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Edited Transcript of VNCE earnings conference call or presentation 12-Sep-19 8:30pm GMT

Q2 2019 Vince Holding Corp Earnings Call

New York Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Vince Holding Corp earnings conference call or presentation Thursday, September 12, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amy Levy

Vince Holding Corp. - VP of IR

* Brendan L. Hoffman

Vince Holding Corp. - CEO & Director

* David Stefko

Vince Holding Corp. - Executive VP & CFO

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Conference Call Participants

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* Dana Lauren Telsey

Telsey Advisory Group LLC - CEO & Chief Research Officer

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Presentation

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Operator [1]

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Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Vince Q2 2019 Earnings Conference Call. (Operator Instructions) Thank you.

I'll now turn the conference call over to Amy Levy, Vice President, Investor Relations.

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Amy Levy, Vince Holding Corp. - VP of IR [2]

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Thank you, and good afternoon, everyone. Welcome to Vince Holding Corp.'s Second Quarter Fiscal 2019 Earnings Conference Call. Hosting the call today is Brendan Hoffman, Chief Executive Officer; and Dave Stefko, Chief Financial Officer.

Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that the company expects. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any financial information discussed on the call.

After the prepared remarks, management will be available to take your questions for as long as time permits.

Now I'll turn the call over to Brendan.

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Brendan L. Hoffman, Vince Holding Corp. - CEO & Director [3]

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Thanks, Amy. We were very pleased with the strong top and bottom line results we achieved in the second quarter. We are particularly excited to see the multiple initiatives that we have undertaken come together, resulting in strong results across the business.

Summarizing our second quarter results. Net sales grew 13%. Gross margin expanded 480 basis points to 48.7%, and our operating performance improved $4.4 million to $2 million profit as compared to an operating loss of $2.4 million in the same period last year.

We delivered strong performance across all channels with double-digit sales growth in our retail and wholesale channels. We continue to gain momentum season after season as customers respond favorably to our seasonally relevant, beautifully designed and crafted collections. We believe that the combination of our elevated product assortment, marketing campaigns that communicate our brand DNA and enhance shopping experience is driving transactions in our direct-to-consumer business as well as enabling us to expand our presence in our wholesale doors, where we have become a market share leader in the space.

In our direct-to-consumer segment, revenues increased 11%, attributable to a 7% comp increase in the 2 new store openings since the end of the second quarter last year. We saw positive comps across our full-price and outlet stores as well as exceptional strength in our e-commerce channel. Our momentum in our business strengthened throughout the quarter and has continued into the third quarter. We expect strong trends to continue through the second half as we expand our offerings in key categories within apparel where we were underpenetrated last year and maintain a consistent offering of seasonally relevant, beautifully design product. We will also continue to test new product categories as we look to fulfill the lifestyle needs of our customers.

Our wholesale channel revenue grew 15% in the second quarter. We are excited to see the broad-based strength across our department store partners, specialty retailers and third-party e-commerce site here in the U.S. and around the world. Our brand performed extraordinarily well at Nordstrom's anniversary sale. We are also now fully functioning on dropship with our major department store partners, which helped drive sales during Nordstrom's annual sale. We believe this functionality will continue to fuel incremental sales and favorable margin rates over the long term.

Looking ahead, we remain focused on advancing our strategic initiatives, which include driving growth through our direct-to-consumer business as we continue to expand our store base in the U.S. and strategically enter international markets, increase market share within the wholesale channel, test new product categories and define our customer journey while refining our marketing efforts to drive traffic and conversion in our stores and on our website.

We continue to expand our retail presence as well as drive strong growth in our e-commerce channel, both of which have significant growth potential. Our Santana Row store in San Jose, California, which opened in early August, is another great location that is off to an exceptional start. We also recently opened our Aventura Mall store in Miami and are excited to be opening our Midtown Manhattan store later this month as we believe this is an another opportunity to further capture walkaway business from exited doors as well as to increase brand recognition in this highly traffic area. Our Prince Street expanded location reopened in early August, and we are excited to be offering an elevated shopping experience in a beautifully designed store with an expanded merchandise offering.

