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Presentation

Illinois Tool Works Inc. beats earnings expectations. Reported EPS is $2.54, expectations were $2.47.

Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW Second Quarter Earnings Conference Call. [Operator Instructions] Thank you. Erin Linnihan, Vice President of Investor Relations. You may begin your conference.

Erin Linnihan: Thank you, Audra. Good morning, and welcome to ITW’s second quarter 2024 conference call. Today, I’m joined by our President and CEO, Chris O’Herlihy; and Senior Vice President and CFO, Michael Larsen. During today’s call, we will discuss ITW’s second quarter financial results and provide an update on our outlook for full year 2024. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company’s 2023 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it’s now my pleasure to turn the call over to our President and CEO, Chris O’Herlihy. Chris?

Christopher O’Herlihy: Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, during the second quarter, the short cycle demand environment continued to moderate across our portfolio. At the total company level, second quarter revenues came in approximately 1 percentage point, or $50 million below what they would have been had demand held at the level we were seeing exiting the first quarter. Second quarter organic revenue was down in three segments with declines year-over-year in CapEx-related products such as welding, test and measurement and construction. These declines were offset by revenue growth in four segments resulting in overall flat organic growth year-over-year at the total company level as compared to our end markets which we believe were down in the low single digits.

As usual, as the quarter progressed, the ITW team executed well on all the elements within our control. As evidenced by record second quarter operating margin, which improved by 140 basis points, 26.2%, supported by 140 basis points of benefit from enterprise initiatives. Operating income grew 4.5% to a second quarter record of $1.05 billion and GAAP EPS came in at $2.54, up from $2.48 last year. As per our normal practice, we are adjusting our full year guidance in line with demand levels in our businesses as they exist today. Current run rates exiting Q2 projected through the remainder of the year results in about flat organic revenue for the full year. The moderating demand is partially offset by stronger margin performance and we are raising our margin guidance to 26.5% to 27%.

Factoring in both of these elements, lower market demand and stronger margin performance, we are lowering the midpoint of our EPS guidance by 1% as we narrow the range to $10.30 to $10.40. While the combination of moderating manufacturing CapEx demand and lower automotive bill forecasts for the second half has us operating in a challenging near-term environment, we will continue to drive our usual high-quality execution on all the elements within our control, while remaining focused on managing and investing to maximize the company’s growth and performance over the long-term, as we build above market organic growth fueled by customer-backed innovation into a core ITW strength. In this regard, we are very encouraged by the progress we are making on customer-backed innovation in each of our divisions.

In concluding my remarks, I want to thank all of our ITW colleagues around the world for their exceptional efforts and for their dedication to serving our customers with excellence and driving continuous progress on our path to ITW’s full potential. I will now turn the call over to Michael to discuss our second quarter performance in more detail, as well as our updated full year guidance. Michael?

Michael Larsen: Thank you, Chris, and good morning, everyone. In Q2, revenue declined 1% with organic revenue down 0.1%, essentially flat year-over-year, and a slight improvement from being down 0.6% in Q1. As Chris said, demand moderated sequentially as total company revenues grew 2% from the first quarter to the second quarter, a point below our historical run rate growth of 3%. Faced with moderating demand, the ITW team, as usual, did a great job in terms of reading and reacting to the environment and delivered record margin and profitability performance in the second quarter, as evidenced by 4.5% operating income growth and operating margins of 26.2%, an improvement of 140 basis points as enterprise initiatives were once again the largest margin and profitability driver contributing 140 basis points this quarter with more to come in the second half.

GAAP EPS of $2.54 increased 2% or 5% excluding a 2023 one-time tax item. Our free cash flow was $571 million which was a 75% conversion of net income, slightly below our historical conversion in the 80% range, as we continue to focus on reducing our inventory months on hand to pre-pandemic levels without impacting customer service levels. We repurchased $375 million of our own shares during the quarter as planned, and the effective tax rate was 24.4% compared to 21.4% in the prior year, which lowered EPS by $0.10. In addition, foreign currency translation was approximately a $0.05 headwind year-over-year. In summary, strong execution and Q2 results as the impact of a moderating short cycle demand environment was offset by strong margin and profitability performance.

