Richardson Electronics Ltd (RELL) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Richardson Electronics year-end of '07 second quarter earnings release conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded. At this time we would like to turn the conference over to Mr. Ed Richardson. Please go ahead, sir.

I am sure you all realize it but this is the second quarter conference call, not year-end. I have Dave DeNeve with me who is Chief Financial Officer and also Greg Peloquin who is the Executive Vice President of the RF and power device group. Greg will be giving you some of the highlights from RFPD and Dave will certainly go over the financial results of the company. As you know, we reported earnings last night; if any of you missed it, it is on our website which is www.rell.com.

We were disappointed in the top line sales number; we finished the quarter at $165.8 million, really two issues. The major shortfall in our forecast had to do with the Display Systems group. As you know, that business is very much a project based business, and we've been forecasting sales based upon the projects being released and delivered per the purchase orders that are placed on us. And we have grown to realize that these orders only go one way. They are never released early. They are always either released on time or pushed out. In this case we have three major contracts that were pushed out that total over $6 million. And we will go through that for you in detail.

In addition to that we had a revenue recognition issue this quarter. At the end of the quarter our central shipping area and will even be more so as we go to the three hub system on a global basis is our LaFox or Chicago facility. And we ended up with 12 inches of snow the last couple of days of the quarter which didn't help us get material out. And we had a reversal of about $1.5 million worth of material which was shipped and under GAAP, basically the material has to be proven delivered to the customer when it is FOB destination to be counted in the quarter. And we actually had about $1.5 million worth of sales reversed. It is sort of a nonevent. Those sales will appear in the third quarter, but it certainly created some shortfall in the second quarter.

So overall our sales were up 6.4% from the prior year. The second quarter gross margin declined. However, in the previous year we had $946,000 worth of a favorable adjustment to warranty expense within DSG, and that did not occur this year. So the gross margin with that adjustment last year would have been just about the same as it is this year. Again part of the problem on margin has to do with DSG; much larger portion of the business proportionately was RFPD which was lower margin and the custom displays, if the business had come through would have been at higher margin and would have given us a pickup on gross margin in total.

And within the quarter we had about $600,000 worth of restructuring in severance expense, and we had $300,000 worth of compensation expense related to the stock option program, which Dave DeNeve will talk to you about. In addition to that, as we go through the global restructuring program we are running a number of our warehouses in shipping, supply chain facilities on a parallel basis until we can get switched over to the three hub system. So we have duplicate expense in many areas of the supply chain while we are running these parallel functions. That also has an impact on inventory. And as you know, we think we can take about 10% out of inventory once the total global restructuring is completed. But in the meantime we are not only running the three warehouses in the hub structure, which will be our supply chain in the future, but we continue to run the existing warehouses on a parallel basis until we make absolutely sure that we are not going to impact our customer service in any way.

So the results of that is we actually have a dual inventory in a number of locations. And that will be eliminated by June 1st as we go to the three hub structure and close down existing warehouses. But in the meantime we are running parallel on a number of these areas. So the result was that we reported $0.06 a share on earnings on a pro forma basis; $0.11 actually if you went in and eliminated a lot of the duplicate expense that has to do with the parallel supply chain it would even be a higher pro forma.

As far as the strategic business units, RFPD is doing extremely well, and I will let Greg comment on the highlights. They were up 13.1% to $90 million in sales in the quarter. So their record sales and record bookings continue. The gross margin was down slightly again; this had to do with an overstock reserve last year of $728,000. So their margin last year was 23.4% versus 22.7%. I think what you should concentrate on is their product margin was 24.4%, which was just about flat with last year. So overall they are doing well.

The main area of increase within RFPD is the infrastructure side, about 90% of our business is in infrastructure, certainly impacted by the rollout of 3G and new infrastructures throughout the world. So the infrastructure business was up 43.8% with sales of $25.9 million. In Asia is the area where a large portion of the 3G rollout is occurring. Licenses are just being issued in China so we see the rollout in this calendar year of 3G and we are already starting to see the pickup. Asia was up 17.5% to $33.4 million in the quarter. Europe was also up. They were up 23% to $22.5 million for RFPD.

And Greg, do you want to comment on some of the highlights? I know your bookings are at a record level, as well.

