Richard Galanti - Chief Financial Officer, Executive Vice President, Director.

Dan Binder - Jefferies John Heinbockel - Guggenheim Securities Charles Grom - Sterne Agee Paul Trussell - Deutsche Bank Christopher Horvers - JPMorgan Mark Miller - William Blair Meredith Adler - Barclays Robbie Ohmes - Bank of America Merrill Lynch Steve Tanal - Goldman Sachs Bob Drbul - Nomura Peter Benedict - Robert W.

Baird Greg Melich - ISI Group Budd Bugatch - Raymond James Scott Mushkin - Wolfe Research Sandra Barker - Montag & Caldwell Joe Feldman - Telsey.

Good morning. My name is Jodie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco's Q2 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn today's conference over to Mr. Richard Galanti, CFO of Costco. Please go ahead, sir..

Thank you, Jodie. Good morning to everyone. This morning's press release reviews our second quarter and first half fiscal 2014 operating results for the 12 and 24-week periods ended February 16th, and our monthly sales results for the four-week reporting month of February, which ended this past Sunday, March 2nd.

The discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and that these statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements.

The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time-to-time in the company's public statements and reports filed with the SEC. To begin with, our 12-week second quarter, for the quarter we reported earnings of a $1.05 a share.

This compared to last year's second quarter earnings reported at $1.24. As noted in this morning's release, our last year's earnings figure was positively impacted by a $52 million or $0.14 per share income tax benefit that was in connection with the portion of the special cash dividend we paid in December of '12 to company 401(k) plan participants.

Several factors impacting our second quarter earnings beyond that, these included lower sales and gross margins in hardlines, most particularly during the four-week holiday period between Thanksgiving and Christmas, lower year-over-year gross margins in fresh foods, the FX impact of weaker foreign exchange rates year-over-year when reporting profits from our international operations.

This represented, if you assumed, no change year-over-year in the currency exchange rates, about $23 million pre-tax or little over $0.03 a share. For example, this year in Q2, versus year ago, the Canadian dollar relative to the U.S. dollars is down 8% and Japan about 15%.

In addition, an income-tax rate, even after excluding that tax benefit I just mentioned, that was still 1.5 percentage points higher year-over-year in the second quarter. Last year in Q2, as I had mentioned there were a couple of positive discrete items that had lowered last year's rate by about $10 million or $0.02 a share.

As well in both, this year's and last year second fiscal quarter, there were few other discrete items that in the aggregate represented a year-over-year negative swing to our SG&A expenses by about 5 basis points, or $0.02 a share.

While earnings results for the first four weeks of Q2 were very weak, our earnings in the subsequent eight weeks of the second quarter showed improvement. In terms of sales for the quarter, total sales were up 6% and on a comp basis up 3%.

For the quarter, sales were negatively impacted by gas price deflation as well a bigger impact by weakening foreign currencies relative to the dollar year-over-year. That alone was about $200 basis points. Excluding gas, the reported 4% U.S.

comp in Q2 would have been plus 5%abd the reported flat international comp, assuming flat year-over-year FX rates would have been plus 7%, such that the total company, which we reported, again the 3% comp for the quarter, excluding gas and would have been plus 5.

For the four-week month of February, which included the last two weeks of the fiscal second quarter, comps came in at a plus 2%. This consisted of a plus 3% reported in the U.S. and a minus 1, internationally. Again gas deflation and FX had an impact, such that the 3% reported U.S.

comp increase for February would have been a plus 4% and the minus 1% international, excluding same FX change rates year-over-year would been plus 5% and the total company, the plus 2%, that we reported would been a plus 4%. I now mentioned, which I have not been quite a while, weather.

It has been all over, particularly in the U.S., snow, rain, just crazy weather. We estimate that the weather impact to February sales results represented about one percentage point hit to the four-week reporting period.

In terms of new openings, after opening 13 new locations in the first quarter as well as closing our Acapulco, Mexico location due to the hurricane damage, we opened three new locations in the second quarter, two in the U.S., one each in Illinois and Texas and one also in Ontario, Canada.

All told that puts our fiscal 2014 openings through the second quarter at 16 new locations and we now operate 649 locations around the world. And between now and the end of fiscal 2014, we expect to open an additional 14 locations, three in the third quarter and 11 in the fourth quarter.

These 14, which again, this will be before fiscal year end on August 31, six are planned for the U.S., two additional locations in each of Japan and Korea and one each in Canada, U.K, Australia, and of course our first location opening in Spain in Seville in the spring, such that we would expect to end the year with 30 new openings for the year.

This morning, I will review with you, of course, our membership trends and renewal rates, our e-commerce activity and of course, additional discussion about margins and SG&A. To start off, again sales, total sales were up to $25.7 6 billion, up 6% year-over-year and comps, again was reported plus 3% and a plus 5$, excluding gas and FX.

In terms of the plus 3% reported comp sales, the average transaction was minus 1% for the quarter on a reported basis. Again FX has impacted that as well. It would have been a little over 1% plus with on a local flat currency year-over-year. Average frequency was a little over 4% for the three recent months.

Frequency was just under 4%, just under 5% and just under 3% for December, January, February and year-to-date shopping frequency continues to be in the 4.25% range. In terms of sales by geographic region, both for the 12 week quarter and the four weeks of February, geographically Southeast, Midwest and San Diego regions were strongest.

Internationally as well, both for the quarter, the four weeks of February, the strongest regions in local currencies where Mexico and Canada. For the second quarter, in terms of merchandise categories, within food and sundries, overall in the low single digits. For hardlines, overall in the mid-single digits.

Within that, we are asked about electronics that were slightly positive for the quarter overall. Within the mid-single-digit comp range for softlines, and then fresh foods up in the mid high single digits, overall, with produce being strongest. For February, again, the traffic was up just under 3% shopping frequency.

Again the reported average transaction was down about a little over 1%. But again big impact from gas and FX. In fact, just during the month of February, year-over-year, the average sell price gasoline was down about 10% for the month per gallon.

From a merchandising category standpoint, food and sundries, overall was in the low single digit range, hardlines overall came in slightly negative with electronics being down in the mid-single-digit range, softlines was the strongest area in the mid to high single-digit range, and finally fresh foods mid-single-digit range overall.

Again, produce being typically strong. In terms of moving down the income statement. In terms of membership fees, $550 million, up from 4% or $22 million from a year earlier of $528 million. Again you have got the impact of FX.

