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Edited Transcript of MTRX earnings conference call or presentation 29-Aug-19 2:30pm GMT

Q4 2019 Matrix Service Co Earnings Call

TULSA Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Matrix Service Co earnings conference call or presentation Thursday, August 29, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. Hewitt

Matrix Service Company - CEO, President & Director

* Kellie Smythe

Matrix Service Company - Senior Director of IR

* Kevin S. Cavanah

Matrix Service Company - VP of Finance, CFO, Secretary & Treasurer

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Conference Call Participants

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* John Edward Franzreb

Sidoti & Company, LLC - Senior Equity Analyst

* Noelle Christine Dilts

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

* Tahira Afzal

KeyBanc Capital Markets Inc., Research Division - Deputy Director of Research, MD & Equity Research Analyst

* William James Newby

D.A. Davidson & Co., Research Division - Senior Research Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Matrix Service Company Conference Call to discuss results for the Fourth Quarter Fiscal 2019. (Operator Instructions).

I would now like to turn the call over to Kellie Smythe, Senior Director of Investor Relations. Ma'am, you may begin.

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Kellie Smythe, Matrix Service Company - Senior Director of IR [2]

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Good morning, and welcome to Matrix Service Company's Fourth Quarter Earnings Call. Participants on today's call will include John Hewitt, President and CEO, Matrix Service Company; and Kevin Cavanah, Vice President and Chief Financial Officer. The presentation materials we will be using during the webcast today can also be found on the Investor Relations section of the Matrix Service Company website.

Before we begin, please let me remind you that on today's call, the company may make various remarks about future expectations, plans and prospects for Matrix Service Company that constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our annual report on Form 10-K for our fiscal year ended June 30, 2019, and in subsequent filings made by the company with the SEC.

To the extent the company utilizes non-GAAP measures, reconciliations will be provided in various press releases and on the company's website.

I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

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John R. Hewitt, Matrix Service Company - CEO, President & Director [3]

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Thank you, Kellie. Good morning, everyone and thank you for joining us.

I'd like to start today's call with the discussion about job site safety and our performance in fiscal 2019.

While we had an outstanding start to fiscal 2019, we ended the year with a consolidated total recordable incident rate of 0.59, which is disappointing when compared to our record performance of 0.49 in fiscal 2017 and 2018. While parts of our business achieved excellent performance, other parts did not and we judge our enterprise performance on this consolidated view. While this statistical variance between 2019 and previous years may seem insignificant to those outside of our industry, it is very significant on how we think about the effectiveness of our safety culture and our drive to 0.

Related to our drive to 0, I would like to share with you today 2 key focus areas for our company in fiscal 2020. Dropped objects have historically played a major role in incidents across the construction industry. In fact, according to the Department of Labor, the U.S. construction industry has approximately 143 dropped object recordable incidents every day. To prevent and mitigate dropped object incidents from occurring, we are raising awareness across all of our job sites, we are also proactively educating our people on the importance of having both primary and secondary retention tools in place, elevated walking and working surface protections, safer scaffold construction and better rigging controls.

The second area, are tasks involving the use of our hands and fingers. Hand and finger injuries accounted for approximately 50% of all recordables across multiple industries. In this area, we are implementing a hands-free program, where increased training and engineered tools are used to keep an employee from having to place his or her hands in harm's way.

Organizationally, we are committed to making investments in these program improvements as well as other initiatives to make our workplace safer.

I am confident that if we create and sustain a safer work environment, combined with a great leadership of our people, a safety-first culture, we will ultimately achieve our goal of 0.

Turning now to our performance and outlook. We are very pleased to report that the fourth quarter marked a strong closeout to our year, as our previously forecasted outlook for an improved second half of fiscal 2019 came to fruition.

Consolidated fiscal 2019 revenue was up nearly 30% over the prior year and we achieved earnings per share of $1.01. In fact, the fourth quarter represented a confluence of events, including high maintenance volumes, strong operating performance and positive capital project timing, which resulted in record quarterly revenue and earnings.

While Kevin will provide the details on our financial performance, I want to remind you of some key expectations that we communicated as we entered fiscal 2019.

We said we will substantially complete lower margin work, taking on during a highly competitive market cycle in previous years. We said we expect higher volumes in our turnaround work, Storage Solutions segment and in the iron and steel business. We said we would produce stronger margins in these segments, and we said consolidated revenue and gross margins would improve quarter-over-quarter. We are pleased to report we have achieved each of these expectations.

In addition, we preserved backlog at $1.1 billion, supported by solid project awards of $1.3 billion and we achieved earnings of $1.01 per share while within our annual -- well within our annual guidance range.

Finally, we have continued to expand our brand across the markets we serve, creating a strong opportunity pipeline that will allow us to build our backlog as we move through fiscal 2020. On behalf of our entire senior leadership team, I'd like to congratulate and thank our employees for their hard work and performance.

