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Edited Transcript of FEIM earnings conference call or presentation 12-Dec-18 9:30pm GMT

Q2 2019 Frequency Electronics Inc Earnings Call

Jan 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Frequency Electronics Inc earnings conference call or presentation Wednesday, December 12, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Martin B. Bloch

Frequency Electronics, Inc. - Executive Chairman & Chief Scientist

* Stanton David Sloane

Frequency Electronics, Inc. - President, CEO, COO & Director

* Steven L. Bernstein

Frequency Electronics, Inc. - CFO, Secretary & Treasurer

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Conference Call Participants

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* Brett Reiss

* Sam Rebotsky

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Presentation

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Operator [1]

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Greetings, and welcome to the Frequency Electronics Second Quarter Fiscal Year 2019 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

Any statements made by the company during this conference call regarding the future constitute forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements inherently involve uncertainties that could cause actual results to differ materially from the forward-looking statements. The factors that will cause or contribute to such differences are included in the company's press releases and are further detailed in the company's periodic report filings with the Securities and Exchange Commission. By making these forward-looking statements, the company undertakes no obligation to update these statements for revisions or changes after the date of this conference call.

It is now my pleasure to introduce your host, Martin Bloch, Executive Chairman of the Board of Frequency Electronics. Thank you. You may begin.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [2]

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Good afternoon, everybody. I have here with me Stan Sloane, who's Chief Executive Officer of Frequency Electronics; and Steve Bernstein, CFO. And we'll set it up that Steve will give the factual down run, and after that, I, Martin Bloch, and Stan Sloane will make some appropriate comments, and then open the floor for questions and answers. When you do ask your question, it would be very helpful if you address it to either me, Martin Bloch, Stan Sloane or Steve Bernstein.

Now without further ado, Steve, slowly working through the factual part about Frequency.

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Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [3]

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Thank you, Martin, and good afternoon. For the 6 months ended October 31, 2018, revenues from commercial and U.S. Government satellite programs increased to $11.3 million compared to $9 million for the same period of fiscal 2018, and accounted for approximately 49% of consolidated revenues compared to approximately 42% during the same period in fiscal 2018. Revenues on these contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI-New York segment. Revenues from nonspace U.S. government DoD customers, which are recorded in both the FEI-New York and FEI-Zyfer segments, were $10.4 million compared to $7.7 million in the same period of fiscal 2018, and accounted for approximately 45% of consolidated revenues compared to approximately 36% last year.

Other commercial and industrial revenues declined to $1.4 million compared to $4.7 million in the prior fiscal year, and accounted for approximately 6% of consolidated revenues, compared to 22% for the same period in the prior year. Intersegment revenues are eliminated in consolidation.

For the 6-month period ended October 31, 2018, the gross margin rate increased to 35.8% from 31.5% over the same period in fiscal 2018. The increase of both the gross margin and gross margin rate was due to increased revenues, lower repair cost and favorable product mix.

For the 6-month ended October 31, 2018 and 2017, selling and administrative expenses were approximately 22% and 24%, respectively, of consolidated revenues. Increase in SG&A expenses during the 6-month ended October 31, 2018, primarily consisted of additional personnel-related expenses and professional fees, partially offset by reductions in other SG&A accounts.

Research and development expenditures represent investments intended to keep the company's products at the leading edge of time and frequency technology and enhance future competitiveness. R&D expenses were $3.3 million and $3.4 million for the 6 months ended October 31, 2018 and 2017, respectively. The R&D rate for the 6-month period ending October 31, 2018, was 14% compared to 16% of sales for the same period of the previous fiscal year. Customer-funded R&D development recorded in revenues is expected to add substantially to overall R&D activity in the full current fiscal year.

The company had increased revenue, gross margin and gross margin rate in the 6 months ending October 31, 2018, resulting in a reduced operating loss of $146,000 as compared to a loss of $1.7 million for the same period of the preceding fiscal year.

Investment income is derived primarily from the company's holdings and marketable securities. Other income for the 6 months ending October 31, 2018, was $277,000, compared to $1.1 million last year. Last year's other income reflected a gain of approximately $1 million when the company divested all its holdings and equity securities in its investment account. This yields a pretax income of approximately $131,000 compared to a pretax loss of approximately $557,000 for the same period last year.

