Q3 2019 Earnings Call
Good morning, ladies and gentlemen, welcome to <unk> third quarter 2019 conference call.
During today's call all participants will be they listen only mode.
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A slide presentation accompanies todays webcast participants are invited to follow along advancing the slides themselves to access the webcast follow the instructions posted in this morning's earning release. Alternatively, you can access the slide presentation on the Investor section of Kwanza Web site under the events and recent presentations link.
Following today's presentation the conference call will be open for questions.
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Please note. This event is being recorded I would now like to turn the conference over to Mr., Kylie again, Kwanza director of Investor Relations and assistant Treasurer. Kyle. Please go ahead.
Thank you operator, and good morning, everyone.
Today, our jobs that are actually quite as chairman, President and Chief Executive Officer, and Dave Honan, Quads, Executive Vice President and Chief Financial Officer.
Because of our agenda today, Joe will lead off the call with a discussion of quad quite frequently the transformation strategy.
We will follow with a summary, applaud third quarter 2019 financial results, followed by Q and <unk>.
I would like to remind everyone that that's called being webcast and forward looking statements are subject to safe Harbor provision as outlined in our quarterly news release and in today's slide presentation on slide two.
Well its financial results are prepared in accordance with generally accepted accounting principle. However, this presentation also contain non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin free cash flow and debt leverage ratio.
We have included in the slide presentation reconciliations of these non-GAAP financial measures to GAAP financial measures.
Finally, a replay of the call him a slide presentation will be available on the Investor section of Quad Dotcom shortly after our call conclude today.
I'll hand, the call over to Joel.
Thank you Kyle and welcome everyone.
We are making bold decisions to accelerate our transformation through investments in our business that will drive long term growth and shareholder value and provide us with the ability to take advantage of opportunities in a rapidly changing printing industry.
I'm pleased to update you on the success, we're having on our Quad 3.0 strategy by sharing that it will generate $125 million or the expected organic incremental sales growth in 2019.
Which helped offset over three full percentage points of annual print sales decline.
True <unk> 3.0, we have created a uniquely integrated marketing solutions platform that includes customer analytics campaign strategies media optimization and global production all woven together to effectively address our clients marketing and process challenges.
That's not so I won't approach is an important point of differentiation from traditional printers and Mark agency holding companies.
As shown on slide three our integrated offering which includes an industry leading manufacturing platform helps clients reduced the complexity working with multiple partners.
Eliminating multiple handoffs that compromise both the strategy of marketing programs as well as the speed at which they are executed.
We also enhancing efficiencies through work flow reengineering content production and process optimization and improved marketing spend effectiveness across all channels through data driven consumer insights media planning and creative campaign strategy.
We have invested time and resources to fine tune, our cost 3.0 platform and continue to scale our solutions to drive additional incremental revenue.
To further explain how our strategy is working though I'd like to share some recent client wins.
On slide four you'll see we've continued to grow our relationship with a leading apparel retailer jockey eastern can Osha, Wisconsin.
Our relationship with the retailer began with catalog Trenton prep work that in 2018, we added photography for jockeys online retail social and kept all channels.
This year, we've expanded into packaging photography, and video production, including Instagram lives stories that promote the brand and its catalogs.
We're also providing additional social media creative direction for jockeys upcoming holiday catalog.
We become doing at data analytics and customer prospecting and for the first time, we're supporting jockeys International division through print ecommerce Copywriting and photography.
Slide five provides an example of a large multi national retailer, which quad, it's helping to expand its marketing into digital channels and make better use of data to acquiring new customers and drive repeat business.
Historically this was a print only customer.
We capitalized on the opportunity to bring them new thinking on an existing print program to demonstrate how they could be marketing more effectively.
This led to quite planning and executing our new customer acquisition campaign.
We started by researching the digital and direct mail behaviors of its customers and underperforming markets.
With those insights in hand, we created and watched a new direct mail program that included new creative and a new format supported by complimentary digital campaign.
Based on the success of this program we are watching on additional integrated direct mail and digital program in early 2020, leveraging the insights liens requires proprietary virtual testing platform accelerated insights.
Our ever expanding relationship with this one account has resulted in over two and a half million dollars organic incremental multi channel revenue in 2019 that we otherwise would not have had.