Please turn to Slide 4 for a look at organic growth by geography. The 2% decline in North America was an improvement over the first quarter’s 3% decline. Europe grew 1% and Asia Pacific grew 3%, with China up 5%. Moving on to segment results, the Automotive OEM segment delivered flat organic growth in the second quarter against a tough comparison of plus 16% in the year-ago quarter. North America was down 4%, Europe was down 2%, and China was up 7%. In the first half, Automotive Builds were flat, and our Automotive OEM segment grew 2% above market. For the full year, we continue to expect solid above-market growth with our typical penetration gains of 2% to 3% and continued outgrowth in China. In our guidance, we have now factored in the most recent automotive build projections, which have declined to negative 2% for the full year.

As you may recall, when we issued our initial guidance in February, Automotive Builds were expected to be flat for the year. On a positive note, the segment delivered strong operating margin performance of 19.4%, a 260 basis points improvement, as we continue to work towards our goal of achieving operating margins in the low to mid-20s by 2026. Turn to Slide 5, Food Equipment organic revenue grew 2.5% against a comparison of plus 7% in the second quarter of last year. Equipment grew 1% and service grew 5% against a comparison of plus 16% last year. By region, North America increased 2% with service up 3%. Organic growth in the institutional market was up mid single digits, and the retail market was up high single digits. International revenue was up 3.5% led by Europe.

As we talked about last quarter, the current margin performance reflects the fact that we’re making focused capacity investments in the first half of 2024 to support and accelerate continued above-market organic growth in our very attractive service business. Looking forward, we expect margins to continue to improve sequentially as we go through the year. Turning to Test & Measurement and Electronics, organic revenue was down 3% with continued softness in semiconductor, electronics, and CapEx-sensitive end markets. Both Test & Measurement and Electronics were down 3% in the quarter. Moving on to Slide 6, Welding was down 5% in Q2, as Equipment declined 5% and consumables were down 3%. By region, North America declined 6% with industrial sales down 7% and the commercial side down 6%.

International grew 3% with some strength in Europe. Operating margin was 32.9% with a solid contribution from enterprise initiatives. Organic revenue in Polymers & Fluids increased 3%, led by Polymers up 10%, and Fluids was up 4%. Automotive aftermarket was down 2% in the quarter. On a geographic basis, North America declined 4% and international grew 13%. Operating margin of 28.2% improved more than 200 basis points. Turn to Slide 7. Demand trends in construction products continue to be challenging on a global basis as organic revenue declined 4% in Q2 in a market that we believe is down in the mid to high single digits. North America was down 2% as the residential and renovation business was down 2% and commercial was down 9%. International markets remain soft as Europe was down 7% and Australia and New Zealand was down 4%.

Finally, specialty products had a strong quarter with organic revenue growth of 7% due to significant strength in our aerospace equipment division as well as pockets of increased demand across our portfolio. As a result, international was up 10% and North America was up 5%. As previously discussed, results can be a bit choppy as we continue to work to reposition the Specialty segment for consistent above-market organic growth, including strategic portfolio work and more significant product line simplification, which included 230 basis points in Q2. Operating margin improved 590 basis points to 31.9% with strong contributions from enterprise initiatives and operating leverage. With that, let’s move to Slide 8 for an update on our full year 2024 guidance.

Despite a challenging first half macro demand environment, the ITW team found a way to deliver solid operational and financial results. And excluding one-time items, we grew operating income 4% in the first half as margins improved by 130 basis points to 25.8% with 140 basis points from enterprise initiatives. GAAP EPS was up 10% — up 5% excluding one-time items. Looking ahead to the second half in our updated guidance, we do not expect the short cycle demand environment to improve. Per usual process, we are adjusting our full year guidance in line with conditions on the ground as they exist today. Current run rates exiting Q2 adjusted for typical seasonality and the most recent automotive build forecast projected through the remainder of the year would result in approximately flat organic growth for the year in markets that we believe are down in the low single digits.

