Lexmark International Q3 2007 Earnings Call Transcript

| About: Lexmark International, (LXK)
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Lexmark International, Inc. (NYSE:LXK) Q3 2007 Earnings Call October 23, 2007 8:30 AM ET

Executives

John Morgan - IR

Paul J. Curlander – Chairman of the Board and Chief Executive Officer

John W. Gamble – Chief Financial Officer and Executive Vice President

Analysts

Min Park - Goldman Sachs & Company

Toni Sacconaghi - Sanford Berstein

Ben Reitzes – UBS Securities, LLC

Shannon Cross – Cross Research

Bill Shope – JP Morgan

Katherine Huberty – Morgan Stanley

Richard Gardner – Citigroup Smith Barney

Andrew Neff – Bear, Stearns & Co.

[Jeff Embersom – Shareholders Management]

William Fearnley – FTN Midwest Research

Keith Martin – Bank of Montreal

Rob Semple – Credit Suisse North America

Operator

Thank you for standing by and welcome to the Lexmark International Third Quarter 2007 Earnings Conference Call. During the company’s opening remarks all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. At that time if you have a question, please press start one on your touch tone telephone. As a reminder this conference call is being recorded on Tuesday, October 23, 2007. I would now like to turn the call over to John Morgan, Lexmark’s Director of Investor Relations. Please go ahead John.

John Morgan

Good morning and thank you for joining us. With me today for Lexmark’s Third Quarter 2007 Earnings Conference Call are Paul Curlander, Lexmark’s Chairman and CEO and John Gamble, Lexmark’s Executive Vice President and CFO. After their prepared remarks we will open the call for your questions as time permits. We ask that you please limit yourself to one question and if needed, one follow up so that we can get to everyone’s questions. Following the conclusion of this conference call, a complete replay will be made available from our investor relations website located at http://investor.lexmark.com. Currently, in the upper right hand corner of this website you’ll find today’s earnings release as well as the supplemental slide deck for the third quarter which includes the reconciliations of GAAP and non GAAP financial information.

Now before we get started I just want to remind everyone that we will be hosting our 2007 Analyst Day Briefing on the morning of November 14 at the New York Stock Exchange. For more information, please visit the upcoming events section of our investor relations website.

Now, as a reminder, any of today’s remarks that are not statement of historical fact are forward looking statements and involve certain risks and uncertainties that are disclosed in the safe harbor section of our earnings releases and SEC filings. Actual results may differ materially from such statements. Lexmark under takes no obligation to update any forward looking statements. With that, I’ll turn it over to Paul.

Paul J. Curlander

Thank you John. Today we’re announcing third quarter financial results with revenue in line with our July 24 guidance and earnings per share better than our guidance. Revenue for the quarter was $1 Billion $195 Million, down 3% year-to-year driven by an 11% decline in hardware revenue partially offset by a 1% growth in supplies revenue. Earnings per share in the third quarter were $0.48 and significantly better than our expectation. Excluding restructuring, earnings per share in the third quarter would have been $0.60. Earnings per share in the quarter were influenced by a number of items including an overachievement in operating income due to stronger than expected supply sales and under run in operating expenses and less unit sales than expected. A tax benefit reflecting the finalization of certain tax audits in the quarter and a reduction in the expected full year tax rate and a larger than expected restructuring charge.

3Q 07 cash from operating activities $142 Million. Supplies revenue growth in the third quarter exceeded our guidance range due to stronger growth in laser supplies. We believe this was driven by some growth in channel inventory as well as additional sales out. Ink jet supplies came in as expected for the quarter. As we’ve indicated in the past, we believe we’re seeing shrinkage in the install base of inkjet products and an associated decline in end user demand. As we look ahead we see the potential for continued erosion in ink jet and user demand. Our current expectation is for fourth quarter 2007 supplies revenue to be flat to down low single digit year-to-year as continued good growth in laser supplies is more than offset by the decline in ink jet supplies.

Now although earnings per share for the quarter came in above expectation we’re still experiencing the issues in our consumer segment that we discussed last time. These are ongoing declines in ink jet supplies and OEM unit sales, lower average unit revenues due to aggressive pricing and promotion and additional costs in our new products. In the third quarter our consumer market revenue was $468 Million down 13% year-to-year with declines in both ink jet hardware and supplies revenue. The consumer segment operating income was -$16 Million driven by lower supplies revenue year-to-year and lower product margins. Ink jet unit sales in the quarter were down 14% year-to-year with OEM units down much more than this and branded units down slightly in the quarter. During the quarter Lexmark introduced three new wireless models and overall sales of wireless products are off to a good start in 2007.

Now, let’s talk a little bit more about the consumer segment. As we look at our second quarter 2007 earnings short fall and the third quarter 2007 results. We see that supplies revenue is dropping faster than expected with end user demand less than the expectation we had as we entered 2007. We’ve also seen more aggressive hardware pricing than expected as we’ve added cost with increased functionality in our 2007 products. As we step back now and analyze the situation we see some of our unit sales not generating adequate lifetime profit due to lower prices, higher costs and supplies usage below our model. We see some markets and channels on the low end of the supplies generation distribution curve and our business is too skewed to the low end versus the market resulting in lower supplies generation per unit.

As a result, we’ve decided to take the following actions. Now, as we did in the first quarter 2006 we are working to minimize unit sales that do not generate an acceptable profit over life. However, unlike before we’ve decided to more aggressively shift our focus to geographic regions, market segments and customers that generate higher page usage. Now, this entails several actions: first, investing in R&D and core ink jet technology to better support this higher usage customer set. Second, optimizing our marketing and sales initiatives and prioritizing specific markets and channels relative to page generation and lifetime profitability. For the highest priority markets this will mean a focus on expanding retail and non-retail sales and associated marketing campaigns. For the lowest priority markets this will mean less or no retail sales. As a result of this market prioritization and the previously mentioned business optimization we expect fourth quarter 2007 ink jet unit sales will be down about 30% year-to-year. And, while our analyst is not yet complete our preliminary view is that we would expect about that same percentage of full year 2007 ink jet unit sales will not be anniversaried in 2008. Now, once we our analysis for the full year we will update this for you in our January, 2008 earnings call.

