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Edited Transcript of TOKMAN.HE earnings conference call or presentation 30-Oct-19 9:30am GMT

Q3 2019 Tokmanni Group Oyj Earnings Call

Mantsala Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Tokmanni Group Oyj earnings conference call or presentation Wednesday, October 30, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Markku Pirskanen

Tokmanni Group Oyj - CFO, Deputy CEO & Member of Executive Board

* Mika Rautiainen

Tokmanni Group Oyj - CEO & Member of Executive Board

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Conference Call Participants

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* Nicklas Skogman

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Tushar Jain

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [1]

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Good morning, and a warm welcome to Tokmanni's Q3 presentation. My name is Mika Rautiainen, and together with me to do the presentation is Tokmanni's CFO, Mr. Markku Pirskanen.

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Markku Pirskanen, Tokmanni Group Oyj - CFO, Deputy CEO & Member of Executive Board [2]

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So welcome from our side -- or my side also.

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [3]

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I will first go through the Q3 highlights, and Markku will then dive deeper with the numbers. And then we have time for questions. So this is basically the plan to go forward.

And first of all, I'm very, very pleased to present good results of Tokmanni's third quarter. Obviously, it's only a 3 months period, but it's very important for the whole company, already the second quarter in a row, to see that we're taking the right actions with the business.

So we had -- about the highlights. We had strong growth in sales. Sales developed favorably in all product categories, especially those which are very important for Tokmanni in those destination categories.

Sales were also supported by tax refunds, and maybe I should explain a couple of words about this Finnish taxation system. Already tens of years, the government paid the tax refunds from the previous year in the beginning of December. And this is the -- 2019 is the first year with a little bit changed system. Basically, the tax refunds are being paid in the beginning of August, September, October, November and December. And the biggest part of the tax refunds were being paid in the beginning of August and September. So from our point of view, this has supported, for example, the nonfood business in Finland in total. And we also could see some support in Tokmanni figures.

And then, of course, strong growth with the EBIT. The improvement, basically -- the gross margin improvement was due to sales mix and higher sales of private labels and direct import products. And with the sales mix, I am referring to especially good sales in the destination categories of Tokmanni. And we also could continue with the relative share of operating expenses decreased and basically decreased the share of operating expenses. And that, of course, led to the growth with EBIT as well.

I'm very happy to thank Tokmanni people for a good job basically done during -- also during the third quarter.

About the figures regarding the third quarter. As mentioned already, all product categories were performing well. Revenue grew by 9.9%, where last year was 7.8%. Tools, leisure and home goods, interior decoration and garden products, we had very, very strong sales. And for example, when compared with food products, these were a much stronger growth, and that also showed with the gross profit.

Of course, very happy about the result for like-for-like revenue increase, which was 4.9%, when last year was 4%. So last year, already a strong growth with like-for-like revenue. This year, even better on the third quarter.

And well, we have been targeting to improve gross margin. And during this third quarter, we already managed to improve it or make a clear improvement, ending up with 35.4% gross margin during the third quarter. And the comparable EBIT was EUR 21.9 million, where last year, it was EUR 15.5 million. So we reached 9.5% EBIT of revenue for the third quarter. Earnings per share were EUR 0.27 compared to last year's EUR 0.17.

And then when it comes to the year this far, from January-September, business basically proceeding according to the plan. However, during the first quarter, of course, there was an effect from these store conversations (sic) [conversions] from the acquisitions, and the result was the first quarter was a little bit more difficult. But the second and the third quarter were already according to the plan. And this far, after 9 months, we've had revenue growth of 9.5%, where last year was 9.9%. So very, very good growth for Tokmanni. As well as with the like-for-like figures with revenue growth was 4.9% compared to last year's very high 5.9%.

And the first quarter, gross margin-wise, was a little bit more difficult, but already now we are, with the result after 9 months, with the improved gross margin level of 34.1%, where last year was 33.7%. And clear improvement with EBIT of EUR 38.4 million compared to last year's EUR 26.6 million. Earnings per share were EUR 0.41 compared to last year's EUR 0.27.

Basically, the driver for 2019 has been improving profitability. And we'll continue that, of course, during the last quarter as well, meaning improving gross margin. We are working a lot at the moment with private labels and direct imports. Markku will show a little bit more about the figures regarding private labels and direct imports, but we are proceeding with this part and we're happy about it.

