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Edited Transcript of ALDA.PA earnings conference call or presentation 6-Nov-19 9:00am GMT

Q3 2019 ALD SA Earnings Call

Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of ALD SA earnings conference call or presentation Wednesday, November 6, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gilles Momper

ALD S.A. - CFO

* Michael Masterson

ALD S.A. - CEO & Director

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Conference Call Participants

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* Charles Bordes

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Enrico Bolzoni

Crédit Suisse AG, Research Division - Research Analyst

* Geoffroy Michalet

ODDO BHF Corporate & Markets, Research Division - Research Analyst

* Lucas Ferhani

Deutsche Bank AG, Research Division - Research Analyst

* Samuel James Bland

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the ALD Webcast Q3 9 Months 2019 Results. My name is Sal, and I will be your coordinator for today's event. Please note, this conference is being recorded. (Operator Instructions)

I will now hand you over to your host, Mike Masterson, CEO, to begin today's conference. Thank you.

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Michael Masterson, ALD S.A. - CEO & Director [2]

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Thank you, and good morning, ladies and gentlemen, and welcome to this ALD Third Quarter Results Call. The main message is regarding ALD's performance during the first 9 months of this year on Page 3 of your pack.

Total fleet grew by 6.7% versus September last year, including the SternLease acquisition and reaching 1.73 million vehicles at the end of September. This growth has been powered by our funded fleet, which has seen an increase of 8% over the past 12 months.

Our private lease segment continues to grow strongly at 145,000. We're well on track to reach 150,000 at the year-end, in line with the targets we set when we completed our IPO in 2017. Overall, we are confident that ALD will reach the 5% to 7% organic growth -- fleet growth guidance for the year.

The quarter saw a number of strategic and commercial initiatives. And ALD is currently building an innovative partnership with Polestar, the Swedish electric performance vehicle brand. We launched our first Mobility-as-a-Service up in the Netherlands. It's called ALD Move. We reached -- we received a EUR 250 million financing from the EIB to accelerate the growth of our hybrid and EV fleet. And ALD Italy launched POP GO, an exclusive peer-to-peer product for the POP MOVE community.I'll comment on each of these in greater detail later.

ALD's financial performance was solid this quarter. During the first 9 months of this year, leasing contracts and service margins together rose 4.8% versus 2018. Growth in margins again exceeded that of operating expenses, which rose by just 3%. As a result, our cost-income ratio improved further to 49.1%.

Car sales results proved resilient in Q3, putting the 9-month average profit per unit sold at EUR 295, near the top of our EUR 100 to EUR 300 guidance range.

Our net income for the first 9 months came in at EUR 426.8 million, up 2.7% versus 2018.

Gilles will comment our financial results in greater detail later. With this solid performance for the first 9 months, ALD confirms its full year financial guidance.

Now let's look in greater detail at this year's fleet growth on page -- on Slide 4 of your pack. As you can see on the graph on the right-hand side, our fleet continues to grow in line with our expectation. Organic fleet growth was 5.8% versus September 2018, and the SternLease acquisition pushed total fleet growth to 6.7% year-on-year. This growth comes almost entirely from our full-service leasing segment with an 8% growth year-on-year, including SternLease. All regions contributed to this growth.

Private lease continues to grow at a dynamic pace with an annualized growth rate of 39% since the start of the year. As mentioned earlier, our private lease fleet reached 145,000 vehicles at the end of September, making us confident of reaching our 150,000 target by the year-end.

Slide 5 shows you the main strategic and commercial initiatives we've undertaken in recent months. We've been busy in the last quarter, building an innovative partnership with Polestar, the Swedish electric performance vehicle brand. Together, we're working to offer fully digital subscription services for Polestar starting with the brand's first electric vehicle, Polestar 2. The aim of this partnership is to provide leasing packages available for flexible duration and mileage with a contract managed entirely online by ALD Automotive from credit assessment to e-signing of the contract. Launch is planned for January 2020.

In the Netherlands, we launched ALD Move in September. Our clients can use mobility -- this Mobility-as-a-Service assistant to optimize their trips using a larger range of services, including personal travel assistant, dedicated chat bot and instant route planning -- planner. We have leveraged our strategic partnership with Microsoft for the development of this app, and the technology use makes it flexible, integrated and scalable.