Looking forward, at recent investor conferences and in our investor roadshows, we've been asked about our strategy for growth and more specifically, how we will reach our fiscal 2022 target revenue of $2 billion-plus. The key elements of our strategic plan include safety, people and communication, clients and growth and execution excellence. These 4 elements are intrinsically linked and together lay the foundation for the specific growth initiatives we will undertake to expand the business and continue to build long-term shareholder value.

On safety, in this fiscal year, we focused on engineered solutions to mitigate safety risks. We also implemented a world-class HSE Management System that will provide better, more real-time data to focus our actions to effectively improve our performance. We will continue to make investments in our people, training and processes to achieve and maintain a 0-incident work environment.

Ultimately, our performance is a direct reflection of our greatest resource, our people. We have and will continue to invest heavily in our people to deepen and broaden our bench strength, inspire a great work environment and to further develop strong communication channels across the organization.

In doing so, our teams are actively engaged on important initiatives, including developing the current and future workforce, improving hiring and selection processes, strengthening our learning culture, building an inclusive and diverse workplace, ensuring a harassment-free environment and doing everything we can for our workforce health and wellness.

Another key aspect of our people strategy is to ensure we have a strong succession process within all levels of the Corporation. Let me share with you some exciting changes within our executive team we just announced.

After 47 years in the industry, the last 11 of which with Matrix Service Company, Joe Montalbano, will retire from his role as Vice President and Chief Operating Officer, effective June 30, 2020. In addition to sharing his vast engineering and operational expertise to our leadership teams over the years, Joe has been instrumental in elevating our ability to understand, assess and mitigate project and contract risk. Please join me in thanking Joe for the tremendous impact he has made to not only Matrix Service Company, but also to our industry and the community. As part of the succession transition, we have created an interim role of President of Operations, this role will report to Joe from now to the end of the fiscal year and have direct leadership for our 3 operating subsidiaries, Matrix Service, Inc., Matrix North American Construction, and Matrix PDM Engineering. Alan Updyke will step into this interim role effective September 3, 2019, and will later transition to the COO position on July 1, 2020. Alan joined our subsidiary company, Matrix Service, Inc. in July of 2012 as Vice President of Capital Construction, was subsequently promoted to Senior Vice President of Operations in February of 2018 and to President of Matrix Service, Inc. Prior to joining Matrix, Alan held various executive roles in the engineering and construction industry.

Brad Rinehart will assume the role of President Matrix Service, Inc. Brad joined Matrix in 1988 and has held numerous roles over his long tenure with Matrix. Brad has spent most of his career in our Storage Solutions business. Brad was promoted to President, Matrix PDM Engineering in December of 2016. In that role, Brad led the integration of Houston Interests, which tripled our engineering capabilities and positioned the company to take on larger EPC projects.

Glyn Rodgers will be promoted to the role of President of Matrix PDM Engineering. Glyn joined Matrix Service, Inc. in January of 2018 as Vice President of Strategic Development. Glyn has over 40 years of industry experience, including executive leadership roles in other large engineering, procurement and construction companies.

Jason Turner has been with the company since 2006, holding various corporate executive roles prior to being named President of Matrix North American Construction in 2014. Jason will continue in his role as President of Matrix North American Construction and with Brad and Glyn, will report directly to Alan Updyke, effective September 3, 2019.

I want to again recognize Joe Montalbano's huge contributions to the organization as well as those of Alan, Brad, Glyn and Jason. These executives represent a portion of the depth of the leadership of our organization. Our efforts related to succession planning, employee development, recruiting the retention, have positioned the company for continued success.

In clients and growth, as we take on increasing volumes of work and larger, more complex projects, we will continue to make necessary investments in people, processes and technology. We will also pursue strategic opportunistic acquisitions where there is a good cultural and strategic fit.

Our world-class EPC storage and terminal capabilities in crude oil, LNG and NGLs are in high demand for projects that support North America's energy abundance and United States' leading position in the global energy market. This expertise is also advancing our position as the leading contractor of choice for midsized LNG facilities where significant opportunities exist for peak shaving, bunkering and feedstock for off-grid and remote electrical generation.

In Oil Gas & Chemical, we continue to build on our strong position in North America's refineries, gaining market share in long-term on-site maintenance and repair agreements as well as ongoing heavy and mechanical turnaround activity, capital projects and plant services.

For example, today, we announced a 5-year contract signed with Shell to service their primary on-site mechanical services contractor at their Puget Sound Refinery where we will provide embedded services including maintenance, small capital projects and turnaround support. With this award, we added routine mechanical maintenance to the services we had provided to Shell at a number of its refineries through the years, including turnaround, tank repair and industrial cleaning services. We're very proud of our long-standing relationship with Shell and history of quality services.

Our progress to build brand awareness and expand our service territory in midstream natural gas processing is gaining traction. Our project outcomes have been very supportive of the expected margin range in this segment and we look to continue this growth as the industry builds out its infrastructure.

Finally, we are focused on extending our expertise in capital construction, turnarounds and plant services to the petrochemical industry as it invests billions in new and existing facilities, primarily along the U.S. Gulf Coast.

