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Edited Transcript of KU2.DE earnings conference call or presentation 28-Mar-19 7:00am GMT

Q4 2018 Kuka AG Earnings Call

Augsburg Apr 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Kuka AG earnings conference call or presentation Thursday, March 28, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Pabst

KUKA Aktiengesellschaft - CFO & Member of Executive Board

* Kerstin Heinrich

KUKA Aktiengesellschaft - Head of IR

* Peter Mohnen

KUKA Aktiengesellschaft - CEO & Interim Chair of Executive Board

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Conference Call Participants

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* Sebastian Ubert

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the KUKA Full Year 2018 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Kerstin Heinrich, Head of Investor Relations. Please go ahead, ma'am.

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Kerstin Heinrich, KUKA Aktiengesellschaft - Head of IR [2]

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Thanks a lot. Welcome also from my side.

Peter Mohnen, CEO from KUKA Aktiengesellschaft; and Andreas Pabst, CFO of KUKA Aktiengesellschaft, will present now our financial results 2018 and answer your question afterwards.

Mr. Mohnen?

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Peter Mohnen, KUKA Aktiengesellschaft - CEO & Interim Chair of Executive Board [3]

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Yes, thank you, Kerstin. Ladies and gentlemen, welcome to the KUKA AG annual results analyst conference. It gives us a great pleasure to welcome you here.

We are facing challenging times, and let it be said right at the start we have a clear plan for KUKA to get back on track again.

First of all, however, let us look at the economic environment. The trade dispute between the U.S.A. and China, Brexit, increasing project (inaudible), all of these factors are weakening the economy and changing general economic conditions, including for KUKA. These developments influence our customers, making them more cautious when it comes to investment decisions. We also registered negative influences in contract business. We are working to become more efficient again in this area. This in turn affects our sales revenue and our operating result. In a nutshell, things could have gone somewhat better for and at KUKA over the past year. Last year's results are not satisfactory. In this press conference, we will therefore be looking not only at the accounting results for last year but also at how we are addressing these changes and what we are doing to make KUKA future proof and successful again.

We need to become more efficient and sharpen our focus still further on what our customers need in their regional markets is. To this end, we adopted an action plan in January and are now systematically implementing it. This is not an easy task for us to take, but we must take it because the future of KUKA is at stake. We are convinced that we have initiated the right steps. Our objective here is clear. KUKA is a global automation company. Together with our employees, we want to offer our worldwide customers and partners robot-based solutions and to shape the smart factory of the future. Our goal is to grow again on a global and on a profitable basis.

Before I go this -- into this in greater detail, I would like first to hand over now to our CFO, Andreas Pabst. He will now present our financial results.

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Andreas Pabst, KUKA Aktiengesellschaft - CFO & Member of Executive Board [4]

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Many thanks, Peter. Ladies and gentlemen, a warm welcome from me, too.

As Peter already stated, the 2018 financial year presented us many challenges. These have had an impact on our financial results. The pronounced economic slowdown and negative effects from our project business affected our business development. We therefore have to adapt our guidance for 2019.

KUKA closed the financial year with sales revenue of EUR 3.2 billion. Orders received totaled EUR 3.3 billion. The EBIT margin before purchase price allocation, growth investments and reorganization expenditures was 3.0%. Taking into considerations all expenditures, the EBIT margin was 1.1%. Earnings after taxes fell to EUR 16.6 million.

Coming to the orders received. KUKA Group has grown immensely in the recent years, with orders received between 2013 and 2018 increasing by an average of 12% annually. Since 2018, however, we have felt the effects of the global economic slowdown due to various economic and political uncertainties. It was not possible to match the record figure of EUR 3,640 million from 2017. Instead, KUKA Group recorded orders received totaling EUR 3,305 million in the year under review and thus down 8.5% on the previous year.

Sales revenues of KUKA Group fell from EUR 3,479 million in 2017 to EUR 3,242 million in 2018. This corresponds to a decrease on the previous year of 6.8%. The increasingly noticeable general economic slowdown primarily affected 2 of our strategic focus markets: the automotive industry and the electronic industry. KUKA is generating more than half of its sales revenues in these sectors. Major customers, particularly in the automotive industry and the electronic industry, also adjusted their guidance targets in 2018. Another factor was the slower growth in China, one of our most important markets.