Our real estate strategy, which we began 2 years ago, has been centered largely around short-term leases, and we are excited to build on this success. The payback period for these short-term leases is exceeding our 2-year target and generating strong cash and cash returns. To that end, we've already extended 4 of these leases based on their performance and plan to open 1 additional new store before year's end. We will continue to opportunistically open stores across the U.S. while maintaining the flexibility in our leases to ensure we drive improved profitability across our store base.

Turning to our international opportunities. Later this month, we will be opening our first company-operated store outside the United States in the South Kensington area of London. We believe this is an ideal market for Vince given our strong performance with shops opened with Harvey Nichols and Selfridges over the last 18 months. This is an important step in driving awareness for the Vince brand as consumers experience our easy luxury style firsthand. We kick-start our influencer program in London, focusing on male and female influencers local to this market to further fuel brand equity.

We have recently been exploring entrants into the China market, where we have also seen many of our luxury peers successfully build real estate networks and develop a strong e-commerce presence. There is a healthy appetite for fashion luxury in this region, where we believe the Vince brand will have strong appeal. I have recently visited China to evaluate the market opportunity, and I'm excited about the growth potential. We are in the later stages of choosing a new, experienced partner to help us launch in this market in fiscal 2020.

Turning to our marketing initiatives. We remain focused on compelling seasonal campaigns to drive customer engagement. For fall, we launched our first campaign highlighting a group of California creatives, including artists, photographers, actors and filmmakers with deep connections to the California region. This campaign features a series of short films providing an opportunity to share unique storytelling and communicate Vince's California DNA. The campaign is also featured on social media and print, including New York Times, T Magazine, General Women and Fantastic Men, digital advertising and vince.com.

We continue to invest in proven media partners, including the New York Times, goop and Condé Nast expanding on creative, impactful custom content, experiential moments such as exclusive events. For example, we partnered with goop on a pre-fall editorial that showcases Vince as the summer's go-to for luxury -- luxurious relaxed looks. The partnership was celebrated at goop's Sag Harbor, New York location boosting an -- posting an influential guest list with our creative director, Caroline Belhumeur, joining host, Gwyneth Paltrow.

We are also pleased to have reintroduced the direct mail catalog. This is designed to drive full-price sales to a targeted customer group who's motivated by new product.

We have begun to drive more efficient digital marketing spend for more sophisticated August -- audience segmentation, resulting in increased click-through rates and decreases in cost per session. We saw positive results by behaviorally driven e-mail segmentation as we are delivering more meaningful and relevant messaging to the various customer segments, resulting in higher AOVs and conversion. We started the process of building out more robust CRM and CEM capabilities and are currently defining the future customer journey. We will focus on acquisition and retention goals towards becoming a customer-focused direct-to-consumer omnichannel organization. This will tie into our efforts to build behaviorally triggered e-mails and direct mail communication.

Vince Unfold, our subscription model launched in Q4 of last year, continues to gain momentum. We are seeing steady growth and new sign-ups to receive unlimited access to a broad selection of our women's apparel. As we were early adopters in this model, we are pleased to see a growing number of brands launching an online subscription service. This furthers our confidence that subscription services align with the way the customers shop and offer an additional growth avenue for our brand.

Finally, as we mentioned last quarter, we may explore potential acquisitions that we believe are complementary to the Vince brand, where we see opportunity to drive growth as well as gain strategic and operational synergies.

As we continue to monitor for updates on current and pending tariffs related to List 4, we have been implementing mitigation efforts including accelerating shipments, which we started in the second quarter, and continued negotiations with our vendors who have been good partners in working with us on pricing. We also do plan to strategically increase prices on select items where we believe we have some elasticity. Longer term, we will also be looking at other sourcing opportunities. However, quality remains paramount, therefore, we will remain disciplined in the process.

