Q3 2022 Tecnoglass Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the Tesco glass <unk> 2022.
Earnings Conference call and webcast.
At this time, all participants have been placed on listen only mode.
<unk> will be opened for questions and comments following the presentation.
It is now my pleasure to turn the floor over to your host Brad Cray of ICR.
Sir the floor is yours.
Thank you for joining us for technical glass in third quarter 2022 conference call copy.
Copy of the slide presentation to accompany this call may be obtained on the investors section of the techno glass website our.
Our speakers for today's call are Chief Executive Officer Zane.
Manuel <unk>, Chief operating Officer, Chris <unk>, and Chief Financial Officer, Santiago go downhill.
I'd like to remind everyone that matters discussed in this call except for historical information are forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
Including statements regarding future financial performance future growth and future acquisitions.
These statements are based on technical losses current expectations or beliefs and are subject to uncertainty and changes in circumstances.
Actual results may differ in a material way from those expressed or implied by the statements herein due to changes in economic business competitive and regulatory factors and other risks and uncertainties affecting the operation of technical losses business.
These risks uncertainties and contingencies are indicated from time to time in technical asset filings with the SEC.
The information discussed during the call is presented in light of such risks.
Further investors should keep in mind that technical asses financial results in any particular period may not be indicative of future results.
Technical losses under no obligation to and expressly disclaims any obligation to update or alter its forward looking statements, whether as a result of new information future events changes in assumptions or otherwise.
I will now turn the call over to Jose Manuel beginning on slide number four.
Thank you Bob and thank you everyone for both your ability we will do those call.
The strong momentum in our business.
Could be into the back half of 2022.
<unk> be more thrilled with our third quarter performance.
Once again.
We believe the work, we withhold cycle literally all financial metrics while.
While operating in a complex merger.
Clinical enrollment.
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To come to market.
Global bonds.
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We are especially happy with the continued strong performance was probably residential business.
Resolution two the Solutia will.
Commercial project in Boston.
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Or multiple years.
Two diagnosis.
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A little slower.
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During the third quarter, we were especially pleased to achieve our local growth margin.
50%.
While these gross margin was well ahead of a normalized level or performance clearly levels.
The power of our business.
This is made possible, but how we can leverage our business as we continue to grow.
Previous investments.
Okay.
Vince.
Our unique vertically integrated platform and those strategic market position.
This gives us confidence.
Current and targeted investments to further modernize the ultimate.
To expand the operations will enable us to maintain our short lead times.
Revenue.
Produce the best returns.
Separately.
Revenue mix.
Working capital management.
Of the 11 straight quarters of strong cash flow.
We will carefully allocated guys, who have multiple avenues to create value.
Based on ongoing business dynamics.
Growing backlog, we're very pleased to announce the authorization.
No proved to be.
Sure repurchase program.
I will pass to return capital to our shareholders.
In summary, we expect to continue executing on highly profitable growth.
To deliver above market growth, while generating strong cash flows and value for the shareholders.
We are proud of our teams that could use them.
Fluid approach, we have to allocate capital to.
To generate attractive returns.
The highly efficient vertically.
Low cost operation with a renewable portfolio in Gabon products leaves us well situated to produce <unk>.
We'll report.
The amount of macro pressures.
In our industry.
We believe <unk>.
Clearly well positioned to.
Marcus.
Given our robust to use causes talk too.
Got it.
As a way to make our business.
Even more efficient.
I will now turn the call over to Chris to provide additional details on our record backlog.
Thank you for someone one moving to our backlog on slide five.
It has been an exceptional year for technical US solid momentum has continued into October which was our highest in Boise month to date.
The resilience of our business performance reflects our ability to capitalize on strong commercial demand in addition to gaining market share.
Single family residential, which is largely repair and remodel work for us.
Despite elevated interest rate the Abi index continues to be an expansionary territory or the 28th straight month of September .
Our activity in commercial end markets continued to pick up as customers resume projects.
Our new ones and attractive.
Africa areas, where secular trends remain very strong.
A reflection of that success is our backlog, which climbed to a record of $697 million at the end of the quarter. In addition to a healthy pipeline.
Immediate projects.
