Jaksich, Executive Vice President and Chief Financial Officer.

Before we begin, please note this conference call is subject to our disclosure on forward-looking statements which applies to today's discussion 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. We'd now like to turn the floor over to our Chairman and Chief Executive Officer, Mogens Bay.

Thank you, Jeff. Good morning, everyone, and thank you for joining us. I trust that you have all read the press release.

We experienced some softness during the first quarter, but we still achieved the second-highest first-quarter result in the Company's history. We had a very tough comparison as last year's first quarter saw earnings up 48% from the previous year as a result of exceptional performance in the irrigation and utility segments. These two businesses still delivered a strong quality of earnings during the current quarter, but not to the record level we saw a year ago.

In the irrigation segment, the first quarter unfolded in a more typical manner, as we did not have the record backlog going into the quarter that we experienced a year ago. Commodity prices have dropped sharply, leading to expected lower net farm income in North America, and that in turn probably put a damper on farmers' enthusiasm for equipment purchases.

In our international markets, we saw continued growth in both revenue and earnings. This growth was broad-based geographically. International markets in many parts of the world are in their development phase and often more sensitive to policy decisions than to commodity price fluctuations as compared to the North American markets.

The quality of earnings in our irrigation segment at 20% operating income to sales was very satisfactory. We have seen good pricing discipline in the US market, and retaining that pricing discipline is going to be important to deliver a good quality of earnings for the remainder of the year in a softer market environment. Recent political tension in potentially large future irrigation markets, Russia and the Ukraine, will probably lead to a pullback in our level of activity in those two countries; however, we do not expect it to have a material negative impact on our international irrigation sales and results in the current year.

Our utilities support structure segment had a challenging first quarter. As communicated to you in our February call, we experienced a more competitive pricing environment as new capacity in this industry is catching up with demand. Furthermore, we were faced with very severe winter weather in this country, and our project deliveries were not as favorably scheduled as we had anticipated.

In addition, our international utilities support structures business had a meaningful contribution to earnings in the first quarter of 2013 which did not repeat this year. At this stage, this business is nearly completely project driven, and the timing of projects are difficult to predict.

We continue to be positive on the utility market, both short and long-term, and our discussions with major customers in North America continue to confirm significant activity levels expected in both 2015 and 2016. The US has a clearly defined need to continue to improve the reliability of our transmission grid, and the current regulatory environment encourages utility investments through rules allowing attractive returns as well as penalties tied to reliability.

International opportunities over time will undoubtedly support growth in this segment. But market penetration outside the US and the adaptation of manifolds as the preferred structure for transmission lines will require much work and much time. We are putting resources towards this effort, but the benefits may not be immediate.

Our engineered infrastructure product segment finalized the acquisition of Valmont-SM in early March. This company is a leader in the manufacture of complex engineered steel structures serving many parts of the energy industry. We expect this acquisition to provide a platform for further penetration into markets attractive to us. The first quarter is always the weakest quarter for the engineered infrastructure product segment, but with the help of Valmont-SM, this segment saw improved performance both in regards to revenue and profitability.

The Australian market is an important part of the engineered infrastructure product segment. Short-term, we have been challenged with a weakening Australian currency and a weakening mining industry. We have seen some reports that the mining industry may have bottomed out, but until this market improves, we will focus on protecting profitability and maintaining our market position through productivity improvements and cost controls. As it relates to currency rates, a weaker Australian dollar will over time improve the competitiveness of local manufacturing and should benefit our facilities in that country.

In the coatings segment, profitability increased slightly in North America and was in line with last year in the Asia-Pacific region. The reduction in revenue resulted mainly from the slowdown in the Australian mining industry.

Turning to other financial measures, depreciation and amortization for the quarter was $20 million, capital expenditures were $23 million, and the net outlay of cash to purchase 90% of Valmont-SM was approximately $120 million. For 2014, we expect depreciation and amortization of about $80 million and capital spending of approximately $100 million. Our quarter-ending cash balance was $488 million.

Now that Delta EMD is reported as an investment in our balance sheet, the value will be adjusted quarterly to reflect the share price on the Johannesburg Stock Exchange. This quarter, the change in the quoted market value of our Delta EMD shares resulted in a $0.13 reduction in earnings per share.

