Q2 2019 Earnings Call
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I would say it was maybe name please.
Hi, it's Rachel space.
Our I C H C O M P H.
And we'll company with.
Area.
E R E.
And Whats conference call you're looking for.
It is the tutor perini.
Yes.
Ladies and gentlemen, the way properties committed under the contract.
Through negotiations however.
In the first six months of this year.
We have been committed and been a part of discussions that now.
Has the basic balance a variety of ways turned over by the fourth quarter of 2019.
Unfortunately, this defers approximately $250 million of revenue.
From 2019 to 2020 and 21.
The only positive associated with this development as we've just reached a very significant an equitable settlement of all our costs associated with these delays with an executed change order and the money to be paid shortly in the month of August .
The newer airport, although going very well has experienced significant weather delays, which have delayed completion and current work by over three months over the last six months.
Rain in wins have been six significantly beyond the norm.
Despite these issues our overall execution.
In the civil and building groups remain strong and long term outlook very positive.
Second quarter results were also unfavorably impacted by very poor performance in our specialty contractors group.
We expect significant improved contributions during the second half of this year and throughout next year.
Given certain of the write downs, we took in the second quarter in specialty this year.
As disclosed earlier this week, we are replacing the current president of our building group was John I'll Biasi, the former President and Chief operating Officer Zachary Construction Carper Corporation headquartered in San Antonio Texas.
John's early career was spent at Brown and root followed by 16 years at the key would corporation, where he served in various senior management position on major projects throughout the East coast.
He left 2002 to go to work for Zachary Corporation in Texas rising to be its president and Chief operating officer until two in 2010 until his retirement this year.
I got to know John in his role as a 25% Parker on high speed rail.
Believed him to be extraordinary and upon his retirement.
From Zachary we have come to terms with him taking over as president and CEO of both the specialty group and the building group.
And taking over those two new group those two groups excuse me John's initial focus will of course be on specialty contractors and our specialty contractors to set about the beginning of improving their results and operations in a more consistent manager than the past to shows.
We booked $916 million of New awards in the second quarter and finished the quarter with a backlog of 11.4 billion up 31% year over year and still at near record levels.
Down only slightly compared to last quarter.
Significant awards included Subcontracts for Fisk Electric desert mechanical and Bekele on our per align three contract, who subcontract awards amounted to $244 million.
On our 1.4 million dollar contract.
Hey, Technology campus 10, an improvement project in Northern California.
For Rudolph and sletten valued at more than 200 million.
And a wastewater treatment plant in Guam for Black construction worth 122 million.
Approximately 75% of our total backlog remains comprised of higher margin specialty.
And civil work.
Strong market demand for our construction services continues as reflected by the significant number of large project.
Opportunities across all segments.
Accordingly, we believe our backlog should continue to grow this year.
As we pursue various large projects and that our backlog will generate continued strong revenue growth improved operating margins, particularly in specialty and just generally increased earnings over the next two years.
I'm most encouraged that black construction is record is currently at a record backlog of 454 million.
This is the highest backlog they've had since I purchased and in 1995 and as almost twice that are previously recorded high.
The us government as we all know is constantly committed sizable funds to Guam.
And is currently bidding over a billion dollars per year in lump sum opportunities in each of the next five years, all of which are scheduled or in the marketplace.
If that were not enough as we continue to bid major work for the US government. We have record backlog of work on the island of Diego-garcia in the Indian Ocean, where we are the only contractor of consequence.
Overall black continues to experience a very strong.
Growing volume of bid opportunities all of which is a very strong margins and we believe will significantly increase their profitability starting this year.
In the years to come.
At the end of this month, our civil group will be bidding to $400 million.
Eighth Avenue Communications based train control project in New York City, a project with a similar scope, but larger in value than the Culver mine project, we booked for the New York City Transit authority in the first quarter.
Other sizable upcoming civil bids.
Include the $400 million Division 20 portal widening in turn back project for the Los Angeles, Mtpa, which bids in approximately 60 days.
Three large projects for the L.A.M.T.A., including a four plus billion dollar Wes Santa Ana Transit corridor $1.5 billion East San Fernando Valley Corridor, which both should bid in the first quarter of next year and the turn back facility project.