The record backlog represents an increase of about 21% compared to the prior year period.
Approximately two thirds of our backlog is mainly composed of medium or high rise.
Angel buildings.
One is related to a wide variety of commercial projects.
As a reminder, our single family residential growth trajectory is not fully captured in our backlog given the shorter terms.
<unk> of projects.
As I mentioned, we have seen continued momentum across our business into the fourth quarter, which is reflected in our upwardly revised full year 2022 outlook.
I will discuss that in more detail.
We are all well aware of our challenging macro conditions in many regions.
End markets in the U S.
That being said, we are mainly a structural competitive advantages that give us confidence in our ability to continue growing through the cycle.
We remain confident in our growth prospects due to our ability to outperform the market with our low cost vertically integrated operations and short lead times.
I've seen over the last several years. These advantages should enable us to continue expanding customer relationships and gaining market share on both the residential and commercial side of our business.
Therefore, we are investing in our production to further automate optimize and expand our facilities.
These investments are expected to decrease all installed production capacity and output.
Approximately 950 million of annual sales by the end of the second quarter of 2020.
We are investing to ensure that our lead times remain among the best in the industry that are world class.
Integrated operations have room to long term growth with both existing and new customers.
Our record of producing strong cash flows reinforces the confidence we have in our ability to innovate obtaining visas and deliver exceptional results.
I will now turn the call over to Santiago to discuss our operations financial results and improved outlook for the year.
Thank you Christian turning to slide number six.
We are extremely pleased with our outstanding results during the third quarter of 2022.
Our performance represents yet another quarter of solid execution and market outperformance.
Third quarter revenues were driven entirely by organic growth in both our commercial and single family residential businesses.
As Jose Manuel and Christian mentioned, we are benefiting from the structural advantages provided by our vertically integrated platform focused execution of our growth strategy to capture demand for our innovative products.
Our ability to provide short lead times, which has made technical is a supplier of choice.
Third quarter single family residential revenues increased 44% year over year to a record $85 8 million and accounted for 43% of total revenues, reflecting an expanding customer base and share gains.
An important point I'd like to reiterate is that approximately two thirds of our single family residential revenues are tied to the remodel and renovation activity, which is not as highly sensitive to mortgage rate fluctuations when compared to new residential construction.
We're in the process of opening showrooms in New York, and South Carolina with additional showrooms openings planned in other regions to fuel the geographic expansion of our single family residential business and complement our already strong presence in the southeast and South Central U S.
We're also seeing benefits from new products, including multi Max and a brand new garage door product that we have developed internally.
Now on slide seven I would like to reiterate several key competitive advantages unique to take no glass that are supporting our success in the current tight supply and cost inflation environment.
More specifically the differentiating factors benefiting our business our number one.
Prior higher return investments in plant automation and capacity upgrades.
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Otherwise in our cost through hedging on aluminum inputs and dependable supplier of raw glass through our joint venture with <unk>.
Number three.
People focused culture to retain quality talent and low turnover as an employer of choice.
Number four keeping transportation cost at around 5% to 6% of revenues.
And number five a 15% energy savings from Green energy, including solar power and cogeneration of power through onsite natural gas.
Now turning to the drivers of revenue on slide number nine.
Total revenues increased 53, 3% year over year to a record 201 8 million for the third quarter.
This increase was driven by solid organic growth in both commercial and single family residential activity.
In addition to market share gains.
Our commercial construction revenues.
Have grown sequentially in each quarter through 2022 with continued momentum expected through the year.
Looking at the drivers of adjusted EBITDA on Slide number 10.
Adjusted EBITDA for the third quarter of 2022 more than doubled to a quarterly record of $78 5 million compared to $38 5 million in the prior year quarter adjusted EBITDA margin of 38, 9% increased 970 basis points compared.
Through the third quarter of 2021.
Third quarter gross profit roughly doubled to $105 3 million.
Representing a 52, 2% gross margin.
This compares to gross profit of $51 5 million, representing a 39, 2% gross margin in the prior year quarter.
Our significant improvement in margin.
Mainly reflected operating leverage on higher sales favorable pricing dynamics, greater operating efficiencies, partly due to automation.
