Jones Lang LaSalle Inc (JLL) 2003 Q2 法說會逐字稿

Good day and welcome to the Jones Lang LaSalle, Inc. second quarter 2003 earnings release conference call. Today's call is being recorded. Any statements made about future results and performance or about plans, expectations and objectives are forward-looking statements, actual results and performance may differ for those included in the forward-looking statements as a result of factors discussed in the company's annual report on form 10-K for the year ended December 31st 2202 and in our reports filed with the SEC. The company disclaims any undertaking to update or revise any forward-looking statements. A transcript of this call will be posted and available on the company's website within two days of this call. At this time I would like to turn the call over to Mr. Chris Peacock President and Chief Executive Officer for opening remarks. Please go ahead, sir.

Thank you for joining us for this review of our second quarter 2003 financial results. With me on the call today is Lauralee Martin our CFO. Let me begin by briefly summarizing the headlines for the second quarter.

We achieved earnings in line with our guidance for the second quarter in what continues to be a challenging and uncertain business climate. Early signals of improvement in the U.S. operating environment led to strong performance in the quarter and significant new business wins from existing and new clients. Most notably, we secured the five-year mandate across the world from Proctor and Gamble for facilities management and project management services. Seeking strong competition to secure a relationship from which we will build rapidly to further differentiate ourselves in this global business.

Our [inaudible] Asia Pacific operations delivered increased revenues despite the impact of SARS on travel and business activity reflecting the gross achieved in north Asia where we continued to make new investments in our business. Our hotels business, which is the key differentiator for [inaudible] each of our three regions delivered record performance advising world class clients and competing against investment banks in all the major world markets. European market conditions generally remain weak particularly affecting our leasing business. However, capital markets have held up overall. One notable gross area was central Europe.

We continued to make significant progress in strengthening our balance sheet using our strong operating cash flows to pay down credit facility by more than $45 million from the prior year and achieving further improvements in receivables and bad debt performance. After Lauralee our [inaudible] results for the second quarter and outlook for the third quarter I will review recent business highlights and our progress in achieving our strategic goals in 2003. Following that, we will be pleased to take your questions. Let me now hand the call off to Lauralee to talk in detail about our financial performance.

Thank you Chris. Results for the second quarter were in line for expectation and guidance. We reported a net loss of 1.4 million or 5 cents a share. Included in the results as we advised last quarter is a pre-tax impairment charge of 4.9 million dollars for the abandonment of a property client accounting system in Australian.

We had strong performance in our America's region, in our hotels group whose results contribute to all three of our regional operations. Asia Pacific with the exceptions of our operations in Singapore and Taiwan weathered the SARS issue well, seeing a year over year revenue growth. The majority of the European economies unfortunately have not seen a bottom or started an improvement which continues to [see an impact] or leasing revenues.

Year to date, we reported a net loss of 8.7 million or 28 cents per share. Of the year-over-year variance of 26 cents, half can be explained by non-operating differences of the accumulative catch up accounting change of 2002 of 3 cents, the year-over-year change in non-recurring and restructuring charges of 6 cents, the impact of lower tax rate of 3 cents, the balance of the variance due to increased insurance expense and 5 cent, and the timing of incentive compensation of accrual.

Our cash generation continued to be very strong, as a result, we paid down our credit facilities by 45 million. Bringing the facility balance to 44 million. This low balance together with entering the strongest cash generating time of year, positions us to execute our plan to call the euro bonds [inaudible] in 2004. Due to the stronger euro the euro bond reported book balance increased by 26 million. This is currency translation as we have not changed our obligation on these bonds. As a reminder, the euro bond interest rate is a fixed 9%. Repaying these bonds with a credit facility in 2004 will significantly reduce the borrowing interest rate as our credit facility of priced at a spread of [LIBOR] which is significantly lower than 9%.

