Q1 2021 Crane Co Earnings Call
[music].
Hello, and welcome to the Crane co first quarter 2021 earnings call.
At this time all participants are in a listen only mode.
They want you to require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Jason Feldman. Please go ahead.
Thank you operator, and good day, everyone welcome to our first quarter 2021 earnings release Conference call I'm, Jason Feldman, Vice President of Investor Relations on our call. This morning, we have Max Mitchell, our President and Chief Executive Officer, and Rich Maue, Our senior Vice President and Chief Financial Officer, We will start off our call with a few prepared remarks, after which we will respond to questions.
Just a reminder that the comments we make on this call may include some forward looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report 10-K and subsequent filings pertaining to forward looking statements also during the call we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers and tables at the end of our press release and the.
Accompanying slide presentation, both of which are available on our website at www Dot Crane co dot com in the Investor Relations section.
So mark your calendars for May 26th virtual Aerospace and electronics Investor Day, and now let me turn the call over to Max Thank you Jason.
Well, we had a solid quarter on so many levels.
I told you all that our February Investor day.
That crane was at an inflection point for accelerating growth after years of organic investments in the first quarter you saw substantial evidence of that inflection and the related themes from Investor day reading through we are well positioned for accelerating organic growth as our end markets continue to recover.
In addition, we are outgrowing our end markets because of our consistent and ongoing investment in technology, new product development and commercial excellence.
Solid execution continues to leverage that growth into earnings and strong free cash generation.
Which creates substantial flexibility for capital deployment.
And continued evidence of the value we create through acquisitions with stellar performance at Crane currency, Cummins Allison and Ines.
As we announced last night first quarter adjusted EPS was $1 66, a 44% increase from the prior year.
All three of our strategic global growth platforms performed better than we forecast led by crane currency and with demand ahead of expectations across all businesses most substantially at fluid handling.
In addition to market growth the outperformance was driven by extremely strong fundamental execution at all levels across the business from productivity price actions growth initiatives driving market outgrowth, and new product development, all driven by our rigorous cadence and disciplined approach to managing.
In our business.
Regarding market outgrowth, we will spend dedicated time on aerospace <unk> electronics at our May 26 Investor day.
But I would like to highlight a handful of notable accomplishments this quarter and our other businesses.
At fluid handling starting with our water and wastewater business.
We continue to make progress with the new products that Alex discussed in February.
Our new high efficiency non clog pump remains on track to launch in July.
We are already seeing significant interest in the product with substantial momentum and quoting activity.
When launched this would be the most efficient pump in the market with the proprietary cooling system that allows the motor operate.
With far less resistance improving efficiency.
Our chopper pump introduced in 2018 has been proven to reduce maintenance costs by 75% a little over two years. After launch we continue to gain share and we just had our best average sales month for this product in March.
Together. These two products are on track to drive 30 million of incremental sales by 2025.
For the core process part of the business, we continue to drive new product vitality to new levels in this business.
We've always had a strong process business known for its quality reliability and differentiated designs.
But we've improved upon that solid position for the product development process that continues to drive greater innovation and speed to market.
In February we presented in addition to our Triple offset valve line. The FK Tri X product that is true breakthrough focused on replacing other valve technologies and expanding our addressable market by another 500 million for this product line.
This valve is completely new in the industry and delivers four to six times better flow than the competition.
While maintaining the superior sealing technology of a triple offset valve and therefore, reducing the total cost of ownership by 50%.
During the quarter the team completed its fugitive emissions certification process and quoting year to date is already more than double our original target.
We also continue to make progress with our large <unk>.
<unk> diameter pipe product that we presented at our February 2020, Investor Day event.
This product provides more resistance to delamination, and corrosion and lasts over 10 times longer than competing products.
We just exited our best quoting months ever for this product, which was introduced in 2019 and we are on track to deliver sales approximately four times last year's levels.
Continued progress on new products as well as commercial excellence driving share gains and above market growth across the fluid handling business.
At our crane payment innovations business, we continue to capture exciting opportunities across our various vertical markets with innovative and new to the market solutions and February Curt discussed the growth. We are seeing an alternative self checkout solutions that are smaller and more versatile than the traditional self checkout lanes.
