Peabody Energy Corp (BTU) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy quarterly earnings conference call. For today's conference, all the phone participants are in a listen-only mode. However, there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) Today's call is being recorded.

Now with that being said, I'll turn the conference over to the Senior Vice President in investor Relations and Corporate Communications, Mr. Vic Svec. Please go ahead, sir.

Thank you, John, and good morning, everyone. Thanks for taking part in the conference call this morning for BTU.

Today our Chairman and CEO, Greg Boyce, will provide an overview of the economy, our markets and environmental activities. Executive Vice President and CFO Mike Crews will review our second quarter. And our President and Chief Commercial Officer Rick Navarre will discuss Peabody's position in the current macro environment.

Forward-looking statements should be considered with the risk factors that we note at the end of our release, as well as of course the MD&A section of our filed documents. We also refer you to PeabodyEnergy.com for additional information. With that, I'll turn the call over to Greg.

Thanks, Vic and good morning, everyone. Mike will review our solid quarter amid the current economic turmoil and Rick will discuss Peabody sales and trading initiatives given the varied market dynamics, but I'd like to focus on our insights into the economy, the coal markets and provide some environmental updates.

Now, the macro economy, it's clear, continues to be driven by emerging nations such as China, India and Indonesia. They led during strong economic times and continue to outperform in recession. Growing at a reduced, but still impressive mid-single-digit pace.

The recent data showing China car sales outpacing the US and a 7.9% China GDP mark for the quarter punctuates the point even further. This is in contrast with the US and Europe, which continue to experience recessionary effects, very cool weather and lower steel production.

Globally, coal is the low cost, large scale global fuel, so it's no surprise that the largest or fastest growing global economies are powered by coal. Coal was once again the fastest growing fuel in the world in 2008, and the five successive years before that. Long-term coal growth is projected to outpace the combined growth in natural gas, hydro, nuclear, wind and solar.

So expanding in the regions that serve the world's fastest growing economies is central to our strategy. Our international earnings eclipsed the 50% mark in 2008, and global growth will be the primary focus of our attention in investments going forward.

Let's turn from the economy to energy. We are seeing stabilization and signs of early recovery in coal markets in the Asia-Pacific region, while neither is yet evident in the Atlantic or US markets. After the end of steel destocking in a number of Asian countries and the annual contract settlements, met coal demand has begun to accelerate while thermal demand is holding its own.

In the global met markets, we have seen a 35% reduction in global steel demand outside of China, which is still up over 2008 levels. Fortunately, global steel cuts have been matched by 45 to 50 million tons of declines in seaborne met output, most of which are in the higher cost regions of the US, Russia and Canada. Regarding seaborne thermal coal, the Pacific supplies are expected to remain largely stable in the second half of 2009, while the Atlantic markets will be down based on sharply lower US exports.

Now, the real market appears stronger than the prompt spot indices suggest. Lack of investment will cause a sharp rebound when economies recover. In longer term, global supply and demand will be dominated by Australia and Asia. More than 200 gigawatts of new global generation that is under construction will come online over the next five years, representing 700 million tons of incremental annual coal demand.

Let's focus on China and India for a moment. China's GDP continues to surprise the world. China is also importing coal at a record rate. May had been the highest month so far this year, until June numbers came in overnight. China's net imports were up an amazing 15 million tons in June, 36 million tons now year to date. As China set a 12-year low mark in exports last month.

In India, rolling blackouts remain commonplace. Coal stockpiles are again at critically low levels, and the imports are rising. Our view is that India will be the fastest growing coal importer over the next decade.

Now as we look to the Atlantic, we are not yet prepared to say that a rebound is taking hold. Steel plant output remains weak, electricity generation is soft, and inventories are high. The strong export story of 2008 is unwinding this year due to lower European demand, and the fact that the US is positioned high on the global cost curve.

The US needs to work through reduced generation, industrial use and exports. So demand for US coal is likely to be some 115 to 125 million tons lower this year. And at the same time, we are seeing coal stockpiles 15 to 20 days above normal. That's a brief look at the international and US dynamics.

Given the Asia-Pacific growth, it is important to note that Peabody continues to build our global coal platform. During the quarter, we finalized our joint venture commitment with Peabody-Polo resources in Mongolia. We agreed to explore joint development of a major open cut mine in northwestern China with LAN, our local partners. We continue to evaluate acquisitions of companies, assets and joint ventures particularly in the Asia Pacific during this opportunistic time.

And our global coal trading business continues to expand. In fact, in recognition of what we see as the strongest and fastest growing markets for coal, Peabody will be establishing a new Asia Pacific trading hub in southeast Asia. The office will further expand our presence in serving the fast growing importing nations, while accessing coal supplies in Indonesia, Vietnam and other nations. You can look for a more detailed announcement later this quarter.

No one else has the leverage to the fast growing Asia Pacific markets. As we look out over a five-year horizon, we only see growth in the two US markets where Peabody is strongest, the PRB and Illinois Basin. But even their growth will be lower than the high growth Pacific centers of China and India. Peabody has the best balance sheet, and we will accelerate our focus and growth in the Pacific markets.

Now, the third area I'd like to review is the recent activity in green coal and carbon management initiatives. This year, we have seen a ramp-up of activity around the world on carbon capture and storage, and the consideration of carbon legislation in the US and Australia. I'll address the latter first.

The US House eked out passage of what is commonly called the Waxman-Markey bill after changing it considerably. It now faces a likely uphill battle in the Senate. We view the House bill as a potential cup half full. On the plus side, it is growing recognition of coal's importance in energy security and affordable electricity.

We also saw major support for carbon capture and storage. Significant changes, however, will be required in the Senate to produce a passable bill.

We've also been encouraged by the acceleration of CCS projects. These have generated new momentum, green gen has started construction. Gasification and retrofit projects are advancing in multiple countries. The US and UK are expanding their funding, and many new companies are entering the CCS space. Peabody continues to participate in more than a dozen initiatives across the US and globe to accelerate CCS deployment.

I believe the Peabody team is performing extremely well and we are executing an operational plan that addresses the tough times. And we're looking past the next few quarters to ensure that we capitalize on opportunities to capture and drive far greater growth, long term.

Now for a review of our finances, I'll turn the call over to Mike.

Thank you, Greg and good morning, everyone.

Peabody turned in a solid second quarter amid the current global recession. Despite the soft demand, our EBITDA was on par with last quarter and our liquidity remains at very comfortable levels. Given the changes brought on by the current economy, I will generally discuss second quarter performance relative to the first quarter of this year rather than a year ago.

