好市多 (COST) 2013 Q3 法說會逐字稿

Good morning.

My name is Angela and I'll be your conference operator today.

At this time, I'd like to welcome everyone to the third quarter FY '13 operating results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

Mr. Richard Galanti, CFO, you may begin.

Thank you, Angela.

Good morning to everyone.

This morning's Press Release reviews our third quarter operating results for the 12 weeks ended May 12.

As with every call let me start by stating that the discussions we're having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that these statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements.

The risks and uncertainties include but are not limited to those outlined in today's call as well as other risks identified from time to time in the Company's public statements and reports filed with the SEC.

To begin with our 12 week third quarter, for the quarter earnings per share came in at $1.04 per share, up 18% from last years third quarter earnings per share of $0.88.

For the third quarter total sales were up 8% and our reported comparable sales figure was up 5%.

During the quarter sales were impacted by both gasoline price deflation and by weakening foreign currencies relative to the US dollar year over year such that the 6% US comp sales increase in Q3 excluding gas deflation would have been 7%.

Our reported 4% international comp figure, assuming flat year over year FX rates, would have been plus 7% and total Company comps again reported for the quarter at 5%, excluding both gas, deflation and FX impact, would have come in at 7% as well for the quarter.

In terms of new openings, after opening 14 new locations during the first half of the fiscal year, we opened five additional Costcos in the third quarter, two in Japan, in Kitakyushu and Hiroshima, and one each in Chihuahua Mexico; Wheaton, Maryland; and South Hampton, UK.

All total that puts our fiscal year 2013 openings through the third quarter at 19 new locations and we now operate 627 Costco warehouses around the world.

Between now and September 1, the end of our fiscal year, we expect to open an additional nine locations, three in the US, three in Japan and one each in the UK, Taiwan and Australia such that we'll most likely end the fiscal year with 28 new openings for the year.

And that's up [relatively] from 16 net openings in Fiscal 2012.

Also this morning I'll review with you our membership trends, our eCommerce activity and of course additional discussion about margins and SG&A.

For our third quarter, again, sales were up 8% from $21.85 billion last year in the third quarter to $23.55 billion.

Again, comps on a reported basis were plus 5. 5% reported comp sales results were a combination of a flat average transaction for the quarter.

Of course that included the detriment from both the FX and gasoline which together represented about 1.5 percentage points, and an average shopping frequency increased of about 5.5%.

That compares to a fiscal year to date shopping frequency number of about up 4.5%.

So pretty strong frequency there.

Cannibalization for the quarter was pretty similar to what it was the prior quarter that negatively impacted sales by approximately 60 basis points.

And given our expansion I don't anticipate much change in that.

In terms of sales comparisons by geographic regions, all US regions were in the mid to high single digit comp increases, with Texas and the southeast being the strongest.

Internationally expressed in local currencies, Korea and Taiwan were on the weak end of that range, with Canada and Mexico being the strongest in terms of comp sales increases.

In terms of merchandise categories -- in terms of sales by merchandise category for the quarter, for the third quarter within food and sundries, mostly in the mid single digit range with deli, beer and wine and candy being the relative standouts.

Within hard lines, overall in the high single digit range, the departments with the strongest results were hardware, lawn and garden, and consumer electronics.

Consumer electronics by [day] sales were in the mid to high single digit range for the quarter.

For soft lines, up about 10%.

Small electrics, housewares, jewelry and apparel were the standouts, with media as expected continuing to be on the relatively weak side.

And within fresh foods where comp sales were in the high single digit range, deli and produce showed a little better results than the other areas.

Moving to the line items of the Income Statement, membership fees came in at $531 million, up 12% or $56 million from last year's $475 million, also representing about an 8 basis point increase year over year.

In terms of membership we continue to enjoy the strong renewal rates and I'll go through that in a minute.

Continued increasing penetration of the Executive Membership and of course as I've mentioned for several quarters now, we're still benefiting from the $5 and $10 membership fee increases that began in November 2011 in the US and Canada for new sign-ups and in January of 2012 for renewals.

Due to deferred accounting treatment for membership fees, of that $56 million increase during Q3, a little over 50% of it was due to that annual fee increase and how that rolls into the book P&L over about a -- just under a two-year period.

And as previously mentioned, membership fee income will continue to benefit from this deferred accounting for that fee increase throughout the fourth quarter of 2013 and to a lesser extent into the first fiscal quarter of fiscal 2014 this Fall.

New membership sign-ups in Q3 Company-wide were very strong, up 19% year over year.

That strong performance is mostly reflective of the very strong sign-ups we had in our Asia openings this past March in Japan.

In terms of number of members at Q3 end, at Q2 end we had 27.8 million Gold Star members.

At Q3 end, 12 weeks later, that was 28.2 million.

Primary business went from 6.5 million a quarter ago to 6.6 million.

Add-ons remained at 3.5 million and you add those numbers up, Q2 end we had 37.9 million member households and 38.3 million at the end of the quarter, with the extra spouse card 69.1 million at Q2 end and 69.9 million at Q3 end.

At May 12, the third Quarter end, paid Executive Memberships were 13.3 million, the vast majority of that of course is in the US and Canada.

We also offer it now in the UK and Mexico.

That 13.3 million by the way during the 12-week quarter represented an increase of just under 250,000 or about 21,000 additional paid Executive Members per week increase.

Executive members are just over one-third of our member base and a little over two-thirds of our sales.

Within the quarter, the -- I'm sorry, on a year over year basis the percentage of members of being Executive Members was up about 1 percentage point which of course would translate into about a two basis point hit on margin as with the reward.

In terms of renewal rates, they continue strong.

Again going back a quarter ago, business renewal rates were 93.9%.

At the end of the quarter they remained at 93.9%.

Gold Star went from 88.8% tweaked up a little bit to 88.9%.

So total in the US and Canada, these are US and Canada numbers, was 89.8% at the beginning of the quarter or the end of last quarter and tweaked up to 89.9% at the end of the third quarter.

Worldwide, at the end of the second quarter we were -- I mentioned last quarter we were up at 86.5% and that tweaked down one tick to 86.4%.

Again when you open new warehouses you tend to start off with a lower renewal rate, particularly in countries where outside of the US and Canada and so that's to be expected.

Going down the gross margin line, our gross margin in the third quarter was higher year over year by 12 basis points, coming in at a 10.67% in Q3 versus last year's 10.55%.

