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Edited Transcript of VMI earnings conference call or presentation 23-Apr-20 1:00pm GMT

Q1 2020 Valmont Industries Inc Earnings Call

OMAHA May 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Valmont Industries Inc earnings conference call or presentation Thursday, April 23, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Avner M. Applbaum

Valmont Industries, Inc. - Executive VP & CFO

* Mark C. Jaksich

Valmont Group Pty Ltd - Director

* Renee L. Campbell

Valmont Industries, Inc. - VP of IR & Corporate Communications

* Stephen G. Kaniewski

Valmont Industries, Inc. - President, CEO & Director

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Conference Call Participants

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* Brent Edward Thielman

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Brian Paul Drab

William Blair & Company L.L.C., Research Division - Partner & Analyst

* Christopher Paul Moore

CJS Securities, Inc. - Senior Research Analyst

* Jonathan Paul Braatz

Kansas City Capital Associates - Partner and Research Analyst

* Nathan Hardie Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Ryan Michael Connors

Boenning and Scattergood, Inc., Research Division - Director of Research and Senior Analyst of Water & Environment

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Presentation

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Operator [1]

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Greetings, and welcome to the Valmont Industries First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, Renee Campbell. Please go ahead.

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Renee L. Campbell, Valmont Industries, Inc. - VP of IR & Corporate Communications [2]

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Thank you, Kevin. Good morning, and welcome to Valmont Industries' First Quarter 2020 Earnings Call. With me on today's call are Steve Kaniewski, President and Chief Executive Officer; Avner Applbaum, Executive Vice President and Chief Financial Officer; Mark Jaksich, Vice President of Finance; and Tim Francis, Senior Vice President and Corporate Controller.

This morning, Steve will provide a brief summary of our first quarter results, a COVID-19 business update and commentary on our strategy and long-term business outlook. Mark will review our first quarter financial performance, provide an update on our second quarter outlook and our assumptions for the remainder of 2020. Avner will give additional segment commentary for the second quarter, with closing remarks from Steve. This will be followed by Q&A. A live webcast of the slide presentation will accompany today's discussion and is available for download from the webcast or on the Investors page at valmont.com. A replay of today's call will be available for the next 7 days. Instructions are included in the press release that was distributed yesterday.

Please note that this conference call is subject to our disclosure on forward-looking statements, which applies to today's discussion and is outlined on Slide 2 of the presentation and will be read in full at the end of this call.

I would now like to turn the call over to our President and Chief Executive Officer, Steve Kaniewski.

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [3]

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Thank you, Renee. Good morning, everyone, and thank you for joining us. Before reviewing our first quarter results, I'd like to start with a couple of comments.

First, I want to say thank you to our 10,000-plus employees and their families for their enduring spirit and perseverance as we have been adapting to new ways of working and communicating through the COVID-19 pandemic. Every week, I'm inspired by the responses I get from each of you following my e-mail and video updates. In these communications, I speak often of our core values, resiliency and ability to come together as a team. Since our company was founded nearly 75 years ago, Valmont has met the challenges that we faced head on. We continue to do so now through the talent of our teams and our focus on lean and standard work, which are so critical during times of crisis. We will get through this situation together. I also want to thank our customers, suppliers, and the shareholder and analyst community for their flexibility and understanding during these unprecedented circumstances.

Now I would like to take a moment to introduce and welcome Avner Applbaum to the Valmont team. Avner joined Valmont as Chief Financial Officer about 3 weeks ago. I'm excited to have him on our management team and look forward to his contributions.

I'll now turn the call over to him for a brief introduction.

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Avner M. Applbaum, Valmont Industries, Inc. - Executive VP & CFO [4]

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

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [5]

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Thank you, Avner. I would also like to thank Mark Jaksich for extending his retirement date to the end of the year to provide support and ensure a seamless transition. With that, let me turn to a brief recap of our first quarter summarized on Slide 3 of the presentation.