In summary, we are extremely excited to see the strategic initiatives that we have employed coming together to drive strong top and bottom line performance. We expect the recent momentum to continue into the second half and beyond outside the tariff pressures. Moreover, we are working diligently to offset the tariff increases announced today and therefore do not expect these cost pressures to have a meaningful impact in our financial results in fiscal year 2020.

Having stabilized the business and created a strong foundation, we believe we have meaningful opportunity to drive long-term sustainable growth by expanding our brand presence in the U.S. and international markets, continuing to gain market share in the wholesale channel and extending our brand awareness through our direct-to-consumer channel and marketing strategies.

With that, I'll turn it over to Dave.

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David Stefko, Vince Holding Corp. - Executive VP & CFO [4]

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Thank you, Brendan.

Second quarter consolidated net sales increased 13% to $71.4 million compared to $63.1 million in the same prior year period. Our wholesale channel sales increased 14.7% to $43.4 million, primarily due to the acceleration of seasonal wholesale shipments. Our direct-to-consumer segment sales increased 10.6% to $28 million in the second quarter. While comparable sales, including e-commerce, increased 7.1% due to an increase in transactions and in average dollar sale.

Gross profit in the second quarter was $34.7 million or 48.7% of net sales. This compares to $27.7 million or 43.9% of net sales in the second quarter last year. The 480-basis-point increase in gross margin rate was primarily due to product mix, efficiencies in the product development cycle and sourcing initiatives.

Selling, general and administrative expenses in the quarter were $32.8 million or 45.9% net sales as compared to $30.1 million or 47.7% of net sales for the second quarter of last year. The increase in SG&A dollars was primarily a result of increased compensation and benefits partially related to the growth in stores, increased marketing investments, costs associated with enhancements to our e-commerce and Vince Unfold platforms as well as higher occupancy costs related to new stores.

Operating income was $2 million or 2.8% of net sales compared to our operating loss of $2.4 million for the second quarter of fiscal 2018. Net income for the second quarter was $1 million or $0.08 per diluted share compared to a net loss of $3.8 million or $0.33 per share in the second quarter of last year.

Moving to the balance sheet. We ended the second quarter with $52.1 million of borrowings under our debt agreements. This is a decrease in our overall borrowings under our debt agreements of $12.3 million since the same period last year and was primarily the result of a $9.4 million decrease in net borrowings under our revolving credit facilities and a $2.9 million of net repayments to the term loan facilities.

Capital expenditures for the quarter were $1 million primarily attributable to new stores. At the end of the quarter, we operated 60 stores in the U.S., reflecting a net increase of 2 stores over the prior year period.

Before turning to our outlook for fiscal '19, as Brendan discussed, we have mitigation efforts underway that will partially offset the impact of tariff increases this year. We will continue to advance these efforts in fiscal 2020 through a number of initiatives without compromising our commitment to quality.

As it relates to our guidance, our outlook for operating income includes an estimated $0.5 million of impact from the Section 301 tariffs that were effective May 10, 2019, and prior. This estimated $0.5 million impact was incorporated in our guidance provided last quarter. In the updated guidance we are providing today, the operating income excludes a $2 million estimated impact net of target mitigation efforts of additional Section 301 tariffs effective on or after September 1 of this year.

For our updated fiscal 2019 guidance, we are raising our consolidated net sales expectation by $5 million to a range of $295 million to $305 million. This now reflects high single-digit consolidated net sales growth at the midpoint of our range. Noting the above, operating income is now expected to be between $7.5 million and $9.5 million, reflecting an over 45% growth compared to adjusted operating income last year at the midpoint of the range. We expect operating margin expansion to partially offset by SG&A deleverage, in part through the strategic consulting fees that were recorded in the first quarter as well as continued investments in the business. Interest expense for the year is expected to be approximately $4 million. We continue to expect capital expenditures of between $4 million to $4.5 million.