We renewed our credit facility this quarter adding two new banks into the relationship. We also reduced the facility amount from 275 million to 225 million due to lowering borrowing needs. We have the capability if needed to increase the facility by up to 100 million when we call the euro bond. We were comfortably in compliance with all of our bank covenants this quarter. We continue to focus on strengthening the balance sheet. Receivable aging over 90 days improved from 5.7% to 4.3%. We had lower bad debt expense this quarter as compared to the prior year. A reflection of focus on managing receivables aggressively. Cap ex at 9.8 million year to date was slightly above last year's level.

In discussing our operating results now, I will be referencing the impacts of foreign exchange year-to-year. This is due to the strength of the euro, the sterling, and the Australian dollar relative to the U.S. dollar in which we report our results. Total revenues increased 7% to 214 million in the quarter and were up 9% year to date. In local currencies, revenues declined less than 2% for the quarter and year to date were flat to last year. We review -- we view these results as a positive indication that the downward revenue trend is now manageable. We have revenue increases the Americas, north Asia, and our hotel business lines in all regions. These revenue increases were sufficient to off set the continued European decline.

Operating expenses increased 12% in both the quarter and the year to date but increased only 4% in local currency. Compensation expense increase 5% and 6% for the quarter and year to date due to expansions in north Asia, New York and LaSalle Investment Management. Operating and administrative expense declined the local currencies despite the increase in insurance expense of 1.5 million for the quarter and 2.5 million year to date. Net interest expense for the quarter was 4.9 million an increase of 13% in U.S. dollars but was 5% lower in local currency. T

he interest in the quarter also included $150,000 of accelerated debt cost amortization as a result of the renewal of bank credit facility. Our tax rate was 34% for the first half as compared to 40% in the prior year. The improvement in tax rate is due to proactive tax planning to efficiently manage our global tax position. Because we're in a lock position, this rate actually negatively impacts results year to date by 3 cents. We will favorably receive the benefit if we move into profitability during the balance of the year. We continue to take actions to further improve the tax rate this year.

I will now briefly discuss our reported operating segments. In the Americas, revenues increased over the prior year by 9% in the quarter and 8% year to date. Both the project development services and tenant representation group continued to see new business wins and existing client expansions. The Proctor and Gamble relationship is exciting new global opportunity. We're currently in a transition period with the client, a time when our costs are directly reimbursed but we do not return revenues. We'll start to see revenues from this relationship in 2004. Expenses continued to be tightly managed with compensation up less than 3% —including New York expansion costs. Operating at administrative costs were flat. As a result, operating income was down modestly only due to bonus compensation timing experiences from year to year.

Europe continued to experience the challenges of a declining economic environment. Revenues were up 3% and 6% for the quarter in year to date in U.S. dollars. But down in local currencies by 14% and 11% respectively. The declines were in the key markets of Holland, France and the U.K. We also saw some slippage in the capital market business as deals moved in to the third quarter. The decline the also due to last year having a significant [incentive fee] from our property management join venture with Scandia, which we did not have this year. We acquired our partner's interest at the end of last year and now own 100% of the entity. Our investment in this market is being rewarded by solid capitalist markets activities.

Our expansion into Central Europe continues to perform well and the hotels business in Europe had a record quarter culminating in the successful disposal of the hotel and of the resort complex both in Italy at Starwood. European expenses declined in local currencies as to region maintained a focus on cost controls. Additionally the lower performance resulted in lower bonus accrual relative to last year.

Asia Pacific saw a 5% improvement in local revenues. A positive performance given the impact SARS had on travel and business activity. SARS had the most impact our on businesses in Singapore and Taiwan while Hong Kong and Beijing businesses demonstrated considerable resilience. On the positive side, north Asian markets, particularly Japan and Korea continued to show a solid revenue growth. Expenses increased 7% in local currencies due to the investment in north Asia, but we remain comfortable that this investment will have a quick pay back throughout the year.

The corporate outsourcing trend continues to grow and we have strongly positioned a market differentiated position in this region of the world to serve our global client. LaSalle investment management revenues increased for the quarter and year to date and local currencies 2% and 11% respectively. The growth came from the annuity advisory de-components as we’ve renegotiated these in Europe and from fees from successful fund closings in all three regions. The majority of the revenue increased was reinvested into the business expansion.

