Corbion NV
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Good day and welcome to the Corbion Interim Management Statement Q1 2020 Conference Call hosted by CSM corporates. Today's conference is being recorded. At this time, I would like to turn the conference over to Jeroen van Harten, Head of Investor Relations. Please go ahead, sir.
Yes. Thank you, Holly. Good morning, everybody. Welcome to the Corbion Q1 conference call. Today, with us, all in a different location, Olivier Rigaud, our CEO; and the CFO, Eddy Van Rhede van Der Kloot; and myself, Jeroen van Harten, Head of IR. As usual, in Q1 and Q3 releases, Olivier will briefly take you through the results. After which, we will open the lines for Q&A. Olivier, please go ahead.
Thank you, Jeroen. Good morning, everybody. So I don't have to tell you that these are really unprecedented and extraordinary times for all of us. And for Corbion, it's no different. If you remember, just after we presented our strategy plan, Advance 2025, on March 9, most of Europe went into lockdown, quickly followed by the U.S. So around that time, we also see our sales accelerate from what was already a pretty solid start of the year, building on the momentum we had already shown in Q4 last year. Our customers in the Sustainable Food Solutions business were beginning to secure supplies, fearing supply chain disruption. At the same time, the consumer has been shifting from out-of-home to in-home consumptions and also restocking some products in their pantry. So within Corbion, we've been scrambling to accommodate as much as possible of our customers' request, and as you can imagine, not always under the easiest circumstances. We also had to make sure that our supply were coming in and also that our colleagues were able to operate in a safe and healthy environment. As you can imagine, I'm very proud that we came through with flying colors through these first weeks of the year. In our Lactic Acid & Specialties business, we also showed very good growth there and that was almost across the board in the different categories. So the PLA joint venture with Total continued to perform very well, as our ester business, mostly sold into the electronics and the agrochemical sectors. Looking forward, there are still, of course, many uncertainties, as you can imagine, even though we've kept our outlook. And although, I mean, we show to be very well positioned during this crisis and we do have a resilient business model, there are some one-offs effects in these Q1 results that probably won't reoccur in the quarters to come. As an example, I mean, of course, the inventory buildup we've seen in the U.S. Also, in the lactic acid area, we are working very hard, as we speak, towards capacity increase in our Thai operations that could be completed -- will be completed in June. But we know that this will also cause some planned disruption to the lactic acid production, so in the quarter to come. So on this short introduction, I'd like to open up the call for Q&A. So operator?
[Operator Instructions] We will now take our first question from Wim Hoste from KBC Securities.
Yes. Gentlemen, 2 questions from my side, also from home, like most of you, I guess. First one is on, yes, the lactic acid business and the PLA joint venture. Can you maybe elaborate a little bit how much of the growth in Lactic Acid & Specialties is driven in the first quarter from growth of the PLA business? Also, elaborate a little bit on whether that is based on the existing clients you already had, whether new clients have come in? And also, yes, what is your take on the profitability outlook for that PLA joint venture? When will it be profitable? What kind of margins can we assume? So that's the first question. And then secondly, I would also like to ask you for an update of the AlgaPrime DHA business. You have been growing on, I think as the press release mentioned, on the back of a liquid version. Can you maybe elaborate a little bit whether that is allowing you to win new customers? Or is it helping you to increase volumes with existing customers? What is driving that business? These are the 2 questions I would like to ask.
