Genesee & Wyoming (GWR) John C. Hellmann on Q1 2016 Results - Earnings Call Transcript

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Genesee & Wyoming, Inc. (NYSE:GWR)

Q1 2016 Earnings Call

April 28, 2016 11:00 am ET

Executives

Thomas D. Savage - Treasurer & Vice President-Corporate Development

John C. Hellmann - President, Chief Executive Officer & Director

Timothy J. Gallagher - Chief Financial Officer

Michael O. Miller - Chief Commercial Officer-North America

Analysts

Allison M. Landry - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Alexander Vecchio - Morgan Stanley & Co. LLC

Scott H. Group - Wolfe Research LLC

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Robert H. Salmon - Deutsche Bank Securities, Inc.

Justin Long - Stephens, Inc.

Bascome Majors - Susquehanna International Group

Matt Troy - Nomura Securities International, Inc.

John Barnes - RBC Capital Markets LLC

Operator

Ladies and gentlemen, good morning, thank you for standing by, and welcome to the Genesee & Wyoming First Quarter Earnings Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Tom Savage. Please go ahead.

Thomas D. Savage - Treasurer & Vice President-Corporate Development

Good morning, and thank you for joining us today on Genesee & Wyoming's Q1 2016 earnings call. Please note that we will be referring to a slide presentation during today's call. These slides are posted on the Investors page of our website, www.gwrr.com. Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP measure and likewise posted on the Investors page of our website.

We will start with the Safe Harbor statement and then proceed with the call. Some of the statements we will make during this call, which represent our expectations or beliefs concerning future events are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which provides a Safe Harbor for such statements. Our use of words such as estimate, anticipate, plan, believe, could, expect, targeting, budgeting, or similar expressions are intended to identify these statements and are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from our current expectations, including but not limited to, factors we will discuss later and the factors set forth in our filings with the Securities and Exchange Commission.

Please refer to our SEC filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward-looking statements we make will be realized. We do not undertake and expressly disclaim any duty to update any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law, and you should recognize that this information is only accurate as of today's date.

On the call today, we have four speakers, our President and CEO, Jack Hellmann; our Chief Financial Officer, T.J. Gallagher; our Chief Operating Officer, David Brown; and our Chief Commercial Officer, Michael Miller.

I will now turn the call over to our President and CEO, Jack Hellmann.

John C. Hellmann - President, Chief Executive Officer & Director

Thank you, Tom, and welcome to G&W's earnings call for the first quarter of 2016. As always, we will start our call this morning with safety.

On slide number three, you will see that G&W's same railroad safety index was 0.61 injuries for 200,000 man-hours in the first quarter of 2016. Meanwhile, our Freightliner operations improved to a safety index of 1.17 in the first quarter, a significant improvement over 2015, and we are clearly headed in a positive direction.

Now, let's turn to financial results for the first quarter of 2016 in slide number four. Our adjusted diluted EPS were $0.77, which was roughly 6% better than the midpoint of our guidance. On the top half of slide number four, you will see that our total revenue was roughly 2% better than expected, our adjusted operating income was around 5% better than expected, and our adjusted operating ratio of 83.5% was about 50 basis points better than outlook.

As previously disclosed, we recorded a significant charge related to our Australian operations in the first quarter of 2016 as our last remaining iron ore customer entered voluntary administration, and we wrote off USD 21.1 million related to accounts receivable and a now idle maintenance facility.

The bottom half of slide number four highlights our first quarter performance versus guidance by geographic segment. The big picture is that North America performed well, thanks to improvements in our steel, ports and railcar storage business, as well as good pricing that T.J. will detail in a moment.

In addition, Australia continued to manage its costs well in a difficult economic environment. Meanwhile, the U.K./Europe segment was below our expectations, primarily due to further weakness in U.K. coal and softer performance in our Continental European intermodal business.

With respect to U.K. coal, our workforce restructuring is proceeding as planned and should be complete in the second quarter. With respect to intermodal and Continental Europe, we continue to re-price traffic and redeploy assets to more profitable lanes.

Now, let's turn to slide number five, which is the high-level comparison of Q1 2016 versus Q1 2015 for our North American operations. Overall, our revenue was down $17.8 million or 5.6%, primarily due to a 36% decline in coal revenue and a 14% decline in agricultural products revenue.

Our steam coal traffic continued to suffer from low natural gas prices and high utility inventories due to the warm winter, while agricultural products were affected by low global prices and the strong U.S. dollar.

Despite the revenue decline, our North American adjusted operating income increased modestly in the first quarter, and our adjusted operating ratio improved 180 basis points to 76.4%. The chart on the bottom half of the slide presents the numbers in a slightly different way. First, isolating the impact of fuel, then showing the margin loss on our lower carloads, and finally, highlighting the $5.8 million uplift from cost savings and the overall management of the North American business.

Now let's turn to slide number six, which is a comparison of Q1 2016 versus Q1 2015 for our Australian operations. At a high level, including Freightliner Australia, our revenue was down 14% and our adjusted operating income was down 36% due to weakness in the mining sector.

Since there are few moving parts in Australia, I will try to make it clear. First, the adjusted numbers on the slide do not include our write-off from the bankruptcy of Arrium. Second, if you look at the chart on the bottom of the slide, you will see the largest impact on our first quarter with the roughly $6 million loss of operating income from lower manganese and iron ore shipments. Net of currency and the impact of Freightliner Australia, we reported USD 10.2 million of adjusted operating income and an 80% operating ratio.

Looking ahead, Australia's operating income will be negatively impacted by the loss of the fixed payment for Southern Iron, which is an Arrium-owned iron ore mine that is under care and maintenance. Southern Iron generated roughly $5 million of revenue per quarter and fixed payments, a loss which we expect to partially offset with further cost reductions, as well as redeploying excess equipment to new business. As previously disclosed, we currently expect to continue serving Arrium's remaining iron ore business in the Middleback Range.

Now, let's turn to slide number seven, which is a review of our U.K./European operations. Recall that we owned Freightliner for five business days in the first quarter of last year, making the comparison not particularly meaningful.

