Source Capital, Inc.
Q2 2013 Earnings Call Transcript

Published: 31 Jul 2013

[Mark Hancock:]

Good afternoon everybody and thank you for joining us today. We would like to welcome you to the Second Quarter 2013 webcast for our FPA Paramount and Perennial Funds. My name is Mark Hancock, and I am Director Client Service and Business Development, here at FPA. The audio, visual and transcript elements of today’s webcast will be made available on our website fpafunds.com in short order. It is my pleasure to introduce the portfolio management team, Eric Ende, Steven Geist and Gregory of our small midcap quality strategy which includes our Perennial and Paramount funds. Today we review the Funds performance, the portfolio, related events and current positioning. I would now like to hand it over to Steven Geist.

[Steven Geist:]

Thank you, Mark. As usual we will start off with review of performance and some of the top performers within the portfolio. Looking at performance for the period ending June 30, you can see that during the quarter we are pretty much in line with performance and the Russell 2500. And over longer periods of time, the funds outperformed the Russell for the 1, 5 and 15 year periods. A special note is that during the trailing one year period, Perennials performance has beaten the category, 96% of its category peers. So it has been doing very well. In terms of long term performance, if you look at Perennial Funds over the 15-year period, you can see the returns versus the indices and just to put that in terms of dollars if one were to have invested $10,000 at the beginning of 15-year period, in Perennial Fund that would have grown to $41,000 versus $32,000 for the Russell 2500, and only $19,000 for the S&P500. You can also note that for just about every period it’s been more lucrative to have been investing in these midcap funds than in the larger cap brethren. For the second quarter, I have listed the best and worst performers in the portfolio and this is in terms of the dollar impacts of the portfolio. So that’s the function both of the return of the individual company and its way within the portfolio. So the largest positive contributor in the second quarter was CarMax which had an excellent return in excess of 10% and is also our second largest holding within the portfolio at 7.1%. CarMax recently reported their first fiscal quarter earnings. Their same store sales were up 17%, which was an incredible number and that is what you had hoped for basically a category killer in the used car sales arena. The second largest contributor to performance was The Riley Automotive, which is our largest holding within the portfolio and it too was up almost 10%. And again they continued to perform well with their second quarter same store sales up 6.5% and the integration of their acquisitions have been going extremely well. On a negative side, Copart had the largest negative dollar impact in the portfolio and Copart is suffering a little bit from the impacts of the hurricane Sandy as you may recall Copart works with insurance companies to auction off vehicles that are deemed to be total losses. Whenever you have a large storm like a Sandy there are many vehicles that are deemed losses, Copart has to specifically inundate the area with personnel, should take care of those vehicles and there are costs associated with that and the stock market is a little bit unhappy about that although that's perfectly within the norm for Copart's business. Bio-Rad is our second largest negative performer basically suffering from the sequestration cuts in the budget which affects the National Institute of Health and also some of the academic research that goes on in the biotechnology area. Maxim Integrated Products had the largest percentage loss, close to 15%, fortunately, it was a relatively low weight within the portfolio, Maxim was punished in the stock market because Samsung is its largest customer, Samsung accounts for 20% of its revenue and sales of the latest Samsung phones have not been as high as the street as expected. And therefore that affected Samsung's stock price as well as Maxim's and there are stories in the trade that indicate that Samsung may have cut its vendor orders by as much as 20% during the quarter. For the year to date, again, best and worst performers, Life Technologies was the largest positive dollar impact for the first half of the year, we mentioned during our last call that Life Technologies is the subject of a takeover and so there was quite a bit, quite a large price increase and the first in this quarter which made it carried over into the second quarter as well. And again O'Reilly was the second highest dollar impact for the first half of the year. On a negative side it's interesting to note that all five companies have very small weightings within the portfolio. Again Maxim Integrated Products as we just discussed in the quarter had the largest negative dollar impact for the year to date. Loxaton which is involved in organic beauty products had a large negative percentage return although a small weighting within the portfolio in its latest earnings release Loxaton only grew at 12% which wasn't good enough for the street, and so the stock price went down although of course we believe the company is doing very well. At this point I'll turn it over to Eric Ende who will discuss three companies that were liquidated from the portfolio during the second quarter.