On the financing side, we're happy to announce a financial partnership with EIB. As part of the cleaner transport facility program launched by the European Commission and the EIB, we've been granted EUR 250 million credit envelope for the development of our hybrid and electric vehicle fleet.

The launch in September of ALD POP GO in Italy was also an important milestone this quarter. It's an extension of the partnership with the digital start-up, POP MOVE, that ALD Italy has entered into at the end of last year. POP GO is a ready-to-share, full-service leasing product, exclusively dedicated to ALD private customers. It allows them to share their vehicle and save on their monthly rental fee. POP GO products and POP MOVE community aim to optimize fleet rotation and efficiency, opening multisegment peer-to-peer, sharing opportunities on the Italian market, exclusively managed through ALD cars.

ALD's strong customer service performance continues to be recognized by our clients and peers with our subsidiary ALD France receiving the award for the 12th year in a row.

And last but not least, Fitch Ratings confirmed ALD's long-term issuer default rating of A- with a stable outlook, highlighting our record of robust profitable growth over the past several years and our ranking among the largest full-service leasing companies worldwide.

Let me hand over there to Gilles, who will give you an update on our financial performance.

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Gilles Momper, ALD S.A. - CFO [3]

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Yes. Thanks, Mike, and good morning, ladies and gentlemen.

So I'm on Slide 6. So let's start by taking a look at the cost-income ratio. We can see a graph you might recognize illustrating the ongoing improvement of our cost-income ratio. During the first 9 months of this year, leasing contract and services margins continue to grow, rising 4.8% versus the same period last year and slightly above Q1 and above Q2. As most of you already know, this number should be seen in the light of the rebalancing of our fleet from diesel towards petrol and greener vehicles, which has been weighing on our services margin growth in the recent quarters.

Our operating expenses rose just by 3% in the first 9 months of 2019 to EUR 475.6 million. OpEx is growing well below leasing contracts and services margin, generating strong operating leverage. And this explains why our cost-income ratio, excluding car sales results, improved to 49.1% from 50.5% recorded a year earlier.

This continuing downward trend is driven by scale benefits. So you see an automation of processes throughout the organization combined with a strong cost control culture, enabling ALD to maintain its investment in IT. With this performance for 9 months, we are on track to reach the circa 49% target we set for 2019, and we expect further improvements in the coming years.

On Slide 7, it shows the performance of our marketing activities. With our used car demand continuing to support prices. Our car sales results reached EUR 21.1 million this quarter, showing a stabilizing trend. The volume of cars sold rose at 74,000 in Q3 '19, up from 71,000 in the previous quarter and 70,000 in Q3 '18. Car sales results per used vehicle sold to that EUR 285 for the quarter, down from EUR 346 in Q2. But the average of the first 9 months of the year reached EUR 295, at the top of our guidance.

The average stock turnover remained stable in Q3, in line with recent quarters. So keeping in mind that seasonal factors are generally negatively impacting Q4 car sales results, we are expecting the average car sales results per unit for 2019 to be in the upper range of the guidance.

On Slide 8, on the P&L, it shows you the full P&L for the first 9 months. We've already discussed trends on the income components. But here, you can see that on the first 9 months of '19, our margins have increased by EUR 45 million together compared to the first 9 months last year, while our operating expenses have only increased by EUR 14 million. And this is a substantial achievement in terms of operating leverage.

The impairment charges on receivable reached EUR 32.4 million in the first 9 months of 2019, Q3 being overall in line with preceding quarters. And our effective tax rate remains low at 17.4%, reflecting the ongoing strong impacts of the tax benefit of the Italian Stability Law.

Q3 '19 shows net income at EUR 46.1 million (sic) [EUR 146.1 million], being the second best quarter after Q2 '19. And the net income group share reached EUR 426.8 million for the first 9 months, up 2.7% compared to the same period last year.

So on that, we can switch to the Slide 9. And this final slide shows the guidance we gave for the year, which we reconfirm that our year-to-date commercial and financial performance makes us confident that we're able to reach these targets and be able to distribute a 2019 dividend above last year.

