Q4 2019 Earnings Call
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French is scheduled to begin shortly but continue to standby. Thank you for your patience.
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Ladies and gentlemen, thank you for standing by welcome sort of rise education.
And full year 2019 earnings conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
To ask the question during the session you'll need to press star one telephone.
Please be advised that todays conference is being recorded.
Now I turn the conference I got to also speaking today.
Lee. Thank you. Please go ahead.
Thank you operator, Hello, everyone and welcome to patients.
And a full year 2019 earnings conference call.
We hear from the whole loan chairman and CEO, who will discuss our operations. My that's taken to minimize the impact caused by the upgrade calls with my team and the company is long term strategy and he has only deal in a CFO. We'll go over the financial results for the quarter and what ends up we are.
Both will be available to take your question. It looks good and they section that follows people they probably I like to remind you that today's discussion may contain certain forward looking statements made and there's a safe harbor called leases up though you asked private Securities Litigation Reform Act on 1995.
Forward looking statements are subject to risks and uncertainties that may cause actual results could differ materially from our current expectations.
Understand the factors that could cause results to materially differ from those in the forward looking statements. Please refer to one times he asked well at least the as they see a four liking to solve in my team, we do not assume any obligation to update and well any forward looking statements, except our is accurate party end.
I think about law now I'd love to turn the call over to really hall, who will be well quick introduction.
Good morning, and good evening to everyone and thank you for joining US today. My name is Lee home wall, and but I'm very excited to join rice, which has viewed a solid reputation as a leader in the large and fast growing after school English tutoring market.
Overall 2019, we continue to expand our school network and student base across China and generated solid growth in terms of revenue and de be dot. The start up 2020 caught with the outbreak of Colby 19, which disrupted everyone and everything in China first.
Now spread globally.
Over the demand for office School English tutoring services in China remains very strong even more so through all the break.
I firmly believe that as a market leader and with the right strategy and strong execution capabilities right well be able to achieve long term world [laughter] I. Appreciate all taking the time to <unk> earnings or today I would now like to invite our.
Our COO.
CFO to walk everyone through our Q4 2019 performance.
I will then go through my presentation will I will brief you on the actions we have taken in response to the challenges created by the Cobot 19 outbreak key milestones with the launch of online small group causes and my thoughts on our long term strategy then don't piece.
Thank you Lisa.
Hi, everyone. Thank you for joining <unk> earnings call I will now go through our financial highlights for the fourth quarter of 2019.
Before I begin please note that all numbers stated a year RMB.
Total revenues during the call to increase the by 17.5% year over year to 416 going to meeting driven primarily by a 17.2% year over year increase in revenue from our educational programs to 379.9.
And meeting the.
The increase in revenue from our educational programs was primarily attributable to an increase in the number of students he.
Well a regular.
Oh, please be myself owned and learning centers and the increase in pricing for our regular closes at the beginning of 2019 in baking.
She Oh April thus far.
In Shanghai, when he was Joel and Shinjin.
The number of itself old and learning centers increased to 89 at the end of 2019 from 76, a year ago. We also added 213 classrooms as of December 30, Threerd 2019.
When compared with the end of 2018.
Franchise revenue increased by 17.2% year over year to 33.2 meeting during the quarter, primarily due to an increase in recurring revenue.
She leaves and increasing the number of franchise franchised learning centers from 300 of school as of December 13th for 2018 to 330.
383 as of December 31st 2019.
Cost of revenues for the quarter increased by 22.1% year over year 283.6 minute non-GAAP cost of revenues for the colder increased by 22.8% year over year 279.9 billion.
The increase was primarily due to personnel.
Associated with an increasing patrons.
Total teaching hours and the teachers compensation.
Telephone and learning centers, and increasing rental costs associated with the expansion of region.
Well profit increased by 14.1% year over year to 232.6 meeting.
Gross margin was 55.9% compared with 57.6 person in the same period over the prior year.
Turning to marketing expenses for the colder was 87.8, meaning like increase of 26.2 year over year from 69.5 minute.
The increase was driven primarily by an increase in marketing channel expenses as well as it has increased and they tend to like incentive related to sound every race or marketing stuff.
Non-GAAP selling and marketing expenses were 86.6 meeting increase of 31.5% year over year.
