NN, Inc. (NNBR) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NN Inc. Fourth Quarter 2012 Conference Call. [Operator Instructions] This conference is being recorded today, March 11, 2013. I would now like to turn the conference over to Marilynn Meek. Please go ahead, ma'am.

Thank you, and good morning. Welcome to NN's conference call today. If anyone needs a copy of the press release, please call my office at (212) 837-3773, and we will be happy to send you a copy. Before we begin, we ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release. The same language applies to the comments made on today's conference call and live webcast available at www.earnings.com. With us this morning is Rock Baty, Chairman and Chief Executive Officer; and members of NN's management team. First, management will give an update and an overview of the quarter and then afterwards, we'll open up the lines for questions. With that said, Rock, I'll turn the call over to you.

Thank you, Marilyn, good morning, everybody, and thanks for joining the call this morning. With me this morning in Johnson City, I have Jim Dorton, our Senior Vice President and Chief Financial Officer; Will Kelly, our Vice President and Chief Administrative Officer; Tom Burwell, our VP and Chief Accounting Officer; and Dan Brown, our Corporate Manager of Level 3. Today, Jim will offer an analysis and commentary on the fourth quarter and full year results through December 31, 2012, and then I'll conclude the call with additional comments regarding 2012 performance, as well as provide our revenue outlook for 2013. With that I'll turn the call over to Jim.

Thanks, Rock, and good morning, everyone. Well, we had a lot going on in addition to our normal business during the fourth quarter, and I'll cover all of those accounting activities that we are considering to be nonoperating entries after I recap the financial results of the fourth quarter and the year. Q4 continued the basic story that we've seen most of this year: weak European and Asian sales due to economic turmoil and destocking significantly reduced revenue from normal levels. In addition, U.S. automotive production took an extra period of shutdown in December, which made the quarter even weaker. Q4 sales were 16.8% lower than Q4 of last year, but December was 27% lower than last year, reflecting this additional year-end production slowdown in the U.S. But the December weakness appears to be only a temporary phenomenon because revenues in January and February are back up to the higher levels before December and are actually running a little ahead of our business plan in Europe. Net income from normal operations was $2.8 million or $0.16 per share during the quarter. Gross margins were actually up slightly from year end despite the 17% drop in revenue. As with the past few quarters, the significant improvement in profitability at Whirlaway combined with excellent cost controls in Europe and Asia that allowed our gross profit margins to improve even in a down year. Now including all of the nonoperating adjustments that I'll talk about, we had reported net income of $8.2 million or $0.48 per share. Now let me cover the nonoperating items during the quarter. Some of you will remember that way back in the second quarter of 2009, which was several quarters into the financial crisis, we put a full valuation reserve against our deferred tax assets in the U.S. resulting in a $5.5 million charge in that quarter. From that point on, we didn't book any U.S. tax benefit or expense until we became solidly profitable in the U.S. again and could meet the "more likely than not" standard that we would utilize those deferred tax assets. While we made this "more likely than not" determination in the fourth quarter of this year, so we reversed the reserve we originally made on the deferred tax asset, which had since grown since the original reserve from $5.5 million to $10.8 million. And there's several other related tax entries that impact that. Also as a result of the actions taken during the financial crisis, we generated certain tax claims in Europe related to guarantees given by our European entities against the U.S. credit agreements. And the other thing that happened in the fourth quarter is that we were -- we completed a complex return of basis tax transaction between our European holding company and the U.S. parent to give us cash flexibility for the next several years. This low-tax-rate transaction generated a partial offset to the positive tax benefit of the reserve reversal. So when you net all that together, we booked a tax-related net benefit of $7.3 million, and this is shown on the reconciliation schedule at the end of the press release. Now just to finish up on taxes, now that we will be booking tax expense for the U.S. operations going forward, our average tax rate will rise in 2013 from the 25% range, which had been the guidance in the past year, to the 32% to 34% range. We had 2 other nonoperating adjustments. The first of which was a $1 million impairment of older assets, which was primarily a write-down of the building that we have for sale in Ireland. And finally, we excluded $827,000 in foreign exchange losses on intercompany loans, which has been our practice for some time. For the full year, the reported EPS number of $1.42 per share and the adjusted number from normal operations of $1.12 per share are both records despite the fact that revenue was $54.6 million or 12.9% lower than the prior year. Looking at our cash flow performance in the balance sheet, we had positive cash flow in Q4 of $10.4 million for a total reduction in debt net of cash for the year of $23.2 million. This exceeded our stated goal of a $20 million reduction in 2012. As we have previously stated, we've planned to achieve the reduction in net debt to give us the flexibility to begin implementation of our strategic growth goals, including acquisitions when the time is right. We expect to generate positive cash flow in 2013 of between $15 million and $20 million, excluding any acquisitions. As you can see on the balance sheet, we ended the year with $19 million of cash, and the majority of this was in Europe. Now that we have completed the return of basis transaction I mentioned earlier, we have the ability to bring this cash back to the U.S. tax free to repay revolving credit debt or use for other purposes. And you will see the reduction in cash and debt in the Q1 financials when we report in early May. Due to the lower sales in the fourth quarter versus the third, we had a reduction in working capital during the -- reflecting the lower activity level in the fourth quarter. Working capital, excluding cash and debt, was reduced by $6.2 million in the quarter. Days sales outstanding were down 2.6 days, as we did a pretty good job on collections, but days of inventory were up 4 days due in part to the severe dropoff in sales in December. We spent $4.7 million on capital in Q4, bringing the total to $17.1 million for the year. The majority of the spending in 2012 was for increasing the capacity of our China ball plant, improving operations in our roller plant in the Netherlands and for new tapered roller lines in Tennessee. We did spend at the lower end of our $15 million to $20 million guidance range due to the lower sales levels in the second half of the year. The capital plan for 2013 calls for spending of approximately $7 million for new booked sales programs at Whirlaway, $2 million for new sales programs at the Metal Bearing Components businesses and about $8 million for cost reduction in maintenance projects for a total of $17 million. As with 2012, the actual amount spent will be gauged against the positive -- the economic environment so that we won't overspend if business momentum is not positive. That concludes my comments. Now Rock will give you some comments on the outlook for 2013.

