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Good afternoon, ladies and gentlemen. Welcome to the Jamieson Wellness conference call to discuss financial results for the fourth quarter and full year of 2018. [Operator Instructions.] As a reminder, today's call is being recorded. On the call today from management are Mark Hornick, President and Chief Executive Officer, and Chris Snowden, Chief Financial Officer and Corporate Secretary. Before I turn the call over to Mr. Hornick, please note that a press release covering the company's fourth quarter and full year 2018 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section on the company's website. Please note that the prepared remarks which will follow contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore undue reliance should not be placed upon them. We refer you to all risk factors contained in Jamieson's press release issued this afternoon and in filings with the Canadian securities administrators for the detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward-looking statements. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances, except as may be required under applicable security laws.Finally, we would like to remind listeners that the company may refer to certain non-IFRS financial measures during this teleconference. A reconciliation of these non-IFRS financial measures was included with the company's press release issued earlier today. Also please note that unless otherwise stated, all figures discussed today are in Canadian dollars and are occasionally rounded to the nearest million.I will now turn the call over to Mr. Hornick to get started. Please go ahead, sir.
Well, thank you, Hector, and good afternoon, everyone. I'm pleased to report that we had a very strong finish to 2018, delivering the largest sales and earnings quarter in the company's history. We fully met our full-year guidance for revenue, adjusted EBITDA and adjusted earnings per share. We generated 18% fourth quarter revenue growth, or 22% before the new revenue recognition accounting change that Chris will discuss later. We generated 22% growth in adjusted EBITDA as well and 25% adjusted EPS growth during the fourth quarter.We entered 2019 with strong momentum in both our domestic Jamieson and international businesses, and improving trends month-over-month in Specialty Brands. Let me begin with an overview of the fourth quarter and business trends.So Jamieson's Brands revenue, excluding the new recognition impact, was up 12% during the fourth quarter, driven by a 16% growth of the Jamieson Brand in Canada and a 26% growth internationally. The double-digit growth of Jamieson in Canada reflects continued strong point-of-sale trends and timing as shipments have caught up with year-to-date growth in consumer purchases.International sales growth remains robust, with strong demand for the Jamieson Brand, particularly in Asia, Europe and the Middle East. We're seeing strong volumes in China and in Hong Kong. We were granted 2 additional Blue Hat product registrations in the fourth quarter and expect additional registrations by midyear. We added 3 new markets during 2018, including our recent exclusive agreement with MedPlus in India.As we expected, Specialty Brand volumes decreased 11% during the fourth quarter but saw improvement on a month-over-month basis throughout the quarter. We've implemented initiatives to enhance the brand and improved our sales structure and our sales strategy with a focus on improved customer relationships. This has already yielded increases in distribution, and we successfully launched new innovation during the fourth quarter and are pleased with the early success of both our Perfect Probiotics launch and our Progressive Elite multivitamin. We're encouraged by these recent improvements and anticipate Specialty Brands to return to growth in the third quarter of 2019.For context, Specialty Brands represents 15% of the consolidated company revenues, and within our long-term growth forecast for branded revenue of 5.7% to 7%, Specialty Brands accounts for 1% of that. And that's what we target from Specialty Brands.Finally, Strategic Partner revenue was up 57% during the quarter. This growth was driven by timing, new contract and strong demand for our partners' brands. As we discussed, the timing of raw material availability and the shift in sales from the third quarter to the fourth quarter in our last conference call, a lot of this growth was to be expected. While our quarter-to-quarter Strategic Partner revenue can be choppy, as we've seen this year, we were in line with our full-year growth target of 20%.Looking at the entire fiscal, 2018 was another successful year for JWEL. Before the new revenue recognition accounting impact, we generated 11% full-year revenue growth, driven by 8.5% growth in our branded business and 19.5% growth in Strategic Partners. We achieved our target with strong growth and momentum on the Jamieson Brand in both Canada and internationally, and that more than temporarily offset some softer sales in Specialty Brands. We expanded our margins while increasing investment in our brand, and we increased our quarterly dividend and expanded