Greetings, and welcome to Clean Harbors, Inc's Second Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors, Inc. Thank you. Mr. McDonald, you may begin..

Thank you, Sherry, and good morning, everyone. With me on today's call are Chairman, President, and Chief Executive Officer Alan McKim; EVP and Chief Financial Officer, Mike Battles; and SVP of Investor Relations Jim Buckley. Slides for today's call are posted on our website, and we invite you to follow along.

Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, July 31, 2019.

Information on potential factors and risks that could affect our actual results of operations is included in our SEC filings. The company undertakes no obligation to revise or publicly release the results of any revision to the statements made in today's call other than through filings made concerning this reporting period.

In addition, today's discussion will include references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance.

Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are available in today's news release, on our website, and in the appendix of today's presentation. And now I'd like to turn the call over to our CEO Alan McKim.

Alan?.

Okay. Thanks, Michael. Good morning, everyone. Thank you for joining us. Starting on Slide 3, we delivered another strong performance in Q2. We extended our momentum by achieving our seventh consecutive quarter of profitable growth.

Revenue this quarter, we're up about 2%, and we achieved adjusted EBITDA growth of 7% on the strength of our business mix, our cost-savings initiatives, and pricing. We saw nice contributions from both Environmental Services and Safety-Kleen. These more than offset the increase in our corporate segment resulting from our investments in our workforce.

Turning to our segment results, beginning with Environmental Services on Slide 4, revenues were up modestly this quarter largely because in Q2 '18, we benefited from an unusually strong turnaround season in several large projects.

Certainly in areas of the Environmental Services segment, particularly our facilities group, enjoyed robust growth in Q2 this year, which more than offset the lower industrial turnaround activities. Adjusted EBITDA increased 8%, which translated to a margin improvement of 120 basis points and put us above 20% for the segment.

This business achieved greater profitability, primarily through better mix and increased efficiencies. In addition, we're continuing to realize the benefits of the regional organizational structure that we instituted in 2018 as well as enjoying greater results out of our El Dorado incinerator, which is now in its third year of operation.

Incineration utilization came in at 82%, down from a year ago, but this was somewhat expected due to the high number of down days at our plants. We also pulled forward turnarounds of two incineration locations from July to late June. We anticipate fewer down days in the back half of the year and have a strong backlog of ways in our network.

This backlog is reflected in our deferred revenue, which increased $7.6 million in the quarter and more than $13.3 million since the year end. In the quarter, our average revenue per pound for the incineration increased 15% due to our ongoing focus on driving a higher value mix of waste streams into our network.

Landfill tonnage in Q2 was down 10%, but we view this as just timing as we have some projects kicking off here in Q3. And this quarter, we generated about $5 million in Emergency Response revenue, primarily attributed to flood-related work in the Midwest and the Houston Ship Channel.

Moving to Slide 5, Safety-Kleen revenues were, was up 4% in Q2 due to the growth in the branches, pricing and higher production at our rerefineries. Safety-Kleen's adjusted EBITDA rose 9% and margins improved 120 basis points to 26% due to the higher revenue, our ongoing pricing improvement programs and cost-reduction initiatives within the branches.

We're also beginning to reap more of the substantial benefits from the investment we made in 2017 into the Safety-Kleen's national customer care center. Parts washer services were down, but that was more than offset by other core lines of business.

Waste oil collection volumes were strong at 63 million gallons, with the charge-for-oil rate that was higher than a year ago. Direct lube sales accounted for 7% of total volume sold, up from 6% a year ago. Total blended product sales were 28% compared with 27% a year ago.

Turning to our corporate update on Slide 6, as we look at back half of this year, profitable growth remains our focus. And as I mentioned, we expect volumes to ramp-up considerably, starting here in Q3. We continue to pursue multiple avenues to increase our total blended sales in 2019.

We've had reasonably good volumes during the first half in our direct program and like to see that momentum continue as well as driving volumes on the distribution side. Not too much report today on IMO 2020 or PFAS since we last spoke in early May.