As usual I'll ask you to jot down a few numbers.

The columns would be -- we'll just do the third quarter here.

Two columns, reported and then without gas deflation and the line items would be core merchandising, the second line would be ancillary businesses, the third item -- line item would be 2% reward and the fourth item would be LIFO, the fifth item would be Other, and then a total of course.

So again, going -- the two columns going across, the reported core merchandise margin was down 5 basis points and without gas deflation down 11, ancillary businesses were plus 6 and plus 5, 2% reward was minus 2 in both columns, LIFO was a credit, so plus 6 in both columns, and Other, which is a non-recurring lawsuit recovery, which benefited margin this quarter by 7 basis points.

So plus 7 and plus 7. If you add the two columns up, the first column of course Reported comes up to the plus 12 basis points that we reported and without gas deflation, plus 5. The core merchandise component again was minus 5 on a reported basis and a minus 11 excluding the benefit of gas deflation.

The four core categories, food and sundries, hard lines, soft lines and fresh food each showed lower year over year gross margin percents as we continue to invest in price, both in our domestic and our international operations.

And as I've stated before, this is Costco playing offense.

It's driving sales, member shopping frequency, member sign-ups and renewals and market share.

Ancillary business gross margins I mentioned was up 6 or 5 without gas deflation basis points.

Margins were stronger in the one hour photo mini labs, the optical and the hearing aids, slightly lower in pharmacy and gas was slightly positive.

The impact as I mentioned earlier on the Executive Membership increased penetration was minus 2 basis points and as I mentioned LIFO, the year over year is a 6 basis point swing.

Basically we recorded a $8 million or 3 basis point pretax credit during this quarter.

And lastly Other as I mentioned is a non-recurring legal settlement that we received in Q3.

Moving to reported SG&A, our SG&A percentages Q3 over Q3 were lower or better by a reported 3 basis points, coming in at a 9.82% this year versus the 9.85%.

And again, the two columns reported and then without the gas deflation and five line items, core operations, central, RSUs, quarterly adjustment and total.

In terms of core operations, the reported piece was plus 2 basis points, without gas it would have been plus 7 or better -- plus means lower or better, and so we had 7 basis points of positive there.

Central was plus 2 and plus 2. RSUs was minus 1 and zero.

Quarterly adjustments actually was zero and zero such that total we reported a plus 3 or SG&A lower by 3 basis points, again on a more -- in our view on a more normalized basis, it would have been lower by 9 basis points if you exclude the impact of gas deflation.

In terms of a little editorial on SG&A, again the reported 3 excluding the deflation would have been better by 9. The core operations component was better or lower by two year over year and again 7 by excluding gas deflation.

Within core, our payroll as a percent of sales improved year over year by 4 basis points.

Total payroll dollars actually increased about 6.5% in the quarter compared to the 8% total sales increase.

In addition to improvement in payroll we were able to leverage benefits including healthcare and workers' comp.

They were leveraged during the quarter by a few basis points.

Actual healthcare costs in the US, which is the key driver of this area, eased a little bit, up around 6 percentage points in dollars during the quarter.

That's down from low double digits in the past couple of quarters.

Our central expenses as I just mentioned was better or lower by 2 basis points.

That's by the way notwithstanding the fact that the ongoing IT modernization cost which I've talked about in the last few quarters.

During the quarter that represented about a hit to SG&A or higher SG&A by about 5 basis points.

So notwithstanding that impact of minus 5 in the central category, we still showed a lower by 2 there, so overall I think pretty good expense control and certainly helped by strong sales results as well.

Next on the Income Statement, pre-opening 6 million last year and 10 million this year.

We opened four openings -- net openings last year in Q3 and five this year.

All told, operating income in the quarter was up $100 million or 16% from $623 million last year to $722 million this year.

Below the operating income line, reported interest expense was $6 million higher year over year in the quarter coming in at $25 million versus $19 million a year ago.

If you recall last year on March 15 to about a little over a month into the fiscal quarter, we paid off a $900 million fixed rate 5.4% interest debt.

This represented about a $4 million reduction in interest expense year over year in the quarter.

Offsetting that $4 million reduction of course was our December offering of $3.5 billion debt offering in late November of Senior Notes with an average -- a weighted average interest rate of just under 1.25%.

For the 12 weeks that's about $10 million increase of course in interest expense.

So the $4 million reduction and the $10 million increases, that is the $6 million net increase that we're talking about here.

Interest income and Other was lower year over year by $3 million, coming in at $15 million this year versus $18 million a year ago.

About two-thirds of that $3 million delta is actual interest income being lower this year, coming in at $9 million this year compared to $11 million last year, and Other rounded to the last $1 million both relatively similar numbers in the -- within the interest income and Other line.

Overall pretax earnings were up $90 million or 14% from $622 million last year in the quarter to $712 million this year.

In terms of our income tax rate, very close to being the same in both third fiscal quarters--34.81% this year, down just a tick from 34.84% last year, so essentially the same year over year.

Overall net income was up 19% from $386 million last year to $459 million this year.

While the balance sheet is included in this morning's Press Release a couple of items I usually point out, depreciation and amortization for the quarter totaled $221 million and that brings year-to-date for the three quarters to $651 million.

As you look at the balance sheet of course if you look at Accounts Payable as a percent of inventories, on a reported basis it was 104% a year ago and 102% at Q3 end.

That includes payables for things other than merchandise, most particularly all the construction and expansion activity we got going on.

So if you look at just merchandise payables to actual inventories, it was 92% last year and a tick down at 91% this year.

In terms of average inventory per warehouse, I think in the last several quarters on a year over year basis we've generally shown numbers in the $600,000, $700,000, $800,000 increase range or 5% or 6% or 7%.

This quarter on a year over year basis it was up $400,000 or 3%, coming in on an average of $12.2 million versus $11.8 million a year ago.

Just over 50% of the $400,000 increase related to higher levels of merchandise and food and sundries scattered among various sub-departments, about $100,000 was consumer electronics with a balance spread over a variety of other department -- non-foods departments.

Overall, inventories are in good shape, as well our mid-year physical inventories, which were taken back in January and February, were our best ever.

So we continue to do well in terms of -- in our view in terms of inventory control and how that relates to operation safety as well.

In terms of CapEx, in Q1 we spent $488 million, in Q2 $455 million and the quarter just ended, $435 million, so to date just under $1.4 billion.

