A O Smith Corp (AOS) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the second-quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to Craig Watson, Vice President, Investor Relations. Please go ahead.

Good morning, ladies and gentlemen, and welcome to our conference call. Before we begin with Paul's remarks, I would like to remind you that some of the comments that will be made during this conference call, including answers to your questions, will constitute forward-looking statements.

These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in this morning's press release. Paul?

Okay, thank you, Craig and good morning, ladies and gentlemen and welcome to our call. This morning, we are pleased to report record second-quarter earnings. Our operating units are performing well in the most difficult economy in recent memory. Operating margins in both of our businesses exceeded 9% and we remain confident in our ability to manage the challenges associated with the weak housing market and relentlessly high raw material and energy costs.

Total sales in the second quarter increased slightly to $622 million from $612 million last year. Net earnings of $32 million increased 20% compared to last year's second quarter while record second-quarter earnings per share of $1.06 increased 22% reflecting the additional benefit of our share repurchase program.

Because of the strong performance in the second quarter, we have increased our 2008 earnings forecast to $2.70 to $2.85 per share from our previous estimate of $2.60 to $2.80 per share. We still maintain our previous cautious view regarding the back half of the year. Terry will now discuss the financials in a little more depth and then I will come back and talk more about the outlook. Terry?

Thanks, Paul. Sales of about $381 million in the water products business were 8% higher than sales of $354 million in the second quarter of last year. Sales growth in China more than 30% and pricing actions to cover higher steel costs more than offset lower residential water heater unit volumes. Second-quarter sales of $242.4 million in electrical products declined 6% compared with the same period last year. A sharp decline in unit volumes related to the soft housing market more than offset pricing initiatives related to higher costs for steel and copper.

Overall, second-quarter operating profit increased $3.7 million as a result of electrical products' strong performance during the quarter. Water products' second-quarter operating earnings were $36.3 million, slightly lower than the second quarter of 2007. Lower residential volume and higher steel costs more than offset the strong growth in China, the higher sales in commercial products and pricing actions. Consequently, operating profit margin declined to 9.5% from 10.4% a year ago.

Electrical products' second-quarter operating profit of $22.5 million increased to 24% compared with the second quarter of 2007. In addition to ongoing cost reduction activities, the increase in operating profit resulted from targeted efforts with certain productlines and customers consistent with the profitability roadmap, improved commercial terms, including terms for freight, increased pricing for raw materials and favorable manufacturing cost absorption of approximately $3 million. In addition, the second quarter is almost always the most seasonably strong quarter.

Operating profit margin was 9.3% compared to 7% in the second quarter of 2007. The third quarter will be adversely affected by unfavorable absorption, higher steel costs and lower volume. Thus, the cautionary language we have included in our press release. We want to be cognizant that, because of the seasonality of this business and the strong second-quarter volumes relative to the rest of the year, the margins in the third and fourth quarters will normally be lower than the margin in the second quarter.

Our earnings of $1.06 a share also included a nonrecurring net benefit of $0.03 a share related to the restructuring in our motors business. As planned, we recorded a charge of approximately $2.6 million related to the closure of our plants in Mebane, North Carolina and Scottsville, Kentucky as we prepare to transfer hermetic motor production to Mexico.

At the same time, we recorded a $2.6 million after-tax currency gain related to the closure of our operation in Budapest. As a result, the expense and the gain offset each other and the $1 million tax benefit from the US restructuring flowed to the bottom line, resulting in a $0.03 per share pickup. The second quarter of 2007 included pretax restructuring expense in the motor business of approximately $100,000.

Year-to-date operating cash flow declined to $23 million from $38 million last year. The year-over-year decline was the result of an increase in working capital, primarily inventory, and electrical products related to lower-than-expected sales volume and an increase in raw material inventory related to increased cost for steel. An improvement in the inventory days of water products offset the increased working capital at electrical products and as a consequence, consolidated cash cycle days were flat compared to last year. As a result of the positive operating cash flow, our debt-to-total capital ratio decreased to 31.7% from 34.3% at the end of last year.

During the second quarter, capital spending totaled $25 million compared with depreciation and amortization of $34 million. Capital spending for the year is still expected to range between $80 million and $90 million while depreciation and amortization is expected to total approximately $70 million. We are now projecting operating cash flow of approximately $110 million to $120 million in 2008. I will now turn the call back over to Paul for concluding remarks. Paul?

