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A. O. Smith Corporation (NYSE:AOS)

Q3 2008 Earnings Call

October 16, 2008 10:00 am ET

Executives

Patricia K. Ackerman - Vice President of Investor Relations

Paul W. Jones - Chairman of the Board, President, Chief Executive Officer

Terry M. Murphy - Chief Financial Officer, Executive Vice President

John J. Kita - Senior Vice President of Corporate Finance, Controller

Craig Watson – Vice President - Business Development

Analysts

Michael Schneider - Robert W. Baird

Ned Borland - Next Generation Equity Research

Paul Mammola - Sidoti & Company, LLC

Matt Summerville - KeyBanc Capital Markets

Operator

Good morning ladies and gentlemen and welcome to the third quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to our host, Vice President of Investor Relations, Patricia Ackerman.

Patricia Ackerman

Good morning ladies and gentlemen and thank you for joining us on this conference call. With me this morning participating in the call are Paul Jones, Chairman and Chief Executive Officer; Terry Murphy, Chief Financial Officer; John Kita, Senior Vice President of Finance; and Craig Watson, now Vice President in our Business Development Group.

Before we begin with Paul’s remarks I would like to remind you that some of the comments that will be made during this conference call, including answers to your questions, will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in this mornings press release.

Paul Jones

We want to welcome you, Pat, to your knew responsibilities in investor relations. I have to say you have a knack for timing.

Anyway good morning ladies and gentlemen and welcome to this morning’s third quarter 2008 conference call. We are pleased to report our third quarter results this morning.

Total sales in the third quarter increased 9% to $603 million from $554 million last year. Net earnings of $21 million were $3 million lower than last years third quarter while earnings per share were $0.70 per share compared with $0.79 per share last year.

Adjusting for two things last years non-recurring tax gain of $0.10 and pre-tax restructuring expense of $2.1 million, equivalent to $0.05 per share in our Motors business, earnings per share on an adjusted basis increased 10% to $0.75. Our operating units are performing well in the most difficult economy in recent memory. We remain confident in our ability to manage the challenges associated with the weak housing market and relentlessly high raw materials and energy prices.

Because of the strong performance in the third quarter we have increased and narrowed our 2008 earnings guidance to $2.80 to $2.90 per share from the previous estimate of $2.70 to $2.85 per share. Obviously we remain cautious regarding the balance of the year.

Terry will now discuss the financials in a little more depth and I will come back and talk about the outlook.

Terry Murphy

Sales of $372 million in the Water Products business were 11% higher than the $335 million reported in third quarter of last year. Strong commercial sales and growth in China of more than 25% as well as pricing actions related to higher costs for steel were partially offset by lower residential unit volumes.

Third quarter sales of $232 million at Electrical Products rose 5% compared with the same period last year. A double-digit decline in unit volumes related to the soft US housing market was more than offset by sales growth in China and improved pricing related to higher costs for steel and copper.

Total operating profit was $3 million lower than last year, primarily the result of higher restructuring costs at Electrical Products this year versus last year.

Third quarter operating earnings for the Water Products business of $32.8 million was similar to the third quarter of last year. Lower residential volumes and higher steel costs more than off set the benefits from higher sales of commercial product and China and the impact from pricing actions. Operating profit margin declined 8.8% from 10% last year.

Third quarter operating earnings at Electrical Products were $10.7 million and included $2.1 million in charges for restructuring activities. Operating earnings were $12.7 million in the third quarter of 2007. Operating margin was 4.6% compared with 5.8% last year as a result of lower volumes; adjusted for restructuring operating margin was 5 ½% in the third quarter of 2008 compared with 5.9% last year.

Operating cash flow was a real highlight during the quarter. We generated $56 million of operating cash bringing year-to-date cash flow to $79 million. Compared with the same period in 2007, cash cycle days declined to 63 days from 67 days in the third quarter as a result of better receivable collections and the lower inventory days primarily at Water Products.

As a result of a positive operating cash flow our debt to capital ratio declined to 29.7% from 34.3% at the end of last year.

Year-to-date capital spending totaled $44 million compared with $42 million last year. Capital spending for the full year is expected to range between $70 and $80 million, down from the $85 million previously forecast.

Depreciation and amortization for the first nine months totaled $50 million and is expected to total about $67 million for the year.

