Q2 2020 Curtiss-Wright Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Curtiss Wright second quarter 2020 financial results Conference call.
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I would now like to hand, the conference over to your speaker today.
Ryan Senior director of Investor Relations. Thank you and please go ahead Sir.
Thank you Dan Good morning, everyone welcome to persuade second quarter 2020 earnings Conference call.
Joining me on the call today, or Dave Adams, our chairman and Chief Executive Officer.
Spark is our vice President and Chief Financial Officer.
Well today being webcast by the press release as all the copy of today's financial presentation available for download for the Investor Relations section of our company website.
He W.W. dockers freight dot com.
Replay of this webcast also can be found on the website.
Please note today's discussion will include certain projections and statements that are forward looking as defined in the private Securities Litigation Reform Act for 1995.
These statements are based on management's current expectations are not guarantees of future performance.
Could you tell those risks and uncertainties associated with a forward looking statements in our public filings with the FCC.
As a reminder, the company's results included in adjusted non-GAAP, you that excludes first your purchase accounting cost associated with acquisitions.
Onetime transition costs associated with the relocation of the DRG business.
Structuring cost 2020.
And the noncash foreign currency translation loss associated with the substantial liquidation number for legal entity.
Reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website.
Hey references to organic growth, excluding the effects of restructuring foreign currency translation acquisitions and divestitures unless otherwise noted now I'd like to turn the call over to Dave to get things started.
Thanks, Jim Good morning, everyone I'll begin today with an update of how to cope with 19 pandemic is impacting our business and then provide some highlights of our second quarter results.
Chris will then provide a more detailed review of our second quarter financial performance as well as our reinstated full year guidance.
Finally, I'll return to wrap up our prepared remarks before we head into Q1 I.
Curtiss Wright like so many other companies has been greatly affected by the pandemic.
Throughout this challenging environment, we've maintained an unwavering commitment to keep our employees safe.
We continue to follow a comprehensive health and safety protocols across all of our facilities, including the necessary investments in equipment and resources to minimize disruption to our business.
I'm pleased to report so all of our manufacturing sites our operational today.
Further I'm proud of our teams agility in responding to this dynamic situation.
Acceleration of our initial restructuring plans and incremental austerity measures have been and we'll continue to be highly effective in mitigating the sharp reduction in commercial revenues.
These actions along with the strength of our defense markets provides us the confidence to re initiated a full your 2020 guidance.
Turning to the second quarter 2020 adjusted results.
Although our overall sales were down 14% growth in our defense markets remain strong for both customer demand and our operations were generally uninterrupted by the pandemic. However, within our commercial markets, we experienced significantly lower customer demand as well as government mandated factory costs.
Closings, which negatively impacted our results.
Overall, the commercial sales decline drove adjusted operating income and margin down, 27% and 250 basis points respectively.
Adjusted diluted EPS of $1.31 was inline with our expectations and it's expected to be the lowest quarter in 2020, followed by sequential quarterly improvement for the remainder of the year.
Regarding our orders.
We experienced solid growth of 3% overall and backlog is up 1% year to date, providing further stability to our re initiated guidance.
Last week, we issued a press release announcing that we secured more than $220 million in new Naval Defense orders 175 million of which were received in the second quarter.
Growth in defense orders drove a strong book to Bill of 1.4 times and defense and 1.1 time sports Curtiss Wright overall.
Although our commercial markets were significantly challenged we experienced some sequential improvements in both quoting activities and orders as we progress deeper into the second quarter.
Our guidance anticipates, a slow recovery from the pandemic and recent order patterns between April and July provide optimism for modest growth in our commercial businesses in the second half of 2020.
Turning to our free cash flow.
Adjusted free cash flow of $136 million increased 70% year over year due to an intense focus on working capital and reduce spending on non essential capital expenditures.
This performance drove robust adjusted free cash flow conversion of 247% keeps us on track for a strong finish in 2020.
Now I'd like to turn the call over to Chris can provide a more thorough review of our second quarter performance and outlook for 2020, Chris. Thank you, Dave and good morning, everyone.
Begin with a review of our second quarter end market sales.
Overall, we experienced a 5% increase in sales to our defense markets, while sales to our commercial markets declined 29% year over year.
There are few items that I would like to highlight on the slide.
