Kratos Defense (NASDAQ:KTOS) & Security Solutions, Inc. (NASDAQ: KTOS) reported robust financial results for the second quarter of 2024, with revenues and adjusted EBITDA surpassing estimates and a strong outlook for the year. The company's diverse portfolio, including the Erinyes hypersonic glide vehicle and Zeus solid rocket motors, has contributed to its success. Despite challenges in personnel recruitment and satellite business segments, Kratos is confident in maintaining a 10% year-over-year organic growth rate and capitalizing on a $12 billion opportunity pipeline.
Key Takeaways
- Kratos Defense & Security Solutions exceeded Q2 financial forecasts with revenues of $300.1 million and adjusted EBITDA of $29.9 million.
- The company's engine and turbine, microwave electronics, and C5ISR businesses outperformed expectations.
- Kratos is expanding its drone manufacturing capabilities and investing in new launch capabilities for the Valkyrie system.
- Despite delays in space and satellite sectors, Kratos anticipates future growth opportunities.
- The company is actively participating in the global defense budget increases and is focused on vertical integration to mitigate supply chain risks.
- Kratos maintains a record $12 billion opportunity pipeline without anticipating significant acquisitions.
Company Outlook
- Confidence in meeting the financial guidance for 2024 with an organic growth rate of 10%.
- Expansion plans in Oklahoma for drone manufacturing and engine production.
- Expecting significant growth in hypersonic and rocket businesses in the US market.
Bearish Highlights
- Technical difficulties in the commercial satellite business have led to a decline in sales.
- Recruitment and retention of personnel, especially turbo machinery and propulsion engineers, present ongoing operational challenges.
Bullish Highlights
- Increased demand for the company's target drone business and positive prospects for training systems and cybersecurity businesses.
- Strategic investments in product development are paying off with milestones achieved in key systems.
- Strong demand in international markets, particularly NATO countries, for air defense and counter-UAS systems.
Misses
- Cash used in operating activities amounted to $2.7 million, and free cash flow used from operations was $15.4 million.
Q&A Highlights
- Clarification that the Prometheus contract has not yet been awarded but is in progress.
- The potential $170 million target drone contract announcement expected in the next 30 to 60 days.
- The impact of Airbus' space business reevaluation considered in the financial forecast, with confidence in the satellite business remaining intact.
- No significant impact foreseen on the business even with potential changes in the administration concerning the situation in Ukraine.
Kratos Defense & Security Solutions, Inc. (NASDAQ: KTOS) has demonstrated a strong performance in the second quarter of 2024, with several business units surpassing their forecasts and contributing to the company's overall growth. The company's strategy of investing in product development has proven effective, with significant milestones reached in systems like the Erinyes hypersonic glide vehicle and Zeus solid rocket motors.
Despite encountering technical challenges in the commercial satellite segment and facing industry-wide hiring difficulties, Kratos remains optimistic about its growth trajectory. The company's participation in the uptick of global defense budgets and strategic focus on reducing supply chain risks further solidify its positive outlook.
Kratos continues to develop its portfolio, with expansions in drone manufacturing and engine production in Oklahoma and new capabilities for the Valkyrie system. The company's diversified offerings and strategic investments position it well to capitalize on the increasing demand for defense systems, particularly in the context of global conflicts where drones and missiles play a significant role.
With a robust opportunity pipeline valued at $12 billion and a clear focus on innovation and market expansion, Kratos Defense & Security Solutions is set to continue its upward trend in the defense and security sector.
InvestingPro Insights
Kratos Defense & Security Solutions, Inc. (KTOS) has navigated a challenging environment to deliver a strong second quarter, with a keen eye on future profitability and growth. InvestingPro data and tips highlight several key financial metrics and strategic insights that may be of interest to investors and industry observers.
InvestingPro Data indicates a substantial 15.91% revenue growth over the last twelve months as of Q1 2024, with the company achieving a 19.59% quarterly revenue growth in Q1 2024. This growth is reflected in a market capitalization of $3.01 billion, illustrating investor confidence in the firm's potential. Moreover, the company's gross profit margin stands at a healthy 25.88%, signaling efficient operations and cost management.
Two notable InvestingPro Tips for Kratos include the fact that the company holds more cash than debt on its balance sheet and that analysts expect net income to grow this year. These insights suggest a solid financial position and an optimistic outlook for profitability. Additionally, the company's liquid assets exceed its short-term obligations, providing further evidence of its financial stability.
It's also worth noting that while the stock has taken a significant hit over the last week, with a 1-week price total return of -8.9%, analysts predict the company will be profitable this year, which could indicate a potential rebound. This is particularly relevant as Kratos does not pay a dividend, highlighting the importance of stock performance for shareholder returns.
For those interested in deeper analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/KTOS, which provide further insights into Kratos' valuation multiples, profitability, and stock price trends.
These financial metrics and strategic tips from InvestingPro not only underscore Kratos' current financial health but also provide a glimpse into its potential for continued growth and profitability in the defense and security sector.
Full transcript - Kratos Defense & Security Solutions (KTOS) Q2 2024:
Operator: Good day, everyone, and thank you for standing by. Welcome to Kratos Defense & Security Solutions Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Now I will pass the call over to the Senior Vice President and General Counsel, Marie Mendoza.
Marie Mendoza: Thank you. Good afternoon, everyone, and thank you for joining us for the Kratos Defense & Security Solutions second quarter 2024 conference call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer; and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of a Safe Harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind, as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance and other forward-looking statements during today's call. Today's call will also include a discussion of non-GAAP financial measures, as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP. With that, I will now turn the call over to Eric DeMarco.
