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Edited Transcript of BFF.MI earnings conference call or presentation 10-Feb-20 4:00pm GMT

Q4 2019 Banca Farmafactoring SpA Earnings Call

MILANO Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Banca Farmafactoring SpA earnings conference call or presentation Monday, February 10, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Emanuele Bona

Banca Farmafactoring S.p.A. - VP of Finance & Administration Department

* Massimiliano Belingheri

Banca Farmafactoring S.p.A. - CEO & Director

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Conference Call Participants

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* Antonio Reale

Morgan Stanley, Research Division - Equity Analyst

* Luigi Tramontana

Banca Akros S.p.A., Research Division - Analyst

* Simonetta Chiriotti

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to BFF Banking Group Conference Call about 2019 full year results. (Operator Instructions)

Please note this event is being recorded. I would like to turn the conference over to Massimiliano Belingheri, Group's CEO; and Emanuele Bona, Vice President, CFO. Please go ahead.

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [2]

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Thank you, everybody, for joining us today for the full year results for 2019.

We are pleased to report earnings of almost EUR 99 million adjusted net income with a growing return on tangible equity, despite a lower net LPI over recovery compared to 2018. We continue to accumulate our back-book reserve in terms of LPI, which is almost now at EUR 400 million, and we continue to improve our operating leverage, with operating costs to loans at 2.09%.

The growth of the business, as we will see, has translated into a better RWA mix that has allowed us to earmark EUR 71 million for cash dividend. This represents a 72% payout ratio, a dividend of EUR 0.415 per share, which is actually a 38% growth year-on-year on a like-for-like basis if we looked at the dividend capacity without the excess capital that we had on balance sheet.

Capital remains plentiful and the funding base and liquidity of the business is strong as well as the credit quality.

Growth has been good in terms of customer loans, which has been up 15% year-on-year at EUR 4.1 billion. 41% are now outside Italy. Volumes have grown at 3%, with a good performance particularly in Spain and less positive in Italy. The acquisition of IOS has contributed very positively to our results, both in terms of addition of the business, but also in the growth of the platforms, and their volumes have grown at 26% year-over-year.

In this year, we've launched our new business plan, and we've already executed on a number of initiatives that were there contained: We started to acquire non-NHS receivables in Greece, and we've started to operate in France. We continued to optimize funding. We launched a branch in Poland to collect deposits there. We obtained the first-time public rating by Moody's at Ba1 with positive outlook, and we've actually issued our first rated bond under the EMTN program, which we actually extended at the beginning of this year. Finally, with the IOS Finance acquisition, we've done our second acquisition in the last 4 years, and we consolidated our presence in the market.

Now let me turn to Page 3, and go through the net income results. The net income grew 8% year-over-year, which we see the strong performance, considering also that we had EUR 2.7 million lower net LPI over-recovery compared to 2018. This growing earnings has translated in growing profitability, with adjusted return on tangible equity of 38%, and that has generated EUR 71 million of expected cash dividend.

It's important to flag that while the net over-recovery of LPI has been at 16.8% compared to 19.5% of last year, the back-book reserve of LPI has actually grown by EUR 40 million, from EUR 356 million to EUR 396 million, therefore giving us increasing capacity to actually get LPI over-recoveries in the year to come.

This year is the first year where we've actually reached our target total capital of 15%. And therefore, I think it's helpful on Page 4 to see what it means in terms of our dividend capacity and the proven ability of our business to continue to self-fund growth, M&A and dividend payout.

So on this page, you can see that we compare 2018 and 2019 in terms of adjusted net income, the RWA growth of both years, the variations we have in terms of net income adjustments or delta equity account, the acquisition of IOS Finance, and then what we have as a positive is, starting beginning of the year, excess capital compared to our 15% total capital ratio.

Clearly, at the beginning of 2018, we had a much higher level of excess capital compared to the target compared to this year. And so actually, the ability of the business to pay out dividends out of internally [joint] capital has actually increased year-over-year.

If you take last year, we paid EUR 91.8 million of dividends. EUR 44.2 million was the excess capital we had, which got reabsorbed through RWA growth and other adjustments. And so the dividend capacity of the year was really EUR 47.5 million. This year, despite the acquisition of IOS, which accounted for EUR 8.7 million of dividends, we actually paid out EUR 70.9 million of dividend, of which only EUR 5.3 million is actually the excess capital we were carrying at the beginning of the year.

