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Edited Transcript of 006400.KS earnings conference call or presentation 29-Oct-19 4:30am GMT

Q3 2019 Samsung SDI Co Ltd Earnings Call

Kyunggi-do Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Samsung SDI Co Ltd earnings conference call or presentation Tuesday, October 29, 2019 at 4:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kyunghoon Kim

Samsung SDI Co., Ltd. - SVP of Electronic Materials - Marketing Team

* Michael Son

Samsung SDI Co., Ltd. - SVP of Battery - Marketing

* Yoontae Kim

Samsung SDI Co., Ltd. - VP of Business Management Office

* Young-No Kwon

Samsung SDI Co., Ltd. - CFO, Executive VP & Director

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Conference Call Participants

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* Daniel Kim

Macquarie Research - Analyst

* H. Kwon

JP Morgan Chase & Co, Research Division - Analyst

* Jeongu Ko

NH Investment & Securities Co., Ltd., Research Division - Analyst

* Jung Hoon Chang

Samsung Securities Co. Ltd., Research Division - Head of Small Cap

* Soonhak Lee

Hanwha Investment & Securities Co., Ltd., Research Division - Analyst

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Presentation

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [1]

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Good afternoon. I am Yoontae Kim, Vice President of the business management office at Samsung SDI. Before we begin, I would like to introduce our management team attending today's conference call. Our CFO, Young-No Kwon; Head of the Battery strategic marketing team, Michael Son; and Head of Electronic Materials strategic marketing Team, Kyunghoon Kim, have joined us. We will now start the third quarter 2019 earnings call.

First of all, we will announce our third quarter 2019 results. Third quarter revenue was KRW 2,567.9 billion, an increase of 7% from the previous quarter.

By business divisions. Battery revenue was KRW 1,951.7 million, a 7% increase quarter-on-quarter mainly driven by an increase in ESS and automotive battery sales. Electronic Materials revenue was up 6% quarter-on-quarter to KRW 614.3 billion, thanks to an increase in display materials sales.

Operating profit was KRW 166 billion, a 6% increase from the previous quarter. Pretax profit was KRW 300.4 billion, and net profit was KRW 217.4 billion.

Next, our Q3, our financial highlights on the right-hand side. Assets as of the end of third quarter was KRW 19,737 billion, KRW 28.8 billion decrease from the previous quarter. Bond increased as a result of the revenue increase, but cashable assets decreased under the influence of redemption. Liabilities stood at KRW 6,981.4 billion, decreasing by KRW 267.2 billion due to decreased borrowings. And shareholders' equity was KRW 12,755.6 billion, an increase of KRW 238.4 billion.

Next is our third quarter performance by business divisions and the fourth quarter outlook. Mid- to large-sized battery revenue surged over the third quarter. In the automotive battery business, revenue significantly grew quarter-on-quarter as our major customers launched new EVs and PHEVs. ESS revenue increased quarter-on-quarter due to the resumption of sales to domestic consumers and the growing sales in the overseas markets such as the U.S. In the fourth quarter, we expect the increase in sales mainly from automotive battery business. We predict increasing supply to major customers, which can contribute to higher profitability. Since the fourth quarter, we've already been selling ESS products with improved safety equipped with a special extinguishing system. We expect a steady ESS sales growth in international markets including the U.S. and Australia.

Next is the small-sized Battery division. In the third quarter, small-sized battery revenue slightly decreased quarter-on-quarter. Cylindrical battery sales were influenced by stock assessments of our customers led by lower demand from the upstream industry. Polymer battery revenue slightly fell due to increasing sales of [PHEV] model, but we could enhance profitability of our polymer batteries as core customers launch new smartphones. In the next quarter, we expect an increase in sales predominantly in cylindrical battery sales. We plan to build sales in high-powered batteries targeting power tools, vacuum cleaners and garden tools. Despite unfavorable seasonality, we'll increase polymer battery sales by expanding supply to our core customers who produce wearable devices and Chinese smartphone makers as well.

