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Edited Transcript of SRT earnings conference call or presentation 7-Aug-19 9:00pm GMT

Q2 2019 Startek Inc Earnings Call

DENVER Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of StarTek Inc earnings conference call or presentation Wednesday, August 7, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lance E. Rosenzweig

StarTek, Inc. - President, Global CEO & Director

* Ramesh Kamath

StarTek, Inc. - CFO

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Conference Call Participants

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* Mark Nicholas Argento

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities

* Patrick A. Schulz

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

* Omar Samalot

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for participating in today's conference call to discuss Startek's financial results for the quarter ended June 30, 2019.

Joining us today is Startek's President and Global CEO, Lance Rosenzweig; and the company's CFO, Ramesh Kamath. Following their remarks, we'll open the call for your questions.

Before we continue, we would like to remind all participants that the discussion today may contain certain statements, which are forward-looking in nature, pursuant to the safe harbor provisions of the federal securities laws. These statements are subject to various risks and uncertainties, and actual results may vary materially from those projections. Startek advise all the listeners to this call to review the latest 10-Q and 10-K posted on their website for a summary on these risks and uncertainties. Startek does not undertake the responsibility to update these projections.

Further, the discussion today may include some non-GAAP measures in accordance with Regulation G, and the company has reconciled these amounts back to the closest GAAP-based measurement. These reconciliations can be found in the earnings release on the Investors section of their website. I would like to remind everyone that the webcast replay of today's call can be available via the Investors section of the company's website at www.startek.com

Now I would like to turn the call over to Startek's President and Global CEO, Lance Zweig. Please go ahead, sir.

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Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [2]

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Thank you, Jonathan. Good afternoon, everyone, and thank you of all for joining the Startek 2019 Second Quarter Earnings Call. Last month marked the 1-year anniversary since our business combination with Aegis, and I can proudly say that our business has considerably transformed over these last 12 months.

We have appointed a new global leadership team, added global scale and operational synergies to enhance margins and profitability, implemented a new client-centric management model that has led to improved client satisfaction and repositioned Startek as a premium provider of tech-enabled customer experience management for high-growth companies. And through some key new client wins, we have set the stage for future growth. In summary, we have taken what was once a very volatile and declining business and have established stability and predictability of results.

This stability has been further aided by the diversification of our clients and revenue. For perspective, our nontelco verticals accounted for 59% of revenue during the second quarter compared to 51% in all of 2018. We have been keenly focused on targeting new clients that we can grow with, both organically by nature of their own growth, but also by cross-selling services and geographies. This execution has enabled us to consistently expand gross margins every quarter since the business combination last year, which also reflects our commitment to being a premium provider in the industry and no longer focusing on the mass market.

While consistently and significantly improving our financial performance, we are also reminded every day that our people drive our success. In that regard, we are thrilled to have been recognized by Aon as a best employer in India, among 16 of India's leading companies across industries that have been bestowed with this honor. I would like to thank and congratulate our passionate team and leaders for creating the vibrant workplace and in fostering our mission of being an employer of choice across the globe.

As you may have seen in June, we have been added to the Russell 2000 index at the conclusion of the indexes' annual reconstitution. We are proud to have come this far as a public company and expect this new index addition to provide increased awareness to the broader investment community going forward.

Now that we have completed the 1-year anniversary of our business combination and are on to the next phase of growth, we believe it is appropriate to bring uniformity to our branding across geographies to better reflect the combined businesses, which we are planning to implement in the coming weeks.

In addition to bringing uniformity to our branding, we also felt it was important to bring uniformity to our global client operations. As such, we have recently appointed Rajiv Ahuja as our Global Chief Operating Officer. Rajiv is a multifaceted leader with decades of experience in our industry and a proven track record of taking customer-centric organizations to the next level. Rajiv has had very successful leadership roles with companies like Convergys, AOL and Dell. He was also with Aegis earlier in his career as President of ASEAN and ANZ.

