LeMaitre Vascular's CEO Discusses Q2 2011 Results - Earnings Call Transcript

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 |  Includes: LMAT
by: SA Transcripts

LeMaitre Vascular, Inc. (NASDAQ:LMAT)

Q2 2011 Earnings Conference Call

July 28, 2011 17:00 ET

Executives

J.J. Pellegrino – Chief Financial Officer

George LeMaitre – Chairman and Chief Executive Officer

David Roberts – President

Analysts

Ethan Roth – WJB Capital

Joe Munda – Sidoti

Larry Haimovitch – HMCC

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 LeMaitre Vascular Inc. Earnings Conference Call. My name is (Tahisha) and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a remainder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre. Please proceed.

J.J. Pellegrino – Chief Financial Officer

Thank you, Tahisha. Good afternoon and thank you for joining us for our Q2 2011 conference call. Joining me on today’s call is our Chairman and CEO, George LeMaitre and our President, Dave Roberts.

Before we begin, I would like to read our Safe Harbor statement. Today, we will discuss some forward-looking statements, the accuracy of which are subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as belief, expect, anticipate, forecast and similar expressions. Please note these words are not the exclusive means for identifying such statements.

Please refer to the cautionary statement regarding forward-looking information, the information under the caption Risk Factors in our 2010 10-K and subsequent SEC filings including disclosure of the factors that could cause actual results to differ materially from those expressed or implied.

During this call, we may discuss non-GAAP financial measures. Please refer to our earnings release on our website www.lemaitre.com for a discussion and reconciliation of non-GAAP financial measures.

I’ll now turn the call over to George LeMaitre.

George LeMaitre – Chairman and Chief Executive Officer

Thanks, J.J. I’d like to use my time this quarter to remark on our five strategic initiatives for 2011. As you may know from our recent announcements we are undertaking the following changes in order to improve our sales growth rate and profitability. Firstly, we are terminating Endologix stent graft distribution. Second, we sold our TAArget/UniFit stent graft business. Third, we are closing our California factory. Fourth, we closed our Italian factory. And fifth, we went direct in Spain and Denmark.

Since these five moves obviously present operational challenges, I am pleased that the company continued to motor along in Q2, posting record sales of $15.1 million and $1.9 million of adjusted operating profit. These five strategic initiatives are ultimately intended to improve profitability and speed up top-line growth. More specifically, they focus LeMaitre Vascular on our larger, faster growing vascular surgery business, consolidate all manufacturing into our Burlington factory and expand our direct hospital sales footprint.

As in the first two initiatives our decision to terminate our Endologix agreement and divest our TAArget uniform platform are intertwined. We exited stent grafts for several reasons. Firstly, we think this will increase our focus on our dominant vascular brands. This will move our focus on selling and research efforts towards our larger, faster growing, higher margin vascular brands. In these niches, we offer leading technology and powerful brands, which provide us with pricing power and enviable gross margins. So, we have made a choice to work in markets, where we dominate and grow faster.

Secondly, we find there is less competition in open-vascular than in stent grafts. Moving away from stent grafts is also realization that in certain competitive markets we might be wise not to keep up with the (indiscernible) nor Medtronic clearly state their claims in the stent graft market.

Conversely, we have found that product development cycles in open vascular niches are more forgiving and demand fewer investment dollars. Indeed so many companies have moved into stent grafts that we now think there is an open field opportunity in the vascular surgery business. We also want to sharpen the focus of our sales force. We wanted over these last six years that there are sales channel problems when you sell $8000 stent grafts alongside $500 (indiscernible). The high price stent grafts distracted our European sales reps from selling our bread and butter vascular products.

You may recall that in 2010, we posted 18% organic sales growth in North America versus 3% growth in Europe. One key difference, the North Americans did not have stent grafts to sell while the Europeans did. Moving forward, we will, once again, have a single unified sales force focused on vascular surgery not stent grafting.

Lastly, we want to sell our higher margin products. From a profitability perspective, our move towards vascular makes good sense. As you may note, self stent graft an additional layer of clinical specialist is necessary. At a high watermark, we had eight such clinical specialists and this is expensive. Also, TAArget/UniFit once occupied two-thirds of our new product development activities and necessitated sizable clinical trial costs. Furthermore, the Endologix stent grafts carried a typical distribution gross margin of 45% to 50% well below our corporate average.