I'll begin with the income statement highlights. Revenues for the quarter totaled $1.3 billion or 8% below first quarter, driven by lower pricing on the April 1 annual contracts in Australia. Our trading and brokerage revenues were lower sequentially, however, year to date they were comparable with 2008. And in the US, our revenues exceeded both first quarter and last year, due to higher prices.

Second quarter EBITDA was $324 million, and consistent with our first quarter. Contributions for mining operations rose 5% as higher Australian output more than offset lower PRB volumes.

Tax expense reached $77 million, largely due to the remeasurement of tax liabilities denominated in Australian dollars. The Australian dollar rose 18% against the US dollar during the quarter, adding $48 million of tax expense. The increase in tax expense for remeasuring these long dated tax liabilities is noncash, and obviously beyond our control but can swing the tax line significantly.

In rough terms, every $0.01 change in the A dollar results in a $0.01 change in earnings per share going forward due to the tax remeasurement. This quarter the effect was $0.18.

Back in January, I said that our annual effective tax rate would be likely be around 20%. Assuming today's exchange rate, a noncash currency driven remeasurement we have had so far this year adds another 10% to our effective tax rate.

Now let's turn to the supplemental schedule, beginning with US sales at 47 million tons. Revenues per ton improved 4% from the first quarter on slightly lower volumes.

Western volumes declined 5% from the first quarter at slightly higher southwest of Colorado deliveries were more than offset by reduced PRB volumes. We lowered production nearly 3 million tons in the PRB, as we work our way toward our 10 million tons of planned cuts versus 2008.

You'll recall that we are targeting 2009 production of 185 to 190 million tons, which would be 10 to 15 million tons below 2008 levels. We are on our way toward those levels, with annualized production of just over 190 million tons, but we expect further cuts in the back half of the year. Our reductions are in line with the overall 7.5% decline in US generation that we anticipate for the year.

Turning now to revenues, our western per ton average reflects both a change of mix toward higher priced contracts as well as improved contracted prices over first quarter. On the cost side, western per ton cost reflect suboptimal PRB production levels, as we adjust to lower customer demand and the change in sales mix.

In the Midwest, our improved revenue per ton reflects the roll-off of lower priced contracts and the benefit of contracts signed last year. By holding the line on cost, we have expanded our Midwestern margins for the fifth consecutive quarter.

In Australia, volumes rose to just over 5 million tons versus first quarter's 4.5 million and included 1 million tons of met coal. Our monthly met volumes increased throughout the quarter as Asian customers returned to the market and we secured some new sales to China. We still expect full-year met sales of 5.5 million to 6.5 million tons.

Our revenues at $62 per ton reflect a blend of legacy and domestic contracts, as well as contracts that priced April 1st. Australia costs were $38 per ton, which is notably lower than the first quarter and our run rate. The main driver was a change of mix toward lower cost thermal coal, as well as higher met coal inventories due to extended customer negotiations and related shipment delays. As our met shipments ramp up over the rest of the year, you'll also see the impacts on cost, which we expect to average $55 to $60 per ton for the full year.

Turning now to the balance sheet, cash continues to be solid at $446 million and our liquidity remains near $2 billion. The change for March relates to the timing of Australian tax payments and the higher met coal inventories.

We continue to exercise tight capital discipline, CapEx was $58 million for the second quarter, and $107 million year to date. Total capital for the year is expected to be $400 million to $450 million including sustaining capital of $1 to $1.50 per ton as well as about $100 million for the new Bear Run Mine and $60 million to fund our Prairie State investment.

With most Australian contracts now finalized, we are initiating full-year targets. EBITDA is expected to be $1 billion to $1.2 billion with earnings per share of $1 to $1.40 including the remeasurement effects. I would note that our EPS range assumes stable currency rates for the remainder of the year.

Our 2009 targets include the second half impacts of lower Australian contract pricing, partial deferral of Australian carryover value beyond 2009, lower US production and lower anticipated trading activities industrywide.

One final point regarding guidance, which as you know has been initiated later this year given the delayed annual contract settlements. Because our book of business is so heavily shaped by international commitments, going forward we intend to give our first annual guidance in the April time frame in line with international settlements.

With that overview of our financials, I'll now turn the call over to Rick.

Thank you, Mike and good morning, everyone. I plan to provide more detail on the global and US markets and Peabody's position in those markets.

Having recently visited the major Pacific demand and supply centers of China, Indonesia and India, I would reinforce Greg's earlier comments, the difference between the Asia Pacific markets and the US and Atlantic markets are dramatic.

Starting first with the global metallurgical markets. The current Asian met coal landscape is changing quickly as we are beginning to see the effects of destocking and higher demand. In addition, many customers have been holding off on sending ships until our contract negotiations were finished. This partly explains the recent resurgence in shipping, Peabody's June met coal shipments for instance were more than double our April levels.

Strong shipping and sluggish rail performance has also led to longer ship queues in Australia. This combination has driven tighter Asia met coal margins. The spot price of met coal has moved above the benchmark settlements, and we believe the markets could tighten further as time passes.

Because of the protracted settlements that we discussed, we still have met coal that's unpriced for 2009, and that sets us up quite nicely. Much of the surprising strength in this year's global met markets comes from the scarcity in hard coking coals as well as the rise in China imports.

China demand is real. China has just set a record for six months steel production. Its strong met coal demand means that Australian PCI products are now being pulled back into the met markets and out of the thermal supply and not competing with the thermal coals. And as Greg mentioned we have seen the Australian imports increase 126% this year, quite a significant number.

The last point on met coal is related to the settlements that occurred after our first quarter conference call. You'll recall that on the last call we were just beginning to settle the issues on pricing, volume and carryover terms. We concluded most of our business off the $129 benchmark for the high quality hard coking coals. We also had 1.7 million tons of met contracts that had not been delivered in the prior contract year representing more than $200 million in EBITDA.

During our April call we indicated that we intended to retain this value from these high end business and the good news is that we do expect to recover most of this value. Although some of this will be on a deferred basis with about half coming through this calendar year, and the remainder expected to be realized in 2010 through 2012.

In the seaborne thermal coal, we are also seeing improving pricing. We conclude the bulk of our annual contracts off of the benchmarks in the $71 range. The spot market here is also ahead of the contracted pricing with very sharp contangos in the two to three year forward curves, as much as 50% higher.

