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Edited Transcript of AVAV earnings conference call or presentation 6-Mar-18 9:30pm GMT

Q3 2018 AeroVironment Inc Earnings Call

MONROVIA Mar 8, 2018 (Thomson StreetEvents) -- Edited Transcript of AeroVironment Inc earnings conference call or presentation Tuesday, March 6, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Steven A. Gitlin

AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication

* Teresa Covington

AeroVironment, Inc. - Senior VP & CFO

* Wahid Nawabi

AeroVironment, Inc. - CEO, President & Director

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Conference Call Participants

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* Brian William Ruttenbur

Drexel Hamilton, LLC, Research Division - Director of Research

* Joseph William DeNardi

Stifel, Nicolaus & Company, Incorporated, Research Division - VP

* Kenneth George Herbert

Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst

* Peter J. Arment

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Troy Donavon Jensen

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the AeroVironment, Inc. Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

With us today from the company is President and Chief Executive Officer, Mr. Wahid Nawabi; Senior Vice President and Chief Financial Officer, Ms. Teresa Covington; and Vice President of Investor Relations, Mr. Steven Gitlin.

And now at this time, I would like to turn the conference over to Mr. Gitlin. Please go ahead, sir.

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Steven A. Gitlin, AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication [2]

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Thank you very much, Brandon, and welcome to our earnings call. Please note that on this call, certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results performance or achievements; and may contain words such as believe, anticipate, expect, estimate, intend, project, plan or words or phrases with similar meaning. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, reliance on sales to the U.S. government; availability of U.S. government funding for defense procurement and research and development programs; changes in the timing and/or amount of government spending; risks related to our international business, including compliance with export control laws; potential need for changes in our long-term strategy in response to future developments; the extensive regulatory requirements governing our contracts with the U.S. government and international customers; the consequences to our financial position, business and reputation that could result from failing to comply with such regulatory requirements; unexpected technical and marketing difficulties inherent in major research and product development efforts; the impact of potential security and cyber threats; changes in the supply and/or demand and/or prices for our products and services; the activities of competitors and increased competition; failure of the markets in which we operate to grow; uncertainty in the customer adoption rate of commercial unmanned aircraft systems and electric vehicles; failure to remain a market innovator and create new market opportunities; changes in significant operating expenses, including components and raw materials; failure to develop new products, product liability, infringement and other claims; changes in the regulatory environment and general economic and business conditions in the United States and elsewhere in the world. For a further list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission.

The content of this conference call contains time-sensitive information that is accurate only as of today, March 6, 2018. The company undertakes no obligation to make any revision to the statements contained in our remarks or to update them to reflect events or circumstances occurring after this conference call.

We will now begin with remarks from Wahid Nawabi. Wahid?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [3]

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Thank you, Steve. Good afternoon. Our solid third quarter results keep us on track to achieve our fiscal year 2018 goals and advance our objectives of creating value for our stockholders, customers and employees. On today's call, I will briefly review AeroVironment's third quarter financial results, then share with you the significant progress we made during the quarter on our fiscal year 2018 and long-term plans. Teresa Covington will review the third quarter financials in detail, then I will discuss our outlook for the balance of the year. Following this, Teresa, Steve and I will take your questions.

Today's 3 main messages are as follows: First, we successfully executed our plan in the third quarter. Second, continued strong backlog supported by significant order flow in the quarter increased our visibility into our full year revenue and EPS objectives. And third, with the formation of our HAPSMobile JV with SoftBank Corp. and its $65 million contract to AV, we have launched our global next-generation broadband communication business.

Now let's review the solid results our team delivered in the third quarter. Revenue of $63.9 million increased by 20% year-over-year, and loss per share of $0.04 was less than half of last year's third quarter loss of $0.09 per share. It is important to point out that our third quarter loss per share includes an estimated onetime expense of $3.1 million or $0.13 per share from remeasuring our deferred tax asset and liabilities due to the federal Tax Cuts and Jobs Act of 2017. This means that third quarter earnings per share would have been $0.09 if not for this onetime adverse effect. Fiscal year-to-date revenue grew by 30% over last year, and earnings per diluted share of $0.07 is significantly higher than last year's $0.78 loss per share for the first 9 months.

Healthy demand for our products and services in the United States and across the globe drove funded backlog to $123.5 million, significantly increasing our revenue visibility for the current fiscal year, as Teresa will detail shortly. Across our business, our team produced solid results. Now I'll share with you some highlights from the quarter.

We see signs of increasing demand for small UAS within the U.S. DoD where we maintain our leading market share. In our core small UAS business, we're tracking several important opportunities. First, the Army Soldier Borne Sensor, or SBS, program is moving ahead with the goal of selecting a very small drone that can be carried by a war fighter and deployed quickly to provide situational awareness within 1 or 2 kilometers. As we stated previously, we have delivered 30 snipe systems for customer evaluation. The anticipated award date is later this calendar year with a total acquisition objective of more than 7,000 systems over the life of the program. As always, this will be a tough competition against very capable competitors in the nano UAS category, but we're confident in the strength and value of our solutions.