Our estimate for the year is right at $2 billion and that of course compares to fiscal 2012 expenditures and CapEx of $1.5 billion and of course reflects the fact that we're opening quite a few more units than we did a year ago.

In terms of Costco online, we currently operate Costco eCommerce activities in the US, Canada and more recently in the UK.

For the third quarter sales of [all fits] were up nicely over last year.

Q3 eCommerce sales were up over 20% both in the US and Canada and as I mentioned Costco UK started less than a year ago.

In terms of expansion, as you recall in the last two full fiscal years, in 2011 we opened 20 net new units, in 2012, 16.

To date for the first three quarters this year, 19.

And our plans are to open nine in the quarter.

That would put us at 28 for the year.

So as compared to fiscal 2012's expansion of about 3% unit in square footage growth, this year's 28 units on a base of -- beginning base of 608 would be about 4.5%.

New locations by country for the year, of the 28, assuming the 28 would be 13 in the US and three in Canada, three in the UK, seven in Asia, one in Taiwan, and Korea each, and five in Japan and then as well one additional unit in Australia and one in Mexico.

As of Q3 end our total square footage was 89.709 million square feet so again an increase of about 4.5% year over year.

In terms of common stock repurchases, as you know, we purchased a small amount in Q1, about $34 million worth and that's all the activity we've done so far.

We did no additional repurchases in the second and third quarter.

In terms of dividends our current quarterly dividend stands at $0.31 a share.

That was recently increased at the -- about a month ago, up 13% from the previous 27.5% share.

This annualized number of $1.24 per share represents a total cost to the Company of about $550 million a year.

These quarterly dividends of course are in addition to the $7 per share special dividend, which totaled about -- just over $3 billion that we paid out to shareholders back in December of 2012 or in the second quarter.

The usual supplemental information we posted on the Costco Investor Relations sites a little later this morning.

Lastly, our scheduled earnings for Q4, which is the 16-week quarter that ends September 1, is currently planned for Wednesday, October 9, and that will again be for the 16-week fourth quarter ending September 1. Mind you, last year we had -- it was a 53-week year and therefore a 17-week fiscal fourth quarter.

So that was about 6% more days in the quarter if you will.

With that, I'll turn it back to Angela and be happy to answer any questions.

(Operator Instructions)

Deborah Weinswig.

Good morning, Richard.

Can you talk about your frequency, which was obviously very strong in the quarter on an absolute and relative basis, can you talk about any new drivers behind that?

Not really.

We're not doing anything different other than continuing to be aggressive on pricing and if you haven't tried our rotisserie chicken that's the new hot dog in terms of $4.99 chickens.

We haven't changed.

There's not been a lot of difference year-over-year in any of the MVM mailers, the coupon mailers, so not really.

We certainly are getting our share of free press out there, whether it's the late night talk shows or the morning business shows, so I think we certainly are getting a lot of -- but that's all anecdotal of course.

But there's nothing specific that we have done different of late.

And then can you also discuss your inflation outlook as it stands right now?

In talking to the buyers there's not a lot of anticipatory inflation with the exception of some aspects of protein.

They continue to see inflation in some of those items, beef, poultry and pork.

Some of the what we call limited resource commodities like nuts, because of increased world demand with increasing -- the increasing middle class, if you will, those have spiked up.

With a few -- with those few exceptions there's not a lot.

I think to date, we are -- if you look to -- if you use as your benchmark the LIFO calculation, which looks at what our US inventories buy item at cost were and how those costs have changed as of from the beginning of the year to now, again is ever so slight credit in each of this quarter and the last quarter, I think together, if 100.00% was the base as of the beginning of the fiscal year, as of Q3 end, it was 99.41% so 0.6% lower cost inflation.

Now that's again that's one measurement that's easy to look at because it's basically our US LIFO inventory counts.

But that wasn't that discernibly different than a quarter ago, but we don't really see a whole lot of trend upward beyond those small areas that I mentioned.

And then gas is always who the heck knows?

On the Executive Membership side, which has obviously been incredibly successful in the US, beyond Canada, the UK and Mexico, how should we think about the growth there?

There's -- we continue to look at it in all countries.

I think we seem to like it.

It works for us.

Generally speaking, we like to have a core number of locations there because -- and start off with a -- some small number but more than one or two of services that we can provide under the Executive Member format.

So the member services where the Executive Members in some cases get a better deal on those -- on some of those services.

So we'll continue -- we continue it, I would guess over time we'll continue to roll it out to other countries.

Again the 13.3 million I think all but about 400,000 of that are US and Canada, which of course are -- US and Canada is probably roughly 80% of our Company in terms of sales or locations or what have you and well over 95% of the Executive Member base.

But that's because it started here.

John Heinbockel.

Richard, a couple things.

The price investments, do you -- is there more of a skew toward consumables or, no, it's more broad based than that?

It's more broad based than that given just the sheer volume of items.

What we need to make sure is we don't want to spread it out.

You've got to be wow, if you will, on items and not just spread it across all categories and all items and so we try to do a pretty good job of that.

But its spread among categories.

I -- a little tongue and cheek talked about the chicken.

As protein prices go up our costs go up and we've been very successful we think in driving sales and if we can get you into -- go to the back of the location and get that great chicken for $4.99 you're going to shop and do other things.

But it's across the board.

So the idea -- no matter what department you're talking about, the idea here is not so much where you can get your cost down but where you can make it clear [impression] on the customer perception-wise?

Why, sure.

Ultimately it's an art form and it's merchandising and it's across the board.

Sometimes we work with vendors and sometimes we'll rotate items in and out.

It's not unlike what we do historically on the fence.

You're always going to see -- or end caps.

You're always going to see some -- we try to create excitement as you walk down those larger aisles, down the main aisles.

Do you think, as you guys look at it, do you think the price gap has changed or widened versus your various competitors or no?

It's about what it was?

I think its been pretty similar over the last few years.

We don't see any dramatic change in it.

If anything, we tend to sincerely play offense and irrespective of what's going on out there.

You're always going to see what be it our direct competitors of Sam's and BJ's or other category-dominant retailers.

Or you're always going to see items in departments, but for the most part, when we do our weekly by location market baskets on key competitive items, those ranges in our view of our competitiveness is pretty similar to what it has been, if not a little higher, a little better.

More favorable to you?

Yes.

But I don't think [we have] points.

Then just two last things.