Before depreciation for purchase price allocations, before growth investment and before reorganization expenditures, EBIT stood at EUR 96.4 million in 2018. This corresponds to an EBIT margin of 3.0%. The figure for the previous year was EUR 148.3 million, with an EBIT margin of 4.3%. Taking into consideration all expenditures in 2018, the earnings before interest and taxes for KUKA Group totaled EUR 34.3 million. Accordingly, the EBIT margin was 1.1%. The decline was additionally attributable to project deteriorations and measures for increasing profitability.

On account of the business development, earnings after taxes decreased from EUR 88.2 million to EUR 16.6 million at year-end 2018. The lower revenues and higher taxes as compared to the previous year impacted the earnings after taxes.

Investment totaled EUR 295 million, significantly exceeded -- exceeding the previous year's figure of EUR 138 million. This is primarily attributable to consideration measures that we are carrying out around the world. The strong growth of the past few years and the condition of some very old buildings prompted us to invest in our home site, for example, in new production buildings. We have also built a new production facility in the Chinese city of Shunde and expanded our Shanghai location in order to be able to serve the world's largest robotics market. In the U.S., investments were made in conversion of the production plant for KTPO, KUKA Toledo Production Operations, where we were building a successor model for the Jeep Wrangler under the terms of a pay-on-production contract. The Wrangler Gladiator pickup truck has been in production since March 2019.

The cash flow from the current business operation totaled minus EUR 48.2 million; and is mainly attributable to the lower earnings after taxes, the reduction in trade payables and the increase in inventories. The rise in trade working capital to EUR 566 million had also a negative impact. The cash flow from investing activities is affected by the capital expenditures in the research and development sector and increased investment in tangible assets. Examples here included the conversion of the production facility at KTPO, as I just explained; and the production building in Augsburg and Shunde. As a result, the free cash flow fell to minus EUR 213 million in 2018 after minus EUR 136 million in the previous year.

The number of people employed by KUKA Group fell slightly in the 2018 financial year from 14,256 to 14,235. The Robotics division expanded its workforce by 7.8% or almost 400 new KUKAnians to 5,399 employees. The headcount at Swisslog rose by 5.9% to 3,075 people. By contrast, we registered a decrease of 11.9% in the workforce at Systems to 4,811.

At Robotics, orders received fell slightly by 1.7% and maintained the previous year's level of EUR 1,223 million. The new orders received by Robotics came primarily from Europe and Asia. Sales revenue totaling EUR 1,182 million were down slightly by 1.5% compared to previous year. Here once again revenues were generated primarily in Europe and Asia. Robotics managed to increase the EBIT slightly in 2018 to EUR 134.4 million compared with the previous year's figure of EUR 133 million. The EBIT margin stood at 11.4% compared to 11.1% in 2017.

Systems generated orders received totaling EUR 1,314 million in the past financial year. Compared to the previous year's result of EUR 1,530 million, this presents a decline of 14.1%. Sales revenue also fell by 17.6% from EUR 1,579 million to EUR 1,301 million. These decreases are due in part to the declining investment cycle among U.S. automotive customers. Moreover, the lack of revenues at KTPO as a result of the ongoing change of the model referred to earlier has also had an impact. EBIT fell to minus EUR 32.8 million, with an EBIT margin of minus 2.5%. The negative developments here are partially attributable to the aforementioned missing revenue at KTPO. In addition, there were a negative earnings contributions from ongoing projects. Furthermore, the decline in the strong investment cycle within the U.S. automotive industry also played a major role.

Swisslog. Orders received by Swisslog in 2018 amounted to EUR 836 million compared to the previous year's figure of EUR 926 million. This presents a decline of 9.8%. The record value from the previous year included major orders in the logistics sector, where we were not able to secure comparable orders in 2018. In 2018, Swisslog generated sales revenue of EUR 819 million. Revenue was up 7.3% on previous year result of EUR 763 million. The WDS segment and the health care both contributed to this increase. On account of the large-scale orders posted in previous year, Swisslog was able to recognize high revenues, primarily in the growing markets of logistics. EBIT fell to minus EUR 16.3 million, with an EBIT margin of minus 2%. In 2017, EBIT was EUR 10.4 million, with an EBIT margin of 1.4%. This was due not last (sic) [least] to higher expenditures on research and development. Swisslog intensified investment in the development of products and solution for hit -- for its key markets. Furthermore, one-off integration and reorganization expenditures was incurred in 2018. The operating result was negatively impacted further still by delays in execution of projects.

