Edited Transcript of KAMBI.ST earnings conference call or presentation 24-Apr-20 8:45am GMT

To give you some idea of our momentum, average daily operator turnover for the quarter up to the 12th of March when the sports began to be impacted was up 47% year-on-year and 7% sequentially. And that is with a very high margin, which suppressed the turnover.

Our business continues to go from strength to strength. During the quarter, we processed the first legal sports bets in the states of Illinois and Michigan, clocking up our 10th U.S. state in the process. Our fantastic record in the U.S. often goes under radar, but we have proven ourselves to be the partner to be trusted online and on-property. And I’ll give you some more color on this later.

Added to this in the event after Q1, the combination of DraftKings and SBTech received shareholder approval yesterday. We don’t really have anything to add at this point. Only to say, Kambi remains well positioned for the long-term growth, and we will continue to serve DraftKings with the same technology and services that has enabled it to take a leading position in multiple U.S. states.

For now, I will hand over to David who will talk you through the financial highlights. Turning to Slide 6.

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David Kenyon, Kambi Group plc – CFO [3]

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Thank you, Kristian. Good morning, everyone. In Q1, we had revenue of EUR 27.9 million, up 33% from last year. Operating costs for the quarter were EUR 21.1 million, giving an operating profit of EUR 6.8 million, up 25%. The cash flow for the quarter, excluding working capital movements, was plus EUR 4.1 million. The net cash position at the end of March was EUR 39 million.

Let’s look at the income in more detail, turning to Slide 7. This slide sets out the Kambi turnover index. The graph shows the aggregated results of Kambi’s operators. The turnover is the total stakes placed with the operators by their end users. In Q1, operator turnover was up by 27% on Q1 last year. Until the 12th of March, when the impact of COVID-19 on the sporting calendar took most effect, the average daily operator turnover was actually up by 47% compared to the equivalent period in Q1 2019 before falling significantly in the last few weeks of the quarter.

The margin represents the combined trading margin made by the operators. In Q1, this margin was 9.3%, buoyed by favorable results in some of the major European football leagues. It’s worth noting that this high margin is also likely to have suppressed the level of turnover in the quarter.

We can see the conversion from operator turnover growth to our revenue growth on Slide 8. Operator turnover was up by 27% compared to Q1 2019. The operator trading margin, multiplied by the turnover, generates the operators’ gross gaming revenue, or GGR. The operator trading margin of 9.3% compares to the 7.8% we saw last year. Overall, this led to an operator GGR increase of 51% year-on-year.

Kambi’s commission is based on a percentage of the operators’ net gaming revenue, which is after the deduction of gaming tax and certain marketing incentives. This tax impact has increased reflecting the increase in the parts of our business coming from locally regulated markets, in particular the U.S. In total, 79% of our revenues came from locally regulated markets compared to 71% last year.

The impact of the fixed part of our revenues and certain volume-related commission tiers is shown in the other column of the graph. This quarter, we’ve seen an effect from the significantly increased level of operator NGR, which has reduced the effective commission rates charged to our operators due to the tiered structures in some contracts. The net effect of all these factors is that revenue for Q1 2020 is up by 33% on Q1 last year to EUR 27.9 million.

Let’s turn to the full income statement on Slide 9. Operating expenses for the first quarter were EUR 21.1 million. We continue to invest in building the market-leading sportsbook as well as the ongoing licensing and development of our commercial operations in the U.S.

Operating profit was EUR 6.8 million for Q1 compared to EUR 2.6 million last year. In accordance with IFRS 9, we recognized a one-off bad debt expense of EUR 0.6 million to fully write off the amounts owed by National Lottery AD in Bulgaria. This operating license was suspended in Q1. After accounting for this exceptional item, profits after tax was EUR 4.8 million for the quarter.

Now let’s turn to the cash flow on Slide 10. Set out on this slide are the major components, which impacted our cash position during the quarter. Our opening cash balance was EUR 45 million. Capitalized development costs in the quarter were EUR 4.7 million, whilst the amortization charge on previously capitalized costs was EUR 2.9 million. Our trade receivables increased by EUR 3.3 million, reflecting the increase in the amounts invoiced to operators following particularly strong revenues in February. Most of these February invoices have subsequently been settled in April. The net cash inflow for the quarter was EUR 1.3 million, and our closing cash balance was EUR 46.3 million.

