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Edited Transcript of ONTEX.BR earnings conference call or presentation 31-Jul-19 7:00am GMT

Half Year 2019 Ontex Group NV Earnings Call

Zele Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Ontex Group NV earnings conference call or presentation Wednesday, July 31, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Bouaziz

Ontex Group NV - CEO

* Charles André Pierre Desmartis

Ontex Group NV - CFO and Executive VP of Finance, Legal & IT

* Philip Ludwig

Ontex Group NV - Head of IR & Financial Communications

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Conference Call Participants

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* Alan Vandenberghe

KBC Securities NV, Research Division - Co-Head of Research & Equity Analyst

* Charles Eden

UBS Investment Bank, Research Division - Research Analyst of Consumer Staples

* Fernand de Boer

Banque Degroof Petercam S.A., Research Division - Research Analyst

* Mirza Faham Ali Baig

Crédit Suisse AG, Research Division - Research Analyst

* Richard Withagen

Kepler Cheuvreux, Research Division - Research Analyst

* Sanath Sudarsan

Morgan Stanley, Research Division - Research Associate

* Thijs Hoste

Kempen & Co. N.V., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Ontex H1 2019 Earnings Conference Call. Today's call is being recorded. Today's call will be hosted by Charles Bouaziz, CEO; and Charles Desmartis, CFO. Following the presentation, there will be a Q&A session. Copies of today's earnings release and presentation are available on www.ontexglobal.com. I would now like to remind everyone that the safe harbor statements apply to this presentation.

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Philip Ludwig, Ontex Group NV - Head of IR & Financial Communications [2]

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Thank you very much, operator, and welcome, everybody, to our H1 2018 call. I'm Philip Ludwig, Head of Investor Relations at Ontex Group. And I'm happy to be joined by our CEO, Charles Bouaziz; and CFO, Charles Desmartis. Before we jump into the prepared remarks, a couple of housekeeping measures. As usual, all comments that we would make about revenue will be on a like-for-like basis unless otherwise indicated. The second, and as you know, not only us but for many companies in the market, we have applied IFRS 16 leases since the beginning of this year. We have provided both in the press release, a pro forma H1 2018 figures because we believe that's more comparable. We've also provided a separate document available on our website, a full disclosure of H1 and full year 2018 pro forma for IFRS 16. This can be very useful.

And finally, all of definitions of our alternative performance measures can be found in the press release and in the notes to the half year report.

With this, I'd like to hand the call over to Charles Bouaziz.

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Charles Bouaziz, Ontex Group NV - CEO [3]

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Well, thank you, Philip, and good morning, everybody. Thank you for attending our first half 2019 earnings conference call. Today, I will provide some brief remarks on the first half of the year highlights before handing over to Charles Desmartis, who will detail our financials. I will wrap up on the outlook. After that, we'll be happy to take your questions. Let's go on Slide 5. Before we get into the financial details, let's look at the first half highlights. First of all, we saw strong like-for-like revenue growth in the AMEAA division. Second, we believe that we have hit bottom in Europe divisional revenue, and we should see an improvement as of H2, helped by actions to drive organic growth. Third, the positive price and mix actions we took as well as progress on cost savings allowed us to mitigate continuing raw material and ForEx headwinds in the first half of the year. Fourth, strict working capital management allowed us to post a robust improvement in adjusted free cash flow. And finally, we began the implementation phase of Transform2Grow, or T2G, whose first benefits are embedded in our full year outlook. [Let's put] into context, the personal hygiene market where we operate remain highly competitive in the first half of the year.

The main trends seen during the past couple of years were unchanged. No surprise. Babycare category volumes were lower, Femcare category value was stable and Adults Incontinence category value grew on the back of volume. We did see some encouraging signs in our markets. Babycare pricing improved in a number of markets outside of Europe, leading to limited growth in total category value after an extended period of decreasing value.

In Europe, retailer brands continue to outperform the markets, underlining the structural attractiveness of retailers competing with their own brands against the international players. In Europe, again, according to panel data, for the first time ever in the first half of 2019, the participation of retail brands in the total baby diaper sales exceeded 50% in value, and 60% in volume. For the first time, again, the market leader is below 50% in baby diapers in value and below 40% in volume, reflecting the strength of retail brands and the continued growth.

Turning to other external factors, we faced headwinds in H1. And this is [for most] of the main raw materials increased in H1 2019 versus last year, as expected and as announced previously. And we continue to see a negative impact from variations in exchange rates of the currencies in which we do businesses. However, we are also encouraged to see that the commodity outlook has somewhat improved. In particular, price levels have moved back from their all-time high, though they remain very high from an historical perspective.

Now looking at our business, the expected recovery in our Europe division, which will also benefit from more favorable comps in H2, continuing growth in the AMEAA division, and an expected better profitability in H2, driven by higher revenue, the favorable effect of mix and pricing and cost savings will support an improved performance in H2, that allows us to confirm our full year 2019 guidance.