Each represents potentially meaningful opportunities for us with one strengthening our Safety-Kleen segment and the other the Environmental Services segment. With IMO 2020, it could materially widen one or both ends of the spread we manage in our Safety-Kleen Oil business.

We should begin to see various markets respond to its impending implementation later in the year and hopefully in a way that it's going to be favorable to our business. Turning to our capital allocation strategy on Slide 7, we continue to execute across all four categories in 2019.

As noted on prior calls, we're investing a bit more CapEx this year, but we remain selective in our investments. We're continuing to acquire companies this year that support our core businesses. We have continued to buyback shares, and we repaid debt opportunistically based on timing and market conditions.

So in summary, we crossed the midway point of 2019 in a strong position and anticipate an excellent second half from both of our segments. And overall, 2019 should see significant profitable growth in margin expansion for Clean Harbors. So with that, let me turn it over to Mike Battles..

Thank you, Alan, and good morning, everyone. Turning to Slide 9 in our income statement, as Alan highlighted, we delivered another solid quarter of profitable growth in margin improvement in Q2. We increased revenue by $19.5 million while growing adjusted EBITDA by $10.5 million, an incremental flow-through of more than 50%.

Our profitability and margins in the quarter were driven primarily by pricing and cost initiatives, along with operating efficiencies within both our segments. From a gross margin perspective, we saw a 20-basis-point improvement in Q2 from a year ago due to favorable business mix, pricing, and improved asset utilization.

Those favorable areas more than offset the higher down days year over year within our incinerators that Alan mentioned. SG&A expenses were down both in absolute dollars and on a percentage basis, where we achieved a 50-basis-point improvement driven largely by Safety-Kleen.

Using the midpoint of our guidance range, for full-year 2019, we continued to expect SG&A to be down slightly in absolute dollars with an annual improvement of 40 to 50 basis points versus 2018. Depreciation and amortization in the quarter was up $1.5 million, which reflects assets we've added from tuck-in acquisitions and increased capital spending.

For 2019, we now expect depreciation and amortization in the range of $290 million to $300 million, which is flat to prior year, resulting from increased capital spending, offset by some existing assets becoming fully depreciated.

Income from operations for the quarter increased 14% to $73 million, reflecting the improving, the improved operating margins as well as our revenue growth. On a GAAP basis, EPS was $0.65 versus $0.54 a year ago. Our effective GAAP tax rate was 30.7% in the quarter versus 30.8% in the previous year. On an adjusted basis, our tax rate for Q2 was 29.4%.

For the full year 2019, we continue to anticipate that our tax rate on an adjusted basis will be in the 28% to 31% range.

Before walking through the balance sheet items on Slide 10, in June, we refinanced a large portion of our long-term debt, replacing $845 million of five and eight senior notes due 2021, with a combination of $545 million in eight-year notes and $300 million in 10-year notes. This benefits us in multiple ways.

We will save about $1.4 million in annualized interest expense, the tenure of the dent, debt is pushed out by at least 8 years and it divides our large debt tower into two pieces.

On the balance sheet, cash and short-term marketable securities at quarter end totaled $259.7 million, up approximately $35 million from the end of Q1 and in line with our expectations. During the quarter, we acquired an environmental services firm based in the Pacific Northwest for approximately $15 million.

The firm has locations in four states and serves a similar set of end markets, making it a complementary addition to our Environmental Services segment in the Western region. DSO at quarter end was 74 days, a four-day improvement from Q1 and 2 days better than year-end. It's nice to see that number trending in the right direction.

It remains a primary focus of our team, who is driving a current refresh of our billing and collection process. We expect our DSO to continue to come down in the quarters ahead. Our debt balance was $1.57 billion, flat with year end. On a weighted average cost, our weighted average cost of debt today is 4.7%, down slightly from prior year.

Our balance sheet remains strong. Using a trailing 12 months adjusted EBITDA and our current cash balance, we were 2.5 times levered at the end of Q2 on a net debt basis. Turning to Slide 11, cash from operations in Q2 was up 40% to $108.7 million. CapEx net of disposals was $56.4 million, up about $8 million from a year ago.

