Q3 2020 Earnings Call
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And thank you really need to Michael's call discuss these results for the third quarter or physical 2020, which ended March 31st 2020.
Right now you should read a copy of the news release from the company that was distributed to close at regular treating is available on the company's website.
As a reminder, during these call the company refer to a presentation is available to participate in your best relation section.
Website.
Entered the advent presentation have.
You have also published management scripted commentary on our website.
Please knew that some of the information you hear your our discussion is able to insist aboard the print statements.
Without limitation is regarding revenue.
Gross margin.
Operating expenses.
Income and expenses taxis.
Capital allocation in future business outlook, including a potentially impacted Kobe 19, how the company's business and results of operations.
There are a number of risk factors that he causes it might just be good results in different purely commercial stations.
You can learn more about these risks in a press release, where you should really this afternoon.
My most recent Yankee falling for Jesus 19, <unk> filings.
All these documents are available on the vets relations pages Supermaxes website.
We assume no obligation to update me forward looking statements.
Most of today's presentation, where your version non Japanese result in business outlook.
An explanation of or non got painful measures. Please refer to the accompanying presentation or to our press release publish or today.
In addition, a reconciliation of gap non get results you can pay in today's press release any signal information attached to days presentation.
At the end of today's prepared remarks, you will have a <unk> analysts to ask questions.
Now turn the call Overdid shopping chairman and Chief Executive Officer.
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Thank you Charles.
Hurst I would like to think.
Our employees customers and pastors and partners for their support as we navigate the challenge is during the cold 19 pandemic.
Upon the news is the outbreak overseas. Our first response would to actively manage our supply chain from potential shortage risk by increasing inventories of critical components.
Since that time, we have continued to add to our safety stock for key components, such as C.P.U.'s memory access d.'s and to a lesser extent G.P. use such that customer orders can be fulfilled as they are received.
Designated a central business, we responded to the directive of Santa Clara County, and the state of California regarding sheltering in place instructions to combat the spread of coping 19.
Our first priority is the safety of our workforce.
We immediately began to implement numerous health precautions and work practices to operate in a safe man.
Operating in the critical sector of I.T. infrastructure, we assessed our customer base to identify upright running customers, who also operate in critical industries guiding us in our go forward strategy.
Quickly transition most of our indirect labor force to work from home.
We also shifted some focus towards Taiwan operations from Europe, and the United States.
Despite the disruption we successfully managed the last two weeks of March to achieve revenues at the bottom of our original guidance range.
Now, let me turn to the financials.
Our fiscal third quarter revenue total $772 million, which was that the lower end of our initial guy who's range given on February 6th and above the midpoint of the guidance range. We gave on April 2nd.
This reflects an 11% quarter on quarter decrease from the second quarter of fiscal year 2020, but a four per cent increase from the same quarter of last year.
Systems comprise 74% of total revenue and volumes of systems unknowns shift toward down sequentially, but oh, you're over a year.
A lot number of large enterprise customers fulfills data center projects in the summer quarter and is the all through the case pause in the March quarter.
S.P.'s increased quarter on quarter, but declined year over year.
Geographic performance on a year over year basis was mixed with the U.S. down 3% <unk>, 20%.
Asia, 10% higher.
On a sequential basis, the U.S. market decline, 20% well he may I grew sequentially by 9%.
Asians declined a modest three per cent sequentially.
There were a number of sizable discrete events in the quarter that I would like to emphasize.
First we received the settlement fee on a joint product development project for $10.1 million.
Your point 6 million of which reduced cost of sales and 9.5 million that reduced r. and d. expense applying R.U.S. tax rate of 23% would yield a 14 sent benefit type deluded earnings per share on both our gap and non gap financials.
Second in our last call, we mentioned that we expected to incur additional one time charges of 35 million to $40 million related to a residual clean up matters from our extend the blackout period.
Directional smart board of directors, we start input on this matter from investors holding approximately 45% of our shares outstanding incorporated that input to grind cash awards, many of which included performance conditions.
This quarter, we recorded 10.3 million an expense 2.9 million of which increased cost of sales and 7.4 million that increase operating expense related to the awards.
As noted in our last call we have excluded this item from or non gap managers.