Yes, the biggest highlight is concerning how do we and are we going to continue this growth. And for the third quarter in a row the book-to-bill was over 1.1. So it continues to make us very positive about the third and fourth quarter continuing this type of growth. The growth came out of -- as Ed -- mentioned power conversion had an outstanding quarter and is having an outstanding year. The restructuring of that organization has proven very positive. We did that six months ago in the restructuring. Sales are up 20% and numerous applications throughout the world. There is no one hit wonders in this continue with the bookings and billings; the power conversion group is doing very, very well. And the two other markets in Q2 that helped the growth, Asia, Asia is gathered strength every quarter. We saw the first large releases in the quarter for the China 3G buildout and the Korean market proved to be healthier than we had anticipated as they continue to support that market also.

The defense market in both U.S. and Europe is going very, very strong. This is the longest design cycle of all of our markets and a lot of our design registrations and many of you know our DOQ program. Some of these designs were completed in 2002 and 2004, and we're seeing the revenue today. So it is a very strong backlog. Sales per day are up 15%, and bookings per day are up 17%.

So going into Q3 some other positive things that we are going to see, Avago, formerly Agilent, who is the dominant player in the Illinois amplifier market has come to Richardson to be part of their global capabilities. And that program will be in place in Q3. And their design registration program fits right into our very strong demand creation model.

A couple of other items for Q3 that really our growth comes out of our suppliers introducing new products and our engineered solutions capabilities continued to grow. M/A-COM has become part of the new Tyco group. We are M/A-COM's largest customer, and we're seeing a huge investment in new products out of M/A-COM, and we will se increased revenue from them in Q3.

The acquisition or privatization of Freescale has proven very positive to us, the new group seems to be extremely focused on topline growth of new products and expanding their customer base. Our sales at Freescale are up nearly 75% this fiscal year. WJ is starting to hit their mark in terms of new products and revenue from these new products we will see in late Q3 and Q4. And there is some passive suppliers as you saw that business unit continue to grow, ATC, Anaren and Toko has shown strong growth with us through our associated design registration program. So all in all the state of the union is very strong, and we are very positive that this type of growth will continue into Q3 and Q4.

Thanks, Greg. The Electron Device Group was up about 3.6% to $25.5 million. They are still our most profitable strategic business unit. Gross margin was 32.7%. The growth there was led by the semiconductor wafer fab equipment side of the business, which uses Magnetron and power grid tubes as their power source. That business was up 30.5% with a gross margin of 35.3%. And the majority of that equipment is manufactured in-house, and it is interesting now the semiconductor wafer fab portion of our business has gotten to be the highest growth area and also the largest portion of Richardson Manufacturing. So it is very positive because the margin is quite high, as you can see, at 35% plus.

It was rewarding that EDG was still up 3.6% because our largest outside vendor on tubes has been going through a move in California, and we really are in short supply. We are at a $7 million backlog with this particular vendor. We could have shipped well over $1 million in this quarter if we had the product. So EDG is doing quite well, and we get all the other SBUs to emulate their bottom line performance, we would be doing all right.

Security Systems division was just about flat at $28.1 million. Major impact here was Latin America. As you know, in our restructuring we actually closed warehouses both in Mexico and in Colombia. I think the biggest impact here was on security, the security business is highly focused on dealer contractor business who -- these dealer contractors need local stock in local currency and basically that was the impact on the Latin American business as we closed the warehouses in Mexico and Colombia. SSD was down about $900,000 in the quarter in Latin America. The good news is that RFPD's business has continued quite strong in Latin America. So that portion of the restructuring is working well. On the other hand within SSD Burtek, which is our Canadian operation was up 7.9% with sales of $18.5 million in the quarter, and their margin was 29.3%. So they are doing very well up in Canada, and that continues. And of course our strategy is to bring their working operation and strategy down through the U.S. and Latin America. We've relabeled the Security System division Burtek Globally, and we think as we bring their strategy through the entire SSD organization that the sale and earnings will improve throughout.

DSG was the real problem. We are learning DSG is a -- last year was our fastest growth area, centered around projects like the New York Stock Exchange, which was $10 million plus. Very much a project oriented business. We forecasted DSG sales to be $29 million in the quarter. They came in at $21.4 million, so it doesn't take much math to figure out that our entire shortfall was around the DSG business. The shortfall really had to do with a half a dozen customers on projects that were pushed out. Major ones had to do with [Sealy] in partnership with [wireless ronan]. In total it is probably a $10 million contract to be rolled out. We felt a good portion of it would be rolled out in this last quarter. Didn't happen. In this case it was a touch control that had to be redesigned where one of our vendors led us down on a particular part. And so we see that going forward in the future. Also have a very large order on the books for Northwest Airlines. As you know, Northwest is in bankruptcy. The contract was awarded to us. The product is ready for delivery. The bankruptcy court has not allocated funds for delivery of the contract and we're waiting for that to happen. And then we had another very large order from the VA Hospital organization. And again we were short by a particular part of Linux drive for the unit and we are not able to complete the order to ship in the quarter.

