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Edited Transcript of NM earnings conference call or presentation 15-May-18 12:30pm GMT

Q1 2018 Navios Maritime Holdings Inc Earnings Call

MONACO May 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Navios Maritime Holdings Inc earnings conference call or presentation Tuesday, May 15, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angeliki N. Frangou

Navios Maritime Holdings Inc. - Chairman & CEO

* George Achniotis

Navios Maritime Holdings Inc. - CFO

* Ioannis Karyotis

Navios Maritime Holdings Inc. - SVP of Strategic Planning

* Thomas Beney

Navios Maritime Holdings Inc. - SVP of Commercial Affairs - Navios Corporation

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Conference Call Participants

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* Justine Beth Fisher

Goldman Sachs Group Inc., Research Division - Fixed Income Analyst

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Presentation

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Operator [1]

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Thank you for joining us for Navios Maritime Holdings First Quarter 2018 Earnings Conference Call. With us today from the company are Chairman and CEO, Angeliki Frangou; Chief Financial Officer, George Achniotis; SVP of Commercial Affairs, Tom Beney; and SVP of Strategic Planning, Ioannis Karyotis.

As a reminder, this conference call is being webcast. To access the webcast, please go to the Investors section of Navios Maritime Holdings' website at www.navios.com. You'll see the webcast link in the middle of the page, and a copy of the presentation referenced in today's earnings conference call can also be found there.

Now I'll review the safe harbor statement. This conference call could contain forward-looking statements in the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Holdings. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Holdings' management and are subject to risks and uncertainties, which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in Navios Holdings' filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios Holdings does not assume any obligation to update the information contained in this conference call.

The agenda for today's call is as follows: we'll begin this morning's conference call with formal remarks from the management team, and after, we'll open the call to take questions.

Now, I turn the call over to Navios Holdings' Chairman and CEO, Angeliki Frangou. Angeliki?

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [2]

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Thank you, Laura, and good morning to all of you joining us on today's call. I am pleased with the results of the first quarter of 2018. For the first quarter, we reported revenue and adjusted EBITDA of $116.8 million and $28 million respectively. We are beginning to see the effect of a healthy charter market on our business results. Rates for variable currencies improved materially, with the time charter equivalent rate for the Q1 of 2018 about 40% higher than Q1 of 2017. In fact, adjusted EBITDA from core shipping operations increased over 10x in Q1 2018 compared to Q1 2017.

Slide 3 provides our company's highlights. Navios Holdings directly controls 72 modern dry bulk vessels and manages 208 vessels, roughly with an average age of 7.7 years is 16% younger than the industry average age. Our scale and the benefits from managing a large fleet allows to maintain industry-leading operating costs, estimated to be 42% below the average of our listed peers. In an improving market, we created market exposure for 63.5% of available days.

Slides 4 and 5 illustrate a universal, diverse company. Navios is a global brand with significant scale, management talent and industry relationships. Navios Holdings' value derives from the dry bulk fleet it holds directly and the equity interest in its subsidiaries owning tankers, dry bulk vessels, container ships and ports.

Slide 6 outlines our tested operating platform which is favorably positioned to gain the benefits of a recovering charter market. We believe we are the premier operator in the dry bulk sector. Our scale of 200-plus vessels generate significant operating leverage and enable us to achieve substantial cost savings. We quantify the competitive advantage for 2017 as $38 million in terms of an estimated operating cost savings and discounts for the year compared to our peers. We also decreased SG&A by 40% over the last 3 years.

Slide 7 provides some further insight into the $38 million of estimated operating cost savings. To judge our efficiencies, we compare our operating costs to the published results of our peers. We computed our peers' operating costs by reviewing their 20-Fs and related disclosures. As you can see from the slide, our analysis reveal that NM's operating costs were estimated at approximately 42% lower than the average of our listed peers. We believe that the savings demonstrate a substantial competitive benefit we can generate and the value it delivers to all our stakeholders. And we believe that computing our benefits based on actual operating results is the most persuasive way to demonstrate actual savings.

