Shaw Group F1Q08 (Qtr End 11/30/07) Earnings Call Transcript

Jan. 9.08 | About: Shaw Group (SHAW)

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Shaw Group Inc. (SGR)

F1Q08 Earnings Call Transcript

January 9, 2008 9:30 am ET

Executives

Chris Sammons – Vice President Investor Relations

Jim Bernhard – Chairman, President and Chief Executive Officer

Brian Ferraioli – Executive Vice President and Chief Financial Officer

Analysts

Jamie Cook – Credit Suisse

Scott Levine – J.P. Morgan

John Rogers – D.A. Davidson

Barry Bannister – Stifel Nicolaus

Steven Fisher – UBS

Operator

Welcome to the Shaw Group first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Chris Sammons, Vice President Investor Relations for the Shaw Group. Please go ahead, sir.

Chris Sammons

Thank you, operator. Good morning, everyone. Thank you for joining us. First off I’d like to remind everyone that in addition to our call today we have a slide presentation on our website. You may access this by navigating to ShawGRP.com and our investor relations tab. We will refer to the slides by number as we proceed in the call.

Today on the call will be lead by Jim Bernhard, Chairman, President and Chief Executive Officer, and Brian Ferraioli, Executive Vice President and Chief Financial Officer.

Before we begin, I’d like to remind everyone that our statements today on the call may be considered forward looking statements and regulation G statements within the rules of the Private Securities Litigation Act of 1995. The words “believe, anticipate, plan, intend, foresee, should, would, could” or other similar type expressions are intended to indentify forward looking statements.

However, the absence of these words does not mean that the statements are not forward looking. Actual results may differ materially from those expressed or implied by forward looking statements as a result of many factors or events including the factors we discussed or referred to in the risk factors section of our most recent annual report on Form 10-K and our quarterly report on Form 10-Q and on our website under the heading forward-looking statements.

This presentation includes some non-GAAP measures as defined by the SEC. A reconciliation of these measures to the most directly comparable financial measures under Generally Accepted Accounting Principles is included in the attached appendix to the presentation and to our press release today. It’s also under our Reg G disclosures on our investor relations section of our website.

As usual there will be a Q&A session at the end of the comments this morning and the operator will provide instructions. Now I’ll refer you to slide 3 and turn the call over to Jim Bernhard.

Jim Bernhard

Good morning, thanks. We’re pleased to announce that we have recorded record revenue for the quarter of $1.7 billion and excluding Westinghouse, an EBITDA that reached a record level of $79 million resulting in $0.49 per share excluding Westinghouse. Operating cash flow was $109 billion and awards were, as expected, about $1.3-$1.4 billion for the quarter.

Turn to page 4, it just shows simply the segments. I know you’re all familiar with them. On page 5, let’s talk about the fossil and nuclear business that we have. Our coal projects remain on schedule and the new coal project bookings subsequent to the quarter were a little [gypsy], occurred a couple weeks after the quarter, $700 million, our share of the project which is now a signed contract which will go into Q2.

The coal market continues to run on schedule, we have several opportunities that we are developing now, new coal plants both in the United States and discover activity, we should continue to progress that work along with some new awards in the next few months.

Nuclear activity continues to be real robust an activity and development of new contracts for nuclear plants continues on schedule in the United States. Outside the United States, work in certain countries are developing quicker than anticipated and coupled with the US business that we see the activity in the next few years, next decade should be robust with plenty of nuclear activity for our company.

The EBITDA continues to grow and we expect the nuclear business to be part of the leading groups of our company for this year and years to go.

You might turn to page 6, our maintenance continues to be steady with increased awards of $143 million and fossil and nuclear plant fleet agreements continue to develop in the company.

One thing you might note is the EBITDA -- 15, 9, 12 -- the business is somewhat cyclical with always the third and first quarters being greater than the other two quarters as well.

I think that our nuclear business will continue to develop new clients. Our nuclear business, well over 40% of the nuclear plants are maintained by our company, which is another reason that we’re going to be the leading constructor of nuclear power plants in the country going forward.

Turn to page 7, on our energy and chemicals division. We increased our EBITDA this quarter to $9 million, the volume in the refinery segment was up slightly. We continue to see high demand in the olefins and derivatives thereof and the markets remain very, very strong. I think that Ryan’s going to address the gross margin in this particular division and I think there are some explanations of the margins are not reflective of what we see going forward.

