Q3 2020 Earnings Call
Thank you for joining this lazy boy fiscal 2023rd quarter results Conference call. All participants are in listen only mode. What you will have the opportunity to ask questions. After todays.
With that I'm pleased to turn the floor over to your host Kathy Liebmann welcome Kathy.
Thank you Jim and good morning, Thank you for joining up to discuss our fiscal 2023rd quarter results with the morning, Kurt Darrow La Z Boy, Chairman, President and Chief Executive Officer, and Melinda Whittington CFO.
Well open and close the call in the Linda will speak to the financials midway through well then open the call to question.
Like will accompany this presentation you may view them through our web link which will be available for one yeah. Yeah. It's a telephone replay of the call will be available for one me getting this afternoon.
Let me begin the presentation I'd like to remind you that some statements made in today's call include forward looking statements about baby boy future performance. Although we believe these statements to be reasonable our actual results could differ materially the most significant risk factors that could affect or future results are described in our anymore.
Report on form 10-K, we encourage you to review those risk factors and solid other key information detailed in our FTC filing.
Also our earnings release is available under the news and events cap on the Investor Relations page of our website and it includes reconciliations of certain non-GAAP measure, which are also included as an appendix.
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With that I'll now turn over the call to Kurt Darrow, La Z Boy's Chairman, President and Chief Executive Officer.
Thank you Kathy and good morning, everyone.
Following yesterday's close of market, we reported a strong third we reported strong third quarter results.
Which included an increase in sales to 476 million.
The double digit gap consolidated operating margin.
Double digit upholstery margins operating cash generation of 66 million.
And 19 million returned to shareholders through dividends and share purchases.
Our performance for the period reflects the ongoing strength to the lazy Boyd brand.
Coupled with our powerful global supply chain.
Against the entire North America across the entire North America, La Z Boy Furniture Gallery network.
Written sales.
Same written same store sales increased 10.5%.
The fourth consecutive quarterly increase and our company owned retail segment turned in its seventh consecutive quarterly increase in delivered same store sales.
Looking at her results fiscal year to date.
Consolidated sales are up 3.5% delivered sales, where our company owned retail segment art.
9.7% higher and written same store sales for the.
They should work furniture Gallery network are up 6.4%.
All in all a very solid performance.
With consumer confidence remaining high.
Interest rates low and positive housing trends on a macro side.
We believe we're well positioned to capture market share in this environment with our strong brand.
Our vibrant lazy boy furniture galleries system.
Last custom offering and speed to market promise.
I will now walk you through our operating results by segment that we'll start with our retail segment given its ongoing excellent performance.
Our retail segment continues to deliver excellent results driven by improved traffic trends and ongoing strong execution at the store level increase design sales selling more complete room groups and improved and engagement with consumers.
Sales for this segment increased 5.1%.
267 million.
And delivered same store sales increase of 5.5% the seventh consecutive quarterly increase as we noted earlier.
On a GAAP basis operating margin improved to 9.8%.
From 8.9% in last year's third quarter.
Not a non-GAAP operating basis, it increased to 9.8% 9.1%.
Across the broader store network.
Which includes both company owned and do their own stores.
Written same store sales for the 355 lazy boy furniture galleries doors increased 10.5% for the third quarter.
We believe this excellent performance reflects the strength of the La Z Boy brand.
The positive impact our marketing.
Platform, featuring Christian Bell, which I'll talk a little bit more about in a moment and our broad array of odd trend furniture, coupled with our design program.
The results also reflect positive momentum in Canada for the quarter and year to date.
The strength across the store system demonstrates our core customers preference to shop in store.
Fueling our objective as well as our dealers to continually invest in the lazy Boy furniture Gallery program.
Well the third quarter across the network three new stores were opened three were remodeled.
One was relocated and one was closed.
For the fourth quarter.
Plans are to open one new store Regal relocate relocate one we model one and close to ending the year with 354 lazy boy furniture galleries doors with 152 in the new concept.
Now onto our wholesale business.
In the upholstery segment on sales were 337 million.
GAAP income GAAP operating margin increased to 13.8% from 10.3% in last year's third quarter.
Non-GAAP operating margin increased to 11.2% up from 10.3%.
Reflecting supply chain inflationary pressures more than offset by efficiencies and lower raw materials.