With this very healthy balance sheet in mind, let’s consider our financial situation in the current environment. Turning to Slide 11. The sporting calendar has been severely impacted by COVID-19 since mid-March. We’ve seen the level of sporting activity driving operator turnover of 25% to 30% of where it was earlier in Q1. As soon as the impact on our revenues became clear, we implemented a comprehensive cost saving program, resulting in savings across the whole business, including significantly reduced travel and marketing costs, freeze on staff recruitment and a substantial reduction in pass-through data costs due to fewer sporting events. We also applied for the financial support packages announced by the Swedish and U.K. government.

As a result, total operating expenses are anticipated to decrease during Q2 by 20% to 25% compared to Q1, with capitalized development costs falling by 20% to 30% and remaining at similar levels, whilst the current situation continues.

Once the sporting calendar resumes and restrictions are lifted, the business will be able to ramp up instantly to ensure that the full offering is available from day 1 with the associated costs. In the unlikely events that the sporting calendar does not increase from its current level and based on the cost saving measures taken so far, we would expect the average quarterly cash outflow to be in the range of EUR 7 million to EUR 9 million, although we anticipate the figure in Q2 to be significantly more favorable for Kambi due to the working capital movement, I mentioned previously.

With our strong balance sheet and the cost savings we’ve been able to implement, we believe we are very well placed to weather the current storm and immediately gear up to normal levels of activity as soon as sports resume.

So now, let me pass you back to Kristian. Turning to Slide 12.

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Kristian Nylén, Kambi Group plc – CEO [4]

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Thanks, David. Although the whole industry is going through a tough period at the moment, we certainly see the light at the end of the tunnel, and there are many reasons to feel positive about the future.

The sporting calendar will pick up in time and many postponed events may be rescheduled for a later date, potentially creating a busier sporting calendar than usual. We have also seen increased appetite from regulators to consider, and in some cases, expedite online regulation. Many jurisdictions have seen the retail sector badly impacted, and therefore, the prospect of online betting has moved up the agenda. Pure retail businesses are also taking more interest in the potential of online. So we expect to see increased regulatory movement over the next 12 months, which, of course, we welcome.

I also believe the current challenging period will remind people of the benefits of outsourcing. The costs associated with running, maintaining and continuously developing a high-quality sportsbook continue to rise and are only sustainable for a few companies that could possess sufficient scale. Therefore, the situation may well prompt those operating a sportsbook without that scale to think carefully about the pros and cons.

Turning to Slide 13. As I mentioned previously, the quarter began very well for us, both in terms of the numbers and how we continued to increase our footprint in the United States.

In January, we launched in West Virginia with Penn National. In February, we launched 5 retail sportsbooks in Mississippi also with Penn. And in March, we — just before coronavirus took effect, we took the first legal sports bets in the states of Illinois and Michigan with Rush Street and Penn National, respectively. We also launched with Penn in Illinois. These are 2 large and important states, both with passion for sports. So we look forward to seeing how business develops. We have many more launches in the pipeline and are looking forward to completing these as soon as it’s safe to do so.

Our record of delivery in U.S. is unmatched, as I will show you on Slide 14. There can be no doubt Kambi has been setting the pace in the U.S. We are active in more states than any other end-to-end sports betting supplier. As you can see on the map, we are now active in 10 states with Colorado to follow shortly. Within these states, we are online everywhere it is currently possible to be and operate more than 30 on-property sportsbooks with approximately 600 betting kiosks in operation.

Since our first U.S. retail launch in Q4 2018, we have been opening retail sportsbooks at a rate of around 5 per quarter. And among these 10 states, we have created 8 market firsts through a mixture of first legal bets and first legal online bets, including taking the first legal online bet in the U.S. post PASPA. This speaks to our operational excellence and reliability to deliver for multiple partners simultaneously. It also reaffirms our strength in regulatory compliance and corporate probity, which enable us to get license quickly. Not only is Kambi the trusted partners for operators but we are highly trusted by regulators, too.

Moving to Slide 15. Due to the impact on sports, we have had to be flexible to ensure we continue to provide a good service to our partners. On this index graph, you can see the change in which sports have been driving turnover. The impact on sports and our turnover really began to take effect on the 13th of March, at which point football and the collection of other sports were generating almost all turnover. However, as these leagues and sports were gradually postponed, you can see how our focus shifted to table tennis and e-sports, which by the end of the quarter were responsible for a large proportion of the turnover. You can also see from the 16th onwards, our turnover remained relatively stable for the rest of the month, which highlights the great work we have done to provide a good service to our partners and their players during this time. Since the end of the quarter, we have also seen Dodge emerge as a key contributor to turnover.

