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Edited Transcript of EXPO earnings conference call or presentation 30-Apr-20 8:30pm GMT

Q1 2020 Exponent Inc Earnings Call

Menlo Park May 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Exponent Inc earnings conference call or presentation Thursday, April 30, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Catherine Ford Corrigan

Exponent, Inc. - President, CEO & Director

* Richard L. Schlenker

Exponent, Inc. - Executive VP, CFO & Corporate Secretary

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Conference Call Participants

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* Alexis Magee Huseby

D.A. Davidson & Co., Research Division - Senior Research Associate

* Marc Frye Riddick

Sidoti & Company, LLC - Business and Consumer Services Analyst

* Samuel England

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Trevor Romeo

William Blair & Company L.L.C., Research Division - Associate

* Whitney Kukulka

The Blueshirt Group, LLC - MD

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Presentation

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Operator [1]

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Good day, and welcome to the Exponent First Quarter of Fiscal Year 2020 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Whitney Kukulka of Investor Relations. Please go ahead, ma'am.

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Whitney Kukulka, The Blueshirt Group, LLC - MD [2]

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Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's First Quarter of Fiscal Year 2020 Financial Results Conference Call. Please note that this call simultaneously webcast on the Investor Relations section of the company's corporate website at www.exponent.com/investors. This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without prior written consent.

Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; and Richard Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.

Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption Risk Factor in Exponent's most recent Form 10-K. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them whether as a result of new developments or otherwise.

And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [3]

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Thank you, Whitney, and good afternoon, everyone. Thank you for joining our call today. I hope that all of you and your loved ones are staying healthy and safe. These are unprecedented times, so we will be taking a somewhat different approach to our earnings call commentary. On today's call, we will not only review our business performance and financial results for the first quarter, but we will also share with you the impact that the coronavirus pandemic has had on our business, what we are doing to address the associated challenges and how the strength of our business model positions us for long-term success.

We are pleased to report another strong quarter with year-over-year growth in revenues and earnings. Our total revenues grew 7% to $106 million, and our earnings per share were $0.49 as compared to $0.42 in the same period last year. This revenue and earnings growth occurred despite the impact that business restrictions related to the coronavirus began to have on our Asian operations in late January, and on certain areas of our European and United States operations in the second half of March.

Exponent's engineering and other scientific segment represented 80% of the company's first quarter net revenues. Net revenues in this segment grew 6% in the first quarter as compared to 2019. This segment had notable performances in its biomedical, mechanical engineering, vehicle engineering and biomechanics practices. Multinational companies across industries engaged our interdisciplinary teams of world-class consultants for scientific expertise and risk assessment. Our work for Pacific Gas and Electric related to the integrity management of their electric utility infrastructure and fire risk was approximately 4% of Exponent's net revenues in the first quarter of 2020.

Exponent's environmental and health segment represented 20% of the company's first quarter net revenues. Net revenues in this segment increased 8% in the first quarter as compared to 2019. Within this segment, the chemical regulation and food safety practice continued to grow as our scientists evaluated the effects of chemicals and new products on human health and the environment.

Exponent is addressing the challenges associated with COVID-19 with the same seriousness, intellectual rigor and fact-based analysis that we have employed for over 50 years. We are focused on 3 things: the health and safety of our people; demonstrating leadership by continuing to solve our clients' most pressing problems; and deliver value to shareholders.

Our unique capabilities, dedicated team of scientific experts, adaptable business model and highly diversified client base shape Exponent's leading market position. Despite the expected near-term headwinds in some areas of our business, we are serving many essential industries, including utilities, life sciences, chemicals, transportation, insurance and food. We are confident in the resilience of our business and our ability to deliver growth over the long-term as society continues to focus on safety, health, sustainability and reliability. Exponent entered this crisis in a position of strength. We ended the quarter with $152 million in cash, cash equivalents and short-term investments. We have no debt. And today, we reiterated our intent to continue quarterly dividend payments. Exponent has a long history and a strong track record of delivering for all of our stakeholders amid macroeconomic turbulence.

I will now provide some details about how Exponent has responded to the COVID-19 pandemic and comment on the trends that we are seeing across the business. Our employees have been working from home since the initiation of shelter-in-place orders, with the exception of laboratory and inspection activities for essential businesses. Our business continuity plan and robust infrastructure have empowered productive remote work from day 1. Our business development process has evolved to adapt to a remote working environment. And the vast majority of our engagements for new and existing clients continue to be initiated by inbound communication based on our reputation and longstanding relationships. We continue to see strong demand for utility integrity management services as clients focus on power reliability, while their customers are asked to stay at home. Preparation for fire season is an additional market driver in this sector.

