Q2 2019 Earnings Call
Second quarter 2019 earnings conference call at this time, all participants are in listen only mode. After managements prepared remarks, there will be a question and answer session.
Today's conference is being recorded if you have any objections you may disconnect at this time.
I would like to turn the meeting over to your host for today's conference get done.
Thank you welcome to our second quarter 2019 earnings Conference call. Joining me on the call today are Mr., Richard due to Dot Com group CEO Mr. late you see all of Treaty retail Mr. Joke, we won't see all off duty logistics, feeling well, Seattle and drowned out our chief strategy officer for today's agenda, rich or do will discuss highlights for the second quarter 2019, followed by scenic while our sample other management will join the queue and recession.
Before we continue I refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will make forward looking statements also this call those discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.
Finally, please note that unless otherwise stated all figures mentioned during this conference call R&D I would now like to turn the call over to Richard you.
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For example, our JD logistics after years of efforts Oh, we have agreed to all the break even point.
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And as we have gone from like <unk> as we have talked about the path. We are solidly I'll confirm with you that well continue our efforts and green Courte inefficiencies and the day has come to fulfill all of our promises.
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Oh, well continue to see that continue to give you a quick what any update a we're very pleased to report.
Solid second quarter.
With strong results across all key metrics.
Oh net revenues exceeded the upper end of our guidance.
And we achieved record high operating profit.
In a heavily promotional season.
We're also encouraged by a healthy growth.
11 million net additional customers.
To a total of around 21 million in the past month.
These strong results illustrate the solid fundamentals of our online retail business model. So as the significant progress we have made to improve our R&D capabilities operational processes and organizational design over the past few quarters.
During the second quarter of 2019.
Our net revenue growth accelerated.
22.9%.
Despite market concerns about macroeconomic conditions and competitive dynamics.
All major categories of electronics and home appliances.
So double digit growth during the quarter.
And the general merchandise categories.
Uhhuh by 34% led by FMCG products.
Net service revenues grew by 42% year over year.
And it contributed 11.2% of our overall revenues.
Given by strong momentum from third party logistics and advertising revenues.
Logistics and other services revenues grew over 98%.
Thanks to the team's focus on product innovation and superior service quality.
Gross margin in the second quarter was 14.7%.
Up from 13.5% in the same quarter last year.
The margin expansion.
It was contributed by both Katy retail and our third party logistics business.
Judy retail gross margin improved by 76 basis points, driven by economies of scale from a one p. business better economics of advertising and certain onetime benefits of the V.T. passive form which took effect on April 1st 2018.
This marks the 21st consecutive quarter of JT Leto schools margin expansion on a year over year basis.
In spite of intense competition from existing and new industry participants.
It validates the resilience of our business model and a long term margin trajectory that we have communicated.
So you saw IPO.
On the other hand.
Judy logistics also delivered a stellar quarter.
Yes, its capacity you got it.
And stop productivity reached the normalized level during a seasonally weak quarter.
The third party logistics business saw its gross margin for the improved.
And as Richard mentioned also reached passed the breakeven point.
On a non-GAAP operating income level in the second quarter.
By the same token our fulfillment efficiency was benefited as well.
During the second quarter. So many expense ratio was 6.1% the lowest level in our history as a public company.
Since the second quarter of 2014.
As Richard mentioned, our fulfillment expense ratio first began to rise in 2014, as we started to extent six network into the lower tier city.
Creating short term headwinds on our fulfillment expenses.
In 2015, we expended aggressively into the FMCG categories, where the average basket size was much smaller than our average order size. After the time, creating further short term headwinds on non-GAAP fulfillment expense ratio.
We then began expanding our capacity and service offerings in 2017 drive scale, while serving external business customers.
Which created an additional short term increase in our fulfillment expense ratio.
Now five years later.
When all the dust finally settle down we emerge as a much stronger and more efficient modern logistics operator.
That can fulfill six and a half times more daily orders than five years ago.
The greater scale, coupled with sophisticated supply chain technologies.
That's brought operating leverage.
Even as we fulfill more and more small orders.
Further enhancing our structural advantage over our major retail peers.
And to bring more clarity to I'll call economic model.