Turing to the third and fourth of our five strategic initiatives for 2011, closing our Californian and Italian factories is a time-tested LeMaitre Vascular strategy. These are our sixth and seventh closures since 2003. We will now manufacture all of our devices under single roof in Burlington. On average, the factories we acquired had 20 employees and typically manufactured just one product line. In my own opinion (indiscernible) economically viable, we closed factories principally because we want to produce efficiently as possible and as a rule of thumb its take about half of as many employees to manufacture Burlington, as I did in the acquired factory. We also found that our products evolve more quickly, when they are physically adjacent to our development engineers.

Finally with all the products in one building, we are able to and still maintain uniform quality standards across the portfolio. Our fifth strategic initiative in 2011 going direct in Spain and Denmark is also right out of the LeMaitre vascular play book because we operate in niches we frequently found independent distributors can not penetrate our product as deeply as we can. With the conversation of Spain, we are now directing 8 of the top 12 vascular markets in the world, just the four BRIC countries were main Brazil, Russia, India, China. It is ought to be directly allow us to control end-user pricing and enables closer contact with our surgeon customers.

Of course exiting the businesses and closing factories is never easy, and these shifts bring one-time expenses, which plough the income statement. But the LeMaitre Vascular, which emerges from all of this should have a much cleaner open vascular focus, which enable faster sales growth. Also with just one factory instead of three, I believe we will be able to manufacture all our products for less, what we further upgrade our quality.

Finally our reach in Europe should be just that much deeper as we gain direct sales in two more countries. Executing the set of five initiatives is challenging, but the resulting entity should make it well worthy effort.

With that, I will turn the call over to Dave.

David Roberts – President

Thanks, George. I would like to take a moment to briefly describe the two transactions we have executed in the last month, which will allow us to make a clean break from stent grafts. First on June 30th, we signed an agreement to divest our TAArget/UniFit stent grafts to Duke Vascular.

Duke paid us $100,000 on June 30th, will pay us another $500,000 on June 30th 2012 and has assumed the stent graft clinical trials. Through September 30th, we will manufacture TAArget/UniFit for Duke on an OEM basis. We will also fill the backorder we had as of the June 30th closing day.

Following the divestiture of TAArget/UniFit, we concluded it no longer made sense to distribute Endologix stent graft in Europe as the sales and marketing leverage was gone. As such on July 6th, we entered into an agreement with Endologix to terminate theirs relationship early. Endologix will pay us $1.3 million in Q3 2011 in exchange for terminating our distribution rights August 31, 2011, providing a smooth transition and returning inventory.

With that, I will turn it over to JJ.

J.J. Pellegrino – Chief Financial Officer

Thanks Dave. I would like to start by giving some color on our Q2 financial results, talk briefly about our share repurchase and dividend programs and conclude with some remarks about guidance. In Q2 2011 we posted record sales of $15.1 million, an increase of 7% over Q2 2010. Our open vascular category continued to post solid results growing 12% over the prior period.

Gains in this category were led by Valvulotomes up 18%, AnastoClip is up 36% and Carotid Patch is 28%. Separately our endovascular category was down 7% versus Q2 2010. This was mainly due to 59% decline in TAArget/UniFit. Our exit from stent grafts is required a significant adjustment with those European sales reps are custom to selling higher price devices.

We believe that this for our rep productivity in Europe across all product lines. As we set up for a final break from stent grafts, we look forward to reaping the rewards of a more focused, simple and streamlined sales team in Europe. Organic sales growth excluding stent grafts sales was 3% in Q2 2011.

Moving down to P&L, our Q2 2011 gross margin was 68.8%, down from 75.3% in the prior year period. The decline was due to startup costs related to the transfer of the Italian factory to Burlington, other manufacturing inefficiencies, and $361,000 stent graft inventory write-down. Excluding the write-down our gross margin was 71%.

Turning to operating expenses, we continue to hold the line on spending. Excluding $650,000 from restructuring charges, Q2 2011 operating expenses were $8.8 million, up 3% increase from the year early period. Excluding the effects of the weaker U.S. dollar Q2 operating expenses were below those of the prior year period.

