Applied Industrial Technologies Inc (AIT) 2006 Q2 法說會逐字稿

Hello and welcome to the Applied Industrial Technologies second quarter 2006 financial earnings conference call. All lines will be in a listen-only mode until the formal question-and-answer session. At that time, instructions will be given.

At the request of Applied Industrial Technologies today's conference call is being recorded. If you should have any objections you may disconnect at this time.

I would like to introduce Mr. Richard Shaw, Applied's Vice President of Communications. Mr. Shaw, you may begin.

Thank you, Sheila, and good afternoon everyone. I will apologize in advance for a little echo we have here today. We are offsite at a different meeting room and it isn't quite as good a sound as we would normally have.

On behalf of Applied Industrial Technologies, I would like to thank you for joining our second quarter teleconference and webcast. You should have already received our earnings news release that was issued this morning. If you have not received the release, you may retrieve it by visiting our website at www.applied.com. A replay of today's broadcast will be available for the next two weeks and archived information is contained in our news release.

Before we begin, I'd like to remind everyone that we will discuss Applied's business outlook during this conference call and make statements that are forward-looking. Applied intends that all forward-looking statements be subject to the Safe Harbor of the Private Securities Litigation Reform Act of 1995. All forward-looking statements are based on current expectations, regarding important risk factors, Including trends in the industrial sector of the economy, the success of our various marketing strategies, and other risk factors identified in Applied's most recent periodic report and other filings made with the Securities and Exchange Commission.

Accordingly, actual results may differ materially from those expressed in the forward-looking statements and the making of such statements should not be regarded as representation by Applied or any other person that the results expressed therein will be achieved. Applied assumes no obligation to publicly update or revise any forward-looking statements whether due to new information or events or otherwise.

This conference call is the copyrighted property of Applied Industrial Technologies. Any copying, rebroadcasting, publication, posting, transcription, or distribution of any portion of this call without Applied's expressed prior written consent is prohibited.

Our speakers today include Dave Pugh, Chairman and CEO of Applied, who will discuss our overall performance during the quarter. We will also hear from Mark Eisele, Vice President and Chief Financial Officer on our financial performance, and Bill Purser, President and Chief Operating Officer, who will discuss operational activities. Dave Pugh will start us off.

Thanks Rick. Good afternoon; thanks for joining us again. As we enter 2006 we find that the decisions that we have been making and the actions that we have been taking are providing the results that we've expected, in that it allows us to provide continuing benefits for our shareowners. The numbers hopefully speak for themselves. It was another record quarter. The 13th consecutive quarter where we achieved year-over-year earnings per share growth of 25% or greater.

The markets are continuing to remain solid. We have been successful in balancing our acquisition strategy against any underperforming or eroding markets, giving us overall the profitable growth that we've targeted as our objective. Our investments in new market opportunities -- while temporarily raising our incremental rate of SD&A -- are on track and provide optimism for a broader and even more diversified base of served available market, which is going to be important to us if and when the general economy slows down.

Our product managers continue to acquire key product authorizations that allow us to expand our product available market. Even in the face of constantly eroding U.S. manufacturing base, our actions are allowing us to show good sales growth by entering new markets with more product.

Now our gross margins were negatively impacted for the quarter by the timing of passing on price increases. This should be mitigated over the next quarter and, in general, our initiatives on margin enhancement are still going well and we feel like we still have upside potential.

Our balance sheet is a bit out of character for the quarter but it is certainly not out of control. This was a seasonal issue; Mark is going to explain more about that a little bit later. Our asset management program is well-planned and it should provide excellent cash flow over our second half.

Because of our current position, this is going to have strong management focus in the coming months to ensure that we aren't going to miss any of our targets and I am fully confident of our ability to convert these assets into solid earnings and cash flow. While we are by no means complacent, I am certainly pleased with the balance that our current results show. I will now let Mark and Bill add the details.

Good afternoon, everyone. I assume you have all had a chance to read and digest our earnings release. Without rehashing the details there are a few things I would like to highlight.

Our 12.9% increase in sales came on the same number of selling days as we had in the prior year. Price increases accounted for three to five percentage points of this gain. Most of the increase came from our Domestic operations. Our Canadian operations had a higher rate of change aided by a 5% improvement in currency translation. Mexico and Puerto Rico had slower rates of growth. As a result of a combination of facility additions, closings, and mergers we currently have 441 operating locations.

