Jan 25, 2010
Executives
William Hartman – VP IR Alexander Cutler – CEO Richard Fearon – CFO
Analysts
Eli Lustgarten - Longbow Research David Raso - Isi Group Ann Duignan – JPMorgan Robert Wertheimer - Morgan Stanley Jeffrey Hammond - Keybanc Capital Markets [Terry Darling – Goldman Sachs] Robert Cornell - Barclays Capital Nigel Coe - Deutsche Bank Securities [Tim Thane – No Company Listed] Christopher Glynn - Oppenheimer & Co. Jamie Cook - Credit Suisse Mark Koznarek - Cleveland Research Company Andrew Casey - Wells Fargo Securities Ted Wheeler – [Buckingham Research Group] Dan Dowd – Sanford Bernstein Rob McCarthy – No Company Listed
Operator
Welcome to the Eaton Corporation fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host, Mr.
Bill Hartman. Please go ahead, sir.
William Hartman
Thank you. Good morning everyone.
Welcome to Eaton's fourth quarter and full-year 2009 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO, and Richard Fearon, Vice Chairman and Chief Financial and Planning Officer.
As has been our practice, we will begin today's call with comments from Alexander, followed by a question-and-answer session. As a reminder, the information provided in our conference call today will include forward-looking statements concerning the first 2010 and full year 2010 net income per share and operating earnings per share, full-year 2010 estimates on revenue, our worldwide markets, our growth in relation to those markets and our growth from acquisitions.
These statements should be used with caution and are subject to various risks and uncertainties many of which are outside of the company’s control. Factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in today's press release and related Form 8-K filing.
As a reminder, we have included a presentation on the fourth quarter results which can be accessed on the Investor Relations page of eaton.com. Additional information is available in today's press release, which is also located on Eaton's home page at www.eaton.com.
With that, I would like to turn the meeting over to Alexander Cutler.
Alexander Cutler
Thanks William and let me welcome everybody. Thanks for joining us this morning.
We have both a very strong quarter and we think some exciting guidance relative to 2010 to go through with you this morning. I am going to work from the presentation that Bill mentioned so if you have that in front of you I would ask you to turn to page three, highlights from the fourth quarter.
Before I walk through these numbers with you in the ten some years we have been doing these forums, the audience has changed a great deal and is obviously much broader than it once was. So let me start by thanking first our customers for their continued confidence in what has been a challenging year, 2009, especially to thank our employees whose focus and sacrifice throughout this year has really made an extraordinary difference in diverting a very difficult economic environment into what we think were very strong results at the end of this year.
Turning to our results, obviously on this sheet you can see our operating earnings were up some 25% year-over-year. Obviously also stronger than the guidance we provided for the fourth quarter.
Net income per share also up 1.8%. Our sales of $3.1 billion down 10% from a year ago so we think it is significant obviously that our earnings were up on down sales and reflects all of the work we have done this year to really get our cost structure and our balance sheet situated to really deal well in this environment.
End markets down still some 15% but clearly better than we saw earlier in the year and that has continued in every quarter this year. Some 25% of our sales now from developed nations.
Operating cash flow, the beat goes on there and obviously very strong performance for the fourth quarter. Operating cash flow was $469 million and for the full year a free cash flow record of $1.2 billion.
Embedded in both those figures in terms of the operating cash flow achievement as well as free cash flow achievement are very substantial and we think permanent movements in our working capital. Days on hand were down some 19 days from the year-ago fourth quarter.
Also down three days from the end of the third quarter and our DSO was down seven days from year-end 2008 and four days from the third quarter. So not simply a reduction in dollars on the balance sheet but a real change in the efficiency of our working capital during the year.
As we turn to chart four, a quick comparison to our fourth quarter guidance. Obviously the guidance we provided for operating earnings per share for the fourth quarter was $1.20.
We had higher RIF expense during this quarter. We detailed in our earnings announcement we did take some action in a number of our late cycle businesses and some of our mid-cycle businesses to further trim our cost structure.
This cost us about $24 million or $0.17 per share more than we anticipated when we put our $1.20 guidance together. Our RIF savings came in a little lower than we had estimated.
Really nothing material there but about $12 million difference or $0.08. So about $0.25 of pressure from those two items which then were more than made up for the fact that a tax credit came in at about 25% instead of the 17% we had anticipated at the beginning of the quarter but the real big news is the improved performance of the businesses of $0.32 really continuing that very strong momentum we saw in the third quarter in this respect.
Our actual came in at about $1.35, about 12.5% above our guidance and our revenues were about what we expected at about $3.1 billion. The full year markets finished down about 21% as we anticipated really for the full second half of last year.
Turning to page five, just a quick summary that highlights a couple of figures on this chart. You have seen them all at this point.
Obviously the $3.1 billion in sales, 11.1% operating margin at the segment level that compared to 10.9% in the third quarter and 8.2% in the second quarter and 4.2% in the first quarter. I think that gives you a sense of the rate of improvement throughout this year.
Market growth, as we mentioned, on the lower left hand corner of the chart, down about 15% in the fourth quarter and FOREX slipped from the earlier quarters in the year now contributing about 5% to sales. All that nets out to the 10% reduction in our sales for the quarter.
If I ask you to turn to chart six, starting into our individual business segments, electrical Americas segment sales of $827 million. That was down from the third quarter of $843 million.
If you recall this segment peaked in the second quarter of this year as we have seen these markets continue to run off during this year and I will talk more about that next in a couple of charts. Strong continued margins in this business.
15.2% in the quarter. We commented in the press release it would have been 16.1% except we did have to take some additional reduction in force charges to help ready ourselves for the market as we continue to see the non-residential segment of this portion weakening.
Bookings a little bit better than the third quarter but generally still down 18%. Non-residential construction down 25% from a year ago.
Our stimulus orders which we have been talking about really since May as being an expected source of strength for us during 2010 now at $140 million and we are in the midst of negotiating another $325 million so we feel comfortable we can get to this $500 million number in 2010. Overall markets down 22% and slightly offset by the 2% FOREX.
If you turn to electrical rest of world this trend has continued quite strong this year in terms of both volume increase quarter-to-quarter and operating margin increase quarter-to-quarter. Third quarter volumes were $646 million.
You can see we are up to $698 million in this quarter. Very significantly we broke back into double-digit operating margins at 10.6%.
