Q3 2019 Earnings Call
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Called begun momentarily please remain on the line.
Hello, and welcome to the third quarter 2019 rough on earnings call. My name is study up and I will be <unk> coordinator for today to that.
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I'll now hand, you over to your host Eric one to begin today's conference. Thank you.
Hey, do Lydia good morning, everyone and thank you for joining the call.
Earlier today the company released its financial results for the quarter ended September Thirtyth 29 to <unk>.
Not already received a copy the earnings release copies can be obtained on the company's website Rabbani dot com.
Let me call. This morning are gonna be Pullmantur, President and Chief Executive Officer.
Turia donor Chief Financial Officer.
A discussion today might include forward looking statements that are based on current expectations.
Nobody pursuant to the private Securities Litigation Reform Act the 1994.
Information on factors that could affect actual results and calls in the doesn't materially from such forward looking statements itself or the companies that you see filing.
Moving into Q3 29 to 10-Q.
The company undertakes no obligation to publicly update any forward looking statements except for the company's obligations under the U.S. Federal Securities laws.
Remarks that even through the discussion certain GAAP non-GAAP results.
Consistent with past reporting practices.
non-GAAP results exclude certain non operating items non directly attributable to the company's underlying operating system.
Just a measure that upon in the earnings release and are also reconciled in the financial tables at the end of the really.
Please also note that certain amounts provided throughout this call I've been around it.
Cultivation I'll be copied recorded you would that we'll turn the call over to Debbie.
Thank you Eric Good morning, everyone and thank you for joining us.
Despite the continued headwinds facing on North America business.
In the third quarter, we continue to see momentum in our key strategic areas that we have previously discussed with you.
Growth in our international markets and ecommerce channel was offset by declines in our North American business.
Dominantly Revlon and portfolio segment.
We remain focused on driving improved profitability, which we achieved in three of our four segments.
As well as generating strong adjusted EBITDA.
For the corner. We also saw improved as reported gross profit margin relative to the prior year quarter.
Speaking first to our multiple areas of growth and investment.
Our international business continues to be driven by Elizabeth.
Care, which grew 29% on a constant currency basis compared to prior year quarter.
We saw growth in our key franchises their mind, which grew 33%.
Oh, gosh, which increased 41% an eight hour, which grew 8% all on a constant currency basis.
Our core products continue to perform well in each of these franchises and in the third quarter, we launched exciting new innovation.
And there might be continued to build on our successive castle with our newest launch vitamin C. sound like castle.
Within our premium franchise of providers, we lost the progressive renewal treatment into China in the third quarter.
And within our eight hour franchise, we enter the daily Moisturizers segment, but right eight daily defense Moisturizer, which has been performing extremely well, especially through E Commerce channel.
Our lives with our in fragrances continued to drive growth.
Particularly our key pillars of green tea, and Waikiki with the launch of flankers.
Globally, our Elizabeth Arden consumption in the third quarter has accelerated versus the first half outpacing our net sales growth.
Additional drivers for our international net sales are Mitchell makes you tech, where we saw double digit growth primarily in EMEA, where are these brands have strong market share in their respective categories.
Turning to E Commerce, we continue to expand this part of the business.
In the third quarter ecommerce net sales grew approximately 66%.
Now representing approximately 9% and net sales.
Just 5% in the prior year quarter with growth in all geographic region, and Asia, representing the largest component.
Part of the Asian growth was fueled by the ecommerce launch of Revlon color cosmetics into China, which went live in July 2019, when a curated assortment of cheap products.
We are excited about the initial results and anticipate building on this foundation over the coming month.
Additionally, we continue to invest behind all of our own E Commerce platform, especially Elizabeth Arden, Dotcom, which grew double digits over the prior year quarter.
Despite the continued growth in Archie investment areas. Our total company performance was heavily impacted by challenging North America result.
Well, its revlon and how many brands were negatively impacted by customer inventory management.
They continue decline of the color cosmetics category as well as our increased promotionality.
We estimate that these three factors drove the majority of the net sales decline in both the Revlon and now May brand in North America.
Touching on other mass channel portfolio brands sure right and Sinfulcolors also declined over the prior year quarter, primarily driven by face off that occurred early in 2019.
Despite our overall challenging north American net sales results.
