Franklin Electric Co Inc (FELE) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to your Franklin Electric second-quarter 2010 earnings conference call. At this time of all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this program is being recorded. I would now like to introduce Mr. Patrick Davis, Treasurer. Please go ahead.

Thank you, Mary. And welcome to Franklin Electric second-quarter 2010 earnings conference call. With me today are Scott Trumbull, our Chairman and CEO, John Haines, our CFO, and Gregg Sengstack, SVP of Fueling and International Water. On today's call, Scott will review our quarterly and year-to-date business results and John will review our quarterly and year-to-date financial results. When John is through, we will have some time for questions and answers.

Before we begin, let me remind you that any forward-looking statements contained herein including those relating to market conditions or the Company's financial results, expense reductions, profit margins, inventory levels, foreign currency translation rates, liquidity expectations, business goals, and sales growth involve risk and uncertainties. These risks and uncertainties include but are not limited to general economic and currency conditions, various conditions specific to the Company's business and industry, weather conditions, new housing starts, market demand, competitive factors, changes in distribution channels, supply constraints, technology factors, litigation, government and regulatory actions, the Company's accounting policies, and future trends and other risks which are detailed in the Company's SEC filings and are included in item 1A of part one the Company's annual report on form 10-K for the fiscal year ended January 2, 2010, exhibit 99.1 attach thereto, and in item 1A part two of the Company's quarterly reports on form 10-Q. These risks and uncertainties may cause actual results to differ materially from those indicated by any forward-looking statements. All forward-looking statements made herein are based on information currently available and the Company assume no obligation to update any for the forward looking statements. I would now turn the call over to our Chairman and CEO, Scott.

Thank you, Patrick. We were pleased with the operational performance or the second quarter. Consolidated sales increased by 15% to a $190 million, all of the sales growth during the quarter was organic. Foreign currency translations effects were not as significant factor during the quarter, increasing our consolidated sales by less than 1%. Earnings per share before restructuring charges increased by 53% to $0.55 per share. We achieved this increase after recognizing expenses of $3.8 million or $0.10 per share related to various legal matters in Franklin fueling systems which John Haines, our Chief Financial Officer will discuss in greater detail shortly. So excluding the expenses related to these matters, our EPS before restructuring would have been $0.65 per share up 81% versus prior year. Our water business, which represented 84% of our total sales during the quarter, achieved a record performance. Our second quarter water systems sales of a $160 million was the highest for any quarter in the Company's history and increased by 19% compared to the prior year.

Our sales performance was particularly strong in the developing regions of Latin America, Asia-Pacific and Southern Africa. Together these regions represented about 30% of our total water sales during the quarter and grew by 31% versus prior year. The sales of our Brazilian company, Franklin [MotoBombitz] grew by 59% from the depressed levels during the second quarter prior year and by 8% versus second-quarter 2008. Our sales in the Asia-Pacific region grew by 26% during the quarter as we are expanding our distribution networks throughout Southeast Asia, portions of China and Australia. Sales in Taiwan were also strong due to the timing of customer orders. Our water system sales in the US and Canada which represent about half of our global water sales rebounded nicely from depressed prior year levels.

Our second-quarter sales in the US and Canada grew by 19% versus second quarter 2009 and were within 4% of our record second quarter 2008 sales pace. While we were pleased by our own sales growth in the US and Canada, we are concerned that based on trade association debt data, we believe that overall industry unit shipments of clean water pumping systems declined modestly compared to second-quarter prior year. While we obviously increased market share, we would prefer that this were occurring in a stronger overall industry environment. Our US and Canadian sales grew most rapidly to the residential end market, where we believe most of our sales were for replacement applications. Our sales of products that are used in the agricultural, industrial and municipal markets were also up in the US and Canada during the quarter.

Our water system sales in Europe, the Middle East , and northern Africa which represent about 20% of our global water sales, increased by 4% compared to prior year. Excluding foreign currency translation effects, sales in this region increased by 14%. Our revenues in southern Europe declined due to general economic conditions combined with an unusually damp spring. But this decline was more than offset by growth in northern Europe, the Middle East and northern Africa. Vertical SPA, the Italian based supplier of stainless steel pumps and components that we acquired in early 2009, also continued to perform while achieving double-digit sales growth versus second-quarter prior year.