[Eric Ende:]

Thank you, Steve, this quarter we'd like to discuss some stocks that we recently sold and the reasons why, not surprisingly since intelligent use of cash flow is an important criterion in deciding to buy shares in a company, disappointment in this area or change of policy or objective can often be the catalyst in developing and decision to dispose of one of our portfolio holdings. One of the challenges that Actuant has staged deploying its capital into attractive deal is that its high returns strong market share business segments industrial and energy which can boast of operating margins of over 20% even over 30% at some cases have not produced at plethora of bolt on deals which could have permitted Actuant to deploy capital in familiar businesses at attractive margins. Unfortunately instead of waiting patiently for the right opportunity to come along to spend its accumulating cash Actuant response to this jussive desirable deal was to pursue several large acquisitions in less exciting part of its business most significantly in electrical. It acquired Mastervolt in November 2010, the cost $150 million represented 1.4 times sales. Mastervolt makes specialty electrical products with the marine and European solar markets. Marine, the smaller and less important market actually has a pretty good fit with some existing Actuant businesses but this plan and we set for Mastervolt solar business, the European solar market is almost completely dependent on government tax subsidies. Periodic changes or even elimination of these subsidies wreak havoc with industry participants as volumes, prices, and inventories move around in unpredictable fashion. This certainly has been the case in recent years and it has become clear that Actuant paid well in access of fair market value for Mastervolt. In June of 2013, Actuant confirmed this by announcing that it would divest its entire electrical segments and would record non-cash after tax charge of $150 million. Actuant had owned Mastervolt for only two and half years. In addition to the capital allocation issue, we are also cognizant of valuation. Actuant was purchased for the first time in October of 2008 at $17 per share or 11 times PE ratio ending up with last purchase had less than $9 a share or 7 times PE ratio. Near the March 2009 market lows, our recent sale was at an average price of $33 which valued the company at 19 times earnings. Our disappointment with Actuant’s deployment of its cash flow and the risk of future miscalculation was the most reason for our sale but the company’s full valuation makes us comfortable that this was an opportune time exist as well. Another company recently sold its manpower the large provider of temporary workers. Manpower’s two part strategy is straightforward, first expand in underserved markets generally once in which there was a limited tradition of temporary employment and often ones in which temporary employment had only recently been legalized. Most of the countries of Europe were fairly recent but enthusiastic converge to temp labor, unfortunately for manpower Europe represent almost two thirds of revenues and with the economic weakness in Southern Europe the source of over one third of total manpower revenues overwhelming the continuing preference by companies for temp workers. Outside of Europe, expansion of temp labor in emerging markets made those countries Manpower fastest growing segments of the last two years with very long term potential for emerging market is significant to margin foreseeable future will likely remain structurally lower than in developed countries. In addition to the organic growth described above, Manpower also has made a series of acquisitions generally in related areas like permanent placements or specialized niche markets like finance or IT, trading, outsourcing services, out placement, et cetera. Results for these deals have been mixed, leading us to questions this choice for future capital deployment. Despite a current return on equity of only 7% on mid cycle earnings Manpower stock has done remarkably well since late last year, rising from the high 30s to $60 per share driven by improved prospects for recovery of the worldwide economy. We do not share the markets enthusiasm and had a generous PE of 24 times; we’re great for the opportunity to exit our position. In recent years, VCA Antech has been faced with a deterioration of its basic business model; VCA Antech had a two part business strategy. First it operated a chain of animal hospitals across the country. It is by far the largest in this sector and earns solid margins in a highly fragmented market. Second, it has about 50 regionally based veterinary diagnostic test labs, which provide overnight results for test panels requested by vets. The lab business is strong economies of scale driven year root density and has long earned excellent margins operating as it has in protected markets. VCA has used its free cash flow for many years to acquire veterinary hospitals and practices paying a price which reflected the economies of scale VCA could bring to operations of the acquired assets as well as the value of the exit strategy which VCA was providing the vet. Over the last few years hospital acquisitions have been getting less productive, but VCA hasn't backed off the expansion of its hospital division despite this decline in returns. After recent shareholder agitations both company agreed to begin share repurchases but has only committed to make the small portion of the cash flow allocation. Second strategic issue for VCA is in its lab business, its most important competitor IDEX has long put a greater emphasis on points of care tests which give very rapid results enabling the vet to provide more timely and accurate care. As technology advances and increasing number of key tests can be performed in the pet hospital putting greater pressure on VCA's lab business, in addition, IDEX has been effective in bundling reference lab point of care, practice management software, resulting in continuing erosion of VCA's market share. With both parts of VCA's business facing strategic challenges our balance sheet under stress and returns on capital deteriorating as well as recent share price appreciation from low 20s a few months ago to a recent $27 per share implying 20 times earnings, we concluded that it was time to move on. And next I turn the mic over to you guys.