In our Industrial segment, we remain the leading contractor of choice for maintenance and repair services inside North America's integrated iron and steel facilities and for new capital projects supporting advanced high-strength steel and other next-generation processes.

Our brand in mining and minerals and material handling also positioned us for improving opportunities when the industrial commodity demand and pricing strengthens for copper and other nonferrous metals, including gold and other rare earth minerals.

Finally, while the power delivery portion of our electric infrastructure segment has been challenged by our current limited geographic footprint, significant opportunity exists as a result of aging infrastructure and the need for more reliable, efficient, secure and interconnected distribution. To address the demand in power delivery, we will continue to grow our leading brand position organically beyond our current geographic footprint as demonstrated by our current expansion into the Midwest. Additionally, we're actively looking for acquisition targets that fit our strategy, culture and financial expectations.

Lastly, the demand for environmentally compliant power generation, fueled by low cost and abundant natural gas, is continuing to create unique opportunities for us to support our strategy of smaller, well-defined package work.

In execution excellence, we are continually engaged in initiatives that will allow for greater efficiencies and consistent and sustainable earnings. These initiatives include among others, implementation of an enterprise-wide quality management system, enhanced engineering tools, improved business and project management processes and continued strong cash management.

We are also work -- at work formalizing our sustainability strategy to tell our story about initiatives already in place and to expand our efforts even further. We want to thoughtfully ensure that we embed a strong corporate social responsibility culture into our business strategy and processes and that we communicate about the results of our efforts to all stakeholders.

With continued focus on these foundational elements of our strategic plan, safety, people and communication, clients and growth and execution excellence, our top business growth investment areas include expanding our power delivery reach, client base and revenue through organic growth, strategic acquisitions and capital investment in needed specialty equipment. Expanding our EPC project capabilities, primarily in Storage Solutions and Oil Gas & Chemical by adding people as needed in engineering, estimating in operations to handle expanding workloads and considering bolt-on acquisitions that bring added capacity, expanded geographic reach and new skill sets.

Investing in people initiatives, enterprise-wide, to ensure we recruit and retain and develop, best-in-class people and that we are creating an inclusive, diverse and safe workplace.

Expanding internationally through acquisitions where we can gain an operating foothold, we will also continue to strengthen our business development activities, with internationally experienced people and resources to facilitate market penetration as well as follow existing clients into these markets.

And finally, we will continue to expand our engineering depth and breadth through active recruitment and employee development programs, focused succession planning and targeted acquisitions that support not only our existing markets but also our strategic growth areas such as chemicals and petrochemicals.

We will also consider investments in other areas to grow and strengthen and improve the business, among them acquisitions that help build scale in our Canadian operations and expand our industrial electrical services. We will continue to assess our entry point into the renewable energy space.

Pursuit of joint bidding opportunities and/or acquisitions that will allow us to enter the federal market with our Storage Solutions and energy infrastructure capabilities, and expansion of our fabrication capabilities in steel plate structures, piping systems, modularization as well as specialty vessels through equipment investment, acquisition or both.

Making these investments over the next 3 years, we expect to grow organically year-over-year at a rate of 5% to 8%, with remaining revenue to achieve a top line of over $2 billion coming from acquisitions. With increasing project volume and higher-margin work as well as our continued focus and prudent management of our cost structure, we expect to achieve EBITDA margins of 6.5% and return on invested capital of 12%.

While we are confident in our ability to achieve our objectives, and we are operating in an environment with strong tailwinds, we will also closely monitor potential headwinds including macroeconomic, political and other external factors that, as we are all aware, create an environment of global uncertainty. As we have experienced in the past, we must always be mindful of market conditions that can impact the timing of project awards and starts as well as client-spending patterns. These factors can create variability in our quarter-over-quarter award cycle and bottom line performance.

While we will watch these conditions closely, over the long term, I remain confident in our ability to deliver continued growth and sustainable shareholder value because we are working in strong, diversified markets where our services are in high demand. We are focused, we have a clear vision and a strategy with experienced leadership, best-in-class people and a solid culture and core values, and we know how to execute. We put safety first, deliver on our promises and conservatively manage our capital. These elements: Demand, focus and execution, create significant momentum for higher backlog, revenue, earnings and free cash flow.

I will now turn the call over to Kevin to discuss fourth quarter and full year results.

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Kevin S. Cavanah, Matrix Service Company - VP of Finance, CFO, Secretary & Treasurer [4]

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Thank you, John. I would like to start by thanking our employees for delivering strong results in fiscal 2019.

As John mentioned, we are pleased with both the fourth quarter and full year operating performance.

The fourth quarter continued the 5-quarter trend of improving revenue, margin and EPS performance. Revenue of $399 million and fully diluted earnings per share of $0.47 represent the highest quarterly operating performance in our history.

The fourth quarter is also a strong close to fiscal 2019. Full year revenue of over $1.4 billion and fully diluted earnings per share of $1.01, mark a substantial improvement over the operating performance the last couple of years.

