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Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter Earnings Conference Call.
(Operator Instructions.) Thank you.
I would now like to turn the conference over to Mr.
Geoff High of Pfeiffer High Investor Relations.
Sir, please go ahead.
Geoff High - Pfeiffer High IR
Thanks, Paula.
Good afternoon and welcome to Dynamic Materials' Second Quarter Conference Call.
Presenting on behalf of the Company will be President and CEO, Yvon Cariou, and Vice President and Chief Financial Officer, Rick Santa.
I would like to remind everyone that matters discussed during this call may include forward-looking statements that are based on Management's estimates, projections, and assumptions as of today's date and are subject to risks and uncertainties that are disclosed in Dynamic Materials' filings with the Securities and Exchange Commission.
The Company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements.
Dynamic Materials assumes no obligation to update forward-looking statements that become untrue because of subsequent events.
A webcast replay of today's call will be available at dynamicmaterials.com after the call.
In addition, a telephone replay will be made available beginning approximately two hours after the conclusion of this call.
Details for listening to today's replay or webcast are available in today's news release.
And with that, I will now turn the call over to Yvon Cariou.
Yvon?
Yvon Cariou - President, CEO
Thanks, Geoff.
Global economic concerns continue to elevate out of our explosion welding end markets and this was reflected in our second quarter sales figures and order backlog.
Bookings from the chemical, petrochemical, hydrometallurgy, and domestic refining industries have been already very sluggish as end market customers are clearly wrestling with demand and capacity issues.
On the positive side, several other end markets are showing signs of continuing strength.
These include alternative energy, where we are engaged with some of the dominant players in the industry.
We booked a significant alternative energy contract during the second quarter and are pursuing a number of additional large order opportunities.
The power generation industry also remains active.
We have received large orders from projects in Russia and Germany and are seeing further opportunities in several emerging global markets.
While we continue to actively quote projects from the international refining industry, we now believe the most imminent conventional energy opportunities will be extreme.
We have been bidding on several sizeable oil and gas projects in recent quarters and it appears some of these orders are finally being released.
Much has been made of the downturn in worldwide aluminum production, but we nevertheless have seen continued strong demand for our electrical transition joints, which are installed in smelting operations around the globe.
Aluminum producers push their equipment hard and this is urging sustained demand for replacement of the electric transition joints.
In spite of limiting drilling activity in North America, our oilfield product segment is seeing improving prospects in international markets, such as Russia, and this could lead to a meaningful [size] improvement for this business segment during the second half of '09.
As Rick will discuss in a moment, we have taken several steps to line our cost structure with anticipated near term sales levers.
In light of continued strong quoting activity and the prospects of further economic expansion in several emerging global markets, we remain very bullish about the mid and long range future of our business.
I will now turn the call over to Rick, who will provide another view of our Q2 financial results.
Rick?
Rick Santa - SVP, CFO
Thanks, Yvon.
Second quarter sales came in at $37.8 million versus $63.2 million in the same quarter last year.
The slowdown in bookings as well as previously discussed shipping delays and $4 million in unfavorable foreign exchange translation all were factors in the decline.
The lower sales volumes coupled with the more competitive pricing environment reduced second quarter gross margins to 24% from 30% in the second quarter last year.
Operating income was $3 million versus $10.1 million in last year's second quarter.
And net income came in at $1.5 million, or $0.12 per share, versus $6.2 million, or $0.49 per share in the same quarter last year.
Adjusted EBITDA was $6.4 million versus $14.7 million in last year's second quarter.
Since adjusted EBITDA is a non-GAAP measure, please read the section in our news release regarding our use of such disclosures.
With respect to expenses, we have implemented a range of cost cutting initiatives in both Europe and the U.S., including reductions in incentive compensation, tighter controls over discretionary spending, staff reductions, and shorter work weeks.
Second quarter G&A was $3 million.
This represents a 20% reduction versus the same quarter last year, and a 14% reduction from this year's first quarter.
As a percentage of sales, second quarter G&A was 8% versus 6% in last year's second quarter and 7% in the first quarter.
Selling expenses in the second quarter were $1.8 million, a reduction of 30% versus Q2 last year and 21% versus our 2009 first quarter.
As a percentage of sales, selling expenses were 5% versus 4% in the same quarter last year and 5% in the first quarter.
