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Edited Transcript of BONT earnings conference call or presentation 16-Nov-17 3:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Bon-Ton Stores Inc Earnings Call

York Jan 11, 2018 (Thomson StreetEvents) -- Edited Transcript of Bon-Ton Stores Inc earnings conference call or presentation Thursday, November 16, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad Stauffer

The Bon-Ton Stores, Inc. - Chief Merchandising Officer & Executive VP

* Jean Fontana

ICR, LLC - MD

* Nancy A. Walsh

The Bon-Ton Stores, Inc. - CFO and EVP

* William X. Tracy

The Bon-Ton Stores, Inc. - President, CEO & Director

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Conference Call Participants

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* Elie Radinsky

Cantor Fitzgerald & Co. - MD - High Yield, Distressed & Bank Loan Credits

* Karru Martinson

Jefferies LLC, Research Division - Analyst

* Steven Anthony Ruggiero

R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst

* William Michael Reuter

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Good day, everyone, and welcome to The Bon-Ton Stores, Inc. Fiscal Third Quarter 2017 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jean Fontana. Please go ahead.

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Jean Fontana, ICR, LLC - MD [2]

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Thank you. Good morning, everyone, and welcome to Bon-Ton's Third Quarter Fiscal 2017 Earnings Results Conference Call. Bill Tracy, President and CEO; and Nancy Walsh, Executive Vice President and CFO, will host today's call. Chad Stauffer, EVP, Chief Merchandising Officer, will also be on the call to help answer your questions. You may access a copy of the earnings release on the company's website at www.bonton.com or by calling (203) 682-8200.

The statements contained in this conference call which are not historical facts may constitute forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, including those set forth in the cautionary note in the company's earnings release, and all of which are described in the Company's filings with the SEC.

With that, I will turn the call over to Bill.

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [3]

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Thank you, Jean, and good morning, everyone. We appreciate you joining us for today's call. Nancy will review our financial results for the third quarter in detail as well as discuss our outlook for the remainder of the year. But I would like to first discuss the actions we are taking to better position the business, both for the near and long term.

As many of you know, I officially began my role as President and CEO on August 25 of this year. Over the past 3 months, I've taken a fresh and comprehensive look at our business, particularly given the continuing headwinds of a challenging retail environment. While our third quarter results fell short of our expectations, I want to assure you that we are approaching the challenges to the business with a sense of urgency and decisiveness. As such, we are taking more aggressive steps to drive improved performance as well as strengthening our financial position.

As part of our efforts, a few months ago, we retained PJT Partners and AlixPartners, advisers who are helping us implement new operational and financial initiatives. In partnership with these teams, we will be refining our 4 areas of focus, which include: differentiating ourselves through merchandise assortment enhancements, driving growth in omni-channel, refining our marketing strategy to increase traffic and customer engagement and reducing costs through the continued rollout of our profit improvement initiatives.

In addition to these initiatives, we are instituting a more aggressive store rationalization plan and redirecting capital expenditures toward investments designed to drive sales growth. Importantly, and as you know, we are also working with our advisers to proactively engage with our debt holders to review alternatives to strengthen our balance sheet. Taking all of these initiatives together, we have now developed and are implementing a comprehensive turnaround plan for Bon-Ton.

Beginning with our operational initiatives, we will be taking more aggressive actions with our store portfolio. In recent weeks, our internal real estate team, with the assistance of our real estate adviser, A&G Realty, as well as PJT and AlixPartners, has completed a detailed analysis of our stores, looking at economics of the leases and quality of the locations. To ensure we move forward with the most productive store footprint possible, we are engaging with all of our landlords to bring our occupancy costs more in line with our sales and store performance, and we plan to close at least 40 locations through the next year.

In addition, as we have said previously, we will continue to pursue opportunities available within our real estate portfolio. For example, during the third quarter, we completed an $18.9 million sale-leaseback of our recently remodeled Herberger store located in the Rosedale Center in Roseville, Minnesota, which unlocked additional capital. Moving forward, we see opportunity to complete additional real estate sales, either closing or leasing back the stores.

