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Edited Transcript of MSON earnings conference call or presentation 8-May-19 8:30pm GMT

Q3 2019 Misonix Inc Earnings Call

FARMINGDALE Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Misonix Inc earnings conference call or presentation Wednesday, May 8, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph P. Dwyer

Misonix, Inc. - CFO, Treasurer & Secretary

* Stavros George Vizirgianakis

Misonix, Inc. - President, CEO & Director

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Conference Call Participants

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* Kyle William Rose

Canaccord Genuity Corp., Research Division - Senior Analyst

* Michael D. Kaufman

MK Investments I LLC - President

* William Patrick Fafinski

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* Norberto Aja

Jaffoni & Collins, Inc. - MD

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Presentation

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Operator [1]

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Good day, and welcome to the Misonix Third Quarter Fiscal Year 2019 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead, sir.

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Norberto Aja, Jaffoni & Collins, Inc. - MD [2]

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Thank you, Melissa, and good afternoon, everyone. Thank you for joining the Misonix Fiscal 2019 Third Quarter Conference Call. We'll get started in just a minute with management's presentation and comments. But before doing so, let me take a minute to read the safe harbor disclosure.

Today's call and webcast contain forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as anticipate, intend, plan, goal, believe, estimate, expect, future, likely, may, should, will and other similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding guidance relating to our financial results. Forward-looking statements are neither historical facts nor assurance of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risk and changes in circumstances. They are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial conditions to differ materially from those indicated in the forward-looking statements today include, among others, our ability to achieve operational efficiencies and meet customer demand for products and solutions and the risk described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and Form 10-Q. Any forward-looking statement made by us in today's conference call is based solely on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements that may be made from time to time, whether as a result of new information, future developments or otherwise.

Today's call and webcast will also include non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as in the company's website.

With that, now I would like to turn the call over to Mr. Stavros Vizirgianakis, President and CEO of Misonix. Please go ahead, Stavros.

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [3]

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Thank you, Norberto, and good afternoon, everyone. Thank you for joining us on the call today to review our fiscal 2019 third quarter operating results. Joining me on the call today is Joe Dwyer, our Chief Financial Officer.

Misonix' strong fiscal 2019 third quarter and year-to-date financial performance reflect the growing success of our direct sales team and the continued execution of our go-to-market strategies in driving demand for our clinically tested ultrasonic medical devices. Excluding license fee revenue of $4 million from the comparable period, product revenue growth of over 21% for the first 9 months of fiscal 2019 is pacing in line with our prior guidance, and we continue to maintain a healthy gross margin on product sales of approximately 70%.

A little over 2 years ago, we embarked on a new company-wide strategy focusing on positioning Misonix for sustainable long-term growth and profitability. In just 27 months' time, we have transformed Misonix from an underappreciated and underutilized company with valuable yet ineffectively monetized proprietary technology into a world-class organization with high-margin revenue streams growing in excess of 20%. Our approach has enabled us to make investments to support our continued growth, including our expanded direct sales team, product marketing, systems and infrastructure, engineering and new product innovation.

With our current operations continuing to generate strong growth on their own, reaching the definitive agreement to acquire Solsys last week in an all-stock transaction marked a watershed moment in the history of Misonix and a tremendous near- and long-term growth opportunity for our shareholders. Solsys and its leading wound treatment application, TheraSkin, is highly complementary to Misonix' existing wound debridement solution, SonicOne. As a result, the combined entity will be ideally positioned to establish a new standard of care in the growing chronic wound care market through what we view as the best-in-class wound treatment solution. The Misonix-Solsys differentiated wound care solution is supported by extensive clinical data that demonstrates the positive impact to critical aspects of the wound healing process. Together, our combined offering will deliver improved patient outcomes as well as clinical efficiency and a strong economic value proposition for hospitals and outpatient clinic -- clinics.

The transactions clearly meets our M&A criteria in terms of enhancing our overall competitive position and expanding our industry leadership through meaningful scale and commercial reach. With a combined team of over 130 dedicated wound and surgical sales professionals and expected pro forma annual revenues in excess of $80 million in the first fiscal year following the completion of the transaction, Misonix' current and long-term growth outlook is even more compelling.

I will do a quick review of the third quarter. And then Joe will provide additional color regarding our financials and some points of guidance related to fiscal fourth quarter.

Robust consumables and equipment sales resulted in product revenue growth of 13% for the third quarter when excluding $4 million in license revenue from our Chinese partner recorded in the comparable period year before. The increase in total product revenue was attributable to the continued growth of BoneScalpel. Looking at our 2 revenue streams, consumable sales increased 17% and accounted for 72% of third quarter revenue, while equipment sales grew 6% and represented 28% of total revenue. The overall financial benefits of our initiatives focused on shifting our sales mix towards higher-margin products are becoming more and more visible as the recurring nature of our consumables revenue is providing added predictability to our results.

