Quaker Chemical Corp (KWR) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Quaker Chemical Corporation first quarter 2005 earnings results conference call. At this time, all parties are in a listen-only mode and there will be a question-and-answer session following the formal presentation. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host, Mr. Ronald J. Naples, Chairman and Chief Executive Officer of Quaker Chemical Corporation.

Thank you very much. Welcome, everybody. Good afternoon. As in the past, here with me today are Neal Murphy, our CFO, and he'll make some comments when I'm finished with my thoughts. And Joe Bauer, our President, is also here with us as he has been in the past. And after Neal is finished with his comments, Joe will have some specific words about CMS. And, of course, we'll all be available for questions.

Before we start, I just should say -- let you all know this is the last analyst meeting for Joe. He's retiring on July 1. In the future I presume he will be on your end of this call. Joe has been at this for seven-and-a-half years and he's made a lot of contributions and we'll miss him, but of course, we all wish him well as he goes into retirement.

Going forward, I just should let you know that we don't plan to replace Joe's position in kind. We could never replace him as an individual, of course, but we're also not going to replace the position in kind. We've decided to change our organizational structure so as to split up the Chief Operating responsibilities among Neal as our CFO, Mike Barry, who runs our metalworking business, and Mark Harris who runs our steel business. Those three folks will report to me and bring our day-to-day operating focus to our business as a team. So that's how we plan to go forward from here, and I'll just reiterate my thanks to Joe for all the contributions he's made over his seven-and-a-half years here.

Now on to the first quarter. As, frankly, an unpleasant a subject as it is for us. You can tell from our press release that it was a tough quarter, certainly not what we expected coming out of last year as we looked to the prospect of improving gross margins and solid demand. Instead we found raw material prices once again daunting. In the quarter, the prices in the quarter, in the quarter alone ran ahead of the pricing actions that we had in place as extensive as they were.

We reported $0.32 versus last year's $0.33. Our income before taxes was slightly down from last year, $5.9 million versus last year's $6.1, but I have to point out that this included the positive of about a $4.2 million gain from the Quaker Park sale, now about $1.2 million of that was regular preferred distribution, but it also included the negative of $1.2 million of workforce reduction charges, so that puts our PBT at slightly less than half of last year's first quarter. So, of course, it was a disappointing quarter for us in that regard. Not what we had planned on certainly.

Cost challenge played a big part of that, particularly in raw materials. That applied to our range of raw materials, from animal fats to vegetable oils, but the most important piece of that, of course, was oil. We left -- we came out of '04 with an average in oil about $42 and we averaged in the first quarter somewhere between $49 and $50 of raw material costs for oil during the quarter. Indeed during the quarter we had prices up over $55, $57, $58, and, of course, that was also a sign that was not a happy one for us.

Our plans called for pricing actions going into the first quarter good enough to offset most of the increases we saw in '04. For the most part that's precisely what we did. We worked with customers to serve their needs and ours, and we made a lot of progress, although there's certainly more to do, and we, of course, for the year plan to push further for price increases during '05, because that's simply the economic reality we face.

The plans and actions we have in place going into first quarter did not account for the extent of price volatility in raw materials, particularly in oil, that we saw in the first quarter. Our unrecovered raw material costs in the first quarter was something about between $0.12 to $0.14 a share during the quarter. The bulk of this was new cost that came in -- that was new to us in the first quarter for raw materials or finished product costs in CMS Tier II products. Neal will have more to say and more detail about gross margin later.

Suffice it to say, though, that we have more to do in this regard and we continue to work with our customers to make our case, built on the levels of service and value that we've delivered to our customers over a long time. In any case, gross margins in the first quarter certainly suffered from this mismatch of pricing and costs. Gross margin percentages during the quarter also were hurt by a product mix shift for some lower margin products during the quarter that we think will self-correct over the year as our product mix gets more back to normal.

Regarding product sales beyond just the mix factor, volumes were not all that we would have expected, either. As we note in our press release, our customers were trimming inventories, both steel and metalworking, and particularly in Europe in response to the softer demands that they faced.

But some good news did flow on this front, and it points to a fundamental strength we can build on for the long term, and I'm talking about our market position and our share strength. In Europe, we recaptured a couple of major accounts in steel that are important to us. Steel accounts are under pressure because the impact of oil-based derivatives in these products, in steel products, is greater than they are in metalworking, but even in the face of this kind of challenge we can build market share and we did build market share.

