Ecolab Inc (ECL) — Q2 2016 Earnings Call Transcript

Thank you. Hello, everyone, and welcome to Ecolab's Second Quarter Conference Call. With me today is Doug Baker, Ecolab's Chairman and CEO.

...on the conference call. Hello? Did we lose it?

Okay. Thank you.

Sorry. We've got an odd dial tone. All right. A discussion of our results, along with earnings release and the slides referencing our quarter's results and our outlook are available on Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statements on these materials stating that this teleconference, the discussion and the slides include estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Factors that could cause actual results to differ are described in the section of our most recent Form 10-K under Item 1A, Risk Factors, and in our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. Starting with a brief overview of the quarter, continued attractive new account gains and new product introductions drove strong acquisition-adjusted fixed currency sales growth in our Global, Institutional, Industrial and Other segments during the second quarter, nearly offsetting a decline in Energy sales. New business and ongoing cost efficiency work led the adjusted fixed currency operating margin expansion, more than offsetting the impact of soft economies, challenging end markets and continued currency headwinds. These, along with lower taxes and shares outstanding, drove the 7% adjusted earnings per share increase before currency translation. While Energy segment results have been challenging, we believe that recent trends suggest the bottoming of our energy cycle, and we expect second half Energy segment sequential results to reflect that stabilization. We look for the market recovery to begin gradually and take hold in 2017 and improve through 2018 and 2019, and for the Energy segment to show results reflecting that market improvement. Looking to the third quarter, we expect our Global Institutional, Industrial and Other segments to continue to show further strong acquisition-adjusted fixed currency growth outpacing their markets in soft international economies as they leverage investments we have made to further improve sales and service force effectiveness and profitability and more than offset lower year-on-year results from our Energy business. We look for the third quarter adjusted diluted earnings per share to be in the $1.24 to $1.32 range, with that range including approximately $0.08 per share or 6% of unfavorable impact from the Venezuela devaluation and deconsolidation, and currency translation as we continue to aggressively drive business growth. For the full year, the Global Institutional, Industrial and Other segments are expected to continue to show strong acquisition-adjusted fixed currency growth. Energy year-on-year sales comparisons should improve versus the first half and for the full year are expected to decline around 10% versus the last year. We continue to expect to outperform our markets in 2016 while also investing in the key drivers for future sustainable above-average earnings growth. We expect our consolidated results to show improving comparisons in the second half and have narrowed our forecast for adjusted diluted earnings per share in 2016 to the $4.35 to $4.50 range from $4.35 to $4.55, which includes expected currency headwinds of $0.27 to $0.32 per share of which $0.17 per share is from the Venezuela devaluation and deconsolidation. Moving to some highlights from the quarter, and as discussed in our press release, reported second quarter diluted earnings per share were $0.87. On an adjusted basis, excluding special gains and charges and discrete tax items from both years, second quarter 2016 adjusted diluted earnings per share were $1.08 and included $0.08 or 7% currency headwinds. This compared with adjusted diluted earnings per share of $1.08 a year ago. The adjusted diluted earnings per share growth was driven by delivered product and other cost savings, cost efficiencies and lower taxes and shares, which offset investments in the business and higher variable compensation. Our consolidated acquisition-adjusted fixed currency sales were modestly lower as our Global Institutional, Industrial and Other segments grew 4%, but were offset by lower Energy sales. Regional sales growth was led by Latin America and Europe. Reported operating margins declined 50 basis points. Adjusted fixed currency operating margins expanded 30 basis points as delivered product and other cost savings and cost efficiencies offset investments in the business, higher variable compensation and lower Energy results. In 2016's difficult environment, we are focused on driving new business gains by helping customers lower costs. We are using our industry-leading product innovation and service strengths to help customers achieve the best results and the lowest operating costs, and through these, aggressively drive new account gains across all of our segments. We expect third quarter adjusted diluted earnings per share in the $1.24 to $1.32 range, reflecting a combined Venezuela devaluation and deconsolidation impact and currency translation drag of approximately $0.08 or 6%. Consolidated results are expected to improve with the second half outperforming the first half. We narrowed our full-year adjusted diluted earnings per share forecast to the $4.35 to $4.50 per share range from $4.35 to $4.55. This forecast includes expected unfavorable currency exchange in the $0.27 to $0.32 per share range of which $0.17 per share is from the Venezuela devaluation and deconsolidation. In summary, despite a very challenging global economic and market environment, we expect to continue to deliver solid fundamental results in 2016. We remain confident in our business, our markets and our people, as well as our capacities to meet our aggressive growth objectives over the coming years. And now, here's Doug Baker with some comments.

