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Edited Transcript of FLGT earnings conference call or presentation 10-Mar-20 8:30pm GMT

Q4 2019 Fulgent Genetics Inc Earnings Call

TEMPLE CITY Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Fulgent Genetics Inc earnings conference call or presentation Tuesday, March 10, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brandon Perthuis

Fulgent Genetics, Inc. - Chief Commercial Officer

* Ming Hsieh

Fulgent Genetics, Inc. - Chairman, CEO & President

* Paul Kim

Fulgent Genetics, Inc. - CFO

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Conference Call Participants

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* Katie Anne Tryhane

Crédit Suisse AG, Research Division - Research Analyst

* Rachel Marie Vatnsdal

Piper Sandler & Co., Research Division - Research Analyst

* Nicole Borsje

The Blueshirt Group, LLC - MD of IR

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Fulgent Genetics Earnings Conference Call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Nicole Borsje with Investor Relations. Thank you. Please go ahead.

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Nicole Borsje, The Blueshirt Group, LLC - MD of IR [2]

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Great. Thanks. Good afternoon, and welcome to the Fulgent Genetics Fourth Quarter and Full Year 2019 Financial Results Conference Call. On today's call is Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; and Brandon Perthuis, Chief Commercial Officer. The company's press release discussing its financial results is available in the Investor Relations section of the company's website, fulgentgenetics.com. An audio replay of this call will be available shortly after the call concludes. Please visit the Investor Relations section of the company's website to access the audio replay.

Management's prepared remarks and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements such as predictions of future events and should listen to management's remarks today with the understanding that actual events, including the company's actual future results, may be materially different in what is described in or implied by these forward-looking statements.

Please review the more detailed discussions related to these forward-looking statements, including the discussions of some of the risk factors that may cause results to differ from those described in the forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-Q for the third quarter of 2019, which is available on the company's Investor Relations website.

Management's prepared remarks, including discussions of earnings and earnings per share, contain financial measures not prepared in accordance with accounting principles generally accepted in the United States or GAAP. Management has presented these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but they should not be viewed as a substitute for or superior to the company's financial results prepared in accordance with GAAP. Please see the company's press release regarding -- discussing its financial results for the third quarter 2019 for more information, including description of how the company calculates non-GAAP earnings and earnings per share and a reconciliation of these financial measures to income and income per share to the most directly comparable GAAP financial metrics.

With that, I'd now like to turn the call over to Ming.

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Ming Hsieh, Fulgent Genetics, Inc. - Chairman, CEO & President [3]

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Thank you, Nicole. Good afternoon, and thank you for joining us today to discuss our fourth quarter and the full year 2019 results. I will review the highlights from the fourth quarter before handing to Brandon Perthuis, our newly appointed Chief Commercial Officer, to provide update on our go-to-market strategy. Finally, Paul Kim, our Chief Financial Officer, will discuss our financial results and 2020 outlook in detail.

We finished the year with a good fourth quarter with revenue for the full year within our most recent guidance range. And I'm very pleased that we achieved organic growth of the -- more than 50% for the year and the test volume growth of more than 160% year-over-year.

At the same time, we saw a strong bottom line and generated approximately $5 million in adjusted EBITDA for the year, along with positive operating cash flow. Specifically, regarding the fourth quarter, revenue grew 48% year-over-year to $8.4 million. Billable tests increased 118% year-over-year to 13,977. Our ASP was $600, an increase of 20% compared to the third quarter of 2019, benefiting from the shift of a mix of our test volume to higher ASP tests.

At the same time, our cost per test increased modestly in the quarter, primarily due to both shift in mix of tax as well as reduce the benefit from economics of scale as our test volume in the fourth quarter declined from the regular volume we saw in Q3. Non-GAAP gross margin in the fourth quarter was 59%, up approximately 6 percentage points from the fourth quarter last year and down approximately 5 percent points sequentially. GAAP loss was $296,000, and the non-GAAP income was $778,000. Adjusted EBITDA was a positive $1.1 million in the fourth quarter.

Coming off a record third quarter for the company, we were pleased with the results we achieved in the fourth quarter, which finished in line with our expectations. While our test volume coming down to a normalized level in the fourth quarter, we saw less concentration from any single customer. We are bringing -- see the benefit of our diversifying customer base and adoption of our broad test menu.

As discussed on our recent earnings calls, we began to see an increase in test volumes about halfway through the year, and we believe we are now reached a new elevated level of sustainable volumes for Fulgent based on availability of our extensive offering.

The additional new customer and our aggressive commercialization strategy. To give out some insight around the long-term drivers of our growth, I will provide additional color on 4 key areas of our business.

