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Edited Transcript of RCKY earnings conference call or presentation 20-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Rocky Brands Inc Earnings Call

NELSONVILLE Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Rocky Brands Inc earnings conference call or presentation Thursday, April 20, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendon Frey

ICR, LLC - MD

* Mike Brooks

Rocky Brands, Inc. - Chairman and CEO

* Thomas Robertson

Rocky Brands, Inc. - CFO

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Conference Call Participants

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* Jonathan Robert Komp

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

* Mitchel John Kummetz

B. Riley & Co., LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands First Quarter Fiscal 2017 Earnings Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded, and will now turn the conference over to Mr. Brendon Frey of ICR.

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Brendon Frey, ICR, LLC - MD [2]

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Thank you, and thanks, everyone, for joining us. 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 risks 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, 2016.

I'll now turn the conference over to Mr. Mike Brooks, Chairman and Chief Executive Officer of Rocky Brands.

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [3]

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Thank you, Brendon. On today's call with me for the first time is Tom Robertson, our recently appointed Chief Financial Officer. Tom has been a great addition to our senior management team since assuming his new role in March of this year. You will hear from Tom shortly when he reviews the financials, but I want to first discuss our recent operating performance.

I'm pleased with our start for 2017. First quarter sales increased approximately 10%, driven by more than a doubling of Military segment sales to a quarterly record of $12 million. At the same time, Wholesale sales were down just slightly, as trends in this channel continued to show signs of stabilizing. Importantly, gross margin for both segments improved meaningfully compared with the levels we experienced in the second half of 2016. During the first quarter, we also realized significant savings from cost reduction actions we implemented late last year which, combined with our top line performance, allowed us to deliver earnings of $0.20 a share.

Before I go into the greater details on our first quarter results, I want to applaud the efforts of our managers and associates here in Nelsonville, and our facilities in Puerto Rico and Dominican Republic. Our ability to quickly respond to the headwinds we faced during the first 9 months of 2016 and position the company for improved earnings starting in 2017, is a testament to their hard work and dedication. While there is still more work to do to drive profit growth consistently over the long-term, I am confident we are headed in the right direction.

I would also like to thank the board for their insight and dedication and decisions during this -- during what has been a pivotable turning point in the company's history.

Getting back to the first quarter. Starting with Wholesale, our largest segment. While the retail environment remains challenging, many of our accounts started the year with improved inventory positions, which have created better at once opportunities for certain of our product lines. This was especially true for Georgia Boot, as the brand's spring product line has been well received by consumers. Followed initial sell-through at retail fueled a low double-digit increase in Georgia Boot sales combined with a 100 basis points increase in product margin during the first quarter.

Sales of Work footwear in total were relatively flat year-over-year as we are still comparing against contributions from our low margin private-label program, which was discontinued in the fall of 2016.

Turning to Western, Durango posted a mid-single-digit sales increase for the first quarter. However, this was offset by a decline in Rocky western footwear, which we believe was due primarily to the disruption caused by the 2016 restructuring of that sales force. We are confident the internal changes we've made will have a positive impact on sales for both the Durango and Rocky Brands going forward as well as the category's gross margin, which was up 270 basis points from a year ago.

Now to Hunting, where the Rocky Brand continues to occupy a leadership position, thanks to a its strong heritage, history of authenticity and innovation. This said, the overall category has been very challenging due to a second consecutive warm winter and ongoing retail consolidations. This is causing a vast majority of our accounts to be very cautious with their orders, buying very close to the need and in smaller quantities. While we have experienced an increase in booking for the fall season, we want to see a sustained improvement in retail sales sell-through before we get more positive on our growth prospects for the Hunting in 2017. Meanwhile, our Wholesale segment is also benefiting from a strong demand for military footwear, and our teams are doing a good job capitalizing on the opportunity through commercial military business. Direct sales to enlisted soldiers increased high single-digits in the first quarter, driven by growing demand for our popular S2V and new lightweight C7 boots.

Looking at Retail segment. Sales were up low single-digits, led by our e-commerce business. Our effort to grow this channel by further expanding the merchandise assortment available online and driving higher traffic to our website through additional marketing investment is -- are gaining traction.