Our next focus is on our merchandise initiatives, which we believe can generate significant incremental sales and margin dollars. We have previously discussed our focus on differentiating Bon-Ton through an enhanced assortment. As a result, we had several merchandising wins in the third quarter. We showed strength in denim, active, home decor, young men's and fine jewelry. And we were also pleased with the performance of growth businesses such as impulse, UGGs, Adidas and Close to Home. We have also begun implementing some of our new merchandising initiatives focused on our flagship and high-potential stores, and early reads have us excited for the holidays.

Key strategies for the holidays include a focus on gifting and impulse businesses. We were pleased with the launch of FAO Schwarz shops in 186 stores. Other holiday merchandising strategies include spanning our successful Santa's Pantry specialty food items and holiday pop-up shops designed to drive conversion with unique, giftable items, including our Sweet Dreams Sleep Shop, beauty-to-go and our relaxation shop. In January, we anticipate relaunching our wedding and gift registry services for our customers. We have taken steps to modernize and simplify this service to enhance the experience for customers who register with us, included an updated website and mobile app, an expanded assortment of wedding and gift-related products online and in stores.

Overall, we believe that we can meaningfully enhance our performance by owning Bon-Ton's competitive advantages as the hometown store by building on the improvements we made in our merchandising execution. We are not only working to build powerful merchandise assortments, but we are also implementing tactics to improve store planning, allocation and replenishment, enhance our private brand offerings, and improve the effectiveness of our promotions and markdowns.

We are redefining our merchandise assortments to meet customers' needs across a broader spectrum of occasions. This means investing more in core essentials, which are our best-selling products that drive customer loyalty and the latest fashions to add newness to our floors and create an emotional connection with our customers. We will eliminate low-performing, tertiary SKUs and implement new visual merchandising standards.

Complementing our investment in core essentials, we are focused on strengthening our replenishment practices with an emphasis on leveraging dynamic forecasting and SKU level replenishment. We will also invest more on our flagship and high-potential stores, while evaluating store clusters to support assortment localization, ensure that we have the right inventory in the right locations.

We have piloted a new merchandising strategy across 10 stores that are representative of the overall chain. Across these targeted stores, we've invested an increased merchandise [debt], implemented an enhanced marketing program and increased staffing levels to provide exceptional customer service. We have seen an immediate uplift in sales at these stores. They were outperforming the rest of the chain and exceeding the sales improvement targets we set out for them. With the success of this test, we plan to roll out the learnings from this strategy across the remainder of our fleet during the first half of 2018.

Private and exclusive brands are essential to the long-term differentiation, and we are reevaluating the positioning of these brands to ensure alignment with the assortment changes we are making. Over the next few years, we look to increase the penetration of these brands to 25% of sales from the current 17% as we expand brands such as Ruff Hewn, Studio Works, Exertek, Relativity and LivingQuarters.

Finally, we have taken a new approach to promotional markdowns, simplifying our coupons and having clear signage to better communicate the value we are delivering to our customers. At the same time, we are focused on more aggressive first markdowns and more disciplined around the aging standards, thereby making our inventory more productive.

Turning to omni-channel, which is an important element of our strategy to grow sales and gain new customers. Our goal is to increase penetration to 20% from the current high single-digit percentage. We continue to see momentum in this business with double-digit sales growth in the third quarter, driven, in part, by increased focus on digital media and improved processes to expedite merchandise availability.

Once again, our product is critical to the success of this business, and we are expanding our online merchandise offerings to ensure that we have our customers (inaudible). We have taken steps to make our website more customer friendly. We're elevating the digital experience through platform enhancements that expand accessibility to our website, increase the speed and agility of navigation, and enable convenient and secure credit card applications for mobile devices. This will ensure a seamless experience for our customers for the holidays, beginning with Thanksgiving, Black Friday, Cyber Monday and beyond.

We have also created a more compelling online shopping experience. For the holidays, our gift cards are designed to make shopping easier with great gift ideas by category, gender, value price points and curated gifts based on holiday traditions. In addition, we are focused on increasing the productivity of our West Jefferson fulfillment facility to support the growth in our omni-channel business. Through our continuous improvement mindset, we have reduced costs and importantly, improve speed throughput -- throughout the entire process flow, achieving approximately 35% year-to-date improvement in Labor Day -- in labor productivity versus our goal of 30%.