Lastly, we recorded a provision for an S.D.C. settlement I'm $17.5 million that we have excluded from or non got measures.
Working down the piano gross margin on and I get basis was 17.7%.
250 basis points higher than last year, driven by lower commodity costs as well as favorable customer geographic and product mix and the aperture mentioned settlement fee.
Q3, operating expenses on and got basis increased 7% quarter on quarter to $118 million, mainly due to 12 12.5 million dollar increase in salaries and benefits, including previously disclosed performance awards in related payroll tax withholding.
And the 17.5 million dollar provisions for an S.B.C. settlement.
These expenses were offset my 9.5 million related to the joint product development related settlement fee.
On a non got basis operating expenses decreased 15% quarter on quarter and increased 8% year on year to $87 million.
The sequential decline was due to several factors, including lower audit costs, and lower employee costs, including R. and D. expenses and the joint product development related settlement fee recall that concluding it onto the liquid filings in December quarter led to the sequential reduction of ought of fees.
Of approximately $6.5 million.
[laughter] other income an expense was a 0.9 million gain as compared to a 0.4 million loss last quarter, primarily related to the foreign exchange impact on our Taiwan dollar denominated term.
This quarter, our taxes were a 0.9 million dollar benefit on a gap basis, and a 2.9 million dollar expense on an ongoing basis.
In both cases, we benefited from reduced tax liabilities in the U.S. and the Netherlands, We continue to expect both our gap and non gap tax rate going forward to be for approximately 20%.
Lastly, our share of results in a joint venture wasn't 1.1 million dollar lost this quarter as compared to a 1 million dollar loss from the previous quarter and a 0.5 4 million dollar loss in the same quarter a year ago.
Q3, non gap diluted earnings per share totaled 84 cents per diluted share compared to 57 cents last quarter and 49 cents last year.
Cash Houston operations totaled $21 million as we invested in inventory of the defensive measure and Catholics total $11 billion, resulting in free cash out flow $32 million.
Are closing cash position, including restricted cash was $319 million.
Quarter are cast conversion cycle with 92 days, which is slightly above our target 85 to 90 days.
Sales outstanding was 41 day's days payable outstanding total 61 days and inventory days was 112.
Now.
Turning to the outlook for our business given the uncertainties of cold in 19, we will not be providing guidance for the coming quarter. However to provide context around their business. We are sharing the following metrics in fact.
We continue to see ongoing demand as we enter the fourth quarter a fiscal year 2020, and did not have significant direct exposure to industries, such as retail oiling dash and travel and leisure that have been impacted the greatest as time passes we may discover grader indirect exposure to distressed industries through our.
Channel partners and L.E.M. customers.
We note that are shipments plus borders shippable in the June quarter as the last week are up as compared to the prior quarter and are also compared to the same quarter a year ago as well.
Looking forward logistics has emerged as a new challenge as the transportation industry restricts the frequency of departures and increases costs.
We expect increased costs and freight as well as direct labor costs, as we incentivize or employees to continue to work and assist us in serving our customers many of whom are in critical industries.
We expect these incremental costs to reduce gross margin by 100 to 150 basis points on a sequential basis.
We also expect to record expensive $16 million to $17 million related to the after mentioned performance awards in June 2020 quarter, approximately $20 million to $25 million in cash will be paid in June 2020 quarter related to these performance Award.
Yeah, our management team is focused on guiding our company's through the unfolding in emerging challenges presented by Colin 19.
Although we're unable to predict the extent to which code 19 me further impact or business operations financial performance and result of operations. We believe we are well positioned financially and strategically in a uncertain business environment without alternate back to James for couponing.
Operator or radio from the queue for questions.
Thank you sorry, ladies and gentlemen, a question <unk>.
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Finally, we ask that you, let it yourself to one question and one follow up.
I tell all the key you have that had an opportunity to ask a question.
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No question again that is star one if you would like to ask a question.
Your first question comes from the line as many her seeming.
Sake.
Thanks for taking my question.
Two items, one on a P.N.L.N.P. mix <unk> provide some color on how can mix 15, instead of their system and stop system was in the March quarter and use yeah trending into that June quota and then on the Internet.
That went up by about 116 million.
Going to continue to build in Ventura into June quota to that extent how'd, you to think about cash from operation and free cash flow. Thank you.
