Avient Corp (AVNT) 2007 Q1 法說會逐字稿

Good day, Ladies and gentlemen, and welcome to the first quarter, 2007 Polyone Corporation earnings conference call. My name is Tanya, and I will be your operator for today. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Dennis Cocco, Vice President of Investor Relations. Please proceed, sir.

Thank you. And good morning to everybody. Thank you for joining us today. I'm Dennis Cocco and today's call, Chief Executive Officer Steve Newlin will make opening comments, followed by our Chief Financial Officer David Wilson and we'll open the lines up for questions. Because we would like to provide as much opportunity as practical for the investment community to ask questions this morning, we ask that if you represent the media and have questions, please call me at the conclusion of the conference call at 440930-1538 Last night, we issued our first quarter earnings release and it's posted within the investor relations section of the Polyone website, which all of our past financials and our first quarter 2010 Q. We're webcasting this call.

In today's discussion, we will likely use both GAAP, generally accepted accounting principles and non-GAAP financial measures. The non-GAAP financial measures are operating cash flow, operating income before specials and the per share impact of special items and earnings per share before specials. A detailed definition and a list of special items can be found in attachment 5 of the release and attachment 6, you will find a reconciliation of a non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of how Polyone management uses the non-GAAP measures. In addition, we will likely discuss statements or other information defined as forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements give current expectation or forecast of future events not guarantees of future performance. They're based on Polyone's management's expectations and involve a number of business risks and uncertainties any of which could cause actual results to differ materially from those expressed or implied by the forward looking statements. I would recommend you review the updated risks in yesterday's press release and the 10-Q because those risks could actually cause results to materially differ from what we expect . With that opening, I would now like to turn the call over to Stephen

Good morning and welcome to Polyone's first quarter earnings call. We're glad you could join us today. I'm going to leave the in-depth quarterly financial review to our CFO Dave Wilson. But first, I want to make a few comments pertaining on to our results and strategy. We earned $0.08 a share during the quarter, this is well below the first quarter last year and really underscores the weight of the cyclical resins and intermediance joint venture income carries in our existing portfolio This situation reinforces the importance of the strategy we unveiled last fall to drive growth in our core business. David Wilson will go into this in more detail. But the earnings comparison decline is really due to three elements. Significant, lower resins and immediate earnings, $32 million lower than in the first quarter of 2006. Also in the first quarter of 2006, we had 8.8 million in one-time benefits that we did not have in this quarter. In addition, first quarter 2,006 earnings were -- 2006 earnings were positively effected by $0.18 per share due to a lower effective tax rate. The results of the way we're now reporting our taxes so these are all the factors that we disclosed in our last earnings outlook.

Despite the declining earnings, there is good news. In our first quarter, we can point to a number of reliable and important signs that are shown within our operating businesses that demonstrate our transformational strategy is gaining traction. Let me start with gross margins. The significance of improving gross margins is a theme I have been hammering home since joining PolyOne So let's talk about how how we did. In the first quarter, gross margins of 13% improve 1 1/2 percentage points compared with the fourth quarter of 2,006. Compared with the prior-year first quarter, gross margins improved .8 of a percentage point and this progress is very encouraging -- because yet occurred under much tougher decisions than we faced last year. The gross margin expansion drove an aggregate double-digit percentage year-over-year operating income improvement for our core operating business segment excluding the RNI segment and the 2006 non-recurring benefit and special item. Driving this improvement were sales mix, pricing and now higher value business closes. Quite honestly, as we indicated earlier, we had not expected to see the impact of our specialization strategy until late this year or early 2008.

So we're beginning to see evidence that we're executing our strategy and moving in the right direction. We know that real shareholder value comes from specialization and delivering sustainable organic earnings growth in our operating businesses. These are the reasons we're striving to improve the mix of our earnings within our operating business. Frankly, I think it's misleading at this time to look at Polyone on the basis of a top-line growth, we're not on a value hunt, that would devalue all the work we're doing to establish ourselves as a provider of specialized solutions to our customers. We want our operating businesses to demonstrate improvements that drive sustainable profitable growth. The top-line growth will come but that is not our focus today. Particularly in North America. So while we're pleased to see early examples of our strategy at work, must much Mark work remains. We continue to see softness in our end markets, particularly building in construction. We're also looking at a new wave of raw material cost increases into the second quarter and this will make for a challenging year-over-year comparisons. But we are focused on maintaining positive momentum.