And finally, we recently started to implement our comprehensive transformation plan, T2G. With this, we aim to step change our operational efficiency and commercial practices. We will accelerate the execution of our 2 strategic priorities, strengthening our current leadership positions and expanding organically into new businesses and geographies within our 3 core categories. Our objectives remain to outperform markets in which we operate and improve our profitability as well as our cash generation. Transform2Grow is our road map, and together with the measures we have taken to simplify our organization, we believe that with our teams fully mobilized around T2G we will make Ontex a stronger and more profitable company, delivering growth and creating value for all stakeholders.

Now of course, it is too early to see tangible results of this plan in today's earnings presentation, as it was announced only in May, but we should be seeing gradual improvement in the coming quarters.

With that, let's get started on Slide 6 with the main highlights of our H1 performance. Overall, as expected, OpEx faced a challenging Q2 but posted a resilient performance thanks to the growth areas, particularly in AMEAA. Group like-for-like revenue stood at EUR 1.1 billion, down 1.3%. This performance was in line with our expectations as we saw less volume in Europe, reflecting previously disclosed retailer contract losses. We managed to partly offset this through improved pricing and mix in all divisions and categories, reflecting the power of our portfolio transformation. We saw strong revenue growth of Ontex local brands.

Adjusted EBITDA in the first half of 2019 amounted to EUR 124 million at constant currency, down 6.4%. Adjusted EBITDA margin at constant currency was 11.1%, down 61 bps in comparison with H1 pro forma, the application of IFRS 16. The resilience of our EBITDA margin reflects our efforts to partly mitigate strong ForEx headwinds through cost savings and optimize price and mix effects. Reported adjusted EBITDA was EUR 111 million, and the related margin stood at 10%. While I'm pleased to report a strong adjusted free cash flow in H1 2019, which more than doubled compared with the same period last year. Net debt was at EUR 899 million at June 30, down EUR 40 million versus net debt at the end of Q1. And the leverage ratio was at 3.71x. Both net debt and leverage figures reflect the application of IFRS 16 leases, which was adopted in January 2019, as Philip mentioned. It is important to note that our financing arrangements provide for the effect of changes in accounting standards to be neutralized, and therefore, the application of IFRS 16 has no consequences for the group's financing covenant testing. We were in full compliance with the leverage covenants of our financing arrangements at the end of June 2019.

Now I will hand over to Charles Desmartis, our CFO, to look at this performance in greater detail.

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Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [4]

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Thank you, Charles. And I'm now on Slide #8. We are reporting like-for-like revenue of EUR 1,115 million the first half of 2019. Like-for-like revenue [evolution] was in line with our expectations, as Charles highlighted. Revenue decreased by 1.3%, as mentioned earlier, with volumes down 4%, mainly driven by contract losses and high 2018 comparables in the division in Europe as well as in Healthcare. We managed to partly mitigate for the volume decreases in the 2 divisions with a good performance of our Ontex brands in emerging markets, increasing retail brand sales in the Americas as well as positive price/mix evolutions across all 3 divisions and categories, with a positive impact on sales of 2.7% overall in the period. Currency headwinds had a much less pronounced impact on sales in the first half compared with what we've experienced in the last 2 years. Unfavorable currency impact was only EUR 0.5 million of our revenue at constant currency. With this, our reported sales at EUR 1,114 million were down 1.4% versus first half 2018.

Let's move now to the category review on Slide 9. In the first half, we posted slight growth in the Adult category, driven by pricing and mix while other categories decreased, reflecting again lower volumes and a challenging comparable in H1 last year.

In Babycare, which represented 58% of our sales in H1, revenue was down 1.6% like-for-like, and this decrease was driven by again contract losses of retail brands in Europe, the impact of which started in Q3 2019.

However, Babycare revenue in Q2 was flat year-on-year, marking a clear improvement in like-for-like trends compared with Q1, driven by higher sales in emerging markets. Indeed, revenue of Ontex brand diapers in markets outside of Europe posted growth over the first half. And also in the first half, sales growth in baby pants outpaced that of baby diapers, in line with previous periods.

In the Adult category, which made up 31% of our sales in H1, like-for-like revenue was up 0.4% in the semester, and this came on top of the 5% growth reported in the first half of 2019. However, a strong comparable in Q2 last year, in particular, in the institutional channels of our Healthcare divisions account for the 0.7% year-on-year increase in Q2 this year. Sales in retail channels comprising our own brands as well as leading retailer brands decreased 4%. And adult pants sales posted broad-based growth, supported by investment in expanding production capacity. In Femcare, revenue was 7.1% lower in the first half, and this decrease reflects, on the one hand, a very strong comparable base in H1 2018 when revenue was up 5%. And on the other hand, lower volumes related to contract losses of retailer brands in Europe, where most of our revenue in Femcare is generated.

Moving now to the review of our 3 divisions. We start with Europe on Slide 10. Like-for-like revenue was down 8.4% to EUR 469 million, again in line with our internal expectations, reflecting volume decreases on the back of the contract losses of 2019, largely a consequence of price increases implemented in the second half of last year. However, pricing and product mix improved in all categories over the last 3 months, and we recorded revenue growth in Adult Incontinence.

The sales were low in Europe in H1 for the [multi] we exposed earlier, but the Europe division management has designed and is implementing multiple initiatives to improve execution further, which underpins our forecast of like-for-like revenue trend, improving progressively across H2.