Nielsen data shows both Revlon and Elmi consumption continued to strengthen throughout the quarter and into the month of October where we outpaced the market.
Our Revlon live innovations have performed well and enabled us to regain our number one positioning and the lift and lift boss categories in the U.S. mass market.
And now May our latest innovations in the make up remember category continued to perform exceedingly well outperforming the market.
Turning to our Elizabeth Arden brand in North America, our net sales decline was in large part due to our planned SKU rationalization efforts in our color cosmetics business as we prioritize more productive use in order to increase profitability.
We were also impacted by the timing of shipments, particularly of our holiday blockbuster program.
No our ecommerce business continues to remain very strong in this airport. It was unable to offset the declines within our traditional channels.
Finally, the fragrance business in North America has stabilized as a third quarter marks the beginning of our important holiday season.
While our fragrance business and the prestige channel declined primarily driven by timing of innovation versus the prior year quarter, we experienced net sales growth of 12% in the mass channel.
This was driven by Arland fit Taylor and car brands, which grew 32% and 54% respectively on a constant currency basis.
In summary, despite the topline softness driven by North America, we are encouraged by the momentum in our key strategic investment areas, namely in Elizabeth Arden.
Expansion of our businesses in China, which grew over 100%.
Travel retail, which grew 11% and in E Commerce, which grew 66%.
In the third quarter, we drove strong growth in profitability as well as improved cash flow usage, resulting from our cost optimization program, which is on track to deliver the previously disclose cost reduction.
Although a number of external factors, including category declines.
Customer inventory management impacted our third quarter results in North America, we remain encouraged by our global consumption trend in Revlon.
As with Arden and now me.
Before I turn the call over to Victoria.
As you know we are working with Goldman Sachs to explore strategic alternatives for our business and our brand.
This process is progressing and we will update you at the appropriate time.
I'll now hand, the call over to Victoria to walk you through the details of our third quarter financial before we begin chewing.
Thank you Debbie and good morning, everyone on the call.
Let me start by highlighting our third quarter 2019 result.
On an as reported basis net sales for the third quarter of 2019 were $597 million.
Klein of 9% versus the prior year quarter.
On a constant currency basis net sales decreased 7%.
Primarily by declines in our portfolio and loved one segment, partially offset by growth within our Elizabeth Arden segment.
As reported operating profit for the quarter was $17 million, a 14 million dollar improvement compared to the prior year for.
The improvement in operating profit was driven by lower SGN expenses.
As well as 140 basis point improvement in gross profit margin.
The lower SGN, a is mainly attributable to lower overhead costs, driven by our cost reduction initiatives, including our 2018 optimization program.
We also benefited from lower integration expenses due to the substantially completed Elizabeth Arden integration program that impacted the prior year period.
You should also note we continue to support our brand.
In the core brand support dollars will essentially flat on a constant currency basis, while the percentage to net sales increased relative to prior year.
As reported net loss for the quarter was $45 million versus $11 million in the prior year period.
The higher net loss was driven by a $37 million decline in the benefit from income taxes due to a onetime noncash true up associated with the U.S. 2017 tax act in the prior year period, and higher interest expense, partially offset by the higher operating income in the quarter.
Finally, adjusted EBITDA was $68 million in the third quarter of 2019 compared to $72 million during the prior year period.
Excluding the impact of the recently imposed tariff and foreign exchange adjusted EBITDA would have increased approximately 2% versus prior year period.
Next I would like to turn to our segment results.
Rub one segment net sales in the third quarter of 2019 were $217 million, representing an 11% decrease on a constant currency basis.
The decrease in net sales was driven primarily by lower net sales of Revlon color cosmetics in North America due in part to the continued weakness in the U.S. mass retail channel and or increase promotionality as well as lower net sales of Revlon colorsilk hair products due to planned to company actions to manage trade inventory.
Only levels.
Rub one segment profit decreased to $7 million driven by the segments lower net sales and lower gross profit margin as well as higher rents support both absolutely and as a percentage of net sales as we continue to invest in the Roseland brands.
Elizabeth Arden net sales were $123 million, representing a 3% increase on a constant currency basis.
This improvement was mainly driven by higher net sales of Elizabeth Arden skin care products, including ceremony and football coach as well as fragrances, principally in our international territories.