Lastly side six it's about plots rapidly growing partnership with a large national discount grocery chain.
Until June we only parted weekly retail circulars for its 1100 plus stores.
Since then we've been awarded print media placement creative in production services for the circular program.
Followed by hosting the change digital circular.
In addition, the relationship has grown to include all digital and broadcast media planning and bye.
We accomplished this through our leading capabilities and thoughtful guidance on the best way to harvest media to accomplish the clients multichannel business goals.
In particular, our integrated approach to media services matches, the right content to the right channel at the most opportune time and into right geography.
It was the solution. This clients had been looking for because it offers the highest probability of inspiring a shopping trip.
Furthermore, we started a media mix modeling study for this client that measures one or two different media mixes against the clients Capesize. This study will produce the insights necessary to improve media spend performance on into the future.
Through this relationship we also have been able to increase organic incremental multichannel revenue by more than two and a half million dollars in 2019 that we otherwise would not have had.
Furthermore, the media spend that quite as managing at procuring on behalf of this clients will be in excess of $30 million on a go forward basis.
These client examples along with many others across a wide range of existing and new client relationships has contributed to the $125 million of expected organic incremental sales growth in 2019 I discussed earlier.
Quad will continue to build on our current relationships to provide even more services products in value and continued to transform ourselves as a trusted marketing solutions partner.
Given our success with bought 3.0, we are taking decisive actions to further accelerate our transformation through optimizing our product portfolio to ensure alignment with our quad 3.0 vision.
Further streamlining costs and resetting our dividend, which will provide additional financial flexibility to continue to scale, our quad 3.0 strategy and maintaining a strong balance sheet.
While also being able to take advantage of opportunities in a rapidly changing print industry.
In reviewing our product portfolio.
We made the recent decision to divest of two businesses. The first what's transpac, our industrial wood, creating business, which we divested in the third quarter.
This was a great niche business, but it was non core to quad 3.0.
Now we are divesting of our book business, which generates annual revenues of $200 million.
Divesting this underperforming business makes sense as we look at our product portfolio through the lens of our Quad 3.0 transformation strategy.
Over the years, we've made significant investments in our book platform and talent all of which will benefit the industry long term.
As we pursue this sale we take our employees for their continued focus on serving our clients well.
Looking ahead, we will continue to proactively optimize our product portfolio to advance our quad three point on strategy and capitalize on the ever changing media landscape.
We also continue our focus on cost management, which Dave will share more details on in a moment.
Lastly to help accelerate our cost 3.0 strategy, we have made the proactive decision to reset our quarterly dividends.
This will provide us with additional financial flexibility for growth focused opportunities that address our clients evolving needs and maintain a strong balance sheet over the long term.
It will also provide us with the ability to take advantage of opportunities in the rapidly changing print industry.
And all that we do we continue to prize our ability to make decisions that are in the best long term interest of our Clive shareholders and employees and we have a disciplined capital deployment strategy that helps us do this.
With that I will now turn the call over today.
Thank you drill and good morning, everyone. Please note that today's discussion of our financial results exclude discontinued operations of the book business at all comparative periods with exception of cash flow information.
Slide it provides a snapshot of our third quarter 2019 financial results.
Net sales were 944 million in the third quarter as compared to 974 million in 2018 down 3.1% organic sales with exclude acquisitions declined 4.3% during the quarter as Joel mentioned earlier organic sales benefited from new revenue generated from the Quad 3.0 strategy.
Well were offset by ongoing print industry volume and pricing pressures at a negative 0.5% impact from foreign exchange.
A year to date basis net sales were 2.9 billion flat with 2018, excluding acquisitions organic sales declined 2.6%.
Organic sales reflect new revenues generated from the Quad 3.0 strategy offset by ongoing print industry volume and pricing pressures at a negative 0.7% impact from foreign exchange. Our Quad 3.0 transformation strategy is driving 125 billion of expected organic incremental sales growth in 2018.
Which is helping to offset over three percentage points of annual print sales decline.
Adjusted EBITDA was 80 million in the third quarter 2019, as compared to $107 million in 2018, and adjusted EBITDA margin was 8.4% as compared to 11% respectively.
Variance to prior year, primarily reflects the impact from a 4.3% organic sales decline and 8 million dollar impact from the reduction of market prices for paper byproduct recoveries and an 8 million dollar impact from strategic investments made to increase hourly production wages.