And reducing the share of operating expenses, it's proceeding according to the plan, especially when it comes to real estate and maintenance costs and store personnel costs. But we still do have a lot to do with the supply chain management, which will be also in our focus for 2020.

And of course, developing online business is a crucial part for our business as well. At the moment, all preparations has almost been finalized for Black Friday, which is, of course, the highlight of the year. And at the same time, we're launching new tools and also some methods, trying out some express deliveries to improve our customer experience with online business.

And here's the figures from the Finnish Grocery Trade Association. This -- it has been noticed that these figures, they don't include the online retail sales at all. But with the red curve, you can see the Tokmanni market developments, sales development. And with the black one, it's all non-grocery operators in Finland. And from our point of view, the Q3 development for all players in the Finnish market, we feel that this is supported by the tax refunds, at least partly. But anyway, very good development with nongrocery market in total.

So then it's about time for Markku to dive deeper with the figures. Please?

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Markku Pirskanen, Tokmanni Group Oyj - CFO, Deputy CEO & Member of Executive Board [4]

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Okay. Thank you. Let's look a little bit deeper with figures and then taking some graphs there. Mika already, of course, mentioned the main figures and then the -- but let's go forward.

Starting from revenue. Here is the graph which includes a little bit history, basically 5 years' time backwards. And we are seeing here '15 -- years '15, '16 and '17, that our growth has been quite modest and even negative when we are speaking about the like-for-like revenue. But the actions, what we started to do at the end of 2017 and beginning of 2018 by emphasizing the customer confidence, putting some -- putting cheap prices has a very important role and also making some wider product assortment or actions to make it wider, it seems to be that they have been very, very right decisions. And then already in 2018, we achieved good growth figures. And now we have to be very, very satisfied that also the development has continued during 2019.

And when we are looking at the Q3 figures, the total growth was 9.9% and then the organic growth or like-for-like growth was 4.9%. Basically, it continues the same development, what we had during the first half of 2019. And now looking at the 9 months figure, we are at the level of 9.5% as a total growth, and then in like-for-like revenue, growth was 4.9%.

So the next slide. I always like to remind that Tokmanni's business is very seasonal. And now looking at the graphs here, we are really seeing that the first quarter is the lowest when we are looking at revenue and also the profit. Profit point of view, the second and third quarter are always about the same level, and the fourth quarter is clearly the most important for our company.

As said, these forms are looking about the same when we are looking at different quarters. But of course, when looking the graphs, during 2019, they are now a bit higher level compared to 2018. And the EBIT for Q3, EUR 21.9 million, compared to last year's EUR 15.5 million was very nice development.

Next slide, our comparable gross profit. And we have said and we have set the target to improve percentage-wise our gross profit. And now during Q3, we achieved a good growth in our percentage. And 1.2% is quite a big jump. But why it came? It really is coming from our sales mix. And we were basically able to sell the products with the product groups with a better margin percentage. And of course, at the same time, we have to remember that when we are looking our sales mix, that it is also in relation how well we are able to sell the private labels or how well is our direct imports developing. And now with all parts there developing well, and that's why we ended up to the good development in our gross profit percentage.

And happily, I have to say that also now, we are also cumulatively on higher level compared to 2018. So after 9 months, the gross profit margin is 34.1% compared to last year's 33.7%.

One or 2 important drivers for developing our gross profit margin is, as earlier said, private labels and direct import. And here, you find the numbers for that issue. And looking this left-side circle, we see the Q3 development. And we are able to see that our private label share was 31.8% compared to last year's 30.9%. And below the circle, you can find the development during the first 9 months. And we have to say that, here, we are still a bit lower level compared last year. The cumulative figure is 30.9% compared last year's 31.1%.

And looking at our direct imports' share, we can find -- which is this right picture here or right graph, we can find that the jump was also quite a big one, ending during Q3 to 25.7% compared last year's 23.6%. And cumulatively, we are now over last year's figures, ending up 24.2% compared to 23.4%.

And as said, we have to remember that this is in relation to what kind of products we are able to sell. And of course, at the same time, we have to remember that we have made different kind of actions to achieve higher percentages here. And then somewhat, when we are looking these results, I have to say that at least in some actions we have managed quite well.

