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Greetings and welcome to the Tecnoglass Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Rodny Nacier, Investor Relations. Thank you. You may begin.
Thank you for joining us for Tecnoglass’ first quarter 2021 conference call. A copy of the slide presentation to accompany this call may be obtained on the Investors section of the Tecnoglass website. Our speakers for today’s call are Chief Executive Officer, José Manuel Daes; Chief Operating Officer, Chris Daes; and Chief Financial Officer, Santiago Giraldo.
I would 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 1995 including statements regarding future financial performance, future growth and future acquisitions. These statements are based on Tecnoglass’ current expectations or beliefs and are subject to uncertainty and changes in circumstances.
Actual results may vary in a material nature from those expressed or implied by the statements herein due to changes in economic, business, competitive and/or regulatory factors and/or other risks and uncertainties affecting the operations of Tecnoglass’ business. These risks, uncertainties and contingencies are indicated from time-to-time in Tecnoglass’ filings with the Securities and Exchange Commission. The information discussed during the call is presented in light of such risks. Further, investors should keep in mind that Tecnoglass’ financial results in any particular period may not be indicative of future results. Tecnoglass is 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 José Manuel beginning on Slide #4.
Thank you, Rodny and thank you everyone for participating on today’s call. We continue to advance our position as an architectural glass leader. During the first quarter of 2021, we delivered record results across nearly all of our key operating metrics. This includes total revenue, gross profit, operating profit, adjusted EBITDA, operating cash flow and backlog. Our record revenues were largely attributable to the continued positive reception of our single family residential products, allowing for additional market share gains in the U.S., which represented 91% of our first quarter revenue.
On this positive activity, we increased adjusted EBITDA by an impressive 65% to $33.5 million. Our track record of delivering strong financial results demonstrates our commitment to consistent execution, operational excellence and innovation. We are achieving this by leveraging our structural and sustainable competitive advantages, expanding relationships, introducing new products and investing in high-return margin-enhancing opportunities. Already in 2021, the efficiencies in our business are delivering significant structural advantages for Tecnoglass. We have not been impacted by tight labor constraints and material availability impacting most of our industry. We are positioned really well to efficiently control our supply chain, manufacturing problems with shorter lead times and best secure customers in what we expect to be a year of significant growth in demand.
Based on our success so far this year and the opportunities we see ahead, we are pleased to increase our full year revenue and adjusted EBITDA growth outlook. Santiago will discuss that in more detail later on the call. We have seen a significant demand recovery since the onset of the pandemic. We are, therefore, excited to announce today that the planned construction of our previously announced second float glass plant in our JV with Saint-Gobain is back on track. We expect to commence in doing work in the second half of 2021. This plant will be one of the most advanced and efficient glass production facilities in the world, located in close proximity to our current plant network. It will further reinforce our radically integrated platform and allow us to secure additional float glass supply to serve long-term demand.
Our first quarter results are a direct reflection of the market-leading company that we have created. Moving forward, we will continue to leverage our strategic high-return investments in capacity, products and people. Together with our business development activities and growing project portfolio, we plan to maintain our industry-leading margins and drive above-market growth. We remain very excited about our outlook and the opportunity to generate shareholder value in 2021 and beyond. I am extremely proud of our outstanding performance, and I have never been more optimistic about the future for Tecnoglass.
I will now turn the call over to Chris to provide additional details on our backlog.
Thank you, José Manuel. Moving to our backlog on Slide 5, in the first quarter, we were true to see the positive momentum continuing our business as we report a sharp acceleration of growth. We are seeing strong demand in both residential and commercial end markets where we operate, resulting in an increase in our backlog to the core levels of $552 million at quarter end. As a reminder, our single-family residential growth trajectory is not fully captured in backlog, given shorter-term spot duration of projects. Two-thirds of our backlog is comprised of medium and high-rise residential projects as well as single-family residential already in production, while one-third is related to a wide variety of commercial projects where demand has recovered significantly.
We are pleased to see several of our larger scale projects resuming activity in line with improving fundamentals and the ABI Index, which increased further into expansion territory for the second consecutive month in March. The March ABI index increased to 55.6 compared to 53.3 in February, returning to levels not seen since early 2019. During the quarter, we continued to broaden our customer base, expand our dealer network and strengthen our presence in new markets across our increasingly diversified footprint. Strength in activity continues to be led by the Southeast U.S. where we are extremely well positioned in both residential and commercial end markets.
