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Edited Transcript of HUH1V.HE earnings conference call or presentation 19-Jul-19 12:00pm GMT

Q2 2019 Huhtamaki Oyj Earnings Call

ESPOO Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Huhtamaki Oyj earnings conference call or presentation Friday, July 19, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Héaulmé

Huhtamäki Oyj - CEO & President

* Thomas Geust

Huhtamäki Oyj - CFO

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Conference Call Participants

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* Pasi Väisänen

Nordea Markets, Research Division - Senior Analyst of Utilities and Energy

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Presentation

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Unidentified Company Representative, [1]

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Hello, ladies and gentlemen. This is [Arpov] from Huhtamaki Investor Relations. Welcome to our quarter 2 results call. I shall now hand it over to our President and CEO, Mr. Charles Héaulmé.

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [2]

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Good afternoon, everyone. My name is Charles Héaulmé, and it's my pleasure to be in this call for the first time, presenting our quarterly results for Huhtamäki Group. And I will unfold immediately the results.

We -- starting with the sales growth for the second quarter of 2019, where we are reporting a strong net sales growth of 10%, reaching EUR 867 million, and that growth of 10% reported is composed of an organic comparable growth of 6% compared to the same period of last year. We want to mention that since it is an important part of our strategy, we are growing even more in the emerging markets with a 7% comparable growth. Then we are at about 2% of acquisitive growth, but -- and then EUR 25 million of support from the currency evolution, that's roughly 3%.

When we are looking at the same picture but for the first semester, and basically the structure is the same, where we are growing 10% overall in the first semester, with a 5% comparable net sales growth. This semester's growth comparable is 7% again in the emerging markets, 3% from acquisitions since -- of the last 12 months, and then positive impact on the currency of 3%. So all in all, a very good growth for the first semester.

Looking at this growth, but now, specifically, the comparable growth for our different businesses and our different business segments, and each one contributing to this 6% growth in the first (sic) [second] quarter. Then we have the Foodservice Europe-Asia-Oceania that is contributing 3% comparable growth. And that's mainly linked to the fast food customer segment that is growing quite nicely as well as from the regional point view, from a geographical point of view, mostly the Eastern Europe part of the region that is expanding this 3% comparable growth. North America is where we are growing faster, and actually a 13% comparable growth in the second quarter. I would suggest that we look at the first semester for North America with a 9% growth, specifically due to the timing of Easter, which was taking place in the second quarter in 2019, whilst it was in the first quarter in 2018. And therefore, for good comparison purposes, it's certainly better to look at the first semester as a whole. We come back to the drivers for this performance. Flexible Packaging is growing in comparable only 1% in the quarter and 3% in the semester. It's been very much a moderated growth by a tight and proactive portfolio management that we did in 2019, I'll come back to that, in order to support or improve our profitability. This, combined with a negative growth in Europe in the last quarter, explains this result. Fiber Packaging is growing a comparable 7% in the quarter and 5% in the first semester, and that's very much linked to the additional capacity that we have installed in 2018. Looking now at the P&L and the balance sheet, all the key financial indicators. So as I said, a couple of highlights, first of all, with a strong net sales growth reported of 10%. Second, the fact that the earnings in Europe were growing in the second quarter faster than the sales, so with 11%. That's the same for the first semester, very much driven by North America and by the Flexible Packaging segments. I will come back to that.