Our next focus is on refining our marketing strategy. We see an opportunity to reduce overall marketing spend going forward, while still increasing our investment in the areas where you are seeing high returns. In the third quarter, we tested a number of new promotional events and strategies with positive results, providing opportunities for refinement and expansion going forward. We developed technology to meaningfully improve the customer experience by greatly speeding up the promotional coupon processing at POS, a boon to customers and sales associates facing long holiday checkout lines.

And in the near term, our marketing efforts will communicate a new level of excitement in stores and online for the holidays. We are launching our biggest after Thanksgiving sale at 11:00 a.m. on Thanksgiving day, our earliest opening to date, offering customers more choices for when they begin their holiday shopping. We will feature bold, exciting new offers and promotions and we're adding a chainwide VIP event and beauty and style parties, as well as localized store events, including a holiday open house at key locations.

Our new holiday gifting campaign -- perfect gifts, perfectly priced, perfectly easy -- will fully support our robust merchandising initiatives, emphasizing the best gifts under $50 as well as our best designer brands, highlighting Bon-Ton as the destination for holiday shopping. Longer term, we will move our marketing to a more customer-centric model, with a shift from direct mail towards digital and radio, and utilizing data to develop more personalized engagement with our customer.

The final items I would like to cover are our cost-reduction efforts, how we plan to invest in our business going forward and strengthening our balance sheet. You'll remember that our in-house profit improvement team was created at the beginning of 2017 to expand on the cost saving initiatives begun last year. Recent successes of this team include identification of gift card breakage income, IT savings and favorable service contract renewals.

As for investments, in the third quarter, we completed 4 major store remodels, renovating and updating existing Bon-Ton locations and former Macy's locations that we have taken over, and further enhancing our customer shopping experience with an augmented product assortment and the addition of new key brands. Since these stores had their grand reopening on September 13, sales have significantly outperformed company average. As we look to 2018, our capital expenditures will be targeted toward our flagship and high-potential stores as well as infrastructure that will support our omni-channel growth.

Finally, turning to our balance sheet initiatives. As I mentioned, we will be working with our advisers to proactively engage with our debt holders to review alternatives to strengthen our balance sheet. Our objective is to establish a sustainable capital structure to support the business for the long term.

Looking at the fourth quarter, we are pleased to have amended our revolving credit facility agreement, which provides us with substantial additional liquidity through the holiday season. With increased access to capital, we have worked with our vendor partners to ensure that we have the right inventory in sufficient quantities in place for Black Friday and the holiday season. We appreciate the ongoing support of our vendor partners and our lenders as we execute on our turnaround initiatives.

Before I turn the call over to Nancy, I'd like to reiterate that we have taken a critical look at our business and are executing a comprehensive turnaround plan that is focused on rationalizing our store portfolio, improving our merchandising, omni-channel growth, marketing, cost reduction and targeted capital investments. At the same time, we are working to put the right capital structure in place to help us succeed. We are operating our business under the assumption that the retail environment will remain highly competitive and continue to evolve.

We believe that the structural changes and initiatives I have outlined will address the challenges we face, reinvigorate our brand, drive improvement in our operations and ensure we have a strong financial foundation. We're off to a great start in the month of November, seeing positive high single-digit comps and we are focused on having a successful holiday season.

I will now turn the call over to Nancy, who will provide a detailed review of our third quarter financial performance and discuss our outlook for the remainder of the year. Nancy?

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [4]

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Thank you, Bill, and good morning, everyone. I'll review our third quarter results and updated guidance for the year. Total sales for the third quarter was $545.3 million, a decrease of 7.6% as compared with the prior-year period. Comp sales decreased 6.6%, largely due to unseasonably warm weather and the continuation of soft traffic trends. The decline in sales of cold weather goods represented approximately 240 basis points, over 1/3 of our comp store sales decrease. As the weather has recently turned more seasonable, we're encouraged by customers' response to the cold weather goods in our holiday assortment.

Private label credit card sales as a percentage of total sales increased approximately 90 basis points to 57.9% in the quarter, signaling that our best customers remain fully engaged with our business. We continued our double-digit growth in omni-channel sales during the quarter, driven by increased demand and conversion on both our e-commerce and mobile channels in the period.

