Q1 2020 Earnings Call
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I would now like to hand, the conference over to your speaker today, Mr. and Thornton Chief Accounting Officer, Ma'am you may begin.
Thank you.
Good morning, welcome to the Brady Corporation fiscal 2021st quarter earnings Conference call. The slides for this morning's call are located on our website at Www Dot Realty Corp. Dot com slashing doctors, who will begin our prepared remarks on slide number three.
Please note that during during this call we may make comments about forward looking information.
Such as expect will maybe leave forecast and anticipate or just a few examples of birds identifying forward looking statements.
It's important to note that forward looking information is subject to various risk factors and uncertainties, which could significantly impact expected result.
With sectors were noted in our news release, this morning, and and Brady's fiscal 2021st quarter Form 10-Q , which was filed with the FCC. This morning.
Also please note that this teleconference is copyrighted by Brady Corporation and May not be rebroadcast without the consent of Brady.
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I'll now turn the call over to British President and Chief Executive Officer, Michael Millman. Thank you and good morning, and thank you all for joining us.
We released for fiscal 2021st quarter financial results. This morning, I'm pleased to report another poodle profit improvement and strong cash generation. This quarter, we increased pre tax income by 4.2% increase net income by 22.4 person and increased earnings.
For chair by 20.7% all won't continue to generate strong cash flows.
Earnings.
Organic sales declined by <unk>, 0.4% this quarter, we're seeing the effects of a challenging industrial economy said good you several geographies around the globe, including Europe , the middle East and China, which resulted in a slight decline in organic sales in both our identification solutions and.
Workplace safety businesses this quarter.
Organic decline and ideas. It was only <unk>, 0.2%, but this is <unk> versus <unk> of the group trend that we've enjoyed for the last several years. This was driven by the macroeconomic challenges that we've experienced outside of United States organic sales are WPS business decreased by 8.8%.
This quarter Mama schools in Europe , which offset by the won't see double digit declines in North America, and Australia weak economic backdrop in Europe , and Australia has certainly impacted or WPS businesses, well, we're working hard to take share wherever we can offset these challenges at the same time.
We continue to see improvements in our North American business. That's already decline. It's definitely improved we're pleased with this progress is reports we turned this business to study revenue and profit growth comes out the sluggish economic environment controlling what we can cause a consistent execution of our key priorities the chart.
With best in sales generating resources, and new product development, the server customers extremely well all while driving sustainable efficiency gains sort of business. We believe this relentless focus on improving or manufacturing processes and driving savings water business while investing.
In organic growth positions us extremely well for an even stronger return one or end markets repairable, although the industrial economy is challenging.
Well in a number of our businesses and geographies our ideas business in the Americas continues to generate strong organic growth and solid returns. This school what are you weren't business, where we're seeing strength in most product lines any markers or we can embellishments and new product development are also providing benefits.
We launched several new products and Rod U.S. business. This quarter that we've been looking forward to bring it to our customers. The WPS business in North America continues to make progress improving its digital presence North American WPS sales declined in the low single digits. This quarter, which was a sequential improvement from mid single digit.
Decline last quarter, we're making steady progress throughout this business and digital sales increased sequentially since the fourth quarter. We continue to believe that were on the right talk to turn this business profitable world.
Fundamentals in place in a digital presence improving well looking ahead, what we believe it's a beginning of a trend of organic sales and profit improvements in fiscal 2020.
We executed a fits into gains isn't as to me for the last four years and this quarter was no exception, we continued to part and execute sustainable improvement slaughter businesses, maybe which we're starting over the last several years are now beginning to pay off.
He is a testament to the team's strong commitment to making investments in both the time and resources that are necessary to drive long term.
Process improvements now I'll turn the call over to arrogant its corporate finance results, then overturned could provide specific commentary about our dedication solutions and workplace safety businesses Aaron.
Thank you Michael and good morning, everyone. The financial review starts on slide number three.
Sales in the first quarter were 286.9 million, which consisted of an inorganic sales decline of 0.4% and a decrease of 1.7% from foreign currency translation pre tax income increased 4.2% well net income was up 22.4% to 37 point.
5 million this quarter compared to 30.6 million in the first quarter last year diluted EPS increased 20.7% to 70 cents compared to 58 cents in last years first quarter and cash flow from operating activities was 38.8 million this quarter, which is more than doubled 18.8 million.