Equity gains were down from the prior year impart due to an impairment charge of 1.1 million. Accounting rules require us to recognize impairments at an asset level despite an overall fund performance that is positive. We are anticipating equity gains in the seconds half of the year as several transactions being marketed are scheduled to close in the third and fourth quarter. The challenge this year is investing capital prudently as many markets continue to see real estate prices remain high despite underlying deteriorating property occupancy and rental rates. The group is very focused on maintaining their excellent performance record for investors.

This completes my review of our second quarter and year to date results. In giving guidance for the balance of the year, we have evaluated the balancing inflections of and improving America's market and a not yet stable European marketplace. These off setting economic trends make accurate forecasting a challenge. In the third quarter, we expect earnings to be in the range of 20 to 30 cents per share. For the total year, our goal remains to improve on last year's results. Let me now turn the call back to Christopher Peacock.

Thank you Lauralee. You have heard from Lauralee the details of our financial performance for the second quarter. As she has highlighted we have once again achieved our earnings guidance in uncertain markets, and that the mix of our businesses ensured that out overall revenues were only slightly down in local currencies despite the continued downward pressure in Europe. We have maintained discipline management of controllable expenses and continue to strengthen our balance sheet. At the same time, we have been able to sustain our investment for growth of north Asia and New York and LaSalle investment management. In a few moments I will describe some recent business successes in the pursuit of our strategic goals and some particular successes this quarter in our hotels business around the world.

First, I would like to briefly share our perspective on the market environment in which we are operating. As we are identified at the end of the first quarter, U.S. market fundamentals have continued to suggest early signs of recovery. Quarterly economic growth is strengthening, consumer and business confidence manufacturing and retail growth, similars from tax cuts and the weak dollar are all helping to create an environment from improvement, although, unemployment remains high.

In the property markets cheap capital continues to drive demand in prices though vacancy rates reached a 9 year high at 17% in the second quarter. While leasing volume may start to improve next year, rental growth is likely to be some time away. By contrast in Europe, economic growth remains sluggish overall. With negative trends year on year in Germany, Italy, and the Netherlands offset by slight growth in France and the U.K. Consumer demand, low interest rates, and some recovery in equity markets are underpaying the economy to an extent but more fundamental recovery is still not identifiable.

For real estate, capital market volumes are holding out as property maintains its appeal as an attractive asset class though [inaudible] remains tight. Leasing continues to suffer with an average vacancy rate over 8% and declining rents which are expected to continue into next year. In Asia, containment of SARS late in the second quarter and positive signals from the U.S. appear to clear the way for economic improvement during the second half of the year. Significantly, Japan is also showing upturn in projected growth. The Hong Kong and Singapore economies remain more subdued in reflected in the property markets with negative net absorption and increasing vacancies.

Overall the global outlook has become more encouraging due mainly to the removal of the uncertainty around a Iraqi war and SARS. However, the continued condition of the European economies rules out an overall recovery in the real estate markets before 2004. Up against this background Jones Lang LaSalle, Inc. stayed focused on our goals of driving growth and superior returns through the delivery of excellent plan service.

In previous quarters, I have described in details the performance of our corporate solutions, investment management, and capital markets businesses in pursuing their growth strategies. In all three of those areas we have again been successful in securing further wins in all major transactions that demonstrate our competitive advantages and markets across the world. The most notable and exciting win in the quarter, which I briefly referred to earlier, is the global real estate out sourcing mandate with Proctor and Gamble secured against strong competition through effective team-working by our corporate solutions teams in all three regions.

The agreement is contracted for five years and covers nearly 13.8 million square feet of office and technical facilities in 60 countries. Proctor and Gamble selected Jones Lang LaSalle because of our strength of our valued proposition, the culture similarities our companies share, and our deep commitment to customers. We're proud of that recognition from a world class organization.

This was any one of the wins achieved by corporate solutions in the quarter. We also extended our relationship with Europe reflecting the client ongoing satisfaction with the service we're providing to them globally. Our Asia-Pacific offered secure of extended relationships with Deutsche Banc, ENC Corporation, and [Exencia] in further demonstrations of our success in servicing clients outside of headquarter markets.

