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Edited Transcript of IMD.AX earnings conference call or presentation 19-Aug-19 2:00am GMT

Full Year 2019 Imdex Ltd Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Imdex Ltd earnings conference call or presentation Monday, August 19, 2019 at 2:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bernard William Ridgeway

Imdex Limited - MD & Director

* Paul House

Imdex Limited - COO

* Paul Anthony Evans

Imdex Limited - CFO & Company Secretary

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Conference Call Participants

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* Ben Brownette

CLSA Limited, Research Division - Research Analyst

* Huiyi Wang;CTHD Investment

* Josh Charles Kannourakis

UBS Investment Bank, Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the IMDEX IMD 2019 Full Year Results Announcement. (Operator Instructions)

I would now like to hand the conference over to Mr. Bernie Ridgeway, Managing Director. Please go ahead.

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Bernard William Ridgeway, Imdex Limited - MD & Director [2]

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Thanks, Libby. Welcome, everyone. Thank you for joining us today. It is a pleasure to present our full year results for the 2019 financial year.

Before doing so, I would like to thank our talented team at IMDEX for their hard work and dedication throughout the year. Joining me on the call today are Paul Evans, our CFO and Company Secretary; and Paul House, our Chief Operating Officer. The presentation will take approximately 15 to 20 minutes, and then we'll turn the call over to the operator to moderate a question-and-answer session.

I will begin with a brief overview of our company and technologies, however, like our previous presentations, we have included some additional information in the appendices.

Starting now on Slide 2, who is IMDEX and what do we do? We are a leading global mining-tech company, and our integrated solutions enable cost-effective operations across the whole mining value chain, from exploration to production.

On Slide 3, we have included several achievements we are proud of and would like to call out. We have been outpacing industry growth where revenue and EBITDA compound annual growth rates over the last 3 years have been 19% and 37%, respectively. This reflects the investment we have made in technology and value-added services to our client base. Our balance sheet continues to strengthen, and we have a strong net cash position. We are on approximately 70% of drilling rigs globally, which provides excellent leverage to upsell and provide a wider range of integrated solutions to our clients, and we always have a rich pipeline of new technologies.

FY '19 was no exception. It is these new technologies and end-to-end solutions which will drive sustainable revenue and earnings growth in the coming years.

Moving now to Slide 4, which illustrates what our technologies do. The graphic depicts how our cloud and cloud-connected devices and drilling optimization products improve the process of identifying and extracting mineral resources globally. We help drilling companies and resource companies. We help them move fast, hit targets and make critical decisions to increase their efficiencies.

Slide 5 provides a more detailed description about our range of technologies and what they do. However, in the words of our Global Product Development Manager, Dr. Michelle Carey, it's about drilling faster and smarter and knowing your rocks in realtime.

We have included Slide 6 to emphasize that our portfolio of technologies is applicable to the whole mining value chain at all stages, from exploration to production. I'd like to draw your attention to 3 points on this slide. IMDEX IQ -- IMDEXHUB-IQ, I should say, connectivity is a key differentiator to ensure quality, chain of custody and accurate data can be shared, analyzed and acted upon in realtime. Increasingly, our breadth of solutions across the complete mining value chain means we stand alone in the marketplace for our range of integrated solutions. No other competitor can offer this breadth or depth. Our solutions reduce the timing cost for the driller and increase efficiency of productivity and data insights for resource clients.

Applying our existing technology portfolio, engineering and product development capabilities to this broad spectrum is a key part of our strategy for sustainable growth. As we announced in our release this morning, FY '19 was a positive year with particularly strong first and fourth quarters. Slide 7 summarizes the highlights.

We achieved record revenue, which was up 12% on FY '18 and an EBITDA increase of 12 -- 23%, I should say. The directors declared a fully franked final dividend of $0.014 per share. Cash flow from operations was up 121%. We continued to strengthen our rental fleet with more sophisticated technologies that are cloud-enabled. We remain on track to commercialize our new drilling productivity technologies and achieved our first rentals of COREVIBE in early August 2019. Our Drill & Blast technologies are on track to produce revenue in second half '20.

We continued our disciplined spend on engineering and product development and are pleased to report 43% of our applicable instruments are now cloud-enabled, a 25% increase on FY '18.

We continued to streamline our operations, and in conjunction with our internal digital transformation, have improved our cost base. And importantly, we consolidated our improving safety performance.

I will now hand over to Paul to conduct the financials -- or to cover the financials in more detail.

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Paul Anthony Evans, Imdex Limited - CFO & Company Secretary [3]

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Thank you, Bernie. I'll begin on Slide 9 which shows our key metrics for FY '19.