That compared to 8.8% in the third quarter, 4.4% in the second quarter and 1.8% in the first quarter so a real source of strength for us. We are pleased in terms of what we are seeing in terms of bookings, down 2%.
Obviously we are starting to get close to having this business reach the levels of volume we had seen the year before. You can see the top line was only down 1% in the quarter.
The big surge has been in Asia where orders were up 16%. Europe is improving but is still down 10% from the year before and if you flip over to the left hand side you can see that the composite of the markets for these regions is still down some 13%.
If we move to chart eight, hydraulics, pretty flat sales. For the third quarter sales were $418 million.
They are $419 million here in the fourth quarter so I guess that does determine flat. If you look at the operating margins of 3.1% they would have been 5.1%.
We did take additional restructuring of course in this mid-cycle business and that reduced the margin here in the fourth quarter. US markets still down fairly strongly at 39%.
The rest of the world down 21% but a big change occurred in this business that is worth noting; that is bookings momentum. This is the first quarter we have seen global bookings up over the year before, up a very strong 11%, up 8% from the third quarter and most significantly the month of December was a real whopper for us.
We had just an outstanding bookings month in December. One month does not make a trend but we are very encouraged to see a significant change here in the hydraulics market.
Talking about the market this year down overall 39%. You can see the reconciliation on the left side with the year-over-year down 21% [and falling].
If we move to aerospace which is on page nine, this market again you remember we peaked in the second quarter of this year. Third quarter volumes were $394 million, fourth quarter $381 million.
Our margin has declined. You will recall we came off the mid 17 range in the second quarter down to 15.5% in the third quarter and now 13.1%.
It would have been 14.2% without the additional RIF expenses. This is a continued walk down in terms of the volume.
Overall markets pretty much as we expected. US markets down about 5%.
International down about 20%. Commercial aftermarket continued soft for all the reasons we all well understand.
You can see the sales mix reconciliation on the left that explains the 15% volume decrease from a year ago. If we move to chart 10, the truck segment, a sequential quarter-to-quarter volume increase.
$443 million up from $401 million in the third quarter. A really very strong operating margin of 11.5%.
You will recall it was at 6.2% in the third quarter, negative 0.9% in the second quarter, and negative 11.6% in the first quarter. So we have seen a real snap back in spite of the fact we still have this very, very low level of Class A builds this year that you can see detailed in the yellow footnote.
The real bright news within this in terms of a growing segment is the hybrid business continues to accelerate. Still, an overall weak market.
If we then move to chart 11, which is the automotive segment, again quarter-to-quarter volume growth. It grew up to $363 million from $326 million in the third quarter.
Again, quite significantly a very big step up in the margins to 8.8% as compared to 7.1% in the third quarter, a negative 7% in the second quarter and a negative 16.7% in the first quarter. So a real change here in terms of the profit run rate of this business.
Non-US markets up some 17%. US markets when you take out the transplants because we actually served the transplants through our association with Eaton Valves so that is not reported in our sales, down some 5%.
The real activity here is what we are all reading about on the daily basis. The fuel economy and emissions remain absolutely critical and that is around the world.
That is really what is driving our product development and our revenue in at this point. If we move to chart 12, just a quick synopsis really for your convenience of the sequential improvement.
I covered some of these figures but you obviously can see we started this year with markets down very hard. Very weak activity.
We were busily restructuring and taking costs out of the company and you can see the second half benefit from that as you look at net income or segment operating margins and you can see the cash flows. If we move to chart 13, a quick recap of many of the activities we were undergoing during this year to help get at our cost structure.
We noted in our press release slight changes from our estimates at the end of the third quarter. It ended up obviously with $182 million of severance costs.
We had told you it would be $158 million. This are those additional costs for December.
Savings of $416 million. We had told you $428 million.
The net is $234 million versus what we had talked about being $270 million. So that obviously was the $0.25 pressure we felt in December that was more than offset by the better operating performance of the company.
Significantly, if you drop to the bottom of the chart on the bottom box on chart 13 we had been indicating year-to-year 2010 benefit of $220 million. That has now increased to $260 million.
That is the additional benefits coming from the activities that we undertook in the month of December so good news for 2010. If we turn to chart 14, this has been an extraordinary year in terms of strong cash flow.
There are a couple of elements to it we thought might be helpful to you in understanding actions relative to our balance sheet and our pension plan. Obviously you can see on the top line the operating cash flow.
The second line is our capital expenditures which we had indicated to you would be at $200 million. We came in slightly less than that.
You can see the [variation] of the free cash flow. It is significant in when you step back from it and look at the year accomplishments in this regard we did pay down $750 million in debt.
We were able to contribute $270 million to our pension plan. Then here in early January we contributed an additional $300 million to our pension plan in January 2010.
So very significant results with very strong cash flow. This now allows us to have no term debt payable in the year 2010.
In fact we don’t really face a payment until 2012. So very strong position in terms of our liquidity.
If you turn to page 15, I will start to talk a little bit about 2010. 2010 we have captioned here at the top of the chart as a “transition year.”
The reason why is we do expect to see positive growth which is very welcome news. But we think that 2010 is in many ways a transition year to a fuller resumption of economic growth in 2011 and beyond.
You can see these numbers so I won’t pick through each of these. The summary in the right hand column was detailed in our press release.
I do want to just comment on the electrical Americas index for US growth. That negative 3% growth is the composite of a non-residential construction assumption of negative 14%; residential growth of plus 6%; power quality market growth of plus 5% and industrial utility and other markets growth of 6%.
So it is not a 3% forecast for non-residential construction. It is a negative 3% growth for the weighted average of those four markets I mentioned which includes non-residential construction at about negative 14%.
If we turn to page 16, obviously outlines our guidance for this year. In terms of the mid-point for operating earnings per share of $3.85.
Net income per share $3.65. For the first quarter $0.80 for operating earnings per share.
Net income $0.75. Trying to help you walk through a logical transition if you turn to chart 17, between our 2009 operating EPS of $2.59 and our $3.85 midpoint of our guidance for next year.
You will see our assumption of 5% market growth. Our year-over-year RIF savings, those are the $265 million of additional market out growth at 35% margin and FOREX contribution.
Then again another strong year of additional cost synergies that are coming out of the Moeller and Phoenixtec acquisitions. Offsetting that is the tax change that we have spoken to you about on several occasions.
There actually being a tax charge in 2010 versus the credit we experienced here in 2009. The restoration of what we call the “other savings” category.