Thank you, Terry. I just want to update you on some of our initiatives before I conclude with the outlook. First, the roadmap at electrical products. We are making progress with the lean product initiative and expect to complete the lion's share of this product standardization effort in our fractional horsepower motor business by the end of the fourth quarter. We expect big benefits to flow through the manufacturing process from this standardization.

Terry talked about product and market optimization when he referred to improved pricing at targeted accounts. Over the last year, we have gone back to some of our customers where product and contract profitability was really challenged and we laid down new pricing that we believe would put these programs back in the black. In some cases, customers have taken their business elsewhere. While with others, we are now getting paid more fairly.

And finally, our third roadmap initiative, asset optimization, remains on schedule with the closure of the Budapest, Hungary plant completed and the closings of the plants in Mebane, North Carolina and Scottsville, Kentucky to be completed by the end of the year. We continue to expect related cost savings of $5 million in 2008 and annual savings of $20 million in 2009 and beyond. Furthermore, the asset optimization initiative will really benefit from the lean product initiative as cost savings and efficiencies cascade throughout the organization.

In the water products business, China sales grew 32% to $51 million and sales have grown almost 40% year-to-date. In addition to the strong growth in unit volume, the business is also benefiting from favorable currency adjustments. The current planned expansion project to double capacity in Nanjing by the end of next year remains on schedule. For obvious reasons, we are very pleased with the fast growth in sales and profit we are enjoying in China.

As part of our strategy to extend our rapid growth in China to the larger Asian region, A.O. Smith began marketing residential water heaters in India during the second quarter, introducing glass-lined products specifically designed for consumers in that large and fast-growing market. We expect to begin manufacturing in Bangalore, India during 2010.

Now let's finish up with the outlook. To no one's surprise, weak construction markets continue to challenge us and just about everyone else and though we enjoyed higher commercial sales during the second quarter, we still believe the commercial market will weaken further during the second half of the year and this will have an adverse effect on sales mix and margin. But more importantly, the elevated steel costs we are enduring remain our biggest concern regarding our forecast for the balance of the year.

As depicted on this chart, steel costs have risen dramatically and are expected to remain at record levels for the balance of the year. Our ability to offset these higher costs with pricing will significantly affect our ability to make our forecasted earnings and we will continue to look to our customers to absorb the impact of these increases. Though they will help, our productivity programs will not be enough to offset these historic raw material cost increases.

To conclude, our operating units are performing very well in a difficult market. The performance during the first half of this year is a reflection of our ability to operate our plants efficiently, focus on cost containment, and recover increased raw material costs from our customers.

In addition to the full impact of sharply elevated steel costs during the second half of the year, the protracted weakness in the housing market and the likelihood of weaker commercial construction will make the next six months particularly challenging. Because of the sharply higher raw material costs and lower unit volumes in the second quarter, we expect third-quarter earnings to be significantly lower than the record $0.79 per share earned in the third quarter of 2007, which included a nonrecurring tax benefit of $0.10 per share.

Having said that, we are increasing and narrowing our full-year 2008 earnings forecast to $2.70 to $2.85 per share from our previous estimate of $2.60 to $2.80 per share to reflect our strong performance during the first half of 2008. This estimate continues to include approximately $0.25 per share of expense related to restructuring in our electrical products business. With that, we will now open the call for questions. Operator?

(OPERATOR INSTRUCTIONS). Paul Mammola, Sidoti & Co.

Good morning, guys. I think obviously the biggest eye-opener on the page is the electrical products' operating margin and Paul and Terry, you guys both went through a few reasons why that is up so big. I guess I am trying to get a sense of what is the biggest contributor. Is it pricing, the restructuring efforts, or the contract terms you guys have seen so far?

Paul, it is a lot of things and we are not going to start going through a list on a priority basis. That would be giving too much information to our competitors. But we are benefiting from the mix adjustment relative to the targeted actions that we've said we were going to be doing and it is now that those actions are showing up on the income statement. I am equally pleased with all the other things going on. 9.3% margin is certainly better than we have done in recent history, but that is not an acceptable number to us long term.

Okay, that's helpful. (multiple speakers). I'm sorry?

So we are still working on all the pieces of the equation to get the margins up there for us and be able to sustain them.

Okay, that's fair and helpful. So would you say that you are ahead of schedule? I guess in a low-cost steel environment, are you guys ahead of schedule for the 200 basis points addition to the operating margin you forecasted for '09?

