Jul 19, 2012
Executives
Glen Ponczak Stephen A. Roell - Chairman, Chief Executive Officer, President and Chairman of Executive Committee R.
Bruce McDonald - Chief Financial Officer and Executive Vice President
Analysts
Christopher J. Ceraso - Crédit Suisse AG, Research Division Brian Arthur Johnson - Barclays Capital, Research Division Ravi Shanker - Morgan Stanley, Research Division H.
Peter Nesvold - Jefferies & Company, Inc., Research Division Patrick Nolan - Deutsche Bank AG, Research Division Richard M. Kwas - Wells Fargo Securities, LLC, Research Division Sanjay Shrestha - Lazard Capital Markets LLC, Research Division Joseph Spak - RBC Capital Markets, LLC, Research Division
Operator
Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded.
If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Vice President, Glen Ponczak.
Sir, you may begin.
Glen Ponczak
Thank you, Pat. Well, good morning, everyone and thank you for joining us.
Before we begin in the call today, I'd like to remind you that Johnson Controls will make forward-looking statements in this presentation pertaining to its financial results for fiscal 2012 and beyond that are based on preliminary data and are subject to risks and uncertainties. All statements other than statements of historical fact are statements that are or could be deemed forward-looking statements and include terms such as outlook, expectations, estimates and forecasts.
For those statements, the company cautions that numerous important factors such as automotive vehicle production levels, mix and schedules, energy and commodity prices, the strength of the U.S. or other economies, currency exchange rates, cancellation of or changes to commercial contracts, changes in timing or levels of investments in commercial buildings, as well as other factors discussed in Item 1A of Part 1 of the company's most recent Form 10-K filing, which was filed November 22, 2011, could affect the company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the company.
In a few moments, I'll turn it over to Chairman and Chief Executive Officer, Steve Roell, who will give us an overview of the quarter and some of the market conditions. After that, Bruce McDonald, Executive Vice President and Chief Financial Officer, will do a more in-depth review of the business results and provide an overview of the financial performance in the quarter.
That will be followed by questions and answers, and we will end at the top of the hour. And with that, I'll turn it over to Steve.
Stephen A. Roell
Okay. Well, thank you, Glen, and good morning, and thank you for joining us on the call.
This morning, in our third fiscal quarter results, we reported that earnings were up 50%, record levels for the period. And I just want to start by expressing my appreciation to the JCI employees, that listen to this broadcast, for their contributions to our results.
But I also want to quickly acknowledge that we fell short of the guidance that we provided on the call just 3 months ago, and we'll go through some of the details that led to that. But during the quarter, there were many times where we were confident in our ability to achieve that 20% growth that we projected.
But ultimately, the slowdown in the European market and the escalation of lead cost in our Power Solutions business were just too much to overcome. Now, I guess, I would just as a comment here tell you that, that the shortfall from the guidance we provided to you, we could easily explain just by -- simply by the Power Solutions business shortfall in lead.
And I'll explain to you what that is in just a second. If we look at the numbers, in terms of the results, sales of $10.6 billion were slightly higher than last year.
If we adjust for foreign exchange, our growth was 7% year-over-year. As the slide indicates the impact from a standpoint of pure dollars was about $515 million just due to FX.
Our segment income increased 14% to $615 million. That yielded net income of $466 million, a 15% increase.
These are all non-GAAP numbers. We think these are the more accurate numbers to look at.
EPS was $0.64 per share. You can see there how they compared to the $0.56 a year ago.
Now let me turn to the market conditions that are impacting our business and how they're likely to affect our upcoming quarter. In general, I guess, I make the statement that we've seen demand slow across several of our industries and geographic markets.
Clearly, the one exception has been the North American auto market, where production was up 27% in the third quarter. But I think even that good news is tempered by the most recent outlook for the current quarter, our fourth fiscal quarter where production growth is expected to slow to about 4%.
The European market, auto market in the quarter continued to soften with industry sales declining 5%. And that pressure, as you can imagine, is expected to continue.
And turning to the Building side, nonresidential building markets are not recovering at the rate that we had originally anticipated. And we've had to align our spending and cost structure accordingly.
I think we've talked about that throughout the fiscal year. I think Dave and his team have done a great job of doing that, as evidenced by their improvement this quarter.
But just turning back to the industry, domestic growth in the first 9 months for us has really been concentrated in state, local and federal government sectors, as well as the commercial buildings, airports and life sciences. But the institutional sector of education and healthcare, where we have a very strong presence, has declined.
And I know some of you that follow the building market are probably familiar with the Dodge Report, and its projected that the institutional market will contract 10% in calendar 2012. Again, for those of you who also follow that sector recognize that the Architectural Billings Index has stagnated the last 3 months after being up 5 months prior to that.
International building markets, we continue to see good growth in Asia and the Middle East. The Western Europe remains depressed, particularly in Southern Europe, and I think you all understand what's happening there.
I want to go back down and explain to you what we saw at -- in the Power Solutions business relative to lead. We normally don't talk about lead.
We haven't had to talk about junk batteries again for a long time. We saw something that was very uncharacteristic; we haven't experienced in some time, and that is just a lack of retail activity at the aftermarket where we are dependent upon collecting what we call junk batteries or cores.
Now we need that -- those cores and junk to be able to recycle those to produce new batteries and provide those to our tollers and also to supply our smelters. That demand, or I should say that the lack of retail, which has been really uncharacteristic across-the-board in North America has resulted in a shortage of cores.
We haven't seen that before. And as a result, we had to go through and actually pay up to get that -- to get the cores we needed to meet our tolling arrangements, as well as to start up our smelter operations.
I'm going to tell you that year-over-year, that impact is roughly $40 million. So if you dollar out -- put a dollar or a percent share on that, that will explain almost the entire shortfall that we didn't expect coming into the period.
It's a timing issue. We know the cores will come.
We know that as soon as retail picks back up, we'll see that in the fall and winter, so we expect that not to continue -- extend beyond the current quarter. We are seeing it continue in the month of July and that’s part of our concern about the fourth quarter forecast.
But I wanted to just highlight that, that issue of buying cores and at the prices we had to pay, is a $40 million decline in earnings year-over-year in that segment. And that really was not expected in our forecast when we provided you the guidance in -- back in April.
