Q2 2021 Weatherford International PLC Earnings Call
Ladies and gentlemen, thank you for.
For Sandy by welcome to the Weatherford International second quarter 2021 earnings call all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1.
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As a reminder of this event is being recorded I would now like to turn the conference over to Mohammed top of wallet of director of Investor Relations and M. N day, Sir you may begin.
Welcome everyone to the Weatherford International second quarter.
For 2021 conference call.
I'm joined today by Gary Finally, Crum, President and CEO, and Keith Jennings Executive Vice President and CFO, We will start today with our prepared remarks, and then open it up for questions. You may download a copy of the presentation slide that corresponds with today's call for.
For more web site's Investor Relations section.
I want to remind everyone that some of today's comments include forward looking statements. These statements are subject to many risks and uncertainties that could cause our actual results to materially differ from any expectation expressed herein.
Please refer to our latest security.
Securities and Exchange Commission filings for risk factors and cautions regarding forward looking statements.
All comments today also include non-GAAP financial measures the.
The underlying details and a reconciliation of GAAP to non-GAAP financial measures are included in our second quarter press release, which can be found on.
On our website with that I'd like to turn the call over to Girish.
Thanks, Mohammed and thank you all for joining our call today.
We will start on slide 3 of which highlights our exceptional performance in the second quarter.
We came into the quarter the good momentum and I'm very proud of our team for carrying this forward and delivering on all of our priorities.
Overall, we delivered above the expectations outlined on our last call kept pace with larger more diversified industry players and made significant headway in our efforts to create a business capable of sustainable profitability and free cash flow generation.
Generating $48 million of free cash flow in an interest.
<unk> quarter, while driving significant margin expansion is a testament of the laser focus on cost and cash we maintain.
We have talked in the past about our approach being to plan for flat activity and then take advantage of activity improvements, which provide greater pull through.
On our Q2 results demonstrate.
<unk> sort of outcome of that strategy.
In addition to the financial results, we had several remarkable achievements on safety, which is of the core of out of operating culture.
We continue to reduce our total incidents and achieved zero recordable in June.
As an example of our commitment to safety I'd like to highlight a middle.
The population, where we delivered 10 years of completion operations and 20 years of liner hanger operations without any lost time incidents for a major national oil company.
Partly we are honored to receive the Kuwait oil company CEO HSC award for logging and perforation services.
<unk> activity increases across all of our Geo zones of the second quarter that drove sequential growth. This includes the North America, <unk> zone, which overcame seasonal slowdown in Canada I.
I am, particularly pleased with our EBITDA performance as we delivered an outstanding quarter with EBITDA margins of 15% an improvement of 200 and the.
80 basis points sequentially.
We have previously highlighted that 15% EBITDA as a goal for us over the next several quarters on while achieving it this quarter proves the feasibility of that ambition. We recognize we still have work to do to ensure the sustainability we.
We did have some 1 time items during the quarter, but.
We saw those are margin sticked up significantly and we had on our rate of sustainably generating 15 plus percent EBITDA margins.
Most importantly, our cash performance was terrific with the company generating $48 million in free cash flow, putting us on track for another full year of positive free cash flow, which would be a fairly.
The taxable achievement.
As you are aware, we recently completed the listing of our shares on the NASDAQ stock exchange and we are excited the complete this journey and trade SWF R&D.
This quarter's results further demonstrate the ability to deliver consistent performance and validate our overall game plan.
I.
Mark take a moment to convey my gratitude to our 1 day for team members for all of their contributions commitment and customer focus our people are the foundation of our performance and I am excited about the potential we are unleashing from within our organization.
That potential is evident in some of the operational highlights for this quarter.
Turning to slide for an important area of continuing to gain commercial traction is managed pressure drilling or MPD of disciplined we definitely lead in our industry.
Weatherford has offered a field proven market, leading portfolio of MPD technologies and services over the course of 50 years and counting.
It started.
I would like to first rotating control device and it continues with automated solutions such as our victim of intelligent MPD and next generation of automated risers.
There is a growing interest on our MPD capabilities, which combine domain expertise with automation and smart control algorithms to push the boundaries of what our customers can achieve in terms.
The bring overall cost and enhancing well integrity.