Net sales of $674.2 million declined $18 million or 2.6% compared to last year. This decrease was in line with our expectations, as we had indicated last quarter that we expected revenue in the international utility business to be approximately $30 million below last year. Unfavorable currency translation impact of approximately $10 million also impacted sales this quarter. We were very pleased with the strong North American sales across most of our businesses.

Turning to the segments and starting with the Engineered Support Structures, sales of $230.7 million were flat with last year. We had a solid quarter of sales growth in North America of lighting and traffic products. While we expected a favorable comparison given last year's spring flooding event, continued investments by state and local government strengthened demand in transportation markets. Globally, wireless communication sales were lower, as expected, in part due to a very strong first quarter last year. Sales were also impacted by a slowdown in carrier spending ahead of the T-Mobile/Sprint merger. Impacts from the government-mandated facility closures in China related to COVID-19 contributed to approximately $2 million of the sales decline. Sales of Access Systems products were also lower, primarily due to a continued challenging construction environment in Australia.

Turning to Utility Support Structures. Sales of $225.5 million decreased 7.6% compared to last year, as we expected, primarily due to lower sales in the international business, as mentioned earlier. In North American markets, sales were higher, driven by continued strong market demand across all structure types. In international markets, lower volumes in offshore wind and a large solar tracker project in 2019 that did not repeat led to lower sales. During the quarter, our global backlog increased to $689 million, up 12% from the end of 2019, including receipt of a large transmission order in Europe.

Moving to Coatings. Sales of $88.1 million were 1.5% higher than last year. Higher volumes in North American markets were offset by lower volumes in international markets, mostly driven by the closure of 8 facilities late in the quarter, as mandated by local governments.

Moving to Irrigation. Segment sales of $156.7 million were 2.6% higher than last year. In North America, sales were down 1.8%. Higher sales of systems, including from regions outside of the traditional corn belt and growth of aftermarket parts and advanced product technology solutions were offset by lower industrial tubing sales led by steel price deflation. International sales were 13.1% higher than last year due to higher volumes across most regions. We were very pleased with record sales in Brazil in local currency during the quarter and signs of a market recovery in Australia after a very difficult year in 2019.

I will now turn to Slide 4 for an update of the COVID-19 situation and specific actions we have taken to help mitigate business impacts. First and foremost, the safety of our employees continues to be our #1 priority. Weeks ago, we proactively started implementing our global pandemic plan to ensure the safety of our teams across all global locations, including standard work and measures aligned with CDC, WHO and local guidelines. We have enhanced a number of our safety protocols across our facilities. As noted on the slide, these include safe distancing procedures and processes in all of our facilities and work areas, a remote work policy across our administration teams where possible to limit the number of individuals at our manufacturing facilities and providing additional PP&E equipment and supplies to our teams. We believe these deliberate steps we have taken have helped limit the number of positive cases to only 7 out of our 10,000-plus global employees. I'm very happy to report that these colleagues are all recovering at home and doing well.

Turning to Slide 5. Our products and solutions are considered essential as they support critical infrastructure sectors and food security as defined by many global government agencies. This has helped the large majority of our manufacturing facilities to continue regular operations. Certain facilities have temporarily ceased operations due to preemptive government mandates. The primary revenue impacts for these closures affected our ESS and Coatings segments, mostly beginning in the second quarter. At present, it's anticipated that all these factories will resume operations by early May. From a macro standpoint, we expect favorability from lower cost of steel, energy, freight and other raw materials, improved labor availability and lower turnover. We also recognize that potential longer-term economic headwinds in the markets we serve could impact our businesses, and we are working with our global teams to anticipate and plan for these potential changes.