[Steven Geist:]

Thanks Eric, I will talk a little bit about Copart which I mentioned before, is a provider of services to the automotive insurance industry. Copart is a market leader in this area; they process over 1 million vehicles annually. As we have mentioned in prior calls, after starting as a domestic business over the past couple of years we have been expanding internationally with its most recent acquisition international acquisition accruing in Spain. Recently they acquired a company in the United States and the name of Salvage Parent Incorporated. There are three pieces to the business Quad City Salvage Auction, Crashed Toys and Desert View Auto Auction. Combined these businesses operate in 39 locations in 14 states; obviously this is not a small business. It has close ties to several of the large insurance companies, mainly state farm progressive and farmers. Strategically, Quad Cities is the most important piece of this acquisition to Copart. Quad City’s process is over 150,000 units annually although exact figures are not known. Annual revenue is estimated to be about $50 million per year. What is extremely important to Copart is the fact that Quad Cities is the third largest player in the charity car donation business. I’m sure most of you have heard radio commercials about donating your car that you don’t want, to charity for the benefit of the charity. What the charity does with that car is again turn it over to a company like Quad Cities. They will then auction the vehicle off for cash which is then given to the charity that you donated the car to. This is an area that Copart has been under-represented in and something that is a great opportunity strategically for Copart to grow. Currently, Quad Cities handles about 60,000 units of charity donations and Copart would look to expand that business using the organic structure of Quad Cities. I’d now like to turn it over to Greg Herr to discuss two additional companies.

[Gregory Herr:]