Thank you, Mike. Hello, everybody. Just a couple of thoughts on the quarter and the second half of the year. So, Q2 results were solid, particularly given the environment. So, adjusted EPS was flat versus last year, but plus 7% excluding currency. And if you look at operating cash flow, it was up 37% versus last year for the first half. So, these results are driven by continued strong performance, as Mike just went through, in our Institutional, Industrial and Other segments. Those segments combined had a 6.5% top line growth, 4% organic. Our Energy segment is stabilizing. If you look at Q2 sales and OI, they're very much in line with Q1, with sales off about $5 million, but OI is stronger in Q2. Importantly, if you look at underlying metrics, what we call our leading indicators, both our new business and innovation metrics remained strong. We believe it will strengthen throughout the year. We expect a strong second half as a result; so that will be driven again by continued strong Industrial, Institutional and Other performances. We will see a lessening Energy and FX headwinds we are forecasting in the second half. Energy is really driven principally by an easier base because last year we have seen more of the drop in the second half than the first, so the base is just simpler to compare against. FX is our forecast, but really we're annualizing against last year's big second half move, and we predict that FX will be close to neutral, modestly negative in the fourth quarter, but obviously coming out and being more neutral going into 2017. Last thing, I guess, I would highlight is a real callout to our team who I think is doing a great job in a very tough environment. We remain focused on what we can control, we're getting after new business, we're driving innovation, we're taking care of customers. We're doing a terrific job there. We continue to invest in the future. We're managing the business the right way, particularly around cash flow metrics and working capital, and we're also continuing to focus on delivering in the short term while doing all of these. So I'm very proud of the team and proud of the performance. And importantly, happy to be moving into the second half where we're starting to see a little less of a headwind that we've seen in the last six quarters. So with that, now let me turn it back over to Mike to introduce Q&A.

Thank you, Doug. That concludes our formal remarks. Operator, please begin the question-and-answer period.

Yeah, I wondered, Doug, just talk a little bit on the charge in the Energy business this quarter, was that just kind of a little bit of cleanup there in that business with a few more head count reductions and the inventory adjustment or do you see there being a little bit more to come? It seems like that could be an additional sign that you're also really seeing the bottom there.

Yeah, well, Nate, I would say, our view is that we have bottomed or are bottoming in the Energy segment. As a consequence, we felt it was a good time for us to analyze what assets were actually going to be useful or not useful, given the change in the Energy business. So, we chose the timing based on our belief that we are at the bottom and starting to move into an inflection point, though as I've said before, the coming out angle is going to be a lot lower than the coming in angle. So, it's not going to be an equal recovery. It's going to take more time to get out. But it's basically looking at our inventory situation, we had made product which made a lot of sense in the previous environment, i.e., guar replacements and the like, and given the drop-off in the guar market, they don't make sense anymore. And so, that would be an example of the type of inventory that we disposed of. Simply, it made a lot of sense two years ago; doesn't make a lot of sense in this environment. And likewise in some of the capital, it could have been some fleet assets or some mixing vessels, etc., that just aren't going to be productive going forward, and so we felt it was the right thing to do to take these off the balance sheet. So, really the timing was as you said, and we do believe that this represents the "re-look" at the assets as a consequence of the change in the energy market. We don't believe there is more to come, but also it's hard to predict the future. But that was the idea.

Okay. Fair enough. And then second, in terms of a follow-up question, obviously you continue to see that nice gross margin expansion. I know part of that is due to the lower raw materials and part of that is due to just ongoing internal initiatives. I was wondering if you could kind of give us a little bit of flavor for the two buckets, and then what to expect here going forward as we probably lose a little bit of that benefit on the raw materials side?

Yeah, similar to where we stood at the end of the first quarter, we are still forecasting a modest increase in raw material prices in the fourth quarter. And that's still our view. I would say, the likelihood of that has lessened and not increased as time's gone on, but that's still the forecast. I would say, our ability to drive gross profit isn't solely dependent on raw materials. Obviously, it's pricing, timing and volume. And we believe we'll be able to manage through any raw material rise that we're likely to experience just as we've successfully managed through 2004, 2009, 2010 and 2013, 2014, etc.

