Q2 2021 Gildan Activewear Inc Earnings Call
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The U S Private Securities Litigation Reform Act of 1995, such forward looking statements involve unknown and known risks uncertainties and other factors, which could cause actual results of the differ materially from future results expressed or implied by such forward looking statements. We refer you to the company's filings with the U S security.
And exchange Commission and the Canadian Securities regulatory authorities that may affect the company's future of results and with that I'll turn of the call over to Iran.
Thank you Sophie.
Good morning to all and thank you for joining us and the call today and.
This morning, we reported strong second quarter results, which as anticipated reflected of significant recovery from the height of the Covid shutdowns and the second quarter last year.
We also delivered improved sequential performance building from the solid start that we saw and the first quarter of this year further when compared to prepandemic levels and the second quarter of 2019 Ah results are showing that even though we have not seen the full topline recovery are back the basic strategy is unfolding better than plan and.
Benefits from eliminating redundancy and complexity and our business or driving solid sales performance efficiencies and our operations cost savings and stronger profitability.
Of course this strong performance is supported by strong execution and once again, our team demonstrated exceptional operating capability during the quarter by delivering on our targets, while navigating through the challenges of of tight supply chain environment.
And the and we were able to deliver higher than anticipated sales of $747 million adjusted operating margin of 19.9% adjusted EPS of 68.
Up 21% over the second quarter of 2019 and record second quarter of free cash flow of 208 million.
Given the strong recovery, so far the better than expected progress of our back the basic strategy. The company's prospects for continued free cash flow generation and with our net debt leverage ratio and now it 6 or board approved yesterday, the reinstatement of our share repurchase program to buyback over the next 12 months up to 5% of the company's outstanding shares.
So overall another strong quarter.
Now turning to more specific details on our results.
As I just mentioned for the second quarter, we generated sales of $747 million of 225% over the prior year driven by volume creases across all product categories and favorable product mix.
Activewear sales came in at 597 million up 354% and sales and the hoser and underwear category where of $150 million up 53% versus last year.
Volumes were up and all markets and geographies, particularly and and principles driven by the strong recovery and P. O S and the impact of the non-recurring of significant distributor inventory Destocking, which we saw last year and distributors grew down there and maturity's during the Covid shutdown period.
On the underwear and host front, we saw double digit growth drive higher underwear entire underwear unit sales during the quarter as well as and hosiery products, which were particularly impacted by last year's store closures.
Comparing the second quarter of 2019, which was a strong quarter sales were down 7%.
Which we nonetheless think is encouraging when considering the impact of both lower and principles net selling prices of this year and product mix slightly unfavorable compared to 2019.
Overall, and principals <unk> was down approximately 8% compared to the same period and 2019, showing some further improvement from the 10% decline and we saw going into the quarter, mainly due to improving trends in North America.
Specifically and principles pass in North America was down and the single digit range compared to the second quarter of 2019, while POF and international Imprintables markets remained weak down close to 30%.
And retail channels overall pass and the quarter was up compared to the same quarter and 2019.
So overall, we were pleased with the top line performance, we delivered and this quarter, especially given the context of of tight supply chain environment, where labor shortages and the U S are continuing to affect your and supply and constraining our ability to completely rebuild inventory levels fallen and the hurricane from last year.
Moving to gross profit, we reported of strong recovery over last year generating adjusted gross margin of 35% and the quarter.
While last year, we had significant COVID-19 related costs and back to basics related charges and the second quarter of 2020 flowing through our numbers. We're now also seeing the favorable impact of product mix lower raw material costs and benefits stemming from our back-to-basics initiatives in our gross margin.
This was evident on a sequential basis with adjusted gross margin and the quarter of 240 basis points from $28 and 1%.
After excluding the 1 time USDA pandemic assistance benefit we received and the first quarter of this year, which impacted margins by 300 basis points.
Likewise, our margin performance compared to 2019 Prepandemic levels also improved meaningfully even though sales of not yet fully returned to 2019 levels.
Adjusted gross margin of 35% and the second quarter was up 270 basis points compared to 27, 8% and the second quarter of 2019.
The increase was driven primarily by lower raw material costs and back the basis cost savings, which more than offset lower and principles net selling prices and slightly unfavorable product mix compared to 2019.