As a percentage of revenue now that setting and the marketing expenses were 28.8% compared with 18.6 person in the same p. read the prior year.
She any expenses for this quarter was 84.3 million increase of 13.4, because in that year over year. The increase was mainly attributable to a increase in professional fees will all strategic process.
No gravity and the expenses was 70.
That's going to meeting increased.
13.2% year over year.
Operating income was 60.7 meeting increase of 1.1% year over year non-GAAP operating income was 75.6 meeting a decrease of 29% year over year.
No GAAP operating margin was 18.2 per cent compared with 21.6 person in the same period of the prior year.
The decrease in non-GAAP operating margin was mainly due to an increasing teacher salary and our reinvestment in marketing activity.
Adjusted EBITDA was 91 million essentially flat on a year over year basis.
Adjusted EBITDA margin was 21.9% compared with 25.7% in the same period of the prior year.
Income tax expense for the quota was <unk> eight.
8.8 million compared with 24.7 needed.
Well the same period of the prior year.
Interest income tax expense decreased significantly because at one of our major subsidiaries obtained the qualification certificated as a high and new technology enterprise in the fourth quarter 2019, and it was therefore entitled to a preferential enterprise income tax rate.
15% for the full year 29 tools I mean [noise].
[noise] 2019.
Net income attributable to life for the quota was 51.1 million increase of 62.3% year over year.
Non-GAAP net income attributable to rise was 66.1 million.
Please 38.2% year over year.
Non-GAAP net margin attributed to rise was 15.9% for the quarter compared with 13.5 within in the same quarter over the prior year.
Basic and diluted net income attributable to rise <unk> 80 ads for the colder weather.
Point 91.
Good morning 19, respectively.
Basic and diluted and non-GAAP net income attributable to rise as were 1.7 team and a one point 16, respectively.
Turning to our cash flow performance, we generally to 17.
Going forward meeting in cash flow from the operating.
During the quarter compared with 72.5 meeting in the thing pure rate of supply here.
As of December therapy for 2019, the company had a combined cash cash equivalents and restricted cash.
1 billion.
22.8 million compared with.
1 billion 316.8, meaning as of December 31st 2018 [noise].
As of December 31st 2019, total deferred revenue and a customer advances was 756 million a decrease of 27.2 person from one of the there 38.8 billion meeting.
The December 31st 2018, the decrease was primarily due to the change intuition collection schedule in certain cities.
The full quota of 2019 will begin reporting the number of students in crop and the new students enrolled on a quarterly basis Stephens Inc.
Refers to the students who were taking a look closely as of gave them date.
A new student scenes old referred to.
The newly acquired the students enrolled in our policies during a given period of time, we believe that had decent matrix more accurately reflect a business a woman and provide a more meaningful comparatives analyses then the previously reported student enrollment.
Metrics, which included new student enrollment and when you just student enrollments.
We knew the student enrollment can be highly impacted about oh promotional activities.
The increase includes crises own genuinely the first 2019 incentivized to existing student to renew their closing volume as most of the are scheduled to graduation date.
Making the student enrollments matrix exceptionally high in the fourth quarter of 2018, unless indicated otherwise business performance on a year over year basis.
In addition, the adoption of the three miles to Asian collection policy is certain cities in December 2018, also significantly impacted the student of the new student enrollment.
Which made them less comparable on a year over year basis, then the number of new students enrolled.
Newly acquired and I haven't played out the full rights courses.
Neil students enrolled during the quarter was 6200 down 5.1% year over year from 6536, well full year 2019, you students enrolled with 29049.
Freeze them to be person from 25862 in 2018.
As of December 31st 2019 students in close to 54383.
The increase of 10.2% from 49360 fives as of December 31st 2018.
In accordance with the government regulations to contain the outbreak of called me My team.
Right learning centers will temporarily closed through all of the majority of the first quarter, Twentytwenty, which will adversely impact our financial performance.
He spoke to the ultimately we immediately to measures to effectively move all feeling policies to all like like small group policies through lifestyle or self developed Oh and old platform and to begin monetizing them in early December 2020.
No that timetable so the lifting of governmental regulations on the temporary closure of learning centers, we expect the first quarter Twentytwenty revenue to beat in the range of nice lumpy find meeting.
And 100 media.
Now I will hand, the call back to leave alone.