Even as our steel accounts are under some pressure, our industrial metalworking accounts stayed solid. We moved prices to respond to the raw material challenges we face. We're working on new product initiatives in new niches, such as tube and pipe and new coatings products all to build our position in those markets and to keep our volumes growing.

We're building share in the automotive business, largely because of the position we've created through CMS. And Joe will have more specifics on this later, but let me just step back to give you some quick remarks as an overview. CMS, while it is contributing to our profits, hasn't contributed as much as we planned, largely because of the impact of raw material costs on Tier II suppliers. Product conversions are going very well and we remain focused on that as one of the primary strategic imperatives of the CMS business. Where Tier II suppliers are concerned, in their product costs, we're working with them and our customers to find ways to better accommodate the kind of cost challenges we've been facing.

Our contracts with our customers will be coming up for renewal within the next year, and we will start working with our customers in the near term to recognize Tier II realities that we can face and address in these renewals. When we first did our contracts, or when we did the first contracts, we certainly didn't contemplate the kind of cost increase experience we've had, so this will be a new point of departure as we explore solidifying this business and building off the market share we've captured.

Despite the fact that we have top customers and pricing is never easy, we're gratified that we've been able to establish the pricing accommodations that we have. As we said earlier, this speaks to the kind of market position and value we've created for our customers. We've got more to do here, of course, but we'll remain focused on value that we can deliver to our customers as we pursue price increases.

Where demand is concerned, of course that varies by customer segment and by geography. Among steel customers, total real volume was down worldwide. That's a mix of big positives, such as in China and negatives in -- and market negatives in large markets such as Europe. We expect a better top line looking forward because of the share gains that we think we can build on, because we expect a more regular product mix than we've had in the first quarter and because of continued new business gains in China, with new mills coming up there and with the kind of sales growth that we've had there.

Where metalworking is concerned, in terms of market demand, we've seen metalworking, of course -- industrial metalworking serves a mix of businesses across a range of industries. As I said earlier, the overall demand there has stayed solid, if not ebullient, and with the new businesses we're working on and new products that we've got introduced, we think that our demand should stay pretty solid in that segment.

Automotive markets were hurt by soft demands for our customers in both Europe and the U.S., no question about it. Production levels were down in the United States among the big three. We saw Volkswagen and Mercedes production levels down in Europe. And the markets don't -- do not have signs of rebounding strongly. In the U.S., inventories are at the 80- to 90-day and even higher levels, where you typically have inventories at the 60- to 70-day level, so you can see that where the automotive markets are concerned, there is still a challenge in terms of current demand.

However, having said all that, we've made tremendous progress, as I said, in our volume growth in these metalworking markets and actually saw positive growth even with these down markets, largely led by the CMS penetration that we've had.

All this takes me back to the strategic imperatives I've talked about so many times in these meetings. Selling value, operating as a globally-integrated whole and harnessing our worldwide knowledge, the kind of imperatives that we think are critical to our success in the business long term. We're going to stay true to these, we're going to build on these, because we think it's the most important way and the most effective way to establish our differentiated position, which in the end is what will make us successful.

Staying true to these is harder in days like these. High service levels carry the implications of higher costs. We've responded to some of those realities. You know that in the fourth quarter we took some steps to consolidate operations in Asia where we felt we could be more effective at a lower cost, and of course, in the first quarter we've made some workforce cutbacks in various parts of the world for the same reasons, and we'll continue to work hard on the cost elements. But we don't want to lose sight of what makes our market position possible and sustainable, and that's the kind of service levels we can provide to our customers. In the long run, that's what will really deliver for us.

So it's a year that we're going to be focusing hard on our priorities. Building off of the global and value orientation we've pushed so hard, and moving to the share growth, pricing relief, and cost sensitivity that will be characterizing our operations this year.

So with that overview, I'll turn to Neal and he can give you some more of the detail. Neal.

Thank you, Ron. Good afternoon, everyone. Yesterday we announced quarterly sales of $104.2 million and diluted earnings per share of $0.32 for the first quarter. This included a gain from the sale of property by the Company's real-estate joint venture as well as charges for restructuring and other related activities.

I will focus on the drivers of first quarter performance with particular emphasis on margin drop off from the first quarter of last year. Joe Bauer will then make a few comments on CMS, and we'll open the floor to questions.