Okay. So starting with the PLA question and the lactic. As we discussed also during the strategic plan review, we've had still, I mean, a grow momentum. And what we see also this to be continued for the remaining part of the year. Actually, so in PLA, we still have a very good momentum. As you know, packaging these days, knowing that there is also a large amount of our PLA that goes into the food area, packaging is doing well. So we see a continued momentum. And as we speak, we still have a number of additional customers coming in for PLA. So we do not see a difference in the dynamic. So still as strong as it was before, not less, not more. And basically, we follow the growth plan we've had, and as you know, it goes together with the expansion of our lactic acid supplies from the Thai operation, as also we discussed previously, yes. On the profitability question, on the joint venture, PLA EBITDA, we are positive since Q2 '19, so -- and what is happening right now is that we are further ramping up. So we have good outlook also on the profitability side for PLA. On the second question about AlgaPrime, so as also we discussed, yes, so of course, we are in a customer conversion program. Obviously, what is happening now on Q1 is new projects or conversion that were initiated last year. And what happened with the liquid form that we mentioned in the press release is that we saw the benefit of improving our product portfolio by adding some liquid form to the powder form we had so far. That would bring a lot more convenience in terms of helping customers to convert from fish oil to AlgaPrime, making their life much easier, having a liquid product being replaced by another liquid product. So we see some benefit in terms of convenience and easy to use in terms of replacing fish oil or adding up to fish oil. So back to the dynamic in AlgaPrime DHA. What we see as well is that the fishing season, early this year, was pretty bad in the Southern Hemisphere, primarily Chile and Peru. And we see fish oil price going up. So -- and today, I mean, again, our position is more relevant in terms of pricing than it used to be a couple of years ago. That is also having an impact on creating a better momentum. Having said that, I want to reiterate that it's still very early days. And also, we are very pleased to see the growth in Q1. Yes, we want to have, I mean, a few consecutive quarters where we're going to see a significant growth before claiming that we are in the position where we need to be. Now also, I want to have some comment around, obviously, all the development that we are planning right now are put on hold because simply we cannot travel at customers to assist and help during the trial period. So -- and that's something that we see actually across the board is that, yes, obviously, we benefit from some strong organic increase at current customers, but it's more difficult in the period to come to visit customers and help out. This is a kind of very high technical shift. And our technical people have to be there to assist customers to switch and convert to AlgaPrime. So we cannot assess yet the impact of, of course, these projects being potentially delayed going further. But so far, the outlook for this year in AlgaPrime is good, and we do not change our views on AlgaPrime for this year.
And our next question comes from Patrick Roquas from Kepler.
And good to see that you had a great start of the year. So I have a couple of questions. To start with, trading. So when exactly in March did you see clients starting to prestock? And what have you seen so far in April? And therefore, might we expect another kind of comparable COVID-19 effect in April and perhaps also in May? That's the first question. And then secondly, in the presentation, you indicate a cost increase of around EUR 4 million. I'm interested to hear how much of that was investing for growth and how much is related perhaps to COVID-19.Then, thirdly, we've seen a significant drop in sugar prices and also the U.S. dollar being favorable, developing so far. Now I know about your hedging policy, but I would be interested to hear, let's say, what the implications could be for your business, let's say, as of the second half or 2021? And then finally, on let's say, your capacity or the JV's capacity in PLA. I know that the JV will probably -- will announce their own thing. But could you give us any flavor for, let's say, when we could expect the JV to expand further capacity, knowing that the momentum in PLA is still very strong?
Okay. So thank you. So I will answer the first question around COVID, and Eddy will take the 2 and 3, so on the cost increase and the dollar, and I will be back on the PLA, yes? So on the COVID impact, what we saw is that we still had some positive impact on the first, like, couple of weeks of April, but then it came back to normal. And we do not expect, again, to see another high surge as we've seen in March, in April because the last 2 weeks are more normal weeks. And we don't see that repeating in May going forward. So I think this is not something we anticipate. We also see, as you might have read over the last couple of, days that still the situation is pretty fragile because some industries have serious disruption in their supply chain. When you look at what's going on at -- in the meat industry in the U.S. right now and where some of these plants are forced to shut down because people are working shoulder to shoulder and get infected, we don't think this will have a material impact in our business, but we follow very closely what's happening at our customers as well in terms of, indeed, a supply disruption on their side. So cut a long story short on this one, yes, we do not expect Q2 to be as strong as Q1, primarily on the impact we've seen in March. We also do not see any other reason why the base business of pre-COVID wouldn't continue as it was. But yes, I think the one-off of March, we will not see again. So about the last question, and then I will give the floor to Eddy, on the PLA joint venture and expansion. As also we discussed, we are really ongoing discussing with our partner, Total, to look at the future, yes. So -- and we are right now, busy, indeed, I mean, looking at what it means in terms of capacity, but also in terms of market type of customers, a geographical aspect on the JV. So actually, the great thing about the cooperation with Total is that we are really well aligned on the strategic intent of the joint venture. And of course, we want to continue with both parent companies invest into what is a quite successful story today. So yes, it's on our agenda from both parent company. And we are actually working right now on some of the plans, but it's early days to come to more detail as we speak. Eddy, can you take the question about cost increase and U.S. dollar?
