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Edited Transcript of RCKY earnings conference call or presentation 25-Feb-19 9:30pm GMT

Q4 2018 Rocky Brands Inc Earnings Call

NELSONVILLE Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Rocky Brands Inc earnings conference call or presentation Monday, February 25, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason Brooks

Rocky Brands, Inc. - President, CEO & Director

* Thomas D. Robertson

Rocky Brands, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Jonathan Robert Komp

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Brendon Frey

ICR, LLC - MD

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Rocky Brands Fourth Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) I would like to remind everyone, this conference call it's been recorded.

I will now turn the conference over to Brendon Frey of ICR. Please go ahead, sir.

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Brendon Frey, ICR, LLC - MD [2]

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Thank you, and thanks to everyone joining us today. Before we begin, please note that today's session, including the Q&A period, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of the risk and uncertainties, please refer to today's press release and our reports filed with the Securities and Exchange Commission including our 10-K for the year ended December 31, 2017.

And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?

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Jason Brooks, Rocky Brands, Inc. - President, CEO & Director [3]

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Thank you, Brendon. With me on today's call is Tom Robertson, our Chief Financial Officer. Our fourth quarter performance represents a strong finish to a successful year for Rocky Brands. There were several highlights from our most recent quarter, starting with a 15% increase in retail sales, the highest growth rate the division has experienced in quite a while. At the same time, our wholesale channel once again posted a low single-digit sales gain, which is in line with our previously stated long-term target for this business. The growth of our 2 highest-margin segments combined with the improved efficiencies we've recently achieved in our company-operated manufacturing facilities, fueled by a nice improvement in year-over-year profitability on an adjusted basis.

On our Q4 call this time a year ago, we outlined our growth and profit improvement strategies for 2018, which were a continuation of the plans Tom and I outlined after we assumed our leadership roles the previous year. From a high level, they included exciting our consumers with great products, increasing brand awareness and stimulate demand through improved marketing with an emphasis on digital, providing excellent retail support and expand distribution with our key brick-and-mortars and our e-tail partners, accelerating expansions of our Lehigh CustomFit program through investments in technology and personnel, and utilizing internal production capabilities on growing number of commercial military opportunities and improve the efficiencies of our factories. I'm very pleased that, as an organization, we have successfully executed on each of these fronts and consistently delivered improved results. While there will always be some movement in how sales flow by quarter from one year to the next due to the nature of some of our businesses, on an annual basis, I'm confident we can build on our recent momentum by staying the course we've outlined.

I'm going to review the sales highlights for each of our segment from the past year, and then Tom will review the financials in more detail and provide some thoughts on 2019 guidance, after which we'll be happy to answer any questions.

Starting with wholesale, our largest segment, sales increased 4% for the year or 7% excluding the Creative Rec brand, which you'll recall we sold in late 2017. By brand, Georgia Boot was up mid-single digits in 2018, fueled by new product introductions, investments in new POS materials and select door and shelf space expansion at existing accounts.

In terms of product, there were several standouts from the past year, led by the Carbo-Tec Work Western collection and our new Logger collection of boots for the Farm & Ranch channel. Consumers also responded favorably to the new styles within our popular Athens Work line, and many of these collections include our new easy on, easy off technology.

We supported the introductions of these innovative new features with enhanced in-store point-of-purchase materials as well as social media programs aimed at driving traffic to our participating retail partners and georgiaboot.com. We were very pleased with the effectiveness of these campaigns.

Moving to Durango. Sales for the year were also up mid-single digits, as the brand continued to sell-through very well in distribution network. Sales of key collections, led by the Rebel series for both men and women and new styles, such as the Maverick Western Work series were up nicely at mid specialty retailers such as Rural King, Work Ware Safety Shoes and Tyson Supply. And we're even stronger in our smaller field accounts. And we have recently introduced the new Rebel Pro collection at the National Finals Rodeo in December. The response has been very encouraging, leading to incremental shelf space and good momentum at retail to start the new year.

The Rocky Brand had an exceptional 2018 with sales up mid-teens. The business saw a boost from the reconfiguration of the brand sales force and the establishment of one of the sales rep per account during the first half of the year, which has allowed for better service levels and opportunity to cross-sell across all the categories. This change, combined with some key product introductions, such as the rugged, yet ultra-comfortable Sport Pro Rubber hunting boot with stretched neoprene and the XO-Toe, the world's most comfortable safety shoe, fueled a very strong second half for the brand.

The best-performing category within wholesale last year was our commercial military business. This was true for both domestic and international sales, as we recently started to make a bigger push outside our home market by taking advantage of our international manufacturing capabilities to produce and sell boots to military allies of the United States. Throughout 2018, we invested in building commercial military inventory, particularly our popular S2V boot, which allowed us to take advantage of the recent surge in demand for tactical equipment. With this global trend expected to continue, we see a nice runway for growth in the years ahead.