Thank you, Steve. And I’d like to start with FMC Technologies, which is a company that produces the equipment that you see in the slide that fits on top of an oil or gas well and it controls the pressure in the flow of oil and gas coming out of the well. And you can see here that this equipment is on the bottom of the ocean, and actually about two thirds of FMC’s business after this equipment comes in a subsea format. Now, those of you that have attended this webcast before might recognize these slides. We’ve talked about the long term opportunity for FMC to sell this subsea equipment. And I’m just going to very quickly go through why we see that opportunity and then we’ll talk about what happened this quarter to confirm that, that exist. So long term, we think the industry is going to significantly increase their spending in the deepwater. You can see from the table that’s on the slide that few years ago less than 20% of total production was coming from deepwater. Today it’s going to be closer to 25%. We would expect that to increase over the next several years based on all the spending that the companies have been doing there. Now, what that means in terms of the specific equipment that FMC sells, these are called subsea tree, that picture that we looked at. You can see that for the industry we forecast that the number of trees is going to increase pretty significantly over the next few years and that’s going to come as I said from additional spending that the companies have already done in terms of exploration. Now, for FMC specifically, you can see that they’ve typically averaged about 40% of the industry awards. So, as that pick up come to past we would think they would get a significant amount of the business. So, turning specifically to the second quarter, the company received 2.6 billion in project awards for the subsea equipment, total alone has a project in Nigeria that was 1.2 billion award, Petrobras another $0.5 billion and then some various other projects worldwide amounted almost another billion dollars. So, to put that 2.6 billion in context over the last 12 months you can see FMC have 4.3 billion in total subsidy revenue. So, in one quarter they had awards representing 50% to 60% of the business and when we look out to the whole year, we think they’re going to get 5.5 billion plus award this year, probably a similar number next year. So, what that translates into for the business at this point is a company that is typically is been able to generate low to mid 20% kind of returns on capital. We mentioned they have a leading market position in terms of their technology and their ability to address these deep subsidy wells and then you get an acceleration in the spending of the customers are doing and that’s going to result in the earnings pickup that we see on the slide here for FMC. So, we’re very pleased with the FMC acquisition at this point. The second company I’d like to talk to you about is Varian Medical Systems and this is one we haven’t talked about before, it’s a company that develops and manufactures the linear accelerator that you see in the slide that’s used to provide radiation treatments for cancer patients and FMC is a company that we’ve owned Varian Medical is a company we’ve owned is very small startup position for numbers of years and the reason we’ve owned the business in a small size has been some very attractive business attributes and a couple of things in particularly we wanted to highlight. The first is if you look at the market table on the bottom of the slide Varian last year captured a little less than half of the orders for this equipment worldwide but even more significant is that Varian and our main competitor Electo which is Swedish company have almost 90% of the market combined worldwide and Siemens is at the bottom of that list and use to be a really big player in the industry has basically announced they’re shutting down their business for new equipment sales going forward. So you have two players controlling the market and we think that’s going process going forward and then as far as other companies getting into the business, there is pretty significant on regulatory hurdles here where you’re dealing with radioactive device it hopes, you’re also depending on the dose and the way you shape the beam, you could potentially do a lot of harm to patients. So there is lot of over side about the products and lot of technology involved, they’re very complicated pieces of equipment. In terms of the technology, Varian has been the market leader for basically the history of the industry, the main in a way to industry and you can see on the bottom right they spend about twice what the competitors spend on R&D so we think they’re going to be able to maintain that technology leadership going forward. And then everyone knows that the population is aging in the U.S., in Western Europe, Japan even in China and so the number of cases of cancers are going to be increasing pretty significantly over the next 10 years. This treatment has been found to be very affective both clinically and in terms of cost so we think this is something where you’re going to get even more and more use of radiation therapy in the years ahead. I mentioned that Varian is been in a pretty small position for us, in the second quarter we were able to take some of the money that we realize from the sales of the company that Eric was talk about and we use some stock to increase our stake in Varian and there are couple of reasons why the stock was under pressure. The first was the market growth. If you look at the chart in the bottom right, particularly in the U.S., has really slowed down in the last couple of quarters. And the U.S., at this point is predominantly a replacement market for this equipment. All the hospitals, and the people we’ve spoken to have suggested that there is a significant amount of uncertainty about what’s going to happen with the affordable care-act as it goes into effect next year. So a piece of equipment like this could cause $2 million to $3 million depending on the configuration, and hospitals are reluctant to spend like that right now, given they don’t know what the business is actually going to look like next year. We’ve also had some issues in Europe where the economy has been weighing on hospital purchases there. Now the flip side is emerging markets where the last couple of years, the business has been growing 20% a year, and the governments in China and Brazil, and some of these other countries have committed to improving the equipment and the hospitals for their growing populations. So overall we think the market is growing about mid-single digits right now. And that’s still pretty attractive, despite the slowdown we’re seeing in U.S. The second thing that has happened, if you look at the table here in the slide, over the last six quarters, the company’s gross margin has fallen by well over 200 basis points. Half of that is the medical device tax, that’s part of the affordable care-act. That’s a 1% tax on every piece of medical equipment sold. The second thing that has happened is they have a new business segment which is providing proton radiation therapy, a new technique. It’s a very expensive piece of equipment. It’s probably 15 to 20 times the cost of the regular equipment and it’s grown from nothing to about 5% of the revenues today. The problem is that this new equipment is a breakeven profitability right now. So as those sales have grown that’s been a drag on the margins as well. Going forward, we think this is a level that’s close to atrophine, in terms of the gross margin. And we will point out the company’s actually healthy operating margins this entire time, and has been some pretty productivity gains allowing them to do that. So we are comfortable with the margins at this point. And that leads us with the business that we are thinking grow organically at least in the mid-single digits. It generates mid-teens kind of turn on assets, and a 30% of return on equity on an unlevered basis. We continue to like the competitive position that I mentioned and so we increased our position a little bit in variant in the second quarter, and we will be happy to do that again if we get an attractive price going forward. So that’s the end of the company discussion today. Thanks again everyone very much for joining us. We appreciate your time and attention. And at this point we will be happy to take any questions.

[Mark Hancock:]

Before we go to Q&A, so I would just turn it over to Eric Ende for a quick segway before we move into Q&A.

[Eric Ende:]

Thank you Mark. I am pleased to announce that with board of directors’ approval, Greg Herr will be joining Steve Geist and myself as portfolio manager on the Perennial Funds and on Source Capital. Greg has been serving in the co-portfolio manager role for the past two and a half years for the Paramount Funds. Greg has played the key role of the implementation of our investment strategy for a number of years and we are pleased to more formally recognize this by naming him co-portfolio manager at this time. Congratulations Greg.

[Greg Herr:]

Thanks Eric.