I've talked before about our vision. To be the world's premier provider of supplies and polymer materials, services, and solutions. I've also outlined the four components of our strategy: Specialization, Globalization, Commercial Excellence and Operational Excellence. I want these strategic components to really remain the focus of our discussions about PloyOne because they really continue to drive our actions. And they're the key to understanding what we're doing and why So first let me talk about specialization for a moment. Many companies talk a good game here. At PolyOne, we are living it. Specialization underpins our entire strategy by differentiating Polyone through innovation and development of new specialized new products, technology and services, wore upgrading our business mix and reshaping our identity as a high-value added solutions provider to our customers. Let me try to give you a couple of examples. We have over 10 years experience with the wood plastics composites, which year -- are used in applications such as fencing, decking, railings and window and door frames. We provide a range of products and services to this market.

To this market, which includes colorants, and thermal plastic additives, color-matching services and vinyl compounds. We just introduced a new line of patent-pending color and additive concentrates for wood plastic composites. Our on-color WPC concentrates are very easy to use and they bring improved color distribution to the difficult process of extruding and molding accumulated wood products. Just one example of how we can bring real value to our customers. We leveraged our technology and processing expertise to formulate the specialized product in a way that gives our customers distinct benefits. We're improving our innovation process to help drive specialization.. This brings us to global situation which, is another core component of Polyone's strategy. We maintaining a vigorous space as we enter and expand a high-growth geographic markets to support our global customers with quality and consistency as you should expect from a global leader. Our international business experienced strong double-digit growth in the first quarter of 2007. Most of our investment is incurring in Asia and Eastern Europe.

For example, construction of our new color plant in Poland, well underway with a targeted opening this summer. During the second quarter, we expect to complete our acquisition of the assets and operations of [NHH Plaschem Company], including a plant in Kuang Dong Province, China, where we'll launch our vinyl compounding operations Last December, we announce that we'd opened a Sales and Business Development office in Mumbai, India. If you're wondering why we're there, India has quickly become the it world's third largest in fastest growing consumer plastics. We've uncovered some excellent business opportunities with global customers such as Whirlpool and many others. The continuing success of our international business testifies to our capabilities as a global partner. And distinguishes us from among the regional competitors, who lack our reach and our broad knowledge base. As we gain and accumulate experience in this arena, we're going to get smarter and stronger. Commercial excellence Well that's all about selling value, not just products. To deliver competitive advantage to our customers. We have been very active here as well.

And the last year, we've hired 65 of the roughly 100 people we expect to add to our sales, marketing and technology teams to support commercial excellence. Going forward, we will continue to prudently add critical resources to drive our strategy. But we're going to do so with an eye to prevailing economic conditions. While hiring great people is a start, but if you strive for commercial excellence, you also have to train them. We're putting our global sales force through in depth value-based sales training with the intent of understanding and quantifying the economic impact of our products and services delivered to our customers. This results in improved performance for our customers and value creation, of course, for our shareholders. In addition, we have aligned our product development process with marketing to effectively commercialize innovations. And we formed dedicated cross functional teams for our key accounts. Commercial excellence helps us create and capture an communicate value proposition to our customers and it really helps our customers improve their operations.

Turning now to our four strategic color operational excellence. This one drives continue us improvement of all phases of Polyone's business in pursuit of improved performance and flawless customer fulfillment. We expect operational excellence to permeate our entire organization. We continue to improve our on-time delivery and the first quarter of 2007, on-time delivery crossed the 90% threshold, that's 7 percentage points better than a year ago and this means something to our customers. Our new goal is to advance our delivery performance another 5 percentage points by the end of 2007, during the first quarter, we completed the Lean Six Sigma introduction to all of our business units. Lean Six Sigma helps us signify work processes and eliminate waste. While we initially expected this first year would be financially neutral with consulting costs and investment offset by savings, it appears we'll be ahead of our earlier targets. During 2007, we now anticipate annual savings of roughly $2 million, net of training and consulting costs. And we fully expect an accelerating increase in Lean Six Sigma benefits in coming years. So just to summarize and move on to the specific financial details at this point, we have approximately one year of transition under our belts and I think it's been very eventful. The new editions to our management team are making their presence felt.