We realized in last year's first quarter overall, our earnings growth and cash generation were quite solid, especially given the economic challenges that Michael mentioned.
Turning to slide number four you'll find our quarterly sales trends.
Yes, organic sales decreased 0.2% and WPS organic sales decreased 0.8% the decline in ideas organic sales was due to macro challenges in several of our foreign businesses in Europe and Asia, we saw growth and most product lines in North America, but this was not enough to bring the entire.
Yes division to organic growth this quarter.
The decline in WPS organic sales was driven by our North American and Australian businesses.
As Michael mentioned growth in our European business wasn't quite enough to offset the low single digit declines in North America and Australia.
Slide number five is our girls gross profit margin trend in our gross profit margin was 49.3% this quarter, which is a decrease of 70 basis point points from last year's first quarter, we're seeing input cost pressures in both Rds and WPS with our largest areas of cost pressure being labor and certain raw materials.
We're focused on aggressively driving process improvements throughout our manufacturing facilities in an effort to offset these cost increases and we had a strong pipeline of opportunities that are teams are driving each and every day.
Turning to slide number six you'll find our S. Unite expense trends in SGN, a was 89.5 million this quarter compared to 94.6 million in the first quarter of last year. Approximately one third of this decrease was due to foreign currency translation as the U.S. dollar strengthened against most major currencies and.
The remaining two thirds of this decrease was due to ongoing efforts to drive sustainable process improvements throughout or asked you in a structure.
As a percent of sales SGN a decreased from 32.3% in the first quarter of last year to 31.2% of sales this quarter.
Slide number seven outlines the trending of our investments in research and development.
This quarter, we spent 11 million on R&D, we continue to invest in new product development, and we're committed to increasing our investments overtime. While at the same time, ensuring that we're very disciplined so that we get the most out of every dollar spent in R&D.
Moving to slide number eight you'll find our quarterly trending a pre tax income we increased pre tax income by 4.2% to 41.6 million this quarter.
This 4.2% increase in pre tax earnings is in comparison to a particularly hard comparable as we do a pretax earnings by more than 14% in last year's first quarter.
Our ability to improve pre tax earnings in a challenging industrial economic environment is a direct result of the sustainable efficiency gains we've implemented over the last several years and we'll continue to implement in the future.
Slide number nine illustrates our after tax income in quarterly earnings per share trends diluted EPS increased from 58 cents last year to 70 cents in the first quarter of this year an increase of 20.7%.
Along with an increase in pre tax earnings. We also had a lower tax rate. This quarter. This quarter's tax rate was 9.8% while last year's first quarter tax rate was 23.2% this lower than normal tax rate was primarily due to the impact of a favorable audit settlement and the realization of tax benefits from equity based compensation.
We now expect our tax rate to be approximately 20% for the full fiscal year ending July 30, Onest 2020.
Turning to slide number 10, you'll find a summary of our quarterly cash generation, we generated 38.8 million of cash flow from operating activities compared to 18.8 million in last year's first quarter.
Free cash flow was 31.1 million compared to 12.8 million in the same quarter last year.
He portion of this improved cash generation was due to the timing of our annual incentive compensation payments.
Last year annual incentive compensation payments were split between the first and second quarters well. This year. The vast majority of annual incentive compensation payments will be made during the second quarter.
On an annual basis, we've consistently generated cash flow in excess of net income and we're always focused on making the right long term cash decisions for the organization.
This quarter, we returned 11.5 million to our shareholders in the form of dividends and we also invested 7.7 million in capital expenditures, most of which was new machinery and equipment to either add new capabilities are to drive further efficiencies in our manufacturing processes.
Slide number 11 outlines the trending of our net cash position along with our debt structure at the end of the quarter.
We increased our net cash position by 16 million this quarter, while continuing to invest in capital expenditures and increasing our annual dividend. We finished the quarter in a net cash position of approximately 245 million.
Our debt consists of a 45 million euro denominated private placement scheduled for repayment in May of next year, and we have no borrowings outstanding on our recently renewed line of credit.
Our approach to capital allocation remains consistent we are disciplined and we are patient first we use our cash to fund organic sales and efficiency opportunities throughout the economic cycle, which includes funding investments in new product development sales generating resources I T improvements capability enhancing cash.
Capital expenditures and capital expenditures to increase efficiency and automation in our facilities and second we focused on returning cash to our shareholders in the form of dividends.
After funding organic investments and funding dividends, we then deploy our cash in a disciplined manner for acquisitions, where we believe we had strong synergistic opportunities and we use our cash to improve shareholder returns through opportunistic share repurchases are cash generation is strong our balance sheet is strong and we're focused on driving long term debt.
Thank you for our shareholders through this disciplined allocation of capital.
Slide number 12 is our guidance for the full fiscal year ending July 31st 2020.
Because of our reduce the income tax rate, we're increasing our full year diluted EPS guidance from the previous range up to 45 to two to 255 to our new range of 250 to 60 per share.
Organic sales growth expectations remain unchanged at approximately 1.5% to 2.5% for the full fiscal year ending July 30, Onest 2020.
And as I mentioned, we also expect our income tax rate to be approximately 20% for the full year ending July 30, Onest 2020.
This tax rate guidance of approximately 20% is consistent with our longer range forecasts for fiscal 2021 and beyond.
Depreciation and amortization expense are expected to approximate 25 million and we anticipate capital expenditures to approximate 35 million. This year. This guidance is based on foreign currency exchange rates as of October 31st which continued to be a headwind due to the strength of the U.S. dollar.
And we're not excluding any onetime income or expense items from this guidance does guidance is based on financial results are fully in accordance with U.S. GAAP.
I'll now turn the call back over to Michael to cover our divisional results and to provide some closing comments before turning the call over to QNX, Michael Thank you Aaron.
Slide number 13 outlines the first quarter financial results for our diversification solutions business.
I guess sales declined 1.4%, finishing at 215 million within organic sales decline of 2.2% and a decrease from foreign currency translation of 1.2%. This quarter organic sales increased in low single digits in the Americas region, we continue to see solid.
Unit growth in the U.S. was our strongest growth in safety and facility identification products organic sales decrease in the mid single digits in Europe , and the low single digits in Asia. This quarter, we started to see an overall reduction inorganic growth rates in the back half of last year and the softer economic.
Conditions conditions continue in or first quarter, resulting in an organic sales decline in both Europe and Asia.
Segment profit increased 2.1% to 42.4 million this quarter as a percentage of sales segment profit was 19.7%, which was an improvement over the same quarter last year's segment profit of 19.1%, we improve the profitability compared to the prior year.
Even though we had a modest organic sales decline and foreign currency headwinds. This profitability improvement as result of ongoing process improvements and efficiency gains that we've been pushing throughout our business. The soft industrial economy outside the U.S. makes a process improvement initiatives that much more important as we can.
Can you to drive reductions in F G and H.
When we remain committed to our investment in R&D. This quarter, we launched several high tech material to the suited for a variety of manufacturing applications. For instance, we launched thermal transfer printing volume the labels, which are designed for circuit board electronic component pre possibly believe process labeling in manufacturing.
These labels are resistant to chemicals heat corrosion and humidity and meet a wide range of governmental and industrial compliance requirements. We also won for one of the labels materials for inkjet printers that are specifically designed to withstand the outdoor elements during overseas shipping.
We bill the high Tech label material to think combined with our full color high resolution inkjet printer results in the clear reliable solution that meets all GHS compliance requirements for marine shipping.
Both of these materials can be used in a variety of complications in industries and are extremely high quality and most importantly, there. Each a great example of the reliable solutions, we offer that prevent high cost for compliance failures that our customers face every day.
For the full fiscal year 2020, we expect ideas organic sales growth from 2% to 3%, we'll continue to invest in R&D and drive efficiencies throughout our facilities at an S. DNA, we remain committed to our top priorities, which are to invest inorganic growth opportunities in both sales and.
R&D to launch innovative new products to serve our customers extremely well and to continue to drive efficiencies in our manufacturing processes and asked you today.
Slide 14 outlines our workplace safety performance WPS sales declined 4.2%, finishing at 72 million with an organic sales declined to <unk>, 0.8% and a decrease from foreign currency translation of 3.4% this quarter organic sales increased modestly in Europe and <expletive> .
Climbed in the low single digits in bulk Australia in North America, we're seeing consistent improvements in our North American digital sales as a result for the changes we've implemented in the back half of last year overall, our rate of decline continues to improve as our sales decreased in the low single digits compared to mid single digit.
Decline last quarter, but we still have work ahead of us to build sales back to level, we experienced prior to the initial digital platform change remain focused on three priorities for per turn or WPS, North America business to consistent organic sales growth and improved profitability third we're improving the.
Buying experience for our customers. So the simplest possible reach our customers the way they prefer to be reach further online mobile catalog in person through a combination of these channels is essential to returning a business growth, which is exactly why we're focused on having industry, leading web sites second.
We're increasing our customer interaction rather than only filling orders. This allows us to better understand what our customers are dealing with in the safety and identification perspective, and helps us better serve those needs by offering or compliance expertise and complete solutions. We're doing this through our expanded sales force with expertise in industry.
Specific regulatory and compliance requirements that are competitors do not possess.
Third.
One of our strengths is our ability to customized products and quickly turned orders, we're improving our portfolio of products by introducing more customized and proprietary products to their customers need we believe that we're increasing the value that we bring to our customers by focusing on these three priorities, which creates customer loyalty and.
Same store sales and profitability over the long term.
A recovery in North America has been and will continue to be choppy. However, we believe we're on the right tack to have a solid fiscal 2020 in this business organic sales led by our European WPS business. This quarter, although Europe is a challenging market.
Focus and dedication of our team continues to help us grow in our key end markets in Western Europe .
Our Australian business declined in the low single digits. This quarter economic growth in Australia has slowed recently and we're seeing impacted this macro environment on our sales.
Focused on improving our pipeline of opportunities. So we can versus decline and return to growth WPS segment profit was 5.2 million compared to 5.5 million in last year's first quarter as a percentage of sales segment profit was 7.2% this quarter compared to 7.4% indices.
Same quarter last year for the full fiscal year 2020, we expect organic sales to be approximately flat in the WPS business and we expect to improvement segment profit benefits from our with these cost structure and continued efficiency opportunities and SGN day.
Looking again at pretty total results I'm proud of our ability to once again increased profitability in this channel challenging economic environment, where foreign currency rates continue to trend against us and organic sales have slowed in geographies outside of North America, we're executing efficiency opportunities.
Controlling costs or other manufacturing facilities and our SGN a structure, we've seen sequential improvements in our WPS North American business, our ideas business in North America continues to be strong as growing nicely fueled in part by new products.
But we must remain focused center priorities, which are to execute sustainable efficiency opportunities in manufacturing and there she in a while investing in selling resources and R&D to grow organic sales growth, we need to kick in to come through this period, a sluggish sluggish economic activity and even stronger.
Vision, we're in today, and we're confident by maintaining our focus and eliminating distractions, we're setting ourselves up to do just that.
Overall, we're in a very strong position, we're dealing with a tight labor market, some increasing material costs and foreign currency headwinds, but brady. Its an organization that is accountable and committed to delivering strong financial performance now and into the future.
I'd now like to start the Q and aid operator would you please provide instructions for listeners.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or are you wish for move yourself from the Q. Please press the pound cake.
Once again to ask a question. Please press Star then one now.
And our first question comes from Keith Wholesome from Northcoast Research. Your line is open.
Good morning, guys. Thanks for the opportunities the my little bit on the your expectations for how the quarter once.
The results versus expectations, and then second with.
The decline here at I'd ask more specifically what gives you the confidence that.
We'll be able to keep your.
Annual growth rate of 2% to 3%.
Good morning, Keith.
I would say a couple of factors are very important this quarter, we saw across the board and incredibly slow August on anticipated in household was and we didn't saw we were able to build on that in September and October . So we do believe that despite the extremely slow.
I will start to last quarter, the trend is better than the overall quarterly results indicated.
Great and then switching over to the a the gross margins yeah. The 70 basis point decline year over year, it's probably the most you guys are having a while I think this lost gross margins I've seen in the past several years a your confidence in your ability to for your automation efforts to keep up with some of the pressures that you are seeing with your raw input and.
Hey, just any color on that.
Yes, we actually are continuing to move forward across the board in that effort I think as you may know a part of our culture. It to an annual communications meeting with all our facilities at the beginning of our year. So our senior leadership kits eyes on at all our facilities, what we should be doing what we are.
Doing well having.
Just finish that process I can tell you I'm extremely pleased not only with the projects that are finishing up but the pipeline of new projects that are coming forward and are being introduced right. Now we we have a lot of opportunity to move forward. It by the way Keith This is not choose group for productive.
The improvements it's good for our employee base as we shift generationally.
The interactive nature of our employees changes of how they like to interact with manufacturing manufacturing equipment, and our new field systems, our new automated technology fit in line with the desires of our continuing.
Employee base.
Great. Thanks, I appreciate it good luck.
Thank you Sir.
Thank you and again, ladies and gentlemen to ask a question. Please press Star then one now.
Our next question comes from Joe Mondello from Sidoti Your line is open.
Good morning, Charlie Good morning, Brian actually on for Joe. Thanks for taking my question is Oh.
All right.
Just real quick a couple of question on the first one on I'd S. Specifically in the U.S. organic growth still solid what's really driving that any particular end markets are divisions.
And things like that.
Up to fold and safety ideas are strongest driver in that market, Brian but I'd also tell you as you can listen to the calls over the last few quarters or cadence of new product development of actually patented proprietary products has been growing strongly in the industrial marketplace that takes a little longer develop into <unk>.
Revenue than another marketplaces, but we are starting to really see that coal home. We in addition to that we're doing a much better job of connecting with our end users. The Brady brand. The Brady product set has a great reputation, but the more interactive we can work with our.
End users jets, the better they can really take advantage of that it we are seeing that as well.
Great. Thank you and then transitioning over to healthcare looks like sales were kind of flattish in the quarter any update there on how that business is trending on as far as profitability things like that.
We feel very good about that businesses I think I mentioned last quarter, we did foretell a little choppiness as we came out into growing and we're seeing exactly what we expected to see how we've got a great new sales force.
That we've really increase in that area, new product sets up printer families set a really.
Generating.
Some energy within our customer base. So we do see that continuing to move in the right direction and are pleased with where we're at this point.
Alright, Great then also moving over to the workplace safety I'm, specifically with digital sales it looks like those were up organically.
Any concern that what happened in North America in recent quarters could potentially happen.
And in that segment as well.
We are I, we're looking very hard at all times throughout our global footprint for WPS seeing if there any bleed over is.
As you know.
We did have a disconnect on our digital platform.
Irrigate June .
Which drove us in the wrong direction for several months before became apparent as to the root causes.
He had been moving into right direction since approximately February January February of this year. So that part we're confident we have addressed and are moving in the right way.
We do and work hard to bifurcate our markets in Europe in places like that to really hit our customer needs.
I still feel fundamentally that the European customer inventories different and not only from the U.S. mentality, but within countries and even regions of countries and so our approach that marketplace is somewhat different.
Just as in Australia, we've headlines that that we've been working to expand.
Into different industry segments from our original primary segment of mining.
And if done an effective job of that.
So overall economic.
Issues are always a challenge both in Europe and in.
Australia.
All right and then last one from me here.
Just on the refinancing of the credit facility earlier was that just based on the maturity or was there something else involved and then just a you know you touched on M&A, a little bit in your prepared remarks, but.
How's that pipeline look anything specifically should be a aware of our looking forward you.
Brian This is Eric I'll answer the credit facility question. It actually was due to due to expire within a year and we typically like to extend our credit facilities. When we get about a year out. So that's that's really the main reason that we did it.
There are no other extenuating circumstances.
In regards to M&A as a public company, we keep certainly can't for Shadow of hotel M&A activity. What I can tell you is that as you look back over or air and in my tenure, we have created a philosophy a building building on the fundamentals on the foundation and I have been.
Talk you about the fact that we're moving strongly into an ability to execute our M&A in a logical technology driven way at this point in our juncture.
Whether that happens or not depends on a lot of factors, we deal with private companies in many cases.
It is important to there with the right spot as it is we're in the right spot, but you can know that we are.
Looking at key opportunities that will help us drive our technology for to really create a better growth platform in the future and that we are actively always at this point in discussions with different individuals to see whether we can combine for one plus one equals three to.