[Mark Hancock:]

Congrats Greg, the well done to Erik and Steven. We have received some questions, both live and prior to the call. And I want to run through those, and any of you who are on the call want to continue to log in some questions as we continue; happy to have them on site, before we break in a little while. The first one that we came across, and I am going to direct it to each of the team here and then we will take it from there. I am curious what (side) in the current environment.

[Steve Geist:]

That's an excellent question. Those listeners who have been following these calls and have been reading the semiannual letters for the two funds have seen many times that we talk about investing in companies with the history of high profitability, with companies that have strong balance sheets, good management and so on. When it’s hard when to get more specific about what we invest in sometimes it’s actually easier to talk about sectors where we were typically not investing. And there're basically four sectors that would fall into that category. This does not necessarily mean we absolutely refuse to look at companies in these categories, but we would expect that the opportunities would be few and far between. The first sector would be in the utilities or the telecom area. These are companies that are extremely asset intensive. They typically have a large amount of debt on the balance sheet in order to build up these assets and in many cases these businesses are highly regulated such that the economic returns are not subject to the free market, but are instead determined by regulators. Another sector would be biotech or really any other emerging technology. These are typically in industries that are characterized by fast paced technological changes. We are long term investors. We like to think that we invest in a company; we'll be able to hold it for a very long time. When you're dealing with these types of companies they may in fact only have one or a small handful of products which could easily be replaced in the next year or two. Secondly specifically in this mid cap area many of these companies do not have positive returns, some companies in biotech that you can think off, Genentech or companies of that nature do in fact have excellent returns but they're also very large cap companies. In our arena, that is typically not the case. Although again if we were to find a company we would certainly invest in it and do not shut the door on this sector at all. Financials are another area that we would typically not be invested in, financials again are characterized by high leverage, there's typically depending on the type of financial company there's either credit or underwriting risk which is not to become involved with. And the true earnings power of some of these companies is very difficult to ascertain. Many times when they report earnings there're several onetime gains and one time losses and the true earnings power is somewhat hidden. Lastly commodity suppliers, a large chemical company, these are highly cyclical companies, again asset intensive with high fixed costs and therefore would typically not match the financial metrics that we're looking for in our companies.

[Mark Hancock:]

Thanks Steve, I'm going to jump around a bit here. Got a couple of questions, I'm going to lob them together, they came in as you were talking Steve and I'll open it up to either of you, Which is how are you funding opportunities at the moment and coincidental with that is, sort of, what you’re doing with the cash and sales that you’ve made in the quarter.

[Steve Geist:]

We have made a couple of new acquisitions for the portfolio right now there we’ve only accumulated a small waiting within those companies. And so at this point which is not to name as companies in particular. But yes there are opportunities out and the within the quarter we have made two such acquisitions.

[Greg Herr:]

Mark, I would just add that to put the some numbers around what we did in the quarter. The three sales that Eric was talking about were about 5% of the fund in total. The purchases that’s Steve mentioned both Varian and then some of the as new positions were probably about 2% or so of the cash. So, overall, at this point we’re sitting with cash levels that are at the high end of the range we’ve had historically typically depending on the portfolio somewhere around 10%, 11%, 12%.

[Mark Hancock:]

Thanks Greg and Steve. On the Varian topic equation, why are companies like GE or Phillips competing in the market with Varian?

[Greg Herr:]

Yes, it’s a good question and actually for those companies in particular Phillips actually was in the business. And if you go back it’s probably been about 10 years ago Elekta actually acquired their business and as they consolidated all the manufacturers in Europe. GE actually has been supplier of imaging equipment to the Varian Systems historically so that’s kind of how they participated in the business. I guess more broadly the question is why aren’t there more entrance and why the two players have 90% of the market. And there are a couple of things we didn’t talk about in terms of barriers, but when you talk to doctors out in the field, we use this equipment. One of the things they discuss is the software that’s involved with one of these machines. So you need the software to plan a treatments and then executive them and then talk to the hospital IT system and they’re very reluctant to change to a new piece of equipment partially based on the stickiness of the software that they use. And then the other thing is if you think (inaudible) hospital buying a $2 million or $3 million dollar piece of equipment, they basically want to have is much uptime and utilizations they possibly can. And so if there is any issues with the equipment you need to have a service force out in the field to get in there and repair it as quickly as possible. And Varian and Elekta both have a worldwide sales and field service force repair for this. In order to get into the business, you would have to invest significantly into building out a similar capability. And so that’s another thing that we think probably keep some people out of the business.

