Jan 26, 2009
Executives
William Hartman – Senior Vice President Investor Relations Alexander M. Cutler – Chairman of the Board, President & Chief Executive Officer Richard H.
Fearon – Chief Financial and Planning Officer & Executive Vice President
Analysts
Robert Cornell – Barclays Capital Ann Duignan – J. P.
Morgan Jeffery Hammond – Keybanc Capital Markets Eli Lustgarten – Longbow Research Mark Koznarek – Cleveland Research Company Christopher Glynn – Oppenheimer & Co Nigel Coe – Deutsche Bank Securities [Robert Wertheimer] [Daniel Dodd]
Andrew Casey – Wachovia Capital Markets, LLC [Jason Feldman] [Fred Russell] Analyst for [Josh Slocum]
Operator
Welcome to the Eaton Corporation fourth quarter earnings conference call. For the conference all the participant lines are in a listen only line.
However, there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions) As a reminder, today’s call is being recorded.
With that being said, I’ll turn the conference now to the Senior Vice President Investor Relations Mr. Bill Hartman.
William Hartman
Welcome to Eaton’s fourth quarter 2008 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO and Rick Fearon, Executive Vice President and CFO.
As has been our practice, we will begin today’s call with comments from Sandy, followed by a question and answer period. The information provided in our call today will include some forward-looking statements concerning the first quarter of 2009 and full year 2009, net income per share and operating earnings per share, full year 2009 revenues, our worldwide markets, our growth in relationship to those markets and our growth from acquisitions.
These statements should be used with caution as they are subject to various risk and uncertainties many of which are outside the company’s control. Factors that may cause actual results to differ materially from those in today’s forward-looking statements are set forth in today’s press release and related Form 8K filing.
As a reminder, we have included a presentation of the fourth quarter results which can be accessed on the investor relations page at www.Eaton.com and additional financial information is available in today’s press release which is also located on Eaton’s home page. Finally, I’d like to emphasis to everybody that it’s a busy day and what we’d like to do is try to hold during the question and answer session to just one follow-up question and if we have time at the end we can certainly go back and pick up some more.
We want to make sure that everyone has a chance to ask a question. With that, I’d like to turn the session over to Sandy Cutler.
Alexander M. Cutler
As Bill mentioned, we’re going to work from the presentation that was put out on our web page earlier this morning. I’m going to review some highlights of the fourth quarter results.
I trust by now you all had the chance to read our earnings release and perhaps had a chance to glance through this presentation. We were able to achieve just slightly above the revised guidance that we gave out in mid December for the fourth quarter, $1.08 in terms of operating earnings per share.
We had all time record sales for the fourth quarter up some 3% from a year ago in spite of the fact that we were seeing our end markets come off by about 6% which is more than we had anticipated in the middle of December, I think giving further evidence of how fast the capital equipment markets have been decelerating through the fourth quarter and are continuing to do so here in the first quarter. Just over 20% of our revenues continued to come from the developing countries.
While they’re growing slower than they were they’re still growing at a premium to the developed countries. Significantly and really the story we’ve been sharing with you over the last couple of years is our transformation in terms of mix is really paying off and you see that again emphasized here in the fourth quarter when 97% of our segment earnings excluding the one-time charge in automotive for the closure of our Massa plant really came from our electrical hydraulics and aerospace businesses.
In spite of the very weak demand levels, we were very, very pleased that the extraordinary efforts that we’ve taken during the third and fourth quarter to ensure that our working capital is managed very tightly really paid off with record operating cash flows of $624 million and a record free cash flow of $513 million. As I said in spite of the fact that volumes were decelerating on us, we actually decreased our days on hand by one day versus the third quarter and our receivable DSOs by two days; we think both marks of a very tight cash management.
Turning to the next chart, chart number four, just a quick summary if you’re looking at the guidance versus where we came in for the fourth quarter. Again, our midpoint of our guidance for operating earnings per share was $1.05, we came in $1.08.
Obviously, a stark contrast to the economic conditions we were dealing with a year ago as you see really reflected in these numbers and for our full year achievement, $6.83 in terms of operating earnings per share versus our guidance of $6.80 that we had shared with you in the middle of December. Turning to page five, a quick recap of our income statement, all time record sales $3.487 billion in the quarter up some 3%.
The segment operating profit, the segment operating margin and the segment operating profit as reported all included the $27 million charge for the closure of our Massa Italy plant. If you recall, when we shared with you our guidance in the fourth quarter we indicated that that charge would impact the segment profitability and there would be benefits reported on the corporate tax line that would largely offset this negative and we’ll comment on those benefits that really came from moving production in to an advantaged region of the world.
Looking to the left, market growth of -6%. We outgrew our end markets by two points.
Acquisitions, primarily the big ones in electrical, they really drove still the 13% benefit and forex as we had highlighted for you in December continued to be a real negative here in the back end of the year accelerating in to the fourth quarter of a full six points. If we turn to chart six to give you a feel for individual segments, let’s start with our largest segment, our electrical segment, record sales for fourth quarter, very strong operating margins.
Comparing that 12.5% margin to the 13% margin, that really reflects the change in the quarterly distribution of our business post the two large acquisitions Phoenixtec and Moeller that you remember were not in the fourth quarter last year, they started to be introduced to our business in the first quarter of this year. Acquisition integration charges you can see it begun to accelerate as we’re really more in to the main portion of the integration of Phoenixtec and Moeller and that will continue in the early part of this year.
For the first time, quarterly bookings down, beginning to show you the impact of what is happening in terms of markets are slowing down around the world. US non-residential construction, you probably have all seen the data, actually continued quite strong in the fourth quarter but our own view is that turns down here in 2009.
We are still very much on track for the Moeller and Phoenixtec acquisition integration savings that we’ve profiled for you on several occasions during this past year of $0.30 net income benefit in 2009. As we mentioned to you a year ago, it is our intent to now begin to break out two reporting segments within our electrical business, one will be the Americas, the second will be the combination of our Europe, Middle East and Africa as well as our Asia Pacific regions which we will call rest of world.
In our February analyst meeting in New York we will break out for you both history for those and give you more detail in terms of how to think about those two segments separately. As you look at this segment, volume dropped about $205 million from the third quarter, about a 11% drop to give you a feel of what’s really happening in the trends of our businesses and we recorded a 28% decremental which we think is quite respectable on that type of a steep drop quarter-to-quarter.