Another point that we may want to highlight is the CapEx looks fairly lower in the quarter than it was in quarter 2 2018, however, this is no indication of any different pace at -- on a yearly basis. It's very much linked to the timing of the investment between the 2 years. And then when it comes to the cash flow, that is improving, but only improving 5%. We have actually better performance of the cash flow, but that is moderated by -- at least when you compare Q2 '18 to Q2 '19, it is moderated by a onetime booking in -- it's a onetime gain that was booked in the second quarter last year. So that's distorting a bit the comparison. Let's dive a little bit deeper into each business segment, starting with Foodservice Europe-Asia-Oceania, where we have a strong net sales growth of 12% in the first semester, 9% in the second quarter, and that is linked to the 3% comparable growth that I mentioned before. And then there is basically acquisitive growth, mainly linked to the acquisitions of 2018 of Tailored Packaging in Australia and CupPrint in Northern Ireland -- in Ireland, sorry. The important thing is as well to mention the earnings that are improving quite nicely in line with the sales. And as highlights for the quarter, I would say that the sustainability agenda is becoming more and more present in our business, which in a way is very good opportunity for us, Huhtamäki. What we see happening is very much a continuation, but somehow an acceleration of the decisions -- the consumption decisions toward more fiber packaging and a slight decline or accelerating decline in plastic. The second point I would like to mention in line with this is our reaction to this trend has been very well received by the market with, for instance, our innovations in paper straws that we launched during the second quarter. So I would like to give you maybe a few words additional to this investment that we started in 2018, which is very much in response to the customer -- consumer, sorry, awareness and the customer's needs and the overall industry regulation. And the decision was made in 2018 to launch paper straws. We have developed a technology very swiftly, I must say, and we have the production in place now with a dedicated manufacturing facility that we opened in Antrim, in Northern Ireland. The launch was made in May this year. The paper straws are obviously a recycle -- recyclable, sorry, but they are made of 100% certified paper. Considering the demand that there is in the market and the very positive reception, we're going to expand our capacity, both in Antrim as well as in other units in Europe. So this is a very positive action, where we are positioning Huhtamäki as an innovation leader for more sustainable products that will drive, obviously, growth going forward. Moving to North America, where, as I said before, we have a strong comparable growth. And in terms of reporting growth, we have 19% growth in the second quarter 2019, and that's plus 16% when we look at the overall first semester. That comes from a very good volume development from new business gains as well as, as I said before, the Easter timing during the year, shifting from Q1 to Q2 this year. And I think very important to mention as well, that this growth, especially when we compare to the first half of 2018, is very much linked to responding -- or reflecting, sorry, our investment in the new capacity in the factory, Goodyear in Arizona, that we started in the later part of 2018. Earnings are growing even faster than the sales, and that's as a result of volume pricing, end pricing, but as well in the lower distribution cost that we are having as well as operational efficiency that we continue to drive in North America. So a very good result in Q2 and the first semester.

When it comes to the Flexible Packaging business unit, the flexible sales are growing only 4% (sic) [3%] in Q2 reported sales, and 6% in the first semester, which is a moderate achievement. However, despite the decline in Europe, linked to a soft demand of the market, we have managed actively our profitability and that's what is really successful in the first semester, but specifically, in the second quarter through a conscious portfolio management. And you can see that we are continuing to grow in -- nicely in the emerging market, but in terms of earnings, we are growing the earnings by 11% when we are growing the sales by 4%, and that's this conscious management of the portfolio that is definitely paying off.

Another highlight of the quarter is the fact that we have started to -- with the launch of recyclable laminates. And I'd like to give you a few more words on this, which is -- you have certainly heard about it when we launched it during the quarter 2. It is called the blueloop concept, which is a new range of recyclable flexible packaging. And it's an innovation in maintaining the same properties in terms of food safety and barrier protection. However, instead of being a multilayer of multi-materials, it is a multilayer of mono materials, being polypropylene, polyethylene or paper. That's the innovation which makes it recyclable after consumption. So that's very important toward the need of enhancing our inclusion and our participation in the circular economy. This is a very important innovation that, again, position us as innovation leader for more sustainable products.

Moving on to the Fiber Business segment. We are in Fiber growing with a 9% in the second quarter and 7% (sic) [6%] when we look at the first semester. And the growth is basically entirely organic, and that's very much linked to our new capacity in Australia as well as strong growth as well in Russia during the quarter and the first semester. We have, overall, a good operational performance, which means we are growing the earnings as well in Fiber. However, as you see it reported, we are growing in [euro] only 3% and the reason is, in our organic-based business, we are growing nicely in line with the sales. However, since we have an important innovation called Fresh, which are fiber-based for ready-meal trays, we are accounting for, in the second quarter, some development and commercial expenses, which moderate, obviously, earnings increase.