First enabled defense, we experienced solid organic revenue growth on both the Virginia in Colombia class submarine programs as well as inorganic growth from the nine to one de acquisition.
This growth was partially offset by time, the timing of production within our DRG business, where we completed the transition to our new facility in the second quarter and anticipate production ramping up during the second half of this year.
Shifting to the commercial markets and commercial aerospace our performance was impacted by customer driven production slowdowns, leading to reduce sales on all major OEM platforms.
Our sales were also impacted by government mandated shutdowns of two Curtiss Wright facilities in Mexico, which a sense resumed normal operations.
Diving into the general industrial market industrial vehicle sales were impacted by industry wide reductions in demand and the on highway market, particularly on North American class eight vehicles.
And industrial pumps and valves, we experienced lower valve sales due to a pullback in industry capital expenditures on large projects as well as reduced camerawork quite similar to what we experienced during the last industrial recession.
Next I'll discuss the key drivers of our second quarter operating performance.
And the commercial industrial segment, our results reflect unfavorable absorption on lower sales, partially offset by the benefits of our cost containment initiatives in 2020 restructuring actions.
In addition.
Your results included a 4 million dollar onetime gain on sale the building, which generated a margin headwind of approximately 130 basis points.
And the defense segment adjusted operating income increased 10% on a 7% increase in sales while adjusted operating margin improved 60 basis points. The performance reflects both savings generated from our restructuring actions as well as a solid contribution from the nine to one de acquisition.
And the power segment, our results reflect unfavorable absorption on lower power generation revenue as well as the timing of naval defense revenues.
Partially offsetting those declines were again the benefits of our restructuring actions.
Next I'll focus on our strong balance sheet were Curtiss Wright remains very well position, we have more than sufficient liquidity in our leverage ratios remain in line with a strong investment grade rating.
In mid May we took the opportunity to further strengthen our balance sheet by taking advantage of excellent pricing in the private placement market.
On May 15th we circle, the 300 million dollar note offering at very attractive rates near 3% for 10 and 12 year maturities.
We opted for a delayed draw feature for up to three months to provide us with some additional short term flexibility and intend to use these proceeds to support our balanced capital allocation strategy.
Overall, we remain very pleased with our flexible yet conservative capital structure, which provides further confidence in our ability to successfully navigate through this downturn.
As Dave outlined at the start of the call today, we are reinstating our 2020 guidance.
Starting with our 2020 end market sales guidance, we now expect overall sales to decline, 4% to 6%, reflecting the impact of the pandemic.
In the defense markets, we expect revenue growth of 8% to 10% overall and 4% to 6% organically. This is unchanged from our prior guidance. This outlook reflects our solid backlog following strong second quarter orders and the contribution from the nine LNG acquisition.
In aerospace defense, our guidance remains unchanged and we expect sales growth to be driven by higher demand for actuation and flight test equipment on key programs principally the F 35.
And ground defense, we've reduced our outlook in this market as we expect delays and funding on international ground platforms.
Enabled defense, we've increased our outlook and continue to expect strong organic sales growth driven by the ramp up on the CVN 80, and 81 aircraft carrier programs and higher Virginia class submarine revenues.
Moving to the commercial markets, where we now expect sales to be down 14% to 16% overall.
Our updated commercial aerospace guidance is based on widespread reductions in OEM production rates by Boeing and Airbus for actuation equipment sensors and surface treatment services.
Next in power generation, our updated guidance principally reflects lower international aftermarket sales largely due to project delays.
Meanwhile, domestic aftermarket sales are expected to remain flat social distancing related delays and maintenance are expected to be recovered in the second half of this year.
Regarding the cap 1000, although we continue to project increased revenues on the program in 2020, we're projecting a $10 million revenue shift into next year, principally due to delays caused by social dispensing.
In general industrial we expect sales declines in all major categories, reflecting our views of bulk market specific drivers and reductions in global economic activity.
We anticipate that the second quarter revenue will be our lowest as order trends have improved and are expected to slowly increase throughout the second half of the year.
As you can see based on the collective updates to our end market guidance, we now anticipate 50% of our overall revenues and defense markets and 50% in the commercial markets.
The appendix of our presentation, you'll find our 2020 end market sales waterfall chart.