But there certainly are a number of our businesses that are performing exceptionally well. Most notably were the 5 business categories that comprise our Building Efficiency segment, where each of them achieved double-digit earning increases.
In total, that segment, as you saw, was up -- income was up 28%. We believe we're gaining share by virtue of the backlog growth that we saw in the orders that we’ve had this quarter.
I'm also encouraged by the bidding activity. We talk oftentimes about our pipeline, and I continue to see that pipeline improving, which may be contrary to what you would expect.
And I even see it improving in some of the institutional sectors that we monitor. I also expect Building Efficiency to show margin improvement again in the fourth quarter.
We've guided that all year that we said it would be in second half. I think you saw that happen in a big way in Q3.
Contrary to what you're hearing from some other markets and industries regarding China, I would have to tell you that China is performing -- our markets there are performing very consistent with what we expected as we are coming in the fiscal year. I'm talking primarily around Building Efficiency and Automotive Experience.
Bruce will highlight some of the increases we had. But at this point in time, we see the China market performing and holding up well for us.
In the near term, higher temperatures are driving HVAC service demand; that did not happen in June. We're hoping to see some of that in July and August.
We're seeing the shortening battery life, certainty from the higher temps, which will bode well for us in the upcoming year. And certainly, it's supporting our growth in the residential air conditioning markets, which again, Bruce will highlight for you.
In recognition of some of the market conditions, we opted to take a $52 million restructuring charge in Q3, primarily to reduce our staffing in Europe and building efficiency in automotive. We're currently planning to take further action in Q4, and again, a lot of that or a high proportion of it is tied to what we see in the European market softening in the view that, that market is going to remain soft for the midterm.
And certainly, we faced in -- it has basically caused us in Q4 to lower earnings guidance to the 0 to 5% growth. The factors that prompted us to change our projections come -- from the previous guidance are as follows: First would be the weaker battery demand early in the quarter and the higher lead cost.
I mentioned to you that what we saw in Q3, we've seen continue in the month of July. We're seeing increasing weakness in our European businesses.
It's difficult to get improvement in the automotive metals business in Q4 because of the shutdown period and lower production levels. And in general, I think we're just to the point where we're seeing things like commercial negotiations extend longer in automotive.
So it's just a number of factors and we looked at those, and said it's time for us just to go back and let's be a little more conservative and if they come fine, but we're having difficulty forecasting the timing of some of these issues. And so we thought it best just to lower the guidance, and we'll see.
But I do want to come back and also highlight our midterm and long-term views. The next slide really covers that.
I want to just go through that real quickly with you. The things we've talked about in the past that drive our stock and drive our performance are still intact.
We have a strong position in SLI batteries; we have the ability to drive higher margins. We’ve talked about the vertical integration investments we're making, and again, those are all on track, and we believe they'll be -- they'll bode well for us in 2013 and '14.
Investments we're making in AGM battery technology to support our customer demand for Start-Stop vehicles continues to gain momentum. We're well positioned and market leaders in all the emerging -- in the emerging markets in all 3 of our businesses.
Higher automotive margins via our seating metals strategy. We believe that, that's still a core strategy and key to us as we drive to a core product portfolio and standardization.
And finally, Building Efficiency with its market share gains through it's -- our ability to help our customers improve energy efficiency and reduce greenhouse gas footprints. So those are again the factors we've talked to you about that are the core to Johnson Controls and our long-term strategy and value, and we believe those are all intact.
We just have to deal with some of the headwinds in the near term. So with that, I want to have Bruce go through and highlight some of the third quarter by-business results.
Bruce?
R. Bruce McDonald
Okay. Thanks, Steve.
Well, good morning. As you'll note in our press release, we did have a couple of nonoperational items this year and last year and I'll maybe just talk on those.
So for this year, they netted to a charge of about $0.03. And as Steve indicated in his comments, some $52 million of restructuring charges.
And we also had some nonrecurring tax benefits of $22 million, which reflect valuation allowance releases in certain foreign jurisdictions associated with improved levels of profitability. In the year-ago quarter, you'll recall we had a $0.04 charge associated with the acquisition of Keiper.
And so as I really talk through the 3 business segment here, I'm going to exclude these items from my comments. So starting off with Building Efficiency.
I'd say, overall, superb quarter here, especially when we look at the state of the major markets that they participate in. Sales were down 2%.
If you back out foreign exchange, we are actually up about 1%. We saw good revenue growth in both GWS, which was up 7% in Asia, up 7%.
Again, those numbers are without foreign exchange, although this was largely offset with softness in Latin America, Europe and the Middle East. In aggregate, if you look at our North American businesses, I mean, I'm talking about our systems and services business that focus on the nonresidential markets, we were down about 2% in the quarter.
Residential was a bright spot for us. That's one of our higher-margin businesses.
And you can see on our slide, we've talked about the fact that our revenue was up 24%. On a unit shipments basis, we're up about 20%.
I guess, what I would note, if you look at the mix within our residential business, what you're seeing is the sales of the lower efficiency-type products are doing exceptionally well. If you look at the higher end, the energy efficiency furnaces and air conditioners, well, those volumes are comparable to year-ago levels.
So really seeing, I guess, a trading down phenomenon in the residential space. But nonetheless, it's good to see the volume start to finally improve after several years of sluggish demand there.
Look at the segment income, up 28% at $264 million. If you look at our margins here, we're up about 160 basis points to 6.9%.
And as Steve mentioned in his comments, all 5 of the business segments within Building Efficiency reported double-digit margin improvement with GWS and North America kind of leading the way here, up 86% and 49%, respectively. If you really look at what the drivers were there, we saw better labor utilization of our service workforce.
We started to see the benefits of some of the technology investments that we've made in our North America services business. And also several of the restructuring initiatives that we've taken over the last few quarters, a dividend for us in the third quarter here.
Turning to Power Solutions. We had a tough quarter, as Steve mentioned in his remarks, really reflecting the weak demand outlook, particularly here in North America.
If we looked at our point-of-sale data from our customers, what we're seeing, our sales to our customers are down 2% or 3%. What we're seeing at point-of-sale, unfortunately, here is volumes being down 8% to 10%, particularly in May and June and as we start into July here.
So we've got a little bit of an inventory buildup in the channel, the aftermarket retail channels here in North America. And that, combined with the lead, are 2 factors that are going to carry over here in the fourth quarter.