Turning to Slide 16. We see some positive signs that some leagues and tours could return without spectators. While a small number of European football leagues have been cut short, the German league is expected to return behind closed doors within a matter of weeks with 9th of May the current target date. All eyes will be on how we handle this, and if successful, you could see many other football leagues follow in their footsteps. For example, the English Premier League plans to finish its season before the end of July, potentially with some games streamed on free-to-air. Elsewhere, the PGA recently announced its tour would resume in June, and plans are in progress to get a Major League Baseball season underway as soon as possible. So there is certainly some cause for optimism.

Turn to Slide 17. So in summary, Q1, so Kambi began the year in the same fashion as we ended the last, with a strong financial performance. Without the impact of the pandemic, it would have been yet another record quarter. Meanwhile, we have taken steps, we think, leaves us in a very good position for when the sports do return, reducing costs while protecting staff and the long-term interest of our business.

Of course, things are not ideal right now, but we’re in a good financial shape, and with the resumption of sports and more partner launches, we have a lot to look forward to as we look to regain the momentum shown recently.

Now I will pass over for — to the operator for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Viktor Högberg from Danske Bank.

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Viktor Högberg, Danske Bank A/S, Research Division – Analyst [2]

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I have a question on — you said the end of March or April, revenues were 25% to 30% of those in Q1. And we saw the development here in end of March, at least with the — with ping-pong. Could you elaborate on the trajectory during April versus March? Have you seen the same levels in the beginning of April as you saw in the last 2 weeks of March? Or could you elaborate a bit on that?

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Kristian Nylén, Kambi Group plc – CEO [3]

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Yes, as I said, from 16th of March and up until now, more or less, we have seen quite stable turnover figures throughout the period. I think we have seen a little bit different mix in sports. As I said, Dodge has become more of a proper sports when it, yes, it didn’t really exist in the first couple of weeks of this pandemic, but that has grown a little bit. We have lost a few football leagues on the other hand. So it’s kind of stable at the moment. And I expect it to be so until we see some major development on some big leagues.

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Viktor Högberg, Danske Bank A/S, Research Division – Analyst [4]

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Okay. Could you say something about the margins for the sports or for the events that you are currently having hopes on? Is there anything special to note there?

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Kristian Nylén, Kambi Group plc – CEO [5]

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No. I haven’t — I don’t really want to guide on the margin. It’s very early into the quarter as well. But what I can say is it’s more live betting proportionally than it was before. So for that reason, we would expect a slightly lower margin.

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Viktor Högberg, Danske Bank A/S, Research Division – Analyst [6]

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Okay. And in the report, you said that in the event of events not returning, you see costs down 5% to 10% year-over-year in 2020. And I assume that will be in the worst-case scenario. So what is the base case for cost development? You’ve guided for Q2, but should we expect flat costs for 2020 over 2019 if we would have Bundesliga returning in May and the events that you do — you mentioned, if that materializes, is flat OpEx or OpEx up or OpEx down? What do you expect for base case for this year?

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David Kenyon, Kambi Group plc – CFO [7]

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I mean, I don’t think — it’s David here. I think we really have to play that one by as and when we get some facts about when things are coming back. We know what OpEx would have been if this hadn’t happened. We know what OpEx will be given the current assumptions. So I think anything else is just pure speculation. So I think we just need to wait till we see some resumption, and then we’ll — we can give some further guidance at that point.

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Operator [8]

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And the next question comes from the line of Marlon Värnik from Pareto Securities.

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Marlon Värnik, Pareto Securities, Research Division – Research Analyst [9]

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Marlon here. Question regarding the market. You mentioned in the report that America share of the group revenue is 37%. What part of the America is the U.S. revenue?

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Kristian Nylén, Kambi Group plc – CEO [10]

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It’s — we didn’t really guide on that, that much last time. But I mean, it is still the same as in Q1. Majority is coming from the U.S., but we have a strong foothold in Latin America, and especially Colombia as well. So that’s a large chunk of the revenues as well.

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Marlon Värnik, Pareto Securities, Research Division – Research Analyst [11]

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Okay. And you mentioned also in the Q4 report the DraftKings of the U.S. GGR is roughly 50% to 60%. What’s the number for Q1?

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David Kenyon, Kambi Group plc – CFO [12]

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Yes. So roughly in the same ballpark for us.

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Marlon Värnik, Pareto Securities, Research Division – Research Analyst [13]

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All right. And regarding coronavirus and the legalization process in U.S. sports betting, have you noticed any impacts from coronavirus in terms of the legalization process of sports betting in U.S.? Is it less prioritized or more given the tax revenue income?

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Kristian Nylén, Kambi Group plc – CEO [14]

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I think we hear voices that it’s becoming higher up on the agenda. We have already seen a few states that actually are started talking about it. But at the same time, I would say, I mean, with the current situation, regulators are also working at homes. So first, of course, it is to run the day-to-day business. So I think you will see some states expedite it before the end of the summer. But so far, I can’t give you any concrete examples. It’s more rumors.