They're breathing new life and fresh ideas into PolyOne. Employees are optimistic about their roles in the visible progress we're making. I came away from our recent North American sales meeting very excited by what I see as real opportunity for success. We have some extremely talented, energized and enthusiastic people in the field. We have been trained to utilize new tools to benefit our customers and PolyOne. I'm gratified to hear in meeting with existing and potential shareholders they support our direction, but I know we still have far to go. No one is more dissatisfied with our stock price than I am. We believe we're making steady, significant advances and we're confident our shareholders will be rewarded. I'm encouraged by our early success. We did not anticipate the degree of measurable benefits that we achieved in the first quarter. It's encouraging but we're barely out of the starting gate. We invite you to watch as our pace accelerates. So with that, I would like to turn it over to our CFO, David Wilson, who will review our first quarter results and our near-term outlet. Dave?

Thank you, Steve and thank everyone, for your interest in PolyOne this morning This morning, I'll be discussing the topics, first quarter earnings, first quarter cash flow and liquidity, and the outlook for the second quarter of this year. First and importantly, we're encouraged our earnings exceeded the street consensus and I'll get into the specific factors that drove this outperformance as I continue my remarks. In the first quarter, sales were $658 million, down 2% from our first quarter of 2006. As Steve mentioned and reflective of our drive to lift the value of our mix of our core business base, half of this decline can be attributed to our shedding accounts where we realized little to no margin. North American demand was also adversely effected by softness in key construction in automotive and end-markets, continuing the trend that became evident during the second half of last year. A different picture exists in high growth markets internationally. Especially Asia and Eastern Europe. where we continue to drive mix improvements through growth and to higher-valued application in support of key global accounts.

We're continuing to invest in additional capacity to ensure that we're prepared to capture the market opportunities in these attractive regions and to meet our customers' needs effectively and stay ahead of the demand curve. International sales growth was also held by the stronger Euro. Operating income in the quarter was $26.5 million compared to 68 million a year ago. This GAAP is fully explained by lower resonator immediate segmented earnings of 32 million and 8.8 million non-recurring benefit recorded in the first quarter of 2006 as well as the net unfavorable swing of $2.8 million largely from environmental-related special items as described in attachments 5 and 6 of our earnings release. The decline in earnings from our Cloro vinyls joint venture investments reflected the anticipated continuation of narrowing of PVC resin product spreads, primarily attributable to substantially lower construction and market demand. Chlor-alkali earnings were down compared to the first quarter of 2006, also reflecting softer demand and moderately lower operating margins. The performance of our core operating businesses, however, was encourage, was encouraging, given the backdrop of a generally weak North American economic environment as noted and defined in the earnings release, these businesses and aggregate achieved year over year operating income growth that was double digit on a percentage basis after taking into consideration the investments we have made to strengthen our commercial teams. Traction being gained from the gross margin improvement plans implemented by each business unit is evident.

Gross margin for the company was 13% in the first quarter, up .8 percentage points from a year ago and a much more challenging, operating environment and up 1 1/2 points sequentially. This meaningful improvement largely result from improving sales mix and gaining new higher value business, we have stated that gross margin improvement is the key indicator of progress of strengthening our core businesses and executing our specialization strategy. The investment we're making to strengthen our commercial teams is evident in the comparison of year-over-year selling and administrative expense. I also emphasize that our investments are only associated with the S as we're rigorously controlling the A. In the first quarter, our S&A, as a percentage of sales was 9.3% in line with our earlier disclosed intentions to raise overall spending through commercial investments. This level represents a 1 percentage point or $4.9 million increase compared to a year ago after correcting for the 8.8 million non-recurring benefit that was in our first quarter 06 numbers. Foreign exchange, salary and benefit and general inflation account for about 40% of this increase with commercial investments representing the balance. As we go forward, we anticipate holding this ratio at this general level with absolute spending rising with sales growth.

In the quarter, interest expense declined $1.3 million in line with the year-over-year debt reduction of nearly $50 million. The increase in interest income is an additional reflection of our stronger financial position and profile. Now, turning to net income, we earned $0.08 per share down from the $0.51 we reported in the first quarter of 2006. And in addition to the drop in resin and intermediates earnings and a non-recurring benefit recorded last year, the decline in EPS was due to the previously-disclosed change in our effective tax rate as we resumed recording tax expense on our P&L, no longer offsetting our tax liability by reversing a portion of our deferred asset valuation allowance. The difference in the effective tax rate positively effected the first quarter of 2006 earnings by $0.18 per share. In aggregate, these three factors account for more than the decline between quarters. I also wanted to point out that this change in domestic tax reporting should not effect 2007 cash flow as the additional domestic tax provision should be offset by our,NOL's. On a pro forma basis, adjusting net income for special items, we earned $0.09 in the quarter compared to the street consensus of $0.8 and $0.33 a year ago. Again, I draw your attention to attachments 5 and 6 in the earnings release where we define special items and reconcile our pro forma earning to net income and earnings per share.