Our gross profit was down from the unusually high first quarter which you may remember was positively impacted by a rebate carryover from last year. Still, it was a solid 26.6% which is a full 90 basis points higher than last year's quarter. We accomplished this in the face of another round of vendor price increases which always suppress margins in the short-term. We also had a slight negative impact for mix, which Bill Purser will discuss later.

We expect gross profit margins to be slightly better for the remainder of our fiscal year. Our overall rate of selling, distribution, and administrative expense remains consistent with our prior five quarters, though the incremental rate of growth compared to our sales growth rate is a bit higher than you have been seeing. This rate is impacted by our investments in new markets, by our growth through acquisitions, and by several compensation elements as a result of our improved financial performance. In addition, we increased our provision for bad debt during the quarter, particularly due to certain situations in the automotive parts industry.

While we have increased our oversight and tightened our credit procedures here, there are still risks that warrant our conservative approach. The combined effect gives us an operating margin of 5.5% for the quarter which continues our trend of improved results over the prior year period. Our annual effective tax rate of 37.7% for the quarter was slightly higher than last quarter's. We feel a rate of 37.5% is reasonable for the remainder of the fiscal year.

Our balance sheet remained solid with shareholder equity at $398 million and a current ratio of 3.3 to 1. Our pretax return on assets improved from 10.3% last year to 14.2% this year on a quarter-to-quarter comparison. Our use of cash from operations increased in the quarter, as we increased our inventories ahead of supplier price increases.

Through the remainder of the year our cash from operations are projected to improve and should result in a full year result at least equal to last year's. We also used cash to take advantage of the stock repurchase period that allowed us to acquire over 544,000 shares at an average price of $32.92. We are still using our cash wisely.

And speaking of share repurchases I'm sure you noticed in this morning's dividend release, that our Board gave us a new authorization to buy up to one million shares of our common stock. This authorization replaces the previous one under which 544,300 shares were purchased through December 31st, 2005. The new authorization represents approximately 3% of the current shares outstanding. These purchases can be made in open market and negotiated transactions from time to time, depending upon market conditions.

As a result of this quarter's performance and our outlook for the remainder of the year, we are increasing our annual earnings guidance to an earnings per share range of $2.10 to $2.20 on sales from between 1.86 billion and 1.89 billion.

Now Bill Purser will comment on sales and operations.

Hello, everyone. It is a pleasure to be with you especially since we have such good results to report.

This afternoon, I would like to discuss four topics. First, the review of a few key industries that helped us achieve ourselves increase for this past quarter as well as providing you with our view of their strengths or weaknesses going forward. Second, bring you up to speed on a few of our focused markets in the program. Third, review with you the margin pressures we witnessed during the quarter. And, fourth, provide a brief review of the key indicators of what we are seeing for the remainder of the business year.

This past quarter was an unusual one from a customer mix standpoint. For the first time in several years, our large accounts drove our sales increase. That compares to the past several years where small and medium-sized accounts was a catalyst for driving sales. The impact of this customer mix on our margins will be discussed later.

We experienced double-digit growth in three market areas, including lumber and wood products, fabricated metal products, and chemical and allied products. Electric gas and sanitary services, petroleum and coal products, coal mining, and amusement and recreation services were also strong as were the industrial machinery, paper and allied products, and stone, plate, and glass products. The food and kindred products as well as the primary metal industries were only up slightly, and we saw a downturn in the transportation equipment industry.

We feel the paper and allied products, lumber and wood products, and the aggregate industry will be particularly strong for all of calendar 2006. You may remember that we have marketing programs focused on each of the aforementioned industries and feel we are well-positioned to take advantage of their growth.

In regards to a few of our focused programs, I would like to first begin with our catalog efforts. Our 2006 catalogs are hot off the press, with a new user-friendly design. I feel this is our best product yet in our catalog selling effort. In addition to the new look and feel of the catalogs, we have a new look to our marketing programs as well.

One area of improvement is a greater focus on our direct marketing efforts where we have moved from a mass mailing approach to a more targeted effort. This includes both our Fluid Power Connection catalog and our Applied Maintenance America one.

For our first two quarters, we ran about even with last year from a sales standpoint. However due to these view marketing efforts I believe I will be able to report improved sales gains next quarter. As you know, we believe there is a good long-term potential for us to grow catalog sales at good margins by leveraging off our presence and reputation in the marketplace.

