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Edited Transcript of MDI.TO earnings conference call or presentation 10-Sep-19 1:00pm GMT

Q1 2020 Major Drilling Group International Inc Earnings Call

Moncton Sep 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Major Drilling Group International Inc earnings conference call or presentation Tuesday, September 10, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Denis Larocque

Major Drilling Group International Inc. - President, CEO & Non-Independent Director

* Ian Ross

Major Drilling Group International Inc. - CFO

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Conference Call Participants

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* Ahmad Shaath

Beacon Securities Limited, Research Division - Research Analyst

* Daryl Young

TD Securities Equity Research - Mining Research Associate

* Eric Benjamin Swergold

Firestorm Capital, LLC

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the first quarter 2020 results conference call.

I would now like to turn the meeting over to Denis Larocque, President and CEO. Please go ahead, Mr. Larocque.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [2]

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Thank you. Good morning, everyone, and welcome to Major Drilling's conference call for the first quarter of fiscal 2020. With me is Ian Ross, our Chief Financial Officer. You should have received a copy of our results last night. If not, you can go to our website at majordrilling.com.

Before we start, I'd like to draw your attention on the first slide on the picture. The -- what you see on that picture is one of our 2 specialized rigs that we bought this quarter. It is a deep hole with hands-free rod handling. This is one of our -- it went right away to one of our senior customer's site for which we purchased. Should be there for a while. And this is just an example of our financial strength and being able to respond to senior customers' need as they have request, and we were able to bring this rig right away for a long-time customer.

Now let's get to the call. And before we start, as usual, I'd like to caution you that during this call, we'll make forward-looking statements about future events and future performance, and these statements are forward-looking in nature and actual events or results may differ materially.

I'm quite pleased with the progress we've made in all of our regions this quarter. Each region delivered good increases in revenue as compared to last year and marked improvement in profitability. In most of our markets, we've been able to grow our market share due to our specialized drilling expertise, our innovative solutions, our safety culture and our customers' appreciation of our financial strength.

We added several new contracts with senior and intermediate companies, which have more than offset a reduction in our work from junior customers due to financing constraints.

This quarter's performance demonstrated the company's operational leverage as good revenue growth of 19% translated into 78% increase in EBITDA. Improved productivity, better pricing, lower administrative costs are responsible for most of the improvement in our net earnings this quarter. We continue to reap the productivity benefits from the tools we've developed over the last couple of years and from our enhanced training and skilled labor force.

The company maintained through this a strong working capital position with net cash, net of debt, staying relatively flat at $9.7 million while during the quarter, we added 7 new rigs to our fleet, land and support equipment with 2 new -- 2 of our new rigs being truly specialized as I mentioned at the start of the call and going to service new contracts with senior customers.

Ian will take you through a summary of our quarterly results, and I'll come back to talk about the outlook.

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Ian Ross, Major Drilling Group International Inc. - CFO [3]

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Thanks, Denis. Total revenue for the quarter was $117.5 million, up 19% from revenue of $98.5 million recorded in the same quarter last year. The favorable foreign exchange translation impact for the quarter, when comparing to the effective rates for the same period last year, is estimated at $1 million on revenue, with a negligible impact on net earnings.

The overall gross margin percentage for the quarter was 26.1% compared to 23.8% for the same period last year. Price increases and productivity improvements had a positive impact on margins.

G&A costs were down $600,000 or $11.8 million when compared to the same quarter last year, despite a higher volume of activity. The decrease was driven by the shutdown of operations in Burkina Faso as well as the impact of the implementation of IFRS 16, which reclasses our lease expenses to depreciation.

The provision for income tax for the quarter was an expense of $2 million compared to an expense of $1.2 million in the same quarter last year. The low effective tax rate for the quarter was mainly caused by the utilization of nontax affected losses in certain jurisdictions. This combined for net earnings of $6 million or $0.08 per share for the quarter compared to a net loss of $2.5 million or $0.03 per share for the prior year quarter, a very positive quarter illustrating our operational leverage.