Our water systems profit performance also increased across the board. Water operating income before restructuring was $28 million, up 51% versus the second quarter 2009 and up 8% compared to second-quarter 2008. Water operating income margin before restructuring for the second quarter was 17.7% up 370 basis points versus prior year. About 200 basis points of the 370 basis point improvement in margin resulted from increased variable contribution margin as raw materials purchased at favorable price levels during the recession came through our profit and loss statement during the second quarter. We also benefited from reduced direct labor and burden cost as a percentage of sales due to the consolidation of the significant portion of our North American manufacturing into our factory complex in Linares, Mexico. Operating leverage accounted for about a 170 basis points of the overall 370 basis point improvement in water margins as we were able to hold the growth rate of our fixed cost structure to a level that was significantly below the growth rate of our sales.

Our fueling business also had a good quarter operationally. Our global fueling sales declined by less than 2% during the second quarter as sales in the US and Canada were down by 10%, all attributable to the wind down of vapor control equipment purchases by station owners in California. Our fueling sales in the US and Canada, outside of California, were up 9% and our international sales were up a healthy 29% versus the second-quarter prior year led by strong demands for our vapor control fuel management and pumping systems product lines in Asia. The growing profitability of our fueling business was masked by the $3.8 million charge to SG&A expenses that we recognized for legal matters that I referred to earlier. Excluding this charge, our fueling operating income before restructuring for the quarter would have been $5.6 million, up 12% compared to prior year. Looking ahead to the third quarter, we currently believe that our operating income will continue to increase, but at a slower pace than the very rapid rate of growth we been able to achieve during the first half of this year.

In water systems, we believe our sales will grow at a high single-digit rate compared to the third quarter prior year, excluding the impact of foreign currency translation and at a mid single-digit pace if exchange rates remain at the recent levels. We also believe that our third-quarter water systems operating income margins before restructuring will increase by about 50 basis points compared to the third quarter prior year. There are a number of cross currents impacting our water business as we enter in the back half of the year. We are mindful that our largest -- in our largest geographic market, the US and Canada, overall industry shipments of clean water pumping systems have slowed during the past quarter and the outlook for growth is not clear.

We are also aware that while the cost of raw materials flowing through our P&L during the first half was declining, this situation will likely change during the back half of the year. And we're aware that if foreign exchange rates remain at recent levels, translation effects will reduce our back half sales by about $7 million and our back half operating income by about $3 million. On the other hand, we expect to continue benefiting from sales growth in developing regions, share gains in the US and Canada, and cost reductions from our consolidation in Linares. So when we add it all up, we're forecasting ongoing operating income growth in our water business albeit at a less rapid pace than we achieved in the first half.

In our fueling systems business, we're forecasting that are sales and earnings growth rate will accelerate significantly during the back half of the year. For the third quarter, we believe our fueling sales will increase by 10% to 15% compared to the third quarter prior year and that our operating income margin, before restructuring, will increase by 500 to 600 basis points compared to the relatively low margin level we recorded in the third quarter prior year. During the second half of this year, our sales comparisons in California should no longer be a drag on our overall fueling sales growth rate and we expect ongoing increases in demand for our fueling products in international markets as we continue to see investment in filling station infrastructure in developing regions where automobile sales are expanding rapidly. So in total, we believe third-quarter 2010 consolidated operating income, before restructuring charges, will increase by 15% to 20% versus the third quarter 2009. I'll now turn the call over to our Chief Financial Officer, John

Thank you Scott and good morning. Our fully diluted earnings per share were $0.47 for the second quarter 2010, an increase of 88% compared to 2009 second-quarter earnings per share of $0.25. Earnings per share before restructuring charges were $0.55, an increase of 53% compared to the prior year. In the second quarter 2010, the Company also recognized expenses for various legal matters in fueling systems resulted in a reduction to EPS of $0.10 per share. Therefore, EPS for the second quarter 2010 before restructuring and legal matters would have been $0.65 per share.

Second quarter 2010 sales were $190.4 million, an increase of 15% compared to the 2009 second quarter sales of $165.3 million. Water systems revenues increased by $25.7 million or about 19% overall from the second quarter 2009, the water system sales increase excluding foreign currency translation was $24.3 million or about 18%. Internationally, water system sales excluding currency translation were up 19% versus the second quarter 2009. As Scott indicated, sales revenues increased in all international markets with the most significant improvements in Latin America and Asia-Pacific. Fueling system sales declined by 2% during the second quarter 2010 compared to the same period in the prior year. This decline was due entirely to a decline of vapor recovery equipment sales in California and was offset by sales growth in the US outside of California and in international markets.