So we're hoping that, that inventory bulge kind of blows through here in the fourth quarter. The lead issue is a one-quarter phenomena, so we're hoping we get back into the Q1 of 2013 more in balance here.
If you look at the revenues, down 2% -- or sorry, up 2%, excluding foreign currency. Unit shipments were -- had a good performance in OE side, North America really leading the way, but in aggregate, up 4%; aftermarket, up just 2%.
Looking at the segment income, down 9%. There’s where we really saw the impact of the spent cores in terms of the impact on our results.
It has kind of exasperated for us here as we start up the launch of our South Carolina smelter in this quarter. I guess, I'd just remind folks that in Power Solutions, we're on LIFO basis.
So we have to think about the startup of the facility. We have to buy roughly one million units at the current prevailing market rates, which are extremely high.
Unfortunately, when we bookkeep that, we put them into inventory at our long-ago historic cost. And that really drives a charge in the quarter.
And as Steve said, if you look at the second -- third quarter here, the impact is about $0.05 a share just from this lead issue. Turning to Automotive Experience.
We did deliver a solid quarter here, although I would acknowledge it was below our expectations, really due to the deteriorations that we're starting to see in the European market and the weaker euro. Look at our sales increases by territory.
We saw sales up overall, 7%, 13% if you sort of back out foreign currency. And there's where you really see the impact of our backlog flowing through the revenue line.
If you look at it geographically, in North America, we are up 31% against a 27% industry increase. If you'll recall, that number seems very high.
If you really look behind the details, what you see is the Japanese customers really bouncing back from the depressed levels associated with the tsunami last year. Europe, if we take out currency, we were flat versus a 5% lower industry production level.
And in Asia, we're up 24%. And as Steve said in his comments, we were pleased to see our results in China do well for us.
For automotive, if you look at our sales, which are primarily through nonconsolidated joint ventures, we're up 24% to $1.2 billion. And you kind of need to compare that against passenger car volume, which in the quarter we’re up about 13%.
So again, good strong outperformance in all 3 of our geographic territories versus the market. Turning to segment income.
We're up about 18% to $202 million. We did benefit from higher volumes in North America and Asia.
But this was partially offset by Europe where we swung back into a loss position in the quarter. If you look at the issues that we're facing in Europe, we did start to see some of the impacts of lower volumes.
If you listened in to our earlier calls, we've largely been insulated from that because most the deterioration tended to be in the French and Italian markets where we would say we have been underexposed. But now we're seeing more broad-based reductions in production, and that's starting to impact us like the rest of the sector here.
We also would acknowledge that within our European numbers, we roll off South America, largely because that market is dominated by European OEs. And that business has turned from a profitable position in the year-ago period to a loss-making position.
That swing for us on a quarterly basis was worth $0.02 or $0.03. And so that's a market that we’re going to need to focus on rightsizing.
And we would acknowledge that we're having a little bit -- we're trailing behind in terms of the operational improvements, the pace of them. Those are metals and interiors businesses in Europe.
Nonetheless, if you look at our margins, we did manage to expand margins in the quarter by 110 basis points. And you can see on the slide here, I've kind of indicated what the return on sales was by geography.
Turning over to Slide 11 and focusing on the income statement here. As we sort of referred to, sales were up 2% to back out the impact of the euro, which has gone from $1.44 last year to $1.28 this year.
Our top line improvement would have been a very respectable 7%. You can see our gross profit, a little bit of pressure versus last year, down 50 basis points.
Here, we're really seeing the benefit of higher revenues in our cost reduction initiatives, but it's offset by our business mix. And by that, I mean, automotive being a bigger piece of the pie this year versus last year.
Auto has a lower gross margin in our 2 businesses. Well, that's a bit of a headwind here.
This is where we also see the impact of the lead input cost flowing through and some of the launch difficulties that we're having in Europe. SG&A, we were pleased to see a 60 -- or 90 basis point reduction in our SG&A expenses, down to 9.4% of revenue.
This decrease really represents the focus that we've had on rightsizing our cost structure in light of the current market realities. And if you really look at the SG&A expenses by business unit, really, Building Efficiency is where we're seeing the most traction, and we've gotten the benefit of the recent restructuring initiatives.
We also point out that we did go into this year with a plan to increase SG&A spending in some of our -- to support some of our key growth initiatives. And that would be areas like innovation, our Emerging Market infrastructure, new product development.
Those initiatives we're protecting, and we are dialing some of those back. But if you look at those types of things, we are spending more money on a year-over-year basis than we did in the prior year.
In terms of equity income, a strong increase, 25% to $70 million. This is really due to 2 things.
One, the fact that we've consolidated our hybrid joint venture. That's a business of losses in the prior year, that's now fully consolidated.
It doesn't flow through this line. The other factor here would be improvements in profitability in our automotive joint ventures.
And so if you look at our segment margins here at $615 million -- or segment income, I'm sorry, we saw a nice segment margin improvement of 60 basis points to 5.8% versus the 5.2% last year. Turning to Slide 12.
If you look at financing charges, up about $16 million, very comparable to sort of the year-over-year increases we've been seeing the other few quarters of this year. The higher level of interest expense really associated with higher borrowings to finance the 2011 acquisitions that we made and higher levels of capital expenditures.
In the quarter, you can see our underlying tax rate was about 16% versus about 18.5% last year. That reduction really is a fact -- is attributed to the fact that we have a revised mix of where our income is flowing on a geographic basis.
So we -- generally, you could sort of take away here. We're making more money in lower tax jurisdictions and less money in higher tax jurisdictions, most notably the U.S.
where we've been -- where we're taking a hit on the battery and the lead side. If you look at the income attributable to noncontrolling shareholders, in the past, this has been a bigger year-over-year charge.
What I'd point out here is we, in the quarter, we did purchase substantially all of our minority partners in Plastech for $120 million. That is going to bring us about an annual benefit of $20 million on a run rate basis, so we got about $5 million improvement here in the quarter associated with that buyout.
Then lastly, in terms of our diluted earnings per share, it came in at $0.64, which is an improvement of 14% versus last year. Let me just make a few comments now on the balance sheet.
We're pleased to see our cash provided from operations, $619 million, that was a 70% improvement over last year. You can see CapEx came in at 22% higher at $447 million.
If you look at the CapEx number for the company, we continue to believe our full year number is going to be around $1.7 billion. That would imply a pretty significant reduction here as we go into the fourth quarter.