The Board of Directors of Delta EMD has weighed various options for the business and has announced their intention to liquidate the company's assets subject to shareholder approval. We expect the final cash realized from the sale of assets to exceed the current value on our balance sheet.

Now turning to the remainder of the year. For the irrigation business, we will have another tough comparison in the second quarter. Last year, the strong momentum in the first quarter carried through the second quarter, but this year, we expect a much more normal selling season with declining activity in North America as we go through the quarter. This likely will result in substantially lower volume and result in deleverage during the second quarter. In the international markets, we expect favorable comparisons for the quarter.

For the second half of the year, the comparison should become easier, and we currently see irrigation segment revenue and profitability more in line with 2013. There's been some improvement in commodity prices lately, and many parts of the country are experiencing lack of moisture, but as a word of caution, predicting the next irrigation selling season this early in the year is difficult.

In the utilities support structure segment, we expect higher volumes for the year compared to 2013, with flat revenues as a result of more difficult pricing environment and lower operating income. To offset the effects of the more challenging pricing environment, we are increasing our focus on productivity improvements and cost containment. We currently expect this segment to deliver operating income as a percentage of sales towards the lower end of our target range of 15% to 20%.

In the engineered infrastructure product segment, we expect to continue to see positive comparisons for the remainder of the year. And in our coatings businesses, we expect revenue and profitability in line with last year's results.

In summary, our current outlook for the Company is for diluted earnings per share to be in the range of $10 to $10.50 for 2014. And we will now take your questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of Nathan Jones with Stifel.

Good morning, Mogens, Mark, Jeff.

Good morning, Nathan.

Just on the Utility margins I guess is where I'd like to focus. At the last quarter, you said for the first quarter, you did expect increased revenue on lower profitability. Revenue was down 10%, and profitability was obviously down.

It looks like the majority of that came from price with probably some impact from lower international revenue. Can you talk about what changed later in the quarter that, that result came in lower than you were expecting?

Well I would say, first of all, international revenue, even though international on an annual basis is not a significant part of the overall segment revenue, in the first quarter of last year it was. And this year, international revenue dropped dramatically because of lack of project, so that's part of the explanation. Also North America we had a couple projects that we expected to ship in the first quarter that moved out to the second quarter.

And did you see the pricing deteriorate as the quarter went on, and are you expecting pricing to be more challenging going forward than it was in the first quarter? Or have we found any equilibrium point? Or what's your outlook for margins there?

Well, I would say that from a margin standpoint, I think we're going to see operating margin as a percentage of sales to be in the lower end of the range of 15% to 20%. As we talked about before, depending on where we are in the cycle, the profitability will move.

Actually in those kind of businesses, a 15% operating margin is a pretty attractive margin and a good return on invested capital, but we have over the last couple of years seen those margins in certain quarters approach 20%. I don't think we are going to see that this year, but I also don't think we will for the year drop below 15%.

What do you think the risk is to that? In the 2010 downturn in that business, I know that the revenue decline was a lot more severe there. We got down to kind of low double-digit -- what do you think the risk is that the pricing, the rationality in the market deteriorates and we could get down to that level? How would you handicap that?

I wish I could. Let me start with what we do control. Over the last 10 years, that business has grown from about $100 million to close to $1 billion, and therefore by far the most efforts in managing that business has gone into adding capacity, building the organization to be able to serve our customers well, and to retain or gain market share.

In the current environment, we have to switch our focus just like we did in Engineered Infrastructure Products a few years ago when those businesses faced some headwinds. And we are going to focus more on making the capacity we have more productive. So that's going to offset some of whatever pricing challenges there are going to be.

The extent of the pricing challenge is actually obviously out of our hands. Since we expect that market to continue to be a strong market over the next few years, there really should be no reason to have more downward pressure in the pricing sense, but we are only one part of that equation.

Thanks very much.

Your next question comes from the line of Julian Mitchell from Credit Suisse.

Hi guys, thanks. It's actually Charlie for Julian. I was just wondering what gave you guys confidence that the back half of the year for Irrigation would be flat both in terms of sales and profitability versus last year. I just didn't know how much visibility you have in the book today.

As we have said many times, there's not a lot of visibility for the second half of the year. But last year second half, we saw a return to more of a normal selling season. The euphoria that was driven by the drought conditions the year before that, in 2012, had abated, and we saw more normal weather pattern. We have already experienced some of the decline in commodity prices.