Eric DeMarco: Thanks, Marie. The successful execution of Kratos' strategy and our position as a leading defense and technology hardware and software company is reflected in our Q2 and year-to-date financial results. Kratos' strategy of making internally funded investments in close collaboration with our partners and customers to rapidly develop engineer field and be first to market with relevant products, systems and solutions is working for our customers, partners, shareholders and all of our stakeholders. At Kratos affordability is a technology, which is directly related to our strategy of investing our own money, enabling us to move fast, rapidly developing our products to low-cost mass production in large quantities and for affordable mass. As we watch peer adversaries in both potential and active conflict and at the same time, see adverse DoD budget program cost impacts, Kratos is focused on solving these challenges with systems that are truly realizable, near-term achievable and affordable. At Kratos, we believe that better is the enemy of good enough and that someday in the future, maybe having the perfect capability or solution that is studied and modeled and then studied again is too late, too expensive and an abject failure. Recent examples of Kratos' successful strategy execution with relevant working systems include Kratos' Erinyes hypersonic glide vehicle from initial conception to first flight with the Missile Defense Agency and the Navy in approximately 30 months for an approximate $15 million total development cost. Kratos' Zeus family of Solid Rocket Motors from conception to successful Static Fire in three years for an approximate $23 million investment and now positioned for the MACH-TB program, hypersonic Erinyes missions and several additional customers. Kratos' Valkyrie runway enabling trolley system from conception to first flight in effectively 15 months for a few million dollar investment with Kratos' Ghost Works achieving another important milestone in Valkyrie operational deployment flexibility which we continue to rapidly mature and demonstrate. Each of these relevant Kratos' funded and developed systems are expected to be important contributors to Kratos' business and our future financial growth and profit trajectory, based on specific customer orders and feedback and a representative of the value Kratos generates to our stakeholders. In Q2, Kratos' engine and turbine business continued its revenue growth and profit expansion trajectory, beating its forecast, including engines for drones, missiles, aircraft, space, hypersonics, supersonic and other systems. Kratos is the clear industry leader and independent merchant supplier of engines, propulsion and subsystems in our areas and we expect continued future growth based on customer demand. We recently announced the Kratos small jet engine partnership with General Electric (NYSE:GE) Aerospace, which is incredibly important to Kratos with GEA bringing large-scale engine production experience, capital, intellectual property, customer relations and more. And we are anticipating future production of thousands of low-cost engines in this class for drones and missiles. The GEA partnership is specifically with Kratos' turbine technology business for Small Turbo Fan Engines and is not related to Kratos' TDI Small Turbo Jet business, which has separate locations, technology, IP and target market opportunities. As part of Kratos' arrangement with GEA, where we will be sharing future engine production revenue and profit, Kratos in coordination with GEA will be making an investment and standing up a new low-cost, small engine manufacturing facility as we begin preparation for expected future production. Separately, we are investing and expanding our TDI Small Turbojet Engine production capacity and Kratos' overall hardware and manufacturing capability, including additional additive manufacturing, 3D printing, milling, machining, casting and forging capabilities, which is part of Kratos' vertical integration initiatives. We are establishing new engine production lines related to the many new drone, missile and loitering munitions programs that TDI has, including those that we are designed in on. We are either now in contract negotiations for and we are hopeful to receive an initial 1,000-unit order with a potential 10,000-plus opportunity in the near future. Kratos Turbine Technologies, TDI and our engine and propulsion system business are currently expected to be some of our company's primary future growth contributors. Kratos' Israeli-based microwave electronics business also exceeded its Q2 forecast, including programs supporting multiple Air Defense Systems, including Iron Dome, Iron Sting, Lightning, Arrow Brock and others. Kratos' microwave has also a record backlog and opportunity pipeline. And we are making the investments to increase our facilities, hardware and manufacturing capacity in order to address existing and forecasted increased future demand, including a space-qualified capability, as a result of certain new satellite systems, awards we've received and opportunities. Kratos has deep relationships with Israeli Aerospace Industries, Rafael and Elbit. And we expect our Israeli business to be one of Kratos' future year-over-year organic growth leaders as we support our important Israelian international customers. Global air defense system related demand, including missile, radar, counter unmanned aerial system and space systems also contributed to Kratos' C5ISR business exceeding its Q2 forecast, including Patriot, THAAD, SHORAD, indirect fire or IFPIC, IBCS, CUAS, DE and HPM related systems. Kratos' C5ISR programs backlog and opportunity pipeline is also at record levels, and C5ISR is expected to be an important future year organic growth contributor, as we support our important partners, including Northrop (NYSE:NOC), Lockheed, Raytheon (NYSE:RTN), Dynetics and others in their national security missions. Kratos' C5ISR backlog and opportunity pipeline is at a record level, and we are making the investments necessary to support our partners and customers, including expanding our C5ISR business' hardware and manufacturing capacity, and also including our new Sentinel program facility. Kratos' training systems business is also growing, with increasing margins as certain programs we have been awarded ramp-up and additional new program wins are expected. The global recapitalization of strategic weapon systems, in addition to the weapon system, requires training systems, with Kratos being an industry leader with representative Kratos systems, including M1, Abrams, Bradley, Black Hawk and Air Force Global Strike Command systems. Kratos' training system opportunity pipeline is one of the strongest in our company as we head into the second half of 2024. Kratos' cybersecurity business, one of the company's most profitable is also forecasting future growth, including as the DoD's cyber maturity model certification program, or CMC initiative progresses, with Kratos having some of the industry's most important and critical cybersecurity-related relationships, relevant past performance qualifications and customers. As we have communicated previously, Kratos' space and satellite business, our company's largest is being adversely impacted by the previous extended 2024 CRA, which delayed and pushed certain government programs or existing program funding to the right including programs Kratos is or expects to be under contract on, and we are now also assessing the probable upcoming federal fiscal 2025 CRA, which is likely to begin October 1. Additionally, our satellite business is also being impacted on the commercial side by the highly publicized technology and other issues being experienced by the manufacturers of software-defined satellites, which is delaying the award and/or deployment of the related satellite system ground communication infrastructure, including Kratos. However, we are now in source selection on several DoD national security and other program opportunities, certain of which we expect to receive either later this year or early next which should put Kratos' satellite business back on a growth trajectory. With a large number of LEO, MEO and GEO constellations and satellites planned for or expected to be launched, we remain confident in the future prospects for our satellite business, including our first-to-market