We are also strongly encouraged by the sea borne Pacific markets, particularly India, the world's fastest growing coal importer. I have recently met with and spoke with high ranking Indian coal officials and executives who say the nation will need as much as 200 million-tons of imports within the next five years on an annual basis. Even if only half of this occurs, it is a tremendous demand increase for the seaborne markets.

As Greg said, our new Asian trading hub will be part of our increased focus to serve this growing market. I'll now turn to the US market. For the full year Greg referenced a decline in US demand of some 115 to 125 million tons. This is represented roughly by 65 to 70 million tons of lower generation, 25 from industrial and 25 to 30 from reduced exports.

While this paints a cloudy near term picture, markets can change very quickly, and I would emphasize several points. US coal production has begun to rationalize. In the past 4 weeks, the PRB is running at a pace of some 60 million tons less than prior year. And overall US shipments declined by 25 million tons in the second quarter, about 100 million tons annualized, if it stays at that pace.

To be clear, it's our view that this is likely still not enough. But we believe cost challenges will create an unsustainable production level in Appalachia, where at least one-third of the production has a cost structure that's higher than current market prices. Appalachia has also been most affected by low natural gas prices and the significant decline in exports.

New coal plants that are coming online will increase coal use by 70 million tons over the next few years. And will most benefit the PRB and Illinois basin. Regions where Greg mentioned we have the number 1 position.

Yet still with US stockpiles currently well above target levels, it is clear that a US recovery will lag the Pacific markets. That's why we strategically positioned 2010 with our business substantially priced in the United States. And as a result, we have very little unsold US production, preferring to have our major leverage to the strengthening global markets.

With that, I'll now turn back to Greg for concluding thoughts before we open the call for questions.

Thanks, Rick. That's a review of Peabody's second quarter, the state of the global markets and Peabody's near and long-term actions to work through the current economic challenges and position us for even greater long-term growth. I want to thank Peabody employees worldwide for their efforts during the quarter.

We believe we're uniquely positioned where the markets will rebound the fastest and have the highest growth rates, and we've got the market insight and the balance sheet to capture these opportunities.

With that, John, we'd be happy to open up the call for questions.

Certainly. (Operator instructions) First we will go to the line of Shneur Gershuni with UBS. Please go ahead.

Hi, good morning, guys.

Good morning, Shneur.

Had a couple of quick questions. I was wondering if we could start on the guide assumptions for the back half of the year. If I sort of take out the first half of the year, it seems like you're implying certainly on the low end that you expect the second half of the year to be more challenging than the first half of the year. And I was just wondering if you can direct us as to what areas where you expect to see these challenges arising from.

Sure. I think as Mike indicated in his remarks, if you look at the back half versus the first half, obviously we see lower volumes in the US as the full impact of our planned reductions come into effect in the second half of the year. We will see lower pricing for our Australian platform, the full impact of that for the second half of the year. We will be shipping more met coal in the second half of the year but overall the pricing structure will come down. And so those are really the two big impacts to the year.

We also think that our trading platform will be quieter in the back half of the year. I mean, there's been a number of counter parties that have left the market. The amount of trading activity has slowed. So as we look at the back half of the year, we think that area will be down as well.

Okay. And I guess two more just tidying up questions on the quarter. I was wondering if you can kind of give a breakdown of what shipped with respect to met coal out of the Australian operation. What was rollover tons, what was new contracted, PCI, semisoft and so forth.

Sure. This is Rick. That's a lot of detail to go through by quality and we typically won't give it to you by quality. But we did ship, I mean we started to ship in significantly higher quantities in June. And we still expect -- the ultimate number really is we are going to ship 6.5 million tons of metallurgical coal for 2009.

Okay. I can follow up with Christine or Vic, afterwards. Ant then just one more question on the Midwest, we kind of saw a big jump in volumes there and so forth. Can we expect that run rate through the back half of the year or do we expect that to come off as well as part of the volumes falling off in the US?

I think overall we will probably see some of the volumes in the Midwest come off in the second half as well.

And there's also a little bit of anomaly because we have some purchased coal that's in this quarter that makes the overall production number look a little bit higher.

Perfect. Thank you very much.

Our next question is from Michael Dudas with Jefferies. Please go ahead.

Gentlemen, good morning.

Good morning.

For either Greg or Rick, can you characterize since last year in the US coal market, would you characterize what we are witnessing as more cyclical forces or are you seeing some secular changes that will make the US coal industry when it emerges from this downturn different than maybe you would have thought 12 to 24 months ago?

Well, I think underlying that question is the assumption that you have to make about the economy and what's going to drive GDP growth going forward. I would say in terms of industrial demand for electricity as well as the industrial load directly for coal, I think the answer to that question is whether it's cyclical or going to be a longer-term change is still a bit unanswered, quite frankly.

We are very concerned about the overall economic activity and if you will the lack of solid footing and recovery in the industrial load for electricity as well as the direct industrial call for coal. But it is unclear as to whether that's a long-term effect or cyclical, and that remains to be seen.

On the supply front?

Well, on the supply front, I think there's no question that you've seen and we are seeing a transformation in the supply front. You've got the east rising in terms of mining complexity, regulatory complexity and cost structure, which in our view will shift volumes continually to the Illinois basin and the Powder River Basin. Which is why we see those two sectors of the US supply growing over the future while the rest of the US platforms beginning a long term decline.

Thank you. And, Rick, to my follow-up, Rick, commenting on your trips throughout the past two, three months internationally. Could you maybe talk about, you talked very jointly about the demand picture China, India, other emerging nations. How about the supply? Two areas I'm thinking about, one Indonesia, how much can they impact or help satisfy some of that Indian demand? And secondly, possibly South Africa and their appetite to sell more coal into the Pacific basin. How that could maybe impact flows going into the Atlantic.

Good questions, Mike. When you look at the supply side, clearly there's a couple of places where the supply has to come from to feed the growth in Asia and Indonesia. As you know has been the fastest growing thermal exporter over the last five to six years. And that growth has started to slow a bit over quality issues and also regulatory issues within Indonesia to keep more domestic coal at home to satisfy. They have got a large 10,000 megawatt crash program; a building coal fired generation in country. We still see Indonesia as a major player to be able to provide that coal into India. We think that's going to continue to happen.

As we look at Australia, I clearly think Australia is going to -- when it's all said and done Australia will be the dominant exporter of both met and thermal coal at the end of the day. South Africa is moving some coal into Indonesia -- I mean into India, certainly. And it's all about transportation, how much needs to stay home in South Africa. I don't see South Africa personally growing as fast as the other two regions.