And on that, I guess, we are ready for any questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Lucas Ferhani from Deutsche Bank.

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Lucas Ferhani, Deutsche Bank AG, Research Division - Research Analyst [2]

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I'll have 3. So the first one on diesel repricing, I was just wondering whether the step-up we see in services margin is due to less of an impact of that diesel repricing? Or is it still kind of similar to previous quarters? But until your performance is better, I imagine it's quite tough to kind of say which is what, but just if you have a view on that. The second one was on the Italian Stability Law. Can you explain a bit, I mean, why the gains from the law were so much higher than kind of what you expected previously? And also, we're getting close to kind of the end of the period where if you look at your contract duration and the impact from that should have ended by next year. Do you think we can see impact after that period? And explain a bit what is driving that. My last question was just on your exposure to rental companies. I mean some of the big, short-term rental companies have profit warned and quite a different change in their outlook. I was -- just wanted to see your exposure to that and if you see any danger from this.

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Michael Masterson, ALD S.A. - CEO & Director [3]

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Okay. Thanks, Lucas.

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Gilles Momper, ALD S.A. - CFO [4]

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Yes. So maybe I'll take the first 2 ones. And so on the diesel repricing, yes, it's the same similar trend as we've seen in the previous quarters. I mean we've been -- we have been repricing, as you know, as we've explained during the last quarters, the diesel, the residual value of diesel cars, which has still away on the -- and you can see on the services margin mainly. So this is the similar trend that we have seen in the previous quarter. There is no -- not a big change on that. Maybe more importantly, on the Italian Stability Law, just to understand the dynamic of the law, the law again has been very efficient in Italy. It has boosted the registration at the period when the law was in force. You know that we're also able -- in some countries, we're also able to do some contract extensions. And so depending on the real maturity of the contracts, we are still -- we can still benefit from the law, and it's a very profitable law for us. So the longer the contracts are, the best it is for us because the more we can further benefit from this law. So it's in our interest to extend the contract duration in Italy. And overall, the tax gain on the tax benefit for us is overall EUR 180 million. I'm just rounding the figures. It's slightly above this year to what we're expecting, especially because we have had this -- the -- this appetite to have longer contract. And it's difficult to -- we have -- generally speaking, we have original contract duration. Sometimes, the real contract durations in long -- is -- are longer, and hence, the benefit of the Italian Tax Stability Law is higher. It's not very different to the benefit we had last year. It's in the same range. Keep in mind, EUR 50 million. And next year, we expect this benefit to half, to be divided by 2 and to -- normally, we should still have a slight impact in 2021.

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Michael Masterson, ALD S.A. - CEO & Director [5]

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Okay. Just going on to your question on the rental car companies and the challenging environment and our exposure to them. We really have no significant exposure to any of the major rental car companies. We're not doing any. Essentially, occasionally, they're looking for car financing as such. And obviously, that's not the business that we are in. We did have, over the past few years, some exposure to what you could call mobility players. And what we -- one of the conscious decisions we made this year is to decrease our exposure there. If you look at the third quarter results, you can see the cost of risk last year was at EUR 13.2 million, and this year it's at EUR 10.6 million for the third quarter. So quite a significant -- nearly 20% drop in the cost of risk. And that's partly linked to a lower exposure to some of the start-ups around the mobility area where we have less exposure. But in answer to your main question on the rental car, we don't have any exposure to the major rental car companies.

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Operator [6]

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The next question comes from the line of Sam Bland from JPMorgan.

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Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [7]

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Two2 questions for me, please. First was back on the kind of services and leasing margin. I think the gap in those combined services and leasing margins versus fleet growth has probably closed a little bit this quarter versus previous quarters. Can you just talk about what might be driving that, please? And the second one was on the -- obviously, the fleet growth has been a change in the mix. The funded fleet is growing particularly strongly. Just talk about what's maybe caused that? Was that a deliberate move or something customers have asked for, et cetera?