In terms of our financial position, we continue to have one of the most solid balance sheets in our industry. During the quarter, our net cash position, net of debt, remained relatively flat at $9.7 million as net working capital increase related to increased activity and capital expenditures were offset by cash generated from operations. The company spent $10.6 million on capital expenditures, adding 7 new rigs, land and support equipment. 2 of the drills are highly specialized and went to service new contracts with senior customers. We disposed of 7 older rigs, in line with our strategy of improving our fleet and services. Total rig count remains flat at 601.

New breakdown of our fleet and utilization is as follows: 293 specialized drills at 39% utilization, 137 conventional drills at 27% utilization and 171 underground drills at 49% utilization for a total of 601 drills at 39% utilization. As we mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Therefore, we should also give you the breakdown of our revenue by type of work for the quarter: 62% specialized, 11% conventional and 27% underground.

Also seniors and intermediates represented 89% of our revenue in Q1 while juniors represented 11%. Revenue from the seniors and intermediates has increased 39% versus the same quarter last year mainly due to market share growth. Our highly skilled labor force, stringent safety culture and financial strength have provided this opportunity for this growth.

Juniors continue to have difficulty accessing capital. However, with gold prices on the rise, there is renewed optimism this will improve. In terms of commodities, gold projects represented 53% of revenue while copper was at 23%.

With that overview on our financial situation, I'll now turn the presentation back to Denis to discuss the outlook.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [4]

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Thanks, Ian. Going in our second quarter, we expect activity levels to stabilize somewhat while adding a few rigs on existing contracts. As we look forward, the fundamentals driving the business is continuing to improve and senior and intermediate mining companies should continue their drilling activity for the foreseeable future.

Prices for drilling services continue to improve, although these improvements are always initially offset somewhat by an increase in labor and mobilization cost. The price of gold, which typically makes up half of our activity levels, has increased by 15% over the last 3 months.

With the Precious Metal Summit and the Denver Gold Show happening this week, we could see a pickup in gold financings in the coming months as these events bring together the investment community and most of the gold companies, seniors and juniors. Please note that the potential increase in financings will not translate into immediate drilling activity as it usually takes a few months to get the drilling campaign organized.

In regards to base metals, due to the economic uncertainty, copper prices have been depressed down some 5% over the quarter. Despite this, we have seen increased activity from senior copper producers as they need to replenish their reserves as they face a supply deficit in the coming years. The same applies to metals like nickel and zinc, which are also facing looming supply shortages.

We continue to strengthen our relationships with many of our senior customers, as Ian alluded to. And while junior funding has been slow, we have built strong relationships with well-funded juniors looking for truly specialized drilling.

We are very well positioned at this point in time as the leader in specialized drilling. With our financials -- with our strong financial position, it allows us to continue to improve our fleet to meet our customers' demands in terms of rigs, rod handling, mobile equipment and technology, which is key to our success to remain the leader in specialized drilling.

Also, having the financial resources and the best equipment allows us to attract the best people at a time when we are going into a labor crunch in our industry.

Finally, our Annual General Meeting will be held on Thursday this week, September 12, at 3:00 p.m. Eastern at McCarthy Tetrault's office in Toronto, which is situated at 66 Wellington Street West, Suite 5300. We hope to see you there.

And On that note, Alina, we'll open -- we'll be open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Daryl Young with TD Securities.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [2]

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Just wondering if you guys can give a bit more color on some of the new contract wins that you had in the quarter in terms of are they predominantly specialized deep holes or are they mine site production drilling and maybe what the longevity of these contracts is.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [3]

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Yes. For the most part, they were coring exploration for senior customers. Some of it was underground as well. So -- and well, we added a few rigs to the drill and blast section as well, so a little bit of everything, but I would say predominantly related to exploration. And yes, they are -- although they're not -- at this point, we're not signing multi-year contracts, but they are more than just for a couple of months like you might see sometimes with juniors. They're with a senior that has a campaign ongoing.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [4]

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Okay. Great. And then margins were -- definitely showed some improvement this period, and they were stronger effectively across all jurisdictions. Could you maybe give a just a little bit of color on where that's coming from and how sustainable that pricing is?