In fiscal 2019, we saw significantly higher revenue volumes, larger projects, a revenue stream that presented improved [operating] potential and higher utilization and leverage of our cost structure.

As a result of the strong operating performance, we also ended the year in a strong financial position. Liquidity increased to -- increased 76% in fiscal 2019 and we ended the year with $242 million, our highest level in 5 years.

Now let's talk about the fourth quarter in more detail. As I mentioned, revenue was a quarterly record high of $399 million. This was a significant increase over the fiscal 2019 (sic) [2018] fourth quarter revenues of $293 million. Storage Solutions increased $53 million or 55% to $149 million in the quarter on higher volumes throughout this segment including tank and terminal, specialty storage and repair and maintenance. Industrial revenue almost doubled from $64 million in the fourth quarter of fiscal 2018 to $120 million this quarter. The growth was a result of increased volumes of iron and steelwork.

Electrical Infrastructure revenue was up slightly from $53 million last year to $54 million this quarter. And Oil Gas & Chemical revenue was $76 million compared to $80 million last year as a result of lower levels of capital work.

The company recorded a consolidated gross profit of $43.7 million during the quarter compared to $21.5 million during the fourth quarter in the prior year.

Our overall gross margin for the quarter was 11% compared to 7.3% in the prior year. To better understand this significant improvement, we need to look at segment performance. The Storage Solutions and Oil Gas & Chemical segments produced their highest gross margins of the year of 13.9% on strong project execution. This gross margin performance represents the earning potential for these segments that is above our normal targeted ranges.

Industrial also produces highest gross margins of the year at 8.5%. Improved margins were created from iron and steelwork and better recovery of overheads, partially offset by margin deterioration on a thermal vacuum chamber project that's nearing completion. The gross margin for Electrical Infrastructure was only 4.3% due to quality.

Proceeds received on the settlement of a disputed power delivery contract were less than anticipated. The revenue on our initial organic Middle West expansion produced margins below our long-term expectations. We expect these to improve as the business matures in this new market. And as we've discussed before, the power delivery business has not met our expectations recently, and we continue to work to improve the operating performance.

I'll talk about future margin expectations for each of the segments when we review guidance for fiscal 2020.

Consolidated SG&A during the period increased to $26.3 million compared to $20.6 million one year ago. The increase was primarily due to the higher levels of variable compensation expense as a result of the improved operating performance. SG&A as a percent of revenue decreased to 6.6% in the quarter as compared to 7% in the fourth quarter last year.

As a result of the improvements in revenue and gross margins, the company was able to produce wholly operating income of $17.4 million, net income of $12.8 million and earnings per share of $0.47.

Moving to full year results. In fiscal 2019, our revenue exceeded $1.4 billion, which was a 30% or $325 million increase over fiscal 2018. The significant organic growth was driven by Storage Solutions, which increased $207 million or 66% on increased tank and terminal construction work and higher levels of repair and maintenance spending and Industrial, which increased $159 million or 80% on higher volumes of iron and steel spending and increased thermal vacuum chamber work.

Offsetting these significant increases were a $39 million or 15% decrease in Electrical Infrastructure revenue due to a strategic shift away from larger EPC power generation projects as well as lower power delivery volumes, partially offset by higher volumes of power generation package work and a $3 million or 1% decline in Oil Gas & Chemical segment revenues as lower volumes of midstream gas processing work was largely offset by higher volumes of turnaround and maintenance work.

Consolidated gross margin increased to 9.3% versus 8.4% in fiscal 2018. The improvement was a result of better overhead utilization and operating performance in the last 2 quarters of the year.

For the year, Oil Gas & Chemical produced a gross margin of 11.3% as compared to 10.4% last year on strong project execution and improved overhead recovery in fiscal 2019.

Storage Solutions gross margins also improved significantly to 10.7% versus 8.2% in fiscal 2019 (sic) 2018 . This is reflective of strong project execution, higher volumes and an improved market.

Electrical margins were 7.1% in fiscal 2019 as compared to 7.2% in fiscal 2018. While we saw a strong operating performance in the power generation portion of the business, the performance of the power delivery business was below expectations.

In addition, we had a charge on settlement of a disputed power delivery contract and low margins on geographic expansion revenue.

Industrial margins were 6.8% versus 7.3% last year. While the iron and steel business performed well during the year, fiscal 2019 margins were impacted by the deterioration on the margin on a thermal vacuum chamber project that is nearing completion.

Consolidated SG&A expenses were $94 million for the year, which was an increase from the prior year, primarily as a result of higher variable compensation expenses associated with improved operating results. Despite the increase, SG&A as a percentage of revenue decreased from 7.7% in fiscal 2018 to 6.6% in fiscal 2019.

Due to the improvements in revenues, gross margins and SG&A leverage, the company was able to produce operating income of $37.9 million, net income of $28 million and earnings per share of $1.01.