Tight cost controls and favorable FX trends given the recent strengthening of the U S dollar.
SG&A was $35 2 million compared to $21 7 million in the prior year quarter.
With the majority of the increase attributable to shipping expenses as a result of a higher sales volume and higher unit shipping costs in part to serve a more fragmented single family residential market.
Additionally, we incur into a one time settlement expense related to a project contracted in 2016, which is now fully resolved.
As a percentage of total revenues SG&A was 17, 4% compared to 16, 5% in the prior year quarter.
Excluding the settlement SG&A as a percentage of total revenues improved by 180 basis points compared to the prior year quarter.
Now looking at our improved balance sheet and leverage on slide 11.
We have taken many actions over the past several years to fortify our balance sheet and we have improved our weighted average interest rate by over 350 basis points since 2020. These.
This has left us with significant financial flexibility to execute growth and other initiatives.
At quarter end, our leverage ratio once again improved to a new record low of 0.4 times net debt to LTM adjusted EBITDA down from 0.9 times in the third quarter of last year.
As of September 30th we had cash balance of approximately 84 million and availability under our committed revolving credit facilities of $170 million, resulting in total liquidity of approximately $255 million.
Turning to our structurally improved margins and cash generation on slide number 12.
The improvement in our gross margin performance has been driven by themes. We've discussed in recent calls.
Structural and sustainable operational improvements related to automation initiatives the shift in our business strategy to penetrate the higher margin single family residential end market, where we don't do installation.
And improve operating leverage on higher revenues, which have more than offset depreciation labor and other indirect manufacturing cost.
Taking into account. These factors, we now expect our gross margins to be in the mid to high $40 range for the full year 2022.
Compared to 32% in 2019.
Beyond 2022, as we think longer term, we now see upside to our low to mid 40% normalized gross margin range that we previously communicated.
Building on our strong margin performance, we have maintained an exceptional track record of cash flow generation with third quarter operating cash flow of $29 1 million.
Our impressive history of cash generation has provided us with financial flexibility to drive additional value for our shareholders, including a recent 15% increase to our quarterly dividend announced last quarter and today's authorization of a new $50 million share repurchase program.
We have also been able to further enhance our glass and aluminum facilities to increase production capacity and automated operations to prepare us for the future.
Increased demand indicated by our growing backlog.
As Christian mentioned, we are on track to increase our installed production capacity by over 35% to an amount equivalent to approximately $950 million of annual sales by the end of the second quarter of 2023.
This project has been funded entirely by our operating cash flow generation.
Overall, our increased profitability better working capital management reduced interest expense and a more favorable mix of revenues have collectively provided us with multiple levers to create additional value. We continue to expect strong cash flow for the full year 2022.
Further strengthening our resources to invest in value enhancing initiatives.
Moving to our outlook on slide number 14.
Based on our exceptional third quarter performance and strong invoicing into October we are increasing our full year 2022 outlook for revenue and adjusted EBITDA.
We now expect full year 2022 revenue to be in the range of 680 million to $700 million.
This outlook represents growth of 39% at the midpoint led by single family residential based.
Based on these sales outlook, our anticipated mix of revenues and our exceptional margin performance. We now expect full year adjusted EBITDA to be in the range of $240 million to $255 million, representing 67% fully organic growth at the midpoint of the range.
Gross margins are now expected to be in the mid to high Forty's range for 2022.
Mainly attributable to the leverage on higher sales favorable pricing and FX dynamics structural advantages from our very clean integrated operations and an overall higher mix of product versus installation revenue for the year.
In summary.
We are extremely pleased with the momentum in our business as Jose mentioned earlier in the call. We believe that we can maintain our performance and share gains in the event the macro pressures intensify given our highly efficient cost structure and the significant investments we have undertaken.
To further increase the efficiency of our very clean integrated operation. We have delivered record results in each year since 2018 and are well on our way to produce another record year in 2022.
With that we will be happy to answer your questions. Operator, Please open the line for questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We ask that while posing your question you. Please pick up your handset if listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions.
And the first question is coming from Alex Rygiel from B Riley Securities Alex Your line is live.
Hi, Good morning. This is actually in for Alex This morning, and congratulations on a great quarter, just a few questions here.