This compares to a prior organic growth guidance of 1% to 3% and impacts EPS by approximately $0.25. The lower top line guidance is partially offset by stronger margin and profitability performance, which is expected to continue into the second half, including a significant contribution of more than 100 basis points from enterprise initiatives. As a result, we raised margin guidance to 26.5% to 27% as we continue to make solid progress towards our goal of 30% operating margin by 2030. The higher margins impact EPS favorably by about $0.10. The net of these two factors, as you saw this morning, is that we lowered the top end of the range of our full-year GAAP EPS guidance to a new range of $10.30 to $10.40, which is a reduction of $0.15 or 1% at the midpoint from $10.50 to $10.35 with 6 months to go in the year.

To wrap things up, we delivered a solid Q2 and first half in a challenging demand environment, and we’ve updated our full year guidance per usual process to reflect current levels of demand. Given the strength of our competitive advantages, the resilience of the ITW business model, and our diversified high-quality portfolio, we’re well-positioned for whatever economic conditions emerged through the second half of the year. With that, Erin, I’ll turn it back to you.

Erin Linnihan: Thank you. Audra, will you please open the line for questions?

Operator: [Operator Instructions] We’ll go first to Andy Kaplowitz at Citigroup.

Andy Kaplowitz: Hey, good morning, everyone.

Christopher O’Herlihy: Good morning.

Michael Larsen: Good morning, Andy.

Andy Kaplowitz: Good morning. Chris and Michael, you continue to have unusually strong results in specialty products in Q2 after I think you said in Q1 that it was a bit unusual and Q2 would normalize. I know you mentioned aerospace. I don’t think I’ve heard that particular business mentioned before. So could you give us more color on what’s going on there and what is the probability that segment could continue to outperform?

Michael Larsen: Yes. So, Andy, we’ve had a — as you’ve outlined, a very solid half one here in specialty. There’s a few different things going on. I think strength in aerospace has been a feature throughout the first half. There’s some other pockets of strong demand elsewhere. Obviously, we had favorable comps in specialty and we’ve also benefited from the timing of some orders, particularly in Q1 for some of our European equipment businesses. This is a segment that we’ve got some strategic portfolio repositioning going on. A bit more than the normal kind of PLS that you’d see, more than maintenance, much more strategic, it’s going to be a bit of a drag on revenue for the full year, we would say. We probably expect specialty to be up just above flat, maybe flat to low single digits for the full year.

But the important thing here is that the strong work that we are doing to really make this segment a 4% grower in the long-term. And based on the progress that we’ve seen this year, we certainly believe we can do that.

Andy Kaplowitz: Very helpful. And then Chris and Michael, you mentioned that demand continues to moderate in Q2, but could you give us a little more color regarding the cadence of the demand you saw? Has demand stabilized at lower levels across your short cycle businesses, or would you say it’s still getting worse? And then with the understanding that you’re forecasting the exit rate of Q2, you do have much easier comps in the second half. So just at the enterprise level, are you digging in any conservatism or is it really just on run rates?

Michael Larsen: Well, so I think in terms of the cadence, I think we saw as we were going through the quarter is the demand continued to moderate as the quarter by — as the quarter progressed. And by segment, definitely auto, as auto builds came down, the CapEx businesses that Chris mentioned, Test & Measurement and Welding, were maybe a little bit more impacted than some of the other businesses. I think on a positive note, I just might add that June also had really strong margin performance. So I think we got some good margin momentum heading into the second half. In terms of the back half of the year, as we said, per our typical process, this is based on current levels of demand that we’re seeing in these businesses adjusted for seasonality.

We do have, as you recall, some more favorable comparisons here in the second half of the year. If you look at last year, we were up 4% in the first half of ’23, and we’re flat in the second half of ’23. So, the comparisons definitely get easier. We also have the benefit of two additional shipping days in the back half, one in Q3 and one in Q4. And then the last thing I would add is we’ve updated the automotive build forecast, as we saw a decline there from previously about flat for the year to down 2%. And we expect to outgrow that per typical 2% to 3% and we continue to outgrow by a little bit more than that in China as we’ve talked about previously. So those are all the elements that kind of went into the top line guidance. I might just add, if you look at the reduction, 1 to 3 organic now to about flat, and you look at kind of the flow-through on that, that’s about a 20% decremental, just given how strong the margin performance is and how flexible our cost structure is so that we can continue to kind of read and react to whatever demand environment we’re dealing with in the second half.

Andy Kaplowitz: Appreciate all the color.

Michael Larsen: Sure.