Moving now to Americas, Middle East, Africa and Asia Division on Page 11. The division posted a solid start to the year and reported sales of EUR 427 million, with a like-for-like revenue increase of 8.1% in the first half versus the same period of last year. Growth clearly accelerated in the second quarter, for which we reported 10.4% like-for-like growth, mainly driven by North America and Middle East, Africa. Sales of Ontex brands, which is a focus of the division, were higher in all 3 categories and nearly all geographies. In the Americas, revenue grew in both Brazil and Mexico, thanks to our portfolio of local brands, while the U.S. also posted higher revenue, mainly driven by retailer brands. Revenue in the Middle East and Africa also rose despite political and economic challenges in some markets. [At reported currency] , our revenue increased by 8.5% compared with first half of 2018.

Let's turn now to Healthcare on Slide 12. Healthcare like-for-like revenue decreased by 1.6% to EUR 218 million in the first half, largely due to a strong comparable in H1 last year when reported growth was 3%. Our Healthcare division is generating the largest part of its revenue from the institutional market in Europe, which is slightly decreasing in value, as I've shared with you on several occasions. Therefore, while we maintained a strong competitive position in this channel, we're enhancing our initiative to increase our presence in the self-pay market.

Please turn now to Page 13 to review our adjusted EBITDA performance. As Charles just mentioned, adjusted EBITDA came in at EUR 123.9 million at constant currency, and margin stood at 11.1%, a decrease of 61 basis points versus H1 2018 pro forma for IFRS 16. Reported adjusted EBITDA was EUR 111 million, and reported margin was 10%. Lower gross margin as well as strategic investment in sales and marketing accounting for the decreasing adjusted EBITDA, the positive mix and pricing evolutions across all divisions and categories that were highlighted earlier outweighed lower volumes for a positive impact of 95 basis points on EBITDA margin. Continued strong savings, net of inflation-driven cost increases in operation and supply chain mainly accounted for an 111 basis points improvement, which offset almost half of the 240 basis point negative impact of higher raw material prices.

Indeed, even though raw materials prices have been stabilizing or posting slight decreases over the last 2 quarters, they remained high in H1 -- higher in H1 in the first half of 2019. One last word on foreign exchange. In H1 2019, foreign exchange variations had a limited impact on group revenue, as we mentioned earlier. With that, again, a net negative impact on adjusted EBITDA of EUR 12.9 million. This is mostly due to the weaker Turkish lira and a stronger dollar, as a consequence of the large amount of raw material purchased in USD. For the full year, and on the basis of the spot rates as of June 30, we see an interval FX impact of EUR 18 million to EUR 19 million in our adjusted EBITDA compared with last year. While, of course, this estimate will change on spot rates, it would represent a significant improvement over the unfavorable impact of EUR 27 million reported in 2018.

Please move now to Slide 13 -- 14, sorry, where we present our nonrecurring expenses. Those expenses in the first half amounted to EUR 39.6 million. Of these, nonrecurring expenses not related to the T2G implementation amounted to EUR 12 million, in line with the EUR 10 million recorded in the same period last year. In the first half, we started to record charges related to the T2G in the first half. They totaled EUR 27.6 million, mainly constituted by restructuring expenses and consultant fees, and these expenses are both in accordance with IFRS, based on the advancements of the different T2G-related initiatives and negotiations. Only EUR 11.5 million out of the EUR 39.6 million non-recurring expenses recorded in H1 have translated into cash outlays at the end of June, of which EUR 4.6 million relate to T2G. So we take this opportunity to confirm our projection of $130 million financial investment in T2G over 2019 and to 2021 period, including one-off costs for EUR 85 million and capital expenditures of EUR 45 million. And we reiterate our outlook for the year, that out of this amount, EUR 45 million to EUR 50 million are forecast to result in cash outlay this year 2019.

Please move now to Slide 15. Adjusted free cash flow. As Charles highlighted, adjusted free cash flow post-tax was EUR 81.2 million in the first half. This represents an increase of EUR 41.5 million versus last year. So we more than doubled our performance of last year, pro forma for IFRS 16, despite lower adjusted EBITDA, and this result is essentially attributable to active management of working capital. And as a percentage of revenue, working capital was 9.5% at the end of H1 2019, a 30-basis-point improvement over the 11.5% reported at the end of 2018 -- at the end of June 2018, and lower than our target of 12%. And this improvement reflects notably the decrease in inventories in the first half. So [factoring] at the end of H1, amounted to EUR 111 million, only EUR 8 million higher than at the end of December 2019, and therefore, this is not one of the main factors accounting for the improvement in free cash flow and working capital. So going forward, we are committed to maintaining strict management on working capital to optimize cash flow conversion. So that's all for my part. And I will now hand over to Charles for his concluding remarks.