Our outlook for the fourth quarter is about $300 million. So the difference, the sort of headwind that we've had all throughout the year of CapEx being way up versus prior year levels is going to flip around here in the fourth quarter, and it's going to be somewhere between $150 million, $160 million year-over-year decline.
So that's going to be a source of cash for us as we go into the fourth quarter here. In some of the earlier notes, I did see some comments about the year-to-date cash outflow position that we've taken.
And I guess, I would just remind folks that if you do look at our year-to-date numbers, we have about a $400 million outflow associated with discretionary funding of our Pension Plans. And that shows up as a use of working capital.
So, yes, it's a cash burn, but on one hand, we're really just taking part of our money that we would otherwise use to reduce debt and better funding our pension plans. At the end of the quarter, our net debt-to-total capitalization was consistent with where we were at the end of the second quarter of 34%.
We still have a strong balance sheet, and we do expect to see some further deleveraging here in the fourth quarter which should position us pretty well as we go into 2013. A few comments on the pension and our pension and retiree medical plans.
We continue to improve the net funded position. We expect to end the year in the 90%-plus funded rate.
That’s really as a result of pretty good asset performance this year, but also the $400 million of discretionary funding that I talked about earlier. Over the course of the last year, we've also taken a look at adopting mark-to-market, a pension accounting methodology.
This is a methodology that I'm sure many of you are familiar with on the call here. But a number of large companies have adopted this change, and we believe when you really look at the fundamentals here, it's a simpler and more straightforward methodology that improves financial transparency.
So we're going to make this change in the fourth quarter, and we'll book sort of a year-to-date retrospective charge in prior period numbers. So we end up from an accounting perspective, restating prior-year numbers so that we show the impact of the catch-up in our first reported period; then we'll show all comparable periods on a like-for-like basis.
If you kind of try to model out what the impact of that would be on 2013, we will see a reduction of our pension expense associated with some of the amortization of prior year losses. However, if you look at the lower discount rate that we're going to be facing in 2013, combined with a reduction that we're going to take in our discount rate as we -- or sorry, a reduction in our expected planned return on assets rate that we're going to take as we derisk our pension plan, those are largely going to offset the impact that we don't expect to be material.
So if you really -- I guess really just putting this in perspective, for the last few years, we've kind of been on a path to insulate our financial results from the volatility of pensions and pension accounting. Some of the things that we've done, we've invested about $1.5 billion in discretionary pension contributions.
We've closed and frozen the majority of our global defined-benefit plans, and we've adopted a number of more conservative investment strategies to derisk our investment returns, and so, you really need to look at this accounting change in light of all that. It's another step in that process.
The other thing I would just point out for our employees that might be listening to the call, is this is just an accounting change. It has absolutely no impact on our funded levels or the benefit levels that we pay to our current and future retirees.
Lastly, I'd like to just talk a little bit more about some of the -- some of our restructuring initiatives. We did take some small charges here in the third quarter, and we expect to do more in the fourth quarter.
And if you really look at the focus of those, it's going to be on properly aligning our headcount to the sort of market realities that we currently face. We're going to continue with divesting some smaller non-core assets, and we've had a number of those flow through on a year-to-date basis.
We do expect to make some footprint changes in certain geographies. And we're going to do some consolidation.
And that would be both in some of our manufacturing activities, but also in some of our back-office functions. We do expect to continue to invest in our key strategic growth initiatives, and we're hopeful that these actions, combined with some of the growth initiatives that Steve talked about in his section, are going to enable us to deliver a solid, improved profitable into 2013, even in light of the market environments that we sort of currently face.
Then lastly, just on an informational item. We are going to host our Analyst Meeting in New York again, although we're going to change the timing here from what has typically been in the October timeframe to December or January.
And really, the key thing here is in pushing it back to this time, we're going to be a lot closer aligned to when some of our peers report, but we also are kind of in a real unique situation where there's a lot of uncertainty around fiscal and monetary policy, particularly in the U.S., but also in Europe. And it's very difficult for us to forecast the economic climate we're in when we've got GDP growth that could swing 4, 4.5 percentage points based on the outcome of some of the legislative changes that we're facing here.
So that's really what's driving us to push our timing back to the December, January timeframe. With that, Glen, I will open it up for questions.
Glen Ponczak
Great. Pat, we're ready to take questions.
Operator
[Operator Instructions] Our first question comes from Chris Ceraso with Credit Suisse.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
A few items. I guess, first, on the battery business.
Maybe we can talk about why you don't think these pressures continue past Q4. Do you have -- bought up all the cores that you need, or you're just expecting there'll be more cores available and therefore, the price comes down?
Stephen A. Roell
It's the latter. There'll be more cores.
In fact, we expect there are going to be a lot of cores. That would be the normal situation.
It's just a function that we have to go into production almost this early to be able to meet the demand. We level our production, and so we're actually at almost full production here from July through the end of the year just to be able to meet the stocking required by the aftermarket.
And we think it'll be -- even though, like Bruce described, there's probably a little bit of a pent-up inventory at the aftermarket right now, it's not significant, and so we expect that because of the hot weather and what it’s doing to the chemistry in the batteries, which it destroys them. And maybe for those of you that are on the phone that don't know that industry, the shortest lives of batteries are in the high heat districts like Vegas and Phoenix.
And so the hot heat we're seeing throughout the Midwest and the East and the South is, in fact, weakening the batteries or shortening the battery life. We expect there to be therefore a flood of cores by the fourth quarter.
It shouldn't continue beyond that. This is just very unusual, Chris.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
It's somewhat contingent then on an increasing replacement demand, but you think with the heat that, that should happen.
Stephen A. Roell
Or just the normal seasonal pattern will do it, too, okay?
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Okay. And then also on the batteries, there was -- the weakness in volume overall outside of any kind of weather issues, was any of that attributable to price hikes that have been taken in that market?
Stephen A. Roell
No, I don't believe so. I don't sense that at all.
Yes, it's pretty consistent amongst the -- if you sort of look at some of the competitors who have reported sort of similar numbers there.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Okay. And I have a few questions on the pension.
The guidance for Q4, that does not include the change to your pension accounting, right? That's just a pure change based on the fundamentals?
R. Bruce McDonald
That's correct.
Stephen A. Roell
That's correct.
