Q4 2020 Powell Industries Inc Earnings Call
Good morning, and welcome to the Powell Industries for school, 2024th quarter results Conference call all participants will be on Muslims.
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Richard Ryan Coleman Investor Relations.
GAAP.
Thank you and good morning, everyone. Thank you for joining us for Powell Industries Conference call today to review fiscal year, 2024th quarter and full year results with me on the call are Brett Cope How's chairman and CEO and Mike <unk> cash Powell CFO, there will be a replay of today's.
The call will be available via webcast by going to the company's website <unk> dot com or a telephonic replay will be available until December 16th the information on how to access. The replay was provided in yesterdays earnings release. Please.
Please note that information reported on this call speaks only as of today December nine 2020, and therefore, you're advised for than any time sensitive information may no longer be accurate at the time for replay listening or transcript reading. This conference call includes certain statements, including statements related to the company's expectations of its future operating results.
Assets that may be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 investors are cautioned that such forward looking statements involve risks and uncertainties and that actual results may differ materially from those projected in these forward looking statements. These risks and uncertainties include but are not limited to.
Competition, and competitive pressures sensitivity to general economic and industry conditions international political and economic risks availability and price of raw materials and execution of business strategies.
For more information please refer to the Companys filings with the Securities and Exchange Commission with that I'll now turn the call over to Brett.
Thank you Ryan and good morning, everyone. Thank you for joining US day, her new pouch fiscal 2024th quarter and for your results.
I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions.
Since our last update our cash safety measures have remained in place and we have continued to prioritize the held for our employees customers and suppliers above all else.
That's an essential business, we remain fully operational we.
We continue to follow all recommended safe work practices, such as ensuring that our team has access for personal protective equipment, they need on a daily basis.
They've just something on workstation.
Stagger work schedules and when possible work from home options for rolls to support manufacturing operations.
I continue to be impressed by our team's response during this crisis and their commitment to Powell and our customers.
Throughout the fourth quarter industrial end markets remain cloudy and under pressure as a result on the pent up.
Which impacted on revenue and new orders for the quarter Accordingly.
However across all Powell, our operations executed well on current products and were able to contain cost effective.
Fourth quarter revenues for $115 million down 23% from compared to prior year on.
On lower by roughly 3% sequentially.
The decline was driven by the lower revenue from both our oil and gas and petrochemical customers, which were down 50%, 35%, respectively compared to fiscal 2019.
Those declines were partially offset by sustained activity in our utility contraction market, which each grew over 30% compared to last year.
Fourth quarter gross margin as a percentage of revenue was 18.9%.
Which is a decline of just 30 basis points compared to one year ago, and an increase of 80 basis points compared to last quarter.
Sequential increase resulted from restructuring activities that we took in may as well as strong productivity in our domestic operations.
We continue to restrict travel and other discretionary expenses in this environment, partially due to local state and federal stipulation.
Going forward, we will continue to it we will continue to evaluate our cost structure to ensure we are aligned with the current environment, while ensuring we remain properly staffed for the eventual return project customer project activity.
We reported net income of $3 million in the quarter down from $6.5 million on the prior year for.
Primarily due to a decline in revenues and gross profit bolting from an income from a decrease in new orders and adverse market conditions.
We continue to effectively manage our working capital position.
Volume with our focus on our cost structure, we generated $18 million of free cash flow for the quarter.
New bookings on a gross basis for the fourth quarter for $75 million.
Net orders for the fourth quarter were $57 million as the quarter was offset by $18 million of adjustments to previously booked orders.
The net $18 million 13 million.
It was related to our previously awarded project in our backlog backlog that was re scope to engineering only project.
At the request of our customer and they're ensuring partner.
We ended the quarter with backlog totaling $477 million, which includes the previously announced on March industrial order that was booked in the second quarter to support design manufacture integration and testing of the Powell custom integrated electrical distribution solutions.
Total design build and deliver on multiple power control rooms in support of the project.
Come on track will convert to revenue over a three year period.
During the quarter, we continue to experience lower bookings rate.
Adjusted with third quarter EPS, the impact that pandemic jet for core market.
However, we did experience improved quoting activity at the start for the fourth quarter across most of our operations.
One of the key value differentiation to Powell small is our extensive engineering capabilities.