Next is our Electronic Materials business. Display material sales were the growth engine of the third quarter revenue. We maintained a steady sales growth of our polarizing films by mainly targeting large panel LCD TV makers in China. OLED material sales also increased due to increasing supply to new flagship smartphones. Semiconductor material sales also slightly increased. Next quarter, higher profitability is projected driven by increasing sales of OLED and semiconductor materials. In terms of OLED materials, we expect new supply to main customers, new platforms as well as supply to Chinese customers. Semiconductor materials sales are foreseen to grow as well in line with growing demand from the upstream. Polarizing film sales are projected to decline under the influence of unfavorable seasonality and panel makers' decision to curtail production.

This completes my presentation. Before we move on to the Q&A, our CFO, Young-No Kwon, would like to make some comments.

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Young-No Kwon, Samsung SDI Co., Ltd. - CFO, Executive VP & Director [2]

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Good afternoon. This is Young-No Kwon, CFO of Samsung SDI. I would like to briefly talk about the background to the implementation of our ESS safety reinforcement measures that were recently announced and share some thoughts about our future business direction.

We felt a sense of great concern that the repeated incidents of fires since last year may possibly undermine the entire Korean ESS industry as a whole, which has been the leader of the global ESS market. As the leader of the ESS industry, Samsung SDI believes that it needed to take preemptive measures to address this concern and decided to fundamentally enhance the safety of ESS by installing a proprietarily developed special fire prevention system in all sites in Korea.

The company is aware that our decision to bear all costs related with the safety system has caused some concern among investors about our performance implication. However, we view that this simply is not a one-off cost but a critical investment necessary to strengthen the competitiveness of our products and to gain greater consume -- customer trust in the global ESS market, which is growing by more than 40% each year.

Due to the ESS issue, the mid- to large-sized battery business, which is a key point of interest to many investors, has been quite challenging this year. Fortunately, the automotive battery business continues to maintain a fast pace of growth as we originally planned. Also, starting from the second half, we have seen a significant pickup in new product demand from our customers. And with a smooth ramp-up of new product production, both revenue and profitability are improving significantly.

With the timely completion of the ESS safety measures, we expect the business to resume its normal path of growth to satisfy the expectations of our investors. Thank you.

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [3]

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We will now have a Q&A session. Please ask your questions according to the instruction of the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will be provided by Soonhak Lee from Hanwha Securities.

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Soonhak Lee, Hanwha Investment & Securities Co., Ltd., Research Division - Analyst [2]

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I have 2 questions regarding the ESS business. I'll first ask my first question. The first question, regarding the safety measures that you announced, you estimated that the cost of that will be around KRW 200 billion. Assuming that this will be applied to about 1,000 sites, that comes up to about KRW 0.2 billion per site. Can you share with us the details of what these safety measures include? And also regarding the new products, what will be the incremental increase in cost and impact to overall profitability?

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [3]

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To answer your first question, the safety measure that we have announced for the ESS involves basically taking back the battery modules from the existing sites, applying fire prevention sheets and thermal diffusion blockers and then reinstalling the modules back onto the site. And so the cost that we have estimated includes all of the labor costs, logistic costs as well as the material costs that is needed for these measures.

On the other hand, for the newly shipped products, the only incremental cost will be the material cost, so the cost increase is not large. And also, we plan to make up for these cost increases through future cost-saving activities, so the impact to our profitability will not be significant. Also, on the upside, because these enhanced safety measures will further enhance the competitiveness of our products, we believe that this will contribute to sales expansion in the future.

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Soonhak Lee, Hanwha Investment & Securities Co., Ltd., Research Division - Analyst [4]

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Yes. My second question regarding the ESS business is your strategy towards the overseas ESS markets, given the fact that probably the domestic ESS market will not be growing at the fast pace we saw before, so your growth probably has to shift towards the overseas market. What are your business outlook there?