Gross margin decreased 200 basis points to 33.1% of net sales, primarily due to increased net markdowns in the quarter. We remain committed to cost savings and continue to effectively execute on a number of profit improvement initiatives. These efforts resulted in an SG&A expense reduction of $11.2 million or 5.2% during the quarter.

Expenses totaled $202.6 million or 37.2% of net sales, which is an increase of approximately 90 basis points compared with the expense rate in the prior year's third quarter due to sales volume. We realized savings associated with stores closed in the prior year and reductions in medical insurance, payroll and store occupancy costs. Overall, we anticipate we will realize net savings of $41 million to $45 million in 2017, excluding $10 million of expense associated with our 53rd week.

Net loss for the quarter was $44.9 million or $2.19 per share. Net loss in the third quarter of fiscal 2016 was $31.6 million or $1.58 per share. This resulted in adjusted EBITDA of negative $5.2 million in the third quarter of 2017, compared with adjusted EBITDA of $10.6 million in the prior year period. Please note that adjusted EBITDA is not a measure recognized under GAAP. Refer to the table in our press release, which reconciles this non-GAAP measure to net loss.

Turning now to a review of select balance sheet items and other data. We ended the period with inventory down 10% from the prior year as we remain disciplined in our inventory management. However, we are well positioned with merchandise as we enter the important holiday season. We ended the quarter with total debt, excluding noncash items, up 3% compared with the prior year period. This was the result of increased borrowings under our revolver to support various financing transactions and associated fees to fund capital expenditures and operations.

As noted in our release at the end of the third quarter, our ABL credit facility was classified as current debt. This was required as part of our amendment, but I would note that the maturity date remains the same, at March 15, 2021. As of October 28, 2017, we had approximately $162 million of excess borrowing capacity under our revolving credit facility and $184 million as of November 14, 2017.

As Bill mentioned earlier, we amended our revolver to provide substantial additional liquidity through the holidays and the flexibility to allow full access to our borrowing capacity, enabling us to secure inventory and quantities sufficient for the season. We are very pleased with and appreciate all the support from both our lenders and vendor partners.

Capital expenditures for the quarter excluding external contributions were approximately $14.5 million, and net of external contributions were approximately $11.6 million. Our CapEx spending focused primarily on projects that build infrastructure for growth such as omni-channel enhancements, customer-facing store upgrades and information systems.

Turning now to our full year fiscal 2017 guidance. Based on our third quarter results, we are tempering our expectations for the balance of the year and reducing our fiscal 2017 adjusted EBITDA guidance to a range of $100 million to $110 million. We now expect loss per share to be in the range of $2.86 to $3.35, inclusive of the $0.05 per share expense related to the 53rd week.

Updated assumptions in our full year guidance include the following: a comp sales decrease now ranging from 4.5% to 5.5%, which excludes sales from the 53rd week; a gross margin rate decrease now ranging from 50 to 65 basis points below the fiscal 2016 rate of 35.5%; SG&A expense now ranging from $836 million to $840 million, including approximately $10 million for the 53rd week, compared with SG&A expense of $880.6 million in fiscal 2016; capital expenditures not to exceed $30 million net of external contributions; and an estimated 20.3 million weighted average shares outstanding.

As Bill noted earlier, we are focused on operational and financial initiatives to enhance our revenue growth, improve profitability and ensure we have a strong financial foundation. We are working to ensure we have a sustainable capital structure for the business. We believe we are solidly positioned for the holiday season. And looking out into next year, our team will continue to take steps to ensure we have the right store footprint, improve our merchandising execution, drive continued growth in omni-channel, implement more-effective marketing, further reduce costs and target our capital investments to support our growth initiatives. As a general note, our Form 10-Q for the third quarter will be available by December 12.

With that, we will open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question today from Steven Ruggiero with R.W. Pressprich.

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Steven Anthony Ruggiero, R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst [2]

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Good morning, Bill and Nancy. Clearly, you guys are working very hard and have outlined a thoughtful plan for the remainder of this year and next. I do have a number of questions, but I'll limit it so others can jump in here. Regarding the 40 locations that Bill mentioned next year, what would be the timing of those locations? And I would gather that those are not all coming off lease. And I'm trying to understand the philosophy because you had previously -- well, it's pretty evident, but you had previously indicated that you would not close stores that are not coming off lease. And that goes back in time before Bill was CEO. Is this -- what is the cost going to be involved here? And the final part of this question is, are any of these locations owned?