Thanks, Jim. I'll begin with general comments on 2012 for the full year. During 2012, net income of $19.1 million and EPS of $1.12 from normal operations, as Jim mentioned, represents record results for NN as a company. These record net income and EPS results were achieved in spite of the $54.6 million drop Jim mentioned or 12.9% from 2011. The ongoing recession in Europe and secondarily, low growth in China, along with destocking of inventories throughout the entire supply chain, led to the revenue reductions that were very significant during 2012. Given the direct dramatic revenue reduction, the fact that our gross profit margins improved 2.2% from 18.1% in 2011 to 20.3% in 2012 speaks volumes to our post-2009 global recession improved structure and improved earnings capabilities. The margin improvement was achieved as a result of 3 very important factors: First, Whirlaway continued the momentum in operational and financial performance returns that began in the last half of 2011 and carried into the entire year for 2012; Second, our corporate Level 3 program delivered historical results in terms of records in both dollar and as a percent of revenue savings during the year; And finally, our demand-impacted European and China facilities performed exceptionally well by removing significant additional costs from their operations that allowed for very good levels of profitability despite lower revenues they experienced throughout 2012. In addition to the margin improvement I just mentioned, we continued our focus on liquidity and cash flow during 2012. We exceeded our "beginning of the year" net debt reduction goal of $20 million and reduced our net debt by $23.1 million for the full year. Net debt of $50.5 million at year end allowed us to improve our net -- improve our net debt-to-EBITDA leverage ratio to 1.2x by the end of the year. All in all, a very good year performance wise given the very difficult demand and revenue environment we experienced throughout 2012. I'll conclude today's call by commenting on our 2013 outlook. We did mention in the press release this morning that we are forecasting full year revenues for 2013 to be in the range of $365 million to $375 million. The midpoint of the range, $370 million, if achieved, would represent essentially the same level of revenue as 2012. We also mentioned in that release that our revenue guidance assumes the European recessionary levels will continue and no improvement in the destocking for all of the upcoming year. We are hopeful that these assumptions prove to be conservative, and in fact, our first quarter 2013 results are exceeding our forecast for revenues thus far. Having said this, given the uncertainty in Europe, it continues to be a very difficult environment in terms of putting a stake in the ground with respect to revenue forecast for the full year. I can say that we're planning to manage our business on the basis of a continuation of our operating performance in 2012, namely, a continuing emphasis on company-wide Level 3-driven cost improvement, closed cost controls in our European and Chinese facilities and continuing good results from U.S. Metal Bearing Components, Rubber and Plastics and Precision Metal Components business unit. We expect good levels of demand in our U.S. operations for all of 2013. Our intention is once again to manage our business to ensure that we capture significant earnings leverage when revenues do improve. We anticipate 2013 to be another year of excellent cash flow result. Our balance sheet is now well positioned, as Jim mentioned, in 2013 to begin executing on our growth initiatives outlined in our 3-year strategic plan, including a renewed focus on complementarity acquisitions and shareholder value actions to further grow our revenue and corresponding EPS. With respect to shareholder value actions in 2013 and ongoing discussion at the board level includes a possible reinstatement of our dividend, the amount of which and timing is yet to be determined. Finally, the search committee of the board is involved in an ongoing process of identifying my successor. The timing in my retirement announcement last September regarding a transition remains at or near the date of our Annual Shareholders' Meeting, May 16, 2013. We would like to now open up the call to answer any questions you may have.