In addition, we will be bidding the $3.5 billion Port Authority of New York Bus depot, the $2 billion, Brooklyn, Queens Expressway, Triple Cantilevers, and a $400 million Amtrak tunnel phase three all in New York as well as the $1.4 billion portal swing bridge replacement and the $450 million rendered Tan River lift bridge, both in New Jersey bidding in 2020.
Last week the building group submitted the pricing for a large pvthree courthouse project in Miami with selection an award for that anticipated in October .
Other larger opportunities for building.
Group includes three large healthcare projects in California.
With combined values totaling over 1.2 billion.
Nor state University Hospital Harbor, you see La Torrance and Kaiser Roosevelt.
The $350 million.
Las Angeles Civic Center project in FY, three and finally, the $200 million government renovation building in New Jersey bidding in September .
Our specialty contractors group continues to experience strong unmet demand amid limited industry capacity.
As they have been bidding.
And winning new projects at excellent margins.
As we speak.
The specialty group has in their pipeline over $700 million worth of mechanical and electrical projects in New York, Texas, California, and Florida.
Over the balance of 2019.
Next I will discuss certain major projects that contributed to our second quarter results.
In Los Angeles work continues to progress very well on the $1.4 million billion dollar Purple line section two extension as we advanced the construction of the launch fit and the tunnels shaft in century city.
We expect to begin assembling the tunnel boring machines as they do in number in November anticipate tunneling starting in January .
In Beverly Hills, we are continuing with the final utility relocations and preparing for start of station. Construction later this year probably in September .
British Columbia Frontiers, Kemper's work on the 273 million dollar commodity tunnel project continues to progress well in a wet in the Midwest Lunda construction is now underway with significant work on the $800 million Minneapolis Southwest Light rail project as well as continued progress on the $337 million.
I 74 bridge in Iowa.
In the northeast our most.
Active projects include the $190 million Canton Vion in Maryland.
The $665 million CMO seven project for New York City Transit.
The 660 million CS 79, and $380 million C Q3 3, again for the New York Transit Authority as a part of the east side access projects in New York City.
And of course, the 1.4 billion dollar Newark Airport terminal in New Jersey.
As I have highlighted previously the Newark project.
Is it typical example of the type of large complex projects.
That tutor Perini is uniquely qualified to bill.
As we are able to leverage and orchestrate resources from all three of our business segments, namely the building group who manages the project.
The Civil group, who has performed the Earth work removal of concrete and demolition and last but not least the specialty group, which holds the electrical contract at $270 million the mechanical contract at 92 million.
I would also note in July we received the notice to proceed for the Purple line to excuse me.
The Purple line three $1.4 billion project, and we anticipate immediate and significant.
Contributions from both Purple line projects over the remainder of this year and particularly next year.
As project work increases.
We still foresee a significant acceleration of activities over the remainder of this year into next year.
As many of our larger projects, which have been delayed in design or right away procurement.
Finally get going those being purple line, two and three.
California High speed rail in Newark, as previously discussed.
Minneapolis right.
The light rail and of course at $450 million chalked, our casino and resort in Oklahoma.
Which recently broke ground.
And immediately started significant construction.
However, taking into consideration the second quarter earnings shortfall, we have now determined that our full year 2019 or.
Earnings per share excluding of course, the impact of the goodwill impairment will be lower than we previously anticipated.
So accordingly, we are revising our 2019 adjusted earnings per share guidance to a range of $1.60 to $1.80.
We have been watching with interest in near disbelief as our stock prices continued to tumble.
It is abundantly clear to us that our investors may have lost some confidence in the company's ability to collect disputed amounts that are new us. So today I'm going to provide more detail in sight and we have done before.
As to the progress we are making in resolving many of these items by summarizing anticipated dollars timing in collections, including claims open change orders as well as overdue accounts receivables many of which are tied up in the resolve of the unbilled receivables.
Hopefully this will reassure you.
As our investors that we are in fact, making excellent strides and resolving many of these issues.
To start in the last 45 days, we have settled five significant cases, which has enabled us or will enable us to reduce receivables build our unbilled.
By in excess of $90 million and will result in collections of $125 million most of which is in the third quarter.
We are also in serious negotiations on nine individually issues totaling $257 million.