Slide 8 provides an overview to our fleet and [volume] problem. We have expanded our charter-in fleet at an attractive time. We acquired 10, and sold 3 vessels, thereby adding a net of 7 vessels to our fleet. In particular, we acquired a Capesize vessel, built 2000, for $10 million. The vessel increased the collateral value of our secured bonds by $4.25 million. We therefore charter and calculate 9 Kamsarmaxes, some of them with purchase options. We also sold 3 Supramax vessels for $19.5 million, which had an average age of about 17 years. These purchase options provide real value. We have no significant capital requirements, which allow for capital flexibility and expansion capabilities at an opportune time. As a result of this fleet renewing and expansion activity, we improved the average age of our fleet by 13% and increased our fleet size by 11%. Also, our charter-in fleet days have increased, allowing for additional revenue generation. Finally, 70% of our charter-in fleet has purchase options.

Slide 9 shows the cash flow potential of our fleet and the market recovery. Our time charter rate for Q1 of 2018 was $10,983 per day. For the remaining 9 months of 2018, our fleet has 17,113 available days, of which, 10,870 days have market exposure. At current rate of $15,152 per day, our fleet would generate $43.6 million of free cash flow. If rates were to increase to a 20-year average, we would have about $115.5 million of free cash flow. In fact, our fleet can generate an additional $11 million of free cash flow for every $1,000 increase in charter rate.

Slide 10 sets forth Navios' cost structure. Our expected daily revenue for the remaining 9 months of 2018 is $14,368 per day. We fixed 36.5% of our available days at an average daily rate of $11,953 per day. Daily revenue may increase by $2,038 per day based on an expected impact on current market rates on open and index days and an additional $377 based on the current NNA and NMM dividend.

Our breakeven cost for 2018 is expected to be $11,819 per day. Our cost includes all operating expenses, scheduled drydock expenses, charter-in expenses for our charter-in fleet, G&A cash expenses, as well as interest expense and capital repayments.

Slide 11 highlights our strong liquidity position. Net debt to book capitalization was 72.1%, and we had cash of $121.9 million as of March 31, 2018. We have no significant committed shipping growth CapEx or any material debt maturity until 2022.

I would like now to turn the call over to Tom Beney, Navios Holdings' Senior Vice President of Commercial Affairs.

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Thomas Beney, Navios Maritime Holdings Inc. - SVP of Commercial Affairs - Navios Corporation [3]

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Thank you, Angeliki. Slide 12 presents our diversified dry bulk fleet, consisting of 72 dry bulk vessels totaling $7.3 million deadweight, split between Capesize, Panamax and Supramax Handy. We continue to be one of the largest U.S.-listed dry bulk operators in the world, established over 60 years ago. We have 65 vessels on the water. The average age of the fleet is 7.7 years, 16% younger than the industry average. Navios Group's total fleet of 208 vessels includes 54 tankers, 42 container vessels and 112 dry bulkers and is a highly diversified public shipping group.

Please turn to Slide 14. The IMF forecasts world GDP growth at 3.9% for 2018 and 2019. Emerging markets are expected to grow at a healthy 4.9%. On the back of synchronized global economic growth, dry bulk trade grew by 4% in 2017 and is forecasted to rise by 2.6% in 2018, above the expected 2.1% net fleet growth.

Moving to Slide 15. Data from the IMF shows further evidence of the global economic expansion as all major economies are growing simultaneously. This was last experienced during the period 2004 to 2007, and previous to that, in the late '80s. Important for seaborne trade, the percentage of countries showing export growth has risen to 85%, which is the highest on record. I would like to point out that the dry bulk market still has substantial upside as it remains about 40% below the 20-year average.

Turning to Slide 16. Worldwide steel production experienced a 5% increase in 2017 on the back of firming steel prices, and Chinese steel production rose by 6%. Up till end of March 2018, Chinese steel production is up a further 5%. Chinese steel exports have reduced to cater for the increased domestic demand, which has been stimulated by large infrastructure projects and recovery in the housing market. The One Belt, One Road project is a cornerstone of the Chinese economic plans for the next 5 years and supports steel and power demand inside and outside China. Chinese domestic production of iron ore in 2018 is down 36% year-on-year in Q1.