Operator: We’ll move next to Scott Davis at Melius Research.

Scott Davis: Hey, good morning, guys.

Michael Larsen: Good morning.

Christopher O’Herlihy: Good morning.

Scott Davis: I know I probably asked this in prior quarters, but M&A is, I assume, no change in strategy there, more bolt-ons? Or we have heard of some larger assets that are going to become available, would you guys be comfortable casting a wider net there?

Christopher O’Herlihy: Yes. So, Scott, I think our posture on M&A hasn’t changed much. I mean, as we shared at our Investor Day, we have a pretty disciplined portfolio management strategy and we’re certainly staying consistent to that. From our standpoint, we have a pretty clear and well-defined view of what fits our strategy and our financial criteria. So, for us, it’s a case of just finding the right opportunities. Very much focused on high-quality acquisitions that can extend our long-term growth potential, growing at a minimum of 4% plus at high-quality. We’ve been able to leverage the business model to improve margins. So we review opportunities certainly on an ongoing basis, pretty selective given what we believe to be pretty compelling organic growth potential that we have in our core businesses.

And if I go back to the MTS acquisition from a couple of years ago, that was certainly an acquisition that ticked all the boxes and only a couple of years in here and already turning out to be a great ITW business. So to the extent that we can find acquisitions like that, then we’ll certainly be very active.

Scott Davis: Okay. Fair enough, Chris. And then I was just looking back at your investor deck and your growth, your long-term growth targets, 4 to 7, 2 to 3 points of that were coming from customer-backed innovation, and you did mention that in your prepared remarks. But are you still confident that you can drive that kind of growth from customer-backed innovation? It seems like a lot to me, but you guys would have a better feel for that.

Christopher O’Herlihy: Yes, I was going to say, Scott, that we’re even more confident now than we were at Investor Day. Our confidence has certainly continued to grow. We’re very encouraged by what we’re seeing in our businesses. It’s one of the reasons that we believe that we’re outperforming our end markets right now. And our view on customer-backed innovation is that we’re going to lean into customer-backed innovation in the same way with a similar approach that we utilized in really reinvigorating front to back 80-20 in the last phase of our enterprise strategy in terms of our intention around it, in terms of the rigor and capability build that’s going on all over this company right now. And in doing so, increase our contribution from what was approximately 1% in 2019 to north of 2% today, and what will be north of 3% in the not too distant future.

So everything we see on customer back and the work we’re doing in our divisions gives us an even stronger sense of confidence that this is going to be really impactful in terms of our ability to grow 4% plus in the long-term.

Scott Davis: Okay, thank you, Chris. I’ll pass it on, appreciate it.

Christopher O’Herlihy: Sure, Scott. Thank you.

Operator: Next, we’ll go to Tami Zakaria at JPMorgan.

Tami Zakaria: Hi, good morning. Thank you so much.

Christopher O’Herlihy: Good morning.

Michael Larsen: Good morning.

Tami Zakaria: So my first question is — morning. So, my first question is North America saw negative, I think you said 2% organic growth while other regions are positive. Are you still seeing destocking headwinds in North America or any other region? Or is the market softening now more a function of just demand rather than destocking?

Michael Larsen: Yes, I think it’s more the latter, Tami, that demand is a function of where we are in the economic cycle. And so destocking, which was a headwind all of last year, is no longer a significant factor at this point. I think if you look at just North America, down 2% was really driven by Welding, down 6%. And then Auto, Polymers & Fluids down 4%. And then some positive momentum in Food Equipment up 2% and Specialty up 5%. But again, that’s really more reflection of kind of where we’re at in the cycle versus anything going on from a destocking standpoint.

Tami Zakaria: Got it. That’s helpful. And then just a bit clarity on the new operating margin guide. So operating margin expected up about 165 basis points on flattish organic growth. Can you help me understand that 165 basis points, how much of that is enterprise initiatives versus the 140 you saw in the first half? And then is there any price cost or volume or anything else that’s adding to that 165 basis points year-over-year?

