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Edited Transcript of TEV.TO earnings conference call or presentation 8-Nov-19 2:00pm GMT

Q3 2019 Tervita Corp Earnings Call

Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Tervita Corp earnings conference call or presentation Friday, November 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John William Cooper

Tervita Corporation - CEO, President, COO & Director

* Linda Dietsche

Tervita Corporation - CFO

* Robert P. Dawson

Tervita Corporation - EVP of Strategy & Corporate Development

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Conference Call Participants

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* Aaron MacNeil

TD Securities Equity Research - Analyst

* Elias A. Foscolos

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Greg R. Colman

National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst

* Jeffrey Eric Fetterly

Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst

* John Mark Bereznicki

Canaccord Genuity Corp., Research Division - Analyst of Oil and Gas

* Jon Morrison

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

* Tim Monachello

AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research for Energy Services

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Tervita Corporation third quarter results conference call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, John Cooper, President and Chief Executive Officer. Thank you. Please go ahead.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [2]

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Thank you, Mariama, and welcome to Tervita's conference call for the third quarter of 2019. Joining me on the call today is Linda Dietsche, our Chief Financial Officer; and Rob Dawson, our Executive Vice President of Strategy and Corporate Development.

During the call today, we will make forward-looking statements related to future performance, and we will refer to certain financial measures that do not have any standardized meaning prescribed by GAAP. Forward-looking statements reflect the current views of Tervita with respect to future events and are based on certain key expectations and assumptions used by Tervita. Although Tervita believes that the expectations and assumptions on which forward-looking information is based are reasonable, undue reliance should not be placed in the forward-looking statements as Tervita cannot give any assurance that they will prove to be correct.

Since forward-looking information addresses future events and conditions, by their very nature, they involve inherent risks and uncertainties. Actual results could differ materially from these both anticipated due to numerous factors and risks. Please refer to our continuous disclosure documents as they identify factors which may cause actual results to differ materially from any forward-looking statements and identify and define the non-GAAP measures.

Well, today, we will review our results for Q3 2019 and our outlook for the business for the remainder of the year. We are very pleased with Tervita's strong third quarter results, demonstrating the resiliency and stability of our production-based energy business, our stable growing industrial business as well as our continued focus on driving efficiencies in the business.

So first off, Linda will walk us through the key highlights from our Q3 results, then Rob will review our capital program. And finally, I will move into a review of our outlook for 2019.

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Linda Dietsche, Tervita Corporation - CFO [3]

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Thanks, John. Revenue in the third quarter decreased from the prior year to $611 million, largely a result of lower drilling activity and unusually wet weather. However, these results demonstrated the strength and resiliency of our production-based business as revenue was down 5%, while drilling activity declined approximately 30% over the same period.

Q3 2019 adjusted EBITDA was $65 million, an 8% decrease from the prior year as contributions from our industrial business and our continued focus on cost management mitigated the impact of the decline in oil and gas activity. It is also important to note that we are comparing to Q3 2018, a period where our industry experienced the second highest level of activity based on rig count in the last 2 years, reinforcing the strength of our business model.

Year-to-date, adjusted EBITDA was $174 million, a 23% improvement over the same period in 2018. This improvement reflects growth in Industrial Services and the full integration of the Newalta acquisition and related synergies. Our adjusted EBITDA margin for the quarter and the year remained strong at 34% and 32%, respectively, largely consistent with the same period in the prior year. G&A as a percent of revenue improved to 6% in the quarter compared to 7% last year, and this was on a lower revenue base, which reflects our focus on efficiency and cost discipline.

Energy Services divisional EBITDA decreased 15% compared to Q3 2018, driven by 3 key factors. Production-related volumes increased by 5%, reflecting incremental volumes associated with our acquired facilities, but a shift to lower value waste streams led to an overall reduction in the production-related revenue. The combination of unusually wet weather and challenging market conditions contributed to decreased drilling activity, which resulted in a 17% decrease to drilling-related revenue. Weather also affected the timing of customer remediation activities contributing to a 23% decrease in oil volumes and a decline in revenue from facilities. And third, the energy marketing revenue decreased by 4% compared to prior year due to lower prices as the year-over-year average WTI price decreased 19%. This was partially offset by a 35% increase in marketed oil volumes as we began marketing volumes from our acquired facilities at the beginning of 2019.