The U.S. Army is also in the process of evaluating our Puma and Raven systems equipped with the new frequency modifications. This program is currently referred to as FCS and was formally called Frequency Relocation. We stand ready to respond to requests for proposal for the FCS program.

Additionally, we recently responded to an RFI from the Department of Homeland Security for small UAS capabilities and look forward to pursuing this opportunity.

International demand for our family of small UAS also remains strong. During the third quarter, we secured our largest ever international contract award for small UAS. This Middle Eastern customer issued a $44.5 million contract for Puma AE systems with the i45 super gimbal sensor suite. As we previewed in our last earnings call, in order to respond more effectively to continued international demand, we are establishing in-country logistics support services operations. The first is up and running in Australia, and the second is planned for the first quarter of fiscal 2019 in Western Europe. As we've said previously, some of our international customers operate our small UAS continuously, relying on our solutions to help them proceed with certainty 24/7. Positioning our logistics support services capabilities closer to our international customers gives us the ability to be more responsive and deliver more value.

Our new overseas operations also address our customers' desire to build even more intimate and stronger relationships with us. AeroVironment continues to be viewed as the best-in-class small UAS Family of Systems solution provider across the global market even with significant native and non-native competition.

In our Tactical Missile Systems business, we continue to produce and deliver our Switchblade systems to help protect our forces as we advance the development of our Switchblade variants. As part of the U.S. Army's continued evaluation and procurement process, we competed again and we were again selected as the de facto solution provider for their LMAMS requirement. We're currently working to finalize the contract with the Army for the next tranche of orders for Switchblade systems via a joint urgent operational need statement. This means that Switchblade continues to be the solution for LMAMS, and this contract will lead to additional demand and deliveries. Once the current contract negotiations are finalized, we intend to provide more information on its scope.

The U.S. government released the President's fiscal year 2019 budget request in February, and it reflects healthy demand for our solutions that I will now summarize. The Army requests the procurement of 200 Raven B systems, valued at $46.4 million as part of the long-standing Rucksack Portable Unmanned Aircraft Systems, or RPUAS program. This is the largest Army request for Raven systems in years. The Army also requests $21.7 million for Soldier Borne Sensor acquisition in government fiscal year '19, and the Air Force is requesting $13.5 million for Puma AE system procurement. This totals more than $80 million in potential government fiscal year '19 small UAS demand from the U.S. DoD, a larger quantity and value that we have seen in years.

Beyond government fiscal year 2019, the budget request proposes procurement funding for the Army's Short-Range Reconnaissance UAS, or SRR, formerly known as Short-Range Micro, with an acquisition objective of more than 2,500 systems. The associated proposed funding over the following 4 years for SRR totals more than $100 million, providing initial visibility into plans for the Army's next-generation small UAS procurement.

The government fiscal year 2019 budget request also includes an Army procurement line item totaling $113 million for more than 1,300 Switchblade rounds, plus additional equipment and services. This represents by far the largest procurement request for Switchblade systems that we have ever seen. More importantly, it further validates Switchblade's unique and game-changing capabilities, enforce protection and collateral damage avoidance.

Shifting to our commercial information solutions, or CIS, initiative. We're now selling Quantix drones and AV DSS subscriptions through a growing network of agriculture dealers and directly via our website, www.avdroneanalytics.com. We are focused on 2 specific geographic regions in the United States for our launch: California's Central Valley and the Midwest Corn Belt. Our CIS business is focused on achieving its milestones this year for product launch, dealer sales channel development, customer usage and satisfaction. Because we offer a fully integrated drone, sensor and data analytics solution, we believe the dealer channel onboarding and end user education process is a critical component of our growth strategy. The manufacturers suggest that retail price for the Quantix drone and a 1-year subscription of AV DSS is $16,500.

Initial market feedback indicates that our price value proposition is compelling. We believe we are well positioned with a uniquely differentiated solution and focus on growing this business over the long term.

Still within our emerging commercial portfolio of growth initiatives, we're very excited about our new strategic joint venture with SoftBank Corp. to launch our global stratospheric broadband communication business. The initial phase of the joint venture company, named HAPSMobile, Inc., is intended to demonstrate the next-generation solar High-Altitude Pseudo-Satellite, or HAPS. By high altitude, we mean maintaining continuous operation at more than 60,000 feet above sea level. We are fortunate to have partnered with SoftBank Corp. whose leaders share the same strategic vision for this global business.

Our joint venture agreement grants AeroVironment the rights to develop, produce and supply the aircraft to HAPSMobile JV based on contract terms for commercial opportunities globally. AeroVironment also retains exclusive rights to pursue noncommercial opportunities globally outside of Japan. AeroVironment owns 5% of the HAPSMobile JV, and we have the option to increase our ownership to as much as 19% of the JV. The HAPSMobile JV's planned initial $100 million capitalization funds AeroVironment's demonstration program valued at $65 million.