Now, we’re also taking action to improve our cost and expense structure. We’re announcing today a restructuring plan to reduce our cost infrastructure including the closure of one of our ink jet supplies manufacturing facilities in Mexico. The restructure will impact about 1,650 positions by year end 2008. In addition to ink jet supplies manufacturing there will also be impacts to positions in the areas of supply chain, G&A, marketing and sales support and service delivery. Most of the impacted positions are being moved to lower cost countries. The expected restructuring cost is about $90 Million. The expected savings in 2008 is about $40 Million. The annualized savings thereafter is expected to be about $60 Million once these actions are completed.

Now, let’s talk about the business market. In the business market segment in the third quarter, revenue was $728 Million up 5% year-to-year. The strong growth in supplies revenue partially offset by declines in hardware revenue. Business segment operating income was $144 Million down 5% year-to-year due to increased investments in demand generation and R&D. Pricing in the business market continued to be very aggressive during the quarter. Laser units in the third quarter were down 7% year-to-year as strong growth in the workgroup segments of model laser, color laser and laser MFP, was more than offset in declines in low end units. Low end laser units declined in the quarter as we held back chasing the aggressive market pricing.

Now, let’s talk about the fourth quarter of 2007. As we look into the fourth quarter we expect revenue to decline in the low to mid single range and GAAP earnings per share to be in the range of $0.32-$42. Excluding restructuring and related costs and expenses, non GAAP earnings per share is expected to be in the range of $0.50-$0.60. And, while our near term earnings per share results are down significantly year-to-year, we continue to focus on the long term growth and success of the company. With the changes in our consumer market strategy we believe that we will be better positioned for the future. With our wireless ink jet initiative in 2007 we have introduced a significant and compelling new area of opportunity in the ink jet market to better attach printers to the growing sales of wireless notebooks and routers. To date, the results look promising.

We’re continuing our investment in new products and technology to provide a strong pipeline in future products and we’ll now expand this to better meet the needs of the higher usage consumers. We’re investing in improving the brand position and awareness of Lexmark and are encouraged with the results of that initiative. In fact, our latest TV commercials focused on our new wireless ink jet products will begin to air in the next two weeks in preparation for holiday sales. And, we continue to build our enterprise solution and services capabilities and have seen success here with some of the world’s major corporations. Although all these investments affect our results in the near term, the positive impact from these investments is expected to come in the future.

I’ll now turn it over to John Gamble for some more detailed comments on our financials.

John W. Gamble

Thank you Paul and good morning. Consistent with previous calls, I’ll first discuss our results of the third quarter 2007 relative to the prior year and then relative to the second quarter 2007. I’ll then discuss selected changes on the balance sheet and certain items of cash flow. Finally, I’ll finish with more detail regarding our guidance for the fourth quarter. I will call out the impact of restructuring related expenses we walked through the P&L. In the supplemental slide deck posted on our investor relation website, we have included details on the income statement line items impacted by the restructuring related activities.

Now, let me begin with the P&L. Total revenue for the quarter was $1.195 Billion down 3% compared to last year and down 1% sequentially from 2Q. Geographically for the third quarter US revenue of $526 Million declined about 7% year-to-year. Revenue in [inaudible] of $425 Million grew about 2% year-to-year. The remaining geographies declined about 3% versus a year ago. Laser and ink jet supplies revenue in the third quarter grew 1% year-to-year with good growth in laser supplies revenue being mostly offset by an ongoing decline in ink jet supplies revenue reflective of the lower ink jet branded unit sales through 2006 and the continuing weakness is OEM sales.

Laser and ink jet printer revenue in the third quarter declined 11% year-to-year. Laser hardware unit shipments declined 7% versus prior year. We had strong unit growth in the workgroup segments of model lasers, color lasers and laser MFPs. The strong workgroup unit growth was more than offset by weakness in low end lasers. Laser average unit revenue was up 1% year-to-year as positive mix was partially offset by aggressive pricing. Ink jet hardware unit shipments declined 14% year-to-year driven primarily by continued decline in OEM printers. Branded unit sales were down slightly in the quarter. Ink jet AURs declined 6% versus the prior year due to aggressive pricing which is partially offset by positive mix of more AIOs.

Business segment revenue for the quarter of $728 Million grew 5% from the same quarter in 2006 and declined 1% sequentially from 2 Q 07. The year-to-year increase was driven by strong supplies revenue growth partially offset by decline in hardware revenue. The sequential decline in business segment revenue was primarily driven by a slight decline in hardware revenue which has been the typical seasonal pattern. Laser supplies revenue held flat sequentially which is stronger than the usual seasonal pattern.

Consumer segment revenue for the quarter was $468 Million down 13% compared to a year ago and down 1% sequentially. The year-over-year decline was due to declines in both ink jet hardware and supplies revenue. The sequential decline was due to lower supplies revenue partially offset by increased hardware revenue.

Gross profit margin for 3Q was 27.8%. Excluding restructuring related charges of approximately $4 Million gross profit margin would have been 28.2% down 470 basis points versus prior year and down 280 basis points sequentially. The 470 basis point decline versus last year was principally due to a 750 basis point reduction in product margins, the largest factor of which was a decline in ink jet hardware margins. This more than offset the positive impact due to a lower mix of ink jet hardware. Sequentially, the 280 basis point decline is driven by a 210 basis point reduction in product margins due principally to the negative impact of APCLCM in the quarter. The sequential impact of APCLCM reflects its negative impact in 3Q 07 results versus the benefit that it provided in 2Q 07. The additional 70 basis point decline is due to mix reflecting the increased mix of ink jet hardware sequentially.

Operating expense for the quarter was $312 Million. Restructuring related expenses of approximately $10 Million impacted operating expense this quarter. Excluding this impact, operating expenses was $302 Million an increase of $24 Million year-to-year. SG&A was $200 Million an increase of $16 Million from 2006 driven by increased demand generation expense. R&D was $101 Million an increase of $8 Million from 2006. Sequentially, operating expenses excluding restructuring related costs was down $2 Million versus the second quarter. The operating expense to revenue ration in 3Q excluding restructuring related costs was $25.2%.

Operating income in 3Q was $20 Million. Excluding total restructuring and related costs and expenses of approximately $15 Million, operating income was $35 Million down $93 Million from 3Q 06 and down $36 Million sequentially from 2Q 07. Compared to 2006, excluding restructuring related activities the business segment operating income in 3Q of $144 Million was down $8 Million versus last year and down $5 Million sequentially. The $8 Million decrease versus 3Q 06 is due to the higher operating expense principally increase employee expense in marketing and sales and higher development spending. The higher operating expense is partially offset by higher gross profit reflecting increased supplies. The $5 Million decrease sequentially is primarily due to higher operating expense.