Substitution of Chinese expensive, low-quality iron ore with higher-quality and lower-priced imports continues. Iron ore imports into China for 2017 rose 5% or 50 million tons and is forecast to rise further in 2018. Vale recently reiterated that they expect to meet their 2018 production target of about 390 million tons, which will result in increased export volume for the balance of the year since Q1 was negatively affected due to seasonal weather issues. This should support Cape rates as 1 ton of Brazilian ore equates to almost 3 tons of Australian ore in ton miles.

Please turn to Slide 17. The Chinese government continues to rationalize domestic coal production, closing down small, inefficient mines and encouraging consolidation of large mining groups. It is expected that the restructuring of the Chinese coal industry will continue to encourage imports as inefficient, polluting mines are closed. During the peak winter season, stocks of thermal coal at power plants in both China and India reached uncomfortably low levels, prompting both governments to allow additional coal imports to maintain power supply. In 2017 Chinese seaborne coal imports were up by about 10%, and through March of this year, they were up by 28% to date.

Turning to Slide 18. Agricultural production worldwide continues to increase. After a strong 7.1% growth in 2017, forecasts for 2018 are for a further increase. Worldwide grain trade has grown by 5.5 CAGR since 2008, mainly driven by Asia demand. Demand increases are focused on Asian economies, and especially China, where incomes are rising and diets are changing. Chinese imports of soybeans in 2017 were up 15%. Most of the increases in grain production are based in the Americas or European regions, increasing ton miles for longer trips to Asia.

Moving to Slide 19. In 2017, 34% of total expected new buildings never delivered. In spite of a significantly better market this year, the nondelivery rate increased to 41% year-to-date. Forecasts offer a 2.1% net fleet growth in 2018, the lowest since 2000. Based on the current order book and shipyard availability, low net fleet growth is expected to continue over the next few years. In addition, as a result of incoming changes in IMO regulations, scrapping of older vessels is expected to continue.

Turning to Slide 20. 2017 ended with another low net fleet growth of 3%, about half of the long-run average fleet growth of 5.8% and below the dry bulk trade growth of 4%. Total scrapping in 2017 was 15 million tons. The current dry bulk order book before nondeliveries is about 10% of the total fleet, and we know that vessels over 20 years of age equal about 7.5%. Given forecasted trade growth, there is balance between new expected delivers and potential scrap candidates.

The fundamentals for 2018 and beyond remain positive. In fact, forecasts for 2018 show that demand growth of 2.6% will be more than the level of supply growth of 2.1%. With demand above supply, the market should continue to recover and support increased charter rates going forward.

I would now like to turn the call over to our CFO, George Achniotis, for the Q1 financial results.

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George Achniotis, Navios Maritime Holdings Inc. - CFO [4]

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Thank you, Tom, and good morning. Please turn to Slide 21 for the review of the financial highlights of the first quarter of 2018. Adjusted EBITDA for the quarter increased by 60% to $28.1 million compared to adjusted EBITDA of $17.5 million in Q1 of '17. EBITDA net income for Q1 in both 2017 and '18 were adjusted to exclude book losses relating to the sale of 2 vessels.

In Q1 of 2018, we recorded a $6.7 million book loss relating to the sale of the Navios Herakles, a 2001-built Handymax vessel. The vessel was sold for $7.7 million net.

In Q1 of '17, we recorded a book loss of $9.1 million relating to the sale of the Navios Ionian, a 2000-built Handymax vessel, that was sold for $5.3 million net. The increase in EBITDA is mainly due to an over 13x increase in the EBITDA contribution of the dry bulk fleet due to a 40% increase in the TCE rate achieved in Q1 of '18 compared to Q1 of '17, which is a reflection of the improvement in the dry bulk market. The increase is also attributable to a 54% increase in the EBITDA contribution of Navios South American Logistics leading to the commencement of the Vale contract at the iron port in Uruguay. The increase was mitigated by a reduction in equity pickup from affiliated companies, specifically Navios Acquisition, as the tanker sectors have a different [volume and] cycle. Adjusted net loss for the quarter was $34.1 million compared to a loss of $39.6 million in 2017.