We expect these negotiations to be concluded one at a time before the end of the first quarter in 2020, but we'll keep you informed of any significant resolve as they occur.
Wish with negotiations there of course, no certainty that the amounts offered will ultimately satisfied however, I must state that in all nine cases, our entitlement to receive major additional amounts have been agreed to.
As a part of our willingness to negotiate and we're discussing money as Oh.
We remain confident but we must move that confidence to reality.
We are also Lee currently in arbitration or litigation.
Eight individual claims with booked amounts totaling $75 million all of which will be concluded in trial or arbitration prior to March 31 2020.
Besides these cases.
Other cases with booked amounts totaling $543 million are expected to arbitrate or litigate to absolute completion between April 1st and December 30, Onest of 2020.
With still others arbitrator litigating in 2021 and 22.
I might add this because we are in arbitration design or litigation does not mean, we don't continue to talk to our owners and hope they see the light or futility of their opposition.
Over the last 20 years.
By our Count will review, we have gone to trial 41 times, meaning prepared for the start of trial when the trial date.
Some of the cases settled on the court house steps, but of the many others that actually litigated. We won all but two these are the facts are shareholder should understand this but more importantly, our adversary should be aware of our records litigation.
As such we remain confident that we will collect the money to do it and the meantime, we will continue to focus on the growth ahead of us that becomes more obvious by the day, while at the same time never losing sight of the criticality of our Unbilled collections with that I will turn the call over to Gary Smalley to present, the details of our financial results.
Thank you Ron good afternoon, everyone.
I will begin with the discussion of our results for the second quarter, followed by some commentary on our balance sheet.
Cash flow and revised guidance assumptions.
As Ron mentioned and Ironically, when you consider our near record backlog level and the very strong demand for our services. We took a noncash goodwill impairment charge in the second quarter that was largely due to the drop in our stock price during the quarter.
Accordingly, I will discuss adjusted income or loss from construction operations adjusted net income and adjusted EPS on a pre impairment basis. So users of our financials will be able to better compare their normal operating results of each segment between the two periods.
As Jorge mentioned earlier.
A reconciliation of these non-GAAP financial measures to the most nearly comparable GAAP measures is provided in the press release, we issued today.
Revenue for the second quarter was 1.1 billion up slightly compared to revenue reported for the second quarter of last year, but negatively impacted as Ron mentioned the delays we experienced on the California high speed rail and Newark Airport projects.
Civil segment revenue for the second quarter was $474 million up 18% year over year.
Reflecting favorable impacts from several newer projects that are advancing and contributing meaningfully.
Revenue for the building and specialty contractors segments.
Plus $428 million and $223 million, respectively, both lower compared to the second quarter of 2018 due to the timing of revenue burn for newer work.
We anticipate larger favorable project contributions from various projects that are in the early stages and are accelerating over the remainder of this year or next.
Gross profit for the second quarter of 2019 was $101 million.
Down 15% compared to the second quarter of last year with a corresponding gross margin of 9%.
Our current quarter results were unfavorably impacted by unfavorable performance and the specialty contractor segment and the delays on the high speed rail and Newark Airport projects.
DNA for the quarter was 63 million down slightly compared to last year, mainly due to lower compensation related expenses.
Our adjusted income from construction operations for the second quarter was 38 million.
Down, 30% compared to $55 million for the same quarter of last year.
Civil segment adjusted income from construction operations for the second quarter was $46 million down slightly compared to the same quarter of last year, principally due to a prior year favorable adjustment for highway project, but partially offset by current quarter contributions associated with revenue from various projects that are early in their lifecycle.
The segment's adjusted operating margin was just under 10% for the quarter compared to 12.3% for the second quarter of last year.
We anticipate even stronger performance in the second half of this year and into next year as many of our newer larger projects contribute more to the bottom line.
Building segment adjusted income from construction operations was $10 million compared to $13 million in last year's second quarter, mainly due to the absence of prior year favorable close out adjustments on certain projects in California and Texas.
Partially offset by increased volume on new projects in the current year.
The building segment second quarter, adjusted operating margin was a respectable 2.3% down 50 basis points compared to the second quarter of 2018.
There are several large new building projects that were recently awarded which we anticipate will contribute more favourably to our results and improve our adjusted operating margin over the rest of the year and in.
2020.