I think stand don't.
Throughout my remarks today, I'll be referring to the presentation that her husband uploaded to our IR website as a supplement to to today's call.
I'd like to begin by outlining the three topics, we won't be focusing on today I'll like to.
First a review of our 2019 performance and plans to drive better student enrollment on retention.
Second the impact from the corporate Notching outbreak and the majors, we have taken to minimize the dish disruption caused to our business.
Third the launch of online smoking causes a milestone as we viewed called on all my merge offline model or I'm old model, which form an integral part of our long term digitization strategies.
Turning to slide three and four you can see that 2019 would the solid year in terms of often actual performance.
A year revenue and adjusted EBITDA grew by 20.3% and 16.4% year over year, respectively. Asciano mentioned, new students you wrote for regular courses increased by 12.3% during the year well total students in cost for regular courses in core.
By 10.2% year over year on the end of 2019.
[noise] throughout 2000, and my team, we saw refund raised trying to try and higher and roll over rage came in lower than expected, which were primarily the result after three months to you shouldn't collection schedule implemented in certain cities this impact.
The total students in cost for regular courses, which came in below our target for the year. Despite a strong pipeline of newly enrolled students.
On top off Dot a lot called for effective digital infrastructure injured management decision, making an operating efficiencies, including marketing channel selection, ROI measurement and Ah Ah customer acquisition cost control.
To resolve these issues I lost project time here that they I came on board a C O.
Turning to slide five you can see Dot project, probably here would guide to achieve a number of specific objectives first deploying systematic approaches to encourage referrals and optimized sales process to improve speed disposition and.
Overall conversion rates.
Second enhanced product and services offerings to lower refunds raised an increase roll over and student retention rates.
Third upgrade or business intelligence system to support better management operational decision.
They should making.
I'm fully confident that's not the successful execution of this project will improve operations and re accelerating topline growth in 2020.
[noise] project time here would also designed to fit directly into the long term strategy I'd be bumpy violent <unk>, which will facilitate advice transition into a digitized cost discipline or read skew based education platform.
The start up 2020 brought with it the unfortunate outbreak of cold with my team.
Which has created significant challenges operationally.
Things agenda reached 21st 2020 off all we're learning centers have been temporarily closed the disruption to the course of normal business compelled us to accelerate the execution of our strategy to digitize our operations and moved all aspects of our business online.
Including marketing teaching treating and communications with parents and students.
One off the first steps we took in response was to reach out to parents and students and offer free online content, which kept our refunds rate very low or.
The same time, we tightened cash management, three ensure sufficient liquidity to support our business.
Moving to slide seven I'm pleased to report a significant milestones with the official launch online small group cautious for our existing and new students earlier this month.
The exit accelerated development of our online small group cautious was a direct result off the dedication and Preservations awful highly skilled team worked tirelessly to build all the product and platform in record time to accommodate the challenging operates reaching.
Environment [noise].
We mobilized the entire company the day after the start after Chinese new year to begin working on this and within three weeks I'm proud to say, we were able to launch three levels of online small group cautious for all of our students nationwide.
As of March 11, 2020 more than.
116, Socgen students have you wrote in online small group causes a who top top approximately 30 solvent Patrick in wrote in the paid pocket.
Moving on slide eight at night offer some deeper insights into how we have positioned online small group cautious and the unique value they can offer.
First we offer one on four to six student classes, where students have the same teacher same classmates and same cost schedule as they normally would have in our offline learning centers.
This means that students and teachers are already very familiar with each other.
Secondly, the cost is what do you buy adopted by our academic gene leveraging their extensive course development capabilities and deep experience, you'll be you'd beauty other online courses such as can talk and rise up.
Third the three level courses emphasize age suitability and key skew based capabilities, which are consistent with our educational philosophy.
Last but not the least there are deployed through out.
Sure our in house developed proprietary online platform, which supports all of my operations.
We quickly extrapolation internal process to support online operations, which expanded in house tech and customer cheap.
I won't go into too much detail on the courses themselves.
Record month, you purchase them for your child or friends children to experienced them first hand.
I would Howard however, like to highlight the high participation rate for existing students across all age groups.
[noise] I'm, particularly proud off our growing technology coal capabilities.