Geographically, international sales grew at 18.5% compared to prior year period, including a 29% increase in consumables revenue and a 10% gain in equipment revenues. On the domestic front, the 10% year-over-year rise in total domestic sales was driven by growth in consumables revenue of approximately 12%, partially offset by lower domestic equipment revenue, which was expected due to the upcoming commercial launch of our new platform, Nexus.

We're seeing visible benefits across our businesses from the various initiatives implemented over the first half of fiscal 2019 to eliminate inefficiencies in our procurements and distribution process, including bringing new supplies onboard, diversifying our supply chain and fully transitioning to a significantly more capable ERP system. Following the successful alignment of our operating infrastructure, we took additional steps in the third quarter to ensure that Misonix continues to drive operational excellence across the business as we pursue our next phase of growth.

In this regard, we've appointed Sharon Klugewicz to the newly created position of Chief Operating Officer, where she will be responsible for overseeing all aspects of manufacturing, regulatory affairs, quality assurance and research and development. Sharon is a proven C-Suite executive who brings extensive relevant experience to her new role, having served other leading health care organizations, including Chembio and Pall Corporation.

We are confident that our operational expertise and business acumen will help Misonix achieve our goals for sustainable revenue growth and profitability, and that our efforts yield the best possible outcomes for our shareholders. With these initiatives now behind us, we have the people and infrastructure in place to support the rapid growth of our business, including the upcoming commercial launch of our new Nexus platform and the Solsys integration at closing.

In regards to Nexus, we made further progress in bringing our new ultrasonic surgical platform to market during the quarter and we are confident that we'll be able to begin booking sales in the mid-calendar year 2019, subject to FDA approval of our 510(k) application. The overwhelmingly positive feedback we have received since unveiling Nexus provides us with added confidence for its potential to serve as a significant growth engine for Misonix.

In summary, our financial results for the third quarter and first 9 months of fiscal 2019 highlight the benefits of our recent investments and the progress we are making to position Misonix for ongoing sustainable growth and profitability. Going forward, we'll continue to focus on driving additional operational efficiencies, further improving our sales and go-to-market strategies, penetrating new geographic markets, repositioning and expanding of our product portfolio, including the introduction of our Nexus platform. We also look forward to working with the Solsys team to ensure an efficient integration upon closing, in order to deliver on the value of this compelling combination for our patients and our shareholders.

With that, I would now like to turn the call over to our CFO, Joe Dwyer.

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Joseph P. Dwyer, Misonix, Inc. - CFO, Treasurer & Secretary [4]

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Thanks, Stavros, and good afternoon, everyone. Total revenue for the quarter decreased 23.2% to $9.6 million with the year-over-year decline attributable to the $4 million in license revenue we had recorded in the third quarter of fiscal 2018. Total product revenue for the 3 and 9 months ended March 31, 2019, increased 13.4% and 21.1% respectively. Domestic sales for Q3 increased 9.7% to $5.4 million and international sales rose 18.5% to $4.1 million.

Our gross profit margin was a healthy 70.7% for the third quarter compared to 68.8% for the same period last year. The increase is a result of product mix with a higher percentage of consumables revenue in the current year along with the impact of routine manufacturing and cost variances.

Selling expenses for the third quarter of fiscal 2019 remained flat with those of the prior quarter -- prior year quarter at $4.4 million. The increase is principally related to higher compensation costs and travel expenses, which are being offset by lower commissions to domestic distributors resulting from the continued build-out of our direct sales force. We ended the second quarter with 61 global sales team members compared to 46 at the end of the third quarter of last year.

General and administrative expenses increased by $600,000 to $2.5 million for the third quarter. This increase was related to legal and professional fees associated with ongoing litigation in addition to transaction fees related to the Solsys acquisition. Research and development expenses increased by $200,000 to $1.4 million in the third quarter due to continued investments in design and development of our next-generation product platform, Nexus.

Moving down the income statement. Less -- the net loss for the third quarter was $1.6 million or a loss of $0.17 per share compared with net income of $2.2 million or $0.23 per share in the prior year period.

Taking a look at EBITDA, we recorded a third quarter adjusted EBITDA loss of approximately $90,000 compared with an adjusted EBITDA gain of $4 million in the third quarter of last year. Remember that last year, we had the $4 million of license revenue in Q3. So we're actually at about breakeven EBITDA in last year's third quarter and this year's third quarter. For the first 9 months of fiscal 2019, we recorded an adjusted EBITDA loss of $193,000 compared with an adjusted EBITDA gain of $400,000 in the first 9 months of last year before license revenue.