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Charles Bouaziz, Ontex Group NV - CEO [5]

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Thank you, Charles. Well, let's conclude by confirming on Slide 17, the outlook we presented earlier this year. Current levels of indices point to a stabilization or slight decrease for most of our raw materials. Pricing, mix improvement and cost savings actions will produce their full effect in the second half of the year, leading to revenue and adjusted EBITDA improvements in H2 versus H1 2019. As a result, we confirm our full year 2019 outlook as: Broadly stable revenue at constant ForEx, with top line growth in developing markets and lower revenue in developed markets; stable EBITDA at constant ForEx; and CapEx of 4.5% to 5% of revenue, excluding the T2G specific related CapEx. Well, beyond the current year outlook, and before turning the call over to your questions, I'd like to add one thing. I understand that externally, T2G could be seen as just normal business improvement plans. But I can say that it is anything but business as usual. In fact, T2G was needed as we significantly change and transform the company since 2013. Revenue nearly doubled, supported by building a second growth platform in the Americas, adding new local brands and manufacturing bases, the number of employees more than doubled, bringing new skills, new expertise, the number of production sites and R&D centers grew, among others. About the only thing that has not changed is that we remain a pure player in personal hygiene company.

This was the right time for us for a full reset of how we operate and go-to-market, leveraging all of our assets following the substantial growth and geographic expansion we have achieved.

Now to conclude, OpEx is well positioned to benefit from the underlying growth trends, currently reshaping the personal hygiene industry. With strong assets in terms of geographic footprint, including a growing presence in emerging markets, we have built attractive positions in essential categories like incontinence and Babycare. We have positive demographic trends as well as growth potential from increasing usage rates. These elements create significant opportunities for OpEx. In addition, very strong growth potential in retailer brands in regions such as Eastern Europe and the United States, and market trends such as consumers favoring local brands and rapid e-commerce growth are also relevant to OpEx and fits with our business model. In summary, we believe that OpEx is on a transformational journey and has a clear road map. Results will appear gradually over time, as expressed in the 2021 objectives we presented at our investor update on May 8. This concludes our presentation. I'd like to thank you very much for your attention. And we are now opening the floor for Q&A. Thank you.

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Philip Ludwig, Ontex Group NV - Head of IR & Financial Communications [6]

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Operator, if you could please open the call for Q&A. I'm sorry, it's Philip again. I'd just like to make one mention. This morning, we spotted a small error on the front page of the press release, showing the Q1 like-for-like, instead of the H1. This has now been corrected and is available on our website. So with that, thank you, operator.

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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 Richard Withagen from Kepler.

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Richard Withagen, Kepler Cheuvreux, Research Division - Research Analyst [2]

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I want to ask 3 questions, please. First of all, you expect growth in Europe to improve in the second half of the year. How are you winning back confidence from customers after a period of weak execution in the past 2 years?

Second question is on working capital. In terms of the progress that you made in the first half, is that sustainable or are there any specifics that impacted working capital positively in the first half of the year?

And then the last question is on price/mix effect in the second quarter seems to be lower than in the first quarter. Can you elaborate on that what's -- explain that decrease in the price/mix?

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Charles Bouaziz, Ontex Group NV - CEO [3]

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Okay. Thanks a lot. I'll start by picking up the first question. I will leave Charles, well it's been [choosing] , Charles Desmartis to get to the second question on working capital, and we'll answer the third one afterwards. So first of all, when I say we plan to improve on the second half of the year, which means that, in fact, we will reduce our [comp's] negative impact versus a year ago in Q3 and then move into a positive area in Q4. That's mainly the trend. What drives this, I would say, [varied] combination of different factors. First of all, we are working hard to improve our service level. And we told you in the past that our service level, we are not at the top in every category, and we are working extremely strongly to move it back to what we consider our standard, that is above 98% in terms of service level. The second element is, it's clear that we have a pipeline of innovation. And on some elements, we were probably too slow to follow and reaccelerate. And when we look in the next 6 months or even in the next 12 months, we have a very nice pipeline of innovation in the different categories that creates a natural excitement from the retail that are willing to partner or to work on this as well. The third element is we bring, of course, capability in growing the categories. And as I said in my earlier comments, especially in Europe, the share of retailer brand is growing. It's growing at a significant pace, and the share of international brands is reducing. So in fact, by definition, it creates also excitement for retailers to continue to build loyalty behind their brands. So that's very important as well.

Now we have confidence because also we see the trend in terms of wins and losses. So we have the visibility that we are not sharing, but we see it quarter after quarter. And we consider that we will get back on track as of 2020. And the positive, by the way, is strongly led also by T2G and the efforts that we put behind it in terms of the commercial work stream, to develop partnership with retailers and accelerate the comeback in different categories. So the balance of gains and losses is getting back up positively quarter after quarter. We have been very disciplined to manage the profitability of the accounts. So I know it's very hard for some of you to accept it that we can lose part of the contract, because when we lose customer, by the way, we lose one category within the customer. So we don't lose the customer, it's a single category, mainly sometimes for pricing reason, and it's very hard to accept, but it's, in our view, positive for the long term. So that gives us the confidence to get back on track with retailers. There's also a human factor. Part of the team has changed. And I think the relationship has improved also from a people perspective in accounts, so that helps a lot to get that level of confidence back.

Now I think the second question was related to working capital progresses, where you rightly ask, is it something sustainable or is it a one-time [nice] events. And on this one, I will let Charles take the answer.