Amortization expense associated with purchased intangible assets declined by 50% to $1.2 million versus last year's second quarter and was up by 4% versus the first quarter.
Amortization expense is related to our 2007 acquisition of DYNAenergetics and the year over year reduction relates to the value assigned to order backlog becoming fully amortized in last year's second quarter.
The sequential increase from the first quarter relates to changes in foreign exchange rates, and going forward, change in amortization expense will only be impacted by foreign exchange.
During the second half of the year, we will maintain our focus on enhancing operational efficiencies, but also intend to preserve our core sales and production talent in anticipation of a rebound of demand for our products.
Through the first six months of the year, we have generated operating cash flow of $12 million and we expect to be cash flow positive in the second half of the year as well.
We ended the quarter with a cash position of more than $20 million, which represents an improvement of more than $4 million from the end of this year's first quarter.
Working capital at June 30 was more than $54 million.
Turning to guidance, we are forecasting that third quarter sales will be down sequentially by 10 to 15% versus the second quarter.
For the full fiscal year, we expect sales will be 28 to 32% below fiscal 2008 sales.
Gross margins during the second half of the year are expected to be in a range of 23 and 25%, while full year gross margins are now expected to range from 25 to 27%.
We are forecasting a full year tax rate of 34 to 35%.
We are now ready to take any questions.
Paula?
Operator
(Operator Instructions.) Your first question comes from Avinash Kant of DA Davidson and Company.
Avinash Kant - Analyst
Good afternoon, Yvon and Rick.
Rick Santa - SVP, CFO
Hi, Avinash.
Yvon Cariou - President, CEO
Good afternoon, Avinash.
Avinash Kant - Analyst
A question first on cancellation.
Could you remind us, the Middle East order that was cancelled, you have already taken that in your backlog and now it's out of the backlog?
Rick Santa - SVP, CFO
No.
The order wasn't cancelled.
We were talking about an order that we did not book.
Last quarter we talked about three significant orders that we were quoting.
Avinash Kant - Analyst
Right.
Rick Santa - SVP, CFO
And that could become prospective bookings.
We booked two of those, but not the Middle Eastern project.
Avinash Kant - Analyst
Okay.
And the pricing pressure that you are talking about, is it coming solely from the [long] bond people or also from some other people?
Yvon Cariou - President, CEO
Oh, there's a general pricing pressure environment.
Since the price of commodities have dropped so much, every buyer in the world is expecting us to align.
And there is huge pressure on some of the global accounts - the Siemens, Dow Chemicals of the world.
Also, of course, there are bond players competing against them as they (inaudible) price pressure.
And in these days of large capacity and low demand some of our customers who have been using weld overlays sometimes would do that in house while the application would be maybe more appropriate for an explosion welding.
So it's a mixed picture regarding competitive pressure.
Avinash Kant - Analyst
All right.
And Rick, you have taken a significant cost cutting approach lately.
Based on that, would you be able to give us some idea about where is the breakeven at this point?
Rick Santa - SVP, CFO
The breakeven sales?
Avinash Kant - Analyst
EPS breakeven.
Like on what kind of sales would you do breakeven EPS?
Rick Santa - SVP, CFO
Below the guidance that we've provided for Q3.
Avinash Kant - Analyst
Right.
Rick Santa - SVP, CFO
Is that good enough?
Avinash Kant - Analyst
No.
But I'm saying that--no, in terms of trying to get to profitability there.
Rick Santa - SVP, CFO
To do that, we kind of have to go through things division by division, Avinash, because there are different cost structures and different margin assumptions that we need to make.
The guidance that we've provided in terms of sales for the fourth quarter, again, is above our breakeven point.
Avinash Kant - Analyst
For the third quarter or fourth quarter?
Rick Santa - SVP, CFO
The third quarter.
Avinash Kant - Analyst
Okay.
So in spite of the guidance in the third quarter, you will be EPS positive, right?
Rick Santa - SVP, CFO
That's what we expect based upon our internal forecasting.
Avinash Kant - Analyst
Okay.
And that's pretty much it for now and I'll get back in the queue if I have more questions.
Thank you.
Operator
Your next question comes from James Bank of Sidoti Company.
James Bank - Analyst
Hi.
Good afternoon.