When I go back a year further, and look at the second half of 2012, that's about in line with 2013 and what our expectations are currently for 2014. So the reason I would maybe turn around saying we don't have much reason to predict that it should be any lower or any higher. But using the smell test to it, we feel that if commodity prices stay where they are now, there's a little more optimism in the market.

If growing conditions, which are not ideal so far because of dry areas in many parts of the country, there should be a good platform for business in the second half. But as I said in my prepared remarks, it's very difficult at this early in the year to predict the second half, but currently we feel pretty good about it.

And one follow-up. Some of you guys closed this deal in March, congratulations on that. Just didn't know if you had any update on whether or not we should expect more deals and whether or not the guidance would have been lower without the deal.

Well, the guidance would have been lower without the deal because we expect the deal to add to earnings this year. And as I've said before, we have a number of opportunities we pursue, but first of all, you can't predict when companies are available that we would like to acquire.

And secondly, you can't predict if we can acquire at a valuation that will allow us to beat out cost of capital. And we have to make sure that we don't let debt capacity or cash on our balance sheet soften our stand when it comes to returns.

Thanks.

Your next question comes from the line of Arnie Ursaner from CJS Securities.

Hi good morning. My first question, just a clarification, Mogens, when you provide EPS guidance, you're doing it on GAAP, not adjusted. Just to be clear is that correct?

For this year, we do it on GAAP. The range I gave you was on GAAP

Right, so on an adjusted basis, it would be higher than the GAAP?

For 2014?

Yes.

I'm going to have Mark answer that question for adjustments.

No, if I understand the question.

Yes. In a way, the $0.13 we took an EMD -- yes, that is outside GAAP. So in a way from operations, you can add that $0.13.

That's what I was trying to clarify, thank you. My next question relates to the acquisition of DS SM which you bought in the quarter. At the time you bought it, you indicated it had annual revenue of about $190 million, and you thought the margins would be consistent with the EIP piece.

If I'm correct in my math, it looks like year-over-year it probably grew at least 13%, and the margin was closer to 11%. Is that the way we should think about that business for the upcoming year?

This is the way we should think about it. First of all, Valmont-SM is also very project oriented. It's big structures they sell, and they have very big customers.

And the month of March turned out to be a month of good shipments, so I would not automatically take those results and multiply them by 12. I would still say that the revenue is going to be in the $200 million range, and I think that our operating income should be around 10%.

Okay, so you are not expecting significant growth in that business this year?

Not currently.

Okay. And my final question goes back to pricing and comments related to Utility. And I've been involved with you guys for years, but I'm not sure I understand what you're really trying to tell us on price.

It seems as though pricing has gotten more competitive because people are trying to fill in the pipeline on a shorter-term basis, yet my perception of that business is most of the orders you might book in Q1 are things that are going to ship two or three quarters later. If trends were impacted in Q1 by weather and some softness, why would that be leading to a lot of pricing pressure? I'm not sure I fully I understand that dynamic.

I think you're correct with the visibility on large projects. There's a lot of big business on much smaller projects that takes place all the time, and it is that part of the business that has seen more pricing pressure. That pricing pressure you will see the effect of much sooner than you will in the larger projects we have in our backlog.

Would it be were fair to say that most of what you booked in Q1 has been shipped or will be shipped in Q2, or is this likely to linger as a margin issue into Q3 and Q4?

It's likely to linger in the sense that on the bid business, a lot of what we booked in first quarter probably shipped in the first quarter. Some will ship in the second quarter, but there's been no indication that, that pricing environment has changed in the second quarter for the bid business in this quarter. So unless that situation changes, we expect the quality of earnings in the segment to be as I talked about.

Thank you very much.

Your next question comes from the line of Ryan Connors from Janney Montgomery Scott.

Great, thank you. My question is on this issue of pricing in USS. I wanted to focus really on the capacity situation industry wide because my understanding of what you've laid out is that, that's really the problem here rather than volumes per se. And I guess my question is, obviously yourselves and others have been adding capacity until very recently. And in fact, we've got new capacity coming online today really, at least on a year-over-year basis. New capacity continuing to hit the market.