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [3]

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I guess, Steve -- obviously, we're taking more aggressive action for the store portfolio. We're obviously working with our real estate adviser, A&G Realty, as well as PJT and AlixPartners. Now we completed -- we're completing a detail -- they've completed a detailed analysis of the stores, looking at the economics of the lease and the quality of locations in the current environment. We're working with our landlords with the objective of bringing occupancy costs more in line with the sales and the store performance. And these negotiations are still ongoing, Steve, so we don't have all the answers right now. We are not providing a list of closing locations or the details at the time, but we expect to close at least 40 stores over the next year in 2018.

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Steven Anthony Ruggiero, R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst [4]

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Are there specific markets you're focusing on?

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [5]

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I think it's -- we believe the actions that will help -- I think we're looking at everything, Steve. I just think we're looking certainly at sales performance and profitability of the locations.

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Steven Anthony Ruggiero, R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst [6]

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Okay. And if I could just follow-up with one other related to the same question. And what type of working capital liquidations would you be targeting? Are these -- another way to ask it, are these average stores or is there some other theme here?

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [7]

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We're not sharing explicit numbers right now, Steve, but I will tell you the answer to one of your earlier questions, these are all leases at the time that we're talking about these locations. They will include some of the stores that we would normally would have closed at the end of this fiscal year based on our normal cadence. And they are generally the negative cash flow stores that we've talked about as well as more of our smaller doors.

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Operator [8]

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And we'll take our next question from William Reuter with Bank of America Merrill Lynch.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [9]

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My first question is for you, Bill. You outlined a whole lot of changes that you guys expect to make. I guess I'm wondering, as you guys think about 2018 and '19, how quickly these changes can meaningfully improve the adjusted EBITDA of the business. And you probably can't give a quantitative explanation for that, but I guess just how you're viewing, like, can EBITDA go up next year?

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [10]

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I think to give you the answer, I'm not letting grass grow under my feet. I've been in charge for 3 months officially, but -- and I first saw the need that we needed help in terms of like AlixPartners, specifically to help with the business plan, PJT as well to help with the balance sheet. And so we're being very -- and we have been very aggressive, candidly. And it's our hope we're going to see things in the first half of next year of the improvement. And maybe if -- we certainly feel good about -- and I mentioned on the call as well, about our -- we are starting mid-November -- the start to the fourth quarter, which is all important. We're very, very pleased with our positive high single-digit comps right now. So we're feeling good about that, so there are things that we're doing now and there are things that will be implemented. But we expect a lot of these things to be implemented, while -- certainly throughout the year 2018, but we're hoping to get a number of initiatives in place at the start of that season.

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [11]

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And Bill, the idea is that we're driving long-term profitable growth, putting all of these initiatives together and focusing that on 2018.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [12]

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Okay. I guess, following up on your comment about the high single-digit comps you guys have seen in early November. You gave the impact of cold weather products on the third quarter as being a negative 240 basis point drag. What was the -- what would the impact so far in November have been of cold weather products? And I guess how have you guys made such a dramatic change from third quarter to November, other than cold weather products doing better?

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [13]

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I think the additional things we've done is in addition to -- look, the cold weather certainly helped and -- however, that's not the whole story, right? We've also done some better execution on some of our marketing events. We had a very successful community days event which, candidly, last year, we weren't -- we didn't execute as well as we could have. So we put a task force together to understand what we needed to do, put some different initiatives in place and, as a result, we had a very successful event.

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Chad Stauffer, The Bon-Ton Stores, Inc. - Chief Merchandising Officer & Executive VP [14]

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In terms of merchandising, Bill noted that the cooler weather certainly helped our cold weather business, which is one of our big pillars, as we've talked to frequently. But in addition to that, we've seen really nice growth in key focused businesses of active, denim. Our gifting strategy for the holidays is really starting to take root. And we've noted in prior calls that, that was a significant focus for us as we are going into the holiday season. So yes, the cooler weather is helping, but we're seeing a lift in many businesses and focused businesses. FAO was another example of new businesses that we brought to the table. We're in 186 doors with shops. Very, very pleased with the initial results there, and we're in the very beginning stages of the volume that will be generated over the holiday season.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [15]

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Okay. And then just lastly for me. I think, if I heard the numbers correctly, that your goal is to move private label from 17% to 25% of sales. What's the time period where you hope to attain that goal? And at this point, what's the difference in gross margin between the 2 -- between private label and the rest of your products?