Moving on to our cash flow and balance sheet. Working capital at March 31 was $15 million and cash used in operations for the first 9 months of fiscal 2019 was $2.6 million, consisting of $1.9 million relating to the loss from operations for the period and $700,000 from increased working capital. We ended the third quarter of fiscal 2019 with $9 million in cash and no debt. This compares with $11 million in cash at June 30, 2018. The decrease in cash is largely the result of cash used in operations.

And as it relates to our guidance, we reiterate our forecast for revenues to grow at 20% for fiscal 2019 and expect our gross margin to remain at approximately 70%, making for a very compelling shareholder value story.

With respect to the Solsys acquisition, we expect the transaction to close during the third quarter of this calendar year, which is our first quarter of fiscal 2020. During our Q4, we expect to record transaction fees north of $1 million for the acquisition. The remainder will be recorded in Q1 2020 when the transaction closes. For our definition of adjusted EBITDA, we will expand it to exclude M&A fees.

With that, I'd like to turn it over to -- turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Kyle Rose with Canaccord Genuity.

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Kyle William Rose, Canaccord Genuity Corp., Research Division - Senior Analyst [2]

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I've just got one and then one follow-up. Wondered if you can talk a little bit about the dynamics in the U.S., where you're seeing the pockets of growth, whether it's more concentrated in the neuro side or on the orthopedic side. And then secondarily, if you could talk to the strength in China, how we should think about that opportunity through the end of the year as well as your confidence in the launch of Nexus over the course of, I guess, the next several months.

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [3]

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Thank you, Kyle. Thank you very much for the question. Talking a little bit about the domestic market, we find good strength on the orthopedic side of the business, in particular, spine with BoneScalpel. We continue to see good traction with that product line. With the aging platform, the SonaStar, our traditional neuro business, we have obviously seen significant erosion in that business, but part of that is to be expected. We're hoping that with the launch of Nexus, we will now have a renewed focus and really be able to compete in the neuro market in a meaningful way for the first time. So I think we've spent a lot of time in terms of identifying sites, preparing the market for a significant push from our side in the neuro business. So we're excited when we get to launch Nexus that neuro will provide a significant growth opportunity.

As you know, right now our story has really been about the BoneScalpel and the wound debridement side of the business. I'd say 98%, even 99% of our efforts have been concentrated there. So we're hoping that we'll be expending significant energy on the neuro side when we launch the Nexus platform.

So if we look at the business, very, very happy with the growth on the orthopedic side. Neuro was disappointing, but a lot of that was a decline in capital sales because up to now, those SonaStar units have been sold. And with the older platform, customers have gone for some of the newer technologies on the marketplace. We're confident that when we launch Nexus that we will make back those losses as well as grow the addressable market for ourselves in neuro pretty quickly.

On the China side, China continues to perform well. Tariffs are having a -- an effect on the distributor in China. They're concerned that at these levels, they can still sort of stomach the tariffs. If the tariffs need to increase significantly, that will have an effect on the business. So at this present point in time, we are maintaining our margin, our pricing and there's good momentum in that market, but we are concerned that tariffs may have an effect on the business.

In terms of Nexus update, we have responded to the additional questions that we received from the FDA. And we are still hoping that by middle of June, we will have Nexus approval and essentially launch late in the fourth quarter of our fiscal year. So I hope those answer the questions, Kyle.

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Operator [4]

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(Operator Instructions) Our next question will come from Michael Kaufman with MK Investments.

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Michael D. Kaufman, MK Investments I LLC - President [5]

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Stavros, good progress. Just a quickie, I remember there was potential for future license revenue in China. Is the $4 million you got in 2018 all of it? Or will there be any license revenue going forward? Or any in 2019?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [6]

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Thank you, Michael. Thanks for the question. There certainly will be additional licensing revenue. The way the agreement was structured, there was a $4 million licensing fee upfront. And then the understanding is that there was $6 million in licensing fees, which were payable in annual payments over 3 years. Part of that we are hoping to receive before the end of calendar '19. Again, we're working closely with our partner to see that they get their manufacturing operations up and running. So they have been scaling up to do meaningful manufacture. We're going to be visiting our partners in July to see the progress that's been made from a manufacturing front. So hopefully, we'll see some of that licensing revenue and also royalties coming in, in the near future.

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Joseph P. Dwyer, Misonix, Inc. - CFO, Treasurer & Secretary [7]

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So Michael, those $6 million of payments will be recorded as royalty revenue when received.

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Michael D. Kaufman, MK Investments I LLC - President [8]

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But it's the same cosmic thing as licensing? I mean, it's money without any cost of goods sold?

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Joseph P. Dwyer, Misonix, Inc. - CFO, Treasurer & Secretary [9]

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Exactly.

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [10]

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Correct.