To support the roll out online classes as you can see on slide 10, our team was able to transform rice posh into a robust technology platform capable of supporting life Interactive online Clos nationwide, leading 20 days over the last four weeks right.
Has delivered a total off.
82000 cautious to 116000 students in 136 cities during the peak study hours over 7200 students are currently taking classes in 1400 virtue costumes.
Since the launch of online smoker cautious right Pos has been operating stapling and reliably.
Weve accomplished much more than just rolling out online classes, but I'll save that for next time.
I would like to share with you my views on the market trends, we are seeing throughout the.
Corporate 19 outbreak.
Turning to slide 11, you can clearly see that's an outbreak is driving significant online penetration shifting both demand and supply online. This penetration Oh My education, it's been facilitated by the department of enhanced and proven technologies growing acceptance.
And by parents and students and more aggressive online education on product offerings.
Nevertheless belief that in person interactive group lessons roommate, and effective and favored model, particularly for younger kids.
They do occasion companies with the ability to implement and Oh I'm old model will be better partitioned to succeed in the future.
Despite current current challenges created by the outbreak we remain confident in the fundamental house, our business today and our ability to implement these strategic initiatives to achieve our long term objects too.
We will continue to accelerate the did utilization of our operations to help us solidify our leading position and the penetrate deeply into the market over the long long run the education market in China continues to present enormous growth opportunity for companies with strong branding I phone.
The cheap curricula and teaching resources and the ability to offer both online and offline learning experience.
I firmly believe that our ability to buda effective OEM or model well insurance right long term growth and success success. Thank you.
[noise], ladies gentlemen, well now begin my question answer session. If you wish to ask your question. Please press star one on the telephone and weight training to be announced if you wish to cancel your question or any time. Please press the pound all ash case.
[noise] Yup. That's question today comes from the line of Shanghai <unk> from Morgan Stanley. Please go ahead.
Hi, good money I think you for taking my question I have two questions. The first one needs. So can you give some more color on the Oh first quarter revenue guidance or what the impact from the outgrow the virus.
And Oh, the Oh, the work I'm moving that to online.
The second time and and what do you expect the accrual in the virus impact. He next few quarters and a full year and second question is up you can you keep some more details about your strategic Oh the seat utilization.
Like what kind of football match, you will provide a in a long time for the students and how do you see the competition going forward after Corona Babbitt's East patronage no I thought those two years actually be up AI interactive cut costs, a 40, a young children per one did you see what's a young.
On that thank you.
[noise] guidance.
Thank you for your question.
Do you hear me.
Yeah, so clearly.
Okay Alright.
At the end, though my remarks, I have asked already given the guidance for our first quarter.
As I mentioned that it did a hobby 19 outbreak so basically in order to.
Respond to the government regulations, we closed Oh, we're learning centers.
Yeah. So most of the first quota and starting from you know right. After the Chinese new year and you know ended there was no clear timetable when the learning centers. It can be reopened and Oh, we can resume to over a novel businesses.
You know, although we'll have that made great efforts I'm, moving or Oh flying students online and we have already.
As you will hear from a b holds the presentation that Oh, we started to charge. The students at the beginning of March for them to register for online a small group philosophies.
So having a given you the background is that our revenue guidance for the first quarter can begin the range over 95 meeting to 100 meeting.
Hi, Sean This is Lee whole hi, how are you just two of the a in the supplement or what's Endo has been saying I think the way you can think copper is a for January because the Chinese new year in early this year or so we basically have ah to start off the month Ah, which can generate ah.
Revenue and then a February Oh, Oh, we well the the major a efforts. We've made is really a reach all the parents and students or help them to a study learning online. So the child classes are free Ah during the the a of the first two three.
Two weeks or basically February or the regular courses are a close Oh Lady.
Other courses like a can talk a write off etch continue to generate revenue for March.
We launched the paid a a line small group classes.
The revenue recognition will mainly from our these Oh line small group causes a however, these costs is.
They are they have shorter duration and also priced differently.
Therefore, the the March a revenue would be almost like one third of the normal a month so that that that's the first quarter revenue guidance based on a in terms of next few quarters, a i. I think the one major a assertion on.
Certainties do is when we can open offline learning centers, there's no clear guidance from the government. Yet however are to counter the challenges are we already prepared to move all offline classes a regular causes to be online.