Turning the page to hydraulics obviously the end market here we had profiled was one of those markets which had been turning down rapidly that saw the big impact in December of many OEMs simply shutting production early in the month of December and also not opening up here in January. Demand has weakened around the world, our bookings declined by just over 30% again, give you a feel for that rapid downturn.
In the midst of all of that somber news, we’re really pleased that many of our advanced technologies are still being adopted by customers. You saw the announcement in the fourth quarter that UPS made a significant commitment for our series hydraulic hybrid vehicles.
We think again, a real confirmation of the investment that we’re making. Market growth down 8% in the quarter, outgrowth a slight negative, acquisitions a slight positive and forex again, a fairly significant impact.
This business, we saw a 17% volume decline from the third quarter to the fourth quarter, about $106 million and we had about a 23% decremental. We again, think very good cost control.
Turning to our aerospace segment, bookings flat with a year ago but as you look around clearly you’re seeing passenger miles and freight miles declining. We’re pleased that the Boeing strike was settled, that’s obviously going to give a slight positive to the market next year because that strike impacted both third and fourth quarter.
Aftermarkets held up really quite well but as I’ll detail in a moment we think it will come off here in 2009 and you saw our announcements of last week of the very significant win on the A350 engines which we’re really pleased with. Volume came down about $23 million third quarter to fourth quarter, about 5%.
Profits however, were flat with the third quarter and we recorded our highest return on sales quarter in our aerospace segment in 2008. A very significant outgrowth at a time when we had a 4% drop in the market and that really reflects the very strong bookings that we’ve had on important programs both the commercial and military over the past couple of years.
Turning to the next chart, chart nine, the truck segment again, this is one of the segments we commented on in December that we were seeing a shutdown of production in mid December, telling you that it would return very slowly in the first quarter and that’s indeed what we’re seeing, it’s coming back very, very slowly. Industry production levels remain very well below replacement levels.
Again, in the midst of a very somber outlook, important wins for us with a large diesel electric hybrid win in China for buses and a large win in India where we’ve just been awarded the Tata world truck program for transmission and we’re really delighted with that. To give you a feel for how significantly this business has turned down in terms of end markets, our volumes decreased by $181 million between the third and fourth quarter, that’s a 34% downturn.
We maintained a 30% decremental again, we think very, very good performance in light of that kind of downturn at a time that the overall market came down some 10% versus a year ago. Forex again, you can see a big impact, 8% on the fourth quarter.
Turning to automotive, volumes down quarter-to-quarter by some 37%, that’s fourth quarter to fourth quarter. If you look at the difference from the third quarter to the fourth quarter, down $113 million or 25%.
We had 43% decremental comparing the fourth quarter to the third quarter and that is adjusted for the $27 million Massa charge so obviously a very precipitous fall of in this business and a steep decremental. You can see on the year-to-year comparison that the market was down some 24%, actually in the us down 26%.
So, a period of really steep decline and forex again, a major issue. Just as we saw before the holidays, a very steep cut back in production.
You’ve all been reading the public data, it will be a very low first quarter as well. Turning to page 11, if you step back from it obviously, the year decelerated as we went through it but we’re very pleased that we recorded record sales and record profits in 2008.
A real indication of the transformation of the mix within Eaton Corporation. Sales of $15.4 billion, not a million number, we put a correction out on the web page, up some 18% from 2007, operating profits up 7%.
We completed six acquisitions and one joint venture, about $2.1 billion in acquired revenue and as I said before, really reflects the repositioning of the company, the breadth of earnings that are really showing themselves during a period of real weakness in the [EU] markets. If we turn to chart 12, our look in to 2009 now at this point, all of this is set within the context that we think that US GDP will decrease somewhere between 2% and 3% in the full year 2009, that US manufacturing production will shrink on the order of 7%, that we’ll see the EU shrink somewhere in terms of economic growth around 2%, China positive around 6.5%, Japan negative 4%, Brazil flat and India about plus 5%.
Clearly, lower economic growth around the world in a year that we do not anticipate any form of strong snap back in the second half. We think this is going to be a very, very weak year of demand around the world.
Within that context, you’ll see now the two electrical segments broken out. Obviously electrical Americas about a 7% growth rate, and that really is applicable to those areas outside of the US as well as the Americas.
Electrical rest of the world, about a 4% shrinkage so that overall that weight average is about -5% for our overall electrical businesses on a worldwide basis. Hydraulics, a big -20% here in North America as you can think through all the areas that are going on in terms of either industrial capital spending being pulled back, construction equipment much lower demand, agricultural having gone over the top and a -11 outside the US for a -16% worldwide.
Aerospace, a 4% and part of what makes it a plus in the US obviously, is the Boeing strike having been settled you get a year-to-year plus there. A -3% out of the US as a 2% overall.
Obviously, a more somber or conservative forecast than I think most in the industry were anticipating just four or five months ago. The truck index, down some 19% in the US, 11% outside of the US for at total of 15%.
We’re thinking the North American heavy duty market will probably be in a range of 155,000 units in 2009, significantly below the 2008 level. Automotive, down 18% in the US, down 13% outside, down 14% overall.
When you put this all together, you can see our view is that our US markets will be down about 9% to 10%, outside of the US down about 6% to 7% for an overall down 7% to 8%. Obviously, a somber outlook for what we think will be a challenging year in 2009.
If we turn to chart 13, that is the reason we began significant reductions in our permanent workforce. These numbers do not include temporary employees.
We also have laid off virtually all of our temporary employees but those were beyond these numbers. As you recall, the 8,600 people was about 3,400 last year and about 5,200 that we’ve announced here largely now taken in terms of those actions taken here in 2009.
$110 million restructuring charge for that severance that has been announced for actions taken in 2009 that will be incurred in the first quarter. Then we’ve got year-to-year pre-tax income benefits this year in 2009 of approximately $165 million and then another $125 million year-to-year benefit in 2010.
These numbers do not include integration synergy actions and that’s why we broke out for you separately the $0.30 of benefit that come from the cost savings in integrating Phoenixtec and Moeller. If we turn to chart 14, a very quick reconciliation of our 2009 operating earnings per share.
As I mentioned, the year-to-year reductions in force is $165 million, yields about $0.84 in terms of earnings per share, $300 million to market outgrowth, about $0.32, $400 million of acquisition growth, this is full year acquisition growth about $0.21. You can see the Moeller numbers, many of you will recall we had a purchase price accounting adjustment in the second quarter 2008 for our acquisition so it was about $0.17.