Consistent with prior economic cycles, we are starting to see an increase in engineering only awards.
Awards keep our engineering teams utilized in the near term, while enabling our clients continue to progress in their projects until such time on full funding for.
Visibility remains challenged for many of our customers as they grapple with a significant deterioration in the near term outlook relative to begin in 2020.
As we've discussed we have seen several mid to large projects shipped or schedules into 2021 at the earliest.
While on a handful of customers continue to evaluate their timetable.
As I briefly mentioned a bright spot for the quarter was the activity within our utility and traction Mark.
Additionally, short cycle service parts and OEM work have continued to show steady improvement.
These projects are typically smaller but they are important work that utilize our assets and our cost structure.
Now, let's go through numerous downturns and customer activity that we have successfully navigated in the past most recently during our fiscal 2015 through 2017.
Of course, the drivers this time for different steps, we are taking on response or similar.
More than ever is critical during times like this that we continue to deliver the Premier service our customers have come to expect from Powell during our 73 year history as a leader in electrical distribution solutions.
We are also taking the necessary steps to manage our cost structure and preserve the strength of our balance sheet.
Ended the fiscal year $179 million for cash and short term investments and essentially zero debt.
This offers us incredible optionality as we navigate this environment.
Looking forward, we believe the economics of low cost abundant natural gas will continue to provide favorable opportunities in the LNG gas pipeline gas chemical process industries we.
We also see opportunities on the renewable markets for hydrogen biofuels and bio diesel.
Several projects on the planning stages that would drive future demand for both the process plants and the supporting pipeline infrastructure.
Additionally, we anticipate that well to chemical projects will become more economically viable as oil price support a return for these projects.
Lastly, any future tightening of regulations that require a lower level of software will drive higher demand for electrical distribution as refiners are required to upgrade facilities to meet improved emission standards.
Like all cycles, our industrial Mark from the customer activity will improve and we are ensuring that we make progress against the initiatives that will drive paals future growth.
One of these initiatives as Powell ongoing commitment to research and development and technological innovation.
Our roots of innovating in the face of new market challenges date back to the company's founding.
We have both the expertise to organically develop new solutions in house as well as the flexibility to evaluate and take advantage of inorganic opportunities.
It has been a core component of Paals passed and will be a critical piece Paul's future.
An example of this is the hirji progress and emerging opportunities within our growing electrical automation business.
We've long been a provider of solutions to help safely manage control the distribution electrical energy.
The adoption of event based maintenance strategies for electrical distribution equipment combined with the continuing cost challenges, but managing and growing fleet on electrical assets for our customers is driving increasing acceptance of digital technologies to solve tomorrow's challenges.
We are helping to reduce unplanned outages and maximize uptime for our customers facility by combining power's existing capabilities in the application of automation with our new and developing line of electrical assets sensors.
Our suite of monitoring technology. Currently includes all of the functions of the breaker the heart of the electrical distribution system. We.
We have recently developed additional sensors to monitor leading indicators adjusted issues, including heat for thermal index.
Signaled that indicate the breakdown of electrical installation and environmental conditions, such as humidity dust that could affect the safe operation of the electrical distribution system.
These solutions will help our customers reduce their costs.
And help protect their capital investment.
This is a new market opportunity that is still in its development stage, but we are seeing promising traction in this higher margin business before I turn the call over to Mike I'll outline our key focus areas as we move into fiscal 2021 from.
First and foremost is the health and safety of our employees customers and suppliers.
We are also focused on maintaining our solid execution performance to ensure that we continue to meet the high expectations.
Customers have Powell.
Net into continuous evaluation of our current cost structure supply chain and resource planning to optimize operations across geographies markets and customers.
It is also critical that we continue to pursue future growth opportunities and markets for Powell, we certainly possess the human capital balance sheet strength technological expertise to remain proactive in the current environment.
That I will turn the call over to Mike to provide more detail around our financial results before we take your questions.
Thank you Brett and good morning, everyone.
Revenues for the fourth fiscal quarter of 2020 decreased 23% to $115 million compared to last year's fourth quarter of $149 million and were down 3 million sequentially as we encountered continued softness across our core industrial end markets.
Net orders for the fourth fiscal quarter were $57 million with $75 million of new orders booked in the period offset by $18 million order cancellations and scope adjustments to backlog.