Ah So the prepared region is ongoing we expect to move a everything online towards the third week of April which at the time, we'll finish over the current online small group classic offered or so so the next few key.
Orders or the uncertainty is still there, but our plan is to move everything online as much as we can once the offline center opened well or tried to catch up or or the cost that we can offer. So it's very difficult to give a full year guidance, but that's the plan.
Two.
To counter the challenges we have now.
But if that answers to your first question, let me very briefly talk about Ah Ah. The second question regarding the strategy, we are developing or the digitization strategy Oh across all of our operations.
So the the so called the online or small class a a small group classes is drugs just one off the element.
The thinking it is not yet compete however, what I would say from a marketing student acquisition to a a learning experience.
After clubs or or you know tutoring.
Well, we'll try to Buda online offline platform so student can learn.
In the offline centers scheduled and after they returned to home or they will also have online courses or unlike content that they can continue to learn oh a at home at the same time, we are upgrading.
All core curriculum as you mentioned a in in in such an age group. We will also offer a combination of all my offline classes.
Or certain group with a guy a teachers and a up awards. We will also have off online life future. Even one on one to be a supplement to the offline courses. So the combined the all my off like courses Oh, well start to launch the.
The Oh.
Towards the end of this year to some off the closet some off the the agents and levels and then hopefully roll off throughout the whole year next year.
Thank you for <unk>, I'm, sorry, [laughter] and a if I may want to ask what the kinda.
Translation rate all feel like Oh, my student to the online and Hum to see the a new moment, a and C change and enough.
So I filled up for my second question is what do you see the competition on escape from the Yeah interactive courses.
Okay.
The first question was a public students moves on hot Yeah, saying, if you see I think it's almost like [noise].
[noise] I would say for the first three weeks a a free trial I'm. Most of our students are moved all life or the participation rate is from coastal lightly a present.
Small age group and for the a higher age group Ah, It's there's 100% for the paint Clos Oh Gee I say showed on the slide right now we have a a close to 30000 students are paid or for other small on my.
Good classes. This is mainly now in road in our directly owned a oh centers or the city's Ah. So the participation rate is evolve a 50% and a this is still ongoing setting in other cities like Shanghai Block Joshi engines.
They started to all life, a small group causes later than Beijing.
So that's the participation raised a in the 30 or so then students. We also have a brand new students coming in over the country in terms of competition, we actually are or take a look off a a the competitors or where do we think are the online offline.
My caught more you know the combined offering a it's a trend and some other players also offering these type of classes. However, I would say there is no.
Fixed programs meeting, you know, which way, it's better Oh, I I do think could be age group and also educational purposes are different from different players. Therefore their combined their courses the the weight of online versus.
I'll fly and also evolving April I, I teachers or life teachers are our own different we think ER visits or trend. However, the you know there's no so called direct comparisons therefore, we will.
Move.
Online and offline or make a combination suitable to our kids a and also educational philosophy that rise Uh huh.
Thank you know, but I also say at a very young age of for example, three to four years old we still believe Ah all fly is the best way and online it should not be the majority often learning experience for our age three to four.
Sure.
Yeah.
Thank you thanks very much.
Your next question comes from the line of Alex Shoes from Credit Suisse. Please go ahead.
Hi, you'd mentioned I think it would be my question. My first question is based on I think I I've seen that 30000 students who wrote.
Hey, plastics online and ER beds.
40, or 54000 students in the regular price so.
Pardon.
We are so that's I didn't mean by 60% of Sweden worth itself separately should be one or.
Exactly.
Perhaps on the pending.
And then secondly.
I would like.
Uh huh.
New student.
Goldman.
The fourth quarter I see that the new student enrollment.
You mean.
And feeling.
Got it could be.
Thank you.
Yeah.
I think.
Okay.
Elaborate more on this phone, but I can do have already.
Thank you seem to see sales team excuse.
Well thank you.
Okay, Hi, IDEXX Ah I won't answer the first question and just don't will answer the second question for the online small group cautious I wanted to explain a little bit more this is actually a additional clos we offered a it is not part of the regular courses so others.
30000 students actually paid extra money to take all these classes.
So this is just that a one to move a students online the second step to move Oh, We hope every one or two to be online is to recognize revenues through the regular courses. So those unlike losses will be.
I would say.
