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Edited Transcript of SOX.TO earnings conference call or presentation 7-Nov-19 3:15pm GMT

Q3 2019 Stuart Olson Inc Earnings Call

CALGARY Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Stuart Olson Inc earnings conference call or presentation Thursday, November 7, 2019 at 3:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David J. LeMay

Stuart Olson Inc. - President, CEO & Director

* Dean R. Beacon

Stuart Olson Inc. - Interim CFO

* Michael UnRuh

Stuart Olson Inc. - Finance Director

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Conference Call Participants

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* Christopher Allan Murray

AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst

* Yuri Lynk

Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Stuart Olson Inc. Third Quarter 2019 Financial Results Conference Call. (Operator Instructions) I would like to remind everyone that this call is being recorded.

At this time, I will turn the conference over to Mike UnRuh, Finance Director for Stuart Olson Inc. Please go ahead, Mr. UnRuh.

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Michael UnRuh, Stuart Olson Inc. - Finance Director [2]

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Thanks, Joanna. Good morning, and welcome, everyone. We're going to start today with some opening commentary from our President and CEO, David LeMay. Also, we have Dean Beacon, our interim CFO in the room with us. After David's prepared remarks, we will open the call to questions. The presentation accompanying today's conference call can be viewed on the webcast.

I would like to remind listeners that several statements made today will be forward-looking in nature and that there are risks that actual results could differ materially from what is discussed. Any forward-looking statements made in this presentation represent the views of management and are presented for the purpose of assisting shareholders and analysts in understanding our financial position, objectives and priorities and anticipated financial performance, and may not be appropriate for other purposes.

In addition, our presentation today includes references to a number of financial measures which do not have standardized meanings under IFRS and are, therefore, considered non-IFRS measures. In that regard, I would strongly encourage you to review the forward-looking information and non-IFRS measures section of our third quarter 2019 MD&A and Slide #2 of our webcast presentation.

I will now turn the call over to David LeMay.

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David J. LeMay, Stuart Olson Inc. - President, CEO & Director [3]

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Thanks, Mike. Good morning, everyone, and thank you for joining us. I want to open the call by commenting on what we are seeing in our markets and what decisive and comprehensive actions we are taking to respond to them.

Clearly, we are feeling the heightened challenges facing our oil sands customers as they are slowing down capital spending, delaying projects, all primarily as a result of challenging economic conditions in Alberta driven from the impacts of the mandatory oil curtailment policy and a challenging regulatory environment. To address these continuing market challenges, we are taking the appropriate actions that we believe are an effective response that will provide our business a stronger foundation in which to operate. We are attacking this in a number of ways.

Please move to Slide #3. First, we are strengthening our financial position. We have successfully completed the refinancing of our $80.5 million convertible debenture that were due at the end of this year. With significant shareholder approval, we secured a new $70 million convertible debenture with a reputable and sophisticated portfolio manager in Canso Investment Counsel Ltd. We have also amended our revolving credit facility to allow for additional financial flexibility. This was completed with the unanimous support of our lenders and includes improved access to liquidity via change to our required debt-to-EBITDA covenant.

Additionally, our Board and management have reviewed our current capital allocation and determined that a suspension of the dividend is prudent to strengthen our balance sheet and ensure we can continue to invest in our growth and diversification strategies.

On the operations side, we are taking actions to restructure our organization to create a leaner, more vertically integrated organization with direct lines of communications, operations and customers. We are creating a flatter organizational structure, in which operational leaders are now reporting directly into me, effectively bringing management closer to operations and customers.

Our goal is to create a stronger foundation from which we can execute on our ongoing diversification strategy and deliver growth and value to all of our stakeholders. We are confident these are the appropriate actions to get us there.

Now turning to an overview of our third quarter performance on Slide 4. Despite the challenging Alberta market conditions, we continue to progress the business this past quarter. I'm pleased to report, we secured more than $195 million of new project awards during the period. Most of these were in our Buildings Group, and included a private sector, light industrial facility and a construction management award to build a new student residence at a postsecondary institution in Ontario.

Combined with our wins in the first half, we've added nearly $800 million to backlog in the first 9 months of 2019 and are moving forward with a healthy backlog of over $1.6 billion.

We also generated third quarter consolidated revenues of $243.1 million, which was up 8.7% year-over-year. And we delivered $11.1 million of adjusted EBITDA, with an EBITDA margin of 4.6%. While not as strong as the same period last year, that period reflected a couple of large projects wrapping up, and this is a solid result in a challenging quarter.