R. Bruce McDonald
Nor does it incur any -- nor does our guidance include any restructuring.
Stephen A. Roell
Yes, just aberration.
R. Bruce McDonald
Because we really haven't sized that yet, Chris.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Right, okay. And then along the lines of derisking and changing the pension around, have you thought about offering buyouts or shifting to third-party annuities like we've seen from some of the OEMs?
R. Bruce McDonald
We're looking at offering buyouts to deferred vested but that's probably something that we're maybe a year away from.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Okay. And then just lastly, on Europe auto, can you maybe sketch out what the path is to improvement here?
I mean, you had done these acquisitions and those were supposed to help the margins in Europe, and that hasn't happened. Has that been because the volume is low?
Are you feeling, now that you've got more vertical integration, you're even more susceptible to volume? Maybe just help us understand what exactly is happening in Europe and how and when it gets better.
Stephen A. Roell
That's fair, Chris. Let me try to -- this is a question I expected from probably most people on the call here, so I want to take a minute to answer this question appropriately.
First of all, let me dispel something. The performance that we have for the Keiper transaction is just exactly what we expected.
It's contributing the way we thought. So it's not the Keiper.
Issues that we're having are pretty well concentrated in 2 businesses, as we've described. It's the metal operation prior to the acquisition and the business that we're awarded under the old product schemes, okay?
And interiors continues to be a drag. But let's talk about metals, which is the one that -- where we expected the biggest improvement and haven't been able to get there.
We have 6 different operating, I'll call them, work streams that we're focused on where we've identified and have mapped, I'll call it that, use your comment, Chris, probably hundreds of millions of dollars in the next 18 months. And they had to do with improvement in operations; they had to do with purchasing; they had to do with commercial negotiations.
And let me just go into some of how -- what they are in detail and then I'll come back and tell you why timing is an issue for us. There's some things we can get our hands on right away.
There's some purchasing opportunities that we have around steel tubes, around motors that we can get our hands on in relatively quick timeframe, meaning over the next 12 months. There are commercial claim processes; there are change processes that we'll get over the long-term and the medium-term.
There are some things that we know we're going to benefit from in 2013, such as lower launch cost, and we're going to be shedding containment cost. That's probably a $50 million year-over-year improvement that we can see today just based on the activity that we have.
There are some things that are probably over the medium-term, and these you'll understand as I walk them through with you. They would include things like how we design for manufacturing, how we standardize our product lines, how we deploy best practices and best processes.
As an example, Hammerstein has an outstanding process that they use for both marrying their tracks and how they stamp rails. And we're deploying them across our product lines.
Footprint optimization, what we can do to improve our machine utilization, our labor productivity. Those are all mapped in what we call a tracker.
We have -- I'm not going to give out a number, but there are hundreds of millions of dollars we have tracked. What we're trying to do now is refine what we can get to in the near term quarter-by-quarter in fiscal 2013.
These are all mapped and expected to be able to happen by mid 2014. So what I'm trying to do is provide some refinements so I can come back and give guidance to our shareholders what that rate of improvement is in the next 6 months, the next year and then more quarter-over-quarter guidance.
That’s what I guess I would come out and tell you. So it's a blend of near-term things we know we can get our hands on and there are some things that we need to do to improve the long-term position of the business and standardize our product lines, improve our machine utilization.
That's all taking place. And so it's not the new acquisitions.
It is the business we were awarded back in 2009 and '10 that we're trying to improve and to making sure that we have the foundation in place and the fundamentals in place to ensure that improvement continues into '14 through '16.
Operator
Brian Johnson with Barclays.
Brian Arthur Johnson - Barclays Capital, Research Division
So just drilling down a little bit more into the European auto experience. It sounds like the improvement program is in metals.
It's not in Hammerstein or Recaro, so it's in the existing metals business. To what extent though -- I guess, a couple of questions, a, is interior still a drag there?
We've seen Visteon being unable to sell its business due to pressures in the European interiors markets. And then secondly, while you're reducing costs, the OEMs are, themselves, running into profit pressures.
What's your confidence in being able to hold on to these cost reductions in light of pricing pressures and seating? And how are you thinking about that as part of the improvement plan?
Stephen A. Roell
Okay. Let me take a shot and I'll let Bruce come in also.
I guess, if you go back to interiors, we still have plans that are a drag. We have product lines that are a drag, and we're actually looking at exiting some product categories, Brian.
I think that the market conditions haven't changed. Interiors is a sector which has got overcapacity.
And I think most players in that marketplace, whether it be Visteon or some of our other competitors, are -- it's not a new phenomena. The industry has been struggling for some time, okay?
I believe that we've got Bill Jackson focused on that business, and that's where -- that's what he's focusing right now. We believe that we'll get some improvement because of that in terms of how we approach the OEs as a standalone business, okay?
That's number one. In terms of your comment about the OEs, you're absolutely right.
There is some additional pressure, and it's spotty. It's select OEs.
We have turned back business where we weren't able to meet the cost reduction request that we were given. We continue to have a strong book of business.
But I do think that our job is to protect that. We've been in investment, and it's our job to protect the investment and the margins that we acquired.
And so from my perspective, the only way to do that is to be somewhat resistant on price reductions requests. And if that shrinks our business, so be it.
I'm managing that business for returns right now.
Brian Arthur Johnson - Barclays Capital, Research Division
What -- and just kind of within the quarter, given that production was only down 5%, it looks like your incremental margins were -- decremental margins were very high, x currency. So I see the improvement path.
But what was sort of the step back vis-à-vis on a year-over-year or sequential basis in the business? Was it just volume, or were there other things that popped up?
Stephen A. Roell
Well, remember, too, Brian. In that European number, there's also the South America swing into a loss and...
Brian Arthur Johnson - Barclays Capital, Research Division
Okay. So it's really the South, so that's part of that?
Stephen A. Roell
That's part of that, yes.
Brian Arthur Johnson - Barclays Capital, Research Division
And is that an improvement plan there or is that just waiting for a better macro real?
Stephen A. Roell
No, it is an improvement plan we have to put in place. Bruce referenced that.
R. Bruce McDonald
I mean, if you kind of look at the South America situation, I mean, it's, in many ways -- I mean, it's obviously, a lot smaller for us. I mean, just the size of South America piece within -- our business now is like 500 million to 600 million to on an annual basis.