So my question is now that pricing is deteriorating, one would hope that any new capacity additions on the drawing boards by competitors have been or are going to be canceled and there's going to be an abrupt halt to any new capacity additions. If not, then this issue should be exacerbated going forward. So can you give us any perspective or color you have on how the pricing situation is impacting the mentality in terms of the marketplace and adding new capacity?

Well, I share your hope. But what happens is -- if you go back and look at what happened to that industry over the last now nearly 10 years, is very rapid growth, and you have seen a little bit of a herd mentality for people that have not been in this business wanting to get into the business and probably some over reaction.

We have been adding capacity. What we are doing this year is that now we are taking a lot of the outsourcing we had in previous years because we didn't have enough capacity, and we are now utilizing it in our own capacity, which is part of the cost reductions that I talked about that we are going to put in place and are putting in place to offset some of the pricing pressure.

So I would guess that whoever follows this industry now will probably take a breather when it comes to adding more capacity until we see how this market settles down over the next several years. Having said that though, we see no reason to expect the market in total to start shrinking.

When we talk to customers, there's lots of projects out there. The timing of them, exactly when they're going to happen is always a little uncertain, but what's on the drawing board is significant over the next few years.

Okay, that's helpful. And then the follow-up on pricing, although across the portfolio the Irrigation, Mogens, you mentioned that pricing will be key to how the remainder of the year plays out in terms of quality of earnings or margins and Irrigation. What's the -- what your outlook in your handicapping of that? I mean historically, when you do see lower volumes, you do see some degree of pricing pressure. So how do you handicap that playing out over the next say 6 to 18 months?

Well, so far we've seen good pricing pressure in general in North America. International, we have many more competitors, and therefore it's our pricing discipline in North America.

International markets, we have many more local competitors, and that moves around from region to region. But if the North American players will continue to stay disciplined as we have seen, then I think that the only deterioration in profitability. Quality of earnings will be directly tied to leverage -- deleverage as opposed to also having to deal with pricing at the same time.

Okay great. Well thanks for your time.

Your next question comes the line of Brent Thielman from D.A. Davidson.

Hey good morning.

Good morning.

One more on pricing, sorry, but for the large projects you're looking at into 2015 and 2016, maybe beyond, is there reason to think the competitive landscape looks more favorable for you there because there's a narrow list of suppliers that can bid on these particular projects?

Well, I would say in general, but I do not think it's going to change over the next year or so, but I would say in general there are fewer players that can provide the very large projects and have the capacity and flexibility to do that. And there are many more players that can participate in the much smaller projects.

I don't think that environment is going to change. So what we see today is probably what we will see for a while.

The work you're seeing today and this year, would you characterize these as smaller projects relative to what you're seeing over the next couple years?

No, I think the mix between smaller and larger projects may stay about the same. But it's the smaller projects that have more people able to participate and therefore could create a more difficult pricing environment.

Okay, and then just one more, switching gears to the Irrigation business. Obviously great rate numbers out of the international piece. Can you talk about some of your growth initiatives there in terms of international, what you're looking at? I think you added some capacity in South America, maybe some discussion there?

In general, we are very well covered geographically around the world in the markets, one, that are very developed. Markets like Brazil and South Africa and Australia and New Zealand. And then we are putting a lot of efforts to some of the emerging markets. I just came back from a meeting last week in Istanbul, where we had our global Irrigation managers all together. And it was nice to listen to them all talk about how the opportunities happened and how they are addressing them.

I would say over the last couple years, we have invested more in market development efforts around the world, and that is starting to pay off. The nice thing about the international business as opposed to North American business is that the drivers are so different around the world, whether it's local politics or local economic situations or local agricultural makeup.

So those markets don't fluctuate as much in the total as we see in North America, and as the international business continues to be a bigger, bigger portion of the overall Irrigation business, then the segment will probably have less cyclicality to it than we have seen in the past.

Okay, thank you.

Your next question comes from the line of Brian Drab, William Blair.

Good morning.

Good morning Brian.

First on the acquisition you made recently, I was wondering if you could talk a little bit more just about the strategic thinking behind that, give us a sense for what your presence has been in that region, in Denmark, in Scandinavia in general. Can you share capacity with some of your other business lines? Can you make some of your other products within that plant?

And then lastly, can you give us a sense for how that business has been growing for the last year or two?