The EBITDA is again expected to grow throughout the year as construction progresses on these major projects on these timing issues, but the market looks very, very good and the backlog is strong in our energy and chemical division.

The fabrication and manufacturing division continues to meet or exceed all expectations. The fabrication and manufacturing distribution both producing record results and will continue to do so, increasing throughout the year.

We see significant bookings on all fronts from LNG to coal to structural fabrication requirements, scrubbers et cetera, bending is very, very, probably the largest bending market that we’ve ever seen, particularly in the pipeline business, our bending machines are selling well overseas. The business is extraordinarily strong, or facility in Mexico continues to develop and should be online by the end of March. It will give us much needed capacity in the market. New awards again were $138 million and our backlog is certainly at a record level in the fabrication business and the margins continue to exceed expectations.

Our environmental and infrastructure had a nice quarter, we believe that business has stabilized now with $13 million EBITDA. The awards were $595 million, in particular about a $500 million increase on the MOX project which is an interim contract that we signed and so the final contract should be signed in the next two to three weeks on that particular facility.

That particular facility should generate approximately $2 billion to $3 billion in new awards for the second quarter and we also retooled the business to go after larger clients on environmental service, particularly our master service agreements for national retail outlets which has really done well and continue to promote our ready contracts and support of rapid response services for the US government. So I believe that business has stabilized. We look forward to doing increasingly well over the coming quarters as well as the coming years.

One note here on the military privatization that we were able to sell the navy part of the military privatization. It was a pleasant outcome and we look forward to exiting the rest of that business during the rest of the year.

Turning to the next page on page 10, just to give you a look at our backlog continues to be very, very strong, about equal to what it was last quarter, $14 billion. We look for the second quarter the backlog should again go to record levels by the end of the quarter. We’re off to a great start with the Entergy contracts. You can take a look at that on page 10, how it’s broken down with almost $6 billion of the backlog executing in the next 12 months. Pretty much the portfolio of contract types has remained unchanged and the geography is substantially the same.

I’ll turn it over to Brian now for the financial overview and the financial highlights for our business.

Brian Ferraioli

Thank you Jim, good morning everyone. I’ll go through the consolidated financial highlights, the segment analysis and then touch upon 2008 estimates. One thing I just want to correct Jim, I think you may have slightly misspoken on the MOX award, it was a little over $300 million, just to clarify.

Page 13, looking at the quarter in summary, our normal chart where we separate the financial results as reported and excluding Westinghouse, that’s the way we look at it internally and that’s the way we think it makes sense to look at our business.

Starting with the revenue line, you see that revenues are up dramatically, over $400 million from a year ago, so the volume obviously continues to expand and we’re quite pleased with the growth that has occurred and we expect to continue in the future. More importantly, our earnings and EBITDA continues to rise.

Now this quarter the Westinghouse segment was significantly and negatively impacted by a foreign exchange translation loss associated with the increase in the value of the Japanese yen versus the US dollar, now this non-cash charge of approximately $57.2 million and what it’s doing is it’s creating a lot of volatility in our financial statements, especially in the P&L.

But I want to point out to everyone that what is not showing up in the financial statements is the increase in the value of our put options. As you may recall, we have the option to put our shares for our investment in Westinghouse back to Toshiba for $124.7 billion worth of yen and that is, for accounting purposes, not being revalued in the financial statements. So you’re seeing in the financial statements the negative impact of the revaluation of the yen debt associated with the investment but you’re not seeing the positive impact of the revaluation of the put option that we have for our share.

What this volatility does for the financial statement is, in this case it broke down the net earnings to basically a breakeven, which causes us certain problems from an accounting perspective due to materiality et cetera. But we think the proper way to look at the financial statements is as shown here, both with and without the Westinghouse segment.

So looking at EBITDA, excluding Westinghouse it was $78.6 million, significantly up from a year ago. A year ago did include a number of charges, the most prominent of which was the Gulf Coast EPC project that we had an investigation on and we had taken a $6.5 million charge a year ago and that is within the E&C group.

If you look at the net earnings, again net earnings are up dramatically from a year ago. The earnings per share of $0.49, I’ll talk a little bit more as we go through the segments about some of the components which led to the earnings for the quarter.

