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Edited Transcript of SCYR.MC earnings conference call or presentation 28-Feb-19 4:00pm GMT

Full Year 2018 Sacyr SA Earnings Call

Madrid Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Sacyr SA earnings conference call or presentation Thursday, February 28, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Mijangos Gorozarri

Sacyr, S.A. - CFO

* Manuel Manrique Cecilia

Sacyr, S.A. - Co-Founder, Chairman, CEO & MD

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Conference Call Participants

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* Guillermo Fernández-Gao Sánchez de Nieva

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Manuel Manrique Cecilia, Sacyr, S.A. - Co-Founder, Chairman, CEO & MD [1]

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Good afternoon, I'm Manuel Manrique, Chairman and Chief Executive Officer for Sacyr. I'm joined today as usual, by Mr. Carlos Mijangos who is the CFO of the company. Thank you very much to you all, analysts, media representatives and investors for attending this results presentation of Sacyr relative to fiscal year 2018.

First of all, I'm going to provide you with an overview about our novelty fulfillment of the strategy plan in order to show the scope of the extraordinary economic results delivered from the prior fiscal year. Next, I'm going to touch upon our future challenges. Next, Carlos Mijangos will provide you with specific data as to the gross results broken down by division and the holding as a whole. Next, we're going to finalize with a Q&A session for all analysts.

So our strategic plan, Plan 2015-2020 was completed in early 2018 and we are very happy and very proud for all the milestones we have been able to attain. Very quickly, let me refer to some of the highlights. First of all, I believe that we placed special focus on the Concessional business. I would like to emphasize once again that our company and our group is a concessional group holding with a significant construction and services company. And that is evidenced by the fact that 75% of the company's EBITDA for 2018 derived from concessional assets.

In 2014, when we drew up these plans, we had EUR 100 million whereas in 2018, it was EUR 414 million. Next, we have been able to reduce debt decisively. Net recourse debt has cut down by 78%. At the time, we had EUR 5.1 billion, whereas right now, in 2018, we reported EUR 1.139 billion on account of net recourse debt. Certainly, we gave full priority to cash management. And this has led us to have an operating cash flow increase of 10x approximately.

Therefore in 2014, we reported EUR 43 million, whereas in 2018, we reported EUR 412 million. So as you can see, this is shown in the chart at the bottom on the right-hand side. On the left, you can see net profit results and how since 2014 to 2018 went from EUR 33 million to EUR 150 million with a year-on-year accumulated result of nearly 46%. All these data are, of course, very significant. We also managed our stake in Repsol actively with a total reduction of debt related to our stake, while eliminating the risk linked to fuel price variation.

Since there was a significant transformation in the construction business, all groups had to go through this transformation while the year 2002, 2003, '4, '5 and '8 were great years but we had to shift towards other markets working with a different kind of system. We had to shift from the Spanish plan to the Anglo-Saxons plan, which has led us to tune up our way of working and restructured our size in order to be in line with the market reality but always, thoroughly controlling risk and keeping a close eye on margins.

Since we eliminated our exposure to the rental property market, we sold Testa and we also reduced our Vallehermoso´s debt by 100%. Since we are leaders in our markets of reference, one of our targets was to foray into the U.S. market. We have been able to attain both targets while moving forward in our strategy plan. Our operating margin also went up by 550 basis points. As you can see on the right-hand side of the bottom of the slide, in 2014 we reported 8.8%, and we were able to deliver 14.3% in 2018.

You can also see a 23% increase on account of EBITDA on accumulative basis from EUR 239 million in 2014 to EUR 543 million in 2018. And finally, we have been able to resume dividend payout to shareholders. We have already announced this to GSMs, these payments will become recurrent between 4% and 5% for shareholders. So what's our goal for the second part of the strategic plan. Well, let me discuss what we're planning to do and I'm sure that we will be able to do it with our current team. We want to strengthen our position as a concessional company. We want to reach over 85% of our EBITDA in the next year.

Construction will also be a differentiating factor, with -- along with concessions, will lead to the development of greenfield concession projects in our markets of reference. We also want to be leaders in our home markets of reference, and we want to grow selectively in the English-speaking markets: the USA, Canada, Australia, et cetera. We will select projects based on our cash generation capacity, profitability and according to all the risks related to such projects. Always with strict financial discipline, we intend to cut down our recourse debt dramatically.