virtualized open space software platform, which is a clear competitive differentiator for our company. Increased demand for our target drone business continued in Q2, with bookings of nearly $130 million and a book-to-bill ratio of 1.5:1 for the quarter, and Kratos' Unmanned Systems bookings being $290 million for the past 12 months. Global weapon, air defense system and training demand I referred to is contributing to the increased Kratos target drone demand which is expected to continue, both domestically and internationally, as air defense systems, missiles, radars, ships, satellites, et cetera, need to be exercised against and war fighters trained against representative targets. Kratos' target drone business is expected to be an important future organic growth contributor for our company. On tactical drums. As has been increasingly reported over the past few weeks, including just yesterday, budgets are tight and are expected to get tighter, affordability matters and is going to matter even more in the future. And we believe that potentially maybe better someday is the enemy of good enough in flying today, and Kratos remains confident in our success. Apollo is now under contract and Athena has been down selected and is expected to be under contract this quarter. Kratos Valkyrie is now in source selection on certain opportunities, so I am not able to make any specific program, opportunity or customer-related comments on Valkyrie at this time. I can say that we have completed our planning for the next serial production run of Valkyries including with our key suppliers, and we are ready to move forward once we have certain additional information on the potential opportunities, including the final version and capability mix of the aircraft. We are now planning the expansion of our Oklahoma drone manufacturing capacity, including a potential additional facility, with the expansion being for both tactical and target drones including certain of our drone systems are utilized for multiple applications or missions based on mission configuration of the system. With the successful Valkyrie flight from the Kratos Trolley launch system, Kratos' Ghost Works is now working on an additional Valkyrie launch capability variant, also in close coordination with the customer. The Valkyrie Trolley launch system funded by Kratos but in close coordination with the customer community, establishes Kratos is the only high-performance jet drone system provider with rail launched runway independence, traditional runway capability and soon an additional launch capability. Kratos Ghost Works is also looking ahead at new and evolving weapon systems, their applicability to unmanned systems, including Valkyrie, the impact of artificial intelligence integration and the potential game-changing impact of a system like this in a pure conflict. Kratos and Shield continue to successfully execute the strategy with Shield AI routinely flying Kratos' high-performance jet drone systems, including an incredible mission in just the past few days. From my perspective, what Shield is doing is potentially transformative and game changes, with Shield taking advantage of Kratos having the only high-performance jet drones that have performed hundreds of actual flight missions with Shield's artificial intelligence system flying and flying and learning and learning with the highest performance jet drones in the world, Kratos. The Marine Corps Miramar Air Show is coming up this September here in San Diego, and in addition to an actual Valkyrie, and actual Air Wolf, a Mako aircraft, et cetera, we intend on displaying several other high-performance Kratos jet drone aircraft at the show and also potentially a new Kratos system, if we can. Defense budgets are increasing globally, including in the areas of air defense, missiles, radar, space, satellite hypersonic engines, propulsion systems, C5ISR, microwave electronics, drones, cyber and training systems, with Kratos being a hardware and software rich technology company, addressing each of these areas and many others. Years of underinvestment in the defense industrial base is and will need to be corrected, and Kratos is participating in this buildup and the recapitalization for the strategic weapon systems. We are making the investments and vertically integrating selectively where it matters to reduce supply chain risk and to also reduce cyber and physical related security risks as we need both surety and security with our supply chain. Producing hardware in large quantities for defense and national security applications that must reliably perform at an affordable cost is hard, and it's a key differentiator for Kratos to our partners and our customers. As you know, the 2024 budget continuing resolution went through March of this year and another potential 2025 budget continuing resolution is expected to begin October 1 just two months from now. Irrespective, we remain confident in our 2024 financial guidance, which we affirm today and we also remain confident in our expected future year-over-year organic growth rate of 10% with the potential to exceed it. As we reported, Kratos' opportunity pipeline is a record $12 billion, and we are in pursuit of certain new large programs as a prime, including classified opportunities in our Unmanned Systems business and our space, cyber and training businesses, which are requiring significant Kratos bid and proposal and related investments including one opportunity, where Kratos' investment in the second half of 2024 is expected to be approximately $2 million for this one opportunity. We have no significant acquisitions anticipated only may be potentially some very small tuck-ins. Operational challenges include the obtaining and retaining of qualified, experienced personnel including those willing and able to obtain national security clearances and the related cost of these individuals. Ms. Deanna?
Deanna Lund: Thank you, Eric. Good afternoon. As we have included a detailed summary of the second quarter financial performance as well as the initial third quarter and affirmation of the full year 2024 financial guidance in the press release we published earlier today, I will focus on the highlights of my remarks today. Revenues for the second quarter were $300.1 million, exceeding our estimated range of $265 million to $280 million, which includes higher-than-expected performance and delivery across most of our businesses, with notable strength in our unmanned systems, turbine technologies, microwave products and C5ISR businesses. We made delivery on an international Middle Eastern drone program during the second quarter, which contributed revenues of $17.4 million, which was originally forecasted to be delivered in Q3. As we have discussed on previous calls, revenues under certain international contract awards, due to the contract terms and conditions are recorded as delivered rather than over time on a percentage of completion basis. As a result, the delivery under a contract of size, such as a delivery this quarter can skew the quarter of delivering over quarter sequential trends. Consolidated organic revenue growth was 16.7% for the second quarter, including the impact of the Sierra Technical Services, or STS acquisition on a pro forma basis as if acquired at the beginning of 2023, driven primarily by organic growth in the unmanned systems business of 61.8% as well as notable growth in the Turbine Technologies, Microwave products and C5ISR businesses in our KGS segment. Adjusted EBITDA for the second quarter of 2024 was $29.9 million, exceeding our estimated range of $20 million to $23 million, reflecting the additional revenues as well as a more favorable mix of higher margin revenues with notable strength in Unmanned Systems, Turbine Technologies, Microwave Products and our C5ISR businesses as well as higher margin software and data-related content from our satellite business. Cash used in operating activities was $2.7 million, which includes the impact of working capital requirements related to increases in receivables related to the revenue growth, increases in prepaid assets resulting from advanced payments or deposits required by key suppliers and the reduction of deferred revenue balances or prepaid customer deposits as work has been performed and delivered. We are seeing a trend in our supply chain where certain of our vendors are requiring