I don't think we have a low-cost steel environment.

No, no.

(inaudible) in the future, but, yes, if we could normalize for that, the team is exceeding the original plan.

Okay. And do you have a motor sales growth number for China? I know you put out the water products number.

Double digit.

It is double digits, continues to be. We just, in the interest of revenue, we didn't put all that in there. But we continue to be as excited about the motor business in China as we are the water heater business. It is rapidly growing. This is the commercial hermetic for people on the phone that aren't familiar with it. It is continuing to grow and that is a product that we sell around the world. I think the US is now our number four market for that product. We sell more of it in Asia, Middle East and Europe than we do in the US.

Okay, and just one last thing. Have you guys put out a capacity expectation for the India plant yet? I know it is early, but just trying to get a sense.

No, we haven't. We are waiting for the bureaucracy there to assign the plot of land to us. We have already made a commitment to an industrial park, as have other people and we have been told we are going to get a plot of land. We haven't been told what it will look like, whether it will be a triangle, a rectangle or what. We are supposed to know that any day now. We are ready for any contingency and ready to put up a facility. But as yet, all I can say is that we are marketing the product there, we are shipping it out of China. It is not a China product. It was specifically designed. It has been through full lifecycle testing for the India market and so far, the order rate is running ahead of our expectations, but that is all we can say so far.

Okay. Thank you.

Ned Borland, Next Generation Equity.

Good morning, guys and great quarter.

Thanks, Ned.

Just on the electrical products side of the business, the revenue decline of 6%. How much of that was from customers taking their business elsewhere? I mean can you give us a sense for that?

Well, I think the two biggest, Ned, I can clarify it this way. Obviously, the housing market weakness is part of it, but the other part of it, a rather significant piece, would be the customer actions, the targeted customer actions where -- you said taking it elsewhere. We do have some customers that are paying these much higher prices. So it is a combination of both things. But either way, helps our margin. If we can eliminate a piece of business that had negative margin or if we can get the price up enough to make it positive, both of those help.

Right, okay. So your pricing adjustments basically netted out some customers that took their business somewhere else is what I am hearing, right?

Yes.

Okay. And then just on materials and pricing in both businesses, I mean I think we were sort of expecting that -- last quarter on the call, there was discussion of it takes a little while for the pricing to offset the cost increases. Certainly we didn't really -- it didn't seem from these results that we saw that. It looks like that is going to be coming in the second half of the year. Is your pricing at a level where you think that you are okay versus your raw materials or do you think you need further increases?

Ned, we get this question every call and it is a legitimate question. There are so many moving parts right now and the numbers are big. I'll give you an example. We expect that, based on our feedback from the industry, that the scrap index would go down this month. It went up $105. On an annualized basis, just that piece alone was over a $40 million additional cost to our Company. Our productivity plans don't add up to that. So we are forced, as are our competitors, to go to the customer base and do everything we can to help recover those costs and that is essentially -- we are being conservative in our outlook.

We always want to make sure we continue to be conservative, but there are some big numbers floating around right now and big potential numbers out there. And all I can tell you is that, on the long term, we are excited about what we are going to be able to do on having a larger value-enhancing corporation here and we are dealing with these bumps in the road, in some cases, mountains in the road as they come up and I think our teams are dealing with them pretty effectively.

Okay, and then a couple of small ones here. The voluntary headcount reduction, how is that tracking with your expectations?

We actually had a little bit more benefit in that, but it was negligible.

Okay. And then is there anything left on the share repurchase authorization? What do you have outstanding on that?

We have $1 million -- a million shares -- pardon me -- a million share authorization on that and we are currently involved in the Smith Investment Company proposal to the Company. So that means we are in a permanent no-trade period, so we have done nothing on that.

All right. Thank you.

Mike Schneider, Robert W. Baird.

Good morning, guys. Maybe we can start with water heaters. Just a few questions. The pricing assumptions for the second half, I'm just curious what you have assumed for retail pricing. I know that has been the area of challenge for you. Have you assumed that you do get midyear price increases before the anniversaries of early next year or have you been more conservative?

I can't answer that, Mike.

And just for competitive reasons?

Yes.

Okay. And then commercial water heaters, they were flat or slightly up even in the first quarter, but it sounds like they were down in units in the second quarter. Is that on track with your estimates and have you extrapolated that into the second half?