The [inaudible] investment management has secured new confidential separate account mandates with two pension paying plans, one in the U.K. for 100 million pounds of discretionary U.K. investments and another in the U.S. involving $110 million of take over assets and $100 million of new core investments.

Turing to our capitals markets business last quarter I talked our European corporate finance group which is a real differentiator in our sector and competes very effectively against investment banks [boutique] advisors. This group is once again added to it's track record major company sale mandates awaiting instructions to sell brand [tatch]circuit limited, which includes the world famous racing circuit in England.

Continuing our theme of focusing on business areas where Jones Lang LaSalle has strong competitive differentiation and strategies for growth, this quarter I want to talk briefly about our hotels group which operates within each of our three geographic regions and has just achieved a record level of revenue for a single quarter.

Jones Lang LaSalle Hotels is the world’s largest specialist hotel real estate investment advisor. It provides clients with value added investment opportunities and advise, helping them to achieve value from their hotel and tourism property assets by increasing operation efficiencies and tapping funding sources on a global scale. The group as placed relationships with all the leading global hotel brands as well as owners and investors in every major market.

During the second quarter, we advised on hotel transactions with combined value in excess of $1 billion. Notable deals included in Europe advising Starwood on the sale of two assets in Italy for over $650 million and acting from the Meridian Hotels and Resorts on the sale of the hotel Ritz in Madrid for almost $140 million. In Australia we advised a [inaudible] the U.S. private equity funds on the sale of the Park Hyatt in Sidney for $89 million. A price per room sets a new record in Australian. We also secured our first appointment in Asia Pacific from Merit International Inc. for the sale of a surface paradise merit in [Queenland].

In the U.S. we acted for Olympus Real Estate Partner selling [inaudible] Spa in the Florida Keys for 35 million dollars. In addition to these successes in the second quarter, the hotels group is also secured extremely strong pipeline for the balance of the year. In recent weeks we have been engaged by [Transact] Properties Inc. to market the sale of the Renaissance Hollywood Hotel, one of Southern California’s premier properties.

In Asia-Pacific we have exclusive real estate advisor to the government in (inaudible) administrative region in China for their proposed major development of Las Vegas style mega casino and gaming and entertainment resort. This world class attraction is planned to attract $5-10 billion of investments to create is largest destination he sort in the region with development of 20 resorts with up to 50,000 rooms; showrooms, exhibitions, and conference services and shopping malls. To win this caliber instructions from the significant players in the global hotel’s market requires a proven track record of market expertise and the highest standards of client service. Our hotel group is the high performing business line. It effectively leverages our global capabilities to act on behalf of a cross board of clients delivering true competitive differentiation.

I would like to conclude by commenting on outlook for the third quarter. As Lauralee has already described we have seen diverging market trends in the Americas and Europe in the first half of the year, which continue to make accurate forecasting for the full year difficult. Against this uncertain background, our focus will remain on the pursuit of new business relationships and instructions to secure strong growth in market conditions improve. Also on excellence in client services for existing clients and, of course, discipline control of expenses. Now, we would like to call for you questions. Operator, would you please explain the process.

at this time, I would like to remind everyone, in order to ask a question, press star and one. We'll pause for just a moment to compile the Q&A roster. Please hold for your first question. Your first questions from Joel Gomberg (ph.) with William Blair.

Thanks. The P and G relationship, what do you see as the opportunities to carry that further in given the size of the deal? Have you seen that open up opportunities for further deals of that size and your ability to take on those type of deals in the future? And then the second question, it seems Europe actually got worse this quarter. And, you know, maybe you could drill down a little bit more by market where you see where that could bottom out and when that could occur?

Okay. Joel, good morning. I'll take the first part of that question. And pass off Lauralee to take the second. I can con contribute I'm sure there as well, but back to the Proctor and Gamble. As I'm sure you you're aware, in taking on that instruction we've also take on a number of their [stars] from all across the world, and many of their [stars] are high caliber people. So leveraging off that fresh expertise that's coming into the firm indeed puts us -- makes us well-positioned to take on other similar type global outsourcing instructions.