prepayments or deposits to secure our position, which is adversely impacting the timing of our working capital requirement to deliver our products and solutions. Free cash flow used from operations for the quarter was $15.4 million after funding of CapEx of $12.7 million. As we planned, we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our Microwave Products, Rocket Systems and hypersonic businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery, equipment and systems. We are also continuing to manufacture the two production lines in Valkyries prior to contract award. Consolidated DSOs or days sales outstanding continued to improve from 107 days in the first quarter of 2024 to 103 days in the second quarter of 2024. Contract mix for the second quarter was 70% fixed price, 24% cost plus contracts and 6% time and material contracts. Revenues generated from contracts with the US Federal Government during the second quarter of 2024 was approximately 65%, including revenues generated from contracts with the DoD, non-DoD federal government agencies and FMS contracts. In the second quarter 2024, we generated 15% of revenues from commercial customers and 20% from foreign customers. An operational priority remains the hiring and retention of skilled technical labor across the company with total Kratos head count of 4,012 at the end of the second quarter as compared to 3,986 at the end of the first quarter. Now moving to financial guidance. The guidance we provided today includes our expectations and assumptions for our supply chain, execution and for employee sourcing, hiring, retention and the related costs. We have also taken into consideration in our firm fiscal 2024 guidance, a federal fiscal year 2025 continuing resolution, authorization commenting on October 1, 2024 and under such expected CRA, no new program contract awards, no increases in existing production contract funding and no transition from program development to production. Our guidance also reflects the impact of certain performance and deliveries made in the second quarter of certain of which had originally been estimated to be executed or delivered in the third quarter of 2024, the most notable of which was the delivery of the international drone program in the second quarter, which has skewed the sequential quarter trend in our Unmanned Systems business. We are affirming our annual guidance with revenues for our Unmanned Systems in the range of $265 million to $275 million, up slightly from our previous range of $260 million to $270 million, with an organic growth rate of 22% to 27% over 23% on a pro forma basis with STS, as if acquired, at the beginning of 2023. Our range for KGS business is $860 million to $875 million, slightly down from our previous range of $865 million to $880 million, which reflects increased weakness in our commercial satellite ground equipment business, resulting from the impact of the current industry technical challenges encountered in the manufactured software-defined satellites that have delayed satellite launches and have had a resulting delay in the deployment of our commercial satellite ground equipment, offset by increasing demand for air defense and related systems in our microwave products, Triton Technologies and C5ISR businesses. Our reaffirmed EBITDA range of $102 million to $107 million includes the expected mix as well as additional $2 million in costs related to the large proposal in our space Cyber and Training business, which Eric referred to previously. Eric?
Eric DeMarco: Thank you, Deanna. We'll pass it to the moderator now for questions.
Operator: [Operator Instructions] It comes from the line of Michael Ciarmoli with Truist Securities.
Michael Ciarmoli: Hey, good evening, guys. Thanks for taking the question. Eric, it sounds like you're making a lot of progress on a lot of programs. I guess, just on Valkyrie, you mentioned that one close to source selection. You're moving forward with the second production lot. Can you just give us maybe some sensitivity, I don't know if you or Deanna, if you do get those or if you do get a contract and you put some planes under contract, how that would impact the current guidance, maybe the cash flow and even the revenue impact?
Deanna Lund: Sure. So Michael, so from a revenue perspective, when the contract is awarded whatever the number of aircraft that the award is under contract for those costs that are currently in our PP&E would be transferred to effectively inventory and unbilled receivables and revenue would be recorded for those systems. So if it's, say, five aircraft, then that are in whatever state of completion, those costs would be transferred and then the revenue would be recorded accordingly for whatever percent complete they are at that time. From a receivable or a collection perspective, it will depend on the billing milestones that we are able to negotiate with the customer. Depending on if we can get a payment upfront, we obviously always endeavor to do that, but it will depend on what we're able to negotiate.
Michael Ciarmoli: Okay. And do you think that's a -- is that a second half kind of development and signing or still hard to tell at this point?
Eric DeMarco: It's possible second half. It's probable 2025. No comments. That's where it sits right now, which is why we're just being cautious in our guidance.
Michael Ciarmoli: Got it. And Eric, I think you guys have had -- you've talked to different variants, different sizes. I know you -- in the prepared remarks, you talked about the trolley system. It sounds like you've got landing gear in place for Valkyrie to kind of -- you've secured a vendor maybe there. Can you talk expectations about what maybe the customer is looking for? And it's kind of runway independents no longer the desired? Or do you just want to give the customer options?
Eric DeMarco: It's the latter, Mike. We're definitely giving the different customers who have different priorities, options. The path we have taken now where we step today with rail launched drones flying, runway launched drones flying with the trolley, as you indicated, very soon, we're going to have a Valkyrie with its own internal gear, which will also have internal weapons flying. And then we have another one to work is working on coming also -- we will have the entire portfolio flying demonstrated for the various customer community.
Michael Ciarmoli: Okay. Got it. Last one for me. The contract in place with GE Aerospace, I think that replaces a previous joint development, but this one includes kind of a full-scale engine production. Have you spoke to? Or could you speak to the potential economics there You know, just maybe what that program could look like as it ramps, as it gets into full production? Do you have customers secured already?
Eric DeMarco: So on -- I'll take the last part first. On the customers we have, we have multiple we, us and General Electric. We have multiple customers that have been working with us for the last several months, they are in the loop and they are waiting for these engines. So that is why we, us and GE we're very excited about this because with the technical capability and the cost point of these engines, which we'll be here very soon. We are going to be -- and every time I say we assess on them. We're going to be first to market with what we believe is a game-changing family of systems here. The economics are very fair. I can't I can't discuss it yet because we're both still under an NDA. But we are, and I believe they are extremely happy with what the economic split is going to be on the engine production. And as you know, at Kratos it's better to have a big part of something that all of nothing, and we were confident that with GE with potential customers and the big air framers, the big missile guys, that significantly increased or assured our probability of success.
Michael Ciarmoli: Got it. Perfect. Thanks, guys. How are they here?.
Eric DeMarco: Yes.
Operator: Thank you. Our next question is from Peter Arment with Baird.
Peter Arment: Yes, good afternoon, Eric and Deanna. Eric Congratulations on the Iris hypersonic test flight. Could you maybe talk about how you kind of see future subsequent tests or flights? And how that can play out as we get into maybe even 2025 as this turn into kind of a backlog growth story. And, obviously, you have another vehicle that’s also part of that program.