Operating income in Q2 2011 was $879,000 compared to $2 million in year earlier quarter. Excluding restructuring charges of $650,000 in stent graft inventory write downs of $361,000, adjusted operating income was $1.9 million. This amount compares favorably to recent Q1 2011 and Q4 2010 results and approaches amounts last seen in the middle quarters of 2010.

Cash in marketable securities as of June 30, 2011 were $21.4 million, an increase of $2.3 million from $19.1 million at March 31, 2011. This increase included the effects of dividends of $310,000 and share repurchases of $130,000.

With regard to our share purchase program since the August 2009 program inception, we have every purchased in excess of $3.2 million of stock at an average price of approximately $5.75. Our board has authorized us to purchase up to a total of $5 million through the end of 2011.

Turning to guidance, we expect Q3 2011 sales of $14.6 million, up 7% versus 2010 and we reported operating income of $1.5 million. We also expect 2011 sales of $58.7 million, up 5% versus 2010 and reported operating income of $4 million. We have reduced of full year 2011 sales guidance by $2.3 million largely due to our exit from stent grafts.

Full year operating income guidance is after approximately $2 million of charges and special items associated with five strategic initiatives, George detailed above.

With that, I would like to turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Joshua Zable from WJB Capital. Please proceed.

Ethan Roth – WJB Capital

Hi guys. It’s actually Ethan Roth on for Josh Zable. Congrats on a really great quarter here. I just first wanted to touch on the vascular side of the business, you guys obviously put up another really strong quarter. Several companies have reported a bit of a slowdown on procedures, so I was wondering if you could just provide your thoughts on volumes and then all sort of what extend volumes growth in that business relative to pricing?

J.J. Pellegrino

Okay. We can handle the second part of that a little quicker and more cleanly. We are ASPs we are up around 4%, and so if you look and most of that over in the U.S. if you look at the U.S. number, I think we were up 6% so that it did take up a bunch of our growth, if you will. Say 4% out of 6%.

In terms of volumes, I’d say there is a chance we are seeing procedure volumes a little weaker over in Europe just are particular set of procedures, but it’s hard for me to unwind that from what’s going on with the stent grafts exit. So, I don’t want to make any too broad of sweeping generalizations about Europe. But our European business has been weak and I think organic growth in the European vascular business forgetting about stent grafting was flat.

Ethan Roth – WJB Capital

Okay, thanks. And then I just a follow-up question here, on UnBalloon, you mentioned that with CE Mark approval this quarter just trying to think about the ramp for that especially now that you have exited the stent graft business and I know that kind of plays in that area a little bit. So, how do you think about the ramp for UnBalloon in Europe?

George LeMaitre

Sure, well of course we are just beginning the beta trial. We have done three cases, all of them in Brazil (indiscernible). We are excited to go through that beta trial. We did find in the last UnBalloon launch so to take a lot to get through the beta trials of Europe. So, it’s all baked in the guidance for 2011 the sales for the UnBalloon are. See, we are not going to try to pull it apart.

We agree that there is a chance we will see less thoracic stent graft because our sales force will start working on less on thoracic stent grafting, but I will say historically LeMaitre has been the right place for a vascular surgeon, whether they are working in the thorax, the abdomen or the peripheries to find a catheter that’s we are known for. So, I think even we are exiting stent grafts I think one of the very good entrée to sell this device to vascular surgeons for both thoracic and then abdominal stent grafting.

Ethan Roth – WJB Capital

Okay great. Thanks for taking my questions.

George LeMaitre

Thanks a lot.

Operator

Your next question comes from the line of Joe Munda from Sidoti. Please proceed.

Joe Munda – Sidoti

Good afternoon guys.

George LeMaitre

Good afternoon Joe.

Joe Munda - Sidoti

Real quick, just a couple of things, can you give me what the sales mix of stent graft was in Europe just the percentage breakdown?

George LeMaitre

Sure. We were down on a reported basis 60% in target in UniFit in Q2. And on a reported basis we were up 1% for Endologix, although because of the strong euro you can do the Endologix number organically that was down 11%.

Joe Munda – Sidoti

Okay.