If we assume flat year-over-year FX, that reported $550 million membership fee number would have been $563 million or up 7% year-over-year In terms of membership, our renewal rates continued at record levels and we continue to see increasing penetration of the executive membership.

New membership signups in the second quarter companywide were up 13% year-over-year, again, mostly reflective of very strong signups some of our international openings, including recent new openings in Japan and Australia.

In terms of number of members, Gold Star, we ended the first quarter three month, 12 weeks ago at $29.6 million at Q2 and it was $30.1 million. Business primary rounded both, Q1 end at $6.7 million.

Business add-on at $3.5 million each, so all told, $39.8 million at Q1 end up to $40.3 million at Q2 end, including the additional card $72.5 million at Q1 end was up about $900,000 to $73.4 million at Q2 end.

Also at second quarter end, paid executive memberships were just over 14 million, an increase of almost 200,000 since Q1 end, or about 16,000 week in the quarter, and again executive members are roughly 35% of sales in a little over two-thirds of our sales. 35% of our membership base and a little over two-thirds of our sales.

In terms of renewal rates, as I mentioned, continue to tweak up a little bit. At Q1 end, business memberships renewal rates were 90:1, at Q2 end it was 90:3 Gold Star 89:3 went to 89:6, so all told, 90.2 up to 90.4 and of course that's U.S. and Canada are 80% of our company in our most mature markets.

Worldwide, including all the new countries, over the last several years, 86:5 went to 86.8, so again continuing good trends in membership renewal rates. Going down to the gross margin line, we were down year-over-year 6 basis points in the quarter from a 10.59 down to 10.53.

Again as I always do ask you to jot down the following four columns and six line items to give you a little explanation of components of margin. The first two columns would be the Q1 '14, reported and Q1 '14, excluding gas deflation. Columns three and four would be Q2 reported and column four would be without gas deflation Q2.

Going across, our merchandise core reported in Q1 was up 12 basis points year-over-year, but excluding gas deflation was up three, but again continuing across reporting Q2 was plus 1 and without gas deflation minus 1. Ancillary, plus 5 and plus 2 reported and without gas in Q1 and zero and zero in columns three and four.

2% reward, minus 3 and minus 2. Then in the second quarter, minus 1 and minus 1. LIFO, minus 1 and minus 1, and in the second quarter minus 6 and minus 6. Other, which I don't need to add here zeros across the columns there.

All told, in total, in Q1 '14, we reported year-over-year gross margin up 13 basis points, but taking out the effective gas deflation up, it was up to. Again, today we reported minus 6 and lower margins year-over-year in the second quarter. Without gas deflation, it would have been minus 8.

As you can see, again, the minus 6, minus 8 without gas deflation, and our core was essentially flat, plus 1, minus 1 with and without gas deflation.

For the second quarter, year-over-year, food and sundries and softlines gross margins were up in the second quarter year-over-year in the 5-basis point to 20-basis point range, while hardlines and fresh foods margins were lower year-over-year in the minus 30 to minus 50 basis points range.

Ancillary business gross margins percentages were essentially flat year-over-year, but again you have got sales impact of a 10% year-over-year lower, the gallonage comp, gallonage in terms of price of gas. The impact of the increasing executive membership, again, 1 basis point hit.

Just meaning more dollars going to their rewards based executive membership program. In terms of LIFO, in the second quarter, we recorded a $5 million pre-tax charge this year in the quarter. That compares to a $9 million pre-tax credit last year, so year-over-year a $14 million or $0.02 a share swing now is 6 basis points year-over-year negative.

As I said when there either a LIFO credit or LIFO charge or this type of swing positive or negative, the fact is, is we really look at as part of quarter given that they work in tandem.

Moving down to reported SG&A, our SG&A percentages Q2 over Q2 were higher or worse by 13 basis points coming in at 9.83% is percent of sales compared to 9.70% last year. The minus 13 translates to minus 10 ex-gas deflation. And again we will put down for us to put down the four columns and in this case five line items.

Again, Q1 for two columns, Q1, both reported and then ex-gas deflation and then Q2 reported an ex-gas deflation. Going across, core operations was a minus 9% in Q1 reported. I mean been higher by 9 basis points, zero without gas deflation. And Q2 was a minus 12% and a minus 9%. Central in Q1 was a minus 3% and minus 2%, both zero and zero in Q2.

RSUs or stock compensation, minus 5% and minus 5% in Q1 and minus 1% and minus 1% in Q2. Quarterly adjustments were zeros across the board. And then total was a minus 17% year-over-year higher SG&A Q1 reported, but again ex-gas deflation was a minus 7% and in Q2 two reported minus 13% becomes a minus 10% that I just mentioned.

In terms of these SG&A figures, the core operations, again was a minus 12%, but minus 9%, ex-gas deflation. Within core, our payroll's percentage sales was higher year-over-year by two basis points. Payroll benefits or workers' comp combined SG&A by about a basis point. And utilities, of course, while cold-weather was higher by two basis points.

Again, as I mentioned earlier, in both this year's and last year second fiscal quarter, we had a few discrete items that in the aggregate represented a year-over-year swing in our SG&A expense by five basis points or $14 million or $0.02 a share. That generally is the luck of the draw. Sometimes that helps us. Sometimes that hurts us.

But it was a net negative year-over-year swing. In central, it was flat year-over-year, notwithstanding ongoing IT modernization costs which will continue which represented about a three basis point higher year-over-year hit to SG&A. Next on the income statement line is preopening. Last year, it was $6 million.

It is up $2 million to $8 million this year. In the last year, we had five openings and this year we had three, but some of that's the timing of openings, preopening impacts several months. A big chunk of it also is the more significant preopening expense related to our upcoming opening in Spain as we essentially are opening a new country.

All told, operating income in the second quarter came in at $724 million year-over-year down 2% from last year's $738 million. Below the operating income line, reported interest expense was higher year-over-year by $1million, coming in at $26 million this year versus $25 million last year.

Virtually all of that is interest expense related to not only the $1.1 billion fixed rate 5.6% interest that we have that will a mature in March 2017, but also the $3.5 billion debt that we issue last December, which has a weighted average in the low 1% range.

Interest income and other was higher year-over-year by $4 million of the quarter coming in at $30 million this year versus $26 million last year. Actual interest income was about half of that $4 million increase, $2 million higher year-over-year and the other component was $2 million swing, $5 million plus last year versus $3 million plus this year.