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Michael Masterson, ALD S.A. - CEO & Director [8]

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Yes. Sure, Sam. Yes, I think the -- just on the margin side of things. There was a -- as you know, we've been growing at some 10% per year over the last few years. And we made a conscious effort, a conscious decision at the start of this year to guide around 5% to 7% partly linked to this transformation of the powertrain away from diesel but also linked to margins and trying to make sure that we focus on those segments where there is the best margins. We are starting to see that come through, and that's really what's driving this closer connection between the fleet growth and the margin growth. What we -- the issue there is that, obviously, we have a 4-year cycle in terms of rotation. It's probably longer than 4 years because you also have a period between when the customer signs the order from a quotation that we make to when the car is delivered. So there's a -- the -- what we'll see and what we're seeing is a progressive improvement in that margin, which we believe will continue. I think that's the main factor there. And we can see internally clear evidence that the slight slowdown in growth has had a significant impact on the percentage of diesel but also a significant impact on the margin.

Just moving on to the difference that you've highlighted, which is true between the growth in full-service leasing and fleet management. Our main focus, obviously, is full-service leasing, fleet -- and mobility products, which drive really the greater part of the margin within the business. The fleet management opportunities are a little bit opportunistic. We have got a couple of significant deals in the pipe. And when they trigger, they will move the needle in terms of the fleet management. Whether that happens this year or in the first quarter of next year, we'll see. But I think the way fleet management works is that when you sign a contract for 20,000 or 30,000 contracts, they come on the next day because, obviously, you don't need to order the car, you don't need to wait for the delivery of the vehicle and you don't need to set up the asset in your balance sheet, you just provide the fleet management services. And so typically, it can be a little bit volatile. And so we look at that more over the longer term. And with 1 or 2 deals that are coming in, I think the -- over the longer term, the growth in fleet management will be -- will continue to be similar to the growth in full-service leasing.

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Operator [9]

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We have no further questions in the queue. (Operator Instructions) The next question comes from the line of Charles Bordes from Kepler Cheuvreux.

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Charles Bordes, Kepler Cheuvreux, Research Division - Equity Research Analyst [10]

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Looking on the ALD Move, is it possible to have a bit more detail on the economic model of this solution? And do you plan to deploy it further in other countries?

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Michael Masterson, ALD S.A. - CEO & Director [11]

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Yes. Yes. I mean ALD Move, it's linked to this strategic alliance that we have with Microsoft, we've been working together on a number of initiatives. It is a kind of Mobility-as-a-Service application. You can link this to your calendar, it will give you information around the best routes, journeys. It will contact you 20 minutes before your journey to advise you on an update on the traffic, or it can -- it has a kind of learning routine in there. So it takes into account what your preferences are. And if you have some -- something where you don't want to drive your car more than 2 or 3 days a week for environmental reasons, it will take into account all these different factors in providing assistance to the driver. I mean what this is, is part of a focus around services to the driver. The closer we are to the driver in terms of the services that we are able to provide, the more services that we can provide, the greater is our capacity to drive those -- that maintenance or tire replacement, traffic towards our preferred networks, which has an impact on cost. And the greater the opportunity there is for us to sell additional services there around replacement vehicles or temporary vehicle. So it's -- there's not an immediate jump in profitability here. It's really a move on Mobility-as-a-Service with a view to extending the range of services that we're able to offer to our partner and ultimately, participating in this multi-modality world, where we are able to offer not just vehicle services but also public transport and connect our drivers to a range of mobility solutions.

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Operator [12]

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The next question comes from the line of Enrico Bolzoni from Crédit Suisse.

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Enrico Bolzoni, Crédit Suisse AG, Research Division - Research Analyst [13]

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So there has been on the Italian press for a while discussion on the potential new financial law that might have an impact also on corporate fleets as they are evaluating the possibility of basically reducing the tax retraction from corporate leasing and fleets in general. So 2 questions. One is how do you see this in terms of your exposure to the Italian market, which, of course, is very relevant? And the second, in particular, older vehicles, so Euro 5 and before that would be impacted the most. So what is the percentage you still have in your fleet in terms of all the Euro 5 over this total?