The -- is there about $30 million left of incremental benefit on the membership fee increase?

Is that about the residual number?

It has a three in it, it's a little higher than $30 million.

It starts with a three.

And then lastly -- what's that?

It starts with a three and it's -- but it's higher than $30 million.

Okay.

And then lastly, when you look at Kirkland, where are you roughly now with skew count and do you think as a percent of club skew count, that inevitably goes higher and I know you don't want to force it on people but obviously there's -- you continue to find value-added items.

Does that just go higher over time as a percent of total skew count?

Yes, absolutely.

I think it's still in the low to lower mid 20s and -- but it keeps going up incrementally.

Part of that is the increased penetration of some of those items overseas where whatever extreme value we are, it's even more extreme on those kind of things.

We have items that do $2,000 and $3,000 and $4,000 a pallet position in the US that do five and 10 times that in some of the Asia countries simply because it's a great value on great stuff.

And we could even be more extreme over there versus brands.

So, yes, we continue to look at different areas and we've -- this past year I know we've put it on some women exercise apparel, active wear, which has been very successful.

We continue to put it on -- I know we have several men's summer items whether it's shorts, or what have -- performance polo shirts and so all those types of things.

So it's not just -- it's food and non-food.

I don't see any discussion on putting it on a television or anything any time soon but certainly there's a lot of categories.

All the low-lying fruit, paper goods, water, those are all done.

But probably the lowest lying fruit in the last few years was probably the disposable diapers.

But there's lots of things.

It always amazes me when individual food items, the cashew clusters or something innocuous like that is a $15 million item and $25 million and $30 million a year later.

And all of a sudden you've got those types of things out there.

So there's -- I think it will scale slowly through the 20s and upward but it's not like we have a concerted effort to try to get to a number by next year.

Paul Trussell.

Good morning, Richard.

Just with the price of investments, you've had a very consistent message over the past few quarters -- past few years really in terms of Costco being on the offensive in terms of making consistent pricing investments.

So should we look at the core being down this period compared to being more flattish the past two quarters as a signal that you -- this is incremental, that this is in addition to what you've done over the past few periods, as you go deeper or wider?

And how should we think about the next few quarters?

I don't -- in all honestly I don't think that we're that smart about it, strategic about it.

I think that our strategy is is to constantly drive it downward.

And the more we can do that, the bigger gap we have with our competitors and the more our traffic grows and the more our sales grow and good things happen.

I remember somebody a few years back asking what happens if a month into a fiscal quarter you're not doing well, what do you do?

We say we don't change what we're doing.

I think that given our strength of late we look at it and say this is a good time.

When we look at certain countries where we're very profitable relative -- bottom line as percent of sales relative to the US and to Canada, and Canada is a little more than the US, we say let's just make sure -- we're our own toughest competitor when things get too good and so again I can't suggest that it's a trend.

I think that for three or four quarters prior to the last three quarters, so all of last fiscal year, on comparing those quarters to their respective comparable quarters a year earlier, it was down and we were talking about investing in price.

And then the last quarter or two was a relatively flat so does that suggest it's going to continue to be flat?

Well Q3 says, no, it doesn't.

But I don't think that you could use that as a trend line either way.

We're going to continue to do things to drive our business and we're fortunately in a positive way.

We would rather be aggressive on pricing and see the benefits of SG&A, which always has been a challenge for us and -- but margins are not a problem.

And on -- the international is becoming a bigger penetration of your business overall and currently that segment has a few hundred basis points higher margins than the US.

Is that sustainable or is there anything -- any change in dynamics that you see that might alter that?

Higher, meaningfully higher, yes.

Is it sustainable at this rate?

Probably not.

We know ourselves that as we take a $300 million unit in Taiwan or Korea or Japan and put a new unit 15 mile or 10 miles away, we'll do 450 the next year between the two but it's going to hit the margin, it's going to hit the P&L for a couple or three years.

So part of this ramp up overseas is going to impact that a little bit and as we've constantly been reminded originally by Jim and now you can be assured by Craig is let's not have the illusion that we can just continue at these strong numbers.

We want to -- again I think some of what you saw in a little bit of margin reduction year-over-year this quarter was a little more so internationally and part of that is the things I mentioned, a little bit of the increased expansion and sitting in the meetings saying, guys, let's not get -- let's -- these numbers are growing pretty fast.

Let's make sure we're giving back price in terms of price.

So it's our doing.

Sandra Barker.

Richard, I just wanted to clarify on the price investment internationally, don't you have less competition there?

I'm just wondering -- I would imagine you had a bigger -- as you talked about the extreme value on the -- some of the private label, I would think you already had a very large price gap versus the competition.

And I had another question also.

We do but, again, if you look at a Company that has a pre-tax return on sales in the three-ish range, very high twos or three, or whatever it is now, and then you look at that US column and extrapolate from the operating percentages that it's in the low to mid twos in the US, better in Canada and a lot better in other countries, when it gets -- we're very good at looking at something and saying, guys, we're making too much here and so we want to keep driving it in the right direction.

And then also just some illumination on buyback and how you think about that in the future since it seems to have dwindled away this year.

Yes, I think we look at it as between the regular dividend and the special dividend and even assuming the 34 -- just the 34 million in stock buyback this year, we still essentially between the two given back about a little over $3.5 billion to shareholders this year, virtually almost all in the form of dividends.

But we look at both and over a longer period of time we would expect to continue to buyback stock as well.

But again, we don't suggest it's going to be a certain number.

Clearly given the relative strength and the fact that -- importantly the fact that we did the special dividend, we don't feel any pressure -- exterior pressure to just do it on a regular basis.

We'll continue to do it over a period of time though.

Any commentary on any impact from Target in Canada?

Really, no.

Not to -- without disrespect, there's really not been in our view a lot of competitive -- now, our margins in Canada have come down and again that's more us than that.

Certainly as I mentioned over the last year and a half, we've been preemptive knowing they are coming in.

But we're also have had very strong numbers, our local currency comps up there are in the very low double digits in local currency.

So it's a strong economy.

We're doing very well and, again, it's one of those things where Craig in the budget meetings says, guys, we're getting -- let's make sure we're watching -- let's not close our eyes and turn around one day and find out we're not as special and let's get pricing back where it needs to be.

And what that means is is we're making good money up there, it's growing well so let's make our competitive posture stronger.

Thank you.