And so if you compare EUR 47.5 million with EUR 65.6 million, the growth has been actually 38%. If you consider that, actually, that includes the goodwill for the acquisition of IOS, then the growth is 57% year-on-year, if you want, on the dividend capacity generated by the operating business.

The performance of the business has been good, starting from the top line, which has grown 6% year-over-year. As you can see on Page 5, adjusted net banking income has grown 5% and recovery credit collections costs have grown from EUR 3.9 million to EUR 7.2 million in 2019.

That is translated in terms of net interest income in an annualized return on risk-weighted assets of 8.6%, slightly down compared to 8.8% of last year. If we take out the net LPI over-recovery, the annualized return on risk-weighted assets is actually flat year-over-year despite clearly the pressure on yields that we're seeing throughout the banking world, which we see, therefore, is a strong performance for the business.

If we look at the details of the net interest income, on Page 6, you can see the dynamic of the adjusted interest income, which has grown 7% year-over-year. And as we have flagged previously, the stock of LPI has grown 13% at EUR 634 million and the unrecognized portion of that fund has grown 11% to EUR 396 million, again providing a strong backdrop for future performance of the business.

Funding costs, on Page 7, have continued to decline and that's despite an increasing strong growth in our Polish business, which is funded in zloty. Net cost of funding has gone to 1.58%, down from 1.73%. And now the zloty cost of funding is roughly EUR 20 million out of the EUR 48 million of the overall cost of funding for the business.

We don't get any ECB financing. We don't access the TLTRO. We don't have any funding costs linked to government bonds yield and see opportunity to actually reduce these funding costs through the launch of the -- recently launched bank branch in Poland and the positive effect of having a public rating for the business.

Page 8. We continue to invest in the business, but at the same time, we continue to have a good operating performance. Operating costs have been up 10% year-over-year; personnel have grown by 16% year-over-year due to higher employees; whereas other operating expenses have grown at a slower pace of 5% per annum compared to last year.

Overall, the cost income, a slight increase to 37%, but that's entirely driven by the lower income by having less recovery of LPI. If we look at what is the key metric for us, which is one of the top bubble on the top graph of Page 8, the adjusted operating cost over loans have gone down significantly compared to last year from 2.24% to 2.09%, which you see is a continuous trend to make the business more efficient as we go ahead.

In terms of balance sheet growth, customer loans have grown at double-digit to EUR 4.1 billion, with a strong performance across many geographies. Italy grew by 4% year-on-year and the international business now represents 41% of the total loans, including IOS Finance, and that's up from 35% at the end of last year.

We have a very strong Spanish business now, which is almost more than double in terms of portfolio compared to last year, even if we were to include the IOS number for 2011 -- 2018, and we see that as a strong growth opportunity going forward as well.

We still have a residual EUR 1.8 million portfolio of net customer loans related to the Polska's SME factoring business, which we put in run-off 2 years ago.

The strong growth in customer loans has been driven clearly by volumes, which have grown at 3% per annum year-over-year. The BFF Polska Group has grown at 7% and that has generated more asset accumulation, given the longer duration of their portfolio.

As the rest of the group has grown at 3%, that has been driven by a strong performance in Spain, good performance in Greece and weak performance in Italy driven by the market. In Portugal, in particular, where we had a contraction from 2018 to 2019, which happened entirely in the last quarter, this was driven by a cash injection executed by the government at year-end.

If we turn to Page 11 and we look at our strategic goals, we are in line to actually continue to deliver according to our business plan, i.e., to continue to develop our current core business and improve our operating efficiency; and we have extended our footprint; we have filed to open a branch in Greece, which will launch in the course of this year; and we have entered France, which is a very significant market since -- given the size of the economy.

We'll continue to optimize funding and capital. We've opened a branch in Poland; we've launched the collection of online deposits in the Netherlands and Ireland; and as mentioned before, we have obtained our first public rating with Moody's and issued of our first rated bond.

And finally, in terms of consolidation of our business through M&A, we've completed the acquisition of IOS Finance in September. And importantly, we've shown in the performance of the business to date that that has been actually pretty successful choice, with a strong performing business well ahead of our plan.

