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Edited Transcript of RM.L earnings conference call or presentation 4-Feb-20 9:00am GMT

Full Year 2019 RM PLC Earnings Call

Oxon Feb 7, 2020 (Thomson StreetEvents) -- Edited Transcript of RM PLC earnings conference call or presentation Tuesday, February 4, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Brooks

RM plc - CEO & Executive Director

* Neil Martin

RM plc - CFO & Executive Director

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Conference Call Participants

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* Harold Everal Evans

Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst

* James Lockyer

Peel Hunt LLP, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the RM plc 2019 Full Year Results Call. My name is Felicia, and I will be coordinating your call today.

(Operator Instructions) I will now hand you over to your host, David Brooks, Chief Executive Officer. David, you may begin.

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David Brooks, RM plc - CEO & Executive Director [2]

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Thank you. Hello, and welcome, everyone, to RM's preliminary results for 2019. It's David Brooks here, and I've got Neil Martin, our Chief Finance Officer, sitting next to me. The two of us will take you through the results with a double act. Hopefully, everyone can see the slides, which we'll use as prompt as we go through. We're very happy to take questions, but can I ask you to do them at the end? You can call your questions out or can type them in.

Okay. Let me start off with the agenda. I'll start by giving you a view of what we see as the highlights of 2019. Neil will then look at the financials in detail before going through a review of each of our 3 divisions. I'll spend some -- then spend some time recapping on our 4 strategic themes and talk about the outlook for 2020. Finally, we'll open up for questions at the end.

2019 was a steady year of progress for RM. Revenue and operating profits were both up slightly. This was driven by good performance in our technology divisions, which more than offset a challenging year of trading in RM Resources and the adverse impact of the new accountancy standards. It was another good year of international revenue growth, up 18% compared to 2018. This growth was primarily driven by a strong performance in RM Results, which reflects new contract wins and growth with existing customers. We acquired an assessment software business in Australia during the year called SoNET. The addition of this business is going well and gives us the capability to offer end-to-end digital assessment from the creation of exams all the way through to marketing them.

Our net debt rose by GBP 9 million to GBP 15 million, but this included the funding of the acquisition. We continue to have a strong balance sheet, and in June, we signed up for new GBP 70 million credit facility with the banks. Our earnings per share has grown again up to 26.4p per share, and we're proposing to increase our dividend again by 5% to 8p.

Before I ask Neil to run through the financials in more detail, let me give you a quick overview of RM, of who we are and what we do. RM sells software and services and resources to the education market in the U.K. and, increasingly, internationally. Our products and services are used throughout the education cycle from early year's settings, primary and secondary schools through to colleges, exam boards, central government and also universities. We organize in 2 distinct divisions. The first of these divisions is RM Resources, which provides curriculum and education supplies to mainly primary schools and nurseries in the U.K. and also internationally. Our unique owned design products enable teachers to innovate the way they bring the curriculum to life in nurseries and schools. Close to 20% of our revenue in this division is now international. We're also one year into a 3-year program to consolidate our 5 distribution centers into a single automated facility to significantly improve efficiency in our back end.

Our second division, RM Results is primarily a Software as a Service digital assessment business. Our biggest market is working with exam boards to help them digitize their exams. Whether the exam is taken on screen or on paper, our technology underpins the whole exam process. In 2019, our software helped our customers process circa 15 million exams. Over 1/4 of our revenues in this division is derived from clients outside the U.K. The digitization of global -- of assessment globally is growing at pace. The pipeline of opportunities we are seeing is growing on the back of this, and we think we're well placed with our end-to-end technology and strong track record in high-stakes assessments to capitalize on this.

Finally, our third division is RM Education. It's another education technology business and provides software and services to schools and colleges in the U.K. Two areas for schools right now -- for focus in schools right now is saving money and managing teacher workload. We provide IT software and services that help address these issues. The business has moved to a model that's almost 70% of its revenue is recurring now. We should -- this should hopefully give you a better view of what we do and who we are.

Let me now hand over to Neil, who will give you a summary of the financials and a review of progress of each division through 2019. Neil?