Other target for us is to improve operating expense ratio. And here, you can find that during Q3, we managed well. We ended up with a ratio which is 19.7% compared to last year's 20.6%. So looking the cumulative figure, we are also on lower level, which is 21.8% compared last year's 22.6%. And I have to say that we are now on the right track. But still, we are doing different kind of actions to improve this one. So we are on our way but still work to be done.

And next slide, about our EBIT. This is basically, of course, the result about the revenue growth, improving margin and better OpEx ratio. And looking at Q3, as already said, ending up EUR 21.9 million compared to 15.5% -- sorry, EUR 15.5 million last year. And especially looking at the percentages here, now we achieved 9.5% compared to last year's 7.4%. But of course, when looking the cumulative figures here, we are still -- or we achieved, after 9 months, 5.8%, and last year was 4.4%. But of course, we still have to remember, as I mentioned during -- when looking at the seasonality, that Q4 is the most important quarter for us. So as said, still work to be done for this year.

Balance sheet and financial position here. You can see here that our inventories has increased, now at the level of EUR 237 million compared to last year's EUR 202 million. And basically, there are 2 wide natural explanations or explanations, what I have told you also earlier: the growth in store network and also this -- that we have made a wider selection of our products. That's the 2 issues which affected. But now during Q3, we made also a decision that we take products earlier to our store to guarantee that we are able to have the products also in our stores when we are starting to make for Christmas season sales. And that should make us in a better position to make a better Christmas sales. And this was the decision that we made, and now you can see here that we have a bit higher inventory compared to revenue, what we had last year.

Other thing which I can pick up here is that our interest-bearing debts, which totaled at the end of period, EUR 424 million. And as a reminder, this is with IFRS 16 standard, which increased our debts very much when we put our rental agreements to the balance sheet, but at the same time, picking up what is our so-called real interest-bearing debts to banks. It's at the level EUR 118 million, which is roughly 1/3 out of our total net debt figure.

Ratio of net debt to comparable EBITDA is now at the level of 3.4. And our long-term target for this figure is 3.2, So we were -- or are now quite near on that figure.

And about our net capital expenditures. After 9 months, we are at the level of EUR 11.9 million compared last year's EUR 10.9 million. And as said here, that we are expecting to be around at the level of EUR 15 million during 2019.

And now I transfer speech to Mika.

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [5]

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Thank you, Markku, for the analysis. So as already -- as we both already mentioned, the fourth quarter is the most important quarter for Tokmanni both sales and result-wise. But we are confident to update the outlook for 2019 revenue. And the update is basically, we updated the good revenue growth to strong revenue growth in total for 2019. And the like-for-like revenue growth, we update to good instead of slight growth for 2019. So this is the change.

Of course, the guidance for the profitability has been for the whole year. Group profitability is expected to improve on the previous year. So we are sticking to this guidance for the rest of the year.

We've been talking about already by the end -- in the end of last year, we mentioned that we will be launching 2 new private label series. After summer, we launched Pisara, a new personal hygiene private label range. It has been very successful during the first months. And right now, actually it was last week when we launched a new Perfekt+ private label range for everyday products: laundry, dishwashing and cleaning. Price and quality-wise, both Pisara and Perfekt+, are, from my opinion, the best price quality, basically value proposal in Finland. But anyway, this Perfekt+ is still very new, so we don't really have like the actual results. But regarding Pisara, we are very happy about sales of Pisara.

And basically, the financial statement review for 2019 will be published on the 7th of February 2020. And here is just a picture. We started in the beginning of September a cooperation with Finnish Red Cross, and it's according to Tokmanni's sustainability strategy. We're very happy about it because we have 189 stores at the moment. By the way, there will be 2 more store openings this year. So by the end of the year, we will have 191 stores in all over Finland. And we are -- in all these stores, we are able to work together with the local Red Cross. And it's already -- right now, it's already -- it shows that it fits in with Tokmanni very well.

So thank you very much. And operator, now it's time for questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Vishal Jain (sic) [Tushar Jain] from Goldman Sachs.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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This is Tushar from Goldman Sachs. I have 3 questions. There's 3 questions on my side I'm going to put one by one, if that's fine.

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [3]

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Okay.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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So the first one is I just want to understand what's the impact of tax refund earlier? And primarily, can it be a sort of a headwind when you talk about Christmas trading given the importance of fourth quarter?