In addition to adding several new dealers in the single-family residential business, we continue to take market share in different geographies as evidenced by our record backlog. We are pleased in continued multifamily strength, the commercial recovery and the resumption of larger-scale projects. We ended the quarter with good visibility on our attractive multiyear project pipeline. In addition, we are very positive on single-family residential demand, which we expect to continue to drive the majority of our outsized growth.
I will now turn the call over to Santiago on Slide 6 to discuss our strong single-family demand profile, vertical integrated strategy and financial results and our improved outlook for the year.
Thank you, Christian. Encouraging trends in housing starts, low mortgage rates and the urbanization combined with our efforts to expand our customer relationships and introduce new products are all supporting the impressive growth of our single-family residential business.
Single-family revenues increased over 70% year-over-year in the first quarter, now representing 22% of our U.S. revenue. Our single-family residential payers are comprised primarily of our Prestige and Elite product lines. However, our largely untapped opportunity with production in homebuilders through our Multimax product line is also an immense avenue for growth. As we’ve move through the year, we will continue to widen our dealer network for Multimax into attractive areas in Georgia, Louisiana, Texas and South Carolina.
Our strong momentum has continued into the second quarter, mainly driven by new business wins and share gains. Simply put, we are winning because we are able to supply superior quality architectural glass products with much shorter lead times and attractive value, which truly differentiate us in the tight supply environment that the industry is experiencing. As an example, we recently received a call from a publicly-traded homebuilder requesting quotes on several large communities. The first question was about lead times, not prices. So to be able to deliver favorably on both is extremely promising in the current environment. Also, that was just one homebuilder and we have discussions ongoing with several others. A lot of our successful business development has been enabled by our operational stability due to both our vertically-integrated model and well-situated operations.
So, let me take a moment to dive deeper into the drivers of our success and above-market growth. Looking at Slide 7, I will explain a bit more as to how Tecnoglass is becoming the architectural glass provider of choice in the U.S. Over many years of investments focused on innovation and operating efficiencies, we have created a defensible architectural glass platform in a well-situated location. This has resulted in no material pressures from raw material inflation. This is due to our vertically – integration that reaches across the entire architectural glass and window value chain providing us with significant control over a substantial portion of cost, resulting in structural advantages relative to industry peers.
In 2019, we entered into a joint venture agreement with Saint-Gobain, which had already been the primary supplier of our float glass in 2013. This joint venture provide us with access to ample float glass supply, reduced purchasing costs and substantially lower inbound transportation costs, given its close proximity to our manufacturing facility in Barranquilla, Colombia. In our aluminum, which is another key raw material component in our production process, we are hedged on a significant portion of projects within our commercial portfolio through fixed-price contracts. Better control of raw material visibility has been an advantage to Tecnoglass and our ability to quote projects for customers. It is important to note that we currently do not have any long supply chains with virtually all inputs being sourced locally or from the U.S.
Another structural advantage is productivity. In 2019, we invested $20 million in high-return automation and expansion initiatives. This helped to optimize our glass and aluminum production capabilities with a significant improvement in output of certain automated lines. At the same time, we have invested in our employees. We have gone through great lengths to establish our company as an employer of choice in Colombia, which has allowed us to benefit from efficient access to talented people and very low turnover. This has, in turn, led to further productivity gains and less downtime. As a result, we are not experiencing material wage inflation or labor constraints which is keeping our lead times very short.
Vertical integration benefits or transportation costs, our soft coating, aluminum, laminating tempering, finishing, assembly and other facilities are all co-located in the same campus and with our float glass supply nearby. This has kept our intercompany transportation cost at less than 5% of revenues. In addition, Colombia has a long-term trade deficit with the U.S., which keeps the shipping rates favorable for Colombian exports to many U.S. entry ports. Many of which are located close to our project sites. On the energy side, in early 2017, we invested $15 million on solar panels for our facilities. Over time, these investments have provided us with over 15% savings on our energy costs. We also utilized cogeneration facilities to power our plants through on-site natural gas emissions. These actions both reinforce our commitment to ESG initiatives and provide meaningful tax savings.
To recap, our structural advantages are powering our ability to quote more projects, expand customer relationships and deliver products when the customers need them. Contractors value our superior products and dependability, which is unlocking opportunities for continued growth and market share gains. As we further ramp up our production to service the increasing demand for our best-in-class products, we are excited to move forward with the construction of our second state-of-the-art float glass plant in Barranquilla. Engineering work is expected to commence in the second half of 2021 with groundbreaking to take place during the first half of 2022. That said, our existing installed capacity following our investments in automation is currently running at about 65% utilization, and we have no operational constraints to meet demand for the foreseeable future.