To grocery stores.
Our new products in this area include our pace station and pay pod solutions for smaller retailers convenience stores and quick service restaurants, which continued to gain traction with customer field trials and rollouts in mid sized franchises.
We are also working with an increasing number of customers on localized retail solutions, particularly with large retailers, who want a fully custom self checkout solution optimized for their footprint and needs.
Further retail is seeing strong demand for various self service kiosks for bill payment applications sale of gift cards, and even the purchased an exchange of crypto currencies.
Gaming is the other area, where we're seeing a strong rebound in market demand paired with increasing opportunities from the innovative solutions, we're offering from cashless solutions that are compliant with the stringent regulations governing casinos.
So our latest simplify software and connectivity suite for both front and back office cash management.
<unk> provides an unparalleled breadth of capabilities and are successfully increasing penetration and gaining share in gaming.
At Crane currency. This quarter's results speak for themselves. We are clearly outgrowing the international market with our portfolio of best in class anti counterfeit security solutions and banknote printing capabilities.
While aided somewhat by demand positively in this COVID-19 environment. The currency team continues to innovate and introduce a steady flow of new best in class security products.
To date 147 day nominations of specified Crane, Currency's technology, and 10, new denomination over the last 12 months, including the first for a new breeze product introduction.
The commercial focus and execution has also been outstanding from strategic account management customer segmentation and holistic value selling and product management.
As planned when we initially acquired crane currency, we have driven substantial improvement in international margins over the last for years through consistent application of CBS, which continues to drive improvements in quality and efficiency. For example paper yields in our Swedish substrate operation are up 8% over the last 12 months our.
Cereal improvement that directly improves profitability.
When we announced this acquisition in late 2017, we targeted $1 of EPS accretion by 2021.
Based on where we ended the quarter I am very confident we will exceed that $1.
In addition to outgrowing our markets there was solid execution in the quarter. We delivered these strong results in an environment with some supply challenges and continued uncertainty related to COVID-19, both which will continue through the balance of the year.
Similar to what many others are experiencing globally, we continue to manage through various supply chain disruptions.
Single major issue, but our teams continue to manage through various shipping delays in random supplier constraints, whether due to COVID-19 lockdowns for sure.
Short term material availability.
And we have also done an excellent job fully offsetting the material cost increases we are seeing across many of our businesses.
That pressure was most notable in engineered materials, where resin prices increased rapidly partly because of shortages and outages. Following the storms early earlier this year in Texas that disrupted production at some of our suppliers.
However that team manage both the sharp increase in demand from RV customers as well as the immediate higher material costs extremely well.
This is an experienced and seasoned team that responded quickly ramped up production and implemented price surcharges and this was all done in a manner that treating our customers fairly met our customers' needs and will result in full price recovery and margin protection for our business on a full year basis.
Excellent performance by the team at actual results and the environment.
We also had continued strong performance from our recent acquisitions Cummins Allison and <unk> are on track to exceed our original full year expectations for 2021.
And remember that Cummins Allison delivered 2020 results ahead of its original plan despite the impacts of COVID-19.
And we are growing capacity for further acquisitions, given our strong balance sheet and strong free cash flow generation.
An excellent quarter and an outlook that is just as impressive we are trending ahead of our expectations on execution free cash flow and margins and also on sales and orders given improving trends across nearly all of our end markets.
The pace of that improvement varies across our businesses. Some were not really impacted negatively by the pandemic, most notably crane currency.
The military side of our aerospace <unk> electronics business and our nuclear service business.
Some like the recreational vehicle market in engineered materials, and our shorter cycle commercial fluid handling businesses are already seeing strong sales growth.
They should be followed over the next quarter or two by our sales inflection at our crane payment innovations business and then by the longer cycle process side of our fluid handling business.
For commercial aerospace, we are already seeing very favorable leading indicators.
Don't expect positive year over year sales growth until the latter part of this year.
Based on what we can see it feels like a solid phased improvement across all segments well into 2022.
However, while our markets are improving our optimism is tempered somewhat by the ongoing uncertainty about how the rest of the year will unfold there are still COVID-19 related lockdowns throughout parts of Europe.
Worsening situation in India.
Ongoing travel restrictions in many parts of the world and risks related to new COVID-19 variance.