For the 6 months ending October 31, 2018, and 2017, the company recorded a tax benefit of $23,000 and $98,000, respectively. The 2018 tax benefit of $23,000 included nominal accruals for unrecognized tax benefits. Consolidated net income from continuing operations for the 6 months ending October 31, 2018, was $153,000, or $0.02 per diluted share, compared to a loss of $459,000, or $0.05 per diluted share for the same period of the prior year. Our fully funded backlog at the end of October 2018 was $38 million, up from $21 million at the end of October 2017. The company's balance sheet continues to reflect the strong working capital position of over $47 million on October 31, 2018, and our current ratio of over 12:1. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and the foreseeable future.

I will turn the call back to you, Martin, and we look forward to your questions later.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [4]

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Hello, everybody, again. I just want to tell everybody this, I'm very excited about the FEI's status at this time for the following very exciting developments. We had the largest amount of outstanding proposals in the history of the company, and what's more important is that they are uniquely related to our expertise in precision time and low noise and low g-sensitivity technology, and those proposals are for military space, commercial space and DoD programs. And as you probably realized, that the narrow technology and this -- there's a certain level of expertise and people you've maintained no matter what level of business, the quality control, all our research laboratories, all our support testing facilities are pretty much the same that we do $10 million worth of business or if we do $60 million worth of business. So this time, we have a great opportunity to significantly increase our top line. And obviously, that makes me very excited to look forward to increase in revenue and increase in profitability for this and for the common future on this. But also, and I'm sure Stan is going to emphasize, that is very important, in addition to the investment of FEI in the IR&D for future products, on this we have experienced enormous investment in customer IR&D in the development of the next-generation product for precision timing for all of those critical requirements for both the military, Homeland Security and all levels of endeavor that require secure communication, navigation and command-and-control. It's very exciting times, and I'm happy to be a part and participating in this opportunity that Frequency is seeing. I'd like to turn it over to Stan, who has a hard job to get everything in shipshape for the future.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [5]

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Thank you, Martin. Hello, everybody. I'm pleased with the progress this quarter and for the first half of the fiscal year. We continue to improve operating efficiency and aggressively manage costs, but that's something we always need to do. More importantly, we've seen a tangible shift in our market opportunities these last few months. We have new business activity we're experiencing is unprecedented, and outstanding proposals are at an all-time high. The amount of research and development we have underway is also the highest ever. That includes both customer-funded R&D as well as our internally funded efforts. As a result of all that activity, we've hired several technical and manufacturing personnel recently to support all the projects. This bodes extremely well for future growth. While we always strive to improve operating efficiency, it's the opportunity for top line growth that is the most exciting and will have the largest eventual effect on bottom line performance. In my point of view, FEI's future has never been brighter.

With that, I think we can take questions.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [6]

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I would just like to add one more comment. In addition to the engineers and physicists that we have hired, we are in continuous search for adding additional expertise to assist us in the exciting development of programs, and I'm sure we're going to be successful. We have a very exciting next-generation timing and development, and that excites physicists and engineers to be part of that exciting new development. Please go ahead with your questions. Please address it to either me, Stan or Steve.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Sam Rebotsky from SER Asset Management.

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Sam Rebotsky, [2]

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You seem to be doing the right thing. Could you sort of address the bids last quarter? I guess, Stan spoke of $170 million, $180 million bids out there, and you've indicated that it's larger, so you -- could you quantify that number?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [3]

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I can tell you it's significantly higher right now than that number. And what is more exciting is that the majority of our proposal is in an area where we have unique expertise, if not the best expertise in the world.

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Sam Rebotsky, [4]

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Okay. And as far as you referred to the foreign subsidiary, which will ultimately have a positive effect, do you expect that to happen? Is that to be sold? Is that to be eliminated by the fourth quarter? And what -- can we quantify what kind of number that is? Or how that improved profitability or -- at this point?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [5]

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Yes, Sam, we're not in a position to give you specific numbers. We're evaluating our options. I anticipate we'll make a decision in the next couple of weeks. And then the timeline for implementing it would be relatively near term.

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Sam Rebotsky, [6]

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Okay. I know this is a difficult thing, but the -- I guess, there's going to be a satellite launch, December 18 by Lockheed, and they indicated that as far as that the accuracy and up to 8x improved anti-jamming capabilities, it sounds exciting and it's this Air Force Lockheed comp and -- which is a potential $7.2 billion. Is there any thoughts about that or...