Yes. So Patrick, so on the fixed cost increase, really, the biggest component there is to be read in the general inflation increases and also the wage increases that we have incurred when comparing this year versus last year. And especially, wage increases have been stronger increase than in previous years based on the -- before the corona times, good economic developments in general. COVID cost, we have some, but not really significant, I will say, in the last -- in Q1. So that's a small contributor. And then the investments for growth, yes, we made some first parts in that. But again, that's not the main cause of this cost increase. Your other question was I thought related to the sugar price impacts and the hedging of that. So yes, you're right, sugar markets came down big time since some period now. Very much also because the oil price came down, and then you have the conversion of ethanol in Brazil to sugar. So the whole complex indeed have reduced in terms of pricing.As a matter of fact, you know that we have indeed an active hedging philosophy and policy in place where we take positions as time goes by going forward. So that means don't expect any positive support, if you will, on these reduced sugar price levels for this year compared to where we are in Q1. Also, in the good part of next year, especially the first half of the year, we are more or less staying at the same levels and positive impacts are more going to have -- to support us in the second half of next year, onwards. U.S. dollar question, I think I missed that one. Sorry about that. I don't know what that question was.
Well, Eddy, I think the dollar is slowly strengthening versus the euro. You generate a lot in dollars. So it should also be a positive going forward.
Yes, yes. So in dollars, we always keep open the translation exposure in our U.S.-based business. We're not hedging that, as you know. So in that sense, the dollar strengthening is giving us support. And we've been open on that also in the past about a $0.01 appreciation of the dollar versus the euro, I guess, an EBITDA support of a good 1 million, more or less, in that range. So indeed, with the current dollar, yes, that is supportive compared to last year. But nobody, yes, at least, as far as I know, nobody knows exactly where currencies will go in the quarters to come. These very volatile, these currency and oil, those kind of markets at this moment.
Okay. One final question, if I may. So you've confirmed your full year targets, which I fully understand. But if you look to the organic sales growth target of between 4% and 7% and knowing that -- what the first quarter was and also pre-COVID and that the underlying trend in your business was pretty okay and that PLA continues to grow. So it seems that, well, at least you should come in at the higher end of the 4% to 7% range. Is that fair to assume? Or do I miss anything, let's say, aside from the uncertainties related to COVID-19?
I think you need to be careful in drawing too quickly certain conclusions. So let's go back. So we came in with an 11% organic growth for the core business because that's what we talk about here, of which about 3% has been supported by COVID impact in Q1. So if you subtract that, then you're back to about 8%. So yes, Q1 also, excluding COVID impact, has been above the bandwidth. But there's, at the same time, lots of uncertainties, how the coming quarters will develop. On the one hand, you have some positive dynamics, but there can also be negative dynamics. Think about everything that's happening in the meat space in the U.S. at the moment. I'm not sure if you're following that, but there's been quite some plant closures, also some plant reopenings. So in a nutshell, there's lots of volatility, I would say, and therefore, very hard to make concrete predictions. At the same time, where we currently are, with the current visibility we have, we are confident -- sufficiently confident to, indeed, maintain the full year's guidance as we've been doing in the press release, which means the 4% to 7% benefit.
Okay. Yes. So I hear what you're saying with regard to meat process. But I thought that Trump kind of indicated or invoked a certain act to reopen those processing plants that had been closed. But sorry to kind of indicate that, it's clear.
We will now take our next question from Fernand de Boer from Degroof Petercam.
It's Fernand de Boer from Petercam. Just to come back on the previous question on the sugar prices. I thought that you always hedge for a period of 6 to 9 months, but it sounds that this is now much longer. Could you confirm that? And the second question is to come back on AlgaPrime. From the fish farmers, I understand that they are -- if this takes longer, this COVID thing, getting more cautious in that even some farmers could run into problems. How have you been prepared on that one? And on PLA, there is some correlation with, let's say, polybutylene prices, at least in the past, where also some of the PLA goes into the [ scale gas ] or industry of -- scalar industry. So you sound very, very confident, but assume what happens if part of this business, particularly to the oil industry, fades away? So those -- and the last question I had, on the noncore, you have been saying we have been phasing out some of the business. Is that now fully done? Or is there still more to come?