But a lot of it has to do with us -- not really a lot of promotional pricing issues that -- from what's going on with them.

And keep in mind that they haven't opened a lot of units yet either.

Joe Feldman.

Sorry, guys, was just on mute.

Just wanted to drill down on inventory again.

I know you'd mentioned you feel like you're in pretty decent shape with inventory but are there areas where you could be adding more or maybe where you're actually missing a sale because of not having the right product or just opportunities within inventory management I guess and assortment planning.

Again, it's part science and a lot of art form.

As you probably know over the last 10 years we have consciously taken down -- reduced our active skew count in a warehouse from 4,100, 4,200 down to 3,700, 3,800 and that's in our view driven sales because we can double mass out something versus having -- taking out an item and replacing it with more of the other item.

And that double space you'll do more than you would have done with two items.

So it's always that, if you will, that intelligent loss of sales.

I can only tell you that in the 26 days a year that we spend in a budget meeting reviewing a half -- a third of which is merchandising discussions and part of the operations discussions are also merchandise discussions.

I hear many more comments from Craig and others of when we have too many of something, five varieties of cordless phones or whatever it might be.

So if anything, we continue to look to see how we can reduce our selection a little bit.

Now, we're also mindful it's the buyers' and the operators' responsibility as they're visiting competition is identifying what they perceive as hot items, not only at Sam's but at other forms of retail, be it Home Depot or category-dominant retailers or specialty retailers.

And so we're constantly trying to figure out what we're missing.

Generally, it's more the opposite though.

What do we have too of -- too much selection of?

If I could ask one more.

About the traffic trend, which has been just so strong for so long, I guess I'm curious how do you sustain it?

How does it keep driving?

Because people are coming in it seems like at a pretty frequent pace, 4% or 5% every month, and it's better than grocery, it's better than most anybody else out there right now.

Is it just the fact that you have a membership fee so people feel like, well, I may as well get my money's worth and go to Costco?

Is there anything -- how do you sustain it and I know it's a tougher bigger picture question but just any thoughts on that?

First of all, this is one person's view here but I certainly believe that two big things that have occurred over the last four or five years in this bad economy is gas prices and the fact that 10%, 11% of our sales are gas and that clearly drives, no pun intended, drives people into the parking lot.

And 30 or so of those for every 100 that pump gas go to shop.

Clearly even if one of those 30 is incremental, that's good, aside from having a profitable gas operation.

The other is fresh foods.

All this is [if this is eye bright] is that when the economy got hammered, people ate out less, not just the steak houses for business travel but families with neighborhood restaurants.

While it's come back it's not back to where it originally was and clearly our strength in fresh foods I think has helped a lot.

That again is a driver in my view of more frequency.

And I get back to the mission of constantly coming up with wow items and getting brands that refuse to sell us to sell us and diverting more of stuff when we -- they won't want to sell us if we can get it.

All those things are what we're about and, again, I'm probably a little bias and my antenna are a little stronger in looking but it seems like every day there's something on television about us, whether it's a national talk show or a news item or a late night talk show, you name it.

All that stuff I think is reinforcing.

The last thing of course is the ramp up and expansion outside of the US and Canada, our most mature markets.

Clearly, you have higher frequency numbers in newer markets so that's got to help a little bit too.

I don't think that's as big a factor because it's a still a small percentage of having total units we have.

So I think the bigger factors are that constant lowering of price and that constant -- and the gas and the fresh foods.

And look, as -- we've all seen what's happened of late with some of the relative strength in companies like Home Depot and Lowe's in the housing market.

I think I mentioned some of the category areas, virtualized category areas in non-foods where we've been strong.

So we get a little benefit there as well.

But that frequency has got to be more that.

I have no illusions that it can sustain itself.

Seemingly for 20 years prior to late 2008 on average the number was in the 1%, 1.5% range and ranged generally from minus one to plus two with the exception of a couple outliers based on how Easter or July 4 or something falls year-over-year.

So we're in unchartered territories.

I remember a year and a half into this recession, after coming -- having maybe a four for all of calendar 2009, reminding people that if we're zero in 2010 that's still a two and a two for two years and not ever thinking that we could accomplish what we have.

And so we certainly benefited by our model and perhaps by the demographic of our member and by the other things I just mentioned.

Chris Horvers.

Wanted to follow-up on the international margin side.

So the ramp in expansion, understanding that you're investing in price internationally because you're more profitable there and you aren't rushing on [morals] and also identifying the base and that brings down existing profitability but what's the other side of it?

Does opening up new stores that are inherently more profitable relative to the domestic, is that a net positive to margins for the Company?

I'd have to honestly pencil it out.

Probably a little but I'm shooting from hip on that one.

Okay, I can follow-up.

And then also a lot of retailers have talked about pressures from the weather and variability to the weather.

You had a great quarter on the traffic side and on the comp side but had -- did you see much variation around whether you saw strength in lawn and garden?

Do you think that was -- it would have been better ex the weather impact suggesting that maybe there's some pent-up demand here that could flow through?

Fortunately, we are at I think 41 or 42 states and Puerto Rico in the US, if you will.

And so when the weather was bad in one part of the country, it wasn't bad in the other part of the country.

Clearly, I know -- I don't have the numbers in front of me but I know over the last few months when the regions got up and spoke, some of the regions had incredible strength as expected when expected in seasonal items like seasonal clothing and seasonal patio furniture and what have you whereas other regions it took -- it came a little later.

I know that -- I don't have the detail in front of me but if there's a little pent-up demand, it's in a little bit of the -- a few of the regions and some of this already happened in the third quarter.

So maybe there's a little bit there but I don't see a whole lot of that.

So is that similar vein that the high exposure to California buffered your weather sensitivity?

California was again all the -- as I mentioned earlier all the eight regions in the US were pretty good, but they were actually at the low end of that range of I think I said mid to high single.

Okay.

It's still positive but the -- no.

Okay, and then final question.

You mentioned healthcare costs up 6% year-over-year versus low double digits in the past quarters.

Is that -- what's changing there?

Are you doing something, is this in anticipation of Obamacare next year and that's blowing through early and what's the outlook there?

I wish I knew.

For the 12-week quarters of when I look each week at just what we pay out in US healthcare costs, which is the thing that drives that line item, it generally speaking was pretty consistent in the mid to little higher single digits and so we didn't have any outliers.