Turning to Slide 6. As we outlined in our March 26 market communication, COVID-19 impacts to our business vary across the portfolio and are the basis for which we are assessing the balance of 2020. One change from our March outlook is the risk profile for irrigation. We now view this segment as having a moderate risk profile as recent disruptions in foodservice supply chains and ethanol prices have changed our view in the near term. It's very important to remember that our businesses have always been cyclical in nature. Like many others, we are currently managing through unprecedented times. But managing through cyclicality is not a new concept for us or our management teams. One of the ways we do this is by implementing cost management measures when necessary, which we have already done across the company. Discretionary spending has been curtailed, we have reduced current and planned capital expenses, reduced overtime hours as needed, restricted all nonessential business travel and are using discretion in all hiring decisions. Our experienced teams have withstood market challenges before. We are confident in the actions and adjustments that need to be made in times like these, and we'll execute accordingly in the coming months as conditions dictate.

Turning to our operations on Slide 7. It's important to note that the type of production work we perform in our facilities already facilitates safe distancing within our plants. For example, welders typically have their own workstations, limiting close contact with others. Many of our products are very large, which naturally increases the distance between people. Automation in our factories also helps reduce the amount of contact between our employees. We have taken additional steps to ensure the safety of our teams, such as closing cafe areas, limiting break room attendance and staggering workers. Our strategic capacity additions that we announced last year are currently on track to support the solid backlogs in our infrastructure businesses, particularly in the Utility segment. Because we have been very selective in adding capacity, it places us in a better position to manage the volume price paradigm as compared to previous cyclicality. Our flexible cost structure, particularly in irrigation, helps us control costs to adjust to volume fluctuations.

Over the past 5 years, we have deliberately diversified our supply chain and taken significant cost out of our business through the transformation and restructuring of our operations. Actions taken include the elimination of subscale plant locations, reducing our global manufacturing footprint from over 100 locations to 87, even including with the acquisitions and strategically reducing our manufacturing footprint in China and Australia. We have consolidated IT business systems, divested the grinding media business and are continuously evaluating product lines against corporate ROIC targets. We believe these actions, along with our conservative balance sheet will benefit us greatly in the current market environment.

Before I turn the call over to Mark, I would like to comment on our outlook for the Access Systems business. Since we do not expect meaningful changes to the market demand environment in Australia, we initiated a focused restructuring plan in this business. Pretax cash restructuring expenses at this time are expected to be less than $5 million with an expected payback in 12 to 18 months. Next quarter, we will provide an additional update on Access Systems and any additional focused restructuring activities planned for the company.

I will now turn the call over to Mark for our first quarter financial review and update to our 2020 outlook.

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Mark C. Jaksich, Valmont Group Pty Ltd - Director [6]

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Thank you, Steve, and good morning, everyone. Before I start, please note that for comparison purposes, references to 2019 operating income and earnings per share exclude the LIFO method of accounting for inventory, which was discontinued at the beginning of fiscal 2020.

Turning to Slide 8. First quarter operating income of $66.9 million or 9.9% of sales was 22.5% higher than last year on comparable sales values with all reportable segments contributing to the improvement. The main driver was a 370 basis point improvement in gross profit margin due to improved sales volumes and operational performance in the North American businesses as well as lower raw material costs. As you may recall, we recognized an impact of $0.18 per diluted share in the first quarter of 2019, due to the effects of the Midwest flooding event last March. Government directed closures of certain international operations due to COVID-19, led to a

2020 first quarter estimated operating income headwind of $1 million approximately. First quarter diluted earnings per share of $1.99 increased 21.3% compared to $1.64 and the first quarter tax rate of 25.2% was comparable to last year.

Turning to the segments on Slide 9, in the Engineered Support Structures segment. Operating income was $15.9 million or 6.9% of sales, an increase of 150 basis points over last year. Stronger quality of earnings was driven by continued sales and margin strength in North American markets, which began improving in the second half of 2019. Lower profitability in international markets was primarily due to an unfavorable comparison in access systems and the effects of government-mandated site closures of some Valmont facilities in Asia Pacific and Europe. In Access system, first quarter losses were substantially less than what we recorded in the fourth quarter of 2019 due to improved cost and operational controls in this business and the absence of loss-making orders in the detention systems product line.