Specialty contractors reported the second quarter adjusted loss of $4 million from construction operations compared to $7 million of operating income in the same quarter of last year.
The loss was mainly driven by unfavorable adjustments on certain electrical and mechanical projects in New York. They are nearing completion, none of which were individually material.
We are not satisfied with the performance of the specialty contractors group.
This year and we are focused on implementing the necessary changes and corrective measures.
That should lead to significant improvements.
The addition of John obviously has the president and CEO of the specialty and building segments should help to stabilize and improve the inconsistent and disappointing performance that we have experienced with this group.
We still anticipate stronger contributions from the specialty segment later this year and in 2020.
As five star electric and Wtf increased activity on various new higher margin projects in New York City.
Despite the segment's recent underperformance, we are still targeting a longer term operating margin range of 5% to 7% for the specialty contractor segment with a goal of achieving the lower end of this range in the second half of 2019.
Interest expense for the second quarter of 2019 was $18 million compared to $16 million in the same quarter of last year.
The increase was primarily because of a higher average revolver balance and interest rate during this year's second quarter compared to the prior year period.
Excluding a onetime $50 million tax benefit on the impairment charge.
Our adjusted effective tax rate for the second quarter.
Was 34.7% compared to 30% for the same period of 2018.
The higher rate in this year's second quarter, primarily reflects the unfavorable impact of expired stock options for which the share based compensation expense recognized in prior periods will not be deductible for income taxes.
Adjusted net income attributable to tutor perini for the second quarter of 2019 was $9 million or 18 cents per diluted share compared to $24.9 million or 49 cents per diluted share for the second quarter of last year.
Next I'll shift gears and discuss our balance sheet and operating cash.
We reduced our project working capital slightly in the second quarter compared to the first quarter, primarily because of an increase in accounts payable due to timing of vendor payments and an increase in billings in excess of costs or over billings as we have been successful in continuing to advance Phil our fixed price projects.
But the big story with respect to the balance sheet was a reduction in our cost in excess of billings or as we sometimes refer to as unbilled costs or unbilled receivables.
Although the change was small this is the first time in three years that we have had a quarterly decline in the unbilled.
This trend is consistent with what Ron and I have been communicating in recent quarters and that is we are at or near the apex in terms of the level of unbilled costs.
And as Ron just outlined in some specificity.
We expect more substantial reductions in Unbilled is during the second half of this year and into 2020 as we continue to focus our efforts.
On negotiating litigating settling the various claims and change orders.
Of course as Unbilled, our reduced our operating cash will improve.
We saw this a little bit in the second quarter with operating cash of $13 million, which was in line with our expectations.
We indicated at the beginning of the year, our expectation for much stronger cash generation in the second half of 2019.
We still believe that this will be the case and now have even more confidence that this will happen as we have more visibility into expected events in the third and fourth quarters.
Our second half cash flow performance should be nothing short of outstanding.
And we'll be driven not only by the reduction in collection of Unbilled, but also by the timing of substantial cash generation from our civil group's projects execution activities.
Although we still have some ground to make up we still expect that we will finish the year with operating cash flow in excess of net income.
Our total debt as of June 32019.
Was $956 million compared to 760.
$762 million at the end of 2018, reflecting an increase in our revolver balance that has supported our working capital needs year to date.
I will point out that our credit agreement like that of other companies allows for the carve out of any goodwill impairment charges.
Therefore, the goodwill impairment charge did not impact our covenant calculations as a result, we are well within the limits of and in compliance with our debt covenants for the second quarter.
Earlier, Ron mentioned, our revised adjusted EPS guidance for 2019.
All the previous assumptions associated with our guidance remain the same with exception of the following.
Our adjusted effective income tax rate for the year, excluding the impact of the impairment charge is now expected to be 28% to 29%.
Interest expense for the year is now estimated at $67 million.
Finally, non controlling interests are now expected to be $28 million to $30 million for the year.
With that Ron I'll turn the call back over to you.
Thank you Gary.
Despite the impairment charge owner delays at high speed rail weather delays at Newark.
And the continued challenges in our specialty group I'm still encouraged by our near record backlog.
And the way we are executing in our major contract work.
With the volume of new opportunities ahead, only adding to it.
Our results can vary at times, which is always indicative of the construction industry an industry that although it can be volatile.