A couple of comments. First, the first quarter has deep seasonality in the U.K./Europe segment due to weak aggregate shipments in the U.K. and Poland, and seasonally lower intermodal volumes. In the first quarter of 2016, our results were further affected by extremely low coal shipments in the U.K. for which many of the related costs are being taken out by the end of the second quarter.

Finally, our results in Continental Europe intermodal were lower than we expected primarily due to pricing discipline being imposed upon the business as we focus on more profitable lanes. Before we turn to slide number eight, let me step back from the details of the quarter and comment on how the business environment feels overall by geographic segment.

North America seems steady overall, but for every commodity that feels a bit better, such as steel and aggregates, others remain weak, such as agriculture and steam coal. In light of this unevenness, we remain intensely focused on costs. In Australia, it's too early to call a bottom, but commodity prices have certainly strengthened, and our management team continues to effectively control their expenses. In the U.K./Europe, the restructuring of our U.K. coal business is on target and our outlook for the year is broadly unchanged.

Now, let's turn to slide number eight and our key priorities for the remainder of 2016. Our first priority remains the safety of our people and our railroads, and we expect to make further progress at Freightliner over the course of the year. Our second priority is to achieve our updated financial targets for 2016, which now include the impact of the customer bankruptcy in Australia. We now expect an annual decline in adjusted diluted EPS of 12% in 2016, which is roughly $0.10 per share lower than our previous outlook.

Meanwhile, our outlook for 2016 free cash flow is an increase of around 8% to $280 million prior to capital for new business investments. Please note that our earnings and free cash flow outlook do not include any one-time charges from the U.K. or Australia. Finally, in 2016, we still expect to deleverage from 3.7 times net debt to EBITDA to 3.4 times net debt to EBITDA, assuming no share purchase or acquisitions and investments.

Our third priority is pursuing additional cost reductions across all three of our geographic segments. While the significant volume contraction that we felt last year seems to have leveled out, we are seeking further efficiencies. Our fourth priority is commercial growth where we continue to pursue significant new business in all of the countries in which we operate. Our fifth priority is an extension of the U.S. short line tax credit that expires in 2016.

We currently have 68 cosponsors in the House and 19 in the Senate, so we are already one-third of the way to our majority target. Our sixth priority is acquisitions and investments as we use our global rail platform to identify the best opportunities for investment. We are currently seeing interesting opportunities in several countries within G&W's footprint.

And I would now like to turn the call over to our Chief Financial Officer, T.J. Gallagher.

Timothy J. Gallagher - Chief Financial Officer

Thanks, Jack, and good morning, everyone. I will walk through the results in the quarter in a little greater detail, followed by an updated outlook. Let's start with diluted EPS on slide nine.

First quarter reported earnings in both 2015 and 2016 contain significant items that we highlight in the slide. Last year in the first quarter, we closed the Freightliner acquisition and incurred roughly $0.39 of acquisition related costs. This year, as a result of the Australian customer bankruptcy, we wrote off $21 million of assets and receivables or $0.29 per diluted share.

Normalizing for these items, as well as other minor restructuring costs, adjusted diluted EPS were $0.77 or 7% lower than 2015. Keep in mind that the short line tax credit was passed in the fourth quarter of 2015 and was not included in first quarter results. Normalized for the short line tax credit, Q1 2016 adjusted diluted EPS declined $0.17 or roughly 20%.

The simplest way to think about this decline is that one half is related to the deep seasonality of our U.K./Europe segment and one half was the impact of Australian mine closures. Meanwhile, North American income was flat year-over-year as cost savings offset lower volumes, primarily utility coal.

Now moving to North America on slide 10. First quarter revenues in North America decreased $17.8 million or 5.6% with roughly 1/2 of the decline due to lower fuel surcharges. The two most significant freight declines were steam coal and agricultural products.

Coal traffic continues to be weak given low natural gas prices, and first quarter volumes were further impacted by the mild winter weather. Ag traffic was lower and continues to be impacted by the strong dollar and low commodity prices. Our storage revenue, however, was higher as it typically increases when freight volumes decline as car owners use short lines to store surplus railcars.

Let's go to slide 11. Here, we show a comparison of North American carloads by commodity. The largest variance was coal which declined 31,000 carloads or 39%, and represented 75% of the total Q1 decline.

Other commodities to highlight. Agricultural products, which I mentioned earlier, were down 2,300 carloads or 4%. Lumber and forest products traffic was up 2,200 carloads or 7%, primarily due to stronger lumber traffic in the Northeastern Canada, as well as strong wood ship traffic in the Southeast U.S.

Metals traffic increased 1,300 carloads or 4%, primarily due to strong finished steel shipments. While this increase is relatively small, it is an inflection point for a commodity group that declined 30% last year. Our minerals and stone traffic was down approximately 3,700 carloads or 8%. Weaker salt traffic in the Northeast due to the mild winter weather and lower frac sand shipments in the Midwest was partially offset by stronger aggregates traffic in our costal and central regions.

Moving to slide 12 and pricing. North American average revenues per carload increased 0.7%. Excluding the impact of changes in the mix of commodities, changes in fuel surcharges, as well as currency, average revenues per carload increased 2.3%. Note that we had changes in customer mix in the agricultural products, auto and minerals and stone commodity categories that impacted average revenues. Excluding these customer mix changes, the core pricing increase in the first quarter was approximately 4%.

Moving to slide 13 and Australia. Australia revenues declined $8.1 million or 13.6%, primarily due to the weaker Australian dollar and the Australian mine closures in 2015. Partially offsetting was $10.9 million of revenues from Freightliner Australia.

Now, let's move to the U.K./Europe segment on slide 14. We show U.K./Europe results sequentially from the fourth quarter of 2015 given the timing of the acquisition last year. As Jack noted, Q1 is the seasonally weakest quarter for our U.K./Europe segment, and revenues sequentially declined across all major commodity groups. In total, revenues decreased sequentially $30 million or 18.6%.

Now, turning to slide 15. Let me refer you to our earlier Safe Harbor statement that noted that these statements are subject to a variety of factors that could cause actual results to differ from our current expectations. These statements represent management's expectations regarding future results as of today, April 28, 2016, and we do not undertake any obligation to update this information.

Now before we get into the specifics of our updated outlook and guidance for Q2, let's start with the big picture for each of our segments.

