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Edited Transcript of OKDBV.HE earnings conference call or presentation 17-Jul-19 7:00am GMT

Q2 2019 Oriola Oyj Earnings Presentation

Espoo Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Oriola Oyj earnings conference call or presentation Wednesday, July 17, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Helena Kukkonen

Oriola Oyj - CFO

* Robert Wilhelm Andersson

Oriola Oyj - President & CEO

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Conference Call Participants

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* Petri Kajaani

Inderes Oy - Analyst

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Presentation

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [1]

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So good morning from Espoo, and welcome to Oriola's Half Year and Quarter 2 Financial Report Presentation. My name is Robert Andersson, I'm the CEO of Oriola.

I propose we do the presentation in such a way because of the webcast that we will -- I will present first and then we have a Q&A session at the end, and you can also ask questions on the -- through the webcast.

So if we start with highlights for the -- for quarter 2, and I will come back to each and every one of these bullet points here and discuss them in more detail in the presentation. So we had strong invoicing, net sales growth, particularly in constant currencies. Kronans Apotek's online sales grew in line with the market at the pace of 36% on year-on-year. We've seen changing consumer behavior and tight price competition affecting Consumer results throughout the year, and quarter 2 was no different there. And we started our ramp-up of Enköping distribution center in February. We've seen, after a good initial start, some slowdown in the ramp-up, and I will comment on this later on. We have become the market leader with a total of 115,000 dose patients in Sweden and Finland, and this market is growing. And last but not least, we had, I would say, a strong cash flow in quarter 2.

Now on the key numbers. Invoicing grew by 5.1% in reported and 7.1% in constant currency. Net sales grew by 12.3% in reported, 14.8% in constant currency. The net sales growth and invoicing growth are driven by -- largely, I would say, by high-priced medicines. There's some volume growth but there's high price of -- high-priced medicines and net sales, particular then by change in the distribution agreements for a couple of large customers.

So invoicing, net sales, the strong development continues. Our challenges are very much related to turning that growth, that positive development in invoicing revenue into profitability. And here again, our quarter 2 result were not on a level which we are satisfied with, EUR 6.4 million in reported and EUR 6.7 million in constant currency. It's an improvement from quarter 1, but as I said this is where we are putting a lot of focus at the moment.

If we talk a little bit about the environment we are operating in and we're operating in during quarter 2. So first of all, we see that the online market grew by 37%, a slight decrease compared to quarter 1 but still a very -- that's the dominant trend, I would say, in the pharmacy market in Sweden.

The market shares have not changed in any significant way compared to quarter 1. If you look at the decimals, the online players are the ones that are taking market share and then the brick-and-mortar players are -- the ones that are stronger in brick and mortar have challenges, too, to keep up with the development.

Maybe one thing that I would like to highlight here that the others category here -- the others, well, category with 3%, those are the ones that are really sort of disturbing the price picture at the moment. We saw a number of players start at the end of last year or beginning of this year. And I would say we've seen the price -- from our perspective, negative price development in the marketplace, particularly for traded goods and OTC which are our high margin products.

And the segment, i.e., the Rx prescription medicines versus OTC medicines versus traded goods, the balance between the 74% for Rx, OTC 9% and TG 17% is unchanged compared to quarter 1. But for the longer term and as a longer trend, we see the Rx going down and, in particular, traded goods going up, and this again is in line with the overall online trend in the marketplace.

One thing which we haven't specified here on the slide is the number of opened and closed pharmacies, brick-and-mortar pharmacies. So during the first half, we have a plus 1 net increase in the number of pharmacies; but during quarter 2, we have a minus 5 development. So 6 were opened during quarter 1 and 5 were closed -- the net closure of 5 during quarter 2. I think we will see this becoming more of a trend. We will see that brick-and-mortar pharmacies are going down in numbers, and because of all of the growth coming really from online.

If we go to the wholesale market, we've seen good, solid growth continuing in Finland, 4.6%; Sweden, 10.6%. Again, mostly driven by new and expensive medicines. Our market share in the wholesale business in Finland was 46% during quarter 1 and in Sweden 42%. These are good levels. In quarter 1, Finland was at 45% and Sweden at 41%.

I want, however, to remind you that these numbers are, to a large extent, a reflection of our principals business. So if the principals that we are serving are having a -- campaigning or good development or positive new -- positive medicines brought into the market, then that will also reflect in our market share.

But as such, it also reflects that we are -- we have a strong and solid position in the marketplace. We are not losing customers. We are kind of gaining and losing or keeping the portfolio on the same level as it's been and actually strengthening a little bit.