The $18 million consisted of $13 million of a converted or re scope projects in roughly $5 million cancellation.
These net reported results reflect a 65% decrease versus the prior year and resulted in a book to Bill ratio from 0.5 times for the quarter.
Reported backlog at the end of our fourth quarter was $477 million 58 million higher versus same period in the prior year.
Compared to the fourth quarter of fiscal 2019 domestic revenues of $81 million decreased by $34 million or 29% versus same period, one year ago, while international revenues were flat versus the prior year.
From an end market perspective versus the prior fiscal year revenues from our industrial sector decreased by 45%, while the utility sector was higher by 31% and traction revenue increased by 32%.
The year over year volume reduction across the industrial sector was led by a 50% decline in oil and gas volume, while petrochemical revenue was down 35% versus same period a year ago.
We reported $22 million of gross profit in the fiscal fourth quarter of 2020, which was lower by $7 million or 24% versus the prior year on 23% less volume.
Gross profit as a percentage of revenues decreased by 30 basis points to 18.9% of revenues in the fourth fiscal quarter compared to one year ago.
This was driven in large part by unfavorable year over year project mix in our international locations.
Mostly offset by favorable productivity across most of our domestic locations.
Selling general and administrative expenses decreased by $3.4 million for 17% versus the prior year attributable the restructuring benefits in overall cost management.
SGN expenses were $16.3 million in the fiscal fourth quarter or 14.2% of revenue compared to 13.3% of revenues a year ago on the lower revenue comparison.
On a net reported basis fiscal fourth quarter net income was $3 million for 25 cents per diluted share.
We generated $18 million of free cash flow in the fiscal fourth quarter.
This was driven by our strong working capital performance in the period as we see the benefits of project Closeouts as well as favorable milestone billings and collections.
Capex spending during the quarter was $852000.
Now recapping, our total year fiscal 2012.
Revenues of $519 million increased $1 million compared to the prior year.
Orders were 577 million, 15% lower versus fiscal 2018.
Gross profit as a percentage of revenues increased by 140 basis points to 18.2% of revenue on favorable volume leverage and productivity across most of our North American operations.
Selling general and administrative expenses were lower by $2.3 million versus prior year. This.
This was partially offset by 1.4 million of restructuring costs in fiscal 2020. In addition to a non repeatable insurance settlement benefiting fiscal 19 by $950000 over.
Overall net SGN expenses as a percentage of revenues were flat year over year at 13.4%.
We reported net income of $16.7 million or one dollar and 42 cents per diluted share compared to $9.9 million or 85 cents per diluted share in fiscal 2018.
Total fiscal year, 2020, free cash flow totaled $67 million versus $65 million in the prior year.
At the end of fiscal 2020, we had cash and short term investments of $179 million 54 million higher than our fiscal 2019 year end position.
Long term debt, including current maturities was $800000.
Looking forward to fiscal 2021, we continue to be adversely affected by the uncertainty across our industrial end markets in anticipated debt cyclical conditions may persist throughout fiscal 2020.
That said as we navigate these near term economic variables, we are well positioned to manage through the industrial end market dynamics as we continue to focus on executing the backlog while also maintaining our strong liquidity.
We're also seeing stronger activity in our utility attraction markets, which were higher by 31% and 32% respectively in the fourth quarter.
While project orders in these markets are smaller in scope. They are important projects that help to keep our asset base utilized in leverage until our industrial end markets recover.
As Weve demonstrated in the past we are committed to maximizing margin margins credit portfolio and will continue these efforts into fiscal 2021 from began.
Additionally, our balance sheet is strong which provides business with the element of optionality as we assess opportunities to diversify and grow into the future.
As a reminder, we typically encounter a seasonality impact at the start of our fiscal year and as such we do anticipate that the first quarter will be softer sequentially from an earnings perspective, due to fewer days work, resulting from holidays and paid time off compared to the prior for.
At this point, we'll be happy to answer your questions.
We will now begin the question answer session. Please ask your question on May Press Star then one on your Touchtone phone you are using speakerphone. Please pick up your handset before pressing the keys.
Sure. Your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Our first question today comes from John Franzreb with Sidoti income.
Please go ahead.