That is the $225 million of temporary actions that took place in 2009 that now flow right back into our cost structure which started with the first quarter of this year. The net of some very small acquisitions and divestitures that we did during the year, primarily small product line activity.
A slight increase in our weighted average of our shares as we move through the year. Then higher amortization and other expenses; the biggest single piece being about a $20 million increase in our year-over-year amortization.
To give you some feel for how this works its way through our segments, our electrical Americas segment we are anticipating margins on the order of about 13% during 2010. Electrical rest of world averaging about 9%.
Aerospace about 15.5%. Hydraulics about 8%.
Truck about 10%. Automotive about 5%.
If you work your way down through the corporate level activities net interest expense of about $145 million. Intangible expense I just spoke about is about $190 million, up about $20 million from this year.
Pension and retiree healthcare running at about $33 million per quarter, down obviously from the rate this year. Stock option expense of about $15 million and net corporate expense about $35-36 million per quarter.
Our tax rate at about 15% but we do anticipate it will start the year a little lower and finish the year a little higher so probably first quarter rate in the 12% range. Turning to the balance sheet, average shares outstanding are somewhere between 169-170 million as we go through the year.
Further improvement for days on hand in terms of working capital. Obviously very critical as we think about how cash will be used in the year.
Probably in the order of about three days. We think capital expenditures will return to about $400 million.
Our dividend at this point we have not changed it for the first quarter but our board will revisit it as we go through the year. As we will talk a little later our positive cash flow from operations somewhere about $1 billion to $1.1 billion and free cash flow about $600 million to $700 million.
If we turn to the next page which gives you a quick reconciliation of the first quarter for 2010, obviously there is large moving pieces here and we thought this might be helpful to you as you think your way through the first quarter. Let’s start with our fourth quarter operating EPS of $1.35.
The elimination of the other savings as we called them last year, the $225 million of other savings we had talked about, that now drops into negative $0.39. The tax rate change from the credit last year to the charge this year is about a negative $0.30 impact.
The amortization of intangibles and others is negative $0.07 and then the additional RIF benefit I spoke to you about that was higher than we originally estimated of about $0.21. That is how you move from the $1.35 to the $0.80.
Now because there are a number of large moving pieces we also felt it might be helpful to give you a comparison of what you might call normalized earnings without the tax impact in them. So this chart on page 19 is really meant to do that.
In 2009 our sales declined by 23%. Our operating EPS declined by 62%.
This is compared to 2008. The change in operating EPS came down by some 72%.
Now if we were to compare this as you look forward to 2010 as our guidance has indicated our sales go up we expect in the order of 11%, our operating earnings per share go up by 49% but if you restated the 2009 results to the 2010 tax rate you would see the impact that our earnings would actually be going up over 100% on an 11% increase in sales. We think that is just the kind of leverage we ought to be achieving now that we have sales moving up and we are taking advantage of the cost structures we have put in place.
Finally as we turn to page 20, a quick summary of the major points in our 2010 guidance and then we will open things up for questions here. Market growth of about 5% grows off of about $600 million of volume.
We expect it to outgrow by about 50%. That is $300 million.
FOREX is about a 4% contribution and about $450 million. That leaves the operating EPS and fully diluted EPS numbers I covered earlier as well as the operating cash flow and free cash flow.
So our net is we think we finished the year very strong. We were really very pleased with the fourth quarter results both in terms of the income statement and the balance sheet.
We are really pleased to be looking at a year now of having market growth as we think the operating plan that stands behind the numbers we presented to you is one where we capture very attractive incremental as we begin to move back up the volume curve. With that, we will open things for questions.
William Hartman
Great. We would like to make sure we get the proper instructions.
Operator if you could proceed.
Operator
(Operator Instructions)
William Hartman
The first question comes from the line of Eli Lustgarten - Longbow Research.
Eli Lustgarten - Longbow Research
One clarification, the RIF expenses you took in the fourth quarter, the $26 million, that is all buried in the restructuring numbers, correct?
Alexander Cutler
That is correct.
Eli Lustgarten - Longbow Research
So that is over and above the numbers we have talked about. You commented about the electrical business, you gave us a negative 3% blended decline in North America and a 5% gain overseas.
I understand the margin decline in North America from 15.3% for the year to I think you recorded a 13% but does that include the $500 million for the stimulus business and do you think that is the trough of the business and we will have higher margin going forward? Secondly, the electrical business rest of world was an 8% margin.
That is sort of below the third quarter numbers below the fourth quarter numbers. Maybe it was a little bit light versus the fact that product revenue shown in the second half of the year?
Alexander Cutler
Let’s start with electrical Americas revenues. Yes it does include the stimulus and in our market forecast as well.
I think a way of thinking about the electrical Americas revenue is if you take the $3.4 million of volume and you take our 3% estimated weighted average market reduction and then add back in what we would expect to be about $150 million of outgrowth. Then there is some FOREX on top of that.
That probably gets you up to a reasonable range of about 3.5% range for volume this year.
Eli Lustgarten - Longbow Research
That is $500 million of stimulus business in there for this year or something less than that?
Alexander Cutler
We are still anticipating we will hit that $500 million. So that is built in and you get up to that kind of $3.5 million range.
Your second question as you go to rest of world, if you get through the kind of seasonality of the electrical business it always starts off weaker in the first quarter both here in the Americas and in terms of rest of the world. You are absolutely correct that our second half experience for our rest of world business has been a whole lot better than the first two quarters of last year.
What we would anticipate in the first half would be more in that kind of 7-10 range where the second half would be probably over the 10 range and that is where you get to the 9% average.
Eli Lustgarten - Longbow Research
That 13% decline in the electrical Americas business over the trough level and I assume it will be down to double digits in the first half before you build up again. Is that sort of the pattern we expect there?
Alexander Cutler
Normally your first quarter again is your weaker quarter and then you start to build and get up at the end of the year. We do anticipate when you look at previous non-residential construction downturns and of course there is always some danger in trying to measure any downturn versus another, but we tend to think these things go on over about a three year time period.
They tend to be kind of a total 30-35% trough. These kinds of numbers we are forecasting for the non-residential market in the Americas this year plus what happened over the last year and a half we think pretty well washes this thing out by the time we get to the end of 2010 and early 2011.
William Hartman
The next question comes from the line of David Raso - Isi Group.
David Raso - Isi Group
If you can indulge me for a second here I apologize. I must be doing the math wrong.