Then looking at the Retail market. We've talked about dose dispensing and, here, the market is continuing to grow. Our market position is strong. We are the clear leader in Sweden. We are #2 in Finland. The market share is basically unchanged in Sweden and in Finland, we are up 2 percentage points compared to quarter 1.

What I also introduced in connection with the quarter 1 reporting was a description of the Retail market for the goods that we are serving and supplying. The traded goods and OTC products in Sweden where Apoteksgruppen and Lloyds, Apotea and many others are our customers. That's in total a EUR 1.1 billion annual market where we have a 26% market share. So we are supplying to Kronans but to many others as well. That's basically the message.

Staffing services in Finland, we served 225 pharmacies in quarter 2 out of a total of 815. Quarter 3 normally is the peak season with the summer holiday and we expect that number to be higher in quarter 3.

I mentioned that we are focusing on profitability, to improve the profitability. One of the key initiatives here or probably the key initiative that we have announced is our 20by20 Excellence program where the ambition is to find and execute EUR 20 million annualized savings by the end of 2020 compared to the cost levels in 2018. And as one sort of component in this -- to reach this target, we have announced a collaboration -- cooperation negotiations at the end of June, where we are targeting approximately EUR 4 million to EUR 6 million annual savings.

The other key strategic initiative that we have ongoing and we announced at the end of last year is our Customer Experience program, CX program, where the focus really has been on improving our customer satisfaction, customer experience. And here, I have some really positive news. We've had, as a consequence of the difficulties here in Mankkaa for, well, last year, particularly or at the end of '17 and most of last year, we had a weak customer satisfaction.

Now we measure customer satisfaction twice per year and whereas -- compared to the customer satisfaction, the NPS score in October/November last year, we are now -- have it at an 18-point increase when we measured in May/June. And those who know NPS know that 18 points is significant. So good development there, and this gives me a lot of pleasure actually to see that. The actions are resulting in positive development.

Then Enköping distribution center. We announced that we started -- we started the ramp-up in February. The ramp-up has been proceeding pretty well. Now however, during the summer season, now we found when we started campaigns, summer campaigns, and adding -- putting more pressure on the system, adding significant numbers of products to the system, we've run into some difficulties which are now pronounced and highlighted by the fact that we are in the middle of the holiday season. This means we have -- we are taking a sort of a bit of a time-out in the ramp-up over the summer, and we will continue at full speed once we have sorted out some process issues and we have people on board and in place to really secure the ramp-up.

We're still saying that we will reach efficiency by the end of 2019. We will not reach the same level of efficiency that we were hoping for still when we started in February but we will be on a higher efficiency level than we were before starting the program. And this means that we will still be working on, if you will. We'll always be working on efficiencies but we will continue then during the beginning of next year to really make sure that we are squeezing out -- getting efficiency out of the system.

This slide I will not really talk about because I think you know we reorganized according to 3 business areas: Consumer, Pharma and Retail from the beginning of this year. I will run through each of these -- the highlights of each of these.

For Kronans, for Consumer business area, we saw a net sales increase of 0.6% in constant currency. The market grew at 3%, which was purely driven by online. Online -- actually the online growth is more than 100% of the growth in total. So online is growing, brick and mortar is actually in slight decline, which is a challenge for us.

Our online, as mentioned, we grew 36% versus market, so basically at market pace. We have been growing more quickly or putting even more pressure on online growth in the previous quarters. Now we've taken a little bit of a breather and time-out, and we've reached a point where there are certain processes that need to be changed and we will come back then with renewed efforts in the second half of the year.

The share of OTC and traded goods of net sales is, again, in our portfolio, down versus last year and that is related to the online trend -- the strong trend of online taking over traded goods and OTC, which again is a challenge for us because the traded goods and OTC are the most profitable ones, the profitable products.

As a comparison, for the Rx medicines, the prescription medicines, the compensation we get from -- through the regulation has been unchanged for the last 10 years. So although the prices of a medicine may go up, we're still getting the same kind of kroner amount as compensation. And the cost levels of our brick-and-mortar operations, the cost in our brick-and-mortar operations are basically salaries and rents. And on the salaries, there is a union contract which guarantees increased salaries annually.

So it's a difficult situation and this is why we also -- largely why we were forced to come out with a profit warning at the end of June.

So price competition, I mentioned the new online players and the established player Apotea. We also had a weak seasonality in quarter 2 with fewer trading days and sun and allergy season, which is the big one during quarter 2, which was weaker than normal.

