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Edited Transcript of ADDT B.ST earnings conference call or presentation 13-May-20 12:00pm GMT

Q4 2020 Addtech AB Earnings Call

Stockholm May 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Addtech AB earnings conference call or presentation Wednesday, May 13, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Malin Enarson

Addtech AB (publ.) - CFO

* Niklas Stenberg

Addtech AB (publ.) - President & CEO

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Conference Call Participants

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* Johan Dahl

Danske Bank A/S, Research Division - Analyst

* Jon Hyltner

* Oskar Vikström

ABG Sundal Collier Introduce - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Addtech presentation of the year-end report. (Operator Instructions) Today, I'm pleased to present Niklas Stenberg, CEO; and Malin Enarson, CFO.

I will now hand you over to Niklas Stenberg. Please go ahead.

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [2]

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Hello, and welcome, everyone to this presentation of Addtech's year-end report. Today, myself and CFO, Malin Enarson...

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Malin Enarson, Addtech AB (publ.) - CFO [3]

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Hello, good afternoon.

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [4]

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We will guide you through this year that passed and also talk a little bit about the near future. First, a quick summary of the full year. I wrote in the report that I was really pleased with this year's result. And when you look at this, not least, the record high EBITA margin, I think you can understand why. Considering that we both had a massive cyber attack, and then almost immediately had to prepare for pandemic, this outcome is really fantastic. To go from one crisis to another is tough, but on the other hand we were already in the crisis mode and can start acting quickly. I will come back to the pandemic and its effect on us later.

We have raised our sustainability ambitions during the year and are now in the process of aligning our sustainability work with the agenda 2030. We have also had a strong year in acquisitions, where we welcomed 12 new companies to the Addtech family during the fiscal year, plus 3 more in the beginning of this year.

A short summary of the fourth quarter. We had a really strong finish, especially on the EBITA growth. We strengthened our cash flow and, in general, improved our financial position. The economic effect from the cyber attack that we were struck in Q3 actually turned out to be milder than we had feared. We had estimated SEK 150 million on EBITA effects with SEK 60 million of these in Q4, but that actually landed much lower. I will come back to that as well. And we continued our acquisition development. As I said, 4 of the acquisitions last year, we finalized this quarter.

Looking at net sales and also a few words on demand during the quarter. All in all, a good development, but of course, variations between business areas and segments. And growth this quarter comes from acquisitions, as you can see. We can conclude that we had no clear effects from the COVID-19 pandemic on the sales in the quarter. And book-to-bill was 105, so still a good momentum throughout the quarter.

On the demand side, however, we did see various effects in the last 2 weeks due to the pandemic. On the positive side, a growing demand from customers in med-tech, but also to electronic devices that are useful in the pandemic. To give a couple of examples, batteries to life starters and electrical components to scanning cameras to detect fever. And this had a positive effect in automation components and the power solution. We also saw a number of customers hamstring, if that's an English word, components and spare parts to ensure not standing without vital components in this insecure environment in world supply, and this has had some effect on the order intake as well.

On the negative side, we saw a drop in demand the last weeks, especially in special vehicles and parts of mechanical industry. Energy had a negative sales development of 6%, but this is more related to projects, and that last Q4 had a number of bigger projects falling out. Demand was very strong in energy during this quarter. Industry process had a weaker quarter, partly due to scrubber facing heavy headwinds now, as you know, and also weaker sales in some other segments. I will come back to that.

As I said, the acquisitions was the driver in this quarter. And as you can see in this picture, it's showing organic growth quarter-by-quarter the last 3 years. And this is actually the first quarter in 3 years with negative organic growth, a bit less than 1%. But again, very tough comparables, as you can see on this orange high stable in Q4 last year. So we are quite pleased actually holding up our sales this year.

EBITA in the quarter, very strong profit growth. And what's sticking out here is, of course, the margin improvement. A couple of things to mention here. The cyber attack, again, was only affected this quarter by SEK 10 million. And also we have some one-offs relating to revaluation of earnouts and some other one-offs. So in total, approximately SEK 50 million in one-offs.

The fourth quarter was the time for us to put the cyberattack behind us. And again, to summarize, we had estimated initially around SEK 150 million in total cost. But what happened in Q4 was that we did not have any negative sales effects in this quarter. So it's only SEK 10 million in central costs. That's the big difference. And the secret behind why we managed to come out so good is, as always in Addtech, the culture, the fighting spirit and resilience in the group. This also shows how deeply -- deep our relations are with our customers.