When you have a client of this nature, it clearly drives best practice across to our business to ensure delivery of our promises. We've already got a situation where a number of other major corporates were waiting to see the outcome of that particular appointment before now sitting down and talking to us about other similar opportunities. So I do think that this paves the way and indeed is, you know, a welcome stepping up of globalized sourcing.

Actually with Proctor and gamble be the instruction that we have relates to the product development services side and corporate property services which is the facility management. But we will be looking also to try and leverage expertise across the world in the future to take on transaction as well wherever possible. That covers Proctor and Gamble at this moment Joel, are you happy with that?

Yes. Thanks.

Okay then. Let's ask Lauralee to talk ability Europe in the markets.

I think when we look at Europe it is a very big area and we have many key markets there's different dynamics in each of them. It's huge. There's mixed messages. Germany is a large market for us, actually we’re flat year-over-year in terms of revenues. So the fact that it's not getting better, it's a big market that needs to get better, but we're also not seeing the same level of deterioration. We're seeing some of that filter in to some other areas. We noted that The Netherlands had escaped that impact so far, all of a sudden is feeling a little bit of that impacting into their market. The U.K. which was down for us is really a lot of different markets and products. And as with most of Europe, leasing continues to be a challenge until the markets recover. However, we were down a little bit in capital markets, and capital markets is a major strength of the firm. In my cases, we believe some of that is timing as we saw transactions slip from the second quarter in to third quarter.

Obviously the key will be for us as we move through the year that we don't have a slippage into the following year as things slow down. But there are places where we are seeing stability. There's some places we're seeing a little bit more decline. There's other areas where in many cases you see a little bit of a up-tick. We do have very nice growth dynamics in central Europe in markets such as Spain. It's not at all a declining marketplace, it's mixed. I think all of Europe is waiting for the U.S. to show for sure signs of improvement as it floats around the world. I think some of the Asia-Pacific recovery is a great deal reflection that the U.S. is getting better. That moving around the world is what we're waiting for, but not completely made its circle.

Thank you.

Next question comes from Will Marks with JMP Securities.

Hello Chris and Lauralee. I had a couple of questions. Really questions for Lauralee on numbers. I'm a little confused on getting to the 6 cents. You do say in the text of pretax impairment charge of 4.9 million. How do we look at that on the income statement? I see there are non-recurring and structural charges.

Yes. We provided a separate exhibit because with the way all the reporting is now --

Do you show that in here? I guess I missed it.

There's an exhibit and we show the abandonment of the property management accounting system and there's two components. One was related to compensation and benefits because when we abandon the system, there was also some people that related to that, that really had no role any longer and then the operating administrative and other which picked up the capitalized cost of the system that we were writing off

Okay, I see that page around that number that you have the 4.8 million and the 113,000 and which adds up to the 4.9. On the income statement, where does that come -- is that all in the recurring charges.

That's correct.

Okay, actually I can come to that. Second question, on looking at last year on an adjusted basis, was the same quarter actually 13 cents or 11 cents? Because I have -- I knew you published the numbers showing without a non-GAAP basis that -- what I'm getting at I guess the most important thing when you guide to slight improvement this year, I would like to know what you're looking at in terms of '02, what was -- it's an improvement over what?

Correct. Last year was 11 cents. So first of all. Which is on the financial statement. And I know one of the things that is confusing is the share count changes if we're in a loss or in a profit position, it's -- it's the reflection of accounting. You get a little bit difference. You can see in the share accounts between basic shares and diluted shares. It stays the same when you're in a loss position. And changes when you're in a profit position. Last year when we talk about what we made it was the $1.08 which was not inclusive of the restructuring charge that we took at the end of the year

That's the number your goal is to top that number?

That's correct.

Okay. And couple other quick questions. You mentioned that cap ex number, year to date, what was that number? 8.9

9.8

Okay, 9.8, and then for the quarters what was that cause I didn’t have the first quarter number.