Sometimes when you see a week or two that's at 3% or 5% increase year-over-year, the next week's 12% or 14% and so the average was still 10% or whatever X is and there's not a lot of new things we're doing.

We're doing a little -- a couple little things but nothing that would have driven this.

We're hopeful that it will continue but we still budget it up a little bit higher than Q3.

Dan Binder.

Hi, it's Dan Binder.

A couple of questions.

First, any early view on how real estate is lining up for next fiscal year?

Secondly, just curious if the -- you commented on the seasonal business being lumpy.

Was there any kind of gross margin hit related to seasonal businesses in the quarter?

None.

Nothing out of the ordinary on the latter question.

What was the first question?

Oh, real estate.

Yes, our best guess right now is right at that 30 number with half or little over, probably a little over half of it outside of the US.

And of that 30 number, how many are secured or definitely going to fall into the year versus what might still be at risk?

I think there's more than 30 on the list and you just use a little guesstimate by location and we come up with a number that's close to 30 so it's a little too early to tell.

It could be -- if you asked me for a range I'd probably say three less and five more than 30, you know 27 to 35 but I'm guessing here.

But 30 is probably a good number.

Final question on membership fee growth, recognizing due to the accrual accounting and the tail end here of benefit that you're getting from the membership fee increase, when we take that into account and the one less week in the quarter, any color you can provide from the impact of those two things versus let's say the 11.8% growth rate that you are at here in Q3?

Right.

I think if you take out the deferred accounting over the last few quarters, the numbers in the 6% to 7% range probably in dollars.

And when we look at Q4 last year, 17 weeks versus 16, 1/17 is about six percentage points.

So just and I have no -- I don't have any Q4 estimates in front of me but just those two simple math items would tell me that anything at or slightly above zero would be expected but I haven't -- we haven't -- I haven't looked at it.

Mark Miller.

Richard, I think you said payroll was up 6% plus in the quarter and so if your dollar per hour wage increase is I think around 3% that's implying your hours worked per club would be flattish.

Is that correct and if so how were you managing that with the mid-single-digit traffic increase?

I know you've got a signature change you put in with AmEx but what are the other key initiatives that are helping you here?

Cutting overtime I think has helped a little bit.

I've used the word focus before.

The operators -- I've also talked about and people asked me a year ago, what's different about Craig?

Craig -- it's not a question of what's different about Craig versus Jim but Craig would say himself his strength is he grew up in operations so I think there's focus on that.

Skew count management is going from X to a lower number means you're [messing out] more stuff and you're -- I think it's all the little things.

There's nothing -- your comment on the signature [thing] capture certainly, yes, can that shave off seconds in a transaction, all those things help.

But a lot of it is the pallet presentations and what we do.

Can you give us some perspective on your efforts to get global pricing terms with suppliers?

Are you getting traction on this.

If it's in the numbers, it doesn't look like we're necessarily seeing it yet.

Yes, we are getting traction.

It's still not material to the size of our Company but again every month when the country managers -- the country heads from each country are here for two days, part of their presentation is -- and part of their off-site additional meetings with our merchants here, is getting on a global basis our buyers here to work with multi-national vendors to make sure we're getting better pricing and in some cases better availability of certain items.

It's a process.

Final question.

What was the one-time legal settlement?

It's -- I can't say what it is but it's was -- it's a few-year period of time where we picked up money that totaled about seven basis points in the quarter.

It was good but it's nonrecurring.

Better plus than minus.

Thanks.

Brian Nagel.

Hi, it's Brian Nagel from Oppenheimer.

I wanted to focus on unit growth.

A couple questions ago someone asked you about the number for next year and it sounds like you're intending to open new units at a pace next year consistent with this year.

The question I have is what's allowing you -- more from a stepping back philosophical standpoint, what's allowing you now to more rapidly open units?

Is there something changed the marketplace or is the decision internally to do it?

And as we look at beyond this year and next year, are you -- is the Company committed to continue to open units at a longer pace consistent with what we've seen this year?

To answer the last question first, yes.

We've got more people -- literally more real estate people on the ground in more countries.

We -- the pipeline has taken time to fill up but it's filled up.

Once we decided -- if I look back a few years ago when we had just as an example in Korea, Taiwan and Japan, six or seven units in each of Korea and Taiwan and maybe eight or nine in Japan, we've ramped that up.

And so we're going from opening -- between those three countries a few years ago opening a couple units a year between the three countries.

So opening up five, six, seven, eight between those three countries a year, so -- but again that's partly that conscious effort both in the real estate area under Jeff Brotman and his people and Craig also pushing that yesterday and today.

They're both out looking at sites in different parts of the country.

Okay, well, thank you.

And we believe that we can -- our goal over the next five years I think I've said is about 150 buildings and if we get a little better than that, great, but that's certainly a good starting point given where we've come over the last few years.

So I guess, Richard, just following up on that as you look at it we talked about and it seems like if you go back a few years, growth -- the unit growth numbers didn't hit your targets maybe what investors were thinking and now you're showing faster growth.

So it sounds to me like you've made the internal decision to grow faster.

Is there -- to any extent is it a competitive response?

Are you seeing a need to jump out to be in front of a competitor or is it just internal decisions?

Sometimes it's competitive only from the standpoint that as we look at our success in other countries, we have a competitor in Korea.

We recognize that.

We want to -- we're successful in several countries where we are the only one.

We want to do more of that.

We think that if you look back at the history of Canada there was a competitor there that chose to not stay there.

And I can remember the time when we had probably 55 or 60 units in Canada and felt one day we might have 75.

Now we have in the mid 80s, high 80s and we think that we can get to a little over 100.

So we'll keep doing that to drive our business but it's not a react -- mostly it's not a reaction to others.

It's a reaction that we're doing well and we want to keep ramping it up a little bit.

And the decision to ramp up as an example internationally, given there is a longer timeline to get a unit open many times, was really made two or three years ago and it's now coming to fruition this year, those efforts.

[Jason De Ryes].

Yes, hi it's Jason De Ryes at EPS.

Wanted to ask a bit more about the membership fees.

Could you maybe share a little bit actually about how the membership fee grew without FX for this quarter, an organic number?

And then if you could talk about how the membership grew internationally versus US, that would be helpful.

Again, I think of the $56 million or whatever million dollar number of increase, a little over half of it was the deferred accounting.

So I think you can take that out and I think it was a 12% dollar increase, so that would imply about a 6% -- rounded up to 6% dollar increase ex that deferred accounting.