But if I look at kind of the market fundamentals, it's very tough. You've got -- markets have softened.
Currencies have significantly weakened, and the auto industry there is often more susceptible to import components, imported components, which puts a lot of pressure. Labor inflation is extremely high and some of the government policies, particularly in Argentina is tough.
And so I think as we are looking at what we can do to improve the situation down there, but we're in a pretty tough market right now, and that's not likely going to change in 2013. Now there are some things that we can do to improve our current position, but our outlook for 2013, is we will have a loss there.
It will be smaller. We are going to take some actions, but we've got to ride that out.
Operator
Ravi Shanker with Morgan Stanley.
Ravi Shanker - Morgan Stanley, Research Division
Steve, if I can ask you, why -- if you can give us any more color on why you delayed the Analyst Day. And if there are any particular milestones or data you're looking for that will help you kind of form your outlook for 2013, or is it more of just giving your restructuring and your operations a little more time to improve?
Stephen A. Roell
No, I think it's the former. I think, really, we're just trying to get a better sense for what kind of environment we're going to be operating in.
I mean, the other thing we could have done is walk in and said listen, on these assumptions, this is what we think. We just think that we'll have a better chance to refine those assumptions.
I think, in general, the investment community will have a better chance to also be focused on 2013. I truthfully think that we're concerned that oftentimes we go out and, really, I say people, there hasn't really been a strong focus on 2014 at that point in time because there's very few companies that have gone out and really talked about it.
And so I think we just feel that we're better equipped to give you guidance for Q1 in the fall, talk about maybe some of the things we’re seeing and the assumptions that we're beginning to focus on for 2013, and then come back and give you better -- we just think we can provide better information. We certainly know last year that was the case.
And last year, things were a lot more stable than they are today. But clearly, those 3 months would have been significant for us in terms of understanding what environment we are in.
R. Bruce McDonald
Yes. I think, Ravi, if you look at the numbers right now between the contents board and the major banks, including your firm, I think what people have right now is GDP growth in North America next year of somewhere in the 1.5% to 2%.
I think there's pretty tight cluster there. And those numbers are coming down.
And on that basis, I think, we'd feel pretty good providing what we think is going to happen in our businesses. But if you then look at the -- between the sequestration-related spending cuts and the exploration of the Bush tax cuts, which are big items, and quantify those, those add up somewhere between 4%, 4.5% of GDP.
So now that takes your 1.5%, to possibly minus 3%, and that's a very different economic picture here in North America. It’s unlikely we're going to know the answer to that between now and when our normal Analyst Day would have been, which is early October, but we just elected to push it back here a couple months.
Ravi Shanker - Morgan Stanley, Research Division
Understood. Just looking at BE in the quarter, your margins were much better than we expected.
Can you help quantify how much of that was some of the SG&A and cost initiatives that you had? And how much of that was driven by just the improvement in resi?
R. Bruce McDonald
Yes, I would say if you kind of look at residential and last year, we -- within our Building Efficiency numbers, we had a large -- we had a onetime benefit in residential. We had a onetime hit in our Latin America business that's largely offset.
But if I strip that out, and what you would see in the residential is we did see a nice pop-up in profitability, but the fact that the mix moved to a lower margin product, our profitability was little changed from an ROS point of view. So that really didn't drive it.
The big area for us was in service. North America service, we saw a nice improvement in our profitability there.
Sort of think about last year, it was kind of cool, especially in the early start of the cooling season. Really saw the benefit in margins there, which was labor utilization and the pricing improvements that we saw that came with the -- our IT investments in that business.
That was the sort of biggest driver.
Stephen A. Roell
But, Ravi, I think the fact that all 5 segments were up in BE, we just explained to you, it really was broad-based.
Ravi Shanker - Morgan Stanley, Research Division
Got it. And finally, Bruce, you pointed out that the FCF should be viewed x the pension contribution.
Can you just help us with what cash flow will look like in the fourth quarter? You've had some pretty big cash-generating fourth quarters in the past.
Is it going to be something similar, or do we expect something similar like...
R. Bruce McDonald
No, no, we expect to see a very strong Q4. We aren't making any -- we're sort of done from a discretionary pension point of view.
So we won't have anything there. As I said in my comments, our capital expenditure is going to be in the sort of $300 million range.
That's a big reduction versus the run rate that we've had for the last 3 quarters, and it's a big improvement versus what we had in the fourth quarter of last year. We do have some -- expect our working capital levels are going to improve by a couple of hundred million, and we have a few sort of smaller non-core assets and properties that we're selling.
So we expect pretty strong improvement in the fourth quarter.
Operator
Peter Nesvold with Jefferies.
H. Peter Nesvold - Jefferies & Company, Inc., Research Division
So I just want to talk about the Power Solutions business for a minute. This is not an area where I'm an expert, but we've heard some channel perspective that believes that JCI's move towards vertical integration is actually helping to drive up lead prices, that a lot of the third-party smelters that you would have historically sold to are kind of out in the market, trying to secure lead and therefore, pushing that up.
Do you think that's accurate? Is that part of what's happening here?
And if that's true, why does it -- why would it reverse out so quickly?
Stephen A. Roell
No, that's not what's happening. And I think it's more a factor that the activity in retail, as I described, I think, is the bigger issue.
The fact that they're just -- and we've talked that -- we've looked across 4 or 5 different aftermarket customers and it's the lack, of course, coming back. That's what's driving up the prices.
We're not -- we haven't ramped up enough at this stage in our own internal smelting to really drive that up.
Operator
Rod Lache with Deutsche Bank.
Patrick Nolan - Deutsche Bank AG, Research Division
This is Pat Nolan on for Rod. Can we just go back to Europe for a second?
I know you talked about the metals business, but you also highlighted the new business launches from 2009 and 2010. Prior to this quarter, you were expecting that most -- the most difficult launches were largely behind you, and we were going to see the containment cost start to taper off.
Is that not what occurred in the quarter? Can you help us frame what was the run rate of containment cost in the quarter versus where they had been running?
Are the launches basically getting -- are the launches tracking worse than you expected?
Stephen A. Roell
No, I don't think launches are tracking any worse from what we expected. I think some of the containment costs that we had on the prior launches where we had expected to shed, we probably haven't shed those costs as quickly, Pat, okay?
But there's nothing there to point to in the new launches, okay?