Our new awards extensions and operational successes showcase our global leadership in this technology in.
In Brazil, we won our second consecutive drilling contract for a major operators deepwater campaign and this marks the first award for our next generation automate.
<unk> MPD Riser system. In addition, we are mobilizing other MPD systems for 2 offshore drilling contractors there.
In Asia, and IOC contacted us after attempting to drill conventionally for 13 days and falling of 1000 feet short of target debt.
MPD enabled the customer to not only reached total depth.
Of note also drill ahead with another whole section for an additional 1200 feet.
We also deployed a victim of MPD solution from a swamp arch for the first time, enabling the operator to reach planned debt in a high pressure exploration well the day matter of drilling window.
In North Africa, and operator awarded us contract extensions for the full spectrum.
The <unk> services, including victors, intelligent MPD and an automated deepwater riser package.
This allows us to expand our capabilities to of deepwater gas field in the Mediterranean Sea.
And for another customer we use of nitrogen capital invariant of MPD to say 42 days of rig time, while also delivering more than 20.
On of empty production improvement compared to offset wells.
As operators face similar drilling challenges across the world. The successes offer powerful validation of MPD technology and the value. It brings by addressing challenges beyond the scope of traditional drilling applications.
Now turning to slide.
The percentage in addition to MPD there are several other core oilfield service technologies that continue delivering success. This quarter. These include products and services within our wireline and drilling services on artificial lift product lines.
Our teams of accumulated notable wins in multiple geos zones, including displacing competitors, leading the major.
Major contract wins these.
These technology achievements demonstrate that we're leading not only in our market leading product lines, but also highly competitive on our other core areas.
And drilling services of customer in Russia awarded Us a 2 year contract, which adds to our scope of work with the customer expands our presence from 8 to 15 rigs and introduces the.
<unk> grocery scalable system to new wells.
And then for an operator in the Middle East our drilling services achieved a new record for rate of penetration and save the customer 47 hours of rig time.
Leading to additional work being awarded to us in the offshore field.
In another core area of artificial lift and operator in the U S.
Awarded Us a fully integrated production pilot program for 8 wells in the Permian Basin.
We displaced the incumbent by recommending a rod lift solution complete with road of flex long stroke pumping units for site edge and core of our continuous drug could deliver savings of capital and operating expenses.
We also see progress.
The Magna the line through our strategic vectors of digitalization and the energy transition.
According to contracts signed last year with KFC in Kuwait, We launched the first phase of a rig site data management and visualization solution by implementing the central software platform and installing a real time drilling decision center.
<unk> that also secured multiple contracts to supply production automation solutions for operators in Europe Asia, and the Middle East in fact on operating in the Middle East will exclusively deploy for site edge production automation controllers on well equipped with multiple lift systems across the fields.
Additionally, we continue to build the successful.
<unk> for track record for our pharma plugging and abandonment solution.
In Europe, we replaced a competitor design, a custom solution leveraging technologies from a firm of portfolio and successfully delivering 27 wells ahead of schedule.
As plug and abandonment activity growth in the coming years, we believe that position.
Positioning ourselves for the service company with the complete solution will enable greater traction and growth of this important activity to ensure sustainability of abandoned wells.
Turning to slide 6 for our view on the market like most industry players. We believe the activity increase as seen on the second quarter will translate into a broader up cycle for the industry.
However, we believe that there will be significant differences geographically.
Driven by the pace of vaccinations and economic rebound in the face of the virus variance.
Despite the growing incidents of cases, we are now more confident and of 2022 growth scenario. Following continued moderate increases in activity in the second half.
The Street and Keith will talk more about that in relation to our outlook.
In North America activity was up during the second quarter with the increase in U S activity, partially offset by seasonal decline in Canada.
With us exiting the drilling services and wellhead product lines in the U S. Our focus remains on profitable growth in North America as we.
Half for delivering on margin improvement in the area, where we are already seeing improvements.
On the international side, we are observing an increase in tendering activity, primarily in our Middle East North Africa, and Latin America yourselves the.
With over 75% of our business coming internationally, we are very focused on our major countries and supporting customers.
2 of their plants as they get up for production increases.
The OPEC plus cuts phase out we are hopeful that the increased production will translate into more drilling campaigns.