So we are learning again what happens on a lot of these large project-based business is that the orders only go one way; they only get pushed out, they don't get delivered early. So going into the next quarter we really discounted the forecast on sales for DSG. If you look at it, the $6 million should be pushed out into the next quarter and we should actually have a very large quarter but we are concerned that the existing forecast, that some of those orders will be pushed out, so we've taken a very conservative stance and what we think is going to be shipped in the next quarter and throughout the year. And hopefully there will be some NYSE types of orders come through and we will see the kind of growth that we saw last year, but at this point DSG has been a disappointment to us, for sure.

Geographically North America was up about 2.6% at $81.3 million, nice margin at 26.8%. We see more and more projects designed in the U.S., especially in the RF and wireless area but the purchasing and manufacturing done in Asia. And that is the reason for the moderate growth in North America plus a large portion of the Display Systems Group business is also in North America.

Asia-Pacific for the entire company was up 12.9% to $39.3 million. Still our lowest gross margin area at 22.9%, but certainly the highest growth area. China was up 19.5%. Their margin was actually up. They went from 20.8% last year to 22.2% this year. And again a lot of it has to do with the rollout of 3G or anticipated rollout of their version of 3G in China. Japan was up 17.7% to $6.7 million. Korea was up 12.6% to $10.1 million, which is actually a remarkable achievement because 3G rolled out in Korea last year and we saw the business go from $30 million to $43 million in a year. And that rollout has been completed but they continue to find new areas of sales and so the 12.6% sales increase was excellent. Southeast Asia was up 12%. So overall Asia is doing great.

Europe was up 14% for the total company at 39.8%. Margin was 25.3%. They were led by Spain which was up 39.5%. Spain has great margin at 29.5%. Israel was up 34.1%. Germany was up 26.7% and Scandinavia was up 13.4%. And the UK was up 11.1%. So it was pretty much all across the board in Europe. We saw nice growth there as well.

Latin America was a problem for us. Again, we've closed warehouses in Mexico and Colombia. I think it had a larger impact than we thought it would on the SSD. We are taking some steps to correct that situation. We think we can use the UPS World Ease program, which will allow us to ship into these countries and appear as if we had local presence and local currency and bill through what our dormant subsidiaries. We are studying that at the moment anyway. That would certainly take care of the problem with SSD sales where the customers require a local importer. They don't have the capability to import the product themselves. And again, in Latin America there was about a $900,000 shortfall in the quarter for SSD alone.

So that pretty much covers the regional areas and the SBUs. We have the six-month numbers; if anyone has questions on six months, we would be happy to give you those numbers. I want to cover restructuring update. Overall the plan is right on track. We are still targeting $8.5 million of savings as compared to the run rate of last year in the fourth quarter. We think $2.8 million savings have already been realized to date. The UPS World Ease program was started in November, and we're utilizing that every day out of LaFox. That program allows us to shift consolidations or look like consolidations into each country of Europe. The product is then broken down and delivered locally; for instance it goes into Cologne, Germany as one shipment, then it is broken down and delivered to the customers in a three-day period of time from LaFox. And the invoices come from our German subsidiary, so it is seamless to our German customers. It appears as if we shipped from our former German warehouse, and they have their product in three days. So we think that is really going to be a benefit to us as we can close these European warehouses, eliminate a lot of duplicate inventory and actually improve our service to the customers.

We've really yet to quantify what the savings is going to be, but we think it will be substantial and that is over and above the $8.5 million that we've projected so far. So we are still targeting that the total restructuring cost will be about $6 million. To date we've spent $4.2 million on restructuring. Severance expenses has been incurred to date of $2.7 million in the fourth quarter, $900,000 in the first quarter and we had $600,000 in the second quarter. So far we have terminated about 60 employees. We also actually sold the small Italian facility that caused us the restatement problem back in the second quarter -- the final quarter of the year, actually called Ingenium, and if you included the employees that were in Ingenium, then we've actually reduced the headcount 88 people.

Some of the good news that has come out of the restructuring, as you know we've been consolidating warehouses. We're going to eliminate some wholly-owned warehouses. We actually completed the sale of one building here in Geneva, Illinois, after the close of the quarter we sold the [Cetron] building for $3,050,000. I can tell you we sold the building for more than we paid for the company years ago, and the capital gain on that particular transaction I believe is about $2.3 million. So it's very substantial.