Turning to SG&A are SG&A expenses, and and the quarter, where 80 million of approximately $15 million over the last year, driven primarily by increases and variable compensation expenses and volume driven distribution costs offset in part by back-to-basics cost savings.
As a percentage of sales SG&A expenses of $10 and 7% were down significantly from last year as you would expect and 80 basis points of better than 11, 5% and the second quarter of 2019.
Adding up these elements, we generated adjusted operating income of 149 million translating to and operating margin of 19.9% and the quarter.
The significant recovery from the loss, we posted last year was driven by the higher sales strong gross margin performance and SG&A leverage.
Lower financial expenses, driven by reduced average debt levels and the non recurrence of fees related to that facility amendments. We made last year also offset the impact of higher income taxes.
Consequently, we generated net earnings of 146 million or 74 cents per diluted share and adjusted net earnings just over $135 million or 68 cents per share compared to of net loss of $250 million or $1.26 per share and and adjusted net loss of $197 million.99.
Per diluted share and the second quarter last year.
Compared to 2019 stronger adjusted gross margin and SG&A performance drove of 360 basis points, adjusted operating margin of improvement and the quarter compared to $16 and 3% and 2019, which led to of 21% increase and adjusted EPS.
Finally from of cash flow perspective, we generated $208 million and the quarter, which was a record for a second quarter up from $177 million last year, and $26 million and 2019 and the.
The increase over last year was primarily due to higher operating earnings and included of net cash benefit of $18 million from insurance proceeds we received and connection to damages sustained from the Hurricanes last year.
These positive elements were partly offset by higher trade receivable balances driven by the sales increase a lower drawdown and inventory compared to last year, when our facilities were idled and higher capital expenditures related to our manufacturing capacity.
Net debt position at the end of the second quarter was 363 million down from $542 million at the end of March and our debt leverage ratio fell to 0.6 times net debt to trailing 12 months adjusted EBITDA, which is now below our historical target target leveraged range and down from 2.1 at the end of the first quarter of 2021.
Consequently, as highlighted at the beginning of the call given the strength of the results we are achieving and the free cash flow. We are generating we were pleased to announce this morning that in addition to the reinstatement of our dividend last quarter. We are now reinstating our share repurchase program.
And important step given the emphasis we placed on the return of capital to shareholders under our overall capital allocation program.
This sums up the key highlights of our results for the second quarter and.
In short strong results driven by a number of considerations, which on balance gives us reason to feel good about our outlook of.
And on the positive side, we are encouraged by the recovery we have seen in North America, so far including the cell true trends for our products as well as the benefits we are seeing for our back the basic strategy.
And the other side of the ledger, we remain cautious about certain factors, including the pace of recovery outside of North America, which currently is weak.
Further on the supply chain side U S. Labor shortages continued to be a factor affecting the orange supply, although we have seen some improvement more recently.
We're also seeing tightness and raw material inputs and broader transportation related issues, which are creating inflationary pressure.
Consequently, we can sum it up by saying we remain cautiously optimistic as the recovery progresses confident that our people and our strategy of positioning of well to continue to move to this environment and capitalize on market share opportunities as we fully utilized and grow our manufacturing capacity deliver on our profitability targets and create shareholder value of.
And for the long term.
This concludes my formal remarks, and with that I will turn it back to Sophie.
Right.
And with that I will now turn it over the fact of our operator of well to begin the question and answer session and allows go ahead.
Thank you ma'am and as a reminder, if you wish to ask a question simply price far then the number of warming and telephone keypad once again and that a star alarming right out of the phone keypad.
Your first question is from the line of.
All of the who S from <unk> your line of Snow open.
Hey, Thank you guys carrying the if you could talk a little bit more about the supply chain and.
And which pieces of the supply chain and might be getting better versus worse, where do you think you have visibility and I'm curious, how you're thinking about pricing.
Kind of absorb some of the the higher costs.
And what do you think in terms of the pricing power of radio habit, and what might be the timing on where you take where and why and you take price.
Okay. All of the answer the question of the first and supply chain. So are really wherever strength breakdown. Our supply chain is mainly and R. U S U R and operations as we.
<unk> our production as we exited the and the.
The end of last year due to the hurricane compounding with the labor shortages and the Marquez take us a little bit longer to bring the folks back to our facilities and get them up and running which are now run and have better right and they were before and.