Looking at the full year, again, as I said, the real year to be proud of, all business areas contributing both organic and acquisitions, equally over the year. And the industrial process, clearly, the shining star with the scrubber market, in particular. We increased profit margin with almost 1% and earnings per share increased with 30%. As you have probably noted at yesterday's Board meeting, the Board decided to postpone the decision on proposal on dividends. And this is purely a precautionary measure to secure best possible resilience due to this insecure environment. This picture shows the EBITA growth over time. So we can add another good year and on average 20% now. So a very strong development.

Just some very quick comment on each of the business areas. Automation finalized its first year as a business area, a very good development with especially good EBITA growth. The quarter was strong. There is quite a lot of acquisition effects in automation and also a one-off of revaluation of earnouts, but underlaying good developments here. One of automation's important areas is linear motion, primarily to machine builders. And here, we have the strong finish, but the clear decline in effect on demand in April due to pandemic. Apart from that, automation has quite a lot of sales in the med-tech and also a good demand for IT solution in defense segment.

Components, all in all, a stable development, very tough comps here from last year, so 4% growth. This is basically organic, is good. Market situation, best development in Norway, both in the quarter and the full year. We still had good progress of oil and gas, fishing industry, electrification, et cetera. But now we see a declining trend in April. As you know, there has been pretty tough lockdowns in Norway. And now the turbulence in oil price is also affecting some of the projects there. At Denmark, good development, a lot of wind power, and that has continued to be strong. Finland, also stable, electronic industry and medical industry. Sweden, interesting mix here. In the end of the quarter, high demand on some products and components due to the pandemic. And on the other hand, vehicle,, mechanical industry, other important sectors here, and this was declining due to lockdowns and lower capacity.

Energy had, as you can see, actually a bit lower sales in the quarter. As I said in the beginning, this is mainly due to where projects are falling out. We have a strong pipeline of projects here. So outlook seems good for energy. And as I said in the beginning of this year, I promised that the margin would improve in energy, and that is what has been done throughout the whole year. A flattish development on installation material, primarily to construction sector.

And industrial process, a fantastic year with a very strong profit growth, also a good growth even taking scrubber aside. And to mention a few words on scrubbers since this has been such an important part. It continued to be good during this quarter. We have been taking quite a lot of our order stock here. We have been waiting for a second wave in demand for scrubbers, and that has not come yet. There are 2 things affecting this market now. First of all, of course, pandemic, especially in China because that is where many of the installations are done. And these installation units were basically closed for 2 months, but also now the change in oil price because that's affecting the fuel spread. And now we are facing very tough comps here, and it's difficult to say how the market will develop. Demand is still there, but on a lower level. We get some positive signals from some customers that demand could pick up again here. And there is still a lot of ships that need to adapt to the regulations. But as I said, it's difficult to predict.

Process industry, in general, positive here. One interesting effect of the pandemic, we can see here in sawmill industry, for instance, because they usually do a lot of maintenance when the market is getting a bit weaker, but we have not been able to visit customers for replacement. So this is something we have seen in April.

Finally, Power Solution, stable development. Vehicle market, special vehicles, a very important segment for power solutions, was actually strong throughout the quarter, and we did see some spare part hamstring in the end. And now we see that projects, especially OEM projects are delayed. Many of our customers have closed down temporarily, both in Nordics and Central Europe and U.S. And now some of them are opening up, but it's difficult to say what development will be here.

I already mentioned acquisitions. Again, we are keeping up a good pace. And as I write in the report, we have increased focus on finding acquisition targets in sustainability-related areas. And here, we see a good potential. As I also have written, we have a good pipeline, many interesting projects that also we have gone quite far in this process. But we have temporarily put this a bit on hold due to the insecure environment.

If you look on how the segments have developed during the year, we have been working to hedge our distributional segments and also geographical presence, as it makes us more stable and reduces some cyclical risks. And as you can see in this chart, we have spread out the risks even more this year. And sales outside of Nordics has increased and is now around 30%. And that is both acquisitions and export of our own products and solutions.