Our marketing expense ratio was 3.7% in the second quarter.
Reduced from 4.3% in the same quarter last year, mainly due to our redesigned marketing strategy and innovative marketing tools was better position and all that.
Oh on the expense ratio was 2.5% up from 2.3% in the same quarter last year.
The R&D expense amount on the other hand has a stabilized sequentially from the last quarter.
That's the key talent and infrastructure are largely in place.
Do you have any expense ratio also improved to 4.9% in the second quarter.
Down from 1.1% in the same period last year.
As a result, we achieved another record.
GAAP and non-GAAP operating income in the second quarter was the operating margins, improving 2.4% and two percentage points respectively.
From the same quarter a year ago.
The significant margin expansion was to support it.
In sum by three key elements, one kt retails gross margin expansion.
To effective marketing programs with spare the ROI and free significant improvement in JD logistics operating efficiency.
Which improved both it's a third party operating margin and Judy Bhutto's fulfillment expense ratio.
Our non-GAAP net income attributable to ordinary shareholders in the second quarter also set a new record.
At 3.6 billion on B with a 2.4% net margin up from 2.4% in the same period last year.
Our free cash flow improved to 39% year over year.
To 18.3 billion on B during the quarter.
If you then by a healthy operating profit in a seasonally strong quarter for cash flow.
No. That's the one time impact of the marketplace settlement change has faced out for four quarters.
Our free cash flow for the trailing 12 month has returned to a solid 7.4 billion RMB.
[noise], let's turn to our third quarter outlook in light of the accelerated growth momentum in the second quarter end of July .
We expect net revenue to grow between 20% and 24% on a year over year basis.
We remain optimistic about the Chinese consumer markets.
And the JD dot coms competitive market position, despite uncertainties with the macro environment.
Finally, I would like to comment on our full year earnings outlook.
Our non-GAAP net income attributable to ordinary shareholders in the first half.
2019.
What's the 6.8 billion on B with a 2.5% net margin.
In addition to economies of scale from JT retail business and a lot but improvement in logistics operating efficiency.
We also benefited from the newly enacted VHP tax reform as well as a couple of.
Other items on the other income.
Which totaled 1.8 billion on B.
During the first half that maybe non recurring in nature.
We intend to reinvest.
These extra gains back into the business in the second half.
To drive our lower tier cities strategy.
Therefore, we are revising our 2019 full year non-GAAP net income guidance to be between 8 billion.
And 9.6 billion on B.
We should reflect our second half investment strategy.
And our anticipation for continued macro economic uncertainties.
The new margin guidance is above the historical peak level in 2017.
And we believe our reinvestment strategy in the second half will help drive sustained growth and continuously rising profitability into 2020.
Overall, we are proud of the first half results, which you speak for the success of the series of.
Strategic and organizational changes we have implemented over the past several quarters, we hope you share our confidence in our unique supply chain capabilities and deep competitive moat.
Around our scale and technology driven business model.
This concludes my prepared remarks, and then we can now move to the two and May session.
Thank you.
The question and answer session of this conference call will start in a moment.
In order to be fair to all callers, who wish to ask questions. We will take one question at a time from each caller.
If you have more than one question fees request to join the question queue again. After your first question has been addressed.
Ladies and gentlemen, we will now begin the question and answer session.
If you wish to ask a question. Please press star one on your telephone and wait for them to be announced if you wish to catch request. Please press the pound or cash.
[noise].
Your first question comes from the line of <unk> Q from Goldman Sachs. Please ask your question.
Thank you. Thank you Richard Sheila you want don't sit me, John and John Congratulations on the strong beat and growth acceleration even in this right rising bigger revenue base. So my question would be more on the investments and also your long term margin commitments given that as you as you've said the of full year guidance is has been lifted.
And the implied second half margin was roughly between calculate implied will be 0.3 to 0.9 per cent. So what do we see as the major investments in the second half.
Particular, you mentioned about Richard mentioned about fresh.
<unk> cloud Big data just want to see what are the key moving parts that we expect will be spending higher in the second half leading to this more conservative sequential margin outlook into the second half and given the full year commitment around 1.4% to 1.7% net margin how are we seeing the longer term normalized margin potential of the business, particularly given the very strong first half if we see the net margins of Walmart between 3% to 4% do we see this moving up to the sort of trends in the next two three years or normalized margin potential of the business. Thank you.