Balancing these factors we are raising our adjusted EPS guidance by <unk> 65.
To a range of $5 65 to $5 85.
At the midpoint that reflects 50% adjusted EPS growth.
We are raising our core sales growth forecast by two points to a range of 4% to 6%.
Inflection.
We have clear momentum with increasing traction from our growth initiatives.
And I am confident that we are on a path to generate substantial and sustainable value for all of our stakeholders.
At this point I will turn it over to rich for some additional financial commentary rich. Thank you Max and good morning, everyone as usual I'll be providing segment comments that will compare the first quarter of 2021% to 2020 excluding.
Excluding special items as outlined in our press release and slide presentation.
Starting with fluid handling sales of $288 million increased 12% driven by a 6% increase from core sales, a 5% benefit from favorable foreign exchange and modest acquisition benefit.
Fluid handling operating profit increased by 24% to $39 million.
Adjusted operating margins increased 120 basis points to 13, 4%, reflecting strong execution on productivity benefits from last year's cost actions.
And the higher volumes.
Sequentially trends in fluid handling improved across the board with with foreign exchange neutral backlog up 4%.
And foreign exchange neutral orders up 15%.
Impaired to the prior year backlog increased 5% and orders increased 2%.
Throughout the quarter the order growth was strongest in our shorter cycle businesses orders at our core process business inflected positive on a year over year basis in March and we expect that trend to continue through the second quarter.
And as possible a portion of the strength and process orders is related to distributor restocking.
But we are also seeing clear evidence of improving end demand and in some cases the start of released pent up demand.
Yes.
We expect the recovery to be led by the chemical and pharmaceutical end markets, both of which are continuing to show signs of strengthening.
For chemicals, leading indicators, including chemical production are improving.
And for pharma our project funnel continues to grow.
General industrial leading indicators are also turning even more favorable and given the long lead times for certain products. In this vertical we continue to build some inventory in advance of the eventual recovery.
Regionally, we still expect the recovery to be led by North America, and China with Europe lagging.
We had positive year over year sales growth across all parts of our commercial business with particular strength in Canada.
For fluid handling overall, we expect to do better than our original 2021 segment guidance in February we guided to core growth.
Of a half a percent, which is now expected to be in the mid single digit range.
Our original guidance for favorable foreign exchange of 2% is now running closer to 4%.
And we still expect an incremental acquisition benefit of approximately $5 million this year from IMS.
Margins should also exceed our original 12, 5% guidance.
However, remember we told you last quarter that while we expect really solid operating leverage this year, the strongest leverage won't occur until our longer and later cycle process business picks up a few quarters from now.
Leverage is also temporarily muted by positive FX movements that we saw in the quarter.
At payment and merchandising technologies sales of $338 million in the quarter increased 13% compared to the prior year, driven by 8% core sales growth and a 4% benefit from favorable foreign exchange.
Segment operating profit increased 176% to $85 million.
Adjusted operating margins increased 500 basis points to 25, 3%.
And while currency core sales increased 52% are high margin payment business core sales declined 12% and is still several quarters away from a full recovery.
We do believe the first quarter will be the best of the year for the segment and for Crane currency and volume and mix certainly did help margins somewhat in the quarter.
However, I think it is also really important to remember several other factors here.
First we have more than doubled international margins at crane currency, even after the significant intangible amortization that comes with purchase accounting.
And while volume helped the execution at Crane currency has consistently and steadily improved over the last for years quality and quality delivery and cost metrics are in a completely different range than they were pre acquisition and we continue to see improvements every day.
And while broad based I would highlight particularly notable improvement in our international operations.
The volume we saw in the quarter was also broad based across the U S. The international markets as well as across security substrate and banknote printing.
And lastly, we are meeting our customers' needs better than ever before and we are being paid for the value that we're providing and that's where we will remain focused providing our customers a level of service and quality of products that they can obtain.
Anywhere else.
At Crane payment innovations, we continue to see improving trends across the business.
We continue to expect the greatest medium term growth in the retail and retail driven by self checkouts strong return on investment as well as the hygiene and health benefits of eliminating direct human interaction and the checkout process.