Our chemical regulation and food safety services represents an ongoing area of strength, as clients must continue to comply with complex regulations as they distribute products around the world. At the same time, we have seen slowing of a portion of our litigation support projects due to courthouse closures and associated legal delays. Very little of our consultants' time is actually spent testifying in courtrooms, but because the legal deadlines have moved, some clients have put work on hold. We are pleased to see that certain courts are beginning to utilize technology to hold virtual hearings and trials.

Travel restrictions are delaying work that requires inspection of a site or of a product that cannot be shipped. But as restrictions begin to ease, Exponent's broad geographic footprint will be a competitive advantage as it puts our consultants within driving distance of many locations. We are also increasing our use of technology, such as video streaming, 3D imaging and virtual reality, to enable remote inspections and laboratory investigations.

This pandemic has also temporarily paused our user studies, but we are actively adapting with study designs and implementing processes and technologies so that we can restart them as quickly as possible while focusing on the health and the safety of our participants and our employees. Our scientific experts are more committed than ever to delivering actionable thought leadership, especially where it can help to manage and mitigate risk associated with the COVID-19 pandemic.

Some examples of issues that our interdisciplinary teams are seeing include: mitigating safety risks in the workplace, from occupational health and industrial hygiene to the use of technology to monitor physical distancing and potential signs of illness; development, regulation and performance of medical products, disinfectants and personal protective equipment, including evaluation of COVID-19 diagnostics, resterilization processes for PPE and disinfection registration across national boundaries; global supply chain optimization, including root cause analysis of increased product failure rates due to supply chain disruptions; strategies for documenting and analyzing construction delay impacts related to COVID-19; and litigation claims related to COVID-19 exposure.

Safety, failure analysis and risk analysis are in the very DNA of our company. For over 50 years, Exponent has advised clients across the globe in times of crisis. We have long demonstrated our ability to pivot quickly to address our clients' most compelling issues, and we are demonstrating that agility in the context of the coronavirus crisis.

However, what remains evident is that society continues to raise its expectations for safety, health, sustainability and reliability and that products and processes continue to grow in their technological complexity. These market drivers have powered Exponent's growth for over 50 years, and have led to increased demand for our interdisciplinary solutions despite periods of macroeconomic turbulence. We remain focused on developing and retaining our exceptional talent to ensure that we are increasing our value in the marketplace. We remain committed to our mission and are highly confident in the long-term health of our business.

I'll now turn the call over to Rich to provide more detail on our first quarter financial results and to discuss business activity in the first 3 weeks of the second quarter. Rich?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [4]

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Thank you, Catherine. I will start by providing details on the first quarter financial results and then pivot to discussing our performance in the first 3 weeks of the second quarter. At this time, we cannot reliably provide revenue and earnings guidance for the quarter or year due to the high degree of uncertainty surrounding business and travel restrictions.

All comparisons will be on a year-over-year basis, unless otherwise specified. For the first quarter of 2020, total revenues and revenues before reimbursements were up 7% to $106 million and $99.7 million, respectively. During the first quarter, our work for PG&E related to wildfires and integrity management of their electric power infrastructure generated approximately 4% of net revenues. It should be noted that we completed the sale of our German entity at the beginning of the second quarter. As previously discussed, this entity had annual revenues of approximately $4 million, and its structural design and inspection services were not a strategic fit. I want to assure you that Europe remains a strategic growth area for Exponent.

Net income for the first quarter was $26.3 million or $0.49 per diluted share as compared to $22.7 million or $0.42 per share in the same period last year. In the first quarter, the tax benefit for gains realized upon issuance of share-based awards was $8.8 million or $0.16 per share as compared to $5.7 million or $0.11 per share in 2019.

As a reminder, most of these shares are granted annually in March as part of our compensation program and released 4 years later. As such, this is primarily a first quarter event. The tax benefit from share-based awards is based on the change in value from grant to issuance date. EBITDA for the quarter increased 5% to $25 million.

For the first quarter, billable hours were 348,000, up 6% year-over-year. Utilization for the first quarter was 71.4% as compared to 71.6% a year ago. For the first 10 weeks of the quarter, our utilization averaged 73.5%. This included the shelter-in-place orders in Shanghai and Hong Kong, which represent approximately 3% of our business.

The final 3 weeks of the quarter stepped down week-by-week to a low of 62% in the 13th and final week. For the first 3 weeks of the second quarter, the average utilization was 60% as compared to 75% for the same period last year. The primary reasons for the lower utilization are the pausing of our user studies, delays caused by travel restrictions, holds on work due to courthouse closures and restrictions on lab work for nonessential businesses, such as consumer products companies. We continue to expect our long-term annual utilization to be in the mid-70s as we build more critical mass in our offices and practices and expand our service offerings.

Technical full-time equivalent employees in the quarter were 938, up 6% year-over-year and 1.8% sequentially. For the second quarter, we expect net headcount to be flat to slightly down sequentially, but still resulting in a year-over-year headcount growth of approximately 5%. We are building a backlog of prequalified candidates, which are ready for in-person interviews as business restrictions are relaxed. We will focus our hiring where we have strong demand and in areas of strategic growth.