So that's $2 million better year-over-year. Overall, pretax income was down 1.6% or $11 million in the second quarter, down from $739 million to $728 million this year. Our tax rate for the quarter came in at 35.0%.

Last year it was 25.1%, and as discussed earlier, a big chunk of that was the income tax benefit from that $62 million benefit in conjunction with the special cash dividend. Excluding that one-time benefit, our tax rate last year in Q2 that 25.1% would have been 33.5%. Still lower when compared to this year's 35.0%.

Again, as I mentioned in last year's second quarter conference call, there were a couple of positive discrete items that went our way in Q2 last year to the tune of about $10 million after-tax benefit to tax line or $0.02 a share last year that we didn't have a benefit of this year. Overall reported net income of $547 million last year in Q2.

Excluding that $62 million income tax benefit, it would have been $485 million and that compares to our $463 million this year, down a little bit. Next, in terms of balance sheet, which is included in this morning's press release, I will note a couple of balance sheet info items.

Depreciation and amortization for the second quarter was $240 million and $471 million year-to-date.

Accounts payable, as a percent of inventories, on a reported basis, year-over-year is down from 98% to 93%, although some amount of that is in the payables calculation is non-merchandise payables, such as most importantly construction payables, so looking at merchandise payables as a percent of inventories, the 87% last year would and 83%.

Average inventory per warehouse was up about 4%, about $500,000 from $12.2 million to $12.7. This increase was pretty much spread over all the departments, nothing that really stood out.

Overall, our inventories are in good shape as well as our mid-year fiscal inventories which we do at the end of the second quarter were essentially tied to last year's best ever results in terms of our low shrinkage results, so I think in our view a good indication of the inventories being managed pretty well.

In terms of capital expenditures, in the first quarter of '14, we had spent $574 million. In the quarter just ended, we spent an additional $447 million, so all told just a little over $1 billion year-to-date. Total CapEx for fiscal '14, we would expect to be approximately $2.3 billion.

I think it's a little up from what I mentioned a quarter ago, reflect from $2.1 billion last year and again reflecting a little ramp up in openings. In terms of e-commerce operations, we had four countries, U.S., Canada, U.K. and most recently few months ago, we entered e-commerce, we began e-commerce operations in Mexico.

For the second quarter, sales and profits were up over last year. How? Well, we do not shared the profit stuff, specifically the sales were up 20%. In fact a little higher given the local currencies, given Canada about 20% year-over-year. Over the past one, one-and-a-half years, as you know we have re-platformed the site.

We have added some mobile apps and we have combined some e-commerce merchandise efforts with our in-line efforts, we have added a few categories to e-commerce, most recently apparel, and some health and beauty aids, we have improved the timing of shipments by shipping out of three depots instead of one.

We are currently testing (Inaudible) e-commerce operations, but we are testing in the Bay area one of several retailers with the Google Express, and we are also testing a few other things that we will let you know more about as we do it. Next on discussion was expansion.

Again, we opened 13 in Q1, we have that closed in Acapulco with the hurricane, so net of 12. In Q2, three, in Q3, three, in Q4 11, so 30 openings less the Acapulco closing so far that will put us a net increase for the year of 29, which would be about 4.5% square footage growth, 4.5% to 5%. New locations by country for the 30 openings, 17 in the U.S.

three in Canada, one in the U.K., two each in Korea and Japan, three in Australia and one each in Mexico and Spain. As of second quarter end, our square footage stood at 93,098,000 square feet.

In terms of dividends, our current recorded dividend stands at $0.31 a share, 1.20, 4% share annualized dividend represents total cost to company of about $540 million. Lastly, our third quarter scheduled earnings release date will be Thursday, May 29th, that will be for the 12-week quarter ending on May 11th.

Before turn it back to Jodie, one comment about Q3 I do want to make, last year in Q3, we had mentioned that there was a litigation settlement that benefited last year's third quarter gross margin results by about $17 million pre-tax or about $0.250 a share, so will be up against that comparison, of course.

Let me just say that overall, I hope that you understand little bit about the factors impacting results this fiscal quarter, how the earnings performance trended positively during the quarter from a very tough first four-week period and a continuing strength in sales, comps shopping frequency and alike.

With that, Jodie, I will turn it back over to you..

Thank you. (Operator Instructions). Your first question comes from the line of Dan Binder from Jefferies..

Hi. Good morning, Richard. I was wondering if you could just discuss little bit of your current thoughts on buyback. Then separate question, any thoughts on international membership fees and whether or not they do for….

In terms of buyback, again, while we let you guys know once a quarter when we have our quarterly earnings announcement. Our intention is to start buying back stock this quarter. We continue to look at it, but I think it's a good statement to say that we will be buying something quarter.

As it relates to international, we are always looking at membership fees. You know us. We tend to be long-term focused and when things are very strong over there, we want to keep pushing for even more memberships.

We have the added benefit in most countries of being the only club operator and we will continue to use that benefit to look at it, but we are not in any hurry to do that..

And then just lastly on the expense leverage or expense deleverage in the quarter.

Obviously FX is hurting a little bit, but where do you think the level is this year for expense leverage in terms of the comp? Where you need to be on a reported basis? Is it still close to the 5?.

Well, I think so, recognizing nothing is perfect. You take those things that I pointed out that in the aggregate we are five basis points. And not trying to be cute here but there is there is always those things that add up or offset each other and this quarter, year-over-year, they didn't. That's five of it.

The other thing is, the biggest impact to our numbers were in those first four weeks. It's a combination of things. I think probably we budgeted it a little aggressively. Our numbers are still not bad for December for that four-week period.

But there was four, five less Christmas shopping days between Thanksgiving and Christmas just based on how Thanksgiving was that fell this year.

The other thing is that FX had a little less to do with it because that affects all the line items, both sales and the margin dollars, but I think some of it also is, while sales overall were satisfactory, they were little less than satisfactory in things like certain non-food seasonal categories were light. It was stronger in fresh meats.

So again, as we mentioned fresh foods margins were down more and then you have the double whammy in some of the non-food categories. So on this level sales we had now, those types of things make a big difference.

And again, I think overall, our margins were a little lower than we had planned, but some of it was very conscious, as you know, in some of the fresh food areas. And to get back to the leverage question, yes, I think a 4 to 5 should be able to do it but we had a few anomalies this quarter as well..