In the Industrial Services division, Q3 2019 divisional EBITDA increased $2 million or 20% over the prior year. This increase was primarily driven by higher waste volumes at our waste services facilities combined with optimization and effective cost control programs and partially offset by the impact of lower ferrous and non-ferrous metal prices.

Discretionary free cash flow was $47 million and $81 million for the quarter and year-to-date, respectively, relatively unchanged from prior year. Discretionary free cash flow was more than sufficient to fund the $38 million of growth and expansion capital cash expenditures and $12 million of share repurchases year-to-date 2019.

I will now pass it on to Rob to discuss our capital program.

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [4]

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Thank you, Linda. For the full year, we continue to expect to come in at the higher end of our 2019 capital budget of $120 million to $135 million comprised of growth and expansion of $90 million to $100 million and maintenance of $30 million to $35 million. Although wet weather in the third quarter delayed our capital schedule moderately, year-to-date, we have executed growth and expansion capital spending of $64 million, with the majority being customer backed. We expect these additions will start positively contributing to adjusted EBITDA next year.

Our capital program is principally targeted at meeting our Energy Services customers' needs in times of a tighter capital discipline and increasing water management requirements. We are continuing to expand our energy marketing terminalling and blending business to further assist our customers in maximizing the value they receive for their products.

As I mentioned, we expect the majority of the benefits from the 2019 gross spending program will start to accrue in 2020 including the expansion of our storage and blending capacity at 5 of our TRD facilities, the continued development of our customer-dedicated water disposal facility comprised of 3 pipeline connected disposal wells in the Montney supported by a long-term customer commitment and the completion and tie-in of additional water disposal wells at active TRD facilities in the Montney and heavy oil areas of operations.

We are in the early stages of defining our capital program for next year. We will balance the opportunities we have in front of us with the current realities of the Western Canadian oil and gas environment. Our free cash flow allocation will therefore be between capital and balance sheet and will focus on creating long-term value for customers and shareholders.

I will now turn it back to John to provide operational highlights and our outlook for the remainder of 2019 and 2020.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [5]

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Thanks, Rob. We are pleased with our strong performance, which demonstrates stability and resiliency in our business model. A broad exposure to every major oil and gas play in Western Canada and diversified platform with our Industrial business has positioned us to deliver solid results in this challenging current environment. For the remainder of the year, we anticipate stable WTI prices of approximately USD 55 a barrel with some widening of Canadian oil differentials and expect drilling and completion activity to remain lower than 2018.

We continue to expect that the contribution from a full year of Newalta operations and related integration synergies, contributions from growth capital additions and steady improvements from our Industrial Service businesses will result in double-digit growth in Tervita's adjusted EBITDA in 2019 compared to 2018. We expect annual 2019 adjusted EBITDA margin to remain stable around the 32% range.

Looking forward to 2020, we anticipate adjusted EBITDA growth driven by contributions from: our ongoing focus on efficiencies, cost control and incremental business improvements in our Energy Services segment; the continued optimization of our waste and environmental service businesses in the Industrial Services segment; and our predominantly customer-backed 2019 investments in growth projects that Rob touched on earlier. These are primarily focused on increasing our water handling capacity in the Montney region and enhancing our clean oil energy marketing capabilities.

In a stable environment reflecting activity levels and commodity prices consistent with 2019, we would expect these initiatives to drive double-digit adjusted EBITDA growth in 2020. Recent uncertainty in 2020 outlook for industry activity and commodity prices could temper these growth expectations.