In terms of M&A, Page 12 and clearly, the IOS acquisition fits into 1 of the 3 buckets of our M&A strategy: buying businesses that operate exactly in the business where we operate, and this comes alongside the other 2 areas, where we keep looking at opportunities, adjacent sector to ours, like we did in Magellan and other new niche markets, where traditional banks struggle to operate and where we can have significant operating of cost -- of funding synergy.

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Emanuele Bona, Banca Farmafactoring S.p.A. - VP of Finance & Administration Department [3]

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And if we move on to Page 13, as you can see, the funding structure has grown to available funding of EUR 4.2 billion. The online deposits have increased by 46% to almost EUR 1.4 billion vis-à-vis a year before, and now they represent 36% of drawn funds. We have issued bonds in October, as CEO have mentioned earlier, with very strong demand as it was oversubscribed 3x.

We maintain a significant liquidity buffer, with about EUR 400 million available but undrawn funding, and a very ample liquidity ratio. You can see the LCR and NSFR in the bubbles in the graph.

As mentioned earlier, we do not utilize any ECB funding. We have renewed in January the EMTN program for EUR 1 billion, and we expect a positive impact on NSFR from new regulation for strong next year.

In terms of the balance sheet, which is shown in the following page, our asset/liability management strategy remains conservative as discussed in the past, with assets showing shorter duration than liabilities. We continue operating natural hedging between foreign exchange-defined assets and liabilities.

And as discussed in the past, our balance sheet shows a positive gearing to higher interest rates, given that on the asset side, we can benefit of both -- most of the Polish Group -- Polska Group assets, which are at variable rates, plus the LPI portfolio, which is also LPI -- sorry, is also variable rate denominated.

Finally, on the government bond portfolio. As you can see at the bottom left of the page, the portfolio has been decreasing and it's now around 20% of total assets, which was one of the targets that were mentioned in our strategic plan.

Moving on, credit risk remains negligible. In fact, collections throughout the year have been strong. NPLs, excluding municipalities in default which, as discussed in the past, we have to classify as NPLs, but in fact BFF remains legally entitled to receive the whole capital and the whole amount of LPIs at the end of the process. So NPLs, excluding those municipalities, have decreased. Now the NPL ratio, excluding Italian municipality, is at 0.1%.

Past dues are also under control and now they amounted about EUR 35 million, 87% of which are represented by public entities.

Finally, cost of risk flowing through the P&L is now at 6 basis points, but half of it is represented by the SME business in Poland which, as discussed, has been now in runoff for the past 2 years.

Page 16 shows us the capital position of the Group. As discussed, if we exclude the expected cash dividend of EUR 71 million, total capital ratio is now at the target of 15% and the CET1 ratio is at 10.9%.

The calculation of the RWA remains conservative as we continue using a standard model, which maintains Italian exposure to NHS risk weighted at 100%. This means that there is very limited downside on -- in terms of Italian rating because it would have to be downgraded by 9 notches for that risk weighting to grow. On the other hand, an upgrade by 1 notch would reduce the risk weighting of the Italian NHS to 50%.

In terms of RWA density, as the CEO mentioned, it continues going down. It's now at 59% versus 63% 12 months ago and this is due to a better loan mix and decreasing net impaired assets.

Page 17, shows how the shareholder structure has been evolving. As you know, during the month of January, the stake owned by BFF Luxembourg, which is indirectly controlled by Centerbridge funds, have been going down to 21.8% through a 1/3 accelerated book building. Management holds a 4.4% direct stake in BFF. So the company is on the path of becoming a fully public company.

Finally, on Page 18, some updates from the legal environment. The split pay -- VAT Split Payment regime in Italy, which is in force since 2015, will expire in the month of July of this year, unless extended. There was no proposal about extension included in the Italian 2020 budget law. So if the measure is not extended, our volumes in Italy would automatically increase by roughly 20% on an annual basis, with virtually no impact on operating costs as they would benefit of -- the economies of scale on the existing cost structure.

There was the reintroduction of ACE, aiuto per la crescita economica. This is an Italian tax incentive, which allows deductions from corporate income taxable base that have been abolished in 2018 and it's been now reintroduced by the 2020 Italian budget law.

And finally, in January 2020, the European Court of Justice ruled that Italy has breached its obligation around payment terms and sentenced to pay court legal costs. We don't expect this ruling to have an impact on the PA payment terms in Italy. But as an upside, this judgment could open the way to hold the central government responsible for a payment of receivables viewed by other Italian public entities. So there could be some upside there that we will investigate.

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [4]

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Thank you, Emanuele.

To sum up, we closed the year 2019 with a strong set of results, having planted a lot of seeds to continue to grow the business in 2020 and the years to come. We continue to invest in the infrastructure by keeping a good cost discipline. We have diversified funding sources, which should allow us to optimize funding further.

And in general, we see the operating environment of the business to benefit from some of the trends, as Emanuele just mentioned, in terms of changing regulation and the like.

Overall, therefore, we continue to report to our shareholders the results, and just shy of EUR 100 million of net income, with strong dividends from the earnings capacity, and in general, the platform that should continue to deliver good growth and profitability for our shareholders.

Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Antonio Reale with Morgan Stanley.

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Antonio Reale, Morgan Stanley, Research Division - Equity Analyst [2]

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I've got 3 questions, please. One, if you could please just give us an update on what you're seeing throughout the years in the key regions in terms of loan demand and competition, please?

Also could we get an update on the DSOs in Italy? I think you used to provide this on an annual basis.

And the second question is on France, which I understand is potentially a large market for you, risk weighted at 20%. The challenge, I think you mentioned in the past, is really to try and convince customers to sell receivables. I thought you closed the first transaction in the NHS receivables. Can you maybe share any anecdotal evidence of what your feedback has been so far with that respect?

And the last question: Your total capital is at 15%, which you mentioned is the minimum to pay dividends. We've seen the change in the loan mix reduce your RWA density. I think it was down from 63% to 59%. What further room do you have in 2020 to lower the RWA? And can we expect a similar trend also in 2020?

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [3]

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Let me answer your question in the reverse order. On the RWA density, we price based on return of risk-weighted assets. So we are a bit agnostic in general about the RWA density of the business. We know that structurally because a large part of our business is still Italian NHS, where the RWA density is 100%. To be growing in other geographies, more towards the public administration, we structurally continue to lower RWA density.

The strong performance of the Spanish business has contributed quite a bit to that reduction, and we expect that reduction to continue, while the growth of international business continues to pick up.

In terms of France, France is an interesting market. It's a relatively good payer in terms of government payment patterns. However, if you take the EUR 120 billion of estimated expansion, goods and services, roughly 15%, 20% based on observatory of the French Treasury, our receivable is paid late. So if you want the addressable market for our product, it's around EUR 20 billion, EUR 25 billion in France.

What you mentioned is correct. It's not only in France. In any new market where we go in, it actually takes a bit of time to convince customers to sell the receivable. That's why the pattern of growth that we see in the market is, usually starting from the low base, we have a growing portfolio. And then we need to convert more and more customers.

If you take the performance of Spain, for instance, it's quite an indication of that. So even though if you count where payment times are actually quite low, at around 100 days, the effect of actually having devoted more salespeople to the commercial effort translates into very strong volumes for the business.

So in France, we expect to be able to leverage 2 things: one is, our relationship with multinational customers; second, our relationship with French customers, who are multinational that actually worked with us already in other markets. We've hired a key salesperson there, who will focus on those accounts, but also we can leverage the cross-border business on that market, again, because the freedom of service operation, our breakeven point is fairly low. And so the business can become quite profitable quite quickly, particularly, as we mentioned, given that it has only 20% risk weighted.

I mentioned DSOs in Spain. In Italy, DSOs have been stable in 2019 compared to 2018. It's gone slightly down on the NHS, slightly up on the rest of the public administration but also function of what we see, so our purchase mix. But overall, we don't see a trend going one way or the other. We see actually since 2017 relative stability in both health care and public administration.

In terms of key markets, look, we -- last year, if you look at the performance of the various businesses, we have had some strong performing geographies like Spain, like Poland, in terms of loan growth, particularly in Poland because, as you know, the new volume there has a much longer duration in the other markets. And good performance also in Greece.

We expect those markets to continue to perform well. We have good hopes in Portugal, where last year we were impacted by this injection of payments by the government, particularly in the health care system. And we see a bit more volumes coming from Portugal this way. Greece, it's a market where we see a lot of opportunities. Actually in Greece, we have quite a lot of revolving deals and the decision to open a bank branch there is also because we see much more continuative relationship than we've seen historically in other markets. And this should allow to actually have our sales force spend the full amount of their time in the country. When you operate cross-border, the salesperson cannot actually stay more than half of his or her time in the country.

So overall, I think there are a lot of engines of growth in the business, and we should expect incremental growth coming from the smaller markets given the low starting [debt.]

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Operator [4]

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The next question is from Luigi Tramontana with Banca Akros.

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Luigi Tramontana, Banca Akros S.p.A., Research Division - Analyst [5]

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Two questions from my side. The first one is regarding the expected impact that you see from the regulation related to the calendar provisioning. And the second one relates to your M&A strategy. We've read in the Italian newspapers that you may consider the acquisition of DEPObank. Could you share with us which could be the synergies and the strategic rationale of such a deal?

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [6]

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On kind of provisioning, as you know, the impact has secured the loans over 3 years past due. So frankly for us, we don't see any major impact over the period of the plan. And to be honest, given the performance of the businesses even thereafter, it's also for us, not, as much as an issue of writing off, but it's also accumulating more reserves. So overall, if you take the next 3, 4 years, they should have a very marginal impact, if any.

On M&A strategy, I mean you have a page on the presentation. It sums up how we see and how we presented in the business plan the -- our view on M&A. And our view on M&A is first of all driven by driving value for our business and our shareholders, where we see the opportunity in general to grow in our existing business, in sectors which are adjacent to us and in areas where we see other specialty finance players operating in niches protected compared to where the large traditional banks operate. We don't comment publicly on any M&A opportunity or speculation. And we simply restate our objective is to find targets through funding synergies or cost synergies can deliver returns that are incremental to our own return.

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Operator [7]

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(Operator Instructions) The next question is from Simonetta Chiriotti with Mediobanca.

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Simonetta Chiriotti, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [8]

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I've got 3 questions. The first is on the tax rate that in 2019 declined. If you can explain the major reason of this reduction. Second question about the split payment, and apparently it will have a positive impact in 2020. Did I get it right that it will regard the whole Italian businesses, so not only NHS but the whole business? And finally, on Italy, if you could elaborate a bit more on the market trends behind the low growth and the slight reduction, the low growth in PA and the slight reduction in NHS.

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [9]

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Yes, I'll leave it to Emanuele to comment on tax rate. On split payment, yes, this would apply to all the public administration and health care receivables that we buy, not for the remaining small part that we buy vis-à-vis the private sector should kick in from the invoices that issued from the 1st of July. And therefore, we should expect the growth in volumes to come from August, September onwards, if you have the full year impact on -- in 2021. As we flagged, there's a temporary measure that expires, and there's no demand for expansion. So in theory, it should expire. That's honest conclusion. We got where we wanted to flag it because that's clearly a substantial event for us if that were to happen.

In terms of market trend in Italy, as you know, last year, in 2018, we changed the commercial director with new commercial director coming on board in February. We redid the commercial team, and we think we now have a much more disciplined machine compared to what we had last year. So we don't see a major issue in the market. It has simply been execution. And that's the reason why the performance of Italian business has not been to the level we expected. We think now we have the discipline and the team to perform well this year. We are well quite hopeful, if you look at the expectation for this year, even leaving aside the split payment.

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Emanuele Bona, Banca Farmafactoring S.p.A. - VP of Finance & Administration Department [10]

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In terms of tax rate declining, that's correct. It's an effect of the geographic mix, as we discussed earlier. The mix of our income is coming from countries -- different -- other than Italy, is increasing. And therefore, on average, our tax rate is going down as we increase our income coming from lower tax countries.

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Simonetta Chiriotti, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [11]

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So we can roughly project the same tax rate also for the following years?

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Emanuele Bona, Banca Farmafactoring S.p.A. - VP of Finance & Administration Department [12]

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Yes. That's a safe assumption, yes. Although, we will continue expanding probably internationally as we open new countries. So that's something you should take into consideration.

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Operator [13]

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(Operator Instructions) There is no question booked at the moment. (Operator Instructions) There is no question at the moment. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Massimiliano Belingheri for any closing remarks.

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [14]

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Thank you, everybody, for joining us today. We feel very excited about the results of this year, and we look forward to touch base with you through the conference at the investors meeting and the next earnings conference.

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Operator [15]

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The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.