Revenues compared -- revenues for the first quarter compared with the same period last year were up 6% to $104.2 million. Of the 6% growth, approximately one-half was due to foreign exchange from a stronger Euro, with the remainder primarily attributable to higher sales prices. Volume strength in the U.S. and Asia Pacific was offset by softening demand in Europe, with consolidated volume essentially flat the first quarter of 2004.

Moving on to gross margin, which is obviously a key focus area for us. Despite a 6% increase in sales gross margin dropped in absolute dollar terms from $32.5 million in the first quarter of 2004 to $30.9 million in the first quarter of 2005. Gross margin as a percentage of sales fell to a disappointing 29.7% this quarter versus 33.1% from the first quarter of 2004, and versus 32.8% for the fourth quarter of 2004.

Higher prices for the Company's raw materials during the quarter, particularly crude oil derivatives, outpaced the Company's price increases as crude escalated past $55 per barrel. We also experienced shortages in key raw materials, resulting in additional upward price pressure. While we worked with our customers to achieve substantial recovery of the cost escalations that occurred -- incurred during 2004, our pricing actions lagged the incremental raw material costs that were incurred in 2005.

In addition to these higher input costs associated with the manufacture of Quaker product, we also experienced significantly higher third-party product purchase costs with respect to our CMS contracts. Several of these contracts did not allow for pass-through of these higher costs. The combination of unrecovered raw material, as well as higher third-party product costs under these CMS contracts contributed over two percentage points of the 3.4 percentage point margin shortfall from the first quarter of 2004. As Ron mentioned, we'll continue to push for additional price relief from our customers despite competitive pressures and contractual limitations.

The remaining 1.4 percentage point margin shortfall from the first quarter of last year is due primarily to both regional and product mix issues. Steel and automotive customers, particularly in Europe, scaled back production in the first quarter to reduce high inventory levels in the face of softening demand, with a negative volume impact to us on our higher margin products.

In addition, the Company sold lower priced, lower margin products in the first quarter as a supplement to our core product range. We had anticipated these lower margin sales would represent incremental business that would supplement our base business, but instead they helped compensate for demand softness in our key product lines with the result in lower overall corporate margin.

In summary, the following three factors drove our margins down in the first quarter of 2005 versus both the first quarter of 2004 and the fourth quarter of 2004. Raw material cost escalations, particularly those that occurred in the first quarter of 2005 that we have not been able to fully recover from our customers, third-party product purchase cost increases under certain CMS contracts, with no contractual mechanism to pay us through these costs, and unfavorable product mix.

Assuming raw material price stability, we anticipate that we will see margin recovery over the course of the year as we implement additional pricing actions and return to a more normal product mix. The level of margin recovery, however, would certainly be enhanced if we experienced lower raw material costs over the remainder of the year.

Moving down the P&L, I will now focus on our SG&A and other expenses. SG&A of $28.2 million this quarter is up $1.6 million compared to the $26.6 million reported in the first quarter of 2004. Unfavorable foreign exchange rate translation accounted for a little less than one-half of this increase. The remaining increase is due to inflation, higher professional fees, depreciation associated with our global ERP system implementation. Offset by lower compensation -- incentive compensation costs. As a percentage of sales, SG&A is stable with last year's first quarter at 27.1%.

During the first quarter of 2005, the Company furthered its restructuring efforts that began in the fourth quarter of 2004, resulting in a net pretax charge of $1.2 million related to a reduction in its workforce. We expect to realize $1.4 to $1.6 million in annual savings as a result of this charge. These savings will be reinvested in higher growth areas, such as Asia Pacific and in the continuing development of new complimentary businesses.

The increase in other income in the first quarter is reflective of the $4.2 million of proceeds received from the Company's real-estate joint venture. The proceeds include a $3 million gain relating to the sale by the venture of its real-estate holdings, as well as $1.2 million of preferred return distributions. Preferred distributions in 2004 totaled $0.9 million including $0.2 million in the first quarter of 2004.

Increase in net interest expense over the first quarter of 2004 is due to higher average debt balances, as well as higher short-term interest rates on the Company's credit facilities. The effective tax rate for the first quarter is 32.5 versus 31.5 for the same quarter last year. Many external and internal factors can impact this rate.