Thank you, gentlemen.

Thank you.

Our next question is from the line of Curt Woodworth from Macquarie. Please go ahead.

Good morning and thanks for all the detail.

Good morning, Curt.

Rick, at the McCloskey conference you commented that you expected to see some of the spot business being done on the met side above the benchmark and we have seen a few tenders where that has happened. How much tonnage do you have right now that is unpriced for met that could be sold into the spot market? And do you think you'll be able to see some of those price realizations for you guys specifically?

Two parts to the answer. First, we have realized some of those numbers that are higher than the bench mark. Not at significant quantities because the numbers have just started to move above that number. So the numbers are real.

Second, I'd say without giving away too much on what we have uncommitted, I would say certainly there's opportunities of up to a million tons of production that we have. As we said, because of the protracted settlements we haven't sold all the coal we would have normally sold by now in our met business. So we do have opportunities.

And in aggregate when you look at the 6.5 million tons of met you could sell this year. How much do you think you could ship into China?

We have moved -- it could be a couple million tons.

And that would be out from hardly any last year, right?

We could move more through our trade house as well and we have shipped a lot of coal into China from our trading shop as well. Probably half of what we move into China comes just from trading; by buying coal from others.

Okay.

And that would be up from a very, very minimal amount last year.

Right. Okay. One last question. On the cost performance in Australia, you guided to 55 to 60 for the year. So that would imply the back half would be running at about $60 a ton. And if you look at what the royalty rates are, they are going to be down a fair amount.

So, I mean, based on my numbers, you're looking at COGS ex-royalties up anywhere from $10 to $15 a ton. Is that math right? And what's driving some of the incremental cost pressures in Australia?

Well, when you look at the first quarter, we were a little over $62 but we said we had $8, it was related to the three long long-wall moves that we had. But the primarily decline into the second quarter really has to do with mix. Our normal mix in a quarter on met coal is going to be about 35% of the total.

Right.

And it was only 18, 19% in the first quarter. In addition, within the thermal component we had shipped some additional domestic thermal which is lower cost as well. So it's that mix to a higher run rate on met coal in the third and fourth quarter that's going to drive that overall average cost per ton up.

Right. But even looking at that, I know -- I understand about the sequential but on a year-over-year basis in the back half of the year with kind of a similar met profile, it looks like your costs are going to be up a fair amount, excluding royalties. Is there anything behind that or is that -- maybe we can touch base off-line because I think the FX rate is about similar.

Yes, the -- you're right, the FX rate is similar. We will see slightly lower royalties. We are projecting a little bit higher to merge in the second half.

Yes, okay. Great. Thanks very much, guys.

Thank you.

Our next question is from Jim Rollyson with Raymond James. Please go ahead.

Good morning.

Good morning.

A couple of big picture questions. You guys are obviously kind of highlighting your favorability towards the Asia Pacific market. And you guys have made some moves there recently. Can you maybe, Greg or Rick, talk about kind of the scope and time frame and maybe cost. But your developments in Polo Resources and your recent northwestern China thermal venture; just kind of timing and size and that kind of stuff? I realize it's a little ways down the road but --

Yes, I think to characterize both of those as emerging opportunities is probably the best approach. We are focused right now -- we have got a significant number of license areas that we hold with the Polo -- Peabody Polo joint venture in Mongolia, and we are drilling on a number of those right now.

Our focus for this year and next year is a fairly extensive drilling program as we try to identify which of the best reserve blocks to begin production on first. So I think we are probably several years away from having substantive production out of Mongolia.

In the case of the China opportunity, there's already a small mine that has been started on that reserve block, it's a very large reserve block in western China and we are working with our partner looking at opportunities and timing as to how we might be able to increase the volumes there. Part of that is dependent on the timing of the completion of railroad expansion, which was started and is taking place as we speak. But, again, we are probably looking at 18 months to a three-year window where we would see us getting up to the kind of volumes that ultimately we would look at in terms of that operation.

Fair enough. And this is kind of a follow-up, another big picture question, there was an article in the Journal yesterday talking about the steel guys' negotiations with the iron ore producers. Possibly trying to cut it back to a quarterly negotiation rather than an annual deal. I guess, do you see that gaining any traction? Do you see that spilling over possibly into the met market?

Well, I read that and it's an interesting concept. I mean, we are all having so much fun on an annual basis. I can't imagine why we would want do it on a quarterly basis. And at this point in time there's been no indication and no discussions, no direction on the coal side to move that up to anything less than the annual negotiations.

The iron ore sector is significantly more concentrated. They have got a variability on their supply side. Their lead times are a little bit different and cost structure is different in terms of bringing on new production.

So whether all of that is feeding into kind of a joint view by the sellers and the buyers that they ought to look at a different pricing mechanism. That's a bit of speculation here. But suffice it to say, to move from a protracted annual price negotiation on the coal side to a protracted quarterly pricing negotiation doesn't sound all that appetizing to us.

Figured I'd ask. Thanks guys.

Thank you.

Next to the line of Paul Forward with Stifel Nicolaus. Please go ahead.

Yes. Thanks. On this new pricing for the 20 million tons of planned production for 2010. I guess a couple of questions. One, were you able to commit at levels that could allow you to avoid some sort of margin deterioration from the roughly $4 margins you saw in the western US this quarter? And then two, why in this crummy market environment commit anything at all?

Well, Paul, this is Rick. Clearly, we have got a business to run and we have contracts that have reopener provisions that we have to renegotiate those provisions under the terms and conditions of the contracts in honor of the contracts. And the majority of that 20 million tons if you think about it was, we weren't out in the spot market actively seeking spot sales of new business. We were responding to contractual reopeners. So that's what we did.

So I don't think we were chasing the crummy market by any means. and I think at the end of the day, I wouldn't look at what the spot prices say any way and use as any kind of indication of what our contractual numbers would be.

Yes, Paul, I would say that we probably have seen this past quarter, actually this past half of year, we have probably seen one of the widest gaps and differential between contract pricing and spot pricing we have seen for a long time. Partly it's because of the size of the inventory and there are a few folks out there that are trying to liquidate excess inventory that's disproportionately impacting the spot market versus what we are seeing in the contractual market.