Patrick Nolan - Deutsche Bank AG, Research Division
All right. I mean, can you give us any kind of framing of where your containment costs are tracking in the quarter?
Stephen A. Roell
Do we have that number, Bruce?
R. Bruce McDonald
I don't. Yes, I don't have that handy.
I mean, we can follow up with you, Pat, on that. As Steve said, it wasn't a down.
It wasn't a variance, okay, versus what we thought. I mean, we -- like I said at the last call, we have 3 or 4 problematic launches.
Those are flowing through as we expected. They were in mainly in the Europe side of our business versus the North America.
You kind of saw in our North America numbers, we were kind of depressed last quarter and the quarter before because launches there, those snapped back, profitably snapped back there nicely. But maybe one other comment I'd add on Europe that we haven't talked about is, not a big issue for us, but it's something that we are worried about is the sort of distresses that we see in our supply base.
And we do have some headwinds associated with that, and that's the area that as things -- if things deteriorate more there, it's going to become a bigger and bigger headwind for the industry, not just Johnson Controls.
Stephen A. Roell
Pat, just let me comment on, not to what you just said, Bruce, but I do think that, that one thing that we've really done well in the last 6 month is get our hands around our launches, in terms of our launch teams. I mean, I think we've staffed them adequately, I think we've got tremendous oversight, and they aren't as complex.
I mean to be honest with you, there were some extremely complex launches and product configurations. So I feel better about what we used to describe.
But to your point, Pat, I would hope to see some prior -- some better and faster improvements in our ability to reduce our containment cost. Our quality is good, and we're getting high marks from our customers on our quality.
It's just a function we've got to shed some costs, okay.
Patrick Nolan - Deutsche Bank AG, Research Division
And you -- prior to this quarter, you were expecting the European margins to get above 3% in Q4. Can you just give us an update on that?
That seems like a pretty big bridge from the negative 1.5% to this quarter.
Stephen A. Roell
Yes, that's fair. That's fair.
And I think if you look at and part of the reason why -- we're not going to hit the 3%. Part of the reason why I think we're -- we are more cautious, and I went back and tried to -- maybe actually quantify this.
If we look at some of the delta in Q4, I would attribute as much as $0.03 to $0.04 to our -- or just our thoughts regarding commercial claim resolutions to this timeframe. One of the earlier questions from, I think was from Brian, had to do with OE resistance.
And I don't think it’s resistance as much as they're just slow walk-in claims and things of that nature. And in the past, we would have always had a very strong fourth quarter in terms of claim resolution.
I think we've had it baked into our forecast, but that's not going to happen, I'm sure. It could happen, but we've assumed that it does not.
And that's our biggest delta in terms of our margin assumptions for Q4.
Patrick Nolan - Deutsche Bank AG, Research Division
Got it. And just lastly on the lead impact, the $40 million you saw in Q3, is the inventory -- bigger build in Q4 bigger so that $40 million could be a bigger number?
R. Bruce McDonald
No, it's going to be, I would say, in the $30 million to $40 million range.
Stephen A. Roell
Yes, it could be -- and it could be less because we think this thing could -- this thing should start to improve by September. October, November, December, it's real obvious if it's going to, okay?
And, in fact, to some extent, we're surprised we're still seeing it in July.
Operator
Rich Kwas with Wells Fargo Securities.
Richard M. Kwas - Wells Fargo Securities, LLC, Research Division
Question, a broader question on Europe. IHS came out with their forecast the other day for calendar year to be down 6.
I know there's a lot of skepticism out there regarding that number. It sounds like you’re a little skeptical on that.
I know you're on a different fiscal year end. But, Steve, what are your thoughts there?
Do you think there's a lot of downside risk to that forecast?
Stephen A. Roell
I think it's what we're trying to get our hands on, Rich, okay? I -- we've sort of been trying to revise our forecast as we get information from the marketplace, okay?
So we're trying to watch our major exposure. We're broad-based with the German customers, along with Opel and Ford.
As Bruce mentioned, we don’t have a lot of exposure to the French. But I think we're looking at the mix, trying to understand what's taking place.
We're trying to guess what's happening in -- the fact that U.K. and Germany is holding up at that, they're still growing.
We're still trying to figure out if that's going to continue. But my sense is that I'm more worried about the level of decline that could happen in the South.
I think France is the one I'm most concerned about. I think Spain, we've already -- probably we're down there already.
But I think Italy and France will be the 2 markets, Rich, that I'm most concerned about. I don't think I want to comment yet in terms of whether I agree with the minus 6, okay?
Richard M. Kwas - Wells Fargo Securities, LLC, Research Division
Okay, all right. And then on the Building Efficiency side, very good margin performance this quarter.
It sounds like -- should we expect similar rate of improvement year-over-year for the fourth quarter?
Stephen A. Roell
At this point in time, I can -- best guess I can give you at this point in time is that they're going to improve at least 100 basis points in the market in Q4.
Richard M. Kwas - Wells Fargo Securities, LLC, Research Division
Okay. And then just looking at -- I know that we're going to be a few months away from getting an outlook for '13.
But, Steve, the sustainability of this margin improvement, how comfortable are you with that, or is that kind of in flux right now as well?
Stephen A. Roell
You're talking about within Building Efficiency?
Richard M. Kwas - Wells Fargo Securities, LLC, Research Division
Yes, within Building Efficiency.
Stephen A. Roell
I think that's where we'd like to get a better handle on. I think -- let me go back.
I think we have a very good handle on our cost structure as we go into 2013. The thing that's going to be important for us -- and I'm only going to give you leading indicators, okay?
We would hope to come out of this quarter with our backlog up 6%, 7%, 8%, if not, more. That's the key, Rich.
That's what I need to see. And probably the category that we need to see it in is in the what we would call the solutions business or performance contracting.
It's something that's lagged the last 4 or 5 months for us. The data we have from our field is saying that they expect that to recover here in Q4.
That's the one we're watching. That will be the key, whether we're up 4% or whether we're up 8%, 9%, that then will dictate whether we get the margin right next year, okay?
R. Bruce McDonald
So, Rich, one -- maybe just a little bit more there. Just -- I would just keep in mind, when we went into this year, what we talked about for building efficiencies about 50 basis points of margin expansion.
And we -- if you look at where we were in Q1 and 2, we were sort of flattish or down slightly. And we talked about the fact that we are fronting some of our investments in like Panoptix and things like that.
