Earnings Call: Q1 2015

Aug 14, 2014

Good morning, good evening. Welcome to Lenovo's Q1 result webcast. This is Gary Ng, VP in Investor Relations at Lenovo. Before we start, let me introduce our management team with us today. We have our Chairman and CEO, Mr. Yang Yuanqing, and our CFO, Mr. Wong Wai Ming. We will first start with our management presentation. After that, we will take your questions. Now let me turn it over to Yuanqing. Hello, everyone. I am very happy to share our last quarter's results with you. This has been a quarter of many milestones for Lenovo, so let's jump right into it. This last quarter, our revenue grew 18% year-on-year, while our earnings increased 23% to $214 million. We continue to deliver on our financial commitments, especially on improving profitability. Our strong performance was driven by growth across all product lines and all geos. In PCs, we gained almost 3 points of the share to reach our all-time high of nearly 20% and strengthened our position as a worldwide leader. We gained share in every year. In tablets, we hit a new milestone. With 67% year-on-year growth, Lenovo became number 3 in the world for the first time. We are particularly strong in Eastern Europe. In Russia, we became number 1. In combined PCs and tablets, we closed the gap with Apple to just 0.7 point. As I said last quarter, becoming number 1 in the PC plus tablet category in 2 years is our goal. We might not need that long. In smartphones, we became number 1 in China for the first time. Our strong performance was driven by demand for our newest smartphones as China transitions to 4G and by expanding our routes to market. Even better, we saw hyper-growth outside of China at 350% year-on-year, especially in Southeast Asia, Eastern Europe, and Latin America. Respectively, they grew nearly 300%, over 500%, and 50%. Eastern Europe and Southeast Asia also had good profitability at 4% and 3% respectively. Now, almost 20% of our smartphone volume came from outside of China, up from just 5% a year ago. Overall, we are number 4 in smartphones worldwide, with sales in 36 countries. We also saw continued growth in our newest businesses. Our enterprise business had a volume growth of more than 33% year-on-year, and our ecosystem business continues to grow with daily downloads now over 27 million. After SHAREit, SECUREit became our second app with more than 100 million users. Our business results have never been as balanced as today. Only 3 years ago, China was almost half of our revenue. But now, even though our China business keeps growing, it's just over one-third of our revenue. That's because EMEA, Americas, and Asia-Pacific geos all have achieved rapid growth and gained strong momentum. In particular, EMEA volume grew more than 50% year-on-year. The last time we saw such an incredible growth rate was in China back in 2010. We only started our consumer business in EMEA 3 years ago, but now we are number 1 in consumer PC there. In Americas, the U.S. was a star performer. In PC, we had a record market share. Asia-Pacific delivered significant improvements in profitability fueled by Japan, which has become a new profit pool for Lenovo. Even as emerging markets face some challenges, Lenovo's overall business is healthy, growing steadily, and you can expect the future to be even better. These results clearly show that our formula for success, clear strategy, innovative products, operational excellence, and a diverse culture global team continues to work. Our balance of innovation and efficiency is a core strength. We will apply our strengths to successfully integrate both Motorola Mobility and IBM x86 server business. Both deals remain on schedule for closing. For Motorola, they are already winning in the market, and their recent results show why they can be a growth engine for Lenovo in the future. Not only is the product portfolio strong, but also the results are improving significantly. With the sale, the product launches in key markets like India and Brazil, and the reviews for the premium products that are driving growth in mature markets. Once our acquisition is complete, we will be able to bring more innovative products to more customers worldwide. We remain confident we can turn it around in 4 to 6 quarters after the deal closes. For IBM x86, we have seen the business stabilize in the last quarter. In particular, they achieved continuous growth in China. We remain confident that once the IBM deal is closed, we can build a $5 billion enterprise business with a higher margin than PC in 1 year. Both acquisitions will further strengthen Lenovo to grow across all lines of businesses. In PCs, with the market becoming stabilized, we expect our strong growth to continue worldwide, especially outside of China, because market share there are still lower. We will strengthen our position in every geo by leveraging both our momentum and the opportunity from industry consolidation to drive profitable growth. In tablets, as we predicted 2 years ago, the market is squeezed by convertible PC on the high end, and by phablet on the low end. In the future, it may not be an independent category. It will be split into 2 categories: either a low-end niche PC focusing on media consumption, which includes 8 inch or bigger, some with an optional attached keyboard, or a big screen