Hi. Good afternoon. Congratulations on the execution. First question, within Global Institutional, some very healthy organic growth there. Can you talk about some of the derivative constituent parts, how it's trending, lodging, QSR, restaurants, anything you can give us around price versus share? And then, I have a follow-up. Thank you.

Yeah, most of the growth in both specialty and institutional businesses is volume driven. You have exceptions like Latin America where you just have high inflation where we're going after and getting significant price because it's a must, given the environment. In terms of underlying business performance, we've never had a one-to-one on foot traffic and we're watching some of the same foot traffic reports that probably everybody else is. I would say broadly in the full-service restaurant area, foot traffic has been soft for literally seven years or eight years, so it hasn't been our principal driver. It's really our ability to drive share based on our technology's capability of lowering costs for our customers. And that's going to remain, we think, in the forefront of how we're going to continue to drive share. And to make sure that we're focusing on what our customer needs are, expanding with them as they expand geographically, and seeking out new QSR customers, particularly outside of the U.S. as they emerge in different markets. And all of those strategies continue to work. We think that both Institutional and Specialty will continue to perform well throughout the balance of the year.

Great. Thank you. And as a follow-up, making a comment on your equity investment in Aquatech in the water space. Can you talk about the broader capital deployment? Are we likely to see more smaller venture type or emerging growth type investments, or how does that landscape look to you folks for the balance of the year? Thank you.

Yeah. I would say Aquatech is somewhat unique. More frequently, we're buying companies as opposed to making equity investments in companies. Here it made sense to make the type of investment we're making given the matching capabilities of what we are looking to try to do; we thought it was a wise way to proceed. I would say in the M&A front generally, I'm quite comfortable that if you take some kind of midpoint of a range around 3% of sales that, without doing anything outsized, there's enough attractive targets out there to continue to add approximately 3% to the sales line. I think you're seeing that through announcements like Anios and other smaller announcements this year. In terms of appetite, it's not that we don't have an appetite for a bigger deal. I think we'd be in a position to do one both on the balance sheet and I would say, most importantly, internally with management capacity and capability. But that's really going to be determined by mutual interest coming to a place where economically it makes sense. And these things, you have to be a little more patient around. So I would expect more smaller deals in the near-term.

Hi, guys. If I could follow-up on that last one. I think historically over the long-term prior to big deals you talked about adding a couple percent from lock-on M&A, but typically not a lot of profits in the first year and then that ramp thereafter. Is that still the right way to think about it? And I guess as part two of that, I guess we're getting closer to year end on Swisher. How is that looking specifically from a profitability perspective?

Yeah, when we did the – so I'll answer the last question first. Swisher. Swisher is more or less on plan and as we predicted at the time we bought it we said the first four quarters of ownership would be likely negative. Obviously, we bought that asset at a pretty low price. It was at a low price for a reason. It didn't make any money. It was likely losing money. And we wanted to turn that around over time because we're quite sensitive. We want to remain in control of keeping the volume and the customers happy. So I would say that's progressing, and we'll start seeing positive out of Swisher either Q4 of this year or Q1 next year. So no different. I'd say I think your formulaic statement around; we get the sales first and the profit next. I think it's more true than not. It's field-dependent. We – the metric we pay most attention to is return when we're doing deals, not accretion dilution. Swisher would be a good example of that. Dilutive the first year, but a hell of a return if we're able to execute on it and we think we will be able to. That's how we like to focus on doing deals. And so we're just not as sensitive to first-year profitability on these as long as we think the return's going to be great. Now we're not against first-year profitability either, but often it will come hand-in-hand. So I think that's how I think about it. But if you do a series of these year-in, year-out, it sort of takes care of itself because you build up a number of annuity streams and you're making money on the deal over any reasonable period of time.

Great. Thanks. And then the follow-up. Obviously interest rates have come down a lot since the Brexit situation. And I guess it seems to me you're likely to face another pension headwind next year if rates stay where they are. Is it too early to get a sense of the size of what that could be, or should we think of the average of the last couple of years when it was at $0.10 or $0.20 headwind? Is that possible? Thank you.

It's a math formula. So if you drew a line right now and said, this is the interest rate, it'd be $0.04 to $0.05 negative next year in that range. So like 1%. I don't think it's going to swamp the boat. I'd rather have a point favorable, but that's the type of impact you'd be looking at.