Moving on to our balance sheet and liquidity. During fiscal 2019, we saw our liquidity increased 76% or $105 million on the improved operating results I just reviewed. We entered fiscal 2020 with a strong balance sheet that includes $90 million of cash and only $5 million of debt. We also have $152 million available under our credit facility, which results in total available liquidity of $242 million.

Our approach of maintaining a strong balance sheet and good liquidity remains. We do intend to pursue acquisitions in fiscal 2020 while we'll do so in manner that allows us to maintain a strong financial position.

Moving to backlog. The company produced a quarter and year-to-date book-to-bill of 0.9 on awards of $351 million in the quarter and $1.3 billion for the year. The company ended the year with backlog of $1.1 billion.

While the company did not achieve the consolidated book-to-bill above 1 in fiscal 2019, this is not an indication of a weakened market. In fact, the full year book-to-bill was 1.1 for Storage Solutions, and 1.0 for Industrial.

I mentioned previously that larger projects are making up an increasing percentage of our revenue stream. Increased variability in project awards comes with this change in revenue mix. When we look at our funnel of project opportunities, we see a larger funnel today than we did when we entered fiscal 2019. Our current backlog and the strong funnel should allow us to continue to grow our business as we move through the fiscal 2020.

Now let's discuss fiscal 2020 guidance of revenue of $1.4 billion to $1.55 billion and fully diluted earnings per share of $1.10 to $1.40. We entered the year with a strong backlog and improved operating conditions, but as John mentioned, we are also in an environment of uncertainty.

Related to the first half of fiscal 2020, we expect the first quarter revenue to be similar to the first quarter of fiscal 2019, but with improved margins. This is normal in our business due to seasonality in electrical delivery and refinery turnarounds.

In addition, the first half of the year may be impacted by the timing of capital project awards and starts. Therefore, we expect our revenue and earnings to improve as the year progresses.

We are maintaining our gross margin ranges of 11% to 13% for Storage Solutions and 10% to 12% for Oil Gas & Chemical. We are also maintaining our long-term range for Industrial of 7% to 10%, however, our ability to consistently achieve this range will be dependent on the mix of work.

The power generation portion of the business is operating within our long-term margin range of 9% to 12% for Electrical Infrastructure, however, we continue to work on the operating performance improvement in power delivery.

Our effective tax rate is still expected to be about 27% and CapEx spend to be between 1.5% and 2% of revenues as we continue to invest in the business to support growth initiatives.

We will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of John Franzreb with Sidoti.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [2]

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I actually want to start where you just ended on the first quarter guidance. Sizable drop I guess in the revenue sequentially. I'm guessing the job profile is the reason why, but is it mostly in storage or is it someplace else that you're going to see it?

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Kevin S. Cavanah, Matrix Service Company - VP of Finance, CFO, Secretary & Treasurer [3]

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I don't think you're going to see it really in storage, but I think you'll see it in -- out of 3 segments, the steelwork is seeing some headwinds right now on the maintenance side. The Oil Gas & Chemical segment will impacted by lower turnaround volumes, as there's basically no turnaround in summer months. And then electricals, the power delivery side is impacted by, it's peak demand season in the summer. So again, there's no outages and there's minimal work going on there. So this -- I guess the first quarter being light is normal.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [4]

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Okay. I just -- I was surprised by the magnitude of it I guess. On the Oil Gas & Chemical side, the June quarter despite sequentially down revenues from the March quarter was substantially stronger. Could you suggest that what's going on in Oil Gas & Chemical, it's a really good number?

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Kevin S. Cavanah, Matrix Service Company - VP of Finance, CFO, Secretary & Treasurer [5]

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Yes, so really we have excellent project execution across the segment. We continued with good, strong turnaround season. So we had other things contributing to the segment, including engineering work on gas processing has really benefited the segment. So it's just good execution throughout the segment. We talked in the third quarter that really just all pieces of that segment were really performing well. We had the same thing in the fourth quarter.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [6]

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And would your expectations be that -- it could be the higher end of the gross margin profile in 2020?

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Kevin S. Cavanah, Matrix Service Company - VP of Finance, CFO, Secretary & Treasurer [7]

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Yes. I expect that it'll vary by quarter. The 10% to 12% range is still what we believe is the right range. If we're able to successfully grow the gas business, then eventually, we may be able to move that range up, but I think 10% to 11% is really good performance for that segment considering that I don't know 75% to 80% of that segment is reimbursable work. So with that it's a little bit lower margin because it's lower risk.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [8]

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Okay. I guess one last question, I'll let someone else chime in. On the full turnaround season and your expectations. Can you kind of just -- we just came out from great spring one, can you kind of walk us through how the laying out now relative to what you're thinking say 3 months ago? And when it comes to changes in the jobs, what kind of leeway they give you, how much notice they give you before you see any kind of sizable changes either up or down?