In regards to our government sales effort, if you will remember, we began the program this July and I'm pleased with our progress. We received our GSA number in March and we have recently received recognition from the Department of Defense. As a result we have been able to populate several of the government electronic catalogs that our product offers. This makes it easier for these customers to do business with Applied.

I will continue to report our progress with this exciting opportunity in future quarters. As we have noted not only is this government such a potentially huge untapped market for us, it also can help balance out the normal cyclicality of our industrial markets. Although pleased with the overall sales growth I am particularly pleased with our associates' effort to maintain margins in face of the marketplace pressure.

Our major bearing suppliers implemented price increases in the September through December timeframe. Couple those increases with the fact that large accounts drove our sales increase, and it makes our ability to maintain margin even more special.

Looking forward, we are anticipating steady margin improvement as a result of being able to pass along these price increases. The key indicators we track, including the manufacturer's capacity index, the purchasing manager's index, and the consumer confidence index -- to name a few -- all indicate our next two quarters should be as strong as what we have experienced today. The growth rate will be just slightly less than 2005.

To summarize, I feel we are positioned in the growth market with good focused programs from our marketing department. I certainly believe that they will help us meet our Company goals for growth; and while our focus is on profitable growth, we also remain committed to all four of our corporate initiatives. Profitable sales growth, aspect management, margin enhancement and cost control.

At this time I would like to turn the program over to Dave for some closing remarks.

Thanks, Bill, and thanks for the performance. It was a good quarter. It was a good first half and we have a positive look for the second half. We feel our strategy is sound. The operating fundamentals are very strong. So I have to feel good at this point.

Before we jump into the Q&A session I just want to give you a quick heads up on a change of direction for us and how we are going to handle commentary on earnings guidance.

Our policy has been in the past to provide both quarterly and annual guidance and update each on a quarterly basis. As nontraditional competition continues to promote and invest into our domain, we feel a need to be a bit more discreet with the level of detail we are going to be providing on our own (indiscernible).

I trust you'll understand and will honor this position as we reduce the amount of information that we are comfortable in providing. We know we have picked up some valuable insights in listening to other people; so we fully understand how conversations like these can convey information that we may not want to convey.

As the only pure play national industrial value-added distributor, we are already required to disclose more detail than our major competitors, some of whom are not even publicly traded companies. Part of this change also will also be a move beginning in the -- well, part of the move is going to be the beginning of the new fiscal year to provide only annual guidance updated quarterly. This policy is in line with what our major competition discloses and it is consistent with the general trend of the publicly traded companies.

This is going to allow us to guard the timing of some of our key initiatives against competitive countermeasures. By no means do I intend to create any doubt about the strength of our current quarter results with these comments. Nor am I implying at all that there is any more uncertainty than usual about the guidance we are providing for the balance of the year. While we understand that this reduction in the amount of detail may make your task a little bit tougher, we feel it closely matches competitive disclosure and it provides enough detail for you to assess the year-over-year strength of our operations, while our first priority is to protect the investment of our servers.

We want to give ourselves the latitude to implement such strategic initiatives in the most timely manner without tipping off competition through adjustments to quarterly guidance.

Another move that we plan on making at the beginning of the next fiscal year is to discontinue the same-store sales information. First of all, we find the material to be -- the information to be immaterial and just not meaningful as we close and combines stores as part of our acquisition strategy. Organic growth and growth by acquisitions become blended in this process and the attempt at data separations serve no purpose for either of us. We seek to be measured on our total growth and our total profitability. We will continue to update you each quarter on changes in the number of operating locations and how we see the markets.

Now having said all this, again, I just want to say how pleased I am with the operating results we've achieved this quarter, the outlook we have for the remainder of the year, and the optimism we have on our future earnings ability. Now we will open it up for questions.

(OPERATOR INSTRUCTIONS) [Adam Allman]. Midwest Research.

I had a question on the gross margin impact from the price increases from the suppliers. First of all, I was wondering if you could quantify the negative hits that you absorbed this quarter?

Generally, we don't talk about that Adam and break that out. We have seen some reduction in the quarter. We expect to hold some of that back next quarter, too.

I think that market that commented on, that you are probably going to see us getting back to where we were prior to this quarter. So you can make your own calculations and while we are not going to specify the exact pieces of this -- it is not unusual. It is a pretty traditional thing when we receive price increases it takes us a period to get those fully implemented in the marketplace.