Let’s now move to our first quarter financials, starting with our improved balance sheet and leverage profile on Slide #9. As we discussed last quarter, the recent recapitalization of our debt structure, combined with our impressive record of cash flow generation is significantly enhancing our financial flexibility to execute on our growth objectives. Strong working capital management, lower interest expense and our higher mix of residential revenues helped us generate record first quarter operating cash flow of $29 million. I’m extremely proud of the transformational step change in our operating cash flow, which over the past 12 months has represented approximately 90% of adjusted EBITDA. Based on our conservative leverage ratio of 1.4x as of March 31, the interest rate spread on our new $300 million senior secured credit facility decreased by 50 basis points to a spread of 2.5% in April 2021 as expected. Annualized interest expense savings are expected to be $11 million as a result of our completed balance sheet recapitalization.
Turning to the drivers of revenue on Slide #10, total revenues increased 27% year-over-year to a record $110.9 million for the first quarter. This strength was primarily driven by continued strong single-family residential sales, recovering commercial construction activity, as well as market share gains, in part driven by the solid operational execution that I just discussed. We were pleased to have improved Colombia revenue by 18.4% compared to the prior year quarter as the cadence of projects begin to normalize in the country. However, most of our other Latin American markets remain in different stages of recovery from the pandemic.
Looking at the drivers of adjusted EBITDA on Slide #11, record adjusted EBITDA for the first quarter 2021 increased 64.8% to $33.5 million compared to $20.3 million in the prior year quarter. Adjusted EBITDA margin at a record of 30.2%, demonstrated an impressive 690 basis points improvement compared to the first quarter of 2020. First quarter gross profit increased 48.4% to $45.1 million, representing a record 40.7% gross margin. This compared to gross profit of $30.4 million in the prior year quarter, representing a gross margin of 34.9%. Our 590 basis point improvement in margin was mainly attributable to a higher mix of revenue from manufacturing versus installation activity as we continue to increase our mix of single-family residential products where we do not carry out installation. The improvement was also supported by a full quarter of greater operating efficiencies from prior automation initiatives, which were fully implemented during the first quarter of 2020.
Moving forward, as a single-family residential becomes an increasing mix of our products this will continue to provide us with greater manufacturing revenue, which positively impacts our margins. This business also strengthens our cash flow, given our single-family projects carry a shorter cash cycle and no repayments. Higher nominal operating expenses for the quarter mainly reflected higher variable expenses related to marine and ground transportation. As a percentage of revenue, operating expenses were lower by 200 basis points compared to the prior year quarter primarily driven by higher revenues and better operating leverage on personnel, professional fees and other fixed expenses.
Moving to our outlook on Slide #13, based on our positive momentum into 2021 and an improved demand outlook, including solid share gains and strong activity into April and May, we are increasing our full year 2021 outlook for revenue and adjusted EBITDA growth. We now expect full year 2021 revenue of $420 million to $435 million representing growth of 14% at the midpoint. We continue to expect higher year-over-year growth in the first half of 2021 based on anticipated timing of invoicing in 2021 compared to 2020 as well as having a full schedule of operation without any COVID-19 related constraints as we had in March and April of 2020. In addition, we expect to have a higher mix of products versus installation revenue in line with our continued penetration into the U.S. single-family residential market. We continue to expect the U.S. to represent the significant majority of our growth, offsetting the slower pandemic recovery in Latin America.
Based on this sales outlook and anticipated mix of revenues, we raised our full year adjusted EBITDA outlook to a range of $115 million to $125 million, representing a 23% growth at the midpoint of the range as well as margin expansion. Our gross margins should continue to benefit from our previously completed high-return CapEx investments in automation initiatives. Additionally, with our increasing mix of single-family residential products, bringing more manufacturing revenue to our revenue mix, we now expect gross margins to trend towards a normalized level in the mid- to high-30s range higher than our previously communicated mid-30% range.
We now anticipate CapEx in 2021 to approximate $20 million to $25 million with the increased amount coming from further automation as we continue to expect robust growth. We are firmly on track to produce another year of record results in 2021. We have effectively positioned Tecnoglass to deliver exceptional above-market growth while maintaining our impressive operating leverage to generate a step change in free cash flow. Our vertically-integrated and well-situated operations are more prepared than ever to meet a level of demand much stronger than our current outlook. Our solid balance sheet and conservative leverage position further reinforce our flexibility to invest in additional value creation. We truly believe our years of hard work and prudent investments will provide greater returns for our shareholders in the quarters and years ahead.