And continuing to improve so we're pretty optimistic about the momentum and we have as we go forward and we're going to continue to.
And incremental capacity as we move into the year of occurred run rate of despite the supply chain.
The restraints as we're running at the same levels and the back half.
Whereas the reaction is 2.2 is 19 levels and during the year we've repurposed.
The more of the of all of the equipment from our Mexican operations, which will allow us actually to have a substantial increase and capacity, which we're working for 2 and my objective is to continue to increase our volumes as we move through the year and and enter into 2022.
As far as the price and is concerned.
Look we're going to leverage our back the basic strategy.
Although the price through our price inflation and we've we've streamlined our business and we have a lot of manufacturing efficiencies.
Obviously, they are not large enough to offset the fixed fight the raw material and some of the transportation costs.
So we will have to adjust price and as we move and 222 level.
The Leverages marches, we counted from or from our operating efficiencies and then adjusted difference in price and I think the most important thing is that our objective is to maintain the 18% of operating margins. So will balance of those 2 out of this make sure that we're in line with our standard of goals as we move forward and the tighter.
Got it. Thank you good luck.
True.
And the next question is from the line of we solid shred the are from National Bank of your lines of open.
To the shop.
Sort of a cat hairier with any of the beginning of of your questions.
Sorry, just thanks for taking my questions can you hear me now.
And Eric.
Okay, great with respect to the 18% operating margin target.
Obviously guild and doing better than most would of thought it but at this juncture and each 1 tracking above those targets understand inflation is coming out of the same types of take price, but given that you are still trapped into that 18 should we think that Hai falls below that 18% of operating margin of level as inflation comes in and you kick and price towards the back end of the year.
Yes, if you look at the 18%, which Glenn and called out which is really important to US right. That's the effectively we're we're targeting as you look at the combination of our gross margin and SG&A.
We have done well and and achieving that target. We thought we would get there we got the back when we got to 2019 levels revenue levels and we've achieved that earlier than the than we thought but if we go into the back half of the year of the shallow and and we will see pressure, we will see inflationary pressure.
In Q3, and we will see it and Q4.
Both and all areas of the business really if you look at the.
The raw materials as the called out we've got caught and prices going up and.
The transportation so all of that's coming through so as we go through the back half of the year will see the flow through our margin, but I think we've achieved the 18% now and our plan is to hold that 18% as we go forward and I think you can assume that in 2021, that's the number we can deliver full year.
Okay.
Just what are you seeing and in the in the market right now given the pervasive inflation are your competitors and I'm talking to of specifically the the.
Of the in principle wholesale market are some of your competitors taking price at this juncture.
There has been the price taken and and the market.
So far this year.
And our strategy is to continue to the whole temperature or low cost manufacturing in the back of the basic strategy. So.
And Ah, what we will do as well adjusted like I said our pricing.
Irrelevant of our competition because of the English sharpness of protecting share and me and the market hasn't recovered.
We're doing well.
We're very happy with our positioning.
We have a lot of capacity that and we're going to be bringing on as we move into 22 with the with the installation of all of our of Ms.
<unk> and Central America from our Mexican operations.
So we're going to balance volume growth with operating margins and make sure that we have a good balance between those 2 sort of not too neutral on price and we can probably take prices up a little bit of RFP wanted to but I think we we feel that maintain.
Maintaining a discipline operating margin target as well as.
Focusing on top of line growth is really what's going with the credit long term shareholder value of course.
Okay, and and maybe just the last 1 here and just given the the inflation come again and the.
And then the transportation challenge the the Labour Challenge how would you how would you reflect on the financial health of the wholesalers and the ability to comment accommodate altered some of these pressures.
Well I think the look of inflation is good for wholesalers and higher prices is necessarily.
The the ship units so they make more money of higher prices. So it's necessarily amount of it as a positive.
From the wholesale perspective.
The.
Thing is of that it's not just the and.
And it's not just the inflationary cost it's actually the the capabilities of doing businesses restaurants are closing because they don't have and place.
That's really much more than the.
That's the structural issue really that and the financial and so I think that's what the.
I think and the us with the careful of is making sure that we can get employment.
We've done a good job of of we have.
And the salaries up and incentives for employees to come back to work, but we're and a good place right now and and we have good momentum. So the rest of our operations and Central America. We don't have those types of issues of employment is abundant and.