As Bernie mentioned, we achieved record revenue of $243.7 million, which is a $0.12 increase on the previous year. EBITDA was up 23% to $52.3 million. We recorded a net profit after tax of $27.6 million, up 31% on the PCP. Earnings per share were $0.074, up 30% on FY '18. Our operating cash flow was $35.2 million, a 121% increase on the prior year, and net assets increased by 18% to $220 million.

Given our strong cash generation, the directors declared a fully franked final dividend of $0.014 per share. This is on top of the interim dividend and brings the total payout ratio for FY '19 to $0.022 per share, which equates to a dividend payout ratio of 30%.

Moving now to Slide 10. As you can see from the graph, FY '19 extended our positive trend of growth. The largest growth area was the Americas. However, all our regions increased their revenue from the previous year. Approximately 46% of our FY '19 revenue was generated in the Americas, 30% in Asia Pac and the balance in Africa and Europe. It is pleasing to note that our revenue graph -- growth, sorry, is outpacing our rental fleet growth. This is due to market adoption of our integrated solutions and cloud-connected technologies, which generally generate higher-average rental rates.

As an example, our newer-generation instruments generate 3 to 5x the revenue of older-generation instruments. It is this adoption of technology by the industry that has enabled IMDEX to deliver a revenue compound annual growth rate of 19% over the past 3 years. It is also pleasing to note the increase in activity that was evident in 4Q '19 that has continued into FY '20 and is reflected in our growing rental fleet.

Moving now to Slide 11 and our EBITDA. Again, you can see we are demonstrating a strong trend of earnings growth. As mentioned, our FY '19 EBITDA result of $52.3 million was up 23% on FY '18. This result reflected improving margins on our higher revenue result and an improvement to our cost base due to our focus on streamlining our operations for the long term and operational efficiencies from our internal digital transformation program.

The improving leverage in our business is demonstrated in the growing EBITDA percentage trend referenced in the graph. For FY '19, this has grown to 21% compared to 19% in the prior period.

Slide 12 shows the reconciliation from our EBITDA result to the net cash flow from operations. From the EBITDA result of $52.3 million, there was a net inflow of operating cash of $35.2 million, which represents an uplift of 121% on the PCP. This was after our investment in working capital, noncash items and $6.4 million of tax paid.

Our FY '19 working capital investment ratio was approximately $0.34 for every dollar of incremental revenue. This was in line with our expectations, and we anticipate a comparable ratio for FY '20.

Looking briefly now at our balance sheet as at 30 June on Slide 13. We continue to improve its strength and the strong cash generation was reflected in our net cash position which was up 194% on FY '18. Our net assets increased by $33.9 million or 18%. Our dividend recommenced, and we continued to invest in leading technologies to drive future growth for shareholders.

I would also like to note that maintaining a robust balance sheet remains a priority, and we are comfortable with our current net cash position.

I will now hand the presentation over to Paul House to provide an update on our growth strategy and operations.

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Paul House, Imdex Limited - COO [4]

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Thank you, Paul. Thank you, Bernie. I'd like to now look at our strategy and the compelling opportunities for growth on Slide 14. We remain committed to our 2-tiered strategy which expands our presence within the complete mining value chain. It includes growing our core business by enhancing our technical leadership, technical integration and increasing share of client spend and further extension into the larger adjacent mining market to build our noncyclical revenue.

Our growth in FY '19 has been driven by offering more comprehensive value through the power of IMDEXHUB-IQ and realtime intelligence to bundle solutions for our clients.

The quadrants on the slide depict our growth strategy in products and markets. Product extension with the exploration and development market is on the left, with ongoing core R&D and the development of new drilling productivity technologies, for example, COREVIBE and MAGHAMMER.

Market extension into the mining market is on the right and includes the development of new technologies including BLAST DOG for Drill & Blast applications.

Our approach opens the door to an addressable market that is far greater than our traditional business within the exploration and resource development sector. It provides more value to our clients and to the industry as a whole and importantly, is less exposed to cyclical impact.

As I mentioned on Slide 15, the ongoing R&D in our core business and particularly for connecting our technologies to IMDEXHUB-IQ is a key part of our growth strategy. The mining technology value is delivered to clients through the HUB, and Slide 16 highlights our progress in FY '19 and the increased demand from clients.

I would particularly like to draw your attention to 2 sections in this slide. First, we now have 49 of our top 100 clients connected to IMDEXHUB-IQ. And second, those clients generate 60% higher revenues for IMDEX by pulling together all our product offerings into a comprehensive realtime solution.