We won’t incur that this year. Those are the pluses.
A 7.5% market decline obviously, $2.45 a big impact for us, higher tax rate and we believe our tax rate will be somewhere between 14% and 16% here in 2009, hits us for about $0.60. Forex as we talked about we think another 6% negative this year, about $0.52.
A slight increase in the number of shares outstanding and we’re using 167.5 million for our share count in 2009. Then, a collection of slightly higher pension, healthcare and other expenses such as LIFO and amortization of intangibles of about $0.25.
All that leads to $4.70 which is the midpoint of the guidance we provided you for operating earnings per share of $4.20 to $5.20. If we turn to page 15, that leads to our guidance and obviously it is very challenging to provide guidance in this type of economic period where you clearly can’t put a decimal point behind any growth number.
Our expectation at this point is, we mentioned in the press releases, our operating earnings per share will be approximately breakeven in the first quarter, about a -$0.15 on fully diluted. If you look at the footnote on that page you’ll see that we’re really expecting that our acquisition integration costs for the full year will be about $0.40, about $0.15 of that comes in the first quarter.
Full year guidance I mentioned just a moment ago for both operating earnings per share and then the net income which is about $0.40 lower as you go through the year. I should mention just two other items in terms of guidance to try and help you think this through.
We would expect that the operating margins, and of course these are operating margins in the segments before integration charges, the electrical business would be on the order of 12.5% to 13.5%; hydraulics 10.5% to 11.5%; aerospace 17% to 18%; truck 8% to 9%; and automotive approximately 3%. Then our net corporate expense we would expect this year would average somewhere between $40 and $45 million per quarter for a total of $170 million.
If you’ll turn to page 16 again, just a quick recap about $300 million of market outgrowth, $400 million from incremental sales from acquisition, you see the guidance and strong operating and free cash flow numbers, you see them there $1.4 billion to $1.6 billion in operating cash flow and $1 to $1.2 billion on free cash flow. We’re pleased that we’re continuing to do a tight job of managing our working capital.
As you think about our first quarter where we expect to see the GDP here and abroad continue to decline from the fourth quarter in to the first quarter it is reasonable to assume that our sales will be lower in the first quarter than they were in the fourth quarter as well. I think it’s important to think through the progression of this year where we see quarter-on-quarter declines continuing through at least the second quarter and possibly in to the third quarter of this year.
I mentioned forecasting pretty difficult to do, I don’t think there’s any new news on the back chart in terms of outlook for 2009. We believe we have our costs adjusted, we believe we have our overall manning for the organization now well sized for this economic environment.
We recognize this is going to be a challenging year but we think the fourth quarter is a good indication that we’ve got the organization ready for what will be a challenging time period. With that, we’ll open things up for questions.
William Hartman
(Operator Instructions) Your first question comes from Robert Cornell – Barclays Capital.
Robert Cornell – Barclays Capital
Maybe Sandy and Bill you can give me more color in to the plant closing and then the plant opening, I mean how you see that arraying? I think you said some number of the plants that were closed in the late ’08 beginning of ’09 period are still closed but starting to open.
Maybe you could just give us some visibility in to what you see, what you sense, what you’re hearing from your customers and when those plants might be opening again? Just sort of what’s the view there?
Alexander M. Cutler
Bob, if you call back to December, we said we really saw that phenomena occurring primarily in our hydraulics business, our truck business and our automotive business and that is where we are continuing to see that. There are a number of mobile hydraulic customers who either are on very much reduced work weeks and in some cases are not opening until they get in to one case, mid February.
You’ve seen in the North American and now in portions of the European automotive market people have done everything from reducing shifts to basically sizing the first quarter having maybe about one month out of what would have been their expected load. Then similar in the truck market, not just here but in Europe and Europe is not as big a factor for us in the truck business but also true in South America, you’ve seen delayed openings here in January and you’re seeing very much reduced shift work.
So, I think the way to think about the first quarter is it’s a significant continuation of people adjusting production and inventory levels down to these much lower end market demands. So, we’re going sort of through a two quarter adjustment and we would expect to see much of that washed out during the first quarter.
But, that’s where you’re seeing that real weakness.
Robert Cornell – Barclays Capital
That actually goes in to my second question, I see the annual look here and I understand how you get there then the street tend to think about earnings this way, if you look at an essentially breakeven first quarter that means the high end of your guidance is actually an increase in the earnings you recorded in the nine months of ’08 by a bit. So, how would you sort of reconcile that view, that in the balance of the nine months we’ll look to have earnings comparable to or at least the high end of the range?
I saw the walk and it looks like to me that you’re counting a lot on this reduction of force savings, is that the right way to interpret?
Alexander M. Cutler
Very much so Bob. You think about the over $2 we lose from the market shrinkage and then you think about the elements that add back to that, that the year-to-year savings we’re quite confident of because they are largely executed at this point.
The $0.30 that we get from the synergy savings for the large integration acquisitions we’re quite confident of those numbers and those are the big steps that we’re taking to start to work against those numbers so those become fairly certain. Where the bigger uncertainty I think is in everyone’s forecast right now is the ability to be precise about end markets so I think that’s the source of uncertainty if you will.
William Hartman
Your next question comes from Ann Duignan – J. P.
Morgan.
Ann Duignan – J. P. Morgan
Can you talk a little bit about step us through your outlook for operating cash flow and free cash flow? They both look pretty healthy for full year but can you talk a little bit about what you are expecting in Q1 just given the significant decline in activity?
Richard H. Fearon
As you know, our normal pattern in past years has been our operating cash flow in Q1 has been relatively modest, by far the weakest quarter of the year. But, in Q1 of ’09 we think it will be a very different pattern and we think our cash flow will probably be pretty healthy in the first quarter due to the working capital being pulled out of the system.
Ann Duignan – J. P. Morgan
Yes, because you did do a good job of keeping inventory levels pretty lean in fourth quarter despite the downturns. So, inventory will continue to be a source of cash early in the year.
Richard H. Fearon
Inventories and receivables.
Ann Duignan – J. P. Morgan
Then just to follow up on your end markets, I know you’ve been talking for a little bit about agriculture, I think you said this morning over the top I think was the way you described it, was that primarily North America and impacting hydraulics or are you also seeing it kind of over the top in Brazil and showing up in the truck business?