On page 17 when you speak of market improvement of 5% at a 35% incremental and you say it is worth $1.44. If I just do 5% on top of your 2009 revenue, give it a 35% margin even if I don’t even tax effective it is only $1.23.
Richard Fearon
Let me just clarify. The way this has been constructed is we have taken the extra profits for market improvement and we take it at the 2009 tax rate, which of course is a credit, so it actually increases it and then we put all the tax rate change in that tax rate change line.
You could do it the other way. There are two ways to do this chart.
That is how we put it together.
David Raso - Isi Group
On the truck margin, if I heard correctly you mentioned truck margins around 10% for 2010. You cued out higher growth for your domestic market where, correct me if I am wrong, but I was thinking it was a little better margins than international but you have the margins for the year lower than we just put up in the fourth quarter.
Can you help explain that?
Richard Fearon
One of the things you have to remember is in each of these segments the other [stations] we talked about, the $125 million, start to flow back in pieces right away in the first quarter. In a way of thinking of this when trying to think how much belongs to each segment is it is almost ratable according to volume.
I think if you go through that exercise you will see that $225 million over the estimated sales for this year comes up 1.5 to 2 points impact.
William Hartman
The next question comes from the line of Ann Duignan – JPMorgan.
Ann Duignan – JPMorgan
Could you help us understand…I know you said in the hydraulics business you took further RIF costs in the fourth quarter and yet you also said bookings were up sequentially 8% and December was huge. How do I reconcile both of those comments and specifically which business within hydraulics were up in December significantly?
Alexander Cutler
I think this is perhaps the market that is currently one of the most difficult to try to fix a point on exactly where it is going to end up here in 2010. It has been improving.
It has been improving not only here but quite dramatically in Asia. Not as much in Europe.
While we had the very big month I referenced, we sure hope we can see a couple of more months like that before we call it a trend. Having said that, our forecast now for this market to grow is quite different I would think on a mental outlook than we had even 3-4 months ago.
So it is getting better. We still felt it was prudent and we have adopted sort of a prudent planning level for volumes for this year to take out some additional troughs in the month of December.
So this will allow whether these markets come back more strongly or not to capitalize quite strongly. We have plenty of capacity so we are not concerned in this business if we end up being a little bit low on the 11% market forecast overall.
I would agree with you. A huge December in light of what we had seen the previous four months was somewhat of a surprise to us.
It was a good surprise and we saw it not only on the OEM side but we saw reasonable demand out of the distribution channel.
Ann Duignan – JPMorgan
So I know you mentioned geographically where things are better and maybe not so strong. What about mobile versus industrial?
I know you talked a little bit about distribution but a little bit more color on the mobile side particularly?
Alexander Cutler
We had commented last year on several occasions that what had happened is many of the longer term orders, orders that tend to be out beyond a couple of months, were pretty well disappeared. We have not really seen that to begin to fade in yet.
I think that is the activity one would expect to see after the market starts to get firmer and shorter deliverable timetables are available. So I would say most of this is still relatively short visibility that we have been seeing.
We are not seeing yet a [lump] on OEM side. I know there have been a couple of very prominent OEMs that have talked about their expectations there was a real wave of orders coming.
We have not yet seen that but we are still hopeful and we are ready when it does.
Ann Duignan – JPMorgan
A follow-up on truck. Could you just talk us through what you anticipate in terms of seasonality for the transmission business?
Alexander Cutler
Probably the biggest issue there is to try and understand the NAFTA heavy duty market and there we are in this range of 150 unit forecast for this year. We think the way it is going to materialize is probably the first quarter is stronger than the second quarter.
So something on the order of 35-36,000 in the first quarter dropping to something like 30-32 in the second quarter and then it begins to ramp into the 42-43 range in the third and fourth quarters. I think that is the biggest piece that will be different from a normal year for the truck business.
William Hartman
The next question comes from the line of Robert Wertheimer - Morgan Stanley.
Robert Wertheimer - Morgan Stanley
On aerospace after market you sounded a bit cautious. I wanted to ask if flat hours improve throughout the year one of those costs you cut last year is travel, would your revenues improve in synch with that or lag?
Then do you have a sense as to whether there has been a little of maintenance push to the edge of the maintenance window so when it does come back it will come back more sharply?
Alexander Cutler
I think you have a couple of different things working here. Let’s just talk about the OEM side first.
A number of programs, some of them fairly high profile, have either pushed out or had their 2010 volumes reduced. OEMs have been working obviously to not order any more materials for those programs.
So that was a negative on the supply chain that would have been on the shipment side coming out of the OEMs. Second, as the airlines have been under a lot of financial pressure they have been working hard to adopt methodologies that allow them to maintenance more quickly.
If you [exiting the gate] some of that maintenance is being done right when you are at the gate now versus the airplane being pulled off to the maintenance depot. We think there has been a lot of pressure all through the year on inventory levels which is one of the reasons why many of the suppliers’ revenues don’t look quite as wholesome as the OEM volumes.
As we go into 2010 the question now is will flight hours start to increase. You have more corporate travelers and we can start to see some improvement in the aftermarket.
We think you will but it will still be negative numbers from the fourth quarter so we have not seen that occur yet.
Robert Wertheimer - Morgan Stanley
Have you hit the trough…can you talk about costs one electrical sort of quarter-over-quarter and what you are looking at in 1Q?
Alexander Cutler
I think it varies. We have had a number of questions around the issue particularly the project business.
There is a big portion of our electrical Americas that is really there to a much greater degree than it is in our electrical rest of the world. A big piece of that is it is a negotiated business.
People who have been around the industry a long time have asked the question won’t you see some pricing pressure in that negotiated projects business. The non-residential market is going to go down.
That is our expectation. We are beginning to see it.
We will see some pressure on prices that will actually weaken margins. That softening is in our guidance of the 13% for 2010.
Robert Wertheimer - Morgan Stanley
Why is amortization up year-over-year?
Richard Fearon
As you go through and finalize all of your purchase price accounting for principally Moeller and PTec you made estimates and when your final numbers come in they are sometimes a bit higher than you had originally estimated. So that is the principal driver.
William Hartman
The next question comes from the line of Jeffrey Hammond - Keybanc Capital Markets.
Jeffrey Hammond - Keybanc Capital Markets
On the temporary costs coming out it seems like you are modeling it coming out right away. Maybe just remind me the big pieces in there and how they roll out.