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Neil Martin, RM plc - CFO & Executive Director [3]

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Thank you, David. Good morning, everybody. If I start by looking at our key financial metrics on Slide 8, you'll see that we've seen slight improvements in revenue, adjusted operating profit and earnings per share in the year. As David mentioned, this has been driven by good revenue and profit growth in the 2 technology divisions, which more than offsets a more difficult year in RM Resources and the adverse effects of the transition to the new accounting standard, IFRS 15. This new standard has reduced revenue by GBP 2.4 million and profit by GBP 1.5 million versus 2018, which we've not restated.

Excluding the effect of the accounting change, our underlying adjusted operating profit grew 6%. Net debt increased in the year from GBP 6 million to GBP 15 million, following a higher level of capital expenditure and the funding of the acquisition of SoNET, which we completed in June 2019. Following this acquisition, we also took the opportunity to sign a new revolving credit facility agreement. This is the GBP 70 million with a GBP 30 million accordion and is committed until June 2022 with the option to extend for a further 2 years.

If we turn the page to look more closely at our revenue development. Looking at the chart to the top left, there are a number of moving parts in the revenue story this year. The headlines are: lower revenues in Resources, which was impacted by a difficult U.K. market and experienced a 4% decline. This was offset by good growth in our 2 technology divisions, RM Results, plus 20%; and RM Education, plus 6%. The legacy bar reflects revenue streams that have been in runoff to help share the underlying performance and this amounted to a reduction in revenue of GBP 3.2 million in the year, primarily representing the closure of the U.K. trade channel in RM Resources and the unwind of noneducation revenue streams.

You'll then see a positive GBP 1.9 million from our SoNet acquisition, and finally, the negative impact of IFRS 15 adoption in the year, which reduced revenues by GBP 2.4 million. The chart on the right-hand side shows the geographical spread of the 18% growth in international revenues that David mentioned earlier. RM Results grew international revenues by 50% with just under half of this coming from the acquisition and the remainder predominantly new client wins.

RM Resources delivered a more modest international growth of 2% this year after a strong year of growth in 2018, which was up 41% on the prior year, benefiting from some large orders in South America.

Turning the slide now and moving on to profit. In the main, you see the revenue story flowing through to profit with a reduction in Resources, but good growth in the 2 technology divisions. The acquisition did not add profit in the year. The results is an underlying profit growth before accounting adjustments of GBP 1.7 million or 6%. And finally, you can see the dampening effect of the accounting transition to IFRS 15, which reduced profit growth to GBP 0.1 million.

Moving on to the income statement and looking further down the profit and loss account. You can see the interest charges have reduced by GBP 0.5 million as a result of lower pension-related finance charges and our exceptional items, after tax in the year, were GBP 2.8 million and reflects acquisition costs, intangible amortization related to acquisitions and some restructuring of property-related items.

Moving on to cash flow. Net debt grew from GBP 6 million to GBP 15 million at the end of the year. Looking at the drivers of this, the notable items are as follows: the group generated GBP 20 million of cash, which is down slightly on the prior year on similar profits. The main driver of this is higher inventory levels held at the end of the year in RM Resources. The acquisition was funded from our debt facility with a purchase price of GBP 7.3 million plus fees and expenses. And finally, CapEx was GBP 6 million in the year.

Moving forward, capital spend will be in excess of GBP 20 million over the next 2 years as we complete the 2 large capital programs by the end of 2021, our warehouse consolidation and new group IT system transition.

Moving on to pension. Our pension deficit increased slightly in the year to GBP 6 million driven primarily by lower bond rates, which are used as a discount factor. Separately, we also concluded the RM pension scheme triennial valuation in the year, which is our largest scheme, and we kept deficit recovery payments in line with current levels.

If we move now to look at the performance of each of the 3 divisions individually in 2019. Starting on Slide 14, we have a summary slide that sets the scene. Notwithstanding the very modest growth in revenue and profit in the year, the table shows the shift in profit weighting with the technology divisions growing and compensating for the decline in Resources. The technology divisions now account for broadly 70% of the group's profit compared to less than 60% in 2018. Moving forward, the objective will clearly be to substantially grow -- sustainably grow profits in each of the divisions.