smartphone, phablets. We are strong in both parts, and we are launching a new generation of exciting products to attack both categories in the second half of this year. In smartphones, the market continues to shift from premier to mainstream entry segments, and we definitely know how to leverage this trend, as we have done in the PC stage. In the intensively competitive China market, we are working to solidify our number 1 position by attacking in premier price band and by expanding our routes to market through the open market and the online channels. Meanwhile, we will be more aggressive in emerging markets, which is our stronghold, and where we see even more opportunity. Finally, we will integrate Motorola to make us an even stronger worldwide player. Definitely, the first quarter gives us momentum, and we are off to a strong start. We are well-positioned in all product lines and geos to not only grow share, but also increase profitability. When our acquisitions close, we will be fully ready to compete across all smart connected devices, infrastructure devices, and in the ecosystem space. Thank you, everyone. Now, let me turn this to our CFO, Wai Ming. Wai Ming, please. Thank you, Yuanqing. I will take you through Lenovo's financial and operational performance in quarter one. Next slide, please. We continue to grow in both sales and profit with margin expansion by shipment growth. Even more, cash flow from our operation has also improved significantly compared to the same quarter last year. We recorded growth in all our key businesses, and at the same time, further improve our profitability. Group sales grew 18% year-on-year to around $10.4 billion. Our mobile device business, including phones and tablets, were up 32% year-on-year to $1.6 billion. PC and personal technology product-related sales were up 16% year-on-year to around $8.5 billion. Sales of other goods and services were $294 million, up about 6% year-on-year. Gross profit for quarter one was about $1.3 billion, up 13% year-on-year. Gross profit margin was 13% against 13.6% last year. The decrease was due to the increased mix from faster-growing consumer business, as well as change in geographic mix. Operating expense increased by 8% to $1.1 billion. This included $4 million severance expenses incurred for the year as part of the efficiency improvement program. Even with that, our EBITDA improved from 11.3% to 10.3% due to scaling benefits and strengthened expense control. Operating profit in quarter one was $283 million, up 40% year-on-year. We recorded non-operating expenses of $90 million, which included interest expenses of $10.5 million accrued for the $1.5 billion five-year notes with a coupon rate of 4.7% we issued in early May. Profit for the period was $211 million, up 24%. Profit attributable to equity holders was $240 million, up 23% year-on-year. The difference between the two profit lines was due to our joint venture partner sharing of loss in relation to the Compal JV. Next chart, please. Our balance sheet remains strong. Non-current assets were about $5.2 billion, and current assets were about $15.5 billion as of June 30, 2014. Increase in bank deposit and cash was largely due to the cash obtained from the USD note issuance in May this year, where net current assets are around $1.5 billion at the end of June. The non-current liabilities were at around $3.4 billion. Now, let's go through the cash and working capital in the next chart. Our cash position remained very healthy. As at the end of June, we have net cash of around $3.6 billion. The quarter-to-quarter increase of our bank deposits and cash was mainly due to the $1.5 billion cash raised from the USD note. We continue to do well in managing our working capital. For quarter 1, inventory days were 28, up one day against last year due to our continuous expansion into the consumer business and emerging markets, and ramp up of our new in-house manufacturing. Receivable days were 32, decreased four days year-on-year. Payable days were 66 days, reduced by two days against last year. As a result, the cash conversion cycle for the quarter was at negative six days, again, a negative one day last year. The quarter-on-quarter change is largely due to the growth of our commercial business. Our operating cash flow has improved significantly during the quarter. We have recorded net cash generated from operations of around $378 million in quarter 1, against $140 million the same quarter last year. Remain at a very strong cash position for working capital needs to drive future growth. Next chart, please. As Yuanqing just highlighted, we continue to record share gain across geographies, products, and customer segments under our strategy and our balanced geographic exposure continue to help contribute to our top-line growth. Strong revenue growth of EMEA and AP helped drive top-line growth, despite China PC industry still experience a decline. At the same time, both regions recorded significant improvement in their operating margins. They both achieved their record high levels driven by strong growth. The revenue from China was up about 2% year-on-year, driven by the balanced growth between our PC and mobile device businesses. We continue to protect our profit pool, and our China overall margin further improved by 0.3 points year-on-year to 5.5%. Our PC revenue