Continuing with our adjusted financial guidance for 2020, we expect solid sales growth in our defense and power segments to be more than offset by reduced sales in our commercial industrial segment.
Overall operating income is now expected to decline, 5% to 8% while operating margin is expected to be down 30 to 50 basis points compared to 2019, despite improved profitability in the defense segment.
Further we've increased our expectations for 2020 restructuring costs due to additional actions that were implemented and accelerated in response to covert 19.
Our adjusted 2020 guidance now excludes total restructuring cost of $35 million, mostly in the commercial industrial segment, which has experienced the greatest impact from the pandemic.
We now expect to achieve $40 million, an annualized savings from these restructuring initiatives half in 2020 and the remainder in 2021.
As a result, we anticipate that full year 2020, decremental margins will likely ranged from 20% to 25% improving upon our prior estimate of 25% to 30%.
Continuing with our outlook in starting in the commercial industrial segment, we have reduced our guidance for sales and profitability in response to end market weakness.
To mitigate those declines we've implemented deep and aggressive cost reduction measures and we expect significant restructuring savings to benefit the second half of the year.
In the defense segment, we continue to expect solid growth in aerospace and able to sense, but have trimmed our overall sales slightly due to the aforementioned reduction in ground defense.
Despite that change we're now projecting full year segment operating income to grow 12% to 14% well operating margin is expected to increase 80 to 90 basis points to a range of 23.1% to 23.2%.
Both represent increases to the guidance ranges provided earlier this year.
Outlook reflects the benefits of our cost containment actions and accelerated restructuring savings that are expected to more than offset higher R&D.
In the power segment, we expect strong revenue growth enabled the sense, while overall power generation revenues are now expected to be down slightly principally due to lower international aftermarket revenues.
Despite the topline reduction operating margin is expected to remain in line with our original February guidance at a range of 17.1% to 17.2%.
Outlook reflects favorable absorption on a strong sequential ramp in second half sales and the benefit of accelerated restructuring savings offset by higher R&D.
Continuing with our 2020 adjusted financial outlook. Please note that we made a few non operational adjustments to our full year guidance.
Higher interest expense reflects the additional $300 million in senior notes, which will close in the third quarter.
In addition, our effective tax rate guidance increase to 23.5% is principally reflects a non deductible and non cash currency translation loss of 10 million taken in the second quarter related to the liquidation of a foreign legal entity.
We've also lowered our full year share count by nearly 1 million shares based on our expectations for 150 million in full year share repurchases, including the 100 million dollar opportunistic program executed in March.
As a result, we expect full year 2020 diluted EPS guidance to range from $6.60 to $6, an 85 Axtone exit sense, we expect sequential quarterly improvements for the remainder of 2020 and approximately 40% of our full year adjusted diluted earnings per share to be recognized in the fourth quarter.
Factors contributing to this cadence include the timing of cap 1000 revenues in our power generation market the sequential ramp in production at our new DRG facility and restructuring savings weighted to the second half of this year.
Note. The Cps pattern for 2020 is quite similar to our rebound from the last industrial recession in 2016. When we also recognized 40% of our full year earnings per share in the fourth quarter.
Next to our full year free cash flow outlook, where we are projecting a very strong free cash flow level similar to our solid 2019 results.
At the onset of the pandemic, we implemented aggressive plans to manage working capital and suspended all non essential capital expenditures to preserve free cash flow and improved liquidity.
Results to date have been very positive and we now expect our 2020 adjusted free cash flow to range from 350 to 380 million with an expected conversion rate of approximately 130%.
This is well above our initial February guide of approximately 115%.
Now I'd like to turn the call back over to Dave to continue with our prepared remarks, Dave Thanks, Chris.
As we entered 2020, we launched several companywide restructuring initiatives leveraging our recession playbook to address the anticipated reductions in demand drive margin expansion as Chris reviewed earlier, we've since expanded the scope and increase the pace of our restructuring actions do the pandemic.
As a result, we expect to drive significant savings, particularly within the commercial industrial segment.
I'd like to share. An example of one of those initiatives, we entered the year targeting restructuring actions within our commercial aerospace business.
Since the onset of the pandemic commercial aerospace demand has significantly declined.
