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Edited Transcript of CTRN earnings conference call or presentation 10-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Citi Trends Inc Earnings Call

SAVANNAH Mar 10, 2017 (Thomson StreetEvents) -- Edited Transcript of Citi Trends Inc earnings conference call or presentation Friday, March 10, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Tom Filandro

ICR, Inc. - Managing Director

* Bruce Smith

Citi Trends, Inc. - COO & CFO

* Jason Mazzola

Citi Trends, Inc. - President & CEO

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Conference Call Participants

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* Patrick McKeever

MKM Partners - Analyst

* David Kwon

SunTrust Robinson Humphrey - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today Friday, March 10, 2017. I would now like to turn the conference over to Tom Filandro, Managing Director at ICR. Please go ahead, sir.

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Tom Filandro, ICR, Inc. - Managing Director [2]

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Thank you, Nelson. Our earnings release was sent out this morning at 6:45 a.m. Eastern time. If you have not received a copy of the release it is available on the Company's website under the investor relations section at www.cititrends.com.

You should be aware that prepared remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may make additional forward-looking statements in response to your questions.

These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements.

We refer you to the Company's most recent report on Form 10-K and other subsequent filings with the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements.

As you may be aware, yesterday the Company issued a press release announcing the intent of a shareholder to nominate directors to the Board. Today's earnings call will focus exclusively on our financial and operating results. Accordingly, during the question-and-answer session we kindly ask that you focus your questions on our business and corporate financials. Additional information will be forthcoming in the next several weeks as we make our required proxy filings with the SEC.

I will now turn the call over to Bruce Smith, Chief Operating Officer and Chief Financial Officer. Bruce?

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Bruce Smith, Citi Trends, Inc. - COO & CFO [3]

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Thanks, Tom. Good morning everybody and thank you for joining us today.

Also on the call is Jason Mazzola, President and Chief Executive Officer. First, I will provide you with details related to the fourth-quarter and full-year results and then Jason will further discuss the results and our business outlook, after which we will address any questions you may have.

Total sales in the fourth quarter increased 5.4% to $185.5 million while comparable store sales increased 3.4%. The higher comp store sales reflected a 6% increase in the average number of items per transaction and a 5% increase in the number of customer transactions, partially offset by a decline in the average unit sale of 7%.

By merchandise categories sales in the fourth quarter in comparable stores were as follows. Home was up 29% on top of a 10% increase in 2015's fourth quarter. The men's division increased 6% after decreasing 7% in last year's fourth quarter.

Ladies sales increased 3% following an 8% decline in the fourth quarter of 2015. Accessories, including footwear, increased 2% this year after being down 2% last year. Children's sales were down 1% in this year's fourth quarter and down 8% in the fourth quarter of 2015.

Total sales for the full year increased 1.7% while comparable store sales were down 0.4%. Cost of goods sold as a percentage of sales increased 30 basis points in the fourth quarter due to slightly higher freight cost and inventory shrinkage. For the full year cost of goods sold as a percent of sales increase 60 basis points, split almost equally between the core merchandise margin, freight and shrinkage.

SG&A expenses as a percent of sales decreased 80 basis points in the fourth quarter due primarily to the leverage attained from the increase in comp store sales together with favorable insurance results. For the full year, SG&A expenses as a percent of sales increased 40 basis points due primarily to a lack of expense leverage resulting from the 0.4% decrease in comp store sales. Depreciation expense declined $400,000 during the quarter as a result of opening fewer stores than in previous periods.

As for income tax expense, the effective tax rate was lower in this year's fourth quarter and full year due to a greater benefit from work opportunity and other tax credits in 2016. Net income in the fourth quarter increased 60% to $5.6 million or $0.38 per share compared with $3.5 million or $0.24 per share last year. For the full year, net income was $13.3 million or $0.91 per share compared with $15.5 million or $1.03 per share last year.

And looking forward, fiscal 2017 will have 53 weeks with the extra week falling in the fourth quarter. From a sales standpoint we would expect the extra week to generate approximately $11 million to $13 million while from an earnings perspective we would expect it to be close to breakeven.

