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Valmont Industries, Inc. (NYSE:VMI)

Q4 2008 Earnings Call Transcript

February 18, 2009 9:00 am ET

Executives

Jeff Laudin – Manager, IR

Mogens Bay – Chairman & CEO

Mark Jaksich – VP & Corporate Controller

Analysts

Arnie Ursaner – CJS

Brent Thielman – D.A. Davidson

Ned Borland – Next Generation Equity

Bob Franklin – Prudential Financial

Isa Salarenta [ph] – Ice Capital Global [ph]

Jon Braatz – Kansas City Capital

Steve Gambuzza – Longbow Capital

Operator

Good morning, and welcome to the Valmont Industries Fourth Quarter 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 speakers' 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.

Jeff Laudin

Thank you, Barbara and welcome to the Valmont Industries fourth quarter 2008 earnings conference call. With me today are 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.

Mogens Bay

Thank you, Jeff, and good morning everyone, and 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 increase 32% and net earnings increase 23% and a 28% increase in sales. Fourth quarter Utility Support Structures segment results were very strong with revenues up 63% and operating income increasing 69%. The 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 Utilities Support Structures 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 leverage 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 investments 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 Engineered Support Structures segment, sales increased 34% to $230 million; operating income decreased 12% to $11.8 million. Segment profitability was adversely impacted by a change in mix with more inner company sales of large force to the Utility Support Structures segment. Another fact that had a negative impact of profitability was reduced factory performance in a couple of occasions. Additionally, we have various contracts, partially funded by the federal government at fixed prices that do not allow renegotiations to recover higher input cost such as steel.

In the North American lighting and traffic market, sales were slightly higher, as expected our commercial sales were lower. The weak economy impacts the need for new lighting due to reduced real estate development for commercial construction, housing and shopping centers.

In Europe, sales in most markets improved, say for France, where weakening economy led to a decline in sales. In our Specialty Structures 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 continued build-up of their wireless communication network.

Sales of utility structures increased in China as additions to generating capacity with prior investments in utility structure for transmission. Our new power 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.

In the Irrigation segment sales were 18% higher at a $121.8 million. The Irrigation segment operating income decreased 16.5% to $11.6 million and was 9.5% of sales. Low effects for utilization in North America and the negative effect of the stronger U.S. dollar resulted in lower profitability.

A stronger dollar makes us less competitive in a number of export markets and pressures margins as we often compete to local competitors. Increased sales in North America were largely a result of higher pricing to recover inflation and material cost. Unit volume sales in North America fell as the farmer reacted to a late harvest, declining crop prices and the prospects of higher input costs for the upcoming growing seasons 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 $32.3 million were 4% lower than last year, largely as a result of reduced pricing due to lower zinc cost. Volumes were higher due to better industrial demand and higher volumes in 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 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 earlier in the year. We also faced some internal challenges with productivity issues at two of our pole plants and absorb startup expenses for new capacity added in North America and China.

Fluctuations in the price of the U.S. dollar and widening liquidity prices in the global 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 used 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 leaves 16% compared to 14% in 2007.

Turning now to the drivers of our business results, the North American utility market was strong as utility has continued to invest in upgrading the electrical transmission grid. We ended the year with record backlog that give us a good start to 2009. In the Engineered Support Structures segment, global sales increased largely due to price increases to recover higher steel cost 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 North American specialty structures operations. This was to a great extent offset by diminished productivity in a couple of our North American pole plants, startup expenses and capacity addition 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 water 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 base load many of our coatings locations with internal products along with better industrial demand led to the sales increase. Operating income improved due to manufacturing levels on higher volume and lower input cost.

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 at pole manufacturer headquartered in British Columbia strengthens our position in the important Canadian economy and the Northwestern portion of the U.S.

PennSummit, the structures manufacturer in Hazelton, Pennsylvania improves our precision in the utility markets adding expanded coverage in the Northeastern part of the U.S.

Site Pro, our 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'll continue to pursue acquisition opportunities that fit into our existing portfolio.

Turning to other financial measures, you would 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 returns are in 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 were $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 plusses 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 mix and factory utilization. We'll continue to update our outlook on a quarterly basis throughout the year.

Valmont has many characteristics we believe that enable us to better weather cyclical nature of our markets. We have the unique capability to allocate capacity to the markets that have the greatest opportunity. In the current environment this allows us to utilize our large pole capacity in the Engineered Support Structures segment in North America and to some extent in China to provide added capacity to the Utility Support Structures segment, without any further capital or labor investment.