our global footprint.As we turn to 2019, we look forward to the rollout of several key projects in support of our growth objectives across all segments of the business. On the branded side, so far in 2019 we've launched 17 new products. As an example, we're following up on the success of our Jamieson Vitamins Plus protein launch last year, with a vegan version of the product to offer vegan protein to the rapidly growing number of consumers looking for it. Just to give you some context, when we measure the success in the protein segment in food, drug, mass of new product launches, our chocolate and vanilla Jamieson Vitamins Plus protein were #1 and #2 across Canada in 2018 in terms of sales. Just this past week we launched e-Trial on jamiesonvitamins.com. For those of you who haven't been on the website lately, you can now order individual products or subscribe to receive a personalized monthly supply of vitamins packaged in convenient daily pouches. Now there's a lot of consumers that visit our website day to day, looking for information on products, and this is going to allow those consumers to order products when they're most curious about them, providing what we hope will be incremental category growth.Internationally, in addition to the new geographies that I mentioned earlier, we're expanding our existing relationship with our current Hong Kong distribution partner to focus on adding additional opportunities in Southeast Asia, with a Phase 1 launch focusing on distribution in Malaysia, the Philippines and Singapore, with potential future expansion into additional countries in the region.In China we continue to advance our product registration pipeline and accelerate opportunities to the domestic Chinese market. Our cross-border e-commerce growth in 2018 exceeded our expectations, and we look forward to build on this momentum with increased promotion and influential programs throughout 2019.On the Strategic Partner side of the business, we're building opportunities with our existing partners and looking for new partners to continue to improve the efficiencies at our manufacturing facilities, specifically in our powder processing facility.So in summary, we're really excited about all our progress on all fronts. As we've discussed before in every update call, there is inherent quarterly sales variability in our business. And on an annual basis, Jamieson has a long-term track record of very reliable growth, and we only see more of that to come in 2019.With that, let me turn the call over to Chris to discuss the fourth quarter financial results in greater detail.
Thank you very much, Mark, and good afternoon, everyone. As Mark stated, we had a very strong fourth quarter and are confident in the trajectory of our business and our expectations for continued growth in 2019. Please note as discussed in today's press release, our fourth quarter and the fiscal 2018 revenues reflect the application of IFRS 15, Revenue from Contracts with Customers. As a result, certain items that previously were included in the cost of sales are now classified as a reduction of revenue. This treatment has no impact on our underlying growth, operating income, EBITDA or net earnings of the company. Also note that our 2018 guidance did not reflect the revenue recognition impact for IFRS 15 and prior year periods have not been adjusted to reflect the impact of IFRS 15. For those of you building earnings models, we have provided a table in today's press release that breaks out our revenue recognition impact by quarter for 2018. The application of IFRS 15 reduced fourth quarter revenue by CAD 3.6 million and reduced fiscal 2018 revenue by CAD 13.3 million.In the fourth quarter, revenue increased 18% to CAD 99.1 million, driven by growth in our Jamieson branded segment and Strategic Partners, offset by the CAD 3.6 million impact due to the revenue recognition. Excluding the impact, revenue increased 22% to CAD 102.8 million, slightly ahead of consensus forecast for the quarter. If a consistent revenue recognition approach was applied to fiscal 2017, the reclassification and impact would have reduced prior year revenue by approximately CAD 14.5 million.By segment, Jamieson Brands revenue increased 6.4% to CAD 69.7 million. Normalized for revenue recognition, Jamieson Brands revenue increased 12% to CAD 73.4 million, consisting of 15.9% growth in domestic Jamieson revenue and 26.4% growth in international. These gains are partially offset by an 11% decline in our Specialty Brands. Revenue in our Strategic Partners segment increased by 56.8% to CAD 10.7 million. As discussed on our third quarter conference call, the timing of customer-supplied ingredients shifted shipments from third quarter to the fourth quarter, impacting fourth quarter growth. Total gross profit increased 14% to CAD 35.2 million, and gross margin decreased 110 basis points to 35.5%. The decrease in gross margin percentage was primarily as a result of the proportionately higher Strategic Partner volumes in the quarter compared to the prior year and includes the new revenue recognition impact.By segment, gross margin increased 320 basis points year-over-year in Jamieson Brands due to operating