Transportation started the year strong and that gaming, we continue to gain traction with our connectivity solutions and cashless payment options.
Vending still remains our softest vertical.
Given the number of offices and schools that are still operating remotely, but we have already seen a clear inflection in leading indicators with machines and public locations like airports on a clear path to recovery.
Given all those favorable trends for 2021 core sales growth is likely to reach the high single digits. This year somewhat better than the 6%, we originally guided to with.
With favorable foreign exchange now a little above a 3% benefit for the year.
The core sales growth reflects solid growth across both.
CPI and crane currency.
Margins are now likely to be above 20% on a full year basis, but we certainly expect margins to moderate somewhat as the year progresses.
At Aerospace <unk> electronics sales declined 20% to $154 million with segment margins of 16, 9%.
In the quarter total aftermarket sales declined 20, 29% driven by a 43% decline in the commercial aftermarket and a 5% decline in military aftermarket sales.
Commercial OE sales declined 32%, but the defense OE business remains solid with sales up 4%.
We continue to believe that the fourth quarter of last year marked the trough for both sales and margins and we will see improvement over the course of 2021.
We are gaining better line of sight to improvement with leading indicators like airline schedules in flight hours trending favorably.
However, we will have at least another quarter of year over year sales declines.
Before sales growth and flex given the long and late cycle nature of this business.
On a full year basis, the core sales decline should be a couple of points better than the 8% decline we guided to earlier this year.
We still expect segment margins to recover back to north of 20% fairly quickly after 2021 as the commercial markets continue to recover on a substantially lower cost base for.
For this year, we expect margins modestly better than the 15% that we guided to in January.
Engineered materials sales increased 6% in the quarter to $54 million with 11, 8% margins.
Sales strength was led by recreational recreational vehicle demand and we have good indications that building products demand is poised for a strong recovery in the coming quarters.
Margins in the quarter were impacted by rising resin prices.
Cost pressure on resin was exasperated by the storms in Texas that disrupted operations for several of our suppliers.
For resin supply is recovering quickly and we expect that to result in resin costs reverting to more normal levels in the next several months.
We have quickly implemented surcharges on our customer base and on a full year basis, we will fully offset the higher input costs with pricing.
Consequently, we are on track to meet or exceed our original 2021 guidance for this segment.
Turning now to more detail on our total company results and guidance.
We had very strong cash flow performance in the quarter generating $45 million in free cash flow compared to negative for $43 million in the first quarter of last year.
During the quarter. We also received $15 million from the sale of a property in long Beach, California that is excluded from free cash flow given required classification as an investing activity.
However, this sale was directly enabled by our ongoing restructuring efforts as we moved operations from this facility to other locations.
Since 2017, we have received proceeds from real estate and other asset sales made possible by restructuring activities of approximately $47 million.
Which means that much of a restructuring has actually been self funded.
We also continue to further improve our strong balance sheet subsequent to the quarter end on April 15th we repaid the term loan originated in April of 2020 in full using cash on hand.
And some commercial paper.
At Investor Day in February I told you that we had very limited acquisition capacity today growing to about $750 million by the end of this year.
Given our revised outlook that number is going to be somewhat higher.
We will remain disciplined but I am confident we will continue to find attractive transactions, where we can deploy our capital to create value for shareholders.
The adjusted tax rate in the quarter was 22, 2% for the full year, we now expect an adjusted tax rate of 21%.
Other than the 21, 5% prior guidance with the fourth quarter tax rate likely the lowest of the year.
As Max explained we are raising our adjusted EPS guidance by <unk> 65.
To a range of $5 65 to $5 85.
Reflecting the strong first quarter performance and our expectation that end markets and execution will be ahead of where we forecast them earlier this year.
That said there is still some uncertainty in many of our markets as well as challenges in certain areas of the supply chain.
But again this guidance appropriately balances our performance and the market environment.
For core sales, we now expect core growth of 4% to 6% up two points from our prior guidance.
Foreign exchange has also become more favorable over the last several weeks and we now expect favorable foreign exchange translation of two 5% up from one 5% of our prior guidance.
Free cash flow guidance was increased to 300 million to $330 million up 35 up $35 million from prior guidance, reflecting higher earnings.