George LeMaitre

So, it was a very tough quarter, I think minus 22% overall was the number a quarter-to-quarter and is that an organic number or reported number? Organic number.

Joe Munda – Sidoti

Okay. And now that you guys have the rest of that business and you had mentioned on the call that we took up a majority of the product development as you turn, I mean, we need to expect R&D to tick down, because it’s coming out of that business you have divested?

George LeMaitre

Sure. Well, one thing that’s clear you are going to see tick down I’d like to distinguish product development R&D from the R&D related to clinical trials, because there are lumped for U.S. accounting process, they are lumped together in the same category. Definitely and we are already seeing it tick down in the clinical trials. There has been a real slowdown in the cost there and we expect since we were able to sell off to do vascular that product line we expect those clinical trial costs to come down rapidly now. So, we are excited about that. From a product development perspective, my guess is that when it all shakes out and it does sells, it’s going to give us a lot more money to put at things like the over the wire LeMaitre Valvulotome for which we received a 510(k) approval today and also the UnBalloon – the abdominal UnBalloon which might come at some point as well as the work we are doing around our MollRing Cutter product.

Joe Munda – Sidoti

Okay. I mean, the same goes as well for SG&A, I mean, we assume that to come down as well in regards to percentage of revenue because you guys aren’t selling that higher price product, so, I mean, is that safe to assume?

George LeMaitre

For all SG&A, I mean, we are guiding here I would say on Q2. If you look at Q2, the SG&A number was really low. I think we said 9.6 is the reported number, but if you pull out about $800,000 in that Spain and Denmark restructuring charge and then you pull out another $400,000 of growth in the off expenses simply due to the strengthening of euro against the dollar. You can kind of make your way to an $8.4 million op expense number. And so I think you are already starting to see that, Joe.

Joe Munda – Sidoti

Okay.

George LeMaitre

We have a very tight op expense quarter. We’re really excited about it.

Joe Munda – Sidoti

And just real quick, can you going into a little bit more of the OEM that you are going to do, I mean how is that going to work with just give me a little bit more color?

Dave Roberts

Sure, Joe this is Dave. Good question. So, when we signed the transaction with Duke, obviously they needed a little bit of time to get up and running. So we agreed that through September 30, we would continue to manufacture for them on an OEM basis at a cost plus the certain percent. And during this three-month window, they are going to be here learning the production and will be moving the equipment and all that out to California for them and will get them up and running. So, it’s pretty straightforward. It ends on September 30 and that will take the wheel on October 1.

Joe Munda – Sidoti

Okay. And I mean are you guys then receive royalty income from them once they know are doing it themselves?

Dave Roberts

No, there is no royalty after that. We just – the only income we get aside from the cash from the transaction is the payment we get for providing OEM services between now and September 30.

Joe Munda – Sidoti

Okay. All right, thanks guys, I’ll hop back into queue.

George LeMaitre

Thanks Joe.

Operator

Your next question comes from the line of Larry Haimovitch from HMCC. Please proceed.

Larry Haimovitch – HMCC

Good afternoon gentlemen.

George LeMaitre

Larry, how are you doing?

Larry Haimovitch – HMCC

Very well, George, you?

George LeMaitre

Very good, very good. Thank you.

Larry Haimovitch – HMCC

So, lots of moving parts here. I guess this question probably best goes to J.J., the gross margin was down, it was one of the lowest margins that I can – I don’t know (indiscernible) quite sometime. I know there was a lot of convoluted factors in there, is there anyway to give us a pure apples-to-apples number on this, because I am little confused relative to what it was a year ago, what it would be if you had all the stuff going on?

George LeMaitre

Yeah, thanks Larry. I mean, we had a number of pieces in there. One is the AlboGraft manufacturing transition, the introduction of life span into the mix with a little bit reduced margin from our corporate margin. And then we had the TAArget/UniFit write-off of about $360,000 as we exited that business. So at a high level, if you added back the AlboGraft transition and the TAArget/UniFit write-off and so to say those are special items. That’s about a 6% or 7% delta. So you can take that 68.6% and add 7% or 6% or so in depth of a low to mid 70s.

Larry Haimovitch – HMCC

So you’d be very close if not right on the money with last year’s second quarter, if you adjust for all those unusual items?