efficiencies on incremental volumes and the impact of lower reported revenues. In the Strategic Partner segment, gross margin declined 610 basis points year-over-year, primarily due to customer mix. The Strategic Partner mix margin impact was included in our 2018 guidance expectations.Selling, general and administrative expenses increased by 18.3% to CAD 16.9 million. This increase primarily reflects the inclusion of CAD 2.1 million of nonrecurring costs related to business integration, international market expansion and e-commerce development. Exclusive of these costs, SG&A expenses were CAD 0.5 million higher than the prior year, reflecting the reclassification of fixed fee trade costs from cost of goods sold. Normalizing for the impact of nonrecurring costs, SG&A as a percentage of revenue decreased to 14.9% from 16.9% in the prior year.Operating income increased 15% and operating margin decreased to 17.2%. Normalizing for the impact of nonrecurring costs just noted, operating margin was 19.4% compared to a normalized 18.9% in the prior year. Adjusted EBITDA increased 22% to CAD 22.9 million and adjusted EBITDA margin increased 70 basis points to 23.1%. The improvement in adjusted EBITDA margin was driven by gross margin improvement from the Jamieson Brand segment and lower SG&A as a percentage of revenue. This was partially offset by the decline in adjusted EBITDA margin for the Strategic Partner business.Interest expense and financing costs were CAD 2.4 million compared to CAD 2.1 million in the prior year. The difference was primarily due to recent increases in benchmark interest rates during 2018.Our reported net income was CAD 10 million in the fourth quarter compared to CAD 3.7 million in the prior year. On an adjusted basis, net income increased 25% year-over-year to CAD 12.2 million or CAD 0.31 per diluted share, and all of the adjustments to net income are described in the press release and included in the adjusted net income reconciliations table at the end of the release.Turning to the balance sheet and cash flow, we generated CAD 22.2 million of cash from operations during the quarter compared to CAD 17.2 million in the prior year. Capital expenditures in the fourth quarter were CAD 4.6 million and we paid CAD 3.4 million in dividends. We ended the quarter with CAD 12.4 million in cash and total debt of CAD 165.9 million. The company had almost CAD 46 million in cash and amounts available through a revolving operating line, plus an additional CAD 60 million in term debt available through an accordion feature included in our existing credit facility.Now let me turn to guidance. We are initiating the 2019 outlook and anticipate the following:Net revenue in the range of CAD 336 million to CAD 348 million, representing top line growth of 5% to 9%. Excluding the new revenue recognition impact and in line with current analyst estimates, our expectation would be CAD 350 million to CAD 362 million in revenue.Adjusted EBITDA in the range of CAD 73 million to CAD 76 million or 8% to 12% growth over fiscal 2018 and adjusted earnings per fully diluted share of CAD 0.90 to CAD 0.95.Additionally, I would like to note some additional assumptions to assist your modeling. We anticipate Jamieson Brand segment growth of 5% to 9%, including 3% to 5% growth in the Jamieson Brand domestically, 25% to 35% international branded growth and Specialty Brands growth of 1% to 5%. Please note that domestic revenue in the first quarter 2018 benefited from customer purchases ahead of our mid-quarter price increase and as such, we expect domestic Jamieson revenue to be flat or slightly negative in the first quarter of 2019. For Specialty Brands, we expect growth to accelerate as we progress throughout the year. We anticipate growth for our Specialty Brands will be realized in the last 6 months of the year as our innovation, customer and consumer programs begin to show identifiable results. We anticipate Strategic Partner segment growth of 5% to 8%. Our Strategic Partners are launching new programs in the first 6 months of 2019. This will concentrate our Strategic Partner revenue growth in the first 6 months of the year. We expect normalized SG&A to increase to 11% to 15% in support of our international market growth and e-commerce initiatives, an increase in marketing to promote our Jamieson and Specialty Brands and the normalization of variable compensation and Specialty Brand commissions. We see increased differentiation reflecting higher capital expenditures to support our growth and capitalization of operating leases with the implementation of IFRS 16 in 2019.We are assuming interest rates ranging between 4.5% and 5.5%, which would lead to full-year interest of CAD 9 million to CAD 9.5 million based on borrowings plus deferred financing fees. Additionally, our guidance reflects assumptions of CAD 1.33 per U.S. dollar exchange rate and an effective tax rate of approximately 28%. Our estimate for fully diluted shares is approximately CAD 40 million.A complete discussion of our outlook and factors impacting our expected performance of 2019 is included in the Outlook section of our MD&A. With that, I would like to turn the call back to our operator for Q&A.
