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Executives

Michael McShane - Chairman, President and CEO

Matthew D. Fitzgerald - Sr. VP, CFO and Treasurer

Analysts

James Crandell - Lehman Brothers

Marshall Adkins - Raymond James

Kenneth Sill - Credit Suisse

William Herbert - Simmons

Robin Shoemaker - Bear Stearns

Geoff Kieburtz - Citigroup

Brad Handler - Wachovia Capital

Roger Read - Natexis Bleichroeder

Alan Laws - Merrill Lynch

David Anderson - UBS

Michael Urban - Deutsche Bank

Jeff Tillery - Pickering Energy Partners

Ole Slorer - Morgan Stanley

TRANSCRIPT SPONSOR
Wall Street Breakfast

Grant Prideco Inc. (GRP RETIRED) Q2 2007 Earnings Call July 26, 2007 8:30 AM ET

Operator

Welcome…

[Operator Instructions]

During the call, the Company will be making forward looking statements. We refer you to the Company's SEC disclosures which describe and discuss the risks and assumptions therein.

With that, I will turn the call over to Mr. McShane, President and CEO, of Grant Prideco.

Michael McShane - Chairman, President and Chief Executive Officer

Thank you, and good morning to everyone. And as always thank you for joining us to discuss our second quarter earnings. We released earnings late yesterday afternoon. Once again, we're quite pleased with the financial results of the Company.

Revenues were up 21% year-over-year. Operating income margins exceeding 32% were up nicely on a year-over-year basis reflecting a 43% incremental contribution on the year-over-year revenue growth in excess of 60% incrementals on a sequential basis.

All of this was achieved in spite of the fact that our Tubular Technologies division continues to be impacted by a relatively weaker market for their products and services versus last year, and the well publicized and talked about decline in Canada which was a disappointment to all in the industry.

With that I'm going to go through some of the revenue highlights in each of the divisions, a couple of the operating highlights and then turn it over to Matt and he'll walk you through a little bit more detail of the financial discussion. But as always we'll keep our comments relatively brief to allow you sufficient time for questions.

Drilling Products and Services had yet another very strong quarter. Revenue growth of 32% on the year-over-year basis. Footage was up 18% producing and selling approximately 4.2 million feet during the quarter, certainly benefiting from a somewhat favorable mix from a size perspective reflecting the price improvement that we've been achieving here for the last several quarters, and notably a particularly strong improvement in pricing in our China market which is growing for us and has become a very important part of our business.

The pricing in China was up 20% on a year-over-year basis. Backlog as mentioned in the press release was essentially flat on a sequential basis. Footage was down somewhat but pricing in the backlog continues to improve. The backlog is reflecting strong demand for large diameter premium connection products that are going into the offshore markets, which are obviously growing nicely.

New rigs coming into the market are needing these products and when you'll take a look at that, that's become a very important part of our backlog. Matt perhaps can expand on that a little bit later. Our '08 backlog pricing is up 28% versus the first half of '07, clearly reflecting this favorable mix.

ReedHycalog had another strong quarter. Clearly the acquisition of Andergauge is benefiting them but we're also very pleased with their growth and expansion in the international market as well. Both of these factors were more than sufficient to offset the severe contraction that we and everybody experienced in the Canadian market. Total revenue for ReedHycalog was up 28% on the year-over-year basis.

Geographically, US revenues were up 21% year-over-year, Canada was down 36% and the international business was up 44 % on the year-over-year basis. Now clearly that reflects some of the benefits of Andergauge. So on a pro forma basis including Andergauge in the prior year, US revenues were up 8% more or less in line with rig activity.

Canada was down 45% versus rig activity being down 51% and the international markets were up 27% versus activity growth of 10%. So again, I think highlighting the strong growth in expansion we've experienced in the international market. Consolidated revenue on the pro forma basis was up 11%.

Looking at Andergauge alone, again as we talked last quarter they are off to a very good start. Product sales of Andergauge products were up 28% on a year-over-year basis and we're really just now beginning to see the benefits of the sales force synergies with these folks operating with our drill bit salespeople, so we think there's a lot more good things to come with the expansion of Andergauge.

Tubular Technology and Services had a strong recovery versus the prior quarters, as we have talked in the most recent quarters, the market for premium OCTG Products and Services remains somewhat depressed versus levels that we enjoyed in the first half of 2006.

That being said things have improved. Inventory levels have come down. There's about three primary sources of OCTG inventories. They vary as to whether or not months supply are at a little bit north of five or a little bit north of six but they're all consistently say that inventories have come down on a relative basis 10% to 15%.

With that environment and with the stable US market, we saw a 30% recovery in revenues versus the first quarter, most of this being achieved at our TCA business which is our heat-treating and threading business. They were the beneficiaries of some increased demand related to deepwater projects in the Gulf of Mexico.

We expect relative stability in our US OCTG businesses from this point forward, and we expect some pretty good growth coming out of our XL products in the second half of the year. In fact, based on the backlog and orders we have today, XL products should produce revenue growth of about 50% second half versus the first half, so that will be the source of growth in that division for the balance of the year.

We have talked recently about a number of manufacturing efficiency expansion projects. Let me just give you a brief update on the most significant ones. ReedHycalog is of course in the midst of a consolidation project where we are consolidating a number of operating locations in the US into a new facility just north of Houston. That is progressing well on time, on budget.

We expect to be fully operational by November. In fact, equipment moves have begun and we've actually begun some limited production in that facility as we speak. So, we're well on track to recognize the direct and indirect benefits of that consolidation move for 2008.

In our drill pipe operations, our new well line in China was commissioned during the quarter. Our automated tool joint, forge line in Veracruz was completed and is operational, and the addition of another weld line in Veracruz is moving forward and we should be operational with that by the fourth quarter.

Lastly, our new heat-treating facility in Amasoto [ph] is progressing and commissioning should be expected in the first quarter of 2008. So all of those projects produce either manufacturing efficiencies or very attractive expansion opportunities for the Company moving forward.

IntelliServ had a pretty good quarter as well. From a revenue perspective, we were actually somewhat ahead of our internal plan generating just under $4 million in revenues. During the quarter, we wrapped up the SPD Well project, completed the first well for BP up in the Wamsutter, and we completed the first PEMEX land project as well.