That's a lot of questions in one. But I will take them one at a time.

I know, sorry if that's too many. Thanks.

We have not had any facilities in Northern Europe in the product lines that Valmont-SM is participating in. We like their manufacturing capabilities and their co-engineering capabilities with their big customers such as Seimens and others.

We like the fact that they are located right in the middle of the biggest growth area for offshore wind, and wind in Europe has a longer runway where we see what's happening because subsidies, et cetera, are in place for longer periods of time than we have seen in North America. So we like that participation particularly in offshore.

They have also dabbled in, but have had some good success in the Utility business, making significant Utility line in their home country. And we think that over time, we can leverage their capabilities as we continue to grow the international Utility business. And I also think that within energy in general, whether it's offshore drilling where they have projects for offshore wind, onshore wind, that we would find opportunities to maybe leverage some of their capabilities and product lines elsewhere in the world.

On your question as to how fast have they grown over the last few years, they have grown I would say double-digits over the last two or three years. We're impressed with the management group, they stayed. The top management will continue to own 10% of the company, so they completely tied their success to our success, and we like that.

Just to clarify, that double-digit growth annually or double-digit cumulatively over the last two or three years?

Annually.

Annually, thanks. And I guess just one more, if I may ask on the Coatings segment, it looks like revenues down just a little bit sequentially, but margins stepped down by 400 basis points I guess sequentially. How should we think about modeling that going forward? Are there any dynamics you can help us understand and the Coatings segment that could be putting pressure on margin?

No, I don't think in general. We have seen some pressure in Australia volume, particularly in the area where we serve the mining industry. And as we see good leverage when revenue improves, we see deleverage going the other way. So we've seen a little bit of that. So in general, the way you should look at the global Coatings business is they are probably going to continue to operate totally at around 20% operating income, which is very satisfactory.

Okay, thanks very much.

Your next question comes the line of David Rose from Wedbush Securities.

Good morning. I have a couple follow-up questions. I don't want to beat it to death on pricing, but can you be a little bit more clear, maybe help me understand on the two-way support structures side. Is the implication that the environment one, got more competitive from your comments in Q4 to today, and two, in your view is the market irrational or is it still rational?

Let me start with your last one. I mean, if you can deliver 15% operating income in these kind of businesses, it's not an irrational market. It's a market that has become a little more competitive. And it's not like prices are dropping in half or anything like that.

But if you have $1 billion business and prices drop 1%, that is $0.25 a share if you don't offset some of that with productivity improvements. So you can see significant improvements in profitability with very small movements in price. So I don't want to over blow the pricing issue except that small swings make big swings in the quality of earnings, even excluding or including what you can do to drive out costs or improve productivity.

Okay, that's helpful. And then if I could piggyback off of the assumptions from Q1 to Q2, given that this was a quarter where fixed costs were probably under absorbed, does that imply, all else being equal, that you should have increased absorption in Q2 and better margins in Q2, a step up from Q1 in that business?

I would expect margins at about the same level. I would expect revenues to increase in Q2, but I wouldn't expect any big impact from absorption.

Okay. And then if we could on the Irrigation side. One, were there any large products in Irrigation international that you'd like to call out that may have driven better-than-expected results?

No.

And then two, can you be more specific on what drove Irrigation margins? Were there particular actions taken, line reductions, furloughs, et cetera that may have helped improve productivity?

Well I would say that, having been as a company in the Irrigation business for 60-plus years, and it being a cyclical business, we react fast to changes in market conditions. So we throttle back on cost, then we throttle back on overtime. In the summertime, we have a number of employees that actually like to be back farming or hunting or doing other things. So we have been able to adjust the workforce to reflect current volume. And hopefully we will be able to do that during the summer too.

But these are businesses that are not only cyclical over time, but they are also seasonal. So I think our Irrigation people are pretty adept at adjusting employee level so we don't have a lot of unfavorable variances of having too many people around.

Okay, great. Thank you. I will get back in the queue.

Your next question comes the line of Kevin Bennett from Sterne Agee.

Hey guys, good morning.

Good morning.

Two quick questions, first on Irrigation. We saw pretty good increase in the first quarter in commodity prices. I'm wondering if you guys saw an improvement in sentiment given that uptick or if you guys feel better about the business for the second half. Maybe we actually could see a little bit higher than last year, or if that didn't really change given what happened with commodity prices.