show a year-on-year growth of about 1%, as we further strengthen our number one position with a strong market share and continue to outperform in the China PC market despite its decline. Our China PC operating margin improved by 0.2 points year-on-year to 7%. Our smartphone continue to demonstrate strong growth momentum. In quarter 1, we surpassed Samsung become number one in China's smartphone market for the first time, and the profitability of our mobile device business continued to improve in the quarter. We continue to solidify our China smartphone business and focus on profitable growth in this highly competitive market. In order to enhance our competitiveness, we invest in product innovation in the 4G smartphone and further broaden routes to market. Asia-Pacific. Revenue was up 20% year-on-year to about $1.6 billion in Asia-Pacific region. Strong performance in Japan, especially in the commercial PC business, supported our overall improvement in the region. Our drive in smartphone, particularly in the RCM regions, has continued to be encouraging. Our operating margin was up significantly by 3.2 percentage point to a record high level of 4.1%, driven by the growth in scale for both PC and mobile device businesses. EMEA. We have excellent results in EMEA with record high market share and improvement in profitability. Revenue grew 49% year-on-year to about $2.8 billion. Strong growth in the emerging markets and consumer business contributed to the strong growth in the region. Our mobile device business, including smartphone and tablet business in EMEA, has also recorded strong growth momentum, and it was the first time our smartphone shipment exceeded 1 million units. The overall EMEA operating margin was up significantly by 1.9 percentage points to 3.4% due to the scaling benefit from the strong growth and expense control. Americas. We continue to achieve a strong growth premium against the market decline in the region with record highest share at about 12.5%. We continue to record strong growth in the U.S. to a record high market share of 11.3% with margin improvements. The revenue of the Americas region grew 90% year-on-year, driven by the growth across all products and regions. Operating margin, however, was down year-on-year. We are still investing in Brazil and the Latin American regions. We have a much more balanced geographic mix today. Sales mix of China dropped to 36% compared to 42% same quarter last year. We believe our strong momentum in markets outside of China will continue to support the growth above market performance. Our share in these markets are still low, and we are confident to continue to deliver strong growth and will contribute to the margin improvement benefiting from the better scaling. Next chart, please. We have a more balanced product portfolio help our expansion in the consumer PC and mobile device business. Notebook shipments were up around 17%, with a 21-point premium to the market, and sales were up 12% year-on-year, respectively. Unit shipments and sales in our desktop business were up 12% and 20% respectively, year-on-year. Our mobile device business continued to show strong performance, with revenue grew 32% year-on-year. Among which smartphone shipments were up 39% year-on-year, and our tablet shipment were up 67% year-on-year. Looking ahead, we believe our existing business will continue to outperform the market across our key products under the solid execution of our strategy with margin improvement. We are confident to continue to outperform the PC market, while at the same time, will also benefit from the gradually recovering market. We will continue to solidify our leadership position in the China smartphone market and improve its profitability. At the same time, we will grow aggressively in the emerging market. Our post-merger management office has been on the ground in closely liaising with our counterparties to ensure the integration work of the two transactions on day one post-closing can be carried out seamlessly and the planned synergy can be delivered. We will stay focused on our efficiency improvement initiatives and growth opportunity of our existing business. We are confident the trend in the growth of our existing business that we have shown in the past several years will continue to deliver the improvement in profitability. Addition of the two businesses after the final approvals will further strengthen the group's competitiveness in driving sustainable growth in the next several years. Thank you. Now we can take your questions. Thank you, Wai Ming. Let's now proceed to questions. We want to accommodate questions from as many people as possible, so please avoid multipart questions and limit it just two questions at one time. Please state your name and name of your company before your questions. All the Q&A will be in English only. Operator, will you please give us your instructions? Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on the telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. The first question comes from the line of Pranab Kumar Sarmah from AM Capital. Please ask your question. Thank you for taking my questions, and congratulations for a very strong first quarter of FY 2015 results. My questions will be more towards your mobile business divisions. Could you give us a little bit of idea what was the operating margins you had in the mobile business in June quarter? Before integrating Motorola operations, probably by end of the year, what will be the margin improvement you are looking at this mobile business and revenue trajectory for next two quarters? Some color on that business, that will be very helpful. Yeah. Our CFO will answer your question. Yeah. Well, thank you for the questions. We actually don't break down, but I can actually directionally what that margin is. Well, first of all, just for clarification, we are still in the process of getting the necessary approval of Motorola, and therefore, Motorola result is not in our Q1 result. It's not included in the normal. Yeah, that's not. Well, I answer that. And then the overall, I think phone operating margin is positive. And our China smartphone business has been breakeven, and continue to see, I think, small improvement on profitability over the last two quarters, meaning that the current quarter, the margin is positive. We don't actually disclose, I think, separately the operating margin of our different businesses. Not until when the business or more likely when Motorola become part of us is more significant, we will then have, I think, additional disclosure. But directionally, I think the margin is improving, is in the positive territory. Yeah. Got it. To follow up on that, I think you are expanding quite a bit on emerging market now on your mobile business, but there are a lot of low-cost smartphones are coming up on the emerging market. And we are seeing even $30, $35 smartphones on the emerging market now. How you are addressing that particular segment and differentiating those product in, say, India and Latin America, or even Eastern Europe? Actually, although we become number one in China market according to IDC data, we think China is still the most competitive market in the world. There are many local players. Some of them are not running the business logically. They just don't want to make money in the short term. They use the internet model. They just want to attract the market capital investment to fund that. I think in short-term, it's hard to make money in this market. But I think we do have more potential in rest of the emerging markets, just with the Lenovo brand. I don't talk about the Motorola. You can see our results are outside of China. Actually, we grow very fast in Southeast Asia by almost 300%. We grow in Eastern Europe by more than 500%. We grow in Latin America by 50%. Not only we grow faster in those areas, and also profitability in those areas are better than in China. As Wai Ming said, in China, we have made breakeven. We definitely focus on the breakeven. We focus on the healthy business. We focus on the balance between growth and profitability. But outside China, like in Southeast Asia, our smartphone business recorded 3% PDI. In Eastern Europe, we recorded 4% PDI. Very healthy business. We will continue to pursue the profitable growth outside of China, particularly outside of emerging markets. Why we can have this performance? Why we should more focus on this area? That's because not only we have the right product portfolio, which can address the shifting from the premium to the mainstream and the entry level, but also we have built a very strong brand in those markets. With our core PC business. We also have built a very sophisticated channel network in those areas. Is there any problem with the phone? Can you hear me still? Yes, we can hear you. Please continue. Okay, good. That will be our strategy. In China, definitely it is still one of the most important markets for Lenovo. But we will focus on the balance between the growth, market share, and the profitability. We want the business to be healthy. But definitely in China, we will try to build online mode. We will try to expand into more open markets and the premium space to ensure we can have this kind of balance between hypergrowth and profitability. But we should more focus on the rest of the emerging markets to grow, to pursue the profitable growth in those areas. Meanwhile, when we integrate, when we close the deal with Google, Motorola, we can have more balanced business across the world. We can become a pure global player because of Motorola's business. It is very complementary to Lenovo's kind of smartphone business. As I said, Lenovo is focusing on China, Southeast Asia, Eastern Europe, a little bit Latin America. The Motorola business is stronger in North America, in Latin America, in Western Europe. Probably the only overlapping area is India. So we are very complementary to each other. We will become a pure global player. We will compete in most of the key markets. That can also give us the advantage, particularly in the mature market. Motorola's technology, IP position can help us to be more competitive. Next. Next question, please. Thank you. The next question comes from the line of Grace Chen from Morgan Stanley. Please ask your question. Thank you, and congrats for the good result. It was great to see more substantial improvements in the margins for your mobile business and also quite good margin performance in almost every region. However, at the same time, the corporate unallocated expenses jumped to over $100 million versus normally, I think it's below $50 million. Can you help us understand