Now I will turn the call over to Jason.

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Jason Mazzola, Citi Trends, Inc. - President & CEO [4]

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Thank you, Bruce, and good morning everyone. We are very pleased with the results of the fourth quarter. Comp store sales increased 3.4% in the quarter and we delivered $5.6 million in net income which is a 60% increase over last year.

In addition, our customer count was up a strong 5% as were units per transaction which were up 6%. While the full-year comp store sales decrease of 0.4% was below our expectation, there were a number of positives in 2016. Compared to last year total sales were up 1.7%, units per transaction were up 5% and customer count was up 1%.

We also delivered $0.91 per share in earnings. We ended the year with $114 million in cash and investments with no debt. We paid dividends of $0.24 per share.

We successfully opened 18 new stores and, most importantly, we finished the year with a strong quarter of positive comp store sales. As we turn our attention to 2017 we believe we are well-positioned to deliver positive comp store sales for the year. We are relentlessly focused on delivering outstanding product and value that excites our customer, fuels loyalty and drives spending.

In the fourth quarter we were happy with the progress made by the ladies and children's departments. Ladies delivered a 3% comp store sales increase for the quarter. The fashion content of our ladies business has improved nicely over the last six months.

We have a balanced assortment of basics, fashion basics and fashion. In our fashion piece of the business we are delivering more on-trend merchandise and each day the mix looks and feels more compelling. Although comparable stores in the children's department were down 1% we believe the children's assortment has also improved.

We have a better balanced mix of core and fashion product and we offer exceptional values. We managed our children's inventory well for the quarter, ending the period down 7% while delivering faster turns and improved productivity.

The home division was once again the standout division of the Company during the quarter, delivering a 29% comp store sales increase on top of a 10% increase last year. It was our 18th consecutive positive comp quarter in home. Driving the business for the fourth quarter was our expanded toy offerings as well as functional home gift giving and beauty products.

In 2017 we continue to view the home division as a very strong growth vehicle. The home area provides breadth to our merchandise assortment and gives our customer a reason to shop Citi Trends for more than just apparel needs. In addition to targeting our customer's broader lifestyle needs, our home assortments offers a hedge against weather-driven demand, providing more predictability to our business.

Now I will provide an update on sales to date for the first quarter. As we mentioned in our fourth-quarter sales release on February 8, there was a delay in the timing of tax refund distributions as compared to 2016. Our customer is particularly sensitive to the timing of these refunds and that has been clearly reflected in our sales results.

Sales to date through yesterday in comparable stores have decreased 7% in the first quarter. Despite the decrease in comp store sales we are encouraged by the sales momentum we have experienced coinciding with the first meaningful tax refunds distributed by the IRS beginning on February 22.

For the first 24 days of the quarter, minimal tax refund distributions negatively impacted our performance, resulting in a comp store sales decrease of 40%. However, in the subsequent 16 days we were able to recover much of the sales shortfall as we delivered a positive comp store sales increase of 47%. Each day since February 22 has been a very strong double-digit positive comp store sales increase.

Historically delayed tax refunds tend to have a negative impact on sales. But we are hopeful that with our improved merchandising strategies as well as a later Easter we can make up the balance by the end of the quarter.

We believe our inventories are in very good shape heading into the first quarter. Total Company inventory was down 1.7%, favorably below our store count increase of more than 2%. We owned less next season buy inventory coming into the first quarter and instead held those dollars open to take advantage of opportunistic deals and fresh trend right fashion across the Company.

We successfully opened six new stores since our last earnings call: Kansas City, Missouri; Panama City, Florida; Richmond, Virginia; Memphis, Tennessee; Philadelphia, Pennsylvania; and Hot Springs, Arkansas. As of today we operate 537 stores in 31 states.

We continue to target new store openings both within existing and new markets to capitalize on our unique off-price positioning. During 2017 we plan to open approximately 20 new stores, relocate or expand about 10 stores and remodel 20 current locations.

Thank you all for your time. Operator, we will now take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Patrick McKeever, MKM Partners.

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Patrick McKeever, MKM Partners - Analyst [2]

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Thank you. Good morning, Jason, and good morning, Bruce.