Alexander M. Cutler
I would say Ann it is the later directly to your question. I think the way to think about this is as the global liquidity cycle has kind of worked its way in to every niche in the world and it truly has, it’s not accepting some regions of the world, growth has been reduced almost everywhere and the kind of draconian moves that you see going on either by corporations or by partnerships or by farmers to reduce capital expenditures is hitting all of these areas.
Now, the one benefit to all of this is that we do know that every year you postpone capital equipment purchases, you get a pent up demand. So, you’re seeing it at some point, and we are not forecasting that in 2009, you will get a push on replacement value.
So, specific to your question on ag, we’re seeing around the world a pullback on equipment purchases and so yes, its hit South America as well.
William Hartman
Your next question comes from Jeffery Hammond – Keybanc Capital Markets.
Jeffery Hammond – Keybanc Capital Markets
I just wanted to get a better sense, I know you separate the acquisition integration charges but can you speak within the one first quarter, where do you see that $110 million falling out? And maybe speak to ’08 as well, where do we see a lot of restructuring costs to date?
Alexander M. Cutler
Jeff, I’m not sure I completely understand your question but the $110 is the non-acquisition and that is the severance for the roughly 5,200 people that we announced that we would be reducing our employment by this year.
Jeffery Hammond – Keybanc Capital Markets
Right, I’m trying to get a sense of where within the businesses it might be heavier loaded, or should we think about that commensurate with the demand challenges within each business?
Alexander M. Cutler
Jeffery Hammond – Keybanc Capital Markets
Then just quickly on Moeller Phoenixtec, they’re revenue contribution in the fourth quarter was a lot smaller than I was forecasting. Is there any kind of seasonal factor?
Can you speak to what those businesses are seeing on a core basis?
Alexander M. Cutler
I would say if you just talked to Europe and electrical at this point, seeing very much the same kind of contraction that we’re seeing elsewhere. So, there historically has been a slightly different pattern to the Moeller and Phoenixtec businesses then there was to the let me call it base of pre-acquisition and that’s really why you see the margin showing up a little bit differently in the fourth quarter than it did a year ago.
I would say demand wise, we mentioned that we saw Europe weakening up and then that continued right through December and December tends to be a little weaker in Europe just because of the work patterns in December a little different than they are in the US. In Asia, we’ve continued to see the single phase portion of the power quality markets, particularly that which is going through the IT resellers being an area that is weakening and that has continued right through the first quarter.
That would really be a large part what is in the Phoenixtec business.
William Hartman
Your next question comes from Eli Lustgarten – Longbow Research.
Eli Lustgarten – Longbow Research
One clarification, the breakeven first quarter includes the $110 million charge, correct?
Alexander M. Cutler
Yes, that’s correct.
Eli Lustgarten – Longbow Research
So you have a pretty good hit just on that basis which we get back the rest of the quarter?
Alexander M. Cutler
Right.
Eli Lustgarten – Longbow Research
Can we talk a little bit about the electrical businesses and I know you have enough trouble in ’09 but I’m going to [inaudible] 2010. Your forecast is now consistent with what’s going on, most people are forecasting non-residential construction to begin to slide, as you go through 2009 I think you’re numbers are down 7% to 8%, I think is what you said in the press release and most people’s forecast are down 5% to 15% not only for 2009 but also for 2010, that the slide is just beginning.
Can you talk about the electrical businesses, profile the margins you go through the year would probably the slide happening later in the year than earlier in the year? And, what kind of trough margins we can expect in the electrical business given the likelihood this decline will continue in to next year?
Alexander M. Cutler
We think one of the benefits again, this business is not simply a construction business any more so remember it’s got a large piece which is power quality and you’re going to get slightly different cycles as you go around the world. But, right back to your specific question, what do we think is going to happen in non-res which affects a portion of the US market.
We think you’re going to see non-res in the order of being down like 9% in 2009 and that it probably has another year of contraction the next year in 2010 and those numbers are not wild numbers for what 2010 might look like as well. It’s pretty hard to forecast ’10 right now sitting here at the beginning of ’09 but what we think you do get is that you’ll go from a year of probably some negative, as we mentioned -5% for the overall electrical business to something that is slightly positive as you go in to 2010 and that is based on the strength of power quality plus a lot of the other segments that are within the electrical business.
As we talk about the trough margins, this is going to be a good test of trough this year for electrical and we think those margins can be, as I mentioned earlier, in that 12.5% to 13.5% range for a couple of reasons. One, we’ve changed and a couple of different businesses we’ve bought have had good margin structures to them and secondly, we’re taking a fair amount of costs out in the integrations of the two large acquisitions and with our reductions that we announced here in early January we are also taking costs out.
So, we think that 12.5% to 13.5% is a good number.
Eli Lustgarten – Longbow Research
And those numbers get weaker as you go through the year or stay pretty much level all year?
Alexander M. Cutler
I think as you think about this year, the first quarter is normally a weaker quarter in the electrical business and you tend to see stronger seasonal quarters in the middle of the year and I would think you’re likely to see that relatively similar again this year.
William Hartman
Your next question comes from Mark Koznarek – Cleveland Research Company.
Mark Koznarek – Cleveland Research Company
I was curious about the breadth of the overall EPS range of $1 given the 7% to 8% top line market forecast. I would have thought that if we had $1 range in EPS that we might have had a four percentage point uncertainty around revenue.
Can you talk about what the variation is between the low end of your guidance range and the high end because it doesn’t appear to be revenue? What would the uncertainties be between the upper and the lower end?
Alexander M. Cutler
I think probably the easiest way to think about it Mark without trying to be overly analytical because it’s a little challenging in this environment to try to get a decimal point relationship is that we normally have a guidance range that’s around 10%. What we’ve done this year is provide a guidance that is around 20% in terms of the full range.
That’s really a reflection of the difficulty of forecasting in this environment. While we know a lot of companies have elected either not to give guidance or not to give guidance for the first quarter which are all among the choices, we really felt that with our restructuring actions and the change in mix of the company it was important for us to maintain guidance but what we would really do to continue to convey the sense of uncertainty is we’d widen our guidance and that’s really what it is meant to depict.
Mark Koznarek – Cleveland Research Company
But directionally though that uncertainty has got to start with uncertainty with regard to the end markets.
Alexander M. Cutler
Absolutely it does and I think everyone is feeling that same sense of uncertainty about where markets are. We’ve done our best attempt to try to have an educated view of exactly where these markets will be but so many historical patterns have been interrupted as we look back over the last six months and that we think are likely to be forward, I would treat that really as being a range depending on what could happen with markets.