In North America, after a 4% core pricing increase in the first quarter, we now expect core pricing increases in the 2.5% to 3% range for the remainder of the year, which will yield a full year average core pricing increase of around 3%, consistent with our original guidance.

With respect to areas of strength and weakness, coal is expected to be weaker than our original guidance, and we now expect our coal revenues to decline year-over-year by $25 million, compared with our original guidance of down approximately $15 million.

We also expect our agricultural product shipments to be lower, but the timing of ag shipments remains our biggest wildcard. Areas of strength include steel, as well as higher freight-related revenues such as storage and port switching. We expect full year revenues and adjusted operating income to be consistent with our original guidance for North America, noting that second half income is typically stronger than the first half given the seasonality of the business and the timing of winter.

In Australia, our remaining iron ore customer filed for the Australian equivalent of bankruptcy in early April, and as a result of this filing, we will no longer receive the fixed revenue payments under the Southern Iron contract, which amounts to about $15 million for the remaining three quarters of 2016.

However, we – as Jack noted, we expect to continue to serve the customer and its other locations. Our full year expectation for Australia adjusted operating income is approximately $10 million lower than our original guidance as new business and additional cost reductions are expected to partially offset the loss of Southern Iron revenue.

Note that both iron ore and manganese prices are approximately 50% higher than at the beginning of the year. These increases can only improve the outlook for certain of our customers.

Now slide 16 and the U.K./Europe segment. The restructuring of the coal business is on track, and we expect the workforce restructuring to be complete by the end of the second quarter at an estimated cost of $5 million.

With respect to our intermodal business, U.K. operations continue to perform broadly in line with expectations, while the rationalization of our Continental Europe operations continues. The Continental intermodal business operated at a loss in the first quarter, but we expect the business to move to profitability later in the year as unprofitable lanes are exited and the rolling stock surpluses are eliminated.

Full-year financial expectations for our U.K./Europe segment are consistent with our prior guidance as initial expense reductions are expected to offset the first quarter shortfall. Note that the intermodal business peaks fairly in the fourth quarter and the second half of the year will benefit from a completed coal restructuring.

Now moving to guidance on slide 17. We provide here, both our original guidance, as well as our updated guidance, to show a comparison. We expect revenues of approximately $2 billion and an adjusted operating ratio around 82%. We now expect our adjusted diluted earnings per share to be in the range of $3.50 to $3.70 with diluted shares outstanding at $58.2 million.

Free cash flow is expected to be approximately $5 million lower at $245 million or $280 million excluding new business investments. The big picture is that our earnings expectations are about $0.10 lower than our prior guidance primarily due to the impact of the loss of the Southern Iron revenues and lower coal volumes, which was partially offset by growth and additional cost reductions. Note that the updated guidance excludes the impact of severance and restructuring costs, as well as the write-down in Australia in the first quarter.

Moving to the second quarter guidance on slide 18. We expect revenues of approximately $490 million and operating income of approximately $84 million. Net interest expense in the second quarter should be approximately $18 million, and we expect D&A of approximately $57 million.

Our effective tax rate should be around 29% and diluted shares should be $58.2 million. The bottom line is we are expecting second quarter diluted EPS in the range of $0.75 to $0.80. The simplest way to look at the second quarter guidance is segment-by-segment. In North America, we expect weaker coal and higher fuel price to offset the normal seasonal uplift in Q2. In Australia, we expect operating income in Q2 roughly equal to Q1 due to a short term freight move that will offset the most of the Southern Iron revenue loss. And in the U.K./Europe segment, we expect a sequential improvement in all lines due to normal seasonality. I will close with our balance sheet on slide 19. Our net debt was $2.2 billion and our debt to adjusted EBITDA was 3.7 times.

And with that, I will open up the call for questions.

Question-and-Answer Session

Operator

. Our first question today comes from the line of Allison Landry representing Credit Suisse. Please go ahead.

Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker)

Good morning, thanks.

John C. Hellmann - President, Chief Executive Officer & Director

Good morning.

Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker)

I wanted to ask about the core pricing in North America. The 4% in the first quarter was a slight step-up from Q4, but, T.J., I know you mentioned it, it should slow to around 2.5% to 3%. So, just curious, what should we read from that? Are you expecting the overall rail pricing environment to slow or is this more related to the timing of certain contracts?

Timothy J. Gallagher - Chief Financial Officer

I'll let Michael Miller, our Chief Commercial Officer, provide some more color, but the short answer to your question is there can be variation in any one quarter. It doesn't make for the whole year. Our expectation is at 3% for the full year and are consistent. That said, fuel prices are low and there are certainly some commodities, such as paper or lumber, where rate increases will be more challenging, while in other ones, we may get more than 3%. Michael, any other color?

Michael O. Miller - Chief Commercial Officer-North America

No. I believe that's right, Allison. Yeah. We're just seeing a little more competition. And obviously, with low commodity prices in certain sectors, we can help work with our customers on rates to try to move volume. So I think those two things, we feel like it may take a little bit of a small step back in pricing. But if fuel changes or truck competition gets tighter, then there's upside as well.

Timothy J. Gallagher - Chief Financial Officer

So, the bottom line, at 3% for the full year, that's consistent with our prior expectations.

Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker)

Okay. That makes sense. And then in terms of the more positive outlook for metals, do you think this is a broader signal that the industry itself is starting to recover? Or is it more reflective of your specific customer base? I know in the past, you've talked about serving some of the very efficient mini mills in the U.S. So just wondering how we should be thinking about that.

John C. Hellmann - President, Chief Executive Officer & Director

Hey, Mike, why not – Michael, do you want to talk to little bit about what we are seeing at the mini mills? It's really plant specific in terms of what we're seeing. And I wouldn't say that there's – while there's improvements, the conviction isn't huge. But, Michael, you want to talk a little bit about what you're seeing by some segments within the metals and in the steel?

Michael O. Miller - Chief Commercial Officer-North America

Sure. Allison, I think it is, to Jack's point, it is very mill specific and commodity specific inside the metal sector. Obviously, there's a lot of automotive traffic, so finished coil steel is going to be relatively strong. There were some tariffs imposed on some certain commodities coming into the States, so those commodities as well have done pretty good.