As a reminder, last year, we began to make additional investments totaling $40 million on an annualized basis to increase hourly production wages in our most competitive labor markets due to historically low unemployment rates and the challenge of finding enough quality entry level and skilled employees. This labor strategy incorporated compare.
Wages strong benefits and necessary training programs needed to fill open positions and retain our employees.
Adjusted EBITDA for the nine month ended September Thirtyth, 2019 was 239 million as compared to 310 million in 2018, and adjusted EBITDA margin was 8.4% as compared to 10.8% respectively.
The variance the primer the prior year was primarily due to the impact from a 2.6% organic sales decline.
24 million a nonrecurring benefits realized in 2018 that did not repeat at the same level in 2019.
24 million dollar impact from strategic investments made to increase hourly production wages and a 14 million dollar impact from the reduction in market prices for paper byproduct recoveries.
Our financial performance in the third quarter was negatively impacted by the prolong nature of the terminated LSC acquisition for which we delayed certain cost reduction activities in anticipation of the related integration synergies given those delays, we announced the cost savings program in the third quarter, which was subsequently increased by $10 million to total 50 million.
Dollars of annual cost savings.
We anticipate 10 million of these savings will be recognized in the fourth quarter of 2018 and be at a full run rate basis by the end of the year to realize the rest of this and the cost savings into 2020.
We continue to proactively work at additional cost savings projects to further grow this $50 million cost savings program into the future.
Year to date free cash flow, excluding $60 million of LLC related payments was negative 35 million as compared to negative 38 million in 2018.
The 3 million dollar improvement in free cash flow is primarily due to higher cash provided by working capital, partially offset by lower net earnings and increased capital expenditures on long term investments in automation and productivity in our manufacturing platform.
As a reminder, we realize our strongest volumes in the back half of the year due to seasonality and as a result, the majority of our free cash flow will be generated in the fourth quarter.
On slide nine we've included a summary of our updated 2019 annual guidance.
Guidance was update to exclude the discontinued operations of the book business and to reflect updated business trends.
We expect full year 2000, net sales to be approximately 3.9 billion updated from our original guidance range of 4.05 to 4.25 billion to exclude approximately $200 million of net sales for the book business.
Full year 2019, adjusted EBITDA is expected to be in the range of 300 to 330 million updated from our original guidance range of 360 400 million primarily to exclude the discontinued operations of the book business and update for current business trends.
We previously discussed several trends impacting the quarter and year to date result that further impact annual guidance such as the delay cost reduction activities and then in anticipation of the related synergies from the now terminated let's see acquisition. Subsequently these delays were partially offset by 10 million an estimated fourth quarter savings from our $50 million.
Cost savings program.
Also lower market prices on paper byproduct recoveries, which significantly weakened in the back half of the year are expected to impact full year 2019, adjusted EBITDA by at least 25 million and finally, the $40 million long term investment in hourly production wages is not yet fully being offset by productivity improved.
Yes.
We have seen strong labor productivity improvements in 2019 from these investments and expect to realize more savings over the long term.
Full year 2019 free cash flow after excluding 60 million an LLC related payments is expected to be in the range of $80 million to $100 million.
This free cash flow guidance was updated from our original guidance range of 145 to 185 million, primarily reflecting the impact from reduced adjusted EBITDA and the impact of 20 to 25 million of expected negative free cash flow from the discontinued operations of the book business, which are included in the Cup consolidated cash flow.
Activity.
Slide 10 includes a summary of our debt capital structure as of September Thirtyth.
Debt increased 242 million since year end to end the third quarter at 1.2 billion, primarily due to a $121 billion net cash paid for the periscope acquisition $60 million of costs related to the terminated LSC acquisition and $35 million of negative free cash flow as previously discussed.
Our debt capital structure is 62% fixed and 38% floating with a blended interest rate of 5.3% at September thirtyth.
Available liquidity under our 800 million dollar revolver was 748 million and we have no significant maturities until may of 2022.
We have the financial resources to pursue future growth opportunities and returning capital to our shareholders through our quarterly dividends.
Our next quarterly dividend of 15 cents per share will be payable on December six 2019 to shareholders of record as of November 18th 2018.