Adjusted free cash flow was up 76% for the quarter to 54, $52.4 million. This was a strong follow-up to a seasonally weak Q1, putting us back on track from an annual perspective.

For 2019, we continue to expect net CapEx of $190 million to $210 million, which represents a 12% increase from the midpoint as a result of growth in our business, landfill cell construction, and incremental capital investments to enhance our rerefining capacity.

During the quarter, we repurchased 74,000 shares at an average price slightly below $67 a share for a total of $4.9 million. Moving to guidance on Slide 12, based on our year-to-date performance and current market outlook, we raised our 2019 adjusted EBITDA guidance to a range of $520 million to $550 million.

This represents a midpoint increase of $10 million from our prior range. The new midpoint would equate to 9% growth from 2018, while the top end of the range would represent 12% growth.

Looking at 2019 in total, we continue to expect normal seasonality this year, where the back half of the year will be stronger in terms of absolute dollars than the first half. On a percentage basis, we currently expect adjusted EBITDA in both Q3 and Q4 to grow in the mid- to high single-digit range compared with the prior year.

Here is how our current full-year 2019 guidance translates from a segment perspective. In Environmental Services, we now expect adjusted EBITDA to increase in the low teens percentage in 2019. This growth will be driven by higher-value waste streams, overall performance in our facilities and some project work in the second half.

For Safety-Kleen, we continue to anticipate adjusted EBITDA growth in the low single-digit range due to growth in key lines of business in our branch network, including direct lube sales, effective spread management in Safety-Kleen Oil, and increased annual production in our rerefineries.

In our corporate segment, we now expect negative adjusted EBITDA to grow by mid- to high single digits from 2018 due to increases in salaries and benefits as we continue to invest in our people.

Looking at our adjusted free cash flow guidance, based on current working capital assumptions and expectations for higher adjusted EBITDA, we have raised the low end of our range by $10 million to $200 million, which now gives us a midpoint of $210 million for 2019. In summary, Q2 was another strong quarter for the company.

Adjusted EBITDA in the Environmental Services and Safety-Kleen grew 8% to 9%, respectively, with 120 basis points margin improvement in both segments. Looking ahead, we remain enthusiastic about our prospects. While we recognize there are some macroeconomic uncertainties, we have not seen a meaningful slowdown in any of our core lines of business.

For the most part, it has been just the opposite. We have a strong outlook for the back half of the year based on our backlog of waste in our facilities, new waste streams that continue to enter the commercial marketplace, the schedule of projects commencing and the stability of the Safety-Kleen branch business.

Our goal remains to deliver on our promises and consistently report predictable results, which is our expectation for the back half of 2019. And with that, Sherry, please open up the call for questions..

[Operator instructions] Our first question is from Tyler Brown with Raymond James. Please proceed with your question..

Hi. Good morning, guys..

Hi, Tyler..

Alan, so pricing was once again very strong in its iteration. Based on my notes, it was a mid-teens increase off of a mid-teen increase comp.

I know you mentioned mix, but is there a way to bifurcate that 15% increase between maybe mix and core price? And then can you give us any thoughts on pricing as we get into the back half for incineration?.

Probably think about one-third pricing and about two-thirds mix as we think of the margin improvement there..

Okay.

And then any thoughts as we move into the back half? Should we see this momentum?.

We continue to look at the mix. And as we've now gotten our El Dorado plant up and running, as you remember, when we first started that plant up, we were burning some very low-margin business just to get the unit up and running and now we've been able to get a much more selective type of waste stream to feed that.

And we've also seen a lot of new waste streams coming online from some of the expansion in the chemical industry in the Gulf. So I would say that we should continue to see that kind of improvement both in price and mix for the rest of this year..

Okay. That's great. And then utilization in the first half is obviously in the low-80% range, which well off last year's number.

I know that there's a number of reasons, but should we think about utilization in the back half of the year kind of improving? And then into 2020, should we expect maybe a smoother utilization rate throughout the year? How should we think about that?.

Yes, we had a major disruption in our Deer Park plant due to a catastrophic fire that was adjacent to our facility where we had to evacuate our plant, we had to shut our plant down for several weeks.