Recent industry projections have suggested that it could take several years before commercial aerospace Oems returned to previous production levels, while commercial aerospace only represents 14% of our projected 2020 sales we are implementing additional facility consolidations and workforce reductions were.
Necessary to align to anticipated future demand. This includes our business supporting the 737 Max program, where we are currently performing at a steady production rate on our actuation contract through the end of 2020. Many of you have asked how our current contract will impact Curtiss Wright in the coming year we.
Understand and recognize the delicate balance between sustaining profitable growth and satisfying customer needs, including inventory on hand.
We continually work to align these two priorities regardless of the status of this contract we may be faced with a headwind of up to $70 million next year. We're actively working to cover that gap through continued growth in defense revenues or potentially via acquisition.
We're taking the prudent actions required to are aligned our cost structure and position Curtiss Wright for continued profitable growth.
Curtiss Wright remains well positioned to whether this challenging environment and we anticipate the strong second half performance, we maintain a diversified business mix with defense markets, representing 50% of our total sales, which provides both solid visibility and stability to our revenue and free cash flow.
We are an agile and flexible business and we have a strong track record of proactively driving margin improvement.
In addition, we expect to generate strong free cash flow in 2020 to further support our balanced capital allocation strategy, our balance sheet remains strong and healthy with sufficient capacity to support our acquisition pipeline.
In summary, based on our restructuring actions continued solid execution and pursuit of new business, including M&A, we remain committed to our goal of ensuring long term profitable growth for our investors at this time I'd like to open up todays conference call for questions.
As a reminder.
Question, you will need to press star one on your telephone to withdraw your question you press the pound key please standby well we can Kyle.
Roster.
Our first question comes from Peter.
Of Jarrod.
Your line open as good morning, David Christian.
Sure Chris Chris just wanted to circle back with your comments on just the on guidance for commercial industrial down 15% to 18% for the year end versus what you just didnt second quarter of down 27%. What do you what are some of the drivers that are giving you some lift in the second half.
Yes, So I mean Q2 was our weakest point in the year I mean, we were expecting this to be our lowest point of the year.
We dug into the orders we saw that that that was the case.
We did experience small sequential improvements in quoting activity in order since may which provides us with some optimism for the second half of the year.
If we look at commercial aerospace orders reached a trough in may de increased customer pushouts and reduced OEM production levels, just basically across all platforms and general industrial.
Mark major product and service categories experienced disruptions, we saw low point in orders in April.
Severe reductions in class a vehicle market with production more down more than 50%.
Now.
We saw pressure from low oil prices and the pandemic and we reached a trough in early may.
But some sequential recovery in June so thus far in July slight improvement and G.
We typically have a slow third quarter in Europe, but despite that we're seeing improvement in our order patterns and we're watching this cautiously on the defense side, we talked a little bit it in the script about the ramp up on the cap 1000 program in the back half of the year as well as the ramp up enabled the sense as our new DRG facility.
He comes up to full production capacity.
Okay Thats helpful. On just Dave if I just a follow up on your comments on M&A.
How are you viewing is the process I assume is slowed down somewhat tied to co bid but.
Just maybe talk about your interest in M&A and your ability.
What the pipeline looks like.
Yes before the pandemic the pipeline was relatively filled was as it is with US for every 10, you might get to that really make it to the finish line and because our scrutiny is pretty heavy duty on some of these but we did have a few that we're making it fairly nicely along.
That process and then of course pandemic it and we all took a pause there to regroup see where we're at and it was given this fact that we've come back in a reinstated our plan and had the basically the confidence that we could reinstate with the conservative manner that we run the come.
But we felt pretty good that are at this was this should open the door now for some of those that were underway in the past right before the Cobra did and then we have been looking and talking since the pandemic hit every body.
Been keeping everything alive. So I'd say that we certainly can tell we've got the dry powder to execute on that now if we can just come to grips with valuations I think some of that is opening up in terms of visibility force and what expectations are the execution certainly on some of those.
Acquisitions that we were chasing since the pandemic have given us an idea of where they are headed and how they have fared. During this process. So that's great to have that sort of visibility at from from an M&A side. When you get to this kind of point, where you get to look back a little bit to.
How the how they performed under duress well, that's certainly either gives you a very warm feeling for the it's kind of puts you at a point, where you can make a different decision and I'd say, so far we're feeling pretty good about feeling pretty warm about how we started it and how we can conclude some of these so I feel pretty good about M&A go.