The network uptime was good approaching 90%, certainly meeting hours and our customers expectations. We expect the third quarter to be somewhat slower from a revenue generation perspective due to project delays which are unrelated to our system.

But based on current commitments, drilling schedules that we have, we should be operational on four to five rigs during the fourth quarter, basically in line with our prior expectations, perhaps 30 to 60 days behind what we would otherwise hope to you but more or less moving ahead on schedule and with very good success of the project.

We're also in negotiations with-- on five different projects, all several of which involve multiple rigs, so I think the interest continues to be quite good. The performance is quite good, dealing with a few project delays that are outside of our control but all-in-all quite pleased with our progress there. With that I'm going to turn it over to Matt and he'll walk you through a little more detailed analysis on the financials.

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Mike. Starting with the income statement, consolidated revenues were another record at $522.2 million up 21% year-over-year and 5% sequentially. Mike covered the divisional revenue changes so I'll touch on some of the revenue mix figures.

Drilling Products, drill pipe represented 82% of total sales in the current quarter up from 77% in the prior year due to a 74% reduction in sales of third party tool joints.

All other product lines showed year-over-year increases sequentially, Drill Pipe and Drill Collar showed the largest revenue increases. Sales of premium Drill Pipe represented 31% of total Drill Pipe sales, down from 34% in the prior year and 36% in the prior quarter.

Despite the lower premium sales mix, average price per foot was up 18% year-over-year due to favorable size mix and sales of our new TurboTorque product line. Sequentially, the average price per foot was relatively flat overall, up slightly although increased 9% in China.

At ReedHycalog, drill bits represented 77% of total revenues up from 90% in the prior year due to the addition of the integrated drilling tools business. Fixed Cutter bit showed the biggest year-over-year increase up 14% while Andergauge was up 28% on a pro forma basis. Sequentially all product lines showed revenue increases except for coring services which are heavily weighted towards Canada.

At Tubular Technologies, most product lines were relatively flat year-over-year with the exception of our TCA heat-treating business which declined 34%. Sequentially, however, TCA's revenues more than doubled due to several large offshore orders, and three of the four product lines showed sequential revenue improvement. Gross margins improved to 49% from 47% in the prior year but were flat sequentially.

SG&A and R&D both increased on a year-over-year basis due to the addition of Andergauge and TReX litigation costs but were flat as a percentage of sales. Sequentially these costs were relatively flat and decreased slightly as a percentage of sales. Operating income margins improved to a record 32.3% up from 30.1% in the second quarter of 2006 and 30.8% in the first quarter.

Drilling Products had record operating income margins at 41%, up from 37% in the prior year and up slightly sequentially. ReedHycalog's operating margin at 32% were down year-over-year but improved from 30% in the first quarter due to improved product mix and the success of our Rock Force roller-cone product line.

Tubular Technologies operating income margins at 24% were down year-over-year due to the slowdown of the TCA heat-treating business but improved from 19% in Q1 due to the recovery from the Q1 bottom. We look for these margins to stay in the mid-20% range for the remainder of the fiscal year.

Interest expense, while up $500,000 year-over-year continued to decline sequentially as we paid off the remaining borrowings from the Andergauge acquisition. Equity income from our VAT joint venture as expected declined on both a year-over-year and sequential basis due to the early delivery of orders which fell into Q1.

Due to the summer maintenance period we're forecasting third quarter equity income to be approximately $25 million and fourth quarter equity income to be in the range of $27 million to $30 million. The tax rate for the quarter was 29.3% down slightly from the first quarter rate of 30.1% due to $1.6 million reversal of a US tax accrual. We are forecasting the tax rate for the remainder of the year to be between 29% and 30%. In total, this rolls up to be $1.04 per share on a fully diluted basis up 31% from the second quarter of 2006.

Now, for the balance sheet. At quarter end we had cash and short-term investments of $193.9 million and interest bearing debt of $204.5 million. Our debt-to-cap ratio was 11.3%. Our day sales outstanding increased slightly to 63 days.

Now, I'll turn it to cash flows. Cash flows from operating activities was $203.5 million. This is net of $64.2 million of working capital increase and includes depreciation and amortization of $15.2 million and $145 million pre-tax dividend from Voest-Alpine Tubulars. Our capital spending for the quarter was $33.7 million leaving free cash flow of $169.8 million for the quarter.

Our year-to-date capital spending has been $61.4 million and we are continue to expect $130 million to $135 million of capital spending for the year. EBITDA for the quarter was $210.4 million. And finally we had 17.7 million of share repurchases during the quarter.

Now, I'll provide a brief earnings outlook. We are revising our 2007 earnings per share forecast upward to a range of $4.20 to $4.25 per share, an increase from our earlier guidance of $4.10 to $4.20 per share. This reflects improved second half results from each of our three divisions but lower equity income from our Voest-Alpine Tubulars joint venture.

For the third quarter we are forecasting relatively flat earnings with the improvement in Canadian drilling activity being offset by lower Voest-Alpine Tubular's profitability and a slightly unfavorable product mix at Drilling Products.

Now we'll turn it over to the operator for questions and answers.

Question and Answer

Operator

Your first question comes from Jim Crandell with Lehman Brothers.

James Crandell - Lehman Brothers

Good morning, guys.

Michael McShane - Chairman, President and Chief Executive Officer

Good morning, Jim.

James Crandell - Lehman Brothers

Mike, can you speak to the pricing initiative you recently took at ReedHycalog on 100 bits for the rental market, sort of the rationale behind it, maybe how it's going now and how long you're going to give it in terms of a strategy?

Michael McShane - Chairman, President and Chief Executive Officer

Sure. Well, as far as how long we'll give it, I guess we'll give it as long as it takes to materialize. The other rationale Jim, and to elaborate just a little bit further, actually we rolled out a price book increase across the board on all products that average 5% to 7% and then specifically with Fixed Cutter rental bits, introduced a price book increase calling for approximately a 15% increase.

The implementation is being dealt with as you might imagine on a customer-by-customer project-by-project basis, and yes I think it's a little bit soon to tell what level of success we will have with it.

The rationale is twofold. Number one, there have been significant increases in materials costs, some of the carbide powders and what not to go into bits and so part of this is just simply a strategy to recover cost increases.