Mark Koznarek – Cleveland Research Company
But directionally the markets could really be instead of your 7% to 8% that’s pretty precise, it’s maybe directionally more like 6% to 9%? It’s broader than what you’re illustrating here with the numbers?
Alexander M. Cutler
I think that’s very fair Mark, that’s what we’re really trying to convey.
William Hartman
Your next question comes from Christopher Glynn – Oppenheimer & Co.
Christopher Glynn – Oppenheimer & Co
On the severance charge, will that be embedded in the segments?
Alexander M. Cutler
Yes, it will.
Christopher Glynn – Oppenheimer & Co
So the guidance you gave for margin by segments such as the 12.5% to 13.5% for electrical that includes whatever gets apportioned to that segment in the first quarter from the $110.
Alexander M. Cutler
Yes, and those are full year numbers.
Christopher Glynn – Oppenheimer & Co
To try to get a little bit more detail, I know you don’t want to give any numbers by segment but maybe just rank in order from biggest to lowest if you could, the absolute amount within the $110 and then proportionately if possible relative to each segment.
Alexander M. Cutler
We’re not prepared to do that at this time. We’ll probably provide some more information when we get out to our February meeting but at this point we’re just dealing with total numbers.
Christopher Glynn – Oppenheimer & Co
I just wondered if you had any comments on what the impact of overhead under absorption in the first quarter will be on your margin from production cuts?
Alexander M. Cutler
No, not specifically but, I would say directionally and our way of thinking about this is that we had, as I mentioned, over a $600 million decline third quarter to fourth quarter and we tried to provide you with the decrementals we achieved on that reduction. We will be coming further off of that in the first quarter because we expect the year again, as I mentioned, GDP and the European growth to decline further in the first quarter versus the fourth quarter.
I think you can use those kinds of decrementals that we were outlining for you plus the $110 million pre-tax charge that would go in to the segments to get you to your estimates.
William Hartman
Your next question comes from Nigel Coe – Deutsche Bank Securities.
Nigel Coe – Deutsche Bank Securities
First of all I just wanted to clarify on the restructuring the $110 million in 1Q does that relate to the 5,800 headcount reduction in 1Q or was that to the whole 8,000?
Alexander M. Cutler
That relates to the 5,200 in the first quarter.
Nigel Coe – Deutsche Bank Securities
So it implies the restructure was about $50 million in 4Q?
Richard H. Fearon
No. In 4Q the biggest part of the restructuring was the Massa charge of $27 million and then we did have additional charges above that.
We have been taking costs out across 2008.
Nigel Coe – Deutsche Bank Securities
But I’m just trying to figure out if it’s $110 million for 5,800 in 1Q, is it 3,200 in 4Q or is that for the whole of 2008?
Richard H. Fearon
That’s primarily in the second half.
Nigel Coe – Deutsche Bank Securities
Then on the electrical you’re going to obviously break out between the Americas and rest of the world. I think initially you were going to go with the power quality versus [inaudible] so I just wondered if you could maybe talk about why you decided to go for the geographic rather than end markets?
Then, if you could maybe talk about your expectations for the power quality business in 2009?
Alexander M. Cutler
Really the reporting segmentation reflects how we’ve chosen to organize the business. We think it reflects better our line of businesses in terms of how we really come at organizing the businesses and the fact that now we’ve got regional scale in these different regions of the world.
In terms of the power quality market specifically, I think you have to think about it having two sort of separate pieces of it, the single phase business which predominately, not totally but, predominately goes through the IT retailer business, has been contracting during the second half of last year and we think continues to contract in 2009 and in many ways that’s a good indication of kind of what is going on with small business and consumer spending. The big project business has been in many cases stronger than we anticipated it would be or should be because there are still some very powerful energy savings dynamics that go on in some of the big project business.
But, as a result for the total power quality business we’re not looking at a big year of growth this next year. We think that business is more on the order of a couple of points this year where it has been running much higher than that the last several years.
Nigel Coe – Deutsche Bank Securities
You talked about Phoenixtec and Moeller margin mix in 4Q, can you just expand on that comment?
Alexander M. Cutler
It really isn’t as much a margin mix as it is their quarterly distribution tended to have a slightly lower percentage of their sales in the fourth quarter than you would have found for our traditional business and with that comes a slightly lower percentage of their annual profits. So that if you looked at the 13% that we had in operating margin in that business before restructuring charges a year ago and looked at the 12.5% now, one might deduce that our business is less profitable.
Really, what we’re trying to convey is that is not the issue. You’re really talking about a mix change now about how those businesses which have tended to have a little bit more of their activity concentrated in the middle quarters versus the fourth quarter have now changed the overall quarterly pattern of our electrical business.
William Hartman
Your next question comes from [Robert Wertheimer].
[Robert Wertheimer]
I’m sorry to keep probing on the same thing but Sandy you talked a little bit about the electrical segment, the power quality strength that you’re seeing and I wanted to ask both on that and the lead time you have on sort of the design phase of some of the bigger power quality projects, how far out you can see and whether you’ve seen any to date sort of slowdowns or cancelations in what would be revenues for this quarter and next? Then second, you give a very realistic forecast on straight up commercial construction but what other pockets of strengths let say are you seeing in the electrical segments?
Alexander M. Cutler
Let me answer them kind of in reverse order if I could, our forecast, I just mentioned that kind of negative percent is total, that’s US non-residential construction so within that is commercial construction and the commercial construction will be weaker. That’s areas like lodging, and office building and retail for example.
The stronger areas are continuing to be in some of those areas we’ve been mentioning as we go through here such as manufacturing structures, such as oil and gas that have held up quite well. Lodging continues to have some strong numbers through this year but we think that one goes down.
We continue to see some pretty strong prospects either in utility or petro chem or waste water treatment areas that continue to be strong. There’s a lot of speculation out there obviously that as oil prices come down won’t you see some back off of the activity in the petro chem area.
To date, the projects we’re involved in are still moving ahead and look quite solid but I think those are the questions everyone has out and around the space. A lot of conversation about what’s going to be done here with the grid in North America, what’s going to be done in terms of generating capacity.
You’ve got to wait and really see where those various elements of the stimulus bill either come out or don’t come out. But, that’s the end of the market that we think will be stronger and we are carrying in to this year remember, record backlogs in our non-residential construction businesses that give us multiple months of pretty strong shipment backlog at this point.