Moving to Slide 10, the Utility Support Structures segment. Operating income of $27.7 million or 12.3% of sales increased 200 basis points over 2019. Stronger volumes and a favorable pricing environment in North America drove the profitability improvement. A 53% or $29 million decrease in offshore and solar energy product sales led to lower operating income there compared to 2019.

Turning to Slide 11, in the Coatings segment. Operating income of $11.1 million or 12.5% of sales was 80 basis points higher than last year. Improved internal volumes in North America and stronger international productivity helped drive profitability gains.

Moving to Slide 12, in the Irrigation segment. Operating income of $23.7 million or 15.1% of sales increased 190 basis points due to higher volumes in both domestic and international irrigation markets, along with lower raw material prices as compared to 2019.

Turning to balance sheet and cash flow highlights on Slide 13. We delivered good operating cash flows of $62.4 million in the first quarter, substantially ahead of 2019 and the best operating cash flow first quarter since 2016.

Our strong start to the year was a result of ongoing efforts in working capital process improvement. These include strategic actions to improve accounts receivable turnover, including negotiations of certain customer contracts and steady progress working with our key suppliers to optimize payment terms through our supply chain finance program. In addition, a stable raw material cost environment and improved inventory management efforts helped cash flows.

Turning to capital deployment. A summary of first quarter is shown on Slide 14. Capital spending was $23.6 million driven by a number of capacity investments we've previously mentioned mostly associated in the ESS and Utility segments. During the quarter, we paid an aggregate of $54 million to increase our ownership stakes in AgSense and Convert Italia, and we deployed $8.8 million toward acquisitions and returned $28.6 million of capital to shareholders through share repurchases and dividends, ending the quarter with $294.6 million of cash.

In February, we announced a 20% increase to our quarterly dividend, the first increase since 2014. It's important to note that given the decrease in the number of shares outstanding over the past several years and lower expected minority interest dividends going forward, the increase in the dividend rate will not significantly affect net cash outflows.

Moving to Slide 15. In light of the growing COVID-19 pandemic and related effects on the global economy, we undertook several actions toward the end of the first quarter. First, we halted share repurchases to strengthen our financial liquidity. Second, we reduced our capital spending plans in 2020 to a range of $75 million to $90 million mostly through delaying certain growth-related and discretionary capital spend projects until later periods. Third, earlier this month, we drew down $75 million on our $600 million revolving credit facility as a proactive measure to help ensure liquidity to support business operations going into the second quarter. Total cash as of -- at this time is approximately $350 million. All of these actions were taken to bolster our liquidity and financial strength given the amount of economic uncertainty at this time. Our balance sheet is strong with no significant long-term debt maturities until 2044.

Let me now turn to Slide 16 to -- as an update to our outlook. As demonstrated by a strong first quarter performance, we were on track to affirm our full year 2020 outlook as communicated in February. However, as a result of the evolving impact of COVID-19 on the global economy, we are anticipating and planning for a slowdown in customer demand and increased business disruption beginning in the second quarter. At present, we are not able to quantify the extent or the duration of these impacts on our businesses. As a result, we are withdrawing our full year guidance for 2020.

Before we review our second quarter outlook, for modeling purposes, there are a couple of nonrecurring items from second quarter of 2019 that we'd like to highlight. In the Coatings segment, last year, we recognized $3 million of legal expense. And in the Utility segment last year, we recognized a $3 million expense related to a customer accommodation. Neither of these expenses are expected to repeat this year. Our current second quarter outlook, excluding any restructuring activities, is for net sales to be between $645 million to $665 million, with operating margins between 7% and 8.5% of net sales.

Key assumptions supporting this outlook are summarized on this slide. Regarding expected operating margins, it should be noted that the 7% margin scenario is a conservative one. And we would -- it would be driven by 3 primary factors. First, it assumes that the international facilities impacted by COVID-19 closures would resume operations at a slower pace than we expect or that market demand will be lower-than-expected once those operations resume. Second, the coatings business levels would decrease to levels even lower than in previous recessions. And third, market conditions in the irrigation business would resemble the last significant global economic downturn.