Please turn now to Slide 22 where the balance sheet highlights are presented. We continue to maintain a healthy cash balance. As of March 31, 2018, the cash balance was about $122 million compared to $134 million at the end of December 2017. Deposits for asset acquisitions reduced to $7.5 million, compared to $36.8 million at December 31, 2017, as Navios South American Logistics took delivery of 3 new push boats during the quarter. I would like to point out that we have no significant maturities until 2022.

Over the next few slides, we will briefly review our affiliates. Please turn to Slide 23. Navios Holdings owns about 20% of Navios Partners, including a 2% GP interest. Navios Partners owns a fleet of 38 vessels: 33 dry bulk and 5 containers. NMM also owns about 36% of Navios Containers, a growth vehicle dedicated to containers.

NMM is a unique platform generating significant cash flow with no significant near-term maturities. The company is currently in the process of renewing its dry bulk fleet with younger and larger vessels. In 2017 and year-to-date '18, NMM has added 11 vessels and has sold 2 with an average age of 20 years, reducing the average age of its dry bulk fleet by 12%. We expect to receive about $3 million in dividends from NMM in 2018. And since 2008, we received about $195 million in dividends.

Turning to Slide 24. Navios Holdings owns about 48% of Navios Acquisition. NNA has a fleet of 35 modern, high-quality tankers, with an average age of 7.3 years, diversified between crude product and chemical tankers. NNA also owns about 59% of Navios Midstream Partners, including a 2% GP interest. NAPs [and MLP] with 6 VLCCs and is expected to provide NNA with about $10 million in distributions in 2018. We expect to receive about $6 million in dividends from Navios Acquisition during 2018. And since 2011, we received about $84 million in dividends.

Moving to Slide 25. Navios Holdings owns about 3% of Navios Containers. Navios Containers is a company that was set up in June 2017 with an intention of taking advantage of opportunities in the container sector. Since its inception, the company raised $180 million at the Oslo OTC market and acquired 25 vessels, mostly through its trade transactions.

This concludes my presentation. At this point, I will turn the call over to Ioannis Karyotis for his review of the Navios South American Logistics' results.

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Ioannis Karyotis, Navios Maritime Holdings Inc. - SVP of Strategic Planning [5]

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Thank you, George. Slide 26 provides an overview of the Navios Logistics business. Navios Logistics operates 3 port terminals. Navios Logistics complements its port business with its barge fleet for river transportation and product tanker fleet for coastal cabotage trade.

Please turn to Page 27. For the overall results of the first quarter of 2018, revenue increased 19% year-on-year to $52.3 million, and EBITDA increased 67% year-on-year to $16.8 million. Q1 2018 port segment revenue increased 59% compared to the same period last year, and EBITDA increased 178% to $12.1 million. The increase is mainly attributable to the operation of the new iron ore terminal.

In Q1 2018, the iron ore terminal generated approximately $10.2 million EBITDA. For 2018, we're estimating about $40 million EBITDA from the Vale contract based on the annual minimum guaranteed quantity.

The grain terminal had a weaker performance compared to Q1 2017 as grain export and recipient volumes were impacted by the drought in Uruguay and Argentina.

The liquid terminal had an improved performance compared to Q1 2017, mainly due to higher storage revenue.

In the barge segment, EBITDA in the first quarter of 2017 was positively affected by 2 extraordinary events, $1 million gain from the sale of 2 self-propelled barges and $1.1 million other income from an [adresna] award. Excluding these 2 events, for comparison purposes, Q1 revenue decreased 10% and EBITDA decreased from $3.5 million to $1.6 million. The decrease, compared to the same period last year is mainly attributable to lower liquid cargo transportation. Q1 is a seasonally low quarter for grain transportation.

Cabotage business Q1 EBITDA increased to $3.1 million compared to $0.2 million in the same period last year. The increase is attributable to higher number of operating days due to less scheduled drydock and off-hire days compared to Q1 2017.

Net loss in Q1 2018 reduced 65% to $1 million from $3 million in the same period last year. The improvement is attributable to the increase in EBITDA that was partially mitigated by higher depreciation expenses related to the iron ore terminal and higher interest expenses. The increase in interest expenses was due to the new Term Loan B issued in Q4 2017 and reduced capitalized interest following the completion of the construction of the iron ore terminal.