For the quarter, year-over-year realized rate increase was approximately 1%. Although we implemented price increases similar to the past several years, the average rate in the first quarter was moderated as a result of mix. For the quarter, compensation expense after adjusting for gains and losses in deferred comp grew 9%. Included in total compensation expense is a contract expense for deferred compensation of $14.6 million as compared to an expense of $5.9 million in the first quarter of 2019.

As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line. Stock-based compensation expense was $6.1 million for the quarter as compared to $5.7 million in the first quarter of 2019. Other operating expenses were $8.2 million, an increase of 2.6%. Included in other operating expenses is depreciation expense of $1.8 million. G&A expenses were $5.5 million, an increase of 21.6%. This included an extra $1.6 million accrual for potential bad debts. Today, we have not experienced a material deterioration in our receivables due to the current crisis, but we are taking a conservative approach by increasing our AR reserve on the balance sheet to bring it to $6 million for both billed and unbilled receivables.

For the first quarter, EBITDA margin was 25% of net revenues, which was down 50 basis points as compared to the same period last year, as a result of a lower utilization and higher bad debt expense. Interest income was $875,000 as compared to $1,055,000 in the same period in 2019. Due to a steep decline in interest rates, we are now estimating interest income for the second quarter of 2020 to be approximately $300,000.

Miscellaneous income for the quarter after adjusting for losses and deferred compensation was $1.8 million, which included $800,000 for foreign currency gains. We expect miscellaneous income for the second quarter of 2020 to be approximately $900,000. For the first quarter inclusive of the tax benefit for share-based awards, our consolidated tax rate was a negative 9.3% as compared to 2.6% for the same period last year. For the remaining quarters of 2020, we expect our consolidated tax rate to be approximately 27.5%.

Moving to our cash flows. As expected, operating cash flow was a negative $13.8 million for the quarter as a result of paying out annual bonuses. Capital expenditures were $1.3 million for the quarter. For the full year 2020, we expect CapEx to be $8 million to $10 million. During the first quarter, Exponent paid $10.3 million in dividends, repurchased $40 million in common stock at an average price of $62.91 and closed the period with $152 million in cash, cash equivalents and short-term investments and no debt. We have a strong balance sheet, intend to continue paying quarterly dividends, and at the end of the quarter had $30 million available under our current stock repurchase program.

Turning to the second quarter. Again, at this time, we are not able to reliably provide guidance for the quarter or year as we do not know when and how business and travel restrictions will evolve. While 3 weeks is a limited data set, we wanted to share the preliminary utilization which averaged 60% as compared to 75% for the same period in 2019. We estimate this decline in year-over-year utilization equates to approximately 15% to 20% decline in net revenues for the 3-week period. If the net revenues for the entire second quarter were to decline year-over-year by 15% to 20%, then the EBITDA margin as a percentage of net revenues would likely be 17% to 20% as compared to 29.5% in the same period last year.

For the second quarter, we estimate that a $1 million increase or decrease in net revenues, which is equivalent to 1% of last year's second quarter net revenues, would generate a corresponding 60 to 70 basis point change in EBITDA margin and a $0.01 change in EPS. It should be noted that Exponent's bonus accrual is 1/3 of pretax pre-bonus profits. And as such, employees and shareholders are aligned in their desire to maintain profitability.

Despite the unprecedented backdrop, we grew revenues, EBITDA and earnings per share in the first quarter, and ended the quarter with $152 million in cash and no debt on the balance sheet. Exponent has a sustainable business model and intends to continue our quarterly cash dividend payments. While we cannot predict the magnitude or duration of the disruption caused by the pandemic, we believe we are in a position of strength.

I will now turn the call back to Catherine for closing remarks.

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [5]

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Thanks, Rich. Our business is resilient because the fundamental market drivers remain strong. As society continues to raise the bar on safety, health, sustainability and reliability, companies will face challenges as they innovate their complex products and processes, tackle regulatory hurdles, mitigate risk and resolve disputes. While physical distancing and the current business and travel restrictions are impacting our business in the short term, by adhering to these restrictions, we are doing our part as a company to protect the health and the safety of the essential workers on whom we all depend for health care and life necessities. We salute these workers and are prepared to emerge from this challenge as an even stronger firm based on the teamwork of our incredible employees and the strength of our balance sheet.

Operator, we are now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Tobey Sommer with SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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My first question is, to the best of your ability, could you kind of bucket the shortfall in utilization and, therefore, revenue in 2Q into 2 primary buckets, deferred opportunity in projects versus actual demand destruction?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [3]

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Yes. Thanks, Tobey. So I'm pleased to say that we are not seeing cancellations of projects. What we are seeing is we are seeing pausing of existing projects, and we're seeing delay in projects that have already -- we've been engaged, but maybe we haven't started yet, right? So this includes things like our user studies, right? Something that Rich mentioned. We have had pauses in that work. But clients, in general, are showing a lot of motivation to get those going again. Obviously, we need to develop protocols that will allow us to do those in compliance with all of the relevant restrictions and focusing on the health and the safety of our participants. But that work is in the paused category.