Now to retail, which was our largest growth segment in 2018 where the sales increased 10% over 2017. This performance was fueled by strong gains in both our Lehigh CustomFit and B2B business and our direct-to-consumer channel.

Starting with Lehigh. Our key account growth, improved participation and retention rates at existing accounts were the major themes for the year. The investments we made in personnel and marketing, including social media, are allowing us to reach more potential customers, while upgrades to the CustomFit interface and the addition of new brands to our offering have helped improve user engagement and sell-through. The focus going forward is on continuing to land new key accounts and further building the account relationships we have to drive higher productivity.

Meanwhile, our branded e-commerce websites have been on a great run, benefiting from recent investments to increase traffic and conversion and enhance the consumer experience. The rich content produced by each brand, including videos, images and banners, are being utilized to improve the look and feel of our websites as well as part of our social media efforts aimed at directly reaching new and existing consumers and transforming our website from what has historically been information marketing tools to e-commerce growth engines. We will continue to invest in our direct-to-consumer business with a focus on the latest technologies to drive increased penetration for this high-margin channel.

Finally, military segment sales for the year were right on plan at $26 million. While this was approximately 30% down from a record high in 2017 due to a number of industry headwinds, gross profit dollars for the segment were actually up slightly as we improved gross margins 700 basis points. This was achieved through increased manufacturing efficiencies as we took advantage of the excess capacity afforded us by the decline in contract military orders to expand our commercial military production.

Our facilities at Puerto Rico and the Dominican Republic are both operating exceptionally well. We view both locations as strategic assets and important to our future growth plans. As such, we are implementing new technologies like automated cutting machines in Puerto Rico to further increase efficiencies, while in the Dominican Republic, we increased capacity to accommodate the shift in some production from our Far East partners to help protect against the potential threat of an escalating trade war with China.

In closing, our focus going forward is on executing our core strategies and driving operational excellence throughout our organization to achieve sustainable growth and enhance profitability. With our balance sheet and a strong position, we are reinvesting a portion of our recent earnings and additional marketing programs and grassroots initiatives to feel increased awareness and demand for our portfolio of authentic brands.

I am confident that we have the right plans in place to build our recent momentum and generate increased value for our shareholders over the long term.

I'll now turn the call over to Tom. Tom?

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Thomas D. Robertson, Rocky Brands, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Jason. Net sales for the fourth quarter were $67.2 million, up about $200,000 from a year ago period, driven by solid gains in our retail and wholesale segments, partially offset by expected declines in our contract military sales.

By segment, wholesale sales increased 3.4% to $45.9 million, retail sales increased 14.6% to $16.5 million and military sales were $4.8 million versus $8.2 million for the same period in 2017.

Gross profit in the fourth quarter increased 3.4% to $24.1 million or 35.9% of sales compared to $23.3 million or $34.8 million -- 34.8% of sales the same period last year. The 110 basis point increase in gross margin was driven by higher military margins as we benefited from improved efficiencies in our Puerto Rican manufacturing facility compared with a year ago period, and a lower percentage of military sales, which carry lower gross margins than wholesale and retail.

Selling, general and administrative expenses were $19.3 million in the fourth quarter of 2018 compared to $19.6 million last year. Excluding approximately $300,000 of transaction expenses related to the sale of Creative Recreation in Q4 of 2017, SG&A was flat year-over-year.

Income from operations was $4.9 million or 7.2% of sales compared to $3.7 million or 5.5% of net sales in a year ago period. On an adjusted basis, which excludes the aforementioned transaction expense related to the Creative Recreation sale in Q4 last year, operating income increased 21% and operating margin expanded 120 basis points.

Net income for the quarter was $3.6 million or $0.48 per diluted share compared to $4.4 million or $0.59 per diluted share in a year ago period. The fourth quarter of 2017 included a onetime income tax benefit of $3.2 million due to the enactment of the Tax Cuts and Jobs Act, which lowered the domestic federal tax rate applied to our deferred tax lability position and partially offset -- and was partially offset by a onetime toll charge related to the repatriation of earnings from our Dominican Republic operation. It also included an after-tax charge of $1.6 million associated with the loss on the sale of Creative Recreation. Excluding these items, adjusted net income was $2.8 million or $0.37 per diluted share.

We've included a reconciliation table in today's press release that bridges our GAAP to non-GAAP results.

Turning to the full year, let me quickly summarize the highlights for 2018. Wholesale sales, excluding the Creative Rec brand from both years, increased 6.6%. Retail sales increased 10.1% to $53.2 million. Gross margin increased 210 basis points to 34.4% compared to adjusted gross margins of 32.3%. Operating margin increased 190 basis points to 7.1% compared to adjusted operating margins of 5.2%, and adjusted EPS improved 62% to $1.88 from $1.16 in 2017.