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John R. Hewitt, Matrix Service Company - CEO, President & Director [9]

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This is John, John. So our expectation is the fall turnaround season for us will be busy, that our teams will be fully employed, working on turnarounds. And that the growth individual turnarounds are usually not known to us and still sometimes as late as when the turnaround starts when they shut the facility down and then they start to look into the different pieces of the plant that they're planning to repair and they can understand that there's some [slow] growth there or some things have changed in their market, that maybe gives them an opportunity to leave the plant shutdown for a slightly longer period of time and they will add some stopes to it. Many of the facilities that we're going to be doing turnarounds on, we are also doing upfront planning, which maybe going on for months before we get there. Sometimes you will know that -- as we go through that planning process, that stokes will be -- have a tendency to be growing, but I'll tell you that probably the higher percentage -- percentage of the time is that we don't know until we actually get into the turnaround.

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Operator [10]

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And your next question comes from the line of Tahira Afzal with KeyBanc.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - Deputy Director of Research, MD & Equity Research Analyst [11]

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John and Kevin, congrats on a great quarter. I guess the first question I had, Kevin, in your prepared commentary you mentioned the back-end loaded nature is partly driven again by really the timing of some new projects ramping up. If you compare the permitting, et cetera stuff that's really out of your control in terms of when these projects start, as you look at this year versus the last 2, is there less dependency on exogenous factors or around the same?

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Kevin S. Cavanah, Matrix Service Company - VP of Finance, CFO, Secretary & Treasurer [12]

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I would say there's less. We're pretty highly booked going into the year, probably close to 70%, which is a good start for the year. Now we've got a strong funnel as we've mentioned. So I guess a big variable that can happen is if those large projects get delayed, but otherwise, we feel pretty confident with the guidance we've put out.

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John R. Hewitt, Matrix Service Company - CEO, President & Director [13]

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I don't think you're going to see, Tahira, as big a revenue build as you saw this year, right? The change in revenue from Q1 in '19 to Q4 in '19 it won't -- it shouldn't be as dramatic in fiscal '20 as it was in '19 because we're entering the year with what as Kevin said a really solid backlog position, lot of activity in -- across all of our markets, larger projects in our funnel we feel very good about -- a number of them and our position with those projects, but the timing of those awards is a thing that we're trying to handicap with our revenue guidance and ultimately, our EPS guidance. So if they start to enter our backlog sooner then we'll see obviously higher revenues in the year, but right now, our expectation is that dramatic changes in our backlog, probably won't be seeing those kinds of things until you get into late in the second -- our second quarter.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - Deputy Director of Research, MD & Equity Research Analyst [14]

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Got it, John, that's pretty helpful. And I guess the second question for me, you've talked about a bit about your prospects being strong and really if you look at all your publicly traded players they've said something similar. I'm just curious, I know you've seen some dislocation with some very core competitors. How much is that helping you on the margin so far? Or is that something that could be a tailwind?

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John R. Hewitt, Matrix Service Company - CEO, President & Director [15]

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I think it's -- you could probably say it's -- there's a little bit of every story to -- in each segment. We've got some of our segments where we're chasing day-to-day maintenance in smaller projects, competition remains pretty stiff, especially with the local players on the larger projects. I think some of the -- the bigger competitors that we chase jobs against, they're getting busy and so I guess having a tendency a little bit to drive some margins up. And I think the other thing that our teams have done a very good job of really getting our brand out in the market, especially in storage and storage terminals where I think clients are taking us a lot more seriously about the services that we provide and the extent of the services we can provide across that entire value chain. So I think the competitive dynamics -- it's still a competitive industry, we still have to win the projects to get in place, we're not handed anything. And so we've continued to have to work hard for to be able to build our backlog and continue to grow the business.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - Deputy Director of Research, MD & Equity Research Analyst [16]

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Got it. John, I would quickly slip in a third one. I mean based on the fact, prospects are strong, it seems like you've anniversary-ed out really the tough mix comps that you had in the past. I get you've got some things that help you in the fourth quarter, that might not be there before. But what makes you get to the low end of your guidance? That seems a little conservative, is that all just a question for the macro?

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John R. Hewitt, Matrix Service Company - CEO, President & Director [17]

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You're not going to call one of us a sandbagger this time?

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - Deputy Director of Research, MD & Equity Research Analyst [18]

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I was going to call Kevin the super sandbagger. So...

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John R. Hewitt, Matrix Service Company - CEO, President & Director [19]

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No, I think it's probably -- if something dramatic happens in the macro environment. Right now, I think it will be hard for anybody to handicap what's going to happen there between the trade issues and global sort of economic uncertainty. So if you put that aside I think it's just our normal awards and start cycle, that we -- it's just part of the life we lead in this industry. And so again us handicapping windows are going to occur and how we built them into our budget models. We'll have and it will impact whether we think we're going to be at the low-end of the guidance ranges or the high-end of the guidance ranges. And so hopefully, we've taken the right view on when those things will happen. And our outcomes at the end of the year will be within or at the top end of the guidance ranges, but we'll see how that goes.

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Operator [20]

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And our next question comes from the line of Bill Newby with D.A. Davidson.