Secondly, if you look at the significant performance enhancements that we have brought to the marketplace in our Fixed Cutter bits over the course of the last couple years, principally through the introduction of TReX and then through Raptor as well as a variety of other features we've added to these bits, we have significantly reduced drilling times in a number of very important areas.

In fact some of the larger EMP companies have commented on that here recently. And so we feel justified in requesting a bit of that performance enhancement if you will to pay for ongoing R&D. So that's the rationale. We'll have to see how it plays out here. Obviously a lot of it's going to have to do with what the overall market environment is but that's the update and the background on that.

James Crandell - Lehman Brothers

Okay, thank you, Mike. My follow-up question is could you comment on the ordering patterns and perhaps even the inventories of the US land rig companies in the Drill Pipe market recently?

Michael McShane - Chairman, President and Chief Executive Officer

Sure. Well, the inventories are something that we do not have a definitive number on, and so we have to use some judgment here based on what they have ordered here over the past year , what we believe they've been consuming and try to come up with where we think they are. We don't think that there's any significant inventory overhang out there but clearly, when you have some of the larger operators with some stacked rigs, there's some pipe that's not moving and we all understand that. I think the ordering pattern has been slow, without a doubt.

There's been a few exceptions but I'd say generally speaking , the large land contractors or the contractors with large land fleets in the US are being cautious about placing orders for 2008 thus far. They-- we clearly are in conversations with them. We have every reason to believe that orders are forthcoming. We've discussed volumes and what not.

But given the fact that we've been able to bring our lead times down somewhat with our expanded capacity on top of the uncertainty that has over hung the US market here for almost a year, they are using that time to their advantage to make sure they don't order more than they need. We are expecting those orders to begin materializing during Q3 and pick up in Q4, so we'll have to see how that

James Crandell - Lehman Brothers

Okay, good. Thank you very much, Mike.

Michael McShane - Chairman, President and Chief Executive Officer

You bet.

Operator

Your next question comes from Marshall Adkins with Raymond James.

Marshall Adkins - Raymond James

Hi, guys. Good job. A couple things, on the IntelliServ that was obviously a nice surprise relative to our model, up about $3.5 million. Mike, you mentioned you expect to be down in Q3 but back up in Q4.

Michael McShane - Chairman, President and Chief Executive Officer

Yes.

Marshall Adkins - Raymond James

Can you give us a little more sense of magnitude? I mean are we talking like nothing in Q3, back up maybe $3.5 million in Q4?

Michael McShane - Chairman, President and Chief Executive Officer

It depends but Q3s can be pretty minimal based on what we see today. The schedules could change, but a few of the projects that were scheduled to be drilling right now are-- have been pushed out and delayed into Q4, so yes Q3 is going to be a relatively minimal amount of revenues unfortunately. Q4 as I said based on our-- the drilling schedules and commitments we've got, Q4 revenues ought to be back up somewhere in the level that we were this past quarter or possibly higher.

Marshall Adkins - Raymond James

Right, very helpful. Talk for a minute about the premium Tubular trends. I mean obviously a nice rebound from Q1. What are you seeing in terms of inventories and in that business?

Michael McShane - Chairman, President and Chief Executive Officer

Yes, well as I mentioned, there are three different inventory surveys that are published or that we have access to, and I guess the most widely read one is the Preston Pipe Report and their estimate, their latest estimate was 6.2 months of inventory out there which is still a little bit high but it's down from the peak of 6.8.

There's also the OCTG Situation Report that's published. It shows inventories at 5.2 months down from a peak of 5.8. And then there's another one that say, I guess more or less a private estimate, which again is estimating 5.2 months but one that we put a lot of credibility in. So somewhere between five and six months supply out there, let's call it five and a half months assuming it's somewhere in the middle, which is not a excessively low level but certainly a lot better than the 6.5 to 7 than we may have been hitting at the peak.

So without a doubt we have seen a little bit steadier flow of demand on premium threading this past quarter and we expect that to continue. That translated certainly into some needed inventory for some of these deepwater projects which are very important to TCA. Their backlog has grown. It bounces around but generally speaking the order inquiry levels that they're getting would suggest to us that we've got a relatively sustainable position in demand for them for the balance of the year.

Marshall Adkins - Raymond James

Okay, great. And one last clarification. I just want to make sure, pricing in the backlog is up 28%, did I hear that correctly?

Michael McShane - Chairman, President and Chief Executive Officer

Looking at the 2008 backlog --

Marshall Adkins - Raymond James

Right.

Michael McShane - Chairman, President and Chief Executive Officer

The pricing is up 28% versus the first half of this year. Now again, the point there as much as anything that is reflecting the more favorable mix of products that are going out in the backlog, that are largely driven by this increase in demand for offshore oriented projects.

Marshall Adkins - Raymond James

Alright, I just wanted to make sure I heard that right. Great guys, thank you.

Michael McShane - Chairman, President and Chief Executive Officer

You heard it right. Thank you.

Operator

Your next question comes from Ken Sill with Credit Suisse.

Kenneth Sill - Credit Suisse

Yeah, good morning, guys.

Michael McShane - Chairman, President and Chief Executive Officer

Hi, Ken.

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Good morning.

Kenneth Sill - Credit Suisse

One of the things that you've talked about I guess with the change in the premium connection business with the acquisition of Hydril by Tenaris is the opportunity for you guys as the last guy standing as an independent to grow that business. Could you discuss a little bit how those discussions are progressing and what the interest level is, and then maybe give us some Kentucky vintage on when that might translate into better results in the premium connection business?

Michael McShane - Chairman, President and Chief Executive Officer

Well, there's a lot of interest in Atlas Bradford today. You're right, it is the last significant independent premium connection company out there. There are a number of Mills which are desiring a piece of the US marketplace that don't have premium connections and we have ongoing discussions with a number of those as to how we might work together. The-- I'd say that with Tenaris owning Hydril, there are obviously customers that have preferences for a variety of things.

I think it's a little bit soon to tell how that all plays out but we certainly feel that Atlas Bradford's position is very defensible with the changes that has taken place in the market and that over time that all the changes that have taken place may open up some opportunities for us. I think in the near term, Ken, we see the business as being stable for us and that the changes have taken place not having a negative impact but a little bit soon to project that there's-- this could translate into a significant upside potential for them.