Good morning Britain margin.
Good thanks.
No actually.
Consider this a rare occurrence of cancelled orders.
Could you give us a little bit of background on why that happened what marketplace. It was it.
The.
Market share on on that one is a cash chemical project and its repeat customer longtime customer Powell is a little unique in the re scoping of it.
On the $30 million on as soon as core question because there were just straight up cancellations on Mike.
Mike mentioned in that detail, but.
Yep guests chemical and.
From what I can see.
Balance sheet.
The call they made to disrupt their balance sheet and defer spending to a later time so.
On the calls up and.
Converted to the engineering only we anticipate some point that'll that'll come back that just these when to pull back on the committed cash.
Okay actually I was more I was actually more interest in the cancel projects not on the re scope Brett because that's what I consider from.
Typically where.
Is there any commonality in them.
Yes.
The five non our solid balance on the cancels were more on the oil space straight refining Brett brick and mortar type jobs.
Okay any sense that debt business has has bottomed or are you still concerned about the trajectory there on that side of the.
Mark.
You know that the if you look at the Q3 Q4 as kind of the same run rate.
I think we might see one or two more it is bottoming, but I don't know we've seen the end of that yet.
Okay.
Recently a.
From comparable company competitor company put some assets up for sale.
I Wonder if you.
For those assets get attractive, it's not something you're interested in because you did mention which is on the kind of revenue. We also is that do you.
Looking at inorganic growth opportunities. So can you just kind of expand upon that.
So I know the question's been asked previous calls and what we're doing with the cash and I share very openly debt with.
On the board and management team are conversations.
Been very focused on this subject and how we're going to.
Direct the company and strategies for the future and working on that now for the better part of the year.
Those conversations continue as I've mentioned before.
To become more focused around a couple of key strategies.
We are watching the marketplace with our competitors in many senses and.
On.
So we're aware of that and evaluating how that might be.
The best for Powell and shareholders in the future so.
So does that mean, you're considering inorganic.
Growth opportunities or not.
We are we're starting to try to build the framework for guidelines by which we're going to stay disciplined to net to do.
Thank you our strategy here too.
Which the company forward into where we see on the market heading for work whats for Paul.
Got it okay.
One last question get back into queue were nearly done with the first quarter.
Besides the seasonality issue reminding us all about.
How is it kind of shaping up relative to the fourth quarter.
On any kind of comparable basis that could help us with.
Coming off of Q4, we certainly in my prepared remarks, I mentioned the upturn in the quoting activity right that was a big difference when everybody is trying to figure out what was going on in Q3 is our thing was kind of scattered all over the place and we're still seeing some effect of people just not in their offices for the for the remote workplace.
Continues to have sort of slowed on effect, whether its utility traction or core oil and gas petrochem.
On the activity definitely picked up.
The run rate.
Still sort of running but from a mix standpoint, the engineering only awards have picked up and while those are large dollars those are sort of the reservation so to speak for the future. So my sense of optimism for.
If and when those get funded which of course is no guarantee that will.
We're making some good progress at future business, but but from an actual run rate no.
No real change heading into the first couple of months for the quarter.
Other than the mixes.
Looking it's more positive in the sense of is looking for from up from a want to fund things and when it does I feel good will be the requisition for those in the backlog.
Great Great. Thanks to my questions got back from Q1.
Okay.
Our next question will come from Jon Braatz with Kansas City Capital. Please go ahead.
Good morning, guys.
First on Michael.
Michael a question on on the non.
On the working capital needs, maybe as we head into this in 2021.
Obviously business is going to be soft, but do you see any need to.
Build working capital and the second second question would be.
Where your cash balances boosted it all by tax deferrals payroll tax deferrals related to the cope with legend cope with legislation.
Yes, so I'll take the second one first the answer to that is no. We didnt have any any impact due to the coated legislation that went through from a working capital impact looking forward into fiscal 2021 interest at day graphs that 2020.
Great Great year for working capital cash overall for the for the company.
Really driven by a couple of things the working capital was benefited by the unwinding a lot of these projects that had finished up in.
Second half of 2020 as well as some of the milestone billings for up for that large project.
Looking forward into 2021, we will use some of that cash flow for working capital for this business.
Total project that we're executing in 2021 and 2022, so I would expect.