First, in our traditional clinical business, we continue to see good demand for pediatric rare disease, reproductive health and expanded the panels. Our traditional clinical business remains a significant contributor to our business, representing approximately half of our revenue this year, with a growing portion coming from oncology and reproductive health rather than rare disease. Moving forward, we anticipate additional growth from tests related to various other conditions, such as cardiovascular, Parkinson's and other diseases.

Second, our sequencing-as-a-service business saw strong growth this quarter as we added new pharma customers, who are leveraging Fulgent's genetic testing capabilities to aid them with therapeutic discovery and the development. We continue to see a significant opportunity for expansion in this area, as we bring more customers who are steadily increasing their test volume with us. As a reminder, the business was launched from scratch as of a year ago and have grown to amount accounted for approximately $4 million in revenue in 2019. Based on a robust pipeline, we anticipate the continued high-growth for this business in 2020, particularly in the second half of 2020.

Third, we have been focusing on adding cash paying commercial genomic laboratories as customers. While last quarter we had one large genomic customer that represents a significant portion of our test volume, we saw contributions from more than diversified mix of customers this quarter, with a significant third quarter customer represents 13% of revenue this quarter compared to 4% in the third quarter. We also gained over a dozen new customers in recent months who have started ordering regularly from us. We anticipate these new customers will contribute to our growth and visibility moving forward. Based on the quarterly quality of our test turnaround time and the service, we anticipate the strength and stability in this relationship. They should provide more stability in ASPs in 2020 versus declines overall ASPs, which we saw this year.

Fourth, our China JV had a great year. The JV posted revenue of $4.1 million, which was an increase over 223% from $1.3 million in 2018. The loss also been decreasing with our portion being less than $200,000 this quarter. As a reminder, the JV utilized our proprietary technology platform in facilitating its operations to meet growing demands from the customer’s base in China. We are hopeful that our JV will able to address the large and growing Chinese market in the long run. Aside from our China JV, we are tracking Europe and the Middle East as growth areas in 2020, which Brandon will cover in a moment.

On the topic of our China JV, I would like to briefly address the subject that has been at the top of people's mind around the world. The test kits for the coronavirus, or COVID-19, like several of our peers, we have been actually working on test kits that could help detect the presence of virus in affected individuals. Our presence on the ground in China, coupled with our flexibility and rapid test development technology, make us a particularly well-positioned to develop tests that leverage the most relevant data to generate highly active results. Our primary focus at this time is to develop a test kit that meets FDA's approval standards for use in the U.S., United States. And also be followed by a more comprehensive, more active, more accurate test for the technology using synthetical long [particles]. While it is too early to say whether these test kits might have an impact on our business in the coming months, we'll see this as a meaningful opportunity that we are working on hard to address, given the uncertainty of the approval process and a need to follow all applicable procedures. We cannot provide any estimate about the timing or feasibility of bringing these test kits to market at this time.

And then finally, as we have recently discussed, we also see an opportunity to make an acquisition to expand our reach. The platform that we have built to leverage our proprietary technology and approach to genetic testing, and we believe this platform is replicable and expandable to the labs that we have worked, that have insufficient process in place.

As we think about our overall approach to expand in the year ahead, we remain committed to make investment, [responsively] to drive the sustainable growth. Mainly with this investment will be in our commercialization strategy, which include international expansion, further building our sequencing-as-a-service business, expanding additional collaborations with key medical institutions and expanded our reimbursement capabilities. To help us better navigate this next phase of growth, we recently promoted Brandon Perthuis to a new role of Chief Commercial Officer. Brandon has been with Fulgent since May of 2017 and has made a great contribution to our business and sales organization during this time. We are pleased to -- and excited to bring him more responsibility in this new role, as he's one on the call today to talk more about this initiative I just mentioned.

In summary, our approach to address this large but competitive market has been based on the science and our technology platform. We continue to make additional headway into the new and exciting area of genetic and are looking forward to share our progress with a differentiation and the strength of our leadership position in this industry. We had a very good finish to the year, and I'm pleased with the strength foundation we have built to fuel the future growth.

I will now turn over the call to Brandon to walk through some of our go-to-market initiatives in more detail. Brandon?

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Brandon Perthuis, Fulgent Genetics, Inc. - Chief Commercial Officer [4]

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Thanks, Ming. Before I dive into updates on our go-to-market strategy, I'd like to take a minute to briefly introduce myself to those of you who I may not have met. I joined Fulgent in May 2017, after spending 10 years at Baylor College of Medicine and Baylor Genetics in Houston in Texas and have been overseeing the commercial activities and sales organization at Fulgent for the last 2.5 years.