Overseas, I don't have the detail in front of me.

My guess is it's higher in local currency but it was a little lower because of the FX -- of the fact that on average, on a weighted average, foreign currencies weakened relative to the dollar so when we convert everything to report in US dollars it was actually a slight negative, so you just made -- the light bulb just went off.

Actually the underlying number ex deferred accounting in local currency probably would have been a little better but again the numbers we speak about when we showed membership income was including the detriment of weaker FX.

The FX would be similar to the FX impact you see on your net sales.

Is that right or --

Sure, yes.

And then I guess understanding the members from another point of view in terms of the traffic, obviously you guys give an all-in number.

Do you have how international traffic is actually doing versus the US?

I know you alluded to it that it's been good and there's been --.

It's actually very similar to the US, but we're not going to go down the road of detailing it because I always find as I try to put more out there, then I've got to give it for the rest of my life.

(laughter) You could just put it all out in one statement right at the beginning of the day but maybe we can talk about that later.

The other question that I have in terms of this international versus US, obviously US fee increases are very invisible to most of the investor base but what's happening elsewhere in the world in terms of the increases and anything in the pipeline there?

We're driving the business.

Historically we've shown that we're prepared and we will increase fees but we'll take that one step at a time.

Again I don't want to suggest that we have a plan to do it tomorrow or a year from tomorrow but I would guess over time you would expect to see fees continue to improve -- to go up but then recognize what we do when we have increased fees, we get more competitive.

Bob Drbul.

I just do one question that I have.

Over the next several years, I know you've talked about 150 clubs over the next five years.

How many do you think you can have in the US and how many of those clubs would you expect to be in the US of the 150?

Of the 150?

I think of our cheat sheet from last year, it was 55 out of 150 were in the US, and my guess is it will be a little bit more than that.

And at -- if we open what we say we're going to open this quarter, we will end the fiscal year -- we would end the fiscal year with 636 units of which 452 would be in the US.

And if you add 50 or 55 to that you're at 505 or 510 and my guess is that five years after that, it's not 50 more but it's 20 to 30 more, who knows?

So I think what we have found over almost 30 years and what I assume we'll continue to find is is we'll always end up opening a few more than we thought were possible.

Sean [Naughton].

Can you hear me?

Yes.

Okay, great.

On the international front, you talked about Mexico a little bit and that does sound like one of the strengths in the international business.

Can you just give us a little bit of an update on that business and how that market is performing and is there an opportunity to grow a little bit more aggressively in this market and how the productivity is doing in those boxes today?

We're grow -- for the five years up til when we acquired out -- the remaining 50% interest last July, I think in five years we opened a total of three units, so less than one a year.

I think this year we're opening one and my guess is that will quickly go to a few, a couple of -- two to four, who knows?

But we'll ramp it up.

Keep in mind we have I think 32 or 33 units there.

Sam's has well over a hundred and we think there's plenty of opportunity down there.

It's very profitable and expressed in dollars, its average unit does about half the dollar volume because of just the relative currencies.

But it's growing nicely.

Its bottom line is much stronger than the Company as a whole, but so are a few other countries in terms of the bottom line with a much stronger top line, so mix was great.

Its been a healthy growth for us and, if anything, for unrelated reasons we had grown a lot for those four or five years and we are starting to invest more now.

From a category perspective, consumer electronics has been an area of strength.

I think it inflected about -- maybe if I'm remembering this correctly about 12 months ago.

And it sounds like the inventory is up a little bit on a per-warehouse basis.

Can you talk about the strength?

What's driving that in this category and then is the opportunity still there moving forward and is this an increase in the skew or is this more ASP related?

Yes and yes and yes.

(laughter) It's -- there's a little bit more presence out there.

We have done very well not only within TVs but higher end TV, the 60- and 80-inch TVs and the smart TVs.

We've also done well at a much smaller scale dollar-wise but on cell phones and doing much better in things like tablets because we're selling some.

We've got all but one of the main brands and our name is out there and those are really starting to pick up for us.

But TVs dwarfs everything else just in sheer dollar volume.

And again they were up low double digits this month and I think in the last year have probably been up in the -- probably on average in the mid to high single digits in dollars.

Peter Benedict.

Just back to the traffic question.

Can you give us a sense of maybe which member group is driving more of that traffic, if there is a difference, is it the business member or the Gold Star member?

Is there anything discernible there?

It's executive.

If you put them in simple sequence order you've got your regular Gold Star, you've got your regular business, you've got your executive of either of those categories and then the triple play, if you will, would be you've got the executive business member with the co-brand AmEx card.

All those things lend itself towards higher frequency and higher total purchases, but Executive Member is clearly a driver.

On to the SG&A, the five basis point headwind that you called out from the IT modernization efforts.

How does that compare to the last few quarters?

I know you've talked about -- I don't know if you've quantified the impact but just wondering if that's typical, if that's what has been running and how long do you think it will persist and when do you think we start to see some payback from those investments?

I think it's been probably in the range of four to six but it's been pretty similar the last few quarters.

I think they will still be incrementally up over the next four quarters but probably at a little -- not five, lower than that.

And then hopefully it will subside a little bit and hopefully then you get some benefit from it as well from more efficient operations, whatever we're putting out from it.

But it's -- for those of you who have known us for a long time, we've prided ourselves in keeping things simple and we were basically a legacy shop.

We wrote our own GL years ago.

So this is new for us and we're doing -- and it's taking a lot of effort for us, a lot of money, fortunately its divided by a lot of sales of dollars, so five basis points is still a lot this year.

I don't know if it's two or three next year but it's going to be lower than five is my guess and then that will then not be a discussion topic in terms of SG&A basis points.

One last one if I can here.

Back on what Bob's question was on the clubs left in the US.

Can you talk about maybe what do the markets look like that you're going to, the next to 50 to 80 or so Costcos in the United States?

How are they any different -- how are they different than your existing footprint?

Is there certain regions where you're going or is it different types of formats, malls, et cetera?

Just kind of curious on that.

Yes, quick back of the envelope guess would be half of it's in fill in strong existing markets and half of it's in newer markets.

I think even -- I'm just looking at the opening schedule, this past year it's been everything from another unit in Washington, D.C., and Maryland in the US to one last Fall in Huntington Beach, California, which is clearly infill to several units in the Dallas and other Texas markets, which have I would say have gone from new markets to very clearly good infill markets in Chicago as well infill to markets like Knoxville, Tennessee, New Orleans, Louisiana.