<unk> with the current commodity prices, we are seeing an uptick in offshore activity, where we have strong technological differentiation.
With that let me turn it over to Keith to provide.
The wide our financial update.
Thank you Girish, please turn to slide 7 for a summary of for second quarter results, which reflect the ongoing improvements in our operating earnings and liquidity.
Consolidated revenues were 903 million, 9% better sequentially and 10% better year on year.
Driven primarily by 12% sequential increase in service revenues.
Product revenues increased by 2% as our production oriented business products kept pace with energy output levels.
The sequential improvement in performance, we're seeing growth was seen across all geos loans, except for Canada, which seasonally.
Lower activity.
The second quarter top line performance, primarily resulted from increased activity in integrated services and projects activity in Mexico increased activity across all product lines in the middle East and Asia and in the completion and production or CMP product lines in Europe Sub Saharan Africa.
And Russia.
We are pleased to report second quarter of positive operating income of $25 million. The operating income result was helped by.
Approximately $10 million of discrete onetime credits and customers pulling forward contracted services.
Adjusted EBITDA for the quarter was 100.
Seasonally looks million, which equates to adjusted EBITDA margin of 15% on improvement of 280 basis points sequentially on 544 basis points year over year.
Without the $10 million of discrete onetime items adjusted EBIT margin is 14% still a substantial improvement.
We delivered solid cash performance with free cash flow of $48 million in a quarter burdened with the larger portion of our interest obligations slide.
Slide 8.
Now, let's look at our geographical breakdown, starting with the Western hemisphere.
The western hemisphere revenues of $425 million in the second quarter increased.
Increased 9% sequentially and 37% year on year.
North America revenues of $220 million increased by 3% sequentially, primarily due to increased activity in the United States for more drilling evaluation of intervention business or the EI, despite the headwinds of seasonally lower activity.
Canada due to the spring breakup.
Second quarter revenues in Latin America of 200 of $5 million increased 16% sequentially driven by increased integrated services and project call offs in Mexico.
Adjusted segment EBITDA of $58 million increased 6 million.
Pivoting on associated margin of 14% improved 30 basis points sequentially and improved almost 200 basis points year on year.
The growth in adjusted segment EBITDA was primarily driven by increased activity in sales in the <unk> product line in the U S and Latin America.
Slide 9.
The second quarter Eastern Hemisphere revenues of $478 million increased 8% sequentially and decreased 6% year on year.
Middle East North Africa, and Asia revenues of $289 million increased 8% sequentially with increased sales in all product lines.
Europe sub Saharan Africa and Russia.
Russia revenues of $189 million increased 8% sequentially, primarily due to increased activity in the CMP product line.
The year over year decline in revenues was related to the delayed pace and timing of the lockdowns in the second quarter of the prior year.
Adjusted segment EBITDA of 93.
<unk> is a 41% increase sequentially and the associated margins of 20% improved 460 basis points sequentially and decreased 10 basis points year on year.
The sequential growth in adjusted segment EBITDA was primarily due to increased activity across Europe Africa and Russia.
A favorable mix of.
3 mirrors and the product sales growth in the middle East and Asia.
Turning to slide 10 for a summary for liquidity.
We continue to maintain a disciplined focus on operating with the mindset of generating cash flow.
This is being demonstrated through the results of our underlying business and cost improvement initiatives.
Sort of a second quarter of 2021, we delivered unlevered free cash flow of $165 million on improvement of $57 million year on year from of 72% increase in adjusted EBITDA.
Free cash flow was $48 million, which improved by 50 million year on year on only down 20.
$22 million sequentially after a $117 million of interest payments.
We had an increase of total cash of $44 million and in the quarter with approximately $1.4 billion.
Free cash flow in the first half of 2021 was $118 million on improvement of 122 million.
Compared to the first half of 2020.
Capital expenditures were $9 million in the second quarter of 2021 compared to $15 million in the prior quarter and $35 million in the second quarter of 2020.
Our capital expenditures were relatively low this quarter as we remained focused on assets.
Redeployment, increasing utilization and re prioritizing our growth capital agenda.
We expect to return to more normalized levels of capital expenditures in the second half of 2021, prioritizing our market leading products and technologies.