Our non-GAAP operating margin, primarily excludes the net benefit of 8.7 million related to our supply chain optimization initiative announced in August most of which relates to income from the sales of our Redlands, California facility.
Recall is part of our plan.
We closed the ride alongs lazy boy branded upholstery facility and shifted production to our new Yoshio, Missouri and silent shrink Arkansas plans.
We also grants.
Positioned our another cut and sew operations from our Mississippi facility to our large cotton So center in Mexico.
Although these moves include short term cost.
We believe they will allow us to further optimize operations.
Strengthen our competitive positioning in the marketplace overtime.
I will provide ongoing annual savings.
On the commercial side of the business, we continue to see momentum with a relaunch of the live life comfortably campaign, featuring our new brand Ambassador Kristen Bell.
Since the launch there has been month by month increase in consumer recognition of the campaign and Kristen as our spokesperson.
Importantly, we are seeing increases in consumers.
Indicating that La Z boy furniture fits their style or is for people like them.
We believe we believe this combined with a quality in comfort that the lazy void brand is broadly known for is driving the brand strong performance in the marketplace.
On the merchandising side as noted last quarter, we are experiencing great success with the new wireless remote upgrade for power recliner with orders continuing to increase in exceed expectations.
<unk> more than half what consumers are selecting the option with its sleep stylish won in various memory position.
We have also introduced a line of pet friendly fabrics teaching I clean technology, which are doing well and our sectional sofa business is extremely hot right now.
At the upcoming April Highpoint market, we will add to our new sectional supergroup collection that allows for multiple configurations to meet consumer needs.
We will also introduce seeding upgrades and enhance motion mechanism and custom leather offering that will give us more competitive starting price points.
Now turning to our case goods side on the centrally flat sales.
Operating margin is was a solid 9%, although slightly down from last year, reflecting the impact of tariffs on the occasional table in increased freight.
As noted last quarter, we have moved much of our occasional tables sourcing to Vietnam and stabilized the business vis-a-vis last quarter. Although there is still some work to be done.
Now, let me spend a few moments on enjoy birds. The E Commerce business, we acquired last fiscal August.
For the quarter Joy were delivered 22 million in sales up 18% versus the prior year.
Business continued to improve its gross margin quarter over quarter fueled by supply chain synergies.
The operating loss decrease versus the prior year period and sequentially from the second quarter.
Joy Bird continues to exhibit fast paced topline growth and is bringing lazy boy, a new consumer through a new channel.
Although the trend didn't growth and integration efforts is slower than originally anticipated.
We remain optimistic about joy birds process prospects to add long term value.
And we'll continue to make improvements across the business model with the objective to balance investments in growth with bottom line performance.
Before Melinda goes through the financials I want to make a brief comment on the past weekends news about art van furniture with respect to its private equity owner exploring a variety of options with its creditors investors and landlords to ensure it can continue serving its guest and communities.
Well, our van is an important customer for US no one customer accounts for more than 3% of our consolidated sales.
To that end, we are monitoring the situation closely but it's too early to define how that may or may not impact our business.
I will now turn our call over double window.
Thank you Kurt and good morning, everyone.
As always let me remind you that we are presenting our results on both the gap and a non-GAAP basis.
Non-GAAP results continue to exclude purchase accounting adjustments for acquisitions.
And one time charges related to our supply chain optimization initiative announced in August, including the onetime gain on the sale of the Redlands facility during the quarter.
Additionally.
This quarter, we excluded an impairment charge spraying investment in a privately held startup.
We believe this non-GAAP presentation that reflect underlying underlying operating trends and performance of the business.
For the fiscal 23rd quarter, we wrapped recorded 1.4 million pretax or two cents per diluted share in purchase accounting charges, the majority of which related to the acquisition of Joy <unk>, which is reflected in corporate and other.
We also recorded a pretax charge of $6 million or 10 cents per diluted share related to the investment impairment.
And we recorded a net benefit of $8.7 million pretax a 14 cents per diluted share related to our supply chain optimization initiative.
In last year's third quarter.
We recorded 1.5 million pretax or two cents per diluted share and purchase accounting charges.
And as always a full reconciliation of GAAP to non-GAAP is included on our press release and in the Appendix section at the end of our consolidated cost line conference call My.