As a leading global mining tech company, we take all appropriate measures to protect our intellectual property. IP is an integral part of our product development stage gate process, and our IP strategy considers the technical advantage, the commercial value and the legal systems to protect our revenue.

Our ongoing investment in R&D and the world-class team we've established in the U.S.A. and Australia continue to build our portfolio of IP year-on-year. The breadth of our patent families is largely unrivaled, and our IP portfolio currently protects over 80% of current and future revenues.

It's also important to note that we've implemented IP e-training for all of our employees, and in FY '19, 97% had successfully completed this training.

We've recently released an update on the development of our technologies, so I will not spend too much time on Slide 18. I would like to highlight, however, that we continue to make strong progress and we have received some excellent feedback from the client trials.

These initial COREVIBE client trials in Australia are now complete, and pilot production has now commenced. Pleasingly, we also have the first COREVIBE units on commercial rent.

In relation to MAGHAMMER, the development at our test site in New Zealand is progressing well, and we intend to commence client trials in the second half of FY '20. You will note at the bottom of the slide, we anticipate exercising our option to acquire Flexidrill and its COREVIBE and MAGHAMMER technologies in mid-December 2019. Further information relating to the transaction and its consideration are set out in our ASX announcement on 18 January 2018.

We have updated our road map for COREVIBE and MAGHAMMER on Slide 19 to include the commercial expansion of COREVIBE in Australia and the U.S.A. and the commissioning of our production facility in the U.S.A. We are hitting our milestones, and we remain on track to generate additional revenue in the current financial year.

Moving now to our mining technologies on Slide 20. Our Drill & Blast project is one of the most exciting developments we have had at IMDEX. The project is advancing well, and we continue to enjoy the strong support of our METS industry partners. We are currently conducting BLAST DOG trials in precious and base metals together with bulk commodities with global resource companies.

To date, successful trials have been undertaken in Nevada and Queensland. More trials are planned in Chile and Australia in the first half of this financial year. The potential to deliver value to our clients through blasting efficiency, increased recoveries and downstream efficiency in production is substantial.

Similarly, on Slide 21, we have updated our development for BLAST DOG. Again, we are hitting our milestones and anticipate generating revenue in the fourth quarter of FY '20.

I will now hand back to Bernie to comment on the outlook.

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Bernard William Ridgeway, Imdex Limited - MD & Director [5]

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Thanks, Paul. As the title of Slide 23 suggests, we are confident the outlook for IMDEX is positive. Mining production levels and commodity prices support further investment in the minerals industry. The major and intermediate resource companies are increasing expenditure to replace declining reserves. New discoveries are likely to be under cover and at depth, requiring more drilling and longer development times. Resource companies are embracing innovation and new technologies to lower costs, increase safety and achieve greater productivity.

In relation to the juniors, conditions have improved due to the stronger gold price, and as recently reported by Bloomberg, there has been an uplift in capital raisings globally.

Collectively, the juniors represent approximately 20% of IMDEX' total revenue. At a company level, we have had a positive start to FY '20 and the increasing activity seen in the fourth quarter of FY '19 is reflected in our growing rental fleet.

Moving now to the key points we would like to leave you with on Slide 24. Our company is well positioned to deliver attractive returns to shareholders. We have a strong financial platform and numerous competitive advantages. We are growing at above-industry growth rates and are leveraging our global presence. We are introducing new technologies to benefit from industry dynamics where resource companies are increasing their budgets, drilling deeper and placing greater value on reducing costs, increasing productivity and ore body knowledge.

In that regard, we have our first COREVIBE units on rent and remain on track to commercialize MAGHAMMER in second half '20. We're also on track with our Drill & Blast technologies to grow our noncyclical revenue.

In closing, we have a positive outlook for growth and are genuinely excited by the opportunities to develop and introduce our new technologies to our clients and deliver long-term attractive returns to shareholders.

That completes the formal part of our presentation, and we're now happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Josh Kannourakis from UBS.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [2]

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Just first question. Just on cost control. So cost control in the period was pretty -- was very strong. And obviously, it got going -- you had a step-up in '18. But can we just talk a little bit about how you expect that moving forward and just some of the incremental cost-in and also cost-out, as you talked previously, you've got going into FY '20?

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Paul House, Imdex Limited - COO [3]

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Hi, Josh, it's Paul House here. So I think the result that you see is a reflection of our IMDEX digital transformation projects coming through and the systems we've managed to deploy, and we've talked about those in the past.