Sure let me try to answer this.
Well first.
I mentioned earlier that you know.
First half we had a couple of one off items that we intend to being best roughly a 1.8 billion on the.
So so that would have an impact you know which will be invested mostly in the lower tier city initiatives not only on the new.
We chat platform, but also on logistics that we actually intend to further penetrate down into those lower tier city areas.
To enhance customer experience and and this is also.
The the intention is to position ourselves for stronger growth.
ER or sustained growth well into next year and the year.
Our margin commitment has been quite clear that no we want to improve our margins consecutively on a year over year basis.
And as Richard also mentioned earlier.
We now are we are in a much better position.
Two two to generate these steadily improving profit because some of our major investment areas have now.
Bearing fruit and our turning profitable.
And the logistics and fulfillment expense ratio example, that I highlighted was the one just one of them you know where we actually went through a series of investment faces. Some of them are really overlapping on top of each other so for quite a few years you couldn't tell whether we are ever going to have operating leverage all we just simply continue to increase the expense ratio.
So so by this quarter a it's a good illustration that you know the fulfillment expense, which actually went back to a historical low levels since our IPO and.
Clearly, we still have room to further improve because JD logistics is.
Still in.
In the investment phase.
And that's why it's just broke even with a slight profit obviously, it will going going forward.
As it completes its investment cycle that business should be much more profitable.
Which will in turn also drive further operating leverage on the Kt retail side. So you know just coming back to your question on long term profitability, we maintain our position that over the long term.
Our first party retail business should generate one to two percentage point higher net margin than the best offline retailers and we are layering on top of that we'll have our marketplace business, which generates a much higher accounting marketing. So combining the two we should be generating somewhere in high single digit.
You combined.
Net margin for for the business and so that.
As as also.
Mentioned by by Richard earlier that we have always committed to a long term margin.
Trent that will ultimately reach that level.
Thank you.
[noise].
Your next question comes from the line of edible Young from Bank of America Merrill Lynch. Please ask your question.
Hi, Good evening, Thank you for taking my questions.
Just a follow up question on a lower tier city investment and expansion and I could you elaborate how you will compete in the lower tier cities, including how to precision JD key goal versus your more traditional JD mall pieces.
As whereas versus your key competitors, which are they will be using a different strategy, especially for mast sourcing from the manufacturers.
Thanks.
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Uhhuh couldn't imagine easy provides important human or something on JD platform, we offer more to like says Oh products that better feed other first and second tier city customers and since this year, we have step up efforts to select products that fit that her to the lower tier cities. We are working with our brand partners to to build up the supply of our products. For example, the appeal and a more cost effective product and also work with the industrial bouts, but it's actually producers to produce the most to fix it pulled back to south while the lower tier cities at the same time, we also diversify our business is on the exclusive sales and exclusive products and more customer products. These are all the efforts we want to diversify our offerings to all the different segments of our customer.
Ah darts and pool or someone else before that happens.
It's not done yet do you guys actually or Youre, a townhall Moqueta Johnson controls and go to the vision.
Yeah, John we had ecosystem and profile and provide a new model that to track to lower tier cities, especially to the female users and low income users and a weight gone up also carry all the policies with some low take rate to attract the best product and the sellers to fit the need of the lower tier customers.
None of the deferred and you got your dollar denominated free almost a $1 million for women May help you actually on a year to me are the children, who on from the leap engine will each year.
They will know some documents in quarter two double digit is a from a.
Debottlenecking hoops again, though im sure.
To go home and I said this was so far then you use this growth our platform from the lower tier city that is the third to six tier cities. The growth rate is much higher than the first and second tier cities. There are what Michel let us know what I'm going to go down in 2000, I believe you did here.
And secondly, the number of over really new users coming from the lower tier city has taken up 70% of our own user base.
Well do some of those are undrawn. So what do you just you kind of don't you you would even told you about a slightly different countries.
And if you feel turns by the recipient address about 50% of the users.
Are coming from the lower tier cities now.