Corporate expense is now expected to be $77 million up $12 million compared to the prior guidance, reflecting a number of changes, including some timing items, some legal fees and higher bonus accruals.
Full details of our adjusted guidance are included both in our earnings press release as well as our earnings slide presentation.
Regarding the cadence of our earnings through the year remember last quarter, we discussed about six cents of earnings that was shifted from the end of last year into our first quarter, given timing and logistics issues. We also had some favorable timing in mix in the first quarter, we expect a step down in EPS next quarter with the second and third quarter at EPS.
<unk> similar to each other and then fourth quarter will follow its usual pattern is the seasonally weakest quarter across most of our businesses.
Operator, we are now ready to take our first question.
Thank you well now be conducting a question and answer session.
If you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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Our first question today is coming from Matt Summerville from D. A Davidson your line is now live.
Thanks, Good morning couple questions first within the currency side of the business up 50% plus year over year, clearly a big first quarter. It sounds like Unfortunately, Thats international a portion of that's domestic maybe if you could sort of talk about that a little bit and maybe parse that out and then how should we be thinking about the balance for the year.
Likely as it relates to that business.
And I guess, what I'm trying to get at is how much of this growth do you think is sort of pandemic, driven which we would say it would be somewhat temporary versus more secular Lee driven I know theres a lot there, but thank you.
Yes, sure so hey on the quarter itself.
Yes, 52% overall for currency recall that last year in the first quarter was.
A very.
The easy comp I would say relative to this quarter given the.
For the Destocking that was occurring and we had not yet began the production on the revised <unk> co with the U S government, so clearly a component of that.
Potential component of that 50, 52% coming from that part of the business, but I don't want to I don't want to undersell. The significance of the continued momentum that we're seeing on the international side.
Matt.
It's been pretty pretty exceptional and we continue to see that continue I think I mentioned on our last call.
Where we had seen in 2020 alone about I think it was close to 40% year over year growth in 2020 versus the prior year on international.
Looking at our numbers this year, it's we're going to be up in the double digit range again again here in 2021.
So that gives you a sense little a little bit about the split between the contribution of the 50% to 52%, we're not going to break it out in detail between the two correct just to continue on what rich is saying.
Matt So if I normalize we had the adjustment for U S U S versus international when you look at it longer term.
We expected it to come back between six 5% to 7 billion that was that's.
My estimate our estimates.
We're at seven six to eight to nine six and we're running at the low end of that.
That's going to continue.
At least another another year for sure.
I feel my estimate not not anything we're getting from our customer.
So you can you can determine what's COVID-19 related in that six 5% to 7 billion versus the seven seven.
<unk> <unk> six which.
As at the low end.
On international the majority of it is I would argue is.
The secular.
<unk>.
Trends of.
Let me correct on international the bulk of it is share gain and our execution versus COVID-19 related and any short term bump.
There is some of that but the bulk of it is us continuing to.
When new customers execute tie.
Tie in our technology design capabilities, all in I think it will.
Executing really really well.
Hopefully that helps yes, I'll just add one on one other thing Matt if I can on COVID-19 as it relates to international in many cases projects were actually delayed.
Cause of COVID-19 in terms of new designs and.
Upgrades and the like during the pandemic, so we've actually invested more on <unk>.
Design.
Designed personnel and so forth to address what we see is some pent up demand on the <unk>.
Projects kicking back in again.
Great. That's helpful. And then maybe just one on fluid handling can you talk about what youre seeing in terms of price realization year over year, whether you need to go get more price in that business to help offset inflation and how what kind of relative spread do you think youll be able to maintain between price and cost in that business. Thank you.
Yes so.
We feel really good about our price actions there is.
Really nothing to go get I would say we've.
And we're going to monitor things closely as we move forward, but all of our pricing actions are in place and we feel really good about about that spread its not.
I would say it's not neutral.
We are doing.
Our best to make sure that we're getting getting that price cost to be.
Accretive, which so far so good and we expect that to continue as we go through the balance of the year.
Great. Thank you guys.
Yes, Thanks, Matt.
Thank you next question is coming from Nathan Jones from Stifel. Your line is now live.
Good morning, Nathan good morning borrowing on for Nathan Congrats on the quarter.
Thank you.
Okay.