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Marlon Värnik, Pareto Securities, Research Division – Research Analyst [15]

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All right. And as you mentioned already yesterday that DraftKings and SB Technology (sic) [SBTech] was approved by the shareholders. Given the severe cyber-security attack on SBTech a few weeks ago, can we expect or is it reasonable to assume some delay in the time line of integration of SBTech and Draftkings? You — can you give a comment here, please?

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Kristian Nylén, Kambi Group plc – CEO [16]

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I mean, it’s probably something you should ask DraftKings rather than us, to be honest. So I can’t really comment on that.

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Marlon Värnik, Pareto Securities, Research Division – Research Analyst [17]

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All right. And the last question regarding the competition in the market. I mean, Techwin is now having a B2B offering in Pinnacle Sports, probably one of the sportsbooks with the most sharpening action, the B2B solution about 1 year, 1.5 years ago. What can you say of the competition in the market? How are you dealing with it now and going forward?

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Kristian Nylén, Kambi Group plc – CEO [18]

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I think if anything — I mean, the examples you mentioned, it will probably take some time before they can be considered a competitor to us. On the other hand, and more importantly, I would expect SBTech’s competitiveness to be severely weakened by being owned by DraftKings. So if anything, I would say, it looks more positive now than it has done historically.

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Marlon Värnik, Pareto Securities, Research Division – Research Analyst [19]

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All right. So you would say that Pinnacle Sports B2B solution is not fully ready for the market. That’s what — what I’ve heard that they have quite a few clients already and quite good flexibility in the offering?

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Kristian Nylén, Kambi Group plc – CEO [20]

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Yes. I can’t tell you. I haven’t seen them in any of the competitive bids where we have been involved so far, at least.

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Operator [21]

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And the next question comes from the line of Erik Moberg from ABG.

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division – Research Analyst [22]

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If some of the soccer leagues were to start up again in late May, beginning of June, such as Bundesliga and Premier League, how much ballpark numbers do you think that this would add to the current sportsbook activity?

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Kristian Nylén, Kambi Group plc – CEO [23]

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To be honest, Erik, it’s impossible to say. I mean, as you can see on how big table tennis became from being virtually nothing for us, yes, getting a few big leagues can be enormously big. So — but you need some frequency as well to get the turnover up. So I mean, you need more than 1 league, I would say, to really get some big movement of the turnover. But yes, what can I guess? I mean, I think you would struggle even in low autumn to see a lot of international tournaments. I mean, I struggle to see that traveling can return to normal. So Champions League, the tennis tour may be heavily impacted by that. But I think it’s, yes, a reasonable guess for autumn, it’s probably somewhere, but we will be back to 50% to 75% of normal turnover.

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division – Research Analyst [24]

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Okay. Fair enough. And in terms of Penn Gaming, has the COVID-19 outbreak changed the planned rollout for their mobile brand? Or is the time frame still the same?

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Kristian Nylén, Kambi Group plc – CEO [25]

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From what we know, it’s definitely the same time frame.

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division – Research Analyst [26]

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And in regards of the pipeline of new customers, if you compare your situation right now versus 1 year ago, would you perceive the — perceive you to be in a better position as of right now even though you have the headwinds from COVID-19?

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Kristian Nylén, Kambi Group plc – CEO [27]

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It’s pretty much the same. I mean, obviously, some of the really big opportunities like Penn, we have signed already, so that’s off the table now. But — yes, I think we have some really good leagues at the moment. So even if we can’t meet the prospect physically, I think sales is actually going on pretty much as usual.

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division – Research Analyst [28]

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Got you. And in regards of Argentina and Buenos Aires, if I recall correctly, Sun International — if I recall correctly, they purchased a casino property in Argentina 2 weeks ago. Could they, in theory, launch a mobile brand there?

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Kristian Nylén, Kambi Group plc – CEO [29]

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Yes. In theory, I think everyone can launch. But I mean, yes, they need to acquire one of the licenses, of course.

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division – Research Analyst [30]

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It’s not something that you have discussed with them, a rollout in Argentina?

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Kristian Nylén, Kambi Group plc – CEO [31]

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Not at the moment, no.

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Operator [32]

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As there are no further questions, I’ll hand it back to the speakers.

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Kristian Nylén, Kambi Group plc – CEO [33]

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All right. So thank you for your questions and for listening in. We will look forward to updating you on the 24th of July 2020 when we publish the second quarter report. Thank you.

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Operator [34]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.