What you are seeing in at least some of your businesses you still have furlough? Are you bringing your 401K back right away?
A little more color on how it flows back in.
Alexander Cutler
The lions share or the biggest piece of it really where our temporary time off without pay. One week every quarter for all employees in the company.
We have announced internally as well as to all our employees we expect to be able to cease that as of the first of the year and that is indeed what we have done. That is why the costs are rolling right back in the first quarter.
Everything else stacks up with that. That is why we say for modeling equally coming out right across the year.
Jeffrey Hammond - Keybanc Capital Markets
Can you talk about where you get your market outperformance by business and if there are any segments you see underperforming?
Alexander Cutler
If you look ahead through this year we think of that roughly $300 million we will have about 150 of it likely to occur in our electrical businesses. We think hydraulics is probably around 50, aerospace around 50 and truck around 50.
That is how you get to the 300. We don’t expect to have significant outperformance in the automotive business.
Part of that really has to do with how fast some of the Asian markets are growing. Obviously the fastest growing markets in the world and our penetration in those markets is not quite as high as it is in the traditional markets.
William Hartman
The next question comes from the line of [Terry Darling – Goldman Sachs].
[Terry Darling – Goldman Sachs]
FOREX assumptions. Euro/Dollar can you give us those numbers in the forecast please?
Richard Fearon
We forecast at least for the plan the Euro in the 1.45 to 1.50 range as obviously a little weaker than there right now but that is what is built into our expectation over the course of the year. The other important number or FOREX rate for us is the Real and we think that is likely to be on the 1.80 to 1.85 range.
[Terry Darling – Goldman Sachs]
A doubling of CapEx. You talk about obviously 2009 was an unusual year but can you talk about where that incremental CapEx is going to be headed across the businesses?
Alexander Cutler
If you look back we have counseled over time the best way to look at our CapEx is roughly 3% of sales in each year. We obviously this past year kept it down to $195 million.
We really cut back very significantly. The biggest portion of our CapEx year-over-year tends to be around new product development.
We have continued to spend strong in that. We have a lot of new product launches this year so it spreads evenly around the businesses because we are launching new product in virtually all.
I would call it more of a return to our more normal rate than a significant increase just over the last year. Having said that we will be cautious here early in the year.
So I think what you can plan on is we are likely to be lighter in the first quarter on CapEx than we will be for the rest of the year.
[Terry Darling – Goldman Sachs]
Coming back lastly to the price/cost balance. You talk about electrical.
Across the entire company can you give us what the assumption in 2010 is or what 2009 was and the assumption for 2010 calc rate there?
Alexander Cutler
I think how we are thinking about the cost/price relationship is it would be neutral X the issues we are talking about there on the electrical negotiated projects business. So our objective is really to not try to gain or lose off of that trade off.
William Hartman
The next question comes from the line of Robert Cornell - Barclays Capital.
Robert Cornell - Barclays Capital
Going back to the comments around visibility and non-res, when you talk about the visibility there how far out in 2010 do you think you have some visibility on the non-res side?
Alexander Cutler
We obviously carry a pretty hefty backlog into the year so that obviously gives us a good feel for what we have in the early months in terms of our ability to ship. That backlog has been a substantial source of help all through this year and it will be through next year as well.
We are looking at projects, we are seeing depending upon the type of project it could be 30 days or some of the really big ones we are quoting wouldn’t be shipping until the second half. I think we have pretty good visibility on the first half.
Robert Cornell - Barclays Capital
So what about inquiry levels? Has that come down?
Are they going up? Sometimes people talk about a pipeline even before you are into the specific quarter.
A final type of [pay]. How does that look in the non-res side?
Alexander Cutler
Obviously with our bookings having been down some 18% in the fourth quarter I think that is a good indication of what [tended] to happen. Down 20% in the third quarter.
So we have been seeing this fall off in not only bookings but also the quotation opportunities in this time period.
Robert Cornell - Barclays Capital
I am trying to think in terms of when you start to see buildings getting finished, the electrical packages tend to go in late. In this sort of non-res decline do you have an idea of when the trough will be and the shipment of electrical packages into the aggregate of the non-res space?
Alexander Cutler
I think that trough is likely to occur in the middle of the year. Middle to late year.
Again, I would guess we would see…and the hard piece here again is the one we have talked about which is the stimulus bill because many of those projects aren’t proceeding on a “normal” trough assumption that kind of lays over the top. We have been watching both quotations and bookings decline in the non-residential market really since early 2009 and the markets were weakening at the end of 2008.
By the end of the year we should be above the amount of time it normally takes to lead this off. We will go into next year with a smaller backlog than we entered this year just as a result of that.
So that quotation, the downturn in the quotation is normally followed by a 3-5 month lower shipment.
Robert Cornell - Barclays Capital
That actually leads into my next question. It sounds like these projects have slipped.
You are talking about $500 million and it looks to me like you said the 140 in orders but the balance is still in negotiations. What is out there that is causing these projects to slip if that is the right interpretation?
Alexander Cutler
I don’t know they are slipping. I get the sense of your question but remember that the money was actually authorized to be spent in 2010 and 2011, 87% of the non-tax dollars to be spent in those years.
So in some cases they have been able to award these contracts before hand and in some cases they can’t award them until they get into 2010 and 2011. What it does mean is there is a real crash on in activity in getting projects awarded and getting them into the economy.
Robert Cornell - Barclays Capital
In the roll forward in the reconciliation of the fourth quarter numbers you had $0.32 of improved performance. Can you go into what really constituted improved performance?
Maybe you can just explain what that $0.32 was made up of.
Alexander Cutler
I would say it is not volume because the volumes came in very much at the level we expected. I think that is a mix of better productivity and actually even better cost savings across the enterprise.
There is a little bit of those informal activities that are very hard to sum up. What I think you are seeing is the company is actually operating more profitably than we actually thought it would and that is the cumulative impact of the focus of employees all across the company.
Just really focused in on just the priorities and really changing the cost structure not just temporarily but more permanently.
Robert Cornell - Barclays Capital
Going back to the issue of margins in the electrical North America those things have been tracking 16-ish% last path. I understand the issue of costs coming back in.
I recognize the price of projects but as you pointed out it is not a big piece of the whole business. Why would we forecast margins down to 13% in 2010 when you got a 16% run rate in the second half of this year or last year?
Alexander Cutler
The average we are forecasting a full year average. The full year average for 2009 was 15.3%.