And then going back to fluid handling.
What was the cadence of orders through the quarter did.
March strength and better than normal seasonality.
And how it's trended through April.
Yeah, what I would say is that.
Things strengthen through through the quarter as.
As I said in my prepared remarks from the commercial side. It was the strongest and it was sustained through the quarter and on the process side, we saw it build through the quarter.
So we do expect that momentum actually to continue here as we move through as we move through the second quarter. So.
Strong month of March in particular on process and again sustained good momentum in the commercial side of the business.
Okay, and then following up on that.
Did you see any benefit or delay from weather related to fluid handling.
And could you quantify that.
Yes, no we did not we didn't see any of that whether it was I think you are referring to the storms in Texas, we did not see really any inflection of any sort related to that.
Alright, thanks for taking my questions.
Thank you.
Thanks for your next question today is coming from Damian Karas from UBS. Your line is now live.
When David Hey, Good morning, guys. Thanks for all the detailed segment guidance.
So I wanted to ask you on the fluid handling 6% organic growth, obviously better than you had expected and you talked a little bit about the short cycle profit strength exiting the quarter.
I was wondering if you could maybe just give a better sense on how much of.
That one.
<unk> was catch up demand or restocking activity and Mac you had highlighted.
The product development.
The opportunity in <unk>.
Handling any sense on how much share gains contributed to that first quarter.
Yes, good questions.
I don't have I don't have a hard on share gain.
On the on the restocking I would say, we think there might have been a little bit of that Damian, but not not a lot in.
No.
Frankly.
Pulling some of our channel partners in the U S.
Who.
But I think wanted to do that they couldnt given the demand that was actually the underlying demand that was actually there. So I think this is really all demand driven right now and not a whole heck of a lot I did mentioned I think that we're attributing some of it but it's not significant in the quarter.
From a share gain perspective.
I would say that.
I think from what we are seeing Damien there should be some restocking coming but right now it seems to be all flowing through.
Occurring so quickly that our channels are the orders that we.
We see in the uptick.
Going immediately to end customers.
Yes, and on share I would say that if.
We're outgrowing the market I don't have a specific number for you on the first quarter for that but we are definitely outgrowing the market given all the initiatives that we've been driving here.
We will take a look at a number of its even get back to you.
Okay, Okay got it.
And then I was just wanted to ask you about the PMT margins.
Yes.
How should we think about the cadence for the rest of the year there obviously.
Currencies kind of.
Positive for your mix right now, but you still have CPI declining and I'm, assuming that that's kind of.
Next up.
When you get later in the year, so what's the cadence look like for for margins in PMT.
Yes, we should still see pretty pretty decent margins I think the full year. We said we were going to exceed overall between our 20% roughly.
Given the 25 here in the quarter, obviously, we still expect some pretty solid margins second quarter will still be I think very healthy.
And it'll probably come off a bit from that point.
Just given.
The project timing mainly in currency.
But on the payment innovation side.
We're going to start to see this demand come back as we've already started to see.
So we do expect that piece of the business to increase but the lumpiness associated with with currency is going to cause us to see some margin.
Coming back in the latter half of the year.
Great. Thanks for the time, guys I'll get back in the queue.
Thanks, David.
Thank you we've reached the end of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
Super.
Inflection and growing momentum consistency of execution, our strong results this quarter support all of our key themes we discussed in February.
In the very early stages of a strong market recovery, we have invested.
I'd heavily in our organic growth initiatives and results are reading through and consistent above market sales growth.
We are growing opportunities for acquisitions in fluid handling and aerospace <unk> electronics building on our core competencies.
And we have an incredibly strong foundation to build upon grounded in the crane business system, and our culture of ethics and integrity.
Great Hank Aaron <unk> said consistency is what counts you have to be able to do things over and over again.
The essence of the Crane culture from the Crane business system, consistent strategic execution and repeatable processes to ensure success paired with driving for continuous improvement and a disciplined approach. One last reminder to encourage all of you to join our.
May 26, aerospace electronics Investor day virtually.
Where we will provide additional details and progress from our strategic growth initiatives and share some very exciting technology advancements with you on that day. Thank you for your interest in Crane have a great day.
Thank you that does conclude today's teleconference webcast may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.