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [5]

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Sorry. I need to ask one more time. You were referring to tax refunds, yes?

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [6]

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That's correct. And can it have a material negative impact over Christmas trading given pull forward of demand?

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [7]

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Yes. Of course, we -- as mentioned earlier, it has been a tradition for tens of years that there is like this tax refund in the beginning of December. And I think that it has boosted Christmas sales every year basically. So right now, we're basically missing the peak of these few days. But let's say -- let's put it this way, that the -- so we think that we are going to miss the peak in the beginning, those 2, 3 days in the beginning of December. But on the other hand, the economic situation in Finland is actually good. So -- and Christmas still has a big meaning. So I think that there will be an effect. Of course, we don't know yet how big it will be, but we're -- we think that we're going to survive with this, losing this peak anyway.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [8]

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That's very helpful. My second question is on private label and direct import. I mean we clearly have seen pickup, as you mentioned as well. Is this -- just trying to understand, is there some one-off benefits kicking in? Or this is more structural, that now you will get this kind of uplift for next 3 years?

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [9]

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Well, of course, I know Tokmanni history from -- close to 2 years' time, but I think that it has always been about private labels and direct imports. And I think that during the last 2 years, we have been working quite systematically with both areas. The private labels, the new private label ranges are, for the moment, it looks as they're successful. Next year, we will take a lot more systematic approach developing the private label ranges, especially in Tokmanni destination categories. At the moment, we're -- of course, we're working quite hard with improving the direct -- or growing the direct imports. And I just came back from China last weekend myself. We were there with the Canton Fair together with Europris and ÖoB from Sweden. And at the moment, the Nordic market: Finland, Sweden, Norway, due to trade war, the Nordic market is a stable and a good market. It seems very good from the Chinese suppliers' point of view. So we will be, of course, working very closely with our suppliers to grow with the direct imports.

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Markku Pirskanen, Tokmanni Group Oyj - CFO, Deputy CEO & Member of Executive Board [10]

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Yes. One comment. As Mika already mentioned, it's -- for private labels, it's clearly the systematic work what we have to do because basically -- and then going forward step-by-step because basically, of course, always, it's customer's choice. And we have to make it so that customers will choose a bit more often our private labels compared to a brand product. But that work will happen step-by-step. So as you said or you make a question, is it for next 3 years? Of course, it's coming for the future. But we are going forward, as said, step by step.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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Got it. Makes sense. And my final question. In terms of your improvement in the supply chain, just wanted to check, is there a risk of disruption there? I'm just trying to understand what kind of improvements you're making in supply chain. And can it lead to some sort of a disruption?

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [12]

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Well, the improvements with the supply chain management in total, it's like a huge area. But as a discounter, that's something that we really have to make a lot of efforts to make sure that we're working in a very fluent and fast and lean supply chain management. Of course, we're -- for example, when it comes to Far East imports, we're working with the amount of harbors. So we're reducing the, how do you call it, unfortunately, my English is not that good with the logistics part, but a logistics wording. But anyway, I think we have -- at the moment, we have too many harbors. We're using too many harbors, for example, in China, which means that we are not getting full enough containers. And we're going to reduce the amount of harbors to make sure that we have full containers and we're being more efficient with that port.

And of course, when it comes to -- Markku already mentioned that we -- the -- Markku mentioned about our warehouse and the amount of goods at the moment, that we're on a very, basically, a very high level of inventories because we wanted to start Christmas earlier. But next year, I think that we should start it even earlier, especially with this big seasons like Christmas and springtime. We should just start it earlier to make sure that the things with the -- also, with our stores and store replenishment works even better. So these are just parts of the supply chain management. And of course, the warehouse efficiencies, that's one part as well. So there are like several parts or sections, or how would you call it, that we need to improve. Unfortunately, it's not like a fast thing to do. But I think -- I feel that we're on the right track right now.

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Operator [13]

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(Operator Instructions) Our next question is from Nicklas Skogman from Handelsbanken.

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Nicklas Skogman, Handelsbanken Capital Markets AB, Research Division - Research Analyst [14]

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I have 2 questions. The first one is on the inventory side. Do you expect to see the traditional sort of sequencing of ending the year on a lower inventory than you had in Q3?