Yeah. Many thanks for the question. So I think the first one in terms of systems versus sub systems. You know, we talked a little bit about how you know sequentially. We had some good systems purchases by enterprise customers that were project related in the fourth quarter oftentimes, we'd get that in the the December quarter and.
Quarter, and those were down quarter over a quarter. So that's primarily one of the drivers of systems being down.
And then.
To your second question as it relates to inventory, yes, we did build a you know quite a bit of <unk> during the quarter. As I have described you know trying to get ahead of the ball game in terms of you know any supply issues that were up there <unk>, we will you know potentially continuing to.
Build inventories during the course of this quarter I think it all depends on you know what we've bought and then the success of our sales are coming out in this quarter as well.
But still in a defensive posture until we feel a little bit more comfortable about scene. You know that's applied situation in terms of lead times coming down a little bit and then feeling a little bit better about not being bit by any statistic issues.
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Okay. Thank you.
Your next question.
Hi, Eric Records, less well spark though.
Yeah. Thanks for taking the questions just kind of building on that last question I'm. Just curious so yeah I guess first of all the constraints I had were were you able to ship.
To any customer demand this last quarter because of supply constraints are compelled to constraints and then you know on that same topic. How how are you currently saying the the pricing environment as you filled inventory you know there there's a little bit of a debate out there whether or not you know memory pricing could start to to to turn the other direction you know meaning.
Declined going into the back after you're just carry so what are you seeing a terrorist you know flash pricing as as as well as D. Ram pricing Ah you know in your in your inventory.
Well I'll take the first question then then I'll, let Charles speak to the second question as it relates to the first question Air and we always exit the quarter with a portion of our demand not being able to be a ships because of shortages that was true this quarter as well.
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Okay. Thank you and then just kinda thinking about you talked about kind of the growth driver the vertical kind of market opportunities that you guys have between A.I.F.L. and enterprise cloud five G.S. telco it in software and services.
<unk> <unk> <unk> can you help us understand that contributions of those of those call. It for vertical to the business today and you know any any thoughts on you know what you're expecting those to kind of grow actually before.
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Your next question comes on the line up and non down by row.
We live capital.
Hi, Hi, good afternoon, guys thanked her taking the questions like a couple of I could.
Child, Kevin Congratulations on on like Crystex occasion as well.
Yeah till I could I guess, the first is that I apologize if if you've already spoken to this that nested but <unk>.
Charles in the press release, you talk about how.
Key application adoption I think you say, all which is accelerating the dog.
Cove, Ed and I was wondering if you could talk.
With a little more contacts as to you know what what you're seeing their.
Guard kill acceleration and it sounds like.
Sounds like you got here leasing some good followed through so I'd love to get some context around you know sort of what types of application just seeing accelerating.
I think maybe there could be some bit of a structural change you know not just a little pull forward you know and any other contact you think they would be useful for us and then they have <unk>. Thanks.
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That's that's great and it may be too early to ask this next question, but hey are you able to develop any sort of opinion on that they're going to the you know any degree of structural change and care and customer a year, but not not consuming.
Cost of our behavior.
Such that you know maybe that the level of Dallas fan and those types of applications you'd better attach problems could remain elevated giving everything that's taken place I I know it sara-lee yeah, yeah, there's a lot of.
But you feel like you're using able to develop land I'd I'd love to hear what it is.
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That's that's really helpful. Thanks, a lot guys I'll I'll get back into camp. Thanks, a lot.
Thank you.
Your next question comes from the line of John Lopez.
Vertical G.R.P.
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Good good. So my first question is well you might just walking through a stepping back.
Timeline or a time frame from sort of February through now and I guess, what I'm looking at are trying to get a sense for is a I'm assuming things where.
Yeah pretty challenging for a pet therapy, but I'm wanting to describe how the quarter ended and just how things have trend it does far as you've gotten into calendar q. too.
Yeah, So I kind of shared that you know we.
First of all the March quarter is always difficult quarter because of the fact that you have lunar new year. There. So typically what we see is that you know where it's pretty slow and the first two months and then you know we try to predict what the third month was this year with no different than any other and as we got into them.