Oh, you do have to go through a woman studies on D. or you can call the bills, yet T mobile Hanover.
Your next question comes from the line of and do you see a yapp from Citigroup. Please ask your question.
Hi, Thank you good evening management congratulation on the strong results. Thanks for taking my questions I have some follow up questions on Sydney. When you mentioned about these one off profit these 1.8 billion.
That you plan to reinvest into the second half.
Can you maybe clarify a bit to us in comes off in the first half how much of it or the one off fees recognized in the first quarter versus the second quarter.
And then how much off these one 1.8 billion.
It is more to one time in nature that is not a recurring and for the second half when you try to spend these reinvestment a mouth or how should we think about the threeq versus the full Q a level at which quarter will be more heavy weighted and we see that as we go into the next year as JD commitment to continue to improve margins on a year over year basis, how should we think about the first half margin in 2020 versus the second half. Thank you.
Who are leases. So we <unk> four to 1.8 billion you could roughly divide them equally into the first two quarters.
So luckily 2.9.
So you know but for for the second half.
We are we're already implementing some of.
The reinvestment strategies and also.
As you know Ron always quick earlier in continental back calculating that the ratio I think you know in terms of guidance is very hot too.
Just back calculating into exact amount because we still have to anticipate.
You know how the competitive environment will be how the macro environment will be and also provides enough flexibility for the business leaders to react and jump onto good opportunities.
To to put put capital to work. So so so obviously, we will have to do it in some.
Room for for all of these.
These factors.
So if.
If you want to due to a rough allocation then.
I would think Q3 should somewhat.
Better than Q4 as no one is that we will introduce the new.
No we chat platform.
Somewhere towards the end of Q3 and also Q4, we'll have our double 11 promotion season, but again. This is you know this is very preliminary guidance for the second half and we do hope that we can.
No, we'll give you more clarity as as as we move into the fourth quarter.
[noise].
[noise].
Your next question comes from the line of Teen along from Credit Suisse. Please ask your question.
Sure. Thank you hi, good evening management. Thank you for taking my questions and congratulations on the good results I have a question more on the logistics side because in your segment reporting that we have from new business bad or the operating loss was about 2 billion in the second quarter. So I want to have a little bit more detail is on the let's break down by logistic by technology and also probably overseas investment and in the meantime, still on the logistics side. Because then you just mentioned that in the second quarter. We have achieved the GP margin break even for like intake. So I want to know for the full year outlook and also probably will we have a further improvement like operating margin breakeven in 2020.
And also how are we going to achieve that thank you.
Okay. So let me take the first question and then we can maybe address the second one.
So the first one on segment reporting is the half year ER beta. So so the number you saw is for the first half of the largest operating loss from the new businesses now is in the technology initiatives, followed by logistics, which you had meaningful non-GAAP losses in Q1.
But improving and Q2 was roughly around breakeven.
So and then followed by the overseas business, but overall you have seen the loss ratio has come down significantly from the first half of 2018.
Oh and then you know also note that the revenue for new businesses has grown quite tremendously over the first half as well. So so we are seeing.
Significantly narrowing loss ratio on these new businesses.
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Yeah.
Your next question comes from the line of Thomas Chong from Jefferies. Please ask your question.
Hi, Thanks management for taking my questions I have a question about our use of walls trend how should we anticipate the user growth in the next couple of quarters or in the coming years.
As we penetrate into lower tier cities, we expect a reacceleration in user growth. Thank you.
Well do you know they're showing up.
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So Don functionality, assuming that you don't want to enable the cold here.
And secondly, things earlier January this year.
In the JD group and also JD retail we have emphasized our efforts on the user experience and making LP as we've shown you a quarter fundamental religious in wireline over $1 remarks, George Lerner from now a woman to Ukraine, and killer functional footprint to the function of four quarter.
Please turn volume quarter over the goal that its tail film accounts Sheila.
Turning to the confusion with the loan total ever fusion for caution.
As this early this year, we came up with the concept of quality growth. So we want to make sure no matter. If there are new customers or the existing customers. They will have a sustainable interactions with us we are reluctant to use some short term measure to come here to go through.
I will also play is your credit younger Jobete assumption charisma, you don't want to go back over your cool.