So a few words on this Fresh innovation, which is a natural alternative to the black plastic ready-meal trays, which as you know, are not recyclable. So we have an innovation that is recyclable and -- which is home -- certified home compostable, and that is microwavable, and that is oven-safe until 180 degrees. So this is a real innovation because it's all made of fiber from certified sources. We have patented the technology, and we have an investment ongoing. So far, we are producing from a pilot plant, and then we have an ongoing investment in our Lurgan factory in Northern Ireland in order to scale up the manufacturing. We will start the manufacturing small scale in the end of the third quarter or beginning of the fourth quarter 2019. And we will have the full utilization of that capacity, that investment in the second quarter of 2020. So as you see, a third example in the quarter of innovation that is really positioning ourselves as innovation leader for more sustainable products.

With this, we'll move to the financials, and then I will invite Thomas, our CFO, to take us through the financials.

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Thomas Geust, Huhtamäki Oyj - CFO [3]

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Thank you, Charles. I will kick off immediately on Slide #15, headed, Solid improvement through to EPS. With that one, we indicate the fact that EPS, EBITDA and EBITDA on adjusted levels is growing ahead of net sales, both for the quarter as well for the year-to-date. When looking at the EBIT margin for the quarter, you can see that we are on a similar level as previous year H1, so at 9%. Operationally, though, we are clearly improving. You will see that through the evidence also gross margin, which is up approximately 1 percentage point versus previous year and slightly accelerating from Q1 as well. The item where we are clearly increasing versus previous year is on other activities, where you need to know this, that we do not have the royalty income of Hershey, which we reported previous year. So that has a significant impact on the margin. So operationally, clearly improving, other activities up.

Looking at, next, financial items. For the quarter, we are slightly below previous year's level and year-to-date basically on track with previous year despite higher debt levels -- net debt levels in this year. You will also find that we have increased our tax rate from 21% to 22%, the main reason for that one being profit mix more and more coming out of high-tax jurisdictions like North America and India. So all in all, the EPS for the quarter is that EUR 0.51 adjusted, and for that EUR 0.46 previous year. Year-to-date, we have EUR 0.95 and EUR 0.86, correspondingly.

Turning to Slide #16. So the positive currency translation continuing. Main currency contributing in absolute terms, still the USD, so positive translation is EUR 25 million for the -- on net sales is EUR 25 million on net sales for the quarter, at EUR 44 million year-to-date, so slight acceleration in the quarter. Positive is to see that also Indian rupee and Russian ruble is now contributing positively to the translation. To remind you that the average rate of USD was last year at $1.18 and as you can see, currently, we are trending at $1.13 on average rate. So from that point of view, the translation impact is expected to continue positively from the USD.

Turning to Slide #17. Throughout the commodities, as a general statement, one concluded -- can conclude that the development has been relatively stable, so prices relatively stable. It goes for resins, paperboard, and then in recycled fibers, depending on markets, we see stable to slightly down turning -- down-trending prices.

Moving forward to Slide #18, indicating our financial capabilities. So net debt levels, net debt-to-EBITDA levels, 2.4 versus previous year at -- unrestated at 2.2, and then gearing of 0.78 versus 0.79 previous year. So financial capability still very much in place for doing also acquisitions and continuing the organic growth investments.

Turning to Slide #19, loan maturities. We are one year later, so you can see that's for -- we had a maturity of 4.1 years a year ago, now we are at 3.2, which indicates that we have not been renewing any significant financing instruments over the last year. We have a domestic bond maturing in May next year, so consideration for that is likely coming up. Unused committed credit facilities still at EUR 303 million, so also from this point of view, we are well equipped for expansion.

