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Edited Transcript of PES earnings conference call or presentation 31-Oct-19 3:00pm GMT

Q3 2019 Pioneer Energy Services Corp Earnings Call

SAN ANTONIO Nov 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Pioneer Energy Services Corp earnings conference call or presentation Thursday, October 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian L. Tucker

Pioneer Energy Services Corp. - Executive VP & COO

* Carlos R. Peña

Pioneer Energy Services Corp. - Executive VP & Chief Strategy Officer

* Lorne E. Phillips

Pioneer Energy Services Corp. - Executive VP & CFO

* William Stacy Locke

Pioneer Energy Services Corp. - President, CEO & Executive Director

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Conference Call Participants

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* John Matthew Daniel

Piper Jaffray Companies, Research Division - Research Analyst

* Stephen David Gengaro

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Lisa Elliott

Dennard Lascar Associates, LLC - Principal

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Presentation

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Operator [1]

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Greetings, and welcome to the Pioneer Energy Services third quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lisa Elliott with Dennard Lascar Investor Relations. Thank you. Ms. Elliot, you may begin.

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Lisa Elliott, Dennard Lascar Associates, LLC - Principal [2]

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Thank you, Hector, and good morning, everyone.

Before I turn the call over to Pioneer's CEO, Stacy Locke; and CFO, Lorne Phillips, for their formal introductory remarks, I have a few of the usual items to cover. First, a replay of today's call will be available by webcast and also by telephone replay. You can find information about how to access both in this morning's news release.

As a reminder, information reported on this call speaks only as of today, October 31, 2019, so any time-sensitive information may no longer be accurate at the time of any replay. During today's call, management may make forward-looking statements that are based on beliefs, assumptions, information currently available to them and while they believe these expectations are reasonable, they can give no assurance that they will prove to be correct. They are subject to certain risks and uncertainties and assumptions described in today's news release and also in recent public filings with the SEC. So if one or more of these risks materialize or should any underlying assumptions prove to be incorrect, actual results may differ materially.

Also note that this conference call may contain references to non-GAAP measures. You'll find a reconciliation to the nearest GAAP measures in this morning's news release. Now I'd like to turn the call over to Stacy Locke, Pioneer's President and CEO. Stacy?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [3]

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Thank you, Lisa, and good morning. Joining me here in San Antonio is Carlos Peña, our Chief Strategic Officer; and Brian Tucker, our Chief Operating Officer; and of course, Lorne Phillips, our Chief Financial Officer.

When you look at our third quarter overall, it looks like a very stable quarter for us. Our consolidated revenues were down just a little bit, approximately 4%. Adjusted EBITDA, when you adjust also for the compensation expense was down about 5%. So it looks to be very stable. However, when you look under the hood, you see that we're operating a very choppy seas. As an example, our Colombia revenues were down 15% quarter-over-quarter while coiled tubing revenues were up 14% quarter-over-quarter. Wireline revenues were down 7%, well servicing revenues were up 3% and U.S. drilling revenues were down 4%. So the seas are choppy. Rig count continues to come down, completion-related activity is soft and very lumpy, very customer-specific, makes it hard to predict and forecast. None of this is really getting any better in the fourth quarter, and you have increased budget exhaust as we head into the end of the year, and of course, we'll have normal seasonality. So we're going to be very cautious as we look towards the fourth quarter guidance.

To help manage in this market, we have taken a number of steps. We've closed quite a few district offices. We've rightsized our workforce to match the lower utilization that we're seeing, particularly related to completion activity. We've tightened up some of our pay practices and repositioned assets to more favorable markets.

Drilling down to some of the specific business lines, U.S. drilling. It looks like we're going to be able to stay ahead of utilization. Our team is doing a great job keeping the rigs booked, and we have picked up 3 new clients during this quarter. Over the third and fourth quarter, we have extended contracts with existing clients and found new clients for almost 50% of our fleet in just these 2 quarters. So the group is doing a great job staying ahead of stacked rigs. Day rates are clearly under pressure, and as you'll see from our guidance, average margins per day will trend lower.