Brand support increase versus prior year, both in absolute dollars, Andrew as a percentage of net sales.
Elizabeth Arden segment profit was $13 million, an increase of $6 million versus the prior year period, primarily due to the segments higher net sales and higher gross profit margin.
Net sales for our portfolio segment were $118 million in third quarter 2019, a decrease of 12% on a constant currency basis.
This decrease was primarily driven by lower net sales almay color cosmetics customer inventory management and our increase promotionality.
Andy nail product, where we are cycling against the launch of shellac luck during the prior year period.
Well as pure life nail Polish as which lost primers source of distribution as discussed with you previously.
Portfolio segment profit was $14 million, an increase of $12 million versus the prior year period as a result of lower brand support and distribution expenses, partially offset by the segments lower net sales.
Finally, net sales of our fragrances segment were $138 million in the third quarter 2019, representing a 4% decrease on a constant currency basis.
This decline was driven primarily by lower net sales Juicy couture and Britney Spears branded fragrances international regions due to timing of innovation.
Fragrances segment profit in the third quarter 2019 $34 million.
7 million dollar increase compared to the prior year period, primarily as result of improved gross profit margin decreased overhead expenses and lower brand support partially offset by this segment lower net sales.
Turning to liquidity cash used in operating activities. During the first nine months of 29, Jean was $167 million on improvement of $130 million versus the prior year period, primarily attributed to the lower net loss and favorable working capital changes as well as onetime costs.
So incurred in the 2018 period related to the remediation of the ERP implementation.
Free cash flow use in the first nine months of 2019 was $187 million compared to $338 million used in the prior year period.
The improvement in free cash flow usage was primarily driven by decreased use of cash in operating activities and lower capital expenditures.
During the first three quarters of 2019, we spent $20 million in capital expenditures and $28 million on permanent display.
As of September 30, as the company had approximately $167 million of available liquidity, consisting of $61 million of unrestricted cash and cash equivalents.
$81 million in available borrowing capacity under the revolving credit facility.
$30 million and available borrowing capacity under the 2019 senior line of credit left slope of $5 million.
And finally with regard to our overall financial strategy in 2018 optimization program. We are continuously working to optimize all lines of up you know with particular focus on improving gross margin and reducing our overhead cost structure.
We remain on track to deliver the previously announced annualized cost reduction of between 125 million and $150 million.
And now expects to realize between 90 million and $95 million of in your cost reductions during 2019 of which approximately $65 million had been realized as of September thirtyth.
Approximately 50% of the annualized cost reductions are expected to be realized within cost of sales and the remainder in selling general and administrative expenses.
As a reminder, the 2018 optimization program has three major focus areas.
First optimizing our global supply chain to drive manufacturing efficiencies.
And rationalizing our global warehouse network and office locations to drive greater efficiency and lower our cost base.
Second enhancing our in market execution by optimizing our commercial and organizational structures to create more effective global and regional capabilities.
And third reducing overhead cost and streamlining functions by leveraging technology and shared services and standardizing and simplifying our business processing.
I'll now hand, the call over to Debbie for closing comments.
Thank you Victoria.
In closing despite the headwinds in North America, we remain focused on investing in our brands and core strategies.
And continuing our ongoing efforts to transform our company.
With that we will now open up the call for questions.
If he would like this in the next question. Please press star one on your telephone keypad and you'll be prompted for your question again. Please press star one on your telephone keypad now.
Our first question comes from the line of William Reuter of Bank of America [laughter]. William Please go ahead.
Good morning with regard to the.
She and optimization program.
<unk> expectations.
So 120 fives.
Sure.
Push back in terms of timing or was this always expectation.
So thank you for the question when we designed.
$50 million it was always our expectation that all of the projects and plans would be in place and in motion by the end of 2019, but that the full year annualized savings would not be able to be relieved.
Achieved until 2020. So this is this is very much in line with our expectations and how we budgeted.
Okay, and then you mentioned.
Some data has improved.
For all manner of along with it.
Product launches that are performed particularly well within those segments or is it kind of across the <unk> Brown.
To build that you've been a question. We are very excited about the strength of our consumption and the continued strength that we were showing throughout the quarter on both alma and Revlon brands.
We did have some a lot of success actually with our new product launches on Revlon in both live and lip gloss and as I mentioned that has enabled us to regained the number one position.