As we have previously discussed it is important to note.
Note that we have an asset base that was sized for a significantly.
Higher activity levels.
As a result, we capitalize on this capability in the first half of this year to significantly increased service revenues by using existing assets without needing to overinvest in new Capex.
I wish to.
1 weatherford team for the continuing cash flow improvements, which are the result of the results of improved operating performance disciplined capital expenditures and working capital inflows driven by improved focus on asset utilization.
On July 1st the standard and Poor's or S&P credit rating on our senior.
Senior secured notes and senior unsecured letter of credit agreement was upgraded to a single b with a stable outlook. The S&P credit rating on our exit notes was also upgraded to triple C plus with a stable outlook.
We recognize the challenges of our capital structure and addressing this remains a priority for us.
The thankfully we are encouraged by the improving tone in the current banking and capital markets that are reflecting the improved macro backdrop for oilfield services and believe they are now beginning to provide the potential for constructive changes.
On June 1st NASDAQ approved our application the SEC declared our previously filed registration.
Treatment effective and we became subject to the reporting requirements of the Exchange Act.
Or ordinary shares began trading on the NASDAQ Global select market on June <unk> 2021, under the ticker symbol W. F R&D.
We are pleased to fully returned to the public markets.
We believe this was the right time to list.
And that doing so will enhance the long term shareholder value.
Turning to slide 11.
I will share a few qualitative thoughts on both the second half and the third quarter of 2021.
We are forecasting the business environment for the second half of 2021 to maintain the activity levels experienced.
In the first half of 2021.
And we are and we now expect our second half of revenues to increase by mid to high single digits from the first half 2021 results adjusted.
Adjusted EBITDA margins should improve further between 100 to 150 basis points above the first half with our continued focus.
The drive margin expansion from variable cost management and organization simplification.
As activity levels improve and we approach the seasonal increase in demand for products. We expect net working capital to be an outflow of particularly as receivables begin to reflect revenue growth net of pass through of recoveries.
If we experienced.
Total growth in activity in the second half of 2021 are supporting the level of working capital investment may be required for.
For 2021, our Unlevered free cash flow is expected to improve.
Slightly year on year.
For the full year of 2021, we expect to reinvest approximately 100 to 110.
$10 million into our business through capital expenditures.
We expect third quarter 2021, consolidated revenues to increase sequentially by low single digits above the second quarter of 2021, reflecting some of the acceleration into the second quarter, we experienced in June.
As we continue to manage inflation pressures.
<unk> adjusted EBIT margin is still expected to be in line with second quarter 2021 levels, excluding the $10 million impact of discrete onetime credits.
Third quarter Unlevered cash flow is expected to decline sequentially largely due to the pickup in capital expenditures and required working capital investments.
If this level of activity continues we anticipate the will deliver a second consecutive year of positive free cash flow.
Thank you for your time today I will now hand, the call back over to Girish voice closing comments.
Thanks, Keith our results on the second quarter of a terrific, but we are firmly focused on the future on the work ahead of us.
Turning to slide 12, I want to provide you with an update on the for key focus areas for 2021.
North America performance is an area of the deserves acknowledgement of this quarter, especially related to expanding margins. Despite the seasonal slowdown of activity in Canada. We saw an overall increase in north American revenues and margin.
Gearing.
Moving on variable cost management is gaining momentum as we continue to find opportunities to reduce our variable spend and are beginning to see positive impacts of that to our bottom line. We are focused on maintenance and repair costs across our global network labor utilization improvements procurement efficiencies and other significant opportunities.
Guarding organizational simplification, we have made meaningful progress aligning our company structure of the market conditions, we believe that we still have opportunities for improvement.
We should see our SG&A as a percentage of revenue continued to decrease over the coming years, driven both by top line increase and further structural simplification.
In.
<unk> of inventory rationalization, we again made incredible progress on our 2021 goal of improving day sales of inventory by 10 days as DSI improved sequentially by 7 days.
On achievements for the second quarter service evidence of the strategy that is taking hold and beginning to yield results, specifically generating positive free cash flow.
The idea of creating EBITDA and growing revenue.