Rick Santa - SVP, CFO
Hi, James.
Yvon Cariou - President, CEO
Good afternoon, James.
James Bank - Analyst
In regard to the quoting activity that I guess has been getting tossed around for the past three to six months, it always seems to be very, very healthy.
But when can we expect really for the rubber to meet the road here?
Yvon, what's your conviction on these quotes in the back half?
(Inaudible) from the press release and your prepared remarks it seems to be pretty good.
Yvon Cariou - President, CEO
My conviction (inaudible) is that it's real [holding].
We are not dreaming those things.
They are real requests.
We are pretty disciplined at screening what we call a project that deserves to belong to the hot list.
So I wish I could tell you when the order is going to hit the road.
It has been now nine months where we say we are quoting hard and we are.
And it's not (inaudible) into bookings.
I would hope obviously that a transformation is going to happen soon inside the next year, inside the next couple of quarters.
I cannot predict, obviously.
But the activity of quoting is serious and real.
James Bank - Analyst
Okay, fair enough.
Rick, on the guidance that you've given for the back half and also full year, and then the details you're giving on the third quarter, can we assume the third is going to be more or less the weak link for the year?
Rick Santa - SVP, CFO
Yes, that certainly would be the conclusion that one would reach if they crunch the numbers--the numbers, the percentages that we've provided.
James Bank - Analyst
Okay.
Rick Santa - SVP, CFO
Yes.
With a reasonable rebound in Q4 from the Q3 sales expectations.
James Bank - Analyst
Okay, fair enough.
And I was wondering could you give me the breakdown of the gross profit for each segment?
Rick Santa - SVP, CFO
For--.
James Bank - Analyst
--The percentage number would do.
Rick Santa - SVP, CFO
Going forward or--?
James Bank - Analyst
--No, no, no.
I meant in the second quarter what was the gross profit for DMC, gross profit for AMK, and then gross profit for oilfield services.
Rick Santa - SVP, CFO
Okay.
For the quarter, our gross profit was 24.2%.
Cladding was 25.5; oilfield products was 17.7; and AMK was 23.7.
James Bank - Analyst
Okay.
And then, two more quick questions and I'll jump back in line.
On AMK, just--it just seems to be so extraordinarily lumpy.
I think if I wrote it down correctly that the operating income is better sequentially.
But the sales are half of what they were in the first quarter.
Is this stemming from maybe the contract with GE and lumpiness with them, or is this just coming from UTA, maybe [Barnes]?
I just wonder if you could just elaborate on AMK on the top line and margin.
Rick Santa - SVP, CFO
For AMK, the sales were very comparable to the first quarter.
The sales--2.2 million, and year to date, 4.454 million.
James Bank - Analyst
Oh, okay.
Rick Santa - SVP, CFO
So you must have read something wrong.
Yvon Cariou - President, CEO
But there is sort of a shift inside the business.
I think we have indicated before we were morphing to more of a production business as opposed to mainly a development business.
So although the sales are comparable, we are witnessing some sort of a shift inside the division.
James Bank - Analyst
Okay.
And in general and administration, is there any chance that can come down any more?
Rick Santa - SVP, CFO
We don't see it coming down from where it was in Q2.
We're certainly doing all we can to control those expenses, but there's some variable expenses, including selling expenses, sales commissions, which have been very low through the first half of the year.
And we expect more export shipments in the second half, which carry commissions.
James Bank - Analyst
Okay.
Rick Santa - SVP, CFO
Another variable piece that we've discussed before is the incentive compensation.
James Bank - Analyst
Okay.
All right.
Well, I'll jump back in line.
Thank you.
Operator
(Operator Instructions.) Your next question is from Mark Parr of Keybanc Capital.
Mark Parr - Analyst
Good afternoon.
Yvon Cariou - President, CEO
Hey, Mark, how are you?
Rick Santa - SVP, CFO
Mark, how are you doing?
Mark Parr - Analyst
Hey, Yvon.
Hi, Rick.
Hey, Geoff.
Geoff High - Pfeiffer High IR
Hi.
Mark Parr - Analyst
I guess my questions are really not significantly different from the general discussion we've been having.
And I think that really the key for you is to--is when will the backlog provide some indication of the fact that we've reached an inflection point?
And Rick, I guess to hear you talk about it, you think that could happen in the third quarter.