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Chad Stauffer, The Bon-Ton Stores, Inc. - Chief Merchandising Officer & Executive VP [16]

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In terms of the growth, we're -- as was noted, we're about 17% right now, moving to 25% over the next 4 years. But that's, obviously, significant growth year-over-year. We're looking at the brand portfolio, as Bill mentioned. We have several brands currently in our portfolio that we're very happy with their performance: Studio Works, Exertek, our LivingQuarters, just to name a few. We're also looking at other opportunities that are out there that we will share with you at a future time. And in terms of specific numbers, we won't talk to that, but, yes, our private brand business, as a total, is more profitable than our other -- than residual brands.

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Operator [17]

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And we'll take our next question from Karru Martinson with Jefferies.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [18]

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When we look at those planned store closures, how much of an EBITDA drag have those been on your performance?

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [19]

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Well, as we've mentioned a number of times, there's only about 15 stores that are actually negative cash flow. So this is really an opportunity for us to holistically look at the store footprint and focus on, again, driving that long-term profitable growth, focus our efforts, both from an inventory perspective as well as other resources on the stores that we think have the most potential going forward.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [20]

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And you guys mentioned that there's a large group of smaller footprint stores in that 40 that you're kind of targeting. Thinking -- if I think back, historically, we talked about being the only game in town. The smaller stores really having an opportunity to differentiate themselves for that local audience. Does this, kind of broadly speaking, represent a turn from that localization strategy or how should we think about that?

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [21]

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Absolutely not. Absolutely not. That is still, candidly, a big focus of us, and I think that's where our success is. And we have very, very successful stores in these secondary markets. So this is not like, oh, we're getting out of secondary markets. This is just looking at some stores. And listen, we're not the first guys to be doing this, right? So many of our competitors have been doing it over, certainly, the last 18 months to 2 years. And we've taken a hard look at each location, and it's really based upon what we see what the future is. But that strategy of being the hometown store in these secondary markets is a critical piece of our success going forward.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [22]

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Okay. And just in comps, given the weather was a little over 1/3 in the quarter, I mean, where do you think that the other 2/3 of the comp went? And do you feel that that's moving more towards your competitors in brick-and-mortar? Is that going all online? Where is that consumer shopping today?

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [23]

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It really isn't -- the other part of that is not really related to losing the business as much as just a function of what's going on for the quarter. With the cold-weather impact, it really had an impact then on our mix. And the focus was on warmer weather product, which is not something you're expecting to be selling in the September-October time frame. So I think there were a number of things that contributed. The largest portion of that was cold weather, which kind of rippled through a lot of the other areas. Obviously, omni continues to grow at double-digit rates, but still 90% of our sales are going through the brick-and-mortar. So I think it was more a function of the mix and a little bit of how we had to deal with the cold weather, but we're seeing that definitely change as we're moving into the beginning part of Q4.

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Operator [24]

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And we'll take our next question from Carla Casella with JPMorgan.

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Unidentified Analyst [25]

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This is [Mae Zin], on for Carla. I just wanted to get some insight on the Amazon Lockers that you installed. How are they performing and are you seeing any pick up there? And do you have any [intimation] to roll them out into your stores next year?

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [26]

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We're having a hard time hearing you. Could you speak up, please?

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [27]

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Yes. Can you speak up, please?

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Unidentified Analyst [28]

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I just wanted more color on how your Amazon Lockers that you installed are performing. Are you seeing any pickup there and do you have more -- are you interested in rolling out more?

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [29]

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On the Amazon Lockers, they've performed very well for us. In fact, they've been fully utilized. We're looking to see if we can get more. And they are certainly being -- are helpful from a traffic standpoint, and so we've been very pleased with it.

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Operator [30]

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And we'll take our next question from Hale Holden with Barclays.