So a little update on COVID-19 impact. In order to be able to guide you a bit, as you notice, we wrote about the development in April. And in total, we had a drop of 5% in organic sales and 15% in order intake organically in April compared to April last year. We are only looking here at 1 month. So it's difficult to draw any big conclusions, but clearly, there is an effect on the pandemic here. And as I have already noted, its the vehicle market and mechanical industry. To give you one example, we have a big vehicle customer on lifting chains in U.K., and U.K. has been quite severe in the lockdown. So also, our company has basically also closed down temporarily during April. One thing that surprises even me is that we have had very limited issues with getting goods from our suppliers. Even if we buy products over the world and it's been locked down everywhere, we have had very few disturbances. Now we put certainly a lot of focus on cash flow and liquidity. We're working a lot in each of the companies. Where we see a decline, we do activities already now. And we try to work on different scenarios. You hear a lot about different curves, V curve, U curve, swoosh curve, et cetera. And we have contingency plans in place depending on the development.

So Malin, some further words on the financial statement.

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Malin Enarson, Addtech AB (publ.) - CFO [5]

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Yes, thank you. So Addtech's financial position. First, some highlights. We outperformed our financial targets. We had a strong cash flow, and our main financial indicators came back to normal. I also want to address our new extended credit facility. During March, we landed a new facility of net SEK 1.3 billion, which means a total credit of SEK 3.8 billion. I think most of you are familiar with our targets. We have a proven track record of delivering profitable growth, and this year was no exception. We are well above our most important targets, which is profit growth and profit over working capital. Profit overall working capital at 56% is our highest ever since we presented it as an official target externally. And it's an effect of strong cash flow. This, in turn, is an effect of strong margins and a more efficient working capital management. As you can see here in the graph, profits and changes in working capital, together with effects from IFRS 16, is what affects our cash flow the most.

Cash flow from operations doubled in the last quarter, which led to a total cash flow from operations for the year, above SEK 1 billion, which is very pleasing and brings our key financial indicators back to normal.

We follow our equity ratio, leverage and gearing closely, and we are happy to see that we are now back to normal levels, even including effects from IFRS 16.

I will not guide you through this slide, but for those of you wanting to see how IFRS 16 affects our financials, you can see it from this specification. And our little snake, we don't have any specific targets on debt ratios, except indirectly by our profitable working capital. Our debt rate is bound to fluctuate over time in a business like ours with a lot of acquisitions. Our target to acquire on our own cash flow is working well over time.

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [6]

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Thank you, Malin. So hard times or not, we still have to keep our long-term goals in sight. We feel, in general, that we have good positions in areas driven by different macro trends like sustainability. So stepping up when it comes to that is part of the goals. We have set new ambitions for 2030 that will be revealed in our annual report. But this relates to ambitions to increase our sales and sustainability-related areas and also to lower our emissions significantly. And as I mentioned before, we have also increased our focus on finding targets with long-term strategies in this field.

And this picture shows what I mentioned before that sustainability is already part of our business. As you can see here, all business areas have initiatives driven by, for instance, climate improvements. And we have many good projects running for future business here with different customers and different segments.

So final picture, a few key takeaways. Just another great year and a strong quarter, an improved hedge in different segments and growth in added value solutions. We have low impact of the pandemic in the quarter, but clear impact in April, especially in general manufacturing industry and special vehicle segments. We have strong finance and good cash flow performance. We'll focus now on securing best resilience in this environment and adapt to the new normal.

And to wrap up, I have a strong -- long-term confidence in our ability to get through this crisis as well. And our great business model to allow us to act quickly on changes, at least myself, I am sure that our business model will again show its strength.

Thank you, and we now open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Johan Dahl from Danske Bank.

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Johan Dahl, Danske Bank A/S, Research Division - Analyst [2]

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Just a question on your sort of productivity, potentially pricing. It just seems as if in the second half of last year, you seem to have improved profitability quite a bit in the underlying business, excluding all the onetime effects of virus as some revaluation of earnouts, et cetera, and acquisitions. I don't know if that's a correct analysis. And if you could possibly sort of talk a little bit about, Niklas, how pricing, productivity, et cetera, how that has impacted profitability? Or is it only business mix that improved in Q4 and second half?

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [3]

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Yes, Johan. You are correct. I mean, we have improved our margins in most of the business areas. And it's -- one part is, of course, the product mix. If you look on Power Solutions, for instance, one thing I've been talking about a lot the last couple of years is change in the battery development, for instance. Here, we have seen a huge development. But that's the reason in Power Solution in when you talk about productivity, there you can really see an impact, especially industrial solutions, so with good incremental margins on the growth we have seen there. And energy, I would say, is more coming back to normal margins. As you know, last year and the year before that, we had a little bit of challenges with these high projects with very low margins. And with the strategy to skip that and still having a lot of good projects coming in with better profitability. So these are some reasons behind it.