Our balance sheet is comfortably leveraged with long-term debt as a percent of invested capital at 31.7%. With the $280 million five year revolving line of credit we recently put in place, we have access to additional borrowing 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 try to maximize our results in whatever economic environment we face. One thing is certain the global drivers of all businesses have not changed. The world must be fed, water resources must be protected and infrastructure must be upgraded and expanded. This includes the prepared portion of our remarks and I'd like to take your questions.

Question-and-Answer Session

Operator

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

Arnie Ursaner – CJS

Hi, good morning.

Mogens Bay

Good morning.

Arnie Ursaner – CJS

My first question relates to the Engineered Support Structures Segment margin. I've gone back five years and you've been no where near the five and half level in margin anywhere in that timeframe except for one quarter where still 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 fix and so we can get a better feel for what maybe normalized margins would have been X these items?

Mogens Bay

Well, in general, if we start with the internal issues we've 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 client support. And important portion of may be 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 Engineered Structure segment to produce products for utility and that is transferred at margins that maybe just a little better than breakeven. So those are the two major elements. As the North American structural businesses overtime will strengthen again, they will get better margins from utilizing their plants more than sales and hopefully the fixes we are putting in place to address some of the operational issues will also help them improve the margins.

Arnie Ursaner – CJS

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

Mogens Bay

We're not giving specific numbers; my feel would be that the operational improvements we're going to see internally in the North American structural businesses probably would have a bigger impact than the inner company sales to 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.

Arnie Ursaner – CJS

Okay. 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 I guess related to assets in your pension fund, but the question –

Mogens Bay

No, deferred compensation plan –

Arnie Ursaner – CJS

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

Mark Jaksich

Yes, Arnie, let me address the –

Mogens Bay

This is Mark Jaksich.

Mark Jaksich

Right. The deferred compensation plan; in the long term assets and 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 amount 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’s about $2.5 million. Now there is a corresponding reduction in the SG&A that goes to 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 corporate expense is the valuation of long-term incentives; that was in the neighborhood of around $5 million and then what balances rest of that out is miscellaneous year-end clean up items and cleaning up accruals and self-insurance and stuff like that.

Mogens Bay

Hello?

Arnie Ursaner – CJS

Yes, can you hear me still?

Mogens Bay

Now we can.

Arnie Ursaner – CJS

Okay. It sounds like you were buying steel at relatively high prices going into Q4 relative to what you've embedded in your cost structure when you gave the prices to your customers. How much more inventory – remind us of your inventory returns on some of your businesses and how quickly we can reverse this problem and have your inventory more in line with current costs in the market?

Mark Jaksich

Well, historically, Arnie, this is Mark again. Historically, our turns on a company basis are somewhere in the neighborhood of five turns based on cost of sales. From our estimation, we're 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, in to a large extent, that inventory is covered by existing orders and the same thing goes to a certain extent in the Engineered Support Structure side. And so while, yes we do have some inventory on hand at higher prices at this point in time, decent amount of that is covered by existing orders in the backlog or stuff that's going through the system at this time.

Arnie Ursaner – CJS

I have one last real tiny question. 3G licenses in China were awarded at year-end. Obviously, you're only reporting on Q4, but post the year end, have you seen a pickup in your wireless tower business in China related to 3G?

Mogens Bay

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 get back to you on that.

Arnie Ursaner – CJS

Great. I'll jump back in the queue. Thank you.

Operator

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

Brent Thielman – D.A. Davidson

Good morning. Congratulations on the quarter.

Mogens Bay

Thank you.

Brent Thielman – D.A. Davidson

On the Utilities Support Structures business, you obviously saw a noticeable uptick in margins in the Q4. Should we anticipate those returns back in sort of lower double digit levels or sort of mid-teens margins sustainable in that business?

Mogens Bay

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

Brent Thielman – D.A. Davidson

Okay. And 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? I mean, particularly maybe some exposure to wind related projects just given some concerns out there and delays or cancellations or constructions of new farms?

Mark Jaksich

Wind related …

Mogens Bay

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's 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 there are sometime in the future 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 that levels we have seen before, liquidity has to be available.

Brent Thielman – D.A. Davidson

Sure.

Mogens Bay

And I can't predict when that's going to happen.

Brent Thielman – D.A. Davidson

Okay. And 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?

Mogens Bay

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 pressure. I think there has been pretty good pricing discipline.

Brent Thielman – D.A. Davidson

Okay. Thanks very much.

Mogens Bay

You're welcome.

Operator

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

Ned Borland – 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 coating activity at the dealer level and what you guys are seeing?

Mogens Bay

Well, currently, we are also seeing a significant reduction in order flow but I think one of the reasons for that is that there's 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 timeframe 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 farmers' 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 have learned from 30 years in our irrigation business is that I can't predict it. I can predict it long-term, but I can't predict it short term. But 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.