We were 5.6 in the second quarter

5.6 okay. How about -- you may have mentioned this I apologize. Net real estate investments?

I'm not sure I understand the question.

I think in the past you talked about how much you co-invested or sold along with your clients given sort of a net real estate investment number?

I'm sorry. Co-investment balance year to date which is 71.4 million. Which is actually down from the beginning of the year principally due to the fact that we're liquid dating assets because of the favorable positions that are in the marketplace right now to sell property

That's it. Thank you Lauralee.

Next question comes from Matt Ostravler (ph.) with Morgan Stanley.

Morning. I guess—I know you are not providing specific 2003 guidance but can you talk, we’re sort of past the midpoint of is year here. I know a lot happens in the second half of the year. But Lauralee can you comment about the given the trends where they are now, are there things that need to change between now and year-end trend wise to get you to your guidance? Are there any concerns you have about having you know previously said and continuing to say that you’ll beat that guidance quickly, do we need to see Europe start improve by year-end?

I think the better way that I'm thinking about it -- hopefully this will answer your question. Through the first half of the year, our revenues are the same as last year currency adjusted. So that's the underlying way that the business performs is the way that I like to think about it. When we were at mid year last year, every one of our markets started to decline. So it was a vicious cycle over that year-over-year. The fact that we're at the mid point of the year equal to this year. At this point in time only Europe looking like it's continuing to decline, it will then be a reflection of if the other three markets continue on the trend that they're on which has been enough to off set the change in Europe and the fact that there are signs that Europe in some of it's markets is stabilizing, that's what still is gives us a positive feeling for the balance of the year.

That's great. This may be too much of a detailed operating question. Do you have a sense, thinking about the U.S. which seems like it's have a transactional rebound can you provide a little more granularity of the transactional rebound? What types of company are looking for space? Is should we be reading anything in to this?

the businesses that are performing in the U.S. that are making the growth for us are the tenant representation group which does focus completely on transactional activity for corporate. When we ask them is it your core client doing more is it the fact that you're continuing to win new clients, it's probably somewhere in the middle of that. The existing clients are doing a lot more transaction but of a smaller shorter length duration still at this time. Our project development services business is other growth area in the United States. It does work for corporate, but it also is able to do a lot of in the marketplace for new transactions. It has had a marvelous year of doing things for clients. It's not completely clear yet, Matt, the fact that we've been so good at winning new relationships or the fact that corporates are feeling bet better.

Great, and I’m sorry if you have articulated this in the past. But Can you comment on what you -- on what your plans are for the bonds next year in terms of, it sounds like you would call them -- what would be -- how would you replace that capital?

the credit facility which we just renewed and renewed it a year early so that we would be very well positioned and flexible is a multi currency facility. We reduced the amount that we have on the line because we don't need borrowing at this time to the extent of this facility. However, we have a capacity in there to take it up by another 100 million if we choose to call the euro bond. They're callable in June of next year. There is a premium to call that it is 4.5% but even with that, the difference between a 9% and a relatively, you know, favorable rate as a spread over LIBOR, it's a very quick payback to call those bonds. We had only 44 million dollars on our credit facility at the end of the quarter. We're going in to the time of the year where we produce a lot of cash. We will most likely have those -- that facility completely paid off probably some time within the fourth quarter.

Okay. And then as it relates to that, you're paying down debt at the great clip, and that’s great news. How are you viewing your capital structure these days? Do you see yourself then going and eating into, you know, if you call the bonds and put those on your facility will you then just be eating in to that debt balance in our cash flows and ultimately reducing leverage altogether?

That's a very complex question. I think it's a mix of a number of factors. First of all, at the interest rates that we will then be at, the decisioning will be very much influenced by what is the price of our stock, how is the marketplace ultimately going to look at dividends and our other opportunities because now the decision of what is the optimum may not be as clear-cut as when you're looking at debt and getting to the position where you can pay off 9% interest rates. I think the other thing we have to look at is we will be able to take the bond and put them in the credit facilities as euro. But ultimately with the current dollar euro relationship, we may also think very carefully about whether we want to pay those down at the cash premium. It would require us given where the euro dollar relationship is.