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Michael Masterson, ALD S.A. - CEO & Director [14]

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Yes. I mean the -- obviously, with the coverage we've got of some 43 countries where we're quite used to managing these kind of changes. Often, the -- one thing I would say in Italy is there have been a lot of potential tax changes over the last couple of years, which haven't necessarily come to fruition. And obviously, they're looking at not just the tax deduction on fleet, but they're looking at global tax rates. Obviously, we have the Stability Law on a number of other changes. But I think what we've seen over time is the -- a capacity for the business to adapt because the fundamental is that our customers need the vehicle and the services around the vehicle. So sometimes we've seen in the past -- or around this deductibility, we've seen a move more towards the drivers renting the vehicle directly rather than the company but typically within a company promoted scheme. And there have been a number of other scenarios that we can outlay in different countries, but typically, this has not been impacting our business so much because of the fundamental that the customers need the vehicle to provide the transport, to provide the services that they have with the customer. And typically, what we do in these scenarios is obviously work with the corporate and advise the corporate on how they can adapt the solution. But one of the solutions that you alluded to there is greater penetration of electric vehicles or potentially Euro 6 vehicles, and that's -- we have a specific consultancy group who advise on this kind of transformation of powertrain.

One of the benefits we've got as a business is the rapid change in our powertrain because of our -- 3- or 4-year cycle of our vehicles, which means that in general, we have the latest technology. We have a high penetration, as you know, of electric vehicles would still continue to grow very strongly. And our exposure to diesel is -- while it was historically high because the market was historically high, it's transforming at a very, very rapid rate. So while we still have a high number of diesel that we still think we're going to be ahead of the curve in terms of the transformation and the impact of changes made within cities and governments across the whole of Europe because it's not just Italy, but we still think we're ahead of the curve in how we manage that powertrain transformation. And that's been part of the focus this year is to have slightly less growth but really accelerate that transformation and have greater agility in -- as we look forward to how we sell these cars.

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Operator [15]

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The next question comes from the line of Geoffroy Michalet from ODDO BHF.

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Geoffroy Michalet, ODDO BHF Corporate & Markets, Research Division - Research Analyst [16]

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I have one regarding the credit lease fleet, which seems to have a stronger momentum, and you are probably on track to beat your guidance, your 2019 guidance. I would just like you to give us a bit more color on what are the underlying trends on this profit lease evolution for 2019, 2020, why not. And if you see the momentum lasting for the next quarter.

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Michael Masterson, ALD S.A. - CEO & Director [17]

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Yes. Sure. I think the core of this growth has been leveraging the partnership network, which we -- which, as you know, is well established. We have more than 100 manufacturer partnerships. We're working with more than 30 banks. But we have, as we've highlighted in recent quarters, a whole range of distributors, whether it is a utility, electric companies, whether it is shops, whether it's insurance companies or web platforms, including Amazon. What's -- progressively, all of those or most of those partnerships are identifying that there is a move in the market towards private lease. So if you are a regional bank or an international insurance company, they're all looking at how they can participate in this move. So the offer that we're providing to them, which is one in which they don't need to invest in technology to create a digital platform, to create all the maintenance insurance services around the vehicle. And we obviously manage the balance sheet, the funding, residual value risk and everything else around the vehicle is -- has been a very attractive one. So we're progressively adding partners to the private lease distribution network, and that is progressively growing the fleet. I think there's a very strong dynamic there because, obviously, there's a snowball effect in some of these partnerships, which we're rolling out across 1 or 2 countries. But we plan to roll out over the whole of Europe. And so we still see a big headwind and a big rollout of the partnership -- through the partnerships and a strong private lease growth over the coming quarters. And our focus is to make sure that we are in the business of providing full-service leasing, so providing on the services around this vehicle. We're not a company which is focused on car finance, to make sure that we focus on our core product, with a view to maintaining margins and profitability and obviously, managing credit risk, which I think we've so far done.

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Operator [18]

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There are no further questions in the queue, so I will hand you back to your host to conclude today's conference. Thank you.

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Michael Masterson, ALD S.A. - CEO & Director [19]

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Okay. Well, thank you all very much for joining us today, and we look forward to seeing you all again on the road soon. Thank you. Thank you very much. Goodbye now.

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Gilles Momper, ALD S.A. - CFO [20]

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Bye-bye.

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Operator [21]

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Thank you for joining today's call. You may now disconnect your handsets. Hosts, please stay on the line and await further instructions.