Okay. Thanks..

Your next question comes from the line of John Heinbockel from Guggenheim Securities..

So, Richard, I wanted to drill down a little bit on the fresh food category.

The margin pressure, how broad-based is that? Or was that a handful of items? And what could you call out among items? And then, is that more you making proactive investments or delaying price pass-through?.

It's almost all us. I would say is, aggressively it is all us. In terms of where it is, as you might expect, it's particularly in the proteins. We talked about chickens before. We have held the price on that chicken. Those 65 or 70 million rotisserie chickens are just part of the chicken. It is also frozen and fresh.

And we are seeing a little relief in some of the pricing there in some of the costing. And that's just starting. I think it's starting a little later than we did six months ago, but we should see a little bit of relief there. Really beyond that, I don't hear, meat is very competitive.

Meat is at an all time high in some categories and that's raining on everybody. Beyond that, sometimes in produce, we have a little issue. Produce was the strongest. It depends when it hits and some of the shortages that impacts us a little bit, but overall, I would say meat, pork and poultry is the biggest culprit there and it's mostly us..

As a follow-up to that, when you look at having some more consistent markups than others, how do you guys think about strategically, right, because you are strength in perishables, we can or should operate with a somewhat lower margin, because we get that traffic, right, which then feeds into all of the higher ticket non-foods you might sell.

Will that hold us to get other culture or not really?.

Well, that's part of the approach, but you again without trying to be too granular here, clearly the comment about how the impact of margins and P&L, of course, in the first four weeks versus the subsequent eight weeks that was dramatic.

Part of that again was seasonal markdowns, both being aggressive and proactive and with little less sales in some areas. While TVs overall, I think, in the quarter were pretty good. You have got other areas.

cameras industry-wise are down quite a bit as you might expect with everybody using smartphones, laptops, desktops, tabs as well, so there is some of that pressure and then that I really think that we probably budgeted a little off given the five few days, but at the end of the day it is hard to know whether there is - other than I can tell you is a heck a lot more was it if it was in those first four weeks, so trend wise that is good, but that doesn't tell you anything about the upcoming quarter, other than what we know that February was a little impacted by whether, so we are starting off quarter in those first two weeks.

Last two weeks, February, which is first two weeks Q3….

Then lastly would you say, when you look at either gross margin or fresh food, some of the individual categories, I imagine there is a fair bit of difference country-to-country or not, and you know, is there more pressure outside the U.S.

or less?.

I would say overall there is lot less pressure outside the U.S. The U.S. is fairly the most competitive with regard to the club business as well as competitive with supermarkets are probably the most competitive U.S. compared to later change everywhere, so certainly that is the case, but you know U.S. is little over 70% of our company..

All right. Thank you..

Your next question comes from the line of Charles Grom from Sterne Agee..

Good morning, Richard.

Just a follow-up on that last question, when you think about the progression of your margin performance and it getting better throughout the quarter, the hardline margins getting better, I guess, intuitively makes sense as you move away from the holiday markdowns, but I was wondering if you could discuss, I guess, if that's the case.

Then two, was the same true for fresh foods? Did the margins in that category also improved as you progressed throughout 2Q?.

I believe they did a little bit, but again world, as you know, we are all about being competitive out there and being proactive in that, but we also want to make money and we want to hopefully show some improving margins, but we are going to do what's right and each day on pricing irrespective of how it could impact margin that day.

Overall, clearly, we looked at first four weeks and we took some actions and I can't tell you where, but it showed some relative improvement and that we feel good about that again this quarter is a new quarter and other than sales starting off a little weaker, we will see where it goes.

Then a lot of that I think is weather, I mean, trend in the Midwest and Northeast in the Mid-Atlantic, the rain last week, I am not trying to make excuses, but it's been unbelievable. Japan, we had several locations actually closed for a few days, which is now the [nobody ever had], so lots of little things.

I will try to not remind you next year when we chose a little better..

Just a follow-up to Dan's question earlier, when you sit down with the board every month and every quarter, what exactly did the push back to at least in your balance sheet and getting more aggressive what is the thought process currently amongst the board?.

I think, it is the topic that we always talked about. I don't think there was a pushback either way. As you know, we did little over $3 billion payout to the shareholders via the special dividend last year as the stock was ever increasingly strong.

As I noted in a couple of the analysts, before the market opened comments, we have been a little under consensus expectations although that's not a direction, clearly Q2 was a larger gap there. Again, I think my comment that we plan to buy some this quarter is a step in that direction.

I don't want to be coy or cute about it, but we will let you know in the quarter, but we will be buying some and we will go from there.

The board is, as you know, we have never looked at it as let's do this because it will be a positive message to the market, but long-term, I think the board, as I am, are positive about our company and certainly it is accretive but at the same token, we try to be judicious about it.

And perhaps we have been a little conservative but we also had the $3 billion dividend last December that helps us be a little conservative. And I think you will see that change some..

Okay, good, and then this is my last question and I will pas it on. Just on the price investments, I know you guys have been doing it religiously for as long as I can remember.

I am wondering with some the new technologies you are putting in place, are you studying it a little bit more closely? Do you feel like the elasticity is there to justify the increasing price investments for U.S.?.

We would never look at it that way. We are out there, I think, again getting back to the simple circuit example, it's not unlike the hot dog example of years gone by. When prices went up, we just saw that as the strength of that and the growth and the number of tickets we are selling, that gets people in.

We don't study and say what if we took it to $549 million and we have this many fewer shops or whatever. We know it's the right thing to do. Again, I think, Q4 and Q2 and that first four-week period, it exacerbates everything because you had all those things, some weaker sales and some bigger ticket items.

Some margins on top of the ongoing fresh foods margins and I am very emphatic about the fact that our fresh foods margins are us, our pricing and we will see some an improvement there but rally when we feel good about it..

Okay. Thanks a lot..

Your next question comes from the line of Paul Trussell from Deutsche Bank..

Hi. Good morning, Richard. Just to go back to the comments you made about expenses.

Maybe you can just help us, provide a little bit more clarity on how we should think about that going forward? Maybe an update on where you are on the IT modernization process? Anything else of note on healthcare, payroll and some of the other items?.