You could have a backlog put in place at the end of September that would result in some sequential recovery in shipments in the fourth quarter.
Just--is there any more color you could give us and quantify say a range of expectation that you're looking at based on quoting activity and what you think would be realistic?
Rick Santa - SVP, CFO
Well, first of all, I'll let Yvon talk about the going forward bookings and potential movement in the backlog.
The sales guidance that we've given is largely based on what's in our backlog today.
Mark Parr - Analyst
Right.
And it's down in the third quarter or the second quarter, right?
Rick Santa - SVP, CFO
Yes, it's down in the third quarter based on scheduled shipments against what's in our backlog at June 30.
Mark Parr - Analyst
Right.
Rick Santa - SVP, CFO
And most of what we are projecting for Q4 shipments are also in the backlog today.
Mark Parr - Analyst
Okay.
Rick Santa - SVP, CFO
So with that, I'll let Yvon talk about--.
Yvon Cariou - President, CEO
--Right.
Well, Mark, I wish again the crystal ball was so clear that I could respond to your question.
Mark Parr - Analyst
I'm sure [Dorothy Stephanic] thinks you've got a great crystal ball.
Yvon Cariou - President, CEO
All I can say that we watch worldwide our sales team quoting.
And I think we are more disciplined than we have ever been into quoting something a real project.
And to quotation level, (inaudible) I see was a good mix in different industries and different geographies.
But I certainly am not sitting here and going to predict when the bookings are going to come in.
But I pray every night they'll come next week.
Mark Parr - Analyst
Is there anything that you can share as far as your feeling about the European opportunity as opposed to the U.S.
opportunity?
Yvon Cariou - President, CEO
We are shifting little bits from that vision.
I think we are looking at the manufacturing sites as production entities and the sales team is more and more global, whether they are in Europe or in the U.S.
And so, it's more relevant I think to talk about selling activity in the regions of the world.
And we may very well sell in the Middle East for something that will be built in Europe or here.
So I think for a minute maybe we should just think of the production sites as just our plants around the world.
And in terms of (inaudible) selling, clearly (inaudible) it is in Europe has been little damage by the economy slowing.
Germany, who has been the locomotive there, definitely is slower.
We are doing a lot in the Middle East as we have indicated before.
We are not maybe doing as much in India, but we are successful there, because we have gathered nice bookings and still quoting.
Certainly, volume of quoting related to the Middle East is significant.
And North America remains very important to us even if it's slower.
And of course, we're still busy in the Far East.
The quoting activity in China and in Southeast Asia remains significant.
So one strength of DMC is we are really global for a small company and it would be hard to take a (inaudible) where the activity is really very, very slow.
We think we are active everywhere.
But clearly, the Middle East has [turned].
And related to the Middle East, India, emerging economies (inaudible) are strong and with a good decent backlog in North America and the rest of Europe.
Mark Parr - Analyst
Okay.
Is there anything coming out of the new administration that--in the U.S.
that is enhancing your growth prospects that you can see?
Yvon Cariou - President, CEO
Besides lots of talk in the news everyday, honestly, we have not seen it.
The--we still hope and believe that the alternative energy will benefit from the new administration.
And that's the main area I think where we can hope for something.
Mark Parr - Analyst
Okay, terrific.
Well, anyway, congratulations on the progress.
And good luck getting the backlog moving in the right direction in the third quarter.
Yvon Cariou - President, CEO
Thanks.
Rick Santa - SVP, CFO
Thanks, Mark.
Geoff High - Pfeiffer High IR
Thanks, Mark.
Operator
Your next question comes from Avinash Kant of DA Davidson and Company.
Avinash Kant - Analyst
Hi.
One quick question, Yvon.
Would you talk about what percentage of sales in the quarter that came from outside the U.S.?
Yvon Cariou - President, CEO
I don't have the statistics in front of me.
Can we get back to you?
I would guess it's probably 50% or so.
But--.
Avinash Kant - Analyst
--Okay.
Yvon Cariou - President, CEO
We'll get back to you.
Avinash Kant - Analyst
And also, within the oil and natural gas segment, would you kind of know what kind of breakdown between upstream and downstream?
Yvon Cariou - President, CEO
In quoting activity, number of quotes (inaudible).