In closing, our strong results in Q3 demonstrate that the steps we have taken since 2016 to strengthen our business have significantly improved our resiliency and stability. The energy industry continues to face headwinds. However, we remain excited about the opportunities in front of us to leverage our infrastructure and create efficiencies for customers. This includes our Montney water disposal infrastructure facility, which is progressing on schedule and expected to be commissioned in the first quarter of 2020. With attractive margins, stable discretionary free cash flow and a well-capitalized balance sheet, we are taking advantage of the many opportunities to generate strong growth from our expanded network.

Lastly, I would like to take the opportunity to thank the Tervita employees for their extraordinary efforts and dedication. We are extremely happy with the progress we've made this year. Our people are the reason we are the leader in our industry and are committed to continuing driving continuous improvement on behalf of our customers and shareholders.

That concludes our prepared remarks. We would be happy to now take questions regarding our results and the outlook for the remainder of the year.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Greg Colman with National Bank Financial.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [2]

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Guys, congrats on the strong quarter.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [3]

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Thanks, Greg.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [4]

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I'd like to start by being super pedantic regarding your outlook as usual, so apologies. You put up $174 million in EBITDA so far this year year-to-date, 3 consecutive beats. If we look at consensus for Q4, it probably means you're going to do something around $230 million for the full year for 2019. So if we assume that's correct, when you guys say growth in annual adjusted EBITDA in the double digits, can we, therefore, conclude that at a minimum, we're talking about a 10% lift in 2020 EBITDA over 2019, which points me to at a minimum $253 million in EBITDA? I just want to make sure I'm interpreting that correctly.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [5]

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Well, we're not going to, as you would expect, give you exact directions on where we're ending up. We do feel confident be it that the end of this year, we will achieve a double-digit growth. For next year, with the activity levels if they remain at the same levels of this year, we'd expect the double-digit adjusted EBITDA growth in 2020. However, as you know, the recent uncertainty in the activity outlook, that could temper it lower than that level of double digits.

We've got November and December to find out as we get clear with our customer work activities and their capital programs. We'll have a clearer view of it by the end of the year and into January.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [6]

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For sure. And that's where I was going to kind of go next, which is we don't know what the world's going to do. But I'm just trying to dig into your assumptions here. Assuming this year is $230 million and assuming the world is flat next year, you're saying 10% year-over-year growth minimum based on those 2 very big assumptions?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [7]

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Well, I mean, based on those assumptions, you'd be correct.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [8]

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Okay. And I guess, all I'm harping on there is just percentage versus dollars. You're not talking to a $10 million increase. You're talking to a 10% increase at a minimum. Again, that's based on flat

EMP.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [9]

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That's correct, yes. That's right.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [10]

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So the second thing is the quarter wasn't perfect itself. I mean the results look quite good. But you talk about wet weather, which we've seen from other operators in many different areas. Do you have an idea as to what the quarter would have looked like if it was like not necessarily perfect but if you didn't have the weather nonsense?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [11]

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Yes, we have an idea of that. I don't know if it would be tremendously material to our results. They're certainly on the cost side. There was delays in our lay costs for our landfill. There was an impact there. We also, as you know, are doing some drilling completions activity in our capital program. There's a delay there. There was also delays in soil revenue jobs for projects as they access our caverns and landfill. So we would have expected higher value from that in the quarter. Not sure it's material. As you know, there's always puts and takes, but that would be the categories that we would look at.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [12]

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Okay. So maybe a small increase to the posted $65 million but not like it wouldn't have pushed it up into the 70s or anything like that?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [13]

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No, we don't think so.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [14]

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Got it. And I know you're still developing -- I believe I caught these comments correctly. You're still putting thoughts towards what your capital program will look like in 2020. But almost -- in almost any scenario, you're probably going to be kicking off pretty decent free cash flow next year after maintenance CapEx for sure and probably after growth CapEx. How should we be thinking about the use of that free cash flow when you look at potential items? And I mean the big 3 I would think about is debt reduction, share count reduction or M&A. What's management's priority when you think about those sort of big 3? Or is there a fourth or fifth that I'm not thinking of?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [15]