why the corporate unallocated costs increased so much in the June quarter, please? Thank you. Yeah. I think it's primarily driven from the M&A expenses. I think it's mostly M&A expenses is then allocated Financial. Yeah. Well, unallocated. I think the way we present is corporate allocation. I think to the extent possible, we allocate to different geographies. Some of those are not geography specific, like M&A expenses. No, the financial. Sorry. M&A. M&A- Interest. Yeah. M&A as far as interest expenses, yeah. Okay, got it. So is that for the coming quarters, that will be the normal level to put in our model? Each quarter, we are expecting to see around $100 million of the corporate unallocated expenses, or is this a one time? Yeah. Well, I think definitely the nature of this is one time. We definitely are not closing those significant M&A deals that need to pay a lot of fees. But having said that, there are still fees to be paid, for example, that we are, I think in the process of deferring the approvals for the two deals. There are involvement of legal, lawyers, so on and so forth. So there will still be some unallocated expenses. The way we look at it is the overall, I think corporate expenses, whether allocated or not allocated. I think the key of our control, our management system, is to make sure that the overall expenses of the corporate is under control. Got it. Thank you. Okay, thanks, Grace. Yes. You have a follow-up question? Yeah. Just quickly on the second question. It's also about smartphone business. We see very strong shipment growth in your June quarter, so it become number one in China. But at the same time, we're also seeing the 3G inventory issue in China. So I'm wondering what Lenovo has done differently to achieve such a great result. And given the inventory issues in China, are you worried about the potential inventory overhang or write-off in the following quarter? Thank you. I think we have paid a lot of attention to the 3G inventory. I think we have controlled that very well. So now we are in a very healthy position. So we are ready to shift to the 4G. As you have seen, just last couple of weeks, we have launched a lot of 4G models in China and other markets. So we are pretty sure we will be more competitive in the 4G stage. Thank you. May I have 4G shipment mix? The last question. Thank you. We raised relatively small, but I will come back to you on that data point later. All right? Thanks, Grace. Great. Thank you. Next question, please. Thank you. The next question comes from the line of Jialing Wei of HSBC. Please ask your question. Thank you for taking my questions, and congratulations on the very good results. My first question is actually on your desktop PC business. In your disclosure, the unit shipment was up 12%, but revenue was up 20% year-over-year. Obviously, a significant part of the growth is coming from ASP expansion. Could you comment on what should we expect going forward? Mainly the ASP expansion, is it sustainable? What was- ASP. Expansion. ASP, okay. ASP, whether- Desktop. Desktop. Yeah. I think Jenny, let me answer this first, and then let Yuanqing to add any comments. We definitely see I think the commercial side, I think the recovery, I think there are definitely signs of that carrying on. To answer your question directly, I think we definitely see that. I think it will, at least so long the commercial business I think continuing to recovery, that is probably going to I think continue in the next few quarters. So in other words, the commercial average selling price for desktop is significantly higher than your typical mix. Is that Commercial is obviously higher than consumer, I think for sure. For desktop. Yeah, for desktop. Yeah. For desktop, definitely. Yeah. Yeah. The growth is driven by the commercial, so last quarter. For the consumer, now they are more willing to buy the notebook rather than desktop. But for the commercial customers, they still need to replace with the desktop model. Right. Okay. Thanks. And my second question- But definitely you are right. Actually, we still have the room to improve our consumer desktop. Our outside of China market. Yeah. Indeed, because your market share in desktop is actually relatively lower. Is that going to be your future growth strategy as well? Yes. That is for sure. So in both consumer and commercial side, we think we have room to improve. So for notebook, the shipment is not the key issue. The logistics is not the key issue. But for desktop, you must build the right logistic network so that it can help you to save the expense. Okay. To add to that, Jenny, I think the area of growth we definitely are quite confident seeing one, obviously, is the SMB. I think we definitely see that there are room for us to see opportunities there. The other within the SMB, definitely desktop. Mm. Okay. Very good. My second question is on smartphone. Obviously, ex-China, especially emerging markets, are becoming much, much more important for your smartphone business. Do you have data to show us in terms of the number of countries you have smartphone exposure globally? How should we look at it, like in the next one to two quarters in terms of your country expansion? Now we are doing business in 36 countries. Besides China, most are Southeast Asia, Eastern Europe, and Middle East and