[Operator Instructions.] Our first question comes from the line of Sabahat Khan with RBC Capital Markets.
Just on the -- starting with the Jamieson Brand segment, can you maybe talk about just the mix of top line from the kind of legacy products versus innovation? And then if we look at margins on an apples-for-apples basis versus prior year, given the accounting change, how did the margins trend? And is the mix helping that, or what's kind of impacting the entire segment there?
So innovation growth was in our target range. There was not a ton of innovation shipment in Q4, so that would not have impacted the quarter. But on a full-year basis, it was in the 2% to 3% expectation for the company's perspective. I think you can calculate the margin impact with and without the top line adjustment. In general, margin in our branded business continued to expand as volume through our Rhodes facility continues to drive leverage and efficiency with the additional volume.
Okay, and then as you think about the international side of the Strategic Partners segment, kind of the margin step-down there over the last couple of quarters -- is that sort of a permanent margin shift, do you think, given the mix of power of the customers that you have, or is that something, you think, was a 2018 event and it could improve as you go forward?
I think 2018 is a more normalized margin versus some of the programs that we experienced in fiscal 2019, which really related to specific products. We would expect 2019 margins to be consistent with the 2018 full-year average, and then we'll look to drive that with incremental efficiencies as we progress throughout the year.
Okay, and then based on your current outlook and just how the industry's going, what are thoughts on potential M&A, or is that something you want to push off and just focus on international growth for now?
I think for the next 12 months, Saba, we've got so many organic growth opportunities, we're going to continue to focus internally. That said, if the right acquisition at the right price becomes available, we will look at it. But our view is multiples are still pretty high in the private equity space and in the private space, so we're not seeing anything that's very tempting.
Our next question comes from the line of Peter Sklar with BMO Capital Markets.
Chris, in the -- at the back of the financial statements, you have this reconciliation where you go from net income to adjusted net income for the quarter. Can you just explain in more depth? There's 3 adjustments. There's international market expansion, nonrecurring business integration and then there's CAD 704,000 for others. Do you mind just elaborating on those 3?
So we're just talking on the last page, the 3 large buckets?
Yes.
So the other was really some consumer research that we're doing on a 1-time basis in China to drive our understanding of the consumer, and then also some M&A work around really understanding the global opportunity from an acquisition perspective, developing a heat map to really identify those companies that would be the most compatible from an acquisition perspective.
Okay, and then the nonrecurring business integration, CAD 844,000?
Yes, that's just continued noise from the pull-together of the Body Plus and LVHS businesses. That will be pretty well it for that amount. There will be a little bit more restructuring in 2019, but I don't think you'll see any amounts anywhere close to this in the future.
And then there's international market expansion for CAD 669,000.
Yes, sorry. That was the China study that we talked about.
Right, okay, okay.
As well as legal fees related to the contracts around our Southeast Asia opportunity as well as our Chinese legal entity that we set up during the year.
Okay. Did you provide a CapEx forecast for -- like in the guidance, you just, like allude to depreciation's going to be up because of higher capital expenditures, and also you have IFR -- can you give a CapEx forecast?
Yes, so we expect capital to be at the high end, so we're going to expect CAD 8 million to CAD 10 million in capital per year for the next 2 years. That's going to allow us to put our facilities in a position to accelerate growth internationally and particularly to take advantage of any potential opportunity in China. That kind of coincides with additional format and tablet growth domestically as well, as we see consumers evolve to more value packs. So when you look at demand in the plant, demand on a tablet basis has outpaced our top line growth because of a migration to Costco-type SKUs and value packs domestically.
Okay. And then lastly, could you explain -- like you touched on it, one of you touched on it during the remarks -- but the margin during the quarter for Strategic Partners was quite low, like the EBITDA percentage margin. I think you referred to customer mix. Could you elaborate?