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [5]

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Yes. I would say half of it came from price increases and half of it came from productivity improvement. We keep looking for ways to improve productivity, and basically, we're making good headway that way. But I mean there's also pricing. Pricing is coming up in many of the regions where -- not all regions, some regions are more competitive than others still. But in most cases, we're seeing pricing improve. And in terms of going forward, like we said, we -- if volume keeps increasing, then we should see pricing continue to improve. Although as we said, there's always a bit of -- there's cost increase that -- as well that comes in. But net-net, we should be able to make some gains as we progress to an upturn.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [6]

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And so looking at margins now, we're kind of on track potentially for 24-ish percent full year gross margins. Is that sort of a reasonable baseline level that you guys think can be supported even with some labor cost increases?

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [7]

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Yes. It's always the -- in terms of what the -- where the year is going to end. It always hinges on what happens in the third quarter as well. How quick or how long they keep drilling towards Christmas and how quick they come back, that's what's going to determine where we land for the year. But in terms of what we had this quarter, I think it's a base that we should be able to maintain. Now with the caveat that we are operating in the elements so sometimes -- there's always potential either weather or operational issues, but those can go both ways. They can work in our favor or against us. But to your point, I think the level you're seeing there, I think, should be a good level to maintain.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [8]

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Okay. Excellent. And then in terms of the base metal work that you're doing, obviously, there's lots of macro headline risks currently. But is the majority of the base metal work related to mine site drilling that is likely going to -- is not going to get cut because it's on long-life large assets?

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [9]

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Yes. You're right. There's really not a lot of junior base metal work we're doing now. Most of the junior work we're doing is gold related. And the work we're doing for copper is with senior copper producers that -- those are basically ongoing on mine site, and it's basically the drilling is required as long as the mine is going to operate. So the work we have with base metal is pretty stable, but there's upside on there. And I truly believe that we will see an uptick down the road. I mean it's all a question on timing, but there's not a lot of pure exploration being done on base metal at all at the moment.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [10]

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Okay. And then in terms of -- I know market share is a bit of a challenging thing to pinpoint. But could you just remind us what percent of the market you guys represent as well as some of the other large players like Boart? And then maybe have you seen any of the smaller players falling away as we've gotten later into this downturn of the cycle?

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [11]

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Yes. The market share, it's really tough to in terms of -- to come up with a percentage. I mean it's so fragmented, it's a highly fragmented industry. Even if you -- I bet to venture if we group the top 5, we'd probably not even reach 40%. So it's highly fragmented. The competition tends to be localized. In every jurisdiction where we operate, we have different a competitor. So it's tough to answer what our market share would be. But in terms of the small players, we haven't seen a lot of players move out of the industry, but there are a lot of players that are struggling financially. There is -- it's been a very, very tough downturn, and it has taken its toll on a lot of companies in terms of being able to invest in your fleet and also gathering up debt on your balance sheet, which you're going to have to pay down as things recover, but we haven't seen a lot of players fall away at this point.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [12]

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Okay. And then maybe just one last one. In terms of the pipeline of work, I know we're still in the early stages of planning for 2020. But I'm just wondering if you're having any more conversations this year, than maybe in the prior year on longer-term work heading into the next year.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [13]

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I wouldn't say we're having more conversations at this point for next year than we were maybe at the same point last year, but we are having lots of conversations. It's just that last year, many of those didn't necessarily pan out as much as we thought they would just because mining companies were still being prudent. But at one point, they're going to have to get going. So again, it's a question of will they -- will everything that is being talked about right now come to fruition when we turn in January, we don't know. But there is still a lot of discussion happening for projects for 2020.

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Operator [14]

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(Operator Instructions) The next question is from Eric Swergold with Firestorm Capital.

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Eric Benjamin Swergold, Firestorm Capital, LLC [15]

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I was very pleased with the quarter in terms of the operating leverage you achieved this early in the new upcycle for the industry. So congratulations on that. I have a couple of questions. In terms of capital allocation, I know as the cycle begins, it requires you to put more cash into the field as rigs start up working again. But can you talk about the potential to use excess cash towards potentially acquiring weak competitors, if there are some, where the geographical overlap isn't too tight, but maybe there are some economies there? And then secondly, you did an excellent job during the downturn in keeping the share count under control of not issuing shares as the miners did. Is there the potential as the cycle turns in our favor to perhaps put a little bit of the money into your own shares and do a modest buyback as cash flows improve through the cycle?