Without a doubt, AeroVironment is the pioneer and world leader in HAPS with decades of demonstrated achievements. Our work in the 1980s and '90s with the U.S. government agencies such as NASA culminated in the flight of our 200 wingspan helio solar HAPS, which achieved the world's highest altitude in level flight at more than 96,000 feet in 2001, a record that still stands today. We also successfully demonstrated high-definition television broadcast, 3G mobile telephony and Internet connectivity from our Pathfinder Plus solar HAPS, which now resides in the Smithsonian Air and Space Museum.

One use case for the HAPS system is to provide next-generation 5G broadband communications connectivity to consumers and businesses around the globe. A HAPS solution would leapfrog the costly build-out of terrestrial infrastructure, speeding Internet of Things, or IoT, adoption. The potential unit demand is very large, and the unit price would be significantly higher than that of our small UAS. We will provide more information on this growth initiative as competitive constraints permit. For now, consider this a partner-funded active initiative within our growth portfolio, which adds significant optionality to our long-term investment thesis.

Now onto our EES business, which continues to pave the way as a leader in the EV charging and testing industry with innovative solutions. In the third quarter, we launched our TurboDX next-generation global EV charging solution for commercial, workplace, utility and residential customers. Built upon our TurboCore product architecture, this is a single scalable charging platform, and our first OEM-branded version has agency certifications for the U.S, European and Chinese markets. TurboDX is optionally networked using Bluetooth and Wi-Fi with smartphone app integration. In addition to shipping this product domestically, we also commenced manufacturing a derivative series of this product, packaged in a custom-designed enclosure for a global OEM customer for Europe and China. We will soon begin shipping units to domestic network partners and installations for commercial, workplace applications. Demand for our ground support charging equipment remains solid, and we are seeing sustained interest in our EV test systems, primarily for global automotive OEMs developing larger, higher-voltage, next-generation battery packs.

As you can see, we are making significant progress throughout our business, progress that supports our current year goals and positions us for our long-term business strategy and growth objectives.

Now Teresa Covington will provide a detailed review of third quarter and year-to-date financial performance. Teresa?

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Teresa Covington, AeroVironment, Inc. - Senior VP & CFO [4]

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Thank you, Wahid, and good afternoon, everyone. AeroVironment's fiscal 2018 third quarter results are as follows. Revenue for Q3 was $63.9 million, an increase of $10.8 million or 20% from the third quarter of fiscal 2017 revenue of $53.2 million. The increase in revenue resulted from an increase of product sales of $12.5 million, partially offset by a decrease in service revenue of $1.7 million.

Looking at revenue by segment. UAS revenue was $53.4 million, an increase of $11.5 million or 28% from the third quarter of fiscal 2017 revenue of $41.9 million. The increase was due to an increase in product deliveries of $13 million and an increase in customer-funded R&D work of $1.2 million, partially offset by a decrease in service revenue of $2.7 million. EES revenue was $10.5 million, a decrease of $0.8 million or minus 7% from the third quarter of fiscal 2017 revenue of $11.3 million. This decrease was primarily due to a decrease in product deliveries of PosiCharge industrial electric vehicle charging systems, partially offset by an increase in product deliveries of our power cycling and test systems.

Turning to gross margin. Gross margin for the third quarter was $20.6 million or 32% as compared to $19.4 million or 36% for the third quarter of fiscal 2017. The increase in gross margin was primarily due to an increase in product sales margin of $4.2 million, partially offset by a decrease in service margins of $3 million. By segment, UAS gross margin increased to $17.3 million for the third quarter of fiscal 2018 from $16.4 million for the third quarter of fiscal 2017. As a percentage of revenue, gross margin for UAS decreased from 39% to 32%, primarily due to a lower service margin on a UAS program due to unfavorable cost adjustments and unfavorable sales mix. We anticipate higher service margins in the fourth quarter. EES gross margin increased $0.3 million to $3.3 million for the third quarter of fiscal 2018, primarily due to favorable product mix. As a percentage of revenue, gross margin for EES increased from 27% to 31%.

Looking at the rest of the income statement. SG&A expense for the third quarter of fiscal 2018 was $13.5 million or 21% of revenue compared to SG&A expense of $12.8 million or 24% of revenue for the third quarter of fiscal 2017. R&D expense for the third quarter of fiscal 2018 was $7.3 million or 11% of revenue compared to R&D expense of $8 million or 15% of revenue for the third quarter of fiscal 2017. The loss from operations for the third quarter of fiscal 2018 was $0.2 million or minus 0.4% of revenue compared to a loss from operations of $1.4 million or minus 3% of revenue for the third quarter of fiscal 2017. The decrease in loss from operations was primarily due to higher gross margins of $1.2 million and a decrease in R&D expense of $0.7 million, partially offset by an increase in SG&A of $0.7 million.