So a combination of both -- but Baxter, Minnesota, I'm not sure if that's an infill or an extension of Minneapolis off the top of my head.

Sounds like your voice is starting to go, Richard.

We'll let you go.

Thank you.

Why don't we have two more questions.

Greg Melich.

I just had two questions.

Want to follow up on the inflation in the quarter or lack thereof.

So if I've got it right gas and FX was 100, 150 bps so ex those, ticket was up 1 or 1.5.

How did that break down?

Was there any inflation or was it all just items in the basket and mix that actually got some basket growth?

Very little inflation.

I mean, the difference -- I'm just looking here.

So with LIFO gain there might have been a little deflation and maybe items in the basket or mix helped a couple hundred bps?

Yes, though keep in mind LIFO deflation is from -- as of the beginning or the end of last fiscal year, not just this quarter.

But if I look at -- literally it's a couple of basis points on our LIFO inventories in the US, so very little inflation or deflation other than gas.

But that's for year end.

And also with the -- that's a nice transition.

What behavior have you seen with the dot com sales up 20%?

Who's driving that?

Is it a small group of members that are using it a lot more or do you find that a lot of your members are trying the online site?

I think it's a little of both.

We're still doing it the old-fashioned way and some would say the stubborn way.

We are doing a few more things.

Clearly, re-platforming, the dot com people feel that's helped.

Mobile has helped a little.

The Apps are driving people to it.

I forget what percentage of the total sales are coming on Apps, which is both phones and -- it's small but it's growing.

And again we don't do a lot of stuff.

Our MVMs probably in our view have had as much effect as anything when we have some of those exclusive online-only MVM coupons in the mailers -- in the physical mailers.

So we're doing a few, I hate to use the phrase social networking stuff, but we're getting the name out there a little bit more.

Got it.

But it's nice to see some increases that didn't have one digit or a one in front of a two digit.

And then lastly on the cash flow, could you help us out a little bit on the -- even with the CapEx up, do we still expect free cash to be around a $1.5 billion even with the CapEx up this year and can payables actually get to inventory?

And then also is it still the plan to buy back enough stock to make sure that there's no option dilution [that it's just] big special dividend, how you're thinking about that.

Yes, clearly the special dividend has some impact on that.

Clearly the very ramp up in strength in our evaluation -- but our view is is we're still on average a stock buyer over time.

We don't feel pressure that we've got to do a certain amount by a certain date.

In terms of cash flow, you take your estimates for net income, take depreciation up the 9% or 10% it's up, dividends -- the regular dividend seems to be going -- we just represented pretty close to what our eight-year average increase is, about 13% or whatever.

Your dividend I think -- the regular dividend is about $5.50 a year.

Even with no stock and assuming CapEx went from the 1.5 to the 2.0, you're going to cash flow a little higher than you suggested but that assumes no stock buyback and we'll see.

I would hope, and I can't say expect because we don't look at it that formally every day, but over a period of time clearly we want to cover our issue dilution but we don't feel compelled that we have to do it by year-end this year.

Got it and on the payable side --

Getting to 100 is tough.

I think it's been in the low 90 -- seasonally it gets over a hundred, sure, but probably on average it's probably 94, 95 on average during the year, maybe 93, 94.

One of the things that happens particularly in this low interest rate environment particularly since we have a lot of cash, we'll offer vendors -- particularly medium-sized vendors that might need to clean up a balance sheet at quarter end for certain covenants, we're being pretty aggressive on what will you give us if we pay you a little early on something even though outside the regular terms.

These are not big numbers but you turn around and it's hundreds of millions of dollars, so I'm not sure if it ever gets to 100 unless the term goes from 12, 13 up to 15 or something and that's going to be tough but we'll keep working at it.

How does international affect that payables or maybe look at merchandise payables to inventory?

Does that force it down a little bit or --

I think it's higher volumes but I think the payables percent is a little lower in some of the countries, but part of that is timing.

If there's a bunch of the stuff you ship to Asia, if 25%, 35% of our sales over there are US-sourced goods and with the exception of probably fresh fruit items that have to be air freighted, a lot of that stuff could be on two and three week -- two week plus containers.

Sometimes you're able to negotiate with a vendor to socialize that and sometimes you're not, so my guess is is -- I'm just looking here at one thing, hold on a second.

This is by country though.

Oh, there it is.

I'm sorry.

If I talked about what was it?

I think I mentioned it was 91 for the quarter, merchandise payables.

And that 91, there were two countries that were over 100 and there were -- outside of the US and there was two countries that were below 80 and a couple in the -- on in the 80s and a couple in the 90s and of course our US was right on, US and Canada on average are a shade above the 91 average and the US is right on it.

So it's a little bit all over the board.

I would have guessed Australia would be near the lower end and that's because it's the longest place to ship goods by sea.

Why don't we take one last question if anybody's out there?

A follow-up question from Sandra Barker.

Richard, I don't want to beat a dead horse about the price investment but I just wanted to clarify.

Can you explain the mix of the price investment and how much of it is going toward international versus the US?

Because I know in the US you had a fee increase and that would be a logical assumption that you would have -- that you'd be offsetting that there but if it's more skewed toward international, is this a different philosophy than you've had in the past and how are you sure that you give back more than you're giving up if you are the only club in a country or you're still new and you have a ton of traffic already?

I'm just trying to understand the philosophy there.

Every action has a different reason so it's not -- sometimes it's emotional and it's what we do for a living.

Sometimes it's certainly as you just suggested, given our membership fee strength in the US and Canada that allows us to be more competitive in other areas and certainly that's part of it.

Given our strength and profitability in some countries, that gives us an opportunity to be more aggressive on certain things.

So it is -- I do want to emphasize it's not as scientific or as analytically thoughtful but we know when sales are going the right directions we can be more aggressive and we choose to be.

And it has worked for us so I'm sorry I can't shed more light on it.

If I look at the core businesses I think probably the least -- the one that was least impacted was the US this last quarter.

But if you look at all of the other countries, every country has a different reason.

And it's not every country; it's all over the board and sometimes it's on hot items, sometimes it's we're trying to build something.

Okay, thanks.

Okay.

Thank you very much and happy to take any calls if -- Bob, Jeff and I. Thank you.

This concludes today's conference call.

You may now disconnect.