Well, on IT, I think now it has been about six quarters that have mentioned it, and there is on average as far as I remember something about 4 basis point and so that quarters five and six in this last, they were 4 or top of 4 or on top of 5 or whatever. And that will probably continue for another half dozen quarters.

It's a five or so year effort with at least a three-year buildup in those types of things. There will be some quarters on a year-over-year basis when there is couple basis points and there will be some when it's 4 or 5, depending on when systems are being input. But we have a lot going on.

We are excited about, the user groups are excited about some of the things they are seeing. We are going to just start implementing some of the components of it starting in early summer to late summer. Again, I am not going to try to be cute or coy here. It will take some time but we have got a lot going on.

Again, a part of that is affected for 25 years. We pride ourselves on having very simple system and they are still simple, probably relative to others. For us, it's an entire effort and again so far so good. But we are a year and half into it. So that's going to still hit us for at least another year, maybe even longer on that line.

Beyond that, in terms of SG&A, something its just how the numbers work in terms of the fact that you have got your FX, a lower weighted average of countries where some of the payroll percent or percentage of the sales of those respective countries and certainly the healthcare systems in those countries is a little lower weighted average when you have got Canada rate down 8% year-over-year.

The Canada exchange rate. We have got Japan in Q2 down 15%, Japan Yen. Australia is down 14.5% year-over-year in the second quarter. So all those things add, well, insult to injury. The underlying numbers, they were a little worse in terms of expense percentages, but big chicks of this were in the things that I mentioned.

And again, there is lots of little things and they all seem to hit at the same time on top of the fact that, in the quarter where you get a lot of leverage, in the four-week period where we get a lot of leverage, it was a little weaker than planned..

Understood., and then, I hope you can just comment on inflation, deflation. What you are seeing across various categories? Just how we should think about LIFO if you think that will still be a factor in 3Q like we saw here in the second quarter..

Well, if I compared it to year end just our entire LIFO for mid-year, it is up about a 0.25%, so just like cost of all items, there was $100 item that we paid $100 for it at September 1st, if you will. February 16th, we were paying on average about $100.25.

As you would expect that there is some deflationary pools like computers, what have you, you have got probably the most inflation in food and sundries, little over 1%, you got a shade of gas inflation although that's ticking down right now a little bit.

Overall, there doesn't seem to be a lot of deflation, but on a $4 billion plus LIFO, LIFO is a U.S. concept only, so on a $4 billion plus probably $5 billion LIFO pool, 1% would be $50 million a 0.25% will be 12.5. I do not think it is should be lot and I do not have in front of me last year's LIFO numbers for Q3 and Q4.

Not that is treasury thing that in Q3 and Q4. Last year in Q3 and Q4 LIFO was a credit, a benefit of about $8 million, $7.5 million $8 million in each of Q3 and Q4, so if it is a little inflationary we will see a similar trend of swing that we saw in Q2, but we will wait and see.

Mind you, when there is a LIFO charge, there is probably a little - Again I look at combination that with the core to, because they tend to work not always but in tandem one closing the other, so not a lot of inflation..

That is helpful. Thank you..

Your next question comes from the line of Christopher Horvers from JPMorgan..

Thanks. Good morning, so two questions.

First, and as you model out FX at the end of the period, when you think that the FX might stop turning to sort of a flat scenario the total comp versus the core comps?.

I do not know and I am not even a student of some of this foreign exchange stuff, but you know when you see as an example, Japan first quarter year-over-year was down 20% second quarter year-over-year was down 15% for us in terms of the Japanese yen, so there has been a lot of weakening.

At some point it's going to bounce back a little bit, but I can't tell you when. Canada has been awfully strong for many years. It is now subsiding a little bit, but who knows and then adds back the craziness in the world with events that could impact these numbers.

Usually, when there is world issues going on, the dollar strengthened and I think that's a little bit of what's happening now, but also particularly in the case of Canada. I remember 20 years ago when Canadian dollar was $0.65 on the U.S. dollar has actually gotten above $1 for the U.S.

dollar and it's come down a little bit, so kind of bounced after that peak, but I can't tell you when that's going to be..

Okay. Then just as a follow-up.

The ancillary business, the margins in that business had been a positive for quite some time and it looks like if I got the numbers right, if it was flat this quarter what piece of the business is, is changing and is there anything you could send out the outlook?.

A lot of it has to do with gas deflation, just weighted average of that chunk. Mind you, gasoline sales as a percent of our company total sales is 11% or 12%, and so we think it is a huge chunk and we have got gas deflation. Our reported gross margin is in the whatever tend to have plus range, 10% to 11% range.

Within that number, gas is in 1% to 5% range every quarter, so that weighted average coming down it has an entitlement number, so you got to look at it both ways. Overall, ancillary businesses were fine, no pharmacy business continued strong. Our hearing aid business although small is very strong.

One-hour photo as you would expect continues to be a little weaker because nobody pictures, but we have been a little creative over there trying to do a few other things, but it's still very profitable, but not as profitable as it used to be. So you add it all up, gas deflation was probably the biggest reason..

Okay, perfect. Thanks very much..

Your next question comes from the line of Mark Miller from William Blair..

Hi. Good morning, Richard. You gave us some additional detail this quarter on the four week versus the eight week and I want to make sure we had the right impression from this. Given you said that the margins, if I heard this right, on hardlines and fresh foods being down 30% to 50%.

Does that mean in the remaining eight weeks of the quarter, you would have actually had gross margin up overall? And is it a fair impression that without those first four weeks, your earnings were closer to about double-digit growth range?.

The first four weeks, well, one of the things we talked about in the press release was those hardline categories that was more impactful in the first four-weeks, whereas fresh foods is more, again, us and continues to be in the quarter. But the 30% to 50% range for those types of categories that were down year-over-year was for the entire quarter.

I don't have the detail by period here but directionally I would think the first four weeks was worse. It clearly showed some improvement to it..

All right.

Has Costco done market research looking at the number of your members that also have an Amazon Prime membership and do your merchants have any sense for how much this might be impacting spending at Costco? Do you think that might have been a bigger factor in the holidays with gift giving? Or you think that it's not a material change?.

Actually, I think some of you guys out there do more surveying of that than we do. And honestly, I have read some research out there that talks about the overlap. There is overlap. My guess is, clearly in areas like the books and CDs, that a changed business over the last many years.

TVs, frankly, we are not bad, overall, and particularly if you add e-commerce to our in-line, we are up a shade for the quarter. I can't tell you what happened in the four weeks of February because they were, what we call majors or electronics, it was down in the mid-single digits year-over-year.