Kenneth Sill - Credit Suisse

And then as a follow-up, I mean are there-- what is the status of being able to sell Atlas Bradford connections internationally giving Tenaris buying Hydril, or does that not change it's still really a domestic market for you guys?

Michael McShane - Chairman, President and Chief Executive Officer

At this time today, it's principally a domestic market, yes.

Kenneth Sill - Credit Suisse

And are you restricted from selling internationally still?

Michael McShane - Chairman, President and Chief Executive Officer

Well there is, as you are aware, there is an existing license agreement between ourselves and Tenaris that predates the Hydril acquisition that would generally speaking restrict us from the international and I don't want to comment beyond that.

Kenneth Sill - Credit Suisse

Okay, thanks, Mike.

Michael McShane - Chairman, President and Chief Executive Officer

Yes.

Operator

Your next question comes from Bill Herbert with Simmons.

William Herbert- Simmons

Good morning.

Michael McShane - Chairman, President and Chief Executive Officer

Good morning Bill.

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Good morning.

William Herbert- Simmons

Hi, getting back to the North American land issue with respect to orders, Mike, could you just educate us as to what the difference in purchase intensity is with regard to a new build land rig boring drill pipe versus a seasoned pre-existing land rig boring drill pipe?

Michael McShane - Chairman, President and Chief Executive Officer

Sure, yeah. We've modeled and estimated that on average, a new land rig coming into the US market may need a compliment of somewhere around 15 to perhaps 20,000 feet of drill pipe.

William Herbert- Simmons

Okay.

Michael McShane - Chairman, President and Chief Executive Officer

It was an offshore rig coming into the market could need as much as 25 or possibly even more 1,000 feet of drill pipe typically is going to be a larger diameter premium connection and obviously a much higher price per foot which is what's happening in our backlog right now. What we estimate the replacement requirement is of an active rig in the US feet or in the world global fleet, we estimate somewhere around 5,000 feet per year per rig, and that can vary fairly significantly on a geographic basis.

William Herbert- Simmons

And when you say replacement for a global rig, 5,000 feet, are you talking both land and offshore or just land?

Michael McShane - Chairman, President and Chief Executive Officer

That's a global number, yes so both land and offshore. Clearly, there are instances onshore where drill pipe can last four or five years if they're drilling in a lot of directional drilling, more challenging drilling environments, the life may be closer to three years. Offshore, the replacement life cycle tends to be a lot shorter than it is onshore. But as I say, we try to estimate this on a regional basis onshore and offshore and those numbers can vary significantly.

William Herbert- Simmons

Okay, so then I guess what I'm trying to get my arms around here is that while on the one hand, I think if I understood you correctly, the preliminary discussions with North American land drillers don't seem to indicate a huge delta year-over-year yet last year was a year that was governed by significant sort of new rig drill pipe order flow, this year probably a lot lower, I would suspect that given that delta in terms of new land rig orders versus pre-existing land rig orders this year that volumes going into '08 for North American land for that reason alone will be down rather considerably, no?

Michael McShane - Chairman, President and Chief Executive Officer

We'll, be down. I think that our preliminary estimates would be and this is assuming a relatively flat drilling environment, and we can debate that obviously add infinitum as to what's going to happen in '08 but assuming a relatively flat land drilling market in the US, the indications we have and that makes sense to us is that yes there would be a moderation in demand for that US part of those fleets. Reflective of the fact that they don't have as many new rigs coming in as they did in the past year so you're absolutely right.

What we are saying that we believe as could be a mitigating factor to that is obviously as I've talked, the continued growth in the offshore demand that is coming into our backlog already that has had a very high price per foot, and there are a few spots internationally, land rigs, which continue to grow and there's a few spots in particular where it appears as though the demand for drill pipe may be unprecedented.

And that's something that's under review and being and you could probably take a guess to where one or two of those markets may be. But there is we believe some significant upside in a couple of international areas that may go a long ways to offsetting any reduction in demand from our US based customers.

William Herbert- Simmons

Fantastic. Thank you very much.

Michael McShane - Chairman, President and Chief Executive Officer

You bet.

Operator

Your next question comes from Robin Shoemaker with Bear Stearns.

Robin Shoemaker - Bear Stearns

Yes, good morning. Mike, I wanted to ask you about your current capacity. I believe that you're at 18 million feet of annual capacity and I guess for the second half of '07, are you anticipating running essentially at full capacity?

Michael McShane - Chairman, President and Chief Executive Officer

Yeah. Just to clarify that, our last 1 million feet of capacity which is targeted or planned for Veracruz actually won't be operational until late this year. So actually, our capacity today theoretically is more like 17 million feet. Okay?

Robin Shoemaker - Bear Stearns

Okay.

Michael McShane - Chairman, President and Chief Executive Officer

For the second half of the year, I would say we'll be running pretty close to capacity, yes. Okay, and in the-- with the backlog that you have currently, is some like is half of that an '08 type backlog, or how far -- ?

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Yes a little bit less. Our backlog for the rest of '07 is about 8 million feet and for '07, it's between -- for '08 it's between 6 and 7 million feet.

Robin Shoemaker - Bear Stearns

Okay, right. And on, just as a follow-up on this China joint venture where you had the 20% better pricing year-over-year, is there a similar trend in '08 and I think you had $170 million in '06 revenue in China. Is it substantially up this year?

Michael McShane - Chairman, President and Chief Executive Officer

The-- yes '07 is going to be up nicely over '06 in China. And just to clarify, the bulk of our Chinese business is 100% owned, with the joint venture has a limited amount of production and operation. '08, it's a little soon to tell on '08. The-- we have been working hard the last several years to bring the pricing structure for our products in China up to world levels, if you will. I think we're getting very, very close to that, and as I noted, our pricing this past quarter was up nearly 20% on a year-over-year basis, so we're narrowing the gap fairly rapidly.

'08, we are in negotiations as we speak, and that is one of the areas where we see very significant upside to volumes for '08 based on indications we're being given by the National Oil Companies there, so it's a little bit soon to predict what the pricing will look like. Certainly it's not going to be any worse than it is today. How much increase we get though it's premature.