Okay. So thank you. So I will answer on algae and PLA and maybe, Eddy, you can take the sugar price hedging and the noncore phasing out. So on algae, indeed, I mean, everything we see as well is that the salmon industry, amongst others, is being disrupted as well in terms of supply chain. Quite a lot was going as well to the, of course, foodservice industry and some specific out-of-home channels. So this is an industry that is, of course, busy or struggling to, of course, address that. And basically, what also -- you see that there is still some fish that stays in the farms and that are not, let's say, being processed. However, these fishes need to be fed. So when we look at it, we do not see, of course, an impact on the fish feed so far because the fishes being in the water are still being fed. So now, yes, you're right in saying, yes, there is still also some uncertainty on what's going to happen for some of, let's say, the players that were more exposed to foodservice or that do see some disruption in their supply chain. So indeed, we have considered dialogue with our big partners there. There is some nervosity. Now if you look at the recent development of fish oil price and the value proposition we have with AlgaPrime, we are getting competitive in the current fish oil price. And that's something that, of course, is helping us out because they might, of course, go for cost optimization. But our product is competitive nowadays because of what's happening on fish oil price. So having said that, yes, it's an unstable situation on the salmon fish farmer. And yes, we -- again, you will understand, we are following that very closely. But -- so short term, no impact on sales momentum. But again, back to what Eddy was mentioning, it's not given for the rest of the year. As you know, the salmon peak season is during Q3 and, of course, this is where we might see, as last year, a boost in sales. So I would remain cautious until Q3 and the outcome of Q3 for AlgaPrime sales. About PLA, indeed, you're right that some of the products were sold into some of the oil sector. But as we've been developing sales, we've had, I mean, a much wider spread across so many categories now that the exposure to the specific segment, although we still, of course, sell into that segment, is not as big as it used to be. And basically, we are in a luxury situation in PLA still today, where we sell everything we can produce. And basically, we are, as we discussed before previously, busy to ramp up the capacity. So we -- as you know, we are in the middle of a major expansion of our Thai lactic acid plant that will be completed by June and some of these additional capacity will be to serve the PLA plant and help us to get to a higher capacity utilization rate of PLA. So we are still in that momentum. So yes, indeed, there are some industry that will get exposure but, at the same time, we see many other industries that are requiring PLA. So do not have a huge concern on that exposure to the oil industry. Eddy, can you take up the sugar hedging and the noncore phasing out questions?
Yes. So Fernand, so the -- actually, our hedging policy for sugar is a bit broader in terms of timing than you mentioned. So typically, we're looking for a hedging period between about 6 months out, up to 1.5 years out, so 18 months. And yes, like I said in the earlier statements, because the market came already down for some period and then more pronouncedly also, more recently, we took already up our positions in that whole coming down of the market. And as we are, per today, we are relatively long in that period that I just explained. And this again, we don't expect the positive tailwinds from lower sugar prices for this year compared to the Q1 position but more in the latter part of next year. On the noncore developments. So this is the co-packing business. So yes, from an activity level perspective, letting the business go, the majority of that has been taking place. Of course, when we are having the comparables between this year and last year, you will still see that in the upcoming quarters in terms of comparables to last year development. But the underlying activity has, for the majority, already been executed.
But that was simply saw -- phased out. There is no agreement made with this -- yes, the ones who you did this co-packing for kind of payment or something like that?
It is a whole -- it's a range of different products. And one by one, there is an agreed-upon phasing when certain products are moved out of our portfolio back to the customer.
But at the end of the day, you're missing this sales. You're missing maybe a little bit of computing, although margins will be relatively low. How is that compensated by the ones who would take this over? Or it's not?
Yes. So for us, it's more a sales development than a margin development. So the margin is relatively low for us. So it's really the sales that will be a negative development for us. And the customers taking it over, yes, they in-source that product, if you will, again back in their business.
[Operator Instructions] We'll now take our next question from Robert Vos from ABN AMRO.