[Mark Hancock:]

That’s great. Next question, you’ve mentioned capital allocation concerns there is reason to sell, how do you know the management hasn’t learned their lesson after a bad deal? Eric Ende Thank you, Mark. Let me (inaudible) about this. In my experience I have determined that stupid managers stay stupid and smart managers stay smart. And I don’t expect that to change in the future.

[Mark Hancock:]

Your FMC chart shows a fall of orders in 2010. What gives you confident that this will not happen again?

[Greg Herr:]

It’s another good question. Maybe, can you go back to that chart? So, there is a pretty significant pick up there you can see in the forecast years and we’ve talked about the increase of spending for the industry. If you go back to 2007 the industry was probably spending 25 to 30 billion a year in deepwater CapEx. We think by the end if this period by 2015 or '16 it will be closer to 70 billion a year and that's basically because the companies have no choice. There is nowhere else to go to find the oil that they can get access to. And if you look at the 2009 '10, '11 period there were two things going on. The first was the recession, obviously occurred and that has impacted things for about a year. The second thing was the BP oil spill in the Gulf of Mexico. The U.S. government had a moratorium in place for a year or so, and that really impacted activity. The forecast is definitely for increase, we don't know if they are going to reach 700 units for instance in a given year, but we know that the level of spending is going to be significantly higher than it was in 2010 and '11. And that give us some confidence in the forecast.

[Mark Hancock:]

Changing topic, what kind of performance do you expect if interest rates rise from Fed-Tapering or otherwise put to more general audience if interest rates dislocate or continue to rise as they have over the six weeks or so. What impact might that have on the company's new portfolio?

[Steve Geist:]

That's a very topical question we have all seen in the news that Fed is talked about tapering their $85 (inaudible) a month bond buying program in order to, they institute in order to keep short term interest rates low. They have indicated that at some point perhaps later this year that that bond buying would begin to trail off depending on the economic situation at the time. Specifically in terms of the effect on companies within the portfolio, in short we would say that we would not expect a great impact to our companies. You have to remember first of all when you talk about interest rates in the first sectors you think about are financials and what the impacts would be there. We mentioned as a result of one and the others questions; we currently don't know any financials within the portfolio. So that would be a major worry that we don't have to contend with. Another item to remember is that we also like to invest in companies’ relatively unlevered balance sheet. If you look at the debt-to-capital for the funds versus the rest of 25 index. The debt-to-capital for the time is about in the mid 30s, 30% range. For as the Russell 2500, the number would be in the mid 40% range. And when you take into effect the cash that is on the balance sheet of many of our companies, our net debt-to-capital is actually is in the mid 20% range. So very conservatively managed portfolio that would not be heavy first order impact due to interest rate increases in effect to it will be more of a second or tertiary impact. Finally, our companies generate high free cash flow and so our companies do not necessarily have to work, continue to go to bank sort of public markets if they need to raise cash for either an acquisition or to reinvest in the business. So in summary I would expect has not a large impact on our companies in the portfolio.

[Mark Hancock:]

Thanks Steve. ScanSource was one of your best performances this quarter and one of the worst last quarter. Is this normal or typical with the strategy?

[Eric Ende:]

Thank you, Mark, it’s a great questions. Some of your more mature listeners may recall that JP Morgan, the distinguished banker, was frequently asked by the press or by people that he knew, what do you think prices are going to do today, sir? What do you think about the market’s prospects for the next couple of weeks? To which Mr. Morgan would reply, stock prices will fluctuate.

[Mark Hancock:]

Thanks Eric. A few of your companies have already reported earnings. Are earnings, revenue and profit margin generally coming in as you might have anticipated?

[Greg Herr:]

Mark, it’s a pretty general question. But I guess I would say that overall, probably this quarter, has been a continuation of what we’ve seen the last few quarters. Meaning, revenue growth has been somewhat limited but the companies have done a real good job maintaining their margins and finding some cost offsets. I guess the one company that really I can think of that had a tough quarter, Steve had mentioned Maxim Integrated in his performance discussion and given the issues with Samsung they absolutely missed our expectations and its reach. But, interestingly, the stock price didn’t change much and seems that the company held up quite well despite.

[Mark Hancock:]

Thank you. A few more left. The auto part industry has done well in the past. Do you think there is still potential correlation for Riley or what kind of growth rate could arise sustainably over the long run? Well, I know how to answer the last part based on this any first one. But perhaps see when it touch on consolidation for Riley in the industry.