Continuing down the P&L, equity income for the first quarter of 2005 was lower than the prior year due to weaker performances from the Company's Mexico and Japan joint ventures. And minority interest was lower for the first quarter of 2005 compared with the same period last year driven by the acquisition of our -- of the remaining 40% interest in our Brazilian joint venture, which was acquired in March of 2005. The purchase price for our acquisition was $6.7 million up-front, with additional annual payments of $1 million for four years subject to compliance with the terms of the purchase agreement. This acquisition is expected to be immediately accretive to earnings.

As a reference point, the minority interest dilution to earnings last year stemming from only owning 60% of Brazil was $1.7 million. This is prior to laying over debt service, increased depreciation and amortization associated with our acquisition, which are estimated to be approximately $600,000.

Just wanted to make a few remarks on the balance sheet and cash flows. The Company's net debt has increased from December 2004 primarily to fund the acquisition noted above, as well as to fund working capital needs associated with the Company's growth initiatives. Net debt-to-capital ratio was 33% at March 31st compared to 28% at the end of 2004. The Company's credit lines total $95 million, $40 million committed and $55 million uncommitted. At March 31st, 2005, we had approximately $59 million outstanding on these credit lines.

That concludes my prepared remarks and we will now turn to Joe Bauer to update on CMS.

Thanks, Neal. Good afternoon, everyone. As Ron mentioned, this is my last reporting to you, and I am sorry to say that I wished I had better results to report. And some six months ago when I decided to retire it was my expectation that by my retirement date we would be looking at better results, but the raw material impact on our business has prevented us from meeting that expectation.

Now I'd like to turn to more of the formally prepared remarks I have. As Neal indicated, my comments will be focused on our CMS business, and more specifically, on North American Powertrain portion of this business. If you will recall from our last meeting, our reported consumption reduction improvements first half of '04 to the second half of '04 of 15%, and for that same period, an increase in Quaker product sales resulting from the conversion of competitors' products to Quaker's products of 65%. For the full year 2004, we realized an overall growth of 40% in our North American automotive business as a result of these conversions.

Turning now to our first quarter results, we continue to see both consumption reduction and product conversion improvements. Our material consumption comparing fourth quarter of '04 to first quarter of '05 showed a reduction of 6%. While our Quaker product sales increased by 10%. So as you can see, we continued to make progress.

Another factor negatively impacting our results in this business segment is the cost increases in our Tier II products. The impact of these increases continued to escalate on a quarter-to-quarter basis. If you will recall, the contractual language of our agreements does not provide for the pass-through of cost increases. But considering the unusual circumstances we face, we have entered into discussions with our customers in an effort to get relief on these cost increases.

Looking forward, we continue to expect reductions in the consumption of our materials, as well as increases in the use of Quaker products through product conversions. Additionally, all new programs will specifically address the recovery of raw material increases and provide for shared savings resulting from the identification and implementation of programs that reduce the application cost of our customer processes.

In summary, we continue to improve our results in our North American Powertrain business through the reduction of consumption and the increase of Quaker product sales. But a portion of this improvement is currently being offset by the cost increases we are incurring in our Tier II product costs. Several actions that we've taken as a result of this situation are, we're entering into discussions, as I said before, with our customers in an effort to get relief on our Tier II product cost increases, and all new programs that we would quote will include Tier II product cost protection, as well as shared savings opportunities.

This concludes my prepared remarks.

Okay. Thanks very much, Joe. And thank you, Neal. At this time, we'll shift to answering any questions or exploring any issues that you may have on your mind. So, Megan, if you would arrange that, please.

Thank you, sir. Ladies and gentlemen, at this time we will be conducting the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question is coming from Patrick Flavin of Flavin, Blake & Company.

Good afternoon, gents.

Hi, Patrick.

Ron, could you address the issue of these CMS contracts? I know it may sound a little bit like Monday morning quarterbacking, but a contract that doesn't provide for higher cost for you and is priced to you on a pass-through basis so that you really don't have any margin, strikes me as a very dangerous contract.

Well, when we established these contracts we had -- don't forget, we have a fixed fee in these, and we have savings built into the economics of how we make these contracts work. When we went down the road of analyzing these contracts, we were looking at the ability to negotiate with our Tier II suppliers and creating a competitive situation among these Tier II suppliers so that we could keep prices in check, plus we had the opportunity to use our products to go into to replace some of the products of our competitors. Now, the reality is that not all of our products, of course -- not all the products in our accounts could be replaced by our products, and, of course, we recognize that.