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Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [4]

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We believe that what we achieved in terms of working capital improvement is fully sustainable, and we made it clear on May 8, and that going forward, cash flow conversion would be a key area of focus for us. We remind you that, and we reported that at the end of 2018, we have built some excess inventory of raw materials in anticipation of higher prices in accordance with the structure of our supply contracts in the beginning of 2019. So a significant part of the improvement in working capital was the reduction of this and the consumption of inventory. So to get back to usual or standard level at the end of June. There is also on the other areas of working capital, talking about customer credit, supplier credit, a number of actions that were implemented, involving all the departments of the company and all the regions, all the geographies, and we believe this is fully sustainable. And this will be our objective clearly for the second half of this year and going forward. So no real exceptional item that would account for this strong improvement, but the reduction of inventory buildup at the end of 2018.

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Charles Bouaziz, Ontex Group NV - CEO [5]

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And then the last question was on the price mix effect that is lower in Q2 than in Q1. That's correct. But it's really mechanical. So I would say that the logic is we are taking, and we learned from the past, we took more pricing in Q1 and in Q2. Objectively, if you take it in Q1, you have a full year impact; if you take it in Q2, you have only 3 quarters. And even last year, if you remember, we were, in some ways, taking price increases as of the second half of the year. So in fact, in Europe as well as outside of Europe in some of our broader business, we have taken pricing in Q1. So that explains the difference between the stronger price mix effect of Q1 versus Q2.

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Operator [6]

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We will now take our next question from Sanath Sudarsan Morgan Stanley.

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Sanath Sudarsan, Morgan Stanley, Research Division - Research Associate [7]

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Two questions. Just coming back to the working capital changes. You've delivered nearly EUR 50 million of working capital improvement in the first half. And I take your point that part of that is due to the phasing of inventory. But should we be expecting a similar line of, let's say, $30 million to $50 million working capital improvement also in the second half?

And this kind of ties into the second question, I wanted to understand is your free cash flow generation in the second half of this year? You've generated about EUR 44 million in free cash flow last year, second half of last year. Your EBITDA is likely to be lower year-on-year as per your guidance. You also have T2G cash outlay of $40 million to $45 million in the second half remaining. So I kind of struggle to see there being any cash flow generation in the second half, if not for working capital improvement?

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Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [8]

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We -- I just said that we think the performance we had in the first half is sustainable on all the operating working capital components, inventory, DSOs, credit and other operating items. Of course, we'll have in the second half of the year, and the numbers you mentioned for T2G are those matching our outlook. Therefore, I will not further comment. If we will -- we believe, and I would not provide any outlook with regard to our cash flow generation, but we're fully aware of the challenges of the implementation of T2G and the costs that will flow, both in our P&L and in our cash flow until the end of the year. There will be further work done on working capital. I cannot give an indication that we will manage to further improve by the same amount as we have in the first half in the second half for the working capital. But we'll work hard to get to a free cash flow generation for the remainder of the year and for the full year. That's the only indication I can give you as of now. But of course, we will not delay cash outlays related to the T2G implementation if this would put at risk, the timing for the delivery of the benefits from T2G going forward.

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Sanath Sudarsan, Morgan Stanley, Research Division - Research Associate [9]

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And can you...sorry.

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Charles Bouaziz, Ontex Group NV - CEO [10]

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And just one point to -- sorry, the inventory part is very important to understand, that this was something that we decided on our own. So even though that again from the external, you could be surprised, and you can say, it is badly managed or well managed the reality is, we were increasing our level of inventory because of the raw materials. So one element of this was, if you build some inventory at a lower cost of raw material, it's better. And behind that, also, when you are entering into a transformation of the company and a manufacturing transformation, it's important to be safe on the inventory side. So I think that was the initial starting point of the year. And of course, the logic is, it will improve over the course of the second half of the year. I cut you off, so you had something, you wanted to add something? I'm sorry.

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Sanath Sudarsan, Morgan Stanley, Research Division - Research Associate [11]

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Yes, sure. No, I get that. I just wanted to clarify that, if the whole of the improvement is only operational or is there any also improvement related to, say, factoring or those kind of financial arrangements?

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Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [12]

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No. As I said, our level of factoring increased by just EUR 8 million at the end of June compared with the end of December, and therefore, this is not a meaningful improvement factor. And we are exactly -- we are just EUR 1 million higher in factoring at the end of June this year compared with the end of June last year. Therefore, factoring was not a meaningful improvement. But, of course, we will develop factoring as much as we can going forward, because this is -- we believe a convenient and rational way to improve working capital. And there was nothing at all related to the covenant. As we said, we passed our debt covenants at the end of H1.

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Sanath Sudarsan, Morgan Stanley, Research Division - Research Associate [13]

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Just on that, can you just give us what's the like-for-like numbers we should be looking for when we compare it to your covenants? What's the exact [work] -- net debt-to-EBITDA number we should be looking at for that benchmarking at 4x?