Hi. This is Dan Rizzo on for Laurence. I just wanted an update on how the market dynamics have shifted, particularly in Europe and the U.S. if anything's changed at all?

Well, U.S., I would say isn't much different than we expected this year. We never have high expectations. We always go into these years thinking that growth is going be more similar in the past couple years – and there's no magic second-half inflection point – seems to be regularly forecast but rarely realized. So U.S., we haven't seen a huge change. I think there is a bit of a consumer spend hiccup in April, May, but that seems to have evened out a bit. In terms of Europe, I don't know that – I would say the more – the bigger impact in the near-term has been around – from terrorism, not British exit. And I think British exit may well indeed have significant impact on Europe in total. I guess it's too early to recognize that at this point in time. But terrorism certainly, where it's hit, though, obviously, the Turkish tourism business is way off for two reasons: their challenges with Russia, which seem to be clearing up. Russian tourists were one of their main draws and that dried up, but obviously the terroristic activity throughout that country has had a dampening effect on people's desire to go visit. And likewise in parts of Europe, you've seen the same impact. With that said, I still think we're going to have positive sales growth this year in Europe. We continue to drive share. Our share anywhere in the world is not anywhere near what we would call max capability. And so what we focus on is taking care of our customers, keeping them and driving share. And we still believe we are more in charge than not of driving top line.

Okay. And then my second question is just with the vitality index, I think the bogey is like 35%. Are you at or near that or a little above, a little below? Just a color there, please.

Yeah, we're right around 30%. And the 35%, it's a little different by business unit. I think on average now, we'd say it's around 33%. So we're just under our target.

Sure. Can you compare the overall new business sold in the first half of 2016 versus the first half of 2015?

Yeah, I think we are plus – I think we're off a couple points year-on-year versus where we were last year, which isn't unusual. But we're basically running at the same elevated rate.

And then as a follow-up, on the energy charge, can you sort of size what percentage of headcount was taken out or give some way of thinking about the SG&A benefits from that charge on a go-forward basis?

Yeah, David, if this is wrong, we'll come back and correct. I think what this was, was the number – probably 4% to 5% of headcount in the company is what it represented roughly.

Yeah, thank you. I just wanted to ask again about the energy recovery in the second half. Is that just more of an easier comps issue? Or – and just curious with oil trading back lower and maybe building some cushion in for the year, just curious, and maybe if you could give us some color on the different parts of that energy breakout and what are you expecting in each?

Yeah, we expect continued softness, clearly, in the WellChem business, in particular. OFC less so, but still soft and downstream continuing to grow in the second half, even modestly better than the first half growth. Some of that is just year-on-year timing as well. But mostly, Manav, what this is, is easier comps. There is a minor benefit from – there's some seasonality. We are not anticipating or expecting any upturn in energy market activity in the second half from really first half levels. We do believe that you continue to have the correction that we've been seeing in terms of supply and demand in the overall oil market. That continues to narrow which we believe is the metric to watch more so than price. Price has seasonal components to it too. We believe that we are likely to see softening of price as the summer ended. It was predicted by many in the industry. I know many are acting surprised, but that was a common prediction and so we still think that the key metrics are supply and demand. They are narrowing. That's what's going to drive correction and price over any period of time, but we don't see any real activity recovery until 2017.

Got it. And just to touch on the Anios deal I guess, if I said that correctly, the healthcare deal, but just some – the strategy there, is that more of the typical tuck-in that you do? Or what should we expect in the healthcare area?

Yeah, I mean healthcare remains obviously one of our real focus areas, and our healthcare business in the second quarter had 4% sales so we're seeing the recovery and improvement that we've been talking about in that business, and we anticipate a better second half in that business even before we close on Anios. So the Anios business and the rationale is, one, it's in very similar businesses, has some excellent technology which we can leverage throughout the other geographic parts of our business. It's a great geographic footprint match with our current European business, i.e. where they're strong, we're almost non-existent and vice versa, so it's an almost ideal puzzle piece from that standpoint. And then the Anios brand is a strong brand, and we see it as a great way to go drive penetration in markets that may not be large enough for us to build our own locally focused healthcare organization, but still develop a very strong distributor-base strategy leveraging a very strong global brand name like Anios. So that's the basics of that deal.