And in the process of bringing that plant back online, we had to come offline again and to bring it back online and subsequently, we probably saw some impact to our refractory in that plant.

And I guess, so quite frankly, we had to move forward a turnaround in July into June in Deer Park, so I would say that should not happen again next year, but that was probably a big part of our utilization issue there..

Okay. Yes. It was a little funny this year. But then you mentioned that there were some large projects kicking off in the third quarter.

Were you specifically talking landfill projects?.

Predominantly. Although we do have some waste coming in for the incinerators due to those projects. But where our landfill business is about 10% off the prior year, you're going to see that comeback this year.

And particularly on the West Coast, one of our landfills there was off-line with one of its processing units and so that took us another three months longer than we had expected, but that unit is back up and running as well.

I guess, so we have a 350,000 ton or so cap at that landfill and so we have substantial volume there available, and we expect to fill it by the end of the year..

Okay. And then you mentioned $5 million of major ER work this quarter.

Does anything linger into Q3?.

Not anything substantial at this point. I mean, clearly we do a lot of events there. But those, that sort of number there kind of represents really two major kind of events, so we aggregate it together just to kind of give some color there..

Okay. No, that's helpful. And just one last one, just real quick on Safety-Kleen.

So at a very high level, are you guys kind of happy with where the spread is today? And if so, is that business really kind of designed to do in the high $200 million of EBITDA kind of no matter the base oil price on that 150 million gallons sold and produced? I think, and is the opportunity to really grow EBITDA dollars in that business really in the long-term migration toward blended and closed-loop sales? Again, all of this excluding IMO.

But is that the big picture way to think about Safety-Kleen?.

Yes. And so I'd like to think that we have a much better control over that spread with the tools that we've given the team over the last 3 or 4 years. And so as base oil changes or as the price of crude oil changes and as the price of number 6 oil has an impact our waste storage collection business. We're doing a good job of managing that spread.

The big opportunity, obviously, as you mentioned is, the more that we can convert our base oil into a blended product, we see some margin lift by doing that. And I think the, we also see some opportunity if the market goes along because of IMO that maybe our inputs costs will even go down further. So that will improve the spread too..

Okay. All right, guys. I appreciate the time..

Okay. Thanks, Tyler..

Our next question is from Jeff Silber with BMO Capital Markets. Please proceed..

In your prepared remarks, you mentioned that you haven't seen a meaningful slowdown in any of your core lines of business. Forgive me, but would your company be more of a lagging indicator there since you're kind of at the back end of the streams? And I'm just curious how you think about that..

I guess, I wouldn't think that we would lag too much. Because a lot of the waste that we bring into our plants is a result of manufacturing, whether it be making a chemical or making a car or making some other kind of product.

And that, so a lot of the waste that we collect, as we look at our drum counts, for example, that's sort of reflective of the regular waste streams that are being generated by industry. And I haven't seen anything.

Mike, you want to, color on that?.

Yes. Jeff, so we can certainly, conceptually, I kind of see your point, since we're waste, we would lag in other industries, but our pipeline is very strong. And so, and we try to, we are very close to some long-tenured customers. And so we are pretty close to them, and we don't, we just don't see it. And so your hypothesis is not inaccurate.

And I think obviously, since we're waste, we'll be at the back end of any type of slowdown. I mean, but we look, we have a pipeline that looks as strong as it's ever been. So that kind of, that's how we got to the comments we got in my prepared remarks just so you get some context on that..

Yes. Typically the customer only has 90 days to store wastes before they need to move it from a regulatory standpoint. So I would say that the drum volumes, which is really reflective of the health of our customer base, continues to be very strong..

Yes..

Okay. Great. That's really helpful. And as a follow-up, you mentioned the comparisons to last year with the heavy turnaround activity.

How much visibility do you get on that? Do you know quarter to quarter how volatile that is just going to be?.

Well, what happened in Q2 last year is, there was a bunch of turnarounds, especially in Western Canada. We ended up winning, let's say, more than our fair share. So that really became a really good spike for us and a really good win for us in Q2 this time last year, Jeff.