So we're pretty comfortable with our outlook here for the fourth quarter that will be -- will get that 50 basis points and maybe another 10 or 20. But the path for improvement for building efficiency because so many of our investments are in SG&A, that glide path, we're not backing away from.
So we're not going to be up 120 basis points next year. It's going to be that 50 to 60 basis points.
That's our trend line.
Richard M. Kwas - Wells Fargo Securities, LLC, Research Division
Okay, understood. And then last one from me on FX.
Are you assuming current trends – current conversion rates in the guidance for fourth quarter?
R. Bruce McDonald
Yes. We use 122 here for the fourth quarter.
Operator
Sanjay Shrestha with Lazard Capital.
Sanjay Shrestha - Lazard Capital Markets LLC, Research Division
First question is on the Building Efficiency side. So this is a very impressive improvement on the GWS side.
Was there anything onetime in the quarter here, or what kind of lead to that 86% improvement in the operating margin there?
R. Bruce McDonald
Yes, I know there isn't anything of a non-recurring nature there. I mean, I would -- it is a big improvement, but I would still temper that with the fact that if you look at the absolute margin level in GWS, it's still below where we'd like to see.
So it's bounced back strongly, but it's still not in that -- in the sort of 2.5% to 3% range that we expect.
Stephen A. Roell
I guess I would just make a statement in general though about Building Efficiency. There really were no unusual items this quarter.
This was one of the cleanest quarters. The quality of that earnings is very, very strong.
Sanjay Shrestha - Lazard Capital Markets LLC, Research Division
Okay, okay. That's great.
And one quick follow-up then, guys. So when we think about your Power Solutions, right, clearly, lead price is sort of what it is, and you guys are saying it's going go away, hopefully, by one quarter.
Now as we think 12 months out, right, so with this incremental benefit from lower prices, how do you think about how that business grows when the aftermarket comes back? And where does the margin go because all the drag is sort of now going to be behind you guys after a quarter.
How should we think about that business in 12 months out?
Stephen A. Roell
Yes, let me start, and then Bruce, you jump in, okay? I guess twofold.
Let me explain volumes first. Whenever we've seen the type of January through March period where we had depressed volumes due to weather, typically, it has continued slightly depressed again in the quarter that we're in today and then up, and then it pops in the fourth quarter.
That's going to be interesting to see if that happens. So -- but regardless, this is going to normalize.
It always has. And so I hate to talk about weather extremes, but we do expect a very, very strong fiscal 2013, start in terms of volumes.
That's number one. Number two, in margins, we've guided higher margins partially because of some things we've done.
We've invested in vertical integration, and that's a big one for us. We also have, we believe, some improvements that we'll have from some cost that we incurred last year in China that will be year-over-year.
So as we think of 2013, we expect the margins to improve in power, primarily because of higher volumes, better utilization, vertical integration and then avoidance of the Chinese year-over-year softness, okay, that we had and cost that we incurred last year.
Operator
Joseph Spak with RBC Capital Markets.
Joseph Spak - RBC Capital Markets, LLC, Research Division
Just to quickly follow-up on Power Solutions, and I'm glad you mentioned China. I know that -- I think the plant partially reopened.
So I'm just trying to think a little bit of margin trajectory in the fourth quarter from the third quarter and the different headwinds. Clearly, the lead issue still -- lead is still is an issue.
But shouldn't the pricing come up a little bit and then also some more cost savings from China. So do those totally offset, or is it still a net negative headwind from lead?
R. Bruce McDonald
I guess, we will see the negative headwind, but when you look at the year-over-year delta, so we do expect to see some margin expansion here in the fourth quarter in power. I wouldn't say that China would be a big part of that.
But the biggest issue is going to be the pricing. We did announce pricing here in the current quarter that we're in, some of it went in, in May; some of it went in June.
So if you just look at the benefit that we get -- in the fourth quarter where we’ll get and we have it implemented across-the-board. So we get the whole benefit here in the fourth quarter; that is going to enable us to offset some of the headwinds that you're referring to and we’ll get back to that path of margin expansion here in the fourth quarter.
Joseph Spak - RBC Capital Markets, LLC, Research Division
Okay. And then just to be -- the $40 million headwind this quarter, I mean, it was -- is the majority of that because you were ramping up South Carolina?
Like had you already been ramped up...
Stephen A. Roell
No. None of it was.
R. Bruce McDonald
That South Carolina ramp up really starts -- is a Q4 issue, not a Q -- and so if you think about that, say, $40 million we talked about in lead in Q3. In Q4, we said $30 million to $40 million.
You probably should think about 1/3 of that is going to be because we ramp up the new facility, and 2/3 of it will be the high cost of cores.
Joseph Spak - RBC Capital Markets, LLC, Research Division
Can you talk about what your, I guess, internally-sourced lead goes from to once that facility is fully ramped up?
R. Bruce McDonald
Well, it's -- the recycling centers are -- roughly speaking, give us a benefit of about $50 million a year at current lead levels. So that's kind of the delta that we'll get from South Carolina.
Stephen A. Roell
But Glen, I think we have all our smelters up. What is our internal source of our leads right now?
Glen Ponczak
50% of our…
Stephen A. Roell
…is there, okay? That's probably from what it was 2 years ago.
15% before we built the 2 smelters, okay?
Glen Ponczak
So we're going to have to cut it off there, Steve. Final comments?
Stephen A. Roell
Sure. Yes, just a couple quick ones here.
I -- first of all, we apologize for the fourth quarter results that we're projecting here, okay? We, hope we have conservatism built into them but believe me, our people are -- have not given up.
We will do everything we can to deliver results on the fourth quarter. We're focused on fiscal 2013 where we feel our fundaments are good.
We're just trying to understand the macroenvironment that we're operating in. Don't read any more into the delay in the Analyst Day than the fact we want to provide you the best information we possibly can.
We'll do what we can in the call at the end of Q4 to sort of tell you what we see in the environment, how we're thinking, and give you some of -- maybe some of the assumptions that we're thinking about on a preliminary basis. So we'll try to give you at least the stage setting for what we see, okay?
So, again, thank you very much for the call and again, we feel very good about our long-term fundamentals, and we're just frustrated by the near-term as you are, and we apologize for that. Thank you.
Operator
Thank you for your participation on today's conference call. You may disconnect at this time.