Operating cash flow remains very strong, you see both with and without Westinghouse, well in excess of $100 million, down slightly from a year ago if you recall, a year ago the operating cash flow contained a lot of the cash flow associated with the Katrina hurricane relief work that had been done the year prior.

New awards, as Jim mentioned, were rather robust, most of which were increases in scope on existing jobs rather than new awards. We had not targeted many new awards for the first quarter and we did not lose any significant awards during the first quarter.

I’d also like to point out that the financial results that we have here were slightly ahead of our plan and we’ll talk a little bit about guidance later on but our guidance basically remains unchanged from what we had communicated in the past.

On a segment basis, starting with the totals again you see the revenues are up dramatically and the revenues here we are indicating net of the flowthrough costs of the customer supplied costs that which there is no margin. The gross profit again is up dramatically, $135 million versus $90 million and margins are up.

If we take on the individual segments you see fossil and nuclear continue to lead the way. Their revenues are up dramatically from a year ago, their gross profit of $42.9 million is after considering what we call an investment, the nuclear investment of $2.8 million. This is period work that is ongoing related to the design of the nuclear power plants which is not yet chargeable to contracts so therefore it is expensed as the work is incurred but we believe we will derive benefit from this in the future when we obtain some significant projects.

Moving on to E&C, E&C is relatively flat from a revenue perspective and from an earnings perspective as well, but considering the E&C I think we need to dive in a little bit more into the details. During the quarter the E&C group wrote off $2.6 million -- or established a reserve I should say -- for problem receivables. We believe those receivables are still valid and may be collectable but they have reached the point where we felt it was prudent to establish a reserve for them, so there’s $2.6 million in the current quarter.

Additionally, you may recall last quarter we talked about a change order that we were pursuing for that business unit. We have not yet signed that change order, we are still pursuing it and we are still hopeful and anticipate that we will obtain this in the near future, but until we do we have not recognized the revenue associated with it and the costs are in the financial results. Had we obtained the change order that we discussed last quarter it would have been another $1.9 million in gross profits in the quarter for the E&C group.

But when I look also at the prior year financial results we also have to take into consideration the charge as I mentioned on the slide before that a year ago we took a charge of $6.5 million relating to the EPC Gulf Coast project that resulted in a restatement a year ago.

So, when you look at the E&C group the message once you pull up from the details, the message here that I want to try and convey is the E&C group has some significant projects going through its book that are in the very early stages. These projects are primarily in the engineering phase at a point in time in which we earn limited progress on the job.

Our period costs remain the same and therefore when we’re accruing limited progress on a job you report limited amounts of contract profit and therefore when you have the lower contract profit in the early phases of a job and your period costs remain the same, the margin tends to be lower at the early phase of the project.

Again, as I mentioned on the previous slide, our overall results for the quarter were slightly better than our internal plan that we had so we are not at all discouraged by any of the results that we’ve had for the quarter.

Moving on to maintenance. Maintenance as Jim mentioned, the first quarter is one of their seasonal active periods. Their revenues were not up dramatically from a year ago, although they were up. But more importantly the earnings were up dramatically. This is an encouraging sign but it is because they’ve had more construction work which some of their construction work tends to be higher margin than the more routine maintenance and outage work that they’ve had.

E&I, we’ve presented the financial results here slightly differently than in the past. For revenues, we began recently to consolidate one of the military privatization entities which has revenues and costs equal, there was no margin. We had written that investment down. So we backed out here the revenues in order to try to get to what we believe are more appropriate margin calculations.

E&I also had some receivable reserve established $2.1 million during the quarter, so if they had not had that they would have been relatively flat with a year ago and as Jim said, we’re quite pleased that business unit is now stable and is poised to continue to get on a path of growth.

F&M continues to do extremely well. As Jim mentioned they’ve had significant bookings, backlog, their revenues are up dramatically, their earnings are up dramatically, their margins are very good and it’s a very nice business, continues to perform well and it continues to earn a very nice return, especially considering relatively low risk to that business compared to some others.

Corporate was about as planned.

Total cash continues to rise. Total debt remains very low. I like this slide a lot.