Thank you Sujal, commenting bondholders will not the whole Wilmington will come along with some presumption I heard two hands when we're kind of I'm not sure how the format to 200 change on Cocodrie assumption.
Turning to the strong volume higher.
Hi, Phil.
Central Asia, when the nominee who is your doctor.
And just one more I would say observation I want to add up.
Your next question comes from the line of Grace Chan from Morgan Stanley . Please ask your question.
Oh, hi, Thank you for taking my call and congratulations on the strong results. My question is about Oh, my advertising business growth potential. This business has obviously been growing very fast and has been one of the key drivers of jetties margin expansion I'm wondering whether you can help us elaborate a bit more on the on the details about the online advertising business dishes yellows price pricing customer mix.
And especially how do you compare yourself with other ecommerce peers in terms of the growth potential any online advertising business. Thank you.
Hopefully that will help with that energy.
Yes.
Craig Hallum summing it up across all of them down them.
Well the key New Orleans.
Good afternoon judicial from Nottingham, and Hulu put on that price shop.
Do you know what.
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Two to three the new home or the sub debt or someone else economic some job on costs and told you that potential.
Thank you some data from God opportunity.
Hi, gentlemen, channel woman yet right.
Collyn reliant on our behalf to allow shifting.
Some analytics.
She lay off JD retail for the first half of the year. Our advertising revenue is mainly driven by all of our improve the technology, namely the AI in the big data and in Q2, we have revamped our main app and continue to optimize our algorithm and the rate of merchants, who are using all of our advertising system continue continue to grow and there are value also grows.
At this stage, we don't plan to increase our advertising inventory because we believe that though the revamp of domains I gave us this possibility, but we'd rather to keep a balanced relationship between our advertising revenue growth and our users' experience and radio operations.
Some critical bands so momentum going we will forego short haul.
Vision continues and when you don't know.
Ali.
You mean, what machine does seem a little can have when look I'm not sure for you on that though.
Hello shutdown.
Functional woman increased due to higher social security number motion picture.
Decree Johan.
That momentum gives you might have fallen.
We do not come mostly from Oklahoma China.
Tenda volatile fully getting them to kind of.
And we do realize that because of the overall, new advertisers and the feedback from other merchants houses.
Thank you.
Thanks.
Your next question comes from the line of Andrey Chan from JP Morgan. Please ask your question.
Thank you management for taking my question a follow up question really fast month and into the second half.
After the rings fasteners and their potential impact on the no bottom line.
Each of the segment will face more pressure into the second half is there a retail business the logistics or to newer technology part and also will that affect our capex to re accelerate into the second half. Thank you.
Yes, so the overall investments they're more in operating a opex all gross profit.
You know as we give back to consumers through promotions and also as we launch the new platform I'm not as as a new marketplace no we would not.
Touched much of a take rate and so so the end and it will take some time for the advertising to catch up.
So these will be the main investment areas.
And also mention on the logistics side, it's also through.
No penetrating down too.
More lower tier cities and so that we can improve the user experience and create a unique.
Logistics experience for for our new lower tier city customers.
We do not see a major increase in Capex, but no. We we mentioned in the past that no capex will be you know has been broken into two categories. One is.
For the properties are built for sale.
And one is for the other regular capex. So on the first category. If we do see good opportunities for example in tier one cities, we will clearly take the opportunity so that on that part of it is less predictable, but overall capex to be under control.
[noise].
Your next question comes from the line of that <unk> from Sea ice easy. Please ask your question.
Hi, Thanks for taking my question and congratulations on a very solid quarter. My question is regarding the J.D. retail our GP margin. It has some variable stuff 76, bips improvement in the second quarter I'm. Just wondering if we exclude the contribution from the VHP tax reform what would the number be and if we try to break it down how much of the improvement comes round. The one p. business and how much from the contribution off the occupies and advertising business and are looking for would Ah, which one will be the largest driver for for the GP margin improvement off did you I retail in the future. Thank you.
Okay. So you know the review Duponts rebates is is actually not very easy to separate out even though when.
The tax was not that beginning of April .
So there will be you know with existing inventory, what we'll have some benefit.