Eric DeMarco: Yeah. So Erinyes is a hypersonic glide vehicle and it's at least the current public version as a test bet. And hypersonic testing is something that is in incredibly high demand in the United States. There are not enough test assets. And if you look at some of the -- what the government agencies say, they would like to test, fly every week or two. Well, we now have that vehicle. We've received additional orders since that flight. This will be one of our primary growth drivers. This is a new -- obviously, new for us, new for the industry this will be one of our primary growth drivers. Beginning next year, I believe under the MACH-TB program and under an additional program that we have. And then we're going to be talking, hopefully, maybe a little earlier than this time next year, about a second hypersonic vehicle of ours that's going to fly that will be an additional market for us. So this is a very important for us. I'm really glad you asked the question.
Peter Arment: So do you anticipate a ramp-up in test activity next year and that have a similar revenue profile?
Eric DeMarco: Absolutely.
Peter Arment: Great. And then just on your engine businesses, obviously, a lot of excitement around both of them TDI and Florida Turbine. Can you talk a little bit about how quickly you can scale up? Because I know that the Air Force has kind of put out an RFI on an RFP on the ERAM, Extended Range Attack Munition that's specifically for Ukraine and it feels like that's right in the wheelhouse of TDI, but you've talked about your other partner following and jointly developing systems there. Can you maybe talk about how quickly you can scale up some of these opportunities?
Eric DeMarco: Yeah. In addition to ERAM, some of the other publicly available ones are MACE, ETV [ph], FrankOne [ph] and CAMs. So those are all out there. There is a handful of other ones in addition to those, virtually all, which need propulsion system in the family in the affordability class of TDI. And those are -- and then, of course, there's Power JDM. We have been working on our production facility and our manufacturing capability. So we will be able to do hundreds, if not 1,000 or two a year. That's what we're getting ready for. And if you take a look at some of those programs I mentioned, the quantities are there. If we just get our fair share of those, which we believe we will, based on our communications with the customers, the Airframers and our designed in positions on certain of these. So we've been getting ready for this, and those are the numbers that we're preparing to produce at annually.
Peter Arment: Got it. Last one for me. Just could you talk a little bit about your bid pipeline expanded by $1 billion this quarter, went up to $12 billion. What was driving that? Thanks.
Deanna Lund: Yeah. So Peter, it's in our unmanned group, as well as our space and training group and our defense rocket systems group. It's across those three businesses. So it's not one specific area, it's across three.
Peter Arment: Thanks, Deanna. Thanks, guys.
Deanna Lund: Thank you.
Operator: Thank you. Our next question is from the line of Sheila Kahyaoglu with Jefferies.
Sheila Kahyaoglu: Thank you, guys, and great quarter. Few questions for you, Eric and Deanna. If we could start on that last subject, Peter was just talking about Zeus and Erinyes. How could we think about that hypersonic activity pipeline of a billion dollars? How could we think about that progressing over the next five years? Would it be equally weighted? Or how do we think about that opportunity of materializing?
Eric DeMarco: Yeah. If things come together the way we see them coming together, next year it could, in 2025, it could be an incremental 50 million to 100 million. Then in 2026, it could be an incremental 100 million to 150 million. And then it could be 150 million to 200 million a year thereafter.
Sheila Kahyaoglu: Thank you, Eric.
Eric DeMarco: That's what the manifest looks like.
Sheila Kahyaoglu: Thank you for that. What do you need to see in order for that to happen?
Eric DeMarco: Budget's in place. No significant changes to the priorities of this customer set. And I'm saying this semi-facetiously, and global peace doesn't break out. So Sheila, we're in a really good position because we're first to market with Zeus, Aeronese, and another system that's not public yet. We're in a great spot and these things are flying.
Sheila Kahyaoglu: Yeah. No, that makes sense. And in Unmanned, your profitability was really good year-over-year. Is that sort of the level we should expect going forward? Or was this one time?
Deanna Lund: It will depend on the mix and from a development perspective and the leverage off of the fixed infrastructure costs. Since we did have a sizable international drone delivery this quarter of $17.4 million. So that did drive some of that leverage off of the fixed infrastructure. But it will also depend on the mix of the programs on a quarterly basis.
Sheila Kahyaoglu: Got it. Thank you so much.
Eric DeMarco: Thanks. Thank you.
Operator: Thank you. Our next question comes from the line of Mike Crawford with B. Riley Securities.
Mike Crawford: Thank you, just a couple of clarifications first. When you're talking about readying for your next serial production spiral of Valkyries, would that be the third such spiral? Are you talking about the, you're not talking about the second one, you already began, right?
Eric DeMarco: The third.
Mike Crawford: Right. And then, thank you. And then you talked about expanding Oklahoma for tactical and target drones, but isn't that also where you're standing up the affordable engine production with GE Aerospace?
Eric DeMarco: Mike, I'm smiling because I saw that report, that news article. We -- so our drone manufacturing facilities are in Oklahoma City, and that's where the expansion for the tactical and the target drones will be, both in the existing facility and a brand new facility we've already identified and we're moving out on. Outside of Tulsa, Oklahoma is where our existing engine business is, and it is probable that, that is where we will be standing up our -- one of our low-cost turbofan with GEK and the primary reason for that is because the workforce. We have a very experienced workforce with engines there already. We're networked. We've got the supply chains. We -- it looks very promising that that's what we're going to do it.
Mike Crawford: And would that workforce also include workers directly or indirectly supplied from GE aerospace?
Eric DeMarco: I can't -- that I can't get into that yet until the final definitive agreement is executed and then we jointly will communicate that, I'm sorry.
Mike Crawford: Okay. That's fine. And then switching gears a little bit. Could you maybe update us on the lay of the land and solid rocket motor propulsion, where you stand versus competitors, some of which seem to have claims perhaps above means?
Eric DeMarco: Yes. That's actually an excellent question. Rocket motors are hard, and solid rocket motors are extremely hard. And the lay of the land right now is there are two that are qualified in the United States, Aerojet and ATK, [indiscernible] ATK and L3 Aerojet, all right? Neither one of them are really a merchant supplier because they're embedded in a prime. And as you've indicated, there are a number of guys out there. Some of them were like so Ursa Major or Crossbow or Adronus, which is part of [indiscernible]. There's a couple of other ones that are coming that they've said they're going to get into this. But Mike, this is very hard. And unless the rules change, the qualification rules, it takes years to get qualified and it takes years to get qualified and designed and on a system flight testing, et cetera. And so the demand is definitely there. There are some guys coming. I will tell you that because of the nature of our business and our customers', being a merchant supplier of solid rocket motors in the United States is something we continue to look at very hard because we would be a true merchant supplier, and we're experts in this area. And so that's something we're definitely looking at relative to our partnerships with the primes.