I have a few. First, on PLA, last -- or earlier this year, in March, at the Capital Markets Day, you showed the quarterly development in tonnage for the PLA joint venture. If I recall, it was 8 kilotons in fourth quarter. Can you maybe share with us the tonnage in the first quarter of this year? And if not, confirm or not whether it was higher than in the fourth quarter of last year. That's my first question. Then, the second one, you mentioned a 300 basis point positive impact from COVID-19. When looking at your cost structure, et cetera, is it fair to assume that the EBITDA impact was about twice that number, so 6 percentage points or so? That's my second question. Then also a question on the phasing out of co-packing and blending. In your sales growth table, it says minus 7% from deconsolidation in the noncore. What is that exactly? Is that ceased operations? Or have you disposed something? Maybe a bit more color there.And then, finally, you said that the earlier weeks in April showed a positive pattern as a result of COVID-19 and that you're expected to return to normal levels after that. But what about destocking at your customers? Do you anticipate that in this quarter already? Or do -- you don't anticipate it at all? I would assume that if the inventory levels at your customers are very high currently, they may have to come down at a certain stage. So maybe you can comment on that as well.
Okay. Thank you for your questions. So I suggest I will take the first and the PLA and the last one, and Eddy, you can take the other 2. So on PLA, we will not disclose the quarterly volume this time. The only thing I can say is that, yes, the momentum is still strong. We have as well, and we announced that, a major shutdown during Q1 on both lactic acid and PLA to prepare for expansions, and it was both an expansion and maintenance outage. So that did impact PLA throughput during Q1. But basically, in terms of business dynamic, we still see a continuous, I mean, good momentum on PLA during Q1. On your last question, on anticipating destocking at customers, yes, we see some of it as some customers already now, by the end of April, that is getting more back to normal, but this is primarily into the Sustainable Food Solutions business. So indeed, I mean, some customers do readjust inventories, but it's not across the board, yes? So obviously, what we are looking at is the changes in consumer pattern, yes, although we -- it's difficult to quantify what is being really transferred from out-of-home to food retail. There is a shift that will be there to stay for a period, but it's not a one-to-one shift. So we do not necessarily anticipate the destocking to be -- on the full extra demand. But again, I have to confess, we have limited visibility on that. We can also say that today, despite this destocking that we might see here and there, the supply chain is still very tense, yes, basically. And so that's also important, is that because everything takes longer today and we have some disruption in terms of trucks, flight, air freight, shipments by boat, the supply chain is very tense. So I don't think people will simply go back to earlier days in terms of having low inventory. I think this crisis learned some lessons to some people, that they will keep some safety inventory because of the uncertain times. Eddy, can you discuss the EBITDA impact and back to the deconsolidation question?
Yes. So on your question on the EBITDA impact of COVID-19, so a 3% on the core sales translates somewhere in the EUR 6 million to EUR 7 million net sales impact. And then if you take more or less our average added-value margin on that, you're looking at an EBITDA impact in the range of 3 -- good EUR 3 million. So in terms of EUR 3 million over the EBITDA, so that is slightly higher than the 6% you were referring to. So that's more or less the indication of the EBITDA impact on COVID-19. The 7% decline in the sales table that we presented in the acquisition/divestments column, so that's related to this divestment of -- or this letting go of this co-packing blending business. So like I said, there's a range of product lines and -- where those products that we actively disengaged from, those we will report under that acquisition/divestment line. But this is not -- we're not divesting in terms that we get the proceeds of that. It is just restructuring that part of the business. We let go the business because it's adding complexity for us and while not really adding margins. And therefore, we have taken this strategic decision to go that way.
[Operator Instructions] We'll now take our next question from Patrick Roquas from Kepler.
Yes. A brief follow-up question for Olivier on AlgaPrime. So if I'm right, the liquid version -- with the liquid version, your product is now more comparable to what your competitor in the market is offering, except that it is not including EPA. Is that right?