But there's other sectors that we serve like rebar, for example, is really struggling just due to global competition. So, to Jack's point, I don't think we're seeing a – we're looking for the sky to continue to be bright and blue and the sun out, but the mills we serve are very competitive and the commodities that we traditionally handle in those mills, with one or two small exceptions, are commodities that are in high demand.

Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker)

Okay, great. Thank you.

Operator

Our next question today comes from the line of Alex Vecchio with Morgan Stanley. Please go ahead.

Alexander Vecchio - Morgan Stanley & Co. LLC

Hi, good morning, thanks for taking the questions. I wanted to maybe touch on the North America carloads guidance. It looks like you're expecting 6% to 8% declines in 2Q and down 5% for the full year, which implies kind of those declines moderate to low single-digits in the back half. Is that just really, largely a function of the comparisons getting easier or are you kind of seeing signs of actual improving underlying fundamentals, if you will? And if the volumes don't end up kind of maybe panning out as you expect in the back half, what else can you do on the cost side to kind of mitigate potential downside to margins?

Timothy J. Gallagher - Chief Financial Officer

Sure. The quick answer about the carloads. The changes in percentages are really, it's a function of the 2015 comp where volumes fell throughout the year, but really dipped off in the fourth quarter. So just maintaining relative stable volumes in 2016 will yield a better outlook by comparison for the second half.

Now with respect to volumes being down 7%, that's primarily – if you look year-over-year, that's three things. That's coal, that's ag, and that's minerals and stone, primarily salt. On a full-year basis, we said, it implies about down 5%. The biggest difference between the 5% there and the 3% we had at the beginning of the year is the lower coal traffic. That's really the difference.

John C. Hellmann - President, Chief Executive Officer & Director

With respect to your other, the second part of your question, so in costs, as I said on our priorities, well, we've got initiatives in place in all three of our geographies. We've done – you can see it from the results, particularly North America, less obviously so elsewhere, we have some major cost savings initiatives of which you felt some of the benefit in Q1 in North America, and which we're executing upon elsewhere. In addition to those, we're doing internal benchmarking now that the volumes had stabilized somewhat, and are taking another look at where else we can be even more efficient.

And so we're not stopping with what we've done. And we think there's always things you can do to be smarter and more efficient. And so we've got three discrete initiatives underway in each geography to see what else we can get out. That's not in the outlook. That's just what we're doing.

Alexander Vecchio - Morgan Stanley & Co. LLC

Okay. That makes sense. That's helpful. Okay, and then I just wanted to follow up on M&A. Can you maybe talk a little bit about where you're seeing maybe the most interesting opportunities geographically speaking? There are some headlines out there about some assets in Australia, specifically in the coal area. I don't know, any comments on the extent to which that might be something you'd be interested in pursuing one way or another or maybe not? Just some more color on the M&A kind of a pipeline at this point.

John C. Hellmann - President, Chief Executive Officer & Director

Yeah, I know – certain transactions make it into the newspaper and certain transactions don't. So I'll just speak broadly to the population set of opportunity, whether it's in the paper or not. And there is a pretty substantial number of opportunities in every geography that we serve right now, North America, Australia in particular, but time will tell.

Alexander Vecchio - Morgan Stanley & Co. LLC

Okay. Thanks for the color. Appreciate it.

John C. Hellmann - President, Chief Executive Officer & Director

Sure.

Operator

Our next question comes from the line of Scott Group with Wolfe Research. Your line is open.

Scott H. Group - Wolfe Research LLC

Hey, good morning, guys.

John C. Hellmann - President, Chief Executive Officer & Director

Good morning.

Timothy J. Gallagher - Chief Financial Officer

Hey, Scott, how are you?

Scott H. Group - Wolfe Research LLC

Good, good. Jack, just a follow-up on that. So how does the experience with Freightliner and their coal issues impact your willingness to buy future coal assets, though? And I realize coal assets can be different from place to place.

John C. Hellmann - President, Chief Executive Officer & Director

Well, yeah. I mean – yeah, the first thing you think about is the geography of coal and which geography is there going to be no coal, which looks like the U.K. is at the top of that list, which we had assumed as well, except we thought it would come a little late. We would have said 2022, not 2017. But it's looking more like 2017 rather than 2022. But that was factored into our thinking. And Australia – it depends on the geography of the coal and its heat content and its sulfur content, and its cost coming out of the ground in terms of where it sits on the global competitiveness curve.

With respect to coal that we currently handle under contract in Australia, it's pretty much to the extent you believe any coal is going to be burned in the world, that some of the coal that we handle. And so that part, so you have to differentiate between the types of coal that exist in the world. Whatever your – the long-term view is, there's coal consumption and coal as an energy source within the broader global economy. So we factor all that into how we think about potential transactions and how we – at what level we might invest in them and what exposure we think is comfortable for – if any, for a company with our size of balance sheet and we'll take that into account.

Scott H. Group - Wolfe Research LLC

Okay. That makes sense. So, I think last quarter when we talked about M&A and you were saying, given where leverage is, we may need to do it with a partner and we don't want to be issuing equity kind of where the stock is. Has anything changed on those lines of thinking just given the increase in the stock price or your views on deleveraging and how you think about M&A?

John C. Hellmann - President, Chief Executive Officer & Director

I would just say what's probably what's changed is the number of opportunities is greater now than it was the last time we talked on a global basis. And so that's one variable that's changed. With respect to us maintaining active dialogues with third-party capital as a potential source of financing, depending on the specific transaction, those dialogues are alive and well. And so how we finance any given transactions can depend on a lot of things, including valuation, the deal structure, and of course, our leverage profile at that moment in time. But we've got all our – I'd say the biggest change is that there's more stuff out there.

Scott H. Group - Wolfe Research LLC

Okay. And just last thing, if I can. Last time you talked about several major contracts you were bidding on, any updates you can give us?

John C. Hellmann - President, Chief Executive Officer & Director

We'll update on when we get them. I think that's – I'll leave it at that. But there are active things that we are bidding on in every geography. The – it's – I mean, there's interesting things happening in all parts of the world right now, and I think we'll comment on them as we – as they unfold. I mean the one thing T.J. alluded to, I wouldn't read too much into it. Our outlook for the coming quarters probably – in Australia is probably better than one would have expected.