Rajiv has reported directly to me in the past, so I know firsthand the outstanding leadership he will bring to our campuses and our client operations. We look forward to leveraging Rajiv's insights as we continue to instill a tech-enabled and collaborative culture at Startek.

Before wrapping up with the closing remarks, I would like to turn the call over to our CFO, Ramesh Kamath, to take you through Startek's financial results. Ramesh?

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Ramesh Kamath, StarTek, Inc. - CFO [3]

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Thank you, Lance. The quarterly results we are reporting today includes Startek and Aegis financials from April 1 through June 30, 2019. Due to certain limitations in regards to publicly available financial information, we are unable to provide the combined company financials from the year-ago period. As a result, we will not discuss year-on-year comparisons as we would be comparing the financials of two companies against one. Instead, we believe it would be more effective to highlight the quarter-over-quarter results with qualitative commentary about the general trends and drivers for each major item. As noted in our press release today, the comparative results for the quarter ending March 31, 2019, include both Startek and Aegis' results.

Now having said that, the total revenue for the quarter was $160.6 million compared to $161.1 million for the quarter ending March 31, 2019. The modest decrease in revenue from quarter 1 was primarily driven by seasonality as quarter 2 is typically the softest of the year. In fact, a modest sequential decline is actually a great accomplishment for our industry because we were able to offset some of this seasonality by growing with our clients that operate in high-growth verticals such as technology, next-gen retail, financial services, health care and travel.

Gross profit for the quarter increased slightly to $27.6 million as compared to $27.2 million in the first quarter, with the gross margin percentage increasing 30 basis point to 17.2% as compared to 16.9% quarter-on-quarter. Margins have once again improved sequentially, primarily due to the continued rollout of our new client-centric management model that has enabled greater client -- greater employee utilization across our global footprint.

SG&A for the quarter was $24.9 million as compared to $24.1 million in the quarter ending March 31, 2019. As a percentage of revenue, SG&A was 15.5% compared to 14.9% with the increase driven by continued investments in sales and technology. Net loss for the quarter was $3.6 million or a negative $0.10 per share as compared to a loss of $3.3 million or negative $0.09 per share for the quarter ending March 31, 2019. The slight increase in net loss was a return -- a result of the aforementioned increase in SG&A along with an increase in income tax expense.

Adjusted EBITDA for the quarter was increased to $11 million as compared to $10.9 million in the quarter ending March 31. As a percentage of revenue, adjusted EBITDA was 6.8% compared to 6.7%.

This concludes my prepared remarks, and I'll now turn the call back to Lance. Lance?

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Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [4]

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Thank you, Ramesh. As I mentioned earlier, with our 1-year anniversary behind us, I can confidently say that we are now into the next phase of our company's growth. This phase will further solidify our position as a global leader in transformative customer experiences. We have more than 45,000 customer experience experts across the globe, utilizing next-gen technologies like data science and machine learning to make every customer interaction unique and authentic. Enabling customer loyalty and success for our clients is the core of what we do, and we look forward to positioning Startek as the premier partner for the world's finest brands for years to come.

Jonathan, Ramesh and I will now open the call 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 line of Mark Argento from Lake Street Capital.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [2]

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Lance, just a couple ones for you here. I know it's been a year now, you guys have done a great job kind of integrating the 2 businesses, realigning kind of some of the key organizational structures. Can you talk about maybe specifically if you can or at least anecdotally some of the wins that you've had in terms of either realignment, client focus and then seeing an extension or expanding of business with a particular client? Just trying to see kind of that realignment at work. Any kind of anecdotes there? Any specific new business wins or expansion of relationships, that would be really helpful, both at a client level but also maybe talk verticals as well?

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Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [3]

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Sure. Thank you, Mark. It's an excellent question. And I'll answer it in two ways. First, with respect to our existing client base. And what we've seen as we've globalized our operations is some strong client successes in expanding to additional geographies and expanding to additional lines of business. And there were several clients I can think of in multiple verticals where we have had that successes. That's partially a function of outstanding performance by our operating teams, but it's also a function of our further global footprint and of our unified global enterprise.