Then the second question that I have is that the organic growth rate here in the second quarter, if you back out the acquisitions that you've completed over the last years so looks to be in the 9% range or so. But the guidance implies that this slows down here in the second half, despite the benefits that you are going to be getting from passing along these price increases and your growth initiatives.

So I was wondering if you could talk about what you're seeing here over the near-term that makes you a little bit cautious. Is there something that you are seeing in your activity so far in January that would lead to this or is this just the typically IT conservatism?

One of the things, Adam, is last January we purchased GLM in Canada so their numbers are included within our numbers for a full 12-month period starting this month. So that's one of the reasons for that. Obviously we are looking at growth over growth and we are still showing improved sales performances going forward for all of our operations and into the future. But the percentage increases look a little bit smaller because of the big huge increases we had in the prior year using the exact same quarters.

Jeff Hammond. KeyBanc Capital Markets.

Just wanted to go back to the working capital issue and inventory build. It sounds like it was mainly to get in front of some price increases. Just wanted to get a sense of where you see working capital? Whether it's in terms of magnitude of source or use for the year where maybe we see inventory settling out at year end? And maybe just a little more color behind the rationale?

I think when we look at our inventory levels, we expect them to go down between December 31st and June 30th. I think if you look at us, our historical past and seasonality and we see increases in inventory that go towards December 31st; and then we see corresponding decreases in those inventories as we head towards June 30th.

We expect that to happen, basically, at the same time this year. When we project out what our inventory balances will be at June 30, 2006, obviously we will have some things this year that weren't there a year ago. For instance, the Spencer acquisition, as well as adding some inventory dollars for new product authorizations, new items in our catalogs, things of that nature. New marketing initiatives, which do add a little bit of inventory dollars.

Basically the targets that we have is to sort of look at inventories from an operational perspective, based upon sales increases and where the price increases are, and to try to target the inventories to get back to the levels we were a year ago with -- of course, with these adjustments in there too. So we would expect a significant reduction in the inventory levels as we go there. So we look at the traditional levels of inventory reductions, similar to what we saw last year.

So, I mean, working capital was kind of neutral last year. Would you expect that to be the case or to be a bit more of a source in fiscal '06?

I think our expectation is that if I just look at total cash provided from operations that we expect that to be close to what we got or to be at last year's levels or close to it, in some fashion. From the specific working capital components of that, I think we will see some uses of working capital for receivables as our sales continue to increase and our DSOs continue to stay at stable levels.

Obviously we will be investing a little bit there because of that growing in the business and then inventory is the other issue for our working capital. But I think a relatively stable level of working capital is reasonable.

Then moving over to share repurchase, fiscal '04, fiscal '05 you were fairly inactive in terms of share repurchase and I would say the last two quarters clearly in acceleration of that with the reauthorization. Has there been a change in view there? And how do you see that going forward, given the new authorization?

I think there hasn't been a change in view. I think the thought that we have on our share reauthorization is we are going to go out into the open market from time to time when situations warrant it, to make opportunistic buying, take advantage of opportunistic buying opportunities in our Company stock. We are not trying to push the stock price. We are basically there almost to view it as a floor when there are downticks happening in the stock price to purchase the shares.

And so we continue to evaluate that on a day-to-day basis. And we want to make sure that we have enough of try shares available to repurchase, to address the situations as they come about.

I think in the past you've talked about some new authorizations with I think [Eric] Becker's, Craftsman, and you mentioned in the call some new product authorizations. Is there anything incremental to that or are those the two major ones that may be gaining traction?

Jeff, next quarter I probably will be able to make an announcement on product authorizations that we can't make at this point in time.

Okay, but that one, the unnamed one would already be contributing?

Not really, no. No this is too new to be having any impact.

Mark, did you quantify the acquisition contribution in the quarter?

No. No we did not and as Dave mentioned, we are looking at total growth as total growth, whether it is the traditional definitions of organic or acquisition growths. And as we stated in the past and in the prior press releases that you can look at, the Spencer acquisition we stated was around a $48 million year run rate in sales and the GLM acquisition was around a $20 million run rate in annual sales.

So maybe to ask it in a different way. How you characterize the GLM and Spencer acquisitions in terms of it relative to your expectations what you expected to get out of it?

Jeff, this is Bill and we are well pleased with both acquisitions as far as performance that we put together and our expectations.

(OPERATOR INSTRUCTIONS) Brent Rakers. Morgan Keegan.