No, that's correct. There is no EPA in our products. But I think that the liquid formula, as I said, indeed, is bringing more convenience and flexibility in terms of usage because, again, without going into too many technical details, most of, let's say, the feed ingredients are being added into other major vegetable oils, yes, and our -- and there are some oil forms. So in terms of easy to use and handling and also preservation systems, it's a benefit to get a liquid version. And most of the big markets are on the liquid based on fish oil, which is, if you would remember, the major part of the fish oil industry going to farm fish is -- you speak about almost a bit less than 1 million tonne of fish oil. So this is only liquid. So when you come with a solution that is really easy to replace, it helps. If you would remember what we present in the Strategy Day, we are adapting our approach, where, in the past, we wanted to go with a value proposition to basically on the back of a better sustainability value proposition, we would increase the omega-3 content on top of wild fish oil. The change in approach now is that, yes, of course, we will still do that, but we are also aiming to replace part of the fish oil, yes? So we go into both directions. Obviously, to replace part of the fish oil, we have to be cost competitive. And right now, basically, we are helped by a higher fish oil price. However, we have an intense R&D development program to, I mean, improve the cost structure of our product by simply increasing the DHA content of our AlgaPrime. So this is one of the major development project we have on our agenda to be implemented later on potentially this year, if the corona crisis do enable us to implement that. So that's a bit the change as well in approach where basically this liquid suspension is also -- liquid form, sorry, is also helping us out also to go for more proactive fish oil replacement. I don't know if that answers your question.
No, that's very helpful, Olivier.
We will now take our next question from [ Kapuni Brune ] from BlackRock.
It's [ Kapuni Brune ] from BlackRock. I have 3 questions. The first one is about the Lactic Acid & Specialties segment. So you've highlighted that you've got or seen a recovery in the semiconductor industry and some growth in pharma sale. Can we expect this growth to be maybe more sustainable than perhaps in the food and in in-house consumption? My second question is whether you have any concrete data or you can point us to anything more concrete about your exposure to U.S. meat packers and the impact we can expect there.And then lastly, maybe an update on the CapEx investments and whether you think that anything will have to be paused or changed. And I guess that would relate to also some balance sheet and liquidity positions that you have.
Okay. Thank you. So I will answer the lactic acid and semiconductor and the meat packers. And Eddy, if you can take the CapEx one. So, so far, if we look to the dynamic in the semiconductor, there is nothing telling us that this will, let's say, get back into a downturn as it was the case last year. But again, in lactic acid, maybe the constraint you will have and we will have is that we are, as I said, expanding our capacity, as we speak, in our biggest plant being Thailand. And this capacity will come on stream only by end of June. And it will be a gradual capacity increase. So in Lactic Acid & Specialties, the constraint is more sometime internally in terms of building up that capacity to follow growth momentum. And as we alluded to in the last Capital Market Day, yes, we have these big investments. You speak about $35 million CapEx that is being completed in Thailand as we speak. But in terms of visibility on the semiconductor market and the feedback we get from customers, it is, let's say, unchanged so far. If you -- going to the question on the U.S. meat packers, yes, so it represents, yes, probably, around 40-ish percent of maybe of our Food business in the U.S. through preservation. What we've seen so far, despite the shutdown, is that the big companies shutting down some operations were able to shift to other plants. And so all in all, we do not see, so far, an impact. But let's say, yes, again, it's still -- I mean, as we speak, evolving every day, so we are very conscious about, indeed, I mean, the exposure we might have there, knowing that also these companies have to cope with a much more increased demand, yes, in the meat and packaged meat and process materials. But yes, so I would say, yes, it's probably about 40-ish percent to the -- of the SSF business, yes. So on the investment, Eddy, if you want to take that one, please?
Yes. So your question on the investment program. As per today, also with the strong results in Q1 and our visibility for the rest of the year, that is not making us change our original CapEx program as it is. You can also see that we have given information in the press release on our net debt-to-EBITDA development in the first quarter of the year. So that states stable at 2.0, far away from the covenants. So in that sense, we feel comfortable with the current visibility to continue our investment program. And like Olivier was already saying, so we are very close to completion of this lactic acid expansion, debottlenecking initiative that is in Thailand, coming up for completion in the latter part of Q2, so in this quarter. And then we're also making our first steps and expenses on the new lactic acid plant that we have announced, again, to be built in Thailand, so we get also some CapEx in that for this year. But all in all, that was already part of the original program and we still feel, yes, confident enough to proceed with that as planned.
Mr. Rigaud, as there are no further questions, I'd like to hand the call back to you for any additional or closing remarks.
No. Thank you, operator. So I want to thank you, everybody, who made it on the call. I also want to say that, hopefully, everybody is going to stay healthy and safe. I would like also to thank you for your continued interest in Corbion, in our company. And yes, indeed, okay, let's discuss for later on, I mean, the new gathering we will have in the next month. Thank you. Have a good day, everyone. Bye-bye.
Thank you. Bye-bye.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.