Africa, and Latin America countries. As I said, we are growing very fast in the expanded countries. Particularly Southeast Asia, we grow by almost 300% year-on-year. Eastern Europe by more than 500%, Latin America, 50%. Also the profit in those areas are pretty good. Southeast Asia, 3% PDI. Eastern Europe, 4% PDI. Better than in China. With currently Lenovo brands, if we go to the mature market, we don't have any advantage because we have to pay a lot of IP royalty. That's not our intent to expand to more mature market with Lenovo brand. But fortunately, as you know, we announced the acquisition of Motorola. We are on track to close the deal. Once we close the deal, we can have the footprint in North America, in Latin America, and in West Europe, in India. That will help us a lot to build a worldwide business, pure global player. We will become strong and more competitive in the market, in each of the markets. Thanks. Thank you, Jenny. Next question, please. Thanks. Thank you. The next question comes from the line of Gokul Hariharan of JP Morgan. Please ask your question. Yeah. Hi. Congrats on a great quarter, and thanks for taking my question. First of all, I had a quick question on China smartphone market. Looks like the market is still extremely competitive, and Lenovo is number one, but I think number two, number three, number four are not too far behind. How do you think this market evolves over the next couple of years? Are we going to see some consolidation in market share? If that's going to happen, is it going to happen immediately, or is it going to take a couple of years for that consolidation to happen? I have a follow-up question as well. Thanks. China is still the most important market in the smartphone area. We will further focus on that area. We think to keep a healthy business is even more important. That means we will balance the growth and profitability. We want our smartphone business in China. It's healthy. You are definitely right. This is the most competitive market. There are a lot of local players. Some of local players are not doing business logically. They just want to make money in the short term. They just want to attract the capital market to give them money to fund their business. They call it the internet model. I don't think this model can last a very long time. We are improving our business model from the carrier model to open market model, to internet online model. We are improving our business model. We are expanding the rural market. That will help us to solidify our leadership position in that market, as well as the profitability opportunity. That will be our China strength. Meanwhile, we continue to develop a more attractive product for the market. We think we should fully leverage the transition from the 3G to 4G to further grow in the market. Probably in China, our key competitor will be the local players. From worldwide point of view, we still think those multinational players are our real competitors. We should focus on that area to try to become a even stronger global player. Okay, great. Thank you very much. My second question is, it's been, I think about eight or nine quarters, if I'm right, since you articulated your three-year PTI expansion target, and we've been essentially tracking or even exceeding that target. Could you give us some kind of a bit more longer-term outlook and update that, in terms of what that PTI target could look like for the next couple of years now that we are almost 70% done with the timeframe that you predicted previously? Thanks. That's still our commitment. Also, we're still on track to deliver our commitment. Actually, if you look at last quarter's performance, in the PC, if you only look at the PC numbers, our PDI improved by 0.7 points year on year in the PC. Right. If you consider our overall business, operationally, we improved by 0.4 points from 2.3 to 2.7. But why we reported a 2.5% PDI? That's because the cost of the bond. You know we lend more money More money last quarter to prepare for the two acquisitions. So that's at 0.2 points of the interest to our expense. That's the reason. So we will not be able to give you the further guidance for the next three years or whatever. Let's finish, I think, the three-year commitment of 1% improvement, and then we'll look at, especially after we have the two deals, and then we will let you our impression. We obviously are very confident to continue to expand the margin. But I think it's a little bit premature, especially over the phone, to communicate our margin expansion plan over the next five years. Okay. Great. Thank you. We have a good track record. So we have a good track record. If we commit, so we want to deliver. Okay. Thank you, Gokul. Next question. Due to time constraint, we'll probably take the last questions now. Thank you. The next question comes from the line of Arthur Hsieh of UBS. Please ask your question. Hi. Thank you. Can you hear me? Sure. Loud and clear. Yeah. Thank you. Well, I must say, I'm a little bit disappointed. I think your margin could be even better if your U.S. operation did not grow that aggressive because actually the margin actually deteriorated. Actually, you could have done better. So my question for you is, what is your current strategy in the U.S. market? Because apparently, HP and Dell, they have improved the