[Operator Instructions] And our first question is from the line of Ross DeMont with Midwood Capital.

Talking a little bit about destocking, can you remind us what the sales impact of destocking was in 2012?

We're sitting here looking at each other because we absolutely don't know the absolute number relative to out of the total reduction in revenue that we experienced in Europe. But we've said it's somewhere between 6% to 10% of the total drop that we experienced in Europe.

Okay. Got it. So I mean, because I was listening to your largest customers at SKF's conference call, and they made it sound like they're going to align production and inventory levels with sales levels suggesting that we might sort of be beyond this destocking problem. But I guess, your point is you're just being somewhat conservative.

That's exactly right, Ross. I mean, of course, we've heard and talked to SKF and heard the same things, but the -- coming off the fourth quarter and in terms of when we were actually developing our business plan back in October, November and the revenue guidance that we provided in the release this morning, we just felt like it was prudent to say, okay, well, if it continues at the same level of reduction, what would our revenue look like. But and I said it in my comments just now, I mean, we are seeing for January, February and then our March forecast -- January, February actual results and March forecast -- forecasted, we're seeing some improvement.

Okay. Fair enough. And then if we did the same revenue level in '13 as we did in '12, say, the midpoint of guidance, so the $370 million, would we likely have the same EBITDA margins? Or do we have enough lift from Whirlaway or something that we'd have better EBITDA margins in '13?

I would say about the same to slightly improved, and that would go for gross profit margins, too.

And our next question is from the line of Steve Barger with KeyBanc Capital Markets.

This is actually Tejas sitting in for Steve. I think the last question kind of got to this, and I think you kind of already answered it. But I guess to get a step further with the whole SKF event, what's the longer-term strategy on the customer diversification there?

Well, I think the question is a good one, and of course, we, in our strategic, 3-year strategic business plan have stated objectives to reduce dependency upon SKF in terms of a percent of total revenue. But that's not by losing share at SKF. Rather, it's by growing our business in non-SKF business -- related business in both our Metal Bearing Components business, as well as growing further organically Precision Metal Components, Whirlaway, both organically and via acquisition. So if we look at -- by 2015, if we execute like we think we can, that SKF total percent of revenue would go well below 30% down to 25%, I believe, is the objective. As we did -- if you look at it since the Whirlaway acquisition and the growth of Whirlaway is well organically, that number has consistently come down the last 4 years.

And just out of curiosity, what was the Whirlaway impact on the quarter?

In what regard? We don't talk segment in the press release until our -- we file our K. We don't talk segment results until we file our K.

Okay. No, understood. And then just with regards to free cash flow and CapEx, longer term, what's a more normalized CapEx number that is more the sustainability and not the growth side?

We think normally, this year is a good example. We have a -- $8 million of our $17 million budget is based on cost improvement and maintenance, and that's probably a pretty good run, a little bit more than half of our depreciation level.

Okay. And then would you -- I think you kind of touched on the EBITDA as a percent of sales, and then historically, it looks like 12% is about where it's been. Going forward, you kind of mentioned, it'd be about the same but in a more normal environment where you don't have the impacts of destocking. Could that go up back to the 14%, 15%, 16% range we saw in the early 2000s?