We've also talked about the refinement we've made to our supply chain process and the focus we've made on our operations and being match fit in that area. So we're pleased with the progress. We still have some runway to go in terms of how we'd like those projects to complete. So we see that being sustained and improved as we move forward into FY '20 and beyond.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [4]

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Okay. Got it. And just second question just in terms of the increase in the average revenue per tool. So 30% obviously a very large increase in the period. Can we talk a little bit about just what the annualization of that is or is that -- and a continuation of that benefit there is into '20? And then maybe just a little bit more detail in terms of -- you sort of broadly talked to it, but more detail in the sort of percentage of fleet and tools out there that are -- have been enabled as a total number?

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Paul House, Imdex Limited - COO [5]

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Right. So we -- that increase in average revenue per tool, which has been on the out since we brought higher-value tools into our fleet. So for example, our gyro is growing year-on-year, 36% over prior year. So you're starting to see the benefit of that coming through.

We have a number of other tools in the pipeline that continued to change that portfolio mix to the positive. So we expect to see that continue. All of those new tools that we are putting into the market have been enabled, and we -- so you'll see the other statistical data that we brought out on those HUB-connected tools and the benefits that we get from those, we expect to build on that over FY '20 and beyond.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [6]

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Got it. And I think you mentioned obviously the number on the 43% of the applicable tools. How many of the tools in the fleet are I guess applicable to this sort of -- to this instrument?

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Paul House, Imdex Limited - COO [7]

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So the exact number, we don't -- we haven't continued with the tool chart, as you know, Josh. So we're seeing that applicable instrument number increase when each volume come out. But the exact number, we haven't put out there as we will remove that tool chart from our fleet.

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Bernard William Ridgeway, Imdex Limited - MD & Director [8]

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Josh, as an overall comment though, you will see it continue to increase as all the tools drop off. And I was more talking that core orientation instruments there. The new core tools going out have been enabled. And yes, over the next 2 or 3 years, you'll expect that every tool we have out there will become enabled in that space.

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Operator [9]

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(Operator Instructions) Your next question comes from Stella Wang with CTHD Investment.

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Huiyi Wang;CTHD Investment, [10]

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I've got 2 of them. Firstly, on the transaction details with Flexidrill. The original announcement mentioned a NZD 22 million consideration that's to be certified with the stock price appreciation from the shares you guys issued or from 10% split after revenue from the new products. Could you guys give us some update on how many shares issued? And how you got the -- this NZD 22 million will be satisfied?

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Bernard William Ridgeway, Imdex Limited - MD & Director [11]

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Yes. Look, that -- I mean that's a matter of record. So the NZD 22 million will largely be satisfied from that 10% gross royalty. So as we rent tools to the market, 10% of that gross revenue goes to the previous owners of Flexidrill. And the number of shares on issue would be...

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Paul Anthony Evans, Imdex Limited - CFO & Company Secretary [12]

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The number of shares that will be issued if we progressed the deal would be NZD 8 million of IMDEX shares.

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Huiyi Wang;CTHD Investment, [13]

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Okay. And that royalty stream go on for -- there's no limit to how many years that's going on?

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Bernard William Ridgeway, Imdex Limited - MD & Director [14]

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I mean the whole transaction is a $40 million transaction. So by the time we exercise, it should be around $18 million would have been paid, with $22 million outstanding. So once the $40 million consideration has been reached, that royalty drops away.

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Huiyi Wang;CTHD Investment, [15]

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Okay. Second and last question. In terms of starting production in the U.S., do you guys have a factory over there? Could you give us any idea of the CapEx you have in mind for that?

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Paul House, Imdex Limited - COO [16]

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Yes. Certainly, Stella. So we have a North American headquarters within Salt Lake City, and we have a strong R&D facility in San Luis Obispo. We are setting up the production facility within our existing North American operations, so we don't need any additional CapEx or property. We are well advanced in that process. There isn't a material capital cost for us to establish that production facility.

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Operator [17]

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(Operator Instructions) Your next question comes from Ben Brownette with CLSA.

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Ben Brownette, CLSA Limited, Research Division - Research Analyst [18]

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Bernie, can you talk us through the retirement? And I guess the question that everyone will ask about the timing and new products and what's going to happen after that. Is there anything that you can -- can you get ahead of those sort of questions for us, maybe?