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Greg, it's Rob here. I think just when we -- first of all, when we look at our growth capital pipeline, I'd say we are always high grading that growth capital pipeline. It continues to on a backward look and the forward look provide us with very good returns, all above 20% in IRRs after tax. We're going to be focusing on customer-backed opportunities and/or opportunities that provide very quick paybacks. On the high-grade, to the -- on the free cash flow side, we have an NCIB program underway. We're continuing to evaluate the status of that and then debt repayment, I think. If M&A does come up, we're not currently looking at anything today, but M&A is something that we will continue to opportunistically look at particularly on the tuck under, tuck-in sort of smaller, smaller-sized scale wins.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [16]

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So Rob, just if I can understand correctly, you look at organic opportunities as being 20%-plus IRRs. If I look at your free cash flow yield, your equity is something like a mid-teens return. So that would be a second choice behind growth CapEx. And then obviously we know what your debt costs, which is mid- to low single digits. So the best use of your free cash flow would be to accelerated growth capital program as opposed to something like debt reduction?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [17]

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I think the point we made is that we're still evaluating how we're going to allocate between growth and whether or not we're going to look at the balance sheet. So that's still an outstanding item. I think it will be a measured and balanced look at both, but that's just a preliminary view.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [18]

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Got it. Okay. That's it for me. Again, congrats on the good-looking quarter.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [19]

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Thanks.

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Operator [20]

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Your next question comes from the line of Elias Foscolos with Industrial Alliance.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [21]

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I'm going to follow a bit up on Greg's questions, and thanks for those previous answers. In terms of the capital budget for 2020, when could we be looking that you would announce something like that?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [22]

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It would -- It's John here. It would -- we would look at that in the first quarter.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [23]

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Okay. And I guess just focusing on earnings a bit and debt refinancing, is debt refinancing something that you would be looking at? I kind of see that as relatively low-hanging fruit.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [24]

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Yes. I mean our fixed debt does not mature until 2021, so we have about 2 years to refinance. We are looking at a variety of structures, currencies and maturities, and we're open to all options. And the window is open now to the end of the year. So we would be looking at that actively now.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [25]

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Okay. Focusing on the outlook for next year. I'm not going to ask Greg's question in a different way. But rather, what would throw off? And I know you said general industry activity. But if there's a couple items that we could point out or that you could point us to, I mean drilling rig counts could be one. And I'm thinking of maybe butane pricing as another, but maybe that's incorrect. Is there something that you could have us maybe focus on that would impact both upside or downside?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [26]

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Well, really, the driving one would be industry activity on drilling and completions activity, which impacts our -- primarily our landfill portfolio. That would be the main driver. We're pretty comfortable with our production based and the stability of that. That's really in that portfolio to be the main driver. And there's uncertainty what that level will be next year. And as I mentioned earlier, customers are working through their capital programs right now to the end of the year as they traditionally do and finalizing that, and we'll have a better sense as we move into early 2020 exactly where they're at. So that's -- in essence, that's the issue. We don't view the butane issue being impactful and material to us.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [27]

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Okay. It was just something I thought I would bring up something. It's something I've seen at your facilities, and it's part of blending. Anyway, I'll leave it at that, and then I'll turn the call over to anyone else.

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Operator [28]

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Your next question comes from the line of Jon Morrison with CIBC Capital Markets.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [29]

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John, would anything outside of a material decoupling in commodity prices change kind of a high-level multiyear CapEx plans that you've talked about in the past, because unless something has materially changed, it feels like there's still hundreds of millions of dollars of organic catch-up on various projects as you recapitalize the asset base that had been somewhat capital starved for probably nearly a decade before? Obviously, you guys joined in, the recap transaction happened.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [30]

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Yes, that's correct. We still have a robust inventory of organic projects. We're risk managing them as we go through them. Rob talked about we're leaning towards more customer commitments, which seems to be a better received view by our customers and with us. But I think you've got that correct, Jon.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [31]