The follow through on the plans. We previously shared on this quarter is a testament of our ability to execute once again I want to thank our employees for the determination and actualizing our goals that said success truly for US is the journey not of destination.
While we take enormous pride.
In our second quarter results, we recognize that we still have work to do to ensure that the improvements of institutionalized. It is through a process of learning growing and improving the weatherford will reach its full potential. Thank you for joining us today and with that operator, let's please open it up for Q&A.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then 1 on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble the roster.
Session. Our first question comes from Ian Macpherson from Piper Sandler. Please go ahead.
Good morning duration, Keith and congratulations on the really strong quarter.
Even if we I wanted to ask for.
For clarity on the beneficial 1 offs that bridges for 15.
After the 14% margin for Q2.
And then maybe the SaaS for a little color on.
What areas of the business relative to the more conservative guidance quarter.
And the.
Where do you think the sensitivities of our for us.
The better performance in the back half as well I know the MPD.
And the sort of kicked off your qualitative discussion, but maybe on the areas as well of that Youre excited about.
Okay.
Good morning, Ian.
Great questions. So first the the $10 million of 1 time credits.
Can be broken down into into 2 main parts.
Parts.
We had a workers' comp the settlement that.
Came into North America large amount and then secondly, we settled some lost in hole disputes with some customers that were.
Above normal levels, because these are still ongoing things but.
<unk> significant amount.
And also some damaged beyond repair amounts on.
And so we thought it best to.
For those.
They go through revenues the.
The lost in hole on the damaged beyond repair at 100% fall through and so we thought it best to exclude that from the baseline as we move forward.
It was the.
Hey.
Ian Let me take a little bit on the second part of it then Keith can join in the first of all good morning, and I appreciate the comments.
Look I think just in general in terms of activity and whats happening GAAP, we've talked in the past again, we are planning for flat, but we have always said we are poised to take advantage.
<unk> of increased activity and that does give us higher pull through so that's really a little bit of what what happened where we are seeing potential in the second half and local just sort of have to see how it fully translate.
First of all is some of the NPD stuff that we talked about and Prs. So the poor businesses that we've talked a lot.
Managed pressure drilling tubular running services or intervention businesses for the fishing and reentry and then cementation products. These are really businesses.
Debt, we have market, leading positions in and as grilling campaign state Con greater holes as we see more production increases we think David will give us.
What about <unk>.
Gain some more share and give us potentially a little bit more lift, but we want to really be tempered on our focus because we still have a lot of operating.
Elements that we need to address the we are firmly focused on that but we are encouraged by the activity swing so that we're.
Seeing from a geography perspective, as we mentioned.
Middle East really continues to be probably the highest area of tendering activity as well as a couple of other regions internationally.
We expect North America growth too.
The tapered off a little bit to a certain extent, but but again you know seeing.
And on general rebound and just hope that the pace of vaccinations really keeps space on the economy keeps opening up.
That's great. Thank you both.
It sounds like just doing the the math that if you're gonna be of comparable 14% margins in.
Q3, your back half guidance, probably puts you exiting the year.
Of the 15% maybe between 42 and a half of 50% margins in the fourth quarter. According to plan.
And I just wanted to sanity check that assumption and then also just think about what the leverage for margins is into next year assuming.
Seeing maybe excluding any any possibility of net pricing leverage, but just the sort of volume metric leverage to your margins going into next year based on it seems like we've we've pulled forward that 15% of ambition relative to what we were thinking of your earlier. This year. So maybe just recast that trajectory if we if we could.
So.
In terms of the exit at 14, and a half I think your assumptions and an algorithm works.
And that's where we're targeting to exit the year.
In terms of.
Fall through its hard to say as always in terms of how we think about that.
We've been seeing good follow through from the service side of the business as we practice cost control beneath that but all depends on how that new business comes if it comes in certain geographies, where we have to scale up in the fall through mixes is much different than if it comes in the geography, where we have already contracted and have people on the ground.
We think it's hard for us to give that viewpoint on 2022, so at the moment. The way. We're looking at 2022 is we are looking at it as a modest step up from where we are going to exit.
The second half of 2021, and so as we get closer to it.
Go through Q3 and get into Q4 will come back and give a better view of where the contracts are and what activities. We are seeing for 2022.