So we are focusing on innovation and technologies strongly, and we want to help to the planet's sustainability by leading the circular economy, mainly through water and waste treatment projects. And, of course, we intend to maximize value for shareholders. Now what about the highlights from an operational perspective from reporting to have for 2018? As for revenue, there was an increase of 23%. So we have been able to grow in all 4 core business areas. As usual, we placed focus on business profitability and cash generation from businesses.

Our EBITDA reached EUR 543 million, reporting an increase of 29%, whereas group EBITDA margin also grew going from 13.7% to 14.3%, year-on-year. And most importantly, one of the highlights, our operating cash flow grew by 41% going from EUR 292 million to EUR 412 million. All this, in the context of growing international expansion, our backlog has surpassed EUR 41 billion. We already have 71% of an international portfolio in place, but we should emphasize that within this percentage, construction and concessions already exceed 80%, with at 82% and 88% respectively.

International revenue for the holding accounts for 60% outside of Spain, despite the fact that some of our activities, mainly services, is particularly, located in the Spanish market, but for the time being. We were granted some significant contract awards in Chile, Peru, Colombia, Mexico, Northern Ireland, Australia, among others. And Sacyr was also able to enter the USA with 4 major projects. And as we have already set as a target as part of our strategy plan, we are also concluding another project that will be formalized for the concession of services in Connecticut.

From a corporate standpoint, shareholder remuneration in 2018, shareholders received EUR 0.103 per share corresponding to the fiscal year 2017. This year, 2018, shareholders will be collecting this payout in 2019, but it's going to be higher. As we said several times, we want this dividend payout to be closer to 5% rather than 4%. We also sold all of our stake in Itinere. Once we were able to work out all the precautionary measures that had been filed before a court and before an arbitration tribunal, we were able to sell this company for EUR 202 million a few days ago. So we keep on having full management of our stake in Repsol and we are of course monetizing value when suitable.

And I wouldn't like to finish off this presentation without making reference to Panama, because in Panama, we have already settled 100% of our debt with the Panama Canal Authority. These payments were received in 2009 by the consortium Grupo Unidos, on account of mobilization and plant installations for the completion of the third set of locks of the Panama Canal project. So we have already repaid such amounts, nothing is left, without affecting our regular investment plan for the company. However, we shouldn't forget that we still have under arbitration USD 5.2 billion.

And I'm talking always about 100% of the consortium and the consortium taken as a whole. So we believe that court decisions should be expected between 2020 and 2023, approximately. So all positive resolutions will have a positive impact on our cash flow. And we are talking again of USD 5.2 billion and our arbitration procedures without taking into account that UNCITRAL arbitration where it says that Sacyr has filed against the government of Panama. Now Mr. Carlos Mijangos will give you more color on the main figures for 2018.

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Carlos Mijangos Gorozarri, Sacyr, S.A. - CFO [2]

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Okay, we're going to give you some details about refunds. We, in terms of revenue, were able to report EUR 3.796 million with an increase of 23% year-on-year. In the case of the international business such growth rate was about 26%, EBITDA reached EUR 543 million with an increase of 29%. And international consolidated EBITDA margin reached 14.3%.

As for EBIT, it reached EUR 365 million with a significant increase of 42%. And finally, net profit, which stood at EUR 150 million, which reflects a 15% increase vis a vis 2017. As for the operating cash flow, as the chairperson already mentioned, this year we were able to reach EUR 412 million, vis a vis 2017, with an increase of 41%. As for the backlog, we were able to grow about EUR 41 million with a variation of 2% despite an increase of revenue as for the company's overall activity.

Now if we take a look at the breakdown by area in terms of revenue, we can say that contributions came mainly from engineering and infrastructure with 42% followed by services with 26%, concessions 19% and industrial with 13%. As for EBITDA, Sacyr Concesiones contributed the highest amount with concessions 48%, engineering and infrastructure 29%, followed by services 17% and industrial 6%. However, the concessional projects in all 4 business areas that correspond to infrastructure and waste plant -- water treatment plant, 76% of EBITDA comes from these kinds of assets with very low demand risk. Now as for the backlog, their division accounts for 2/3, followed by Engineering & Infrastructure, and Services with 14%, Industrial 6%.

Regarding international expansion, if we compare 2008 and 2018, in 2008, 27% was international, now that is 71%. In the domestic market it accounts for 29%. As for where we are right now, in the case of Europe, we have EUR 25 billion with 59% concentration, followed by America with 38% or EUR 16 billion and other markets EUR 1 billion or 3%. As for the main awards, they occurred after our entry into the United States as well is in Chile, Peru, Colombia, Portugal, Northern Ireland and Australia which are our markets of reference.