Moving to our consolidated second quarter results sales increased 1.8% to $476 million led by our retail segment.
GAAP consolidated operating income was 52 million versus 41 million in the prior year quarter.
Excluding the net benefit related to our supply chain optimization initiative and purchase accounting charges non-GAAP consolidated operating income increased to 45 million from 42 million in last year's corridor.
Consolidated operating margin on a GAAP basis was 11% versus 8.7% in last year's quarter.
Non-GAAP consolidated operating margin was 9.4% versus 9%, reflecting improvement in our upholstery and retail segment.
And as a reminder, last years third quarter included a onetime benefit of 110 basis points related to the redesign of our employee benefits programs, which was included in both our GAAP and non-GAAP numbers.
GAAP earnings per diluted share for fiscal 2023rd quarter were 74 cents versus 61 cents in the prior year period.
Non-GAAP EPS was 72 cents per diluted share versus 63 cents in last year's third quarter.
Non-GAAP results for the fiscal 2020 corridor, excluding charges of two cents per diluted share from purchase accounting.
The 10 cents per adult <unk> per diluted share impairment charge and the 14 cents net benefit related to the company's supply chain optimization initiative.
In fiscal 2019 third quarter non-GAAP results excluded a two cents per diluted share charge for purchase accounting and again last year's third quarter GAAP and non-GAAP results included a seven cents benefit related to employee benefits changes.
Turning to gross margin third quarter consolidated GAAP gross margin increased 140 basis points versus the prior year corridor and non-GAAP gross margin increased 150 basis points.
60 basis points of improved gross margin were driven by changes in our consolidated business next due to growth in our retail segment and the contribution from joint Berg, both of which carry a higher gross margin that our wholesale businesses.
Additionally, the upholstery segment margin benefited from supply chain efficiencies that offset inflationary pressures as well as from favorable raw material prices.
Consolidated gross margin was also impacted by a decline in gross margin for our case goods segment, primarily due to higher ocean freight and higher tariff car uncertain occasional tables.
Last years third quarter, GAAP and non-GAAP reporting also included a portion of the one time benefit and the changes to employee benefit.
Moving on to ask DNA GAAP SGN as a percentage sales decreased 90 basis point in the fiscal 2023rd quarter compared with prior year and non-GAAP SGN eight increased 110 basis points.
Changes to our consolidated business mix increased s. DNA as a percentage of sales by 70 basis points for the quarter.
Last year's third quarter also included a 3.8 million dollar onetime benefit from the employee benefits redesign, which was included again in both GAAP and non-GAAP results.
And finally on a GAAP basis, the sale of Redlands drove HM 200 basis point improvement in S.G.N. <unk> as a percent of sales for the quarter and has been excluded from our non-GAAP resolved.
Our effective tax rate for the third quarter was 26% compared with 26.9% in the prior year period.
Absent discrete adjustments the effective tax rate in fiscal 22nd quarter third player would have been 25.8%.
Our effective tax rate varies from the 21% federal statutory rate, primarily due to state taxes, and we continue to estimate our effective tax rate will be in the range of 25% to 26% for the full fiscal year.
Turning to cash we generated $66 million in cash from operating activities in the quarter on stronger earnings increased customer deposits due to the increase in retail written sales and improved working capital management.
We ended the period with $168 million in cash cash equivalents and restricted cash and 30 million in investments to enhance our returns on cash.
During the quarter, we invested $13 million in capital primarily related to machinery and equipment upgrades to our Dayton manufacturing facility and investments in our retail stores.
We also paid $6 million in dividends and spent 12 million purchasing 400000 shares of stock in the open market under our existing authorized share repurchase program, which leaves 4.8 million shares of purchase availability under that authorization.
Our capital allocation priorities remain to invest in the business to drive growth and then provide returns to shareholders with our dividends and discretionary share buyback.
We expect capital expenditures for fiscal 2020 in total to be in the range of $45 million to $55 million slightly lower than our prior estimate due to the timing of projects.
These expenditures are primarily related to plant upgrades and improvements to several of our retail stores.
And finally before turning the call back to Kurt I want to again remind you of several items for the remainder of fiscal 2020, consistent with our call outs in previous quarters.
We will continue to with our non-GAAP presentation, excluding purchase accounting adjustment as well as the charges related to our supply chain optimization initiative.