The risks some inflation, but it's more of an input costs associated with the.
By the factoring in power of electricity of transportation, but the there's an abundance of labor and Central America. So I really focus right now is making sure that we get our yarn facilities up and running to support the.
Has the global.
Thank you.
The next question is from the line of Stephen and athlete from BMO capital markets Your lines of open.
Thank you good morning.
Or I just wanted to ask about the the labour backdrop, and particulars of rights to the Orange spending business.
And you talk about it impacting our ability to rebuild inventories.
Or is there are you seeing are there are there are areas, where demand is actually being unmasked because of the labor shortages.
Well restart the channel and the queue to basically so I would probably be a good reflection of the.
Leaving the.
Sales on the table basically and our inventories of relatively low so.
Demand is strong and and and I don't think the managers of Strom.
Because of the comeback of the market and into matters also stronger because onshoring is also becoming a bigger factor of me.
And I think that's also the big benefit for US as we look forward to the the future is that there is more demand for our products and the other thing I think also the recall of out of a couple of quarters ago was that we believe that the overall market has expanded.
As well, which is also I think of the <unk>.
Drive demand.
And our channel so things are looking pretty good in terms of demand side.
And I think we're well positioned as we move out of this you out of 21 and the 22 to capitalize of.
Of potential upsize and volume growth.
Okay. Okay. That's helpful.
And then I'm just wondering if you're able to give any any more sort of discrete color of around.
How things are shaping up and the back half of the year and you're in terms of your outlook section and the past you've given some and some directional indicators around pls and demand trends are able to do that for for Q3 and into the queue for.
And I look I think Steve and 8 and can see with the the way that the pass improved and the second quarter of the we called out how we started the quarter of how we finished the quarter and obviously things are getting better.
And we as we move through the year as we look at the back half of the year and if you look at our sales overall.
And we think that the 2019 levels are.
Look pretty reasonable and we think about it as Glenn said, we're running a capacity now at 2019 levels. So as we as we think of the back half. That's what we're focused on as I said, the 18% margin overall for the for the full year. So the iPhone.
I'd say, it's and improving environment, but it's not without risk as as we said.
When we opened up the call with our remarks.
Overall, if you look at it.
Probably and you think about of comparison versus 2019 Q3 of little lower queue for a little higher right given the way that the source of the supply chain is is evolving.
But that's about I would say the color we can provide right now as we as we sit here to day.
Okay that so that's real helpful. Thank you rock thanks Glenn.
And next question is from the line of Luke had on from Canaccord changing your line of Snow open.
Hey, Thanks. Good morning first question question for me is on.
Capital allocation of you guys finished the quarter.
And the very clean balance sheet here, which obviously.
Inspired you guys to bring back the share buyback program I am just curious, though if I just do a quick math and.
I assume that you invest a little bit and inventory going forward plus.
Fulfill the NCI b, but.
That still leaves unit very clean position balance sheet wives. So do you see any changes to your near term capital allocation priorities.
So we are very happy with the balance sheet is effectively and I think over the last 12.18 months, we've seen a significant strengthening of our balance sheet as we move through the the the Covid environment and we are genuine we generated a lot of cash.
Last year, and we're generating a lot of cash this year. So I would say, we're very pleased about the the balance sheet and.
And we look forward, we've got our target leveraged range 1 to 2 times that we're working too and I and we will target effectively capital allocation capital return.
To put us inside that range again, where like everybody else, we don't have a crystal ball and we have to be a little cautious as we move through the back half of this year into next year.
Given the overall of broader situations so.
And we are very very pleased with the state of the balance sheet and we will obviously, we plan to generate cash as we move through the back half we.
We do plan to buy back the repurchase stock as we called out and as we go forward will basically you working to that range, probably the low end of the range is where I would look as you think about where we're going to set as the as we move through the the and.
The end of this year and and 2.2022.
Understood. Thanks for the and then just quickly as well and the press release you guys talk about.
And and retail overall pos's up during the quarter relative to 2019 and I'm. Just curious if you can quantify that at all.
Well on the retail side of and and and effectively we did see.
Good strength in our Pls overall, if you look our underwear pos's being really strong I think I would say we are very happy with the way that the underwear has performed.
Versus versus 20 versus the 19, so the underwear the very good.