The consumer segment, again, excluding restructuring related expenses had an operating loss of $16 Million this quarter down $83 Million versus last year and down $29 Million sequentially. The $83 Million decline versus last year is driven by weaker supplies revenue and aggressive hardware pricing and promotion and lower product margins. The $29 Million sequential reduction was driven by the sequentially negative impact of APCLCM, decreased supplies volume and increased ink jet hardware units and revenue.

Other expenses consisting primarily of cost related centralized supply chain, IT and other operating expenses, primarily G&A were $94 Million in 3Q, excluding restructuring related activities, an increase of $3 Million from 3Q 06 and a decline of $1 Million sequentially. Operating income margin in 3Q was 1.7%. Excluding the restructuring related expenses, our operating income margin was 2.9% a decline of 750 basis points from the third quarter of 2006 and a decline of 300 basis points sequentially.

Concerning financing and non operating costs the net interest and other generating income of $6.5 Million up about $2.5 Million from 2006. Sequentially excluding the $8 Million restructuring related foreign exchange pretax gain in 2Q 07 related to the liquidation of our Scottish legal entity, interest and other was about $3.4 Million. In 3Q 07 we had a net tax benefit of $18 Million. This is largely a result of two factors: first, the settlement of a non US tax audit resulted in a benefit in the quarter of approximately $13 Million. Second, our full year 2000 effective tax rate, excluding the impact of tax settlements and other adjustments is expected to be about 20%. A reduction from the 25% we had previously expected. This reflects an expected change in the geographic mix of our worldwide income as non US income, which has a lower effective tax rate has become a larger percentage of our total income. This reflects better relative performance and supplies in international markets as well as, our decision to focus ink jet hardware sales in higher usage markets like the US market which acts to reduce relative near term taxable income in those jurisdictions. For 4Q 07 we expect our effective tax rate to be about 20%.

Net earnings for the quarter were $45 Million. Excluding the $12 Million after tax costs for restructuring related activities, net earnings in 3Q 07 were $57 Million. 3Q 06 net earnings were $86 Million or $95 Million excluding after tax restructuring related charges. GAAP earnings per share for the quarter were $0.48. Excluding restructuring related activities, EPS would have been $0.60 per share. This compares to 3Q 06 GAAP earnings per share of $0.85 or $0.95 excluding restructuring related activities.

Now, moving on to the balance sheet and cash flow items. Cash flow from operations for the quarter was $142 Million down $25 Million compared to 3Q 06 and up $18 Million sequentially. Excluding restructuring related cash out flows, cash flows from operations was $148 Million this quarter, a decrease of $28 Million from 3Q 06 and an increase sequentially for $13 Million from 2Q 07.

Since the end of June, accounts receivable increased $5 Million. Inventory increased $24 Million. Accounts payable increased $47 Million and incurred liabilities increased $7 Million. For the quarter capital spending was $39 Million. Depreciation in the quarter was $59 Million and currency of the Euro was accountable for at $1.37 compared to $1.27 in 3Q 2006.


Cash and marketable securities at the end of 3Q was $639 Million up $113 Million since June. In 3Q we did not repurchase Lexmark shares. At quarter end we had $295 Million of share repurchase authority outstanding. Of our $639 Million of cash and marketable securities at quarter end the significant majority were overseas and not available for share repurchase.

As Paul discussed, we are announcing today a restructuring plan. The focus of the plan is to consolidate our ink jet supplies manufacturing operations, continue the reduction of our cost and expense structure in our business support functions and improve the effectiveness of our consumer segment marketing and sales expense by focusing our efforts in markets and regions of the world that have the highest supplies usage. As part of the restructuring we will be further consolidating the manufacturing capacity and our supplies facilities and will be closing one of our ink jet supplies manufacturing facilities in Mexico and continuing to optimize our manufacturing footprint in 2008. The facility closure reference is expected to occur in 4Q 07.

We are also continuing efforts to reduce our business support cost and expense structure by further consolidating global activity and expanding the use of shared service centers. The areas impacted are supply chain, service delivery, G&A expense, as well as marketing and sales support functions. The actions we are taking are expected to transfer or eliminate approximately 1,650 positions by the end of 2008. The impacted positions are primarily in manufacturing with the remaining impacted positions being principally in supply chain, service delivery, G&A and marketing and sales support functions. The majority of these positions are expected to transition to lower cost locations. We project the cost of implementing these actions to be approximately $90 Million, of which $7 Million was incurred in 3Q 07. In 4Q 07 restructuring and related costs and expenses due to this restructuring action are expected to be approximately $14 Million. The remaining approximately $70 Million of restructuring related charges and expenses are expected to be incurred in 2008. Total cash cost of the restructuring is expected to be approximately $75 Million. 2008 savings is expected to be about $40 Million of which approximately 50% will benefit costs of sales and 50% will benefit operating expense. Annualized full year savings for restructuring in 2009 are expected to be about $60 Million.

Approximately $15 Million of the total $90 Million of restructuring and related costs and expenses will impact cost of sales. These costs and expenses are primarily accelerated depreciation as well as project costs. The remaining $75 Million of the $90 Million will be reflected in operating expense primarily as restructuring charges as well as project costs. Costs and expenses will be incurred in 2007 and 2008.

In 3Q 07 restructuring and related costs and expenses were $15 Million. Of this amount $7 Million was related to the restructuring we are announcing today, principally severance. The remaining $8 Million was related to the ongoing project related costs from our 2006 actions we have discussed with you throughout 2007.

In 4Q 07 restructuring and related costs and expenses are expected to be approximately $20 Million. Included in this amount is expected to be approximately $14 Million related to the restructure we are announcing today with the remaining $6 Million related to the ongoing project related costs from our 2006 actions that, again, we have been discussing with you throughout the year. The 4Q 07 savings related to the restructuring we’re announcing today is expected to be less than $5 Million.

Now, for my forward looking comments concerning 4Q. We expect fourth quarter revenue to be down in the low to mid single digit range year-to-year. GAAP EPS is expected to be $0.32-$0.42 in 4Q 07. GAAP EPS includes expected restructuring charges of $0.18 per share. Non GAAP EPS which excludes restructuring and related costs and expenses is expected to be $0.50-$0.60. GAAP EPS in the fourth quarter of 2006 were $0.91 which includes restructuring charges of $0.14 per share. Non GAAP EPS in 4Q 06 were $1.05.