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Johan Dahl, Danske Bank A/S, Research Division - Analyst [4]

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But do you agree, Niklas, that there has been a step change recently? Or is that due to overemphasize this phenomenon?

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [5]

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When you say step, can you say that again?

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Johan Dahl, Danske Bank A/S, Research Division - Analyst [6]

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I just sense if it was -- I mean, clearly, what we're interested in is how this will carry over into next year. And I'm not sure whether you guys see that all these sort of organic improvements is something that occurred more or late in the last fiscal year and something that will benefit you next year, or that's so over exaggerating things?

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [7]

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Yes. No. I don't think you could really say that -- I mean, one thing that many are, of course, wondering about is what is happening with -- now with the scrubber and the headwind we are facing. But if we look on scrubber, the big growth in scrubber was in Q1, Q2. So it started to decline the sales there in the last 2 quarters. So yes, I don't think you can really say that there's been any major change the last 2 quarters. It's just a gradual development.

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Johan Dahl, Danske Bank A/S, Research Division - Analyst [8]

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All right. Just finally, on Norway. I guess you were in the company class when you last time hit the sort of difficult operating environment there with the falling oil price, et cetera. What are your contingency plans in that area right now? What are you doing right now? And how do you sort of view development in Norway at the moment? And also if you could talk a little bit about the visibility in your recent acquisition of Valutec is.

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [9]

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Yes. Okay. On the first question, yes, what happened, I think it was in 2014, right? At that time, we decided to not do so heavy cost-cutting and instead try to focus on new business areas and -- or customer segments. And when oil price picked up again, we had a really positive development in Norway. Contingency plans, as always, in Addtech, we have, as you know, 130 companies working in many, many different fields. So it varies. Some of our Nordic -- our companies in Norway are still doing very good development. For instance, in electrification of (inaudible) is continuing to be good. So in the companies where we see have a drop, we are doing -- we are starting to prepare both layoffs and furloughs in different aspects. What I'd like to mention is that in Norway, we have seen a very, I would say, quick change. It was very strong during the fourth quarter, but apparently, things have changed quite a lot in April. So it's a bit early to say, actually.

On the second question, Valutec, yes, as you know, we have only had the opportunity to have Valutec for 1 month. But the development in April has been according to plan. And what's interesting with the sawmill industry is that, I'm sure you have read about there are some big projects, for instance, in Finland and also in Central Europe. So I have a positive feeling of the sawmill industry even if, in short term, it looks a little bit flat.

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Operator [10]

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(Operator Instructions) And our next question comes from the line of Oskar Vikström from ABG.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [11]

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I just have one more question there. Could you comment a bit on -- you mentioning components in Power Solutions that customers have been building a bit of inventory. Is that something that has continued in April? And sort of how you're seeing that affecting sales for the whole year? Do you think there will be like an inventory buildup for a period and then sort of slowing orders? Or could you just comment a bit on that, please?

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [12]

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Yes. As everything relating to this pandemic, it's a little bit difficult to say long term. But what we have seen in April is that these customers are taking out the orders that they ordered in March. So it's following plan, and it has also continued to develop strongly in April in these segments. And if you look on the forecast that we get from these customers, for instance, we got from one Finnish company a couple of weeks ago, letter indicating that you have to prepare for much, much higher demand over the year. So I mean, based on the information we have right now, it should not be any just stock buildup short term.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [13]

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Okay. Yes, I understand. And also just -- could you just discuss a bit more on the M&A side, sort of I know you mentioned that it might be slowing a bit, but how are you working in the current environment to get around any headwinds you're facing? Or how does M&A usually develop when the economy gets a bit softer for you in terms of finding companies and being able to execute on those acquisitions?

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [14]

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Yes. To put it like this, I think if you were a company that didn't have enough built-up pipeline, I think it would be very difficult to do M&As right now since you're not even -- it's not possible to visit customers or sellers or owners of company. Fortunately, we have a very good pipeline of projects and potential acquisitions. So for us right now, it's -- what we are doing is that we are keeping up all contracts we have. The projects that we have been working quite long with before this happened, the pandemic, we are keeping it a bit on hold to put it like this. What usually happens, well, a question I often got on this topic is that, is it easier to get acquisition targets or harder? And I usually say that I think the sum, the net sum of that is basically same as ever because some owners feel that pressure to get into a company like Addtech to have a better opportunity, the companies choose to wait until they come back on track again. So at this point, as I said, we are focusing on resilience, but I'm sure that once we can see the life after the pandemic and have a grip of the new normal, we will continue to acquire.