But for overall, we probably fared better than most in line and all that stuff takes away a little bit. We are looking at ways to get, as we have now for a while, to get younger people here as well. We recognize that. And we will continue to do that. But I know, the answer is no. There is not a lot of discernible concern at this point of that..

Okay. Thanks, Richard..

Your next question comes from the line of Meredith Adler from Barclays..

Hi, thanks for taking my question. I will start by just something off from the last question about trying to get younger people in to the warehouses.

Can you talk a little bit about what it is you have done or would consider doing to make that happen? What tools to you have?.

Well, first and foremost, we are not going to do anything rash, but we are also not gong to have us end here. One of things, the test as an example with Google among several retailers but in the Bay Area, has been interesting. I am not going to, again, talk about the detail yet.

We have done a few things with some of the similar social media things out there. One of the impacts which is, what we do is the rise in organic. It's a big business. It's growing fast. We can actually show a better savings on those bigger ticket price point items.

And we have seen that time and again, whether it's organic grown beef or those giant packs of kale or you name it and no, I mean we were doing huge business of that. And that also is driving in some younger people.

One of the first systems going in our modernization effort is that a new membership system which we will start rolling out in the U.S., I believe in June, July.

And again, there will be a lot more bells and whistles, but as you know, our systems have been pretty basic and primitive and we are not going to go crazy overnight on it, but we are doing a few things and it works and we will keep doing some of those things, so that is what I can tell you at this point..

Okay. Thank you. Then I just have sort of a bigger picture question. It's obvious that it's your philosophy to provide very great value, especially in fresh foods to your customers and you will absorb some inflation, but what do you do? I mean, everything I have seen - meat has been inflationary for a while, especially beef.

Do you have to sit down and think about your strategy, it looks like there are items that are just going to be. Good morning think about do your strategy if it looks like there are other than that of and be inflationary for the long time..

Well, part of the answer is no. We do what we do and part of it that was we also recognize that we need to you - our goal was to maximize shareholder value and ultimately that comes into long-term driving earnings and, but we are not going to necessarily do something in the short-term a given quarter to do that.

Again looking at Q2, it was a combination.

I think I probably said six or nine months ago, using it simple check-in example that may seem that there seem to be few months looking forward six to nine months ago that that pull through pricing, the costing list can improved which would improve our margins because we are not lowering the price we just not raised it prior to that.

That's finally starting to happen, so those are the kind of thing that we will do. Strategically, at the end of the day, we have got to show improvement on bottom line. Ultimately, it is not that come from 10% and 15% comps. We are going to have good, but at the levels that we have and assuming there is still going to be better than others.

It's still going to require some the margin over time and we look at that, but we are not terribly concerned about how it impacts the given, so organic helps. The fact of the matter is, is, you know, I think mentioned this as an example, and one of things that again talks about the younger members well.

What we found is when we tried fresh organic around beef. I think in the first year, we did $25 million-plus in an item or two. This is at a higher price point and a greater savings and a fair margin for us, a better margin for us relative to a more competitive.

The cool thing was is that 80% of those sales were existing members that have not bought beef with us before. They love Costco, but they are organic. On average, I would say they tend to be a little younger. That is my guess and so those are the kind of things that I think are going to help us little too.

The fact that increasing penetration of our company is overseas over time.

Notwithstanding the week exchanged rates this quarter we generally tend to have a little higher margin overseas where you even in the U.S, where you do not have a direct competitor in the market a mile away or less, you are going to have a little better margin, so all those things I think should impact us positively, but we are not going to change what we do in terms of occasionally identifying those key items that we are just not going to budge on..

Okay. Thank you for that. One final question, which is kind of related, but we obviously saw softness in some hardline categories, electronics has been bad for awhile, do you think at all you have to re-think how the products that you are offering because of that.

Is there something else that you would be more aggressive on, would you take space away? How are you thinking about longer-term?.

Well, as you know electronics reach you when you walk into a Costco. Certainly, the online is part of that. We do a strong business online. Part of the business is not only bigger ticket, but bulkier is about both the items.

We have a white club alternative installation as well and so that business is growing, but getting people in the door in Costco, we still have a lot of TVs as well that way. Again, you have a few unusual things happening right now. Cameras, I understand, cameras are down 30-plus percent in the industry. We are not that different.

In fact, we have got a lot. That was a very successful and there is still a big volume business, but that has been weak year-over-year in a bigger way for the first time.

Desktops and laptops, we started to get some traction on tablets of late, but I think that is a business and we - I do not think just say re-thinking allocation of space if anything is still a strong area for us, but we got hammered a little bit over that Christmas selling season..

Okay. Thank you..

Again a lot of it was TVs or some of those other items..

Okay, great. Thank you very much..

Your next question comes from the line of Robbie Ohmes from Bank of America Merrill Lynch..

Good morning, Richard..

Hi..

Two follow-up questions. The first, just on the gas deflation that you are now starting to see.

Can you remind us, historically does it impact your traffic trends as gas, in general, if it does get very deflationary and come down a lot, do you have to find other ways to keep drive that traffic comp?.

Interestingly when prices are coming down, we actually historically, saved the member a little more because we turn it so fast and so we are buying every day, if you will. The guys out on the street is buying it every six or eight days or nine days. And so, when it going up, it is costing us a little more and we are competitive.

We are still the lowest price hopefully, but there is a less savings. There is a little less news about it out there and so I think overall, on a macro basis, when prices are just coming down, even though we are saving the customer a little more, it is less newsworthy, the fact that it is not on the nightly news.

And so there is probably a little less positive there. But given how big we are in that business now, it's not as impactful either way..

Got you, and just a different question. Can you remind us with your international business, how you are thinking about new markets? I think France, you have mentioned before.

Any update on timing? Or when you could open a new country?.

Well, Spain is April or May. May. And France is hopefully about a year ahead. And beyond that, we haven't disclosed anything. In terms of how, there is generally the three likely areas and no order as other parts of Europe, South America and China. And we haven't really stated beyond France and Spain, what our plans are beyond that.

Nor do we plan to discuss that right now..

Got it. Thanks very much, Richard..

Your next question comes from the line of Matthew Fassler from Goldman Sachs..