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Charles Bouaziz, Ontex Group NV - CEO [14]

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No, we do not provide the detail of the adjustments, which our covenant provide adjustment to last 12 months, the EBITDA or adjustment today as we reported. What we will continue to report is on a like-for-like basis in 2018 numbers, both for debt and EBITDA adjusted for pro forma for IFRS 16. But that's the impact on leverage for IFRS 16 is roughly 20 basis points. That's what we can tell you.

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Operator [15]

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We will now take our next question from Alan Vandenberghe from KBC Securities.

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Alan Vandenberghe, KBC Securities NV, Research Division - Co-Head of Research & Equity Analyst [16]

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I have 2. The first question is regarding your guidance. I was wondering how important the improved raw material outlook is for you reaching the full year guidance?

And then the second question is -- question, sorry, is on the leverage. Could you maybe give us an idea of how you expect leverage to evolve within the upcoming quarters? And do you think that peak leverage has been reached in the second quarter or do you expect the peak to happen yet later this year?

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Charles Bouaziz, Ontex Group NV - CEO [17]

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Okay. So I'll take the first one. And again, on the raw material, what we said, and even though we can't disclose all the elements, we said that the outlook is very clear on the [fluff] . We said that we were at an all-time high and then we passed that point, and it's decreasing on the balance of the year. It is decreasing, it still remains high, but decreasing on a regular basis. So this is factored in our definition because it's not a crystal ball in [our prices] , the indices is already giving us some of the prices until September, and on some raw material starting in Q4. So we have a clear view of that, yes, when we say it's improving, it's something that is factored and known on our side. So that's not a clear guidance, but it says it gets in the right direction, and it's in all terms the first time since several quarters that we are on a downward trend on the raw material as we've been on an upward trend quarter after quarter until end of H1 2019. As far as the second question on the evolution of the leverage, I will let Charles answer that one.

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Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [18]

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Yes. I think our guidance regarding sales and EBIT in the second half is pretty clear. We expect an improvement in the second half, which means that in terms of leverage, our denominator, which is the last 12 months EBITDA in accordance with our forecast is due to improve in the second half and through the end of the year. So we have to manage the numerator, which is net debt very, very closely. And clearly, working capital, and we discussed this already, will remain a main point of focus. So that when we look at covenant testing at the end of the year based on our current projections, we believe that we'll be able to pass the test. And of course, as we said, cash generation, and therefore containing the debt at levels which we have comfort with regard to overall leverage and covenant will be a focus for the rest of the year.

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Philip Ludwig, Ontex Group NV - Head of IR & Financial Communications [19]

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Operator, can you take the next question, please.

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Operator [20]

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We will now take our next question from Faham Baig from Crédit Suisse.

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Mirza Faham Ali Baig, Crédit Suisse AG, Research Division - Research Analyst [21]

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Three questions for me, if I may. Firstly, could I start with the top line. And the sharp acceleration in the Americas, which went from 3% growth in Q1 like-for-like to over 8%. Could you go into a bit more detail about what factors drove acceleration? Maybe even if you could help us with the buckets in that region? In other words, what the growth rate might be in North America, in Mexico and Brazil, that would be helpful.

Second question is in the Healthcare division or Adult Incontinence, in particular, actually. So the retail channel for you guys has been growing quite consistently high single-digit. In the first half, it was up only 4%, which implies it was flat in Q2. Could you talk around the moving parts there?

And then finally, I want to come back to free cash flow and working capital. Now I understand you're saying that the working capital performance in the first half is sustainable. But it was about, I think, 9.5% of sales. Are we able to assume that percentage for the full year? That's the first element. The second element is on CapEx. Now where -- could you elaborate where -- because of the big swing between 4% to 5% for the full year and what you did in H1 of only EUR 40 million, where is the majority of the CapEx is going to be going in the second half?

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Charles Bouaziz, Ontex Group NV - CEO [22]

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Okay. Thank you. So I'll take the first 2 questions, and I'll leave the last one, that is a multiple question to Charles. So it's regarding free cash flow, working capital and CapEx. So on the top line, well, it's a bit disappointing, but we won't share with you the split by country. What I can tell you is what drives the acceleration, there are a couple of elements, is, first of all, Mexico, we were the first to take pricing in the country on our branded business, and in fact, competition reacted later. So as reacting later, they took pricing, and then the pricing mix reduced and then our share went back and accelerated on the second part of the semester.

On the U.S., I think, we are supplying a large retailer, but also some branded business on the Internet. And we had a soft start of the year from one of our strong partners, and that has accelerated and start accelerating in the second part of the semester. So again, that contributes to the acceleration. And even if I look at Brazil, there was also positive comps. But I would say that the big part of AMEAA is really Mexico and the United States of America. So that's well spotted as you made the comment.