So what we have found is that, of course, with these -- we felt that in any normal raw material environment that we would have been able to deal with this very well through the savings that we've generated and through the negotiations that we had used in the past. We have been running this kind of -- not with the same kind of accounting, but we have been running what we call pass-through accounts for a long time before we went into these other accounts, and we had a great amount of experience in creating the kind of savings that allow us to offset the kind of increases we felt we would be confronting.

So in retrospect, you're saying that we should have -- it's certainly true in that in retrospect we should have put something in these contracts that we didn't, but in our analysis at the time, we felt confident that we had covered the bases built on the experience that we had in the past ten years of running contracts at savings built into them.

Okay. On a go-through basis -- on a go-forward basis, how many of these contracts, what kind of volume, percentage volume or whatever, of these contracts lapse in the coming year?

Well, all of the GM contracts lapse in the coming -- in April of next year. And then we have a set of -- a number of other contracts that have been added since the original GM contracts and, of course, those -- some of them are being negotiated differently, as you might imagine, and others, they will be renewing in follow-on periods to the GM contracts all around essentially the initial three-year terms.

So, then, we are not libel to get much respite for another year.

Well, that's what we've been talking about, and that's the kind of conversations that we've had with our customers on these accounts where there is not -- does not have -- on the contracts that do not have the pass-through aspects, yes. So, formally, we have those contractual constraints, but in terms of practical realities we are talking to our customers about this.

Let me hasten to say, though, Patrick, even in regard to the fact that these are not certainly what we would like them to be, recognize that we are still -- these contracts are still contributing to our profitability. These are not take-aways for us. It's just that they haven't had the kind of returns that we had initially built into them. Which is certainly a disappointment for us, but it's not the kind of thing where -- the growth is certainly being dragged down, but it's not the kind of thing where our overall profitability is being dragged down because of these, so let me hasten to add that. Mark, Neal, or Joe, do you want to add anything to those comments?

I think as you said, these contracts -- and in my remarks, Patrick, I made a comment that the language doesn't provide for, but regardless of that, we still are entering into discussions. And, yes, on a formal contract basis, you might expect that we wouldn't get any relief on these until early next year, but we are still pursuing some relief during '05.

Okay. God speed, gents.

Thank you.

Our next question will be coming from Robert Kosowsky of Sidoti & Company.

Just wanted to double check on one of the numbers. You said of the 340 basis point gross margin decline, about 2% was from just the raw material costs alone?

Combination of raw material costs and higher third-party product purchases associated with the CMS contracts, yes.

Okay. Can you break out what was CMS and what was just kind of the organic business, just to kind of get an idea of the strength of the underlying non-CMS business?

Yes, I would, just in very rough numbers, I would say it's about 75% associated with our organic product base, and the rest associated with CMS.

Okay. And can you guys -- continue on CMS, can you just quantify how much money you might have saved GM over the past years and just the fact that you've done that, are they more or less likely to renew you again in the kind of difficult time that they're having right now and the fact that I imagine any dollar saved is a great fact?

Well, I don't know that we want to be in the of business trying to quantify what we've saved GM, because I'm sure they would have an interest in assuring that that number is confidential also. We certainly don't want to violate any of that. But I think it's fair to say that from our standpoint, and I believe it's true from the perspective of the GM folks who are working with the seasoned accounts that we're really partners with them. We're in their daily plant meetings, we're a part of their problem solving, we raise issues with them, they raise them with us. So we're really an integrated part of the team there. We have multiple people on site every day, as you might imagine.

I think our relationships, in terms of what we've been able to contribute to what they do, are excellent. I have every confidence that GM considers us a valuable supplier and I have every confidence that they will be trying to find ways for us to continue this as we would like to continue it, but, of course, there are hard economic issues that have to be dealt with and we're going to be realistic about that.

Such as getting the Tier II price escalators included?

Yes, a whole number of things. That's certainly something that's important and we want to also try to work on shared savings because at the end of the day that's really the way we can be of service to our customers. And, again, at the end of the day, we're much happier having this conversation with our customers about what we can do for them than simply arguing about prices.

Also in your remarks you mentioned some raw material shortages. I'm wondering which ones those are and whether or not you've been able to pass at least that part of the increase on to your customers.

Yes, some of the nap oils, crude oil derivatives and, for the most part we've been passing our price increases on, but it's not a question of getting the product, it's a question of supply, demand, and having to pay a little bit more for it.