Finally, our Military segment posted a record sales quarter as we continued filling orders under the prior contract and started delivering the initial shipments of hot weather and temperate weather boots as part of the new contract announced in January. With our extended domestic manufacturing facility now fully optimized, we've been able to quickly return the segment gross margin back to their historical low-teen levels, and I'm confident we can exceed this previous high watermark in the future.

For 2017, we have approximately $40 million in contract military orders scheduled for delivery, and we continue to pursue additional opportunities for this year and beyond.

Before I turn the call over to Tom, I want to welcome Bill Jordan and Bob Moore to the Rocky Board of Directors. I am very confident that the company will greatly benefit from their valuable insight and experience both gentlemen have amassed during these years working in the footwear and apparel industries. We are very glad they are onboard.

Tom?

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Thomas Robertson, Rocky Brands, Inc. - CFO [4]

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Thanks, Mike. Net sales for the first quarter increased 9.6% to $63.1 million compared to $57.5 million in the corresponding period a year ago. By segment, wholesale sales for the first quarter decreased 2.5% to $39.2 million compared to $40.1 million last year. Retail sales for the first quarter increased 2.9% to $11.9 million compared to $11.5 million a year ago, and Military sales increased 107% to $12 million versus $5.8 million for the same period in 2016. Gross profit in the first quarter increased to $19.7 million or 31.3% of sales compared to $18.8 million or 32.9% of sales in the same period last year. The 160 basis point decrease was driven primarily by the higher penetration of Military sales, which carry lower gross margins than our Wholesale and Retail segments.

Gross margins by segment were as follows: Wholesale, 33.3%; Retail, 44.8%; and Military, 11.5%. With respect to our Military segment, I would note that the gross margins improved as the quarter progressed and we gained increased efficiencies on higher volumes. For the year, we expect Military segment gross margins to be above Q1 levels into the mid-teen range.

Selling, general and administrative expenses were $17.4 million or 27.6% of sales for the first quarter of 2017 compared to $19.1 million or 33.3% in the period a year ago. The $1.7 million decrease in SG&A expenses was primarily related to lower compensation expenses following the workforce reductions we made during the third quarter of 2016.

Income from operations was $2.4 million or 3.8% of sales compared to a loss from operations of $221,000 in the prior year period. For the first quarter, interest expense decreased to $90,000 compared to $135,000 last year as a result of the significant reduction in debt year-over-year. Net income for the quarter was $1.5 million or $0.20 per diluted share compared to a net loss of $200,000 or $0.03 per diluted share.

Turning to the balance sheet. Our funded debt at March 31, 2017, was $5.2 million, a decrease of $16.4 million or 76% from $21.6 million at March 31, 2016. Inventory at March 31, 2017, was $68.8 million compared with $84.5 million on the same date a year ago. The 18.5% decrease in inventory on a 10% sales increase was the result of several factors, including a higher penetration of military sales, for which we do not hold finished goods, a reduction in raw materials and a general focus on keeping inventory levels low, given the challenging retail environment.

With that, 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) Our first question comes from the line Mitch Kummetz of B. Riley and company.

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Mitchel John Kummetz, B. Riley & Co., LLC, Research Division - Senior Analyst [2]

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So I got a few questions. Let me start with wholesale. So wholesale was down a bit in the quarter, but it sounds like there were some company-specific issues. Mike, earlier you talked about exiting some private-label in Work, you talked about Durango -- I'm sorry, Rocky western, the sales force restructuring. Is there any way to kind of I -- don't want to say, reconcile, but is there any way to kind of think about what the wholesale run rate looks like if you try to may be x out some of these company-specific items? And do you still think wholesale could be up for the year? I think that was your comment coming off of Q4.

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [3]

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I think it will be up slightly. I'm not comfortable saying it's going to be up double digits. Some divisions will be up, but it's still so hard to be certain, Mitch, and I'm just trying to be conservative. And we will say -- we will see, if we had just one brand and one division in the company, it would be easier to answer that question, but with multiple brands, it's difficult.