And then also the new purchases, but you know that the issue is many suppliers and once we're also adjust their pricing strategy many of them actually demand lower official price. So it's actually hard to quantify exactly how much is the the one time off benefit but no. We clearly looks the NYSE, there's a meaningful element.
Q2.
Especially from the existing inventory side, but because it's not very clear cut.
Benefit it has a lot of it's a result of a lot of traction and discussions between.
The retailer and also the plant and also our promotional strategy.
But you know even without.
This one off benefit internally, we've analyzed that our one p. business continues to.
Should still have a margin improvement in Q2.
And over the longer term, we mentioned that both one p. business gross margin and advertising should contribute.
Quite significantly to our future margin expansion and if you look that.
The the margin analysis, we did.
Especially the ones that comparing our operating expense ratio with the top offline retailers.
And also the gross margin was the same.
Large retailers you will see our gross margin was substantially lower roughly 10 percentage points more.
Lower than the offline players. So there is plenty of room.
For margin expansion as we continue to increase our scale and realize better and better.
Purchasing price and also more customized product offerings, we are actually.
Seeing improving mix in terms of.
Customized products from our leading suppliers. So these will help.
Both you know offering our customers the lowest price everyday low price, but at the same time continue to improve our margin.
[noise].
Your next question comes from the line of Gerry you from you'd be S.. Please ask your question.
Hi, Thank you very much two questions for me I think the first is on electronics and home appliances and the first half of this year, we saw a reacceleration in the growth rate. There. So just wanted to see if there are any specific drivers that helped that and also whether D.V.T. or income tax cuts or anything like that helped and second just on a on pinnacle or could we talk a little bit about the strategy to make that a independent unit. Thanks.
Okay. So I'll take the first one maybe I will take the second one song Electronics, you know, we we mentioned actually D.
The macro <unk> when we bought it in the second half of last year. So we already saw some slowdown. So you know the the current growth rate in our mining is actually.
Not a normal Oh, we have always maintained that as hakan.
We should be able to continue to grow well well, we above the industry average.
As we continue to.
You know take continue to benefit from the outsize consumer Mindshare and also our superior customer experience.
And so yeah and on the other hand to be taxed US also help in terms of providing better value to our customers.
[noise].
Oh Oh.
Oh sure that well continue to agree that them and then some.
[noise] Cnf day rates <unk>, let me add a few more things Oh, the category of electronics and home appliances.
HM.
Okay, I'm not sure I'm, sorry, I didn't mean to <unk> finfets so yes.
Do you live which I know you were here youre, putting on the Diamond jewelry show T.D. as in the U.S, who okay. Good you don't from a yield some glenda.
Jardim appeared on something that you don't know who to superiority you on that.
Stueber didn't come through.
Hi, Steve.
Finally, Dinesh accountable she says on the summer so we'll see them.
And secondly in terms of the product before we wait we Oh platform, we have more major banks need range priced our products that are more suitable for the first and second tier consumers and this year, we continue to integrate to diversify our product in terms of the high end and also the low end product to cater to the different needs of other cost about for example, during all of our 618 shopping festival. We have collaborated with a number of high end brands and based on the sales without its very good.
Defended his union has resigned to you cultural change on your time.
Yes.
Overall net debt of one.
He has done a decision on that yet.
Yes, still a maturity unibanco.
And thirdly since last year, we have also exploring some offline business models either of our one key platform or our strategic collaboration and all of these various forms of offline collabra absolutely although the function.
Hi, Josh I'm not too much on the table doubling up on them.
Yes Hello.
And you didn't come down on the hybrid TV show up.
And lastly in this category, we by leveraging over one key platform abilities. We are gradually opening up our abilities daytime services with all of our brand merchants, Andrew we cannot continue to strengthen the collaboration with a friend and improve our supply chains and these were the bulk of the direction and we'll continue to improve to drive the growth of these category.
Thank you.
[noise] [noise].
We are now approaching the end of the conference call.
I will now turn the call over to Judy Coms Jia Dong for closing remarks.
Once again, thank you for joining US today, please don't hesitate to contact us. If you have any further questions. Thank you for your continued support and we look forward to talking with you in the coming months.
Thank you for your participation in today's conference. This concludes the presentation you may now disconnect good day.