During my time at Fulgent, I've come to understand how our technology and approach truly set us apart from other laboratories in the market. Specifically, the Fulgent Laboratory Information Management System, or FLIMS for short, serves as the engine that drives many of our efficiencies. These include proprietary pipeline and alignment tools to tackle the difficult areas of the genome such as pseudogenes. FLIMS reduces labor time for curation and sign out using computer learning and suppression algorithms to help our scientists get to the answer faster, with less need for confirmatory studies. Our technology platform also allows us to be the only lab that enables our physician clients to customize genetic tests in real time. We also recently became the first lab to routinely use next-generation sequencing for parental studies, which we have shown to be critically important in detecting clinically relevant germline mosaicism, this was recently published in the Journal of Molecular Diagnostics. Finally, our technology platform serves as the engine for rapid product development in R&D, which allows Fulgent to maintain one of the largest test menus in the industry.

On the go-to-market front, we have been focused on expanding our test menu, improving reports with robust clinical content, improving turnaround times, securing in-network status with the payers and expanding our global sales organization to capture share in markets where we see opportunity for growth. Specifically, we have made key international hires to better support existing clients and penetrate those markets.

At the time of our IPO in 2016, Fulgent was a rare disease company. Today, we are a comprehensive lab offering testing that spans all areas of genetic health, including prenatal, preimplantation, reproductive carrier screening, cardiovascular disease, neurodegenerative disease in both hereditary and somatic cancer. We are excited to see the new opportunities our expanded menu has created.

And finally, we talked a lot about partnerships in the past with organizations such as the Parkinson's Foundation in Columbia University. These types of partnerships remain a key part of our growth strategy going forward, and we intend to continue to build deep relationships with clients around our technology and services. These types of relationships include biopharma, laboratories and contract research organizations.

I am excited to take on the opportunities that come with my new role as Chief Commercial Officer, and I look forward to continuing -- to contributing to the future growth of our business.

I'll now turn the call over to Paul to provide the details on our financial performance in the fourth quarter. He'll also introduce our financial outlook for the full year 2020. Paul?

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Paul Kim, Fulgent Genetics, Inc. - CFO [5]

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Thanks, Brandon. Fourth quarter revenue totaled $8.4 million, an increase of 48% compared to the fourth quarter of 2018. Our U.S. business remains the most significant driver of our momentum. Revenue from the U.S. grew 79% year-over-year in the fourth quarter, representing 74% of total revenue in the quarter, down from 82% in the third quarter. Billable tests in the quarter totaled 13,997, growing 118% over Q4 of last year. As Ming mentioned, we had 1 customer last quarter, that represented a significant portion of our test volume that we were not expecting to see again to that extent this quarter. Our test volume declined sequentially to a more normalized level this quarter as expected due to less concentration from this 1 customer.

Our ASP in the fourth quarter was $600, up 20% from the third quarter. Cost per test for the quarter was $260 on a GAAP basis and $246, excluding equity compensation of $193,000. While we continue to see increasing efficiencies across our business, we recorded a slightly higher cost per test this quarter compared to the third quarter due to overall volume, while personnel costs and other costs remained largely consistent.

Our non-GAAP gross margin improved 6 percentage points year-over-year, remaining at a healthy 59%. While our gross margins will continue to fluctuate quarter-to-quarter with ramping test volumes, we expect to maintain strong gross margins overall in the quarters ahead. For operating expenses, our disciplined cost structure and commitment to managing expenses while investing in growth, we again delivered a positive non-GAAP operating margin in the third quarter, for the third quarter in a row. Our non-GAAP operating margin was over 6% in Q4, an improvement of 14 percentage points year-over-year. We will continue to see quarterly fluctuations in the near-term as we scale. Sales and marketing expense on a GAAP basis was $1.6 million in the quarter, down from $1.7 million in the third quarter.

As we recently discussed, we plan to invest aggressively in hiring sales professionals specifically in Europe, the Middle East and Canada and expect this will increase our sales and marketing spend going forward. R&D expense in Q4 was $1.8 million, up slightly from $1.7 million in the third quarter. As Ming discussed, we continue to make investments in R&D as we grow our test menu and expand our market reach with our offerings. And lastly, G&A expense was $1.7 million, up from $1.5 million in the third quarter.

Total GAAP operating expense was $5.2 million in the fourth quarter, up from $5 million in the third quarter. Non-GAAP operating expenses totaled $4.4 million, up from $4.2 million last quarter. We remain pleased with the growth we're able to demonstrate on the top line with minimal incremental investments in our business.