We are projecting total operating cash flow of approximately $150 million for 2008 up from our forecast of approximately $120 million at the end of the second quarter.

I will now turn the call back to Paul for some comments on the outlook.

Paul Jones

I would like to spend a few moments discussing the market and our operating environment. As you know our biggest end markets are residential and commercial construction. The protracted slow down in the residential market is old news at this point, while we believe the slow down in the commercial market segments we serve is beginning to pick up some steam.

As you also know, for both our businesses we sell products into fairly mature segments of both the residential and commercial market segments, allowing us to benefit from the lower volatility associated with high replacement demand. As you can see for Water Products we estimate that it’s over 70% replacement while for Motor’s it’s approximately 60%.

We estimate that housing completions will decline more than 30% this year and will decline meaningfully again in 2009. Nonetheless for 2008 the decline in residential water heater shipments is projected to be a more modest 5% to 8.5 million units from 8.9 million units in 2007, the slower pace reflecting the high replacement nature of the market. We do expect a similar change in 2009.

With respect to channels the decline is more pronounced in the wholesale business which is more closely tied to new housing construction.

A couple of slides back I mentioned that the light commercial market segment, that we sell our commercial product into, is beginning to decline at a quickening pace. This slide, depicting retail construction spending, makes that point. We believe this is a good barometer for our commercial business because it captures the strip mall construction that usually accompanies growth in residential construction. As new sub divisions go up, strip malls usually accompany them, conversely as residential construction declines eventually [inaudible] like commercial.

Although we have enjoyed good commercial sales growth during most of this year, we believe the declines in spending will catch up with us beginning in the fourth quarter of this year and will last through most of 2009.

Steel costs are dramatically up in 2008, more than 80% from the beginning of the year, now to over $1,000.00 a ton. Because of the lagging effect of our contracted steel costs we will continue to fully experience the steel costs inflation seen in the last three months during the fourth quarter of this year.

In segments that our current pricing does not cover the cost of steel we are evaluating a full range of options to improve our profitability.

Now I am going to switch to Asia.

China represents more than 10% of our business and is a key ingredient of both our sales and earnings growth initiatives. We expect that region of the world to account for almost $300 million in sales in 2008 and makes a proportionally higher contribution to operating profit. But, economists have been reducing their 2009 growth forecast for China from over 105 maybe two months ago to under 8% last month and around 4% earlier this week. It is only logical that as the world’s developed economies slow in the wake of this financial crisis that China will slow as well. So these more conservative forecasts are not surprising.

Our sales in China grew more than 30% a year from 2003 to 2007, well above the GDP growth in that country. This year the combined China business will reflect slower growth of approximately 20% with some of that reflecting the appreciation of the RMB.

We are beginning to see the slow down in the markets and are making the appropriate adjustments and where our Chinese businesses have helped mitigate some of our US based headwinds the last few years, we are growing more cautious about prospects for the next 12 to 18 months.

Having said all of that we are still very excited about our momentum and long-term opportunity in Asia as we leverage our brand and expand our product offerings.

Where dose that leave us? Well as I stated at the beginning, as a result of our strong performance in the third quarter and despite the difficult economic environment we are facing in the fourth quarter, we have increased and narrowed our 2008 earnings guidance to between $2.80 and $2.90 per share from our previous estimate of $2.70 to $2.85 per share. However, we face headwinds going forward including lower commercial volumes and higher raw material costs that will only be partially recovered. Further more, the uncertainty with regard to the economy’s stability continues to cloud our visibility, thus the cloud you see on this slide.

Regarding our longer-term prospects, again, we see lots of moving parts, some things good and some things not. For instance we do see the housing market stabilizing which is very positive. On the other hand we see it bottoming later than we had previously thought. We see a declining commercial market which carries important mix implications. We see a slowing economy in China which will adversely affect unit demand, but a slow down will allow us and the larger economy to catch our breath while helping to cool global commodity inflation. It all adds up to a lot of moving parts, challenges, and opportunities that we intend to provide further insight to when we meet with you again in January to discuss total year 2008 results.

With that we are ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Schneider with Robert W. Baird.

Michael Schneider - Robert W. Baird

Maybe first we could just start with the Water Products division. Can you remind us now, as we exit 2008, after all of the pre-buys and other dynamics what the commercial and residential split is in revenue and then operating income as well so we can get a sense of what the mix implications are for 2009?