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Okay. What would be -- or can you share what would be the lowest level of base CapEx that you would foresee spending in 2020 assuming that a 55-ish TI price holds and activity levels obviously don't drop in any precipitous form?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [32]

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It's Rob here. We're still evaluating whether it will be -- with the complete allocation of capital, it will be against our capital program. So I think it would be premature to comment on that question.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [33]

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Okay. And from a timing perspective, when you see the first quarter though, obviously, you're waiting to see what producer spends are going to look like. And if those guys delay until January or even February, in some cases, it would be fair to assume that this could be more of a late Q1 event.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [34]

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Yes. Yes, that's right. Yes.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [35]

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Okay. Has any of your conversations with customers around large project opportunities materially pulled back in the last 2 or 3 months? Or those conversations are still ongoing? There's just obviously the unknowns given all the macro challenges out there?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [36]

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It's Rob again. I would actually say counterintuitively, the level of opportunity with our customers is rising, and it's a direct correlation or an inverse correlation to their focus on capital discipline and spending within cash flow. And water management infrastructure is a sub return assets out of their portfolio, and it's something that we're working closely with our customers to try to share that capital spend with them. So I think the opportunity inventory is growing in that regard and competing very well in targeted sort of organic capital.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [37]

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Any change in your appetite for U.S. expansion at this point just given the challenging macro environment in the U.S. and what I would assume is some dislocation and some sellers' price expectations that might be a better place to look than it has been in a long time?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [38]

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Jon, strategically, it's a very good tuck-in or opportunity for us. But I think you've identified the issue. Right now, it's not accretive with purchase price expectations to our shareholders.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [39]

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Okay. Maybe just the last one for me. Are you seeing anything shopped on the industrial side that looks interesting at all? Obviously, you did a couple of recycling deals not that long ago, just not sure if there's much still being shopped in that market?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [40]

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I think we are seeing one. They're more in the smaller level and the tuck-in level. So we -- it will be part of our capital growth allocation. It's going to have to compete with our organic program. And so we've got a nice opportunity for us -- ahead of us in spite of this market environment.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [41]

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But they're not a scaler size that it really alters your broader plans on the organic CapEx side?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [42]

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No, not yet.

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Operator [43]

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Your next question comes from the line of Tim Monachello with AltaCorp.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research for Energy Services [44]

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First question here, just on 2020 outlook. You lay out sort of 3 key priorities here, one being cost control in the Energy Services segment, second being optimization in the Industrial Services segment. Wondering if you guys have a target or a range that you could provide on how much you expect to save on costs in those 2 -- for those 2 priorities?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [45]

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No, we don't really have a range. I mean we -- now that we have completed our acquisition and gained these synergies, our business model what we started off in 2017, we said we want to be low-cost and efficient and have a continuous improvement of our operations in our mindset, so that our teams continually do that. So we are always looking at ways of being efficient, saving money for ourselves but also to pass on that value to customers. So it's a continual theme. We don't establish targets. We have annual programs to beat on our -- for return on capital employed and free cash flow for each one of our businesses. So they all have levels that they need to improve on.

And the Industrial service does have some more upside in 2020, particularly in our waste and environmental service sector, not necessarily cost but also cost on the revenue side. And the same thing in our Energy Services business. To date, in our Energy Service business, we've closed or suspended 11 locations. We are always looking at that, but we don't see anything imminent going forward right now.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research for Energy Services [46]

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Okay. And then in the -- or sorry, in that regard for the Energy Services business, you've seen, I think, 3 consecutive quarters of margin expansion. How much of that would have been from Newalta synergies and sort of optimizations closing at facilities versus higher margin throughput for your facilities?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [47]

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I don't -- I think we mentioned last quarter, we're not specifically measuring integration synergies anymore. So we don't really have that office. But sort of intuitively, the synergies are probably the #1 contributor. But the other 2 are now as we're running the business and improving our operational performance, they'll be a better contributor going forward.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research for Energy Services [48]

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Okay. So safe to say that, that margin expansion should normalize in forward quarters to a degree?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [49]