Robin Shoemaker - Bear Stearns

So you have 1 million feet of manufacturing capacity in China, is that--?

Michael McShane - Chairman, President and Chief Executive Officer

No, we actually have --

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

3.5 million.

Michael McShane - Chairman, President and Chief Executive Officer

Up about 3.5 million feet of capacity.

Robin Shoemaker - Bear Stearns

Okay so you'll be running at full capacity then?

Michael McShane - Chairman, President and Chief Executive Officer

I suspect we'll be running at full capacity in China.

Robin Shoemaker - Bear Stearns

Right. Thank you.

Michael McShane - Chairman, President and Chief Executive Officer

You bet. Just to clarify that, the capacity in China has been 3.5 million feet. It's just recently with conditioning of our new well line is now approaching 4.5 million feet. So I'm ready for the next question.

Operator

Your next question is from Geoff Kieburtz with Citigroup.

Geoff Kieburtz - Citigroup

Thanks, good morning.

Michael McShane - Chairman, President and Chief Executive Officer

Hi, Geoff.

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Good morning.

Geoff Kieburtz - Citigroup

One quick clarification. The comment about the 28% increase in the backlog pricing pertained to which segment?

Michael McShane - Chairman, President and Chief Executive Officer

That's the drill pipe. That's the only segment we really have a meaningful backlog, yeah.

Geoff Kieburtz - Citigroup

Yeah, that's what I thought. Okay. Could you talk a little bit about the Drilling Products backlog? I mean, in dollar terms it's been relatively stable but from the comments you've been making here, it sounds like the composition has been changing fairly significantly over the last four quarters. Could you talk about that a little bit?

Michael McShane - Chairman, President and Chief Executive Officer

That is very true. Let's see here. I'm going to pass this page to Matt. Because the print is so small I can't read it.

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Yeah, no it's clearly that's the case and kind of leading from your first question, that's one of the main reasons that the pricing in the backlog is up significantly is due to that favorable mix. For the first time in quite some time, actually our backlog is now over half of it is consists of offshore orders. So previously, we had well over 50% on the land side and really for the first time at the end of this last quarter it's now over half made up of offshore orders so that's just one indication of the composition of the backlog.

Geoff Kieburtz - Citigroup

And how about on a geographic basis?

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Well, geographic is a little bit tougher because we track it by type of customer and type of rig, but for instance, when neighbors orders pipe, we don't know whether that pipe is used in the US or perhaps it could be used in Saudi or other international locations. So our geographic mix is not, we don't have as good identification of that but clearly, a lot of the demand that we're seeing today is specifically for international orders and of course most of the offshore orders are going to be for the international marketplace.

Michael McShane - Chairman, President and Chief Executive Officer

But as best we can estimate it, Geoff, our US component of our backlog is gone from the mid-60% range down to the low 50s, so again, consistent with what Matt's saying, what we've been talking about, what's driving the backlog today is the international growth and the offshore growth, and it's driving the premium mix up nicely as well.

Geoff Kieburtz - Citigroup

Right okay. And I may have missed this, but could you come back and elaborate a little bit on the reduced outlook for Voest? A quarter ago you thought we'd be seeing somewhere in the $30 million to $35 million contribution this quarter and off obviously that was a shortfall and it seems like your guidance for the second half is lower than I guess what was implied before?

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Yeah, it's a little bit muted. Certainly as I mentioned some of that's due just because of the timing, the summer maintenance period impacts them in both the third and the fourth quarters because of deliveries, but there are a couple things impacting them. They are seeing some price competition, increased price competition in the North American marketplace, so we're forecasting OCTG pricing to be down in North America.

We have also seen some price increases on their sourced materials that will be impacting them in the second half of the year so it's kind of a combination of both. That business is always a bit lumpy, so it is relatively hard to forecast so I can say we generally try to take a fairly conservative approach to our guidance and hopefully that'll be the case this time as well.

Geoff Kieburtz - Citigroup

Any thoughts as to why, I mean, I'm assuming that those two comments about North American pricing competition and increased material or input costs are sort of industry comments. Is there any reason to think that Voest is either advantaged or disadvantaged relative to its competitors?

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

No, no, I don't think so at all. I think everyone is seeing that in the certainly North America marketplace some softness in the OCTG pricing.

Michael McShane - Chairman, President and Chief Executive Officer

Yeah, Matt's right, Geoff. I mean there has been a not pronounced but there certainly has been a softening in OCTG pricing here in the last couple quarters in the US, and that's about as I recall about 25% of Voest-Alpine's business. Clearly there's been some new capacity chasing the OCTG market on a global basis and so that impacts the global market so I think outside the US that OCTG prices thus far came up relatively firm but Matt's absolutely right.

The input costs are definitely going up and as we've talked about before, some of that is going to roll through and our input cost on drill pipe as well, we're fully expecting as the year progresses, that our green tube costs will go up that's under negotiation but without a doubt they're going to go up. And it goes all the way back up to the steel mills in the Billitz [ph] that the cost of the materials is going up, so.

Geoff Kieburtz - Citigroup

And you're still on a quarterly reset on the Voest pricing?

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

No. Right now, it's-- I mean we've been on a kind of a cost plus basis for quite some time but that contract is expiring and as Mike said, we're in the process of renegotiating that as we speak.

Geoff Kieburtz - Citigroup

Okay, thanks very much.

Michael McShane - Chairman, President and Chief Executive Officer

Yes.

Operator

Your next question comes from Brad Handler with Wachovia Capital.

Brad Handler - Wachovia Capital

Thanks, good morning.

Michael McShane - Chairman, President and Chief Executive Officer

Good morning, Brad.

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Good morning.

Brad Handler - Wachovia Capital

Could you please speak a little bit to your strategy as you are in negotiations with the US land customers? In other words, are you holding out a certain amount of capacity kind of anticipating trying to satisfy them or are you pressing ahead as fast as you could with alternatives in those select markets you're talking about? How do those decisions, I mean how do you play that out?

Michael McShane - Chairman, President and Chief Executive Officer

Well, I think that clearly we are pursuing business in all areas where we think the financial returns are there and justify such. We, I think with the capacity additions we've implemented here, we have the luxury of doing both though and clearly, our discussions with our major alliance customers who have yet to place orders for '08, we have given them every assurance that the capacity is going to be there.