Activewear overall down a bit versus versus 19, but activewear again is is doing well overall and then hosiery I would say hoser is is effectively if you look at the versus 2020, we were up very definitely and if you look at 19 and I'd call. It flattish.
Okay. Thanks.
And the next question the spun the line of priestly from desk job the seal line of Snow open.
Hi, Good morning influence you sell and wondering Guy and you can share with both of them with a bit more of what's driving the international.
News.
Well I think the term.
My feeling is it says look of less of the.
And Europe is not our lifestyle markedly and it is in the North American market and until the the more of the.
Of tourism markets and I think there's been and the lack of tourism and which is I think it has affected the business of it because.
Lots of the T shirts, and in Europe are sold and the.
The tourism shops et cetera.
And that could be possibly the 1 I think just the overall.
Market. There just hasn't is not as pessimistic side of the the market is not as large as the U S.
And it's also maybe a little bit driven by the the lack of sickness and the market.
I don't know, it's hard to say for us and we also with you of but.
It's down.
Approximately 30%.
And there's still there's still a pulse and we're still optimistic that as an income Morocco.
By the assist taking a little longer I think.
Okay. That's helpful. And then just shifting over to the USA and remember the last quarter. I think you mentioned that the distributor inventory levels were about 40% below the 2019 level and I'm. Just wondering if you have and updated number of for us.
On that site, while the we do stock together and and a quarter. So the probably more of like 45 now and so.
Okay. That's helpful. Okay. Thanks very much.
Thank you.
Your next question is from the line of Brian Morrison from the Securities and the line is now open.
And thank you and good morning.
I want to go back to your inventories lean and the yarn shortage needs to provide some color on your view the source inputs relative to seem.
Of your peers is I presume you must have an advantage with your protocol integration and then Furthermore, when you say the distributors.
Pardon me I think are you gaining market share from this and then with respect share of 45% comment keeping the numerical value on that.
45 per cent of an inventory of of the inventory of it. So if you look at the.
What we called out the last quarter, we said it was over $100 million with the effectively the way to think about the the destock that occurred versus 2019 and then the further destock that we're looking at this quarter is probably and on the $30 million on top of that.
So we're down probably of 135 million somewhere in that range I would say versus 2019.
Okay, Thank you and and as far as the sector parts of the supply chain concerns, but we're we're vertical right. So.
The few people of who.
Make yarn.
The <unk>.
Manufacturer yarn through finished goods, so our competitors are sourcing yarn or sourcing fabric.
The manufacturers of products so.
That is for us is and.
I think of strategic of long term advantage of.
Short term and what happened was that the.
And the outcome of our classes and hurricane at the same time as the labor shortage was happening and scrub suited for C. So it's taken just a little bit of time to.
And get the folks back to run the plants of which were making big progress on the team and.
It's been it's been of grind the.
Hire 3 lose too and the horror of that type of situation, but.
And it's not a lot of people because we don't have a lot of people and our yard and facilities us the grace of things, but never.
Nevertheless.
That's what type of employment is so, but we're making progress and we feel that the very comfortable as we move forward the increase our overall volumes and to your point, Brian of Oats are vertical integration and when we do feel that we are and a better position from of supply chain perspective than our and our competitors overall.
So we are we don't feel disadvantaged in any way of everybody's dealing with very tight supply chain and we think our team is doing and a great job and this environment and.
And also there is a lot more inflation on on the source churn, particularly and Asia than there is in this hemisphere.
Reising and Asia.
Yarns and fibers is gone the significantly relative to more of a stable cost structure of that in our hemisphere and approximately.
Yeah, So it's kind of be and advantage of and so I want to turn to and you call up and pass that retail for and principles and that's offsetting other vehicles that hadn't returned yet can you just ballpark the size of your national account business and maybe the size of the the opportunity to U C. As onshoring essentially seats further growth and onshoring.
1 of our government's universe Flipper supporting the night to use the as the use of the world of the nuts.
All of these companies are looking to the.
Particularly exit China and number 1 I think is 1 of the the benefits of it and the number to look at her and trying to get closer to the market both of them.
Our big brands on our retail partners based Bureau looking too.
Byproduct of locally so large screen printers and service mass market retailers are growing their businesses.
Which has been of driving part of our success of our Pls. So when we look at it and we sort of look at it and Holistically.