'cause, it's a it's basically moving the offline content online and teach the Oh flying a classes online. So this is the second that therefore, the 30000 paid.
Alex I see you mentioned, 55%. These people paid actual to take that classes and later on we do hope moving everyone. A line to take the a so called the though the online versus offline classes.
Didnt own countless like Okay, I had it and.
Then on to your second question, then a new students enrolled in the fourth quarter and it looks too.
Looks a little bit a week as compare to on the.
The quota of the prior year, Oh, so roughly is a 5.1% or job.
Actually two reasons for that.
First is if you look at the calendar and in the food quota and then there is that <unk>, particularly into the Tenda.
Normally enrollment happened during the weekend and in September they were not as they will actually five weekend in September until they somewhat advance the enrollment in the third quarter.
And then.
Well she would have happened in the full quota. So if you look at the the numbers in the third quarter. They enrolled students enrolled in third quarter, you only invasive seem crazy is actually a 15 close to 15% interest and then that back.
The job in the fourth quarter or I should.
Say that the you know the conversion waiting in fourth quarter on jobs.
Slightly lower as compared to the third quarter Ah that's one of the cheese reason.
That actually driving a total enrollments new students he really in the fourth quarter a lower.
So that's basically ER and explain on the weaker a weaker enrollment and in the fourth quarter 2019 at least when explained so as soon as she joined the company and she launched into the pioneer project leachate well address the conversion.
He shoes and a we already said the targeted for the year to 2020, Andas, we believe we'll be able to achieve that.
Thank you very helpful.
Thank you.
Just a reminder, ladies and gentlemen, if you wish to offer a question today. Please press star one.
Your next question comes from a line of Alex News from China really Nice watch. Please go ahead.
Yes, so that's bajorek I'm, just very quickly the marriage made sure. Some observations on call are over Allpoint competitors are doing during his talk period.
And Oh always our company strategy.
Three consolidation going forward.
[noise] so.
Just.
I wanted to make sure I got to your question right you are asking how our online competitors doing doing the outbreak is the other question.
Oh, sorry, it's all Florida competitors are doing.
Also offline competitor Ah okay.
I I would say a that's off the bigger or companies Oh, all made efforts to move a cottage online as we can see some of them.
Are you using more aggressively or the moving online and then than others basically I do think of that or the first week after Chinese new year people trying to figure out the technology called issues or so or most of the competitors.
Offer a free content or are you know kind of Ah you know our reach two parent and then some launched Ah Ah online classes earlier than us. Some later some you did not even has the capability to offer online classes.
The second difference is Ah Ah some people use the third party platform use the content sourced by the third party or it is really are kind of emergency measure that they they the horses may not be consistent with the corporate curriculum and the plot home.
Also it is the all source for US we do think throughout the course is also the possible technology, our technological capabilities are strategically important to us. So we think even we take a one week longer than a you know all sorts of.
Contents and rely on third party platform, we feel we build accountants are very solidly and I'll also upgrade or technology capabilities for the long run as well or the last thing all the difference could be some people are a move the the so called the offline regular cost is online to directly.
A in the you know you are therefore, they are there there in some way or start to recognize revenue from the regular course is.
And for US, we we took a different approach.
Because we do think or this is the first time that our students are online and they need to get used to be online learning experience. Therefore, we created a a specific all my program, which is lighter more suitable for the first two three weeks a and then also sell down.
In March and later on we feel a both these students and also our teachers would be used to the online teaching and learning.
Experience. Therefore, we can move our offline cost is online offline cost is our our I would say constant heavy or have more need more in inter interactions. So the stock is first a lighter on like coffees and doesn't move off line.
Just on lunch different company, a use different approaches, but but I think it really you you need to think about D.
The visibility the experience online and also your a cheaper purse RP purpose first is to retain students and no refunds. During the October 19 outbreak second is to provide a good learning on likes during the third is really move offline classes online.
Oh, so they can continue the learning a oh I see a schedule.
Okay. Thank you.
Just a reminder, ladies and gentlemen, if you do wish to offer question. Please press star one thank you.
Once again, ladies and gentlemen, if you do shut off your question. Please press star one thank you.
There are no further questions at this time, ladies and gentlemen, this will conclude todays conference call. Thank the participating you may now disconnect.
Thank you very much.
[music].