Net other income for the third quarter of fiscal 2018 was unchanged compared to the prior year net other income of $0.4 million. The effective income tax rate was 300.5% for the third quarter of fiscal 2018 as compared to an effective income tax rate of minus 102.7% for the third quarter of fiscal 2017. The third quarter fiscal 2018 effective tax rate included the impact of the Tax Cut and Jobs Act of 2017, which included an estimated onetime expense of $3.1 million or $0.13 per share related to our remeasuring of deferred tax assets and liabilities. The increase was partially offset by the reversal of a $0.7 million reserve for uncertain tax position and a $0.2 million discrete excess tax benefit from the vesting of equity awards. The equity method investment activity, net of tax, on the HAPSMobile joint venture for the third quarter of fiscal 2018 was a loss of $0.4 million or $0.02 per share compared to equity method investment activity, net of tax, loss of $8,000 for the third quarter of fiscal 2017.

The net loss attributable to AeroVironment for the third quarter of fiscal 2018 was $0.8 million or a $0.04 loss per share compared to net loss attributable to AeroVironment of $2.2 million or a $0.09 loss per share for the third quarter of fiscal 2017.

Now moving through our first 3 quarters fiscal 2018 results. Revenue for the first 3 quarters of fiscal 2018 was $181.5 million, an increase of $42 million as compared to $139.5 million for the 9 months ended January 28, 2017. The increase in revenue is due to an increase in product deliveries of $51.4 million, partially offset by a decrease in service revenue of $9.4 million.

UAS increased $40.5 million to $153.7 million for the first 3 quarters of fiscal 2018, primarily due to an increase in product deliveries of $49.6 million, partially offset by a decrease in customer-funded R&D work of $8 million and a decrease in service revenue of $1.2 million. EES revenue increased $1.6 million to $27.9 million for the first 3 quarters of fiscal 2018, primarily due to an increase in product deliveries of passenger electric vehicle charging system and PosiCharge industrial electric vehicle charging systems.

Gross margin for the first 3 quarters of fiscal 2018 was $63.2 million or 35% as compared to $43.5 million or 31% for the first 3 quarters of fiscal 2017. The increase was primarily due to an increase in product margins of $23.3 million, partially offset by a decrease in service margins of $3.5 million. UAS gross margin increased to $55.3 million for the first 3 quarters of fiscal 2018 from $36.7 million. As a percentage of revenue, gross margin for UAS increased from 32% to 36%, primarily due to the increased sales volume and an increase in the proportion of product sales to total revenue. EES gross margin increased $1.1 million to $7.9 million for the first 3 quarters of fiscal 2018. As a percentage of revenue, gross margin for EES increased from 26% to 28%, primarily due to the increased sales volume and a decrease in sustaining engineering activities in support of our existing products.

SG&A expense for the first 3 quarters of fiscal 2018 was $41.3 million or 23% of revenue compared to SG&A expense of $39.8 million or 29% of revenue for the first 3 quarters of fiscal 2017. The increase in SG&A expense was primarily due to the impairment charges totaling $1 million related to our Turkish majority-owned subsidiary during the 3 months ended October 28, 2017.

R&D expense for the first 3 quarters of fiscal 2018 was $21 million or 12% of revenue compared to R&D expense of $25.1 million or 18% of revenue for the first 3 quarters of fiscal 2017.

Net other income for the first 3 quarters of fiscal 2018 was $1.3 million compared to prior year net other income of $0.8 million. The net other income increase was primarily due to the foreign exchange loss in the prior year and higher short-term interest rates in fiscal 2018.

The provision for income taxes for the first 3 quarters of fiscal 2018 was $0.3 million compared to a benefit for income taxes of $2.8 million for the first 3 quarters of fiscal 2017. The effective income tax rate was 12.6% for the first 3 quarters of fiscal 2018 as compared to an effective income tax rate of 13.6% for the first 3 quarters of fiscal 2017.

The year-to-date fiscal 2018 effective tax rate included the impact of the Tax Cut and Jobs Act of 2017, which included an estimated onetime expense of $3.1 million related to remeasuring our deferred tax assets and liabilities. We expect the full year 2018 effective tax rate to be higher than 2017. The unfavorable impact from the tax law change in fiscal 2018 has been partially offset by the discrete excess tax benefit from the vesting of equity awards, the third quarter reversal of an uncertain tax position and favorable return to provision adjustments. For future fiscal years with higher pretax income, we anticipate a lower full year effective tax rate in the range of 11% to 18%.

Equity method investment activity, net of tax, for the first 3 quarters of fiscal 2018 was a loss of $0.4 million compared to equity method investment activity, net of tax loss of $0.1 million for the first 3 quarters of fiscal 2017.

Net income attributable to AeroVironment for the first 3 quarters of fiscal 2018 was $1.7 million or $0.07 earnings per diluted share compared to net loss attributable to AeroVironment for $18 million or a $0.78 loss per share for the first 3 quarters of fiscal 2017.

Our funded backlog as of January 27, 2018, was $123.5 million, a decrease of $3.6 million or 3% from the second quarter of fiscal 2018 and a decrease of $4.6 million or 4% from the third quarter of fiscal 2017.