Quarter I'm, sorry in a month up March you know things turned around we saw a solid line of sight to be able to you know hit the bottom of range that we were at we were able to navigate the last two weeks as it relates to the disruptions of the the workforce.
And because of that were unlike others at that time, we did not just pull guidance, we decided to wait and be able to give a new guidance in the in the first week off of April you know thereafter, as I said, we've seen continuing demand as compared to our our metrics so backward.
Put shift where it little bit ahead at compared to quarter of a quarter year over year, but the visibility is still very murky up there with a covert 19, we don't know the rate of you know people going back to work or anything like that it's still fuzzy.
Right that's helpful, but I guess think I'm driving a it's your your fiscal Q4 in in you know to your point and we all understand these are not normal times, but I.
I I would imagine your backlog what team building or would be higher in normal fiscal key for it. So I guess thing I'm just kinda drive an idea if you could compare to what would be normal are things more or less back to normal at this point.
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On a year over year basis. It is up that's what I said.
In terms of our backlog experiments as of this time Yep. Okay. Gotcha helpful. My second question <unk>, you may have carpets on the stuff on offer a bit but <unk> relative to the backlog into shippable stuff are there anything other like like 10, I know you highlighted logistics, but like other things that would prevent you from shipping that backlog and is that like part of the.
Reason that you're despite having that.
Excuse me made cautious or you know opting not to offer guidance like two backlog, either but you cannot be able to meet it for one reason or another.
There are a number of reasons, some which is that you know at at this time, especially over the last few weeks, we've had to confirm that our customers are able to receive the products you know having people work on the dock to receive it. So we can't just ship product to them you know and have it left on their Doc with.
With no attention there so there's a number of things like that that our little practical items that we need to you know go through and greater pain, then under normal times.
Yeah that makes sense I I got to other real Crooklyn's chicken ticket bear with me I'm. The first one just on Chris margins, you mentioned that you're going to see some Edwin <unk> cost wise from logistics and I could qualify that it's like 150 200 basis points relative to calendar <unk>.
Excuse me is there anything else that we should think about gross margin wise between counter couponing counter Q2 other than those logistical had once and costs.
Oh, Yeah, we had we had a pretty good product mix them in that quarter. So <unk>, we'll see what the product mix is when we get done in this in the second calendar quarter as well.
I know John.
Now now that you're on the phone I'm going to answer a question that you're not asking because I got merged or by someone here and that is is that I wanted to a highlight that in my prepared remarks, but said that are you know going forward tax rate at 20%. That's our long term going forward a tax rate, which we're still believing will apply to a 2021.
But obviously, we had some favorable tax treatments in you know the in the March quarter and for this year, we expect that because of the fact that we are employees can no prayed their options and sell shares were starting to get some stock com windfall.
And also we've been able to conclude on some.
Old tax audit so for this year, we think the gap tax rate for the full years going to be more like in the mid tool.
On a gap basis, and maybe as low as 10% on the on and on that basis.
I wanted to clarify that because no that was on my list I was on my list. So I'm glad you did it I'm glad you did it okay. So the last one you get rid of me the I understand not giving revenue guidance.
I I guess, the one thing I'm, hoping you could talk to a little bit you can control our backs much more readily they any control revenue. So I know there was a lot of one time, you stuff and calendar keep wanting to think about the balance a year can you just talk through how even qualitatively you're playing on handling <unk> until visibility approves of it.
Yeah. So you know we will be continuing to invest a as Charles had outlined you know, we're still I'm moving to to be able to grow more so in Taiwan than others, but you know trying to be careful and trying to be smart as you know the economy.
You know.
Feels itself.
Okay sounds like we shouldn't expect artifacts to come down a whole lot is that fair way to summarize that.
Yeah.
Okay.
Alright, thanks very much appreciate it.
Okay.
Asking a question. Please press start and then number one on your telephone keypad.
We have to follow up for that matter who's standing with sick.
Yes that that's a couple of follow ups like.
Follow up to the prior question regarding all tax Kevin you mention a couple of items and you're prepared remarks.
Like a higher equity share come <unk> equity compensation and.
Cash award countries, just I like those items are those old kind of <unk>.
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Oh, that's all types looks like when D.'s, one time at one time increase go away and I have fun.