And what's going on there is we're moving a stockpile of product that had already been mined that – which is currently in administration. Now – and so that's what we're benefiting from there. That's not because the price of that commodity is up 50%. It's just because that was the right thing for the administrator to do. With prices of some of those commodities now up 50%, it will be interesting to see what does mines do going forward. So it's too early to make the call on that, but we're watching that with interest in Australia.

Scott H. Group - Wolfe Research LLC

Okay. That makes sense. I just wanted to make sure we hadn't bid on the contracts and lost, and now, there – it's not an opportunity anymore. Okay. Thank you for the time.

John C. Hellmann - President, Chief Executive Officer & Director

No. No, no. There's still – it's still an interesting population set.

Operator

All right. Our next question will come from the line of Chris Wetherbee with Citi. Please go ahead.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Hey, great. Thanks. Good morning, guys.

John C. Hellmann - President, Chief Executive Officer & Director

Good morning.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Want to just pick up on the comment that you just made. And I know you said it's early, but given what we've seen in the move in the commodity prices, just any sort of indications you're getting from customers that are a little bit more upbeat and maybe they were a few months ago? I'm guessing maybe just, at least from a mood perspective, it's better. But anything sort of concrete you can think about?

John C. Hellmann - President, Chief Executive Officer & Director

I wouldn't say much beyond – we're moving a stockpile for a company that's in administration right now. We also actually are starting up moves – I guess I can, I'll call it, we're starting up movements later this quarter of an iron ore deposit that's laced with copper. And I think it's got some gold in there, too. And that wouldn't have – that was probably going to move before the price of the ore was up 50% because of what it's laced with rather than the absolute iron ore itself. But there are – we're quoting prices and signing contracts for things like this.

So those are two contracts that we've signed that are up and running, and we're still quoting stuff elsewhere. So, we'll see how it unfolds. I mean, it's definitely – it's less grim than it's been for the last – my goodness, where are we now? We're in April? So now almost two years that we've been dealing with the house of cards collapsing. And so we're now actually seeing, with this major bankruptcy having transpired, you could sort of start seeing the light at the end of the tunnel.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. And then just switching gears to U.K./Europe. Now that we have sort of a first quarter under our belts, which we didn't before. In terms of the typical seasonality or profitability, I guess, I'm just trying to get a better sense of how to think about that. We, obviously, had an operating loss. I think there's a lot of different factors going in there, but absent coal and some of the pressures that are coming a lot sooner, as you've articulated, how should we think about sort of the typical seasonality of the U.K./Europe business, particularly for the first quarter going forward?

John C. Hellmann - President, Chief Executive Officer & Director

Absolutely. T.J., hit it.

Timothy J. Gallagher - Chief Financial Officer

So without the coal, which would have been a counter-seasonal help in Q1, really, think about the years lowest in Q1, peaking in Q3 for typical intermodal driven business, so that's going to peak early in the fourth quarter. So as you march through the year, Q1 the lowest, then Q2 improving, Q3 the peak, and then Q4 falling back a little bit. If you look back at our Q3 and Q4 last year, you'll see sort of the relative difference between those two quarters. But that's the way to think about the seasonality.

John C. Hellmann - President, Chief Executive Officer & Director

And in Q1, you're certainly not going to be losing money in Q1 looking ahead. And there's two reasons why. Number one is that the coal business is being restructured, and so all those costs are going to be out. And that in its own right would throw the business straight into the black. In addition to that, we absorbed some losses in Europe, in the European intermodal business, that we didn't anticipate absorbing in the first quarter because there were some traffic moves that we thought would take place at a profit.

We decided not to close the traffic because it didn't make economic sense, and we'd rather exit leased equipment and not serve those customers and do so at a loss. But if we're – if you're not making money on that business, you're not operating that business. So it's a very simple fix. So you can – those two variables that we focused on will mean while the seasonality pattern is exactly what T.J. described, you're certainly not going to see a first quarter like that. We won't allow it to happen.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. And one just quick follow-up on that point. That intermodal piece is a little – lags into the second quarter from a loss of profitability. I guess, I just wanted to make sure, I thought that was what I heard earlier in the call, I just want to make sure that's right.

John C. Hellmann - President, Chief Executive Officer & Director

You're moving to – you'll probably be flat – you're probably going to be breakeven-ish in the second quarter and modestly profitable in the back half of the year.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful.

John C. Hellmann - President, Chief Executive Officer & Director

Because you've got – we've got to shake some – I mean, we've got leased – short-term leased equipment that – where if it can't find a proper home, you just get out of it. And then you pick up €0.5 million, €1 million or something like that, and that goes straight to the bottom line.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Okay. Great. Thanks for that. I appreciate it.

John C. Hellmann - President, Chief Executive Officer & Director

Yeah.

Operator

Our next question comes from the line of Rob Salmon with Deutsche Bank. Please go ahead.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Hey, good morning, guys.

John C. Hellmann - President, Chief Executive Officer & Director

Good morning.

Robert H. Salmon - Deutsche Bank Securities, Inc.

With – piggybacking on Scott's question a little bit earlier about the opportunity set that you're seeing from a bid activity, given the declines you're seeing in your broader commodities, I'm assuming a lot of those potential business wins, you can service with existing trains. But can you give us a sense of the potential capital investments of those opportunities you guys are seeking to win?

John C. Hellmann - President, Chief Executive Officer & Director

Well, there's not a single answer to that. They're – embedded in your question was a few areas of new business development. One of those areas is in the case of Australia, it's redeploying excess equipment. So that new business that you're putting online is simply using equipment that otherwise would be idle because of the collapse of the iron ore markets in Australia. So that's requiring zero incremental capital, and that's why you're seeing the profits, the sustained profits that are probably a little better than one would have expected. With respect to – so that's kind of on the commodities side.

Then with respect to new investments and new opportunities, we didn't quantify that. Each of those would be discrete investments for acquisitions, and we're not going to quantify what those dollar amounts are. But I can – what I can say is that there are both big and small opportunities in that pipeline in multiple geographies.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Can we think about just kind of the return on invested capital as being comparable to what we've seen in the past as we kind of try and back into a dollar invested standpoint?