Going forward I think it's going to start opening up across the board.
Thanks for that thanks.
Our next question comes from Myles Walton.
Yes.
And is open.
Thanks, Good morning.
Hey, good morning.
Maybe first off on the power segment.
I know you've got a pretty big ramp implied in the back half the year and you talked about cap 1000 is being.
Piece of that into.
The fourth quarter particular could you just talked about how much of a ramp that looks like.
Into fourq versus sequentially from Twoq to Threeq you.
Yes, I mean, we're not going to talk about the specific numbers miles, but yeah, we essentially.
Yes, as you look at it yeah, we're going to have a very steep ramp in Q3 in Q4.
We're expecting $90 million of revenue on that program for the year, which is still above 2019 levels of about $80 million.
But it will be very steep ramp sequentially.
In Q3, and Q4 being the highest.
Okay, and then I guess from a 2021 headwind.
On a cap 1000 or or overall, new nuclear at this point it sounds like now it'll be a slightly lower headwind in 21, maybe 30 or 40 million and Dave you called out to up to 70 million in our 75 million in commercial Aero is there any any other idiosyncratic things to its kind of consider.
As you look at 21.
No I don't I don't think so I think as you pointed it out miles I mean, the push out here of 10 million could actually be beneficial to 2021.
It's still very early on for us and the budget process and I think we were very happy that.
All the information that we were able to gather here in the second quarter that we're able to offer guidance here for 2020, we sold a lot of work.
And we're hoping to be able to provide a little bit more clarity on 2021 is we get closer to February.
Okay, and then core cleanups, one is on the $40 million benefit from the restructuring savings on so just some clear that's 20 million benefit to to the second half shortage of benefit even here in the second quarter.
And then similarly as you look to next year are you still picking up benefit for from underlying amortization. So if I combine that benefits from restructuring costs benefit from lower amortization you might even.
I think still on revenue would be a 100 basis points margin expansion.
Yes for restructuring you know, we are projecting $40 million an annualized savings right now I would say we recognized roughly three in the second quarter. So that half of that that annualized savings is going to be recognized in 2020. So you've got to a lotta uplift here in the second half of the year you know another reason for some of the.
The confidence that we have here in reinstating our guidance for 2021.
Again, a little probably a little too soon to comment on on where we can go here, but we will see half of that annualized saving slide out into 2021.
Okay, all right I think that's Oh, sorry, one more the working capital looks like you, maybe how to help with 20 million versus the prior guidance.
Is there anything to think about on working capital as you move into a into next year.
No I don't I don't think so I think you know, we're continuing to kind of drive down working capital as a percentage of sales I mean, we've had very strong first half in terms of collections and the way that we're looking at our guide for the full year 350 to 380, we are expecting some pressures in the back half of the year.
And then you get you guys know better than anyone Theres a lot of talk out there about everyone's going to improve their cash position. So we're trying to take a little bit of a conservative position here.
As we guide to the 352 to 380 expecting that there will be some headwinds in collections on as we look out into 2021. I mean, we are we will continue our March to top courts Island and will sharpen the pencil as we get.
Deeper into the year.
All right that's great. Thanks, guys.
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Your question. Please press the pound key.
One moment.
We have a question from Michael Ciarmoli of Truest Securities.
Hey, good morning, Thanks, guys for taking the questions here nice nice results.
Maybe.
Just stay on miles line of questioning on the margins in the restructuring.
And I know, you're not going to definitively speak to 21 guidance, but you you've got this 737 Max.
Headwind you framed it pretty well, Dave I think you said $70 million, it's fair to say that with the restructuring and.
We do continue see improvements in general industrial that you should be able to grow those margins year over year in the commercial segment or will that.
Well that Max headwinds, you know kind of proves to be something that might be a little bit of thornton pressure margins.
I mean as you look at it Mike I mean, certainly you know it is a headwind to the business and as you, particularly caught in the script here. We are we had started and we were we started off the year with restructuring actions and then we've implemented additional cost containment measures.
Yeah.
Yes. Both of those are charged are focused on achieving margin objectives right. The restructuring actions are longer term and more permanent in nature.
The cost containment, a short term and more temporary in nature.