So a number of reasons for not so good -- as good profitability as we were hoping for. Yes, there is a slight trend shift compared to the previous 2 quarters but we are working hard to improve the situation.

If we go to Pharma, I think the picture is looking actually quite good. We see good top line growth, I mentioned, driven by, on one hand, volumes but maybe more price -- higher price -- higher-priced medicines. And then also the difference between invoicing and net sales is very much explained by the difference in some -- in the contracts with some of our big customers where they have gone from consignment to own stock.

The operational efficiency here in Finland is actually on a very good level at the moment. We are exceeding our own plans. Unfortunate then we have the Enköping ramp-up, which is adding cost to Pharma and Retail and particularly to Retail. Pharma, we managed to compensate the Enköping overruns with better results in Mankkaa. And as I said, I think we're starting to see a trend line here. I hope we can continue to keep up the positive development.

For Retail -- and again, those who follow us, you'll remember when you look at quarter 3 last year, EUR 3.2 million, [also here] Pharma EUR 10.5 million. That includes EUR 7.2 million of the EUR 9 million compensation we booked in quarter 3. For Retail, the EUR 3.2 million includes EUR 1.8 million of compensation. So when you're looking at the trend lines, you have to take this into consideration.

Retail grew 5.4% in reporting and 7.9% in constant currency, very much driven by the number of dose patients where we've -- as you know, we've had a very positive development.

For Retail, particularly, the high costs or the inefficiencies or the ramp-up in Enköping are really sort of putting a significant burden on the reported number. It is better than quarter 1 and it is better than quarter 4 but it must be better than reported going forward.

We are also -- we've said we are also -- we have been also continuing our portfolio renewal that we started basically in quarter 3 -- quarter 4 last year, I would say, which is then -- should also result in better results going forward.

Now just repeating some of the financials. Net sales at -- invoicing at EUR 942 million; net sales at EUR 448 million, record level numbers. Good, solid development. Adjusted EBIT in total EUR 6.4 million, up from EUR 3.9 million quarter 1, up from EUR 5.2 million quarter 4, and the EUR 17.5 million in quarter 3 last year includes the EUR 9 million settlement.

The big difference in year-on-year is coming from Consumer and for the reasons that I explained, difficult -- more difficult market situation, competitive situation, combined with the sort of a cost increase that is difficult to address without really addressing the number of pharmacies and the number of people. And we also announced, in connection with our profit warning, that we will be looking at the number of pharmacies in Sweden.

But Pharma, Pharma developing positively year-on-year. Retail, last year, there is -- the comparison isn't necessarily so meaningful because last year we had a different portfolio and then, this year, now quarter 2, the Retail is burdened by Enköping.

Profit for the period. The sharp readers have noticed in our announcement that we had a EUR 1.5 million in quarter 2, now a EUR 1.5 million release of provision, that is improving. The quarter 2 number, the EUR 5.2 million includes a release of EUR 1.5 million. Then quarter 3 last year, again, includes the EUR 9 million. And quarter 4 last year includes the EUR 12.7 million Hehku provision. It's related to the Hehku provision, that we are now able to release EUR 1.5 million because we've been able to execute the ramp down and the closure a bit more effectively, efficiently than we were sort of providing for. And the earnings per share development is obviously following the profit development.

I said cash flow was strong and we have a situation where we have strong -- also strong volatility in cash flow. End of last year, EUR 48 million. First quarter, minus EUR 25 million. Now EUR 70 million. All of the quarters last year were positive or slightly positive, now the -- the volatility hit us in quarter 1 and quarter 2. I think you should be thinking about this more as an average than as individual quarters. And on an average, I mean, obviously, EUR 45 million positive in 2 quarters is a reasonably good number.

And the cash, as a consequence, the cash situation is good. Also considering that we've paid during quarter 2 EUR 16 million in dividends to our shareholders.

The balance sheet, the debt situation, not much drama here. If you read the numbers, you see that the bars for quarter 1 and quarter 2 are much higher than last year. This is related to IFRS 16 change in the accounting principles. And if you look at where it comes from, the leasing liabilities, which were at the end of year -- the year, EUR 1 million, and now EUR 95 million. So a delta of EUR 94 million is boosting this number. So the comparable number is EUR 56 million if you compare to last year. And EUR 56 million of debt is then on a very reasonable level here.