So we think the impact of the lower market plus the costs going back in and the price pressure that is what leads us to the 13%.
William Hartman
The next question comes from the line of Nigel Coe - Deutsche Bank Securities.
Nigel Coe - Deutsche Bank Securities
A lot of moving parts in the margin for 2010 and you gave us some good color on the costs coming back. What about RIFs in 2009?
Can you give us some color on how that broke out by segment please?
Alexander Cutler
We have not gone into the individual segments. I think if you go back earlier in the year the best I could give you is if you look earlier in the year at some of the large costs we have taken and if you look at what we did in December those changes were based on charges basically in electrical Americas, hydraulics, and aerospace.
I think that is the best guidance I can give you in terms of where to go segment by segment. Remember through the year we took some very big charges.
We did break those out by segment at that time.
Nigel Coe - Deutsche Bank Securities
Just to clarify the $82 million of pension settlements was that all included within the RIF expenses?
Richard Fearon
What we did, and we detailed it in the note on the left page of the release, there was a portion of the pension costs that had to do with lump sum settlements and the curtailments we did in the second quarter. All of that, those costs we did put into the RIF costs.
So the simple way to think about it because there are so many moving parts is to just look at what we believe the pension costs are going to be in 2010. That is the $33 million a quarter that Sandy quoted.
Nigel Coe - Deutsche Bank Securities
So the 52-whatever it was, that is in RIF but not the 83?
Richard Fearon
Let me get more detail. Let me have Bill address that offline.
Nigel Coe - Deutsche Bank Securities
Just to help me understand the outgrowth in 4Q I think you under grew in aerospace and auto. Can you just go through where you are in the market?
Is it just US versus the rest of the world? I just want to understand that.
Alexander Cutler
In aerospace I did comment a little bit earlier on the inventory initiatives and I really think that is the big issue. The market is down about 10%...the [inaudible] by about 6%.
As you know the aerospace industry is a very long lead time industry. So we actually think what has happened here is much more of a timing issue of suppliers delivering to OEMs that we tend to measure the market by OEM shipments.
So we think this is really a timing mismatch issue there. Your second question was on the…
Nigel Coe - Deutsche Bank Securities
It sounds like it is end market shipments versus your shipments to the OEMs?
Alexander Cutler
Yes.
William Hartman
The next question comes from the line of [Tim Thane – No Company Listed].
[Tim Thane – No Company Listed]
Can you comment at all in terms of the market growth in the electrical Americas? In the first half of the year it was running high single, low double digits and then that basically went away in the back half of the year.
Despite that you did put up as you commented some pretty sold margin performance. Is your pricing strategy put into that at all in terms of focusing on price over chasing volume or would you say that is attributed more to a function of mix or a specific product?
Alexander Cutler
I wouldn’t point to a specific pricing strategy per se. I think we have been pretty consistent with what we are doing in the marketplace.
You are getting fairly dramatic changes as you alluded to as the non-res is coming down pretty fast and that is a big segment for us. We think it is much more along those lines.
[Tim Thane – No Company Listed]
In terms of the components of the operating cash flow guidance. You mentioned the pension expense and then the contribution.
Anything else in terms of items I guess that works to a balance between that income and higher D&A? Is working capital…I take it that is going to be a use of cash in 2010.
Is that correct?
Richard Fearon
Yes. The way to think about operating cash flow for next year, you of course have net income.
You are going to have D&A which is around $620 million and you are going to have working capital, a small build of probably about $200 million to reflect the growth in the sales.
[Tim Thane – No Company Listed]
Pension contribution of $300 million is that pre-tax or after tax?
Richard Fearon
That will be pre-tax.
Alexander Cutler
You just reminded me that the 300 is what we put into the US plan to there will be about another 100 that goes into the international plans over the course of the year. So in total the dollars we are putting in pension will be about $400 million.
William Hartman
The next question comes from the line of Christopher Glynn - Oppenheimer & Co.
Christopher Glynn - Oppenheimer & Co.
I wonder if you can talk in terms of book to bill and related to a couple of the segments, automotive and hydraulics, and how you see in the first half versus the second half for those two segments?
Alexander Cutler
It is not a convention we use internally here. We used to with our semiconductor business but it is really not as relevant an issue for us at this point.
I think we could give you a view on trends. On hydraulics clearly we have seen a big fourth quarter we are very pleased with.
We still think at this point that the markets came down from 35% for the full year this last year and it has a way to rebuild. I think you will see bookings and shipments parallel fairly closely as we move up.
The one way you are likely to see a bigger disconnect frankly is going to be in the heavy duty truck market. Typically as people start to put in orders for a rebuilding year they tend to put them in towards the end of the year.
So they put the orders in now for shipment towards the end of the year. So we would expect to see orders start to turn up in that second quarter of this year.
They probably won’t be more orders in the second quarter. They are more likely to be orders towards the back end of the year.
Automotive is not much of a disconnect for us. We tend to get orders in and ship quite quickly.
That is still very much the timing [inaudible.] I would really point to the truck market.
Then aerospace is the other one where we tend to have very long lead times in the marketplace and we tend to get multiple months of forward visibility in that business. I don’t think that is going to change a great deal for us.
Of course we have a fairly modest market change forecast for the aerospace business in 2010.
William Hartman
The next question comes from the line of Jamie Cook - Credit Suisse.
Jamie Cook - Credit Suisse
A follow-up question to Ann’s question on the hydraulic business and the bookings in December. It sounds like while they were fantastic you are modeling for a more conservative scenario which is probably prudent but I guess specifically it sounds like there could be room on the US side.
Which end markets specifically when you talk to your customers do you hear incrementally more positive than…is it construction? Is it industrial?
If you could just give more color there. Then your balance sheet is in good condition.
Cash flow has been shored up. Are you in a position then where you feel comfortable enough where you could consider looking at acquisitions again or dividend increases?
That was an area last quarter it sounded like you were still in balance sheet preservation mode.
Alexander Cutler
On the issue of the bookings we are very pleased with the bookings and we think an 11% market increase is frankly a great increase. We would have loved to see that in any single quarter last year.
We don’t think we have an ultimately conservative forecast out there but a 10-11% increase we think is very good momentum and obviously is not of the size of the month of December. We may prove to be a little conservative in this area but again we really think that it is best for us to kind of plan at the 11% side.