For acquisitions to date adjustments continued to be anticipated in the range of eight to 10 cents per share for the full fiscal 2020, plus any effect from revaluation of the contingent consideration liability for future earn outs I enjoy library, where the payout could range from zero to $65 million.
Additionally, our supply chain optimization initiative.
We expect to required costs of one to two cents in the fourth quarter.
For a total impact of five to six cents per diluted share benefit for the full year, when including the sale of the Red one facility.
Also I remind her on mix are evolving consolidated sales next may affect the seasonality of consolidated results.
With joy burden the growth of the retail segment third quarter consolidated sales could outpace or be level with fourth quarter, which has historically been our largest corridor.
Regarding s. DNA cost trends, we would again note the impact of changes in our consolidated business next with retail growing any acquisition enjoy abroad.
This mix impact for the full year is expected to be an S. U N. A increase in the range of 100 250 basis point, the majority of which was realized in Q1, given the timing of the Arizona enjoy great acquisition.
And finally last year's fourth quarter, GAAP and non-GAAP results included a one time three cents per share charge for the final stages of the redesign of our employee benefits program.
And now I'll turn the call back to current for his concluding remarks. Thank.
Thank you Melinda.
As we head into the end of our fiscal year.
I feel positive about lazy boys positioning in the marketplace.
Our foundation is solid and includes a strong brand world class global supply chain, well performing stores system and engaging marketing.
This platform combined with ongoing strategic investments fueled by our strong cash position.
Will drive long term profitable growth and.
And a return to our stakeholders.
We want to thank you for your interest in La Z Boy incorporated today, and we'll turn the call over to Kathy to provide some instructions for getting into the queue for questions.
Kathy.
Thank you for the.
People begin to <unk> question and answer period now Jim. Please review the instructions for getting into Q2 M. question.
Pardon the lender for your comments this morning.
Joining if you'd like to ask a question at this time, Please press star and one on your telephone keypad offended.
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That's a question.
First from John Baugh Stifel.
Thank you good morning, and congrats on a solid quarter Oh jump right in.
I guess first question is on the call all which was quite strong and I know, there's a little softer <unk>, you're part of the I'm curious where there any change in the issues. It Didnt surprise you had good it was was weather banner or maybe some cadence during the months comments on traffic ticket you did mentioned.
Christian Bell just curious if you could parse out why you think that number was so strong.
Oh I can give you a number of factors John I can't give you percentage of which factor.
His old as weighted one way or another but I think.
You start out with lazy boy itself and our dealers had been investing in their stores quite a bit the last four or five years and in our search research would indicate that consumers prefer to I'm.
Shop in stores that are on trend and inspiring and doors that are 15, 20 years old don't really fit that bill. So there's been a great effort in and upgrading the look of our stores.
I do have to give our marketing a call out then.
The way, we're going to market, both online and on television and Kristen Bell has been.
Afresh spokesperson for US who is attracting a younger customer.
But the big issue comes down to my mind to what our store teams are doing their execution.
How they.
How they close.
More sales build the ticket you get into the home.
And it's not it's coming across the whole to habit.
To have a 10% same store.
Sales increase for a quarter you just can't rely on one region or one area, it's coming across to all of North America.
And we see Pos pockets of strength it everywhere.
Can't really comment much about the timing. This was January a better month, because the days between Thanksgiving and Christmas shortened and there was more pent up demand I'm not I don't know how to do that math.
Mass.
Typically but.
I'd say the only thing there was probably a little weather last year on the north and particularly in the northeast, but I don't think it was significant but we have had a warm winter and no major snow on holidays, So I'm sure that that hasn't hurt but I.
I just think it's a multiyear effort of finding our sweet spot and then terminating how we're going to market and what we're doing and and we continue to bring product to the market the customer seems to like so we're obviously very pleased with the direction of our retail business.
And the other numbers, Kurt Warner Canada jumped out at me was upholstery margins and you cited quote efficiencies in the raws being lower.
I guess can you delve into the efficiencies in it that is that a byproduct of the restructuring or something else and then if it's not the restructuring.
Let me remind us how you think that's getting a impact.
Productivity cost going forward, and then and Canadian outlook for the raw material cost situation.
Don't know a few quarters out versus any pricing actions, you've taken or will take thank you.
Sure John.