That being said, as Brandon discussed, we are focused on methodically expanding our sales organization in the coming quarters. Adjusted EBITDA for the fourth quarter was a positive $1.1 million compared to $37,000 in the fourth quarter of 2018. On a non-GAAP basis, excluding equity-based compensation expense, income for the quarter was $778,000 or $0.04 per share based on 20 million weighted average common shares outstanding during the period. The effective tax rate at the end of the fourth quarter was 23% and non-GAAP tax rate was 0 due to a full valuation allowance we recorded earlier in the year.

Turning to the balance sheet. We completed a primary stock equity offering in the quarter, which added roughly $28 million to our cash position, net of expenses. We expect to utilize this cash to make opportunistic investments in our business, including M&A, as Ming discussed. We ended the fourth quarter with 40 -- with 72 -- $70.2 million in cash, cash equivalents and marketable securities with no debt. In sum, for the full year 2019, revenues grew 52% year-over-year to $32.5 million. Net GAAP loss was $411,000 compared to a net loss of $5.6 million last year. Adjusted EBITDA was a positive $4.9 million compared to an EBITDA loss of $747,000 last year. And cash generated from operations was $5.5 million compared to cash used in operations of $675,000 last year.

Moving on to our outlook. Looking at our test volume this quarter, relative to the outperformance we saw in the third quarter, we remain measured in our approach to guidance as growth and test volume normalizes. We've had a strong start to the year, thus far, and expect to generate $40 million in revenues for full year 2020, which represents a growth rate of approximately 23%. For the first quarter specifically, we expect to see revenues between $7.5 million to $8 million, growing approximately $1.5 million each quarter thereafter.

For the full year, we anticipate GAAP gross margins to be approximately 55%. We also anticipate continuing to generate cash and posting non-GAAP profits. However, given our proven business model and ability to capitalize on opportunities, leveraging our technology platform, our priority this year will be scaling our business by aggressively investing in our research and development and our sales and marketing organizations. Overall, we're pleased with the results we achieved this year, which demonstrate that our commitment to responsible growth is paying off. We strongly believe that our technology platform and differentiated approach to genetic testing opens us up to a broad market opportunity, which we're just beginning to tap into. We're still very early in the year and recognize that we could see incremental opportunities as the year unfolds. We look forward to keeping you updated on our progress in the quarters ahead.

Operator, now you can open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rachel Vatnsdal with Piper Sandler.

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Rachel Marie Vatnsdal, Piper Sandler & Co., Research Division - Research Analyst [2]

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So first off, I have a few questions related to coronavirus, and we appreciate the comments you made. So were you assuming a guidance related to coronavirus, if anything? Also, I know you have minimal exposure in China, but can you talk about if you have any exposure from a supply chain or manufacturing standpoint?

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Paul Kim, Fulgent Genetics, Inc. - CFO [3]

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Okay. So I'll first take the guidance, then I'll turn it over to Ming, who can talk about where we sit with the testing as well as our capabilities and the opportunities. We have 0 amount built into our guidance related to the coronavirus opportunity.

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Ming Hsieh, Fulgent Genetics, Inc. - Chairman, CEO & President [4]

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Yes. Thank you, Paul. Thank you, Rachel. So in terms of coronavirus, which is related to the test, our JV in China has been validated in the coronavirus test. We do see the -- our JV in China in this year will be -- have a much, much better than the expected growth in 2020 in terms of their test volumes and their growth. Specifically, in terms of coronavirus, we knew the current test method, which is used globally, has roughly about a 30% -- 40% detect rate. Fulgent, our team here have been developing new test method. One method that will be more accurate than the current one. We did submit our test based on the regular method PCR to FDA already, and we will submit our new comprehensive method in the next few weeks. Hopefully, this one will be addressing the concerns of the detection rate for the coronavirus. So from scientific point of view, we're very proud for our capabilities to develop such tests very, very quickly. Definitely, how to use it, we are looking forward, once we get the FDA approval and the guidance on how to move forward.

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Rachel Marie Vatnsdal, Piper Sandler & Co., Research Division - Research Analyst [5]

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Great. And then my next question on corona. So we've heard from other companies that coronavirus is pressuring hospital volumes since it's impacting patients' willingness to come into a hospital setting. So can you talk about if you or your customers have seen that and if it's pressured any of your testing volumes? Or if you expect it to pressure it in the coming months?

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Ming Hsieh, Fulgent Genetics, Inc. - Chairman, CEO & President [6]

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I think Rachel, the -- in terms of regular test, we are on the same position with all the other diagnostic laboratories, based on the standard test. We are following the CDC's guidelines. In terms of our comprehensive test, it's mainly used by hospitals. I think in that sense, it's related to how to do better detection and associated with treatment. So in that sense, it is not subject to the concern you have.