I think our turnarounds, we do get good visibility to it, but the turnarounds are going to be flat in the back half, I'd say, both in the U.S. and Canada as far as this year versus last year. Just a, and it was very unusual in Q2 last year.

There were a lot of turnarounds, especially in Western Canada, and we won, kind of, let's say, almost all of them. So that was really kind of a great win for us then, which made it a tough comp here in 2019..

Yes, that was going to be my question.

How tough was the comp? What was the order of magnitude did that impacted 2Q '18?.

Q1 alone was $10 million in Western Canada..

Yes. It was a big number, Jeff. I can't put a, I don't want to put too fine a point on it, but it was really, the V was very high. It was tough. They didn't, of the region that did, all our regions did pretty well kind of year-over-year, the Western Canada region was down based on budgeted and refined but versus actual prior year, they're way down.

$10 million is about the right assumption..

Okay. All right. All right. That's helpful. All right. I'll get back in the queue. Thanks so much..

Thanks, Jeff..

Our next question is from Michael Hoffman with Stifel. Please proceed..

If we could walk through the segments. And so, based on the way you're framing the guidance, it would suggest that you would return to low single digits, 3, 5 kind of second half growth in ES.

Is that the right way to think about what happens in the top line?.

Top line? Well, we don't give top line kind of numbers, so it's hard for us to kind of speak to that specifically. Certainly, we think the back half of the ES business is going to be up 8% as we said in my remarks in the back half of 2019..

Okay. And then within context of where this operating leverage is coming from, the Industrial and Field Services, it had declined a lot a couple of years ago. That impacted profitability, its contribution to the overall margin.

How would you frame those margins today relative to where you'd like them to be? And then I'd like to talk a little bit about where the Technical Services margins are sort of the mix of how you got improvement in ES..

Mike Battles:.

Obviously, I want them to be higher. Based on the levels of events in field, that drives that margin kind of in the mid-teens. But as Alan mentioned, there was a couple of, let's say, we call national events that we call out. It wasn't that big of a needle mover in the quarter, but it was certainly helpful.

And so, I think the Industrial Services business continues to do well. It had a tough comp, as I mentioned before, in Western Canada. But that business is still kind of chugging along and producing, I'd say, kind of high single-digit EBITDA margins..

Yes, we pulled some nice waste streams from those businesses into our plants..

Absolutely..

In fact, one of the larger waste streams going into our Deer Park plant right now is a result of a significant incident that we've been working on. So that really tends to show up in the ES business..

Got it.

And then how sensitive is your guidance to sentiment around trade and tariffs related to your customer base? If it remains less favorable, how sensitive is your guidance to that?.

Mike Battles:.

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Michael Hoffman:.

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Mike Battles:.

We're trying to manage our inventory, were trying to manage payables, we're trying to manage kind of all the barriers that could affect operating working capital and ultimately, free cash flow. And so we recognize the fact that, that number has gone up. Obviously, in a growing business, it will go up.

We're trying to manage that and keep that under control..

Okay. Thanks very much..

Thanks, Michael..

Our next question is from Noah Kaye with Oppenheimer & Company. Please proceed..

Noah Kaye:.

And maybe it would be helpful if we can just get a little bit more color on kind of the types of streams that you're seeing coming into the pipeline. Maybe you can speak to sector, region, just to give people a little bit more flavor..

Mike Battles:.

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We see plant, a new plant starting up and some of those take longer than they expected. So some of the things that were expected haven't yet materialized through sort of the first 6 months. But clearly, these plants are starting to go through start-up, and we're dedicating capacity for them to make sure that we're going to be there for them..

And do you have any sense on what's pushing those start times out? Not to, would speak for your customers, but is it macro related or is it just sort of mechanics?.

No. It's just engineering, mechanic. Starting up some of the significant plants are, difficult to get them up and running sometimes. So no different than any other plant like ours..

That's right..

Okay. And on the SK side. I'm struck by how potentially dynamic a situation we could be getting into later this year, early next. As you pointed out with IMO 2020, there's still a fair amount of uncertainty. And then I think about the comments you made about the tools you've given your team to be able to respond. Obviously, you're getting higher CFO now.