In live which is very important for Revlon with regard to al May Oh, we have a new foundation. That's currently in the market.
Which is performing very well as well as the biodegradable makeup removers.
Which continue to perform very well in market.
Okay and I'm, just lastly from me.
A lot of retailers are obviously, reducing their inventory levels. You also mentioned category declines.
Trailers are reducing the spaces are allocating to the category or is it the searchers keeping less inventory on hand, I guess I was surprised with the category overall cosmetics or participate in wasn't decline.
Yes, so thank you for the quarter or the category continues to decline so with its declined about a 4% in the border.
We do see that that retailers are holding a less inventory then they held in the past.
Okay. So there's like you.
Thank you.
Our next question comes from the line of Hale Holden of Barclays. Please.
Please go ahead.
Thanks. This is Ed broker on for Hill.
Question.
About the Hong Kong puts us I was wondering if there's any disruption for some of it from other consumer product companies that that's been an issue.
And thank you for the question.
We have you know obviously, we're keeping close tabs in terms of our business in Hong Kong given the current political situation.
But with regard to our third quarter results, it's really had a minimal impact, but we are continuing to watch that very closely.
[noise], great and then.
You noted that the.
Some of the decrease in sales from U.S. mass.
Or I guess, the Rewalk segment was due to increase promotionality.
I was wondering where you had had to do this and kind of will continue.
Ah so they can for the question we did have increased promotionality for revlon in the quarter.
And you know when you look back at 2018, and the third quarter, Oh, we had work to reduce.
Our promotionality at that time based on what we're seeing in the market.
And this year, we made the decision based on what we are seeing in the market to remain competitive that we would increase it and that's what we're seeing today.
Great and then last one for me is there any update on a 2021 maturity and your capital structure and how you put on it a dressing as it starts to.
Maturities starts to come up.
So that's that's a good question. Thank you for that question. So just let me reiterate where we are from a liquidity standpoint. So at quarter end. The company had arc 567 million of available liquidity $61 million of cash $81 million available borrowing under the revolving credit facility.
And 30 million and available borrowing under the announced line of credit less float of about $5 million and with regard to the 2021 nothing has really changed since last quarter. We continue to work with our lenders to refinance the 2021 maturities and our plans remain too.
To refinance that and to communicate as appropriate when when we already [laughter].
Great. Thank you.
Our next question comes from the line of Jenna Gianelli of Goldman Sachs. Jenna. Please go ahead.
Hi, Thanks for taking the question I wanted to ask I'll, just a little bit about Elizabeth Arden I'm curious if you could talk to us about how some of the other products and mines are trending.
Outside of providing termite given you know, they're seeing such meaningful strength and then also just kind of a follow on seemed like there was a little bit deceleration sequentially. Obviously as the business continues to grow where that's expected but was there anything going on there really timing related et cetera, I'm just some more color. Thank you.
Thank you for the question so with regards to Elizabeth Arden you know as you stated and as we stated in our comments a we are being the growth is really driven by two segments skincare, a with our three franchises. So it is driven by providing Jeremiah but also the.
Franchise at eight hour.
And eight hour is really being driven by our launch into the daily Moisturizer segment.
With our launch of Great eight daily Moisturizer, which is performing very well.
When you look to the other segments fragrances also experiencing growth.
Our key pillars in fragrance today, our green tea and white tea.
And we launched flankers in the quarter, which is contributing to that gross.
With regard to the consumption right. So when you look at the total net sales of 3%.
I think that it's also worth highlighted English for in the out which were in in the remarks that our consumption continues to grow so our consumption in this third quarter is outpacing the first half.
They'll continue to have a lot of.
Thank you for the question.
Thank you and I have actually one more if I may.
On Revlon International I'm curious, if you're seeing similar starting to seize on a similar trends there as you are in the U.S. just really on category challenge It and you know retailer de stocking up of inventory.
It seems like Revlon international non performing relatively better as you know, it's performing arts as a matter. So are you seeing some of those trends as we're seeing in the U.S. start to accelerate internationally as well.
So thank you for the question with regards to Revlon International.
First I would like to highlight the success that we've had.
With regards to the launch of Revlon into China through E Commerce, a where we're seeing a good six good early success and we continue to look to build on that.