In terms of our specific discussion of financial information both the 3Q and 4Q date provided that I am comparing to are non GAAP and exclude the impact of restructuring and related charges. In the fourth quarter we expect gross margin percentage to be about flat versus the 28.2% we achieved in 3Q 07. Operating expense is expected to be up compared to the $302 Million incurred in 3Q 07 primarily due to the higher demand generation including, advertising and promotion. Operating income margin in the fourth quarter is expected to be up from the 2.9% achieved in the third quarter of 2007. The effective tax rate for 4Q 07 as I referenced earlier is expected to be approximately 20%. We project full year 2007 capital spending to be approximately $210 Million down slightly from our previous expectation. We expect full year depreciation to be approximately $180 Million. The depreciation is up from our previous expectations primarily due to our restructuring related activities and project timing.

With that, we’ll go ahead and open it up for questions.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. If you do have a question, please press star followed by one on your telephone key pad. Once again, that is star one for any questions. Your first question is coming from Laura Conigliaro of Goldman Sachs. Please go ahead.

Min Park - Goldman Sachs & Company

Yes, hi this is Min Park on behalf of Laura. Just a couple of questions please. First, regarding Dell’s recently announced partnership with Staples, can you tell us what benefits you can expect to see from this relationship and what risk that there may be you may lose shelf space in your brand of business and to what extent this may open up your dell branded pictures to Third Party, Inc.? And then, I have one follow up.

Paul J. Curlander

Okay. Well, it is very difficult for us to comment on any of our OEM customers so, there’s not really much we can say. All I would point out is that this is not the first time Lexmark has sold an ink jet product OEM to customers who have sold in a retail channel. We did that for a number of years with Compaq, we did not see a problem with that. I think, the issues with Third Party, Inc. are always out there in the market place. I don’t know if the same thing is unique about selling it through retail versus selling it direct.

Min Park - Goldman Sachs & Company

Okay. Then following up, could you please provide a little bit more specificity on what your priority markets are in the ink jet segment? And, how long do you think it will take before you start seeing those results from the shift?

Paul J. Curlander

Well, let me say two things. First, I think we’ve not disclosed exactly what the priority markets are. Obviously, the US is one of those priority markets but, across the world, we have not disclosed the markets and particularly not the ones that are on the low end of the curve. You know, I think that in terms of the shift, there’s the issue of moving from one place and trying to get to another place. It’s always easy to move things out of places than it is to grow the sales of what you are looking to do. So, I think, in the near term, certainly we’ll see the impacts of shifting of our resources and focus as we reduce or eliminate retail in certain markets so, we’ll certainly see that. The key over time for us to turn that is for us to grow the other side which is what the challenge always is. And, as usual, we’re not providing any more guidance than just the next quarter.

Operator

Thank you. Your next question is coming from Toni Sacconaghi Sanford Berstein. Please go ahead.

Toni Sacconaghi - Sanford Berstein

Ah, yes. Thank you. Can you comment about your expectations for Q4? You’re effectively stating that supplies growth rate, you expect is actually going to be a little bit worse this quarter. You’re also saying that you’re going to effectively withdraw from 30% of the ink jet units and yet you expect your year-over-year revenue growth to be similar to this quarter. Can you comment on what’s driving that and also, if there is such a significant withdrawal in hardware revenues, wouldn’t we expect higher gross margins?

Paul J. Curlander

Well, let me say a couple of things on it, Tony. I think that as we look at supplies revenue growth on a year-to-year basis obviously, at plus 1% in the third quarter was greater than our expectation driven by laser supplies. As we move into the fourth quarter as we look year-to-year, the real difference between third quarter is we think we’re just up against a tougher compare in the laser supplies and I think fundamentally that’s it. So, that becomes the shift in plus 1% to where we would think. You know, I think on the revenue side, I mean, revenue obviously is a mix around with what we expect with hardware and what we expect with supplies. From a hardware standpoint, obviously in the business market segment fourth quarter is always the biggest quarter. On the ink jet, it typically is but, we’re doing some unique things here this year. Certainly to the extent that one of the things we’re trying to do is we’re trying to drive more growth in our wireless units in our higher usage segments. We’re hopefully trying to see some impact of that as we’re going forward. I think, those are the combination of things that are kind of causing us to be there.

Toni Sacconaghi - Sanford Berstein

And then, if I could follow up with a second question? Could you comment on the relative health of the laser business? If we look at operating margins before any allocation of overhead costs, you know, they were averaging 25% plus in 2003 timeframe. They’re now, over the last several quarters, around 20% so, we’ve seen some erosion in that laser business profitability before any overhead. Can you comment on what’s driving that? Is that an expense issue? Is that gross margins coming down because of the mix shift in pricing? What’s driving that and fundamentally do you believe the laser business is healthy? Or, should we continue to expect a deterioration in profitability in that business?

Paul J. Curlander

Well, overall, we believe the laser business is healthy and clearly we’ve seen some margins decline over the last couple of years but, the business overall is still very, very profitable. What’s driving the margin decline are really the two issues that you pointed out. First is that we made a decision back in 2003 to start to ramp up our R&D. The vast majority of that has gone into the business market segment and we’ve grown that at a faster rate than revenue and that’s contributed to the erosion and operating income margin. Here recently, in 2007, we put a much greater focus into the marketing and sales side, increasing resources there and that also has impacted the overall OPAX rate versus the revenue. So, we’ve seen that.

The other factor though, I think is also a fundamental factor around the gross profit. But, here the issue is really more around the shift in the model to the extent that color is becoming a more significant piece of the business market segment. It’s a little bit different model because, in color you end up taking a loss upfront in the boxes, it’s a little bit similar to the ink jet side. The overall pages that you drive over time certainly make that up pretty quickly on the color side particularly, when you sell into the workgroup market.

You know, to me, the real measure of the health of the business is what’s going on with the pages in the business market segment for us and we’ve seen steady growth in our pages over time. We would say that the market segment is very healthy. We continue to invest in it and we expect to see those results over time as we go forward.

Operator

You’re next question is coming from Ben Reitzes with UBS. Please go ahead.

Ben Reitzes – UBS Securities, LLC

Hey thanks. Paul, just more color, if you could, on the 30% reduction in ink jet units. It’s just a pretty staggering number to get use to and the prior caller asked about what the impact was on gross margins. You know, back of the envelope you get a few hundred points of support. So, I was just wondering how you think of the gross margin? And then, the other thing is with the decline, if you could delineate which is OEM and branded of the decline? Is a lot of that 30% happening anyway because of OEM? Or, is this much more of a distinct effort where you are really lowering it in branded?