We understand their need to evaluate their volume demands. We're in constant discussions with them and I think they clearly understand that the point will come where they have to make some commitments to us if they want to lock up the capacity but I think we have the luxury of doing both right now.

Brad Handler - Wachovia Capital

That's helpful. Unrelated follow-up, please. Just some thoughts on use of cash next year then. I understand there's some constraints as it relates to your public debt on kind of how much you can do with respect to share repurchase so maybe if you could speak to thoughts on how to address that?

Michael McShane - Chairman, President and Chief Executive Officer

Yeah. There is a restricted payments basket under our public notes which is a bit limiting to us here in the near term. That's something that if need be, I guess we can address. I don't want to get into that discussion here but again, the general comment would be that clearly, as things have progressed and as we look out into '08, we are going to be in the absence of a major acquisition, generators of significant free cash flow. We understand that money is our shareholders, not ours. We have been evaluating quite intensely here in the last 90 days the various options that are in front of us.

At the end of the day we're going to do the right thing and I don't think a restricted payments basket is going to be the in pediment if we believe that there's something we need to do, so share repurchases has been the chosen route for the past year. We are continuing to be in the market buying back shares, but we are evaluating a number of other alternatives as well and I think have every expectation that we will be doing something.

Brad Handler - Wachovia Capital

Okay, fair enough. Thanks.

Michael McShane - Chairman, President and Chief Executive Officer

Okay.

Operator

Your next question comes from Roger Read with Natexis Bleichroeder.

Roger Read - Natexis Bleichroeder

Good morning, gentlemen.

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Good morning. You want to answer that phone?

Roger Read - Natexis Bleichroeder

I'll go to the headset here. Real quick, looking at the backlog for the drill pipe, your dollar values flat, the price realized in there is up. Clearly, the amount of footage in the backlog has declined. Some of that clearly must be the US land market having dropped off. In terms of the timing of international bids, I mean okay backlog flat, kind of I guess we'd say three quarters in a row from a dollar value standpoint. What do you think the timing of international awards is that we would see an acceleration in that backlog?

Michael McShane - Chairman, President and Chief Executive Officer

I mean, that's an ongoing process. I mean I can tell you that just since the quarter end, just through the first couple weeks of July that we booked another approximately 700,000 feet of drill pipe at prices in excess of $100 a foot. So that is an ongoing trend.

Now, you're right that there are a couple of large orders, if you will, that are out there, that are under negotiation and I would suspect those are things that will materialize some time between now and year end. Whether it will be in the third quarter or early fourth quarter, I'm not sure.

But I think that clearly between now and the early part of the fourth quarter, we would expect to have much better visibility about what our volumes are going to be not only from these international markets I've mentioned, but also with by that point in time I think we're going to have to have known from our land contractors here in the US what the requirements are and those orders will have had to have been placed if they want it in '08. So this next 90 to 120 days should tell us a lot.

Roger Read - Natexis Bleichroeder

Okay, that's helpful. And then the other question I had for you I guess on the consolidation of the ReedHycalog into the one facility, isn't it Conroe?

Michael McShane - Chairman, President and Chief Executive Officer

Yes.

Roger Read - Natexis Bleichroeder

How do you manage, I mean its one thing to consolidate in weak markets, it's got to be quite another challenge to consolidate in an active market. How are you going about managing that process in terms of moving the equipment, how much new equipment goes into that facility so there is not that much movement of existing equipment and meet the demands?

Michael McShane - Chairman, President and Chief Executive Officer

It's a challenge for the guys without a doubt, because you're right these facilities, our diamond production up in Provo has been running full out for the last couple of years. Our Fixed Cutter business has been doing quite well so those guys are running not at full capacity but very close, so it is a challenge to move four manufacturing facilities and not disrupt the supply of products to the field. What that entails is doing a lot of advanced planning, making sure we have components manufactured in stage to be assembled in various locations to insure that we don't disrupt that. That has resulted temporarily in some of the build in working capital that we've had has been inventory build that's safety stock, if you will, to insure that we don't have these type of disruptions.

From a peoples perspective, that's the other big challenge of course. This is disruptive, I'll use that word somewhat loosely but obviously peoples commutes are changed and so on and so fourth but I will tell you that the reception has been pretty good from our folks.

We think the environment we're moving them into is very good for them. It's a nice area to work in, there's lots of amenities in the nearby area and we've actually been quite pleased with the level of reception that we've had from our employees about the impending move. So things are moving along. There's a lot of balls in the air. A lot of things to keep track of but so far, things are going quite well.

Roger Read - Natexis Bleichroeder

Okay, thank you.

Michael McShane - Chairman, President and Chief Executive Officer

You bet. Do we have any other questions? Operator?

Operator

Your next question comes from Alan Laws with Merrill Lynch.

Alan Laws - Merrill Lynch

Hi, guys. I just have a couple quick follow-up questions here, more detail than anything. You said your '08 backlog is around 6.7 million feet right now. How much of this do you think is offshore? It sounds like most of it is offshore given the order flow here from the plan.

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Yes that's correct. At this time, most of the-- I mean there's certainly is some land orders but as we've said before, a lot of the larger land contractors have yet to place their orders for 2008.

Alan Laws - Merrill Lynch

Okay and you said that roughly just over half the backlog now is offshore orders. When you look forward on your internal forecast, how high do you think the offshore portion of this is going to get as a percentage of the total? Is it going to max out around 60 or is it going to ---?

Michael McShane - Chairman, President and Chief Executive Officer

Yeah, all that has, I hope Alan it drops back down to 30 or 35 because land business is so strong. I mean, the question is, I mean I think we can sit and we could probably do a pretty good job of projecting how much more offshore business is going to come in between now and year end to set the stage for '08. The big question really is what the volumes are going to be from the land contractors for the US fleets, and that-- when you talk about percentages, I mean those volumes obviously are very important to us. So that's the wildcard. That's the unknown.