Yes. Yes. The previous question, of course, was 2013 and...

Right, right.

Yes. In terms of revenue. But the answer to that, of course, is, yes. We would expect EBITDA margin improvement as revenues come back.

And if you -- just to take that a little bit further, we're off $50 million or so in revenue. If that revenue came back, we don't really have to add any fixed cost for that. So it's just the marginal costs. So if you bring that $50 million back at -- $50 million plus back at 30% kind of drop-down margins, then you're going to see a really big pickup. That's where the real earnings leverage here is.

And then, I guess, to just take it a step further, then you would expect the free cash flow to also take a step-up given the CapEx is at a similar level to FY '12 then, right?

That would be correct, of course, if we'd fund the working capital on the way back up, too.

Got it. And then just with regards to your guidance for '13, I mean, you're assuming weak Europe, which is probably fair at this point and no restocking, which is likely conservative, which, again, is probably a good measure on your part. But what's the guidance assuming for Asia and automotive more specifically?

Pretty flat. I mean, a little bit of slight improvement in Asia but pretty flat was our original assumptions going back to November when we built the plant [ph] .

Okay. And just last question with regards to that guidance for '13, historically, it looks like revenue and earnings have both been more one half favored than the second half. Would you say that still applies to '13? Or do you think the potential of restocking could change that?

I mean, it has the potential of changing it, but if you do look at the first half versus the second half, historically, you could look at it and say there's nothing out there that says it'll be any different this year.

And our next question is from the line of Keith Maher with Singular Research.

Just kind of continuing on talking about the margins, just so I understand if I'm interpreting this right. It sounds like mid-margin improvement if we get it, going forward is going to come more from just better fixed cost absorption and that some of your ongoing cost improvement programs, have they kind of run their course, I mean, that you can't do much more there? Or am I...

I've got a Dan Brown, our Corporate Level 3 Manager, sitting right here this morning, and of course, he would say and the rest of the organization would say no, Level 3, we want to continue to deliver really good results. There's no indication that, that program is going to not deliver relative -- maybe a slightly reduced level than '13 versus '12 but can deliver what we've been delivering since we -- the inception of the program dating back to 2005. And of course, much of that offsets a whole lot of cost issues in our -- inflationary cost issues and other things that you don't necessarily see a margin improvement year-over-year. But in the absence of it, you'd see margin degradation. So the answer to your question is, yes, we would expect the margins to hold -- the improved margins from '13 -- from '12 versus '11 to hold, slightly improve. But as the absorption of the other costs on the revenue side as revenue picks up, we expect to see margin improvement and real earnings leverage, as Jim mentioned, in terms of what it would mean.

All right. That was definitely helpful. With regard to -- I think, your guidance was $15 million to $20 million, and I think that was free cash flow in 2013? Is that correct, taking out CapEx and working capital investment?

Yes.

So would that -- is the thought then that, that would -- that's how you would pay for acquisitions if you were going to make them next year?

Well, we -- our debt-to-cap ratio now is down close to 1 level or getting down there close to 1, so we have a lot of borrowing capacity if we need to borrow. But yes, the free cash flow would -- if we made an acquisition would first go to that and then bank borrowing conservatively, but we would use that net.

Okay. So I mean -- but that would only go up at this point if need be to make an acquisition, it sounds like.

That's right. Yes.

And in terms of -- is that -- I didn't want to cut you off.

No, I'm finished. We're good.

All right. In terms of your shareholder value actions, it sounds like you're favoring potentially restarting the dividend. Is that over any share repurchases? Or is that kind of in addition to that?

We favor and I think, at the board level, favor a dividend in the immediate future versus a share buyback but would not rule out both moving forward. I mean, frankly, when we look at our multiples and the valuation placed on NN buying back stock, our stock, in our opinion, is very inexpensive versus our underlying earnings. So I wouldn't rule out stock buybacks moving forward, but in terms of the immediacy of 2013, I think the board would say that our reinstatement of the dividend would probably be the first priority. And we base that on -- we, Jim and I both, in the last 4 to 5 months of 2012, spent a great deal of time in 4 to 5 different cities talking to existing shareholders, as well as potential shareholders in those 4 to 5 cities that we hit in the last 5 months of 2012. And I don't want to say that the consensus in asking existing shareholders was dividend versus share buyback, what do you think, most of them, the vast majority, however, favored dividend over share buyback.