But can you elaborate just a little bit more on those tools? And how you think you've improved your ability to respond and capitalize on whatever the shift in the spread is as we get into the later this year?.

Well, I think we monitor the, what's going on in the market in all areas. We have 200 branches, over 650 trucks collecting oil, and we're certainly very close in capturing local information that's going on in the market.

As well as a very close to understanding the outlets for oil is available to some of our competitors and how those markets are being changed and potentially, how those outlets are going to restrict flow of oil coming down the pipe here over the next 3, 4, 5 months or into next year.

So I would think that we have a much better source of information and be able to take that information and put it into the hands of the team who are running these different branches.

And probably, that's the most color I probably could share with you, right? But we're on top of it because we know it's critical that we maintain a spread in what sometimes can be a volatile business.

Mike?.

Yes. Noah, 2 things I wanted to add. First of all, we are making a small capital investment in rerefineries to kind of have them run a little more efficiently to crank out a little more base oil, which is going to be, hopefully regardless of what happens to IMO 2020, looks like a winner.

And secondly, our guidance as we've given it out this morning, doesn't include any IMO impact. And so I know, as you said in your opening comments, very dynamic, we agree with that, but we want to make sure that the investing public know that our guidance, we're assuming that, that's an event in the back of the year.

So you expect that becomes a winner for us, well, that's just upside to this model..

Our next question is from David Manthey with Robert W. Baird. Please proceed..

First off, you mentioned workforce additions, which makes sense given the strength of your business.

But can you discuss the specific areas of opportunity that you're seeing today?.

I think it was probably more investment in the workforce. I think we have expanded our benefits program, like our 401(k), our healthcare benefits. We've taken on a lot more additional cost.

So we recognize that we're in a tough environment and that we are very much dependent on a workforce that's going to save us and that we train and we invest in and we want to make sure they stay with us for a long period of time. So it was probably more in that context, Dave..

Mike Battles:.

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Okay. That make sense. And second, on IMO, it's pretty clear it's happening now, obviously. But is there anything that you've heard or seen that makes you more or less confident. Specifically on the impact, kind of the secondary impact on these used motor oil market. And I'm wondering about how your contracts are set up.

And I think you answered in response to a previous question referencing fixed oils. Your contracts set up that way, maybe it doesn't matter so much.

But I'm just wondering if you can give any color in terms of increase or decrease in confidence that you're actually going to see some benefit, even though it's not in your forecast?.

Alan McKim:.

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Okay.

And then just finally, not to pin you down on PFAS, but if it were to be declared a hazardous material, can you just tell us how that would manifest in your lines of business?.

Alan McKim:.

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[Operator instructions] And we have a question, a follow-up from Michael Hoffman with Stifel. Please proceed..

This is as much a comment as a question. I always want to be a little bit cautious when the market gets excited about some new opportunities that thought Tronics was going to be a big win for them, it didn't play out. PFAS potentially could be huge. But to be clear, it's initially a drinking water issue.

And so, you guys really steer clear of drinking water. Maybe the secondary play is you capture the filter media and get to handle disposal of that.

But without a national contamination limit, even if this is just an industrial waste, without a national contamination limit, it seems like that's going to slow the remediation size, particularly on the federal government. The DoD doesn't do anything until you at least get a federal standard.

Is that the right way to think about this? So let's be cautious.

I guess, there could be a great opportunity, but nobody should get over their skis and go, wow, that $13 million last year is going to turn into $100 million next year kind of opportunity?.

Yes. I think that's fair. I think what we're seeing, we're pretty much fully utilized with our mobile treatment capabilities, handling the in-situ kind of opportunities. But you're absolutely right, Michael..

Yes. Michael, we put it in our prepared remarks because we asked to quite a bit and we want to give people an update, there's nothing really to talk about here and we think that the IMO opportunity is much more tangible..

Thanks..

Great..

We have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks..

Okay. Thanks for joining us today. We look forward to speaking with many of you over the next several months at our investor events, including our Needham event in mid-August. And enjoy the rest of your summer, everyone. Thank you..

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a great day..