Turning to our balance sheet. Cash, cash equivalents and investments at the end of the third quarter fiscal 2018 totaled $260.7 million, a decrease of $0.2 million from the end of the second quarter fiscal 2018 and an increase of $18.7 million from the end of fiscal 2017. Net accounts receivable, including unbilled receivables and retention at the end of the third quarter fiscal 2018, totaled $50.7 million, an increase of $2.1 million from the end of the second quarter of fiscal year 2018. Total days sales outstanding for the third quarter fiscal 2018 was approximately 70 days compared to 55 days from the prior quarter and 68 days for the third quarter of fiscal 2017.

Net inventory at the end of the third quarter fiscal year 2018 was $77.3 million compared to $76 million at the end of the prior quarter. Days in inventory for the third quarter fiscal 2018 were approximately 159 days compared to 156 days for the prior quarter and 165 days for the third quarter fiscal 2017.

Turning to capital expenditures. In the third quarter fiscal year 2018, we invested approximately $2.4 million in property improvements and capital equipment and recognized $1.9 million of depreciation and amortization expense.

Now an update to our fiscal 2018 visibility. As of today, we have year-to-date revenue in fiscal 2018 of $182 million; third quarter ending backlog that we expect to execute in fiscal 2018 of $69 million; Q4 quarter-to-date bookings that we anticipate to execute in fiscal 2018 of $38 million; no unfunded backlog from incrementally funded contracts; and revenues needed to hold EES revenues flat relative to last year of $1 million. This adds up to $290 million or 100% at the midpoint of revenue guidance.

Now I'd like to turn things back to Wahid to discuss AV's expectations for the remainder of fiscal year 2018.

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [5]

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Thank you, Teresa. As I stated earlier, we are on track with our plans for fiscal 2018. Our persistence and strategy are translating into higher demand for our uniquely differentiated solutions from our DoD and international customers, and we've made strong progress with HAPS and CIS in strategic commercial markets. As always, there are timing risks relating to government approvals for exports and contracts, particularly related to the LMAMS contract I mentioned earlier. However, with our 100% visibility, we reiterate our annual guidance of $280 million to $300 million in revenue and $0.45 to $0.65 in diluted earnings per share. We also continue to expect research and development investments of 9% to 10% of revenue this fiscal year. We are confident in our ability to manufacture and deliver in the fourth quarter to meet our customers' delivery schedules and achieve our guidance. The strong order flow we've generated this fiscal year supports healthy funded backlog beyond fiscal 2018. In total, U.S. Department of Defense procurement requests of nearly $200 million for small UAS and Switchblade provide the potential for continued strong visibility into government fiscal year '19.

To reiterate our main messages today. First, we successfully executed our plan in the third quarter. Second, continued strong backlog supported by significant order flow in the quarter increased our visibility into our full year revenue and EPS objectives. And third, with the formation of our HAPSMobile JV with SoftBank Corp. and its $65 million contract to AeroVironment, we have launched our global next-generation broadband communication business.

Thank you for your continued support, and thanks to all our employees for their hard work in serving our customers and delivering on our promise to help them proceed with certainty. We remain committed to delivering transformational innovations and creating significant value for stockholders.

Teresa, Steve and I will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) From Stifel, we have Joseph DeNardi.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [2]

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Wahid, I can't think of a time since AV has been public, at least, where there's more going on, and you've always talked about how it's hard to predict revenues just given uncertainty around the timing and magnitude of adoption of some of your capabilities. But if you could just maybe step back and put timing aside and look out maybe 3 or 4 or 5 years, why shouldn't revenues be kind of multiples higher -- of where they are now given the opportunities in front of you?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [3]

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First and foremost, very good points. I've been here for over 7 years and at this position for almost 2 years. And I do agree with you that our -- the demands and the strategic growth initiatives that we've got in -- within our business does look better than I can recall in my recent history here with the company. And that's primarily what I referred to, the direct outcome and results of our strategy and execution and commitment to our long-term stockholder value creation and strategic value creation. So if you look at every aspect of our business, from our domestic small UAS business where we enjoy very strong market share and we have very satisfied customers, we see strong demand signals there. Our Tactical Missile Systems business, we've grown that business significantly and we see also significant strong growth signals on that business. The launch of our commercial information solutions business is very early in a very large potential long-term market and opportunity. And of course, with our solar HAPS business that we just launched our joint venture, it essentially sets and launches our global stratospheric broadband communication business. We're very excited and very focused on execution on that business, and it represents a very large opportunity long term for our 3 stakeholders. And on the EV charging business and EV solutions, obviously, that's directly tied to the adoption of EV market, but the signs there look quite positive as well. So in a nutshell, I could not agree with you more that, in general, our business is doing quite well. We're very satisfied with the execution of our strategy so far for this year, and that's why we confirmed our guidance for this year. Now relating to the size of the revenue and what it could be, we're working on the long-term strategic gets for our business. And with that, it's hard to be able to predict that in a short time frame as to what that would look like. Based on what we see in our pipeline, in our forecast, in our opportunities, in our engagements with our customers in the markets, we feel confident about our confirming of the guidance, and we will update you as we proceed forward.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [4]