With that, we will be happy to answer your questions. Operator, please open the line for questions.
Thank you. [Operator Instructions] Our first questions come from the line of Brent Thielman with D.A. Davidson. Please proceed with your questions.
Thank you. Congratulations on a really strong start to the year.
Thanks, Brent.
Yes. I guess, maybe I will pick on the margin outlook. Obviously, you have taken it up, but you had really extraordinary margins this quarter and what tends to be a little seasonally slower quarter, it doesn’t look like anything sort of transitory in terms of benefits. So, just wanted to get your views on why you couldn’t repeat the sort of gross margin performance going forward, Santiago?
Okay. So, a couple of things there. First one is the mix of business, Brent. We did expect the installation segment to have lower revenues within the first half of the year. We are raising our gross margin outlook to mid to high-30s from the mid-30s that we had previously. So I do think that going forward, our gross margin is going to be higher. Based on mix, we just don’t know that it’s going to be 40%, 41% like we saw this year. But other than that, from an input perspective, raw materials should not be a headwind. As we mentioned during the call, we are hedged on a large portion of aluminum. Through the joint venture, we have a stable supply of glass. So, we are not seeing inflationary pressures that would have caused the gross margins to come down. It’s going to be more a mix type of question as to whether manufacturing continues to grow at this pace. But if we do continue to grow into manufacturing as opposed to installation, the expectation is for them to move higher. So, the mid to high-30s comment was associated with what we are seeing based on input costs and based on the revenue mix that we are expecting going forward for the rest of the year.
Okay. And when would you expect the capacity from the new float glass plant to become available to you just given the fresh time lines you guys provided today?
Well, the expectation is for that to break ground in the first half of next year, and it is expected to be completed by the end of 2024. But that being said, that’s a separate business because that’s the rolled glass manufacturing. We, on our end, have a lot of excess capacity right now. We are roughly at 65% installed capacity to grow on the transformation of glass, right? So, that’s not going to be a constraint if we continue to grow at this pace. The Saint-Gobain joint venture plant will add to the rolled glass manufacturing, which is a separate business, right. That’s just going to provide incremental rolled glass to us to transform and make windows. But for the time being, we are set to grow well beyond where we are.
Yes. Okay. And then just my last question. I mean, Southeast still appears to be a pretty important driver for you. I guess, just wondering if you are starting to see some expansion or growth into some other regions of the U.S., what you are seeing around the country?
We have been growing in the commercial, in New York, Boston, Washington, Illinois, I mean, Chicago area and Texas. And some a little bit, we are doing some businesses in California. In the residential side, we are first filling up our orders from the mid-Florida up, and we are going to start growing west to all the Gulf Coast, which is hurricane-proof. And also of the Northeast, all the way to Virginia, which is also hurricane related. But we are starting to doing that. I mean right now, we are mostly in residential. We are just in Florida.
Yes. Okay. Great. Well, congrats again. Thanks for taking the questions.
Thanks Brent.
Thank you. Our next questions come from the line of Tim Wojs with Baird. Please proceed with your questions.
Hi guys. Good morning, nice job.
Good morning Tim.
Maybe my first question is just about visibility as you kind of look at the second half maybe relative to where you were a few months ago. Obviously, you have seen a lot of backlog growth and I think one of the kind of question marks last quarter was just if some of the projects would hit in the second half versus kind of 2022. So, could you just kind of give us a little bit of an update on maybe some of the visibility there? And is the guidance range basically better visibility into Q2 or are you actually seeing better visibility in the back half?
Well, the backlog started to grow again and it’s going to keep growing, we see because there is a lot of quoting right now. I mean, we are quoting hundreds of millions of dollars in jobs, new jobs that are going to break ground within the next 6 months to a year. The quality process is way before the job starts and way, way before we actually ship. So, we believe – I mean, 2022 is going to be an unbelievable year. We have a gap from last year that we didn’t do any commercial new jobs. I mean, we didn’t land in any commercial new jobs. So, the first 6 months to 9 months are going to be really soft in installation and commercial jobs. But then the third quarter 2022 and 2023 are going to be unbelievable because the strength of the market locally, especially in Florida, it’s – I mean, everything that people put out for sale is selling. So, all the buildings eventually are going to break ground and they are going to go up, and we are going to do the windows.