I mean, clearly, upstream right now is more active.
In terms of the potential for those project transforming into orders, I think it's fair to say upstream is clearly more active today.
A number of significant projects are moving around the world.
Avinash Kant - Analyst
Okay.
And I believe Rick said that the G&A should be pretty stable for the rest of the year given where you are right now.
Rick Santa - SVP, CFO
The SG--the G&A should be fairly stable.
There's some fluctuation.
If we have any business development activities there could be some fluctuations.
The same with incentive compensation to the extent that profitability varies.
And then, on the selling side, the main variable there is our sales commissions, which were low in the second half of the year and will likely be higher in the second half of the year because we project a larger percentage of export shipments from the U.S.
where sales commissions will be paid.
And just getting back to your sales question for a minute, we don't' really disclose the geographical sales until year-end.
Avinash Kant - Analyst
Right.
Rick Santa - SVP, CFO
But if you look at the total sales, about half were made by the U.S.
divisions in both the quarter and year to date and half by the European divisions.
And if you assume that about 20% or so of the U.S.
sales are exports, that would be 40% U.S.
and 60% outside of the U.S., which I think would be very comparable with the numbers disclosed in last year's 10-K.
So I don't think there's been a big change in the geographical breakdown of sales.
Avinash Kant - Analyst
So again, coming back to the model a little bit, even with a 10 to 15% decline in revenue, we shouldn't expect much of a decline in SG&A in general in the third quarter.
Right?
Rick Santa - SVP, CFO
That's correct.
Avinash Kant - Analyst
Okay.
Now, I'm looking at the full year revenue guidance that you have given and also looking at the third quarter revenue guidance.
Clearly, looking at the numbers as you pointed out, there has to be a meaningful in the December quarter compared to the September quarter in terms of revenues, really more than 20% upside on a quarter over quarter basis.
Now, how--would--you wouldn't be able to achieve that if you're not seeing a pickup in bookings in the third quarter.
Rick Santa - SVP, CFO
Again, Avinash, most of the sales that--if you're talking about the explosion welding business where we report backlog, most of the sales are out of the backlog in Q3 and Q4.
And then, with AMK and the oilfield products business we don't report backlog.
So that's more of a peer sales forecast in order to achieve the sales results.
Avinash Kant - Analyst
So the reason I'm confused is that if I'm looking at the sales--projected sales in the second half were explosion metalworking, all your backlog will be consumed in that.
So is that how--.
Rick Santa - SVP, CFO
--That's the case, yes.
Avinash Kant - Analyst
So basically what you are saying is that 100% of your backlog that is right now is shippable within the next six months?
Rick Santa - SVP, CFO
It's not 100%, but it's not very far from that, Avinash.
Avinash Kant - Analyst
Right, very close to--okay.
So all of it is shippable within the next six months, right?
Rick Santa - SVP, CFO
Not all of it.
The vast majority.
Avinash Kant - Analyst
Okay.
But you won't be able to comment anything about bookings - not specific numbers.
But would you expect that Q2 was the bottom for the bookings?
Yvon Cariou - President, CEO
Again, we are back to the quoting activity which is steady and strong.
We went through a number of phases as you will recall that we have discussed in the previous conference call.
First, because of commodity costs coming down a lot of people were postponing their projects to benefit from better prices.
Then, it was maybe financing, refinancing, of the project, waiting for (inaudible).
And then, last quarter, our review as more of people were sitting on the fence waiting to see if end markets are coming back.
And I think we are feeling that mode.
And so, as you see, more optimistic macroeconomic news out there, does that mean that those projects are now going to be released?
The one example of a stream in the oil and gas industry seems to indicate that a flurry of projects are being released.
So is that the beginning of a [border] or release of projects across (inaudible) industries.
I cannot respond today.
Avinash Kant - Analyst
Okay, yes.
It's just that you are specifically guiding to the full year numbers, Yvon, in terms of revenues.
And it's just the math that says you've got to be seeing some pickup in bookings.
Otherwise, you shouldn't have much confidence in the revenue forecast that you have out there.
Yvon Cariou - President, CEO
Well, I think for '09, as Rick explained, we have pretty good confidence because a lot of it is really in the backlog and we are not at the point of talking about 2010 yet.
Avinash Kant - Analyst
Okay, perfect.