Great, thank you very much.

Next question comes from Oliver Deseldorf (ph.) with AXA.

Hi. Could you please talk a little bit about the loss that you incurred in your income -- in February please?

I think you need to repeat that last bit?

That coming from your income -- venture. The 285 million. No. No. No.

Are you on the income statement?

Yes. It's online number.

Yes. You're talking about the equity losses from unconsolidated --

Yes

That is our co-investment capital into –LaSalle Investment Management. In -- in this particular quarter I discuss the impairment charge of 1.1 million. That would go into that line. There are gains that were also achieved from property sales that netted against that but not sufficient to put it into positive number. The impairment charge is really related to the fact that we may have and a fund, in this particular case it’s an opportunistic fund. So by design you expect that there will be some properties that will be significant winners and some not. Netted together they make a performance that is favorable.

The accounting requires that we need to look at the individual assets within than fund. And if there is an impairment, take a write off on those which we did which is the 1.1 million. The funds that those properties are in, in fact, has a favorable performance. So the fund is fine. But the accounting requires that to occur. To give I don't a little bit more color, it's in Europe and there were a couple of properties in Germany and obviously it's a reflection of some of the German economic impacts on property. But in total, that fund is performing.

Thank you:

Once again, I would like to remind everyone, in order to ask a question, press star and then one. We'll pause for just a moment to compile the q-and-q roster.

Your next question in from Ian LaVie (ph.) with Third Avenue Management.

Good morning. Can you talk about the Proctor and Gamble relationship and sort of how you view that as you look out over the next three to five years in sort of what type of capital you will have to commit? I saw 700 million dollar number. I guess that's revenues over five years. And sort of what types of margins you think you can earn on that?

That was actually, I think, taken at 700 million was the kind of internal costs of Proctor and Gamble of running their own facilities over that period. Of course, our key role is to reduce that for them. And we, of course, participate in the savings that we achieve. That's one of the ways we get rewarded. I think one of the exciting things about this instruction of this nature, it's across 60 different countries. It's building corporate expertise in each of those countries taking on some -- a lot of the -- as I said earlier, high quality stocks that already exist in proctor and gamble and have been trained with their facilities and build buildings. The ability to leverage that expertise and offer that service to other similar type plans is one of the most exciting aspects. Because this is an aspect of our business that only improves with quantity. You get critical mass situation of expertise which you can then leverage off to good effect others join on similar bases.

Is your question more about – I am just trying to get to the base of your question--in terms of earning likelihoods from this or --

Well, a little bit also. How much capital -- are there going on capital expenditure associated with relationship. Ultimately, what type of return do you think you can generate on this investment?

I think for clarification, this is not a capital investment requirement on our part. What we do is we come in and as Chris said, we are managing Proctor and Gamble bend on real estate. That's the 700 million we quoted. That number does not flow through our revenue statements that's the money that we manage on their behalf. What we do is we bring our talent of people our best practices, our technology capabilities into Proctor and Gamble and take their people on the ground and make their real estate operations more efficient.

The number that we are, in fact, paid is a fee. It's not a fee we can disclose, but it's a fee that we get paid for base services. There are incentive fees as we perform. With our other clients we have very high record of achieving incentive fees. We also get some cost savings as we produce results for them. With our other clients, that's been a very successful part of our performance with them. So we would anticipate those as well

Thank you very much

Clarification, I think your question on capital expenditure is that many of the technology companies need to put up a lot of capital up front. If something were to happen with the client, they would have that at risk. That is not the situation here. We're bringing best practice real estate capability

Okay, good.

At this time, there are no further questions. Mr. Peacock, think closing remarks.

Thank you operator, as there are no more questions we will draw this call to a close. Thank you everybody, for participating today. We look forward to talking with you again after the third quarter. Thank you.

Thank you for joining today's conference. You may now disconnect.