And our Pls basically with broad said is.
Slightly below 19, but I would say in July and we're seeing.
Closer to the 19 levels and improving so every month things just continue to get better and then the other side of our I think of our pass big opportunity as is.
Neither of us occur and we're starting to see bigger of orders and the market.
Which were just non existent up until now so all of these things are encouraging but at the same time of the other there's.
And there's a delta viruses and heading out and the also words per cautiously optimistic part of it were and the relatively could position and have good balance will get variable level of inventory and our and our and our <unk> our customer warehouses and.
I think thats global supply is tight and 1 of the of the reasons also why global supply is tired of the centre of independent demick, particularly and raw materials and other factors is that during the pandemic.
People idled equipment globally right. So people looked at for example, saying.
Some of the plants and these ones are.
Don't have the proper cost structure and the role of equipment and the Idaho gross facilities and and taken capacity out of the market.
So there's been a big reduction of capacity and and and if you look at the equipment market today and buying new equipment. It's 12 to 18 months of let's.
Let's say for example, which tells you that things are going to be paid for quite some time as people and look to rebuild the capacity.
And so that's also a good sign in terms of where we think of the.
The market is and where growth of the we feel good position.
With our structure of the cost structure of his roles are operating the structure.
Thank you.
The next question is from the line of G. So from UBS. Your line is now open.
Hi, Good morning. This is mortgage of Sagna on behalf of J. So.
First of all and congratulations on the on the results and I wanted to ask a couple of things first on the pricing strategy and is there like a of pricing GAAP do you have and mine and the imprint of holds business versus their competitors and you kind of like target and.
And and the other hand and it.
[noise] talked about inflationary pressure should we think that and will mostly affect the the cost of goods sold or should we also see some dark.
Hitting the SG&A dollars and the second half of the year just thing and also because.
The ash and dollars versus 2019.
And we're like down 14% and the second quarter of just thinking about like a level of that we should think about for the second half of it.
And hanging regarding inflation there. Thank you.
Okay, and we'll all of that sort of pricing and Rado and we'll take care of the part of the question of them.
As far as the President is concerned look at we have a significant advantage on price and the market today.
These pricing and inflation as everybody.
The the only caveat other side I think that we have.
Positive manufacturing efficiencies companies were back the basic strategy.
As we continued as true minor operation so.
The pricing strategy will be a function of maintaining our operating margins and probably.
18% of 18% level and focusing on top of the line growth and that's how we're going to balance that out. So we're really focused on making sure of the Columbine grows as we reported the 22 and.
And at the same time as delivering a good financial reserves the results of targets that we sent to the market.
And and inflation on the SG&A line. The at the bottom line is yes, I mean inflation is everywhere and we expect the inflation to flow through anywhere where you have labor for sure on the distribution side.
We have upward pressure and we see it elsewhere. So we do expect the labor to the impact SG&A that being said, we do believe we have our SG&A Donald and very well if you look at where we were for the quarter and how we're traveling versus our overall SG&A targets, which we had out there for some time I think we are performing well and.
And we think that we will be able to manage our SG&A.
Tightly as we as we move through the back half of the year and.
Again.
And this overall to deliver that the full year, 18% number of from the operating perspective, so but it's inflation is everywhere. It's everything everywhere you look there's inflation.
Got it thank you very much and of congratulation.
Thank you.
And the next question is from the line of that we share Baker from Scott The Bank. Your line is now open.
Good morning, everyone. My questions on the quarter have been asked and answered, but perhaps and you take this opportunity to provide us of an update of how things are going to the Bangladeshi.
All of the belt.
What we're continuing to move forward of Bangladesh.
As plan.
Projected to start the plant at the end of the queue for the 22 and.
And the ramp up during the year of the 23 is really where we stand today.
And where maybe 1 or 2 months I think.
The a little later than we anticipated, but it's still moving forward and and we feel comfortable will deliver to plant. The at the end of the queue for 22.
Thank you.
Thank you, Sir and no further questions I'm, sorry, there and no further questions presenters. Please continue.
Of what.
With that I guess <unk> once again I'd like to thank everyone for their participation today and and look forward to speaking to you soon and have a wonderful day, everyone of and thanks. Thank.
Thank you.
And with that of this concludes today's conference call. Thank you for attending you may now disconnect.
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