Now as for the Engineering & Infrastructures at Sacyr, we were able to stabilize margins quarter-on-quarter, thanks to steady progress of major international projects and positive trends in domestic markets and given their infrastructure requirements.

Finally, as for Services & Industrial, they were also able to increase their backlog, thanks to some significant backlogs. Well, without talking too much about awards, because you have information here, in the case of Sacyr Ingeniería e Infraestructuras, we were able to enter into the United States, several hospital projects in Chile and Mexico, A6 in Northern Ireland, or the Fortaleza Metro in Brazil. There's a pending project for the railway in Paraguay, and then there are also other 2 hospitals in the pipeline and the construction of a highway tranche in Chile.

As for concessions, we have one pending contract for the concession of the Uruguay central railway system, and then the Ovalle-La Serena Highway and the Chacatulla airport in Arica. As for Servicios -- or Services, this was a year of international consolidation. Some of the most important contracts were the following. For example, the Sotogrande water cycle, a contract then. And now the contract in Bogota for cleaning and green areas maintenance, other projects in Peru, the cleaning of the Santiago de Chile Metro, et cetera.

As for Sacyr Industrial, we can highlight 2 international projects, one water treatment plant in Adelaide and a fuel terminal in Mollendo, Peru, as well as photovoltaic plant in Ciudad Real. Well, this map shows where we are currently operating, going from left to right, you can see that we were mainly in the Pacific areas in Latin America. We already have our footprint in the United States, in Florida and Connecticut.

In the case of Spain, Northern Ireland and Portugal, and then we also have some awards in Australia. If we now take a look at the net debt evolution and cash generated by the group, we had a debt in the amount of EUR 3.421 billion. EUR 904 million corresponded to net recourse debt. We were able to generate EUR 412 million operating cash flow. This is quite a significant figure. But from a qualitative standpoint it's also significant because it does not actually have any specificity.

Actually this project does not contribute anything significant in 2018, it's totally stable and recurrent. If we now take into account financial expenses, we were able to go up to EUR 247 million and then we have investments. Well, as a result of this strategy, the concession strategy of the group you can see that we have invested nearly EUR 1 billion in the group's concession projects. Here EUR 245 million in capital were allocated to Sacyr Concesiones on 22 services with 2 small divestments. And finally, and separately, we were able to allocate also a significant amount to the Panama Canal. This has to go through the investment channel so as soon as we get money back from the arbitration awards, this will be reflected in our divestments.

Net debt, therefore, is EUR 4.045 billion. You can see very clearly that the net debt, which was EUR 234 million is virtually what we had to pay on account of debt payments; therefore, the company was able to face up to all of its investment plans together with all the financial expenses arising from the recourse net debt. If we now deep dive into each business area, the first business area that performed wonderfully well was the Engineering & Infrastructure business area, which grew by 40% in terms of revenue and EBITDA by 82%, whereas its backlog also grew significantly even though some significant contracts were signed in January. All these were pushed forward by international activities.

We have several concession projects already underway. They are spinning up quarter-on-quarter with increased margins. On the other hand, 88% of the backlog, outside of Spain enables us to gather more than 43 months of activity. And as we mentioned already, we're already working intensively in the United States developing 4 projects that we were awarded during the year. As with outstanding milestones, we should point out the delivery of the El Marqués hospital complex in Querétaro or the inauguration of the new section of 5.5 kilometers length of Sao Paulo subway in Brazil, or the opening of a school in Luanda, which is quite peculiar.

As for the main contract awards, here you can see a breakdown of amounts, all in all the backlog amounts to more than EUR 6.183 billion. And the months of activities, as I mentioned before, are all-in-all 43. Regarding Sacyr Concessions, main figures increased as follows: revenue by 29%, due to accounting reasons, we had to distinguish revenue from Concessions and Construction; the latter came down by 40% due to the acceleration of some of the concession contracts that are currently underway or under construction; however, concessional revenue went up significantly by 21% because every year we commission 2 or 3 projects and therefore EBITDA grew -- or has been growing constantly year-on-year.