Now on the second element, that the logic is that we have 2 ways of reporting, so I'm a bit -- I'm sorry, but I was confused in the question because we report Healthcare, that is a purely incontinence business. It's 99%, there is a little baby but it's mainly incontinence, Healthcare. And we report incontinence as a category. So historically, and the trend has not changed that. We are slightly -- we are flat or slightly negative on the Healthcare, mainly because of the pressure on pricing. So normally, the volume is growing or stable enough. But because of the price pressure of the tender, normally it's slightly decreasing. So, we are normally between minus 1% and 0 or plus 1%, depending. That's for Healthcare. Now when we report Incontinence, we are mid-single-digit or high-single-digit, but on average, the path is driven by the retail path. The retail category, the sales of Inco in retail are growing. And that's a trend that is there. So the reality is, we lost some of the -- when we say some of the contracts, we lost some share on the retail that could explain the slowdown that you refer to. But I would say the trend is still the same, which means that we enjoy a faster growth in the retail channel on incontinence, that we have in Healthcare. And Healthcare is an element of stability, but a slowdown in our growth algorithm, and this is not changing.

Now if I move to the third one is the multiple question, but I will let Charles take the different answers because, yes, your point was, could we expect a level of working capital really as a percent of last 12 months' sales, 9.5% per year. That's not an outlook which we will give. But, of course, we work hard at, again, containing working capital to the lowest level possible without any disruption, of course we made assumptions made by extra lower inventories or overdue pressure either on customers or suppliers on end of the year. Regarding CapEx, it's a usual pattern at Ontex as in many companies with strong industrial base to have CapEx loaded in terms of cash outlay in the second part of the year. If you look at our first half year, EUR 39 million of CapEx is very comparable -- of cash CapEx, very comparable with the level of last year, almost exactly the same number. So we expect the same acceleration in the second half. But, of course, remaining within the guidance we gave, which is between 4% to 5%, and probably in the middle of the range, excluding T2G specific CapEx.

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Operator [23]

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We will now take our next question from Fernand de Boer from Petercam.

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Fernand de Boer, Banque Degroof Petercam S.A., Research Division - Research Analyst [24]

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(inaudible) actually not been answered already, maybe you want to come back on Femcare. I thought you said you lost a contract. When do we see the annualization of that contract?

And also, in Adult Inco, relatively weak compared to last year, of course, strong comparison base, but should we see that also improving in the second half?

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Charles Bouaziz, Ontex Group NV - CEO [25]

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So I'm not sure I understand -- sorry, I'm not sure I understand the first one because on Femcare lost contract, I think it's...

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Fernand de Boer, Banque Degroof Petercam S.A., Research Division - Research Analyst [26]

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Yes, I thought [it] said that you had a lost a contract and that's the reason why this was a relatively weak quarter.

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Charles Bouaziz, Ontex Group NV - CEO [27]

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Yes. Well, we lost, in fact, contracts in different categories last year and early this year, that were either in Babycare, Inco or Femcare. But we don't give the details of those. But indeed, everything is factored in the outlook we give you. So the logic is when we said our -- our performance on the second half of Europe will be negative in Q3, but a lower negative level than, of course, Q1, Q2, and getting back to almost stability or breakeven in Q4 and getting positive. It's the reflection of the contract losses that are cycling and annualized.

So it's a combination of the 3 categories. So we -- on that we don't disclose the different parts. We are above 40% market share in the Femcare category and we have a big share. So even if we lost some contract, we are still a stronger player, and we are still a strong leader in the categories where we operate, Femcare Inco and baby diapers.

On Adult Inco, you -- well, it's more or less the same remark, I think that we mentioned before. So yes, retail has normally higher growth rates in incontinence than healthcare. As we add some of the contract losses, by definition, we'll lower the incontinent spot in retail, that has an average impact on the total Inco category. Now we expect that we are reaching our low point in Q2, that we will get back in Q3, Q4 and continue with the same pattern as the whole European division. It will get better when we look at the coming quarters. Make it simple.

On the rest, and again I would not like you to leave the call without -- because we always focus on what needs improvement, but we don't focus on what works well. So I think in AMEAA, which is the other part of the world, we are growing our share and our leadership position in Turkey, for instance. We are gaining also -- we are cycling a positive growth in Mexico, and we work on bringing innovation in Brazil to try to regain some of the share that we lost, driven by pricing and less innovation. So the back of the year, again, we are coming back strongly in this category outside in a year, where it's positive already. So that's very important because the portfolio, if you look at it, is the AMEAA is getting close to the size of Europe, and that was part of our transformation started in 2013. And that's very important when we talk about the mix and the portfolio management. Fundamentally, we want to be stronger on retail brand by being stronger outside of the retail brand world, so the stronger we are outside, the better it is to partner with retailers.

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Operator [28]

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We will now take our next question from Thijs Hoste from Kempen.

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Thijs Hoste, Kempen & Co. N.V., Research Division - Research Analyst [29]

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A lot has been asked, but I was wondering if I could dig a little bit deeper into volumes and price/mix dynamics. You reported on group level, but could you give some additional color, maybe in terms of Europe and AMEAA. Especially in AMEAA, if I look at your competitors, pricing improvement is indeed improving. So I was wondering how much pricing you were able to take there year-on-year? And also how you look at this going forward, and as your volumes and price/mix annualize?

Then my second question, and my apologies if I missed it. But could you remind me of what your covenant limit is on the new definition or what your leverage would be on the pre-IFRS 16 definition?