Turning to our balance sheet, which at the end of the year was in a very strong position, highlighted by cash and cash equivalents of $10.2 million and no long-term debt compared to cash and cash equivalents of $3.7 million and long-term debt of $2.2 million at the end of 2017. We were able to increase our cash position by $6.5 million even as we paid out $3.5 million in quarterly dividends and $1.3 million repurchasing approximately 55,000 shares of our common stock.

With respect to our current year, we are planning for growth. We anticipate revenues increasing in the low single-digit range over 2018 levels, led by our retail division, followed by our wholesale. Following the industry headwinds our military segment faced this past year, the business has stabilized and we expect contract military sales to be flat on a year-over-year basis.

In 2019, we plan to utilize our strong balance sheet and reinvest a portion of our cash position in the business, primarily in additional marketing programs to support our portfolio of authentic brands and our unique B2B direct model and drive sustained growth and increase shareholder value over the long term.

That concludes our prepared remarks. Operator, we are now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Jonathan Komp with Baird.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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A few questions. Maybe I'll start on the wholesale business. And when you look at the fourth quarter growth against the tougher comparison in the prior year, can you maybe just talk about what you saw across the businesses, any major variances, positive or negative, and just generally, your sense of wholesale, which I know you said should grow again in 2019? How are you feeling about that?

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Jason Brooks, Rocky Brands, Inc. - President, CEO & Director [3]

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Yes, thanks for being on the call. I think we are in the same place that we have really been all of '18 and starting off into '19. We are comfortable that our wholesale brands, Rocky, Georgia and Durango, are in this low single-digit range. It seems to come at different times in different places. So our outdoor business, as you saw, in the fall was very strong, and some of the other brands may be not as strong. But we're seeing some things happening in Q1 that are offsetting -- outdoor maybe not as strong, but Georgia is stronger. So I think we're really comfortable again. We're in some pretty basic businesses, and I just don't see a huge increase coming in the high single to low double digits. I think it's going to be in that mid area.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Okay, great. And any color on the success of -- I know you mentioned, again, some of the newer products that you have in the marketplace or presented to the market. Any additional color on the reception to some of the ones that you mentioned?

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Jason Brooks, Rocky Brands, Inc. - President, CEO & Director [5]

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Yes, so I think the XO-Toe has really revolutionized the safety toe industry. It's a safety toe that's external. So normally, your safety toe is going to be inside or underneath the leather. We have designed this boot to be an external safety toe. That one has been received very well. It's going to be a slow burn because it's very different, but I think we're going to see that one takeoff in the next 12 to 24 months as people get more into it.

From a Durango standpoint, we really have changed the focus of that whole brand from a casual women's fashion brand in the western market to more traditional western. And the new Pro series that has come out late last year, we'll start shipping that, I think, at the end of Q1, maybe Q2, a lot more traditional looking. And then we have a leather bottom outsole in that one, called the Arena Pro, which will -- I think it rolls out Q3, Q4 this year. And then our introduction with Tractor Supply in the Muddog that has just been phenomenal. We've seen a tremendous success in our waterproof one that we do to the wholesale, Independence, and then we have a special makeup version for Tractor Supply.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay, great. And then, Jason, I think you mentioned strong trends early on in 2019 for Georgia. But maybe just to broaden the question, what are you hearing from your retail partners just amidst -- you had the government shutdown, you have volatility in oil prices? Are you seeing any signs that industrial markets are weakening? Or just any more color there would be helpful.

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Jason Brooks, Rocky Brands, Inc. - President, CEO & Director [7]

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Yes, I think everybody was a little concerned that the government shutdown, if it would've continued to go much farther, I think we were all a little worried about that. We have really not seen anything too drastic, and I'm going to take this one and really give it to our team. I think the reason we didn't see any backwards movement or slowdown is our commitment to our relationship with our retailers has really changed. And I know we talked about this in '17 and we talked about it in '18, but we want to be a good partner. And so I believe we're stealing shelf space from some of the other footwear suppliers in the marketplace, and that's why we're not seeing much change there. I'm very comfortable that we can continue to do that in '19 and, hopefully, in '20 and '21.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [8]

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Okay, great. And then if I could ask, following up on the Lehigh and retail business. I think you're implying retail up in the single digits for 2019, and you just grew 10% in 2018. So I guess I just want to ask your thoughts on the growth opportunity there. Is there any potential for upside? Or how do you kind of cap the outlook as you see for that business?