Yeah sure so maybe I'll step back and highlight the fact that we said that we you know reached out to roughly about.
Shareholders that held about 45% of our shares to be able to craft. These things and so these are cash awards, but because of the fact that most of them have performance conditions, we have to use a ah Monte Carlo analysis to determine how to spread the expense over time I think I mentioned that we had roughly about 10 million.
Inexpensive this quarter and I'm in next quarter I think I said it was about 16 to 17 million and then there's gonna be after that I would expect that it's come on come down on dramatically and there will be you know a tail over the course of time that that'd be far less you know material as it goes so.
That's the way that the expense would be spread and then I highlighted the fact that you know there will be payments you know that will hit our cash balance in this June.
Yes, some of the conditions that excessively Matt.
Okay.
And it to follow ups here detailed when I'd be looking through the second half calendar year, there's nothing quite like it single digit.
5 million dish or quarter with that'd be a fair assumption for modeling purposes.
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No I'm talking about.
The compensation the.
Employee compensation into March quarter was 10 million and then 16 to 17 million in June and then there's going to calm down you said, there's a tail wind and for focus of modeling should I assumed a table when it's not commit single.
In September quarter and beyond.
I'm, sorry, I I think I've missed described it for you [laughter]. So what I said was is let me just make sure here, let me go back and refer to what I said here.
I think I'm <unk>.
You said 16 to 17 million in June and for March with 10 million.
Right. So you know that's about you know 26 million or so and if you remember we had estimated it to be about 35 to 40 million. It's gonna be in the end is going to be maybe not quite 35.
Okay, Yeah, that'll clear but.
That help you.
Yeah Yeah.
And then.
You want to go back to my it'd be a question I was trying to figure out how this service system business track you know the March quarter, why should we expect in Detroit Unquoted I didn't quite understand anything up or down in March.
Yeah.
Sorry to say that again.
Was this service system revenue.
<unk> told having in mind, it's such a system was it so that worked down into much corridor.
It it was down many and I I explained that that it was driven by a enterprise customers, who executed on you know capacity projects and the fourth quarter took a pause in the more mark or and what I said was is that you know by looking at what they're doing in the June quarters are coming back a little bit.
Okay. Okay. All right now also also on the.
Also on you know that cash award Oh, remember word on camping that out.
Don't forget though.
Okay and it just wanting to go back to.
<unk>.
<unk> inventory, but hundred something and then.
In June these typically your strongest quarter sum up the solar system that could not be shipped in March is pushed out to June.
So when I look at these dynamics seems like you or anything to shoot it's stuck to come down.
The second half of calendar year.
Yeah.
So I just like destruction goes away.
Would you agree with.
<unk>, yes.
Yeah, I live evil effects on hot put on a lot as the whole situation dating and pro.
Oh, and we hope so and then.
I've yet to me that <unk>.
Okay.
Oh.
Thank you guys.
[noise]. Your next question, it's a follow up from <unk> capital.
Hi, Thanks, I appreciate the pilot, yes, yes quickly.
Yeah, it's not really clarification gets more context again and they're prepared remarks, you guys mentioned public clouds and some of the things you're getting around public cloud. Your next year there a couple of times.
There's also a mention of cloud in the press release.
So is is there is there you got it or something yeah sort of <unk>, that's going on there. It sounds like you sort of team get out salad lock down just stand you know well how how should we have had you why not to think about with what's taking place there with exposure.
Yeah, I make a question you see that they're not entitled Pal non name to US we have been a always have a call. It us ended up between about the full.
With the mean.
<unk> from U.S.A.S. Beijing, and that's why we are very carefully control to a engage a wee small <unk>, but now enough pool yep as <unk>, we go Oh capacity in Taiwan, a lot. So now we have <unk>.
And <unk> as a fish any private college whale and now even not for <unk>. We have space you cutting up 10 minutes every channel for that so we <unk> the that <unk>, some putting a tool <unk>.
The <unk> web the a and a half full control.
Charles that's helpful and so she we think of.
Sort of the incremental growth in that area should we think of it being Sarah out of.
You're a taiwan capacity.
Tempe, we hope so.
Okay and I guess my next question isn't anything you can share it yeah.