I wanted to first ask and I guess, for Mark if I'm doing my math right, it looks like the DD&A went up from about 3.2 to 4.9 sequentially. I guess, first, is that correct? And then, second, if you could say what the reason is behind that and is that something we should extrapolate right going forward?

That was the depreciation and amortization you're talking about?

Yes, Mark.

I think the increase we have in there was from Spencer and I didn't -- what were the numbers you had again?

I thought I had 3.2 for Q1 and 4.9 for Q2. My math may be wrong there somewhere.

When you throw in the amortization I think you are probably right with that. When I just focus on the depreciation expense that difference in the depreciation part of that really relates to the acquisition. And I don't have the numbers in front of me here but for the amortization, that's generally for intangibles and things that relate to acquisitions. I think that would be that same case but I would need to look into that.

Let me follow-up with hopefully the right information then. If we assume that my numbers are correct or at least and there is some ramp up there in depreciation and amortization, the sequential growth of other SG&A items minus Spencer would be down sequentially. Does that sound familiar and if that is the case is there anything unique I mean going on that would offset some of these initiatives that Bill talked about in some other areas?

Could you rephrase that question for me again, please?

I was hoping and I guess whether you talk in terms of number of employees, branch closings, other things. It looks like by my calculations you guys at least on a sequential basis are really maybe cutting some costs out somewhere because if you put in some initiative-related costs and the revenue opportunities and all that, it seems like SG&A should have been significantly higher than it came in at.

Obviously cost control is one of the key items that we focus on and that we look at regarding things. And the layering on of the SG&A of the acquisitions this quarter that weren't there a year ago same quarter, that does have an impact for that.

Obviously we are really pleased that for the whole quarter, sales went up 4.9% and total SG&A only went up 10.9%. So we were getting leverage for that and so for excluding the acquisition the leverage is even better for things.

I don't know if there is any one thing I can point to, Brent, of what you are talking about that would make things change like that. I think our run rate on SG&A was nothing unusual with that.

Fair enough and then maybe somewhat related to that, I was hoping you could get some insight as to what your employee numbers have maybe done year-to-date. Maybe inclusive and exclusive of the Spencer acquisition?

We are going to plan on reporting employee numbers in our 10Qs on a quarterly basis. We have in the past put it on an annual basis on our annual report and 10Ks . It will be in the 10Qs. Basically the information that we will be stating is that the increase employees really relates to the acquisitions and is pretty much status quo for the other operations.

Just two more questions and I will pass it to the next person. Could you give us a sense -- and I apologize if I missed it -- but could you give us a sense for what kind of a sequential progress was throughout the quarter? I know obviously there's some pronounced seasonality to the business. But in terms of year-over-year gain, did you see roughly flat kind of similar growth rates throughout the quarter or did you see one month particularly stronger? Or maybe an acceleration through the month -- through the quarter, rather?

I think it is tough when you have the month of December in there with the holidays. That makes this a much more difficult quarter to look at those sequential rates than other quarters for that. But I think -- I don't think there's anything unusual that we saw in the numbers.

One last question, when you talk about the ability to successfully pass on higher vendor pricing, in the past you've often referred to maybe the more spot customers, spot market customers if you will as opposed to maybe the national account customers. Are we primarily talking about just timing issues with regards to when these national contracts roll to when you can get those price increases passed through?

This is Bill and you are spot on. It is strictly a timing issue.

Holden Lewis. BB&T.

On the gross margin you talked a bit, I guess, about the things that were a drag, the price increases and I guess the mix is the list. I was wondering -- you don't want to get specific on each one -- but can you in aggregate tell us what the impact of those two things was?

Then, secondly, despite that, your gross margin in Q2 improved I think almost 100 basis points year-over-year, which is the same degree of improvement that you saw in Q1; but Q1 had that significant rebate -- one-time rebate in it. So the fact that it was that strong in Q2, despite these incremental negatives, can you speak about what went right in gross margin?

I think a lot of things go right with the margins. We are out there on a day-to-day basis dealing with these situations. I think if you talk about some of the initiatives that we've been put in the place, we had short-term, medium-term, and long-term initiatives that we have been working on for the last year or so. And they continue to bear fruit. Obviously we see more like bumps in the road when the suppliers have the price increases for those initiatives but we continue to work those initiatives and we continue to see some success for those.

And even older things that we've talked about in prior years regarding let's say freight recovery and the cost for that, we continue to see success in those arenas as well, which helps with the margins.