One surprise that has come out of the European restructuring. We have three buildings -- three I believe, maybe four -- that we own in Europe, which we'll probably be selling. One of the buildings in Europe that we put up we really haven't even listed it yet, but we had a $1.85 million offer for that building, and we actually paid about 100,000 pounds, a couple hundred thousand dollars for that building 20 years ago, so it looks like we ought to be in the real estate business, we really do well in that area. And that building will actually be closed in June so we will probably close on the sale of it sometime in the next calendar year.

So some of those are our bright spots. I guess what is encouraging to me is that the restructuring seems to be right on plan and the dates are not slipping. And we hope to have the total restructuring fully implemented by June first and start to see the results of what we're doing rather dramatically. With that I will turn it over to Dave to talk about the financials.

Looking at the balance sheet, cash and cash equivalents decreased $3.4 million to $13.6 million. The company has increased its focus in obtaining its cash from its foreign subsidiaries on a regular basis. Within the next two weeks we will be implementing a cash sweeping program for all of Europe to minimize the amount of cash it is required to be held by each of those countries. Cash will be obtained in U.S. to pay intercompany payables and will have no income tax consequences on that.

Inventory increased $7.3 million to $124.6 million from year end in order to support the anticipated sales growth. In early November the Company initiated an aggressive program to reduce inventory over the next several months which includes the centralization of inventory in the hubs in Europe and Asia. Despite the business growth by year end we expect inventory levels to be below the amount of inventory at the end of last year.

Total debt decreased $9.3 million during the second quarter to $128.8 million. As Ed mentioned, we sold the building in Geneva, Illinois. We will be recording a $2.3 million gain on that in the third quarter of fiscal 2007.

Looking at cash flow depreciation and amortization expense in the second quarter was $1.6 million, relatively flat with the prior year. Net cash provided by operating activities was $3.7 million in the quarter versus cash provided last year of $2 million. Capital spending was $1.9 million in the second quarter versus $1.7 million last year. The capital spending in the second quarter primarily relates to the implementation of supply chain and sales modules of PeopleSoft, which will complete that integration.

With that I will turn it back over to Ed.

Thanks, Dave. While everyone is always looking for forecasts I guess we are learning a lesson on this project based business. Normally in our fiscal year the third quarter is down about 3% sequentially compared to the second quarter because of Christmas. December turns out to be a two-week month for us. Frankly, December was a good month for us this year, not really extraordinary but better than we thought. At the same time if we use the forecast that we have in hand for DSG we would exceed the second quarter in sales, but we want to be conservative in that area. We are learning a lesson, so I think we're going to project sales at around $165 million for the third quarter, which would put us just about flat, maybe a little bit better than flat depending upon how it comes in for the third quarter compared to the second. What that would do for us is somewhere 9% or so higher than last year's second quarter; we were at $152 million last year. And again, we think gross margin will increase slightly depending upon how much DSG custom display business we can get into the quarter somewhere between 24.5% to 24.7%.

And SG&A is going to remain around $35 million until we can conclude the restructuring and close some of the warehouses and take out some of the people associated with that. So it will be somewhere around 20.6% depending upon sales. And that would exclude somewhere between $0.5 million and $1 million worth of expected restructuring and the severance expense to be concluded in that quarter. So that is pretty much where we are. I would be happy to answer any questions. Operator, if you want to open it up for Q&A please.

(OPERATOR INSTRUCTIONS) Bill Benton, William Blair.

Question for you on more expenses than anything else. I think you just talked about staying around the $35 million level. What was your -- just out of curiosity first, what was your year-to-date stock option expense? You did remember $300,000 you said this quarter; what was the first quarter?

175.

175, so, unless I am doing my calculations incorrect it looks like your pro forma SG&A went from around $33.7 million call it up to $35.2 million sequentially. And I am trying to understand why that dynamic occurred.

About $33.8 million on a pro forma basis in the first quarter versus Q2. You are correct. A lot of it is we are now incurring additional expense related to the restructuring so we are having a duplication of those expenses that we did not have in Q1. As we move forward with the restructuring program, the hubbing program, our consulting expenses have increased as a result of that, as well. So that is a large part of that and they are not directly with the restructuring but they are an offset of that.

Were some of these maybe a surprise to you because I didn't think you expected SG&A to increase by that much sequentially.