Mike, it is actually running ahead of what we expected and not a lot, a little bit in the second quarter. We have been predicting that that would decline and we still are, but we still haven't seen it. The business is remaining above where we thought it would be, which is a good thing.

Okay, but you've still presumably embedded more caution for the second half?

Yes, traditionally it does decline over time for the -- after housing, it does decline. But in our second quarter, we did have growth over last year and we are forecasting it will decline. But I can tell you, we haven't seen it yet. It is still holding up.

And in the residential portion of water heaters, did you see a pre-buy in the quarter? We have heard from your competitors and distributors that people were trying to beat the July price increases. I presume you did and can you quantify it?

It was very small, Mike. There probably was one, but as the material costs keep going up, this might be an every quarter event as we continue to go to the market to recover our costs.

So the increase this quarter organically in domestic water heater sales was then all due to price and units were actually down? Is that the right way to characterize the quarter?

Units were down just a very small amount, so it is price.

Okay. And then in motors, I am curious, Terry, your comment about a $3 million more favorable overhead absorption. Can you give us some more color on that and is that year-over-year or sequential?

It is a year-over-year comparison and there is -- last year, there was negative absorption. This year, there is positive absorption. When you look at EPC's inventories, there are actually only up I think $4 million year-over-year. They are up a little bit. In some respects, we are looking at -- you have got steel costs, which are going to increase inventory costs. You have also got a situation where we are closing these facilities and there is a need to build some product in advance of the closing of the facility. So it is not something that we necessarily expect to continue. But when you look at it on a year-over-year basis, there is building of inventories, which creates positive absorption.

That is even in the face of the 6% revenue decline in motors?

Yes. Because when you keep in mind there is also raw material costs in there, so you have got steel costs that are higher and you have got the building of some inventories as a result of the closing of the facilities.

So the motor margins in the second half, your comments there about sequentially lower margins is -- I guess can you give us some sense is it an equal portion of lower production and an assumption around even further declines in volumes or is it one more than the other?

Well, I think that you are right on, that we expect volume declines in the third quarters because of volume declines. We are not going to absorb as much fixed costs, which will cause margin pressures probably in the third quarter as well. So I think that when we look ahead into the third quarter, we are saying we expect that volumes are going to be off quarter-to-quarter and you are not going to have some of these things like we had this quarter relative to favorable absorption.

And then just stepping back a bit, your largest distributor in water heaters is having cash flow problems, even cut their dividends to zero yesterday. Have you done any assessment around bad debts or have you seen any interruptions in shipments?

We have obviously, given the weakness in the economy and everything, we have had a couple of hits over the last year that have hurt us. Both of them happen to be motors customers. Those happened last year. But we are very carefully monitoring things with our customer base and I think the incident you are talking about is just a conservative customer of ours doing what they think is prudent.

I think generally over time, Michael, we have tightened credit policies.

Oh, yes.

So it is something that we look at on a regular basis.

Yes, we mentioned a little bit about commercial terms and the EPC, electrical products comments. That is -- some of it is tightening of credit policies in addition to looking at things like freight allowances and the like.

And then final question, just the operating cash flow, Terry, the guidance was reduced I believe by about 12%. Can you give us some color in there because it looks like CapEx and D&A didn't change?

The biggest item there is that we did not have a pension contribution in the earlier cash flow numbers. We are now looking to make a $10 million contribution to the pension plan and that is the biggest single change from what you have heard before.

Okay, thank you.

Matt Summerville, KeyBanc.

A couple of questions. What is the full-year tax rate assumption we should be using, Terry?

25%.

Okay. And then I just want to be clear on a couple of things. Paul, you mentioned the scrap index, you track pricing up $105. Is that increase what you are calling the $40 million cost headwind and if so, when does that headwind kind of hit? And I guess this gets back to the original question that I would think people are still trying to figure out is, one, in the first half of the year, do you feel you were in parity with raw material costs and selling prices? And based on what you know today, do you feel you are in parity right now for the second half of the year?

What I am trying to say, and let me explain it, the scrap index is one of the indices we use relative to where we buy our steel and what we pay for it. It is typically a quarterly average, so one point does not make the whole quarter, but we were expecting the scrap -- this is the No. 2 bushlings in Chicago of the Chicago Exchange. It was $430 a ton in April. It's $890 a ton now. It's gone up $460 a ton in three months.