With regards to other markets, particularly with our consumption. We continue to see strengthen our consumption. So we look at key markets like Australia, and South Africa and staying.
We continue to see the consumption on revlon strengthened in the quarter.
With regard to seeing any additional or similar trends.
To the U.S. mass market I would say that the UK.
Or mass color cosmetics is starting to see some similar trends in terms of a slowdown in the category.
Great appreciate the color I'll pass back other thank you [noise].
Yeah.
Our next question comes from the line of Karru Martinson of Jefferies <unk> co. Please go ahead.
Good morning and terms.
[noise] vote.
[noise]. So into you know, we don't give forward guidance in terms of fourth quarter. You certainly saw the incremental impact in Q3, we highlighted that relative to the impact that it had on or adjusted EBITDA.
And that provides an order of magnitude.
[noise] being down.
In North America.
Right.
No.
Going on there.
[noise] launch.
[noise] launching products.
[noise] sponsor.
For sure.
What does it change at all so to me.
Yeah.
So as we start with the impact on then the net sales.
We look at three key factors that impacted the net sales for Revlon.
The first with regards to retailer inventory management.
The second is with regards to category decline in the third quarter, a as I mentioned it continues to decline at approximately 4%.
And then the increase in our Promotionality. So all three of those really impacted.
Third quarter.
When we look at the consumption right, which is has been strengthened throughout the third quarter, we see the impact of the launches.
That we put into market.
Really hitting towards the end of the second quarter for Revlon, particularly in live.
And Ah that.
Moving to be very strong.
And as we head into October we're seeing that the tactics that we put in place with regards to brand support.
With which Victoria touched on that we continue to support the brands.
Really having a positive impact on the consumption of the brand as we headed into October .
Okay.
<unk>.
More than three quarters.
Does that change anything in terms.
[noise] Oh, no it does not.
Thank you very much.
Thank you.
Our next question comes from the line of married Gilbert of Imperial Capital Mary. Please go ahead [noise].
Good morning, with retailers I'm holding less inventory.
And as we go forward you know because it's sort of really impacted dealing this quarter.
Is it something we have to cycle over the next year and how do we weigh that impact with.
The improvement in consumption.
You know and the brand support and if you could also talk about <unk> areas in which the brand support is being deployed and how you're getting that traction there.
Okay.
Thank you Mary.
So with regard I mean, so I'll take the the answer into the various segments for the questions that you had so with regards to retailers and holding less inventory I'm not going to comment on anything forward looking but it is something that did impact this quarter.
With regards to Revlon and M&A.
When you when you look at where our brand support has been and focused on Revlon, it's been very focused on.
Core product lines of color stay safe.
And Super Lustrous lift.
And we continue to drive a core as well as a within Super Lustrous, which is a core franchise of ours. The innovation that we had within that.
Segment with the launch of our matte lipstick.
Okay. That's helpful.
And then.
With regard to what's going on in math.
You know with Cvs, and Walgreens sort of transforming and re merchandising the category, including more indeed brands have you experience 'cause it sounds like we have two factors. One is the overall reduction in inventory given the weakness of the category. But then number two are you seeing a loss of shelf space as a.
You know somebody's mass channel players, bringing in more in de France and are transforming the stores to become a little bit more experiential with services and I wondered if there's any opportunities given that and if you could awful talk about you know.
Some of the innovation that we can expect across.
The portfolio [laughter].
Okay. Thank you so with regards to Cvs and Walgreens and their own reinvention. You know you know I think it's great for the industry I think it's great for the categories that they are investing in beauty and we are very excited to continue to partner with them.
And continue our longstanding relationships that we have with them yeah with regard to just states changes for US we have normal fluctuations that happened throughout the year. The third quarter was no exception, but really nothing material in terms of these fluctuations.
With regards to Revlon around may.
We did have some contract traction in our phase on beauty tools.
And some on Mitcham and as you know I'm, we didnt have a contraction in pure right as well as sinful.
With regards to the innovation that Ah you can expect going into 2020, I would love to be able to talk about that right now, but I'm not going to give any forward looking guidance, but we are very excited about it.
Okay, and then finally can you give us an update on flush beauty.
Ah yes. Thank you. So you know with regards to flush of flesh you know we continued to be very focused on driving the brand with a gen Z and millennials are those continue to be a the consumers who are a you know very.