We're very focused and on achieving and beating our incremental decremental margins for the year as it may be and we're going to make the tough decisions downsizing the cuts and investments in responses to changes in volume so.
Yes, a little too early for us to comment on 2021, but I can assure you that the management team is focused and we're still driving to that 17% margin I think there may be.
We may be a little bit delayed and achieving that 17% based upon the $200 million and commercial revenue headwinds.
But we're still we're still driving towards that that goal and.
Well, we'll know more later in the air.
Got it just as we look at commercial Aerospace you know again, realizing it's a smaller piece of business now.
Are those the margin profile on those aerospace revenues are they in line with the commercial segment.
Below or above just trying to get a sense of.
How does the profitability on those products look versus your general industrial and even some of the other revenues that flow through commercial segment.
Yes, I would say the business is probably a little bit to diverse Mike to be able to provide you with a specific answer as to what we're seeing there I think yeah. The rationale here as we look ahead and 2021 is really going to be.
What are we going to be able to do with margins in that business and the restructuring actions that we're putting into place are good part to mitigate those headwinds so.
Well I don't really provide any information at this point regarding differences into I think it's just I look at it is one big one big bucket, Okay. Steven on a trailing basis just to get a sense like if I will look at last year were were arrow margins sort of in line above that segment average or below segment.
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Yeah, I wouldn't I wouldn't say that you can kind of pinpoint that I'd say it's.
Product by product program by program and Yep.
Got it.
What about can you give a little bit more color you called out the order strength I think you kinda enough commentary you know it sounded like orders bottomed in.
The April timeframe.
Can you give us any more detail on maybe some of those shorter cycle orders, whether it's you know valves pumps industrial controls where you saw the most strengths was it was it more on the defense side, just any any more detail on the order flow.
Yeah, I mean, I would say that surface tech as you know is really kind of our economic bellwether and they're pretty diverse and the markets that they participate in the commercial markets that they participate and and we've seen slow and steady sequential improvements since April.
Vehicles, the low point was April as well.
And we've seen some improvement there and I think I think in the commercial Aero side some of the Oems while they were wrestling with their demand. They also had to consider some of the inventory changes that they were facing and it took a little bit longer for us to see the trust and the drop on that so we saw those really hit in May.
Hey, but we see an improvement in June and then also July again, so I think you Dow's, we saw a trough in may but again kind of like the commercial Aero orders, we've seen sequential recovery in June and then also some slight pickup here in July so the trajectory is right and.
And.
It's providing us with with.
Some cautious optimism and our commercial markets as we entered the second half of the year.
Got it and it just on that you mentioned that economic bellwether surface tech and surface treatment any sense as to current capacity. There I mean, I know those you've got a lot of those facilities close to customer Proximities, if you add to.
Gauge you know at the low point, what was overall capacity and maybe where you've seen it.
Improve too.
Yes, I think you know that what we're doing Mike, but our restructuring is we're being very end cost containment I mean, we're being very targeted if there are temporary headwinds that those businesses are facing in the market. We're adjusting the resources and the cost as appropriate and then if we see anything that's there.
Thats structurally more of a problem as we get.
Long term.
That's that's where the restructuring is really going to kick in the longer term actions that are that are based upon.
More changes within our footprint.
Hi, there Mike that we have very high degree of flexibility within those surface to business units and other 70 of them across the United States and abroad, and given the nature of that business. How they are sometimes in the shop and or next door to their customer or down the street.
There there are profile is one of agility and ton of flexibility to go with in the the ebb and flow of what's going on now so they'll flex all over the place. It's sometimes we'll close the plays down on them, because there's not enough there and move it.
Say 20 miles down the road to one of our other facilities.
And then worked that way or vice versa, if you'd need to grow. Then then we can put on an ownership very easily. So we've got that that's sort of ability with that business.
Got it that's helpful. Thanks, guys I'll jump back in the carrier.
Thanks, Mike Thanks, Mike.
Again, ladies and gentlemen to ask a question you will need to press star one on your telephone.
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I would now like to turn the call back to Dave Adams, Chairman and Chief Executive Officer.
Thanks, Dave Thanks, everybody for joining us today look forward to talking with you again on our third quarter 2020 earnings call stay safe and have a great day bye.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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