Special items this quarter were associated with environmental remediation charges. Last year, the principle special item was associated with reversing the impact of the deferred tax asset allowance which was the $0.18 tax reporting benefit I just discussed. Now, let's turn to cash flow where our performance was also strong. In the first quarter, net cash provided by operating activities was $3.8 million, compared to a negative $10.8 million a year ago. It's instructive to note in the quarter, even though equity averages primarily from our investments and Oxy Vinyls and Sunbelt were down approximately $32 million compared to the first quarter of '06, the cash contribution from these investments was down less than $4 million. I would like to refer to you attachment 6 of the earnings release where we reconciled net cash provided by operating activities to our internal operating cash flow metric. For the quarter, operating cash flow was 1.1 million and improvement of approximately $6 million compared to 2006. This performance was driven by lower working capital requirements, which more than offset earnings and higher capital investments. Approximately 45% of our capital investments strengthened our international operations and expanded our footprint.

Expenditures in Spain to expand value-added product lines and France, to strengthen our additives market position. In Thailand and China to meet robust market growth and Poland to commence production in this key growth market to capture new business and support existing customers who are migrating their operations into Eastern Europe are examples of investments aligned with our globalization strategic pellar. The strengthening of our financial position is also reflected in our debt-to-EBITDA leverage ratio. For the quarter, our ratio is just under 2.8 x. Our fourth consecutive quarter of being under our targeted 3 x. A year ago, our debt-to-EBITDA ratio was 3.3 x. I already noted that balance sheet debt is down approximately $50 million compared to a year ago. Moreover, the combination of undrawn borrowing facility capacity plus invested cash over transaction or float requirements added up to nearly $200 million of undrawn and available liquidity Let's turn to the outlook for the second quarter of 2007. And as I, do I draw your attention to the outlook discussion contained in our earnings release, as well as to our forward-looking statements.

Overall, as stated in our outlook, we anticipate a modest seasonal pickup in demand sequentially but remain cautious concerning the North American demand environment. Especially with regard to the residential construction in automotive markets. Even though leading building and construction indicators are generally favorable and point to gradual strengthening, we don't expect to see material improvements in the second quarter. We anticipate only modest sequential rebound in construction-related demand but not to levels experienced a year ago. Automotive demand is projected to remain generally sluggish through the quarter. Internationally, our outlook is markably different. We're projecting solid demand across each of our primary international markets, driving continued strong growth in sales and averages. For the total company, we expect sales and shipments to be up slightly compared to a year ago, driven by at afore mentioned strength internationally. Additional new business capture as well as further progress enriching our sales mix are expected to drive year-over-year gross margin percentage in most businesses.

Similar to the first quarter, the most challenging year-over-year earnings comp is associated with our resins intermediates joint venture investments, principally due to lower building and construction demand. Publicly available sources indicate industry PVC resin spreads are expected to narrow modestly compared to a year ago, although price announcements in the market for resins, ethaline, and chlorine make this difficult to project. Demand strengths should be the primary price driver but sustained high energy costs could also be a factor. Sequentially, however, PVC resin price spreads are projected to expand as average PVC resin increases are projected to more than offset ethaline and chlorine prices. Compared to the first quarter, the sales breath -- growth is anticipated due to infra structure demand and the seasonal bump in other construction-related end markets like windows and sidings. We anticipate the [chloralchlol] margins will remain relatively strong and improve moderately compared to the first quarter. There are two other key factors compared to last year as noted in the earnings release. The first is a non-recurring benefit of $2.4 million realized last year and not expected to repeat.

The second is the expected increase in our effective tax rates, similar to what we experienced in the first quarter due to the change in tax reporting for domestic earnings that benefited second quarter, 2006 EPS by approximately $0.15 per share. Overall, we anticipate income to improve sequentially but be below the second quarter of the 2006 for reasons parallel with the first quarter. Lower vinyl chain business earnings, lower non-recurring items and the higher effective tax rate. Despite being in a challenging operating environment, we're encouraged by signs that our specialization strategy is gaining traction. We're improving the value of our sales mix, we're capturing new higher-valued business around the world, we're investing to the develop increase and strengthen our operation and commercial capabilities, and we're investing to expand our position and high-growth markets globally and to deliver valued solutions and outcomes to our customers. All of those factors combine to underpin the meaningful gross margin improvement we achieved and the double-digit year-over-year earnings growth from our core operating business segments. With that, I thank you and I will turn the mic back to Dennis, and open the conference call for questions. Thank you.