Turning to us that are acquiring companies when just as much as it is that we when we both kind of winning these transactions to be long term viable and it's got to be based not just on market share, but on a real differentiation and advantage to technology and product sets that will.
Really enable us to move forward, but you can be assured we are continuing to focus more effort in that area.
Alright, well appreciate it thanks for taking my questions and congrats on another solid quarter.
Thank you Sir appreciate.
Thank you.
Our next question comes from Michael Mcginn from Wells Fargo. Your line is open.
Thanks. This is Mike on for Allison I, just had a couple of quick questions.
Michael You mentioned August was particularly weak I was wondering if you could talk about whether you saw any channel destocking from distributors I know you guys have some some shorter lead times and is that now in the rear view and you're going to see better growth going forward, especially I'd ask you just give us color there would be great. Good morning, Mike we did it.
Variance across the board all regions all businesses, a eight dramatic downtick in August that was weaker than any of our teams expected.
The unique part about it was.
It was very consistent in that it was across the board.
But as they said and I want to be clear, we didn't saw progress through September , particularly the second half the September going through October .
We have experienced.
In Europe as an example.
We believe in many cases Brexit related.
Changes in stocking patterns.
And at this point, although we think that we're through that.
As we are not through Brexit.
There's no guarantee that that is an absolute case, but we do believe that we are we're through.
The.
Initial strong stocking and then de stocking situations.
Got it. Thank you and then if I could just ask a little more of a longer term question. Michael I hear you on the more patented targeted approach to our R&D.
It can you give us a little perspective on is there a fine line between maybe an aggressive 80 20 approach.
Two and then still being off able to offer plentiful amount of skews with like a good better best product offering how how do you told that line going forward.
That is actually very true as we take a look at where we're going I want to talk about both product sector to give you an idea.
We for instance, in WPS or a value added distributor at about 50% manufactured products, a 50% by and resell we believe that moving that up to about 70% is the ideal point.
That's still is a significant amount of buying resell, but those are all the products, where we don't add value or don't add enough, Nick nipigon value or possibly or the out as to your point the lower costs. In addition to that we do look at.
At providing our customers with alternative cost value points for them.
That does mean the products our proprietary but it does mean is not will feature sets not all durability levels are needed for all our customers. If you look at four marketing's is a great example, we've introduced new levels of top drive Super tough stripe materials, we have regular grade.
For marketing materials, we can take a customer through very temporary basic needs to the highest durability level for markings and really give them and explain those options for them that doesn't mean, how we do it.
Cases can't be proprietary and patented but it does mean that we're providing them with differentiated products their level of need and I think that's something Brady does very very well, we're super high durability in many of our applications, but we also have levels of that.
Really depending on what the user cases, so I think a point is very valid we do evaluate that not only as we introduce a new product because we think about the development of new products, what does the customer really need and is there bifurcation in the markets neat base and we are doing that and provide that so I have.
Agree that that's something that's very important and we do keep that in mind.
Thank you Oh I appreciate the time, all I'll pass it along thank you Sir.
Thank you.
And I am showing no further questions from our phone lines and I'd like to turn the conference back over to Mike when I'm in for any closing remarks.
Thank you very much I'd like to leave you with few concluding comments. This morning, we reported good start to fiscal 2020 looking forward I believe that Brady is in a very enviable position despite weakness in the industrial economy over the last several years, we've made increased investments to develop high quality.
The innovative new products and those new products are now coming to market, we've improved our customer service and support which is making more loyal customers. We have healthy gross profit margins and we've been aggressively driving sustainable efficiency gains, which you can see in our continued with.
Actions in as seen a expenses. All this has made us a more efficient and effective organization that is better better able to react and adapt to change. These improvement combined with our solid balance sheet that is in a net cash position of $245 million really.
Brady in a position of strength as we can continue to invest in our future aggressively targeting the customers of our competitors. So when our end markets recover we will be an even stronger position and emerge with even stronger financial results. Our team is motivated and.
Hi, motivated keep are positive momentum alive, we expect to grow organic sales drive efficiencies for the organization and grow earnings I'm proud of what we've accomplished so far and I know, we're making the right decisions today to set us up for improved long term financial results as always.
If you have any questions. Please contact us. Thank you all for participating today and have a great. Okay. Operator, you may disconnect the call.
Ladies and gentlemen, thank you are participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.