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [7]

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Well, I can tell you Sam that we're actively participating in the next phase of that program and the next program, the $7.3 billion, is a funded program for GPS 3 follow on. What is it? 11 through...

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [8]

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32.

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Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [9]

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22 satellites.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [10]

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11 through 30 -- 22 satellites, and we're actively involved in that area and it's very exciting to us.

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Sam Rebotsky, [11]

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It sounds exciting to me...

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [12]

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Me too.

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Sam Rebotsky, [13]

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Of course, they expect to launch December 18, so that sounds good.

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Operator [14]

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Our next question is from Brett Reiss from Janney Montgomery Scott.

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Brett Reiss, [15]

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When I -- I'm looking at your website on career opportunities as we speak, and there's -- you're looking for -- to fill 12 or 13 different types of positions. You said you've hired a lot of people because of the greater amount of business that you anticipate. Are all of these openings still -- are you still looking for another senior physicist, another senior...

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [16]

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Yes.

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Brett Reiss, [17]

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Okay. So you must think the pipeline looks pretty robust if you have needs for all these different categories, correct?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [18]

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I'll make it more positive. We are -- we have been funded by our customers for the advanced development of the next-generation atomic clocks, and we need those people now.

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Brett Reiss, [19]

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Okay. Is there a problem in finding enough of these qualified people for the criteria that you need for your business?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [20]

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It's always -- we have been very fortunate over the existing on Frequency, we've had longevity, and we've had, very fortunately, a good team. So we are very selective, and it's going to take effort, but we'll find them, because it's a very attractive program and exciting for young and experienced physicists to be part of it. So I'm sure that we will be able to acquire them.

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Brett Reiss, [21]

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Right. With the existing resources and talent that you have in place, are there any constraints on being able to fill orders that you might get in the near- to intermediate-term future?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [22]

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No, I think we're in good shape on that area.

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Operator [23]

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Our next question is from [Michael Asmer], a private investor.

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Unidentified Participant, [24]

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Anyone can answer this. How is Zyfer doing with the spoofing and jamming and all that stuff?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [25]

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Zyfer's doing well. The number of opportunities there is exciting like everything else. In summary, doing good.

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Unidentified Participant, [26]

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Can you give the -- are you able to give a breakdown of the revenue on that?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [27]

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Not at this time.

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Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [28]

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No.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [29]

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Not at this time, Mike. And we are expanding the same technology not only for terrestrial, but for mobile environments, such as remote pilotless vehicles and airplanes. And so they are very exciting in pursuing this type of opportunities, which is a combination of FEI's unique low g-sensitivity, precision time and their expertise in -- and making sure that they can overcome the jamming and spoofing of GPS signals. So it's a good marriage.

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Unidentified Participant, [30]

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All right. That GPS 3 contract with Lockheed, that can last a long time, correct?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [31]

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Yes. It's a long time, and it has also extended opportunities, as Stan called to my attention that we might be allowed to participate in the European expansion of the GPS system. So it's very exciting.

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Unidentified Participant, [32]

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One final question. How many people do you need by -- for this -- the rest of the fiscal year?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [33]

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Probably, about half a dozen. Half a dozen of the right people. It's not the quantity, it's very specific people to be able to execute on this advanced development. We're trying to build a clock that's 10x better than we have supplied before. We have proven the theory, now we have to implement it, but it takes a skilled team to get it done.

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Unidentified Participant, [34]

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All right. I think you're about 1/4 to 1/3 of the way into that $37 million contract, or -- on the 25%, how is that coming along? The technologies? Everything working on schedule?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [35]

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Yes. Stan?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [36]

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Yes. Technically, our progress on that's been pretty substantial. I'm actually very pleased. I think we're hitting all the milestones right on time. So that's going pretty well.

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Operator [37]

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(Operator Instructions) If there are no further questions, I'd like to turn the floor back to management for any closing comments.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [38]

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I'm very glad we were so informative that we gave you all the information. If anything, you have a question, you can always call Steve, me or Stan at any time. And at this time, I would like to wish a happy holiday season to everybody and express my many thanks to the FEI team that is doing a great job to take us to the next plateau. Have a happy new year, and goodbye.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [39]

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So long, everybody. Thank you.

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Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [40]

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Bye.

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Operator [41]

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This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.