Michael Larsen: Yes, I think not a lot of volume leverage, obviously, as we’re guiding to about flat growth for the year. The biggest driver continues to be the enterprise initiatives. As you said, we got 140 basis points in the first half. The roll-up for the second half looks really good. As we said today, more than 100 basis points. And so somewhere I would say between 100 and 140 is maybe a reasonable estimate. And then price-cost, a modest contribution. We’re kind of back to a normal price-cost environment. And so that’s not a significant driver. Really the big driver here, as I think you pointed out, are the enterprise initiatives that independent of volume, continue to contribute in a meaningful way, which is a great position to be in — in a — given where we are in the cycle, in a pretty challenging and uncertain environment.

And without giving too much away, as we kind of look into the future beyond this year, we’d expect another solid contribution in 2025 and beyond.

Tami Zakaria: Understood. Thank you.

Michael Larsen: Sure.

Operator: We’ll go next to Joe Ritchie at Goldman Sachs.

Joe Ritchie: Hey, good morning, everybody.

Christopher O’Herlihy: Good morning, Joe.

Michael Larsen: Good morning.

Joe Ritchie: Can we go back to Specialty for a second? You guys talked about the strategic positioning efforts there and when I think about that business, it’s a hodgepodge of a bunch of different businesses that seemingly don’t have a lot to do with each other. And so I’m just trying to understand like what’s the kind of like overall strategy with the businesses within Specialty. And then what are you guys really doing to kind of drive this margin expansion sustainably higher over the long-term?

Christopher O’Herlihy: Yes, so Joseph, specialty is indeed, as you said, a collection of high-quality, high-margin businesses. There is a concentration around consumer packaging, both on the equipment side, on the consumable side. There’s also a bit of a concentration around appliance components. And then there’s a collection of smaller businesses, one of which is primarily lined up alongside aerospace, that are very attractive and certainly capable of growth. So we’re going through a strategic repositioning of some of those businesses in terms of heavier leaning on PLS. We haven’t seen much growth in Specialty over the last few years, as you know, so that’s what caused us to really look at the portfolio. But we feel very good about the progress we’re making in terms of there’s a lot of high differentiated product lanes in that segment.

And this repositioning will put us in a position where we accentuate the growth of those, we resource those, and we maybe de-resource some other ones that are not in a position to grow. But overall, I would say it’s a nice portfolio of businesses with a strong differentiation lineage running through it. And as I say, we are well-positioned to grow to some 4% plus in the long-term.

Joe Ritchie: Okay, great, Chris. And then maybe just to follow-up to that is, sometimes companies will go through this, addition by subtraction exercise, and it sounds like you guys are in the process of improving the margins. The margins are already good. But it also kind of seems like there’s an opportunity then for you guys to potentially divest some of those assets going forward, whether it’s in the specialty business or beyond in the rest of your portfolio, how are you guys thinking about that equation in the divestiture side?

Christopher O’Herlihy: Yes. So, we look at our portfolio on an ongoing basis. We believe we’ve got a very high-quality portfolio and if the opportunity comes to divest, we would certainly do that. I would say that as we think about portfolio management today, it’s more likely to be in the realm of product-lane pruning as opposed to divestiture. Now, that could change, but as we look at it today, it’s much more along the lanes of pruning within businesses as opposed to divestiture of businesses, I would say.

Joe Ritchie: Okay. Thank you.

Operator: We’ll move next to Julian Mitchell at Barclays.

Julian Mitchell: Hi, good morning.

Christopher O’Herlihy: Good morning.

Julian Mitchell: Maybe just a question around the free cash flow conversions, because I think it’s sort of 67% in the first half, the year’s guided a 100 plus. Doesn’t seem like there should be a lot of working cap liquidation in the second half because the quarterly revenue run rate is kind of stable at $4 billion. So maybe just to flesh out the confidence in the cash conversion step up, please.

Christopher O’Herlihy: Yes, sure, Julian. I mean, I think you’re right. We are slightly below our typical conversion range here for the first half. And I think on the last call, we talked about our focus at the divisional level on reducing our inventory months on hand from we’re right around 3.1 right now as compared to pre-COVID, 2.5 or even a little bit lower than that in some of our segments. So, we’ve made some progress. Inventory is down a double-digit on a year-over-year basis. But I would agree with you that we can definitely do better. We fully expect to take advantage of this opportunity in the second half to reduce inventory levels and generate above average free cash flow while, as I said, maintaining our typical ITW [indiscernible] customer service level.