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [5]

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Yes, to answer your second question, we also agree that future growth in the ESS market will be around overseas regions such as the U.S. and Europe driven by 2 major factors. One is the fact that many governments in these areas are expanding. There are new renewable energy expansion policies under the overall eco-friendly policy direction. And the second is that the ESS itself is improving in terms of economics. So if we take the example of the U.S. market, which is recording the highest growth rate, in terms of policy state, 5 states, including the states of California, New York and New Jersey, have started to make it mandatory for power generators to install ESS. And also, many states have started to introduce RPS laws which will drive up renewable energy demand or renewable power generation demand and the share of renewable power generation in the future.

In terms of the ESS economics itself, whereas the CapEx as well as the OpEx of solar power plants combined with ESS is gradually coming down. Currently, based on the ESS-connected solar power plants that have been newly installed this year, their LCOE, or levelized cost of electricity, has actually come down below those of thermal power plants. Also, if you add on the carbon trading cost that would have to be added onto thermal power plants, actually, the economics of an ESS combined with solar power plants becomes even more attractive.

Reflecting these trends, some market research agencies have forecasted that the global ESS market size would probably grow from 12 gigawatt hours this year to 100 gigawatts hours by 2025, which is a CAGR of above 40% per year. And looking at these trends, we are also focusing on increasing the share of overseas sales in our overall ESS business especially targeting the power-generating companies in areas such as the U.S., Europe and Australia.

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Operator [6]

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The following question will be presented by Dong-wan Kim from Macquarie.

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Daniel Kim, Macquarie Research - Analyst [7]

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I have 2 questions related with the EV battery business. First question is where is your EV battery production yield standing currently in the context of other companies in the industry reporting some issues with their yield and especially in the overseas plant ramp-up. Second question is about the overall EV market outlook. Given that automobiles in general -- or the sales volume of automobiles in general has started to decrease, what is your expectations and outlook of EV growth?

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Michael Son, Samsung SDI Co., Ltd. - SVP of Battery - Marketing [8]

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To answer your first question about the yield of overseas plants, as you know, we have our EV battery plants in Ulsan, Xi'an and Hungary. And all of these sites are maintaining high yield and are producing very stably. When we attempt new approaches such as a new production site, a new production process or new product, in anticipation of early troubleshooting issues, we have always taken the approach of, first of all, verifying these new processes or products thoroughly in our domestic line through mass production before rolling them out to other overseas sites. We have found this to be very effective in minimizing especially the initial difficulties during mass production at overseas sites. We've always believed that long-term growth in the battery industry can only be supported by not only a very competitive product but also manufacturing technology and operational excellence. And that is why we will continue to maintain and push for a top-level competitiveness in the industry.

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [9]

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To answer your second question about EV growth outlook, as you've mentioned, with the weakening economic cycle, global automobile sales overall have continued to slightly decrease last year as well as this year. However, it's important to note that despite this overall decrease in auto sales, EV sales during the same period grew by more than twofold, and we're expecting EV sales to maintain a high or fast pace of growth in the future.

If you're looking to specific regions such as Europe, major OEMs are planning to increase their EV production volume about twice the size of what they did this year in anticipation of the stronger CO2 regulations that will kick in next year. And also, with stronger support policies such as subsidies and tax benefits being introduced in major European markets, we believe that in Europe, this conversion to EVs will actually pick up pace.

In markets such as China and the U.S., even though due to lack of exciting new models or changes to the subsidy program, the growth rate of EV sales have been muted somewhat, we believe that in next year, with the launch of new models and expansion of infrastructure, the growth momentum will recover.

Also, it's important to note that the product level competitiveness of an electric vehicle is becoming stronger, it's improving compared to the conventional internal combustion engine vehicles. As you know, EV prices are coming down gradually. And also, EVs have many functional advantages compared to the conventional vehicles, and this is driving up demand for EVs in general. So given these positive factors such as the increase of EV production by OEMs, favorable policies -- support policies by many countries and the enhanced competitiveness of the EV itself at a product level, many external sources are projecting that the EV market will continue to record growth of above 20% average until 2030.