Jason, on the -- you ran through the first 24 days of the first quarter, and I think you said comps down 40% and then you mentioned something about the next 16 days and recovering. What was that comp over the next 16 days?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [3]

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Yes, that comp was 47%.

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Patrick McKeever, MKM Partners - Analyst [4]

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Positive?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [5]

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Yes, yes, yes. 47% positive, of course, yes.

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Patrick McKeever, MKM Partners - Analyst [6]

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Okay. But on a first quarter-to-date basis through yesterday down 7%, is that correct?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [7]

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Correct. That is correct.

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Patrick McKeever, MKM Partners - Analyst [8]

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So thinking about the year overall and your earlier comment about positive same-store sales for the year, how would you think about a cadence of same-store sales through the year just given the fact that where comps are first quarter to date the easier comparison in the first quarter and then the tougher comparisons, well, the tough comparison or tougher comparison in the back half of the year, how should we think about the quarterly same-store sales through the year, even broadly if you don't want to give specific ranges or numbers?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [9]

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Sure. And as you know we don't give specific guidance on a quarterly basis as far as comp store sales. However, our goal at Citi Trends is to drive consistent, profitable comp store sales each and every quarter.

That is certainly what Bruce and I and the entire Citi Trends team try to do each quarter. And we believe we do have the right merchandising strategies in place to deliver those positive comps store sales.

Even within the first quarter, you know, we are hopeful and we are encouraged by the signs that we are seeing that once the taxes came our business really got back in gear. And I do think a later Easter will help us. So we do anticipate delivering positive comp store sales results.

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Patrick McKeever, MKM Partners - Analyst [10]

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Even in the first quarter?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [11]

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Again, we are hopeful there. We are certainly working for that.

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Patrick McKeever, MKM Partners - Analyst [12]

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And then a question on the department store closures that are taking place and will take place in the first half of this year, thinking Macy's and Penney's and maybe there might be some others as well, just how do you think about that as it relates to the business? Do you see a potential negative impact as some of the department stores liquidate inventory at those stores that are closing? Or do you view it more as an opportunity perhaps to pick up some better merchandise buys and those kinds of things?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [13]

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I would view that more opportunistically that there could be, that there will be more availability in the marketplace of great product first and foremost. And then second, as Bruce and I have experienced in our real estate team, we have also been able to get into some of the malls that some of the bigger companies are vacating and we've been able to sign some very attractive lease deals, and in those stores so far the few that we have gone into have performed very well. So I think it's nothing but opportunity for us.

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Patrick McKeever, MKM Partners - Analyst [14]

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Okay, okay. And then on the improvement in ladies, I think you said up 3% in the quarter, but it sounds like average selling price is still under a fair bit of pressure.

So on that point, where do you see pricing in 2017? Do you think you will see, continue to see more pressure on prices or will it be more flattish? Or I mean is there potential even for some improvement there?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [15]

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Yes, Patrick, very good question. I will say for the first quarter we still see a little bit of pressure. We think the AUS will be down approximately 3% to 5%, but we've made some very nice improvements to where the 2016 trend was.

For the full year one of our key strategies for the year is to really get that AUS back to flat and to even be a positive, a slight positive on that. Across the Company what we are doing is we are looking for opportunities to drive sales in higher AUS product that our customers really like. For example, denim, dresses, luggage, shoes, handbags, we are really looking for opportunities within higher AUS classes to drive the business, and so I do see that AUS flattening out in 2017.

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Patrick McKeever, MKM Partners - Analyst [16]

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Okay, thank you, Jason.

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Operator [17]

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(Operator Instructions) Pam Quintiliano, SunTrust.

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David Kwon, SunTrust Robinson Humphrey - Analyst [18]

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Hi, this is David for Pam. Could you talk about shrink in the fourth quarter relative to historical levels and actions you plan to take going forward?

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Bruce Smith, Citi Trends, Inc. - COO & CFO [19]

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Yes, thanks, David, for your question. In the fourth quarter shrink was up just a little over 10 basis points. This year it was 1.3% versus 1.2% last year.