Thank you, Dave. Before I ask the operator to instruct you on you how to ask questions, I remind everyone that we would appreciate you keep to one primary question and one follow up. This way we'll be able to accommodate more of you in this morning's call. With that, Tanya, I would like you to instruct people how to ask questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Mike Harrison with First Analysis. Please proceed

Good morning, everyone.

Hi, Mike.

You look at your end markets, obviously you've been have bee seeing outside of North America. But could you walk me through which end-markets growth rates that are above the company average and which are growing slower than the company average?

In North America, the primary challenge, as we all know it, particularly in light of the size and magnitude of our controller vinyl businesses has been the construction building and market demand softness starting in the second half of last year and has continued. Automotive demand has also been sluggish for us and to counter that in North America as we have discussed before, we're working aggressively to shift our mix to having applications on those platforms that are growing rather than shrinking in the market. We continue to look at that but it's off of a smaller base. When we go internationally, there is inherent stronger demand in Asia and Eastern Europe and this is the drive for industrial production is much higher in those regions, a primary driver, where we're seeing specific improvements is the E&E market in Asia and then also in capturing new business, from a combination of things, one, new products that we're offering, as well as the migration of some of our northern, North American or Western European customers into Eastern Europe or Asia. Okay.

Thanks and if I could follow up, can you talk about the turnaround that we saw this quarter in the all-other segment, was that at all related to some improvement in North American engineered materials business or was it really more related to the acquisition that you made in the fourth quarter and then is the all other segment, you think that is going to be a profitable business going forward?

Well, the answer, it's -- it's a great question and I'm glad to answer it. The improvement largely reflects the improvement in our gross margins, some of our North American businesses that have been challenged in the past and we're not going to get into specific businesses, but we're pleased by the progression that we saw in our color business. We talked about that and it's continuing to move. We also did get the benefit as you suggest by having 100% of DH compounding but really, that was not, I wouldn't attribute that as a primary driver. It was more the improvement in our sales mix. From our color business. Our Polymer Coating Systems business also demonstrated good earnings growth and improvement in the mix. Saw a good improvement in both the vinyl [plastisol] segment and the inches portion of that unit. So, it was a combination, partially DH but certainly not all. More of it was explained and can be attributed to really the factors that drove the improvement in our gross margin overall.

Okay, thanks a lot. I'll get back in queue.

Thank you, Michael.

Your next question comes from the line of [Rosemary Morbelli] with Ingalls & Snyder. Please proceed.

Good morning all.

Morning.

You need -- you commented upon raw material cost increases coming your way. Could you give us a feel for how much of the March increase, price increase at your end went through and what you are expecting for the May 1 new increase and with that, will that be enough to affect what you are expecting in the future on the road.

Good questions, Rosemary. The March increase was effective the middle of March. So for the first quarter, it was not going to have a material financial impact. We put it in the marketplace and we are working diligently, customer-by-customer to get as much as we can. You know it's a challenging environment. The May increase that we announced, you know, obviously it's too early to know the success of that, but reflective of the increase in resin, PVC resin as well as the hydrocarbon feeds that would be pushing and causing inflation on that part of the vinyl chloryl business, we would anticipate we would be successful one key factor is also demand. And demand is -- was what usually drives the ability to capture price increases be it for the raw materials or for our products, but it points to our specialization strategy and we said it's going to be very important for us to improve the differentiated aspect of our offering to the marketplace so that we're providing value to our customers so that we're not subject to the roller coaster or the commodity resins and we're working diligently for that.

I will add a couple of remarks to that, Rosemarie. I think our sales force is gaining confidence in gaining new skills that help them do a better job of communicating with our customers that help facilitate passing these costs that come at us on through. If we're doing a good job for our customers, they understand. They don't like -- no one ever likes price increases but understand if you lay them out logically and help them understand what is driving the costs increases. Furthermore, if you differentiated all in the products and services that you're providing to them, they accept them. They never like them but they take it with a bit of a push back always and we would expect that.