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Operator [10]

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The following question will be presented by Jeongu Ko from NH Investment & Securities.

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Jeongu Ko, NH Investment & Securities Co., Ltd., Research Division - Analyst [11]

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I have 2 questions. The first question is about the polymer battery business. In the context of 5G smartphone rollout that will actually take up more steam next year in 2020, with the adoption -- greater adoption of 5G smartphones, what sort of technology direction are you taking in terms of your polymer battery development? And also, what do you think will be the implication to the battery prices as well as profitability as the adoption of 5G is increased?

Second question is about the semiconductor material business. Many people have recently started to get hopes that the semiconductor industry may take an upturn. What is your guidance in that context regarding the semiconductor material business in the future?

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [12]

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To answer your first question about the polymer batteries and 5G smartphones, as you have mentioned, with the adoption of 5G handsets, first of all, the handset itself has to deal with a core increase in traffic volume. Also, the displays are getting larger. And multitasking on the handset is becoming a very important feature. With these changes in the use environment and the use cases, battery consumption will inevitably increase, which means that the need for greater battery capacity and battery life will become more critical. In line with these trends, we have been focusing our polymer battery development around technologies that will increase the energy density and also deliver higher-speed charging. And with these new solutions on top, we will be able to use these as a factor to increase the pricing of our polymer batteries, which we expect will help our profitability.

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Kyunghoon Kim, Samsung SDI Co., Ltd. - SVP of Electronic Materials - Marketing Team [13]

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Regarding your second question of our semiconductor material business, in terms of where the industry cycle is headed, I think we need to wait a bit more. But as far as our revenue is concerned, we're expecting our semiconductor material revenue to increase starting from the fourth quarter especially around pattering material. We also expect that the customers' wafer input will increase in 2020. And we will try to deliver increased revenue and sales by tapping not only our captive customer market but also adding on new customers.

In terms of our long-term business strategy, while we continue to diversify our customer base including our overseas customers being newly added, we will continue to develop new materials such as EUV materials or a new material for V-NAND in line with the process migration of our customers.

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Operator [14]

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The following question will be presented by Jung Hoon Chang from Samsung Securities.

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Jung Hoon Chang, Samsung Securities Co. Ltd., Research Division - Head of Small Cap [15]

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I have 2 questions. The first question is about the polymer battery business tied to the announcement by your major customer to increase the ODM production, which is causing concern for us because we are -- because of possibilities that this may impact the demand or supply chain or profitability of your polymer battery supply to this major customer. So can you share with us some of your thoughts regarding that factor?

Second question is about the Electronic Materials business. As there was comments about this during the opening presentation about the polarizing film -- polarizer film business. Even though we know that fourth quarter is a seasonal low quarter, I think there's some concern that this oversupply situation may not be just a seasonal thing and may end up extending beyond fourth quarter. So in that context, can you give us your market outlook as well as your response strategies for the polarizers?

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [16]

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Regarding your question about the customers' plan to increase ODM production and the impact that it would have in our revenue and profitability, we believe that any impact to our revenue and profitability will be limited. This is because the ODM -- or the smartphones that will be produced on an ODM basis are usually or mostly going to be at the lower end of the low end. And so even if the prismatic batteries are replaced, it would be replaced with low-cost or low-end polymer batteries, which is not a major market segment for us anyway. So we believe despite the ODM increase of our major customer, our market share within our major customers, polymer battery needs will not be affected.

In terms of our business strategy and approach towards our polymer battery business, we will continue to focus on supplying timely to the -- not only the flagship but also the mass smartphones of our major customer and also increase our battery supply for new applications such as smartwatches or wireless earphones to increase our revenue and profitability.