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Unidentified Analyst [31]

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This is Chris, on for Hale. Just on the November comp up high single digits, are the remodeled stores in the comp or they're excluded?

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [32]

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Nope. They are in the comps as well.

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [33]

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They're in the comp.

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Unidentified Analyst [34]

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Okay. So excluding those remodeled stores, the rest of the group is of similar amount, high single digits?

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [35]

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Yes. I'd say in the ballpark, yes.

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Unidentified Analyst [36]

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Okay. Is there anything that stands out to you? Any category that you want to point to, to attribute to the outperformance?

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Chad Stauffer, The Bon-Ton Stores, Inc. - Chief Merchandising Officer & Executive VP [37]

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We've been very pleased with the cold weather performance. Look, that's the big turnaround from Q3 into November. As the weather has become more seasonal, we've seen all of those traditional categories -- outerwear, sweaters, boots and cold-weather accessories --really lifting. It's had a significant halo effect for the entire business.

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [38]

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But as we've talked about in previous calls, the doors that we're overlapping with where Macy's closed 2016, 2017, continue to perform very, very strongly in addition to the cold weather picking up. So there are a lot of areas that we're seeing besides categories, the locations that are having a definite pickup now that the cold weather seems to be taking off.

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [39]

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And also, as I mentioned before, also the execution initiatives that we've improved upon year-over-year, certainly have been a significant factor as well.

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Unidentified Analyst [40]

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Okay. And I hear you talked about SKU reduction of some of the tertiary products. Can you size what type of a margin opportunity you would have from that initiative? And I guess, as a percentage, how much does those SKUs represent in total?

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [41]

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I can't give you that level of detail.

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Unidentified Analyst [42]

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Okay. On the sale-leaseback, can you talk about your current pipeline? And maybe help us quantify a little bit how much dollar that we expect to get from the transactions?

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [43]

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Well, we have 28 stores left that we own currently under the ABL. And as we've talked about many times, we continue to evaluate all opportunities as they present themselves. We did just recently do a sale-leaseback transaction on our Rosedale location. Very successful. We're very pleased with that one. And we'll continue to evaluate anything that we can with the store portfolio. But at this time, I'm not at liberty to share any details further.

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Unidentified Analyst [44]

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So does that transaction sort of mirrors the value that you expect to get for the rest of 28?

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [45]

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I wouldn't necessarily gauge anything. We've been fortunate the last couple of years that we have found opportunities that we liked the terms and it has worked out, but I wouldn't necessarily expect that to continue going forward. We have the 28 properties. We'll continue to look at those. They are some of the small to midsize properties, but we'll just continue to evaluate opportunities as they present themselves.

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Unidentified Analyst [46]

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Got you. And just lastly on the private brands. They're I think you said 17% of the sales, so are they comping positive year-over-year?

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Chad Stauffer, The Bon-Ton Stores, Inc. - Chief Merchandising Officer & Executive VP [47]

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Our total private and exclusive brands are performing better than the company total and just slightly below plan.

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Operator [48]

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And we'll take our next question from Elie Radinsky with Cantor Fitzgerald.

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Elie Radinsky, Cantor Fitzgerald & Co. - MD - High Yield, Distressed & Bank Loan Credits [49]

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This is Elie. A few quick questions. Number one, on the FAO Schwarz arrangement, what is the -- what is that arrangement? Are you renting space to FAO Schwarz? Or are you actually buying the inventory and just licensing it as FAO Schwarz? How is that working?

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Chad Stauffer, The Bon-Ton Stores, Inc. - Chief Merchandising Officer & Executive VP [50]

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Yes. We had been on this endeavor with them for over a year, and this is product that we own. We collaborated with the merch source team in terms of creating shops in store, the collateral, certainly the marketing effort that's behind it. And again, we're very pleased with the initial results in the 186 stores where we carry the product. And as you well know, we're at the very beginning of the holiday selling period, so very excited about what the product represents, very excited with our partnership with the merch stores team and the FAO brand.

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Elie Radinsky, Cantor Fitzgerald & Co. - MD - High Yield, Distressed & Bank Loan Credits [51]

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So the partnership is basically you're -- it's as if you're just buying the merchandise outright and you're licensing it as FAO Schwarz -- you're marketing it as FAO Schwarz, et cetera, and then you're some sort of split on the profits or split on the revenue? Or how is that?