Looking at Colombia. We are also seeing a little year-end instability in Colombia. It's probably mostly related to budget exhaustion in the country for the -- from our operators. So it will translate into a little softness for the remainder of the year and into probably mid-January. In Colombia, it's very hard to start new projects when you hit about mid-December through about mid-January due to the Christmas breaks. We are working with about 7 different clients in Colombia and feel very good about the activity levels in 2020 with those clients.

Turning now to our production services business. The segment held up well in the quarter overall and that was primarily led by our well servicing business. Well services has been very steady. Utilization was roughly flat quarter-over-quarter, but margin was up and margin percentage of revenues was up. And as a result, slightly more -- and that was as a result of slightly more revenue days and higher average hourly rate of $580 versus $569 in the second quarter.

We continue to see steady 24-hour work, and we are providing more rental equipment packages with our rigs. So the outlook in well servicing remains favorable.

Wireline continues to be challenged due to less completion activity. Certain markets are doing well, others are weak. We exited 2 additional districts in the third quarter and made further reductions in workforce. We have shuttered 3 districts overall this year, and we are in the process of selling a district. And we've changed in pay practices, reduced head count and are streamlining our process for delivering our service by utilizing more preassembled guns, gun packages and sourcing less expensive products. All of these efforts have helped us retain margin, and we see margin percentage of revenue actually increase in quarter-over-quarter despite a 7% drop in revenue.

You could almost say ditto for our coiled tubing business to Wireline. They're both very completion-oriented. Like in Wireline, we've reduced workforce there. We've repositioned assets and we've reduced cost. Revenue, margin and margin percent of revenue all increased quarter-over-quarter due to these steps we've taken. But it remains a challenged business like Wireline until rig counts and completion activities begin to ebb the other way, those are going to be difficult businesses. I'd like to turn it over to Lorne to go into a little more financial detail.

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [4]

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Thanks, Stacy. This morning, we reported revenues of $146.4 million and adjusted EBITDA of $7.1 million as compared to the previous quarter's revenue of $152.8 million and adjusted EBITDA of $20.7 million. Our reported net loss was $26 million or $0.33 per share and our adjusted net loss was $23.6 million or $0.30 per share. Adjusted EBITDA was down quarter-over-quarter, primarily due to approximately $12.6 million of additional net G&A expenses related to new compensation plans, which were partially offset by the cancellation of certain previously existing incentive plans. In addition, we incurred professional fees to evaluate debt restructuring strategies.

For our production services, revenues in the third quarter were $86.6 million, down 1% overall from the prior quarter. As Stacy mentioned, this varied by business. The wireline was down 7% due to the lower completion activity and certain location closures. That was partially offset by well servicing and coiled tubing, which were up 3% and 14%, respectively. Well servicing remains stable while coiled tubing benefited from improved weather and the repositioning of certain assets into the Rockies.

Gross margin for the production services business was 19%, up from 17% in the prior quarter, and as Stacy mentioned, that was driven by gross margin improvement in all businesses. Although, stage counts decreased quarter-over-quarter, wireline services generated a gross margin of 12.6%, which was up from 11.8% in the second quarter. Well servicing also contributed to the overall increase by generating a gross margin of 29.3%, up from 28.7%, and coiled tubing's gross margin was 15.5%, up from 9.2% in the prior quarter. For our consolidated drilling services, revenues were $59.8 million, down 8% from the second quarter and utilization was 83%, down from 92%. Our consolidated drilling margin per day was $11,560, up from $10,396 in the prior quarter. Our domestic drilling fleet remained highly utilized for the majority of the quarter with the exception of 2 rigs in Appalachia, one of which mobilized to West Texas during the quarter on a term contract, and the other rig is expected to begin working later in the fourth quarter. Average margin per day was $11,740, up from $10,131 in the prior quarter. The margin was positively impacted by approximately $1,374 per day related to the early termination of a domestic drilling contract.

International drilling utilization was 71% and average margin per day was $11,080 up slightly from $11,023 in the prior quarter. Currently, 15 of our 17 AC rigs in the U.S. and 6 of our 8 rigs in Colombia are earning revenues. Of the 15 rigs earning revenues in the U.S., 12 of those are under term contracts. The contract roll-off is as follows: 1 in the fourth quarter of 2019, which we expect may be idle for 1 to 3 weeks in this quarter before mobilizing to a new client on the term contract; 4 rigs roll off in the first quarter of 2020; 1 rig in the second quarter of 2020; 5 in the fourth quarter of 2020; and 1 in the first quarter of 2022.