Can you talk about sort of a customer perspective, not not specific name, but would you be.
Of public cloud basis, providing that they silly thing into N.T.U.S., a U.S. hyperscaler is China, Hyperscalers I mean, count it would make sad because they said being produced so closely but any kind of text there and you could you cause I would be helpful too. Thanks.
Yeah, and <unk> the most India to involve many yes, we have been always have a large cow popping, though it's it's a watch the jazz because our capacity wasn't even if he that's why we selected to support her then but now we small capacity available as Beijing type Hey, we had reason to.
<unk> Hello, Yeah, and we said.
Yeah. Okay. That's that's great. Thanks, I appreciate the I appreciate the context.
Yeah.
Your next question, it's a follow up problem, John low pass with article group.
Oh, hey, thanks, so much cause I too quick ones. The first one is.
Until made some road map changes a little earlier and I'm wondering you know some impacts to the to the early part of your I'm wondering too so that impact you at all.
He just in terms of I I mean, I know, there's a whole bunch of variables, you're dealing with but [noise].
Excuse me did did that specific variable impact either bookings disability or anything over counter kitchen counter key too.
I don't think so not not not appreciably.
Okay, Great My second one <unk>, there's a sort of a new discussion about some security measures being implemented in China, I, just want us to double check <unk> on your on your exposure, there and a and B. What'd you think that there's any potential impact to you to the extent it those measures move forward.
We're we're not quite sure.
We'll have to see.
Oh, what's your question again.
[noise] Oh, yeah, I'm, sorry, there's just there's just sort of summer new discussion about some tightening of security and export measures between the U.S. in China that may go into effect in a couple of months and you know so I I cheat and I went wide phenomenon.
Yeah, Yeah, sorry, you know that's it.
<unk> have been made your potion facing silicone valley right, let's see inside and he has I go and then we grow <unk>, Hey seems that about 10 years ago and not a capacity heavy have invaded thing. So that's why not all made you will <unk>.
See up at the U.S.A., and then <unk> and then some Polish any nah NASA that between that and in China, or India that <unk> the teak.
That's also true of our sourcing as well, hi, Taiwan, a rich or maybe.
Perfect really helpful. Thanks, I appreciate it.
<unk>.
Your next question is from an rakers way Wells Fargo.
Yeah. Thanks for taking a follow up as well to look like a question you get back on this so you know kind of manufacturing capacity and ability to kind of service more file customers. I know you know several years ago in the past you talked about how much actual capacity her but just because it's revenue you could support with the <unk>.
You have is there any any way you can help us today is how how much revenue could you support with the capacity you have in place and and how much that expanded.
Just like this expansion in type at.
Or Taiwan, <unk> I can pull by their property or picks you up and caving maybe <unk>.
Pays <unk>, we have a huge expansion already in your both in USA and type Hey, So <unk> <unk>, we have a 30% extra capacity, both U.S.A. and typing.
And and that's why we have a d. to grow significant <unk> even <unk>.
And.
Especially in type Hey, now we have a place T.V. increase <unk> operation and thought she and <unk> because I can you know left coast from type Hey invaded t. over the that then 50% of a city combating so we've I see.
And I, just take a dad to been teach and it's about.
10 now.
So oh, it's hospital in typing can be pretty everything.
Yeah, So era and I think if that problem.
You just take it from a revenue perspective that can be maybe getting us to 4 billion or a little bit better you know the capacity is there. Obviously there are the <unk> labor capacity would be increased you know.
Needed overtime.
<unk> <unk> yeah, okay.
Alright, Yeah go ahead I need to have.
Okay. Thank you.
[laughter].
<unk> <unk>.
Yeah.
Yeah, well why did to think all of the investors you know listening in today.
Well, it's the analysts we appreciate you know you're walking LISTERINE through it says we continue to go through the challenges of covert 19, you know we look forward to talking to your neck again next quarter and as you. All know we have are enough shareholders meeting coming up which has a very.
And vote on it related to asking for additional shares for an equity plan, but it's important and we seek your support for that so Charles I think everyone well, yeah. They need to grow Foster now and see you next week on next quarter thought.
[laughter].
Thank you. Thank you made the call operator.
Thank you guys can claim today's conference call you may now disconnect.
[laughter].
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