A couple of things as we said you know we have fueled this business for a long time by great work as kind of continuously driving efficiencies on the supply chain side of things and certainly you know the red ones move as you. As you noted is is a piece of that but you know we will see benefit over the longer term.
We're still on the stage right now where there's cost related to that choose through all of those efficiencies, but starting to see that that turned positive and so I would say you know, it's it's just that continual.
<unk> continual with I'm looking for those efficiencies while at the same time, you know you've got input costs that were seeing inflation on on the raw material side of things that was still a benefit a quarter on quarter in the third quarter, we will pretty much have anniversaried most of that by the fourth quarter.
And so you know that one would probably as far as a year on year, where probably starting to to even out on that broadly, though I'd say the privacy very pleased with with how the upholstery margins.
Yes benefited in the current corridor and we'd see some of that become through but it's a bit of everything kind of worked all together in our favor this quarter as well.
Okay, and lastly quickly.
No. That's this far without talking about the virus that I'm going to bring it up.
Talk to us about how that could influence your business, I guess, particularly leather, but a walk us through what you're seeing and what's your take good could or could not happen to your business. If we continue to be shut down over there. Thank you.
Sure. So you know for us where we obviously are are monitoring the situation very closely you know that for the most part the majority of our employees in our operations are yet in the North American continent, but nonetheless, we have very valuable suppliers.
And some employees there so the first the most important thing is we know that everyone safe Weve provided safety equipment to our employees that are there and we have we've we've temporarily brought our ex pats home, while we whether this situation.
As far as all of the work that that we how with suppliers over there with all the data we have as of today, we don't expect to see any material impact on the current fiscal year, if things continue to kind of not start to two peak down a little bit.
Could it the very end of the fourth quarter start to see some supply issues and as you noted that's really on leather and and some of our upholstery components right. Now we look good but again, it's it's it's fluid day to day and as things continue to continue to evolve we'll be watching out for potential and.
Taxes, we go into next fiscal.
Just curious <unk> yeah.
John just one point that the you know the tier one suppliers and I think Apple mentioned that the tier one suppliers are coming back online.
Last week, but as the supply chain works on one, particularly in China, There's tier two suppliers to three suppliers and we don't have a lot of visibility to the people who actually.
Weve the fabric refine the yarns and so.
We're glad our suppliers are back to work, but if they don't get support from their suppliers and then there could be some little pickup towards the end of our fiscal year Linda.
Related to.
Okay. Thanks, good luck.
Sure John Thank you.
Our next question will come from the line of Bobby Griffin at Raymond James. Please go ahead. Your line is open.
Good morning, everybody. Thank you all for taking my questions and congrats on a a good operational quarter I guess I wanted to first fall back up on on John's question on the virus just to help us maybe get a little bit better understanding our products actually flowing from your suppliers to to your factors now our or you relying mostly on just inventory reserves that youve built up for fabric and leather.
Other.
So if you go back.
Bob you a little bit a lot of product came our way so I'm still on the water right prior to Chinese new year.
And and Chinese new year is normally a few weeks now they've extended it to get people back. So there hasn't been anything moving here for the last three or four weeks, but we plan for that it comes every year we know.
There may be some goods that didn't quite get.
Shipped before they went on break and that stuff will ship their concern is about new stuff being made and heading our deadlines.
Going forward, but where we're not lorawan fabric at this point and we plan out real well and our supply chain team is moderating the oh.
Monitoring this very closely but right now we've not seen any disruption is just the concerned that.
Stories from time to time are changing and.
We we want to see how the next couple of weeks ago.
Okay. That's very helpful. And then I guess next for me pretty Big gap between the same store written sales in the deliver sales I understand the delivered sales or just for the stores you own but is there any timing issues. There have you know getting products out or is there anything to help us think about that that gap.
So.
The fact that we operate with a four to five week backlog.
Bobby that.
Most everything that we sold after Christmas on all through January did not get delivered and in the quarter January was the strongest month. Three so are there was no hiccup rather than normal seasonal points of view and we do a take.
Vacation at our plants the week between Christmas and new years.
But nothing unusual just thankfully a little better business and as you pointed out Bobby that that that written number is across the entire furniture and gallery network, whereas obviously the delivery of just ones that are corporately owned.