So, we have always said we had a sales strategy to layer in profitable business in all markets. If we are going to maintain a billion ton forward book of sales we have got to be selling 250 million tons of coal every year, that's a pretty high run rate on a quarterly basis for sales.

So -- and, in good markets we accelerate and in slow markets we sell the minimum. And as Rick alluded to, what we priced in the second quarter and a little bit that we sold. We viewed it as the minimum we needed to do to maintain the operations and to meet our contractual requirements.

Okay. Thanks. And you've got a lot of visibility now on 2010 pricing and commitments in the Illinois basin and the western US. Could you anticipate, if you look at contract repricings and so on, that you would have margin improvements, or a loss of margin from full-year 2009 to full-year 2010 in those two regions?

I think the short answer, Paul, is we obviously hasn't finalized the volumes by the particular areas or particular -- whether it's going to be PRB volumes versus Colorado versus southwest versus particular parts of the Illinois basin; the high heat or the lower heat. So it's a bit difficult to give you an average estimate for 2010 plus, it's a bit early.

Suffice it to say that within specific product lines and under our contractual commitments that we have, we are very comfortable with what our margins will do year over year. But to try and say on average what that number or target is going to be without having the mix component completed yet is -- we really couldn't do.

Okay. Thank you.

Our next question is from the line of Kuni Chen with Banc of America Securities, Merrill Lynch. Please go ahead.

Hi, good day, everybody.

Good morning, Kuni.

Good morning. I guess just to go back on the strategic front, can you just give us a sense as to whether as far as your international growth plans, you feel you may be closer to any specific opportunities here or that's still sort of longer out on the curve?

Well, I think -- I think we would be reluctant to give you any kind of a view given all of the things that we have in the hopper. Some of it is short term, some of it is longer term. I think the exciting thing is that when you look at the international marketplace, particularly the Pacific and the southeast Asia markets, the growth rates even under today's view of the future are extremely high. And there are real opportunities out there. And so we are working pretty hard on trying to bring some of those across the finish line.

Okay. And I guess just to follow up on that. Can you just give us some parameters as far as whether or not potential transactions need to be accretive or kind of what you see as the hurdle rates on deals? And where you would feel comfortable taking the balance sheet leverage?

Well, I mean, we have always said that we'd like to have long term our balance sheet leverage in that 40 to 50% range, but at times it's gone higher than that as we have made acquisitions. We were up in the upper 50s at one point in time after the Excel acquisition.

And, the Excel acquisition, you can look at that and say, okay, it was -- it was flat to mildly accretive initially, but then got to be hugely accretive when the markets moved. Our preference is clearly always for accretive acquisitions, but as we look at all of the opportunities out there, we look at that over a multiple year period of time not just for the initial year.

Very good.

As it relates to returns. Clearly, we have the country -- country risk involved in any place we go and do business. And that will factor into the returns that are acceptable and we will be looking for higher returns and these businesses typically do have higher returns than we will get in the US.

Right. Okay. Thanks a lot.

And next Brian Gamble with Simmons. Please go ahead.

Yes. Good morning, guys.

Good morning, Brian.

Wanted to start back on that -- on Paul's question about the 20 million tons, you assigned what you had to with the reopeners. I think people view that as positively not wanting to sign a bunch of coal at these lower prices. But, in light of what you have re-signed and in thinking about your discussion earlier on with regard to your overall Western US cost trends being 1250 and you citing suboptimal production levels as the reason those are ticking upwards.

How should we be looking at that number as we go forward both for the back half of the year and then as we roll into next year and its impact on what overall margins are going to be in the US? I mean, is that 1250 number sustainable in the back half of the year? Does that continue to tick upwards depending obviously on production mix via PRB versus Illinois basin?

I think if you -- if you -- if there was no mix change, then our efforts and our plans are to make sure that we are stable in terms of our cost structure. In fact, we have got a significant number of programs in place right now which are trying to capture the real cost savings that are out in the marketplace to reduce our cost structure. But there will be -- as we see volumes in the back half of the year be reduced. And that, obviously being impacting the Powder River Basin which is the lowest cost structure region, we will see a mix change. But absent any mix change, our intent would be flat to declining costs.

How much of a mix change in the back half should we expect?

Well, I think the way to kind of put it to size it up when you look at where we are today and that's why we think that the number -- we are running at a run rate right now in Q2 out of the PRB is the even million tons lower than what we were running in the fourth quarter of 2008.

Yes.

So we are down substantially when you look at it from the higher run rate of Q4 2008. Not a very good comparison compared to the Q2 of 2008 because we had shut downs and other issues. We had floods and other things going on. So the mix is definitely changing and you're going to have more of the higher cost Southwestern captive business embedded into the number.

Okay. That makes sense. And then when you say that of 2010 you've got volumes between 10 and 20 million tons that are unpriced. What sort of production level does that imply? Is that flat year on year? Is that the assumption you're making there?

We haven't disclosed that at this point in time what our 2010 production levels. We will wait to see what that comes up. When we are ready to -- those tons may or may not get priced.

Okay. And then the -- my last question was in regards to the 1.7 million tons that you're talking about deferring. You talked of EBITDA of 200 million half in 2009 half in 2010 through 2012. Should we spread that evenly between those three years or is it the bulk of it in 2010 with trailing amounts in 2011 and 2012?

I would spread it even. The think the first half as I said in 2009 and I would spread the rest pretty evenly through the rest of the periods. Again I guess to say that taking 10, 12 -- spreading it evenly all the way through 2012 -- March 31st of 2012. So essentially spreading it evenly over a 27-month period if that makes sense for you.

It does. One final question. When you look at the mix in Australia, obviously going to be stronger going forward on the met side of things. You talked about how that impacts the cost. But can we expect realizations to go back to where they were in Q1 or possibly above that? Or because of the deferrals that have happened in the EBITDA shifting and whether you're shifting met customer A or customer B, should we expect those numbers to moderate kind of between what you recognized Q2 versus what the Q1 number was?

Yes. This is Mike. The realizations in Australia would be higher than the second quarter due to the concentration of met that you mentioned but they will be lower than the first quarter as our pricing comes down and we have partial deferral of this carryover value.

Thanks, Mike, that's had helpful. Thank you, guys.

And our next question with Luther Lu from FBR Capital Markets. Go ahead.

Good morning, guys.

Good morning, Luther.

First question, I want to reconcile the Australia realization price a little bit. Because in the press release you mentioned the sales average $62 per ton. But given how strong the seaborne prices are, that implies that domestic price is really, really low. Can you give us some guidance on that?