In conclusion, we are pleased with our financial performance in the second quarter, which met our expectations across all key metrics. We expect to build off of this momentum in the back half of the year and are confident in our ability to achieve our full year guidance.

Looking ahead, we have established a strong foundation and are executing the gross strategies, which Brendan discussed, that we believe position us to deliver strong, long-term sustainable growth for our shareholders.

This concludes my comments regarding our second quarter financial performance. We'll now take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from Dana Telsey with Telsey Advisory Group.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [2]

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Nice to see the progress on the top line. Two questions, one on the tariff. So can you just go through that again? Are you including the tariffs in the guidance? Are they excluded in the guidance? And how do you think of the buckets of mitigation? And what do you expect can be done for next year?

And then second thing, on your growth rate in DTC and wholesale, what were the product mix that drove the business and how do you -- and with your stronger beginning or end quarter? And anything else we should be watching as we go into 3Q and 4Q whether it's with collaborations, with some of the new marketing that you mentioned, Brendan, you think will be impactful to continue to accelerate the sales?

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Brendan L. Hoffman, Vince Holding Corp. - CEO & Director [3]

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Yes. Thanks, Dana. I'll try and go through all that, but pause me if I miss something. So regarding the guidance, as stated in the press release and the remarks, there's $2 million from the September 1 List 4 tariffs that are not included in our guidance -- September 1 and later. So what we gave you was the trajectory of the business excluding those tariffs. The impact of those tariffs after mitigation is about $2 million, so that's why we pulled that out. There is $500,000 that's included in the guidance from the earlier tariffs in May. So that's -- that reflects what was initiated over the last 4 weeks that we just weren't able to fully mitigate because of the timing. We did not feel comfortable raising prices. Just operationally, it's been very difficult to do. We are going to raise prices selectively in some of our core items that are go-forward items, and that will happen over the course of the next couple of months. We have worked very closely with our suppliers to mitigate some of the increase as well as accelerating some shipments to get them here before the tariffs were implemented.

Going forward, as we look at 2020, we're frankly less concerned about that as we have time to properly price the merchandise. And we just -- right now, we're in fashion week, it's spring fashion week, so these are goods we'll be shipping in January, February and March, and we were able to factor in what we know now, which is the 15% tariffs and price accordingly and saw no pushback from our accounts. I think it speaks to the elevated product and the strength of the business that the pricing seemed very natural. So that's why we feel like as we go into next year with the proper amount of time to prepare, the tariffs even at this level will be -- not be meaningful.

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David Stefko, Vince Holding Corp. - Executive VP & CFO [4]

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And we do have to mention that our vendors, as Brendan mentioned in his comments, have worked with us to absorb some of the tariff costs and also to help us with strategies to support managing that.

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Brendan L. Hoffman, Vince Holding Corp. - CEO & Director [5]

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And as you know, as we all know, that seems to -- it seems to change. Every morning I wake up, and there's a new sentiment towards what these tariffs will be or won't be. So that's why we felt it was better to categorize it the way we did.

In terms of -- anything else on tariffs or guidance, Dana?

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [6]

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Just on -- the only other thing on that is, as you think about 2020, the $2 million, do you think of it as $4 million or you can mitigate some of $4 million to the year or you mitigate some of it and maybe you get down to $1.5 million or $2 million for an -- on an annual basis?

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Brendan L. Hoffman, Vince Holding Corp. - CEO & Director [7]

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Yes. I don't see -- as I mentioned, I don't see 2020 as being much of a risk. I think given the time we have with the -- and this is fresh off this week of market for Q1 merchandise and pricing in the 15% tariffs and just how natural it seemed in terms of the retails we'll be at, there is no pushback from the major accounts at all. So I think given the place in the market we're at, we're going to be able to pass on enough of the price increases, combined with the negotiations of partnerships with our vendors and other mitigating factors that I don't anticipate being a headwind for us in 2020.