Going to the free cash flow. Free cash development, we are at EUR 34 million versus EUR 36 million previous year, the improvement coming mainly from EBITDA. You will consider -- you will see that the development is slightly negative as reported. However, on a comparative basis, one needs to remember that the previous year, we had the sales of the Hershey trademark in the EBITDA numbers, affecting the free cash flow previous year of an additional approximate EUR 20 million.

So from that point of view, looking at the quarter, we have a -- and year-to-date, we have a clear improvement. When it comes to working capital, inventory is -- efficiency is improving. Where we still are trending the wrong way is the receivable stable ratio, which needs to be addressed.

Continuing to Slide #21, stable financial position. So basically, the assets, operating capital and net debt is following the growth. Gearing, already indicated earlier that it's slightly improved versus previous year. And then, to no doubt that the comparatives on return on investment and return on equity are not in place as we have reached -- as implemented IFRS 16, where 2018 numbers are not yet reflecting the true situation.

Changing to Slide #22, progress towards long-term ambitions. So from the long-term ambition point of view, we are meeting the growth ambition currently on organic growth, and the other parameters still leave some work to be done. However, for instance, reminding you that free cash flow collection is typically more focused towards -- more skewed towards second half of the year.

Slide #24, outlook remains unchanged. So basically stating still that we expect the trading conditions to remain relatively stable, financial position in place and positive cash flow should enable continued -- addressing continued profitable growth opportunities. The capital expenditure is expected to remain on approximately last year's level, still focusing on growth.

And then the interim report Q3 will be published on October 23. And with this one, I hand back to Charles for some additional...

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [4]

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Thank you, Thomas. And we'll, of course, take some questions, but I will like to offer to take a few more minutes to share with all of you my first impression since I'm just at [my start-off], roughly 100 days in the company since I joined 1st of April. My appointment was at the end of April, but I started at the beginning of April. So I have been quite around the world of Huhtamäki in -- and our customers during this 3 months. And I wanted to eventually share a little bit of my impressions. The first thing I would like to say, that meeting customers and meeting our employees in many places, I have been overall very impressed with our business model, with our operating structure, decentralized, empowering people at the right level and as well as being impressed by the competence we have around Huhtamäki world, so all this positive. Then what I would like to eventually offer to you is the reflection that I have coming in, and as long as I was still in the outside-in, if I may say, perspective, and looking at Huhtamäki from an outside perspective, I wanted to have a view on what I consider the key characteristics of a very good business. And I usually look at 4 main things: and one is the safety for employees; second is the quality that is delivered to customers; third is the value that we deliver to shareholders; and then the sustainability that we offer for the future of the planet. And I'd like to give a few reflection on how I see Huhtamäki position. On the safety, I think there is a very strong culture that I've seen around all our operations. There is some culture of safety, it's always the first subject that is discussed, briefed and followed up in all our operation, especially, in our manufacturing units. At the same time, and to be fully transparent, I think we have a way to go before being at the world-class level on safety. This has to be -- this has to do from one side with our infrastructure, where we can always obviously protect all the equipments and so forth. But it has to do as well with the behavior on -- and the engagement of everyone. So this is something we're going into. Even though the culture is there, we're going to reemphasize [to all our plants] in the company.

And quality second, so quality delivered to customer. And when I say quality, it's quality with -- in the broad sense of the world, quality of our products but for our services as well. And that I think is a major strength, it's a major competitive advantage of Huhtamäki, which I have heard from our customers, the ones that I had the time to meet so far, where they consider Huhtamäki being a very reliable supplier and partner. But as well, what I've seen myself, visiting the factories or looking at our product, looking at the way we design and develop innovation, so a very positive picture. With this, I'm not saying that we are there and we are perfect because quality is not a status, it's a daily and everyday challenge. So we have to be on our toes permanently. We should always try for 0 defect and 0 claim, but a very good level.