Okay. And I guess the final question is would you be filing the 10-K this week? Or do you have a time frame for that?

It's due next Tuesday and we'll -- due Monday and we'll try to follow on Friday.

And our next question is from the line of John Cooper with BB&T Capital Markets. John C. Cooper - BB&T Capital Markets, Research Division: Quick question here on the inventory level, I know last quarter, I think, you were ramping from Whirlaway build and trying to get ready seasonally for that. But we saw another tick down in the top line and inventory stayed relatively flat. Are you still kind of the building revenues there at Whirlaway, which is maybe offsetting, masking some of the declines in inventories in the Metal Bearings bit?

John, it's Tom Burwell. Yes, you are correct, but we have seen the reductions in other places offset by the increases in Whirlaway, which is a normal part of their business to be ready for this seasonally adjusted higher sales in Q1 and Q2. And in addition to that, they built some additional stock for the new customer that they didn't have on hand at the end of last year that they would be better able to quickly service the new sales program that they added over the course of 2011. So those 2 things are both for customer service reasons to meet higher seasonal demand.

I also think we had a little bit of build due -- in the U.S. due to this kind of last minute, I won't call them shutdowns but last minute business declines from the U.S. automotive. U.S. automotive plants, a lot of them and some of the Tier 1 suppliers, took an extra week out in December and surprised us, so we ended up with an extra week of inventory that we're going to ship out this year. John C. Cooper - BB&T Capital Markets, Research Division: Got you. So that's something -- I mean, it doesn't sound like it's too meaningful of a bit, but it sounds like it'd probably hit in Q1 of '13 then or you're going to have to write line that just for a little bit?

Yes. We'll be in a position to capture incremental sales without incurring extra starting [ph] costs and overtime costs and those sort of things. John C. Cooper - BB&T Capital Markets, Research Division: Got you. Okay. And then maybe if you can give maybe a little bit of sense of what your guys' expectations are in terms of your pricing environment in 2013? I mean, it seems like it's going to be relatively a difficult environment. Is pricing something that you're expecting to be relatively flat for '13?

Yes. John, we -- our business plan and in fact, moving forward into 2013, our expectations and in reality what's happening in the marketplace are for flat pricing for the full year. And you touched on it. I mean, it's an environment that, in terms of raising prices, very difficult on the basis of our customers are suffering right along with us in terms of especially the downturns in Europe, the recession, the continuing recession in Europe. So our commercial strategy has been to just hold prices for 2013. John C. Cooper - BB&T Capital Markets, Research Division: Got you. Okay. All right. And then, I guess, last, if you could touch on, is there anything that you guys are looking at a little more intensely in the M&A pipeline? Or how is that kind of shaping up for you guys?

We have a pretty good pipeline, particularly in the Whirlaway/Precision Metal Components business unit that we're working diligently on. We've mentioned before that one of the things we liked about the Whirlaway acquisition was the right acquisition pool that we saw, particularly in North America. And so from an execution perspective, we're working that side of it very intensely as we speak. And so I mean, other than to say that there's lots of good candidates out there in terms of handicapping when we might do one, I'll leave that to other folks. But I mean, we certainly have a big focus on it for 2013 based on our improving balance sheet.

[Operator Instructions] Our next question is from the line of Bruce Geller with DGHM.

In the free cash flow estimate of $15 million to $20 million, what is the implied change in working capital for the year in that number, please?

It's up a little bit, but basically flat because, as Rock gave you the revenue forecast, is flattish. I think we have built in some improvement in inventory, maybe offset a little bit with just payables and receivables activity.

Okay. So it sounds like the free cash flow estimate, since CapEx is pretty similar to D&A for the year, it sounds like the free cash flow estimate should not differ materially from the -- what you'd be expecting in terms of earnings?.

Yes. Yes, relatively same amount coming from earnings.

Okay. That's pretty good in light of the higher tax rate. In the cost-reduction portion of the CapEx, I think you mentioned $8 million. What would be the annualized benefit that you would expect from that? Or is that just to kind of maintain the same level of margins? Or is there an incremental benefit to the cost structure from that on a go-forward basis?