George LeMaitre

Yeah, feels like a little bit below, but about that, yeah.

Larry Haimovitch – HMCC

Given that you have had such good price increases and seems that those prices from George has said both publicly when he and I have talked and Dave and I have talked too that they seem to be sticking very, very well. Is there gross margin pressure somewhere else in the business that we are not aware of, because obviously you should be getting better gross margins as you are raising your prices?

J.J. Pellegrino

Yeah, I mean, I think there is a lot of swirl with these two items alone and I would say that over time you should probably improve your gross margin at a high end and we look at it on an annual basis over the sweep of years, but quarter-to-quarter, I think it’s being miffed by a lot of the items we talked about, but certainly ASP increases should help the margin over time. And then I would say that no generally speaking that’s not being miffed by something else.

George LeMaitre

And Larry just an addendum to that, this is George. Remember, we bought the Lifespan company in November of 2010 and that carries a much for now – that carries a much lower gross margin in the rest of our company. For obvious reasons, you have a 7-person factory out Laguna Hills exclusively making a $1, $1.5, $2 million product line. And then secondly, one of the growth items that we do keep calling out is this XenoSure patch. And for now, we have an option, a hard option to buy that in January 2014. And so we have that hard option exercise that we want, but for now it is a distributed item and it’s done particularly well in our hands. And so over time maybe those two items have a negative implication mix wise though they are still bounded by, I can’t those two businesses are more than $3.5 million, $4 million a year in annual revenue at this point right now.

Larry Haimovitch – HMCC

Okay. So gross margin, if you take away all the noise that we have this quarter and last couple of quarters prices going up which is helping gross margins, some mix which is hurting the gross margin?

George LeMaitre

That’s right. And of course all this noise that we keep talking about it’s something there was a reason that we did this. So closing these two factories should have a terrific effect at some point on the numbers that we want to get as a group to higher gross margins.

Larry Haimovitch – HMCC

Okay, good. Second quarter, George you talked earlier, I think someone asked question about UnBalloon what about the U.S. status of UnBalloon?

George LeMaitre

Sure. So we’ve had a back and forth already with the FDA. They seem quite happy with the filing. They are not more or less waiting to see what happens in our international beta trial. And the international beta trial is target for around 20 to 30 procedures and I think the FDA is in a very cooperative less and they are sitting back and they are going to watch what happens in that trial and hopefully that trial will go well and I will feel good about good it.

Larry Haimovitch – HMCC

And so what would be a range, I know obviously it’s not fair to try to pin you to anything specific but what would be your range of gas for possibly U.S. for what we are looking at 2012 at this point George?

George LeMaitre

And Larry I thought you’d be so happy that I got an 510(k) today just for you for the over the wire LeMaitre Valvulotome.

Larry Haimovitch – HMCC

Well on growth?

George LeMaitre

You are never satisfied. So, I actually I can’t prognosticate on that. I always get burned on when we are going to get a yes out of the FDA although we had a very good back and forth on all the details of the file with the exception if they want to see the trial played out.

Larry Haimovitch – HMCC

Do you know how many they have asked for in terms of wanting to see have the troubles is it 10, is it 100, is it 1000?

J.J. Pellegrino

You know, they will never ever give you a number like that, our sense is from some of back and forth that 5 was not sufficient and when they look at our last trial they said they would have been more or less onboard with that. So, not 5 it’s too small, but some number more, but they will never let you pin them down on number like that.

Larry Haimovitch – HMCC

Okay. It’s good. And then finally a question for Dave primarily, Dave I know you have been in a busy quarter, a lot of things going on. I know you busy looking at a lot of things. But you guys have been relatively quite in terms of the acquisitions. I know you wanted to do acqusitions. I know you are looking hard at them. Can you just give us some color on what you see going on for you or the marketplace in terms of acqusitions lately?

David Roberts

Sure Larry. So, yes, obviously after we did LifeSpan in November there was a little of integration work and then frankly between Endologix and TAArget/UniFit divestiture that absorbed a little bit of bandwidth for us. So, and frankly you know, I say corporate wide we have been interested in integrating and letting the dust settle a little bit with respect to a number of these initiatives.