I mean freight recovery (indiscernible) that's sort of an old one where probably the bulk of the gains have been had but you are no doubt making incremental progress; but can you speak to specific initiatives that's getting us there? Are we seeing more foreign sourcing much bigger in the mix? What are some of the specific initiatives that we are working on that have a meaningful impact on the gross margin this quarter?

Holden, this is Bill. I really can't get into the specific initiatives that Mark is referring to. But those are really the things that we have been working on for some period of time and even your reference to the freight recovery, we are still making strides there. That's still an emphasis with our Company but those initiatives really are what counterbalance the customer mix and the inability with some of the SAs to get the price increases through, because of contractual obligations.

Holden, this is Dave. We have some specific initiatives but we are also changing the overall culture of this Company with regard to pricing habits, training of people on pricing strategies, and helping them overcome a reluctance to pass on price increase that we kind of engendered when we went through a five-year period where there were very few price increases. And at that time you have some people who approached our customers, (indiscernible) us to passing these things on and we've had the premium that it is fair to do this.

So part of this is not just a specific program. It is an overall cultural change and training of our people.

I was under the impression that at least this quarter any way the pricing was actually a net drag to it. But I guess the reason I'm asking is because, clearly, there was something which this quarter was a bigger impact that you didn't necessarily see last quarter. And I'm just sort of -- it doesn't seem like a basic block and tackling. It seems like the gross margin performs in this quarter really stepped up even versus last quarter. I was curious what that -- what we can attribute that to.

Let me jump in here for one comment and I think this quarter compared to the prior quarter -- like the September quarter from a gross margin perspective -- we had some negative impacts from because of the supplier price increases. But compared to a year ago in the -- this December quarter versus last December's quarter, we saw compositive with that because of these other initiatives.

I don't know if that helps respond to your questions.

I just wanted to know what the initiatives are but we're not going to get there apparently.

The second question I guess I had was on the free cash flow. If memory serves, I think last year you had -- obviously this is seasonal -- and last year I think you had negative free cash flow in Q2 last year, a negative operating cash flow. But I thought that maybe last year's operating cash flow deficit through the first half might be viewed as reasonably high, primarily because if memory serves last year, you actually prebought a fair amount of product which -- we haven't -- the inventory increases don't look like there's any pre buy in there but it looks like we're having a much deeper operating cash flow deficit. Can you just maybe comment on that?

I think the inventory increases that we had from June 30th through December 31st was $42 million. And I think the increase this year, although I don't have the specific numbers in front of me, was bigger than the increase we had a year ago in the December '04 period. So I think we have had a larger amount of inventory buys in this seasonal arena than we had in the past.

Okay and then just -- I think our operating cash flow this quarter was down about 16.5, our operating cash flow of Q2 last year was down 3.5. Inventory looks sequentially to be up about 8 million versus up I think more like 18 million last year in the second quarter. That's why I'm kind of asking. Looks like last year was the bigger burden because we pre bought. This year we don't have that but we are having deeper OCS deficits. And that's.

I just think that's normal variability within the numbers, I don't think there's anything special in there. I think as we go forward in the third and fourth quarters, we will see some significantly positive cash flow numbers.

Last thing is, the tax rate up 37.5 or 37? Is that good also going out '07, '08? Is that the number we should be looking at?

We haven't projected out quite that far on the tax rate; but I would say that is a reasonable assumption for things on a go-forward basis.

And you are comfortable -- I know it's sort of in the seasonal norm that your tax rate in Q4 tends to drop off, relative to the other quarters. Are you confident that that won't be the case in 2006? You kind of feel like you've got that steadied out or can we see this 37.5 run rate maybe come down nicely, because we do see a fourth quarter dropoff?

Our plan is not to see the fourth quarter drop off in the tax rate. The plan we have is for the tax rate to -- at this point in time through the six months ended December -- to have that to be comparable to our annual tax rate for the first six months compared to the whole year. So whether that is going to turn out that way, there's a lot of items in the mix there from income, from different jurisdictions that have different tax rates. And then depending upon how those things flow through, that will tell how the rate happens in the fourth quarter.

(OPERATOR INSTRUCTIONS) At this time, it appears we have no further questions from the phone audience. Mr. Shaw, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you, Sheila. Thanks to all who listened in today. We do look forward to talking with you again in April when we provide our third quarter results. Have a great day.

That does conclude today's presentation. We thank you for your participation.