Oh, good to hear about junior I guess, Kurt I will take the chances you brought up one of them on sad to see if she should give us any comments on how Presidents' day trended at least for the data you do have.
Well, yeah, we're glad to do that they only data we really have a at this point, it's only a day or a day. After the holiday we were very pleased with our performance over that holiday again, no no poor weather consumers were out shopping.
And and and ready to buy so.
Work, including a holiday I think in good shape.
Great well I appreciate all the detail best of luck in the on the next quarter and thanks again for taking my questions.
Thank you. Thank you.
And once more to our telephonic audience. This morning, if you'd like to ask your question. Please press star and one on your telephone keypad and a from a reminder, please return to your hands, if you're using a speakerphone.
Next from Anthony Lebiedzinski Sidoti.
Yes. Good morning, Thank you for taking the questions certainly in a nice performance.
Same store sales I just wanted to I also look at the.
So the product mixes.
In the 10-Q, you guys show nice job of breaking down the.
Product mix motion upholstery was flat quarter.
Over quarter versus a year ago.
Scenario upholstery up nicely. However, so just just wanted to dig in as far as what you think as far as the reasons why that is and.
But patients kind of going forward.
I think we mentioned in the prepared remarks and things that are that are.
Sectional business the larger groups that old family can sit on sit around the TV.
Both with ourselves in the industry is becoming more popular.
And Ah, that's growing and Oh, we see we've been seeing a little growth the last.
A few months in our recliner business our mix.
Changes quarter to quarter not substantially but.
We may run a promotion.
One category and not another and our dealers they do some other things differently. So Oh I don't I couldn't tell you there is a major shift or a major trend going one way or the other but not every quarter as always.
As always equal, but no nothing that I can point out that significantly different than deal flow with with our categories in any quarter.
All right. Thank you for that explanation.
And the you know as far as a joint bird to you mentioned in your script of the integration is proceeding slower than expected you also mentioned.
Something in the 10-Q about it as well so I just wanted to follow up about the issues as far as the integration is concerned if you could expand on that that'd be very helpful.
Yeah, I'll take that one you know what I would say overall is if you kind of look at what's going on out there with E. Com companies you know it there seems to be a better. They are an interesting balance of you can get a lot of top line growth, but its been a bit elusive.
To see to see Bottomline progress.
Our goal is to balance the two of those and so we were very pleased to see see enjoy birds growth.
Yes in the quarter on a top line basis up 18% Wow. We you know in the bottom line that that that small operating losses getting smaller and smaller I wouldn't say we have issues I would just say, there's there's a thousand little things that are all continuing to improve and together those are taking more.
Time, then we initially optimistically probably focused on and so you know our goal is to continue in the last in the last quarter. We recognize additional gross margin center synergies there's still.
A runway ahead of that we continued to.
On the S DNA investment on that business as well over the last quarter are there new web site, a launched a fully across the nation and honestly just in the last week or so are we really starting to see that get complete traction.
So we still feel very good and and I wouldn't point to issue is per se or any one thing. It just is a lot more you know blocking and tackling then maybe we realized upfront.
We feel confident you know that we're gonna get I continue to to make that sequential progress now yeah. We're going to hit beginning of next fiscal we're gonna have seasonal lows again on the sales.
So well you know will go through a little bit of that but I. You know we feel like we'll continue to narrow that gap on the on the bottom line, a while still driving growth on the top line that is disproportionate to what we're doing across the rest of our businesses.
Anthony weaker <unk> with more marketing spend and all we we could grow our sales faster.
But it wouldn't be a profitable and and we're not as a student of trying to.
Spend aggressively and wait three or four years to get a return I also don't think our shareholders want us to a spend at all costs than take away from our earnings and the rest of the enterprise. So we're taking a balanced approach.
We look around the industry and there's a number of.
Direct to consumer furniture companies that that aren't making any money, we'd like to break that trend and that's kind of target.
Alright, Thank you very much and best of luck.
Thank you.
And to our telephone audience that does include the time that weve allotted for questions today I'd like to turn it back to Kathy Liebmann for any additional or closing remarks that she has.
Thank you Jim.
Thank you everyone for participating in our call. This morning should you have any follow up question.
Please reach out to me and have a great day.
Ladies and gentlemen, this does conclude todays update we do thank you all for your participation you may now disconnect your lines and we hope that you enjoy the rest of your day.
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