I mean certainly, we have done some internal estimates based on our discussions. I'd say right now as a base case, the offshore stuff may end up being somewhere in the 30% range but then you've got a lot of international land business as well that is coming in and that we as I said earlier, we're reasonably optimistic it's going to grow quite nicely between now and year end as well. So a lot of variables and moving pieces here to try to pin it down too much but as I say I think the next 90 to 120 days will obviously, the dye will be cast by then.

Alan Laws - Merrill Lynch

Okay, Mike, just as an observation, in the past you've been pretty cautious when you get in these situations. You seem pretty comfortable with all of the moving parts as you laid out there that next year looks pretty strong for you, even with this --

Michael McShane - Chairman, President and Chief Executive Officer

Yeah, well we obviously are looking at the land oriented business in the US with the same concerns and apprehension that everybody has right now. Gas prices and inventories could be in a lot better shape than they are and we understand how that can impact our business.

With that being said the continued growth on the international side of the business, the continued growth globally and the offshore and the high end products that that requires gives us an awful lot of comfort about even in a scenario where US volumes, land volumes are down and meaningful amount next year, that we believe the scenarios still play out to where we have pretty good earnings growth coming out of our Drilling Products Division.

So yeah, there's a comfort level there that is driven by the significant strength on the international and offshore Markets that goes a long way to mitigating and bear in mind that the reduction in Canadian activity that we've dealt with which obviously is a very important market, we're already dealing with that. Our Canadian business in 2007 is already very depressed from what it was in 2006. So that part of the North American concern, we're already living with this year.

Alan Laws - Merrill Lynch

Okay, the last little follow-up here is on the offshore rig side here, how much or what percentage of the rigs on the come so to speak do you think have ordered the pipe?

Michael McShane - Chairman, President and Chief Executive Officer

Roughly 50% of the ones that are scheduled to be delivered between now and say the next year. So you start hearing about some of the rigs are being ordered for deliveries beyond 2008. Clearly, that's outside of the scope of this but for rigs that are scheduled to be delivered between now and the end of '08, we've estimated about half of those have placed orders.

Alan Laws - Merrill Lynch

Okay so sort of the rat going through the snake can get larger here as you, as we get further along?

Michael McShane - Chairman, President and Chief Executive Officer

I think that's right. And back on the US issue, just again, our view is this is a temporary issue. And I think that while we may see a bit of a lull if you will in drilling activity and as a result the demand for some of our products in the US, we believe that's short term.

Now whether it's mid-'08 that we all start feeling better about the gas market, if it's later in '08, I'm not sure I'm smart enough or anybody is to call that but I think we feel quite confident it is out there and that eventually with the flattening and drilling activity in the US, there is going to be a supply response and eventually there's another leg up to this US market and when that kicks in, we're going to need every bit of that 18 million feet of capacity.

Alan Laws - Merrill Lynch

That's great. I appreciate the answers.

Michael McShane - Chairman, President and Chief Executive Officer

Yes.

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Thanks Alan.

Operator

The next question comes from David Anderson with UBS.

David Anderson - UBS

Thank you very much. Hey Mike, can you just expand a little bit on your comments on China and what's going on over there? You guys have more visibility than most in China. And in terms of your capacity I think you guys were originally talking about exporting some volumes and now I think when we spoke I think a couple months ago you're now thinking of keeping it mostly in the country. Can you tell me what you're seeing out there in terms of that market?

Michael McShane - Chairman, President and Chief Executive Officer

Yeah. I think that we-- number one, I think we, as we study the market and it's not an easy market to get a lot of good statistics on, but you're right we are there and we have a fairly large presence. I think the first point is as this year has developed I think we have concluded that we have probably underestimated the size of the Chinese drill pipe market and as a result, we think there's a larger opportunity for market penetration than we would have thought perhaps six or nine months ago.

Secondly, new rig construction continues unabated in China with many of those rigs destined to go to work and upgrade the fleets they are currently operated in China that allow them to drill deeper and more sophisticated type of programs all of which require higher end drill pipe than what they've been accustomed to using.

So we think there is some fairly robust growth out in front of us going into 2008, and some of the estimates that we're getting from the National Oil Company support that and that is certainly one of the areas and it's early yet and there's a lot of questions, but there are some indications that we're getting that would suggest to us that we could be in a situation where the bulk of that 4.5 million feet of capacity could be consumed by the Chinese market. So we'll see how that plays out here over the next quarter or two.

David Anderson - UBS

Any thoughts in terms of further expansion out there?

Michael McShane - Chairman, President and Chief Executive Officer

Yes. Thoughts but no action, no defensive action plans at this point in time.

David Anderson - UBS

Okay, and what percentage of the market do you estimate you have in terms of pipe?

Michael McShane - Chairman, President and Chief Executive Officer

We used to think it was close to 50%. I think it's probably closer to 40%.

David Anderson - UBS

Okay. And one last question. Just in terms of Voest-Alpine contract. I know you guys have been negotiating for some time. Should we be concerned at all that that hasn't come through yet? I know you've been going back and fourth the last several quarters and I mean are you just kind of continuing to roll over that contract until you come to an agreement?

Michael McShane - Chairman, President and Chief Executive Officer

Yeah. I mean the-- we're continuing, the relationship is good obviously. They have a very good market for their products. They are looking for price increase. We're not willing to pay more than we have to at the end of the day. There will be a conclusion to the contract, but we have some time yet and there's a lot of issues to be resolved, so no it will get done.

David Anderson - UBS

Great, thanks.

Michael McShane - Chairman, President and Chief Executive Officer

Thanks.

Operator

Your next question comes from Mike Urban with Deutsche Bank.

Michael Urban- Deutsche Bank

Thanks, good morning.

Michael McShane - Chairman, President and Chief Executive Officer

Good morning, Mike.

Michael Urban- Deutsche Bank

Just have a couple questions left. At Reed, great result there considering what happened up in Canada. In the international business, clearly that's going to be strong on an ongoing basis but in the quarter was there anything lumpy or unusual, any kind of big sales or is that just indicative of the strength in that market?

Michael McShane - Chairman, President and Chief Executive Officer

Generally speaking I'd say it's just the overall strength in the market. Middle East market has obviously been very good for us as it has for others. That certainly was one of the areas that we did quite well. We are I think making some headway in the West Africa market and we have some pretty high expectations for that going forward.