I will now turn the call over to Avner to speak to our market outlook by segment for the second quarter.

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Avner M. Applbaum, Valmont Industries, Inc. - Executive VP & CFO [7]

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Thank you, Mark.

Turning to Slide 17. In Engineered Support Structures, the market drivers for transportation and wireless communication structures and components in North America are solid. Our current backlog provides us with good visibility to second quarter lighting and traffic sales. Wireless communication sales within the quarter can be somewhat uncertain due to the timing of shipments. International sales are expected to be down compared to last year as COVID-19 measures have impacted demand within the quarter.

In the Utility Support Structures segment, our strong backlog and the benefit of capacity additions are providing good visibility to the second quarter in North America. As always, project timing can impact sales during the quarter. In international markets, we expect our businesses to be in line with recent market trends.

In Coatings, we expect weaker demand driven by current global economic trends and lower expected industrial production level. A reminder that coating sales tend to be highly correlated to industrial production levels and will lever and delever the most with changes to volume.

Moving to Irrigation. Continued weakness in agriculture commodity prices is expected, especially corn and soybeans, which are the largest crops grown under mechanized irrigation. Net farm income levels are not expected to improve this quarter and this metric has historically been the best indicator of demand for this segment. In addition, food supply chain disruption, a bleak outlook in ethanol markets and a strengthening U.S. dollars lead us to expect second quarter sales to be lower compared to last year.

With that, I will now turn the call back over to Steve.

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [8]

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Thank you, Avner.

Moving to Slide 18. The fundamental market drivers of our business have not changed nor do we anticipate them changing over the long term. In Engineered Support Structures, continued government investments in infrastructure development across lighting and transportation markets is expected as past recessions and associated stimulus funding initiatives have shown. Growth in wireless communication products and components, particularly in 5G, are expected to accelerate and the current working and schooling-at-home environment is supporting that strategy.

In Utility, our record backlog is evidence of the ongoing demand and necessity for grid hardening and renewables. Strong returns on equity for both public and private utilities support this growth.

As we mentioned earlier, our Coatings business closely follows industrial production trends. Over the long term, preservation of critical infrastructure and the increasing number of economies that are actively fighting cost of corrosion will drive the need to extend the life of steel products globally.

And in Irrigation, our products and technology are critical to help meet demand for increased food production and security around the world. The optimization of water usage and other farm inputs, mitigation of increased labor costs, and the support of growers' conservation efforts are just a few of the drivers that support demand for our business over the long term. In international markets, the drivers can differ slightly, particularly in developing countries where government's increasing needs for food security and agricultural land development can create opportunities for large projects. Our pipeline of project business continues to be very strong. But as we always say, timing of shipments can be hard to predict based on local factors.

Turning to Slide 19. In summary, we know that these are unprecedented times for all of us. The resilience of our people, our business portfolio and our processes give us confidence in our ability to withstand the downturn. Employee morale is positive. Our production teams are passionate about delivering results and continuing to serve our customers during this pandemic. Our administration teams have quickly adapted to working from home, demonstrating our ability to be flexible while leveraging standard work to remain efficient. Over the past 5 years, we have strategically taken costs out of our business through our transformation and restructuring efforts, positioning us well to withstand economic downturns. Importantly, we can quickly implement cost management measures as needed. Our team has mobilized, and we are analyzing the markets closely, including scenario planning so that we can be better prepared.

Our global manufacturing footprint gives us a distinct, strategic and competitive advantage, which allows us to shift supply and sourcing when needed. Notably, we have not wavered from our strategy to elevate our commitment to ESG principles. Last year, we established a global electricity goal to reduce consumption by 8% over the next 2 years. We initiated an electric vehicle program to replace more than 100 gas-powered vehicles at our largest facility by 2021. And next month, we will break ground at our Valley, Nebraska campus to build a 1-megawatt solar field using our Convert Italia's solar tracking solution, generating carbon-free power for our own usage.

While the disruptions from COVID-19 are creating short-term business challenges, the long-term enduring drivers for our business that I have mentioned earlier have not changed and are not expected to change once we get through this current crisis.

