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Edited Transcript of AIRI earnings conference call or presentation 7-Nov-19 9:15pm GMT

Q3 2019 Air Industries Group Earnings Call

BAY SHORE Nov 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Air Industries Group earnings conference call or presentation Thursday, November 7, 2019 at 9:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luciano M. Melluzzo

Air Industries Group - President & CEO

* Michael E. Recca

Air Industries Group - CFO

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Conference Call Participants

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* John Nobile

Taglich Brothers, Inc., Research Division - Principal Equity Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Air Industries' conference call. Today's conference is being recorded.

Air Industries Group's safe harbor statement. Except for the historical information contained herein, the matters discussed in this presentation contain forward-looking statements. The accuracy of these statements is subject to significant risks and uncertainties. Actual results could differ materially from those contained in the forward-looking statements. Please see the company's SEC filings on Form 10-K and 10-Q for important information about the company and related risks.

EBITDA is used as a supplemental liquidity measure because management finds it useful to understand and evaluate results excluding the impact of noncash depreciation and amortization charges, stock-based compensation expenses and nonrecurring expenses and outlays prior to consideration of the impact of other potential sources and uses of cash such as working capital items. This calculation may differ in calculation from similarly titled measures used by other companies.

And at this time, I'd like to turn the conference over to Lou Melluzzo. Please go ahead, sir.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [2]

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Thank you, Dan. Good afternoon, everyone, and thank you for joining us as we summarize Air Industries' results for the third quarter and the 9 months that ended in September.

Our results for the third quarter are much improved. Sales have increased. Gross profit is up, and expenses are down. We have heightened the focus on continuous improvement and are starting to reap some benefits from the effort. Our workforce is fully committed, and we are executing on the objectives we set at the beginning of the year. Near term, we plan to ramp up our subcontracting to increase production and sales as we continue to look for and hire additional people.

Some particulars for the quarter. Compared to the Q3 of 2018, our sales have increased by over 30%. Gross profit has doubled. Operating expenses have decreased by 18%, and Air Industries reported a net profit of almost $400,000 for the quarter. Our improved financial performance and increased financial stability has strengthened our relationship with our clients and our suppliers. We are collaborating with our customers to prioritize requirements and accelerate deliveries. We are in the midst of refinancing our bank loan and expect to have this completed before year-end.

At this point, I would like to turn the call over to our CFO, Mike Recca, for the financial recap. Then I'll return to close the call. Mike?

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Michael E. Recca, Air Industries Group - CFO [3]

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Thank you, Lou, and thank you all for calling in. The -- I'm not going to read the press release and lower it line by line. Just a couple of points I'll (inaudible) to focus on.

And first is gross profit. Now at our company, gross profit is highly variable with sales. For example, gross profit sales are up 30% and our gross profit on those sales doubled. As a manufacturing company, we have significant earnings leverage. And as an example of that, our gross margin or margins increased at a faster rate than revenue, and that is due to the absorption of fixed costs.

At our Long Island operation, which is our largest, our manufacturing overhead fixed costs for 2018 were $11.9 million, and that represented $0.40 of overhead for every dollar of sales. In 2019, the manufacturing overhead was reduced somewhat from $11.9 million to $11.5 million, a reduction of about $400,000. But that was only 32% -- $0.32 of sales -- $0.32 of cost for each dollar of sales, and that really is an example of how those -- how the overhead gets absorbed by increased sales. And we've really benefited from that in the 3 and the 9 months.

As Lou mentioned, we had positive operating income and net income of $400,000 from continuing operations. Looking forward in 2018, we -- looking back at 2018, we had an operating and net loss in both categories. So our profitability, both operating and net income for the quarter, about $2 million better than in 2018. Now if you try to extrapolate to the balance of the year, if you look for the 6 months, we still have a net income loss, and we expect to reduce that loss for the full 12 months. But I doubt that we will be able to report a net profit for the entire year.

So with that, I'll hand it back to Lou and get on to your questions.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [4]

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Thank you, Mike. Let me close the call with a few thoughts on the remainder of the year.

Our results for the 9 months strongly demonstrate that we are succeeding in increasing sales and margins. With continued defense spending, our robust bid pipeline and an active initiative to get better pricing for our products, we believe we are well positioned for a long-term steady growth. We achieved both operating and net income profitability and remain dedicated to continuing these trends.

This concludes our formal remarks this afternoon. I would like to open up the call to questions from participants. So Dan, can you take the questions, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question in the queue comes from John Nobile.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [2]

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Well, congratulations. I saw the top line, but I was surprised to see no brackets on the bottom line considering the top line number. And I realize, your Q -- well, it just came out. I haven't had a chance to run through it. I was hoping you might be able to just give me a quick breakdown of your sales and gross margins at both of your operating segments.