So you've been able to secure the product, just at a much higher cost?

That's correct.

Thank you.

Thanks for your interest, Bob.

[OPERATOR INSTRUCTIONS] Our next question will be coming from Steven Weiss of Mindflow Capital Investments.

I have a couple questions for Ron. Ron, concerned obviously, with the raw material costs that you guys have seen an increase on. A lot of your competitors for the last year or so have implemented some new strategic initiatives for technology that allowed them to reduce their sourcing costs by being able to collaborate better with their suppliers, establish better supplier scorecarding, optimal allocation levels. I'm curious as to what initiatives you've started or if you plan on some in the future that you're planning to reduce your sourcing costs with your suppliers by collaborating in a more efficient way with them, supplier scorecarding, optimal allocation, cost modeling, et cetera, to help better reduce your cost and drive value to your bottom line.

Okay. Those are things that we do. And one thing we do that you didn't mention is -- and I will talk about your question specifically, but one thing that we are looking at harder that you didn't mention is our own product formulations, in terms of whether or not we can find ways to limit some of the -- to change some of the materials and still maintain the value that we have in our products, to find ways if we can cut down our product line a bit by having more robust products that serve broader needs, because I think the economic comparatives just drive you that way. So those are initiatives that we have internally.

Externally, we do have regular meetings with our suppliers focused on what can you tell us that we can put into our formulation experience or that we can find lower cost sources of material to use. Joe, do you want to add anything more specifically on that? You've been at some of these meetings recently.

Yes. About three weeks ago I had meetings with our -- six of our top suppliers in North America, and the discussion was around just that very issue. We, on a regular basis, have joint development programs with selected suppliers, and as a result of those joint developments, we are able to reduce the cost, the formulation cost, that go into our products. So we do that, and, in fact, out of these meetings we have set up several additional joint development programs with some of these selective suppliers, and that includes just looking at not only enhancements in existing products that we buy from them, but other substitute materials that we might consider which won't damage the performance of our products.

Okay. What are some of your suppliers' feedback? Are they pretty responsive to your initiative?

Absolutely. There is no question that the key suppliers are more than willing to work with us in an effort to find ways to make us more cost competitive.

Are you guys planning on consolidating your supplier base or are you happy with the current supplier base is, and just starting to do more cost modeling to run allocation schedules to see really what suppliers you should be buying from at the right time.

We don't intend to consolidate. We don't have any active program for consolidation of supply base, but we obviously have the advantage, Steve, as you might know, from buying on a worldwide basis, and we do watch that regularly on an arbitrage basis to try to take advantage of our position in the different parts of the world with the change in exchange rates and so on. So we do that and we make every effort to take advantage of it.

That's an important piece of it, Steve, because five or six years ago we weren't in a position to be able to make trade-offs around the world as to where to go to get what kind of product, and today we're in a much better place in that regard. And I think the kind of programs that we've been able to put in place because of that has, frankly, saved us millions of dollars over the last few years.

Regarding trade-offs, do you have a system in place to figure out, okay, what's really the optimal allocation for a trade-off, if one trade-off is better than another, are you running scenarios, or is that more of just a manual process?

I think it's probably an overstatement to talk about running scenarios. We look at the kind of products that we're using and how we're using it in a particular formulation, and we want to look at alternatives for that, for higher viscosity, for lower viscosity, what that might mean in price, but also how that trades off against product performance. I'd say it's, obviously, as you might guess, a pretty complex process since there are so many interactions we have to worry about. But our lab people are -- this is one of the priorities for our lab people. Not the only one, of course, and one of the things that we're working on right now is raising the standing of this priority, focusing on the fact that we just simply may have to do more in terms of getting lower cost raws into our various products.

Great. Sounds like you guys are very concerned with reducing costs, which is really good to hear for the community. I applaud you on your future effort.

Thank you, Steve.

Thank you very much.

Certainly going to try and make that happen.

Let's hope so.

[OPERATOR INSTRUCTIONS] Gentlemen, it appears there are no further questions at this time.

Thanks very much, Megan. Thanks for your interest and attention, folks. And we will be looking forward to talking to you in a few months about the second quarter and the kind of progress we've been making. Thanks very much. Talk to you soon. Bye.

Thank you, ladies and gentlemen, for participating in today's teleconference. You may disconnect your lines at this time and have a wonderful day.