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Chad Stauffer, The Bon-Ton Stores, Inc. - Chief Merchandising Officer & Executive VP [52]

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We own the inventory. (multiple speakers)

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Elie Radinsky, Cantor Fitzgerald & Co. - MD - High Yield, Distressed & Bank Loan Credits [53]

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No problem. I got it. Now one thing I just -- it's very curious. I believe I heard that you said that you're lowering your spending on advertising in Q4. Given the fact that you have a lot of different -- a lot of new products and partnerships, et cetera, why are you lowering your spending on advertising? I would think that you'd actually want people to know about the new and improved Bon-Ton and you'd be raising your spending on advertising.

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [54]

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I think the issue is really spending smarter. We have found -- again, we partner with other advisers and did a deep-down analysis of our marketing. And we found, for instance, direct mail, we overdid it. We're sending way too much out at one time, and we're not getting the return on it that's profitable. Also, you know newspapers, just by the nature of what they are, has been seeing declines in terms of their subscription, so that has had a natural lessening, if you will. So -- however, we are optimizing -- conversely, as I mentioned in my call, in digital and radio, to optimizing. We just think there's a net -- we think we can appropriately market the Bon-Ton as well as maximize and optimize the spend, and we think there's an opportunity as a result of that and some savings on the SG&A line.

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [55]

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And I believe, we did not mention Q4 specifically, but it was more going forward. And again, to Bill's comments, it's really optimizing our total marketing spend with the potential that we could reduce that going forward, but through an optimization, not focused primarily on Q4. (multiple speakers) spend to the year.

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Elie Radinsky, Cantor Fitzgerald & Co. - MD - High Yield, Distressed & Bank Loan Credits [56]

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Yes. That's helpful. Just the last 2 here. One is, when you're reviewing your entire strategy, is there any discussion or thought about collapsing your banners into 1 or removing 1 or 2 of your banners that are out there? Let me just start with that.

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [57]

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I think it's early in the game, but we'd look at that. And there may be opportunities in that in the future, but that's still something we are evaluating, if you will.

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Elie Radinsky, Cantor Fitzgerald & Co. - MD - High Yield, Distressed & Bank Loan Credits [58]

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Okay. And some of your competitors have discussed the promotional cadence or their expectations for promotional activities in Q4. How would you characterize it? Is it more promotional than the last year, equal to last year or less than last year?

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Chad Stauffer, The Bon-Ton Stores, Inc. - Chief Merchandising Officer & Executive VP [59]

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We think it's going to continue to be promotional out there, and we're prepared to do that. That's what our forecasts are predicting and that's where we're going to be. The status out there is that we see all of our competitors continuing to drive sales and we continue to be -- and we will be competitive with our competitors for the holiday season.

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Operator [60]

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And we have a follow-up question we'll take from Carla Casella with JPMorgan.

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Unidentified Analyst [61]

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This is [Mae], on again. Just to follow-up on the vendor front, are you guys seeing any changes in the relationships as you kind of head towards a pre-promotional and pretty challenging retail environment for holiday?

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Nancy A. Walsh, The Bon-Ton Stores, Inc. - CFO and EVP [62]

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We continue to have very strong relationships and partnerships with our vendors and we're very focused on a successful holiday for both of us, so I don't necessarily put the 2 of those together. From a promotional standpoint, we're all working toward a successful holiday. And it's really about the underlying relationship, do we have the right product where we need it, when we need it, and continuing to build on our mutual success.

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [63]

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And we couldn't get the -- now obviously we started, as I mentioned, the high single-digit comp, that could not have been done without the support of our vendor community, for sure.

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Operator [64]

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And at this same, I'd like to turn the call back to Mr. Bill Tracy for any closing or additional remarks.

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William X. Tracy, The Bon-Ton Stores, Inc. - President, CEO & Director [65]

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Well, thank you for joining us for the call today. We truly appreciate your support and interest in the Bon-Ton. Happy holidays to you and your families. Thank you.

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Operator [66]

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Thank you. And that does conclude today's conference. Thank you for your participation. You may now disconnect.