Just to add to that, Tim, to address your question, the way that we projected the rest of the year was basically with the schedule of commercial projects that we had. But as José was saying, since there was some activity that was pushed out at the end of last year, you obviously have a temporary air pocket that moves into 2022, right? So the expectation is that the commercial segment does better in the first half of the year rather than the second half, but that’s going to be more than compensated from the activity into the single-family residential. So, that’s really how we projected the rest of the year. Now if the single-family resi continues to grow as it is, and we have more visibility as we move along into the year, then we will probably be confident to end up at the higher end of the range, if not higher.
Okay. That’s helpful. And then on the residential business, you are obviously taking share. Are there any things that you are doing just to make sure that once some of your competitors’ lead times normalize that you are still, that the OEM that there is kind of new contractors are going to turn to?
After we delivered to a client and they see the difference in not only lead times. I mean, our product is a much, much better product in every aspect, in the finish of the aluminum, in the quality of the design, in the pressures that it withstands, in the water, in the ease of installation. So after we land the client, we rarely lose them. That’s why we don’t need to buy anybody to grow. We grow organically because our clients stay with us forever.
Okay. So, it sounds like pretty satisfied – after you get enough customers. And then I guess, the last question I have got is just how should we think about free cash flow through the year, Santiago?
I think we are going to continue growing on what you saw. First Q was exceptional from a free cash flow perspective. Depending on working capital the rest of the year, my estimate is that we continue to grow, maybe not at $30 million of operating cash flow per quarter. But certainly, we are going to continue to generate free cash flow of each subsequent quarter, the rest of the year, Tim. It’s just going to be a function of what working capital looks like and how we end up growing, especially on the single-family resi. April and May were outstanding, right. I mean, April and what we have for May so far. So, it’s all going to depend on that. But even with that projected growth, we are definitely expecting robust free cash flow each subsequent quarter and the rest of the year.
Okay. Great. Thanks for the time.
Thanks Tim.
Thank you.
Thank you. [Operator Instructions] Our next questions come from the line of Alex Rygiel with B. Riley. Please proceed with your questions.
Thank you, José Manuel and Chris fantastic quarter. Congratulations.
Thank you.
A couple of quick questions here. First, can you expand a little bit more upon sort of your interest in M&A over the next kind of 12 months to 24 months?
Well, normally, we do not have anything in the line of M&A. But since our growth has been so fantastic organically, we – there are some markets that we are not in, and it’s difficult to get in from rock. We are looking into some opportunities with products that we at the moment do not serve. But actually, as of this moment, for example, we have nothing secure. But we are looking. We are always open to look for opportunities. And I believe since we need to grow geographically and in our product line in the next – I mean, we were talking 24 months here. I believe maybe 1 or 2 good opportunities will arise.
That’s very helpful. And Santiago, thank you very much for the guidance, super helpful. One additional challenge that we have is seasonality. Last year wasn’t really normal. And seasonality from a demand standpoint, especially on the residential side and even on the commercial side, this year does not seem normal. Can you help us to sort of understand a little bit about where you are thinking for revenues sort of in 2Q relative to 1Q? And then are we still looking at sort of the third quarter being the peak for the year?
This year is a little bit different, right, because last year, because obvious reasons, there was some backlog that was not booked. And therefore, 12 months later, you don’t get the benefit of invoicing that backlog, right? So, that’s what we are talking about, the second half of the year having a temporary air pocket that moves into ‘22, right. Because you just don’t put things into backlog and invoicing right away. So, this year is just a little bit different. And the way that we model this out is that first half of the year is going to be stronger than the second half on the commercial side. But if things continue to go the way they are on the resi side, the resi side is going to more than compensate that temporary air pocket, right. So all-in-all, to answer your question, we are not expecting seasonality this year. We think that all quarters should basically be around the same. It’s just going to be a different mix of commercial versus residential that you have historically seen.
Very helpful. Thank you very much.
Thank you, Alex.
Thank you. There are no further questions at this time. I would like to turn the call back over to José Manuel Daes for any closing remarks.
Well, thanks, everyone, for participating on today’s call. We will keep you posted. We are doing really good that we believe the future is even brighter for Tecnoglass. Looking ahead, we are confident that we have a really good position to deliver above-market growth in the U.S. with sustained operating leverage to support our industry leading margins and a strong free cash flow. That should lead to exceptional shareholders’ returns in the years ahead. We appreciate your continued interest and support. Thank you.
Thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time. Have a great day.