Paul J. Curlander

Okay. Well, let me comment on 30% reduction in ink jet units. I’ll let John comment on the gross margin. As you locate at the 30% clearly, OEM continues to be a significant decline factor but, a lot of what we’re seeing here also is on the branded side. So, we’re seeing significant decline in the fourth quarter in both of those. What’s driving the branded side is really the issues that we talked about. First, you know, similar to what we had in the first quarter 06, with some of the new data that we’re looking at as we’ve gotten into the second quarter results and looked at third quarter, we’ve been seeing supplies come in under our model. Now, as we look at that we’re getting less pages per installed unit than what we had expected. This changes things, because as you look at a product that you place obviously, price is very important, cost is important and page usage is very important. But, the new news here, other than the fact that the price has moved, which happens quite a bit, we’ve got a little more costs in these products, is the view of page usage on these things. As we look at that, business that we had thought would have been good business, using a different set of page usage assumptions now, starts to become not such good business relative to what we’d like to do. So, similar to what we did in first quarter of 06, we’re back focused on saying, “Okay, let’s go through and minimize those units.” And, that’s having an impact.

But, the second thing, and this is the thing that is really different here versus where we were in first quarter 06, is that when we step back and look across the market overall, we see that Lexmark’s distribution of units, low end to high end or low usage placements versus high usage placements is not really aligned with where the market is. And, we really want to do a fundamental shift to try and push ourselves much more towards where that market distribution is. And, as we looked across the markets that we serve and the channels that we serve around the world, you know, you can do a distribution of those channels in terms of the page generation per unit of hardware placed and there’s some that are on the top of the distribution and there’s some that are on the bottom of distribution. So, the other shift here is that we want to shift our resources from those markets that have just a fundamentally low page usage per placement to the ones that have a much better per page usage placement and tends to have higher usage customer opportunities that are better than the markets on the lower end of the curve.

So, this is the combination of things. We’re really kind of doing two things here: one, similar to what we did in first quarter 06 but, a second one which is a fundamental shift. And, as we make that shift, as I pointed out earlier, it’s always easier to cut units out than it is to grow the units that you’re looking for. Obviously, we’re looking to grow units with the higher usage customers in the higher usage markets. That’s not as quick to do as the cut, and that’s what we’re seeing here and that’s what we’re projecting is going to go on into 2008. We give a preliminary view of that, in terms of what we would not anniversary on a year-to-year basis would be roughly 30% of units. But, that’s a preliminary view, we’ve not done the detailed analysis, hopefully get that complete and give you an update on that in the first.

Ben Reitzes – UBS Securities, LLC


But, it’s definitely OEM integrated?

Paul J. Curlander

OEM continues to be a significant decline year-to-year. Most of, all these actions that I’m talking about are primarily around the branded side.

Ben Reitzes – UBS Securities, LLC

Okay. And then on the gross margin, John?

John W. Gamble

In terms of gross margins obviously, if we sell fewer units the period impact is lower but, I think, as Paul indicated, our guidance reflects that impact as well as the other impact that are impacting the business and he did a brief walk through of kind of the year-over-year change. So, certainly, your math is correct that if we sell fewer units that the losses are impacted but, in terms of specific hardware loss levels and hardware margin levels, we don’t really disclose that.

Ben Reitzes – UBS Securities, LLC

Okay. Thank you very much.

Operator

Thank you. Your next question is coming from Shannon Cross of Cross Research. Please go ahead.

Ben Reitzes – UBS Securities, LLC

Hi. Good morning. Just a couple of questions. One, looking at your laser business, maybe Paul, could you dig a little bit more deeply into how we should think about growth in that segment? Obviously, units were down 7% year-over-year. I think, you talked about a mix shift to the MFP segment but, how does that ultimately get reflected both on the supply side, if we see decline in hardware? And, also what should we think about margins? Because, that’s been under pressure for quite a period of time, do you think they’ll stabilize? Or, where do you expect unit margins to go in that business?

Paul J. Curlander

Well Shannon, as always we don’t give forward looking guidance on where we think the margins are going to go. We only give the next quarter over all range per share guidance. So, that’s kind of all we can say about forward looking. I would tell you that as we look at growth in the laser segment honestly, units declines of 7% year-to-year is a disappointing thing for us. But, as we look at that it is really occurring in what I would call the entry point mono lasers. That’s where the big thing is. Here we’re talking really sub $150 kinds of price points and clearly, we have low end products, we have not really designed those products to go south of $150 but, the market, it’s really aggressive and they’re very competitive. The prices have moved really from the $150 point down south of $100 and our products just weren’t designed for that. That’s not a big source of pages. So, as we think about the healthy of the laser business we think about source of pages and driving units that drive page placements and holding back on price, chasing down boxes that don’t generate a lot of pages just isn’t a strong strategy for us.

So, what we focus on is what we’re doing in the workgroup segment which generates all the pages and here receives strong growth in our mono workgroup lasers, our color workgroup lasers and our workgroup MFPs. So, we feel pretty good about that. Yeah, surly we’d like to be doing better in units and that’s getting dominated by this low end thing. But, from a page perspective on the supply side we think we’re selling a good set of stuff out there.

Ben Reitzes – UBS Securities, LLC

Okay. And then, looking on the restructuring side with the benefit, maybe John can you talk a little bit about maybe where the benefit should come through? If we think about how you segment, you know your segment margins business, consumer and other. I’d assume that most of the benefit would be within the ink jet but, is there, you know, can you give a little more color as to whether or not it would come into other, or the corporate line?

John W. Gamble

Well, I think it will end up hitting every line, right. And, it will hit most of the business given the number of segments we discussed and the number of different functions we discussed. But, in terms of breaking it down by business, consumer and other, at this point we’re not going to do that. The level of detail we provided in terms of where it hits the P&L line items, I think, is the level of detail we’re going in for now.

Ben Reitzes – UBS Securities, LLC

Okay. Thank you.

Operator

Thank you. You’re next question is coming from Bill Shope of JP Morgan. Please go ahead.

Bill Shope – JP Morgan

Okay, great. Thanks. Can you help us understand the percent of ink jet capacity that is being reduced as a result of the factory shut down?

John W. Gamble

Bill, we really don’t disclose that so, there’s no easy way for me to try and characterize that for you. But, clearly we’re closing one of our facilities in Mexico.

Bill Shope – JP Morgan

And, how many total facilities do you have? I guess, that would be a better way of getting at it?