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Okay. All right. And then maybe just a little bit more kind of tactical question. If I look at LMAMS procurement from the Army in dollars, it goes from $55 million in FY '17 to $9 million in FY '18 and back up to $113 million in FY '19. You said last fiscal year, the Tactical Missiles business as a whole, I think, was about $75 million. I think maybe half of that was Switchblade or LMAMS. Can you help me understand what we should expect from LMAMS revenue just given the dip in funding in FY '18 and then the rebound in '19?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [5]

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Great question, Joe. Very good observations. So if you -- again, if I go back to the earlier statement, being able to slice and dice the -- what I call the data on a short-term basis could give us an optical illusion, I would call it, so of speak, because our business is very focused strategically on the long-term get. So if you look at our historical revenue projections and track record for the Tactical Missile Systems business, we've grown that business very, very handsomely over the last several years. In terms of the demand for this business, as you know, we currently do not have a Program of Record with Switchblade, and there is a stated requirement in a potential Program of Record with the Army called the LMAMS program, which I alluded to. And so demand in terms of consumption and fulfilling that consumption to our customer happens primarily through Joint Urgent Operational Needs Statements and Overseas Contingency Operations in dollars that are really not programmatic. And so from that perspective, it's not unusual to see what I call slight fluctuations on a quarterly or even yearly basis slightly this way or the other way. But in general, if you look at the data, it shows and it supports our successful execution of our strategy and the long-term prospects of value creation because we have established a very, very compelling differentiated solution and value proposition for our solution, and we're expanding the Family of Systems to multiple variants, which are just at the beginning of their development and adoption curve. So over the long run, we feel very strong about our prospects for the Tactical Missile Systems business and the Switchblade Family of Systems. In the short term, you could always see a little bit of different types of profiles based on the timing of these events that take place in terms of procurement cycles.

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Operator [6]

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And from Baird, we have Peter Arment.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

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Wahid, if I could follow on to just kind of a timing question. You mentioned you were in the process of finalizing another contract with the Army for Switchblade. Is there an expectation of what that timeline looks like?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [8]

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Well, if -- as I said many times before, the timing of these things always, always is one of the most difficult items to predict, primarily because of all the external factors that are involved in the procurement process. So we do have an opportunity and a contract that we're negotiating with the U.S. government. As you know, the government budgeting process and the U.S. DoD budgeting process has been quite a rollercoaster ride in the last few months. And with the government shutdown and all those related activities and events, sort of made it more difficult to be able to predict exactly when we will be able to definitize that contract. As you see from our develop -- our production plans and expected demand, we have prepared for that opportunity in terms of production capacity and inventory. We stand ready to deliver and execute on that contract as soon as we definitize with the customer. However, the timing of that could be any day or month, and it's very difficult to time it exactly and accurately.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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Okay. That's helpful. And just if I could squeeze in one more, just on the -- congrats on the Puma contract announcement, but could you give us any more color on the timeline you expect the deliveries to occur with that?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [10]

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No problem, Peter. So obviously, this is a historic, again, achievement for AeroVironment. It's the largest ever international contract for small UAS for $44.5 million from a Middle Eastern country. So, a, we're very pleased with this contract, number one. It supports our strategic long-term objective of growing our international customer base as well as deepening our relationship with those customers, and this is another example of that. We have also -- as I said earlier, as I said, the inventory levels that we have built and capacity that we've increased in terms of our production is specifically for these types of opportunities, not just this one but, in general, these types of opportunities. So we intend to execute on this contract very quickly, and we stand ready to deliver. As we have more updates, we will update you within the next quarters to come.

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Operator [11]

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From Canaccord Genuity, we have Ken Herbert.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [12]

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Wahid, I just wanted to just clarify. So it sounds like with -- and Teresa, the numbers you went through, you've got effectively 100% of the revenues either that you had in the backlog coming out of the third quarter or that you've booked so far this quarter that gets you to the midpoint of the full year guidance range. So anything that is booked and shipped between now and the end of April would be upside to the midpoint. Am I understanding that correctly?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [13]

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So, Ken, that's a very good point. We basically looked at our forecast and opportunities and the orders and the timing of various hurdles that we have to go through in order to be able to ship the product and recognize revenue. So we -- for those all reasons and those -- and probably many more, we reiterated and confirmed our previous guidance of $280 million to $300 million and EPS of $0.45 to $0.65. Obviously, there's always upside and downside risks and opportunities to our forecast and our guidance. Given the nature of our business and the various -- for example, export licenses, contracting definitization and paperwork that we have to achieve and complete, we're not at a point where we feel to change our guidance. And we feel strongly and confident about our execution capability, and we are going to provide you an update as we progress through the fourth quarter.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [14]