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Mitchel John Kummetz, B. Riley & Co., LLC, Research Division - Senior Analyst [4]

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And you mentioned that your Hunting fall orders are up. I know a lot of your business isn't really backlog driven, it's more sort of at once.

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [5]

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At once. Yes, sir.

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Mitchel John Kummetz, B. Riley & Co., LLC, Research Division - Senior Analyst [6]

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Is some of the opportunity for wholesale to maybe be up slightly, just the easy comparison around reorders over the balance of the year? I mean, I know those were fairly challenged a year ago, and you did mention the channel inventories looked better with your customers, so.

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [7]

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Yes. I think that's correct. That's where we're at. Years ago, we used to get the huge percentages of our Hunting product booked upfront, but that's changed also. But Hunting is up for fall of '17, but there's still a question mark on the Cabela deal with Bass Pro that looks like that's going through now. So there's still some big players out there. Gander Mountain filed for bankruptcy, as we all know, and the weather has a lot to play with it -- to do with it.

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Mitchel John Kummetz, B. Riley & Co., LLC, Research Division - Senior Analyst [8]

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What is your posture with some of these more challenged retailers, like a Gander, for example? I mean, are you still taking orders sort of business as usual? Or is there any way you guys are trying to protect yourself in case it goes from a restructuring to more of a liquidation or?

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [9]

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We are not taking orders, and we haven't for some time, probably for 3, 4 or 5 months. We stopped late last year. We're still -- we have some past due payables, AOS, but it's not a huge amount. We hear they want to restructure and come back out again. So we're just -- we're not soliciting business there. We are just seeing what unfolds.

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Mitchel John Kummetz, B. Riley & Co., LLC, Research Division - Senior Analyst [10]

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Got it. And on Military, you mentioned -- and this is consistent, I think, with what you said last quarter, that you're still looking for $40 million in revenues there. That's kind of what you have on order. Can you just remind me of kind of what the cadence of that should like over the balance of the year? It sounds like you wrapped up one contract this quarter and started another one. So how should we think about the cadence of getting to $40 million? Is it pretty even over the balance of the year?

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [11]

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Well, we have that big quarter now. It looks like -- I'm just pulling it up here, it looks like they're about -- pretty close to 10 -- 4 tens or $40 million. I mean, it's pretty even. Okay? I mean, you know, we might hit $11 million one quarter, but it's -- yes, I mean, it's pretty close to averaging $10 million a quarter.

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Mitchel John Kummetz, B. Riley & Co., LLC, Research Division - Senior Analyst [12]

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Is there anything of significance coming up in terms of contracts, that could really do that business well above $40 million? Or do you even really want to push it, just kind of given maybe some capacity in there?

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [13]

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That's a really good question. We want it to be profitable and control the level, but we also do a great deal of commercial military in that same facility, which is at full margin. So we don't want to go overboard with Military, because it's controlled margin, as we all know. You are bidding against other manufacturers, so there's an averaging.

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Mitchel John Kummetz, B. Riley & Co., LLC, Research Division - Senior Analyst [14]

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Got it. 2 last questions. One, I know last year reorders were pretty weak in the first quarter, some of that was weather-related. But some of that was also -- you guys at the time talked about some challenges in oil and gas economies. I'm wondering if you've seen any improvements there as rigs have come back online, and maybe even the employment picture is steadily getting better?

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [15]

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I think, it's getting better, but I don't see a skyrocket in rigs coming back. There is some slight improvement. But as I mentioned in my comments, our Georgia Boot line is doing extremely well for this year. We're very pleased with that, and that's a lot of new product and historical product. The Rocky product is not doing as well as I mentioned, and that's primarily, in my own opinion, because we didn't freshen the product up. Much of it is 7 -- 5, 6, 7 years old. We brought our new -- we brought our old designer back, as I mentioned last time, [Mark Ritchie]. He's wonderful. He's working diligently on freshing it, freshening that line up, and what I see is good.

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Mitchel John Kummetz, B. Riley & Co., LLC, Research Division - Senior Analyst [16]

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Got it. And then, lastly a question for Tom on the SG&A side. It sounds like most of the year-over-year dollar decline was really related to workforce reductions. I know those kind of started up in the back half of last year. How much opportunity is still left before you anniversary that? And then, what does the SG&A look like going forward, once that's been lapsed?