We finished the third quarter 2019 with debt leverage up 3.24 times, which is above our long term targeted leverage range of two to two and a half time.
While we may operate outside of this range due to the timing of compelling strategic investment opportunities such as the periscope acquisition, we will continue to target our long term two to two and a half times leverage range in the near term our priority for cash will continue to be debt reduction.
Slide 11 provides an overview of our actions we've taken to strengthen our balance sheet to provide further capital to accelerate the quad 3.0 transformation.
Since 2015, we sold over 20 bacon facilities for $100 million in cash and more recently divested businesses that are non core to our quad 3.0 strategy such as the sale of our industrial wood, creating business for $11 million and the decision, we announced yesterday to divest our book business.
We also remain focused on further improving our cash flow the resetting our quarterly dividend to reserve approximately $30 million of additional annual financial flexibility, reducing interest costs by 12 million annually through the retirement of the term loan b in the third quarter driving more cost savings efforts. In addition to our latest $50 million costs.
Savings program and optimizing our working capital levels through continuous improvement efforts. These measures are focused on accelerating our cost 3.0 transformed it transformation, reducing debt leverage and delivering long term sustainable value to all stakeholders.
And now I'd like to turn the call back tour, operator, who will facilitate taking your questions Sean.
Thank you we will now begin the question and answer session.
Ask your question you made press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before passing the keys to.
To withdraw your question. Please press Star then too.
Our first question today will come from Jamie Clement with Buckingham. Please go ahead.
Good morning, gentlemen, Martin Jamie heard Ajay.
If I could just start with you just it just one housekeeping item and then I'll I've got a couple of questions for Joel if that's okay, absolutely if I look like.
Reported EBITDA numbers from first quarter second quarter third quarter.
I would get to like about a 225 number versus the 239.1 for the nine months here is the difference there is that all book is going to discontinued.
Thats correct okay.
Jamie we put out an 8-K yesterday to give you restated quarterly numbers back through 2018 that will help you reconcile that alright, great. Just just wanted to make sure. Okay. So so.
The investments in productivity I.
I guess going back to 2018.
It sounds like you're you're getting some efficiency gains.
But not all of them.
As we kind of looking into next year.
With any games you expect to get there is that part of the 50 million dollar cost savings plan or is that in addition to.
Well, so let me let me hit on US. So when you look back to 18, we suffered from a productivity standpoint, because of the changing labor market and so our productivity actually was worse than we had in the past and given the either with or without the lsatwo.
Action, we these plants need to have well trained people to run efficiently.
And so we made the tough decision to really bite the bullet and increase significantly the starting wage as well as then you have to deal with compression as a result, and we did that.
Concentrated areas, where we had the biggest problems.
What I find interesting. These days is that with the known entity of the labor market everyone's talking about wage pressure, but it seems as I've talked to industry after industry everyone's putting off the inevitable as long as possible in our case, if you put that off you real we saw you get hurt pretty hard.
And the problem when you do this and you do it the way. We did is all the cost is a light switch it comes on right away the productivity improvements come later, and so theres a lot of timing and Thats and I'd say that.
From 18 to 19.
It's actually significant the productivity improvements we've had.
Year to date, we've seen incredible increase in productivity wherever weve been able to impact the labor rates, because we've definitely seen a higher quality employ as well as less turnover and remember when you have the turnover because of a tight labor market.
The training side gets hurt pretty hard because you're spending that money, but then you have to start over again and you don't train someone in one day. So we saw the increase in productivity happening throughout the year, but no you're correct, we haven't gotten to the point of totally offsetting it but we feel good about.
2020, continuing that trend upward in terms of productivity improvements and Jamie to to directly get to the point, where you're going to is these the $50 million and cost savings are specific programs outside of the productivity that we're talking about that will happen over the longer term related to this 40 million dollar investment in wages.
Right. So thats a lot of the typical things, we do a continuous improvement et cetera. The productivity stuff is stuff that will continue outside about how much do you.
I mean, I know, it's maybe it's a moving target I don't know if it's a specific goal, but I mean, how much more in the way of productivity do you think you'd be able to get maybe over the next six to nine months or 12.
Of course, I don't know I guess, we're probably in the.
Seventh eighth inning, okay. Okay fair, yes, I think it's going to take I think.
And to take more than 12 months to fully see the impact is really going to be based on what happens to another external factors in the labor markets in which we faced.
The challenge of low unemployment and so time will tell of that but we really like the progress. The teams have been making in these plans to increase speeds. Despite more complexity to what our customers are asking us to do with credit because of the personalized nature, where we've moved would print. So it's just been tremendous as Joe said the CD.
The quality rise the retention rates get longer and just put more quality books out the door on time and obviously, it's not just wage that does this we've we've done a lot of innovation in terms of how we recruit who we recruit too we started things with inner cities, where there is under sort of populations. So it's a whole.
Mystic approach, but one of the things I think you got to really understand here.
It's really important is as we look at our performance right now it's not heavily focused on some sort of surprise on the topline almost the opposite we've had we've been able to offset topline regular declined by over three percentage points.
So far this year and Thats pretty significant I mean, if I look at the different areas of where we see volume decline. It really is a little bit of sluggishness on the retail side with retail inserts and if you look at the GDP report. This morning, they echoed that sentiment by saying that they're sluggishness in retail.
But I'll also say that the retailers, while there may be sluggishness in the retail answered. These are the ones that and I used a couple of examples here today are spending more money on the rest of our offering which actually helps offset in our mind. Some of the revenue we lose out on a comp I count basis those weren't insys.
Inefficient revenue increases through services, which have a smaller invoice number dollar amount than typical products, but it also resulted in more products as well. So thats why three point also important.
Joel I borrowing from some of the language in the <unk> in the press release.
And maybe help us understand this a little bit more I I think that somebody saying.
Hi does it language around.
Taking advantage of changes in the printing industry.
Is is not necessarily the same thing as accelerating the 3.0 transformation can you bridge those two together for us a little but certainly it's both I mean look when you when you're looking at the potential the LSC transaction.
The industry needed another reset okay.
We felt I think LLC felt that this was a great way to do it in a controlled way for all constituents that's clients employees shareholders.
But because of the delay that the deal Jay did remember they didnt get to the point of actually blocking it they sued the block, but we walked away because I think both sides understood that with that uncertainty in a dynamic industry with dynamically changing media trends that the risk would have been a lot higher if we didnt walk away from it.
And so now that's not happening what hasn't changed as history still need to reset.
And we're doing it you saw us close two plants after the deal.
Fell apart and we continue to look at ways to make sure that our best performing platforms are running at a high labor rate now that being said there there's going to be other shake out here and as you know we always look at consolidating opportunities if not affordable and if they really lend itself to us creating great strong.
On free cash flow. So we can continue to use that to transform ourselves and so that's the second part a bridging. Your question is we're showing you that 3.0 is no longer an experiment to stop being an experiment like three years ago, we've been putting points on the scoreboard now and it's accelerating faster and faster and so we've done.
On a lot of heavy lifting in terms of creating the infrastructure. It takes to do this type of sale at scale. That's that's hiring talent Thats reorganizing sales department, that's bridging gaps between different business units and so to us.
We're going to continue to scale that whether it's M&A, we've done some of that but right now we're adding a lot of great talent in the analytics space in the video space in all the different multichannel spaces that represent the examples I should say keep sharing with everybody and so it's kind of up we got to be prepared for both.
Actually prepared for potential opportunities as the industry has to go through that reset but were going forward aggressively on 3.0 and Thats why I think it's really important that we had the wherewithal to be able to do that we do have a good balance sheet, but I think we've proven overtime and we've always talked about.
It that if we go above our range of where we'd like to be we always want to have a path down because in a dynamic industry, there's always going to be opportunities, but you can't pick when those come.
And so to me tough decision on the dividend I mean, I'm, a large shareholder here, but to me. The my my responsibilities to making sure that Claude is a very strong company on into the future and that means making sure. We have the wherewithal to wind at our back to be able to take advantage of things that I can't.
Predict when they're going to happen I can't predict when 3.0 is happening it already has and we're going to accelerate that.
With respect to some opportunities that may arise.
Given that a lot of your competitors.
Our our way way way sub your scale of many of them having problems I mean, do you anticipate kind of opportunity for kind of Vertis type situations going forward is that what you're alluding to.
It could be.
If you recall vertis was in conjunction with a with a restructuring its would be opportunities to acquire.
But again it really depends on what it brings to the table for us we're not going to do it for the sake of doing it as you know.
But I can tell you that and by the way. They are still has a very large competitor out there with LLC.
And but I will tell you that.
As things go forward here, it's tough just to be printing products in this environment. Because then you're just dealing with the organic decline.
What we're showing you is that the 3.0 strategy is about offsetting the organic decline my goal is to replace the organic decline and then get to grow.
But that satellites, which as you know, but look at what we've been doing and look at the numbers, we keep putting out there. That's what you need to focus on and that's how we're going to continue to to manage ourselves.
How far along I don't know if you want to talk in kind of.
Nine inning terms, but in terms of like educating.
Sure.
Man, you're print customer base.
All of the solutions services related to 3.0 debt that you all provide like are you still encountering customers that say, hey, I Didnt know you did that.
It's changed dramatically I'd say that this year was a very noticeable change and to your point I mean, the challenges is that.
People are used to managing marketing in silos and from different.
Suppliers out there whether it's the big holding companies in one place printers are always been really just about buying the execution, but everybody is under pressure from a marketing standpoint. This is.
Talking about is broadly it's not just people who use print.
It's people who market.
The idea of having a fragmented spend in marketing right now and managing that weight is that's going to separate the winners from the losers because you can have a great product, but if you're not marketing to the consumer the way they expected in an integrated way using data and using the right analytics.
The right time, and the rate geographies right circumstances someone is going to outpace.
The other thing that we're seeing is an acceleration of non print users starting to use print we're out at add we sponsored one of the sections.
Lot of talk about the power of direct mail.
And Thats, where we do you think about our partnership with DGX with with Tim Armstrong, We've seen this trend for a while that.
Digital only marketers have really done well over the years, but now the expense of doing it is rapidly increasing in the effectiveness is dropping because even in digital that's very fragmented and people aren't necessarily able to measure the proper way and so now we see people coming.
Into Prince very significant names by the way and.
I think if you look at direct to consumer the original ones were catalogers right you think about it how all being or something like that they were print only one channel with dotcom 1.0 came along oldest digital opportunity came and they saw it as an opportunity to replace print Dave made that mistake early on and when they.
Tried to cut print they saw the volume drop off on online and so they learn that when you have different media channels you have to layer them you can't use it as a replacement strategy and so what's happening now on the digital side, where its digital only marketers is they're learning that same lessen the because.
It is going up and the effectiveness as petering out it's not disappearing, it's always going to be a great channel.
But they are realizing that they now have to layer back in legacy channels that includes TV, even basic commercials to Billboard to print to everything and so if I were to kind of educate not only the clients about what we're talking about here with 3.0, I think it's about educating people on that.
Testing in anything having to do with marketing is to truly understand take the time to understand the shift that is going on in the need for integration and the lack of models out there available for a marketer to help them do it and so we're kind of coming out of left field here in most people's minds.
And I'd say that the early years of this was really hard.
The process to get a customer to listen to US took a long time, because they hadn't heard it before.
But now that process is accelerated some of those examples I mean, we're just printing retail inserts less than six months ago suddenly we're buying.
TV commercials, and actually creating video for people. So I see the pace of them understanding what we're doing is increasing we spent a lot of money in marketing.
We've spent a lot of time and educating and what the pressures is turning up on workers not turning down sorry for the long winded answer no no not at all very helpful.
This is this is a really important point for everyone to understand.
Especially in context of what we've announced today and why we're doing.
Okay.
Alright. Thank you all very much for your time I appreciate it. Thank you Jamie Thanks, David.
This will conclude today's question and answer session I would now like to turn the conference back over to Mr., Joel Quadracci CEO for any closing remarks. Thank.
Thank you operator, and thank you everyone for joining us as we shared on todays call. We're confident in our Quad 3.0 strategy, which is working we continue to expand at work with existing clients as well as when new work given our success with Quad 3.0, we are taking proactive steps to further accelerate our transformation, making investments in our.
Business that will drive long term growth and shareholder value and provide us with the ability to take advantage of opportunities in the rapidly changing print industry.
As always we remain focused on making decisions in the long term best interest of our clients shareholders and employees. So with that I. Thank you and look forward to speaking with you again next quarter.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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