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William James Newby, D.A. Davidson & Co., Research Division - Senior Research Associate [21]

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Congrats again, guys, on a great quarter. I guess first is on the award pipeline, you're talking about this funnel kind of growing versus where you were at this time last year. Where are you guys seeing that specifically? Is it crude? Is it natural gas? What's -- I guess what's gotten better?

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John R. Hewitt, Matrix Service Company - CEO, President & Director [22]

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I would say it's probably all of the above. So crude terminal and individual tank opportunities that terminals are involved. We see storage and terminal opportunities in NGLs. We see LNG opportunities, both in large storage tanks, but also in the mid-scale facilities for peak shaving and ship bunkering. So it's really across the entire energy storage terminal market. So that -- in Storage Solutions and Oil Gas & Chemical, we continue to see a very strong market in refining. How strong that's going to be will be dependent again on whether there's any significant scope growth and any of the turnarounds we get into, but we fully expect our crews to be busy in the fall and what we've got lined up in our expectations for next spring will be similar to how busy we were in the spring turnaround last year, the size of which we're -- is part to -- we're not totally sure of because it depends on the opportunity for growth. Plus, we were very busy last year, we were the on-site maintenance contractor for BP at their Cherry Point facility. They had a high-spending year last year. And that -- and we've talked about this before, a lot of the turnaround strength from contractor to contractor depends on who you do business with. And so some years, your core client base could be spending a lot of money on their facilities. And the next year, they're not, but your competitor might be inside of a different client's facility and that's their year to spend money. So we kind of judge that by how busy we keep our people, what's our utilization rates. And so we -- again, we expect 2020 to be a strong utilization year for our teams.

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William James Newby, D.A. Davidson & Co., Research Division - Senior Research Associate [23]

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Got it. That's very helpful. And then I guess it seems like a lot of the opportunities you guys are seeing continue to be in storage and you're starting to get pretty close to at least peak levels of what you guys have done historically in the given year. What's -- can you just talk to your capacity in that business? How -- with the capabilities you guys currently have, how much further can you push that before you really have to think about investing in the business in a more significant manner?

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John R. Hewitt, Matrix Service Company - CEO, President & Director [24]

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Yes. I mean our -- I think we're in a good spot in our capacity, our projects, there is a flow in the life cycle to our projects. And where we're at today with our backlog, we've got a good cadence between project to project, moving teams around, the strengthening of our engineering business that we did over 2 years ago with the Houston Interests acquisition, has really opened up our capacity there on the front-end in feed studies. And then -- so you think about what's in our pipeline of opportunities and the ones that we have a high confidence level that we think we'll be able to turn into a contract, fits our model and fits our bench strength very well. And so we will continue to look for top count to bring into the organization. We'll continue to look for bolt-on acquisitions, both from a construction and engineering standpoint that we can continue to drive more volume in that business.

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William James Newby, D.A. Davidson & Co., Research Division - Senior Research Associate [25]

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I guess one more just on that last point, John, in regards to bringing in top talent, are you -- has the market for kind of project managers changed at all in the last 12 months with all the kind of volatility you're seeing from your biggest peers? Are there maybe more people looking to move than there were a year ago? Or is it still pretty kind of the same?

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John R. Hewitt, Matrix Service Company - CEO, President & Director [26]

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No, I mean I would say the -- I mean the -- plenty of markets where professional staff is -- continues to be a competitive market out there. I think our -- and we talked about it here in our prepared remarks, the things that we're doing from a people standpoint to create a great work environment here at Matrix is really about making sure that we can attract some of the best and brightest in the industry and bring it into our organization. And we want people that when there's time for them to think about a career change, time to think about where they may have opportunities for their career and for challenges in their career, that they're going to see our organization as a place they'd like to come to. And so I think that's important as we think about how we recruit people. And we're continuing to do that today, continuing to find where we can find good talent to bring them into the organization. In some cases, we're doing that ahead of when we may actually need them. So we're trying to balance that growth in overhead with what we see in our pipeline and to make sure that we've -- we're not only bringing top talent in, but that we're investing in our people that are here that makes them great employees and provide them challenging opportunities as well.

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Operator [27]

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And our next question comes from the line of John Franzreb and is a follow-up question.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [28]

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Just a couple of things. Last quarter, you talked about exiting the year at a book-to-bill closer to 1.0. It sounded like 2 questions ago, that maybe the job you expected to come in in the fourth quarter has been moved back a couple of quarters. Am I understanding that properly or is there something else going on there?