That’s sort of our view on that particular side of revenue. Power quality, there on the bigger projects we probably are looking at multiple months of viewing out front in terms of the quote log and the shipment schedule.
[Robert Wertheimer]
Have you seen any material push backs or delays in some of those projects yet?
Alexander M. Cutler
No, not to date. We’ve seen some in the financial segment as you would expect but in some of the big hosting operations, no at this point.
We’ve introduced some new product in that arena, our very high end product which has proved to be very attractive for people. Then, you’ve seen a number of the tech companies recently announce some sort of surprising positive outlooks for this next year and we’re benefiting from being partnered up with a number of them.
William Hartman
You next question comes from [Daniel Dodd].
[Daniel Dodd]
Let me turn to the truck business, so the 155,000 number that you guided to obviously affects the macro weakness right now. How do you look at 2010?
Presumably if we sell fewer trucks in 2009 that would imply more trucks in 2010 if the economy is recovering just given fleet’s need to maintain their maintenance costs. Is this a movement of vehicles from 2009 in to 2010 or do you view these as lost sales that are probably not coming back?
Alexander M. Cutler
I think, and this really parallels so much what’s happening in capital equipment right now whether it’s trucks, whether it’s airplanes, whether it’s cars or whether it’s factory equipment is we believe in the latter part of 2008 and 2009 you’re seeing a whatever you want to call it unnatural reduction in order rates that’s corresponding with huge liquidity concerns. So, everyone is pushing things off by a year.
In trucks specifically, with the fleets here in North America north of six and a half years, way on the high end in terms of age, what that means is that at some point they have to be replaced. What we would have anticipated a year and a half ago is we would have seen a blow off here in 2009 and then a very steep down in 2010 because of the next emission standard.
I think everyone around the industry at this point expects 2010 will be higher than 2009 because you’re coming off a year in 2008 that’s probably 205,000 units, you’re going to have kind of a 155,000 in 2009. So, I think the prospect in ’10, ’11 and ’12 in the truck business is you’re going to have very strong years coming up in those years whereas only as I mentioned a year and a half a ago we would have been expecting a very weak 2010.
I think that same issue applies to many of these capital good markets where you’ve got this artificially depressed activity here for a year, a year and a half and you will get a snap back. But, I want to be clear, we don’t think that snap back is in the fourth quarter of 2009.
We think that is something that can begin to materialize as we work our way in to 2010.
[Daniel Dodd]
But, on the other side of that is the electrical business which clearly has become a part of the portfolio because it has such different cyclicality and given you just mentioned the long backlogs of electrical equipment and the fact that we are just turning negative in commercial construction in North America, presumably we have a pretty weak period for commercial construction in Europe as well. Doesn’t that imply that you are likely to have as the economy and many of your other businesses are recovering that the electrical business is likely to still remain weak by comparison?
Richard H. Fearon
I think the general scenario you painted is not out of an expectation that you’d see a period of negative growth in 2009 then remerging in to positive growth in the electrical business in 2010. But, it wouldn’t be at the market numbers that you saw in the 2006, ’07 and ’08 period and then you would begin to rebuild to much stronger numbers in the ’11 and ’12.
I think that’s the advantage of the portfolio of businesses that we have, we’ve got some early cycle, we’ve got some late cycle and we’ve got some mid cycle businesses so at a time we really see aerospace continuing to ramp up, particularly on the military side during that time period and you’ll see truck come back, you will see auto come back at some point. I know that’s hard for everyone to imagine right now but replacement is well above 10 million units here in North America for example, that you’ll start to see that mix play out so that we think 2010 becomes a pretty attractive year for Eaton again.
[Daniel Dodd]
Even though given the late cycle nature of electrical that could well still be suffering way in to 2010?
Alexander M. Cutler
The suffering, we think it is a lower rate of growth but it’s positive growth.
William Hartman
Your next question comes from Jamie Cook – Credit Suisse.
Jamie Cook – Credit Suisse
Two questions, when I think about your bookings specifically within the electrical business and the hydraulics business was there any severe variation when I think about the sequential order patterns when I’m thinking about the months October, November, December? Then, just a follow up question, can you just help us out with what your material cost assumptions are for 2009 and price?
Alexander M. Cutler
Jamie, on the bookings issue, let me start with hydraulics. We shared that we’ve been through this very, very severe kind of retrenchment on production levels for many of our customers, particularly on the mobile side of the business around the world.
What we saw going on in the fourth quarter in the orders were a fair number of order cancellations so it was not just an issue – and those are netted in our numbers, so it’s not simply and issue of orders not coming in. We think that’s been largely cleaned up in terms of people really trying to bring their orders in to alignment with what their revised future forecast is.
While one month does not make a trend, the first several weeks of January look quite a bit better in that business on the booking side than did the end of last year and that’s what leads us to believe, and again, I’d be cautious with this because it’s just one month’s data, that perhaps the backlog cleaning has been pretty well completed at this point. But, I would not say it’s enough for us to declare that we’re on our way up at this point.
In the electrical business, nothing really unusual in terms of orders that were in or not in a year ago. This quarter I think what it really reflects is the fact that you are seeing markets beginning to slow and that’s what we were trying to say in the fourth quarter so I would say nothing unusual there, I think that’s just a good trend indicator.
On what we’re expecting in terms of material prices versus our pricing, this year really nothing extraordinary to report there. I mean you are seeing a number of materials move around.
I would tell you that spot pricing is moving later than the futures market have so I think people got way out ahead thinking pricings and costs were dropping very quickly because the spot markets have not moved that quickly. We’re comfortable with what we’ve got in our assumptions which is fairly minimal changes here early in the year and we don’t think we’re in a massive deflation market in our commodities because many of our commodities are specialty and they are not the ones you see traded on the commodities exchanges.
So, no big changes in that regard.
Jamie Cook – Credit Suisse
Just a clarification, on the electrical business, the order trend that we saw in December and January, would that be sort of consistent with your ’09 outlook for within electrical?
Alexander M. Cutler
Yes, it’s all very much within the guidance.
William Hartman
Your next question comes from Andrew Casey – Wachovia Capital Markets, LLC.
Andrew Casey – Wachovia Capital Markets, LLC
A couple of detailed questions, within the down 11% truck rest of the world forecast, what are you assuming in Brazil, and most of that is ag?