I think this was what Rock was talking about earlier. We would expect to be able to take cost out of 3% -- 2% to 3% and sometimes 4% of revenue, and some of that goes to offset inflation, and some of it drops to the bottom line. So in total, maybe 1% or 2%.

But I would just clarify a little bit by saying that our CapEx, of the $8 million that Jim mentioned, the vast majority of that -- look, Metal Bearing Components, manufacturing balls, rollers and cages in particular and then in our other businesses as well, very capital intensive. And so you -- much of our capital is what I would refer to as maintenance CapEx. Now Level 3 identifies a number of projects throughout the year that require a capital investment. Not -- the beauty of Level 3 is that not many of it is -- not many of the projects are, I've got to have capital to achieve these savings. But there is a portion of that $8 million, and call it $2 million to $3 million, that is purely associated with, I've got to have the capital to get to the savings. And so in terms of the 2% to 3% number in terms of Level 3, only 20% of that number would be contingent upon capital.

Okay, great. And could you just give a little more color around the CEO search. I know it's been going on for a while now. Do you have it narrowed down to a few candidates? Is it internal and external, kind of quality level of candidates you're seeing come across? I'd just be interested to hear a little bit more about that.

Sure. The search -- a specific search committee of the board was established back in mid last year, call it June or July. And at that time, both -- I think I've mentioned publicly that there were 2 internal candidates being vetted along with an external search. And it's fair to say that the process has progressed to the point where there's a couple of finalist candidates. But -- and of course, I think the quality of both external and internal candidates is excellent, and I would say that there's -- moving forward here, as I mentioned in my comments, the Annual Shareholders' Meeting is when we would hope to have an announcement on a successor.

Okay, great. And last thing I'll say, just a sample size of one over here, with your stock trading below 5x EBITDA, a share repurchase would seem pretty attractive to me here even relative to a potential dividend reinstatement. I just like the thought of being able to buy stock at these levels and have the benefits spread amongst the lower share count.

So your fault would be a share buyback versus a dividend. Is that what I'm hearing?

With its valuation, where it is currently, yes, I think that's attractive, and it's -- my guess is it's pretty attractive relative to most acquisitions you'd be looking at as well. I think you would -- it's probably hard in this environment today with so much money sloshing around out there to find good companies trading below 5x EBITDA. So you got a great one right in front of you.

Your input is duly noted, and of course, our board listens to this conference call every quarter, so it's duly noted.

And our next question is a follow-up from the line of Steve Barger. Tejas, I believe, is back.

Just a few follow-ups. You'd talked a little bit about the debt to EBITDA and acquisitions. Just kind of wondering what sort of ROIC would you be looking for that would make you want to lean towards M&A opportunity versus further reducing debt.

Well, the main thing we'd look for is accretive to our returns like ROIC with an IRR that would exceed our cost of capital. So that would be the goal, and we'd also look for earnings accretion right off the bat as well. And with that said, we are trying to find -- we're not focusing on more commodity -- on commodity automotive kind of businesses. We're looking at in different markets where we hope we can get some of those higher margins of what to pay for them. But anyway, so I can't -- I don't think we’re going to give out the specific numbers as to what it is, but we're going to look for accretion on all those levels.

Okay. And just unrelated question with regards to destocking, just kind of curious as to if you have any insight on just the channel inventory on average in Asia versus North America. Just trying to get a gauge of if Asian markets tend to keep a larger or smaller inventory versus the U.S.

No. We don't really have an across-the-board way to answer that. It really varies by customer and situation.

[Operator Instructions] I'm showing no further questions. I'll turn the call back to management for closing remarks.

Okay. I'd like to conclude today's call with just a general comment that even with the uncertainty in the economic outlook I mentioned previously, we really do believe at NN that we're well positioned to deliver good earnings and cash flow for 2013. Our strategy execution initiative during the year, this upcoming year, should further our long-term growth prospects for each of our 3 business units both organically and acquisitively, Metal Bearing Components, Rubber and Plastics and Precision Metal Components. Thank you again for listening in on today's call.

Ladies and gentlemen, that concludes our conference for today. If you'd like to listen to a replay of today's call, it will be available until midnight, March 18 by dialing (303) 590-3030 or 1 (800) 406-7325 with the access code of 4594581. We thank you for your participation. You may now disconnect.