Page 16. Looking to 2008, as I mentioned previously our guidance for 2008 remains unchanged. We continue to anticipate revenues of approximately $7 billion, the earnings per share excluding the Westinghouse in the $2.30-$2.50 range and operating cash flow in excess of $400 million.

Again, as I pointed out in the last call, we do expect earnings to rise throughout the year due primarily to the phasing of the projects that I mentioned, specifically to the E&C group but that also applies to some of the other groups and we continue to see our balance sheet strengthen.

Slide 17 is a summary. Our markets remain strong, our earnings are expected to improve throughout the year, we continue to have record revenue, record EBITDA, our operating cash flow is strong, our earnings excluding the translation associated with Westinghouse was strong and our balance sheet continues to strengthen.

With that I’ll turn the call back over to Chris and I think we’ll move to questions.

Chris Sammons

Yes operator we’re ready to begin our Q&A session please.

Question-and-Answer Session

Operator

Our first question coming from the line of Jamie Cook from Credit Suisse.

Jamie Cook – Credit Suisse

Brian, you mentioned several times in your prepared remarks that the first quarter was a little bit better than you guys had anticipated, but you’re not really changing your guidance officially. What’s the rationale behind that? Or should we think of the high end more achievable? How much better did you do than you were expecting?

Brian Ferraioli

Well, we did do better than what we had planned. Obviously we did not do so much better than what we planned that we want to move the guidance up. We still think we’re within the range and there is obviously some timing issue on these projects so you can’t look at a quarter and multiply it by four. So again, I think we’re pretty comfortable with that range. I don’t think there’s anything that happened in the first quarter that changed our views dramatically either way up or down.

Jamie Cook – Credit Suisse

Jim, you mentioned in your prepared remarks that there were some opportunities overseas on the nuclear side that perhaps were coming along faster than you anticipated. Could you give a little more color on that and do you think that’s an opportunity for 2008?

Second, in the last call you said you were bidding on two or three coal plants outside of Entergy, any update or status on that and is that an ’08 potential?

Jim Bernhard

Certainly the coal plants are ’08 potential for calendar ’08, should be in the next couple quarters or so and so are the nuclear plants outside the country for calendar ’08. So the nuclear business is really, although you don’t see major awards that we’ve announce so far and we don’t intend to announce, we’re working on four projects currently in the United States but until we get a full ETC notice of contract we’re not going to announce the award.

These things are developing, there’s tremendous opportunity in the nuclear business, not only in the United States but around the world. It’s a technology that travels well and I think that’s important as the business in the United States, is that it is technology from Westinghouse is one that is world competitive and I believe that as we go forward in the world increase in energy supply, nuclear will be a mix and a significant mix in the supply of electricity throughout the world.

Jamie Cook – Credit Suisse

But because it sounds like most of things would be hitting the back half of calendar ’08 it’s reasonable to think that, is ’08 the transition year in terms of backlog growth and that it flattens a bit and then as we look at ’09 it will probably see a reacceleration in backlog growth? Particularly year ’09.

Jim Bernhard

I think that our fiscal year ’08 will increase in backlog from fiscal year ’07. We have some major awards out there. The MOX project alone is $2-$3 billion and we have some other projects that we are hopeful to get. But ’09 as far as major awards and we continue to believe that they’ll happen in ’08 on nuclear plants, but the timing isn’t as important to the company, I know it’s important, everybody wants to know [unintelligible] the first one but the projects are continuing to develop. In terms of timing we believe that we’ll complete the first on in January of 17, whether we get an award this month or four months from now, it’s not going to hurt the timing when the project is going to be completed.

Jamie Cook – Credit Suisse

Alright, thanks, I’ll get back in queue.

Operator

Thank you. Our next question coming from the line of Scott Levine from J.P. Morgan. Please proceed with your question.

Scott Levine – J.P. Morgan

Good morning guys. Quick question on the F&M division, margins continue to move up there, can you give us any indication of how much higher you expect them to go if indeed higher I assume they are expected to go higher and an updated on the Mexican fab plant and the implications of that plant on the margins in the unit.

Brian Ferraioli

Well we haven’t really given forward guidance on margins but we have talked about our Mexican facility. The question on the Mexico facility is really relating to the productivity. Our costs will be lower there than they are at our other facilities but it is a new facility and we’re trying to be a little cautious in our views regarding the margins on that facility. It has not yet started up so we’re remaining cautious about predicting any significant change in margins, but clearly the opportunity is there with the cost base being lower.