As for construction right now, we are also quite well advanced on some projects like the Rutas del Litoral in Uruguay, the Vial Sierra Norte in Peru or Rutas del Este in Paraguay among other projects, also including those in Mexico and Colombia. Regarding the backlog, it surpasses EUR 27 billion with an international weight of 82%. But in the case of concessions, not only revenue from concessions is important, it's also very important to start closing financing and start refinancing projects. 2018 was very active on this note with 5 major closings, some of them in Colombia.

In the first half of the year, we are going to complete some of them, and some significant financing, such as new projects in Mexico like the Tláhuac Hospital. As for the equity invested, as of December 31, 2018, amounted to EUR 245 million more all in all EUR 887 million. Regarding contract awards, we should mention the Tepual Airport in Montt, and then the Uruguay railway with more than EUR 100 million in future revenue.

In the case of Chile, we were able to be awarded the Los Vilos – La Serena project and we were awarded this project in December 19, 2006. Now we were able to continue with this project through another award and then the Aeropuerto [Del Norte] in Arusha. Now talking about services as usual, we have reported 2 digit growth rate. This is a very steady and stable businesses, all business areas hitting the targets following this trend. Revenue went up at 13% earning more than EUR 1 billion, the EBITDA being 95% with an increase of 14% and EBITDA margin always steady between 8.8%, 8.9% approximately. Backlog went up by 4.2% for this year. In terms of services, we should say that we transformed internalization with contracts in Chile, Colombia in Bogota, and Australia with a waste treatment plant in Australia.

We continue growing, we continue forays into new markets, and we continue to undertake new businesses. As for the most important contracts and the most important contract awarded was the water cycle management project in Sotogrande. But then you see other projects such as waste collection in Colombia. In Chile, with the operation and maintenance of several roads or the cleaning of the Santiago Metro or subway. The Antofagasta maintenance operations (inaudible) building of several roads. Sacyr also is being awarded several contracts in different regional governments.

In the industrial division, we're able to grow by 1% reaching EUR 527 million, which was quite significant since its inception this year, we were able to reach EUR 527 billion (sic) [million] with a significant improvement in EBITDA 5% with a backlog of EUR 2.511 billion and an EBITDA margin of 6.9%. We were able to complete 2 major projects in Peru, for example, the oil and gas project in La Pampilla refinery in Peru or also in the case of electricity grids and transmission, we're also moving forward with some contracts in Chile and as for the industrial process plants, we are now completing an important cement plant in Bolivia. And then another one in Potosí and the Urban Waste Treatment Plant in Melbourne.

As for water, we are now about to complete the Sohar desalination plant project as well as another one -- another desalination plant in Ibiza and Tenerife respectively. Finally, as for power generation, average pool price was quite good, reaching EUR 57.3 per megawatt which again shows the good performance of the division. As for the main milestones, the inauguration of the 2 projects I've mentioned before. Well, we now -- I now give the floor back again to the Chairman.

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Manuel Manrique Cecilia, Sacyr, S.A. - Co-Founder, Chairman, CEO & MD [3]

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So based upon this trend of this strategy, that is performed by a highly commended professional team, we have been able to turn Sacyr into a relevant player in the markets and countries where we operate. The group is today, far more sustainable, much sounder and much more efficient. All these results that we have just presented to you, now reinforce our position to keep moving forward along the same lines, while chartering out a sustainable profitable future for shareholders, customers and employees. We shall now be pleased and ready to answer any questions that the analysts may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is by Philip [Leigh], (inaudible) Bank.

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Unidentified Analyst, [2]

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I have 3 questions for you. The first question is concerned with financing cash flows and conversion rate differences. Could you please give us a breakdown of that caption? The second question concerning Pedemontana, how much do they contribute to the annual sales and EBITDA. And finally, in the case of Chile, could you please clarify a little bit more, whether you are planning to sell any minority stakes in your projects in Chile?

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Carlos Mijangos Gorozarri, Sacyr, S.A. - CFO [3]

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Well, going back to the debt slide, you can see Repsol's dividends and then the dividends from the last quarter where we obtained $125 million. Then there is an adjustment in the amount of EUR 80 million due to conversion rate or exchange rate differences. So that's what accounts for such a difference. As for the Pedemontana-Veneta project revenue, comes -- it's $350 million EBITDA being EUR 95 million. So it's important to highlight the financial losses as the investment is accrued, the financial income is also accrued. In Chile the sale process is quite advanced already. We expect to close it in the second half of this year. There has been a great deal of interest shown by many investors. We are right now trying to homogenize all the different tenders we have received and decide who is the investor that will hold 49% in managing these assets.