John W. Gamble

We have three facilities in Mexico and one in the Philippines.

Bill Shope – JP Morgan

Okay. Would you, just looking at that shut down as well as the 30% reduction in ink jet units that you’re expecting, would you characterize the announcement today of the permanency scaling of the ink jet business? And I guess, extending that point, I realize that you’ve fielded this question in the past but, can you help us understand why a more significant de-scaling or even a complete exit of ink jet doesn’t make sense for long term shareholder value?

John W. Gamble

Well, I would not infer from anything we said anything relative to the capacity of ink jet production. What we said was we were doing consolidation optimization between facilities, that’s what we’ve done. So, we have not said anything about capacity and I don’t think you should assume that there’s some change in capacity permanent or otherwise relative to the ink jet business. I think, about the ink jet business overall, I mean clearly, we’re not happy with where we are. You know, we’ve seen a big decline year-over-year, we’ve seen a big decline sequentially over the past couple of quarters, we’re sitting at a -$16 Million, you know, in terms of segment operating income excluding restructuring. We’re not happy with that. But, our focus is to fix the business. We believe this can be a profitable contributor to Lexmark, it’s been that before. I think we have a lot of strengths in the business around our technology and path and markets. And, that’s our focus, to go fix the business. And, we’ve talked about today, where we want to go to do that in terms of shifting the market strategy we’ve got to make some investments in R&D and products and technology to better match the need to the higher usage customers. We want to shift from a market channel global focused and point more effort and resources against the higher usage markets and higher usage customers. And, we’re driving restructuring to better improve our cost and infrastructure. So, these are the things that we’re doing and this is kind of where we are today.

Bill Shope – JP Morgan

Alright. Thank you.

Operator

Thank you. You’re next question is coming from Katherine Huberty from Morgan Stanley. Please go ahead.

Katherine Huberty – Morgan Stanley

Thanks. Paul, last quarter you talked about aggressive pricing to increase shelf space in the ink jet market. Are you fully backing off that initiative now? And, what are the factors that emerged in such a short period of time that forced that decision to focus back on high quality placements?

Paul J. Curlander

The real difference from where we were in the first half of the year is the fact that our supplies were coming in below the model. And, including pricing also place a factor, increased cost plays a factor, the real difference is this issue around the supplies. As we see supplies coming in under the model, again, what this means is we’re getting less pages per placement versus what we had expected. A lot of things can cause that, I mean, there’s no way to differentiate between those. Obviously, you could have shorter product life, you can just be seeing less usage, you can be seeing more remanufacturing and loyalty loss but, that’s kind of the net. So, as we look at that, it just reinforces what we’ve know is our skew of product placements versus where the market is in terms of pages generated per unit is not, we’re not where the market is. We’re skewed much more to the low end. So, that’s our focus, that’s what’s changed.

You know, in terms of shelf space certainly, if you focus on US market, we’re not looking to lose any shelf space, in fact we’re increasing shelf space from the first half of the year to the second half of the year. But, the real focus for us it so to see if we can’t get ourselves much more aligned with the market, shift towards the higher usage customer set, get the products and technology into that market that really match those kinds of things and clearly, that’s going to take us some investment and some time. But, that’s the direction that we want to go and that’s the difference.

Katherine Huberty – Morgan Stanley

Okay. And then, John what are the requirements you need to hit in order to feel comfortable buying back stock again?

John W. Gamble

Well, as you know, we don’t give guidance or an outlook regarding share buy back. So, we’ve made historical statements about the fact that we’re using US cash to repurchase stock as I indicated in the script. The bulk of our cash is currently over seas and outside the US. So, but, in terms of giving framework or guidance for repurchasing shares, we’re not going to do that.

Katherine Huberty – Morgan Stanley

Okay. Thanks guys.

Operator

Thank you. You’re next question is coming from Richard Gardner of Citigroup. Please go ahead.

Richard Gardner – Citigroup Smith Barney

I have two questions. Thank you. Number one, I’m just wondering how concerned we should be about the rise in laser supplies inventory? Can you give us a sense of how much the inventory is up on a quarter-to-quarter or year-over-year basis? And, secondly, I hate to beat a dead horse but, I guess I just don’t understand how significant investment in ink jet R&D are consistent with well, at least not consistent with near term profitability in that business and it seems to be with the competition spending three to five times as much on ink jet printing R&D as you are annually, that de-scaling the business is not the way to get back to sustainable profitability. And, you’re making it even tougher for yourself to close that print head technology gap over time. So, can you really shrink your way to profitability and prosperity in this ink jet business? And, when do you, maybe consider some tough decisions? Thank you.

Paul J. Curlander

Well, let me address first the laser supplies inventory. You know, currently as we went back and analyzed the overage in laser supplies versus expectation we did see, we saw changes in channel inventory that were different than we expected. It is very difficult to call changes in channel inventory. So, part of the difference in expectation really is that movement. So, to the extent we might have assumed that it was going to move down and it moved up, you know, the total in terms of the overage versus expectations is high, in terms of the movement in the channel it is not quite as significant.

As we look into the fourth quarter, I mean, we’re not currently, we’re not projecting shrinkage in the channel inventory as we look at it. We saw the area where it went up and we thought maybe in retrospect maybe, that was kind of low versus where we might have expected. So, I would not walk away thinking that, that is a serious issue for us. We do not believe that we’ll see shrinkage in channel inventory in the fourth quarter. Again, very hard to call but, again, the issue is the change in expectation versus the change in the absolute level that caused the overage.

You know, I think relative to the ink jet business I’d say a couple of things. In fact, you know, this in general, the discussion that we’ve had for a lot of years relative to the market. I mean, we always admit there are people spending a lot more money than Lexmark out there and that we’ve always been successful by focusing in specific areas and try to drive specific areas. I think you should take what we’ve said today to be a more concentrated focus from Lexmark. And, we do believe that when we focus versus trying to do all the other things everybody else is doing, that drives that 3-5 times greater, wherever the right number might be, in terms of their investments. We’re focused in a specific area, to do some specific sets of things. And, I know we haven’t been very explicit on that for competitive reasons but, obviously that’s certainly the focus that we bring to it.