Yes, so that's just the volume of -- the particular item that impacted was twofold. It was that Vitamin A business that we do typically is spread across the 2 quarters. That business has, I think, probably the lowest margin contribution in the entire Strategic Partners portfolio. Because that was entirely recorded in the fourth quarter, that had a significant impact on those margins in the quarter. I think if you looked at the annual average, that's a better expectation going forward.
Right. And then lastly, Mark, if I could ask, I think you mentioned in the write-up that you were able to get some pricing. And like given what's going on with the grocers, like they're asking their suppliers for pricing, could you just elaborate a little bit on the pricing? Was there raw material increases that allowed you to take price, or what was the backdrop, to the extent you can talk about it?
Yes, we executed a Canada-wide price increase in the first quarter of 2018 based on some significant increases in raw materials that we saw. So we implemented that across all of our retailers in the first quarter. And then Chris will talk a little bit about guidance associated with that. We did have some trade loading ahead of that price increase that boosted our Jamieson branded volume in Q1, so you guys will probably want to factor some of that into your modeling. But it was a Canada-wide price increase, and it happened in Q1.
Okay. And Chris, I take it there's -- do you have price, additional price in your guidance for 2019?
No. And just to be clear, Mark, that price increase was designed entirely to offset the impact of raw material increases that we knew about in 2017 or at the end of 2017. There was no margin drive as a result to that. That was just purely a pass-through.
It does affect revenue.
Our next question comes from the line of George Doumet with Scotiabank.
Your '19 guidance implies a margin expansion of 60 basis points. I think, Chris, you mentioned some operating leverage at the Rhodes facility, but are there any other mix considerations in there?
Well, just our international business has very strong margins as well. As you see that grow, that should help margins as well as just a return to growth on our Specialty Brands. That will also help margins. But in general, it would -- as you add volume from a tablet perspective, we're going to do better from a contribution perspective. So I think in total gross margin, we expect about a 100-basis-point increase in 2019, with a little bit of that being invested in SG&A to continue to drive our international opportunities with additional resources as well as additional marketing for both the Jamieson Brand and Specialty Brands.
Okay, and on your -- the guidance calls for the mid- to high-single-digit growth in the Strategic Partner channel. Can you maybe give us a sense of seasonality for those shipments? I know it's always to say because it's kind of lumpy, but --
Yes, so we talked a little bit about that being front-end loaded. If you remember back to Q1 2018, we had about a 15% decline in Strategic Partners, so I would expect you could see up around 30% growth in Strategic Partners over the first half of the year, and then that's normalized in the back half.
Okay, so one last one, if I may. On the -- I think in your commentary you had mentioned domestic Jamieson, there's going to be a slight negative in Q1. Can you just maybe give a little bit more color around that? And just to clarify, most of that 3% to 5% growth in '19 will be mainly unit growth, right?
That's correct, that's correct. So Mark touched on it earlier. We executed a price increase in Q1 2018. There were some purchases ahead of that price increase by our distributors, and ultimately, that pulled volume out of the second quarter into the first quarter. So when you look at that 13% growth compared to our full-year growth of 8.5%, that kind of gives you the quantum of the impact to the first quarter last year. So when you compare that to our full-year growth of 3% to 5% in 2019, that gets you to pretty well flat in the first quarter.
[Operator Instructions.] Our next question comes from the line of Derek Dley with Canaccord Genuity.
This is Alex on the line here for Derek. So I just kind of want to talk a little bit about the international side of the business. So in China, I guess the last we heard was that products were going to begin shipping into retailers sort of end of February, early March. Can we still expect that sort of timeline?
Yes, after Chinese New Year was the timing that we said. We have quite a big conference that we are attending at the beginning of May, where we will do a big gala presentation of the new launch. But we will start shipping to selected retailers before that.Just to give you some context, though, this is really paving the way for the branded launch into the bricks and mortar and the domestic e-commerce channel in China. But it's much more about generating awareness and new trial and new listings than seeing anything other than what we've forecasted in domestic growth. So we don't anticipate any unforecasted volume growth because of this. It's more about getting ourselves set up on the right foot to grow longer term. But all of the business impact from that is forecasted in our guidance.
Okay, perfect, thank you. And then on the, I guess the MedPlus partnership in India, I think last we heard, you were expecting to start shipping potentially in 2019. Is that still the case? And then roughly, how much of your international growth next year do you expect to come from China and India?