In terms of what was working for us, I think you asked, in Q2, we continue to see the brands just hit the center of the bull's eye with our customer. I mean growth was driven a lot around dresses. We saw -- we added dresses to different fabrications where they were in woven, wovens and knits this year. We added a lot more print to the line. Lot of comments on the femininity that's evolved with Vince product.

And it keeps going -- I keep going back to how the team has changed to a more seasonably, appropriate weights and colors. So in June and July, we're still merchandising product that is wearable at that moment in time, not something you have to put in your closet for when the weather changes. And so we continue to get high marks both from the comments and from the results we're seeing. And so that was very exciting to see in Q2.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [8]

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Got it. And then just one last thing. I am -- literally, I'm looking at 10-Q as it just came out, and it looks like the operating margin on wholesale was terrific. And it looked like the revenue growth on DTC, there wasn't as much lever. That operating margin didn't come through as strong. Was there anything on the puts and takes of the operating margins of DTC and wholesale?

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Brendan L. Hoffman, Vince Holding Corp. - CEO & Director [9]

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So regarding wholesale, it just speaks to the growth we're seeing at the channel with less dilutions. I mean our natural margin rate continues to improve, and so that means was, as we have season-ending true-ups with our wholesale accounts, we're just able to reduce the amount of support we give them. So that's really exciting to see.

In terms of DTC...

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David Stefko, Vince Holding Corp. - Executive VP & CFO [10]

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DTC, is she asking about -- on the operating income, Dana, that you're asking?

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [11]

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Yes, exactly.

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Brendan L. Hoffman, Vince Holding Corp. - CEO & Director [12]

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On the gross margin -- while, Dave is looking at it, on the gross margin side at DTC, we continue to see healthy full-price sell-throughs and prior to the tariffs that are going in markup.

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David Stefko, Vince Holding Corp. - Executive VP & CFO [13]

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Yes. I mean you're talking about the flow-through on operating income? Dana, is that what you're asking?

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [14]

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I think it's -- yes, I think it says the operating income for the quarter was around $54 million. I think it was $54,000 compared to $414,000 last year. Anything to note on the revenue growth? So just wondering what was in between that didn't drop to the operating income line.

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David Stefko, Vince Holding Corp. - Executive VP & CFO [15]

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Yes. You have to look at that for the quarter. We've got impact of new stores. Yes, again, we're looking at -- yes, and then we have -- yes, we have direct cost of stores, and then we also have adjustments that were made last year to inventory reserves that benefited last year, kind of a nonrecurring item.

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Brendan L. Hoffman, Vince Holding Corp. - CEO & Director [16]

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And you asked about going forward, I mean what we're starting, I mentioned in my remarks, we're seeing the momentum -- well, you asked how the business went in Q2, it got better as the quarter went along, as I mentioned in my remarks, and we've seen that continue and improve in the Q3 and to mid-September here. And I think we had a great anniversary sale at Nordstrom's, as I mentioned. And I think what we're seeing in our own DTC business that's providing a list is some misses we had last year in the collection in terms of price points. We have some higher priced items this year with some of the shearlings and leathers, and particularly in our own DTC stores as owned stores and online, that really can move the needle, and so having a great reaction to those that is driving early business. And it was something we identified when we post mortem last fall that we felt that, that would enhance the collection. And so far, it looks like we were right.

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Operator [17]

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Ladies and gentlemen, this does conclude the Q&A period. I'll now turn it back over to Brendan Hoffman for any closing remarks.

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Brendan L. Hoffman, Vince Holding Corp. - CEO & Director [18]

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Great. Well, thank you for joining the call today. As you can see, we're really excited about our long-term growth potential, and we continue to build momentum in our strategic initiatives. I look forward to sharing more of our progress with you on our third quarter call. Thank you very much.

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Operator [19]

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This concludes today's conference call. You may now disconnect.