Cash to come.
To come down a little bit as we work our way through.
Through mid 2021.
Okay, and then looking at the new for new business opportunities for business that Youre see coming in the door.
How does that look on on the margin front are you seeing any.
In this weak environment any.
Renewed mark any margin pressure.
Committed job cuts Brett coming into Q1, we are we do see it so much in Q4 I think we are asked the question but.
Not in Q1, we're starting to see some price pressure.
And again, it's in those traditional markets, where we typically see pressure, which is more utility.
On the generation side and some of these markets that the.
Distribution solutions isn't as difficult they are a little bit more.
Open to competition, if you will start to see some there okay. One last question and this probably a long shot but.
Reading the other day about on offshore.
Offshore drilling activity in offshore oil production.
And there was some comments on there about how maybe with these higher oil prices and new technology that offshore.
Oil and gas production may be getting a little bit more in earnest than we've seen recently and you know talking about maybe Gulf of Mexico, and Brazil on so on.
Brett are you seeing any activity and in sort of your on your legacy business the oil and gas.
Platform business.
Our production business, we do have one job that we took last year.
On the offshore market traditionally for Powell really changed several years ago, we did see a little bit.
From a legacy job legacy customer last year do one of these smaller capex expansions and sort of field extensions I do watch the EPS so market John it's not a market. We have competed in net we struggle a little bit too to really effectively compete well that market's actually doing a little better for the offshore side right now and in those markets you mentioned.
We're watching it we are watching even those legacy customers on what how they're thinking about these extensions.
What would they do either top sides or for new technologies to extend these fields or take an existing platform rework it and even though power structure on the new share.
A lot of new thought on.
Power from short type applications, while for that due to on Dec distribution design. So definitely that was different for us of that okay. Alright. Thank you very much.
Our next question comes from John Deysher with Pinnacle. Please go ahead.
Good morning, everyone. Thanks for today.
I was just curious you mentioned margin pressure going into.
The current quarter are you walking away from any business because of price.
No not yet I go back to my prepared comments, John I've talked about 50 to 70 parallel.
There was a point in that cycle driven by again as you recall that the drop in the oil price everything that happened that led to that down cycle, where we did reach a limit.
[music].
We're not there yet didn't see really much price pressure in Q in.
In Q4, we just aren't seeing it kind of at the tail end well begin to Q1, we started to see a little bit and again in some select markets not across the board.
Okay.
Yes, some of your competitors don't have a rock solid balance sheet that you do.
And I'm just.
A little concerned that you know they do those guys gain market share when you reach the price at which you won't compete.
No we're not there yet and we have a lot of chatter about.
The risk profile on the project in terms and.
The whole scope for the job what we are building how we're getting at the site what are the on site services, which is it's an area. We're looking to expand upon and how can we.
Manage the risk with the engineering partner or the on customer to have a more open discussion before the jobs awarded about where Powell can help meet their needs on the job, which we know there's price pressure on first purchase price, but how can we mix around the scope to put power on the best like to do what we do best so those conversations on.
Our.
Assets in our happening now and and we're cognizant of the risk profile, but engaging.
On the cup the customer on that conversation. So we can help them meet their need on the budget side, but yet do what's best for Powell, it and not lose the job.
While lower margin make sure the risk is managed as well.
Right. Okay. Okay, that's good to hear.
On the strategic plan that you indicated you had been working on for the better part of the year.
Is there a timeline there in terms of.
Wrapping that up and figuring out exactly which direction you want to move.
Not yet we are.
We're working on.
With that with the board and the management team and.
We'll get to the point of updating our investor relation debt.
Cash can't quite yet today give a timeframe when that would be published to give the direction on where we aspire to go but.
But I think we are coalescing around a couple of strategic options.
And so we're near there and hopefully very soon we will be on a sort of laid that out and.
In the share with all the shareholders, where we see the best future Powell with putting the money to work okay and.
And finally from me.
As the mix for the backlog.
Shifted at all.
Over the last year or so I mean.
Yes.
For non petrochemical non oil and gas.
On a percentage or is it the same or how is the mix for the backlog shift yes. John This is Mike the way.
Kind of look at look at the mix over the last year and as we go forward.
We are seeing is lower clearly lower industrial backlog as we lead the oil and gas petrochem backlog we.