We expected the savings -- you're exactly right -- it was a little bit of a surprise to us. We do have some incremental expenses related to trade shows and advertising expenses during Q2 that we did not have in Q1. So to some degree it was a little bit of a surprise to us but we should be in that range going forward.

And in terms of the gross margin at the RF and wireless area American wireless side, I guess it looks like the component mix might have been a little bit higher this quarter than it was in the first quarter. I know you just talked about it on a year-over-year basis. I'm just looking at the revenue pretty similar to the first quarter level, but the margin is down pretty noticeably. And I am wondering how the quarter that quarter trended in terms of the mix of the business that drove that margin profile.

Yes, Bill, on the gross margin side the RF power which is the power transistor portion of the RF active group is up about 40% plus, and that is the lowest margin business for us. So that affected the second quarter. Also the power conversion business is up over 20%, and that margin comparatively was down 4/10 of a point. In addition to that we completed it at the end of November but in the quarter we still had not completed the outsource and the restructuring of manufacturing capabilities. So we had a large, I would consider large under absorption issue in the quarter. But that is now completed. Ed mentioned, we have now outsourced all of our manufacturing so the absorption issues will go away. And also the mix, as you mentioned Bill, we're shipping over $1 million more in Q3 of three engineered solutions projects in the quarter, which is as you know well over 30% margin. So I guess the answer, Bill, is we will catch up and exceed the numbers versus prior year, which we talked about hopefully a point a year.

I think you talked about margins going from 24.5 up to 24 -- 24.5 to 24.7 range. Is that contemplating a lot of these display projects shipping, or is that -- it sounds like you would not be contemplating that as a result.

What we have done is divide it by two. We have gone in and taken their forecast and on the incremental business we have said okay, 50% of this is going to ship and 50% isn't because that is about what we saw in the second quarter. So I think anyway we've really been conservative on it, but of course the custom display business is much higher margin than displays that we buy from other vendors and resell.

Is there anything on the inventory side that you guys might be able to talk about? We see one number, and so I know you guys are talking about running duplicate facilities at this point in time. But is their areas that you are seeing improvement where you are currently focused on and could you elaborate on any of that?

I don't think we've seen -- we've put sort of an all court press on the inventory issue and then the SBU managers actually put an incentive system in the end of October to try to get the inventory down. But what is happening at the moment is we still have inventory in multiple warehouses, and we also then have inventory in the new hub areas. So we've actually exacerbated the problem for a temporary period of time to make sure that we don't in any way disturb our customer service. Obviously, it takes years and years to develop a relationship with these customers, and all you have to do is let them down once and you can lose them. And that is our main concern so we are running dual inventories, and what happens, too, is to do that you have a lot of inventory in transit. I know we look at somewhere around 6,$8 million of inventory in transit all the time to try to service these facilities. And once we can get down to the three warehouses a lot of that is going to go away so we think we can pull that inventory down from the base where we started at 10% and its actually gone up. So I think what you are seeing is sort of an anomaly right now while we are trying to run parallel all over the globe until we make sure all of this is going to work efficiently.

Final question, just in terms of -- touched a little bit on this earlier -- but in terms of the progress in terms of cost and revenue as the quarter progressed, I know you also talked about December being not extraordinary but a good, solid quarter. How should we think about the progress of the quarter in terms of cost and revenue and bookings? I don't think we got a total bookings figure during the quarter by segment.

Well, we think it is quite strong. I don't know, do you have bookings here for the entire company?

Right now our book-to-bill ratio is about one. It is a little bit more difficult for the DSG segment and the SSD segment as their sales come in every day. Right now it is around one; touched upon his -- I believe it is about 1.1 right now. A little over 1.1.

So if you had a turns business in security and display and you are above on wireless, is that assume that the book-to-bill in the EDG area would be below one?

In EDG it is right around one, just a little bit below.

Okay. Great, guys. Thanks.

Bob Damron, 21st Century Research.

Good morning, guys. I wanted to -- well first of all it sounds like one of your biggest growth opportunities going into this calendar year is the 3G rollout in China, and I wanted to get my arms around the kind of products and engineering solutions that you are providing that opportunity. And overall is that a higher gross margin opportunity for the Company or is it more product related and therefore lower gross margin?

The initial 3G rollout we are participating on designing in components into these amplifier manufacturers throughout the world, actually; in China but also there are amplifier manufacturers in North America and Korea that are supporting it. So it is your typical component type margins today. And that is why you are seeing such a large increase for example in the RF power world; up 40% that is power transistors going into these amplifiers. But the higher margin stuff is on the passive and interconnect side and as I mentioned with ATC, and Anaren and Toko, they are introducing numerous new products to support that and we are finding growth of the margin as we design in more of these associated selling, meaning selling all suppliers into the amplifier.