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Kyunghoon Kim, Samsung SDI Co., Ltd. - SVP of Electronic Materials - Marketing Team [17]

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To answer your second question about the polarizer film situation, as you will recall in the first half of this year, the supply situation for polarizer films were quite tight mainly because of the Chinese panel companies that actually increased their production capacity which drove up polarizer film demand. And also, some of the Chinese TV companies were increasing their first half shipments to preempt the additional custom duties that will be imposed by the U.S. But when we entered the second half, the panel companies started to reduce their production -- decrease their production in order to consume their inventory. And a Korean company also changed -- shift some of their production lines to OLED production. And this is -- this has resulted in the supply situation of polarizer films easing somewhat in the second half.

However, if you look at our third quarter revenue, it actually was able to grow slightly quarter-on-quarter mainly because we have continued to decrease our sales to our captive -- or decrease our market share of our captive customer in Korea and have continued to increase our Chinese share in our polarizer film sales. This helped us to increase our revenue on third quarter quarter-on-quarter basis. And looking towards the fourth quarter, even though we are expecting our polarizer film revenue to slightly decrease, this will mainly be due to seasonality.

Next year looking forward, we expect there to be positive demand given the fact that the Chinese panel companies will be starting production in their 10.5G lines. And also in the long term, we expect the LCD panel shipments to increase given the increasing share of larger-sized panels. We will continue to leverage our manufacturing competitiveness, to diversify our customer base and also increase the market share within the Tier 1 customers to maintain both our size as well as profitability.

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Operator [18]

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The last question will be presented by Jay Kwon from JPMorgan.

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H. Kwon, JP Morgan Chase & Co, Research Division - Analyst [19]

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I also have 2 questions. One is about the cylindrical battery business, and the other is about your Electronics Material business. First of all, I think with the cylindrical battery business, there is some concern that the growth rate of the power tools market, which accounts for the largest application for the cylindrical batteries is slowing down. Do you think that this slowdown in the power tools market is part of just a global economic cycle or temporary? Or do you think that the lithium-ion battery power tool market itself is entering a late maturing phase?

Second question about the Electronic Materials business is related with your -- with Samsung Display announcing investments in the QD-OLED for TVs. The panel structure I would assume would be different from the mid- to small-sized OLEDs that you have been supplying until now. So in that context, can you share with us some of the materials that you can supply newly to this QD-OLED investment?

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [20]

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To answer your first question, as you mentioned, there has been a decrease in the growth rate of the power tool market, and we read this as a temporary situation driven by factors such as the U.S.-Chinese trade disputes and the weak global economy. Also, on top of that, during the third quarter, some of our customers went through an inventory adjustment, which has also impacted our sales. Even though the power tools market may not record the higher level of growth that we saw in the past, fundamentally, this conversion from corded to a cordless power tool will continue, and that's why we expect this growth trend to continue in the long term.

We're also looking very much towards the e-mobility segment, which we believe will be the new driver of growth for cylindrical batteries. So e-mobility would include products such as EV, e-bikes and e-scooters. And we think that this will be an additional engine to driving growth for the cylindrical battery market in addition to the power tools market. Of course though, we will actively respond to the opportunities that emerge from e-mobility segment to continue our growth in both size and profitability.

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Kyunghoon Kim, Samsung SDI Co., Ltd. - SVP of Electronic Materials - Marketing Team [21]

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Regarding your question about the QD-OLED panels, among the materials that we're currently supplying for the mid- to small-sized OLEDs, the p-dopants and TFEs can still be supplied to the QD-OLEDs. And also, of our new materials, there are materials that are necessary for QD-OLED TVs such as the QD ink or the reflection prevention films as well as the low reflection material.

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Yoontae Kim, Samsung SDI Co., Ltd. - VP of Business Management Office [22]

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And that completes our conference call. Please forward any remaining questions to our IR team. Thank you very much.

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Editor [23]

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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.