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Okay. No, that's fair. I can appreciate there's obviously a lot of moving pieces. I guess maybe another way to ask the question is, if you look at -- because historically, the fourth quarter is a very -- sort of, you typically end the year on a very strong note. If you look at the last few years, could you just talk about maybe how much of the business you typically sort of booked and shipped in the fourth quarter? I mean, I guess what I'm getting at is, with 2/3 of the quarter still here to come, what's been a historical pattern that you've seen for fourth quarter bookings and shipments that we might think about as it applies to this year?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [15]

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Yes. So we are in a slightly -- we are in a better position this year than before, as I said, because of our visibility for the full year, midpoint of our guidance, as Teresa outlined in the details, and she can add more points to this thing. What I would tell you, though, is that our ability to book additional orders throughout the fourth quarter for the fiscal year, obviously, is there. However, as the window shrinks over the next 2 months or 1.5 months, that probability decreases as time goes forward. But the most important criteria for a lot of this is really our customers' demands and requirements and expectations. And whatever their needs and demands are take high priority to everything else that we do, followed obviously by the contractual and timing risks related to the -- what I call the logistics of transacting these contracts. So therefore, we do have visibility. And what I outlined in my remarks, you also saw a strong amount of demand for our products beyond fiscal '18. And literally, $200 million worth of potential demand request by the President's federal government year '19 budget request, that's already into the budget plans that has been submitted, and it's public now. So those things, I believe, it's very positive for fiscal '19 and beyond. As far as fiscal '18 and this year is concerned, the window is short, and we feel strongly about our ability to execute and deliver on our reconfirmed guidance. Anything you'd like to add, Teresa?

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Teresa Covington, AeroVironment, Inc. - Senior VP & CFO [16]

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Yes. Ken, one of the things that I talked about in my visibility walk-down is that we did have a high number of quarter-to-date bookings that we expect to execute. So in that, we have $38 million thus far in the quarter. So that was very strong. And last year, in the fourth quarter, those came in a little bit later. And so at this time last year, our visibility was at 94.5%, so we are a little bit higher than we were last year.

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Operator [17]

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From Piper Jaffray, we have Troy Jensen.

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Troy Donavon Jensen, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [18]

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Maybe a couple for Wahid here. It sounds like -- on that $45 million contract, it sounds like you can't give us details on when it starts and the duration of it. But then in addition to that, can you just talk about the pipeline of other international deals? Are there other opportunities of this size in the pipeline?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [19]

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Sure. So as I've said in my earlier remarks, the demand for our small UAS products is healthy and strong across the board, both from domestic customers and multiple different domestic customers. I mentioned the U.S. Army, the U.S. Air Force as well as the Department of Homeland Security. We also have very strong and broad customer demand for our small UAS internationally. This has been part of our strategy since the beginning of this business, and we have grown and delivered on that strategic objective very well, in my assessment over the last several years. And so this is one example of such opportunity. At any given time, we have a number of different opportunities globally, which I'm not able to go into more details in the specifics for multiple reasons. However, we intend to update you as we make progress. And the number of international customers for us now has grown over 40 countries all over the world. And we believe that as part of our long-term strategy for success in this business, we need to not only grow the breadth of our customer base but also the depth of our relationships with those customers, with support -- logistics support services in each country or regions of the world with larger contracts, Family of Systems sales and multiple branches of the U.S -- or the government's DoD departments. So in general, we feel very strong about our prospect for long-term growth in this business.

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Troy Donavon Jensen, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [20]

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All right. Perfect. I have one follow-up maybe for Teresa here. If you look at the EES business, I'd just be curious to know if this current run rate of $35 million to $40 million, is the business profitable? And then if so, is there any thoughts of an acceleration in demand for EES?

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Teresa Covington, AeroVironment, Inc. - Senior VP & CFO [21]

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Yes, Troy. From the EES side of business, we report down to the gross margin level. It's how we report those numbers. So we don't talk about down to the operating profit level.

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Operator [22]

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From Drexel Hamilton, we have Brian Ruttenbur.

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Brian William Ruttenbur, Drexel Hamilton, LLC, Research Division - Director of Research [23]

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Just a couple of quick questions. On your pricing of your commercial drone that you've talked about, you mentioned $16,500 per year. Can you tell us a little bit more specifics? And how many of those have you actually sold or sold that subscription to?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [24]

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Sure. This is Wahid. I'll take that question. We just launched this business, as you know. We're in the very early stages of this very long-term and large potential opportunity in terms of building that business, developing that business and ensuring that we're at the forefront of the adoption curve in that market. The price that I mentioned, $16,500, it's made up of 2 pieces. It's -- you get a full system, which is the Quantix drone with the tablet that comes along with it and the packaging that goes along with that. In addition to that, you also get a 1-year subscription for the AV Decision Support System software platform. That is the AV DSS software platform, which then the user uses the drone and the tablet to collect the data, and then for advanced analytics, they load it into our cloud and then we process the data on AV DSS and then they can get actionable intelligence so they can make more informed decisions. So the price that we've launched, we intentionally packaged and bundled this because we have learned from our customer engagements that they want a simple, hassle-free solution that they can not only buy but also use and operate. And so that price is at $16,500. Now in addition to that, you asked the question about our status and our progress. We believe that the early education of getting the customer to understand the value proposition and how to use these systems is a very significant piece of the long-term strategic get and success. And so, therefore, we're really focused this quarter on onboarding our dealer channel and making sure that the customer sees value and the end outcome or end product being actionable intelligence. And so then this will actually essentially accelerate adoption and usage and growth in that market. So that's where we're really focused on. In the next quarters, as we make progress throughout the process, we'll provide you with more updates.