Moving on to Resources on Slide 15. This has been a challenging year for the division. The market backdrop was negative with continued funding uncertainty for school leaders, which was compounded by the required increase in teachers' pension funding from 16.5% to 23.6% that came into effect in the year. Our U.K. education revenues were in line with the competitive set with a decline of 4% in the year. That said, TTS was plus 4% in the year, benefiting from its clearly differentiated position and innovative, own-developed products. Consortium, however, declined 9% as some challenges resulted from integration activities and the loss of a key client towards the end of the year.

International revenues grew again in the year plus 2% and our operating costs were broadly flat, which meant operating margins and profitability were down. Operationally, it was a very active year with property and staff consolidation and the progress against a number of key milestones on the transition to a single automated warehouse. More broadly, the funding backdrop looks like it should improve following new government's commitment of an additional GBP 14 billion in education funding over the next 3 years alongside GBP 1.5 billion to fund the previously mentioned pension increase. However, our near-term focus is on delivering an improved performance in 2020 and a number of actions have been taken to support this.

Moving on to Slide 16. 2019 was a good year for RM Results. Revenue grew 19% after accounting for the GBP 2.2 million reduction associated with IFRS 15. This growth was driven by new international client wins, developments of existing clients and the acquisition of SoNET. Operating margins were diluted as a result of the IFRS 15 changes and the acquisition of SoNET. The sales pipeline remains positive, which should enable continued top line growth, notwithstanding an existing client indicating that they will in-source their e-marking activities at the end of 2020. The addition of SoNET is also progressing well and supporting the developments of opportunities to deliver our new end-to-end digital assessment solution.

Finally, looking at RM Education. In 2019, the division delivered 6% revenue growth, which is noteworthy as it is the first year of revenue growth for the division since 2010, a period in which the group has seen revenue run off since the closure of the government's Building Schools for the Future program, which ended for RM this year and the end of RM's manufacture of school computing hardware. The revenue growth in the year was primarily driven by the performance of the Services division, which signed a managed service contract with England's largest multi-academy trust and saw growth in computer hardware sales and associated services.

Operating margins also grew strongly to 14.5% as sales growth was delivered alongside a reduction in operating costs and also some onetime benefits. As we move forward into 2020, we see further opportunities following the conclusion of the legacy revenue streams and from creating clear differentiation and strategic focus between our software and services offerings.

I'll now hand back to David to take you through the focus and outlook for RM moving forward.

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David Brooks, RM plc - CEO & Executive Director [4]

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Thanks, Neil. In order to explain where we want to focus our investment in the future growth of the business, at the beginning of 2019, we introduced 4 cross-cutting strategic themes. I'm going to take a few minutes to remind everyone of these themes and pick out an example for each to show how we've progressed over the last 12 months. After taking through the strategic themes, it's just easy for me to say, strategic themes, I'll end with giving my view on the outlook for 2020.

Okay. So the 4 strategic themes. The first one, intellectual property and technology development; then international growth; innovating with customers; and efficiency and simplicity. In order to accelerate the progress of any of these themes, we will look at acquisitions where we feel it is appropriate. If I move on to IP technology and development, we continue to focus on our investment in developing our own intellectual property and product development capability. As an example, opportunity in this area, there is strong growth in technology being used in high-stakes assessment globally. Education policymakers in countries around the world are looking to digitize their exam systems and move away from just relying on paper solutions. This is leading to quality and reliability improvement. Our approach is to provide customers with an end-to-end digital assessment offering where the complete exam cycle can be delivered without paper. The acquisition of SoNET during the year has accelerated our ability to bring end-to-end digital assessment to the market. On the back of this, we found out, just before Christmas, that we've been successfully awarded preferred bidder status in a new -- in our first new customer where we can deliver this end-to-end digital capability. We're really pleased to get this first new contract win and are seeing the pipeline of opportunities in this area growing.

If I move on to our second strategic theme, international growth. We're continuing to invest in our international sales and marketing capability as well as taking our best IP -- sorry, our best existing IP to overseas markets. As an example of this opportunity is an area with growing trends for international education systems to include coding and programming within their early years and primary schools curriculum. Our approach has been to develop our own unique range of programmable floor robots that are a perfect starting point for teacher control, directional language and coding.