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Operator [4]

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The next question is from Guillermo Fernández-Gao from Kepler.

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Guillermo Fernández-Gao Sánchez de Nieva, Kepler Cheuvreux, Research Division - Equity Research Analyst [5]

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First of all, I would like to know whether you could explain exactly why you were able to sell Itinere, whereas you had always pointed out that there were some precautionary measures taken by a judge. So what's the opinion of fulfilling this respect how come that you were able to do so. Then as for working capital, you talked about capital of EUR 184 million, how much corresponds to the score with recourse. And next question is how many dividends were considered within these

(technical difficulty)

concessions for 2018?

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Carlos Mijangos Gorozarri, Sacyr, S.A. - CFO [6]

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(technical difficulty)

As for the sale of Itinere, perhaps you remember, that there was a court in Madrid, a court of first instance that in September, notified some precautionary measures whereby we were not able to sell to Gateway. So a few days ago, on February 14 to be precise, such precautionary measures were lifted after a hearing. But not only did they lift such precautionary measures but also the other party was to pay for some compensation as well as legal expenses, court expenses. And the decision was quite firm. Apparently, according to the ruling, even if things change in the future, Globalvia was not awarded in favor for any reason at all. So that gave us a lot of peace of mind compared to what had happened in the past. However, a few days later there were some subsequent precautionary measures concerning the first arbitration procedure that had been filed 1 year ago as for the agreement among shareholders of Itinere. But we then succeeded Abanca at Scotiabank. So as part of such precautionary measures, Gateway was not able to correct any interim acquisition. 2 days ago, such precautionary measures were changed. Now the arbitration award said that Gateway could not actually buy a stake in Sacyr. It doesn't say anything about Sacyr, but it also stated that the court could not actually present Itinere Investco which is another third party that is not a party to the arbitration, could not actually undertake a stake in Sacyr. And as a matter of fact, nobody -- having said that, and after we consulted this with our internal and external legal advisers, they realized that the sale was absolutely feasible and therefore we decided to complete the act. And to be precise, that took place last night. Okay, now going to the other 2 questions. The questions regarding working capital about 20% of activities are with recourse and the others with no recourse, the right amount. And as for dividends coming from the different concessions, they reach EUR 60 million all in all.

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Operator [7]

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The next question is from (inaudible).

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Unidentified Analyst, [8]

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Well, I have several questions. The first question, again, going back to Slide 18 and talking about debt evolution, you mentioned different financing flows. Well, all that corresponds to cash, right, derivatives -- all that is cash, is that right? The second question is a follow-up question. Please clarify with regards to other operating cash flows and taxes, there is an amount of EUR 350 million, what does that correspond to, those other operating flows? Regarding associated construction if I'm not wrong and taking into Pedemontana's contribution, the EBITDA margin for the construction business as such in 2018 has been 5.4%, which in the fourth quarter would imply at margin of 6.4%. I don't know whether I'm wrong or not with this calculation. I would like to know that if this percentage is correct, is it sustainable over time or thinking about 5% or 5.5% would be more reasonable. And then as for the equity invested in concessions in the amount of EUR 1.132 billion, I believe that you're still including Itinere because when you drew this up, the company had not been sold yet. So I just want to confirm that the amount stated is correct.

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Manuel Manrique Cecilia, Sacyr, S.A. - Co-Founder, Chairman, CEO & MD [9]

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Yes, let me answer because you hit the nail on almost everything. In the first case, we -- out of those, EUR 80 million corresponds to accounting differences, the rest corresponds to cash. As for the other operating flows plus taxes, this is mainly the adjustment that we had to carry out of financial asset contracts. This is not cash flow and therefore we had to adjust it accordingly during the contract development. That's why operating flow is what really matters because it offsets both effects. And then the calculations regarding construction, they are correct. We ended up with 5.4% with more than EUR 70 million in EBITDA, and the last quarter was particularly good with 6.4%. So whether this is sustainable or not, well some of the projects, which are currently are at way more than 50% going faster than concessions business, allow for more optimization than this, but are formalized with public clients. So I'm sure that -- of course, this is the target the company has as all construction awards become increasingly more steady and profitable.

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Operator [10]

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Thank you very much. There are no further questions.

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Manuel Manrique Cecilia, Sacyr, S.A. - Co-Founder, Chairman, CEO & MD [11]

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Well, if there are no further questions, we would like to extend our appreciation for attending this session and also for your interest. Many thanks, and have a nice evening.