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Brian William Ruttenbur, Drexel Hamilton, LLC, Research Division - Director of Research [25]

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Okay. Can you -- just as a follow-up, can you tell us the number of dealers that you have, ballpark-ish? And then the margins you expect, are they above or below average margins?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [26]

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Sure. So, Brian, in terms of the dealers, for competitive reasons, we are not disclosing the specific number of dealers that we're involved in. What I mentioned on my remarks earlier, though, is that we're primarily focused on 2 regions of the United States, the Central Valley of the California market, which is a very strong agricultural market; also, the Corn Belt of the Midwest. In those 2 markets is where we're establishing our dealer channel. We're educating, we're signing them up, we're training them and we'll be doing the onboarding process. And from there, we're going to build our base and grow this business over time. In terms of the margins of this product, as Teresa mentioned earlier, we provide margin details up to the segment levels of our businesses. We do not break down the margins relative to each individual products, primarily for competitive reasons. And at this -- we intend, long term, to make money in this business. Like all of our businesses, that is our end goal. And as you can see from the solution set, part of the sale and the revenue and profit equation is from the hardware sale up front. But really, the long-term value and revenue and profit also comes from the software services as it's referred to Software-as-a-Service business or Data-as-a-Service business. So those are the components of the economic equation related to this business, which we have believed from the beginning that represents a very large long-term opportunity for us to engage in.

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Operator [27]

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(Operator Instructions) And we do have Joseph DeNardi back online.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [28]

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Wahid, I think in the press release where you announced the JV with SoftBank, you described it as historic. I don't think the market is really viewing it as historic or understanding why it would be historic. So can you just talk about what you mean by historic and what we should expect from the joint venture in terms of shareholder value?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [29]

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So, Joe, I could not agree with you more in terms of the significance, the historical as well as strategic significance and importance of this joint venture and this launch of this business. We, as a company, have been in pursuit of this type of an arrangement in this kind of a business venture for multiple decades. And we have a tremendous track record; undoubtedly, the best track record in the world. And we're uniquely qualified in the world who can actually design, build and establish this stratospheric Pseudo-Satellite High-Attitude airplane. And we have a number of historical achievements and world records, one of which still stands after a decade plus of achieving it. And so what I mean by that is that the world's appetite for broadband communication is only going to increase and grow over time based on many, many different sources. And this platform and this solution set, we always believed, is going to be a game changer in this multi, multibillion dollar global market and of opportunity. And so not only are we uniquely qualified, we also have -- very fortunate to have a strategic partner that shares that same vision with us. They see this exactly how we've seen it for a long time. And after a -- what I call an exhaustive search, both parties came to the conclusion that this is the right partnership for us to launch this business. And I can't speculate on the market's understanding of that, but I will tell you that based on our assessment and our understanding of the opportunity and our ability to execute on this, this represents a very large significant global opportunity for us in the long run. And we're very excited on the launch of the business and as well as we'll keep you updated on our progress.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [30]

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Okay. And then just maybe going back to the first question I asked, I think, on tactical missiles and Army procurement funding, the $75 million that TMS generated last fiscal year. Should our expectation be that, that number goes down in FY '18 when you guys hopefully give us an update on that next quarter and then it goes back up in FY '19 just given the trend of Army procurement funding? Is that the expectation?

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Wahid Nawabi, AeroVironment, Inc. - CEO, President & Director [31]

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Well -- so, Joe, the way I would answer that is if I could predict the timing of that JUONS contract that we're in negotiation for the definitization, I would be able to give you a more confident answer on that. Net-net, I think the take away that I have is we have healthy, long-term demand for this product. We've established a new category of loitering munition systems in the business of munitions, which is a multibillion dollar market opportunity. We're developing multiple variants of that solution. We're making significant progress with our customers in terms of consumption and deploying them more and to the use of the users and saving lives as well as our portfolio of tactical missile system has tremendous long-term potential as a business. So with all that, I wouldn't be able to provide any more specific details on the timing of the revenue for the fiscal year and fourth quarter primarily due to the timing of the procurement process of the U.S. DoD. But in general, we feel very strong about our business and prospects for the long-term value creation.

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Operator [32]

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We will now turn it back to Steve Gitlin for closing comments.

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Steven A. Gitlin, AeroVironment, Inc. - VP Corporate Strategy, IR & Corporate Communication [33]

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Thanks, Brandon, and thank you all for your attention today and for your interest in AeroVironment. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website, www.avinc.com. We look forward to speaking with you again following next quarter's results. Good day.

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Operator [34]

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