Over time, that will be a significant impact on our costs. If all of our indices went up -- we buy 400,000 tons a year. So if all of our steel goes up $100 a ton, then we have got a $40 million annual cost increase from that element. We have had several increases going back to March, April, May, June timeframe. I was just reacting to something that happened four days ago on Monday of this week. And again, I -- believe me, I understand your issues.

All I can say is we are doing everything we can to recover all these increasing costs that are hitting our business and we will continue to do so. But I cannot give in to making statements like the ones you really want me to make. I just can't do that for competitive reasons. Just keep watching our margins. That is the only answer I can give you. Keep watching our margins, keep looking at what we are doing in the business. Are we improving it or not in spite of all these large moving parts that we have going on right now?

How much of the sequential improvement in the motor business do you believe is due to seasonality? I guess I am trying to look at kind of what the base level of margins should be, kind of thinking about the back half of the year.

Very little.

Okay.

Very little of it is seasonal. Our biggest issue there, other than the raw material costs, is the weak housing market in the US.

Okay, all right. That's all I have.

[Jonathan Lewison], Anchorage Capital.

Hi, guys. A couple questions. First, how much of I guess the revenue can be attributed to currency?

Do you have that, John?

Not a significant amount. Less than probably $7 million, $8 million.

$7 million, $8 million? And do you hedge currency at all?

Yes, we certainly do hedge currency.

You do? And then secondly, on the pre-buy, you said that it was very small. I mean we have had pre-buy issues before. I think most recently in the fourth quarter of '07. How did it compare to that?

I think it is safe to say that we have a lot of customers that would have liked to have bought more, but our terms are price in effect at time of shipment and we tend to put some restraints on how much they can buy. It doesn't do us any good to pump up the second-quarter revenue at the expense of the third quarter, so it was negligible. It was a small amount.

And you don't think it should have any real volume impact on the second quarter -- on the third quarter then?

No.

And then --

It hasn't so far. Our order rates are very good.

Are very good. And then what about -- in water products, your margins are about 9.5%, which is about 1% less than the last quarter. In terms of your purchasing of steel, how much of the steel that you purchased this quarter was bought earlier in the quarter than say same time last year?

I think it is safe to say we will buy all the steel we can find at any time. We are able to keep our supply and keep our plants fed with steel, which, by the way, a lot of companies can't say. But we are fairly comfortable that we are going to have a continuing supply, but to say that there is excess out there that we can load up on I think would be an overstatement.

Right. So I mean you are buying -- as we have seen the price kind of run up this year, it has been running up -- it ran up pretty heavily throughout the quarter and you were buying throughout the quarter?

Yes, we are running our factories throughout the quarter.

Thanks, guys.

James Gentile, Newland.

Good morning, guys. Excellent quarter. I just wanted to -- I mean I am looking at the second-half guidance and you guys have been very forthcoming in the weakness that you are forecasting in your models, etc. The Street for the third quarter in particular already has $0.60, which by any stretch of the imagination down from $0.79 would be considered significant at 25%. I mean is there any reason to think that significant would mean more than that?

Well, let me answer it this way. The $0.79 had $0.10 sense of tax one time, so we are really comparing to $0.69.

Okay. So you are using the $0.69.

Yes, and we don't give quarterly guidance.

I understand that.

(inaudible) going to make our earnings as high as we possibly can for the quarter, the year and next year and beyond.

Right.

We feel good about how things are going to go going forward. It is just right now keep reusing the same old phrase. There is a lot of moving parts with a lot of big numbers in it. I am confident that we are doing all the things that we can do to help maximize returns (inaudible).

Certainly, certainly.

We will talk in three months and see how well we did.

Exactly. The Street clearly is already forecasting a very weak second half, so I think you guys are executing fantastically in this environment. Just one more question on pre-buy for water leaders, just to confirm the last comment that you made, Paul, is that you have not seen a significant pre-buy in the second quarter.

No.

Okay, good. And then given the underlying margin trends in motors, no reason to think we are not on track to yield that $20 million in cost savings in 2009?

We are still comfortable that that will occur next year.

Fantastic. And how much stock did you buy back in the quarter?

None.

None. First half?

Let me explain.

The reason --

Go ahead, Terry.

The reason for that, James, is that SICO proposal, the Smith Company proposal, at the time that that proposal was made, from that point on, we are restricted relative to -- for the Company to buy back shares, we are following the same rules that individuals relative to insider information. So we are under a situation where we can't -- we have been advised by counsel that we cannot be buying back shares.