On the litigation side, same kind of thing. We are not seeing, for example, a lots of increased settlements of cases because of the pandemic. What we're seeing is that because the courthouses are closed, things are being deferred. Now we are seeing, very interestingly, the clients and the judges are beginning to use technology. We've seen trials move to bench trials instead of jury trials, so there are signs that those are coming back. And the legal work is interesting because not all of it is paused. There are certain aspects, for example, take the international arbitration arena, where we tend to have sort of larger engagements, those are not subject to the requirements of needing a jury in a courthouse. So what we're seeing there is very different. We're seeing them go to video. We see some positives because of travel restrictions and things like that. But they then get the video proceedings going and they're able to keep those going.

For the types of projects that require on-site inspections, again, those places, we're seeing things paused. But what's happening is those inspection facilities, for example, and we, as a company, are working on, okay, what does that protocol look like, where we can be physically distant, and we can proceed with that inspection. We're ramping up the technology and things like that. So the good news here, Tobey, is that the work is essentially 99.9% in that deferred category. We can't necessarily know precisely what the timing will be on resuming those, but we are actively working with our client base in order to get that work moving again, obviously, taking into account that we need to be protecting everyone's health and safety.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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What's your intent in using the balance sheet for some time? You've had a long-term goal of getting to a different leverage ratio. Is this the time to execute that?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [5]

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Look, yes, we have continually committed to shareholders to over time return cash to them through growing our dividends and repurchasing shares. And I think our actions during the first quarter here, where we expended $10 million on dividends and $40 million in repurchases, is a step in that direction. We do believe we are very fortunate with the profitability of our firm as much as it disheartens us to see our margins drop. The fact that we're talking about margins, even at a 60% utilization, there's no guarantee that, that's where we'll be. Hopefully, we'll be better, but we may not. Even at that level to be at 17% to 20% margins is generating good cash for us. So we are comfortable continuing to execute on that plan of dividends and repurchases and returning value to shareholders.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [6]

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Was the share repurchases in the first quarter, were those concentrated in the month of March when there was more market volatility?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [7]

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They were.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]

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Perfect. Last question from me. With respect to the proactive services that's grown as a proportion of the total company over the last decade, how do you think that is going to perform? And just kind of any color you can give us on that would be helpful.

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [9]

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Yes. So thanks, Tobey. On the proactive side, in the short term, there's a range, right? When you talk about, for example, the utility work that we're doing, that remains an area of strength. I talked about the upcoming fire season, I talked about integrity management, the demand there is quite strong. The demand on our chemical regulation and food safety side, I mean, we're seeing -- we've had inflow of projects already even directly related to COVID-19, whether that's emergency use authorizations in the short-term to some of our longer-term opportunities where those products will need to be classified and to get across the regulatory hurdles beyond just the emergency uses. So that's -- these are ongoing areas of strength. When you look at consumer products, in the short term, those are not necessarily considered essential industries. And so some of the laboratory work, for example, are things that have to be deferred until later. But when I look at the long term, and I consider that there are clearly macroeconomic consequences to this even in the longer term, we feel that because of the nature of the type of work that we're doing on the proactive side, again, the regulatory environment, in our view, will continue around the world to -- the bar is going up, especially when it comes to things like chemicals and the environment. And so we anticipate, as we always have in the long-term, that that will continue to drive demand in that area. When I look at the design type of consulting that we're doing, you know this is primarily in consumer electronics, we've got that going on in the medical device area. Still seeing -- you have the regulatory impact on the medical device area, the medical device regulatory framework in Europe, there's been a lot of changes in the regulatory framework there that are driving work.

So we continue to believe that -- even as clients are tightening their belts, which is what we see in sort of recessionary periods and it's what we saw in the sort of '08, '09 time frame, they are still innovating their products. We continue to believe that from automated vehicles to the types of new consumer electronic technologies, the way that those are interacting more and more with the human and the importance of that human-machine interface. And even now, that human-machine interfaces with voice recognition as opposed to things that you would need to touch will drive more innovation in that area. And so just as we are having to manage through the short-term pauses that we're talking about, from a long-term perspective, we really are very confident in the demand for the diverse types of services that we do and the opportunities that we have in front of us.

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Operator [10]

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We will now take our next question from Andrew Nicholas with William Blair.