And still remain over long periods of time consistent.
The anticipated significant ramp up in activity on several of our now large projects are imminent.
Understanding that often times, our largest design build which incidentally our five largest projects are all design build are contingent upon award of right away turnover and design completion, which once we are awarded almost guarantees everyone well start with effective generation of costs and revenue for up to a year After award.
To reiterate our long term outlook for revenue growth and increased earnings.
As as positive as ever.
Particularly with the vast majority of our backlog represented by higher margin civil projects of consequence, though limited numbers significant in contract value.
In addition, as we previously discussed there is no question that we are making that required progress in negotiating and settling claims change order disputes and frankly collecting accounts receivable are wonderful owners always managed to throw win with the disputes. So we are not only collecting disputed on builds for collecting our accounts receivable balances with them.
I continue to believe that as discussed earlier.
By the end of next year, we will have.
Collected and finalize a very significant level of our unbilled.
And reduce them accordingly, generating a very sizable amount of operating cash with that I turn the call over to the operator.
Thank you we will now begin doing a question and answer session.
If youd like to ask a question you May press star one on your telephone keypad a confirmation tunnel indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key our first question comes from the line of Steven Fisher with UBS. Please proceed with your question.
Hi, Thanks, good afternoon.
Hi, good afternoon.
Hey, guys just wanted to start off clarifying where the adjusted results that you reported.
Only adjusted for the goodwill.
Charges or where they were you adjusting out anything else besides that.
No Steve we only adjusted the goodwill so everything else is reported as we normally wouldnt accordance with them with gap and consistent on a comparative basis to prior quarters.
Okay and can you just maybe remind me.
To the.
The stock price decline triggered the write down or did it trigger a review of the goodwill and then the review revealed that there needed to be a write down based on.
The projected earnings and cash flow.
Yes, so the we do our annual impairment test on October Onest of every year and in the interim you look for triggering events that may indicate that you have to take a goodwill impairment charge and the stock price was one of a few triggering events that we documented in our 10-Q that Tom.
That eventually resulted in us doing a.
Look at the.
At the goodwill and its fair value and at that time, we determined.
On a.
Reporting unit by reporting unit or segment basis that we had impairment in each of the reporting units, but you are right that.
The stock price itself triggers a review.
Okay. That's helpful. And then can you just on focusing on network a little bit how much did the weather impact that project and which segments or was that reflected in.
That would be under the building and civil group, because we have allocated the job 50% of the building group and 50% to the civil group under the New Rochelle Office in New York.
We basically defer approximately $60 million of revenue in the US show associated margins from this first six months.
To the latter part of the year and the first quarter of next year.
The rain in wins in New York have been incredible for the first six months of this year.
And really the last three months of last year.
Generating what we have turned into the Port authority as 93 days of excess weather delays, which means in excess of the norm.
Which of course delays revenue delays cost and delays performance.
And if I could add this Steve run and I when we looked at the impact of the two projects, both New York and as well as high speed rail just to give you a perspective of what the impact was for the quarter.
We we calculated an impact of about 24 cents for the quarter and about 37 cents year to date for those two projects, we don't want to.
Get into project specifics, but Tom just for the two that's what that's what the impact our.
Okay. I mean is this as we think about Newark now I mean is this basically a profit.
Adjustments.
Going forward.
I got out to make less money than you thought or is it just a timing issue just a timing I would say that newer is extremely profitable and remains as such unfortunately with the rain, we could not perform the work and it shifted the revenue and costs as I said.
The job is extremely profitable I personally managing it.
And it just means a timing differential or work shifts forward into a future time day.
Okay, and then on high speed rail can you quantify what that settlement.
Is going to look like.
I.
We just executed I'd, rather not tell you the specific dollars. All I can say is it was very significant and you know the job is approaching $2 billion.
And they have paid us all in costs of delay extending the contract to August of 2021.
Yes, Steve the numbers that Ron covered before when he talked about the five settlements in the last 45 days. It was one of those so.
Yeah. It was in that.
That number was 100.
With that well wait and what I said earlier, yes, that's right we're on.
Hold on Steve.
$90 million 125, mostly in Q3.
A 125 million I alluded to was the settled cash.
And.