Value delivered to our shareholders. I think looking, and I will not go back too much in history, but at least the last couple of years and probably the last decade, I think have been a very positive decade of value creation, both on the growth, on improving the profitability and focusing on the cash flow. Again, there is always room for improvement, so we will be looking into our plans to further look for avenues of growth in our existing businesses and [line up] adjacencies, but that's -- the value creation is a strength, but as well something we're going to further look into. And then sustainability is an area where, for any industry, I think, it was -- in the [relative] case, it was nice to have. It was the subject that you would put at the end of the meetings. Today, it's the #1 subject for any serious industry and for any serious player like Huhtamäki. So from one side, we are -- I think we are very well positioned because our product portfolio is made of -- at least 2/3 of it is made of renewable materials. Second, we are -- as I underlined during the first half of the presentation, we are launching quite many innovations that are supporting the wish of being more sustainable. So that's the [satisfaction], if I may say. But we should never to be too satisfied and always look for more. When we look overall at the circular economy, the industry overall, and we as well, in specific, have to integrate much more in the circular economy. That is a major challenge going forward.

So that brings me to make me give a few words about what I think of the packaging industry overall and what's happening in [the space] and as we enter in a new decade. I see a couple of very important transformative trends happening. None of them will be any surprise to you, but I think it's still very important to, I think, mention them because they will be -- would -- maybe not transformative but at least guiding, I would say, for what we're going to do in the future. The #1 transformation is -- and I'm not giving that in the order of, should I say, importance at all, but maybe with a certain logic because some of them are linked to each other. So the first one would be the consumption, the evolving consumers trend. I think the consumer of today, and if we take the young generations, are far more demanding and inventive in terms of their wish for their lives than the previous generations. And that is creating an acceleration of the need for innovation of products, on customization of products, and therefore, it will have an impact on the packaging industry. The second one is, in a certain way, there is a margin compression in the value chain that is linked to the first point because we're looking for much more convenience in the products, more healthy products and more customized product and therefore, there is a value for the consumers, but there is a cost as well for the innovation. Consumers are not always willing to pay for it and therefore, there is a need for looking at cost efficiency -- efficiencies in order to maintain or to improve the margins in the value chain. The third item that I would like to mention will not be a surprise, but it's something extremely important, is the digitalization. And when I say digitalization, it's digitalization and analytics, so it has to do with how do we bring automation in the operations, analytics in the operations as well as how do we eventually see the digital agenda influencing the way we do the business with consumers -- with customers, but as well with consumers. So that's -- that impacts, obviously, the retailer, and that brings me to the next one, which is the rising of a very strong e-commerce and as well this change linked to the point that I was making about the consumption, which is more about what we consume. Then there is the digitalization in this world is creating a new trend of how we consume and how we buy, which is, for instance, the growth of channels like the food delivery that is a new channel that is quite booming in the market, and that we'll have to consider in terms of what is the implication for the packaging. And we are probably well positioned because of our strong core business in Foodservice.

And then to finish with, maybe the fifth big transformative trend is sustainability. With an extraordinary focus that there is in the society in -- at the [regulators] in the regions like Europe, but as well as countries, but as well in the society itself in terms of awareness for what is the impact of the packaging on the environment. So to wrap it up, I would say, what is it that we're going to do about it in Huhtamäki? And I'd like to comment that, first of all, we're going to, going forward, make sure that we sustain the strength that have been making us successful in the last years. That's the first and probably most important thing, is to never forget the legacy and then the strength that we have in doing the business so in order to sustain the value creation. The second thing is -- that we're going to look is, what are -- in light of all these transformative trends that I was mentioning, what are the strategic capabilities that we need to eventually develop or reinforce in order to be better prepared in -- as we enter in the next decade, better prepared to be leaders in the industry and to transform those challenges into opportunities. And that will mean shaping up our long-term vision, the role map -- society [format] that we have in Huhtamäki for defining what will be the role that we want to play in the world of packaging towards -- [to that purpose]. So that's a little bit what is on our table right now. And I wanted to basically share, without going to too much detail at this stage, but I wanted to share with you. And with this, I would like to probably open for questions. We have 20 minutes probably.