I will now turn the call back over to Renee.

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Renee L. Campbell, Valmont Industries, Inc. - VP of IR & Corporate Communications [9]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Chris Moore from CJS Securities.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [2]

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

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [3]

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

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [4]

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

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [5]

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Yes. No, there's nothing specific at this time. But it just stands to reason that as tax receipts go down, as you get into further budget cycles, you could have allocation of funds issues, whether they go toward social programs or infrastructure. Now infrastructure tends to be a fairly popular one, but we just put it out there on the horizon as a caution. If there's any kind of stimulus or changes in gas taxes like there was in '15, then that could continue at current levels, but we're just putting it out there as a caution and a realistic potential based on how budgets work at the state levels.

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Operator [6]

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Our next question is coming from Nathan Jones from Stifel.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [7]

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Maybe I'll just start with a couple of questions on the 2Q outlook. It would seem to me that you have pretty good visibility into USS and pretty good visibility into ESS, maybe a little bit less visibility into irrigation and probably a lot less visibility into the coatings business. Can you talk about how you got to this $645 million to $665 million, how you got to 5% to 10% down in irrigation, 20% to 25% down in coatings. Just any color you can give us around what you're seeing in the market currently, what your assumptions are for -- do things get worse in May, worse in June, same in May, same in June. Just color you can give us around those assumptions that you've got in there?

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [8]

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Yes, sure. So you're right. With USS and ESS, we have pretty good visibility. So those 2, we feel pretty confident of the outlook and where our production levels are going. In irrigation, we had a pretty good real first quarter. Order rate was pretty nice and then in the last few weeks, we saw a drop-off. And so we're taking that kind of order rate over these last 2 to 3 weeks and basically surmising that for North America over the rest of the quarter. In international, order rates actually are holding up much better and actually have done pretty well, all things considered.

Coatings has the most potential variability with it. There's no backlog. It's only a couple days out. And what we've seen there is our custom order rates have dropped by about 20%. And so we factored that in as well to that range. So the one variable of why it's $20 million in range really comes from the fact that we had over 10 facilities globally that we're restarting in May or late April, May. And we just don't know how all the backlog is going to be re-phased on a customer level. So that's how we basically came up with the range that we came up with. Good visibility in the infrastructure businesses, irrigation, taking our last order rates and then coatings, assuming at least 20% custom volume down.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [9]

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Okay. So the assumptions for irrigation and coatings then are that order rates kind of continue at the same level that they're at now. They don't get any worse. They don't get any better.

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [10]

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That's correct.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [11]

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

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Mark C. Jaksich, Valmont Group Pty Ltd - Director [12]

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

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Operator [13]

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Our next question is coming from Brian Drab from William Blair.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [14]

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And it's impressive how you guys are managing through this tough time. Mark, also, I wanted to say you're looking smarter than ever for establishing 30 and 40-year maturities on your debt.

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Mark C. Jaksich, Valmont Group Pty Ltd - Director [15]

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It's better to be impressive than not.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [16]

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

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [17]

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Yes, Brian. The #1 factor really was the improved operational performance. The efficiency in our factories, we really had little to no hiccups. We were able to produce steadily through January and February. March, we did have some headwind, but still we're able to overcome it because we started to see the shutdowns at that point. I think that's the #1 factor on a global basis as we just had real good productivity levels. Then you look at raw materials and pricing in combination is even though raw materials were dropping, zinc was dropping, aluminum was dropping, we were able to hold on to that through the price discipline and the pricing advantage concepts that we really adhere to. So that was probably the second biggest one. And then just really, overall volumes, where we had some currency and we had the expected utility order, but our volumes in plants where we were open was just higher across the board in those particular plants. And so that also helped the overall margin levels there.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [18]

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Okay. And it's hard to choose, just one 1 more question here. But -- I'm curious about this utility project in Europe that you called out the size of that, the timing of the delivery there. And then could you maybe just update us on how your -- what the outlook is for utility in Europe and like how your share of the market there compares to the North American market and how that's maybe changed over time?

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [19]

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Sure. So it's a mast order, so it's around utility structure order that we can make out of Valmont-SM, and it's north of $30 million. So it's a pretty significant utility order for that area of the world. It's really to bring power from the North Sea into deeper parts of Europe. There's a few of these that are out there. So there are some subsequent tenders that we're also bidding on. And it does help margins overall. And it will be -- it's still not the dominant structure type from a Europe perspective, that's still lattice. And we are participating in some areas in Europe on that. But in terms of the mast orders, we're in a very good position as there's really only maybe 2 other manufacturers that have the capability to make those size of structures and round like that. So it puts us in a nice competitive situation. We expect more of these. It's a focus for us. We have done a couple of these orders in the past, but we see a much more regular cadence as they move. I think it's a 365 line overall that will be utilized. So again, as Europe has gone through a lot more renewables generation, both offshore and solar, they need to distribute that power, and this is a part of those programs.

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Operator [20]

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Our next question is coming from Brent Thielman from D.A. Davidson.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [21]

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

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [22]

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

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [23]

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Okay. And then, Steve, what's the outlook for the solar tracker work, is that more susceptible to all the sort of COVID related issues given all the international exposure? Or do you see big changes in the outlook there?

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [24]

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

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Operator [25]

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The next question is coming from Ryan Connors from Boenning and Scattergood.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - Director of Research and Senior Analyst of Water & Environment [26]

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So -- I appreciate the comments on second quarter and second half, but I mean I think for us, obviously, you play in some very late cycle markets where, ultimately, this is whether or not this has an impact, it's really a story of 2021, even 2022 that you got backlog for a certain period, but the question is the next-generation of projects. And I understand you guys don't have any more of a crystal ball than anyone else. But I think the real decision to point about whether this is an opportunity in the stock is kind of based on the scenario analysis out there, '21 and '22. So I want to kind of just probe what you guys are thinking in terms of scenarios, and I'll use the example, USS, for example. I mean, you mentioned strong ROEs, but utilities are going to base those decisions on load growth expectations and those are coming in, which could push some projects out and things like that. So as you look at -- you talked about state and local USS, kind of -- obviously, you're not going to quantify anything, but what is the range scenario of expectations you're thinking about beyond 2020? Because I think, really, that's where the rubber is going to meet the road here.

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [27]

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Yes. So I'll start with irrigation, Ryan. Irrigation, correlates to net farm income. And so however, that farm income goes in North America so most likely will go our business. So those projections are the ones that we'll follow and model from a North America perspective. We do see growth in aftermarket parts. We do see growth in our technology sales that help us not correlate as closely, so to speak, on that. International has seen growth and we'll continue to see growth, albeit it will be very chunky, but the project work that's out there will continue. It's based on population growth, and not necessarily the net farm income, particularly in the developing countries. Coatings is usually pretty easy that correlates with industrial production. So however, those forecasts go. We've modeled in scenarios that match going back to the 2001 recession, where we had a lot less plants. So I'd say we're being very conservative. But the fact is that the amount of material that gets galvanized now has grown over time because of the corrosion prevention.

In USS, while you're right, they load growth. In fact, I've seen things that it's been down 5% to 7% during COVID, the grid hardening was a much stronger driver in the market. And a lot of the rate cases that have gone to the PUCs have been around the hardening and replacement of existing infrastructure. That I don't think will tail off all that much, albeit there could be some delays from 1 year to the next.

The renewables, as I just mentioned, should also continue because those mandates seem to be not backing off unless legislation comes in to change them. The growth in our international business for us is more of a market share issue and not necessarily just the market growth factor. So we think we will perform better that way.