The Company's consolidated gross profit was $64.5 million for the second quarter 2010, up $15.3 million from $49.2 million in the second quarter of 2009. Correspondingly, the gross profit margin increased to 33.9% for the second quarter of 2010 from 29.7% for the second quarter of 2009. During the second quarter 2010, consolidated SG&A expenses increased by $8.5 million or about 25% compared to the second-quarter 2009, primarily as a result of the $3.8 million charge for various legal matters above, as well as higher legal and professional fees of $1.8 million. Other increases in SG&A included sales commissions of $1 million, compensation related charges of $0.7 million and increased research and development expenses over the prior year of $0.3 million.

As we mentioned, during the second quarter 2010, fueling systems incurred $3.8 million in selling, general and administrative expenses for various legal matters as well as legal and professional fees principally related to those matters of $1.4 million. The expenses resulted from three different areas of litigation the Company has been engaged in. The first, is an ingredient in principle with the key competitor to settle numerous patent, licensing and fair trade disputes. The second is a continuing claims by both the California Air Resources Board and individual air districts in that state relating to components of fueling systems vapor recovery systems products as we've discussed in prior quarters filings. In the third, relates to other claims involving litigation with James Healey who sold Healy Systems to the Company in 2006 regarding payments from an escrow fund and earn out fees under the purchase agreement. Certain of these amounts incurred in all of these matters are subject to indemnification provisions in the Healy purchase agreement were not expense and are also at issue in the Healy litigation. The second and third matters I have just identified remained unresolved at the end of the second quarter.

As of the end of the second quarter however, we believe we have recognized the appropriate expenses that will be required to resolve all three of these matters based on our evaluation of what we now know about them. However, it should be noted that the final outcomes for the two unresolved issues and the final outcome for our claims of indemnification are not certain. The expenses for the legal matters of $3.5 million represent 12.5% of fueling system sales in the second quarter 2010. Therefore, fueling systems operating income margins, before restructuring and legal matters, would have been 18.5% of sales in the second quarter 2010.

Restructuring expenses for the second quarter of 2010 were $2.9 million reduced diluted earnings per share by approximately $0.08. Restructuring expenses include asset write-downs, severance expenses, and manufacturing equipment relocation costs and primarily relate to the closure of the Silent Springs Arkansas manufacturing facility that we had previously announced. Approximately $2.4 million of these expenses were noncash. The Company is currently exploring additional restructuring opportunities, primarily in North America and will provide investors an estimate of future charges when the plans for this restructuring are definitive. Therefore, for the consolidated entity, operating income before restructuring expenses was $21.3 million, up 46% from prior years. Operating income margin before restructuring charges was 11.2% of sales and in the second quarter of 2010, up 240 basis points from the same period in 2009. Operating income margins before restructuring and the legal matters was 13.2% of net sales and was up 440 basis points versus the second quarter 2009.

The Company ended the second quarter of 2010 with cash on hand of about $93 million compared to about $38 million in cash -- excuse me $38 million of cash on hand at the end of second quarter 2009. The Company generated $22.1 million in cash from operations during the first half of 2010 versus $39 million in the first half of 2009. The decrease was primarily attributable to higher accounts receivable, higher sales revenues increased cash use for accounts receivable by $30.9 million versus the use of cash of $11.9 million in the first half of the prior year. Cash used for inventory in the first half was or $4.7 million versus cash generated of $22.1 million from reducing inventories in the first half of 2009. During the first half of 2009, the Company reduced its inventory as consistent with the decreased demand for its products from the end markets.

The Company's account payable also increased in the first half of 2010 consistent with increased production activity. The Company purchased approximately $3.5 million or about 126,000 shares of Company stock pursuant to its authorized stock repurchase program during the second quarter of 2010 and still has remaining 1.8 million authorized shares for repurchase. The Company had no outstanding balance on its revolving debt agreements at the end of the first half of 2010 or at the end of the year 2009 compared with $14 million outstanding at the end of the first half of 2009. The end of the second quarter 2010, the Company's net debt to total capital was 11% and was 12% at the end of 2009. The last 12 months return on invested capital before restructuring at the end of the second quarter was 14.1% and was 13.5% at the end of 2009. Adding back the $3.8 million in fueling systems legal matters, the second quarter last 12 month return on invested capital would have been 14.9%. This concludes our prepared remarks and we'd now like to open the call up for questions.