So much for the results in 2018. I now hand back to Peter.

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Peter Mohnen, KUKA Aktiengesellschaft - CEO & Interim Chair of Executive Board [5]

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Thank you, Andreas.

Ladies and gentlemen, automation and digitalization are continuing to gain in importance, and KUKA is at the heart of these trends. That has not changed. On the contrary, what has changed, however, are the general economic conditions. Since the fourth quarter of last year, we have increasingly felt these effects on the economic -- of the economic slowdown I mentioned at the beginning. This affects our important strategic focus markets.

The investment behavior of our customers in both the automotive industry and the electronics industry has become more cautious. However, KUKA generates more than half of its sales revenues in these markets. Growth also slowed down in China. Growth rates there are currently at their lowest since the financial crisis 10 years ago. And that naturally affects us, as China remains one of our most important sales markets. We are adapting to these market conditions and initiated a clear action plan in January which we are now systematically pursuing.

We have put an efficiency program into place at KUKA, with the goal of saving EUR 300 million by 2021. We aim to achieve around 1/3 of the savings in this year already. In China, we have begun to sharpen the strategy for the Robotics joint venture, setting the course for growth in these in the Chinese market. We have reviewed all research and development projects and established clear priorities and new focuses. We have fine-tuned our organizational structure. On the one hand, this gives us scope for global collaboration, while on the other hand, it enables us to focus even more on our customers. Let us now take a closer look at these individual measures.

First, the efficiency measures. We have put a comprehensive efficiency program in place and already identified savings in the high double-digit million euro range. The savings also include job cuts, which cannot be avoided in the present situation. We have already reacted accordingly in other regions where capacity can be adjusted at shorter notice. In the U.S.A., for example, we adjusted capacities in 2018 to the talent projects and business situation at an early stage. Around 150 jobs were cut at KUKA Systems at the Augsburg location last year. We also had to reduce the number of temporary workers in Augsburg from a peak of around 500 to around 100 at the end of February due to reduced capacity utilization. The remaining temporary workers currently also only have a short-term perspective. This year, we are planning to cut out a total of 350 more jobs in Augsburg out of our total workforce of around 4,000, affecting all companies here in Augsburg. Cuts will be concentrated primarily on so-called indirect areas. Competitiveness is to be further strengthened by means of structural adjustments. On smaller scale, we will also be adjusting the number of employees in direct areas. To this end, we imposed a recruitment freeze at the beginning of this year and are increasingly scrutinizing fixed-term employment contracts and probationary periods. Where possible, we will seek sociable -- socially acceptable solutions for the necessary adjustment and will only resort to compulsory redundancies once all other avenues have been exhausted. For this purpose, we are naturally in trustful contact with the employee representatives and the trade union.

Ladies and gentlemen, I'm well aware that this will not be an easy process. For employees, it will be hard. That is why we will be taking decisions with the greatest of care. We are aware of our responsibility. At the same time, the executive board also bears the responsibility for KUKA's future. We want to guide the comeback into a safe and successful course. We must pursue this strategy rigorously in order to benefit from the automation trends again, and that is something that I'm convinced we will achieve and return to our customary level of performance.

Now second, China. As a group, we can continue to profit from China. The Asian market and in particular China remains a growth market. However, demand for joint-arm robots, the relevant market for us at KUKA, fell by 2% in the first half of last year. No one forecast that at the start of the last year. By contrast, demand remains high for other simpler robot types such as delta or SCARA robots, which are used particularly for assembly joining and pick-and-place tasks. Our measures in China are geared towards this development.

The groundwork being made for these new robot types is a very important strategic step. And as you can see on the slide, demand for such robot kinds -- kind of robots has been increasing double digit last year. For this reason, we have pursued ahead with the planned expansion of our portfolio to include SCARA and delta robots. The start of production for SCARA robots is scheduled for this year. Planning for the delta robots provides for a start at 2020. We are also developing autonomically guided vehicles, so-called AGVs, in China. The first model will already be market launched this year. We have built our production home at record speed and will be starting test production in the near future.