Scott Levine – J.P. Morgan

Okay and the margins that you reported for the quarter reflect what you would expect to be I guess, not actually to give unit guidance but the margins for the F&M division are kind of what you expect to be sustainable going forward?

Brian Ferraioli

Yes.

Scott Levine – J.P. Morgan

Okay. Question for Jim as well. It sounds like the outlook for coal and nuclear looks pretty positive. Is there any change in your view in terms of the mix of plants by fuel type going forward or have you had any change or do you see any change in the industry’s view in terms of the mix of coal versus nuke versus potentially some gas plants in your order outlook over the next year or two years?

Jim Bernhard

They’re going to be some gas plants as an intermediate move, we believe to be an intermediate step, but there are some gas plants that we believe will that will be awarded this year as well. That being said I mean you have coal in the mix as well in certain states and nuclear as well so the activity going forward in the power business is sustainable and very, very long term.

When you look at how many nuclear plants that we built, I think we concentrate too much on the quantity. If we look at how much electricity is generated by a typical plant and then how much is required, the quantity of plants take care of itself. I believe that, we said we were going to build 20, 50 coal plants over the next 20 years it wouldn’t raise an eyebrow, but 50 nuclear plants seem to do that, but in generation and capacity it’s the same amount, so it’s going to be part of the mix with taxes on carbon et cetera and nuclear certainly be part of the mix going forward.

Scott Levine – J.P. Morgan

Very good, thank you.

Operator

Thank you. Our next question coming from the line of John Rogers from D.A. Davidson. Please proceed with your question.

John Rogers – D.A. Davidson

Hi, good morning. I was curious on the, what was it $2.5 million or $2.8 million of unreimbursed nuclear engineering costs. Is that a good run rate going forward or does that number increase and at what point do you start billing that out to customers or is it just development cost for now?

Brian Ferraioli

Hopefully it’s not a run rate. These jobs obviously tend to design work would be specific to that job then it would be chargeable to a job. So it gets back to the timing on when you book the first job.

Jim Bernhard

We’re moving ahead on the design work of a nuclear power plant, confident that the contracts will be there, until we get a contract the expense will be a period expense.

John Rogers – D.A. Davidson

Okay and then at that point does all of the costs associated with that get billed to the customer or booked into revenues?

Brian Ferraioli

The revenues will be whatever we negotiate with the client in terms of revenues. These costs that have been expensed at our period cost remain period cost, they do not get charged to the job at some point in the future.

John Rogers – D.A. Davidson

Okay, understand that, thank you.

Operator

Thank you. Our next question coming from the line of Barry Bannister from Stifel Nicolaus. Please proceed with your question.

Barry Bannister – Stifel Nicolaus

Hi guys, your accounts payable days dropped substantially from about a 38 day run rate to 30 days. It shaved at least $100 million off of operating cash. Can you explain why that happened?

Brian Ferraioli

Well our cash flow has continued to rise Barry and I look at the total working capital, looking at the contracts in process, the receivables, the payables as well as the billings in excess and that continues to be positive for us. So we focused on cash flow and our cash flow continues to rise and continues to be a positive story for us. So looking at one of those components I don’t think is the best way to look at the analysis. They’re all interrelated.

Barry Bannister – Stifel Nicolaus

Yeah I understand but I mean even average collection periods slowed from 75 days to 67 but we’ll talk about it later I just have a question about intra-quarter seasonality. The other question has to do with Jim’s comment about overseas nuclear. I remember when you booked the nuclear awards in China the amount of scope was substantially less than we would expect from an equivalent plant in the United States. So is it fair to say that if you do get a surge in overseas nuclear it’s not as good a news from a scope standpoint as it would be if it were US orders?

Jim Bernhard

No, not exactly. Sometimes scope and profitability in terms of gross numbers is two different things and I think that from country to country our volume of business to build a nuclear plant will vary greatly. I mean some countries will be the same as the US. Some will be less, some will be a mix, so I wouldn’t think that would necessarily follow hand-in-hand.

Barry Bannister – Stifel Nicolaus

Alright and then we saw Duke, we saw Bellefonte and we’ve seen others move forward, any idea of the pace at which those would go into bookings, what percent of the total award in front of the COL approval would go into the actual backlog?