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Markku Pirskanen, Tokmanni Group Oyj - CFO, Deputy CEO & Member of Executive Board [15]

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Yes. Clearly, clearly, from -- or if you look from euro point of view, it will come downwards because Christmas sale starts and we are selling normally more stuff during Q4. Yes, that should be the direction.

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [16]

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If I can add just that -- like at the moment, we have all the Christmas goods either in our warehouse or in the stores. And from now on, we're basically in the peak with the inventory's level. So from now on, it's going to start going lower.

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Nicklas Skogman, Handelsbanken Capital Markets AB, Research Division - Research Analyst [17]

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Okay. Perfect. And then I'm looking at your other operating expenses. They were down 2% in Q2 year-on-year. Now they're up 2.5%, which is sort of below what it was a couple of quarters ago. So are we -- is it this sort of 3% growth level we should be expecting? Or is there anything extraordinary also in Q3? Because I think in Q2, you said you had some services contracts that you had renegotiated that helped you on the costs side.

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Markku Pirskanen, Tokmanni Group Oyj - CFO, Deputy CEO & Member of Executive Board [18]

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Yes. Of course, as I said earlier also, that we have basically taken the easy parts of decreasing the savings -- or decreasing the costs. And going forward, of course, we have to be -- as a discounter, we have to be very careful with the costs and keep them in very, very good control. And that, of course, means that we are in every place negotiating. But it's always very difficult to get it at the lower level in euro point of view. But at the same time, when you are keeping them in a good control and your revenue is growing, it, of course, means that your ratio will improve. And that's, of course, what we are targeting to do. But as said, at the same time, the easy path has been taken.

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Nicklas Skogman, Handelsbanken Capital Markets AB, Research Division - Research Analyst [19]

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Okay. And then one last one perhaps. On the -- what sort of average price difference between the private label good versus a branded one? I'm just trying to think about the potential impact on like-for-like sales from people moving to private label instead of the branded ones. Of course, it's going to help your gross profit and gross margin, but I'm just interested in the top line effect.

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [20]

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Yes. First of all, you're obviously on the right track. This might, of course, affect in very near future. But these private label ranges that we've just been launching for personal hygiene and then this cleaning -- Perfekt+ cleaning products and things like this, I think it's very important for us to have these private label ranges because then, we are -- in Finland, with these products, we are on a very, very, very competitive price level to start with. So yes, it might, of course, affect like on the unit price because it is clearly lower than with the A brands. But at the same time, I think that we are like price, more -- much more price competitive with our competitors. So we also feel that we will increase with satisfied customers with our new product ranges. And this, of course, with Pisara, the personal hygiene range, that's also something that we've already seen already that our customers are -- they have noticed this price-quality value basically, that it's very, very good compared to our competitors. But yes, you're absolutely right. We have to take this to consideration that the private labels are with the lower price level. It's very difficult to give you a percentage because it differs with -- in different product groups. So sorry, there is no one clear percentage difference between private labels and A brands.

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Markku Pirskanen, Tokmanni Group Oyj - CFO, Deputy CEO & Member of Executive Board [21]

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But the difference is clear. That's for sure.

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [22]

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Yes. For sure Yes. that's true.

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Nicklas Skogman, Handelsbanken Capital Markets AB, Research Division - Research Analyst [23]

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Okay. And your home and personal care, is that still around 16% of revenue? Or...

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Markku Pirskanen, Tokmanni Group Oyj - CFO, Deputy CEO & Member of Executive Board [24]

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Sorry?

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Nicklas Skogman, Handelsbanken Capital Markets AB, Research Division - Research Analyst [25]

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The home and personal care category, is that still 16% -- or maybe that was 16% of SKUs actually.

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Markku Pirskanen, Tokmanni Group Oyj - CFO, Deputy CEO & Member of Executive Board [26]

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We have not published these figures. So unfortunately, I can't comment on that figure.

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Operator [27]

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And as there are no further questions, I will hand the word back to the speakers for any final comments.

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Mika Rautiainen, Tokmanni Group Oyj - CEO & Member of Executive Board [28]

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Okay. Thank you for very much. I can just say that if you have a chance visiting Finland during this Christmas season, please come and visit Tokmanni stores and see how we're doing with the Christmas sales. Thank you. Thank you very much.

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Markku Pirskanen, Tokmanni Group Oyj - CFO, Deputy CEO & Member of Executive Board [29]

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Thank you.