Turning to company-wide expense items. G&A expense was $30.5 million, which included the previously mentioned $12.6 million related to compensation plans and professional fees. For Q4, we expect G&A expense to be approximately $21 million, which does include an estimated $2 million to $3 million of professional fees related to our debt restructuring activities.

Depreciation and amortization was $22.9 million in the third quarter and is expected to be around $23 million in the third quarter. Interest expense was $10 million in the third quarter and is expected to be flat in the fourth quarter. For taxes, if you exclude the valuation allowance, the effect of foreign currency translation, state taxes and other permanent differences, our tax rate in the third quarter would have been in the 21% to 23% range.

Moving to the balance sheet. We had $9.4 million in committed letters of credit, and $50.6 million available under our $75 million asset-based lending facility at the end of the quarter. The facility remains undrawn. Our reported cash balance at quarter end was $28 million. Cash capital expenditures in the third quarter were $9.2 million and were $40.5 million through the third quarter. 2019 capital expenditures are estimated to be approximately $46 million to $49 million, which includes approximately $8 million for final payments on the construction of the new drilling rig and previous commitments on high-pressure pump packages for coiled tubing completions operations, all of which were paid for earlier in the year. With that, I'll turn it back over to Stacy for final comments.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [5]

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Thank you, Lorne. Before we take questions, I'll just touch on our guidance briefly. As I stated in the opening remarks, with rig counts continuing to come down and completion activity off, and of course, as we look into the normal Q4 seasonality of shorter days, weather and holidays, this year Christmas, in fact, is in the middle of the week, and the budget exhaustion, we're just going to be cautious as we look towards the third -- fourth quarter.

Production service revenues, which were down about 1% in this quarter over the prior quarter, we're going to guide to be down fairly significantly 15% to 19% in the fourth quarter. Margin, which was 19% in the current quarter, we're going to guide that down a little bit to 16% to 18%, mostly due to the decline in revenues. In our U.S. drilling, which was 88% in the current quarter, we're going to guide 90% to 94%, a little bit of an improvement in the fourth quarter. And in our U.S. drilling margin, which was $11,740 actually reported, but corrected for the -- if you pull out the early-term payment, it being about $10,366, we'll guide that down to $8,700 to $9,200. In Colombia, utilization in the current quarter was 71%, we'll guide that down a little bit 60% to 65% in the fourth quarter. And the margin, which was $11,080, we'll guide down to, $8,500 to $9,500 per day in the fourth quarter. So that will conclude our prepared remarks. We'd be very happy to entertain questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of John Daniel with Simmons Energy.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [2]

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I don't know, I'm going to try one here, see if you guys can answer. But can you tell us anything in terms of timing and process on the debt restructuring?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [3]

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John, we really can't talk about our specific situation and where we are, but I will say that we have some great bondholders that have been -- some have been with us quite a long time a number of years, and we enjoy a very good relationship with them. And I think, probably more importantly, we have a shared vision about the future market and the opportunities that are in the market. And so we're constructive on the process, but we really can't give you any more specifics on it.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [4]

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Okay. I just thought I'd try. You mentioned in the prepared remarks you're -- within wireline, you're selling a district. Does that -- are you just selling property? Or are you looking to dispose some of the units? Just trying to get a sense for what the unit counts might be after that sale?

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [5]

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Well, that's -- John, this is more a consolidation, particularly in certain shale plays. So in some cases, we may have had, supporting the same kind of region. We might have had 2 districts and just consolidating -- we're still supporting that region but we did it out of -- we're doing out of 1 location versus 2. So this is some property that we own. So in this case, we're obviously trying to sell some of that as it comes about.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [6]

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And then, I guess the final one -- or two just housekeeping. Can you just give us a sense for how many -- what percent of the wireline units actually work on any given day, the utilization there? And then this next question and I'll turn it over to others is as you look at the production service revenue decline, I'm assuming wireline and coiled would be down a lot more than well servicing. And just any color there would be appreciated.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [7]

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Well, that's true. Our well servicing segment has held up very well. It continues to be a bright spot. We're seeing actually increased opportunity, picking up new clients, expanding in different markets. So we're pretty optimistic about that business line as we look into next year. Coil and wires clearly where the bigger declines -- I mean well service will be impacted by normal seasonality in the fourth quarter, but those other businesses are just going to be off with completion activity and seasonality. But -- so that's where the bigger declines will come. And then, of course, drilling will be down a little bit too due to in part the util but also margins, rates, day rates coming down a little bit.