If I move to the next slide, you can see here the type of robots. I mean the yellow bee-looking one in the middle is the Bee-Bot, which was our -- the robot we originally developed a number of years ago. More recently, we've increased the range for different age ranges and to develop the technology further. This includes the brand new and award-winning Rugged Robot, which is pictured here on the left-hand side. Our sales of our robotics range drove an increase in revenue in Resources products through our international distributors by 12% in 2019.

Okay. Let me move on to our third strategic theme, innovate with our customers. We continue to look for ways to help existing customers challenge their business processes and see how we can use technology solutions to make it easy to work with us. The U.K. government is urging schools to turn into academies and come away from local authority control. Groups of academies are forming into multi-academy trusts, or MAT. As these MATs grow, they are increasingly buying products and services centrally for all their schools. In 2019, we signed a contract, as Neil said, with the U.K.'s largest MAT to provide a full IT managed services to all their schools. This service saves the customer money and will also help accelerate that 60 schools journey to the cloud.

Our final strategic theme is efficiency and simplicity. Our customers continue to need to save money and are always looking for more cost-effective ways to doing things. We currently have 5 distribution centers across the U.K. This footprint is costly and not efficient. We are running a program to consolidate our distribution centers from 5 into a single automated facility in the East Midlands. We will lead -- this will lead to significant cost savings and an improved service to our customers. In 2019, we made progress on this journey, started to move to 4 centers ahead of schedule, gained planning permission for the new site, signed the lease with a new -- with the developer and chose an automation partner for the new facility. We have a clear plan going forward. In 2020, we will complete the construction of the building and start setting up the automation. In 2021, the focus will be on migrating activities from our other warehouses. Hopefully, this gives everyone a good view of how we've progressed against our 4 strategic themes during 2019.

Let me finish by going through the outlook for 2020. We've continued to strengthen the foundations of the business over recent years and are expecting further good progress in 2020. Our focus and outlook will be: delivering against the key milestones of our 2 major capital projects, the new ERP IT system and our distribution center consolidation.

Secondly, making the most of the growing international opportunity with our broadening intellectual property.

Thirdly, sharpening our go-to-market approach in our technology businesses to make the most of all opportunity.

And finally, delivering on our continued efficiency targets.

Thank you for taking the time to listen this morning. I'll now -- Neil and I will now take any questions people have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We currently have a question from Harold Evans, that is from Nplus1 Singer.

We will move on to the next participant in hopes that Harold will come back to us.

Hello, Harold.

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Harold Everal Evans, Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst [2]

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Apologies for that. Wondering if you could just talk about a couple of things. We saw one in RM Resources, just the different growth rates you saw in TTS and Consortium and whether there was anything to read into that? And then just one follow-up after that, if that's all right?

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David Brooks, RM plc - CEO & Executive Director [3]

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Yes, sure. I mean I think, in the Resources division, the growth rate for TTS was up in the U.K. and internationally. And I mean, I think, the growth in the U.K. is being driven by the Ofsted. There's been a change in the Ofsted framework for U.K. schools, which means that they have to prove that they're providing a much wider, diverse curriculum than they traditionally have. So traditionally, it's been very much they need to prove that they're doing more in news and literacy. But now geography, history, science and a bunch of other things are being asked of them through Ofsted, the Ofsted framework -- the new Ofsted framework that came in during the year. And we've seen that drive some good demand in TTS. And therefore, TTS has been ahead of the sort of market comparators. And then in the Consortium, it has been a much tougher year. I think the market has been down sort of 4%, and Consortium is down 9%. And some of that is driven by some service blips that we had during the year, which we've now fixed but have impacted order intake. And also, some of our competitors being very aggressive on some of their pricing offers during the year.

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Harold Everal Evans, Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst [4]

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Okay. And then just one other on the MATs contract win. Obviously, it's -- it seems as though it's been a long time coming. Do you feel as though that this could now sort of pave the way for future wins? I appreciate that you may want to hold something back, but how do you view this?

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David Brooks, RM plc - CEO & Executive Director [5]

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I mean we are seeing. So that particular contract did take quite a long time to land. It's a large multi-academy trust, and we were in conversations with them for a number of years before we finally got the contract. I think more widely in the market, we are seeing multi-academy trusts, not quite at that size, but most academy trusts coming out to the market and looking to outsource their IT. It isn't -- it is increasing year-on-year, but we're not at the moment at a point where there is a massive surge towards it. So we are seeing it building, but it's building steadily.