A significant part of that was our share remember, we're only a 50% partner.
But 50% of the settlement.
Ready.
And what are the biggest things that have to happen to it to achieve it and how Q4 weighted as it.
It's it's.
Slightly more weighted in Q4 than Q3.
Average all in the backlog none of it anticipate any new awards and the only thing that could affect it as we go forward would be very severe weather, which traditionally we don't get until the latter part of December . So we believe that's an achievable level.
And and that's why when we reduce the earnings we felt comfortable at this level.
Okay. Thanks, a lot.
Our next question comes from the line of Bill Newby with D.A. Davidson. Please proceed with your question.
Good morning, guys. Thanks for taking my questions.
Afternoon, I guess sorry.
[laughter].
Ron on the you mentioned the <unk>.
You expect the right of ways to be completely handed over on on the high speed rail and December I guess, how confident are you that this is the last time you are you have to push this project to the right and.
Gary how much well a bill what I said was it was September .
And I spent all day on high speed rail about three weeks ago.
Were they called the meeting and there were literally 40 plus of US there half a dozen of our managers, including myself for project executive the principles of high speed rail there right away attorneys and they produced a matrix of if I remember 51 individual delays that for the first time, they put on paper and we stop bickering and each one of those delays was analyzed in the responsibilities, but on the page.
My memory serves me correctly 48 of them were the responsibility of high speed rail and they tried to say three of them was ours, but I think we successfully argued that was nonsense be that as it may we agreed on timelines on each of those and those timelines, which.
For the life of me I can't see how they could fail again.
We'll start up on a major way by the end of September and once that start up goes full bore we should get the job.
By Thanksgiving.
Keeping in mind. This is a contract that started it just under a $1 billion and currently is sitting I believe that over a billion 600 million with five to 600 million more in current changes to resolve in various stages of negotiation as we speak.
However, if you ask about all those changes.
I put a policy in place we do not start a change order without an agreed price and entitle change order and an assurance of payment.
The days of going forward with extra work and assuming we'll get paid when the contract permits is over.
In this case it applies to all major work and to high speed rails credit. They agree we are negotiating these changes to conclusion and will not start the work until they are executed with the agreed amount. So high speed rail will be a successful contract it will probably double in size from the initial award.
But it will be delayed until the end of 2021.
And has some potential for delays beyond that however, the magnitude of our contract had so accelerated.
It should all be positive if we can just get the work.
As discussed a few weeks ago in September and October of this year.
I appreciate the color on and then I guess on on the specialty group anymore color on kind of whats. The difficulties are that that business has encountered and changes you expect to be made by the new executive you put in place.
Well the new executive starts September 1st so the poor guy inherits the problems, but I don't think you'll be able to accomplish anything my take is it'll take in three months with me at his side to understand every aspect of what's happening.
And I believe that Weve instituted what it takes to shall we say stabilize the specialty group.
There's just no question that requires more management in potentially management changes within the group before we can get into where we expect it to be.
Obviously going from where they should have earned 10 million in the quarter to losing what they did the single handedly wrecked our quarter.
And all we can do is take them as they are.
And turn them around with whatever changes are necessary, both above the group and within the group.
Does the does the guy that.
Build in any contribution from that group for the remainder of the year, I guess, where the margin expectations for the rest of 2019.
Limited.
Limited.
I appreciate the color guys I'll jump back in queue.
There are no further questions in the queue I'd like to hand, the call back over to Ron tutor for closing remarks.
Thank you.
[noise] is.
Thanks.
<unk>.
I really haven't got anything to add other than we are extremely disappointed in our stock performance.
We have tried to outline why we remain confident in the collection of our receivables.
I think the significant collections in the last 45 days, where the cash hitting our coffers in the third quarter is just the beginning.
All of our issues that have emanated from five and six years ago, whether be it negotiation or flat litigation and trial dates are coming to the forefront.
We just concluded a major negotiation.
With one of our most.
Shall we say impacted owners in the Bay area on a very large project.
For the trends of completely reversed we expect to get a major change reducing the under billing significantly.
And all I can tell you in addition to the specifics I gave you today.
And whether you accepted or not the next nine months will significantly reduce our under billings and significantly increase our cash.
Other than that thank you for your patience.
Thanks talk to you next quarter. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.