That's great. Thank you Keith Thanks for the ratio I'll pass it over.
Great. Thanks for you.
Again, if you of a question. Please press Star then 1.
Next question comes from Philipp Duffner from <unk>. Please go ahead.
I've got 2 questions 1 was on.
On the North America sequential gross income.
Comparisons of your bank.
Competitors out of it.
Was relatively weak.
And you were probably stronger in the international markets in North America is that because you're overly exposed to Canada and comparisons of the big 3 or or is there another explanation for that.
Yeah, Hey flip.
The first.
Net income below thanks for joining a couple of things we've talked a lot of that North America.
Previously and it's very important to note that our business is fairly significantly different from our overall portfolio as well as with some of our peers and competitors over the past year or so we've really.
<unk> changed our profile of North America, and we are no longer playing are in drilling services in the U S. Average is of a significant part of the portfolio for a lot of people we have completely gone out of the Frac business. So that's sort of part of the portfolio and we have changed our business model on wireline fairly significantly as well so.
Of all these businesses that really.
Our product line that really come in with an increase in rig count on immediate drilling we don't play a part and so that's part of the a big part of why you see of fundamental difference in our growth rates.
Separately, we've also talked about it for us in North America, we are very focused on really making.
King sure debt, we're not just chasing volume we have a operational set of actions. We are working through we are seeing that margin improvement come through as the result, and are really going after growth that falls through to the bottom line.
And the.
And you actually very right on our exposure the Canada. So.
For our.
Business, we did take a step down from Q1 for Q2 because of the seasonal breakup in the weather and so that affected.
And blunted some of the.
The growth that we did see in the underlying U S business and.
Brought the average down.
Got it thank you and.
Second question is on the Capex right.
Rica lack of you probably.
Performed better on Capex on H, 1 then.
But you were guiding to and obviously you you are right now guiding to a very substantial of today take care.
<unk> been Capex and age 2 you mentioned some of the reasons for that but.
Could you.
Just maybe go through that in some more detail why there will be of pick up in and why it was so low in the first half and is there a potential to outperform the guidance.
I would say that the first half was as we described it you know we focused on redeploying assets.
Let's be focused on asset utilization and we were spending a fair bit of time looking at re prioritizing our growth Capex agenda, So girish and I have been here now almost a year and so it took us a while to understand the business.
For a bit in terms of where we want to play sort of beds and so.
So we were harvesting.
Some efficiencies, but as we go forward into Q3 and Q4 now.
We're going to put some growth capex back to work until you know primarily behind our market leading product lines.
We also have.
The more activity out there and also of do you think about it for example.
Product lines like wireline right the new standards in the marketplace, where you have to have tool.
Tools that are of a certain age before they go down hole and so forth and so that's going to require capex. So if you think about how we we talked about capex in the past quarters, we talked about it being somewhere in the range of 3% to 7%.
The scent so we've printed only $9 million in Q2 on 900 of revenue. That's 1 that is reasonably low, but we were going through a re racking.
So I would say that over the the ramp up of the cycle you could probably see us moved back towards 3% I wouldn't say, we'd get to 7 but it all depends on.
On on what happens in the business.
Yes.
Thank you and then maybe just 1 last question on on the capital structure is there any update on the ABL discussed on them.
1 of all of that.
Sure.
I can say that the tone in the marketplace.
<unk> has improved.
I think if you look at the trading of our bonds, we've been trading all the way up to 105, implying improving yields the reflecting the improvements in our businesses.
I think if we think of the dialogue, we've been having with the banks I think the there have been.
A lot more constructive.
So at this point in time, we're going to.
Continue those dialogues and then kind of figure out where we go from here.
The the market I think has.
Also opened up on the debt market side, and so we're thinking about whats the holistic.
The solution that we could do in terms of.
<unk> of the ABL back and on does that open up on opportunity too.
The Navy refinance or.
Or address the tower in 2024, so all of these things are in.
In dialogue and as soon as we have a direction of decision, we will come back and communicate to the street.
Thank you that fit from the.
Again, if you of a question please press star on San Juan.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back.
Back over to management for any closing remarks.
Great Hey, thanks, everyone for joining and I look forward to speaking for you again in the quarter. Thank you. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Sure.
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