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Michael E. Recca, Air Industries Group - CFO [3]

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Sure. The operating -- sales at CMS, which is the Long Island operation comprised of 2 entities: Air Industries Machining, our core company, and Nassau Tool Works, sales were about -- let's see, for the full 18 months, they were -- for the 9 months, they were $41 million. They were about [$35 million] just for the 9 months.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [4]

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Okay. Could you give it for the quarter, though? I just wanted to get that breakout on the quarter.

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Michael E. Recca, Air Industries Group - CFO [5]

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Hold on a second. For the quarter, [14] -- they're about $12.2 million for Long Island and about -- and the balance were up at Sterling. Gross profit was almost entirely from the Long Island operations. Sterling is still operating at a modest gross profit of about 7%, but that compares very favorably with last year when they had a gross profit loss.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [6]

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Right. That's what I wanted to get through to find out if Sterling was actually starting to show a positive gross profit. So that's an improvement right there, especially on that level of revenues. So I noticed your third quarter gross margins, 21.4%, which I didn't expect that on this level of revenue. It's a significant increase over the past 2 years. Was there anything that might have skewed this to the high side? Or is this a level that we should anticipate going forward or even growing on this level of revenue?

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Michael E. Recca, Air Industries Group - CFO [7]

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I think you'll -- I anticipate it to continue to grow. I do not anticipate to continue to grow at the rate that it's improved from last year to this.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [8]

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Okay. No, I didn't expect that. But on this level of revenue going forward, we're looking at, at least, a 21% margins, correct? Which is why you really got to the bottom line profitability.

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Michael E. Recca, Air Industries Group - CFO [9]

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No question. 21%, we would be comfortable at these levels. If you look back historically at the particular companies that comprised the -- Air Industries today, back in the 2013, '14 and '15, the Long Island operation operated at about a 25% gross margin. I don't think there's a lot of room beyond that, but -- and I'm not saying we're going to get to there, get to 25% for the balance of this year or next, but that is the ultimate goal.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [10]

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Well, if Sterling was to really pick up sales, that could go over the 25% mark, I assume?

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Michael E. Recca, Air Industries Group - CFO [11]

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It could. But Sterling also operated at about 25%. Sterling's gross margin is more variable with sales than Long Island operation. And principally, that's because they do not -- they, generally speaking, have material supply to them. So when we sell $1.00 of goods to one of our customers, it's 40% material and processing, it's 40% labor with a 20% margin. At Sterling, it would be more like 70% to 80% labor and no material. So as sales go up, gross margin goes up.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [12]

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Okay. But I remember when you first acquired Sterling, I think for that first quarter, it was obviously on a higher level of revenue. I think gross margins were closer to 30% range. Correct me if I'm wrong, I had to look back. But I thought it was around 30% at Sterling.

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Michael E. Recca, Air Industries Group - CFO [13]

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At my advanced age, John, I can't really remember 5 years ago. But my recollection that we were in the high 20s. That was on revenue of about $900,000 a month or basically (inaudible) $10 million of revenue base.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [14]

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That's pretty high for this industry, John. That's not really the normal, but we are a strong (inaudible) size -- sizing the business to the sales. So we've been very cognizant of that, and we've tried to make sure that the head count supports the sales. But we're not carrying extra baggage.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [15]

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All right. And I was hoping, could you talk a little about the capital equipment investments that were made this year? And are there any further investments on the horizon that could help in getting product out the door?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [16]

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We did pick up a couple of horizontal lathes midyear. It took a few months to get them into the shop, to get them to our -- to the location that they're at right now, at Bay Shore. And we stumbled across those by accident. We weren't really looking for capital this year, but the opportunity was there, presented itself. And we made the purchase to remove some of the bottlenecks that we had identified into the year. And there were about [4] of them.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [17]

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Okay. So these lathes, are they fully up and running at this point, fully functional? Or do you anticipate them (inaudible) in the fourth quarter?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [18]

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They came online about 4 weeks ago, 4 or 5 weeks ago, but they needed foundations. They need a lot of prep work, plus they came out of Texas, so it took a little bit of time to get them up here and get them set up.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [19]

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I just have like one final question, probably my most important question because I know last call, you were talking about a bottleneck in the area with your external suppliers, which is really a bottleneck not just for you but also for the industry. I mean, that was hindering orders. And I just was hoping you might be able to give us an update on how that looks as far as that bottleneck with the external suppliers? Because actually, I'm looking -- I don't think you mentioned the backlog in here. But I assume your backlog's still floating around $100 million or close to it. So this is very important as far as getting product out. I was hoping you can just shed some light into -- over the last 90 days how things might have picked up as far as that bottleneck is concerned.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [20]