John C. Hellmann - President, Chief Executive Officer & Director

You should assume that if we deploy capital, on a cash on cash basis, we expect it to earn our cost to capital long-term.

Robert H. Salmon - Deutsche Bank Securities, Inc.

It makes sense. Okay, so no change in philosophy there. T.J., when I was looking at the Q2 guidance, the North American margin degradation sequentially from the first quarter to the second quarter seemed a little bit kind of contra seasonal to me. Can you kind of break out how much of that's coming from the uptick we've seen in terms of the fuel prices and the lag effect there versus kind of the mix headwinds you had noted on the call?

Timothy J. Gallagher - Chief Financial Officer

Yeah. It's really – it's both of those things. It's the further decline in coal, but it's also fuel. We expect fuel to be – I mean, our fuel prices today are higher than they were 3 months ago. And with respect to our fuel surcharge programs, which, as you saw Q1 over Q1 last year, we were perfectly hedged. We had no real operating income – impact to that $8.9 million loss of fuel surcharge. But right now, we're in that zone of any movement down in fuel prices, we benefit, drops to bottom line. But since we're below the thresholds at which the fuel surcharge programs kick back in, we're going to be eating that fuel for a little bit. And so that's really – that's what's going on, Q2.

Robert H. Salmon - Deutsche Bank Securities, Inc.

And is there a rule of thumb we should be using in terms of that threshold in the fuel surcharge?

John C. Hellmann - President, Chief Executive Officer & Director

Yeah. So, right now, the – we participate in a number of fuel surcharge programs with all the Class 1s. If you look at their strike prices – but all of the G&W fuel surcharge programs are struck around the $2.60 on highway diesel. And I think right now, we're about $2.25.

Robert H. Salmon - Deutsche Bank Securities, Inc.

Okay. Thanks so much for the time.

Operator

Our next question comes from the line of Justin Long with Stephens. Please go ahead.

Justin Long - Stephens, Inc.

Thank you, and good morning.

John C. Hellmann - President, Chief Executive Officer & Director

good morning.

Justin Long - Stephens, Inc.

So to follow up on the North American pricing discussion, I wanted to ask about truck competition. Have you seen any of your business move to truck year-to-date? And is the risk of conversion something that you're factoring into guidance for North American rail volumes to be down 5% this year?

John C. Hellmann - President, Chief Executive Officer & Director

So the answer to the second part of your question is, yes, we factored in that competition into the volume outlook. But to give you some anecdotal texture, Michael, do you want to talk about just more broadly, probably paper is the best place to talk about it and different geographies of the country?

Michael O. Miller - Chief Commercial Officer-North America

Yeah. Both paper and lumber, when you look at it from a truck competition standpoint, if you're following truck rates, actually, truck rates have actually slightly declined over the last 30 days to 60 days, plus coupling that with low fuel prices, there's a surplus supply out there. So what we tried to do is be smart about our pricing and make sure we're pricing to the market. We're actually working directly with our customers. They realize that both fuel and driver capacity could change relatively fast, so they're not going to make large conversions to truck.

But there will be certain moves that they can converge short-term that fit, but we're working both with our Class 1s and our customers to make sure what we're pricing to actually protects the volume we handle. But there will be some leakage and in some cases, we'll be able to participate in the upside when they're looking to move traffic to other lanes.

The other factor we've got specifically with G&W is one of our larger paper customers has made several acquisitions and they're redoing their distribution patterns. And some of those circles will get a little shorter, so it makes rail really more competitive – less competitive, but we're working with them as well to find places to move more rail traffic.

Timothy J. Gallagher - Chief Financial Officer

Hey. And, Justin, just you made a comment about a 5% decline in carloads. Keep in mind that about 70%, 75% of that decline is coal. And so, really, the rest of the traffic in North America is relatively flat.

Justin Long - Stephens, Inc.

Okay. That's helpful. And maybe as a follow-up to that, North American rail volumes have been all over the place the last two years or three years. We've recently been in an industrial recession, and I think it's really tough to gauge what a normal environment looks like. As you think about the North American rail business or your business, what do you feel is a reasonable, long-term growth rate for volumes? And what do you view as the key drivers to that growth?

Timothy J. Gallagher - Chief Financial Officer

That's a great question.

John C. Hellmann - President, Chief Executive Officer & Director

That's a great question. The answer will be – I'll tell you what, we'll – why don't we – we'll take that aside and we'll give you – I mean, the answer's you got to look at each discrete commodity group and make a judgment by commodity group with discrete underlying assumptions related to that commodity group in terms of what your conclusion is going to be, because it's going to be a range.

I mean, for example, if you're looking at coal, you probably need the forward curve on natural gas sitting in tandem with it in order to draw any meaningful conclusions. But if you're going to draw a long-term trajectory on agricultural products, you're going to have a multi-variable regression that includes exchange rates and prices of various commodities that are embedded in it and juxtapose with the proportions that we handle ourselves.

So our pricing is inflation plus pricing, and you can see that we've been achieving slightly better than that. Our volumes are truly a commodity specific story, and it clearly feels like we're down in a trough right now. I mean, we've been on a trajectory downwards, so it actually feels okay when you're sitting where we are right now and all we're doing is focusing on costs. But in terms of projecting the line forward from here, I think maybe we'll have to do that separately for you, perhaps on our next call.

Justin Long - Stephens, Inc.

Okay. That's fine. I can appreciate the complexity of it, but just wondering when you put it all together, how you think about that formula.

John C. Hellmann - President, Chief Executive Officer & Director

Okay.

Justin Long - Stephens, Inc.

All right. I appreciate the time this morning.

Timothy J. Gallagher - Chief Financial Officer

Yeah, absolutely. Thanks, Justin.

Operator

Our next question comes from the line of Bascome Majors with Susquehanna. Please go ahead.

Bascome Majors - Susquehanna International Group

Yeah. Thanks for the time this morning. A couple on Australia. When you think about your remaining business in the Middleback Ranges with Arrium, you said that's about $26 million annualized. What's your expectation for how that fares while they're in administration? It just seems like it's pretty complicated and increasingly politicized situation, I'm trying to get a sense for what we should watch for, what you guys are watching for, to kind of see any risk or opportunity there as this unfolds.