Yes, Jose Manuel you mentioned that you had the highest level of invoicing month to date in October I was wondering if you can provide any detail around that in terms of mix pricing any changes from the meteor results.
While our jewelry know has been.
Inclusion in every in every aspect.
Our overall business.
We have more residential.
More commercial.
The only change that we're seeing is that we're penetrating.
No market.
That doesn't mean by the law.
Today.
We believe from January one.
It's going to be increasing.
Rapidly until the end of the year, we hope.
Zero two we can be.
50% of our total Florida.
Excellent that's great to hear.
Also Jason.
Santiago It looks like the settlement expense is probably around $5 million or so.
<unk>.
Is the 14, 7% SG&A.
In the quarter, excluding that charge is that sustainable kind of in the fourth quarter and into 2023 or did you hold back on any spending in the quarter that may kind of come back next year.
No I think it is based on the level of sales. We have always felt that we can get very strong operating leverage on SG&A given that there are.
A lot of fixed costs.
Within that line.
So it is.
The FX this quarter was was a tailwind given how strong the dollar became against the peso, but everything held equal we believe that that is sustainable.
Okay Perfect and then just last question for me can.
Can you talk a little bit about your multi Max product.
Obviously outlook for homebuilders and the new construction side is coming down or has been down given the rise in rates, but.
I'm, assuming that you still expect growth through geographic expansion and share gains. So just any details around multi max.
In our customer relationships.
Geographic expansion would be helpful.
Yes, we have.
Mostly on the West Coast now.
Jobs.
No.
Performance.
Originally about two hours.
Use our usual globally, we have to hope for them.
Reaching out to us for us to quote.
We have a really reliable company, we delivered on time and we have.
Have a very good program and the lack of basically the competition.
So I believe we were going to keep growing.
Okay. Thank you.
Thank you.
Thank you and the next question is coming from Tim Walsh from Baird. Tim Your line is live.
Hey, guys good good good.
Good morning, great job.
Maybe just on on the guidance sequentially.
Just kind of making sure that.
Nothing.
Something because I guess, if I take your kind of implied Q4 from the full year guide it does kind of.
Indicate that theres, a little bit of a step down in revenue, even though October was pretty strong. So just want to make sure I'm not missing anything around seasonality or anything like that that might explain it.
No you hit it Tim typically December is a slower month, given the fact that you have the holidays in place do you have the winter months, we go into scheduled maintenance. So if you look backwards Q4 has typically been a seasonally low quarter, but that's not to say that we have a ton of orders.
We have to keep working we will.
So we are baking in a little bit of a step down given seasonal reasons.
Okay. Okay. Good.
And then just just on an FX.
I guess, where the peso is today relative to the dollar I mean, it seems like it's not just going to be a benefit this quarter I mean, it seems like it's going to be an even bigger tailwind over the next three to four quarters just on the margin. So I guess could you just remind us your Colombian peso denominated expenses and kind of where those fall in the income statement.
Yes, yes, absolutely we our cost structure is one where we have about 65% of our costs and expenses in U S dollars, 35% in Colombian pesos, so obviously with us selling 96% into the U S.
Continued weakness in the Colombian peso is beneficial to our to our P&L to give you a sense of perspective this quarter alone.
As far as gross margin goes we had a benefit of about 22, 9%.
Compared to last year.
What happens going forward remains to be seen but if the peso continues to be weak we'll continue to have a.
Benefit from a P&L perspective for sure and Thats pretty much across the P&L to to answer your question it will be in Cogs and it'll be in SG&A.
Okay. Okay. Good and then I guess on the pricing side I mean is there any way to kind of break out what pricing contributed in the quarter and I guess, maybe from a market standpoint kind of where your pricing is today versus versus peers and some of your markets.
I'll answer the first one and I'll defer to offset to answer the second one four for the quarter. It provided a tailwind of about 3% based on the price increase that we took in may which only starts slowing 60 70 days later, so it fell into July right into the quarter as far as the pricing dynamics in there.
A market I'll, let jose elaborate on that.
So moved.
Yes.
Raw materials have been growing Belle primarily.
A few words.
Still too soon.