Thank you so much.
Operator
Our final question comes from James Bank of Sidoti Company.
James Bank - Analyst
Hi.
Rick, you talked about intangibles--the amortization of the intangibles.
And you said pretty much it's all FX.
And I just wanted to know, are we still targeting a 4.7 million run rate for the year?
Rick Santa - SVP, CFO
Let me--.
James Bank - Analyst
--More or less?
Rick Santa - SVP, CFO
I think I've got the euro amount here.
Let me--it should be in my head, but it's not quite in my head.
But let me look that up very quickly.
The expected run rate is EU905,000 per quarter.
James Bank - Analyst
Okay.
Rick Santa - SVP, CFO
So I'll let you apply your own foreign exchange assumption.
And it should be at that level for the next two quarters and for most of calendar year 2010.
And then, a small amount--there may be a small change after that as some of the trademarks become fully amortized.
So it should be very steady for the next six quarters, except for any change in foreign exchange, the euro versus dollar.
James Bank - Analyst
And you had a bit of a whopper with the tax rate in the quarter.
And I apologize if this was in your prepared remarks and I didn't pick up on it.
But I thought separately a couple of quarters ago, you guys had something, some sort of a credit or something had happened where I think we had a much slower tax rate - around 30 or 32% from where you guys had been historically.
And I'm wondering, did something reverse or cause a higher rate?
Rick Santa - SVP, CFO
What's going on there is we had earlier projected a full year rate of 30 to 32%.
James Bank - Analyst
Right.
Rick Santa - SVP, CFO
For 2009.
And it's gone up because at this point we are expecting higher proportionate income in the U.S.
than in Europe.
James Bank - Analyst
Ah.
Rick Santa - SVP, CFO
And the U.S., between the federal and state tax rate, is much higher than the rates in Germany, France, and Sweden.
So it's the blend of the European versus U.S.
tax rate that's moving it up from where we thought it would be a quarter or two ago.
James Bank - Analyst
Okay.
So looking at out years, it would just have to stem then from an assumption of where I think these sales would be coming from?
Rick Santa - SVP, CFO
That's correct.
James Bank - Analyst
And then, last question.
And Yvon, again, I apologize if I didn't pick up on this.
But did you break down alternative energy at all?
I'm just curious if you could just elaborate on that end market a little bit where you're finding some opportunity - nuclear or maybe some of the other spots.
Yvon Cariou - President, CEO
Yes.
We are not breaking down in terms of quantifying what those markets are.
But clearly, alternative energy relating to the production of (inaudible) silicone, has been a good relatively new segment for us and it remains an active one.
The other markets we talked about being active are the power industry.
Although the world is in a recession, the power demand is increasing, maybe at a slower rate, but still increasing.
And it has been a traditional (inaudible) for us over our divisions.
So most of our divisions are involved in that business, which is supplying tube sheets for condenser units.
And then, we indicated that in part because in the aluminum smelting the electrical condition joint that we make, it's the only [start up] (inaudible) we produce, which has a maintenance component.
So we have a replacement business.
We have a successful product line there.
And as the smelting companies are pushing their plants to maybe postpone CapEx, they are consuming our product faster and it's a good opportunity for us.
Nuclear, new nuclear, remains something we're extremely interested with.
That will take some time, but we are extremely active getting qualified where we need to be and preparing for the future, which is not next quarter.
It's more a couple of years down the road.
We had indicated in previous calls a couple of those segments where we are active with development and testing and we named the--(inaudible) applications and I think we named transportation as targets of interest to DMC Clad.
James Bank - Analyst
Okay.
Thank you very much.
Yvon Cariou - President, CEO
Thank you.
Rick Santa - SVP, CFO
Thank you, James.
Operator
At this time, there are no further questions.
I will now turn the floor over to Yvon Cariou for closing remarks.
Yvon Cariou - President, CEO
Thank you, Paula.
Thanks for joining us for today's call.
In spite of the current economic atmosphere, I want to reiterate our optimism about DMC's future.
The strategic benefits of our product offerings, the diversity of our end markets, our global footprint and our world-class sales and production teams all position DMC to benefit from a pickup in industrial capital spending.
We'll talk to you again in three months.
Thank you very much.
Take care.
Operator
This concludes today's conference.
You may now disconnect.