Great. And when is that listed approximately?

When we get the -- the two special committees still have the project, the Smith Investment Company special committee has made a proposal. We formed a special committee and as far as I know, they are still discussing the proposals and going back and forth. At the point of time that we reach an agreement, that will be -- it will be disclosed at that time.

Great. Well, I think you guys are doing a great job. Congratulations.

Well, thank you.

(OPERATOR INSTRUCTIONS). There are no further -- I'm sorry. We just had a last one queue up from the line of Alan Mitrani from Sylvan Lake Asset Management. Please go ahead.

Hi, thank you. Are your competitors going along with your price increases?

I can't comment on that.

Well, why not? In terms of electrical, what is the -- how is that a competitive disadvantage if you comment on that.

Well, it is a concentrated industry. We do not discuss publicly what we are doing. I mean you folks pick it up from the marketplace and whatever is happening. I think it is a safe assumption that anybody that buys steel is seeing increased costs and I think it is a safe assumption that everybody is probably doing everything they can to cover it.

Okay. And the $20 million of cost savings, it seems like a lot of that is physical plants being shut down. Does that have anything to do with -- so does that assume that steel prices keep going up (inaudible) some of the input costs because I know raw materials are a pretty sizable percentage of your COGS in that business?

That doesn't affect our revenue. We are moving capacity to a lower-cost location and a lot of that savings is some fixed factory overhead we have, as well as some labor savings by moving the productline. Capacity and capability will remain the same. We are not giving up any of that. It is just a matter of lowering our variable costs and in some cases, our fixed costs by shutting down these plants and consolidating into existing plants that we already have that can take that additional capacity and capability into them.

Okay. Can you also talk about any divestitures that you are looking to do?

No.

Do you have any strategic moves on the table or is that all part of the Smith deal, too?

Well, the Smith deal doesn't have anything to do with A.O. Smith's asset base at all. We are still going to keep going the way we are. But we are always looking at whatever we can do to improve shareholder returns. (inaudible) all elements of the portfolio we have.

Any idea when we are going to hear something on the Smith proposal?

No.

Is it an '08 event?

I'm not on that special committee and we just had a Board meeting and their report was nothing. We are still talking. So I do not know what is going on there and neither does anybody else on our Board other than the three members of the special committee. They are doing their job as they should.

Thank you.

Mike Schneider, Robert W. Baird.

Hello, Mike.

Yes, can you hear me, guys?

Barely, yes.

Can you just give us some color on the performance of the sub segments within motors, that is just the range of increases and declines in pumps, distribution, HVAC, etc.?

I think it is safe to say that we were primarily down in the housing-related things. We are -- distribution, which has been one of those 10% a year plus growers was probably flat and has been for a while. And of course, as we have already mentioned, we are up strong double digits out of Asia. So that is about as much color as I think I can give for competitive reasons, Mike. I am sure you understand.

Okay, thank you again.

Paul Mammola, Sidoti & Co.

Just one last thing, there were some rumblings about a joint venture for filtration products in Asia possibly. Is there any update on that? Is that still a near term sort of catalyst we can expect?

That is an area that we are reviewing of opportunity. Whether we do it on our own or with a joint venture or acquire or whatever, all those are open options. We don't have any particular route that we are following to get to that, but we think water filtration is a potential market opportunity. We are looking at it as maybe a place to deploy some capital to get some significant returns for our shareholders. A lot of companies are looking at this right now. So we are being in our usual cautionary mode. We will be pretty darn sure if this thing is going to work when we decide to go a different route.

Okay, that's fair. And Paul, and if you could or not, I am not sure, would you classify that as near term or maybe I am asking too much?

Yes, I get in trouble every time I (inaudible) schedule -- that we are going to do an acquisition or a joint venture, but it is still on the list of things that we are pursuing and we are continuing to have multiple discussions in that area.

Okay, thank you.

There are no further questions.

We appreciate everybody's attention. Thank you very much.

Thank you. Ladies and gentlemen, this conference will be available for replay after 11 a.m. Central time today through midnight July 18. You may access the replay service by dialing 1-800-475-6701 and entering the access code 953366. International participants may dial 320-365-3844 and use the same access code 953366. That does conclude our conference for today. Thank you for using AT&T executive teleconference. You may now disconnect.