market share recently. So it seems like the competitive pressure is stronger there. Is it possible that we just try to adopt more defensive approach in the market that's probably not growing that fast, and try to deploy resources to other regions? Or do you have other strategy to try to address the U.S. market? I cannot agree with you more. It is 100% right. If we can improve the Americas, our performance could be even stronger. I hope you can understand the detail. Actually, our U.S. or North American business are doing very well. Not only we significant outgrow market to gain share, but also we significantly improved the margin, the PDI. You give the number to that. But in Americas, our only issue is not in North America, it is not in U.S. It is in Brazil. Actually, we lost a lot of money in Brazil. That dragged down the overall Americas performance. I wish you know this detail. We are working to fix this issue. Latin America, particularly Brazil, it is a very tough market. Probably nobody can make money in that market because of some regulatory issue. You must build the manufacturing facility locally. You must do the R&D locally, et cetera. I think we still haven't completely fixed the data issue. But our North American business is doing very well, not only in growth share but improve the margin and the profit. Sorry for my misunderstanding. Apparently, the issue is Brazil, and hopefully, you will be able to fix it as soon as possible. The next question is actually related to this balance sheet. Because you have this $1.5 billion borrowing, the balance sheet is quite different from one year ago, and now you have quarterly interest expense of $15 million-$20 million. But actually, your growing operating cash flow is so strong, and your cash conversion cycle is also improving. I am wondering, what is the optimal balance sheet structure that you look forward to structure your balance sheet? Arthur, let me get back to you the AG margin. I think your comment is obviously looking at the American Group overall. We don't break down the North America or the Latin America, but I can assure you that the improvement of the North American margin is as good as, if not better than, the overall Group PC improvement margin. Just really to give you some numbers in your perspective that, I think our North American margin is actually doing very, very well. It is only the low margin, about 1.5% or 1.4% is due to, I think, the underperformance of Latin America. Now, going to the balance sheet, I think that I agree and disagree with you, Arthur, that the balance sheet does not change that much other than, I think, the additional $1.5 billion cash and the $1.5 billion, I think, long-term liability. You are absolutely right that I think our cash conversion cycle improved significantly, because I think, again, this is part of our overall strategy is while we actually have excess cash over the past, we use the cash to build up our scale. When we reach the scale, we improve profitability, as well as the cash generation ability. I think the way we look at it is, I think we have a much better control over, I think, the account receivable as well as account payable, really getting better terms from the supplier, especially when you get better scale. At the same time, trying to have a much tighter control over inventory. You are absolutely right, and your observation is absolutely right that our cash generation capability or result actually start improving from quarter 4 last year, because that is, again, I think part of our overall strategy is to leverage our cash to build up the scale. When we have the scale, improve profitability as well as operational efficiency, i.e., cash generating capability. Arthur, actually last quarter, in North America, we improved our PDI by more than $23 million. In my memory, this is a historic high. It is a historic high. We deal with more than $65 million PDI in North America. But very unfortunate. We are not doing well in Brazil. Only Brazil. Even remaining Latin American regions, we improved the margin. Put it this way. Competitive pressure is not really increasing. Actually, even in the market where competitors are gaining share, but you are still doing well. Yeah. We didn't sacrifice the profit to gain share. Yeah. Why we gain share? That is because our overall competitiveness. You should have this impression. In EMEA, not only we significant outgrow the market, but also we significantly improve the margin. That is because we have already hit the turning point. When the scale reaches to a certain level, that will be easy for us to get a return, to make more money. Over the past three years, our strategy is we protect our commercial customers. But meanwhile, we should significantly attack the consumer business. We have executed the strategy very well in EMEA. But definitely in the first two years, because we haven't had enough scale in the consumer space, so we couldn't make money. But now, with the current scale, I think we can make money. Okay, thanks Yuanqing, and thanks Arthur. Thank you. Thank you everybody for your participation in today's call. If you have any further questions, please feel free to contact the IR team directly. This webcast replay and conference call replay will be available in the next couple of hours. Thank you again for joining us.