Looking at activity in our operating groups. Our Industrial Group grew revenue by 10% year-over-year as we benefited from the addition of the Tartan operations. We also were active on a number of new projects outside of Alberta, including a mine facility construction project for a new client in Saskatchewan, an infrastructure project for a mining customer in Ontario, and a facility construction project for a food company in Manitoba. These projects partially helped to offset the slowdown in oil sands activity.

In our Buildings Group, we increased revenue by over 6%, as some of our projects in British Columbia are in higher activity phases, and the Commercial Systems Group had a very strong quarter, increasing revenue as it executed on its sizable backlog. The group also achieved significantly higher adjusted EBITDA and adjusted EBITDA margin this quarter as project execution continued to improve.

I will now provide a quick overview of third quarter consolidated results on Slide #5. As I mentioned, we increased consolidated contract revenue to $243.1 million in the third quarter, which was 8.7% higher than the same period last year. In fact, revenues were up in all 3 of our operating groups as we executed on our strong backlog.

Third quarter adjusted EBITDA was $11.1 million, which was a little lower than a year ago. This reflects a decrease in adjusted EBITDA from the Industrial Group and Buildings Group, partially offset by improved results from the Commercial Systems Group. We also had the positive impact of adopting IFRS 16 in 2019.

On the bottom line, we reported a consolidated net loss of $2 million or a diluted loss of $0.07 per share. This compares to net earnings of $3.9 million or $0.12 per share in Q3 2018. The year-over-year change reflects a loss in restructuring costs incurred by the Industrial Group, related to a pipeline construction portion of its business that was shut down during the quarter. It also reflects lower adjusted EBITDA and higher interest costs and a year-over-year increase in restructuring costs and other onetime costs.

In terms of the third quarter results from our 3 operating groups, I would refer you to Slide #6.

Turning to results for the first 9 months of 2019 on Slide #7. Consolidated revenue was impacted primarily by the Industrial Group, but also reflects lower revenue from the Buildings Group. Nine months adjusted EBITDA of $26.1 million was $2.8 million lower year-over-year, while adjusted EBITDA margin was a little lower at 3.7% as compared to 3.9%. This reflects the lower contract income for the period as well as the higher administrative costs year-over-year, and we reported a consolidated net loss of $6.8 million or a diluted loss of $0.24 per share. This was primarily due to the higher administrative costs and lower contract income as well as higher financing costs due primarily to a year-over-year increase on our revolver balance.

In terms of the first 9 months, results from our 3 operating groups, I would refer you to Slide #8.

Turning to Slide 9, where we have set out key balance sheet and cash flow metrics. The change in our LTM adjusted free cash flow is due to the lower net earnings year-to-date in 2019. Our cash balance at quarter end was $81.1 million and includes $70 million of restricted cash from the issuance of the new convertible debentures in the third quarter.

Subsequent to quarter end, these funds were used to settle our 2014 convertible debentures, together with available cash and a draw on our revolver. Excluding the restricted cash balance, our cash and cash equivalents as of September 30 would have been $11.1 million, and we had an additional borrowing capacity of $14.1 million, providing with -- us with combined available liquidity of $25.2 million. Had the new amendment to our covenant been in place at September 30, 2019, combined available liquidity would have been $50 million.

Our long-term indebtedness to adjusted EBITDA ratio was 4x on a pro forma basis. This is up from year-end and reflects an increase in our revolver balance to fund operating and investing activities in the first 9 months of 2019 as well as the lower adjusted EBITDA year-over-year. Notwithstanding this higher ratio, we remain committed to our 3- to 5-year target range of 2x to 3x.

Turning to Slide #10. We've updated our outlook for the remainder of the year to reflect the latest changes in market and competitive conditions. On a full year basis, we now expect consolidated contract revenue to be stable, adjusted EBITDA to be modestly lower, and adjusted EBITDA margin to be slightly lower than in 2018. Specifically, in terms of adjusted EBITDA, we now expect between $32 million and $33 million for 2019.

In the Industrial Group, we now expect revenue to be modestly lower, while adjusted EBITDA and adjusted EBITDA margin are expected to be significantly lower as compared to 2018. This updated Industrial Group outlook primarily reflects the heightened challenges affecting our Alberta oil sands operators, which include, as I mentioned before, the impacts of mandatory Alberta oil production curtailment and a regulatory environment that is not supporting capital investment. These conditions are contributing to reduced capital spending, project delays by all of our operators, including earlier than forecast site demobilization as well as more competitive market conditions. Compounding this is last year's completion of major projects that contributed significant closeout margins to 2018 results.

In the Buildings Group, we now anticipate stable adjusted EBITDA margin and slightly lower revenue in adjusted EBITDA as a result of further project timing delays, which include longer times to get permits and an inability to make up the scheduled activity.