John C. Hellmann - President, Chief Executive Officer & Director

Yeah, no. I would just say that it's a very politically visible situation. It's visible not just at the state level given that it's transpiring in the second largest city in South Australia, but also at a national or commonwealth level in Australia because it's steel.

And by the way, the history of that plant goes back to building naval vessels in World War II. And the population of the town is utterly dependent on both the steelworks and the iron ore business. So that is why you've seen involvement, including the Prime Minister. That's why you've seen it find its way from the national press to the international press. I think with the company in administration, there's a great deal of political will to preserve the steelworks at some level.

And the Commonwealth Government, for example, has approved purchases of steel for federally owned entities, basically accelerating CapEx plans that use steel as a sort of a government subsidy mechanism to ensure that outcome. And I wouldn't be surprised if you saw more things like that on the steel side.

On the iron or side, it's all a question of money. And whether the mines are in the money or not, and whether in administration, they become as efficient as they can be to have a long-term future supply in the global iron ore market.

In that geography, you're very close to the water. And so that in itself means that the cost of getting the product from the interior and onto the ship should be reasonably competitive.

In this case, because it's draft, they have to have an intermediate barge move that undermines that a little bit, but when you're approximate to the water, that tends to be a plus.

There are, believe it or not, new deposits that have been discovered directly adjacent to the existing ones that are close to the surface. So those have potential, I think, over time to become part of that mining equation. But, yeah, you're right, it's in a fluid process. It's business as usual today.

Our job is we're integral to the supply chain. It's a very, very complex operation, particularly when you start handling molten steel. Remember, we're operating on a couple of gauges, the track and we're handling molten steel inside the steelworks. So what we do is quite complex. And so we're in close cooperation with the customer and we're working – we're going to work with them to see what their path forward – a sustainable path forward might look like, and obviously, there is – that there is – or any range of possibilities of what its future might hold, including a sale of that business to a new owner. And then it will be dependent on what the new owners' expectations are for the operations there.

And whether they're having rights to other mineral deposits in other parts of the geography are also of interest to them. So you're right, I can't tell you to pay attention to any one particular thing, I wouldn't say, but it's – that's clearly, a vital national interest, and all of their highest level state politicians and commonwealth politicians are well aware of the situation. So, I don't think there will be any shortage of information emanating from the Australian press. So I think I'll leave it at that.

Bascome Majors - Susquehanna International Group

Thanks for the comprehensive answer there and we'll continue to watch. Just one more. On the Australian coal haulage business with Glencore, my understanding is that you guys do provide some service to them already. I know you can't talk about any auction process or not that's going on now, but could you tell us a little bit about if you are entrenched there in any way, shape or form, and does that give you some advantage versus some of the, call it, infrastructures funds or the railroads that might be interested?

John C. Hellmann - President, Chief Executive Officer & Director

No, I think you just said, I can't ask you this question, but I'm going to ask you anyway. And by the way, that was extremely well phrased. I kind of like the first clause sets you up for the second clause as a disclaimer.

Yeah, we crew those trains and we've done it for a long time. And this was part of Freightliner Australia's business. We handle a ton of coal there. Between 30 million tons and 40 million tons per year is historically what's been going on there. It's an integral part of the supply chain that comes out of the Hunter Valley. We got a great team there. We've done a terrific job of providing service, and I'll just leave it at that.

Bascome Majors - Susquehanna International Group

Thank you.

Operator

And we have a question from the line of Matt Troy with Nomura. Please go ahead.

Matt Troy - Nomura Securities International, Inc.

Yeah. Thanks. I just wanted to ask with respect to Australia, what percentage on a dollar basis of the business remains under fixed revenue contracts where you may not be actually providing any service in light of the iron ore closures? Are we at zero now or is there still some little business left where you're getting paid as part of a contract, but you may not be providing, at least today, haulage or service to that customer?

John C. Hellmann - President, Chief Executive Officer & Director

I can't say – I have – risk of not – you can't – I can't speak specifically to a contract, but let me speak on a global basis for our – for the kind of mining industry specifically.

Matt Troy - Nomura Securities International, Inc.

Sure.

John C. Hellmann - President, Chief Executive Officer & Director

There aren't any mining contracts around the world for which we're getting paid to do nothing. That would be a unique situation.

Matt Troy - Nomura Securities International, Inc.

Okay. Okay. So that's been purged. I guess my second question would be then, in terms of margins, you've historically talked about Australia somewhere in the 60%s, sub North American, with the European acquisition, you talked about a 10% or so.

In the intermediate term given the restructuring and the headwinds you face, is it time to maybe rethink what those margins can be? Does Australia settle somewhere in the mid-70s%? Say, does U.K./Europe look like something more like 92%? Or do you think that given the actions you're taking longer term, we can kind of revert to those bogeys?

John C. Hellmann - President, Chief Executive Officer & Director

Yeah, the U.K./Europe, I wouldn't touch. Australia is very fluid, because you've got a business that's kind of mid-80s% right now, having been in the high 60s%. But after losing five major commodity customers, it's actually pretty good that you got to mid-80s%. And one could argue that if you have the same commodity base, you'll probably be around 60%.

Matt Troy - Nomura Securities International, Inc.

Right.

John C. Hellmann - President, Chief Executive Officer & Director

And there are step function changes. Putting a...

Timothy J. Gallagher - Chief Financial Officer

What the OR or what the operating ratio is going to be is going to depend on how much revenue has flown over the track. And if any one of – any single commodity project rebounds with the price of commodities increasing, the operating ratio target is going to be materially different to – from where it's settling right now just by virtue of the economics of our business and the fixed assets that we own. So, I couldn't even, in good conscience, talk about what that target might be for Australia other than we're trying to be as lean as we possibly can be with a dramatically shrunken business. That dramatically shrunken business is a very good business even under, as we talked on the last call, under worst-case scenario, you're going to look at probably $70 million to $75 million of EBITDA, maintenance CapEx of around $50 million, and that's on the downside. So you've got a really strong business. And then from that base, you will – we will seek a trajectory forward.

Matt Troy - Nomura Securities International, Inc.

Got it. Okay. Thanks for the time.