Thanks a lot. This is Steve Tanal, on for Matt Fassler. Just a quick one on gross margins. It sounds like much of the year-on-year decrease was sort of intentional or through price investments, if you will.

And we are just wondering do we think about that going forward? In the next few quarters, at a minimum, do you think the trends likely to stay this way? Or how are you guys thinking about that near-term?.

Well, first of all, let me correct this. With all the different numbers running around here, in terms of Q2, fresh was intentional. The rest of it was not intentional. Some of its promotional, some of it is what we do to have clean inventories, took some extra seasonal markdowns in some areas, including a little bit in electronics.

So, some of it was that. In terms of the plans going forward, again, I have eluded to the fact that we are starting to see a little better costing on the poultry side. Meat continues to be competitive and rising. Then beyond that, I can't tell you a lot. But again, meat and produce, fresh foods was our proactive aggressiveness.

The rest of it is doing what we do and responding to competition and responding to weak sales being a little weaker and getting rid of stuff..

Understood. That's very helpful, actually. Just on membership fees, we seem to underestimate the impact of FX there, but it also does seem like enough. I think that affects the overall comp. You guys talked about sort of two percentage point drag. It looks like it was more like three on member fees.

Is there anything you could help us as we think about the split there international versus U.S.

and how to get that right going forward?.

The biggest impact FX wise was in Canada, which is 10%, 12% of our company. I think a higher, a strong penetration of Executive memberships which is the higher fee. So those things probably pushed it a little bit. In terms of guessing in the future, your guess is as good as mine..

Understood. Then just to confirm that there were no buybacks in the second quarter. Correctly? And you guys are planning to buy back in the third quarter..

Correct..

All right. Thanks a lot..

Your next question comes from the line of Bob Drbul from Nomura..

Good morning, Richard. I just got two questions for you. The first one is, can you comment a little bit? Canada was strong for you fundamentally.

Can you just talk a little bit about the market, what's going on there? What's Costco's positioning and the second question is, can you give us an update on the private label initiative in Kirkland Signature and sort of parse, new categories that you guys are excited about looking forward?.

Canada is strong. Canada, frankly is not only where we (Inaudible), which is a positive. Historically, in the last several years was good about it. It has a good economy. It didn't have the financial crisis issues that U.S. had. It's got a of course part of its economy is natural resource base, which has been on fire, so those are all positive things.

It has lower healthcare expenses as a percent of sales. It's just by the nature of the healthcare out there versus here, so all those things have been positive for us. Again, though we have got a 98% decline year-over-year in currency that washes that away in terms of how we reported for the (Inaudible).

In terms of private label, I think some of the areas, apparel was good one that can be used I think to be exciting as talked [technology] about in last year about the a little [slack].

We have got a great [slack] now that's I think 1999, I know we had some additional items and so we are doing that that will be an area I think that will continue to grow for us. On the food side organic, where we are doing a few more items, which in a lot of places it will continue to grow.

I think what probably over time, we have not appreciated is strength of it not only the U.S. or Canada for these items being able to take it to other countries, where we take a regular branded private international item to that country. We showed incredible savings, where prices have always been high.

These items given the quality level and the pricing if that strengthens is I think exacerbated even more that is the positive..

Thank you..

Your next question comes from the line of Peter Benedict from Robert W. Baird..

Richard, most my question has been asked. Just a quick one on February, you made the decision to call out whether any impact there. What was the weather materially different than what you saw in January and mean you kind of said there were some stuff that happened in. What kind of kept it, because in the U.S.

it just shows like kind of January, February were basically pretty similar..

You probably live in that area. Now it is more severe in February. As an example on just the last week of February, the Southwest handled with rain for five days. Japan was to the company, which is another you insult to injury, if you will.

I mean, I think we had what, 80 units in Japan? I do not have exactly telephone, so half a dozen or fixed rate of that were impacted in the Tokyo market. Yes, so again, that was just a little bit more, but overall, yes, it was more expensive than we have seen before..

That's good color. Thanks. Then just on the club openings reflect you got to kind of get to that 30 kind of gross number this year that you guys are open for.

What about as we look to next year? You are still confident you can get that number North of 30?.

Yes. Yes, I mean the Craig's had just drop of goal Craig and Jeff Brotman's goal are to get that at lower 30-plus range. I am sure, now that I have said it, we will get 28 or 29 but at the end of the day, they are shooting for 30 to 35 years for the next five years..

Okay. Sounds good. Thank you..

Your next question comes from the line of Greg Melich from ISI Group..

Hi. Thanks. First on electronics and then on the membership. You mentioned it was up then you listed some categories like cameras. That is overall down.

Was it just TVs that drove CE, and was that ASP or volume?.

Excuse me.

What?.

Tablets?.

Tablets were part of it. Also the quarter overall was different in February. February was a little weaker in electronics..

So if we look at the --.

The biggest chunk is TVs just by volume. And so that is partly why February, TVs were weaker in February, relatively speaking, than they were for the quarter. And they were actually about flat. I think the average sale price is about flat. It had been up -- it's up. Bob is saying it's up. Hold on, I have to tell you.

In the second quarter, the average price point looks like it was up a 2%, and that's probably because we are selling bigger ticket, bigger with TVs..

Is that inflation --.

No. By the way, one of the comments, that I heard at the budget meeting last week was that, the rollout of the next generation of technology in TVs has been a little bit delayed and it's going to be in a few months ago. April instead of January. I am being coached here. Again, that should help it a little bit but we will see..

Okay, great. Well, I don't think you need any coaching for the next question. On memberships, so I want to make sure I am getting this right. We finally have a quarter that's (inaudible) in terms of the fee increase..

Yes..

So if we are up 7%?.

In local currency..

Is it fair to say, that in the U.S., while membership renewals are great and you have that the mix towards Executive, that memberships per club in the U.S. is actually trending down a little bit.

If that's the case, has that shifted at all?.

I don't have that detail here. I have to look. To the extent that we have opened 14 or so U.S. warehouses and maybe a little bit, but actually, I don't know if I am correct on that. I have to look..

Okay, we can follow-up on it.

But conceptually its still the mix shift going on to Executive?.

Yes, by the way, one of things is, I will give you an example, we opened just couple or three years ago, in Huntington Beach, California, LA. We have 50% plus of the households or more in the Greater LA market at that 40 or so locations. We may open up in a new market there with the eight to 15 weeks prior to opening the sign-ups tabling activities.