We updated our guidance for this year, whereas, we had previously said that we believe we'll be able to report a better number than 2018. We are now saying that the adjusted EBIT on constant currency basis is estimated to decrease from the 2018 level. The main reasons that we have mentioned is the Swedish consumer market where this is not just a quarterly kind of phenomenon. It is a -- unfortunately, a market trend. And we are -- what we're doing is we're addressing this with new -- we are opening drop-in clinics. We are working with Doktor.se together to make a more compelling offering. But online is taking over a large portion of the valuable and high-margin products.

But this is the new guidance. And if I then just summarize with a few couple of key takeaways. We've seen strong invoicing, strong net sales growth for last -- as long as I've been a part of this journey over the last 18 months or so. We are quite happy by now with the operational efficiency in Finland. We have challenges in Sweden and we are forced to take a bit of a slower ramp-up than we were hoping for to put things properly in order and to have a managed ramp-up.

The consumer market is changing in Sweden. This development is not favorable for us. We are addressing it, as I said, with other offerings and, obviously, efficiency. And we've become a clear market leader, I would say, on a Nordic basis in dose dispensing with 115,000 patients in Sweden and Finland.

So this is my presentation, and I'm open for Q&A.

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Questions and Answers

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Petri Kajaani, Inderes Oy - Analyst [1]

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It's Petri Kajaani from Inderes. In your 20by20 Excellence program, you said your aim is to find and execute this EUR 20 million savings. Now you have estimated this EUR 4 million to EUR 6 million from your cooperation negotiations, but have you already found the other circa EUR 15 million that's left? And where are they coming from?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [2]

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So I think when we -- in connection with quarter 1, I said a large portion of this -- we have lots of temporary employees and now particularly in Enköping. So the Enköping ramp-up is instrumental for reaching the EUR 20 million, and we really included this in the 20by20 program to get proper focus on this. There are -- the big components of the EUR 20 million is temporary labor. It's sourcing. So if you recall, when we announced the new organization, we also had put in a kind of proper sourcing organization which we did not quite have in the past. Fairly large savings coming from purchased goods. And then -- well, the supply chain, both Mankkaa and Enköping. And then we are just basically cleaning up internal structures. We are merging subsidiaries into the group and so on to save costs on administration.

Those are the big ones. But then also now with this collaboration negotiations, we are sort of boosting. We were actually -- when we announced the 20by20, we were thinking we don't have to do a [YT] -- or collaboration negotiation to reach the target. But now since the market is sort of -- well, actually, our ambition is to do more than EUR 20 million.

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Petri Kajaani, Inderes Oy - Analyst [3]

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And one question on the Enköping ramp-up. You mentioned it is slower than expected now. And you mentioned all this in your profit warning in June, but has the situation changed now within a month? Is it slower than expected in June?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [4]

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Well, no, no it hasn't changed in -- since I think this was 19th of June that we announced. We saw then that in June that we will have difficulties over the summer and that will delay the overall ramp-up by kind of a -- over the summer period. So it hasn't gotten worse the 19th of June, but it hasn't gotten much better either, if I put it that way. It will take until we get the people. We have called back people from holidays to work on stabilizing the processes, but we need all hands on deck to really sort of execute now on these improvements.

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Petri Kajaani, Inderes Oy - Analyst [5]

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Okay. And one question concerning your brick-and-mortar operations in pharmacies in Sweden. It's obviously a really tough market now. What sort of measures are you doing? You said you are going to probably close some shops there. Do you have any like agenda for more like a -- explaining more what you're going to do there to make the profit go up?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [6]

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So obviously, I mean Kronans Apotek or Consumer business is part of our 20by20 actions activities. We are basically reviewing all cost -- all significant and major cost items, as I said, they are rents and salaries. And we have a number of unprofitable or not-so-profitable pharmacies. So what we are balancing is between sort of minimizing the negative impact on market share and maximizing the positive impact on bottom line by restructuring or rationalizing the number of pharmacies. But this is -- there is no decision yet on, in a way, which ones or so on, so this is a process that has been kicked off and we will continue in August when people are back.

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Petri Kajaani, Inderes Oy - Analyst [7]

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Okay. Could you commentate on the number of the bleeding pharmacies in Sweden? Are they...

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [8]

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Bleeding is a strong word. Bleeding is a strong word. It's -- I would say it's subpar profitability or slightly negative. So there is -- I would love to -- that if we would have 10 bleeding pharmacies, it would be easy. It's much more difficult to sort of rationalize when you have not -- you have subpar kind of activity -- subpar pharmacies. And within scope, at the moment, is maybe 10 pharmacies or so.