John C. Hellmann - President, Chief Executive Officer & Director

Thank you.

Operator

Our next question comes from the line of John Barnes with RBC Capital Markets. Please go ahead.

John Barnes - RBC Capital Markets LLC

Hey, thanks for taking the questions. Hey, Jack, first, in terms of the Australian business, do you have a feel for maybe what percent of your book of business down there is still at risk for having to go into some type of administrative situation? Or do you think you're past all of that?

John C. Hellmann - President, Chief Executive Officer & Director

I think we're past. Based on who – if you look at who we serve down there and their financial positions, I think you're past that now.

John Barnes - RBC Capital Markets LLC

Okay. Are there any of the assets down there that you would potentially take a look at from an M&A perspective? I mean, you bought your big Australian rail line essentially out of a bankruptcy situation. Are there any other rail lines that could potentially go into some either administration conservatorship, something like that, that would make them more approachable?

John C. Hellmann - President, Chief Executive Officer & Director

I'm sorry. Can you repeat that?

John Barnes - RBC Capital Markets LLC

Yeah. Just are there any of the rail lines that potentially could come up for sale in Australia? Are any of those assets at risk for going into some type of administration or conservatorship there? Essentially, you'd be buying them out of a bankruptcy situation.

John C. Hellmann - President, Chief Executive Officer & Director

Yeah. No, I can't envision that. No, I can't envision that pattern per se. I mean, I think our exposure to administration is very specific to what we continue to serve in the Middleback Range and how that plays out.

John Barnes - RBC Capital Markets LLC

Okay. All right, all right. That makes sense. And in terms of your comment about the placing where you took maybe – we've seen a couple of other rails do this where they take in a select customer or commodity type and priced it a little bit different in order to make it more competitive or what have you.

I mean, are there opportunities elsewhere within the commodity base to do the same thing? Or was this just a very one-off situation that you had an opportunity to help or exploit or however you would term it? Or do you see more of those pricing opportunities out there?

Timothy J. Gallagher - Chief Financial Officer

So, are you talking about the first quarter results in North America?

John Barnes - RBC Capital Markets LLC

Yeah, where you talked about a specific situation where you lowered price on a spot base or something. Are there other opportunities like that to exploit?

Timothy J. Gallagher - Chief Financial Officer

Michael can answer the question more fully, but we negotiate with our customers case-by-case, situation-by-situation, product-by-product, lane-by-lane, in order to maximize profitability, which comes to pricing volume. So it's – those situations are going on daily. Sales and marketing team is out there doing that work.

Michael O. Miller - Chief Commercial Officer-North America

Yeah, T.J., I agree 100%. Our job is be as nimble as we can to the market and stay as close as we can to our customers.

Timothy J. Gallagher - Chief Financial Officer

The thing to always keep in mind is, as a percentage of the through rate, the short line is a very, very small piece of that. And so how the – how rates affect volumes is more dependent on others than ourselves.

John Barnes - RBC Capital Markets LLC

Yeah, yeah. Well, I guess I'm asking from the perspective of coal, for example. Reducing the rail rate on coal is not going to make it more competitive with natural gas. So the question becomes, why do it? That's why I'm just trying to get a handle on why would you price to something. But I get your point. I mean, the short line component of it is a very small component.

John C. Hellmann - President, Chief Executive Officer & Director

Okay. It's completely fact specific, as T.J. said. And you can assume we're extremely hyper rational about how we assess the fact pattern of every given commodity and customer to maximize incremental income.

John Barnes - RBC Capital Markets LLC

All right. Thanks for your time. I appreciate it.

Thomas D. Savage - Treasurer & Vice President-Corporate Development

We got time for one more question.

Operator

Well, good. Our final question today will come from the line of Scott Group from Wolfe Research. Your line is open.

Scott H. Group - Wolfe Research LLC

Thanks a lot for the follow-up. Just real quick, two things...

John C. Hellmann - President, Chief Executive Officer & Director

Sure.

Scott H. Group - Wolfe Research LLC

What are your April North America volumes, if you know them? And then, what's the fuel price you've assumed for the third quarter and fourth quarter?

Michael O. Miller - Chief Commercial Officer-North America

I thought you're going to ask me about the fuel prices for the second quarter.

Scott H. Group - Wolfe Research LLC

I'll take that too.

Michael O. Miller - Chief Commercial Officer-North America

Yeah. So, we were around – our actual fuel price paid, again, which is around $1.50 Q1, we're assuming $1.70. This is overall for Q – quarters two through four.

Scott H. Group - Wolfe Research LLC

So $1.70 you're assuming, two through four. So if we see four – and you have risk up to $2.60, you said?

Michael O. Miller - Chief Commercial Officer-North America

No. See, there's two different basis here, what we pay and then what – so to translate that, on the highway diesel, averaged about $2.10, I think, in the first quarter-ish. It's right now closer to $2.20, $2.25. So, yeah, there's probably another $0.25, $0.35 on the on-highway diesel before a lot of the surcharges kicked in.

Scott H. Group - Wolfe Research LLC

Got it. Okay. And then, do you have April North America volumes?

Michael O. Miller - Chief Commercial Officer-North America

T.J.?

John C. Hellmann - President, Chief Executive Officer & Director

We haven't – we'll be giving our carloads here in the next – in the first week of May. So I think we should probably – yeah, we do, we look at them weekly, but I don't think there'll be any big surprises in there. They're embedded in our outlook, but we'll release those shortly.

Scott H. Group - Wolfe Research LLC

Okay. All right. Thank you, guys.

Operator

Well, did you have any closing remarks?

Thomas D. Savage - Treasurer & Vice President-Corporate Development

Thank you very much for joining us on our Q1 earnings call. And we'll talk to you next – on our second call in early August.

Operator

Ladies and gentlemen, this conference will be available for replay starting at 1 PM this afternoon and running through May 28 at midnight. You may access the AT&T executive playback service at any time by dialing 800-475-6701 and entering the access code of 372820. International participants may dial 320-365-3844. Those numbers again are 800-475-6701, international participants dial 320-365-3844. Please enter the access code of 372820.

That does conclude our conference for today, we thank you for your participation and using the AT&T executive teleconference. You may now disconnect.

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