Hi. Thank you very much for taking my questions. Hey, Doug, just in a kind of a general question here. Outside of the Energy business, your other businesses are growing 4% organic. Given the overall global environment and market that we're in, does that feel like the right way to think about this going forward? Or you feel that there's levers to really accelerate the items from 4% to 5% to 6% in the current environment? And then potentially – excluding energy is kind of a wild card here?

Yeah, I think the 4% is a bit understated versus what the actual performance is. Yes. If you said the global environment is going to be static here because you've got a number of industries which are going through major contractions as a consequence of change in economic environment, specifically primary metals, steel, etc., which are big water technology consumers for us, have been contracting. That's got a half-life. They've stopped contracting. While they may not rebuild, you do run into year-on-year base. Mining is obviously going through a major shift, and so you've got these – mining was down 10%. We've got some large pieces of our heavy water business down double-digits as well. That stuff will moderate over time even if the economy doesn't improve from here. So I really think much of our business is growing call it more like around the 5% zone. I don't think that's an unusual expectation or an unrealistic expectation in a modest-growth economy, which we're in globally. So I would probably pin it around there. I think it's going to take a better economy to get us firmly in the 6% to 8% over an extended period of time, and we're welcome to prove that out if the economic gods would benefit us with a better economy.

Okay. And then as a follow-up, can you talk a little bit about healthcare and just the expectation for it to get better in the second half? We've seen a number of times where healthcare has kind of spiked up and then come back down. I guess you could call them head fakes or however you want to refer to them, but what gives you the confidence that we're actually going to see some consistent improvement?

Well, I think last year would probably be the only head fake I really know about and the head fake last year was called a recall, which feeds into this year's confidence that we're going to have a much stronger second half than the first because you're going against the recall base, which we talked obviously about last year in both our third and fourth quarter call. But if you look at the fundamentals in that business, we're having more success than we've ever had in terms of selling new customers on our programs. That's the fundamental that we look at and why we're bullish on this business. So we got a good team, much better execution, the work that we did when we "put the business in the shop" I think is really paying off, and the team execution is quite strong right now. That's really the bullishness.

Thank you. Doug, on Energy in terms of pricing. Did pricing declines accelerate at all this quarter or have they been stable at these levels?

Yeah, they've been fairly stable. I mean, I think we're in our peak decline, if you will, sort of the culmination of pricing moves taken last year and pricing moves taken this year in the third quarter. It's modestly different than what we've experienced in the second quarter, and then we expect it to start improving from there. So we're right around the bottom of the price impact, as well, too.

And I noticed earlier for 2017, but at current oil prices I guess you would say you could grow earnings in energy next year. Can you describe maybe how and how much, perhaps, as an early read for 2017?

Well, it is early. So I would have to ask you a number of other questions about what assumptions you've got for the market. If they're this assumption which is that you do see modest oil price recovery next year where it's – or let's call it $50, $55 for a continued period of time which is what we believe and you start seeing a very modest pickup in activity in 2017, we think that we'll see modest growth which we talked about previously. Call it mid-single-digits and in that scenario, just the volume leverage, overhead coverage leverage alone you would see sizable improvement in operating income from that business. That would – we do not believe next year is going to be a price recovery year simply because typically it's probably going to have to move into 2018 before we see substantial price recovery. The price recovery alone isn't needed to see improved margins or improved profits.

Great. I wanted to just build on the prior question. Doug, you mentioned that the businesses may be understating its growth because of some of the headwinds and hopefully, heavy water. Where are we on those heavy water industries? You mentioned steel and mining that are dragging. Are those comps bottoming? Clearly the comment on energy, I just don't know about these other quantities.

Yeah, I think we believe mining; we come out of it fourth quarter or first quarter. We are annualizing against kind of the significant change that occurred in that market. Likewise, I would also say in heavy water the segments are under pressure there. It would be around the same timing. There's some in Q4, some in Q1, but call it end of the year.

Okay. Great. And then just – it was interesting to hear the comments that your consolidated overall revenue growth was driven by Latin America and Europe. It seems a little bit idiosyncratic with some of the global economies. Can you just talk about what was driving that? Was it your sales execution or are you seeing better fundamental trends in some of those markets than you are in the more mature North America market?