But I think we're having the right kinds of conversations with our customers now, helping them understand what they're buying from us and why it's important that we're a healthy supplier to them as well. If we can't invest in resources to provide good sales skills and people who provide good service and the infrastructure to deliver on time and to innovate products, we're not of much value long-term to our customers and most of our customers clearly understand that. I would also say that we are working harder at understanding drivers of raw material and other costs increases earlier to identify them earlier and to react more swiftly. To get out there with customers and not have as big of a delay between when the costs hit us and when we begin to recover. I can't a we're fully there yet but in the past it may have been as much as a quarter gap, three months. I would say we're closer to a 45-day time horizon or shorter now and that's something we're going to keep working on.

Okay. And if I may ask a second question, regarding our R&I, looking at the 10-Q oxy vinyl actually lost money in the first quarter and some gains dropped in just about half. Do you expect oxy vinyl to break even or actually make money in the second quarter and do you also expect to see sequential improvement in Sunbelt, or is it more in one of the joint ventures than in the other.

We would expect sequential improvement in both. We would expect oxy vinyls to -- expect oxy vinyls to do meter than break even. the combination of improved demand. I mentioned we expect a seasonal bump. Not robust, but improved compared to the first quarter as well as improved operating and earned PVC resin spreads as a result of the price increases that they have successfully put into the market in March and are putting into the market in April.

Okay, thanks.

Thanks, Rosemarie.

Your next question comes from the lone of Mike Judd with Greenwich Consultants. Please proceed.

Good morning.

Morning, Mike.

A question about, you have mentioned in your release here you added 65 people to help you grow the business and they should be adding roughly another 45 or, I guess, 35 or so actually to get to 100. What areas have you been adding them in, is it domestic versus international, and what is the timeline to get to 100 and then I have a follow up on that question.

Mike, I would say the hundred is a rough-cut number, going to be close to where we think we'll land and as we get to that point where we think we have the right support and resources in the right places, we'll build that base to support growth and expansion of our business and our margins. But they have been -- these numbers are net numbers. The in's and out's are included and they in sales, marketing and R&D; predominantly in sales. I would tell you there has been a higher disproportionate percentage in international relative to our total aggregate sales base because we think we can get better returns for those people in that part of the world, but it's really a combination of sales marketing and R&D, heavy on the sales side.

Okay, and if you take, you know, the mid-point of your expectations for revenue growth and use the same percentage for SG&A it implies that SG&A should increase by roughly 4 million sequentially in the second quarter, around 60 to 64, is that what we should be expecting?

Mike, I'm not sure how you got that, unless you're expecting we'll be basically seeing a 40-plus million dollar increase in sales. We would expect our S&A as a percentage of sales will continue to be in the 9.3, up to 9.5 area and, yes, we do expect that our spending will be up with increased investments in the second quarter and the $5 million, you know, the next quarter $5 million is probably too precise to give a specific answer on at that time this point.

Okay, lastly on this topic, in still looking at gross profit, which obviously has been improving and heading in the right direction. But you look at maybe an EBITDA margins, those appear, although they have rebounded where they were in the third and fourth quarters, they appear to still be down on a year-over-year basis. Just any thoughts about that or is -- I mean, n other words, you have a strategy and you're sticking to it.

Well, I mean, I think the improvement we have seen in the gross margins is really the reflection and the EBITDA is including the SG&A and I think we've got to be looking at the results of our business and. We've said that we would continue to invest in commercial resources. We've said that even despite those investments, we expect the double-digit earnings growth from our core operating businesses and that we would see the primary driver of that earnings growth coming through improved gross margins. First quarter, we saw a good example of both of that having achieved both metrics. But, clearly I will say we're going to continue to work on driving sequential improvements in our gross margin because we've e talked about specialized businesses to start with the 2.

Thanks for the help.

Thanks, Michael. (OPERATOR INSTRUCTIONS)

There are no further questions in queue at this time, I would like to turn the call back over to management for closing remarks.

That is interesting. I was a little surprised we only had two questions, or only three questions this morning, but actually I was expecting a few more. But that's okay. I understand today is a very busy call day today and I know that a lot of people are on mutual calls. I want to thank each of you for your participation today. Both Dave Wilson and I will be available the balance of the day to take your follow up questions and with that, we'll conclude today's conference call. Thank you very much.

Thank you.

Thank you.

This concludes the presentation, you may now disconnect and have a great day.