We attracted to the brand, particularly buying through e-commerce , both in our direct.
[noise] duty dotcom as well as on Ulta dotcom.
Okay. Thank you.
Thank you.
On a reminder, if he would like to submit a question. Please press star one on your telephone keypad and you'll be advised to ask your question.
Our next question comes in the line of Eli Witynski of Cantor Fitzgerald you like please go ahead.
Please ensure that your line is unmade if locally [noise].
[noise].
Eli we will try to return to your call. Please try pressing star one again, we will now move onto our next question from Collyn. This army of Starlink capital Cops Holland. Please go ahead.
Oh, yes, thanks, I had a quick one for Victoria, but a follow up forgive me if I may I appreciate the Q.
Victoria can you remind us are you still in market trying to refinance the existing notes or is that process thoughtful given the potential street strategic.
Oh transaction, so with the repayment of Goldman and then related Lee can you also touch on.
Which assets, if any or all the time on in slumbered or not collateralized by existing bar.
I'm just curious about the borrowing base.
George metal capacity.
Okay. Thank you for the question I think I'm going to stick to the what I've said before which is is that we are constantly working with our lenders to refinance. The 2021 note maturities nothing really has changed in that answer since Q2, as well and that we will communicate when appropriate about.
The timing of that execution, but we continue to work actively diminish the capital structure and the read and the refinancing.
Okay. Thanks, and then just on any unencumbered assets or one of the tangible intangibles.
We're not going to comment on that.
Okay, a follow up for Debbie them now that we've lapped the ERP implementation can you just talk about some of the operational benefits that you're now seeing given that you.
Several quarters now under your belt with that in place and in particular, if you could link any of those benefits.
To the ability to to make cash flow capex more efficient overtime and and more visible.
Sure. So I will touch on it and then Victoria will also add to it no booklet went for bars to the benefits that we've been seeing a on the in the ERP with regards to ERP system that we implemented we did eliminate a several legacy systems within the business.
We've had we've been able to really streamline our processing fees and various functional areas such as finance.
As well as within a supply chain. So we have seen the benefit.
And I think just to build on that if we go back to you know the tenant behind the optimization program I think putting the ERP system and helps us be able to drive the savings that we've seen in the optimization program. Because there was you know there were three parts to it but two of them specifically relates to starting to standardize global process.
These streamlining how we work and being able to become more efficient what's right. So we can take out spans and layers and operate in a more efficient in a more efficient manner. So I think we're seeing the benefits of that ERP system enabled through the optimization program.
Thank you [noise].
Our next question comes from the line of Stephanie was sick of Jefferies. Stephanie. Please go ahead [noise].
Hi, This is actually analogous one for stuff was saying thanks for taking your question.
Just wanted to unpack trends, you're seeing the professional channel and then are you seeing any emerging trends in color cosmetics. Thank you.
So so with regard to the professional channels.
I'm, just trying to get a little bit more clarity on the question.
Through your professional stylish products.
Okay, So with regard to our Revlon professional business.
We are you ended the performance for the quarter has been basically flat a sense for prior year quarter.
Ah and we continue to be focused on a the strategy of leading with our hair color business.
Within Revlon professional.
Okay, great. Thank you and then anything you're seeing emerging in color cosmetics.
With regard to product trends.
Yeah, just industry trends.
I mean, you look we continue to see color cosmetics with regards to trend trends. Specifically you know is really where we are launching right. So we continue to be focused on the areas with Revlon and went down eight at are core to that business.
Particularly with Revlimid very focused on live a in the quarter and without me very focused on our face launch as well as the make up for movers.
Great. Thanks, so much thank you.
Our next question comes from mine. It then on <unk> of citizens Bank not on and please go ahead.
On line. Please ensure that your phone it's I needed locally.
[noise].
My line, we cannot hear you I'm going to meet your line again, if he would like to ask a question, which I can.
[noise] [noise], Okay, I think no additional questions. Let me say thank you.
All of you who have joined our call today and especial note how our team members around the Revlon World who are listening.
Thank you for all the efforts that you make every single day I am proud of all that we have accomplished together striving to build a stronger global business.
Thank you.
[noise].
Thank you for joining today's conference you may now disconnect your lines.