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Trevor Romeo, William Blair & Company L.L.C., Research Division - Associate [11]

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This is actually Trevor Romeo in for Andrew. Thank you also for providing the detail on the revenue and utilization trends in April thus far. I was just wondering, if there was any difference in that trend as you progress throughout April, if you saw kind of a gradual decline kind of similar to how you -- what you saw in March or if you've seen any improvements coming up below at this point?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [12]

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Yes. Sure. I can give some details around that, again, for everybody. We are dealing in weekly increments that I'm going to share now, which is even more precision here. But what we saw in April -- in March was a step down from really that 73%, 74% utilization in the 10th week down to where it stepped down to 69%, 66%, 62%, as I mentioned, in the last week of March. What we then saw in April was that utilization was 61% the first week, 58% the second week and back up to 61% in the third week. So I don't want to -- I didn't want to sort of set that, "Oh, we've hit the plateau and bottom." But clearly, when you take the last 4 weeks being between that low 60s of 62% in the last week of March all the way through back to 61% in the third week of April, you can see that we're hovering around in that high 50s, low 60s, at least for the last month. The first dramatic drop we got back in March was sort of clearly user studies being put almost on hold immediately. That work was probably about somewhere about 6% of revenues right away. And then you saw some gradual play in of courts being closed and travel restrictions really tightening up there as we moved into the latter part of March because things were happening geographically for us, things sort of stepped in over that period of time, and that's played out.

What we did see, I can lend in over in Asia and again, it's a small part of our business, but when I look at what was going on over in Shanghai, in Shanghai, our business is very much about testing different components that our clients are having challenges with doing deep analysis and then obviously reporting back to the client. But we need a lot of that data to come in through our testing to feed into our analyses. And with production over in Asia, both development -- research and development all the way through up into the full production cycles, that being brought to a hold and stay-at-home order in Shanghai, we saw that work drop down to almost 0 for several weeks there. And then it began to step back up to the point now that we're seeing levels of productivity over in that small office that are higher than what we've had in -- back in several months, even back into 2019. So we are seeing an upswing there when we take that as an example. So we do know, like what Catherine was saying, part of our slowdown is not being able to do testing for nonessential businesses. We still are able to do testing and evaluation and all that in our labs for essential, but some of the nonessentials hopefully, as those things play back in the U.S., that will help improve that part of the business.

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Trevor Romeo, William Blair & Company L.L.C., Research Division - Associate [13]

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Okay. I certainly appreciate that level of detail. And then for my follow-up, just wanted to touch on the expense side. It sounds like you're still willing to add headcount in certain areas. So is that true across the board? Or are there areas where you'd be looking to freeze head count and beyond, I guess, compensation? Are there other levers you can pull to manage expenses in the near-term while you laid this out?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [14]

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Yes. Thanks, Trevor. So I can take that one. On the headcount side, first of all, I think it's important to note that performance management is something that we are always very actively doing in the company, and this becomes particularly important in times like this. Our goal is that our professional staff are, in fact, growing in their careers, and they are increasing their ability to provide value to clients. And that's the type of bar that we use to -- in sort of a -- for headcount on the performance management side. And we continue to do that very strongly during this time. But because of what has gone on, there actually has been a natural feathering of the headcount growth because of our recruiting activities. We do think in the long term that it's important for us to continue to fill our recruiting pipeline. It's a long courtship product for Ph. D. So we continue to hold university recruiting events virtually. But it's to fill our pipeline for when we expect these deferrals of work and pauses to be eased and to continue recruiting in areas of strength. And that's a very important point is that currently, we have quite a lot of activity going on in our chemical regulation and food safety practice. So if there are opportunities for us to bring on the right kind of talent that is going to be able to realize that increased demand, we're going to be doing that over time. And in other areas of the business, if we find that there is a sort of structural change in demand, well, then we will have to manage that. But it is absolutely a sort of business area by business area, market-by-market kind of evaluation that we have around our talent and around our headcount.

Now with regard to other expenses, there has been a natural decline in things like nonchargeable travel, nonchargeable meals. Our consultants are not able to be out at conferences right now because most of those are -- have been canceled and probably have been replaced by virtual events. And we're actually doing quite a few of those webinars, thought leadership, things like that. And so there has been decline there. And that's where we primarily are realizing some of the cost related reductions.

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Operator [15]

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We'll now take our next question from Marc Riddick with Sidoti.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [16]

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So I was wondering if you'd touch -- and first of all, thank you very much for all the detail that you provided on your business and the trends. It's certainly helpful. I wanted to get a sense of if you were getting much in the way of conversation around pricing or financial relief or anything like that from customers, and whether or not you're seeing any pressures along those lines?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [17]