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Thomas Robertson, Rocky Brands, Inc. - CFO [17]

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Yes, I mean from the SG&A perspective, from a wages and benefits standpoint, I think we've kind of -- we've made a lot of the reductions in Q3 of last year, and so, I think, we anniversary that pretty much right at Q3 of 2017. We've had a little bit more reduction since September of last year. So maybe a little bit more than what we saw in Q4. But from that -- from a SG&A standpoint to -- we've also made some reductions in some advertising and travel expenses too. So it's not all just the compensation.

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Operator [18]

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Our next question comes from the line of Jonathan Komp of Robert W. Baird.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [19]

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Couple of questions on the wholesale side. First one, just more short-term. I know that -- I know the wholesale business has been negative year-over-year for some time now. And I'm just wondering, do you think the first quarter of '17 is the last negative quarter we'll see? Do you think -- I'm just trying to gauge maybe the pace of improvement you're expecting for that business?

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [20]

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I think there's opportunity there. I don't think -- you know, retail is tough, but we're seeing increases online. So I'm not in a depressed mode at all, I'm in a happy mode. Product is right, price is right, taking a lot of cost out of the business. We just got to go out and get our share of the business, and maybe some more. So sales team is working hard, marketing team is working hard. I think we'll see a slight increase.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [21]

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Got it. And then, when I look at the Work business, if I look at 2016 versus your peak, I think, in 2014, the revenue down in order of about $20 million on an annualized basis for the Work piece specifically. And I'm just wondering, how you're thinking about the ability to recapture that amount? How much of that's dependent on the external environment versus some of the internal drivers that you might have?

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [22]

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Again, I'm going to repeat, but I -- for me, it's new product, fresh product development, separating yourself from your competitors. And we've got some really attractive new product out in our Georgia division. It's performing extremely well. And -- so I -- there's talk about putting more Americans back to work. So that hasn't materialized in any big numbers at this time. But we're focused -- we brought a consultant in to help us understand how to grow our business online. She has added a lot of value, and so we see increased sales there. So as a whole, I think we're going to be successful and grow the business.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]

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Got it. Okay. Last one on the Work side. Last month, one of your larger peers, that's publicly traded, had an Investor Day, where they outlined plans to rededicate behind some of the Work categories. And I'm just wondering kind of your overall take on the competitive landscape, and how your brands fit within that?

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [24]

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Well, it's always been competitive. I've never known when it wasn't competitive. Everybody wants a piece of the pie, but the Work segment's a major portion of our business and -- so, yes, it's -- but it has to do with the ability to develop unique, lightweight, comfortable, durable, priced right product, and get it out through your retail customers and online. And I think we have one of the best designers in the business today.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [25]

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Great, that's helpful. Last one from me, then it's just -- a question on the wholesale gross margin for the year. I know the -- I guess, maybe if you could clarify how much your wholesale inventories are down currently? And maybe, it sounds like some parts of the channel are a lot cleaner. So I'm wondering how much margin rebound you might expect for the wholesale business this year?

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Thomas Robertson, Rocky Brands, Inc. - CFO [26]

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Yes, from a margin standpoint, John, I think we see -- I think we feel pretty comfortable with where the margins came in Q1. We're also pretty confident about those margins moving throughout the rest of the year. From an inventory perspective, of our big decrease in inventory, I would say, 10% or 11% of that was of our finished goods inventory. Predominantly all that is wholesale, so I feel really good about our inventory levels. And from a margin standpoint, the one thing we had to think about from Wholesale, obviously, as Mike mentioned is, we're not doing the private-label any more, which was a lower-margin product. So hopefully, we will benefit from that the rest of the year.

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Operator [27]

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(Operator Instructions) There are no further questions over the audio portion on the conference. I will now like to turn the conference back over to management for closing remarks.

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Mike Brooks, Rocky Brands, Inc. - Chairman and CEO [28]

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So Tom and I thank you very much, and we're excited about the balance of the year and to deliver for our shareholders. Thank you.

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Operator [29]

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This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.