Yes, I think the answer to that is that you're correct. The domestic pricing is a low pricing. You have to remember that that domestic pricing reflects the way Australia leases coal reserves for domestic contracts and that is they amortize the -- what would normally in the US be up front capital costs of the reserve purchase into the costs or the pricing of the coal into those power facilities. So you're always going to see lower domestic delivered coal pricing in Australia versus what you would see on an export basis into the thermal market.

Okay. Sounds good. The next question is we saw Newcastle yesterday reduce the quota for the producers. Is that going to impact Peabody's second half or shipment volume on the thermal side? And also the DBCT continue to have congestion issues. How would that impact the shipment volume in the second half?

This is Rick. I think on the Newcastle side, they did reduce it a million tons yesterday. And, we have -- due to other opportunities that we have, we don't think that's going to impact us. And in a normal period we could get a pro rata share of that which would be 10 or 15% of that number but we don't think it's really going to have an impact for us on this particular one-million ton reduction. If they were to reduce it more down the road, obviously it would have an impact on us. So with this one, we are in good shape.

On DBCT, they just recently improved the throughput capacity to 85 million tons of DBCT, we hope that's going to help work down some of the congestion there. In both ports, you have a number of what we call dead vessels that don't have coal in them. So that's exaggerating the amount of ships that are in the queue to some extent. And it's not coal they are waiting for Peabody, they are waiting for other producers so it's not a Peabody ship that they are waiting on.

As we look at DBCT we just hope towards the back half of the year, as Mike said, we have got a little of inventory to move in the met coal area and we hope the congestion cleans itself up. The rails have been improving. So we have got our fingers crossed that the best way to set the second half of the year because we can't totally control the logistics there.

Just one more question on Australia. Any signs of the -- they reconsidered the northern missing links to lessen the infrastructure burden in Queensland?

Well, I think it's recently been approved as far as the rail side of things, it has been approved to move forward with that project. A lot is still to happen, a lot of capital still to be raised, and a lot of agreements that have to be negotiated with the rails. As you might understand in Australia, you have different entities that own the ports that own the railroads, that own the cars, that own the above rail. So a lot of parties to negotiate with still.

Okay.

That's -- hopefully we will increase the capacity so there's a lot of things in the works including NCIG down south that hopefully will help throughput. But Australia is always going to be chasing throughput because of the demand and the coal resources they have.

Our next question is from the line of Mark Liinamaa with Morgan Stanley. Please go ahead.

Hi, guys. Can you comment at all on any tangible reasons to help us believe that the Chinese met and thermal coal import changes are sustainable?

Well, I think, our view is you just have to look hard at the Chinese economy and what is driving that economy right now. Their stimulus packages that they have put in place where they are well down the way of actually spending the cash was all focused around infrastructure, rail projects and the like, which is high steel consumption. So that certainly has benefited in the near term the met coal imports.

China is short on any kind of quality met coals at all. So any time that their steel industry continues to grow, which it has even in the face of this recession, they will continue to be increased buyers of met coal.

On the thermal side, all of the power generating facilities that they built still require coal. And in the current market environment, they were very strong buyers of international coals. But it's also a reflection of the slower growth rates and their action to deliver new mined coal in China versus their electricity rates. And we think that's a struggle they may have for a period of time.

And domestically, other than an economic recovery in the back half, are there any sign posts you can point to when we might see an inflection point to inventories? I know that's not a real easy question to answer but it just seems they continue to rise.

Yes, well, of course, the summer that never existed in the context of global cooling in the US and Europe certainly has exacerbated the inventory issues. I mean, the burn rates are down to levels that nobody ever would have estimated. I mean, we are projecting US generation, coal in the fuel generation is going to be down to the 7 to 7.5% range of overall coal demand, which embedded that is the generation.

So, I think unless we have a particular change to where we actually see an increase in underlying electricity using GDP consumption, it's going to have to be a step change, as Rick indicated earlier, a lot of these folks that are kind of hanging off in the high cost part of the cost curve are going to have to start to see some changes. That would be the -- in my view, the early inflection point, before we would see a significant change in the demand side.

Next question is from the line of John Bridges with JPMorgan. Please go ahead.

Good morning, Greg, everybody.

Good morning, John.

Just a question on Australian costs. I'm afraid it's a bit like a broken record but we are just trying to still reconcile this big jump or big difference in the costs. And if I just play around with the numbers, I just can't get to that. Are there one offs involved in that?

Well, John, it's Greg. I mean, basically as you look at our Australian platform, the average cost of our thermal coal is significantly lower than the average cost of our metallurgical coal operations in Australia. That's true for all producers. And to the extent that in the first half of this year, and particularly in the second quarter, our met volumes were so low and our thermal volumes were pretty steady. It was a mix issue.

Now, as we get into the back half of the year, we expect that our met coal is going to be significantly higher than it was in the first half of the year. And so as you add that into the mix at a higher cost, it's really what drives that difference. And what we have tried to provide is a number that we think we are going to hit for the average for the entire year because of that additional met in the back half of the year. Does that help a bit, John?

In general, let me add one point to help maybe to kind of punctuate that. If you look on the balance sheet, John, you'll see that our inventory costs have risen period over period. So what has happened is we have produced the met coal at a higher cost than the average cost that you're seeing on the schedule. And since we didn't ship it, it's in stockpile, it's still below our sales price but it's in the stockpile. So when it comes out of the stockpile, it will come out of cost, which will drive up the cost because it's a higher cost product.

Okay. I think that's probably the missing link. In the western region, is it fair to assume that the reduction is primarily PRB rather than western [bit].

Yes.

Yes.

Okay.

We have actually had a little bit higher on some of our captive mines in the southwest a little bit higher production.

And then a global question. On the met coal, we have begun to see a little bit of the met coal that was idled in the end of last year coming back into the market. Any sense as to how quickly that can come back in more volume?

I think it's going to be slow. I mean, I think, anytime you idle properties, it takes a bit of time to bring those back online. And even ourselves, if we think the markets are strong right now, John, because I was asked the question earlier. How much could I ship into China? I could ship more into China if I could turn on the mines that we throttled back faster. But I can't. And because equipment is taken to other places, shut down, it just takes time.

So this market is starting to kick back in, but -- and that's why prices are going to be strong because you can't respond to the demand side, the supply side can't respond that quickly.