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Unidentified Company Representative, [5]

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Yes. Thank you, Charles. Thank you so much. Like Charles mentioned, questions are welcome and our operator will be handling the process.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Pasi Väisänen.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst of Utilities and Energy [2]

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Yes. This is Pasi from Nordea Bank. Well, I have at least 3 questions so...

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Thomas Geust, Huhtamäki Oyj - CFO [3]

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Pasi. Sorry, it's cutting off. Pasi, we cannot hear you.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst of Utilities and Energy [4]

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Hello. Can you hear me?

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Thomas Geust, Huhtamäki Oyj - CFO [5]

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Yes. Now we can hear you, Pasi. Please go ahead.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst of Utilities and Energy [6]

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Sorry about the connection problem. Well -- so 3 ones. First, India was okay in the first quarter, if I remember right, and now the volume growth was practically missing, so what's going on in India?

And secondly, what is this portfolio management you were talking about related to Flexibles? And so is this kind of ordinary variation? Or are you actually scaling down the plastic-related business in a group level? Because if I remember right, something over 30% from the top line is actually plastic-related business.

And lastly, we have seen that the plastic prices and paperboard are down as well as the transportation costs. So the cost pressure is not anymore a problem, and you have actually reached the 9% EBIT margin again. So what's needed that Huhtamäki will be able to actually reach the 10% sustainable EBIT margin after this point? Well, these were the three questions.

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Thomas Geust, Huhtamäki Oyj - CFO [7]

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Okay. So if I start off with India. First of all, I think the thing is really that we focused on the portfolio management there now and with that one, it is really to secure the margins. We are and have been very diligent to monitoring the portfolio in India now for the last quarters, and since then, you have seen the EBIT improving. Then it's always some fluctuations also in the India market. And I would say overall market was lightly -- slightly lower than we've seen in previous quarter. But with all of this said, the overall development in emerging markets in Flexibles was approximately on a segment ambition level. So from that point of view, I don't see anything dramatic in it. So I'm extremely satisfied with the margin expansion in India.

Yes. Then the second question, the portfolio management scaling down. That one I didn't quite get for the Flexible side.

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [8]

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It's probably linked to a comment that I made, that we are actively working on the portfolio management, and that was the point made exactly on India. So the two questions are absolutely related. There's nothing else than this portfolio management in India [pertaining to] the profitability.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst of Utilities and Energy [9]

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So that means that you are not scaling down the plastic-related business?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [10]

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Or maybe you're relating this one to a comment I was making as well on the Foodservice, that there was some plastic declines starting or accelerating in the market that we see happening. We don't know yet if it's, how should I say, a temporary trend or there -- a structural trend to continue. We believe that the sustainability matters are definitely creating a wave that is there to continue on plastic, however, not affecting directly Flexible. This was on plastic products, on disposable that are, apparently, according to the recent month, shifting slightly to more fiber-based products.

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Thomas Geust, Huhtamäki Oyj - CFO [11]

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I would say, all in all, when it comes to our focus areas, they remain unchanged. So from that point of view, no change. Yes.

And then your last question was related to what it takes for us to achieve the long-term ambition. Well, I've said it before. First of all, it requires a pretty stable environment, and I think we have, in that sense, currently a more stable environment than previous year, for sure, so that's one of the elements.

Second of all, to some extent, we need growth because we have some parts of the business which are still coming out of the investment phase, so with the growth, you also get the leveraging. I think North America is descriptive for EBIT margin, currently indicating a good benefit coming out of a more pressured environment, including now then also a favorable product mix.

Then what else do we need to have? We need to have a few -- we need to get the European Flexibles back on track. So I would say those are some of the elements which are in here. So with the Flexible segment improvement, it would have been really positive to see the European business being up there at normal level.

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Operator [12]

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(Operator Instructions) We have no further question at this time. Please continue.

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Unidentified Company Representative, [13]

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Okay. Thank you all for participating in this result call. We wish you a good day and a good weekend.

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Operator [14]

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That concludes the conference for today. Thank you for participating. You may all disconnect.