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Marc, we really aren't seeing that. And I think that's primarily because Exponent has established over decades that we have a price structure that is, each consultant in our firm has an individual billing rate based on their value in the marketplace. We established that each year on -- at the beginning of January. We charge all clients the same rate for that individual's time that they're expending. So it is well known in the industry that we are not going to negotiate, discount individual or rates that we're doing or that we're going to discount at an overall bill level at what we're doing, or that we're going to give a volume discount to players. We've -- that same rate is the rate our newest small client is paid as well as our largest, most established clients, and we've established that in the marketplace. There is no doubt we've seen it over decades that our clients will become even more focused on the value that they're getting from our services in this time. And Exponent is focused on making sure that we're being clear in our communications as to the budgets we have, the work we're going to deliver and scope in that, and making sure that we're being even more diligent about following up with clients and communicating further with them on the overall financial arrangement that we have with them. So that's the approach that we're taking to ensure that our clients are getting top value in what they're doing.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [18]

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Okay. Great. And then I wanted to touch a little bit on -- and I can imagine that you had previously done business continuity testing to some degree and were prepared for this. But I did want to just spend a little time if you could sort of discuss what the process was like as far as transitioning to having the consultants work from home, what the technological aspects of that may have been, and sort of how you feel about where you are from a technology standpoint? And if you feel as though you need to maybe upgrade? And then maybe not just from a technology standpoint, but when we sort of get to the other side just a little bit, how that might reflect how you look at the mix of being in the office versus working virtually in that type of thing?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [19]

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Yes. So I'm going to start off and talk a little bit about business continuity planning and technology in that, and then I'll hand it over to Catherine to talk a little bit about the latter part of your question that's definitely more operational and cultural driven in nature. So Exponent was -- we absolutely do have a business continuity plan. It's something that we test, we work on. It's a team that goes across our organization. It actually happened to be led by our Director of Health and Safety and Quality that handles our area of business continuity. That's the Director that leads that effort. But a very important part of that team is, obviously, the technology that we have in place that is driven from the IT team there as well as our information security team that needs to ensure that we can transition over and do it.

We were able to, literally, go from the normal number of people that are out on the road remotely that might be 100 or 150 or 200 connections in a day that's VPNing into our organization to 1,200 simultaneous connections coming in within a day or 2. So right away on the next day, everybody was able to come back in, be fully connected, working on the servers and doing that. Our IT organization for our computing and visualization stuff is able to set up virtual environments that allow our analysts and people who do some of that heavier computing, heavier visualization stuff, were able to continue to do that from home no different than they would if they were running their models at night or doing some work offsite and doing those types of things.

In addition to that, our software team continued to expand and stand up our business continuity sites, continued to reeducate our staff on the collaboration tools that we had in place to use, and all of those things have gone very well. We've continued to solicit feedback from everybody, improve things as we go on, learn about new tools that we need to add into the toolbox. But we've been very -- if you go down the list and look at how our people are working from home, and how productive they're being on their work that they would otherwise be doing in the office, the feedback has been excellent on that front and productivity is very high. It's just, as Catherine has said, where we've seen some of the slowing is those things where you need to be in the lab on an inspection, in a court room, have a participant study, things of that type that are driving some of the delays in the work that we're having.

Catherine, do you want to talk about how you see this long-term or changing things maybe even in the short term?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [20]

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Yes, yes. Let me add a little bit to that sort of left on the technical side, but more on the people side. We're a company where the synergy and the interactions among our team members are very important. The part of the secret sauce of Exponent are these multidisciplinary capabilities, right? And this is why our business continuity plan allowed us to pivot so quickly to this remote work environment where people are being productive because that's people's ability to engage together on projects and also on other sorts of development programs, on business development, on marketing, is very important to our company. So we've had quite an emphasis on connection that goes beyond just the ability to have the technology, right? We've set up a website to where our employees can share their volunteer type of experiences in the community because that builds teams and that builds the way people can work together. We've been doing lots of communication, emphasizing both formal and informal gathering with use of video. I've been doing weekly video addresses to the entire company, about where we are and what's going on. That importance of communication just cannot be overstated and the employees are incredibly grateful for that. And that sense of team, that sense of family within the company is something that we are working very hard to maintain because in the long term that is where we want to be. We don't anticipate being a company that will have people working at home as the norm a number of years from now, but we have absolutely demonstrated our ability to pivot to that in the short term. And in the medium term, as things will start to get back to normal, we're going to be able to continue to have this culture of teamwork that is going to really help us to emerge strongly out of this.

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Operator [21]

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And we'll now move to our next caller, who is Alexis Huseby with D.A. Davidson.