(Operator Instructions). Our first question comes from Matt Summerville from KeyBanc.

Morning. Couple questions, Scott I joined the call maybe two minutes after you started speaking and you were talking about raw material costs and the benefits that they were to Franklin on a year-over-year basis. Did I hear you quantify that correctly at a 200 basis point positive impact that's going to turn into a modest negative in the back half of the year? Am I getting that right?

Well, we said that of the 370 basis point improvement in margins that we achieved during the second quarter, 200 basis points of that was from increased variable contribution margins. Meaning, the difference between our revenues and our direct costs. And--I attributed a portion of that to the fact that raw materials purchased at favorable price levels during the recession came through our P&L during the second quarter and also we had some benefit from the Silent Springs consolidation into Linares, which helped our direct labor costs.

And so -- now there are other factors which drive improved contribution margins beside lower raw material costs and lower direct labor cost, there's also the price impact during the quarter and -- so our outlook however, for the back half was for our water margins to continue to improve -- now we have been given outlook for the whole back half. But, for the third quarter, we're saying that our water margins -- the guidance we're providing is water margins up in the area of 50 basis points and fueling margins up 500 to 600 basis points. And the reason that the water margins are not going up at--to the same degree that they have in the first half of the year are that first of all, there's an operating leverage issue. We had a really strong second quarter from a top line perspective and we're not expecting that our third quarter sales in water are going to be as strong as they were in the second quarter and so there's an operating leverage impact and then there is the fact that we think that raw material costs are going to start going up. And that that will play to our numbers but we did not quantify that, Matt.

Got you. Thank you for that clarification. And then, sticking with the water business in North America, I believe, the business was up 19% which is obviously very good. Can you provide a little color across two dimensions? One, can you talk about your clean water business versus your gray water business and then how your sell in, that plus 19%, would have compared to your distributor's sell through in the quarter?

Okay, both the clean water and the waste water business were up, the waste water business was actually up a little more than the clean water business. But they were -- The difference would have been in and I'm having to give you a approximations here but one would have been up 13% to 15% and the other--the wastewater business may have been up a 20% or 22% in that range but they were what up solid double-digit increases. As I mentioned in my comments, we were a little surprised and pleased quite honestly with the performance in our residential business. Because we know that that the housing starts continue to be way off versus where they have been historically and so we're seeing a good strong replacement demand in our residential business. However, the products that go into agricultural, municipal and industrial applications were also up during the quarter and we have no indication, Matt, that that our sales do not reflect sell through for our distributors. I am not -- I have not picked up anything in any conversation that I've had with any of our customers that they're building inventories, for instance, at this point. They're all trying to watch inventory levels in their businesses. So I think the sell through is indicative of what went off our distributors shelves-- or that our sales to distributors is indicative of what went off their shelves.

With regards to the residential side of the business being called out as so strong on the replacement side, I guess why ask the inventory question, Scott, given housing actually came down a little bit as the quarter kind of went on. If the replacement business is so strong, I guess, I would have thought that replacement site would have proven out to be fairly inelastic from a demand standpoint. Is that not the case?

I want to be sure I understand the question, Matt.

Basically, what I'm trying to ask is what gives you confidence that there was not an inventory build this quarter, given that on the residential replacement side, I would have assumed that demand is fairly inelastic and that if someone's well breaks they probably do whatever they can to fix it because it's their drinking water so I guess I'm trying to close that loop.

Matt, I--my comment about our business--residential business being influenced by replacement cycles is a hypothesis on my part because I'm aware of how weak the new home construction business is. We have no evidence that our distributors are increasing inventories. In fact, if I look at industry shipments of--especially of clean water because I've not seen the waste water numbers yet, but industry shipments of clean water pumping systems were up very sharply in the first quarter.