Alexander M. Cutler
Brazil has ag there and then we also provided transmissions in to a number of different businesses. We have concluded or we do believe that we’re going to continue to see ag weaken significantly in Brazil this year.
Richard H. Fearon
Andy, it’s going to be on the order in Brazil of ag weakening in the 20% to 25% range and overall vehicles in Brazil we think are down in the 9% to 10% range.
Andrew Casey – Wachovia Capital Markets, LLC
The moving on to hydraulics and kind of gelling to two guidance pieces there, the 10.5% and 11.5% margin against the 16% revenue decline, it pretty much implies that 12% to 17% decremental margin after two years kind of in the mid 20s incremental range. When I look at the implied structural cost changes, all of that related to headcount revisions or is it related to the absence of whatever the restructuring was in ’08?
Alexander M. Cutler
The $165 year-to-year improvement, these are corporate numbers not just hydraulics numbers, is a year-to-year improvement in profits that comes from the full year impact of benefits last year that we only had a partial year of, the avoidance of last year’s severance and then the savings we’ll get this year in 2009 minus the severance we’ll take this year.
Andrew Casey – Wachovia Capital Markets, LLC
But, in the hydraulics piece, you’re obviously looking for a bit of a structural cost change, is there some restructuring in ’08 -
Alexander M. Cutler
I think what you saw – look at the numbers I shared with you, I think the best indication we can give you there, the numbers I shared with you about hydraulics segment fourth quarter that they had a 23% decremental rate on the fourth quarter versus the third quarter and that was at a time that we had a 17% drop in volume in one quarter. So, what I think you’re trying to get at, a portion of that structural change we were able to get in place for the fourth quarter and the next piece really comes out of the additional layoffs that we’re doing here in the business in the first quarter.
William Hartman
Your next question comes from [Jason Feldman].
[Jason Feldman]
Looking at the end market growth forecast, the one positive area seems to be aerospace and I understand that you’ve got some easy comps with the Boeing strike but with the business jet market continuing to decline and the commercial aftermarket weaker, where’s that end market growth coming from?
Alexander M. Cutler
A couple of pieces to think about, if you think about the US commercial market, we think that you’ll see fairly substantial growth there and that really comes from Boeing deliveries are expected in most people’s forecast to be up over 20% and that’s because remember they didn’t have a lot of shipments during the strike. We do think you’ll see the aftermarket within that continue to weaken significantly and that really comes out of the overall planes that are being put down.
So, when you put that all together you probably end up with overall growth in that segment of 7% to 8%. In the business jet market, I agree with your comment, rapidly decelerating.
It will be slightly negative growth. I think depending on which platform you’re on because the platform backlogs and shipping schedules, it’s pretty volatile in that segment, it really depends which aircraft right now.
International commercial airbus forecast are for about 8% up and you’ll hear some people they’re going to say, “Gee, we think the A320 is going to reduce from 36 per month to 30 per month.” That would reduce growth to 3% versus the 8% so you can kind of take whatever you feel your own discounting is on that.
A380, the forecast is slightly down from where it was originally but it is higher than what was delivered in 2008 and again, we think you’ll see aftermarket decline. US defense which is a piece of that overall forecast, we think is probably overall in the order of 2% but the real key is which programs you’re on.
Remember the F35 is a very big program for Eaton and that we will do well on it and we think the aftermarket growth within military will be actually a positive number. So, that’s when you put all that together that’s how you get to that overall forecast.
[Jason Feldman]
Then just a quick follow up on that same kind of topic, given the shift it sounds like a lot more new equipment weaker on the aftermarket. How worried should we be about potential margin compression in that segment next year?
Alexander M. Cutler
I think if you look at our fourth quarter, our 17.7% margin in the fourth quarter was the highest of any quarter that we had this year. We’ve had a number of these trends going on.
We believe that our overall forecast of 17% to 18% is a reasonable forecast. That obviously has a lot of different platforms and moving pieces underneath it but we feel pretty comfortable with that forecast.
William Hartman
Your next question comes from [Fred Russell].
[Fred Russell]
Would you tell us in what hydraulics area you experienced strength and weakness, what markets?
Alexander M. Cutler
I think the easiest way to kind of come at that is that the mobile markets have been, particularly in the fourth quarter, extremely weak. So whether this is agriculture or whether this is construction equipment, or whether it is other off highway vehicles or on highway vehicles, very, very weak.
The limited portion of strength is coming in individual applications within stationary or industrial and clearly some of the alternative energy applications are areas that have continue to receive a fair amount of spending but they too have weakened up a little bit. So, I’d say where you’ll find it right now it tends to be in specific applications within industrial or stationary and the big weakness is on the mobile side.
And, that’s pretty well true around the world.
[Fred Russell]
In the alternative energy area what markets are particularly strong?
Alexander M. Cutler
Well, wind power has been fairly strong and we’ve got a pretty good position in that segment, one we’ve continued to see spending within.
William Hartman
Your next question comes from [Josh Slocum].
Analyst for [Josh Slocum]
Number one, it looks like with the free cash flow going up to $1 billion compared with operating cash flow, it looks like your cap ex is going to be substantially reduced for the current year. Can you talk about that for a moment?
Alexander M. Cutler
We would anticipate it to be down on the order of 20% from this last year. We spent approximately $450 million on cap ex and we think a reasonable expectation this year will be somewhere between about $340 and $380.
Analyst for [Josh Slocum]
But then what gives you that free cash flow boost?
Richard H. Fearon
Well you have of course you’re spending less – our definition of free cash flow is operating cash flow less cap ex and so you’re dropping your cap ex spending on the order of the better part of $100 million so that’s one element. The other element is simply our ability to continue to manage our working capital very tightly and make some further improvements.
Analyst for [Josh Slocum]
So operating cash flow, the way you give it here of $1.4 to $1.6 billion does not include changes in sources from working capital?
Alexander M. Cutler
Yes it does.
Richard H. Fearon
Operating cash flow is cash from operations as you see it on the cash flow statement so that includes changes in working capital and the only difference between operating cash flow and free cash flow is the cap ex.
Analyst for [Josh Slocum]
What do you expect the working capital contribution to be this year?
Alexander M. Cutler
Well, the pattern is going to be liquidation of working capital for the first half of the year and then if we’re correct in saying that the market is going to begin to improve, albeit modestly, in the fourth quarter then you’re going to see some of that working capital go back in. So, net/net it is likely to be an improvement, a significant improvement north of the $100 million kind of range but it’s going to have a different pattern than it would in [inaudible].