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [16]

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Yes. In terms of acquisitions and to your point, we're always looking, and I'd be lying if as Daryl mentioned in terms of our -- basically the -- how the industry is going and weak competitors, we got a lot of phone calls from competitors out there, small competitors. The problem is that there hasn't been a lot of reinvestments in the industry or in -- because of this downturn. So therefore, in a lot of cases, when we get phone calls, the equipment is not necessarily in the best shape. And then they -- people are struggling. Again, it's been really tough.

So people are struggling, not a lot of contracts. Therefore, not a lot of employees that comes with the contracts. What they have to sell is the iron, and the iron is not in the best shape. So that is -- that has been a lot of the phone calls that we got. So that's kind of what we've been looking at. But having said that, I mean, we are always looking for opportunities, and we've got a good balance sheet to look at that. And if we see good opportunities that come up with a good company with good equipment and good people, we'll certainly have a seriously look at it.

In terms of the share buyback, it is something in terms of -- at this point, it might be a bit early as we ramp up. And to your point earlier, in terms of looking, there might be opportunities on acquisitions but also on organic growth. That's where we feel that our capital is better spent at this point. But it's not out of the question in terms of as things progress that we could look at that possibility. It's not in place at the moment, but it's something that we could certainly look at.

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Eric Benjamin Swergold, Firestorm Capital, LLC [17]

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Okay. And I applaud your discipline in not buying junk on the acquisition front. And then one last question we've discussed in the past, which is a number of the directors have quite substantial shareholdings in the company, which is good to see because that means their interests are aligned with us but there are a few that at this point have not beefed up their holdings as of yet. Is there something in the works to get all the directors aligned with shareholders in the amounts or at least to some extent closer to some of the major directors who have quite substantial holdings in the company?

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [18]

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Yes. There is ongoing discussions about that, and it's something that basically at our governance. Those are ongoing discussions. But we do have many directors. And also, we have new directors. We've had a few directors -- we've had a turnover of almost half of our Board, so we have directors that are newer and just building up their position as we go.

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Eric Benjamin Swergold, Firestorm Capital, LLC [19]

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Okay. Great. Congratulations on your forward progress and good work coming through the downturn in good standard.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [20]

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Thank you.

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Ian Ross, Major Drilling Group International Inc. - CFO [21]

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Thanks.

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Operator [22]

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There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Larocque.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [23]

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Thank you. And again, we have our Annual General Meeting which we invite you to attend and -- on Thursday at 3:00 p.m. So there is no more questions, Alina?

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Operator [24]

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I apologize. We do have a new question from Ahmad Shaath from Beacon Securities.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [25]

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Congrats on a solid quarter. Just trying to wrap my head maybe around -- a little bit around margins. I mean, I know pricing is getting better. And for the last maybe 2, 3 years, you guys have been doing a great work in terms of doing the training and the mobilization and all of that. Is any -- like how aggressive it is to expect some more gross margin improvement in the coming quarter, at least especially that you're deploying more rigs on existing contracts? It seems that there's so many things that point towards improving the margin. Are we missing something here that's going to eat up some of that benefit?

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [26]

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Well, again, as we ramp up, labor is going to be an issue and attracting labor, and labor costs basically follows pricing. So therefore, as we progress, pricing goes up because the next rig going out, it basically will go out at a higher price than the last one that went out. And again because of that labor crunch, it gets more difficult to put the next one out. So therefore, you need a higher price. And at the same time, to retain and attract good employees, we are leaders in compensation just because we need to be -- we need to have the best people. So therefore, we are known to be leaders in compensation. But we need to keep up with the markets. So therefore, our approach again on pricing is the next rig going out will probably have a higher price, and that will be there to cover the labor cost increase but also there should be margin improvement as we move forward. So therefore, the price increase is not all margin. Some of it will get -- there's going to be cost increase in there as well. But net-net, there should be some improvements as we move forward, as you mentioned.

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Operator [27]

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And there are no further questions registered at this time. So I'd again like to turn the meeting over to Mr. Larocque.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [28]

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Okay. Well, thank you, everybody, and we'll be talking next quarter.

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Operator [29]

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Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.