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Brandon Perthuis, Fulgent Genetics, Inc. - Chief Commercial Officer [7]

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Yes. Thanks, Rachel. This is Brandon. I'll just add that we continue to use telemedicine when necessary. There was some press today about further using telemedicine to address any restriction to hospitals and to clinics. Fulgent does have the ability to do at-home collections of samples, if necessary, via saliva or buccal samples. So I think it's correct that in general, we don't expect any sort of disruption to patient flow or patient’s access to our types of services.

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Rachel Marie Vatnsdal, Piper Sandler & Co., Research Division - Research Analyst [8]

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Got it. Makes sense. Next question. So you've talked about building out your international and local sales team this year. So can you just give us an update on how that's progressing? And when do you expect to have those teams fully hired? Is it midyear, end of year, just any color on that would be great, along with how many people you plan on hiring?

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Brandon Perthuis, Fulgent Genetics, Inc. - Chief Commercial Officer [9]

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Yes, Rachel. Brandon, again, and thanks for the question. We have already put key hires in place. We are approximately halfway there, and we expect to have the remaining half in place sometime early this summer.

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Operator [10]

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Our next question comes from Erin Wright with Crédit Suisse.

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Katie Anne Tryhane, Crédit Suisse AG, Research Division - Research Analyst [11]

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This is Katie on for Erin. Can you talk or speak to some of the key drivers sort of volume in the quarter, particularly across oncology and reproductive health?

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Paul Kim, Fulgent Genetics, Inc. - CFO [12]

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Sure. As we indicated on our prior calls, we introduced many tests in 2019, that we're a much more diversified company than we have been. Having said that, our traditional rare disease and the pediatric part of the market is holding in the strong. But if you take a look at the composition of what we're selling, it's much beyond pediatric and rare disease. During the quarter, we had a nice mix of products in the area of oncology. We also had a nice mix of products in the area of cardio as well as women's reproductive health. And our sequencing-as-a-service business also chimed in very strongly.

I know that I'm talking about strength here, Katie, but the results for the fourth quarter, it was below what we achieved in the third quarter. And I'd like to take a moment to explain that. As you remember, in the fourth -- third quarter, we had 1 particular customer that comprised of approximately 40% of our business during that quarter. That 1 customer was down to 13%. The reason why that happened was because this 1 customer had a significant amount of backlog in Q3, which we digested. We still have this customer. It's a very important customer. But we believe that we're at a more normalized amount. If you actually strip that away and take a look at the remaining portion of our business during the fourth quarter, it actually grew by more than $1 million. That, combined with the fact that we signed on over a dozen core customers who have started to order regularly from us, particularly in the last 4 weeks, gives us confidence and conviction in our guidance of $40 million for this year.

We think that we're at an elevated state of volumes as well as business and capabilities for Fulgent. And we fully anticipate that each of the quarters that we post in 2020 will be sequentially higher. We believe the other concern and questions that we've gotten about the ASPs swinging around in 2019 was of a question to certain people. We think based on the breadth of what we're selling, the mix of what we're selling as well as the customers and the contracts that we see, that the ASPs will be more normalized in 2020. And we should continue to see the progression of the cost per test going down in each of these quarters.

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Katie Anne Tryhane, Crédit Suisse AG, Research Division - Research Analyst [13]

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Okay. That's really helpful. And then just separately, can you remind us of some of your recent collaborations, for instance, in New York State Department of Health and what those are contributing in terms of volume? Which collaborations are really moving the needle for you now?

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Brandon Perthuis, Fulgent Genetics, Inc. - Chief Commercial Officer [14]

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Katie, thanks for the question. This is Brandon. With regards to the New York State press release that you saw, that was really a validation of our laboratory. So after multiple years of attempting to gain approval by New York State, we were recently able to obtain that. So we are now able to do business in New York State with very few restrictions. As you probably have been made aware, it's a very sort of onerous process, a very detailed process to get New York State approval, and Fulgent was able to obtain that licensure in New York State.

In terms of the other collaborations and partnerships, we continue to be in a tight partnership with the Parkinson's Foundation, which we'd announced late last year. We're beginning to see an increase in the recruitment for that study, and we're very happy to be a part of that study. And then the Columbia University is another strategic partner of ours, where we have actually licensed FLIMS to them to help run their laboratory operation in New York. So in addition, we continue to see deep collaborations with biopharma around our sequencing-as-a-service business.

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Operator [15]

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And I'm showing no further questions in the queue at this time. Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect.