This report analyzes the financial performance of Flight Centre Travel as a potential investment opportunity for an international company. It focuses on working capital, financial structure, activity, and profitability. The report includes a recommendation letter based on the findings of the performance analysis.
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Performance Analysis1 Flight Centre Travel (ASX: FLT) Performance Analysis by Student Name Class & Course Professor University The City & State Date
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Performance Analysis2 Abstract The report analyses the Flight Centre Travel Company as a potential investment opportunity for an international company. The analysis focuses more on FLT’s working capital, financial structure, activity, and profitability. The study is divided into two main parts, namely the financial analysis of the Flight Centre Travel Group Limited and a recommendation letter based on findings of the performance analysis. The financial report is further divided into several sections. Based on the comparative financial performance analysis, FLT has an unfavourable but a promising future. The company is not worth investing in as a single investment option. However, the company has a positive performance outlook, which is encouraging to investors. FLT will be in a position to sustain its cash requirements in the future. FLT pays 40-60% dividends from its net income annually after taking future cash and investment requirements into consideration. The company has paid out a dividend in the past three consecutive years. The risk associated with the company can be managed by adding it in the diversified investment portfolio. In conclusion, BACA consultancy recommends that FLT should be part of the diversified investment portfolio. Further investigation should be conducted on the company’s valuation and its management team.
Performance Analysis3 I.Introduction Financial performance analysis report represents a summarised version of a company’s annual reports. Performance reports help investors to understand the financial health of a company before making investment decisions. In this scenario, an international investor is interested in investing in the Australian market. The investor is particularly interested in an ASX listed company. BACA Consultancy has been contracted to choose a potential investment company for the investor. The consultancy has settled for the Flight Centre Travel (ASX: FLT). However, the BACA has to conduct a financial performance analysis on the company to evaluate whether or not it is a viable investment option. The performance analysis relies on the three latest financial statements of the company-income statements, cash flow statements, and balance sheets to make an informed opinion about investing in the company as well as projecting the future performance. The analysis focuses more on FLT’s working capital, financial structure, activity, and profitability. The paper is divided into two main parts, namely the financial analysis of the Flight Centre Travel Group Limited and a recommendation letter based on findings of the performance analysis. The financial analysis is further divided into several sections. The sections are; a)Description of FLT, b)Performance ratios calculation and analysis, c)Cash management analysis, d)Perform a sensitivity analysis, e)Systemic risks and un-systemic risks, f)And, dividend payout ratio and dividend policy. The Consultancy firm believes that the investor will benefit from the report by making the right investment decision based on the informed opinion presented in this report. 1.0.Financial Analysis of FLT Company Financial analysis refers to the process of analysing suitability and performance of businesses. The process applies several analysis techniques such as ratio, risk, cash management, and sensitivity to evaluate whether or not a business is liquid, stable, profitable, or solvent enough to invest in(English, 2011, p. 67). This section relies on 2016, 2017, and 2018 financial statements of FLT to conduct a financial analysis. 1.1.Description of FLT Company Flight Centre Travel Group Ltd (FLT) is an ASX listed company which operates in the traveling industry. FLT was established in 1982 and had its headquarters in South Brisbane. The company offers services such as corporate travel management, retail, and wholesale travelling. FLT offers thirty brands in four business segments, which are Retail, Wholesale, Corporate, and Leisure across over 50 countries(Flight Centre Travel Group Limited, 2019, p. 14). The key global destinations for the company are Australia, Europe, the United States, Africa, the United Kingdom, Asia, and New Zealand. FLT has over 20,200 employees you have been employed on a full-time basis. Moreover, the company engages indirectly in the employment of over one million people. The company
Performance Analysis4 posted a 2.9billion during the 2018 financial year which a 10.35% compared to the revenue realised in 2017. Several investment decisions contributed to the company's group in recent years. First, the introduction of low-cost new systems that improved productivity. Second, the introduction of unique brands and products to the customers. Third, the introduction of flexible working programs for employees to enhance their performance. Fourth, high presence on the online and digital market which enhanced the company’s capability to deliver. And fifth, expanding the organic growth strategy by acquiring in the Mexico, Netherland, and Malaysia markets(Flight Centre Travel Group Limited, 2018). 1.2.Calculation and analysis of selected performance ratios The profitability and market efficiency ratios are the most appropriate in evaluating the performance of the company. The financial ratio analysis is based on 2016, 2017, and 2018 financial statements. a)Profitability ratios Profitability ratios evaluate the ability of a company to raise income. The ratios are calculated by comparing the revenue generated are the expensed incurred while generating them. The profitability level of FLT is evaluated using the gross margin, return on assets, return on equity, and net profit(Bailey, 2005, p. 78). Ca(Harrison, 2016)lculations RatiosFormula201620172018 Gross Margin Gross Profit/Net Sales * 100% 345,043/ 2,677,336 *100% = 12.89% 325,445/2,641,7 75 *100% = 12.32% 363,493/2,949,955 *100 = 12.32% Return on Assets Net Income / Assets 244,556/ 3,003,211 = 0.08 230,773/ 3,195,488 = 0.07 264,213/ 3,405,219 =0.078 Return on Equity Profit After tax / Net worth 244,556/ 1,345,945 = 0.09 230,773/ 1,428,755 = 0.16 264,213/ 1,554,442 = 0.17 Net Profit Margin Net Profit / Sales*100% 244,556/ 2,677,336 *100% =9.1% 230,773/2,641,7 75 *100% = 8.7% 264,213/2,949,955 *100% = 8.9%
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Performance Analysis5 Analysis and Justification The comparative analysis of the profitability ratios is as shown below. Graph one: Gross margin and Net margin comparative analysis Graph Two: Return on assets and Return on Equity comparative analysis Gross margin Gross margin ratio examines the amount of profit generated from every dollar spent by a company(Harrison, 2016, p. 33). The higher the ratio, the more profitable a business is. FLT had gross margins of 12.89%, 12.32% and 12.32% in 2016, 2017, and 2018 respectively. The ratio had a decreasing trend.
Performance Analysis6 Net profit margin Net profit margin measure the profitability of a business after taking both direct and indirect expenses into account. The higher the ratio, the more profitable a business is (Gibson, 2012, p. 97). FLT had net profit margins of 9.1%, 8.7% and 8.9% in 2016, 2017, and 2018 respectively. The ratio is on a reducing trend. Return on assets This ratio evaluates how effective a company is in using its assets to generate income (Kaplan, 2012, p. 56). 8%, 7% and 7.8% of the net income generated by FLT in 2016, 2017, and 2018 respectively came from its assets. Return on equity This ratio evaluates how effective a company is in using its equity to generate income. 9%, 16% and 17% of the net income generated by FLT in 2016, 2017, and 2018 respectively came from owners’ equity. b)Efficiency ratios Efficiency ratios are used to evaluate the ability of FLT to manage its operations. The ratios will be used to test the ability of the Company to utilize its assets and manage its liabilities(Berrington & Bhandari, 2011, p. 90). The ratios have been calculated and analysed, as shown below. Calculations RatiosFormula201620172018 Accounts Receivables Turnover Revenue/Average Accounts Receivable 2,677,336/ 672,176 = 3.98 2,641,775/ 762,274 =3.47 2,949,955/ 845,098 =3.49 Average No. of Days Receivables Outstanding 365/Accounts Receivables Turnover 365/ 3.98 = 91 days 365/ 3.47 = 105 days 365/ 3.49 =104 days Inventory Turnover Cost of Goods Sold/Average Inventory 2296732/ 1,753,500 = 1.31 2321919/ 1,480,500 = 1.59 2557947/ 1,434,000 =1.78 Average No. of Days Inventory in Stock 365/Inventory Turnover 365/ 1.31 = 278 days 365/ 1.59 = 230 days 365/ 1.78 = 205 Working Capital Turnover Sales/Average Working Capital 2,677,336/ 702,905 = 3.81 2,641,775/ 696509 = 3.79 2,949,955/ 751,357 = 3.93 Fixed Asset Turnover Sales/Average Fixed Assets 2,677,336/ 686,675 = 3.9 2,641,775/ 857,687 = 3.9 2,949,955/ 913,881 = 3.23 Total Assets Sales/Average Total Assets 2,677,336/ 2,894,641 2,641,775/ 3,099,350 2,949,955/ 3300354
Performance Analysis7 Turnover= 0.92= 0.85= 0.89 Analysis and Justification The comparative analysis of the efficiency ratios is as shown below. Graph Three: Efficiency ratio comparative analysis Graph Four: Efficiency ratio comparative analysis Accounts Receivables Turnover The ratio evaluates the efficiency of a company’s credit policies. Accounts receivable turnover ratio evaluates how quick customers pay their bills to the company. The lower the number of days it takes for a company to collect debts from customers, the better. On the other hand, many collection days shows the inefficiency of a company’s credit
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Performance Analysis8 policy(Gassen & Schwedler, 2010, p. 112). FLT’s account receivables turnover was 3.98, 3.47, and 3.49 in 2016, 2017, and 2018, respectively. The ratio is high meaning that FLT has ineffective credit policies. Inventory Turnover Inventory turnover evaluates the efficiency of a company in managing inventory. A lower ratio shows that a company has failed in efficiently managing its inventory. On the other hand, a higher ratio indicates that a company is efficient in managing its inventory(Van, 2009, p. 66). FLT had an inventory turnover ratio of 1.31, 1.59, and 1.78 in 2016, 2017, and 2018, respectively. The trend is increasing. Therefore, the inventories are staying longer in the company before they are sold. Working Capital Turnover The ratio measures the operating capital that is required by a company to maintain its sales. A company with a higher working capital turnover is considered to be efficient in managing its working capital. On the other had a low ratio indicates that a company has not utilized its working capital to the maximum(Deegan, 2013, p. 71). FLT’s working capital turnover ratio was 3.81, 3.79, and 3.93 in 2016, 2017, and 2018, respectively. The ratios show that the company is efficient in managing its working capital. Fixed Asset Turnover Fixed asset turnover ratio measures sales that a company generates from its long term capital investments. The ratio evaluates how efficient is a company’s capital investments (Demirgüneş, 2015, p. 34). Higher the ratio, the better for a company. FLT’s fixed asset turnover ratio was 3.9, 3.9, and 3.28 in 2016, 2017, and 2018, respectively. FLT was efficient in using its long term capital investments to generate sales. Total Assets Turnover Total assets turnover ratios measure a company’s efficiency to generate income using current and fixed assets. A higher ratio is better because it shows how effective a company is when utilizing its entire funds(Edmonds, et al., 2015, p. 75). FLT’s total asset turnover ratio was 0.92, 0.85, and 0.89 in 2016, 2017, and 2018 respectively. The three ratios are less than one showing that FLT was ineffective in utilizing its funds to generate sales. Average No. of Days Receivables Outstanding The ratio measures the number of days in a year; it takes a company to collect a debt from customers. The lower the number of days, the better. On average it takes FLT a 100 days to collect its debts from customers(Brigham & Ehrhardt, 2014, p. 62). The collections days were 91, 105, and 104 in 2016, 2017, and 2018, respectively. The company has an ineffective credit because the number of collection days has increased between 2016 and 2018. Average No. of Days Inventory in Stock The ratio evaluates the number of days it takes before inventory is sold out. The fewer the days inventory is help before being sold, the better. FLT held its inventory for 278
Performance Analysis9 days, 230 days, and 205 days before being sold in 2016, 2017, and 2018 respectively. The number of days it takes to sell inventory has reduced between 2016 and 2018. 1.3.Cash management analysis Market securities are debts or securities which can be redeemed or sold within one year. Market securities are part of the current assets if they are most liquid and can be converted into such within a year. Market securities are a significant part of cash management because they contribute to the liquidity of a company(Kaplan, 2012) (Baker & Martin, 2011, p. 121). According to the 2018 balance sheet statement for FLT, the company had several market securities under its current assets. The market securities are cash equivalent, financial asset investments, and derivative cash instruments(George, 2010, p. 61). Cash equivalents refer to the cash the company received its customers as a prepayment before the actual delivery of products and services. FLT raised financial asset investments through ownership claims and contractual rights(Flight Centre Travel Group Limited, 2019, p. 43). In 2018, FLT’s cash and cash equivalents account amounted to $ 1,272,992. The amount comprises of the client cash ($828,456) and ($ 444,536). Likewise, financial asset investments amounted to $204,148. The figure was constituted of Equity investments ($1,767), and Debt securities ($ 192,684(Flight Centre Travel Group Limited, 2019)). 2.4. Sensitivity analysis with data provided YEARS 01234 Cash outflow-2,000,000 Price Per Unit20202020 Units sold300000300000300000300000 Revenues6000000600000060000006000000 Expenses Fixed Expenses300000300000300000300000 Variable Expenses3600000360000036000003600000 Total Expenses3900000390000039000003900000 EBITDA2100000210000021000002100000 Less: Depreciation450000450000450000450000 Gross Profit1650000165000016500001650000 Less: Tax30%495000495000495000495000 Net Profit1155000115500011550001155000 Add back: Depreciation450000450000450000450000 Add: Residual Value200000 Add: Working Capital600000 CASH FLOW-20000001605000160500016050002405000
Performance Analysis10 PVIF0.90910.82640.75130.683 Discounted Cash Flows-20000001459106132637212058371642615 NPV3633929 The NPV is $3, 633, 929 a)Unit sales decrease by 10% 01234 Cash Ioutflow2,000,000 Price Per Unit20202020 Units sold270000270000270000270000 Revenues5400000540000054000005400000 Expenses Fixed Expenses300000300000300000300000 Variable Expenses3600000360000036000003600000 Total Expenses3900000390000039000003900000 EBITDA1500000150000015000001500000 Less: Depreciation450000450000450000450000 Gross Profit1050000105000010500001050000 Less: Tax30%315000315000315000315000 Net Profit735000735000735000735000 Add back: Depreciation450000450000450000450000 Add: Residual Value200000 Add: Working Capital600000 CASH FLOW-20000001185000118500011850001985000 PVIF0.90910.82640.75130.683 Discounted Cash Flows-20000001077284979284890290.51355755 NPV2302613 YEARS A decrease of sales by 10% would result to NPV of $2,302,613. b)Price per unit decreases by 10%
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Performance Analysis11 01234 Cash Ioutflow2,000,000 Price Per Unit18181818 Units sold300000300000300000300000 Revenues5400000540000054000005400000 Expenses Fixed Expenses300000300000300000300000 Variable Expenses3600000360000036000003600000 Total Expenses3900000390000039000003900000 EBITDA1500000150000015000001500000 Less: Depreciation450000450000450000450000 Gross Profit1050000105000010500001050000 Less: Tax30%315000315000315000315000 Net Profit735000735000735000735000 Add back: Depreciation450000450000450000450000 Add: Residual Value200000 Add: Working Capital600000 CASH FLOW-20000001185000118500011850001985000 PVIF0.90910.82640.75130.683 Discounted Cash Flows-20000001077284979284890290.51355755 NPV2302613 YEARS A decrease of the unit price by 10% would result to NPV of $2,302,613. c)Variable cost per unit increases 10% 01234 Cash Ioutflow2,000,000 Price Per Unit20202020 Units sold300000300000300000300000 Revenues6000000600000060000006000000 Expenses Fixed Expenses300000300000300000300000 Variable Expenses3960000396000039600003960000 Total Expenses4260000426000042600004260000 EBITDA1740000174000017400001740000 Less: Depreciation450000450000450000450000 Gross Profit1290000129000012900001290000 Less: Tax30%387000387000387000387000 Net Profit903000903000903000903000 Add back: Depreciation450000450000450000450000 Add: Residual Value200000 Add: Working Capital600000 CASH FLOW-20000001353000135300013530002153000 PVIF0.90910.82640.75130.683 Discounted Cash Flows-20000001230012111811910165091470499 NPV2835139 YEARS An increase of variable cost per unit by 10% would result to NPV of $2,835,139. d)Cash fixed cost per year increases by 10%
Performance Analysis12 01234 Cash Ioutflow2,000,000 Price Per Unit20202020 Units sold300000300000300000300000 Revenues6000000600000060000006000000 Expenses Fixed Expenses330000330000330000330000 Variable Expenses3600000360000036000003600000 Total Expenses3930000393000039300003930000 EBITDA2070000207000020700002070000 Less: Depreciation450000450000450000450000 Gross Profit1620000162000016200001620000 Less: Tax30%486000486000486000486000 Net Profit1134000113400011340001134000 Add back: Depreciation450000450000450000450000 Add: Residual Value200000 Add: Working Capital600000 CASH FLOW-20000001584000158400015840002384000 PVIF0.90910.82640.75130.683 Discounted Cash Flows-20000001440014130901811900591628272 NPV3567363 YEARS An increase of cash fixed cost per year increases by 10% would result to NPV of $2,835,139. 1.3.The systemic risks and un-systemic risks The performance of FLT is influenced by substantial operating costs, systematic, and unsystematic risks. Increasing terror threats, economic recessions, security, and safety concerns lead to huge operating budgets. Volatile prices of fuel, labour costs, and insurance cost also contribute to the high cost of operation. Notably, rising fixed and operating costs contribute to systematic risks for FLT(Mark, 2009, p. 76),(Kennedy, 2009, p. 101). Systematic risks arise from the changes in tax reform, global fuel price, and the Australian economy. On the other hand, unsystematic risks are caused by poor management, technological advancement, competition, and strikes. A difference between systematic and unsystematic is that the latter can be avoided while the former cannot(Fisher, 2010, p. 127). The two types of risks negatively impact the performance of FLT’s stock in the market. The growth of FLT in terms of more acquisitions and investments expose the company to economic vulnerability(Joel, 2008, p. 111). The company has its presence in several countries which attract high competition from competitors in the host nations. With more investments, FLT requires more funds to run its operations. The company would seek outside financing, causing high leveraging. The company has to high interests to acquire external funds. Failure to service the loans would expose the company to liquidity and bankruptcy risks. Lastly, the inadequate training of employees, incompetency, and low resources negatively impact the performance of the company(Green, 2008, p. 71). All these factors contribute to credit, market, interest rate, and liquidity risks. 1.4.Calculate the dividend payout ratio and dividend policy Dividend payout ratio (DPR) is calculated using the formula below. DPR = Likewise, dividend paid (DP) is calculated using the formula;
Performance Analysis13 DP= (Net Income + Opening Returned Earnings) – Closing Retained Earnings 2016 DP = ($244556 + $837485) – $922599 DP = $ 159,442 Therefore,DPR = DPR = 0.652 or 65.2% 2017 DP = ($230773 + $922599) – $1051033 DP = $ 102,339 Therefore,DPR = DPR = 0.443 or 44.3% 2018 DP = ($264,213 + $1051033) – $1122334 DP = $ 192912 Therefore,DPR = DPR = 0.73 or 73% Dividend policy chosen The management of FLT considers several factors to determine the amount of dividend paid to the shareholders. These factors are projected cash requirements, present and expected economic performance, and operational and growth plans. The company uses a residual dividend policy where the dividend payment varies depending on the anticipated needs(Flight Centre Travel Group Limited, 2017). The company aims to pay between 50-60% of its net income to the shareholders. For example, the dividend paid to the shareholders between 2016 and 2018 were based on on-off profit items, projected cash outflows, and seasonal cash flows. FLT paid out 65.2%, 44.3%, and 73% of each dollar from net income as a dividend in 2016, 2017, and 2018 respectively(Flight Centre Travel Group Limited, 2019). III. Recommendation letter To the investor,
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Performance Analysis14 BACA Consultancy was contracted to evaluate the Flight Centre Travel (ASX: FLT) as a possible investment option for you. In particular, you were interested in examining whether it was worth including the company in the investment portfolio. The performance analysis relies on the three latest financial statements of the company- income statements, cash flow statements, and balance sheets to make an informed opinion about investing in the company as well as projecting the future performance. The analysis focused more on FLT’s working capital, financial structure, activity, and profitability. The analysis has shown that the performance of the company has been influenced by volatility in the industry and the global market. Several risks have an impact on the performance of FLT in the market. Therefore, the company is not worth investing in as a single investment option. However, the company has a positive performance outlook, which is encouraging to investors. FLT will be in a position to sustain its cash requirements in the future. Lastly, the company pays 40-60% dividends from its net income annually after taking future cash and investment requirements into consideration. FLT has paid out a dividend in the past three consecutive years. The risk associated with the company can be managed by adding it in the diversified investment portfolio. In conclusion, BACA consultancy recommends that FLT should be part of the diversified investment portfolio. Further investigation should be conducted on the company’s valuation and its management team. IV. Conclusion The report addresses the financial performance analysis of the Flight Centre Travel (ASX: FLT) as a potential investment option for an international investor. The report helps the investor to understand the financial health of a company before making investment decisions. The company operates in the Australian airline market. The performance analysis relies on the three latest financial statements of the company- income statements, cash flow statements, and balance sheets. FLT suffers numerous risks in its operations. First, the company has a substantial operating costs and volatile prices of fuel, which reduces its profitability level. Second, the company faces both systematic and unsystematic risks, which hinders it from realizing its full potential. Third, there is high competition in the industry which forces the company to spend more on marketing, advertising, and technology to counter its competitors. The financial ratio analysis of the company is not promising. However, the company shows a positive future based on its free cash flows. Based on the risk and return analysis, the investor should choose FLT as part of a diversified investment portfolio and not a single investment.
Performance Analysis15 References List Amos, T., 2011. Diversification and capital structure.Journal of Accounting and Finance, 5(2). Bailey, R., 2005.The Economics of Financial Markets..New York: Cambridge University Press. Baker, H. K. & Martin, G. S., 2011.Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice.New York: John Wiley & Sons. Berrington, M. & Bhandari, . V., 2011.Pinnacle Financial Statements.illustrated ed. New York: IFRS SYSTEM. Brigham, E. F. & Ehrhardt, M. C., 2014.Financial management.Mason, OH: South- Western Cengage Learning. Deegan, C., 2013.Financial accounting theory.4th Edition ed. North Ryde, N.S.W: McGraw-Hill Education. Demirgüneş, K., 2015. Determinants of Target Dividend Payout Ratio: A Panel Autoregressive Distributed Lag Analysis.International Journal of Economics and Financial Issues,5(2), pp. 418-426. Edmonds, C., Edmonds, T. P., Olds, P. R. & McNair, F. M., 2015.Fundamental Financial Accounting Concepts.New York: McGraw-Hill Education. English, P., 2011.Capital Budgeting Valuation: Financial Analysis for Today's Investment Projects.1 ed. New York: John Wiley & Sons. Fisher, K., 2010. Risk management and stock returns in the airline industry.Journal of Business Research,Volume 22, pp. 123-133. Flight Centre Travel Group Limited, 2017.2016 Annual Report,South Brisbane: Flight Centre Travel Group Limited. Flight Centre Travel Group Limited, 2018.2017 Annual Report,South Brisbane: Flight Centre Travel Group Limited. Flight Centre Travel Group Limited, 2019.2018 Annual Report,South Brisbane: Flight Centre Travel Group Limited. Gassen, J. & Schwedler, K., 2010. The Decision Usefulness of Financial Accounting Measurement Concepts: Evidence from an Online Survey of Professional Investors and their Advisors.European Accounting Review,Volume 3, pp. 495-509. George, D., 2010. Relationship between systematic risk and accounting variables. International Journal of Hospitality Management,Volume 31, pp. 57-71. Gibson, C. H., 2012.Financial Reporting and Analysis.London: Cengage Learning.
Performance Analysis16 Green, M., 2008. Explaining variation in risks across firms.Journal of Risk and Insurance,20(7). Harrison, T., 2016.Financial Literacy and the Limits of Financial Decision-Making. London: Springer. Hendersen, S., Pierson, G. & Herbohn, K., 2014.Issues in Financial Accounting. Sydney: Pearson. Joel, S., 2008. Financial strategy and measure of risk and return.Journal of Accounting Review,22(3), pp. 105-117. Kaplan, D., 2012.Introduction To Financial Statement Analysis.New Delhi: The Kaplan Group. Kennedy, M., 2009. The effects of company’s capital structure on systematic risk. Journal of Finances,Volume 56, pp. 98-120. Mark, C. T., 2009. Size and leverage as determinants of equity risk.Journal of Finance, Volume 30, pp. 73-88. Van, H. J. C., 2009.Fundamentals of financial management.Harlow: Prentice Hall.