Ned Borland – Next Generation Equity

Okay. Thank you.

Operator

Your next question comes from Bob Franklin of Prudential Financial.

Bob Franklin – Prudential Financial

Hi. Thank you. First, I didn't catch the CapEx number that you gave in your prepared comments?

Mogens Bay

I think it will be about the same level. We are planning about the same level from our last year which was about $50.8 million.

Bob Franklin – Prudential Financial

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

Mark Jaksich

It's all revolver at this point in time.

Bob Franklin – Prudential Financial

Okay. So your term debt is gone?

Mark Jaksich

Term debt is gone.

Bob Franklin – Prudential Financial

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

Mark Jaksich

We have about $100 million –

Mogens Bay

$169 million.

Mark Jaksich

$169 million, yes.

Bob Franklin – Prudential Financial

Okay. And can I just do simple math for the availability, take that from $280 million or is there something else in there?

Mogens Bay

Availability.

Mark Jaksich

Availability. Yes, over $100 million.

Mogens Bay

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

Bob Franklin – Prudential Financial

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

Mogens Bay

Yes.

Bob Franklin – Prudential Financial

Okay.

Mogens Bay

But also, if we find opportunities to acquire in this environment (inaudible).

Bob Franklin – Prudential Financial

Understood. Understood. And how about covenant with the revolver?

Mark Jaksich

There's only two covenants, there's 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.

Bob Franklin – Prudential Financial

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

Mark Jaksich

3.75.

Bob Franklin – Prudential Financial

3.75 times.

Mark Jaksich

EBITDA.

Bob Franklin – Prudential Financial

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

Mark Jaksich

No, through the life of the revolver.

Bob Franklin – Prudential Financial

Okay. And coverage?

Mark Jaksich

2.5.

Mogens Bay

2.5, yes.

Bob Franklin – Prudential Financial

And this matures in 2013. What month in 2013?

Mark Jaksich

2013 and I think probably September or October.

Bob Franklin – Prudential Financial

Okay. You can tell them from the fixed income side.

Mogens Bay

Yes.

Bob Franklin – Prudential Financial

Alright. Thanks very much.

Operator

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

Isa Salarenta – Ice Capital Global

Hello, guys.

Mogens Bay

Hello, there.

Isa Salarenta – Ice Capital Global

And 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?

Mogens Bay

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 has announced also a stimulus plan and that includes a lot of infrastructure spending. And in general, unless the global economy deteriorates much further, I am pretty optimistic that our China operations will deliver yet another record year.

Isa Salarenta – Ice Capital Global

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

Mogens Bay

Thank you.

Operator

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

Jon Braatz – Kansas City Capital

Good morning, gentlemen. Mogens, in the fourth quarter, your irrigation sales were up nicely and margins were off considerably. As we head into fiscal – and head into this year, obviously it looks like volumes will be off from last year's levels. What are you doing – 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?

Mogens Bay

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. So 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 utility 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.

Jon Braatz – Kansas City Capital

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

Mogens Bay

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.

Jon Braatz – Kansas City Capital

Okay. Okay. Secondly, I believe the big Texas wind project is ready for construction. Now I know it's going to last, the construction might last three years, four years, five years, or whatever. But there are 4,000 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?

Mogens Bay

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 TXU, to a joint venture between mid-American and AEP and it was to the tune of at least $10 billion.

Jon Braatz – Kansas City Capital

Right.

Mogens Bay

And none of these contracts have been let yet. Now, 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 U.S. to discontinue investing.

Jon Braatz – Kansas City Capital

Right. Any thoughts as to the time table of some of these contracts and when they might be led?

Mogens Bay

Well, there's some pressure on it and some of these contracts should be led this year.

Jon Braatz – Kansas City Capital

Okay.

Mogens Bay

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

Jon Braatz – Kansas City Capital

Sure. Okay. Thank you very much, Mogens.

Mogens Bay

Thanks.

Operator

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

Steve Gambuzza – Longbow Capital

Good morning.

Mogens Bay

Good morning.

Steve Gambuzza – Longbow Capital

Wanted to ask about kind of the seasonal progression in the business as you see it in 2009. If you look back over the past couple of years, we have been in a fairly powerful irrigation up cycle. There has been kind of a consistent seasonal pattern in the consolidated earnings. And with Q2 being the strongest – the kind of Q1, Q2, Q3 progression has been relatively consistent. I'm just wondering do you see that changing this year relative to kind of the last couple of years?

Mogens Bay

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 in 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 the 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.