As you know pointed out at the beginning of your questions, your question there are a lot of moving parts at the business right now. And so to lop an acquisition on top of the company in the middle of that, though we came close in Q1 of this year, but the seller that called feed. We are definitely out there looking, at any one time I have got as you know, probably two to four real deals that are kicking around. I don’t like to get real specifics about it, but we are out there looking for the standard drop in acquisition and we will look at larger deals also if they are appropriate. So, we are looking around and when we find something that we like, had a evaluation that we like because we are value buyers then we will execute.

Larry Haimovitch – HMCC

Great. Thank you, guys.

George LeMaitre

Thanks Larry.

Operator

(Operator Instructions) Your next question comes from line of Jason Mills from Canaccord Genuity. Please proceed.

Unidentified Analyst

Hey guys. This is (Jim R) for Jason.

George LeMaitre

Good afternoon Jim R.

Unidentified Analyst

I got a couple. First one is just to make sure that the change in your operating income guidance is all due to the charges from your (indiscernible) and noted related to any of the underlying business.

J.J. Pellegrino

This is J.J. Jim R. Thanks for the question. I feel like that in the large part the answer is yes, although I would say with 3% organic growth excluding stent grafts that’s not necessarily where we want to be. So, there is a piece of it, which relates to more than stent grafts, but I would say by and large the vast majority of the guidance change relates to the stent grafts.

The Endologix piece in the $4 million to $5 million sales ranges is a very big chunk when that goes away obviously that’s going to ripple through the P&L from the sales line down to the op income line. And the TAArget piece going away as well being one of our native products had a pretty decent gross margin and that would ripple through the P&L as well.

Unidentified Analyst

Okay. And then following upon the loss of though the Endologix in Europe is that having effect on sales force attrition out there. What you expect and then in terms of your total number of reps, where are you at this quarter end. Do you still plan to have around 70 at the end of the year?

George LeMaitre

Right, okay so, the back half of that question is easier more concrete. Yes, we are at 65 or 66 that figure we put in the press release 65 and we do still anticipating low 70s. By the end of the year a lot of the growth is come in the United States, where our sales force right this moment not as of the end of the quarter right this moment it like 40-ish or 41 and we’ve been really making a big effort to get these Tier A guys in.

The good news is that the Japanese and American sales forces are 100% insulated from the stent graft issues in the stent graft transactions. And so we’ve had nice lack of turnover in those sales forces and we feel really good about what’s going on there. But your point in Europe, we definitely seen more sales force turnover recently because some of the folks came to given their fair adieu, they came here to sell stent graft and now Dave and J.J. and George telling him, oh we don’t sell stent grafts anymore as of September 1. And so some of them their careers have changed and they decided hey I’d like to chase the stent graft thing rather than the open vascular thing. So, we are seeing a little more turnover and one would expect also (indiscernible) to see that turnover continue for another two, five months until things settle down and everything gets clear, but just to clarify for everyone on the call, the last stent grafts really get sold at this company in Europe on August 31 of 2011 and that’s when we think things will start really settling down in that sales channel.

George LeMaitre

And Jim, I would that, that turnover is actually something the we want, we want to get the folks that want to sell open industrial products vascular products to stay with us and focus on that and the focus that didn’t, I think it’s best that we replaced them with folks going forward that do. So I think that turnover is a healthy part of the change in the strategic direction.

Unidentified Analyst

All right, thanks a lot.

George LeMaitre

Thanks a lot (indiscernible)

Operator

Gentlemen, we have no more questions in the queue, so I would now like to turn the call back over to Mr. George W. LeMaitre for closing remarks.

George LeMaitre – Chairman and Chief Executive Officer

Thanks, Tahisha. First, I’d like to thank all the participants on this call. I’d also like to mention that we will be speaking at the following investor conferences over the next couple of months. We have the Canaccord Genuity Growth Conference in Boston on August 10 and the Midwest Healthcare Investor Forum, the same day in Chicago. After that, we’ll be at the Stifel Nicolaus Healthcare Conference in Boston on September 9.

With that, I’ll turn the call back over to Tahisha. Thank you very much,

Operator

Ladies and gentlemen that concludes today’s presentation. Thank you for your participation. You may now disconnect. Have a great day.

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