Paul Jones

For competitive reasons we would rather not talk about what those are. The unit volumes are out there, I think you can get that. We have about a 50% share on the residential side and we have been able to move up to north of that on the standard and commercial side. But, we are not going to talk about the margin splits and I’m sure you understand why.

Michael Schneider - Robert W. Baird

Yes and well we have to make an assumption about average price points. Could you give us a sense of what your average price point or revenue per unit is in residential versus commercial so we can make those assumptions?

Paul Jones

I really can’t. It is all over the map. We make some commercial water heaters that are five gallons and we’ve shipped a couple of huge 6,000-gallon commercial stainless steel units to Dubay a couple of weeks ago, so it is all over the map, everything in between. We have cranked up our export business there and that is doing quite well for us. I know we’re hitting you with some caution. I would just remind you that we are conservative folks. It is very difficult right now to forecast given all the volatility and all the different mixed signals that are coming at us, so we tend to go with a rather cautious or conservative approach.

Michael Schneider - Robert W. Baird

That leads to my next question on the commercial water heater side. If you look at light commercial construction included in the chart you have laid out in your presentation it has been down and deteriorating really for two years and has been negative this year. Yet your commercial products, I would guess, are probably having record quarters right now. Is it exports, is it market share gains, is it just the price increases that are distorting negative volume shipments? Can you just give us an color to explain why we haven’t seen it yet in your commercial business?

Paul Jones

Well it is a lot of things. I am really proud of the leadership team we have there. We are doing a lot more on export. We have been able to bring out a lot of new products. I’m not going to go into great detail, but we’ve got a cyclone water heater which is moving up to, I think we are getting close to 20% of our commercial sales. It is a brand new high efficiency commercial water heater. We have a variable plane boiler, a light, small boiler that is doing well. It is a lot of things.

We are selling products all over the world. We are expanding our commercial business in China; we are putting a commercial production line in there. As a matter of fact we are already making some units there. There are a lot of things going on. We are probably anticipating some things that are going to happen. I think you would expect us to constantly look at not only what the most likely is, but make sure we are protecting against the worse case.

Michael Schneider - Robert W. Baird

Are unit volumes actually down this quarter in commercial or are they up just in addition to positive pricing?

Paul Jones

We had a good quarter last quarter in commercial.

Michael Schneider - Robert W. Baird

Okay and then on pricing you and your two major competitors went out with 10 points of pricing on commercial alone. Do you think that drove any pre-buying this quarter in the commercial slice?

Paul Jones

Yes it did. That increase was in September so that pre-buy came into August. There might still be a little bit of an overhang of that, Mike, it is hard to tell.

Michael Schneider - Robert W. Baird

On the residential portion, did I hear you right Terry that there were double digit volumes declines in residential or was that revenue?

Paul Jones

Yes it was in motors.

Terry Murphy

A couple digit declines in motors.

Paul Jones

I mean we are seeing unit declines in residential water heaters; it is down about 5% I think.

Michael Schneider - Robert W. Baird

And with the pricing though, is residential still up in dollars?

Paul Jones

Yes.

Operator

Your next question comes from Ned Borland with Next Generation Equity.

Ned Borland - Next Generation Equity Research

I just want to talk about the electrical side for a minute. Even x the restructuring, if units are down that much, is there something going on there with regard to the road map initiatives or are there some unfavorable copper hedges or what’s going on with the margin there?

Paul Jones

It is still a tough economy; I mean the volumes are down. Look at the customer base we have and check out what they are saying about, look at the HVAC businesses right now. But, we are still on track with the road map, we are still committed and have detailed plans to achieve the anticipated results we’ve given you. Have we lost some business, yes we have.

Our objective is to get our margins everywhere across the company above the cost of capital and we’ve got detailed plans in every little market segment and product line and customer and where we are not able to do that we are taking pretty aggressive actions to get up either with a significant price increase, or redesign, of product substitution, maybe we do a product downgrading that better fits what they need. There is any number of things.

We have also exited some business and we’ve had some customers exit business with us when we were pretty aggressive on the pricing. Sometimes they come back. We just had one make an inquiry the other day that exited several months ago and they are not getting the quality and service so they are now initiating discussions with us again.