Mike Crawford: Okay. Thank you. And then just one final one, because we haven't really talked about CCA on this call, but at some point, we'll be moving from more of the exquisite to like a round two that's something more accretable? And I think another article I read was that Ghost Bat now is not even being designed to carry weapons. So, -- versus -- I think you have multiple platforms that have distributed that ability, right?
Eric DeMarco: Correct. I saw that article that Boeing (NYSE:BA)'s Ghost Bat does not have -- carry weapons capability, which caught my eye, of course, I know what caught industry's eye. Yes, multiple of our aircraft carry up deployed weapons -- and including Valkyrie, of course. And as I mentioned in the prepared remarks, we are -- we remain laser-focused on affordability, attritability and hitting cost points of affordable mass can really be achieved with things that are flying today, not potentially seven years from now.
Mike Crawford: Okay. Thank you, Eric.
Eric DeMarco: Yes.
Operator: Thank you. Our next question comes from the line of Seth Seifman with JPMorgan.
Q – Rocco Barbero: Good afternoon. This is Rocco on for Seth.
Eric DeMarco: Yes
Q – Rocco Barbero: Looking at the Q3 guide, even -- the $17.4 million of international target drone deliveries, the guidance is for sales to decrease next quarter sequentially. What is driving that decline?
Eric DeMarco: So primary decline in that is in the commercial part of our satellite business. As I've mentioned and it really hit the press in the last three or four weeks. The manufacturers of the software-defined payload satellites are having some incredible technical difficulties and the satellites are not going up. So with the satellite, and Kratos is open space software defined virtualized ground specifically designed in part to communicate with the software design satellites -- I'm talking on the commercial side. And as those satellites are not going up, the operators, and again, there was an incredible article in this just in the past few days that's out there that, of course, we've known. The operators are slowing down their supply chain, including the ground infrastructure guys like Kratos are going to communicate with them. So we're designed in. We've won the slots but the operators are making the right business decision by not deploying until the satellites go up. And so we are being very cautious in our assumptions in the commercial side of our space business. It's being offset by the government side, which is doing great, and it's being offset by other businesses in KGS, which are growing 15%. But that's the primary reason we're going to be very cautious there until some of these commercial satellite issues get resolved.
Q – Rocco Barbero: Right. That makes sense. Then has the outlook for combat drones and Kratos' position in the market changed meaningfully over the last few months?
Eric DeMarco: Hasn't changed meaningfully. I believe that we are in a better position. We were -- I believe we've been in a great position. I believe we're in a better position today than we've ever been in. Let me tell you why. Jet drones are happening. They are happening. And when you look at the Pacific and the Ranges that are going to be involved in survivability or lack of survivability, which will be quantities, Kratos' class of jet drones is the answer. There are more and more war games that are becoming public, reports that are coming out. The Mitchell Institute just put one out. There was an incredible report that just came out last night on this, that quantities we'll do far better deterring and must be defeating China than exquisites or semi exquisite. And we have been focusing on extendable and attritable drones and that's our sweet spot. And they're low, low cost, and they're very lethal and they're very survivable, and I think we're going to win.
Q – Rocco Barbero: Great. Thank you, guys very much.
Eric DeMarco: You got it.
Operator: Thank you. Our next question is from Ken Herbert with RBC Capital Markets.
Q – Ken Herbert: Hi, good afternoon, Eric and Deanna.
Eric DeMarco: Hi, Ken.
Deanna Lund: Hi, Ken.
Q – Ken Herbert: I wanted to just follow up. Can you give any indication, I would assume it's factored in the CapEx guide, but the investment you're making specifically in the turbofan engine capacity as you look to scale that up?
Deanna Lund: Yes. That's roughly about $10 million to $12 million for the year.
Ken Herbert: Okay. Perfect. And you've obviously had a step-up in CapEx this year to reflect some of the incremental investments and opportunity. Is it -- can you comment on next year? Does CapEx based on current plans step up again next year? Or is it contingent upon sort of contract wins? Or can we view this year as sort of the peak CapEx year?
Deanna Lund: It is contingent on contract wins. However, I believe there is I would say in the $70 million to $80 million of the CapEx guide for the year, I would say $40 million to $50 million of that is what I would call investments that are – I don't want to use were nonrecurring, but that's probably the best word at this point. So what I see is our maintenance CapEx, it's closer to, call it, $35-ish million a year. But depending on contract, awards and opportunities, there could be opportunities in 2025 that we would make investments for.
Ken Herbert: Okay. That's very helpful, Deanna. Thanks. And just maybe, Eric, as I look at just such phenomenal growth internationally, I guess, specifically in NATO countries, can you just level set us on, what percentage of your sales are into maybe NATO countries or outside of the United States more broadly? And what kind of growth you're seeing in that this year and potentially into next year?
Deanna Lund: Yes. So our international revenues are about 20% for the quarter.
Eric DeMarco: And the growth there in Israel and in systems that are going to NATO countries that we build. So these are air defense systems, radar systems and counter UAS systems. It's very strong. So Ken for a -- for a data point, and I talked in detail about our space business, putting our space business aside, KGS grew -- is growing 15% organically. A significant part of that is our C5ISR business where we work with Raytheon on Patriot. We work on FAD, we work on a number of counter UAS systems. We're working with Dynetics on indirect fires or enduring shield, all of these air defense systems. And in addition to that KGS part is where our Israeli business sits, where we are supporting Iron Dome, Arrow, Barak, Lightning, Iron Sting, virtually every missile and radar system. And so they are very, very strong. The backlog is very strong and the order book potential for the next two years is not only strong, but it's increasing.
Ken Herbert: That's great. So I guess it'd be fair to say that the international piece of the portfolio probably seems much better growth than sort of the 10% you've talked about for the company over the next few years organically?