Analyst for [Josh Slocum]
So the next question is Sandy, is what do you expect to do with the $500 or $600 million of free cash flow after dividends that you’ll be generating this year? And, have you included any return in making your estimate for the year?
Alexander M. Cutler
First of all, let me just kind of comment on sources of use of cash, is you saw that we did not comment on our dividend rate and while our board will make its decision on that at this point, the forecast does not anticipate any dividend increase and we feel very solid about our ability to maintain it. Secondly, we just commented on the capital expenditures.
Third, on the subject of acquisitions, we don’t anticipate either a share re buyback or significant acquisitions during the year. Now, having done that, all of that is really we think prudent in this time period when liquidity is really critical and we are working to continue to improve our ratios although we made, we think, solid progress during 2008.
We came in to 2008 with a fairly leveraged balance sheet in light of some of the large acquisitions we did, committed to last year and then finished this year. In terms of the return on the additional cash, Rick do you want to comment on that?
Analyst for [Josh Slocum]
In other words you might have $800 million left over after your dividend if you hold the dividend and I’m wondering whether you’ve assumed any kind of return on that in factoring the earnings estimate this year?
Richard H. Fearon
What we simply assumed is that we’re going to use the cash and pay down debt. Now, we do have a term maturity of about $269 million in the middle part of the year and then the balance will be used to pay down CP.
So, we’ve applied the interest savings that we’ll get from paying down those two different debt streams.
Analyst for [Josh Slocum]
The last question is, do you still feel the 9% free cash flow yields to sales is something that your book of businesses can achieve?
Alexander M. Cutler
Very much so.
Richard H. Fearon
Very much so. In fact, we’re encouraged by the progress we made on working capital efficiency in the fourth quarter and we believe that both the prospects of improved margins when volume is a more normal level and then also our increasing efficiency in using capital should allow us to get there.
William Hartman
Your next question comes from Robert Cornell – Barclays Capital.
Robert Cornell – Barclays Capital
You’ve addressed this I think in part and maybe I haven’t gotten the whole picture but, of the overall market forecast down 7% to 8%overall market forecast down 7% to 8% globally I mean how does that array as we go through the year? Obviously, the first quarter is tough but I don’t remember you gave us a specific and maybe to help us understand how that 7% to 8% arrays as we go through the year?
Alexander M. Cutler
I think the best way to think of it Bob, we didn’t break it out in terms of market forecast quarter-by-quarter, I think the best way to think about it is our view in terms of what’s happening from a GDP point of view. If you think about the GDP that we’re thinking of and let’s just take the US as a surrogate because it’s pretty close to what we’re thinking around the world, our thought is going to be that you see the GDP down on the order of 2% to 3% and you start the first quarter with another decline on the order of 4% compared to the fourth quarter of 2008.
Then that declines by approximately another two points in the second quarter and you get out to the third quarter and we think that’s the important quarter in terms of whether it indeed goes flat, and I mean flat with the second quarter or whether it continues to decline. Our best thinking at this point is that’s the quarter when this flattens out, that you might get some very nominal growth in the fourth quarter but we’re not forecasting a big rebound.
What I think that says for our end markets is that we think we get the biggest decline this year right in the first quarter and that’s why we would expect our revenues to decline in the first quarter as well. A slightly lower decline in the second quarter and seasonally in our businesses we tend to get a little stronger in the second quarter so that’s going to help us a little bit at that period of time.
Then, there’s not a rapid run to the roses at the end of the year just because we don’t think the market’s going to be snapping back that strongly. That’s the best guidance we could give you and I guess if you think about manufacturing, industrial manufacturing production, it tends to run kind of two to three times often what GDP does so if you think you’re going to see a 4% decline in US GDP, you probably are seeing a manufacturing industrial production down between 10% and 12% in the first quarter.
That’s why we say the first quarter and that’s why we believe it will be breakeven for us on an operating earnings per share, we have two issues occurring in the first quarter, one the $110 million severance charge but equally important is a downturn in US manufacturing industrial production of between 10% and 12%. So, the recession has not bottomed.
It still has further to go.
Robert Cornell – Barclays Capital
Then what you’re talking about then is sort of a simultaneous global slowdown. You’re not talking much a lag between Europe or Asia either?
Alexander M. Cutler
That is absolutely correct. We think the lags are out at this point and whatever lagging there was in the third and fourth quarter, at this point the world is really gripped with a simultaneous, liquidity driven contraction and it has now really found its way – it found its way in to the financial institutions last fall and it has now really found its way in to the manufacturing sector here in the fourth quarter increasingly in the first quarter and then a little bit more in the second quarter.
So, if there was a lag, it’s a lag between the manufacturing sector and the financial sector. It’s not between the geographical regions.
William Hartman
Your last question comes from Nigel Coe – Deutsche Bank Securities.
Nigel Coe – Deutsche Bank Securities
On the tax rate, is the tax rate for ’09 clean or are there any discrete items we should be thinking about there? And I guess, a follow on to that would be should we not expect the tax rate to rise until we see the higher kind of structural US income materially recovered?
Richard H. Fearon
The tax rate, let me give you at least a little historical perspective, if you look at ’08 and you take out the discrete items the tax rate was very close to 14%, just a little under 14%. Our expectation for ’09 is that we’re not likely to have any significant discrete items and that’s why we think the rate will be in that neighborhood.
It obviously depends on the precise mix in any given year and as we’ve looked at the mix and tried to forecast, we think that it might be a little bit higher in ’09 ex the discrete items than it was in ’08. But, you’re right the mix is – the location of where demand is and where you’re earning your pre-tax profit very much determines what happens to your tax rate.
And even, for example, in the severance program, the employee reduction program, that will probably have a little bit more of an impact in the US from a pre-tax standpoint than in some other markets. That is one factor that is likely to cause the rate to go up a little bit.
Nigel Coe – Deutsche Bank Securities
So it sounds like if we do get a recovery in [profit] and after automotive comes back then we might see more upper pressure in 2010 essentially?
Richard H. Fearon
Depending on the growth and market for that lower tax rate so it’s all a question of the relative growth?
William Hartman
I’d like to thank everybody for your participation. As always, I’ll be around for the rest of the day to continue to field your questions.
Thanks again.
Operator
Ladies and gentlemen that does conclude your conference. You may now disconnect.