There are a lot of things going on. We are still committed to the roadmap and we are still convinced that that is going to lead to significant profitability improvement in Electrical Products and get that business up to covering the cost of capital.

Ned Borland - Next Generation Equity Research

On the roadmap initiatives I guess the big savings come next year, but can you give us a sense of how that kind of lays out for next year?

Paul Jones

We have said we are going to get 45 million this year. We have already gotten most of that so we are very comfortable that will happen and that will increase the $20 million next year, $15 million over this year from the restructuring roadmap activities. We are still on [audio gap] that is baked into our budget for next year, the [audio gap] that we’re doing and as always we are not satisfied with that, we are looking at other opportunities.

We are starting to do a little bit more on the motor side on some growth initiatives, both new products and some new customers, some geographic things going on there that we are pretty excited about. Some of these take a year to get online, but where we have successfully taken a product line up to a margin level that is acceptable for the long-term it would make sense that we would then go out and start trying to grow that and that is what we’re doing.

We have been in shrinking fix it mode there for four years and I think you as an investor would expect us at some point to turn that around.

Ned Borland - Next Generation Equity Research

My last question is in regards to the operating cash flow, it looks like you saw some good improvement there. I know you’re still kind of in a holding pattern with regard to share repurchase, but are we just looking at that reduction going forward with the free cash flow?

Paul Jones

No, I mean we’re very pleased to drop below the 30% debt to capitalization. We had originally said that would happen at the end of the year and we got there in the third quarter, so I’m really proud of the team for what they’re doing.

Like every other manufacturing company out there right now cash is king is the motto we’re using right now. We still have ample room in our debt agreement and it’s got a few more years of life left in it. The reason we have the no trade window is the pending deal with SICO, Smith Investment Company that is still being worked on those special committees.

We are looking at acquisitions. There might be some private equity firms out there that maybe have got some troubled assets and they are looking for cash and we are out doing a lot of prospecting right now, as well as looking geographically, as well as some product expansions, and we have got a couple of technology moves that we are looking at.

We think we’ve got some dry powder right now. We know we have some dry powder and if we could find a real bargain out there that would immediately return the cost of capital and be accretive to earnings we are going to be after it.

Operator

Your next question comes from Paul Mammola with Sidoti & Company.

Paul Mammola - Sidoti & Company, LLC

Given what you said about pre-buying steel and how you have lagged the price of steel and copper over the past six months would it be fair to say that going forward you could see further margin pressure from where we are here?

Paul Jones

Yes a little bit. It is going to be about the same as where we were in the third quarter. Our steel agreements, I think we have discussed this in the past, we will take last quarter a three-point average and that determines the price for the next quarter. We have done that so we could have some surety of what our costs are going into the next quarter. Then we use that as an index, depending on the material content of the products we sell, to put into the contract. This is primarily on the Motors side, so that as we go into a new quarter if our steel costs are going up the majority of our contracts will have an automatic escalation clause so we get that cost recovered. We don’t quite have the same situation on the water heater side.

The rapid increase, again, we saw one the second quarter and then lately there was another spike towards the end of the third quarter. It is now falling back a little bit and that certainly maybe will give us a little bit of relief going into the first quarter, but right now we are not anywhere close. Well we are close, but we are not where we were at the beginning of the year relative to steel and we are taking some actions to make sure we rectify that.

Paul Mammola - Sidoti & Company, LLC

On India, obviously that could be a big market for you guys. Would you expect the ramp up there to be similar to China or in other words maybe a ten year sort of timeline to get a sizeable chunk of that market?

Paul Jones

We think it will be faster than that. We have learned a lot of lessons and we still have the same people that did the China expansion. We have gone into India with product specific for that market. We had a lot of the same sort of things we do here. We get focus groups together and find out what the ultimate consumer wants to have in a water heater and we design that in. We have a very special product for the market there and we are off to a much better start. We have had a lot more sales than we initially thought we would get.

We are still making the product in China and shipping it to India, which for a whole lot of reasons is not helping out short-term on the profitability, but once we get the factory up and running there and making the product in India we think we are going to have a pretty solid business there in a very short period of time.

Paul Mammola - Sidoti & Company, LLC

You spoke and gave some good color on China. Is it fair to say that through the first few weeks of the fourth quarter that China is slowing or is that about to come about would you think?