In the Commercial Systems Group, revenue is expected to be slightly higher as a result of new awards. Adjusted EBITDA and adjusted EBITDA margin are expected to be significantly higher as the group benefits from its focused improvements in project execution. And in our Corporate group, we expect adjusted EBITDA to be similar to 2018.

Our backlog, which is shown on Slide #11, is a healthy $1.6 billion. As I referenced earlier, we've added almost $800 million of new projects to backlog in the first 9 months of 2019, and we continue to see a strong pipeline of project opportunities, which will continue to support our backlog going forward.

Slide #12 looks more closely at the opportunities we're pursuing across our business groups. While the Industrial Group is experiencing project deferrals, we see approximately $640 million in industrial MRO and general contracting projects that span many sectors, including the alternative energy, midstream, mining, agriculture, food processing and petrochemical sectors. In the longer term, we continue to see significant opportunities for our Industrial business to be part of the $40 billion LNG project in British Columbia, which we conservatively think we can bid on at least $2 billion of that scope of work in key service areas.

The Buildings Group has an estimated project pipeline of opportunities exceeding $600 million. These opportunities include some larger projects in British Columbia and Ontario. We are also selectively expanding our pursuit of projects as a design-build contractor. And our Commercial Systems Group has been successful in 2019, adding new projects to backlog. The group remains focused on expanding its reach in both its existing markets in Western Canada as well as our newly expanded reach into Ontario. We currently have a project pipeline of approximately $480 million. We continue to see tremendous opportunities and partnerships going forward, and continue to pursue a number of these strategic opportunities across all of our business lines.

Looking at potential partnership projects ahead, we see contract values totaling in excess of $700 million across all our groups.

In summary, despite the headwinds in Alberta, our diverse project pipeline remains strong, and combined with a healthy backlog and the decisive actions we're taking today strengthen our business and enable us to pursue our growth and diversification strategies.

I will now turn the presentation back to Mike. Mike?

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Michael UnRuh, Stuart Olson Inc. - Finance Director [4]

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Thank you, David. Joanna, could you please provide the instructions for the question-and-answer session again.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from Chris Murray from AltaCorp.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [2]

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Dave, you've outlined probably some opportunities and stuff like that. But looking at where you are in terms of leverage, Q4 will probably be a little bit weaker than you expect. Of course, you've got some seasonality that works against you. How do we think about the pacing on leverage? And I appreciate, you've announced some changes, some head count reductions [moving] the dividend. But how do we think about total leverage in the near term? And what other levers can you pull on to keep yourself from breaching your covenants?

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David J. LeMay, Stuart Olson Inc. - President, CEO & Director [3]

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Yes. So I tell you, we have 4 strategies -- there are 4 actions that we've taken. We've taken, obviously, the recent amendment to the revolver to increase our liquidity; the suspension of our dividend to preserve cash and affect the balance sheet; the refinancing of our converts and the restructuring of our business to really create a very lean and vertically integrated model, which I think is the right model in this environment today. We're very focused on operations. We're very focused on execution, and we're focused on building our backlog which we think we're going to be doing through 2020. With respect to how we see the profile of our leverage, as we look into 2020, candidly, we don't typically provide guidance this time of year. But we believe, at this point in our planning, that we're going to be flattish next year, and I'm talking at an EBITDA level. So we're going to be conserving cash and focusing on bringing that leverage down.

But certainly, we think the steps that we've taken this quarter, help us to get there in a better position in 2020 and certainly position us for a larger execution and growing revenue in 2021. Just to jump into another point, we see, particularly on our MRO business, we've talked about this a number of times, how there's a down year and then a bigger year in our 2 or 3 major clients. What's happening this year is -- we actually do expect next year, and I've talked about that on the last call, to be -- we expect the Industrial Group to be up next year. However, the 2021 turnaround cycle is looking like a very significant cycle. We're in the midst of planning that now. So this is about, as I talk about flattish next year, really positioning ourselves for 2021. So it is our longer-term strategy to get us to that 2 to 3x, but we'll be taking these steps that will improve everything in the short to medium term.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [4]

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Okay. I mean considering where some of the headwinds you're facing, have you guys started considering any sort of strategic alternatives for pieces of the business to help you reshape the portfolio?