We have a -- we take, as you can imagine, we take shrinkage very seriously at Citi Trends, and we have a loss prevention department that teams up with our store operations group to do monitoring in our stores on a regular basis. And that's been there for a number of years and will continue. So no significant changes to the way we handle shrinkage, but we are always treating it as a very serious item for us.

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David Kwon, SunTrust Robinson Humphrey - Analyst [20]

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Okay, in terms of gross margin expansion opportunity in fiscal 2017, could you talk more about that and the drivers behind that, merchandising and planning and allocation and such?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [21]

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Sure, I can give you some color there. We are updating our planning and allocation system in the second half of this year. The updated system will allow us to allocate the merchandise to our stores with much better precision by ranking stores at the division and department level versus just the store level.

The updated system should allow us to improve sales and inventory turns while reducing markdowns. And this should lead to improvements in gross margin that would predominantly beat in the second half of the year.

As you may recall, we installed a new planning and allocation system in 2014 and 2015 which yielded very nice results. This would be an enhancement to that system. So we do see some opportunity at the back half of 2017 and then into 2018.

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David Kwon, SunTrust Robinson Humphrey - Analyst [22]

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So could you see similar, I guess, well, sorry, how does that reflect an SG&A potential leverage in 2017 then?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [23]

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I don't have specifics on that. I wouldn't want to say a specific number.

Bruce, would you have any color? Yes, I don't think we want to publicly say any specific numbers to that. But we see opportunities there.

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David Kwon, SunTrust Robinson Humphrey - Analyst [24]

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Okay. And historically speaking in past you had first 10 days of last quarter, last year a 35% impact on delayed tax refunds. And you were unable to make it up for the rest of the quarter.

How is it different this year relative to the past? And I guess the later Easter, what impact has that on the quarter?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [25]

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Sure. I will start with Easter and then we will go back to taxes. So a later Easter generally has a positive effect on sales for a Company like Citi Trends. When Easter falls in April the stores have the opportunity to be well set up with exciting new spring merchandise, and the weather is generally aligned with our customers buy now, wear now philosophy, meaning it's warm outside and spring fashion is out there.

So we are looking forward to driving sales with a later Easter this year and we think there's an opportunity there. As it relates to taxes this year there were more days without taxes, so a total of I think 24 days where last year it was only about I think 10 days. So we've had less time in the quarter to make it up where the last time when we were on the call we had a little bit more time to make up the sales deficit.

And, again, it is a significant deficit and that does affect our customers and traditionally it has been harder to make it up. However, we think our merchandise is more on point this year and that a later Easter will help us a little bit and that we will be able to move it forward. So we are very hopeful about continuing to deliver some nice results and having a continuation of that sales momentum that we've seen the last 16 days.

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David Kwon, SunTrust Robinson Humphrey - Analyst [26]

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Okay. In terms of taxes on a different front, can you talk about what you think in potential changes to the tax rates including border taxes and how that would impact you?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [27]

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Yes, I probably, I think it's too early to say anything specifically about the border tax or what the new administration might do because there's been so many conflicting reports. So we don't, we are not going to speculate about that and we don't really have much control over that. The team at Citi Trends is focused on exactly what we can control, which is what we buy and how we operate our stores, so that's where we are spending 100% of our time.

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David Kwon, SunTrust Robinson Humphrey - Analyst [28]

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Okay, any updated thoughts on a potential loyalty program, as well?

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Jason Mazzola, Citi Trends, Inc. - President & CEO [29]

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Right now we don't have any plans for a loyalty program. It is something that is on our radar screen. It's something that we review on a yearly basis, but in 2017 we don't have specific plans for a loyalty program.

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David Kwon, SunTrust Robinson Humphrey - Analyst [30]

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Okay, great. Thanks. That's it for me.

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Operator [31]

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I am showing no further questions at this time.

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Jason Mazzola, Citi Trends, Inc. - President & CEO [32]

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Okay, great. Thank you everybody for your time and have a nice weekend.

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Operator [33]

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Thank you. Ladies and gentlemen, that does conclude the conference call. We thank you for your participation and ask that you please disconnect your line.