Jim Bernhard

The way we’re progressing with our clients and I can’t speak for others, the contract will be a full ETC contract. They won’t be partial contracts, it’ll be for the entire plant at one time. So it would all go in backlog upon award.

Barry Bannister – Stifel Nicolaus

Upon award, do you think that the awards are contingent upon COL approval?

Jim Bernhard

Well I mean it will be typical as a coal plant is, if you don’t have an air permit you’re not going to build a coal plant but I think that they’re confident enough that the COLs are going to be approved in a timely manner.

Barry Bannister – Stifel Nicolaus

Okay, got it, well thanks a lot.

Operator

Thank you. Ladies and gentlemen, as a reminder to register for a question press the one followed by the four. Our next question coming from the line of Steven Fisher from UBS. Please proceed with your question.

Steven Fisher – UBS

Hi, good morning. A couple clarifications. First on the MOX booking, is that going to be the full $2-$3 billion or is that going to be half? I think last month you mentioned that you have a JV partner.

Brian Ferraioli

Yeah, we do have a JV partner, Steven and I think I misspoke on the last call. We would book 100% into our backlog and into our revenues. It’s going through a consolidated subsidiary. The joint venture partner’s share of the earnings would come out of the minority interest line.

Steven Fisher – UBS

Okay, that’s helpful.

Brian Ferraioli

We would book 100% of it but we don’t have 100% of the earnings associated with it.

Steven Fisher – UBS

Got it and then how big is the Little Gypsy project likely to be?

Brian Ferraioli

Little Gypsy, the booking is about $700 million and let me circle back one more time to the MOX, I just wanted to point out, we own 70% of the MOX joint venture with our partner.

Steven Fisher – UBS

Okay great. And then as the presidential campaign heats up here it seems like most candidates support clean coal development and commercialization, I’m just wondering can you remind me what Shaw’s capabilities are or experience in the areas of gasification or carbon capture?

Jim Bernhard

Well we have, we’ve done piping on gasification and our gasification may play a part going forward, we believe that it won’t be nearly as substantial as other types of generation of electricity and carbon capture, we’ve done some work but not very much.

Steven Fisher – UBS

Okay great thanks a lot.

Operator

Thank you. Our next question is a follow up question coming from the line of Barry Bannister from Stifel Nicolaus. Please proceed with your question.

Barry Bannister – Stifel Nicolaus

Hi, the purchases of property, plant and equipment nearly tripled to $23.5 million in the quarter, can you give us some idea Brian of what capital and expenditures would be for fiscal ’08?

Brian Ferraioli

We had said previously we thought it was going to be in the $75 million range. Included in there is the Mexico facility which will be approximately $35 million, so obviously that’s not a run rate if you’re looking for any out year projections.

Barry Bannister – Stifel Nicolaus

And about a year ago Shaw Group released a press release that it was going to try to substantially increase their head count. Just wondered if you had an update on whether the hiring plans to position yourself for the growth you see have been successful in line with that press release?

Jim Bernhard

Well we’ve increased our head count substantially and although I don’t have numbers in front of me I think that would be in line what I could call about 1,000 people. I’m certain that we’re in line with that, so we continue to increase our head count, particularly in Charlotte and Houston and some other offices in that region as well.

Brian Ferraioli

And I continue to try to add to the administrative staff. During the quarter we hired a new individual to run our power group, an individual who has 20 plus years experience.

Barry Bannister – Stifel Nicolaus

Do your folks in Charlotte, North Carolina feel like they’re adequately staffed to position themselves for the work you see coming or are they still working towards that goal?

Jim Bernhard

Still working towards that goal.

Barry Bannister – Stifel Nicolaus

Okay. That’s all I have thanks.

Operator

Thank you. Mr. Sammons there are no further questions at this time, I will now turn the call back to you, please continue with your presentation or closing remarks.

Jim Bernhard

Okay, we thank everyone for being in attendance here today and we’re looking for a great year going forward and again the awards, the EBITDA, the revenue and the earnings were in excess of our internal forecast and we’re confident in our guidance going forward, cash flow, earnings, backlog and we appreciate your attendance and we’ll keep you updated next quarter. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you please disconnect your line, have a great day.

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