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Operator [11]

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Our next question will come from Alex Nowak with Craig-Hallum Capital Group.

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William Patrick Fafinski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [12]

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This is actually Will on for Alex today. Just on Nexus quickly, could you share any detail on the game plan to launch Nexus once it's approved in the middle of this year? How many systems are built? How quickly do you think you can roll this out? Any color around this would be helpful.

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [13]

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Sure. Thanks, Will. I can, at this stage, provide limited color because what we're going to do is a very staged launch. So I think in the first quarter, the focus is going to be very much around the neuro opportunity. So we have identified the neuro sites. And what we're going to be doing is rolling it out to a limited number of sites and then, obviously, review the impact of those efforts and adjust strategy accordingly. So initially, the focus is going to be around the neuro opportunity. We think that the neuro opportunity represents a lot of upside because ultrasonic technology is already regarded as the standard of care in this market. We do also realize that we're going up against 2 very established players, but we would like a chance to test our disruptive model in the space. So I know it's a vague response, but at this stage, it's going to be a very measured and staged approach that we take to market.

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William Patrick Fafinski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [14]

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No, I appreciate that. And then I guess on the Solsys acquisition, you announced it last week and then you had to go back to the Misonix team and tell them the news. I was wondering if you guys could just detail their reaction of the announcement. And what was the most asked question that you were getting from some of the employees?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [15]

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Sure. I think we're fortunate, yesterday, literally a minute after the signing of the deal, we had the leadership of the 2 teams from the sales and the marketing perspective together in a room. So everybody came together a little bit apprehensive, not quite sure why we'd brought everybody up. But I think there was a lot of enthusiasm when the deal was announced because I think what this provides the company on just high level metrics, the way people looked at us, the transaction essentially doubles the revenue of the company, doubles the size of the company from an employee base and also triples our reach in terms of sales force. So I think the way that the sales force looked at this is that they now have the focus to really look at 2 businesses, since we're going to have a dedicated wound team as well as a dedicated surgical team. So I think the existing Misonix people look at this as a way to really focus in on the surgical opportunity, have that additional bandwidth to grow the neuro business in a meaningful manner and at the same time, not lose out on the growth that we have generated on the wound side of things. So I think the overall reaction was largely positive from the teams because they see the tremendous opportunity.

I think what it also provides both team members, since -- although Solsys is traditionally a wound company, there is a fair amount of business that is in the surgical arena. So I think team members on both sides realize that there is now an opportunity for them if they'd like to pursue a career in surgical versus wound or vice versa, that the company can actually provide that career growth for both lots of people. The cross-selling opportunity is obviously significant, and I think everybody walked away looking at this as a way to increase not only revenue for the company, but their individual earning capabilities, by not only having more bandwidth and focus but potentially a wider basket of product to sell.

Also in preparation for Nexus, I think the feeling from the team was instead of having 55 people out there promote this universal platform to the marketplace, you now have 135 resources out there that are going to promote Nexus. And that is a net positive for the company, so I think very, very positive.

Obviously, sales are normally very vocal, and they certainly didn't disappoint us in that regard. So the tone was very, very good. From the administrative staff, some of those concerns are more around what is the future of the company. And as we said, this deal where we put the companies together didn't come out of necessity, but because we really believe the 2 companies were better together. So I think that the message that we bought across not only to the salespeople, but to the administrative people as well is that they're really part of the growth story. This is not about putting companies together and cutting back on people. We made it clear that over the next 2 years, we want to significantly grow the sales force as well. So I think having a young dynamic sales force certainly left them charged up in terms of the opportunity.

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Operator [16]

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And that concludes our question-and-answer session at this time. I'd like to turn the call back to management for any additional or closing remarks.

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [17]

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Thank you. I'd like to close by thanking the outstanding team at Misonix for all of terrific work they're doing to build the new Misonix and capitalize on our abundant opportunities. I'd also like to thank our loyal customers, great partners and supportive shareholders. This is an exciting time for Misonix. And over the past year, we've succeeded with several key strategic initiatives, including creating a performance-based culture, driving consumable revenue and addressing new markets. These efforts led to a significant growth in revenue in the first 9 months of fiscal 2019. We're positioned to continue our business momentum and create significant future shareholder value with the launch of our new Nexus platform and with the completion of our transformative acquisition of Solsys, which are both expected to occur later this year. We are confident that the direction we are headed in will enable us to meet our goals of enhancing long-term shareholder value as we move through the remainder of fiscal 2019 and beyond.

We look forward to speaking to you again when we report our fourth quarter and full year fiscal 2019 results. If any additional questions arise in the meantime, please contact our Investor Relations firm, JCIR, at (212) 835-8500. Thank you again for your support and for your time. Goodbye.

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Operator [18]

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That does conclude our conference for today. Thank you for your participation.