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Operator [15]

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Our next question comes from the line of Johan Dahl from Danske Bank.

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Johan Dahl, Danske Bank A/S, Research Division - Analyst [16]

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Just on your specialty vehicles. I think did you talk a little bit about weakening demand there? How much is that a group sales? And what's going on in that particular area?

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [17]

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Yes, it's about 10% of total sales. And it's a mix -- of this 10%, it's a mix of OEM -- of OEM components to customers throughout Nordics, Europe and U.S. and the rest is more spare parts and aftermarket. And what we see right now is that the spare part market is running on pretty normal. But as you have read and seen in the papers, the special vehicles market, our customers have been in lockdown more or less the last period. And of course, that has affected the projects for new machines and new installations. So in this segment, we saw the clearest drop in April. Some of these customers, as you have also read about in the papers, they are now opening up again. And we just don't know to what extent and the productivity they will come back to at this point.

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Operator [18]

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Our next question from the line of Jon Hyltner from Enter Fonder.

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Jon Hyltner, [19]

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Niklas and Malin, a question on market shares. Do you notice any change in market share or gain in market shares from your Nordic companies, which usually meet competition from, I don't know, Italy or China or anywhere else, where they haven't been able to deliver, where you can deliver here from the Nordics?

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [20]

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Yes, we have some examples of that, absolutely. We -- as Malin said, we have improved our profit of working capital. One reason of that is that we have had -- we have been able to deliver. And in some cases, customers have come to us and said that our usual supplier in these countries have not been able to deliver. So yes, I don't know really to what extent and the impact of it. But I have heard in some cases like that.

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Jon Hyltner, [21]

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Interesting. And then coming back to cash flow, big working capital release in the quarter. Could you elaborate a little bit more on this? Is this any onetime effects here? Or are your work that you initiated a long time ago now paying off? Or could you go through it a little bit more, please?

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Malin Enarson, Addtech AB (publ.) - CFO [22]

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Yes, I think that it's not really one-offs. I mean, one thing is the IFRS 16, of course, that is maybe more or less a one-off. But on the other hand, what we see in cash flow from working capital is usually when it's not heavy growth, it is a bit of a release for cash flow, and that is what we have seen. But then, of course, during this year, since we have had a bit of a problem with rising working capital, we have been working very hard to try to be more efficient. And what we can see compared to last year is that even though our working capital is actually increasing, it's been handled more efficient lately, and that is what gives us the effects on cash flow.

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Jon Hyltner, [23]

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Okay. Good. And then finally, on acquisitions, what you say it's -- acquisitions are for now put on hold. Is this mainly because you want to safeguard that your own operations are strong enough, so you don't want to take on new companies now? Or is it due to difficult to see how the acquisition targets will develop in this environment? Or what's really behind being more cautious on acquisitions in this period? I guess some opportunities might arise that could be super attractive.

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [24]

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Yes, exactly. And it's a little bit of everything you mentioned. I mean, the development of this pandemic, as you are well aware, has been so quick. And when we see that we are affected, we try to focus on where we stand right now. And we have done quite a lot of acquisitions lately, and now we focus on implementing them. And since we have a good pipeline and some projects that we could start-up more or less directly, we don't feel any hurry, so to say. So main reason, I would say, is that we want to have a better grip of where things are going, even if it looks quite stable after all with cash flow, et cetera. But then another aspect is what you are mentioning is that it will most likely occur some very interesting projects. I would be very surprised if it doesn't occur, new opportunities. And then, of course, we want to be able to take a grip of that. So it's not in any way that we feel that now we have done the acquisitions, we want to do, and now we will sit down. We always try to keep up a good pace here.

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Operator [25]

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(Operator Instructions) And if we do not have any more questions registered, I'll now hand back to our speakers for any closing comments.

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Niklas Stenberg, Addtech AB (publ.) - President & CEO [26]

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Yes. So thank you very much for listening and for interesting questions. And I hope you all stay healthy and continue to follow us. Thank you very much.

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Malin Enarson, Addtech AB (publ.) - CFO [27]

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Thank you.

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Operator [28]

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This concludes our conference. Thank you all for attending. And you may now disconnect.