[Greg Herr:]

I guess more.

[Eric Ende:]

I guess, Mark, maybe the way we’re thinking about growth for Riley at this point is that it expanded their store base across the majority of the country. And they still have the opportunity to grow the store base in Florida and in North East. And so that’s going to last for the next several years. They also now we think have the ability to sort of infill stores on the West Coast where they did the CSK acquisition five years ago and they’ve just finally gotten to the point where we’re now going to start opening more stores there. And then in the last quarter they talked about how they are opening an branded distribution center in Chicago because they’re going to start adding stores in the Midwest, which is a place where they’ve historically had a very strong presence. So you’re at over 4,000 stores today. Longer term, we think they can continue to grow at the current rate of stores for many-many years to come. And, in terms of EPS growth, the business has been generating mid-teens EPS growth for the last several years as they’ve taken working capital out of the business and they’ve used it to buy back shares. That’s going to come to an end at some point. We’re getting closer to the end of that. But between comp store growth and new store expansion, they’ll able to grow the top line high single digits for quite a while, we think.

[Mark Hancock:]

Thanks. A question about Paramount and Perennial that I will put to the team, which is obviously Paramount in August of 2011 expanded its mandate to true global mandate Perennial maintaining its relative U.S. centricity. And maybe just a question for the team in terms of the key differences at this stage with team Paramount to Perennial on the sea for high quality in great companies?

[Greg Herr:]

It’s a good question, Mark. So we’re taking the two funds in different directions. As you mentioned, Perennial is going to focused on domestic opportunities and paramount is a global fund as we’ve discussed previously. At this point Perennial has about 25% of the portfolio and companies that are outside of the U.S. We would expect that percentage to increase overtime. And it’s basically a function of what the opportunities are and how fast that’s going to increase is going to depend on the prices of the companies we’re interested in buying, but over time we definitely think it’s going to be increasingly focused on holding international businesses. And then in terms of Perennial it’s going to continue to do what is done historically and so for those of you that are best it based on a profile of high quality businesses, relatively concentrated portfolio of domestic companies that’s we would expect Perennial to continue to be going forward.

[Mark Hancock:]

We have received some other questions myself and my team will address with some of the respective individuals. The only think I will say is some people have asked about fund flows and obviously we in order to capacity, we’re open for business and we love more of it. So, I’ll leave it at that. At this stage that leaves, that’s sort of runs out on questions thus far and we’ll move to wrap up. Thank you for participation in today’s second quarter 2013 webcast. We invite you, your colleagues and shareholders and clients to listen to the playback of this recording, either presentation slides and listen to transcripts which it will be available on our website fpafunds.com of the coming week or so. We urge you to visit the website for additional information on the funds such as complete portfolio holdings, historical and after tax returns. Following the webcast today, you will have the opportunity to provide feedback. Please do we take it seriously and (inaudible) constructive or negative feedback that we get from you. Please visit our website fpafunds.com for future webcast information. As I said earlier, included in the replays, we will post date and time of the perspective calls towards the end of the each current quarter and expect the calls as is evidenced today to take three to four weeks following each quarter end. If you did not receive an invitation by email for today’s webcast and would like to be put on that list please email us at [e-mail]. We have our quarterly commentaries webcast and special commentaries. We will keep you appropriate informed on the strategy. We want to make sure that you understand that views expressed on this call as of today July 30th, 2013, and are subject to change by some markets and other conditions. The view may differ from other portfolio managers and analyst of the firm as a whole and are not intended to be forecast of future events, a guarantee of future results or investment advice. Any mention of individual securities in those sectors should not be construed as a recommendation of purchase or sale as securities and any of mentioned provided is not a sufficient basis on which to make an investment decision. Information provided does not constitute or should not be construed as an (inaudible) solicitation, with respect to any securities, products or services discussed. Possible (funds) is not guarantee of future results. It should not be assumed that the recommendations made in the future will be profitable or equal the performance of the security examples discussed. Any statistics that been obtained from socials to be believed reliable but the accuracy and completeness cannot be guaranteed. You may request to prospectors directly from the funds distributors, LOC or from our website fpafunds.com. Please read it carefully before investing. FPA Paramount fund and FPA Perennial fund are offered by UNB distributors LOC. This concludes today’s call, again thank you and enjoy the rest of your day.