So as India is a new market, and they don't have a lot of experience with foreign brands, we sent a pilot order to India that would suffice for the demands of about the 500 top stores in MedPlus, and we sent that in Q4. So it took a little bit of time for that order to work itself through customs, clear regulatory and get us on a path of regular customs clearance. So a second order is going to be coming during the first half. Now we're setting up shelves, getting our marketing program set up with MedPlus, detailing the pharmacists, et cetera. And so the program is off to a good start. And as we learn our way into this, we will see increased volume coming from that as we expected.We are off to a good start in China, so we expect, from an international perspective, to have another good year, as I think Chris has indicated in the guidance. And then -- and the results of that will be, I would say, heavily focused on China. But it's pretty well forecasted, and you can find that in the guidance numbers that Chris gave you.
Our next question comes from the line of Endri Leno with National Bank.
Just continuing on the international side of the business, there's been a little bit of a foreign affairs kind of tough times between Canada and China. Have you see any impact, or would you expect any impact on the approval of products or launching anything over there?
So overall, not. When the Huawei incident happened, there was some reaction in Chinese social media with regards to Canada and some dissatisfaction with how Canada was handling that situation, that some Canadian brands were mentioned as being sourced from Canada, et cetera. We didn't see any lasting business impact from that. And to give you some perspective, our January sales in China are up solid double digits, so we're not seeing anything lasting from that. But that's a good question.
Thank you. And then just one more question on the China. There is one of your peers -- well, I guess Blackmores. They reported, or they expect weakening consumer demand in China. Would you care to comment on that at all?
So there's 5 major international brands in China as far as what our data would tell us, and they all have different business models. Ours is unique, so we operate through our partner, Shanghai Healthway. And so far that business model is working very well for us. We have not seen anything in our business results that would suggest any weakening in consumer demand, nor anything but a very positive year to come in China. So I think everyone has a different model. There's been some regulation changes in China as of the first of the year with regards to imports. It didn't affect our business, but it may have affected those of our competitors. So everyone will have their own point of view on kind of how international business looks in China. In our particular case based on our business model, it's very positive.
Great, thank you. And a question on the Specialty Brands integration. Are you able to quantify in terms of the -- how's the integration going? Are you at 50%, 70%? Where are you expected to be optimized? And how is it tracking in Q1 2019?
I guess I'll give you, Endri, just a general picture that maybe you'll find it useful. So we changed leadership about 4.5 months ago, so Mike's been in place since then. And he has very firmly taken the reins. We further reorganized both our sales and our marketing departments. We've brought in new talent. We've realigned our sales structures and priorities, and we've launched our Perfect Probiotics and our Elite Multi in December.We've met with all of our key customers and started various stages of new business development plans with each one of them. We've equipped our sales force technologically with new, state-of-the-art equipment to gather data report sales results and to tailor their sales calls to optimize things for the customer. And all of those changes, including a new sales structure and a new commission structure, for that matter, have been very positive. So we've built incremental distribution versus our expectations. We've dramatically increased customer satisfaction, both solicited and unsolicited in terms of, “Mark, your guys are really on the right track in Specialty Brands, and looking forward to seeing more,” which has been good. We've built month-on-month sales, and we are very much in line with the expectations, which were that we're going to fix that business and restore it to growth in the second half. So we are fully on track with that, Endri. And I hope that's enough. We hesitate to start giving month-to-month volume, et cetera, but overall, I would tell you that we are very satisfied with the progress and looking forward to delivering our commitment that that business will be back to growth in the second half of the year.
Great, thank you. Last question for me. On the accounting and guidance, are you able, Chris, to quantify what the impact of IFRS 16 will be on EBITDA for next year? And just to make sure, the guidance, does it include any impact from IFRS 16, or is it apples to apples with 2018 numbers?
No, the amount, it will be new for 2019, and the impact is included in our guidance.
Are you able to quantify the impact?
I don't think that we can tell you that number at this point in time.
Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Mark for closing remarks.
Well, thank you all for joining us. 2018 has been a great year for Jamieson Wellness. We'd like to thank you all for your support, and we very much look forward to a great year in 2019 and continued growth as we proceed with our mission to improve the world's health and wellness. Thank you very much.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.