We’re certainly looking to shift resources as best we can in the ink jet business versus grow resources and, that’s another element that we talked about here today. But, clearly as we shift resources we are looking to put money into technology that we believe can drive the future of the business and that’s not different from where we’ve been. Obviously, we understand the issue around scale and units but, in the end units are important, pages are more important, right. And so, you know, to the extent units drive more pages, we can accomplish the same thing with less units and less hardware loss around units potentially. So, these are the things that we focus on as we look at the strategy and how we’d like to go forward. But, we’re in a difficult position as we talked about last time. You know, we’ve got the supplies coming down, we need to sell more hardware and we’re skewed to the low end of the market relative to where the hardware is that drives pages. So, we need to make a change. We think this is the right set of things and will put us in a better position for the future.

Richard Gardner – Citigroup Smith Barney

Thank you Paul.

Operator

Thank you. You’re next question is coming from Andrew Neff of Bear Stearns. Please go ahead.

Andrew Neff – Bear, Stearns & Co.

Just two questions I guess. One is just can you talk about the implications, and you sort of alluded to this before but, on shelf space? One of the things that we’ve noticed as we’ve canvassed retailers is it seems that Lexmark is beginning to lose shelf space to other competitors. And, I guess second, can you just update us on how the reactions been to your wireless initiative? And, what you think your differentiation is going to be?

Paul J. Curlander

A couple of things, shelf space if you’re looking in the US clearly, in any one retailer you go up and down. But, as we look across all the shelf space that we have, we are increasing shelf space in the US. From first half to second half we’re up double digits in terms of shelf placements. You know, so we feel pretty good about that and obviously, our focus is to do the best to hang on to that. But, within any given retailer the stuff goes up and down from time-to-time and certainly, there are some retailers where we’ve lost some shelf space, there are some others where we’ve gained some shelf space.

You know, relative to wireless, I would say that, you know, I think the reaction has been pretty good. You know, this is a new thing for Lexmark. We have historically never had a lot of success trying to grow a new category or trying to be a leader. With wireless, we’re out there trying to do that and we’re certainly pleased with the results. You know, we have a moderate expectation certainly, as we start up a new category. But, I will tell you that we’re off to a pretty good start. Wireless is already a significant percentage of what we sell in terms of our branded units in the third quarter. So, we feel pretty good about that.

What we see in the retail channel is that not every retailer is as good as another relative to how they market this. We think there are some stronger ways to market it versus weaker ways. Clearly, the thrust around wireless is to drive better attachment to notebooks and wireless routers. That’s what we think. Some retailers do that better than others and these are areas for us to work on that. You know, I think relative to sustainability, you know, I think that this is the question that we face with every product and every feature set that we bring into the market. The issue for us is to stay focused and to stay ahead of the competition in terms of driving a better customer experience. So, let me know comment specifically about what we’re going to do but, we’re very focused on it and, you know, we’re ahead and we’d like to stay ahead and it’s a very competitive market so, you know. That’s that thought.

Andrew Neff – Bear, Stearns & Co.

Thank you.

Operator

Thank you. You’re next question is coming from [Jeff Emberson] from [Shareholders Management]. Please go ahead.

[Jeff Embersom – Shareholders Management]

Thank you. I was wondering if you could talk a little bit about the decline in OEM. What are some of the drivers? And, how do you see that strategically versus the retail space and the emphasis on increased marketing dollars?

Paul J. Curlander

Well, OEM, typically what drives OEM up or down is an alignment of two companies with both the same objectives in terms of what they’re trying to do. So, I think when you hook up, we’ve done a lot of OEM business historically and as we work together with other companies what we have found is when they are very focused on achieving something and we are, that tends to go well. When something changes in the customer’s focus then, things can go the other direction. That’s a little bit of the situation that we’re seeing right now. The difficulty with the OEM business is we can’t control our customer. Our customer makes the decision about where their priorities are, where they want to invest and where they’re going to focus. That’s kind of what we’re seeing with our OEM partners right now. We clearly have a number of OEM partners but, that’s kind of the issue that’s causing this to go down. The thing with OEM is you ride it up when everything’s in alignment and you ride it down when things are not in alignment. That’s a little bit the cycle that we’re in right now.

You know, I think from a retail, I’m not totally sure I understand your question on retail. Is your question about Lexmark or about our OEM customers getting into retail?

[Jeff Embersom – Shareholders Management]

Just more about your efforts in retail and getting more shelf space. You talked about increased share end, etcetera.

Paul J. Curlander

Sure, I think the key for us in retail is that we need to be getting more shelf space as we go forward on the product set that’s going to drive the pages for us. And, I think that historically, our shelf space has been much more on the low end. Now, what we’re trying to do obviously, we’d like to spend more on some places and spend less on some other places. So, this is the whole issue around the shift, right, is to try to hold what we’re spending, you know, the same or see if we can’t get more efficient with it but, try to shift it to focus in the markets, and in the channels, and in the retailers that are going to give us the placement relative to the boxes that we want to sell and that will drive the pages. So, that’s what we’re trying to do right now. We’re trying to work our way through that shift and as we talked earlier, it’s always easier to cut something than it is to get the new stuff going to grow something. And, that’s kind of where we are right now. So, clearly, in the near term we’re gong to see impacts of those cuts but, the key for us is to be working hard to grow the stuff that we want in the markets, in the channels, with the retailers that are going to support our initiatives to get the higher usage customers.

[Jeff Embersom – Shareholders Management]

Right. And, in terms of installed base, you look at the consumer and the business and you’re trying to forecast about supplies and obviously, that’s proven to be a pretty difficult thing to do, how good of a sense do you have of your installed base? What sort of programs or tracking do you have to actually understand the amount of units in the field both from a consumer and business perspective?

Paul J. Curlander

Well, you know, that’s a good question and that’s a challenging question. I mean, the realty is that you don’t know what that install base is. And, you know, I think in some parts of our business, like the enterprise parts of our business we can get some sense because, you know, we’re selling to the customers directly, you know, in terms of demand generation we kind of know what they have. But, I will tell you even the enterprise space, large enterprises you lose track of how many units they have, they lose track of how many units they have. You get the small to medium businesses, you get the consumer, there’s just no way to know exactly how many units are out there. All we can see is the orders placed on Lexmark. That’s the only thing we know. We get some reporting out of channel inventory, that’s not 100%, that’s not always accurate. But, all we can see is what’s placed on us. So, we have models that we’ve developed that take that input that we know, which is the orders placed on Lexmark and we try to extrapolated back to what we think really is going on relative to install base and usage and loyalty loss. Now, there’s no way to differentiate between those so, there’s no way to know that your model is exactly right. And so, what we’re seeing here recently on the ink jet side is that we’ve been tracking actuals less than what the models project. So, something’s changed in one of those three things between usage, or loyalty or install base, we don’t know. We certainly have theories but, we don’t know.