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Charles Bouaziz, Ontex Group NV - CEO [30]

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So on the first one, as we said on the first question, I think it was the first question, is we took pricing in Q1 in some regions like Latin America. We also took pricing with some European retailers, but it was on the back of pricing taken already in the second half of 2018. In terms of volume, I think the volume drivers in the second part of the year are mainly driven, in my view, by the ability to bring innovation. So we have a pipeline of innovation and launches of the branded business, that will arrive in Q3, Q4 launches on feminine hygiene in Mexico in different categories. On incontinence, we are pushing a lot underwear-like type of products, which are value accretive. And so the net is, we expect to regain both on volume and pricing over time. Volume is the benefits of regaining customer that we lost, this will come mainly in 2020. And on pricing, it's also a mix effect. So we have a double impact of the customer mix, where pricing plays a role. This is on Europe. And as well as category mix when we deal with the broader business outside of Europe. If you look at Turkey, for instance, we've been able to take pricing on our baby diaper category, competition has followed. We are taking pricing on incontinence in Turkey where we are market leaders. So that helps in the mix. And an example of Turkey brings a dual benefit, it's volume-related and pricing-related on Incontinence. So we gained share in volume, but also in pricing. So I think this will not change in terms of dynamics. What we don't share is the split by category or by country, as you can imagine. Because we don't want to give competitive information. That's simple as that.

On the second question, that is -- yes, I think the question on the difference and the leverage between IFRS 16 and before, I will let Charles answer.

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Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [31]

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Yes. Firstly, frankly, we did not adjust the 2019 numbers to neutralize the impact of IFRS 16. We do that for the purpose of our covenants because, as we said, our covenant are based on the IFRS in force at the time when our financing arrangements were signed. And therefore we do this work just for this purpose. We provide you an information. So I cannot tell you what our leverage would be, the reported leverage before excluding IFRS 16 impact for H1 '19. Now we give you in the press release on Page 2, we remind you the reported leverage at the end of H1 last year, which was 3.25, and the H1 2018 leverage pro forma for IFRS 16 is estimated at 3.45, giving a 20-basis-point difference, I'd say unfavorable, due to the application of IFRS 16. That's all I can answer. But again, we don't provide the detail of the adjustments made to the numerator and denominator for the covenant testing. But you can refer to the Annex of pro forma, which is including the details of the adjustments to numerator and denominator deriving from the application of IFRS 16 for 2018.

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Thijs Hoste, Kempen & Co. N.V., Research Division - Research Analyst [32]

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Could you just also remind me of what the covenant is at your definition?

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Charles Bouaziz, Ontex Group NV - CEO [33]

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No, we do not disclose this, as we said. What we look at, we're reiterating that we passed the test at the end of H1, and that we're geared to pass the test again at the end of this year.

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Operator [34]

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We will now take our last question from Charles Eden from UBS.

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Charles Eden, UBS Investment Bank, Research Division - Research Analyst of Consumer Staples [35]

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Could you talk a little bit about your covenant about increasing your presence in the self-pay channels for adult incontinence, and exactly how you see Ontex positioning here, given the very high level of competition, both from European and global competitors?

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Charles Bouaziz, Ontex Group NV - CEO [36]

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So our definition when we mentioned self-pay is very simple. It's by definition, we have historically been very strong on the tender markets. And the tender is not self-pay. It's mainly reimbursed. This is the case in Italy, where we are a market leader. This is the case in the United Kingdom, where we are strong player between #1, #2 depending on the semesters. What happened is we started the journey several years ago, where the team in Healthcare to improve over the long run, the profitability, decided to expand into self-pay. And self-pay being the pharmacy channel being the nursing home, the private part of the nursing home being the distributor channel. And this is what the team is working on. So how we do it, it's by developing specific products by developing our capability in terms of selling SKUs because it's a different channel. And by adjusting our terms and policies for this channel, that is very different from the tender one. The value of being in self-pay is that you can adjust your pricing strategy over time depending on your cost and then you're less dependent on the raw material. The tender business is by construction, fixes the price, so it gives us flexibility to adjust. So when you are on a very increasing trend in terms of raw material, as we've been in the last 1.5 years, by definition, you're struggling and it's -- the team is working hard on the profitability side because the prices are locked. Whereas in self-pay you can adjust it and move on this. So we have attacked the channel in Italy because we have a strong run. We work as well in Spain. Because in Spain, we have a lower share. So it's very important in terms of mix. And we work in countries as well like the United Kingdom or Belgium, that is our headquarter, where we [look] a lot with distributors, nursing home that are private nursing home and the channel that are outside of the tender.

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Operator [37]

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That concludes today's question-answer session. I'd now like to turn the conference back to today's host for any additional or closing remarks.

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Charles Bouaziz, Ontex Group NV - CEO [38]

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Well, I'd like to thank you all for joining us today. As we said, we -- and as you have seen, I hope, we are working now to improve our performance and accelerate the transformation of Ontex. We will work significantly to regain our strong positions in the different divisions as well as improve steadily our profitabilities in terms of margin. We look forward to our future exchanges. And we hope to see you in the quarter 3. Thanks a lot. And hopefully have great holidays for those who are leaving. Have a good day. Bye.

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Operator [39]

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This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.