Sure I mean vessels claim enterprises book.
60% of the materials have been going down and obviously, we have to go down with the market because everybody.
He is reducing their prices trying to stay in the lung cancer.
We are penetrating new markets.
Even though today, we offer with everybody.
We've seen a lot of our peers, reducing their prices dramatically.
Two producers.
We'll do the same.
I believe we're going to.
Keep growing because.
Our global.
Seems to have better acceptance.
Look better and perform better.
We have very competitive pricing.
I would add Tim is that our base case is not that the margins are going to drop because pricing coming down because as Jose Jos elaborated input costs have also come down quite a bit, namely aluminum coming down from 3800 per ton to about 2200 right now so.
I'll return to margins in our case okay.
Okay. Okay. Good.
The color and keep the good work.
Thank you Dr <unk>.
Thank you and the next question is coming from Julio Romero from Sidoti and company.
Clearly your line is live.
Thanks, Hey, good morning.
On the comment you made on gross margins.
About thinking about longer term upside to your normalized gross margin range just talk about maybe what's.
What's driving that confidence in that upside is it is it solely the operational improvements related to automation or.
Or is there maybe a change in what you assume normalized product versus install mix has to be yes.
I think we saw upside on the operating leverage that we were able to get on the business that accounted for about 5% of the bridge against last year. So with this level of revenues. We were we were able to get quite a bit of leverage.
And then also the other upside was related to the FX with the dollar strengthening very rapidly over the last quarter that remains to be to be.
<unk> seen as to what happens that's what we are now guiding to 52, 2%.
But mid to high Forty's right, because we cannot count on that factor being there we can count on the operating leverage we can count on the efficiencies.
And obviously pricing maybe.
A temporary effect, but as I, just said to Tim we don't we don't bake in that margins reduced because prices go down because the input costs are also coming down. So I would say that the biggest surprise was the amount of operating leverage that we can get on the business with this level of sales.
Sure.
Got you so.
<unk> pricing.
Unclear beyond this year, but going forward beyond this year, the op leverage and efficiencies are sustainable.
Alright, operating leverage and efficiencies from from prioritization initiatives.
Got it and.
Can you maybe talk a little more about the new garage door product that you've developed anything you can provide in terms of what market that is going after the Tam.
Anything you can give on that would be helpful.
Yes. This is jose.
We just allowing the pro three months ago, we have.
A huge backlog.
Of those breeds.
Internationally.
Though only four.
Hurricane Michael.
The development of the Central Florida.
Non hurricane.
That will be out of Florida.
That will be loans.
March next year.
It has a lot of them are closed.
<unk> is a great problem.
We have installed.
Meanwhile, 54.
Beautiful growing rewards well everybody is.
We're really happy about.
Got it that's helpful and.
Very encouraging to see the announcement of the share repurchase program what kind of.
Cadence maybe are you thinking about in terms of the buyback deployment.
We're going to we're going to.
<unk> take a cautious approach we haven't put in.
Time line as far us when he goes so.
We're going to see.
See what the market reaction is.
We believe that the shares are certainly undervalued.
Is it a good opportunity for the company as well as for shareholders too to get cash back so.
We haven't set out a specific target for for any months Julio will just going to wait and see how it goes.
Understood.
Thanks, very much for taking the questions alright take care.
Thank you and once again, ladies and gentlemen, just a reminder, that if you wish to enter the Q&A queue. Please press star one on your phone at any time.
The next question is coming from Joshua Wilson from Raymond James Joshua Your line is live.
Good morning, and thanks for taking my questions and great quarter.
Hey, Joe how are you. Thank.
Thank you Manuel.
Could you give us some color on what you're assuming for single family growth in the fourth quarter and maybe any early thoughts you have on what that could look like in 'twenty three.
Yes, I'll take the first one.
We're assuming slightly higher revenues from what you saw in Q3.
So you can kind of baked into what that equates for growth obviously.
You're comparing it against a higher comparable last year.
Our.
Yes.
What the new year.
Looked like let us take that to provide more color.
We hope to.
Well by around 15% next year.
10% will grow.
Geographic growth.
More of the local market.
Sure.
Great and then as we think about.