I mean, the good news for us, John, is as we look at our Australian platform, if you'll remember, when we completed all of those capital projects that we inherited as part of the Excel purchase. We have a platform in Australia that has the capacity on an annual run rate to begin to approach the 30 million-ton range. And so right now we are kind of coasting that platform.

So we have the capacity to grow and to meet this market much quicker than anybody else because all we have to do is to just bring back some of the equipment that we moved to other places and or have the contractors add some additional people in additional shifts. Once you get beyond that, and anybody that's got to add real capital for expansion, that's going to take a lot longer period of time.

So I think, our view is we are going to get a good benefit from this change because we do have the ability to produce more tons without capital in Australia.

Our next question is from the line of Brian Singer from Goldman Sachs.

Really following up on some earlier questions including the last one. Looking for just some more color on specifically what China's increased imports have done and can do for Peabody's volumes, especially relative to your guidance. Can you talk about how much met you have sent to China during the first half? And whether the 1 million tons of flexibility you mentioned earlier is that within your guidance range or does that represent upside? And then maybe lastly, if that is coming from trading, why not be more optimistic on the trading potential?

We have shipped 3 million tons of new business into China in the first half of the year and that's continuing to accelerate and if we had more domestic product available, as we said earlier, we could probably ship more than that. And of course we have sent some of that through trading as well. I'm not sure I'm following you on the million ton [question].

I guess to the extent that you can sell an extra million tons, would you then beat your guidance for overall Australia volumes or is that within the range of the 20 million to 23 million?

If we could sell an extra million tons and we could source it, it would be upside.

And move it through the infrastructure in Australia.

Right. And that, I guess, is my follow-up. Which is you touched on the last question on the fact that it does take a while to get things operating. What is that lead time? So we have now seen China increase their met imports substantially for, I guess, a good four or five months here. And so are you in process to try and begin to move some of the equipment needed to raise volumes as needed or is there more that you still need to see and how long would that take?

Well, I mean, we are in the process as we look at this and look at where we are going to be for 2010 as we -- and as we said, we think we are going to move more coal in 2010 than we did in 2009 as a result of the uptick in volume. To put it in context, what you have to think about is that there were a number of the traditional customers, because of their destocking exercise and if you look at where steel supplies come from, that actually didn't take as much volume this year as they took in the previous years. So what's happened is China has soaked up the difference is what's really happened so, when those new customers -- the traditional customers come back to market at the same levels is when we are really going to have a significant amount of production to meet.

And the net effect of what China's purchases have done is not only support the met coal but has supported the thermal coals as well because they have bought a fair bit of PCI coals which have, absent their purchases would have stayed into the thermal side of the business, so overall it's just helped to pull that volume out of the Pacific market that, as Rick said, was reduced from the traditional customers. To the extent our view is that they stay in the market and the traditional customers begin to come back in for both the thermal and met, it will put that much pressure -- more pressure on the markets. Our strategy in Australia, part of our high stockpiles down there and our higher inventories were related to more longer and more protracted negotiations than we anticipated, but part of it also is our strategy to make sure that we always have coal on the ground available to put into railcars and send them to port when other producers have production or shipping issues, which happens all the time in Australia.

I mean, you look at the vessel queue at both Dalrymple Bay and New South Wales and a quarter of those vessels are what we call dead vessels. They are destined for producers that just don't have the coal available. So to the extent that we tried to be opportunistic, just like we are in everywhere else that we produce, we have added a little bit of extra inventory on the balance sheet. Now, we think a significant amount of that does come off in the back half of the year but we will run a little higher than normal so that we can take advantage of these market opportunities when they arise.

Next question is from the line of Mark Caruso with Millennium Partners. Please go ahead.

Few clarifications. The first was Rick I want to make sure I heard you correctly on the carryover tons in the last call it was 1.7 million tons and I thought you said earlier that you guys were only getting partial credit but then when Brian Gamble asked the question earlier it sounded like we were going to get 100 million this year and 100 next year so I just wanted to make sure I -- which part of that is correct.

I think what happened in the last call when we talked about it, we had said that we were going to negotiate tough to get all of our credit. We had some tons at risk for sure on the semisoft side of the ledger and but as we -- we have held tough and we think we are going to get the majority of the value of that 200 plus million, we will get 100 million in 2009, and we will get the remainder in Cal 10, Cal 11 and the first quarter of Cal 12.

Great. And then as far as the committed tons, it looks like you guys booked 20 million more, but last quarter -- you sort of changed the way that you guys reported. Last quarter you gave a percentage committed. This quarter you gave the total tons number for next year. Is it safe to assume that you've gone up, pretty substantially above the 80% you were priced and committed last quarter?

Yes, we are 95% committed and 90% priced probably at this point in time for the -- in the US. So that's substantially priced really at the end of the day. There's very little left to price.

Okay. But at the same time once again we go back to the 20, over half of that was purely just reopener business that was all contractual in nature. Okay. Great, and then you said earlier that you think 6.5 this year. Do you guys feel good about -- I know, Greg, you just mentioned you had the capacity to ramp back up to 30, the way that things are shaping up. Is it feasible to be 25 plus next year or is there just sort of a slow grind of ramping back up that will mess up timing there and it will be more of a run rate?

I think we would anticipate next year we would be up, in that 15% range in our Australian platform across the board.

Our next question is from the line of David Lipschitz with CLSA. Please go ahead.

Hello, everyone.

Good morning.

Good morning. Question for you on -- there's a question earlier about going to quarterly contracting. What about just going purely to spot? That way you wouldn't have deferrals. It would just be whatever the price is.

Well, the biggest problem is particularly in the Pacific rim is the spot markets or the exchange traded numbers, I mean, those volumes are very, very small and are really only on the margin for the total volumes that take place in the Pacific rim. So until you would ever get to a point where you'd have highly liquid and very large exchanges, you really wouldn't want to price off of those. It would be no difference than, why we don't price off the exchanges in the US, particularly out in the west, is because they don't really reflect the underlying contractual market or the fundamentals of what's happening with supply and demand. Maybe that's going to be a recipe that the steel guys thinks make sense in order to drive a longer-term balance between supply and demand, but, it doesn't on the surface seem like it's something that we would be interested in.

Sometimes if the price goes higher from this 129, you lose out. If the price goes higher, then they drop the price lower, you lose out as well because they defer a lot of those shipments. And it just seems plausible from that perspective.