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Alexis Magee Huseby, D.A. Davidson & Co., Research Division - Senior Research Associate [22]

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The workforce connected and feeling engaged with the company, I think we all are beginning to recognize just how important that is. So I did have another question for you on technology. So it sounds like you've seen some adjustment on the litigation business to using technology in courtrooms and outside it. Just wondering if you had a sense of what portion of your projects can comfortably be conducted remotely. And when it comes to eventually reopening, do you plan to end work from home and travel restrictions on a regional basis or will you have a company-wide time line?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [23]

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So first of all, I mean, the ability to do things technologically depends -- some of them we have full control over, some of them require agreement with the clients, maybe even other experts and parties that are involved in, in the matter we're in. And then other times, it's truly the technology that the courtroom is going to choose to implement there. But what we are committed to is being a leader in utilizing technology to communicate effectively our work, our findings and be present for our clients and those regulators, judges and such that we may need to interact with. We are also working with technologies to ensure that we can leverage our broader geographic locations and attending inspections and sites and gathering that documentation that we need so that others and maybe a further geographic location can work on that matter even though they weren't able to physically visit that site. And that can be done through drone scans, scanning areas, people going out and taking measurement images, it's quite diverse in the applications that we can apply there. So Catherine, do you want to add on here?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [24]

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Yes. It very much is sort of a kind of a business area by business area sort of impact. On the litigation side, it's been very interesting we've been -- we're in very close contact with our clients, not just on a project-by-project basis, but on a relationship basis, to really understand what's going on. And in the first couple of weeks, it was very much a -- everybody's hunkered down kind of attitude that we had. Like, well, we had just taken this big -- a big punch in the gut, and folks were just hunkered down, the courts were closing, and we were on that ramp. But we are very much now -- the vibe around this is turning the corner in terms of what the conversations are sounding like, right? The conversations now are about staying hunker down. The conversations now with the clients and with the judges are about how do we get this moving again? Because we've got a backlog in our courts, and we've got plaintiffs who need the justice system, right? And we've got insurance claims that need to be adjusted and paid out. And we've got various things that disputes that need to be resolved. And so there's a lot of motivation there. And of course, we -- as Rich said, tying it back to the technology piece, we have a big role to play in that, not only because of the technology we can bring on the inspections, but the expertise we can bring from the standpoint of the health and safety of the participants, whether that's in an inspection or things like that. One of the first areas that we were called on related to COVID-19 when this really started to impact the United States was in the occupational health and safety and occupational medicine area because our health scientists are able to advise companies on how they can be managing that down ramp. But now it's about how do we manage the on-ramp because we've got to adjust to what this sort of new normal is going to look like. And there's no longer this sort of passive approach to it. It's a very active approach, and we are really trying to lead from a technological standpoint so that we can accomplish that.

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [25]

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Yes. I would add one last thing on to that. I think what we're seeing is that we're still at a point that the majority of our work is continuing on. And that is even on the litigation side, the majority of the work is continuing on. Some work is not being affected at all. And what we've heard from our people and seeing is, the larger the engagement, the longer the engagement, the more likely it is to not slow down at all because those clients realize this is a long haul, there's lots of work to do to be there. And taking a month or 2 off in the middle of it is not going to be -- get them the answers and information that they need to make the right business decisions. So yes, we've been clear that some work has been paused, some clients have chosen to take that opportunity. It's tended to be on the smaller to mid-sized cases that are individual cases, then it might be a class action or a serial sort of issue that's going to continue on and there's no reason to sort of get off and get back on those types of issues. So -- and it is -- even in most practices, there is work that continues on and some that don't, it depends on the client, depends on the matter and how close it is to that hearing or trial date and such that's there, but the majority of it is continuing.

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Alexis Magee Huseby, D.A. Davidson & Co., Research Division - Senior Research Associate [26]

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Understood. That makes sense. And then on that subject, there are some sort of projects that are put on hold. Do you have any sense or insight into on your client side, is it being put on hold just due to general uncertainty in the business environment? Or is it more of a cash flow issue? And in that vein, would you say that those clients benefit at all perhaps from the CARES Act or any other governmental aid?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [27]

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Yes -- go ahead, Rich.

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [28]

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So -- yes. So our clients are a very diverse set of clients. They're small companies to very large companies. But look, we've talked many times to investors about the fact that the majority of our revenue -- remember, 20% of our projects make up 80% of our revenues. And the majority of that work is for large corporations that are out there. Are some of those corporations finding it more difficult than others in this environment? Sure. But the majority, yes, they are doing it so that they're putting something on hold because they realize if you just keep spending along and things get stretched out, they do just -- they tend to cost more. And so they put the lawyers and the experts and everybody on hold in doing that or they realize that things cannot be as productive in that period of time or as efficient. So it is going to ultimately save them money in doing that. It is -- we went through every client that we had $100,000 outstanding with and asked our project managers, our reviewing principal and the officer over that business area to review the collectibility of that? And are there issues there? And we got an incredibly strong feedback through that review of the strength of the clients we have. It doesn't mean -- remember, we've got automotive companies. We've got ones that are in the industries that are taking a big hit. But we've only got 4.5% of our business in oil and gas, and those are for some of the larger players where most of the receivables would be. So we're going through this. We feel there's -- our assessment is that we're in pretty good shape there relative to the quality of the receivables and the fact that the clients at the end of the day, what we saw back in the last recession is even if they're getting hit hard, you still have to deal with the litigation that's on your plate. You still need to register your product through the regulatory bodies. You must do those things. Some clients can hunker down and pull that inside, they can't do it on litigation; but on regulation, they can do that, but others put on a hiring freeze, and it means they use more people outside. So it was quite variable in the last cycle with clients, but ultimately, they need to deal with these things.