Eric DeMarco: Yes. But – yes, but. Next year with our partner, Northrop, which is one of the best partners we have. Sentinel is going to start ramping for us in a big way, very significantly, tens and tens of millions incrementally which of course is U.S.-based. And yeah, on the target drones, I was going to say target drones, but you're absolutely right on that. It's a mix of international and the other one, Ken, our hypersonic business. Our rocket business, as I answered the earlier question. No later than the second half of next year, a significant step-up is expected, significant. I went through the numbers. And so 25 -- definitely 26, 27, that is going to be all U.S. and it's going to be significant. So the mix -- my point is the mix may change, because of these programs we've won.
Ken Herbert: Great. Thanks, Eric. Very helpful.
Eric DeMarco: Thank you.
Operator: Thank you. Our next question is from the line of Josh Sullivan with The Benchmark Company.
Josh Sullivan: Hey. Good evening. Eric, Deanna.
Eric DeMarco: Good evening, Josh.
Deanna Lund: Hi Josh.
Josh Sullivan: As far as the GE relationship, we hear a lot about tightness in forgings and other aspects of the aerospace supply chain. Do you see this as a hurdle for the GE partnership engines? Or are your designs, just given their lower cost able to circumvent some of these issues, cater some of these higher volumes?
Eric DeMarco: Yes. Two things. Number one, our designs are definitely able to circumvent some of the issues. However, one of the key attributes and one of the key reasons we did this with GE is because they're the big dog. They're the preeminent, and they have priority. We call them kryptonite parts, with kryptonite vendors on very specialized subsystems and components for the engines via their supply chain and their relationships. That's an incredible value they're going to bring us. It not only brings surety to us but is also bringing surety to the missile guys. These engines are going to go in. That if we get a multi-hundred-a-year order, we're going to be able to source it. And we're going to be able to build it. And with General Electric behind Kratos or Chronic Kratos, if you want to look at it, that's what's closed in the deal here.
Josh Sullivan: Got it. And then just as far as the loitering munition market, given the increasing use in the battle space, you mentioned you were in contract negotiations. But what's your sense of how quickly this market ramps?
Eric DeMarco: I think it's possible by the end of this year; it's probable it will happen next year. We're going to begin to get the initial production orders on turbojets. So think 200 pounds of thrust and below. And it's probably going to start out at a few hundreds and then it's going to ramp up. Again, I would go through some of the program names. If you take a look at what they're talking about, it's going to ramp for us to several hundreds and potentially 1,000 or so a year over the next several years. And that just ties into the -- I have a list here in front of me; again, I went through some of them -- the opportunities that are out there, most of which, if not all of which, were either designed in or we're working with because we have flying engines. And our cost points are very, very competitive.
Josh Sullivan: Thanks for the time.
Eric DeMarco: Thank you.
Operator: Thank you. Our next question comes from the line of Joshua Zoepfel with NOBLE Capital Markets.
Joshua Zoepfel: Hi. Good afternoon, guys. Josh turn up for Joe. So you guys basically answered pretty much all of my questions. But just kind of more for a couple of housekeeping ones. You guys talked a little bit about the Prometheus contract you guys were awarded. Is there kind of any progress on that contract? Is it still kind of expected to be contracted by the end of the year?
Eric DeMarco: Yeah. If I said that we had been awarded Prometheus, I misspoke and I apologize, I don't remember doing that, but if I didn't, I apologize. Prometheus is an opportunity that we are working on, okay? We are getting there. We're in the red zone football term, but it's not complete yet. So again, I apologize for that misunderstanding.
Joshua Zoepfel: Okay. That's helpful. Thanks for clearing that up. And kind of a couple of months ago, or you're talking about in the space satellites, reevaluate space business. Is there any more impact to that reevaluation that it has on Kratos itself are satellites being pushed even more further to the right due to that?
Eric DeMarco: And I want to make sure I understand your question. Are they being pushed to the right because of what
Joshua Zoepfel: The Airbus reevaluating its base business as a whole.
Eric DeMarco: Got it. I got it. Yes. Yes. So what's going on with Airbus is definitely impacting the ecosystem and it's definitely impacting Kratos. And I feel bad for them and I really hope to get this stuff figured out. I am highly confident we have taken that into consideration in our financial forecast. And as Deanna and I tried to articulate today, we're very fortunate here at Kratos that we have six divisions and 5.5% of them are ripping. And the half that is not is tied to commercial software-defined payload satellites right now, which we've taken into consideration. The management team over there in our satellite business, I got to tell you, they have done an incredible job on the resource allocations, to our national security programs, our defense programs and some other things they're working on, like our global space demand awareness network to hold court. I mean, reading, other companies based businesses and what's going on with them, which is tied directly to what your question is. Our team is far outperforming them. And so we've taken it into consideration, as soon as these technical issues with some of these software-defined payload satellites get fixed and the operators can get them, and they get launched, we're going to be in fantastic shape.
Joshua Zoepfel: Okay. That's helpful. Yeah. Thanks for time guys.
Eric DeMarco: You've got it.
Operator: Our next question comes from the line of Pete Skibitski with Alembic Global.
Pete Skibitski: Hey, good afternoon, guys. I was just wondering if you could quantify the size of the Apollo contract. You said it's on contract now and then was wondering about timing if there is the potential for a larger follow-on in the future?
Eric DeMarco: Right. So it's -- think of a couple of tens of millions right now. And that's over a couple of years. And if we're successful and we us and this customer, there is absolutely the opportunity for a larger follow-on here.
Pete Skibitski: Okay. Okay. The only other one, I think I know the answer to this, but if we do have potentially a change in administration next year and there's less financial support for the effort in Ukraine. I was just wondering, do you guys have any direct exposure there? Or maybe would you consider kind of near direct exposure?
Eric DeMarco: So our primary exposure relative to what's going on in the Ukraine has to do with the NATO countries rearming. And I saw the other day that virtually all of them now are over the 2%, and they're increasing with some of them at 4% and 5% like Poland. My opinion is if the Ukrainian situation gets resolved, that in the NATO countries minds does not address the primary threat, which is Russia. And so I don't believe it impacts us or our customers, our partners on the air defense systems. The number of air defense systems surface-to-air missile systems, counter UAS systems that have been ordered and that are coming down the pipeline. These are just the ones that we're involved in. It's stunning to me. It's stunning. And so I don't think I don't think a resolution in the Ukraine impacts us because the primary threat or the inherent threat will still be there.
Pete Skibitski: Okay. I appreciate the color. Thanks, guys.
Eric DeMarco: Yes.