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Bernard William Ridgeway, Imdex Limited - MD & Director [19]

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Yes. Look, it's pretty simple, Ben. I'm 65 years of age. I'm 66 this November. I will have been in the IMDEX chair, I'm in my 20th year. We have a strong team, senior team internally, and we have -- the company has never been a better place in terms of its financial capability and as well as its technology portfolio including those new technologies coming through. So it's a great time to look at stepping down. So I've given the Board plenty of notice so that they can run a process that's controlled, that's planned and the transition will be smooth. So we're doing it in the right way. And so I intend to remain an equity investor in this company, and I think it has fantastic upside. But after 20 years, it's time to hand over the baton to someone a bit younger.

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Ben Brownette, CLSA Limited, Research Division - Research Analyst [20]

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Yes. Fair enough. And can you just maybe walk through some of the numbers in the second half of fourth quarter, especially in APAC, sort of seems the underperformer, and I was just a little bit surprised. But I don't have the numbers in front of me anymore as to what I was thinking about individually. But was there some weakness there that you didn't expect in terms of what you've seen in the last couple of months? How is that different geographically, and when you sort of dig through those numbers on a sort of a constant currency basis as well, can you dig a little bit into Americas?

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Paul Anthony Evans, Imdex Limited - CFO & Company Secretary [21]

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[Okay. I think if you were in this thing, no doubt], I gather on that.

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Ben Brownette, CLSA Limited, Research Division - Research Analyst [22]

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Yes.

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Paul Anthony Evans, Imdex Limited - CFO & Company Secretary [23]

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Yes. Okay. So the revenue profile on -- obviously, it was up in all regions. And I think as a general comment, there is a currency benefit coming through, as you call out. The Asia Pacific was reasonably strong for us. It's most only South America that is a little bit soft at the moment. North America is strong with those new larger contracts from Newmont and Barrick coming through.

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Ben Brownette, CLSA Limited, Research Division - Research Analyst [24]

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So I'm sorry, if I'm -- as it may seem I'm not reading this correctly, but it looks like APAC was down a little bit in the second half. And I've noticed some of the conversations we've had, I thought -- my inference was that APAC was kind of going awry in the second half.

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Bernard William Ridgeway, Imdex Limited - MD & Director [25]

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Yes.

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Paul Anthony Evans, Imdex Limited - CFO & Company Secretary [26]

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Yes. Now APAC as a region is going well. I think to -- it was a little bit softer on the fluids side. But look, it is -- the half as a total -- or particularly in the last quarter, the run rate that we're seeing moving into first quarter '20 is pleasing.

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Bernard William Ridgeway, Imdex Limited - MD & Director [27]

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Yes. So I mean just an overall number, Ben, I think we've made a comment that the fourth quarter was our second strongest quarter on record. So yes, we're running a global business and we have seasonality. We have competition. We have all sorts of things going on in the business, but you've seen an increase in GDP, and you've seen an increase in EBITDA, so -- in terms of margins. So there aren't too many negatives there.

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Ben Brownette, CLSA Limited, Research Division - Research Analyst [28]

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Yes. And then what about just in terms of things turning around? Obviously, we've seen Canada raisings pick back up quite sharply and moving in the right direction. What are you seeing on the ground over there?

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Bernard William Ridgeway, Imdex Limited - MD & Director [29]

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Yes. Paul's probably better to answer that question, but we had the North American guys on the line late last week. And there is certainly more activity coming through in the juniors sector that's quite noticeable. So it's starting to reflect from the increased raisings as a result of the falling gold price. Paul, do you want to answer that?

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Paul House, Imdex Limited - COO [30]

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Yes. Look, I think that's right, Ben. The outlook for the juniors certainly seems to be more positive. There's commentary around the gold price actually being a positive influence in all of that. Certainly, the conversations that we have on the ground, there are plans as opposed to uncertainty. So as we see that roll through to putting dollars in the ground, we think that outlook in the area is fairly positive.

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Operator [31]

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There are no further questions at this time. I'll now hand back to Mr. Ridgeway for closing remarks.

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Bernard William Ridgeway, Imdex Limited - MD & Director [32]

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Many thanks for dialing in to this call. But before finishing, we'd like to leave you with the following comments.

Our balance sheet is in good shape, and we are well placed to support the growth of our business. We have continued our investment in technology development and have a strong market position. Resource companies and service providers are investing in technology to reduce costs and increase efficiencies, and IMDEX is well placed to deliver technology solutions to the global minerals industry.

We have considerable operating leverage as a result of investing in initiatives that are anticipated to provide sustainable revenue and earnings growth, and we believe the cycle has some years to run and look forward with optimism as we apply our strengths to increase revenue, profits and shareholder returns.

Thank you again, and we're looking forward to seeing many of you during the week.