Please turn to Slide 28. Navios Logistics has a strong balance sheet. Cash at the end of Q1 2018 was $82.1 million compared to $79.9 million at the end of 2017. Net debt to book capitalization was 55% compared to 56% at year-end 2017.

Now I would like to turn the call back to Angeliki.

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [6]

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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 the line of Justine Fisher of Goldman Sachs.

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Justine Beth Fisher, Goldman Sachs Group Inc., Research Division - Fixed Income Analyst [2]

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Can I ask a broader question about the time charter versus the acquisition of ships? And you guys are chartering in ships to grow the fleet, and I'm assuming that the rates -- that you're making money chartering them in at lower rates and then able to take advantage of the improving market to charter them out at higher rates. Will Navios start to buy some more ships at some point? I mean, when do you start to make that decision to buy more vessels as opposed to charter them in?

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [3]

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In essence, we value those vessels as almost a [cost tool] to exercise the options. Just to give you an idea, if you see on the -- on -- we have -- first of all, we have -- 70% of our charter investments have purchase option. On the new vessels - Japanese vessels, our overall cost is -- including the OpEx and everything is below $9,000. It's about $8,000. So you get -- and you have purchase option from here for every year at the declining of $1 million or $2 million per year. So you are -- actually are able to (inaudible) these vessels are part of our core fleet, which we'll also exercise the option when we find that it's more attractive than the financing. It's in essence a financing almost way, but it gives you the purchase option and it brings you at a very convenient -- leveraging at very low cost, taking advantage of the Japanese interest rate environment, to be honest.

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Justine Beth Fisher, Goldman Sachs Group Inc., Research Division - Fixed Income Analyst [4]

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Okay. And then another question on the duration of the time charter. So I'm looking at some of the ones you guys have signed for some Capesizes, and it's -- I mean, they're all reflecting the stronger market. You've got some charters in the mid-teens, and they look like they're about 1-year duration. I'm just looking, a lot of them end in March of 2019. And so is that kind of the sweet spot of the charter market now where the -- your clients are saying, "Okay, we know rates are rising. We're willing to do it for 1 year." But you can't really lock in kind of a 2- or 3-year charter at that rate. You got -- the market is just not that strong. So it's kind of the 1 year where there's the most activity. And how deep is that market for kind of mid-teens to 20,000 time charters now for 1 year, let's say?

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [5]

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I will say that on the last couple of the 3, 4 weeks, we had, in our headquarters, almost every major commodity house coming and asking for a deal. What you see is that the 1-year rate is well established at the -- even when the rates will drop to about $8,000, $9,000 on the spot market on the Capesizes, you are doing deals of 1-year at close to $20,000 -- $19,000, $20,000. So the $20,000 and low $20,000s is a well-established level for the 1-year rate. And to be honest, it's a good charter rate. I'm not saying we are very bullish on the market, but we see that it is a good level where you can fix the 1-year rate. We have now started seeing also some 2-year rate, a bigger rate on the counter markets of around high $13,000s. So this is start developing. The strategy of Navios is as -- we have about 2/3 of our available days exposed to the market. But selectively, we will start shipping at nice margins that we're seeing developing at around $20,000 and trying to create different maturities, meaning creating a 2-year, 3-year and creating some cash flows and visibility.

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Justine Beth Fisher, Goldman Sachs Group Inc., Research Division - Fixed Income Analyst [6]

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Okay, great. And then I have one more question for George, if I may. You said that you acquired a Capesize for $10 million, but it added $4.25 million to the bond collateral pool. Why was the -- why was there a difference in how much collateral was added to the pool versus what you paid for the ship?

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [7]

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We took a vessel out, which we sold. And we added a vessel with a higher value. I think you will see more transactions like that, exercising -- we will be exercising options that we have in our books for younger vessels, 2007, 2008, and substituting with older vessels that we're taking out.

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Justine Beth Fisher, Goldman Sachs Group Inc., Research Division - Fixed Income Analyst [8]

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Okay. So that was a net addition to the collateral pool over and above what the previous vessel was. Okay, I see.

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Operator [9]

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And now I would like to turn the floor back over to Angeliki Frangou for any additional or closing remarks.

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [10]

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Thank you, this completes our Q1 results.

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Operator [11]

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Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect, and have a wonderful day.