So, that’s basically what we do. We track the information we do know, we use that in the models to best determine what we think is going on and then we take action based on our best judgment of data that’s not exact.

[Jeff Embersom – Shareholders Management]

Alright. Thank you.

Operator

Thank you. You’re next question is coming from Bill Fearnley from FTN Midwest Research. Please go ahead.

William Fearnley – FTN Midwest Research

Yes. Good morning. Paul, how much of the ink jet challenge here is competition? And, specifically, you have a new entrance in the AIO with photo category, you have emerging smaller players being more aggressive in the US, which you said is a key market for you. How much of this is competition and what’s your view of the competitive environment for this quarter and going forward versus the beginning of the year? Is it harder than it was? What specifically are you seeing in the competitive space? How much of that is wrapped around the ink jet challenge? And, I have a quick follow up.

Paul J. Curlander

Well, I think, you know, competition is a big part of the ink jet challenge. I mean, obviously, we’re seeing very aggressive pricing, that’s all about competition. We’re trying to, as we go forward, shift where we are and as we do that we may start to encounter more of some of these other players. But, the reality is as I look at someone like Kodak and the photo base, that’s not the big competitive impact for us because, we don’t sell those kind of boxes. That’s not where our strength is. That’s not really where we’ve been. You have other new entrants like Brother, but again, they tend to sell pretty much about $79. A lot of what we sell is below $79. But, both of them are somewhat positioned as to where we’d like to get to in much greater strength. So, you know, I think as we look at the environment it’s very competitive, it’s been competitive, it’s harder to imagine it’s anymore competitive because there’s a couple more people in there. It’s been extremely competitive – HP, Canon, Epson, these are tough competitors. We expect it to be competitive wherever we go, price points, up and down because, these companies are very strong and so, that’s not what’s new. I guess what’s new and what we’re trying to do is how we focus our business and what we try to bring to the table as we try to drive a differentiation versus the competition.

William Fearnley – FTN Midwest Research

And with the product development to go after these higher printing segments, should we expect a smaller ink jet printer assortment here for the near term until the R&D catches up with some of the new product developments to go after these new segments?

Paul J. Curlander

No. I mean, certainly in the US, the US is not one of the markets we are looking to change what we’re doing. But, obviously, even the US we’re looking to better get to higher usage customers. You know, I think in the near term, the assortment is what we have and we’ll certainly be focused on trying to sell what we have. Our emphasis in that assortment will be towards the units that are going to drive a higher page placement but obviously, we’ll be selling up and down the line. Over time, obviously, as we can get more products in R&D in place to meet the needs of the customers that we see, you know, driving higher usage then, you’ll start to see some changes potentially in the assortment. But, in the near term, the product set is what it is.

Operator

Thank you. You’re next question is coming from Keith Martin from Bank of Montreal. Please go ahead.

Keith Martin – Bank of Montreal

Hi guys. I have two questions if I could. The ink jet business, it seems like its been under a perpetual state of restructuring here for a couple of years. To sort of follow up from Shope’s question, you know Paul, how long do you give it? What are the metrics and the time frame that you’re using to identify if there is, in fact, a business case to continue to support the ink jet business? Is there anything you can give to investors to hold on in terms of metrics or timing? And then, the second question is, John there’s was an earlier question about buy back, my follow up is how much capacity is available to do a buy back with the restructuring costs you have in front of you versus significant part, not sure what significant means but, with cash being held over seas? Is there anything you can give us in terms of availability to in fact perform buy backs given those various forces?

Paul J. Curlander

Well Keith, relative to the ink jet business, all I can tell you is here is where we are today, right. And, our focus is on fixing the business, our focus is on shifting our strategy to go after some higher usage customers and to go after markets and channels that will help us get to those customers. That’s where we are. I think, you know, relative to the metrics, you know, we give you the core metrics. In the end, this is a very simple business. It is in the end about units, it is in the end about supplies revenue growth and those are the core metrics. I mean, obviously, there are some sub segments of that, that we look at internally but, in the end, the business doesn’t turn until those metrics start to turn and those are the metrics that we give you. And, yeah, I know, it’s not what you or other investors want to hear but, you know, we’re not trying to call the time, we’re not trying to call the turn and we’re giving outlooks and guidance one quarter at a time and that’s our expectation as we go forward.

John W. Gamble

So, in terms of repurchase, right, I think, what we said historically and continue to say, significant majority of the cash is over seas, as I said earlier. And, to date we have indicated that we are not looking to leverage the company to do share buy backs. So, in terms of a specific answer to your question, we don’t forecast buy backs but, those are two statements that we’ve made historically and that we continue to make.

Keith Martin – Bank of Montreal

And John, I’m not asking you to forecast buy backs, I’m just trying to understand how much you think is available, whether you use it or not?

John W. Gamble

Again, we’re not, we don’t forecast capacity either, right. I think all we’ve really indicated is the two things that I’ve stated and that’s where we are.

Keith Martin – Bank of Montreal

Okay. Thank you.

Operator

Thank you. Our final question is coming from Rob Semple of Credit Suisse. Please go ahead.

Rob Semple – Credit Suisse North America

I just wanted to ask a, kind of a question about last year at this time. Was this ink jet market intelligence available at that time obviously, in terms of looking at specific regions that you wanted to move into, or customer segments? Because, it would seem more appropriate to really undertake this strategy a year ago as opposed to just kind of walking away from the low end of the business. You know, what’s different this time around?

Paul J. Curlander

Well, I think, I think that what’s different is were looking at a different set of facts today then we were looking at a year ago or even two years ago. You know, in retrospect clearly, I wish we had made this shift sooner but, the fact set was different. I think Rob, it’s not accurate to say we’re walking away from the low lines and I certainly didn’t mean to imply that as we shift our focus but, what we’re doing is we are going to put our focus on the markets, and the channels and the customers that have higher usage. And, as we do that, right, the markets that have less usage, as we pull back from that, the units that fall out are low end units. So, it’s not that in the markets or the channels where the usage is better on that overall, you know, geographic curve, that we wouldn’t want to sell the lower end units, we would, it just as we make the shift from a market and customer priority set, the stuff that tends to fall out is low end. But, we would still have low end as part of the portfolio. Obviously, our focus is going to be more on the products that meet the needs of the higher usage customer.

Rob Semple – Credit Suisse North America

Okay. Thanks.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

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