Second, we've also seen the success on the new client front. We have, as been mentioned in the past, reorganized our sales team, so it's now a single global organization. We've brought in a new head of global sales, and all signs show that it's been a great success.

We have had successful new closes in multiple verticals, including some of our existing verticals as well as financial services and education and auto and telco. And we've been very pleased with how our global sales organization has been working together to achieve these results.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [4]

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All right. That's helpful. And in terms of a -- what's the traditional time to ramp or ramp period for when you initially kick these off to, say, kind of achieving 50%, 75%, 100% kind of run rate? How long you typically -- what's the gestation period?

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Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [5]

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Yes. It varies by the type of client. So given our focus on some of the world's finest brands, these are sophisticated growing companies. And so the launch time is a bit longer because it does take an enormous amount of IT integration and training, et cetera, to be up to the kind of world-scale levels that they require. So typically, we would see about a couple of quarters from when the ramp begins. And then usually those ramps themselves will last a couple of quarters. So we're sort of at full go after about a year from closing a deal.

That said though, another beautiful thing about these types of clients is that they have multiple lines of business that are available to us should we perform well, and the company has a history of doing that. So even when we grow a new contract up to its level, there's others coming. And we've seen that consistently, and we're really excited about the opportunity to grow these clients further, even beyond the initial SOWs that are signed.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [6]

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Great. That is helpful. So some of the new business that you've onboarded over the next 12 -- 3, 4 quarters that should start to materially kind of impact revenue run rates, obviously adjusting for seasonality. Is that the way to think about how we should see some of those new business onboarding?

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Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [7]

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Yes. That is a fair characterization.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [8]

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All right. And then maybe quickly, anything in terms of the Amazon relationship? I know that was a deal done before your time there, but maybe talk about to the degree and extent you can how that relationship is progressing, deepening, growing in terms of a percentage of revenue or contribution? Any kind of anecdotal things there would be helpful.

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Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [9]

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Sure. We do not discuss individual clients, but what I can say is that the next-gen retail category is a key growth target for us. And we have been seeing great growth and success in that vertical.

One of the things to note is that, that vertical does come with seasonality. So the retail business tends to grow and peak across Qs 3 and 4 and then slows down across Q1 and Q2. So we saw that seasonality in Q2, but given the overall strong growth of our business, we're able to mostly overcome it, despite kind of seasonal decline in that vertical.

But we're very happy with our clients in that vertical. We're very happy with the brands that they bring and the passion that they bring toward their customers and quite honestly the global sophistication and presence they have as sort of leading customer centric organizations. And we think that, that bodes well on us, both with those clients as well as with others that we are increasingly targeting.

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Operator [10]

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Our next question comes from line of Patrick Schultz from Baird.

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Patrick A. Schulz, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [11]

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Congrats on a great quarter. And the first question I had is, do you guys have any updates? I know you previously kind of laid out your $30 million synergy target. Do you have any updates on that?

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Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [12]

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Yes. So we mentioned a quarter or so ago that, that synergy target is -- over time, becomes increasingly difficult to calculate. And the reason I say that is that it becomes more and more discretionary to say whether this gain is a function of synergies or not a function of synergies. So we're not commenting publicly on that specific number.

But what I could say is that we are very happy with our progress relative to our existing -- relative to our initial targets that we've set with -- specifically with respect to synergies. So we're feeling very good about it. We're just not reporting specifically against it, given the sort of discretionary nature of that.

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Patrick A. Schulz, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [13]

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Awesome. Thank you. And then could you also remind us on what the -- looks like a $1.4 million income from noncontrolling interest is for the quarter?

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Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [14]

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Yes. Ramesh, why don't you take that one?

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Ramesh Kamath, StarTek, Inc. - CFO [15]

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Yes. We have investment in our Australian subsidiary there, small partnerships from them. And this is relating to that.