In the ESS, again, it's -- the high variable here is infrastructure spend by governments. And what we've seen is that we'll probably have a pause of some sort as they look at their tax collections and maybe even miss a budget year to -- or an opportunity to do that. But all things said, so that's what we'll plan for, but all things said is that if gas is really low, that's usually when they sneak in gas taxes for roads and road construction. And in places like Europe and Asia, it's the primary stimulus tool is usually infrastructure spend. So we have to plan for the downside of it, and that's what we're doing. But overall, USS utility should probably endure this the best. Based on the levels, it could come down somewhat, but I don't think it will be significant based on that grid hardening. We just have old infrastructure that still needs to be replaced and is susceptible. And even during the pandemic, there was the tornadoes down south. There's always a big part of the storm hardening, grid hardening, fire in California. Those look to be multiyear events, whether it's the southeast or out in California. So those are good underlying kind of base loads on our business there.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - Director of Research and Senior Analyst of Water & Environment [28]

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Got it. Okay. No, that's a really helpful overview. And my follow-on was just as it relates to -- you talked about in the press release and your prepared remarks about cost levers and looking at discretionary spending and so forth. I mean, in a more negative scenario, how much of the SG&A, for example, is -- do you feel like -- is that a -- would you be able to move into without cutting into bone, is it 5%, 10%, 20%? I mean what kind of ability do you have to flex the cost down in a more negative scenario, just order of magnitude?

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [29]

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

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Operator [30]

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(Operator Instructions) Our next question today is coming from Jon Braatz from Kansas City Capital.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [31]

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

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Avner M. Applbaum, Valmont Industries, Inc. - Executive VP & CFO [32]

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Thank you. Same here.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [33]

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

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [34]

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Well, I can tell you this, Jon, and all of my team knows this, our default is we're holding the price. We do tend to be the price leader. So if we move, usually, our competitors will move fairly close to us. So knowing that there's a lot of turmoil, there's a lot of issues, there's a lot of competitors who may not actually make it with cash being king, we have no impetus or reason to have to chase volume at this point. The one thing that our restructuring over the last couple of years has done is really allowed us to make our cost structure a lot more variable and so being able to use, let's say, an infrastructure plan for both Utility and Engineered Support Structures, we're not having to chase 1 volume in 1 segment to keep it full. We can balance the load across the 2. In irrigation, we've always been able to pull out cost going back for a very long period of time and because it's always been a cyclical even during the year business. And in coatings, with temp labor, overtime and then looking at shifts and cycle times, we feel that we can adjust those pretty simply. So we don't have to go to the price lever in order to get the kinds of returns we want to get.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [35]

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

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Stephen G. Kaniewski, Valmont Industries, Inc. - President, CEO & Director [36]

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Yes. We've had -- we've enjoyed a couple of those big projects that have been out there. We do not see any change in those, at least from a schedule or timing perspective. But your question about the number of them is still about the same. They're mostly small to medium. When you talk about grid hardening and renewables, those projects tend to be of those sizes to begin with. So we don't anticipate a lot of large transmission projects. Europe is one example where there is one. So as we participate outside the U.S., those will probably tend to be a little bit bigger in nature. But overall, they still are the smaller KV and the smaller structure types. So we anticipate our mix kind of staying where it has been even as we look out over the next 2 to 3 years.

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Operator [37]

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

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Renee L. Campbell, Valmont Industries, Inc. - VP of IR & Corporate Communications [38]

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Thank you, everyone, for joining us today. As mentioned, today's call will be available for playback by phone for the next 7 days or on our website, and we look forward to speaking with you again next quarter.

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Operator [39]

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Included in this discussion are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made in light of experience in the industries in which Valmont operates as well as management's perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. As you listen to and consider these comments, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties, some of which are beyond Valmont's control and assumptions. Although management believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Valmont's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include, among other things, the continuing and developing effects of COVID-19, including the effects of the outbreak of the general economy and the specific economic effects on the company's business and that of its customers and suppliers, risk factors described from time to time in Valmont's reports to the Securities and Exchange Commission as well as future economic and market circumstances, industry conditions, company performance and financial results, operating efficiencies, availability and price of raw material, availability 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 does conclude today's teleconference and webinar. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.