Ladies and gentlemen, let me say one more thing on the topic of China. I'm sometimes asked how things are going with our Chinese majority shareholder. The answer is simple. Our Chinese investors behave like any other investors. Their primary interest is in the successful development of KUKA, so we have the same goal. Within the joint ventures in China, we share the responsibility for this. We are working very hard in the joint ventures to meet our common objective. However, as far as KUKA issues outside China are concerned, meaning here in Augsburg, Europe and the U.S., they are being resolved by the people sitting here today, together with our global management team.

Third, R&D. In our immediate action plan in January, we have focused on our research and development. We want to approach investments in a more targeted manner. In times for -- of growth, many topics are initiated at the same time and new approaches are taken as well. That is a good thing. We nevertheless considered it necessary to define a clear focus in this area. This relates to the global distribution of roles in development, on the one hand, but also to our product road map, on the other hand. For this reason, we have fine-tuned our global R&D structure. In the U.S. we are developing cloud software. In China, alongside new robot types such as delta and SCARA, AGVs are also being developed there. In Augsburg, the focus is on robot hardware and control-sensitive and mobile robotics, software and connectivity and the IoT. Here you can see the importance and relevance of our home location. It represents the innovative strengths and long-term viability of our company. At the same time, the need -- we need an international orientation for our R&D activities in order to offer our customer all over the globe products and solutions that meet their regional needs.

KUKA's strength is technological expertise and innovative strength. We are focusing on the new robot types for China, but also on sensitive and mobile robots, industrial IoT solutions, the so-called Industry 4.0. And we are introducing a new robot already next month. From April 1, the successor to the KR QUANTEC, the KR QUANTEC 2, will be available on the market. In 2020, the KR QUANTEC 2 is also being followed by a new controller, the KR C5. We will be presenting the KR QUANTEC 2, together with a range of other highlights, at our in-house fair in July. And QUANTEC, from my point of view, has the potential to be a best seller.

Fourth, a strong customer-focused organizational structure.

The initial item in our immediate action package was adjustment of our organizational structure. We have already accomplished this. Since 2012, we have centralized many functions at KUKA, including IT, HR, finances and marketing. That was important for coping with the strong growth of the past years but also for the successful internationalization of KUKA. The key aspects of the new organization is the stronger focus on our customers. We have now moved into decentralized structure in favor of the divisions and given them more responsibility again. At the same time, our holding structure is becoming significantly more streamlined. Furthermore, we have separated our cell business from our systems engineering and allocated it to Robotics. We expect better standardization of our solutions and improved competitiveness as a result.

We are firmly convinced that these measures will strengthen entrepreneurial thinking and action within the business segments. A number of our customers and employees have already reacted to this step with a positive feedback.

Ladies and gentlemen, we have already launched many good initiatives in 2019 that will also help us in the future. We have converted the production plant for the Jeep Wrangler in the U.S.A. Here KUKA produces the body in white on behalf of Chrysler. Production already commenced last week and thus ahead of schedule. We are delighted with the relaunch, this time for a pickup model.

Mobile robotics is another topic that is relevant for the future and one on which we are investing and already reaping the initial results. For example, the KMR iiwa is being used in semiconductor production in Taiwan, and the KUKA KMP 600 is integrated in the Swisslog carry pick solution. This is an application in the field of e-commerce automation. And the first projects involving up to 60 AGVs were already implemented at the end of last year. We also have new products and projects in the pipeline at Swisslog that will help us to move forward. For example, our Swiss colleagues presented the next generation of a robotic order-picking solution at the LogiMAT fair in Stuttgart in February. It is called ItemPiQ. The solution uses a new robot technology and intelligent vision system that enabled improved order-picking performance and functions for machine learning.

Ladies and gentlemen, let us close with a summary.

We are currently confronted with a phase of economic slowdown to which we must react as quickly as possible. We have a clear plan for this and are now systematically implementing it. We are working on our efficiency and costs. We will be sharpening our focus on what our customers need in their regional markets. We will also be working on improving our international processes, however. We will be launching innovations that will make us stand out from the crowd, pooling our strengths and closing gaps in our portfolio. We have a clear objective in sight, and the entire KUKA team is working to achieve it. We want to stand for robot-based automation all over the world. We are convinced that we are doing the right thing to get KUKA back on track. Automation is a trend that we shall exploit, together with our employees, for our customers and partners.