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John R. Hewitt, Matrix Service Company - CEO, President & Director [29]

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No, there's not anything else going on there and, Kevin, in his prepared remarks talked to you about the -- about storage was over 1 and Industrial was 1. And the other 2 segments while there were slightly below 1.0, which obviously puts the entire enterprise into a 0.9. We're not concerned about it, we've had some -- we've had some projects that we thought we're going to get awarded in the fourth quarter that moved into the first and had subsequently been awarded, not major ones, but they're kind of the ebbs and flows of our normal capital projects that come in and out of the business. And as far as major projects, we had 1 major project that we thought was possible might come into the fiscal 2019 late in the year, has moved out until later in the calendar year, mostly related to financial structure of that client and how they were going to build their project. And so we still think we're in a very good place related to that project. And so we're not -- we feel very good about our backlog position, we feel very good about the backlog coming into this year and the opportunities in front of us. So the 0.9 -- exiting the year at a 0.9 is not really a concern.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [30]

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Okay. And I might have missed this also, in the Electrical Infrastructure business, did you reset the gross margin expectations, Kevin? And also, it sounded like that you are accepting lower-price jobs in order to achieve your goal of geographic expansion. Is that the case and is that what you said or am I misreading that also?

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Kevin S. Cavanah, Matrix Service Company - VP of Finance, CFO, Secretary & Treasurer [31]

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Yes. So I said that -- first of all, in the geographic expansion, when growing organically, we've got to prove ourselves, and we've got to take the work away from somebody else. So we may have to get a little more competitive on the pricing when that happens. That's also a lot of times reimbursable work. So it may be a little bit lower margin. And we've got the 9% to 12% longer-term expectation. The power delivery packages we're executing now, they're definitely supporting the ranges that support that 9% to 12%. Power delivery work, we still got work to do to get consistently up in that range. So I would expect this to move towards that range in fiscal '20. Will we get there? It's hard to say when you're looking to turn around a business, it takes some time to achieve.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [32]

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Okay. I guess this might be somewhat related, cash is starting to build, you haven't executed any kind of sizable M&A deal in a while, and you used to attribute it to you wanted to right the ship on the electrical side of the business. I'm wondering is it the pricing of deals that is unattractive. Can you just talk about the M&A environment? And how you view it today versus a year ago?

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Kevin S. Cavanah, Matrix Service Company - VP of Finance, CFO, Secretary & Treasurer [33]

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I think for us, the way we approach the M&A environment might be a little bit different. I mean we're not -- typically don't like to enter auctions. We're very focused on the businesses that we're interested in. And we're very disciplined on what we're willing to pay. And so we're actively looking in a variety of different pieces of our markets and different target companies in informal dialogues with a couple different businesses. And we'll continue to do that, but it is definitely our intention to this year we find the right strategic fit and the right cultural fit with the financial model we look for. This will be the year that we will be looking forward to add some acquisitions into the business.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [34]

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Got it. And I guess one last question on the SG&A side. If you kind of work with that maybe a midpoint of your revenue guidance, Kevin, are we looking at a steady $24 million and change-ish $25 million SG&A number or we're going to start lower and build again as the year progresses kind of like we saw in 2019?

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Kevin S. Cavanah, Matrix Service Company - VP of Finance, CFO, Secretary & Treasurer [35]

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Well. So there is a portion of our SG&A that is variable. Our incentive compensation is tied directly to how much money we're making for the shareholders. So there will be variability each quarter based upon that, but we also talked about as we grow this business, we've got to make the right investments to make sure we've got the talent and the resources to effectively execute. So we'll still be improving in those investments, but our SG&A is not going to go back down to the level it was in fiscal '19. So yes, it's still going to probably be somewhere around $25 million and when we get a really big quarter, then it will pop up and will go higher than that.

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Operator [36]

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And your next question comes from the line of Noelle Dilts with Stifel.

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Noelle Christine Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [37]

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Congratulations on the quarter again. Just a quick question I think. I just wanted to get a little bit more detail on how you guys are thinking about the LNG export opportunity. And kind of the timing of some of those larger LNG-type projects as well as chemical projects, how are you thinking about those projects as you move into 2020?

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John R. Hewitt, Matrix Service Company - CEO, President & Director [38]

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From a timing perspective, I would say we're -- our anticipation for the projects that we're currently active in the large -- larger scale projects that we've either bid the tank work into or that we're looking at the entire project as an EPC. And to be clear, we're not going to be building multibillion dollar LNG export terminal, that's just beyond our capacity as an organization, but certainly some of the smaller scale ones for export or for ship bunkering is within our [daily wake] and we will be and are engaged in those to some level. So the timing on adding more LNG-related work into our backlog of any scale, again, will probably be no sooner than second quarter this year, probably into the third quarter. But we see that as a very well investment -- go ahead.

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Noelle Christine Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [39]

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Sorry, I was just going to ask the second question. Finish ...

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John R. Hewitt, Matrix Service Company - CEO, President & Director [40]

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We see that as -- we've got a very good position in that market as a company and the services and talent we have to offer, and we believe that the LNG market, across a variety of the pieces of that market will be part of our backlog for many years to come.

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Operator [41]

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And I am not showing any further questions in the queue at this time. I would now like to turn the call back to John Hewitt for closing remarks.

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John R. Hewitt, Matrix Service Company - CEO, President & Director [42]

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Yes, thank you, everybody for listening into the call today. And we look [forward] to talking to everybody between now and our next call. Thank you very much.

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Operator [43]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a good day.