We have a little bigger exposure on the mobile side than we do on the industrial side. We have not seen distributors rebuilding inventories yet.
We have had several settings and in general what we are seeing is when a distributor sells more items they buy more items. They are not buying yet to really build inventory.
Our best estimation is that we are not going to see a lot of the inventory rebuild until the general more economy plays their own balance sheet and are careful in that respect. We clearly have the capacity to be able to support them.
We did see some OEM increases obviously here in December to get that kind of booking increase but again we have not seen the huge numbers that many people talked about might be coming in the way of suppliers this fall. They may well be coming.
We just haven’t seen them yet. We are pretty bullish with a 10-11% market increase that this will be a much improved year for hydraulics.
We would be delighted if it turns out to be even stronger than that.
Jamie Cook - Credit Suisse
On mobile specifically is it construction? Can you give more granularity within the mobile side?
Alexander Cutler
I would say it is fairly balanced. I would say it is one of the players this morning announced a little stronger activity than many people expected.
It is just early for us. We just haven’t seen a couple of months of orders back to back.
I think that is perhaps why we are a little bit more cautious. The good news is we didn’t have a flat month of December.
We had a very big month of December. Now what we have to see is does it really lay in January, February and March and it would be terrific if it does.
Jamie Cook - Credit Suisse
You haven’t seen anything or you don’t have January numbers?
Alexander Cutler
No.
Jamie Cook - Credit Suisse
Cash, acquisitions or dividends?
Alexander Cutler
On dividend, we did not cut our dividend last year and a lot of people did. We did not and we felt our strategy and our business model was in place and we would see profits and cash flow come back just as they have.
So typically this has been a subject that our board has wanted to have very much in line with our forward look of earnings. Obviously our earnings are getting better this year.
The board will revisit that subject as we go through the year. On the acquisition side we have not stopped any of our courting activities.
We made a comment on that in a number of public forums. Clearly our balance sheet is much better than it was.
Our confidence of being able to contribute the $300 million here in January to the pension plan is another indication of that. I would say we are going from a period in 2009 of really being on the sidelines in terms of the acquisition markets to one now where we are looking much more anxiously or enthusiastically at the opportunities that are out there.
William Hartman
The next question comes from the line of Mark Koznarek - Cleveland Research Company.
Mark Koznarek - Cleveland Research Company
Just a little detail here for currency you are expecting to contribute $0.31 next year. What was the impact to earnings this year?
Richard Fearon
Let me just tell you, I have right at hand here the fourth quarter was $9 million for the fourth quarter. The fourth quarter was a positive.
The only quarter that was positive. For the full year it was minus $58 million.
Mark Koznarek - Cleveland Research Company
That is pre-tax operating income?
Richard Fearon
Yes.
Mark Koznarek - Cleveland Research Company
I have a question on the hybrid outlook. A few years back you gave kind of a rolling schedule.
I think you were expecting to do 30 million and then 50 million and then 70 million in sequential years. Are we within that range exiting 2009 and what is sort of the growth rate expected for 2010?
Alexander Cutler
Your numbers are right in terms of when we laid out the outlook and we were actually hoping that it would go from 50 to 150. We now think the 100 is probably an activity more in line for the year of 2010.
The 150 is probably more of a 2011 number.
Mark Koznarek - Cleveland Research Company
150 was roughly what you did this past year?
Alexander Cutler
A little better than that.
William Hartman
The next question comes from the line of Andrew Casey - Wells Fargo Securities.
Andrew Casey - Wells Fargo Securities
A few questions, more detailed to the higher level ones than answered. In truck how does your aftermarket business trend during the quarter?
Has that seen year-over-year improvement yet?
Alexander Cutler
Not yet. Not at this point.
Andrew Casey - Wells Fargo Securities
Per the comment for potential order pickup in the second quarter of 2010, are you seeing any multi-year large orders being negotiated for the industry?
Alexander Cutler
I am personally not aware of any at this point. They may be going on I am just not personally aware of them.
Andrew Casey - Wells Fargo Securities
Hydraulics, getting back to the order surge you talked about in December. Was there any pricing around that specifically on the distributor side in December?
Or if you did any pricing was that more effective in January?
Alexander Cutler
No, we don’t believe the surge was caused by price protection, price avoidance or any of those types of activities. This was kind of our best understanding is it is real demand as opposed to some sort of…
Andrew Casey - Wells Fargo Securities
Pulling up to the overall on the price discipline that seems to have been existing through the downturn across most markets would you expect that to hold now that most markets have stabilized or are you seeing some people get more aggressive to fill out their capacity a little bit more quickly?
Alexander Cutler
I think that story may prove to be a little different in each of the segments. As I mentioned in the non-res that is where we think that the large project business is likely to be some pressure.
I think the backdrop to all of this is continued commodity movement. We continue to see a number of important industrial metals moving already.
I think a good way to think about that is it is being driven by the economy expanding more quickly around the world and that obviously is China. In spite of the fact we have seen some policy moves made in China to try to slow down the acceleration of their economy we still expect to see the Chinese economy growing in the order of 10% as we go into this next year.
That is going to continue to put pressure on the metals. We just think you will not be likely to be cutting price right in the metal deflation [timeframe].
William Hartman
The next question comes from the line of Ted Wheeler – [Buckingham Research Group].
Ted Wheeler – [Buckingham Research Group]
I wanted to circle back on the margins in both auto and truck as you laid them out. I guess we add 200 basis points or so for RIF cost pickup for the year.
It just seems like a 7% adjusted and 12% adjusted on auto and truck margins are a little bit behind where I would have thought they would go given your revenue outlook. Is there something else?
Is there pricing pressure or am I just not quite getting it here?
Alexander Cutler
I want to well understand the question. As you come off the fourth quarter number and those are great numbers for the fourth quarter for those segments.
As we obviously look at the average for the year the truck numbers are in the high 2’s. Automotive was actually a loss for the year.
So there are some different seasonal factors to how this thing goes through the year as well. That is where we think the roughly 10% for the truck and roughly 5% for auto are the right numbers.
We may prove to be a little conservative. What we have found here obviously in the fourth quarter is that the tremendous focus upon cost reduction efficiency across the company actually exceeded our own expectations obviously with the outperformance we had in the fourth quarter.
So we have been pleasantly surprised on this issue across the company. That opportunity still exists.
This is our best thinking as we go through the individual numbers and rack up the plusses and minuses.