Well, I would say start by saying we have not measured any material change in sentiment, but clearly when commodity prices start recovering a little bit, and if you have fairly dry growing conditions, if that continues to be the case, that will transfer into improved sentiment.

So we are not euphoric regarding the second half of this year, but we are also saying it could match the second half of last year. If you look within it, I would say maybe North America could still be on the weak side, but international should be on the strong side, and in totally, we think we will be about flat.

Got it, thanks for that. And then one quick question for Mark. Corporate expenses this quarter took a pretty big step down, the lowest in a while. I'm wondering if there's anything going on there and if that's a good run rate for the rest of the year, or if it's going to jump back up to that $18 million-ish level

The big drop in the first quarter corporate expense was incentives. And with our lower projected earnings for the year, you should expect to see incentives be quite a bit less than last year. And the other part of it is there were some discretionary expenses that were not done in the first quarter of this year.

So looking forward, it sort of depends on whether those expenses actually happened. That number, the $13.2 million I think is a little bit on the low side. It could be up a little bit in the next quarter, but it won't approach anywhere near the $18 million or whatever we were incurring last year.

Got it, that's helpful.

Your next question comes from the line of Jon Braatz from KS Capital.

Mogens, all my questions have been answered. Thank you very much.

Thank you.

Your next question comes from the line of [John Dunning] from BB&T Capital Markets.

Good morning. This is John in for Sean. Just a quick question on galvanizing. We've seen zinc pricing come up quite a bit this year in Q1. Do you guys have any concern about being able to pass on that pricing through?

Well, our Coatings business, this is the input cost. So we are pretty adept at passing on price increases to the marketplace. And as I said, North American profitability was up slightly compared to last year, so obviously they did a good job.

Okay great, thank you guys.

Jodi, are there any more questions in queue?

Yes sir, there are.

(Operator Instructions)

Your next question comes from the line of Nathan Jones from Stifel.

Hi again, guys. Just of couple follow-ups. If I could go back to Irrigation for a minute, I think probably a very, very good job on the margins in the first quarter there.

And I think that the deleverage given the shift in mix as well, which would be negative for margins, would actually imply that pricing didn't degrade at all in the first quarter. Is that a fair assumption, and in your opinion, can that dynamic hold in the market given these volume declines?

I think that's probably a fair assumption. And there are several players that have to determine whether it will hold.

So you are uncertain at this point would you say or confident that pricing will hold?

I have no reason to be either of the two

Okay, fair enough. And then on the acquisition with $200 million in revenue and 10% operating margins, I'm assuming that is a cash operating margin and that given all the purchase price accounting and stuff, that will be probably substantially lower this year. With your guidance being on a GAAP basis, can you give us a bit more color on what you're expecting from the GAAP accretion for that issue?

Yes, this is Mark. We don't have all the fair value assessments done on the acquisition. That's being worked on as we speak, and that's going to determine what the actual purchase accounting effects are going to be. But I would say it would be close to double-digit operating income for the year including the purchase price adjustments based on what we know today.

And then what are the cash margins?

I'm sorry -- cash margins?

Excluding the purchase price accounting?

It would be into the low double-digits.

Okay great, thank you.

Your next question comes from the line of Arnie Ursaner from CJS Securities.

Mogens, could you go back on the Utility piece on the international decline in project activity you highlighted and perhaps expand on that a little bit and maybe give us some better sense of the numbers involved?

Yes, and since usually we don't break out international, except I said in total, international is probably less than 10% of segment sales for the year. But I would say in this first quarter, it was -- the profitability in international compared to last year probably dropped at least $0.05 or $0.06 a share, the equivalent of $0.05 or $0.06 a share.

Okay. And I know Q1 is relatively unimportant, but just highlight again your exposure to China and the 4G network buildout we're seeing basically globally and how that's affecting your business?

Well, our exposure to China is not significant, but it's also not immaterial completely. And I would say that if you look back over our history in China, one of the strengths of our China activity has been in support of the wireless communication business. And we have seen an uptick in activity this year in China as result of 4G buildout in that country as well.