In terms of the average number of wirelines...

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [8]

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Ballpark is fine.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [9]

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On a given day, they vary with a 30, 40.

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Carlos R. Peña, Pioneer Energy Services Corp. - Executive VP & Chief Strategy Officer [10]

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Anywhere from 40 to 50, maybe a little bit over that at times. With the number of districts we have, we always have some units that are basically serving as back-up units. And like -- as you probably know, it varies daily.

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Operator [11]

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(Operator Instructions) Your next question comes from the line of Stephen Gengaro with Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [12]

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I guess 2 things. First on the wireline side. Could you give us a sense for what's going on? Like from an efficiency perspective, I mean we're hearing more and more about these integrated gun systems and I'm -- just wanted to get a sense from you how that ultimately can help the business and/or hurt the business depending on how you're thinking about it. But does that help your efficiency in -- as you work with that, can that help drive margin improvement going forward?

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Carlos R. Peña, Pioneer Energy Services Corp. - Executive VP & Chief Strategy Officer [13]

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It can. With these gun systems, we're able to be more efficient on location, and it allows us to do a few things: one, we can build guns faster and potentially not be a bottleneck on location. But most importantly, it eventually will allow us to reduce our labor cost because with additional things on location, we should be able to operate with a more efficient field crew. And so even though some of these gun systems are more expensive, we can change our operation and earn back that margin. And we're testing it out and we're pretty optimistic about the possibilities.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [14]

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Okay. So that's sort of a work in progress. I assume it's difficult that there's some are integrated and some are not. It's hard to impact your labor force until it swings more dramatically in one direction, I would guess.

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Carlos R. Peña, Pioneer Energy Services Corp. - Executive VP & Chief Strategy Officer [15]

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That's right.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [16]

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That's correct.

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [17]

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This is Brian. I think one thing to add there. Just I think as we kind of transition to these, I think you are correct there in some cases, we are moving towards an entire district running these preassembled guns. And I think that's where we'll see some of the savings that Carlos mentioned.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [18]

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Okay. That's very helpful color. And when we think about the rig side in the U.S. I mean you've talked about where your contracted status stands and you gave some color around margin per day, is -- how much of the margin per day drop off in the fourth quarter sequentially from sort of the adjusted number in the third quarter is price? And how much is just kind of utilization and moving around? I'm just sort of trying to frame it as I think about looking into next year.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [19]

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It's mostly price. It's day rates coming down and that's the bigger factor. Utilization is going to actually go up in the U.S. and down a little bit in Colombia. But it's mostly our cost, we've managed very tightly, consistently. And so it's more in the day rate pricing.

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [20]

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Yes. We agree as to what Stacy said, that is the majority of it. But I would say, we also had some movement of rigs that happened late third quarter. We had a movement of a rig from a northern location into the Permian basin. So that will have some impact on our margins for that rig over the next 6 months. So that should recover back to a normal margin probably by second quarter of next year. So that would have some impact as well. But the team has done a great job, like Stacy mentioned. We've been very aggressive and we've worked hard. We got a great brand out there and we worked hard to keep our utilization up as a 16-rig or 17-rig drilling contractor. And our rigs are well positioned to do it. And like Stacy mentioned, we've brought in 3 new clients that we're very excited to partner with in the Permian.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [21]

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And then just a final one. I might have missed this, but any guidance on 2020 CapEx?

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [22]

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We haven't given guidance. What we've said in the past, and I think we still feel is that a $40 million routine and maintenance number is our viewpoint today. We're always refining that. That number would include some routine and maintenance and replacement in it of some units, but there's times where it could flex a little lower. But I think that's a good number for now.

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Operator [23]

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Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [24]

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All right. Well thank you very much for joining us on the call this morning, and we look forward to visiting at the next quarter. Thank you.

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Operator [25]

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Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.