As of opening day, we might have 5,000 or less new members. In the mean time, that's a unit that may very well, well exceed our company average for the first year, do $150 million, $100 million of which is new and $50 million which is cannibalized. So you have got numbers that are closer, they are going to shop more frequently for the first time.

Contrast that, in Asia where again during those eight to 15 weeks prior to opening, as of opening day, we see numbers in the 25,000 to 50,000 new member signups with a bigger non-renewal. A lower renewal rate the year hence but nonetheless that should be a big difference..

Okay. That's helpful..

So my guess is, that yes, it could be flat or down slightly, but that could be expected in that example..

Given the cannibalization. Got it. Thank you..

Your next question comes from the line of Budd Bugatch from Raymond James. Budd, your line is open..

My questions have all been asked. Thank you..

Your next question comes from the line of Scott Mushkin from Wolfe Research..

Hi, guys. I will be quick. It's at the end of the call. Just wanted to follow-up on the inflation question and produce inflation, deflation and whatnot with the potential of some inflation working in to produce, you guys investing in price there.

How is that going to work through, as we assume next, say a quarter or two, if we do get some spikes in produce inflation? How does that work through your numbers?.

My guess, it would help a little unlike. As an example, meat is so much more that's out there. Produce, everybody has got different items, different pack sizes, different qualities and we can still show great savings but it is just not, in my view it is just not the same type of level as competition.

So I don't think that that's going to impact us as more. That will impact us as much. The biggest thing in produce is, is when there is a drought or a freeze and we are doing hundreds of millions of dollars of items, be it strawberries or blueberries.

In a given month, you know you did $5 million an items, instead of 15 during the holiday item that was [freeze] that is more impactful than competition's..

Then just one last one (Inaudible) if you don't want to, let's talk offline, but as you guys expand internationally because much more focused the growth and we have seen other retailers try this has worked well.

It's working well for you guys, but just talk about the structure a little bit you are putting in place to make sure that kind of momentum up overseas. Thanks..

First and foremost, we start any country with existing employees that are from our company. The woman running Spain is a seasoned, operations person executive from Canada for many, many years. The guy running Taiwan goes back to the price club days in Southern California.

The guy running Korea started as a warehouse manager at Costco and before that I believe - but when we go over we send a core group of half a dozen people, have three or four people to merchandising operations.

I think the biggest thing to make sure everybody is on the same pages is, these individuals travel to Seattle every four weeks or 13 times a year for a day-and-a-half budget meeting and they are typically here for an extra day and doing other operations in merchandising-specific meetings.

Then like Jim for many years, Craig and others are traveling to those countries or often Craig out of the country today. The biggest way we do I think is everybody beginning on the same page. The other thing is, I will give you a good example.

When asked for why have we been so successful in several countries including some of these countries in Asia, we think part of it is, is not only is our value proposition more extreme over there, and also that people actually do like big American stuff.

The fact is, is that some of these private label items that we are developing now have been huge successes in some of these of other countries and those U.S. sourced goods, so I think all those things play well into our hand, but that's going to change over time, so we do what we do best is we are constantly focused on it.

These heads of countries and [purchaser] countries come to Seattle at least four weeks know one of things that each of the senior VPs of operations in every country has one, Canada has two and U.S.

has eight, but all those foreign ones, they come here and one of the things that they report on is what initiatives in terms of global sourcing procuring goods from a multinational manufacturer where the U.S.

buys a heck of a lot from, perhaps Canada does, because we are big and they are now longtime, but because of whatever it is a licensing arrangement or regional pressure on their side. It is a work in progress that were making good success there. All those things, they are little things, but they help us every day, so I think that will continue.

It is really a lot of that blocking and tackling and we had, just like we did when we went to Alaska for the first time and to Hawaii for the first time, we feel that we have really lower prices in those markets and they were more competitive, but we still shine better competitively versus other retail formats.

Given the fact that in some of these countries pricing has been a lot higher. I think that has helped us. Bringing goods, whether it is in the Jumbo Cashews or the fresh blueberries to countries where they are buying a lot more of it..

Perfect. Thank you..

I am going to take just two more questions..

Okay. Yes, sir. Your next question comes from the line of Sandra Barker with Montag & Caldwell..

Hi, Richard. I just wanted to clarify.

Maybe you said this and I missed it, but when you talked about the 30 basis points to 50 basis points of gross margin impact, how much of that would have been sort of those response to price cuts versus proactive?.

Well, I guess there's three things to talk about. I can't tell you exactly. I know in and fresh foods it's just wanting to keep the price where it is on key items and doing what we do. If you think about, let's say, card lines, let's say whether it's electronics or whatever.

Again, if sales are a little soft, we are proactive to mark things down to get rid of them before the season ends. Structurally, we have the benefit, I think, of being in and out of seasons early, but that doesn't mean we still don't have to take some excess markdowns some times.

In terms of responsive, I would say proactive is more impactful than responsive, the issue of being responsive, but there is some responsive too out there..

Do you see any changes in the competitive landscape and where is it coming from?.

No, we really haven't. There is still a lot of tough competition out there.

We wish that part of the challenge with the Internet and delivery, there is delivery included and what extra things, I think we are getting a little better of communicating what's the value in our product, in terms of an extra controller or whatever it is or the shipping because when we do price shops, the least competitive ones are some of those that are on the Internet.

Now I don't need to name names..

Yes. Okay, great. Thanks..

Your next question comes from the line of Joe Feldman from Telsey..

Hi, guys. Thanks for taking the question. Sorry for prolonging this call, but just wanted to ask you, competitively I have seen a lot from, you are the big major club competitor out there lately in terms of, you are testing some stuff with online membership or your being little more aggressive in different countries.

And I am just wondering if you guys are seeing any impact to that or any pressure or just how you are dealing with competitive issues?.

Well, in terms of direct club competition, no. I believe Sam's did a fee increase that they tested originally in Texas and rolled that out now in the U.S. They are only, by the way, in the U.S. and in Mexico.

But we have that seen any, Sam's is very competitive, but we haven't seen any giant changes in that or us needing to respond to something that they have done..

Got it. Thanks, guys. Good luck with this quarter..

Thank you..

Thank you. There are no further questions. I will turn it back over to management for closing remarks..

Well, thank you, everyone, and for the chatting in 12 weeks. Have a good day..

Thank you. That concludes today's conference call. You may now disconnect..