And then they actually declined during the second quarter and I read that as-- that distributors across the industry probably built inventory during the first quarter. They took it down a lot over the course of 2009, anticipating a better year this year they increased inventory and it reflected in our sales--our industry sales during the first quarter this year. But then in the second quarter with industry shipments being down 5% or so, that struck me a--I didn't read a lot of inventory build into that number. And I don't believe that, for instance, our distributors for some reason increased inventories while all the rest of the distributors reduced inventory.

Okay, thank you for the color, Scott.

Yes.

Our next question comes from Mike Halloran from Robert Baird

Good morning. Could you talk a little bit about the sequential trends through the quarter and maybe give a little bit more granularity by some of the end markets?

Sequential trends during the quarter, you mean, like what happened in May -- April, May and June? How our sales build over that period? Mike, is that the question?

Exactly.

Okay. The--our -- we went through a period-- During the time that our Company made its big change in strategy, going was sales direct to distribution and introducing pumps to our product line. That, as you know, in 2007 and 2008, led to an intensified price competition and promotional competition in our industry. And one of the aspects of that competition was that we just noticed that at the end of each quarter there was an extraordinary amount of promotional activity, which caused our sales and our industry sales in the US and Canada, this was not a global phenomenon, baring in mind that half of our water sales are outside of the US and Canada. But within the US and Canada we would have these spikes in sales in the last month of every quarter.

Well, this year and through the end of last year, the promotional activity has abated and with that a change in this trend that we had seen of big spikes in sales at the end of every quarter. We're now having a more normal sales pattern where-that reflects the seasonality of the business not so much the promotional cycles of the business. So as a result, what we're seeing is the first two months of each quarter, sales are--have been up versus prior year and during the last month of the quarter, the sales either slow down because they're comparing against a spike in the prior year. So, If I'm addressing your questions, we saw that pattern in the second quarter of this year. Pretty strong sales in the first couple of months and then, relative to prior years, a slowdown in month three just because of the different promotional behavior that is occurring at the end of the quarters now. Does that address your question?

In part. Any particular end market that you could call out on the domestic side here- US, Canada- where you saw acceleration through the quarter trying to normalize for that seasonality that you were talking about this year versus last year? Could you break that down a little bit?

Well, I guess we are--our ag business has not been--has grown over this quarter and through the first half of the year. But it is not growing as rapidly as some other segments of our business and we have attributed a portion of that to the weather during the portions of the spring in areas of the country where there are particularly heavy with ag irrigation. And that as weather conditions become hotter and drier we've been optimistic that we would start seeing that segment really start to grow through the year and I guess we've seen some signs that that may be occurring. But, other than that, I haven't seen any particular trends.

We've been encouraged--we've been pleased with the growth of our waste water business. It's up pretty sharply in the second quarter and, as I said, somewhat surprisingly our residential water business has been up. We have introduced some new products in the residential water area which have been helpful and we think our distributors are just winning in the marketplace too.

Thank you for the color there. And then still on the seasonality question, but this time 2Q to 3Q. When you think about your guidance range for both the water division and the fueling division, maybe you could just talk about if the guidance itself embeds a relatively normal build from 2Q to 3Q? Or maybe builds is the wrong word there, the strength and seasonality in 2Q.

Okay, last year, our sales in the third quarter were higher than our sales in the second quarter in our water business. And this year we're forecasting that that will not be the case, that our sales in the second quarter will be higher than they are projected to be in the third quarter.

If you go back over our history, you'll see that pattern, that there are years where the second quarter is stronger than the third quarter and there are years where the opposite is the case. And we're projecting this year, because the second quarter was such a strong quarter, that our third-quarter sales are going to be lower than second quarter sales this year, even though last year third quarter sales were actually higher than second quarter. And again, I think it's just because we felt that this was a particularly strong quarter. We do have some currency factors that are going to work against us year-on-year and we would expect currency would be a little bigger factor in the third quarter than it was in the second quarter, a little bigger negative factor. And we just didn't project quite as strong demand in the third quarter this year as we experienced during the second. I would say that we were encouraged because July has actually been a pretty good month for us, but we think it's prudent for us to not project a third quarter that's as strong as the second quarter was this year.

Sounds good. I appreciate the time.

Our next question comes from Paul Mammola from Sidoti and Company.

Hi, good morning, everyone.

Morning, Paul.

Hi Paul.

If I could I take you back to Matt's question, just to clarify so it's sounds like there was inventory restock in 1Q, at a lesser rate in 2Q, and you would view restock as an opportunity, as substantially complete at this point? Is that fair to say?