So big focus on this in the second half. And just given our track record around, kind of do what we say, execution, we feel like we’re really well-positioned to generate above average free cash flow in the second half.

Julian Mitchell: That’s helpful. Thank you. And then just my second question would be around the sort of, it looks like the second half run rate on the total company sales and margins, very similar to Q2, as you normally guide, with sort of 26% margin, $4 billion revenue a quarter. You mentioned, Michael, the day sales effect in Q3, Q4, but just wondered, anything else in terms of seasonality for total company you’d remind us of for the third versus the fourth quarter? Any big moving parts on the segment margin as we step into the back half? I think Specialty, you’ve talked about Polymer & Fluid, I’m also curious about the margin outlook there, please.

Michael Larsen: Yes. Yes, I think all good questions, Julian. I mean, Q3 looks a lot like Q2, I would say. We typically see a modest increase in revenues from Q3 to Q4, with emphasis on modest. And we also see typically a modest improvement in operating margins as we go through the year — from Q2 to Q3 and then into Q4. And so there’s really nothing unusual going on there. We do, as you pointed out, we do benefit from having a couple of extra days here in the second half and then, like I said, more favorable comparisons. The other thing that would not be in the run rates is what Chris talked about earlier, which is this increased contribution from new products coming in at higher margins. But we feel like we’ve really maybe taken not just an approach that’s consistent with kind of how we’ve done it historically in terms of guidance, but a fairly conservative approach going into the second half.

Certainly things can change quickly. Things kind of improve, but they can also deteriorate and hopefully, kind of parsing out for you the impact here in Q2 in terms of what a point of revenue growth sequentially means or decline means, the $50 million at the decremental that we talked about, I think gives you a way to kind of further risk adjust your numbers, or if you are more optimistic, you can certainly make those adjustments as well. But that’s kind of how we think about the guidance here for the second half.

Julian Mitchell: Great. Thank you.

Michael Larsen: You’re welcome.

Operator: And we’ll take our final question from Walt Liptak at Seaport Research.

Walt Liptak: Good morning. Thanks, Chris and Mike. I wanted to ask a follow-up on the guidance and just a comment that you made on the first question about — it sounds like June might have gotten a little bit better for some of the capital goods businesses like welding or maybe some others. I wonder if you can talk about that, that some of that macro industrial weakness start to get better.

Christopher O’Herlihy: Well, yes, I think, Walt, June was — things continued to moderate, particularly Auto Builds were softer in June. And then on the CapEx side, Welding, I think consistent with commentary you may have heard from some of our peers in the welding space. And then Test & Measurement, I think while we have not seen a pickup in semiconductor or electronics or CapEx, I would say semi also has not gotten worse. So it’s kind of bumping along. And I would just add that we remain like really well-positioned for the inevitable recovery down the road. And I think if you look at, some of the segments with positive organic growth here in Q2, so you look at Specialty, you look at Polymers & Fluids, the operating leverage that we generate of fairly modest organic growth is pretty remarkable.

So we’re really well-positioned for that. We continue to invest, a lot of focus on new products, but we’ve not seen a pickup in those markets yet. But again, really well-positioned for the inevitable recovery down the road here, whenever that may happen.

Walt Liptak: Okay. Yes, totally agree with that. On one of the segments it’s doing — that’s growing, Food Equipment, you guys sounded kind of upbeat about kind of the retail chain, despite some of the bankruptcies that have been going on. I wonder if you can talk about, maybe in a little bit more detail, how that retail part of the business is moving?

Christopher O’Herlihy: Yes, I mean, I think the retail growth similar to in the first quarter, I think up 9% here in the second quarter, and it’s all driven by new products. So this is all way and wrap equipment and new product rollouts. And I’d say our customer base is not part of the population that you may be alluding to that’s having trouble financially. I mean, these are all the big grocery store, retailers, chains that you would expect. And so we’re not seeing any impact there from them being in trouble financially. Quite on — quite the contrary.

Walt Liptak: Okay, great. Okay, congratulations for that. Thanks.

Christopher O’Herlihy: All right, thank you.

Operator: That concludes the question-and-answer session. Thank you for participating in today’s conference call. All lines may disconnect at this time.