Paul Jones

I think we’re seeing China slowing, but remember we are now down to only about a 20 or 25% growth rate. That is not something I am going to be too upset about. It has been above 30 for the last several years. We are still doing much better in GDP for two reasons: our water heater business is targeting a still growing segment of the market, that’s the upper middle class and our Motor’s business, we are doing much more exporting out of China now all around the world with our commercial hermetic which is becoming a pretty good sized piece of the company now and a profitable piece.

Operator

Your next question comes from Matt Summerville with KeyBanc Capital Markets.

Matt Summerville - KeyBanc Capital Markets

Terry I was wondering if you could quantify what your pension expense is in 2008 versus 2007 running through the P&L and if today was 12/31 assuming that is your measurement date, what would pension expense look like next year?

Terry Murphy

For ’07 it was $11 million, for ’08 it was about $4 million and at this point ’09 is really up in the air given current market performance. My best guess is that it would be a little bit higher than it was in ’08, but probably it won’t be as high as it was in ’07.

Matt Summerville - KeyBanc Capital Markets

Then could you guys also talk about how you perceive channel inventories in both the water heater and electrical products business. In motors maybe compare your OEM guys versus distributors and then on the water heater side what you’re seeing in channel inventories at the retail level as well as at the wholesale level.

Paul Jones

The OEM side I think they’ve pretty well got the inventories in line. We don’t see an excess or a shortage there on the motor side. Distributors, in some cases, are seeing an opportunity on the replacement side and we have got a couple of distributors that are actually tweaking up their inventories a little bit. We have a very short production cycle from order to shipment so we are doing everything we can to help make sure when they do have opportunity for business we can support it.

On the water heater side I think the inventories are down from where they were a year ago at our wholesalers’, that’s good. I think they are down at our retail partners’, that’s good. The reason for that is we have shortened our cycle time from order to delivery and significantly increased our service levels. We have pretty well absorbed those things this year and I think the inventories are pretty much in line.

We may be still, as I mentioned earlier with Mike Snyder’s question, we may still have a little bit of overhang on commercial water heaters, because it was a pretty sizable price increase in September and we did see a few customers lay in some standard commercial product. Maybe they are still holding onto that for another few weeks and then that will be out of the system. Then of course things are still, we are still evaluating what we are going to need to do January 1 relative to price and we will be coming out with those announcements during this quarter.

Matt Summerville - KeyBanc Capital Markets

How should we be thinking about copper as far as how that’s impacting the Motor business in the third quarter and kind of on a go forward basis since the commodity price is well up, it’s high, and at the same time does that then mean that your average selling prices, everything else held equal so steel held equal, would actually come down then?

Paul Jones

We hedge copper, as does everybody else in the industry. We do about half, maybe a little bit over half, of our hedging alongside our customer. In other words the customer makes the decision to lock in some copper at this particular price and we go lock it in and that determines the selling price to them for that period of time.

For competitive reasons I don’t want to talk too much about hedging, but I think it would be safe to say that everybody in the industry is doing a lot less hedging than maybe they were a couple of years ago, simply because of the volatility and the prices have been coming down.

Copper got down to $2.05 last Friday. It then went up to about $2.50; I think it is $2.20 today. It is pretty volatile, so we along with our customers, we have some customers, one in particular with some pretty sophisticated forecasting models. Overall, the way we do it is we have a copper hedge committee; they meet on a regular basis. We have smart people in there. We have some outside forecasters giving us what they think will happen. Like all forecasts they are almost always wrong, but they have been less wrong lately then they were before. So we just watch it and I think I would be surprised if any of our competitors would give you any different of an answer than that.

Operator

Your last question comes from Michael Schneider with Robert W. Baird.

Michael Schneider - Robert W. Baird

I wonder if we could just talk about the implied guidance for Q4 and the sequential decline in earnings that’s implied. If you look at the annual guidance back out it seems to imply that Q4 earnings on a GAAP basis are going to be at the mid point $0.37 which is almost half of what you reported this quarter. I suspect there is about $0.05 more of restructuring in Q4, at least based on the annual guidance, but even scrubbing that additional $0.05 I struggle to understand why earnings are going to effectively be down 405 sequentially when seasonally that is normally not the case.