So maybe initially it is more has a higher mix of product and therefore it is a little lower margin. But as you get into some of these other product opportunities where there is more engineering solutions maybe as we move forward into 3G then it becomes a higher margin opportunity?

Right and that is what it has always worked, we've always lead with components, worked with the customer on their designs and as they get used to us or understand our capabilities from an engineering solution side then we can put more and more engineered solutions products in there. So yes, that is (indiscernible) but right now you will see probably in the third and fourth quarter, you'll see an increase in gross margin. But you will see the product margin stay pretty much flat based on this components.

Okay, and then just another unrelated question. In Latin America it looks like the sales growth has been impacted to some degree by the closing of the warehouses. Do you at all think there is that same risk in Europe when the warehouses in Europe are closed, or is it a kind of more of a different customer base there that maybe doesn't need the warehouses so close to their facilities?

Well, there are two issues. First, to tell you frankly, we did not anticipate the impact on SSD. And so that is one answer. The other answer is in Europe we are opening hub in Amsterdam to replace the European warehouses and we did not do that in Latin America. We maintained the warehouse in Brazil, but we are trying to shift to Latin America from the U.S. using UPS World Ease and other programs without a hub in Latin America. And where it impacted SSD is you have these dealer contractors who basically want to be able to go and pick up product on a same day basis in local currency, and our current system doesn't accommodate that. We are going to attempt to fix that, but we are sort of a day late and a dollar short and most of it had to do with SSD.

That's fair, and Dave, last question for you. If we look into fiscal '08, the tax structure is going to change dramatically. Maybe you could just give us a little bit more color on how that will work and maybe the expectation for taxes in that fiscal year.

You're correct, we do expect a significant decrease in the effective tax rate. We have not finalized or quantified all the impact of that; the rate will be below the 34% U.S. federal rate right now. It could be as low as 20 but it will be a transition as we roll it out, it will take some time quarter by quarter but eventually we hope to get closer to a 20% rate as we use up the U.S. NOLs.

Okay, that is all I have. Thank you.

Kent Shaw, Buckhead Capital.

Hello, gentlemen. I got two quick questions. The $8.5 million in savings and some of the other guidance, sort of broad guidance has been given as far as the restructuring, does any of that include potential gains on the sale of real estate in billings that you outlined? And does any of that include supply chain savings?

The answer is no in both cases. We did not try to calculate what the sale of the buildings would generate. And we don't know even to this moment how much the supply chain savings is going to be. We did some initial calculation, and under our previous system it was costing us about $29 a shipment to shift into Europe under our present system. Where we would ship from LaFox to a hub in Lincoln and then distribute out to eight warehouses over Europe. And under the new system it is $21, $22 a shipment. So we know it is substantial, but the question then is how many shipments are going to come from Chicago, from LaFox under UPS World Ease? How many of the shipments are going to come from Amsterdam from the hub? And then the way we are set up is product, for instance that is made in Asia can be shipped from our Singapore hub directly into Europe without coming to LaFox at all. And in the past what happened is we would buy from a vendor in Asia, bring the material into Chicago and then reship it back to Asia. And I can honestly tell you we have not been able to calculate what the savings is. We know it is going to be substantial but it is not included.

So when do you expect to be able to update investors on some of those?

I think when we are in full operation probably in June or July.

June or July this year?

That is when the parallel duplicate warehouses are going to go away. We're going to try to turn all this over to the hub system June 1.

Excellent. Thank you. That's all I had.

Sam Bergman, [Bayberry Capital]

(OPERATOR INSTRUCTIONS) We are not showing any other question in queue at this time.

Okay, well we appreciate you're spending time with us this morning. Greg and I and Dave will be in the office all day. So if you have follow-on questions, please call us, and we appreciate your support and ensure you that going forward we think we can improve the company's performance dramatically. Thanks very much, Kent.

Thank you, and ladies and gentlemen this conference will be available for replay starting today, Thursday January 11th at 12:30 PM Central time, and it will run through Wednesday, April 11th at midnight central time. You may access the AT&T executive playback service by dialing 1-800-475-6701 for the United States or Canada or from outside the U.S. or Canada please dial 320-365-3844 and then enter the access code of 857688. (OPERATOR INSTRUCTIONS) That does conclude our conference for today. Thanks for your participation and for using AT&T's Executive Teleconference. You may now disconnect.