My final question is one I know you get asked a lot by more perhaps aggressive shareholders who look at your balance sheet and question the aggressiveness of your capital deployment. So maybe it's a multiple part question, but remind us again of your targeted view of capital structure, how you're evaluating additional acquisitions versus share buybacks again.

I may appreciate, in the past, share buybacks may not have made sense given the liquidity in your name, but that's drastically different today. And if you don't do anything, you're going to be in a net cash position which is completely inconsistent with your targeted goal in the past of 40% debt to capital. Help us reconcile those various issues.

You sound like you've already given the answer, in your opinion, but let me repeat where we are. First of all, our priorities for cash is organic growth, and then it is acquisitions that fit within our portfolio and our comfort areas.

We do have a strong balance sheet. We do have a lot of liquidity, and we all the time discuss with our Board kind of a capital allocation strategy, and we will do that again at the upcoming Board meeting. Now in the first quarter, we spent well over $100 million in acquisition. If we could do that every quarter and count on it, then it would be answer easy to answer your question.

But we are not -- we are very cognizant of the fact that if we don't see a prudent use of our balance sheet going forward, in the near term, we have an obligation to evaluate returning money to shareholders in the form of either dividends or stock buyback. And the way I look at stock buyback is how I would look at acquisition. It's a company we know better, and if we think that's a better acquisition than something else we are looking at, we wouldn't hesitate.

Okay again, thank you very much.

Your next question comes the line of David Rose from Wedbush Securities.

Sorry, a follow up question to the acquisition. Just to be clear, the $1.9 million operating income from DS SM, is that EBITDA or is that a GAAP basis, that's after amortization?

That's GAAP basis.

Your guidance for the remainder of the year of $10 to $10.50 is again a GAAP basis number that includes virtually everything, but if there isn't any adjustment for that accounting, that would change the guidance for the $10 to $10.50? If there's any purchase accounting adjustments?

I think that would be immaterial in relationship to the guidance, and if there's some one-time issues like we had with EMD shares in the first quarter, we will point that out.

Okay that's helpful. Thank you very much.

Your next question comes from the line of John Dunning from BB&T Capital Markets.

Hi guys, one quick follow-up question, more of a housekeeping item. The $2.4 million other expense was a pretty large delta compared to previous quarters. Just wanted to get a sense of kind of what's buried in there and whether any of that's going to continue on into future quarters?

Yes John, this is Mark. That movement consists basically of two things. First thing is core earnings on the assets that are in our deferred compensation plan. So since there's an offsetting liability on the balance sheet, there is a corresponding decrease in SG&A. So that particular item does not affect earnings before taxes. It's just a bookkeeping exercise we have to do for GAAP purposes.

The remainder of that difference is largely foreign exchange losses that we had on transactions. Those are basically categorized in two different ways. First of all is assets that are positions we've taken on the balance sheet, for instance putting foreign cash -- let's say under foreign operations but US dollars in cash to cover expected purchases in US dollars from a hedging standpoint.

And some of those cases, the dollars weakened against those currencies. And so since we don't get hedge accounting for it, that has to go through the P&L. So from an economic standpoint we're are hedging so we are not taking exposure. And that hit us in a couple currencies, most notably the Australian dollar and the Brazilian real to some extent.

The other part we're just unhedged or uncovered foreign-exchange balance sheet exposures due to exchange rate fluctuations. I would not expect that going forward to continue anywhere close to where we were in the first quarter. And we are taking some actions to mitigate some of those effects going forward.

Okay great, thanks for the help.

Thank you. There are no further questions at this time. I will turn it back over to Management for closing remarks.

Thank you, Jodi. This concludes our call, and 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, Jodi will read our forward-looking statement.

Including 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 comments are not guarantees of performance or results. They involve risk and uncertainties, some of which are beyond Valmont's control, and assumptions. Although Management believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements.

These factors include, among other things, risk factors described from time to time in Valmont's reports to the Securities and Exchange Commission, as well as future economic and market circumstances, industry conditions, Company performance and financial results, operating efficiencies, availability and price of raw materials, availability and market acceptance of new products, product pricing, domestic and international competitive environments, and actions and policy changes of domestic and foreign governments.

The Company cautions that any forward-looking statement included in this discussion is made as of the date of this discussion, and the Company does not undertake to update any forward-looking statement.

Thank you. That concludes today's conference call. You may now disconnect.