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Unidentified Company Representative [9]

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And we have online questions and we'll continue with Enköping. And the question is, after the automation and expansion of Enköping, how well is the distribution center addressed to handle growing volumes in online pharmacy business?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [10]

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Okay. So the automated distribution center in Enköping is actually not built to handle the online logistics. It is built to process the traditional pharmacy and retail goods logistics to our pharmacies, to Kronans and the other pharmacies we are serving. We are building -- the positive impact of Enköping being up and running is that it frees up focus on the online and we have a sort of a different plan for our online -- next step for the online logistics.

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Unidentified Company Representative [11]

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And then there is a question related to employee head count in Enköping. When you will be able to start to reduce that?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [12]

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In the second half of this year.

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Unidentified Company Representative [13]

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And we still continue with Enköping and -- but then also about the volumes in Sweden in general. So the question is, besides the slower ramp-up in Enköping, did you have other inefficiencies in Sweden to do the higher volumes?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [14]

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Not really. We've had -- we've been plagued with the challenges in transportation and damaged goods but it's -- I would say these are more business as usual that we are addressing. Those are typically the phenomenon you have when you have significant increases in activity. So I would say it's Enköping, which is the key challenge and the key focus to put in place to fix.

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Unidentified Company Representative [15]

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And then we continue with our agreements. Should we expect more changes in distribution agreements in the upcoming quarters?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [16]

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I'm not aware, I'm looking at Helena. Are you aware of any significant...

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Helena Kukkonen, Oriola Oyj - CFO [17]

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Not the sort of the structural changes. But of course we have the sort of normal onboard business sort of [tie-ups].

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [18]

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Yes. We are -- so Helena said that, no, not necessarily, not any known major ones. What I would like to add maybe is that we are obviously in ongoing negotiations with a number of principals, as we always are. And for some of these, we have seen slightly different terms and conditions than we have -- we are negotiating slightly different terms and conditions that we've had in the past, but nothing that will be really sort of dramatically changing the picture.

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Unidentified Company Representative [19]

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So what is the market outlook in Finland?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [20]

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Now this is a rather unspecific question, but we've seen -- quarter 1, we had the wholesale market growing 4.6%. I think we can expect similar growth rates. The pharmacy market is typically growing at roughly the same rates because those wholesale products are going into the pharmacies. I don't see any kind of major shifts in the market.

Then if we're talking about the political situation, whether -- if the question is about whether we will see regular change in the regulation of pharmacy, I would say I'm not expecting anything in the very near -- in the near-term future. Right now, the government is fully booked with being with the EU presidency or chairmanship and then there will be a long hangover after that, and then we'll see what happens.

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Unidentified Company Representative [21]

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And what is the normalized EBIT level in Retail? And is it in line with Pharma?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [22]

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So I would expect yes, that -- I mean, if we see -- this is typically -- as you know, wholesale is low-margin business. The wholesale part of Retail is comparable to Pharma margins. So I would say, a good performance between 2% and 4%.

But also Retail, we have to remember includes staffing services. So the 225 pharmacies that we rent -- or the 225 pharmacies that rented staff from us, that business is higher margin. It should at least be in kind of -- in 10-plus EBIT margin territory. And I would also say that health care, the dose dispensing has the potential to be a higher-margin business than the overall wholesale of Retail products.

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Unidentified Company Representative [23]

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And do you have any significant investment needs in Mankkaa in the coming years?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [24]

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The big investments here in Mankkaa were made with the SAP investments to year ago. We are not planning anything kind of really worth mentioning. I mean we have ongoing -- the facility is old and there's sort of a continuous investment, but nothing that we -- nothing that I see we will be reporting externally.

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Unidentified Company Representative [25]

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And then we'll continue with this area but we jump to Sweden. Is it possible that you would have to invest in a new logistics center in Sweden designed solely for online business?

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [26]

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I would say -- I don't think it's -- if we do, I don't think it will be solely for online. But within the facilities we have or within the businesses we have, we will be continuously developing and investing into logistics facilities.

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Unidentified Company Representative [27]

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And that's what we had at this point coming from the webcast. People which are listening, please, in case, if you have any more questions, type them in.

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Robert Wilhelm Andersson, Oriola Oyj - President & CEO [28]

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Or in the room, please.

If not, then I would like to thank you all for participating, both here in the audience in Mankkaa and as well as on the webcast, and I want to take the opportunity to wish you all a very nice summer. And I will start my summer holiday tomorrow, so I'm eager to join and enjoy the fine summer weather, which is coming. Thank you.