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Well, yes, the industry is still booming, and we've really made it -- we really have made an attempt in our Q3 to try to dual-source some of the -- these bottlenecks. We're going all over the place to get the same services that we were getting right here locally. But they're not getting any less busy, let's put it this way, your Magellans of the world and Rypac -- that the Rypac and ACPs and the local companies that we use here. So we've got trucks going to Connecticut every day, and we've got -- we're coming up with some places in the Midwest. We even go to Canada for a few outside processes. That's how we're kind of getting through it. As the aerospace cycle is still high, we're going to have those bottlenecks.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [21]

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Okay. But I mean, is there somewhat -- I mean, your numbers are obviously -- let's see, you had a $13.4 million sales in Q2. So you went up $6 million -- $600,000 this quarter. So I just wanted to see if, indeed, improvement was being made as far as that's concerned? And your outlook right now for the next few quarters, does it look like it's going to ease a little bit where you'll be able to push more product out?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [22]

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With some of our supply base -- with the supply base that we're coming up with, we should have a less -- we should have less trouble finding the services that we need. Is it going to ease? I'm -- not on Long Island. Long Island is pretty busy. Again, we've got stuff on trucks outside of our comfort zone, but that's where we got to go. I don't want to go to Canada for a service, but I have to.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [23]

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Yes. I just -- I mean, that's what I have. I just wanted to -- I alluded to the fact that you probably still have around $100 million backlog. Is that true right now?

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Michael E. Recca, Air Industries Group - CFO [24]

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Yes. That's about accurate.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [25]

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Correct. That's about right.

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Operator [26]

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(Operator Instructions) Our next question comes from [Vincent Alecia].

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Unidentified Analyst, [27]

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This question is specifically for Michael Recca. Mike, I saw that the operating expenses have dropped significantly during the course of the quarter. And I just wanted to check and see to what percentage is that attributable for the ongoing consolidation of operations over at Bay Shore? And has that been completed now at this point?

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Michael E. Recca, Air Industries Group - CFO [28]

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It has been completed. Basically, and unfortunately, since I do this from memory, so it'll be a lot of round numbers, the -- for the 9 months, our operating expenses are down by about $988,000, something like that. And of that, about $200,000, $250,000 relates to reductions in rent. And that is about $200,000 at Air Machining, as we exited most of the Nassau Tool space. And the other $50,000 was the rent we avoided at our headquarters up on -- up in Hauppauge by consolidating back down to Bay Shore. We had, let's just see -- we also had a noncash, it didn't affect EBITDA, we had some amortization of about $150,000. That was completed. So that no longer is expenses -- no longer an add-back also, but whatever. And then we had about $200,000 reduction in employment costs, and that was comprised of about $250,000 which we incorporate in Air Machining offset by an increase of about $60,000 at Sterling as they ramped up because Sterling still is suboptimal in terms of profitability. But its revenues have grown significantly from the year before. So that's $450,000, $500,000. And then our professional fees are also down by about $250,000, $300,000. That's the combination.

Now again, I don't expect significant reductions in operating costs from this point going forward. There's no more space to consign. There's no more space to abandon. We're pretty much at the employment levels we want to be, and I'd love to get professional fees down to 0. That's unlikely. So there are -- there's minimal room for additional savings. So if you look back 2 years ago, it's significantly reduced from where it was.

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Operator [29]

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Our next question comes from [Steven Brandstetter].

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Unidentified Analyst, [30]

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Congratulations, gentlemen. I just want to ask when do you guys plan to go on the road and maybe talk to investors at conferences?

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Michael E. Recca, Air Industries Group - CFO [31]

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Historically, we've been on the -- we were on the road for quite a bit in the years past. I think this year, we'll probably attend 3 or 4 conferences beginning (inaudible) 2020.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [32]

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2020, we'll be on the road.

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Operator [33]

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And our next question comes from [Brandon Tahil].

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Unidentified Analyst, [34]

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Congratulations on the quarter. I just wanted to touch on last quarter, we discussed that there could be an announcement of some new contracts. You said you couldn't announce it at the time. Any update on that?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [35]

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You said Brandon? I'm sorry. I -- the bid pipeline is pretty full. We've been -- it's been a very hectic year for quoting. Obviously, the OEMs buy on their cycles, and I think some contracts are a little bit late and get placed at this point in time. But there's still a healthy amount of activity that's -- that we've got out there, that some of it's going to hit, there's no question about it.

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Michael E. Recca, Air Industries Group - CFO [36]

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Yes. If I could add to that, we have been promised some contracts, but we're waiting until we have a tangible signed document before making an announcement.

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Operator [37]

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And speakers, there are no more questions in the queue.

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Michael E. Recca, Air Industries Group - CFO [38]

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Okay.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [39]

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Okay. So with that, once again, thank you, everyone, for taking the time to be on the call today and for your attention and questions. The management and employees of Air Industries look forward to the balance of 2019 and to 2020. Dan?

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Operator [40]

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Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.