Operator: Thank you. Our next question comes from the line of Andre Madrid with BTIG.
Andre Madrid: Hi, everyone. Thanks for taking my question. Looking at the strong unmanned book-to-bill for the quarter, I mean, with the [indiscernible] contract, how much, if at all, of this contribution for bookings was from tactical drones?
Deanna Lund: It was primarily all on the target drone side.
Eric DeMarco: Yes. Well, on a relative basis, it was small. That mix will probably change in either Q3 or Q4. But target drones are doing very well. We're probably going to be in a position relative to that to make an announcement of our largest target drone order ever in the next month or so. We just got it.
Andre Madrid: Got you. Got you. That's helpful. And then sticking on the men side, I mean looking at what you guys announced with the GEK Engine, you guys are saying that's probably going to be in the thrust range of probably less than 3,000. According to the RFI as released on CCA, they're aiming for something to between 3 and 8. I know you guys said you could scale up, but kind of piggybacking off of Peter's question earlier, how easy is it to scale up?
Eric DeMarco: I'm sorry on both of those. I can't comment. I just can't do it. And I'm not affirming what you saw. I just can't comment on it. I apologize.
Andre Madrid: No, no. No worries at all. And then my last one is pivoting away towards GS just I know you noted hiring at the firm level, but how has that been looking and progressing more specifically at the -- on the KTT side because I know that, that was pressure point previously.
Eric DeMarco: Yes, that's a good question. It is very difficult. Turbo machinery engineers, propulsion engineers tying directly into the discussion we've been having here this afternoon. They are an incredible demand, and many of them don't exist anymore. They retired, and they're fishing. And this is very challenging, and it's very expensive to hire them and keep them both in cash and equity at the executive level. So this is a challenge. It remains a challenge and I believe it's going to continue to be a challenge for us and the industry.
Andre Madrid: Got it. Thank you, both.
Operator: Thank you. [Operator Instructions] And it comes from the line of Trevor Walsh with Citizens JMP.
Trevor Walsh: Great. Hi team. Thanks for taking my questions today. Eric, maybe just a follow-up, similar line of questioning for your -- based on the Ukraine question you got earlier, but maybe applying that to Israel. It sounds like the Israeli business was strong in the quarter. Not ask you to necessarily predict what will happen there. But if things go more towards the kind of positive side around leasing those tensions there, what either -- what prognosis do you have around just the forward-looking part of that business, either particularly in Israel or even similar systems being deployed in other countries, lessons learned around just making sure there's enough kind of munitions that are stored and kind of ready for -- ready to go or if things kind of break out again, just kind of what's your outlook on that, just given the -- again, the more positive scenario of things easing.
Eric DeMarco: Yes. So I'll give you my -- this is my opinion, Eric's opinion. My opinion is that the quantity of munitions that have been expended has been incredible, years worth of inventory. Years and years worth of inventory have been expended. And that must be replenished in order to maintain, but consistent defense posture. So I don't see in the foreseeable future years, any abatement in demand as you're indicating and that would be wonderful if resolution would happen, peace broke out, the significant increases we're seeing month-over-month over month will probably flatten out. But that is at an exponentially higher ratio than it was before October 23. So that's specific to there. Outside of there internationally, the lessons learned, the lessons learned is that -- look at the first potential strike that I ran trying to do on Israel. I mean it came out that there were 300. It was actually over 500 munitions, missiles and drones, ballistic crews and drones were fired in Israel, and that one Mirage. Okay. In the Ukraine, over 10,000 drones on one side are being shot down a month. The vast majority of those are not in our class, they're Class 1, 2 or 3, but a significant number of them are jets. Okay. The lesson learned from there is quantities have a quality all of their own. And those quantities can offset lack of defense budget of countries that can't afford exquisite systems. And so their exquisite systems will be thousands of something. And we're seeing that. We're seeing that in direct orders, and we're seeing that in orders with our prime partners where we build major subsystems. So I -- as I've said several times, this is like into the Reagan buildup. This is 1981. We're in the second inning. And the difference is that there has been such a consolidation in the defense industry, there are just very few of us left that can do it. And as I said in my prepared remarks, building hardware for defense or national security applications is hard. Building it in mass production is even harder. And the experienced guys like Northrop and Lockheed, Raytheon and Boeing and Kratos, we know how to do it, and that stuff has got to work, which I believe is one of the reasons in a shitty situation for the foreseeable future, our business is going to be very strong.
Trevor Walsh: Got it. Really appreciate the color. Then Deanna, maybe one quick follow-up for you. Services revenues looks like it stayed pretty flat quarter-over-quarter, but then margins had a nice little bump up about 200 basis points. Just wondering if there was anything in particular that drove the improvement there on the margin side? Thanks.
Deanna Lund: Nothing in particular, it was just what the mix was for that quarter that drove that margin expansion.
Trevor Walsh: Got it. Okay. That’s all for me. Appreciate it. Thanks.
Eric DeMarco: Thank you.
Operator: Thank you. And our last question comes from the line of Pete Skibitski with Alembic Global.
Pete Skibitski: Yes. Sorry to extend the call. But Eric, I would just want to de-conflict something you said a little while ago about a month from now about your largest target drone contract over. I don't know if we've talked about this before, but earlier in the year, I think DISCA had an announcement about a potential target order from Korea for their ships.
Eric DeMarco: Right.
Pete Skibitski: It wasn't just -- it wasn't just BQM-177, it was also payouts [ph], but it talked about like $170 million order. Are we talking about the same thing? Or is that different?
Eric DeMarco: Pete, that's a great question. You are on your game. It's a separate order and a separate customer, and it's a different platform.
Pete Skibitski: Okay. Any -- I know this does things weigh in advance, any time frame on that particular opportunity?
Eric DeMarco: I hope we won. We got it sole source. I'm hopeful that we will be able to announce it next 30, 60 days. I'm hopeful, but we've received it.
Pete Skibitski: Okay. That's great. Congratulations. Thanks guys.
Eric DeMarco: Thank you and it's a good question.
Operator: Thank you. And this concludes the Q&A session. I will turn the call back to Eric DeMarco for final remarks.
Eric DeMarco: Great. Thank you, all, for joining us, and we'll chat with you at Q3.
Operator: And thank you all for participating in today's conference. You may now disconnect.
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