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David J. LeMay, Stuart Olson Inc. - President, CEO & Director [5]

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Well, as a management team, we're weighing strategic alternatives versus the strategic plan all the time, Chris. It's a fair question. We really do believe the business that is together today is the right business to be together. However, we're certainly always looking at all options, and candidly, don't typically comment on kind of the details of our strategies. So for today, we believe that the pieces that are together, should be together. There's definitely -- we look at the pieces of our business and how they're performing. Currently, we believe that the strategies that we've got in place will get us there. This is an economic condition. We're not sitting here talking about significant project losses. Everybody knows the -- I would say, the challenging and almost punitive regulatory environment that exists today. That's really hurting our -- we've worked really hard to diversify our business. We talked this year about how revenue would be almost its largest amount outside of Alberta. But the reality is we're still 50% Alberta. And if you look where we're down, that's where we're down. So that's what we're seeing.

So short answer, Chris, we're looking at everything all the time, but there's no plans to be divesting of anything today.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [6]

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Okay. And then just a final question. Just as we're trying to model out this cash flow and trying to make sure we understand some stuff. Thoughts about working capital into the end of the year, any pickups? Just as projects ramp down, typically, you've got some cash inflows coming but just want to hear any color you can give around -- give us on that?

And with sort of the restructuring, fair to think that capital spending stays pretty modest over the next year or 2? Is that the right way to think about it?

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David J. LeMay, Stuart Olson Inc. - President, CEO & Director [7]

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Yes. And I think on the capital side, we've said this before. We're a lean business. We've always talked about this, and I think back to even right to the divestiture of our civil business a number of years ago. That was strategic because we like the capital-light model. If you look at the scope of our revenue versus our capital plan, we're very capital-light. And we have the ability to shut that off, almost shut it off 100%.

So no question, given our leverage, capital is going to be very tight. And we can do that without hurting the business. So those are the kinds of things we'll be looking at. From a working capital or inflows of cash, one of the things that naturally happens at the year-end is, things ramp down and we do get an inflow of working capital. I think it will be modest, however.

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Operator [8]

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(Operator Instructions) Your next question is from Yuri Lynk of Canaccord.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [9]

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Just a clarification. When we're calculating your net debt to adjusted EBITDA covenant ratio, the convertibles are included in that number?

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Dean R. Beacon, Stuart Olson Inc. - Interim CFO [10]

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Well, they're not included -- I think they're included from a corporate overall debt side. And this is Dean speaking. But when you talk to the RCF covenant calculation, the convertibles are not included in that calculation.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [11]

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Okay. So the covenant...

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David J. LeMay, Stuart Olson Inc. - President, CEO & Director [12]

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The covenant is strictly covenant LTM EBITDA.

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Dean R. Beacon, Stuart Olson Inc. - Interim CFO [13]

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Right, against what is bank debt and other debt that would be considered in that. I think any debt outside of the convertibles is included in there. So I think, Mike (sic) [Yuri], typically, it's the RCF debt plus $10 million, something like that.

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Michael UnRuh, Stuart Olson Inc. - Finance Director [14]

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That's about right.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [15]

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So the 4x that you're showing on Slide 9 is not directly comparable to your 4.25 covenant?

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Dean R. Beacon, Stuart Olson Inc. - Interim CFO [16]

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No, no. And in fact, like we said, the net debt that we show in the publications is kind of exactly that. It includes convertible debt, RCF debt, the bank debt, less cash over that trailing LTM EBITDA number. In the RCF, it's strictly bank debt. And as I said, there's a little bit of other bank debt adjustment against the same trailing adjusted debt, which includes the IFRS 16 adjustment.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [17]

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Okay. Would you happen to have -- where you are on your net debt-to-EBITDA that corresponds to your 4.25 covenant?

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Dean R. Beacon, Stuart Olson Inc. - Interim CFO [18]

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Right today, I mean, at the end of the quarter?

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David J. LeMay, Stuart Olson Inc. - President, CEO & Director [19]

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At the end of the quarter.

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Dean R. Beacon, Stuart Olson Inc. - Interim CFO [20]

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We're about 2.67.

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Operator [21]

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(Operator Instructions) There appear to be no more questions at this time. I will now turn the call back over to Mr. David LeMay, Stuart Olson's CEO, for concluding comments.

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David J. LeMay, Stuart Olson Inc. - President, CEO & Director [22]

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Thanks, Joanna. As we move into the final part of this year, we are strengthening our business and responding to the challenging market conditions. We have completed the refinancing of our convertible debentures, amended our revolving credit facility, reallocated capital to support operations and created a leaner, restructured organization that is even more focused on execution and our customers. We believe the combination of our actions will provide a stronger foundation from which to execute our growth strategies and deliver value to all stakeholders.

With that, I want to thank you for your questions today. We appreciate your interest. Please do not hesitate to contact us, if you have any follow-up questions. Thank you very much, and have a safe day.

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Operator [23]

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Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.