I mean to the extent that you have to be able to plan capital investments in this business, I'm not sure we would want to be exposing 100% of our platform to the kind of volatility that we have seen in these markets. We like the volatility on the trading side because we make a lot of money off the volatility, but we want a little bit of our book or a good portion of our book under contracts that we can plan for the capital investments that it takes to maintain and grow the business.

Thanks.

Our next question is from the line of Laurence Jollon with Barclays Capital. Please go ahead.

Good morning. Regarding the $480 million term loan that matures in two years. Can you update us on your plans in the coming months. My thought is given the improving bond markets, thought maybe the access to the bond market could term out this maturity and potentially prefund any acquisitions or investments such that you wouldn't have to draw on the revolver.

There's no question the bond market has gotten better and the bank market remains relatively weak. It doesn't mature until September 2011. We will start looking at that over the next several of months. We may end up terming that out but at this point I would like to have the bank market excess ability in terms of prepayment but by terming out as a replacement of debt. And I still have pretty good headroom under the credit facility as well. Under the revolver.

Okay. And as my follow-up, can you provide us with a dollar amount of investment and joint ventures on your second quarter cash flow statement? The reason I ask is the second quarter operating cash flow of $39 million looked a little weak and I thought perhaps it was affected by cash outlays for the Polo Peabody and the Prairie State investment.

Yes. The Polo investment was $10 million. The biggest thing that's impacting the cash flow is the working capital movement and that was largely driven by the inventories in Australia.

Our next question is from the line of Lasan Johong with RBC Capital Markets. Go ahead.

Thank you. In your 65 to 70 million-ton reduction in generation consumption of coal, how much of that do you attribute to switching from coal to gas and do you think it's going to accelerate, stay the same or go down from your original provisions of about 25 -- projections of about 25 million tons.

On the coal to gas, we started out the year looking at 10 to 15 million tons and I think the last quarter we said we could probably see ourself at the higher end of that number and I guess today with what we have seen with the continued suppressed gas prices, we would probably be closer to the 20 million-ton impact related to coal gas switching on those marginal coal plants mostly located in the East.

And did I hear you correctly that tax rate is changing from 20% to 30%?

Yes. We have said our normal run rate would be around 27%. Because of this tax remeasurement that we had, that's going to add about 10% to our rate. That's a book rate. In terms of our cash taxes it does not impact it, that incremental 10%.

Our next question is from the line of Justine Fisher with Goldman Sachs. Please go ahead.

Good morning.

Good morning.

I have a quick question on coal cargoes going from Australia to China. We had heard I think it was a couple of weeks ago that there were some cargoes that had been cancelled when the coal was already on board. I'm wondering if you guys have heard anything like that, over the last, I guess, month or two?

Justine, this is Rick. I saw the one that you're talking about that was published in the, in the trade publications and it was a steam cargo that somebody didn't accept, I guess, and I think it was a one-off situation. We personally haven't had any issues with any of our cargoes that we have shipped into China, so I think there were people that were looking for the Chinese not to potentially honor some of the shipments as the prices moved up and the import activity changed, but to the contrary, they have been, good to do business with, and we haven't had any issues.

Okay. And then the next question also related to China is, I'm trying to reconcile the bullish commentary on China with the guidance which isn't necessarily lower because you guys hadn't given guidance before, but with the sort of subdued, I say numbers for Australia going forward and if the outlook is truly bullish for Asia, why are we not seeing more CapEx spend to develop production or to increase production back up again in Australia and what would it take for us to actually see that?

Well, first of all, as we indicated, we don't need to spend CapEx in Australia in order to increase production, and as I indicated earlier, we are already planning on higher production rates the back half of this year and more importantly next year, because of what we are seeing in China. What other producers need to do relative to their CapEx spend, some of those producers are having global issues relative to CapEx and they will have to make their own decisions relative to met coal, but we are planning on increases to the back half of this year and what we believe will be a healthy increase next year.

Okay. And then just the last question on the US market. I know that last quarter you guys said that you had not been approached by any of your utility customers to defer US shipments and you hadn't been approached to make any deals for them to pay you to keep tons in the ground. Is that still the case? Because we have seen some other US producers announce deals over the second quarter where by utilities paid them not to ship coal.

I think Justine, I think maybe it was unclear what we said last time but I think last time we said we had had very few approaches last time and we had made some settlements with certain customers where we took some buyouts and that did happen in the last quarter. Not any significant tons by any means. Have we had people approach us this quarter? Sure. And, we continue to work with those customers if it makes sense and if there's, through the options of either buying out, deferring schedules, moving coal from different locations because we have such a wider portfolio, but just taking, not shipping coal that's in the money, we are not doing that.

So, we are trying to preserve our rights and move the products. So you've seen others announce it because it may be more material to them. The transactions and the amount of tons that are being asked of us are, A, small compared to the overall portfolio so there's really no reason to have public discussions around them. But we are working through them with our customers as we always do.

We have time for one last question. That will be from the line of Sanil Daptardar with Sentinel Investments. Go ahead.

Thanks. On the back three arrangement, how long will this continue? Is it just for a short period of time or it's going to continue into 2010 too?

It's related to FX rates and as the FX rates move, it changes. Essentially it's a fixed balance related to deferred taxes relatively fixed balance, and as the foreign exchange rate changes, compared to the dollar, that you have to remeasure those tax liabilities and if it stays flat, nothing happens. If it moves as Mike says $0.01, it moves P&L one way or the other.

But no impact to the cash flow statements?

None.

Okay. You talked about India going to be a major player in the next decade. Are you having any discussion with Indian utilities to ship coal into the next decade into that country or are you primarily thinking that you will remain with China as major exporter to China?

Well, I think it's clear that they are going to be significant opportunities to ship coal into India and, we will pursue opportunities to be able to be a participant there as Greg mentioned we are going to open a new Asian trading hub and one of our destinations for coal will be India.

And I'll turn the conference over to Mr. Boyce for any closing comments.

Thank you very much, John, and I thank everybody for your interest in Peabody and BTU. As you can see, we feel good about how we are weathering the current economic climate, but feel very good about what we see particularly in the Pacific rim and the Asian markets on a medium to longer-term basis and we look forward to keeping you all updated on our progress in our future calls.

Ladies and gentlemen, this conference is available for replay. It starts today at 12:30 p.m. central, will last until August 21st at midnight. You may access the replay at any time dialing 800-475-6701, or 320-365-3844, the access code 103353. Those numbers again, 800-475-6701, or 320-365-3844 and the access code 103353.

That does conclude your conference for today. Thank you for your participation. You may now disconnect.