Well, our sales in North America ex-energy were clearly stronger than Europe. Substantially. I would say Energy's impact, negative impact, was principally North American story. So that's really the North American perspective. Europe, I think the Europe team's been doing an outstanding job and since last year when we started getting some sales traction they've been on the fundamentals that drive it, which is new business and innovation, and they're doing a good job executing it in spite of obviously a less-than-robust economy. Latin America, we've got very modest volume growth in Latin America but a very strong pricing impacts, which is I said earlier were and are critical given the high inflation in those markets which is really driven by their currency devaluation. So they import a lot of technology and a lot of raw materials, and those raws cost more in those markets as a consequence of their currency moves and we had to get pricing to negate that and we are. So that's – I guess, the perspective I have on those regions. So L.A. we continue to get modest market share gains with significant pricing gains.

Good afternoon. A couple of questions, if I may. First of all, can you talk a little bit about what's going on in the Food and Beverage market? We've seen growth there over the first six months or so, a little bit slower than it's been in the past. Are you anniversary-ing some of the share gains you've gotten, or is the overall market a little bit lighter in terms of demand? Can you just give us a little bit more view on what's going on and what you expect to go on there in the second half of the year?

Yeah, I guess second half we would expect F&B to be equal or a little better than you've seen in the first half. And as 4% probably moving into the 5% range is sort of the range that we're talking about. I'd say F&B continues to perform well. It's got pretty even execution around the globe. But you've seen a lot of consolidation, particularly in the North American market as there's been real pressure on a number of processed food companies, there's been a number of large acquisitions, both executed and considered. And so when two big companies get together they tend to drive synergies, which means fewer plants and what we would like is more food produced in more plants. That's not exactly how our customers view it, so they like more food produced in less plants and as a result we've got to go work through those things. But we've been doing this off and on, this goes in cycles. We're just going through another one, and this too has an end. But at the end of the day we continue to drive share in that business. We've got great new technologies coming out, particularly in the antimicrobial areas. So I'm quite bullish about F&B's near-term future and long-term future.

Okay, Doug. And then as a follow-up, I think you mentioned that you expect some raw material inflation in the back half of the year. Can you talk a little bit about sort of where you see that coming from, whether it's petrochemical side or non-petrochemical side of the equation, or – I'm just – I'm not seeing a lot of sort of raw material pressure, so I'm just wondering where you're seeing them.

Yeah, we see some of it in the caustic area and have already seen some. But also our forecast is a bit asymmetrical, i.e. no real pickup in activity, not significant price change in the oil market, yet we do have forecast some petrochemical raw materials increasing. But you need this in a forecast because I promise you maybe that's conservative. I promise other things that we think are conservative are going to prove to be not conservative, and so it's just what's in our forecast today as we go forward, and as I mentioned earlier, I would say the likelihood of that increase is less now than it was a quarter ago but we'll see. We've remained with that in our forecast.

Hi. Good afternoon. Thanks. Wanted to ask another question just on the energy front, just on maybe the pace or trajectory of recovery. You mentioned, Doug, that you didn't think it would be the same angle of recovery as the angle of decline. Then you also mentioned you expected a sizable improvement in operating income, even with a mid-single-digit top line improvement next year. When you say sizable, I think the consensus number for EBIT growth next year in energy is around 20%, 25%. Is that the type of growth you think we should be baking in or is that aggressive?

Well, one, I would say – I don't want to get pinned down on exactly what we think energy EBIT growth will be next year, simply because we are just initiating our planning cycle as we go through and taking a view on what we believe raws are going to do next year as well as the market and everything else. So if you would, we'll give more transparency into that expectation as the year goes on. But right now, it seems to be – it's just too early for us to do that in good conscience because our odds of being a right are even smaller than they will be in December. Now with that said, when you have volume degradation in a business, particularly after X, you just see a lot of margin chewed up because you no longer are getting coverage. And so you will see, I think, a march back on OI that is different on sales, simply because as you get some nominal volume coverage, it starts rebuilding overhead coverage. And you also get out of cutting inventories and back into even building inventories. And so, this thing is always a little bit pro-cyclical on how you have to manage inventories and everything else. It accentuates the negative, and probably in a small way, accentuates the positive when you get out of it. Any further questions?

Thank you. That wraps up our second quarter conference call. This conference call and the associated discussion and slides will be available for replay on our website. Thanks for your time and participation, and our best wishes for the rest of the day.