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Operator [6]

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Our next question is from James Lockyer from Peel Hunt.

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James Lockyer, Peel Hunt LLP, Research Division - Analyst [7]

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Three questions from me, please. So you mentioned the automated warehouse within the release and talking about, obviously, the consolidation benefits there with your cost and efficiencies. But in terms of the automation itself, can you sort of talk about what we have -- what that might involve? And how operating efficiencies might come through that? And I'll move on to the other ones after that one.

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Neil Martin, RM plc - CFO & Executive Director [8]

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James, it's Neil here. Yes, so the plan will obviously be just to recap. We currently use 5 warehouses. We've reduced that -- coming close to reducing that to 4 as we're consolidating one into another. Construction has started on building the warehouse, and we are looking at automation equipment of a search and retrieval system, which is reasonably traditional in this environment. Clearly, what it will do is reduce and automate the picking and handling process and will enable us from coverage across 5 warehouses to have 1 warehouse with a reduced level of staff requirement because the automation will provide a lot of that picking and handling, which is the key area of where the financial benefits come. I think there'll be some -- also some inventory management benefits and also customer service benefits resulting from the adoption of the equipment.

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James Lockyer, Peel Hunt LLP, Research Division - Analyst [9]

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Okay, great. So on the second question, you highlighted the GBP 14 billion funding in the call earlier. But I was wondering if you could give us some more color around where you think this stands at the moment? And where that funding might come from in the sort of the earlier years towards sort of the outer years. Just to give us an idea of where you're thinking at the moment on that?

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David Brooks, RM plc - CEO & Executive Director [10]

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Yes. So the government has made it quite clear what the breakdown is over that 3 years going forward. I think we need to be aware that the U.K. schools feel as though they've been underfunded for a period of time. So if you go into a school and talk to head teacher about this funding, they -- although it's a lot of money nationally, they don't see it. Most schools don't see it as a significant improvement in their funding. In parallel with the additional funding, the government is putting in place a new funding mechanism that means, in time, all schools will have the same funding. So at the moment, some schools in the southeast have quite significantly per pupil funding higher than the midlands and the north and the government are changing that. So broadly, every school will get GBP 5,000 per pupil per year in terms of funding. So I think -- and the funding that will be -- the additional funding, I think, will be used on staff as well as the sort of things that customers buy from us, Resources, IT, et cetera. So I expect it to be -- we expect to be a better position than it has been in the next 3 years than the last 3 years. But we don't -- as I said, once you go down to the school level, schools aren't seeing this as a significant change in their funding. They're thinking it's just being an improvement on something that's been really quite tough for a while.

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James Lockyer, Peel Hunt LLP, Research Division - Analyst [11]

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Okay. And just my final question around people within the business. Wonder if you could talk about sort of how -- where you've been putting investments? And how your capabilities have sort of grown within the business over the past year? And where your focus will be around poking in pockets around the business or putting incremental investments in people.

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David Brooks, RM plc - CEO & Executive Director [12]

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Yes. So I mean, I think, we've been making an investment in our international sales and marketing for a number of years, and we've upped that investment again this year. We've also continued to invest in our software development, both in the Results business and RM Education. And we're also looking and sort of at the top end of that software development, some of the innovations we're looking around in terms of -- particularly in Results, how we might automate the assessment process more, et cetera. So yes, the sales and marketing, software development, we have made some changes in the top team over the last year or so as we bring in new talent. So as an example, in Resources, we've brought in digital -- more digital talent and people from a retail background as we think that the business has those sorts of characteristics.

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Operator [13]

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(Operator Instructions) It appears we have no further questions on the line. So David back to you.

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David Brooks, RM plc - CEO & Executive Director [14]

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Okay. Yes, fine. Thank you. Okay. So I'll wrap things up then. If you do have any more additional questions, then please do forward them to either Abena or Stephen at Headland. It just leaves me to say thank you very much for joining us today, and have a good day. Thank you.

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Operator [15]

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Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.