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Patrick A. Schulz, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [16]

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And then with SG&A, looks like it ticked up a little bit compared to Q1. Could we expect SG&A expense kind of to flatten out from here? This is as low as you think it can go?

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Ramesh Kamath, StarTek, Inc. - CFO [17]

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Though we don't provide forward looking, I think growth in SG&A is typical of the plan to increase in quarter 3 and 4 for the business seasonality that comes in. And as we mentioned in our script, it is also due to the increased investments we continue to make on sales and technology. But we definitely are not expecting or nor do we plan to be material increase that number. The idea is to move from one bucket to the other.

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Patrick A. Schulz, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [18]

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Okay. And then one final one for me. Interest expense is at $4 million now. Is that at a more normalized level? It's actually interest rates have kind of come down? Or could we see this tick down a little further going out forward?

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Ramesh Kamath, StarTek, Inc. - CFO [19]

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Actually, the interest in that is around $3.5 million, $3.6 million. The balances is, we have taken some interest rate hedge for our debt in Singapore and there was a foreign exchange loss against that. So if that stabilizes, then by just doing nothing, the interest cost will come down by that much. Other than that, I'm not expecting any change in the interest cost as we go forward.

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Operator [20]

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(Operator Instructions) Our next question comes from line of Omar Samalot, private investor.

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Omar Samalot, [21]

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So I noticed the -- there's an accounting item for -- of the warrant contract revenue. I imagine it's related to the basing of additional Amazon warrants?

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Ramesh Kamath, StarTek, Inc. - CFO [22]

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Omar, yes, you are quite right. It is relating to that warrant.

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Omar Samalot, [23]

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Okay. So I know you don't want to touch that -- commenting on that stuff, but it -- obviously, as the way that agreement works it means that it has or will reach a minimum revenue threshold for the time period that is against determining that warrant. Is that a fair assumption?

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Ramesh Kamath, StarTek, Inc. - CFO [24]

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Absolutely. You are quite correct. And once that is reached, we had to do a Monte Carlo evaluation from an outside consultant and ensure that we book it, just like we did the first $2.5 million.

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Omar Samalot, [25]

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Okay. Got it. And I also noticed a small amount from restructuring costs, could you maybe comment a little bit on that?

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Ramesh Kamath, StarTek, Inc. - CFO [26]

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You said the right word, it's a small amount. We closed 1 small site in the U.S. and there is some amount of employee restructuring that we have booked. So these are -- I mean a large part of other severances we now expense it off, but anything which is specific that is part of restructuring will go there. Again, having said that, we don't expect a big jump that we had when we began the merger.

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Omar Samalot, [27]

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Okay. Good. And I was trying to find a net debt balance for the quarter. I wonder if you had that handy.

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Ramesh Kamath, StarTek, Inc. - CFO [28]

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No. The net debt is not down for the quarter. It is up, I think, about less than $0.5 million. I don't have the exact number handy with me. I had opened it a few moments back, but it's not gotten down. It's a little higher. That's again come from the fact that our usual expenses on growth are now coming up, but we are not too much out.

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Omar Samalot, [29]

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Okay. Well, I mean, from my point of view, this is -- this looks like a pretty good quarter, higher quarter-over-quarter revenue, when you put aside that warrant accounting, and unusually a down quarter for this industry, so that's pretty good. And also higher gross margin, that 17.5% (sic) [17.2%], that's pretty good. It seems higher revenues and new business growth, I really want to congratulate you guys.

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Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [30]

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Thank you, Omar. Really appreciate your comments.

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Operator [31]

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And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Lance Rosenzweig for any further remarks.

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Lance E. Rosenzweig, StarTek, Inc. - President, Global CEO & Director [32]

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Thank you, Jonathan, and thank you all for joining us this afternoon and for your continued support for Startek. We will be at that 2019 Annual Gateway Conference in early September to meet with investors, and we're always happy to make ourselves available by phone. So if we don't speak then, we look forward to speaking you next when we report our quarterly results in November. Thank you very much.

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Operator [33]

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Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.