But the Russian market likewise we're doing well in, so it's a number of areas but anything in particular that stands out, no. It's just the overall strength. Now with that said, in any of these regions international with the bit business, there are companies that will order as much as six months or a year supply of bits at once.

And so there is tender business that's awarded periodically that any one of these regions could be up or down on a sequential basis because of those buying patterns, but there's nothing that I would really say is out of the ordinary in the quarter, no.

Michael Urban- Deutsche Bank

Okay, and shifting over to TTS, just wanted to clarify your comments there. With the inventory levels at least stabilizing and maybe getting a little better, you felt that the OCTG piece of the business was relatively stable. Does that mean kind of a flat outlook pending the inventories coming a little lower?

Michael McShane - Chairman, President and Chief Executive Officer

Yeah. I think TCA and Atlas Bradford, we would expect that business to be relatively stable from this point through the balance of the year, and the Tube-Alloy business which has a little bit more international orientation got a few projects that it's benefiting from, so we're expecting it to do a little bit better in the second half.

And then the bulk of the growth if you will in that division will come out of the XL products business which is very project oriented and has a number of projects scheduled to ship in the second half of the year, and that's where I said that their revenues, if everything goes according to plan, should be up second half versus first half by about 50% and that's all international oriented projects.

Michael Urban- Deutsche Bank

And roughly, what's the, could you remind us what the size of that business is or what percentage of revenues that is in TTS?

Michael McShane - Chairman, President and Chief Executive Officer

Yeah. XL is about 1/3 of the business.

Michael Urban- Deutsche Bank

Okay great. Thank you.

Michael McShane - Chairman, President and Chief Executive Officer

Yes.

Operator

Your next question comes from Jeff Tillery with Pickering Energy Partners.

Jeff Tillery - Pickering Energy Partners

Hi, good morning.

Michael McShane - Chairman, President and Chief Executive Officer

Good morning.

Jeff Tillery - Pickering Energy Partners

Could you just update us on where you think industry lead times are for the US land drill pipe market and kind of where you stand in terms of lead times?

Michael McShane - Chairman, President and Chief Executive Officer

Yeah, Jeff, we are obviously pretty well booked up through 2007. I'd say most of the first quarter is booked up, though we probably still have a few holes because some of the orders we've booked are actually probably for delivery in Q2, so we're probably on average about six/seven months out that we could still fill some slots.

Jeff Tillery - Pickering Energy Partners

Where do you think your competitors are?

Michael McShane - Chairman, President and Chief Executive Officer

I think it's probably varies but I'd have to say on average we suspect they are roughly the same.

Jeff Tillery - Pickering Energy Partners

Okay and then my last question, just in terms of how you think about building strands for IntelliServ, you're in negotiations for-- with five different customers and presuming more than five strands are in negotiation. Do you build pipe ahead of those? Do you wait until those orders-- until those contracts are signed and then build the pipe? Kind of how do you think about that?

Michael McShane - Chairman, President and Chief Executive Officer

Well, generally speaking, we're not building pipe until we have a firm commitment. That being said, if the discussions have progressed far enough that we feel that commitment is firm enough and of course if the project is such that we need to go to work on the pipe, then we're willing to make that bet and certainly some that-- we start with standard drill pipes, so we can play with that a little bit and then we have to look at the conversion time.

But generally speaking we don't start converting conventional drill pipe into wire drill pipe until we have the firm commitment, and that conversion time can be 60/90 days, kind of depending on the size and the length and what not. But as I said once we feel like the discussions have advanced far enough that we feel pretty good about the commitment and particularly if it's a size that we have a number of prospects spending for, yeah, we'll go ahead and get it converted so that does not become an impediment to project start up.

Jeff Tillery - Pickering Energy Partners

Okay, thank you.

Michael McShane - Chairman, President and Chief Executive Officer

You bet.

Operator

Your last question comes from Ole Slorer with Morgan Stanley.

Ole Slorer - Morgan Stanley

Thank you very much. Just a quick question on some of the latest rumblings out of Washington on the ITC, putting potential restrictions on the Chinese imports. Do you have any thoughts on that? I really thought it could have been quite impactful for Voest-Alpine if nothing else?

Michael McShane - Chairman, President and Chief Executive Officer

I'm not sure that it would have a direct impact on Voest-Alpine. I'm not sure I really follow you.

Ole Slorer - Morgan Stanley

The Chinese imports into the US market, wouldn't that potentially have a favorable impact on pricing?

Michael McShane - Chairman, President and Chief Executive Officer

Well, I guess yeah, indirectly it could in that Voest-Alpine is about 70%/75% of productions going outside the US, so if it were to allow some of the production that otherwise they've been competing within the international market to penetrate the US market temporarily, but at the end of the day, things kind of level out.

There's so many tons being produced and there's so much global demand and this pipe can be shipped around. But yeah, I guess you could draw a scenario in the short term where that could maybe divert some competition into the US market from the markets they participate in.

However I would qualify that by saying that if you look at what Voest-Alpine produces, it's at the very high end, high alloy type products where thus far the Chinese have not been very competitive. And so one of their biggest markets for Voest-Alpine is in fact China, at the upper end of OCTG market.

Ole Slorer - Morgan Stanley

Just one more clarification you mentioned that the acquisition of Hydril by Tenaris and the subsequent turnover of the restrictions on Tenaris imports into the US market somehow must be a good event for Atlas oil domestic Atlas Bradford license. Could you sort of elaborate a little bit on that?

Michael McShane - Chairman, President and Chief Executive Officer

Well, yeah, I guess I would say simply that you've essentially eliminated one competitor in the US marketplace. We've been competing with Tenaris in the US on the premium connection. We've been competing with Hydril, and they're now one. And so the choices that our customers have been reduced by one premium connection company. Generally speaking, that means that some of that market that they enjoyed individually may be up for the rest of us to go after. So I guess I'd leave it at that.

Ole Slorer - Morgan Stanley

Okay, well thank you very much, Mike.

Michael McShane - Chairman, President and Chief Executive Officer

Okay.

Matthew D. Fitzgerald - Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Ole.

Michael McShane - Chairman, President and Chief Executive Officer

Thank you everybody for joining us, and as always if you have any follow-up questions, Matt and I are both available and we'll look forward to visiting with you again next quarter. Thank you.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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