Steve Gambuzza – Longbow Capital

Okay. But I guess from a top line standpoint – from an earnings standpoint, you've seen kind of over the last couple of years a fairly substantial pickup in Q2 versus Q1, relatively flat in Q3 versus Q2. That has been the pattern.

Mogens Bay

Well, the leverage in the irrigation business has very much helped Q2, and if that doesn't happen this year you're going to maybe see a damping there.

Steve Gambuzza – Longbow Capital

Okay. So we could see a different pattern this year?

Mogens Bay

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

Mark Jaksich

Not a lot of difference.

Mogens Bay

No.

Steve Gambuzza – Longbow Capital

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?

Mogens Bay

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

Steve Gambuzza – Longbow Capital

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 but might come out?

Mogens Bay

Many thoughts, but no knowledge.

Steve Gambuzza – Longbow Capital

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

Mark Jaksich

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

Steve Gambuzza – Longbow Capital

And 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. And do you have any thoughts on why that is, why you so outperformed them on the top line? And in terms of the fungibility of your capacity, is it fair to say there is substantial, additional flexibility to continue to produce more towers if the demand is there?

Mogens Bay

Let me start with your last question. Yes, there's capacity and flexibility to produce more towers. The first part of your question, without commenting on Thomas & Betts’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.

Steve Gambuzza – Longbow Capital

Thank you very much and congratulations.

Mogens Bay

Thank you.

Operator

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

Arnie Ursaner – CJS

I want to try to follow-up on the irrigation side because that's where we get the most questions. You, I think, said, Mogens, if I heard you right, that your operating margin might be similar to what you had in Q4 in irrigation. Is that what you intended to say?

Mogens Bay

In the first quarter.

Arnie Ursaner – CJS

Because normally in Q1, you have a pick up in margin and Q2, obviously margins are dramatically hard so I just want to be very clear. You're not suggesting the 9% type margin you showed in Q4 is what we should expect for all of 2009, is that correct?

Mogens Bay

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.

Arnie Ursaner – CJS

Alright. 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…

Mogens Bay

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

Arnie Ursaner – CJS

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

Mogens Bay

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

Arnie Ursaner – CJS

Okay. So can you again walk us through how you envision maybe take it on a five month or six month basis, how you envision the irrigation piece coming together? Obviously, it looks with hindsight, like last year was unusually strong in irrigation in the noncritical winter months, in the November, December, January period appear to be, with hindsight, last year was unusually strong. Can you walk us through perhaps the kind of 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?

Mogens Bay

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 is going to be because there is 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'll 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 like 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’s a very important part of our business, but its the business that's the 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'll be right in our predictions, sometimes we will not but we will react.

Arnie Ursaner – CJS

I think 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? Or can you give us some feel for how far out this will carry us in a sense, does it base load your entire utility business for the year?

Mogens Bay

I would say the current size of the backlog will base load our utility plants for a good portion of the year well beyond six months.

Arnie Ursaner – CJS

Okay.

Mogens Bay

And 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.

Mark Jaksich

And Arnie, I think another thing to keep in mind is, 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.

Arnie Ursaner – CJS

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 you in fact seen some deferrals as people are waiting for the next bill to come in?

Mogens Bay

I think about 15% of total Valmont revenues about 15%. 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 that there are some wait and see situations also on that part of the business and its 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.

Arnie Ursaner – CJS

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

Mogens Bay

Well, when you look at the maintenance capital et cetera, that's probably going be at about the level we've 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.

Arnie Ursaner – CJS

And what segments would they be for?

Mogens Bay

Poles.

Arnie Ursaner – CJS

Okay. Thank you.

Operator

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

Brent Thielman – D.A. Davidson

Hi. Just a couple last minute items. Just, Mogens, 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?

Mogens Bay

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 et cetera et cetera, so this is a more coordinated steel industry we are dealing with than we used to five years 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.

Brent Thielman – D.A. Davidson

That's okay. Thank you.

Operator

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

Bob Franklin – Prudential Financial

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

Mark Jaksich

The operational cash flow for the year is $52.6 million.

Bob Franklin – Prudential Financial

$52.6 million and your CapEx was $50.8?

Mark Jaksich

Yes, $50.8 million – $50.9 million, something like that.

Bob Franklin – Prudential Financial

Okay. So pure free cash flow was about breakeven, then?

Mark Jaksich

Yes.

Bob Franklin – Prudential Financial

Okay. Thanks.

Operator

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

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.

Operator

Included in this discussion are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made in light of experience in the industry's in which Valmont operates as well as management's perception of historical trends, current conditions, expected future developments and other factors that believe to be appropriate under the circumstances.

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

These factors include, among other things, risk factors described from time to time in Valmont's reports to the Securities and Exchange Commission as well as future 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.

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