Your capex outlook and free cash flow for this year can you give us an update on the cadence of the capex spending and what the cash flow generation could look like with especially as it relates to working capital impacts.
Yes, I would expect a similar quarter to Q3, obviously with their rapid growth.
You see in the cash flow, we do have a usage of working capital, but nevertheless, we were able to generate quite a bit of cash flow from operations and in line with what we discussed earlier, we continue to invest on growth capex to get to about $950 million in sales by 2023 or operate.
<unk> capacity of $950 million in sales.
So I would expect Q4 to be kind of similar to what you saw on Q3 and.
And next year once we fine tune our projections, we'll provide better guidance on that.
Great. Good luck with the next quarter.
Alright, Thank you Sir.
Thank you and the next question is coming from Brent Thielman from D. A Davidson Brent Your line is live.
Hi, This is John Mills for Brent how are you.
Hey, how are you.
Could you with the backlog as large as it is.
Could you talk about your flexibility to meet these orders for 2023.
<unk> given us some color whether.
The first half will be full and will there be some room in the second half.
That year.
Yeah.
Thanks, Tim.
Yes.
We think we are putting in place.
Good Capex.
We expect to have incremental capacity beginning in January .
In March we will add some more.
By June we will.
Half.
50% to 60% more capacity and laminated glass.
Hung around 50% more capacity and insulating.
So we really believe that.
We could even go beyond.
And 13% growth.
The volume for next year.
We can sell that much.
It looks like we're going to be able to sell.
We don't want to jump into any early conversions.
Many things are going on the market.
Interest and financing.
So we wanted to be cautious about it but we're putting in place.
Capacity, so we can.
Continue to grow.
Good percentage rate.
The following years.
Thank you.
And just could you talk a little bit about the implications of the hurricane in the fourth quarter.
Whether that creates replacement demand this quarter or going beyond Q1 2022.
Yes.
Whoa.
No.
When the hurricane passes.
Takes a bit of time.
Time.
The government and the insurance companies and the owners.
Then to go to.
How youre going to.
Sure.
Go about the replacement of the whole year.
And we go through.
We believe this quarter.
As Martin with any of them we removed all the is for next year.
So this quarter is already mostly sold.
We believe we're next year, we're going to see a lot of movement from the West coast to Florida.
Yes.
We said in the press release.
<unk> was the best selling month of the year.
November and December orders are already in.
We know that we want to have a good.
Quarter.
And as usual, we want to be cautious of how we guide.
Because we prefer to give you good news.
As a result.
Not that we failed to meet you.
Yes.
Got it and if I may can I ask one more question.
Could you I know.
Given.
Bullet points on.
The initiatives.
Efficiency, but could you walk me through.
If there is any more color into what led to the 50% gross margin and.
How are you.
And if you're planning on adding any new sort of initiative.
Going forward into 2023.
Okay.
Yes, so just to bridge gross margin.
Three leverage and getting to this level of sales versus what you saw.
Last year added quite a bit to that but not only.
We have that kind of sort of permanent reason, but there is also a couple of the reasons that I mentioned earlier for instance, the dollar strengthen against the peso at a very rapid pace this quarter.
So you had about 300 basis points of positive effect on gross margin.
And we obviously don't know what's going to come out of that but the expectation is that the peso will continue to be weak with the fed taking the actions that it is that it is taken.
And on top of that we had about 300 basis points of pricing effect that we discussed earlier for the pricing increase that we took in may that starts flowing through orders and invoicing in the Q3 of this year as.
As far as initiatives.
Yes, as Christian laid out we are continue to kind of upgrade and automate the facility.
These next couple of months, we'll add to have capacity north of 800 million and as he laid out well.
We'll continue to do so until June of 2023.
To get to increase capacity and that also includes further automation, which hopefully and should bring incremental efficiencies.
Yes.
Great. Thank you I appreciate that so much.
Thank you.
Thank you and there are no other questions from the lines I would now like to hand, the call back to Jose Manuel for closing remarks.
Okay.
Okay. Thanks, everyone for producer David will Dominion's Cove.
We'll keep working towards.
Excellent.
We plan to keep growing and even good news towards shareholders.
Thank you.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.
Yeah.