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Operator [29]

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We'll now take our next question from Sam England with Berenberg.

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Samuel England, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [30]

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Just a couple from me. The first one, you talked before about some opportunities in areas like supply chain management coming as a result of the impact of COVID-19. I just wondered if there's any evidence of those projects materializing, any conversations being started with any potential client in that area?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [31]

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Yes. Thanks, Sam. So we're early on. And Rich talked a little bit about the ramp up that that's going on over in Asia, in Shanghai, in particular, and to some extent, in Hong Kong. This is really an opportunity for us because with our clients who are manufacturing over there and their staff unable to travel, it presents an opportunity for us to be able to really support them, whether that's from a root cause analysis type of perspective if they had an actual product failure or issue. It allows us to support them in a scenario where they are having to change suppliers for some reason, they need those qualified. They have issues evaluating quality control and things like that. And so while there -- these are conversations that are going on right now that certainly is not an area that has moved the needle from a materiality perspective as of now. But it's something that we are actively pursuing with our clients based on the relationships that we have.

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [32]

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Catherine, do you -- maybe you could talk a little bit further about the areas that we truly have had engagements on because there's a number of different areas that we -- it's not just discussions. It is truly that we are getting engagements, they're not. Again, as you said, we're not at the point that we're here to say that this is the full move of the needle, but that truly could develop into something bigger over time.

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [33]

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Yes. No, sure. I mean I can elaborate a little more on that. The regulatory side is quite busy with activity, actual engagements around things like emergency use authorizations where various active substances, and these are typically bio sides, that are utilized in products to actually kill microorganisms. And there are many regulatory hurdles that need to be met like labeling, scientific studies, things of that nature. So that is probably the largest area of existing project activity that we've seen ramp up over just the last few weeks. And that's up for both our U.S. team as well as our United Kingdom team that is doing that sort of work. I mentioned a little bit earlier work that is related really advisory work around occupational health and safety. This is with clients particularly in the manufacturing sector who are manufacturing products, who have concerns about the health and safety of their workforce. At the same time, they want to be ensuring that, and they also want to be able to, again, actively manage their on-ramp back into production. So we are actively doing work in that area as well. And so those, I think, are 2 very important areas of -- that have really have been the earliest activity that we've seen come through.

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Samuel England, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [34]

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Okay. Great. That's really helpful. And then the next question was just, you commented on the business development process not changing in terms of it being based on inbound calls. Could you just talk a bit about how much of a slowdown there's been in those inbound inquiries? Is it similar to the level of revenue decline that you've seen? Or are there still a lot of conversations ongoing? It's just people might be a bit more hesitant to commit to staff and anything at the moment?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [35]

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Yes. So with regard to the business development process, yes, I mean, it really hasn't changed in terms of the way that the engagement ultimately is closed, right? It doesn't depend on our employees being out at a meeting, giving a pitch, right? It tends to be done based on -- we are ongoing in contact with our clients, and we are engaged by them directly. But one thing that we have been very focused on is the opportunity, while our people are not traveling, to use technology to be doing thought leadership to be doing using webinars. We've had some excellent attendance and a lot of demand. Our clients are cooped up in a way as well. They are craving the sort of information around COVID-19. And so we've been dedicating resources to ensuring that our capabilities are well articulated and that they're out there and that we are getting those touches in that way. In terms of the incoming project flow, we are absolutely continuing to see opportunities coming in and actual engagements coming in. I would ballpark that for you, Sam, at probably maybe an 80% to 85% sort of level. And this is, again using Rich's caveat that we're only talking about maybe 3 weeks of data, like we were for the utilization, but that's going to be roughly -- and just in terms of numbers of projects. We don't know what the revenue will be on those, but that sort of hit rate is about at that level.

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [36]

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Yes. I think it's a good indication, while that 80% to 85% seems low, it is we are still getting in, let's call it, hundreds because we do such a large number of projects, it means that we're getting in that over 100 new engagements a week that are coming through in that in volume. So clients are still having a new litigation matter and wanting to get us engaged and have a new product that they need to have evaluated and getting us engaged, and they've got a new regulatory issue and getting us engaged. Some of them want it tomorrow and get started, and others want to make sure that the engagement is all set, and they're going to start that work when they can, but we're clearly seeing that. Again, the super majority is still sending us and getting us that engagement to only have 15% or 20% that might be waiting until there is even more clarity, I think, is, in a way, good news for us because we believe those matters will come along as time elapse.

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Operator [37]

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And that does conclude our question-and-answer session for today as well as the presentation. We'd like to thank everyone for their participation. You may now disconnect.