We are seeing more traction and utility work. However, as we mentioned in the prepared comments. So you we are seeing a little mix shift both from a product standpoint product application standpoint, as well as GM geographically you know we've got a very strong backlog in our Canadian facility as well as well as our UK facility.
But.
They carry different margins as well so it does have a little bit of a mix impact.
Industrial oil and gas that's still the lion share of the backlog at this point.
At this point, yes, right, Okay, and you mentioned traction I'm not familiar with that one.
What is traction.
John Brett debt, so mostly on North America light rail and markets. So you think about on Washington Metro Bay area Rapid Transit Chicago Transit Toronto Transit switching on the.
Oh, it's just that we do the rectifiers.
Yeah.
And the DC switch gear for powering rail okay, great. Thanks.
Thanks, and good luck. Thanks.
Thanks. Thanks.
Our next question will come from John for answer with Sidoti income. Please go ahead.
Yes, just a little bit on on the cost structure as you brought back anybody that's it everybody that's been for load.
Are you at the what you anticipate the go forward.
Workforce slowed.
And also I guess.
All the restructuring actions that you announced over the summer they are they completed.
And then are there any more contemplated or are you satisfied with the current configuration in the from.
Just Brett I'll start and Mike was that some color here so.
So no nothing more since since the day adjustment nothing significant debt, we bring people back you know.
Some of this engineering only work, yes, we're going out to its it is challenging us a little bit so that is sort of a little bit of a turn there and into Q1. We're we're looking at those resources and trying to.
The site.
Can we get people back to hand on the slow it how long does it go. So we are in that thought process right now, but thats really the only on function the rest of it sort of status quo looking forward.
Its its quarter by quarter on right now until we get better clarity.
You said in the market. There is one desire, which is engineering only awards for instance that they get funded it could be very interesting if they don't Theres us when do you get when do you do you need to do something else the drags on a different way. So it is a little quarter to quarter until we get clarity and we're trying to be very thoughtful about the cost structure.
For two to not.
On the cap us long term because it is as you know on the model. It takes a long time to spit up tribal knowledge, if we let it out the door. So we really we really want to keep for people.
Okay.
Okay.
Hi, I mean.
I think what we did in May and June really benefited the second half for the year.
Into to Brett splayed say its quarter to quarter.
Pulsing that worse cadence the commercial activity out there understanding just looking around the corner and we're doing that every free week, so staying very close to it.
And Brett.
The incoming order book.
And maybe the lowest I've seen.
Decades.
How does that.
Surrounded the index coming quite a sweet should we expect maybe a sharp recovery or or is it just.
Just on the visibility for you to tell.
On the visibility is very positive.
As I mentioned earlier John to your earlier question the pace in the Q1 as we started isn't significantly different the mix is a little different and that we're seeing.
Some some awards that aren't the whole job is the hey, Powell help us get through these early phases, we'll see what's going on in the market what's going on.
Damaging effect on the economy. The macro certainly has play here across the world. So it's a little bit more positive in the sense of.
Let's get some work go on because we think we want to get this job until they get the for funding on return.
Through there for the end user so.
But the but the absolute number isn't significantly different so I don't know John I don't know, but if I look forward, there's potential to certainly have a couple of quarters. It start to jump up nicely, but right now for quarter. The run rate is still very very carefully.
Use the word cautious.
Cautious coming in and I don't I don't think there'll be any big change on that in the near term AK next quarter or two but but the potential is there that we could we could pop up quarter.
Okay. Okay. Thanks for taking my follow ups Brett.
There are being no further questions. This will conclude our question and answer session I would like to turn the conference back over to Brett Cope CEO for any closing remarks.
Thank you Greg.
For pandemic is certainly challenging our customers and how we operate each day. However, Powell is uniquely positioned to weather the storm.
We have an incredibly talented team healthy backlog strong balance sheet and great relationships with our customers and suppliers.
We are firing on all cylinders across our operations.
And we are not standing standing idly by while we wait for our industrial markets to recover we are focused on advancing our efforts in new and encouraging growth avenues that will better diversify our backlog and project mix going forward.
With that thank you for your participation on today's call. We appreciate your continued interest in Tal look for.
For to speaking with you on next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.