Ted Wheeler – [Buckingham Research Group]
Coming out of 2007 and some down years you have been holding margins pretty well and you have taken a lot of costs out since particularly in truck. It just doesn’t feel that…that was a little conservative the way I see it.
Alexander Cutler
I think the way to think about it is if we are still operating at the truck levels that are down 16% in volume in 2008 and down 12% in 2007. On the automotive side we will still be operating at volumes that are down by 28% from 2008 and 37% from 2007 levels.
So while the volumes are coming back there are a number of these segments still at volume levels way below what we have seen historically. That is why I think we are all having a little bit of a challenge thinking through the margin numbers.
The margin numbers seem to be following the business. The business is getting better but even as they are getting better it will still be down 37% from 2007 levels in automotive and that is a very long way.
William Hartman
The next question comes from the line of Dan Dowd – Sanford Bernstein.
Dan Dowd – Sanford Bernstein
Let me address two separate issues. One is on the electrical business.
One of the things you talked about over the last year is that there is really pretty limited management capacity in the electrical business given the challenges on the integration of that side. Presumably that is roughly coming to an end.
First of all is that correct? Secondly, where do you see electrical business strategically in the 2010 and 2011 timeframe?
Is it really still just a consolidation or are there other opportunities you think are going to be important over the next several years?
Alexander Cutler
I think on the issue and your memory is right that we were obviously focused on integrating both the Phoenixtec and the Moeller acquisitions. We really wanted to be sure we did that right and we are confident we have.
I think you will see that again this year with another $0.30 of earnings accretion coming from that integration activity. We feel very comfortable we are in a position now where that business has pretty well digested those and the right opportunity became available we could add that to those sectors.
In terms of the capacity there are a number of interest areas in terms of where we might add to the business. I am not going to detail these because we are not the only people looking at them but there are a number of areas that we see quite exciting if you think about what is really going on now is how do you change the business from a business that simply can connect the individual components to now really start to get towards the concepts that are behind the smart grid of building efficiency.
That obviously talks about being able to capitalize of the very strong component capability and service capability we have and add a couple of additional pieces to it. So there are really intriguing areas of the business we want to continue to expand into.
Dan Dowd – Sanford Bernstein
Would you say they are prioritized above expansion in other pieces of the business or not?
Alexander Cutler
No, I wouldn’t say that. Our focus is still electrical, hydraulics and aerospace on external and the acquisition dollars.
We continue to spend aggressively through 2009 and we will through 2010 in a series of product development initiatives in all of our businesses. Again, every one of them is focused on power management and that is really where the action is today.
Everyone is trying to figure out how to use less energy and when they use energy to be absolutely sure it is being done safely. Those are the things that lead to a [cross] sheet whether on a boat, plane, ship, airplane, car or building.
So all our segments are very much involved in the power management process.
Dan Dowd – Sanford Bernstein
How much more improvement in your balance sheet would you believe you need to have before the ratings institute might upgrade you?
Richard Fearon
It is very hard to speculate on such things. What we have said and believe is that given the significant changes in the world capital markets in the last 18 months that we really should be looking at managing our net debt to total capital more in this mid 20’s range than in the mid 30’s where we had been 2-3 years ago.
So we are now about in the right range. We ended at 28.4% at the end of the year.
We will make further improvements or expect further improvements during 2010. In terms of rating agencies they tend to take a very long view of things.
So it is hard to know when they would be see their way to making a ratings change.
William Hartman
I would like to apologize before this next question. There are several people and we have basically run out of time.
Rob McCarthy is up next. We will answer your question Rob and then we are going to have to part.
Those of you we haven’t answered yet please call me right away.
Rob McCarthy – No Company Listed
Can I ask about the incremental RIF expense that you recognized in the fourth quarter. Is that simply an acceleration of expenses and actions you would have been talking to us about today that would be occurring in 2010 and we simply took advantage of the stronger than expected performance in the fourth quarter to book?
Or did you see something change in one or more later cycle businesses late in the year that made you look for places to take more costs out?
Alexander Cutler
I would say our general view of the way that 2010 is shaping up in terms of markets did not change. We felt we had the management capacity to really be taking on additional programs or to situate the company more strongly so it just felt like the right time to do that.
As you know, what we think is very significant of the fourth quarter is despite of taking those actions, roughly $24 million of higher expense, we still had a very strong quarter. So I think that just speaks again to the strength of the underlying performance.
Rob McCarthy – No Company Listed
So for example no meaningful change in your outlook for non-res?
Alexander Cutler
No. It is not the result of our peering into the next year and seeing the markets falling apart.
Rob McCarthy – No Company Listed
The interesting comment made earlier about how difficult it is to predict where the hydraulics market might go this current year. I wonder if you could just take 60 seconds and talk briefly about how you approach that this year given the difficulty and I am wondering within that whether you could comment on what you are thinking about potential for a pre-buy in the off-highway equipment industry and helping that business later in the year?
Alexander Cutler
If you think about the hydraulics market roughly 50% of it is coming out of stationary equipment or industrial equipment. That tends to be driven by capital spending and I think as we have all seen there has been a real gutting of capital spending on a global basis during 2009.
There will be a resurgence in 2010. The question is does it come all the way back to 2008 levels or does it work its way back.
We think a lot of that CapEx spending tends to be a middle to late portion of the year in terms of a significant comeback as corporations are going to want to watch their profits improve and capital spending tends to be a function of improved cash flow. So that kind of forms our thinking on that side.
As you get over to the mobile side ag and construction clearly the construction market is very tough over the next couple of years. There is quite a wide spectrum of forecasts on how fast that market will come back and will the low end come back more quickly than the high end and will mining continue to be strong.
Lots of different views on that. On the ag market clearly being led up by what is happening in Brazil where again we are seeing a pretty strong step up.
Again, quite a variety of forecasts here in North America and Europe for the ag market. Then with the NAFTA heavy duty truck markets we saw a pretty strong resurgence this year.
So a lot of different variables in this. What we do know about the hydraulic market is when it turns it tends to come back fairly rapidly.
People tend to always feel too good when it is really high and too bad when it is really low. We think we are at one of those turning spots.
Perhaps December will be that spot that shows it is really starting to move. It is just a little too early to call.
William Hartman
Again we thank everyone for your attention. As I said, I will be available to take additional questions all day and we apologize again for some of you who we couldn’t get to.
Thank you so much.
Operator
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference.
You may now disconnect.