Well--that's my read. As I said, I just have no indication that are distributors are--during the second quarter, were materially increasing their inventories.

Okay, fair enough, I just wanted to make sure I was reading that correctly. I would assume we saw more of a benefit from Linares in the quarter. What's utilization there like right now? And do you still think they're incremental benefits from margins there through the back half?

Well, the Linares plant, as I indicated on calls in the past, has done a really nice job of leaning out their operations. We have moved into our Linares plant complex all of the production that we had at one time in our Jonesboro factory in Indiana, all of our production that we had, or most all of our production that we had in our Little Rock, Arkansas facility and now all of the production that we had in our Silent Springs, Arkansas facility. Together those three plants had about 510,000 square feet of manufacturing space in them.

Linares has a little over 300,000 square feet of manufacturing space and--or 310,000 square feet and so we have comfortably been able to accommodate the manufacturing that had occupied 510,000 in this 310,000 square foot facility. And we are creating space in that facility to add significant amount of additional production. I think that's quite an accomplishment. So when you ask about utilization, we believe that there is an additional opportunity for us to move several hundred thousand man-hours of additional production down to Linares. And our Linares costs on the direct labor side are less than $3 on most of our North American facilities they're $15 to $20. So, there's a significant additional savings opportunity in Linares. The facility utilization is such that we have room for significant additional increment before we would say that facility is full from a square foot perspective. Now, we also operate the facility, for the most part, most of our production processes are operating at either one or two shifts down there. So, we do have the opportunity by adding additional shifts to significantly increase the output in that facility as well.

Okay that's very helpful. So when you re-- when you evaluate new restructuring here, is it due to you needing to continue to scale down costs for what you see as demand in the overall water business, or is that more of the good results that you've seen in Linares so far?

It has nothing to do with any anticipated reduction in sales. It has everything to do with the opportunity for us to reduce costs.

Okay, and then finally you mentioned in prepared remarks, Europe has obviously been kind of damp. Have you seen that kind of improve as the second-quarter progressed, and maybe into 3Q to assume maybe the order rate improvement might be there in 3Q, based on weather?

Well, if you talk to our European people they feel like they're having a really good year because their sales in Euros are up 14% in Europe, Middle East and north Africa. And our business is up nicely in northern Europe and it's up nicely in the Middle East and it's up nicely in north Africa. Now it's-- only up or 4% in dollars in the last quarter because of the currency impact. But, that's a nice sales increase for that region of the world. Now, the one area that was down was, as you might suspect, southern Europe but they don't -- and I say they--our management team in EMEA, would attribute it--that reduction in southern Europe as much to the weather as they would to general economic conditions. So, they're feeling pretty good about their business right now.

Okay, understood. Thanks for your time.

Our next question comes from Ned Borland from Hudson Securities.

Good morning, guys. Just on the share gain commentary, just maybe a little color on that. Is the gain on share that you've seen more product related, more price related? I saw that your gray water business was up better than clean water, was it mostly attributable to that? Can you help us think about why it is you've gained so much share? Why your sales are so much different than the industry overall?

First of all, when I commented on industry growth I was referring--I think I said in fact, clean water pumping systems declined as an industry, modestly. We base that on trade association data that we received and I'm talking about clean water-- clean ground water pumping systems, which is kind of the core of our product line on the clean water side. That we get industry data on and that was down in our shipments were up, significantly. So, we have to hypoth--that's a strong indication that we gained share.

I think it was partially because of some new products, particularly in the drive and control area, and some other new products that we had introduced on the pump side of our business during--over the last several quarters. We're getting some traction with those and I believe that we have been able to assemble the strongest distribution network in the North American market and that we've just picked up--our distributors are outperforming our competitors distributors and I give them a pat on the back for the kind of results they're turning in.

Okay and then shifting over to fueling, the third quarter forecast that you've called out here, what's driving the profitability?

Last year, in third-quarter our--for a variety of reasons, our operating income margin was unusually low. It was down 13% or 14% and we feel the fueling business is a business that's capable of generating 500 to 600 basis points higher operating income margin than that, and we think that's going to happen in the third quarter.

Okay, thanks.

I'm not showing any further questions at this time.

Okay, If that's the case, thank you for your attention. Goodbye.

Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.