Paul Jones

I am going to tell you that I don’t feel good about how well we can forecast right now. I hope you don’t take that as a negative comment. I hope you take it as a cautious comment. There is just a lot going on out there right now. We are monitoring our customer base very closely, their liquidity. A lot of money dried up over the last two or three weeks and we are making some assumptions. Obviously we are going to work 24-7 to make sure we beat the heck out of this forecast, but right now we don’t want to give you a number and miss it. I think we have proven that and it is just a touch time right now to sit down and put a forecast together.

Michael Schneider - Robert W. Baird

I understand. Have you, as a consequence, taken significant production days out of the forecast for Q4 to reduce your own inventories or what do you expect based on your plans for Q4 internally that would impact margins so dramatically? A decline that bad I have only seen in my history with you guys over the last ten years that it is associated with huge inventory and production cuts in Q4.

Paul Jones

We have taken some days out of the production schedule. We actually have one day this month that we did not run a water heater plant in the US. That is the first time that’s happened since I’ve been here. It’s just one day, but again, cash is king. We are monitoring the cash. We have made a lot of internal improvements in operating systems where we are able to give better service at lower inventories. We are now to the case where we can keep our inventories in line, keep our service levels up. We are monitoring our customers.

One of the reasons for a conservative forecast is we have a motor OEM customer right now that is talking about possibly taking several weeks out in the fourth quarter. Well if they take several weeks of production out that is several weeks of our sales to them that won’t occur.

We don’t know for sure what is going to happen. Our poke [ph] folks are in daily contact, as you would expect us to be, with the OEMs where our product is designed into their product. We are kind of taking a worse case scenario and trying to make sure that we still have positive cash flow and hit our earnings estimates.

Michael Schneider - Robert W. Baird

In the retail water heater space we have been talking about potential price increases finally being realized. Do you have any update there?

Paul Jones

I can’t talk about pricing there Mike. I am sure you understand.

Michael Schneider - Robert W. Baird

In Motor’s, the distribution slice of that business, can you just describe the trends there, not only during the quarter, but maybe even as late as an indication of your industrial exposure?

Paul Jones

First of all our industrial exposure in distribution continues to decline. That’s the interval of horsepower. That is just not a business that we can compete with the Baldor’s and Regal’s and we are deemphasizing that. But, on the replacement side it is still growing. We are still picking up some business. We are still picking up additional pages in the catalogue, for lack of a better word, and we have some programs going into next year that will help us continue to do that.

Now the pieces of the business that go to some of these peoples sell to the pool, swimming pool installers, that’s down, so that piece of it; but the replacement market there, people still replace their swimming pool pumps, so that part is still going okay.

We are pleased. Our distribution, as you know we started an emphasis on that a few years ago and we have grown it every year. It is my expectation we will continue to do that this year and beyond.

Michael Schneider - Robert W. Baird

Okay and just in water heaters again, did you see quarter end or even in October now any trends that signal a significant change in direction?

Paul Jones

No, we are actually forecasting the incoming order rate is okay, it is not great it is okay. The joke we always have, the good news and bad news about water heaters. The bad news is the replacement parts of GDP business, the good news is it is always there. Thank goodness for the strength. We say 70% of water products are replacement. If you look at the US residential it’s a number well north of that, probably as much as 85% right now and that is as steady a business as you could ever have.

Michael Schneider - Robert W. Baird

Paul, I know you are always evaluating business lines, business portfolios. Do you have an update on your view of the portfolio at this point and/or when we might get one?

Paul Jones

We will try to give a little bit more information on that in January. Right now we are still continuing to evaluate.

We have cranked up our new product introduction in the market segments, or new product programs in the market segments that look attractive to us. Our ECM motor is finally getting some traction. We have a major program that will be kicking off next year that’s coming to fruition. We love our commercial hermetic. We have a few other market segments, even one in Water Products that we are continuing to look at and looking at alternatives and as we can give you an update I want to. Let me just put it that way. As we can say something that won’t put us at a disadvantage on a competitive basis, we will tell you.

Paul Jones

Thanks everyone for joining with us. It is a pretty volatile time out there right now and I don’t have to tell you that. We appreciate your continued interest in our company and we are going to continue to do the best job we can for you.

Operator

Ladies and gentlemen this conference will be made available for replay after 11:00 am today until October 17 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code 96486. International participants may dial 1-320-365-3844.

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