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Yes.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research for Energy Services [50]

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Okay. Next one for me. Just regarding the energy marketing segment, I've seen differentials blow out in the fourth quarter here a little bit for heavy crudes. Is there any opportunity there? And are you able to quantify if there is what the impact could be in the fourth quarter?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [51]

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It's Rob. Tim, I think, actually, the -- because the energy marketing business since we bought the Newalta facilities on, we've got such broad access across the full basin. We've been able to take advantage of opportunities that have existed throughout this year. So the answer is yes. As WCS widens out, there are opportunities that present themselves. But at the same time, you've seen condensate sort of increase in price, so that lower-priced condensate or the heavy to sour, one of those 2, have also been opportunities that we've had earlier this year that are slightly lower. So no one of those things is going to give us an outsized rise. I think it's just more of a stable productive business line in a lot of environments.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research for Energy Services [52]

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Okay. Got it. That's helpful. And then last one here. I just noticed year-over-year basis drilling-related volumes, both fluid and landfill volumes, were a lot more stable than we saw the drilling rig count or the decline in drilling rig count in Canada. Wondering if you could speak to that if it was more of a function of the addition of Newalta ramping up or if there's some other factors there that help keep those volumes more stable?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [53]

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It's John here. I think, generally speaking, the addition of the Newalta operations was a primary contributing factor. We have had some market share gains in some of our waste sheds. But overall, it's been pretty flat, so just a little bit up, but mostly on the Newalta business side.

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Operator [54]

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Your next question comes from the line of John Bereznicki with Canaccord Genuity.

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John Mark Bereznicki, Canaccord Genuity Corp., Research Division - Analyst of Oil and Gas [55]

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What's the curtailment strategy in Alberta? Obviously evolving pretty quickly as we found out this morning. I mean how did that impact you in Q3? And how should we think about it in 2020, both in terms of oil sands and conventional?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [56]

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Well, I guess, with the recent announcement, growing crude by rail allowances, we do expect crude by rail to increase over the remainder of the year and into 2020. And that -- the curtailments should continue to be eased, then all of that should provide additional benefit to us. For Q3, to be candid with you, John, I don't know what the real impact of Q3 would have been with the curtailments. But going forward, that's our view.

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John Mark Bereznicki, Canaccord Genuity Corp., Research Division - Analyst of Oil and Gas [57]

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Okay. I appreciate the color. And then secondly, can you talk a bit about the caverns and how they're performing and how they're important to the overall business in this environment?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [58]

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It's Rob here. Our caverns have continued to be particularly at Lindbergh, one of our core assets and continue to provide stable, some of the more complex wavestream stable disposal for some of the more complex waste streams. It's an area where the addition of the Newalta facilities has had a much better impact on operations than we had anticipated. We're at a point we can now process the waste in advance of disposing of it. And then we were able to recover the oil off of the lease that we're putting in the caverns for going in there. So that's enhanced our returns in the heavy oil area quite a bit this year more than we thought it would.

That being said though, in the past, these caverns would have been a much bigger percentage of Tervita's operational earnings than they are now with over 90 facilities across the whole piece. And while they remain very important, they are just one piece of a pretty broad level of offerings. But they remain important.

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John Mark Bereznicki, Canaccord Genuity Corp., Research Division - Analyst of Oil and Gas [59]

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Great. And then just last one for me. Just on the marketing side, I mean, it looks like bringing that in-house within Newalta assets has been pretty helpful on volumes. Any thoughts on potential to grow this business and make it even a bigger contributor overall?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [60]

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Yes. It's John. Yes, first of all, you're right. We have an expanded network, which means that there's volume increases. But it also provides more optionality for our team to work with customers to continue to provide them with value. So there's that. The other thing is on our capital growth program, we are seeing some blending opportunities in small growth projects that have very good returns that we can implement quickly. So we continue to build it out that way. So we're excited about the opportunities in our energy marketing business and continuing to grow that unit going forward.

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Operator [61]

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Your next question comes from Aaron MacNeil with TD Securities.