If we systematically implement the measures that have just been outlined, we believe that KUKA will already return to growth this year and achieve satisfactory profitability again. To be specific: We expect a slight increase in sales revenues to around EUR 3.3 billion in 2019. For EBIT margin, we are expecting around 3.5% before final evaluation of reorganization expenditures. The forecast is based on the prevailing economic conditions and the expected business development. We are also expecting a considerably better second half year. This is due, on the one hand, to our market expectations for the second half of the year; and on the other hand, to the measures we have adopted which will have a greater impact in the future course -- in the further course of the year.

I would like to thank you for your attention. Andreas and I looking now forward to your questions.

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Kerstin Heinrich, KUKA Aktiengesellschaft - Head of IR [6]

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Thanks a lot. So we could start with the questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Sebastian Ubert from SocGen.

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Sebastian Ubert, Societe Generale Cross Asset Research - Equity Analyst [2]

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Sebastian here from SocGen. I have 1 or 2 questions with regards to your view on an improved business outlook for the second half of the year. What gives you the confidence? And in which areas do you really expect the pickup? Since yesterday, we had also the warning from Infineon that has flagged that it does not expect the pickup in the demand from the consumer electronics industry; and saying that most industry analysts also have to bring down their expectations with regards to car production that they expect now to be down in the mid-single-digit range, thus down compared to being flattish. So I was wondering where your optimism for the second half comes from.

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Peter Mohnen, KUKA Aktiengesellschaft - CEO & Interim Chair of Executive Board [3]

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Yes. Sebastian, thank you for your question. We believe that now our customers have shut down CapEx spend a lot, but there is a big pressure for them to invest into the future technologies. And we see that or expect that these investments will go into automation and that there we are well positioned to help our customers to improve their efficiency. And that, for example, we see in the battery business of the automotive customers, more or less worldwide. And as well, in China, after now we ramped up our capacities last year, we see signs of an increased demand for automation.

Perhaps it's as well that we believe that we are better positioned in the Chinese market meanwhile and have a better access to as well local customers, so -- and increase our product portfolio -- that as well is, for sure, an aspect; and bring new robot types to the market.

For the QUANTEC, a new -- our new butter-and-bread robot, will go into the market from next week on. That are the aspects we have in mind when we believe that the second half of the year might be developing better than the beginning of the year.

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Sebastian Ubert, Societe Generale Cross Asset Research - Equity Analyst [4]

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Okay. And then if I may have one follow-up question. On the Swisslog, we have seen orders down about 10%. We have seen competitors in the area of logistics like KION and with Dematic but also others, seeing a nice increase in order intake. Is it just for the lumpiness of the business that you were down about 10%? Or that could be about one project. Or is it a trend that also here demand is slowing, or about the decisions getting pushed out? Just to get a feeling what is going on in the logistics space.

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Andreas Pabst, KUKA Aktiengesellschaft - CFO & Member of Executive Board [5]

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Listen, maybe I can take your first question. So if we compare 2017 and 2018, we had some big tickets in 2017 which we were not able to have again such big tickets in 2018, but if you look at the [long-first] trend on logistics market, you see that it is a really growing market by a good digit number. And if you look at what we see currently and where we are in a position -- in a good position in negotiation with customers, we really think that we will have a good order intake in the year 2019 as well. So it's a good market. We have good projects, like what you see at LogiMAT, for example. And we are in some good positions. So I'm comfortable in Swisslog, that we will do that in 2019.

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Operator [6]

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(Operator Instructions) It appears there are no further questions at this time, ma'am. I'd like to turn the conference back to you for additional remarks.

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Kerstin Heinrich, KUKA Aktiengesellschaft - Head of IR [7]

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Yes. Thanks a lot for your time. Then we would close the conference call.

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Peter Mohnen, KUKA Aktiengesellschaft - CEO & Interim Chair of Executive Board [8]

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Yes. Thank you very much.

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Andreas Pabst, KUKA Aktiengesellschaft - CFO & Member of Executive Board [9]

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Thank you.

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Kerstin Heinrich, KUKA Aktiengesellschaft - Head of IR [10]

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Thank you.

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Operator [11]

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Thanks. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect your line.