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Thomas D. Robertson, Rocky Brands, Inc. - Executive VP, CFO & Treasurer [9]

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Yes, Jon, this is Tom. From a retail perspective, we're going to continue to try to push our consumers to our own e-commerce website, obviously, for our own margin expansion, both from a Lehigh standpoint, which is our largest portion of retail sales. We had a lot of key account wins in 2018, and so we're hopeful that we can get some more large key account wins. The CustomFit side of the business was up 13% in 2018, and so I think that we know that, that was really strong growth. Obviously, each year is going to be a little bit harder comparison as we continue to grow that business. And the other thing to kind of keep in the back of our mind too, from a Q1 perspective, we still had some New York City transit in Q1 of 2018, right? That's the anniversary, too. So that's going to be little bit of a headwind as we move forward this year.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10]

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Okay, excellent. Maybe a couple more, Tom, if I could, if you don't mind. First, I don't know if you gave the gross margin by segment. I guess, I'm specifically interested in wholesale, but maybe if you had all of them?

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Thomas D. Robertson, Rocky Brands, Inc. - Executive VP, CFO & Treasurer [11]

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Yes, for the quarter, gross margin for wholesale was 33.3%. That was actually down from our -- from prior years. A couple of things have led to it. As Jason talked about, our outdoor business was up strong double digits. And our outdoor categories carries a little bit more margins than the rest of our traditional wholesale business as well as there was a push from the management team here and the sales team to unload some discontinued inventory, which also pressured our margins a little bit.

Moving down to retail. Retail margins were 45.5%, pretty much flat with last year. And then our military segment margins were up pretty substantially, 27.7%. The growth there, again, much as we talked about with the increased efficiencies in our Puerto Rican facility with the laser cutting machines. And then also, I think we've talked about on our previous call, as military -- as our commercial military continues to grow at this rate, it's eating up more and more of the production overhead that's getting assigned to it. So military is not carrying as much of the overhead burden as it once was, so we've seen margin expansion there.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

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Okay, great. Last two for me, if I can, then. Just in terms of some of the discussion about reinvestment to drive growth, can you give a little more color on specifics, what you're planning there in 2019?

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Jason Brooks, Rocky Brands, Inc. - President, CEO & Director [13]

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So I think, for us, what we want to do is find ways to drive brand awareness. We are relatively small regional brands, great company altogether, but we got to find ways to get people to understand who we are. So you're going to see us spend some dollars and some marketing areas to drive the brands in those areas, be it in the southeast or the northwest, but just continue to find ways to do that. At the end of 2018, we rolled out a small little campaign from our commercial military standpoint where we did some advertising on the Army-Navy game, and we think that really increased some brand awareness for us, got us in front of a lot of people. And so we're going to continue to do some things like that as long as we see the positive results that we're getting right now.

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Thomas D. Robertson, Rocky Brands, Inc. - Executive VP, CFO & Treasurer [14]

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Yes, Jon, I mean, big picture too, we've devoted a lot of our time and energy to some of our new products. Jason has talked about the Rebel Pro, the Arena Pro for Durango is coming out, the Rocky XO-Toe, the Muddog or Athens, the easy on, easy off technology for Georgia. And we really believe in this product, and so we're going to put some money behind it and try to drive some more sales growth in the future because we think the product is great, we just we think more people to know about it.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [15]

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Great. Last one, if I could, just on the inventory balance at quarter-end. I know, Tom, you mentioned some closeout sales within wholesale. But the total inventory growth at the end of the quarter, if you could just give more color on the composition there and how we should view that?

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Thomas D. Robertson, Rocky Brands, Inc. - Executive VP, CFO & Treasurer [16]

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Yes, absolutely. So I think there's a few things going on here. I think one, we're going to continue to push in Q1 and Q2 of this year to unload some discontinued product as well so, hopefully, we'll see this balance come down. But there was some investment made in the commercial military in the duty space from an inventory standpoint. So manufacturing efficiencies were picked up because of that. And also, some of these contracts or these bids to come out, you need to have all the inventory on hand to win the bid, so we made some investments there. There's also some increases and some special makeups that we're doing for some of our key accounts to support their forecasted sell-through as well as we've increased some raw materials down in Puerto Rico as -- with the freight and the shipping of items to Puerto Rico, the time -- lead times have gotten longer. So we've invested in some inventory down there as well, and we hope that, that also will bring in some margin efficiencies or margin improvement there with buying a little bit some of those raw materials in bulk.

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Operator [17]

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(Operator Instructions) That concludes our question-and-answer session. At this time, I'll turn the call back over to our presenters for any final or additional remarks.

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Jason Brooks, Rocky Brands, Inc. - President, CEO & Director [18]

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Just want to say thanks for everybody on the phone today. We appreciate it, and we look forward to another successful year in 2019. Thank you very much.

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Operator [19]

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That does conclude our conference call for today, everyone. Thank you all for your participation. You may now disconnect your line.