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Aaron MacNeil, TD Securities Equity Research - Analyst [62]

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John, you kind of touched on it as part of Tim's question, but I thought I'd clarify. In the Industrial Services segment, you obviously pointed to higher waste volumes in the disclosures as part of the strong quarter, but you also mentioned optimization in cost control programs. And I guess I'm just wondering, should we be thinking about Q3 margins to something that can be sustained? Or is it more of a high watermark for the segment?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [63]

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No. Our -- like I guess in our Industrial Service segment, in our waste and environmental services, we have started and began to integrate the offerings and locations into one site. And so that's proven us to save dollars cost but also being more efficient for our customers with an integrated offering. So it's 2 things. We're kind of saving costs and providing customers with a more complete offering and gaining more market share incrementally. So the margins that we're expecting in that segment, we continue to see them stay at these levels and modestly improve like Q4 and into next year. There is seasonality in that business. But overall, on a year-over-year basis, that's what we see.

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Operator [64]

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Your next question comes from the line of Jeff Fetterly with Peters & Co.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [65]

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Follow-up question on the capital program side. So in the summer, you talked about $200 million to $300 million of opportunities that you are evaluating considering your SOW. How would you characterize that number today?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [66]

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I think that number remains intact. Jeff. It's Rob here. We continue to see that level of opportunity in most of our facilities. They all exist in areas where facilities are either currently fully utilized or where there's debottlenecking opportunities at facilities to expand the total throughput to small amounts of capital. And in addition to that, they'd be small expansions in storage and/or pipeline connections either to customers or to regional midstream pipelines for energy marketing. So the opportunities that we've continued to talk about that exists within our existing facility network remain relatively the same. We're going to be looking at that against near-term activity forecast to make sure we'll be high grading to the ones that are in the busiest and highest demand areas, but we believe the pipeline is still intact.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [67]

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So when you talk about high grading, is it that some of those opportunities might not meet return thresholds in this environment or a potential weaker 2020 environment? Or is it just a capital constraint element?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [68]

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I think we're always going to be -- we are capital constrained. We were this year. We will be again next year, perhaps more so because we'll be considering balance sheet allocations of capital, as we've discussed. So we'll be -- by high grading, I mean, everything that we're looking at is -- meets our return criteria. So we're just looking for either the best return with the highest probability of that return. So customer-backed, as I mentioned, and/or a very short payback, where we think we can get our money back in the current environment with less market risk.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [69]

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What would cause you to spend less on growth capital in 2020 than you are guiding to for 2019?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [70]

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I would say, we've mentioned the current uncertain environment. Opportunities to perhaps delever and remain opportunistic for opportunities that might show up either on the M&A or customer opportunities that I've mentioned are starting to become a little more available and perhaps quite valuable, and they are competing against our organic capital pipeline. So we're not in a rush to spend money as fast as we're making it. We're going to continue to be measured and disciplined and make sure that we are spending money on the best opportunities that we have.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [71]

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Just last question on the NCIB side. The $8 million provision for automatic purchases during blackout, over what period of time do you expect that, that will be allocated?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [72]

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That's -- I would say that's more of just an accounting requirement. That $8 million doesn't necessarily mean that's what we intend to purchase. It just means because there's an ASPB underway and we have the NCIB program in place, it assumes that it will be underway until the NCIB program is done. That's what the $8 million calculation would be. We could spend or highly likely to spend less than that over the next little while so...

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [73]

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So how do we reconcile that with the provision for repurchase that's in Note 12, the million shares?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [74]

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That's the same amount.

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Operator [75]

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There are no further questions at this time. I will now turn the call back over to the presenters.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [76]

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Well, thank you, Mariama, and thank you, everybody, for participating on our third quarter call. And we look forward to talking to you further. A taped broadcast of the call will be available on Tervita's website, and we look forward to providing you with an update on our performance at the completion of the fourth quarter of 2019.

Thank you, everybody, and have a nice day.

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Operator [77]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.