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Edited Transcript of BYD.UN.TO earnings conference call or presentation 10-Aug-18 2:00pm GMT

Q2 2018 Boyd Group Income Fund Earnings Call

Winnipeg Aug 28, 2018 (Thomson StreetEvents) -- Edited Transcript of Boyd Group Income Fund earnings conference call or presentation Friday, August 10, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brock W. Bulbuck

Boyd Group Income Fund - CEO & Non-Independent Trustee

* Narendra M. Pathipati

Boyd Group Income Fund - CFO, Executive VP, Secretary & Treasurer

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Conference Call Participants

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* Ben Jekic

GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research

* Bret David Jordan

Jefferies LLC, Research Division - Equity Analyst

* Christopher Allan Murray

AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research & Senior Analyst

* Jonathan Lamers

BMO Capital Markets Equity Research - Analyst

* Maggie Anne MacDougall

Cormark Securities Inc., Research Division - Director of of Institutional Equity Research

* Mark Robert Petrie

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst

* Michael W. Glen

Macquarie Research - Analyst

* Steven P. Hansen

Raymond James Ltd., Research Division - SVP

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Presentation

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Operator [1]

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Good morning, everyone. Welcome to the Boyd Group Income Fund Second Quarter 2018 Results Conference Call.

Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties relating to Boyd's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Boyd's Annual Information Form and other periodic filings and registration statements, and you can access these documents at SEDAR's database found at sedar.com. I'd like to remind everyone that this conference call is being recorded today, Friday, August 10, 2018.

I would now like to introduce Mr. Brock Bulbuck, Chief Executive Officer of The Boyd Group Income Fund. Please go ahead, Mr. Bulbuck.

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [2]

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Thank you, operator. Good morning, everyone, and thank you for joining us for today's call. With me today are: Pat Pathipati, our Executive Vice President and Chief Financial Officer; and Tim O'Day, our President and Chief Operating Officer. We released our 2018 second quarter results before markets opened today. You can access our news release as well as our complete financial statements and management discussion and analysis on our website at www.boydgroup.com. Our news release, financial statements and MD&A have also been filed on SEDAR this morning. On today's call, we will discuss the fund's financial results for the 3- and 6-month period ending June 30, 2018 and provide a general business update. We will then open up the call for questions.

In the second quarter of 2018, we were once again able to demonstrate our ability to deliver consistent positive results, posting double-digit increases in sales, adjusted EBITDA and adjusted net earnings, driven by our continued execution and focus on our growth and operational effectiveness strategies. We remain confident in our ability to achieve our long-term goal of doubling the business by 2020, based on 2015 metrics, on a constant currency basis. Our corporate development team continues to have a healthy pipeline of targets. So far in 2018, we have added 30 new collision locations, including 3 U.S. intake centers. Six of these new locations are also in 3 new U.S. states so that we now have collision operations in 24 states.

Looking now at our results for the past quarter. Our total sales were $456.6 million, an 18.9% increase from $384 million generated in the same quarter of 2017. This reflects a $76.5 million contribution from 150 new locations. Our same-store sales, excluding foreign exchange, increased by 3.2% in the quarter to $393.6 million compared to $381.3 million in Q2 2017. The increase in same-store sales percentage was positively impacted by approximately 1.3 percentage points or $5.7 million, due to same-store sales gains in the glass business. The quarterly results were impacted once again by foreign exchange, with the year-over-year decline in the U.S. dollar foreign exchange rate from CAD 1.35 in Q2 2017 to CAD 1.29 in Q2 2018. As a result, same-store sales decreased by $14.7 million due to currency. For the 6 months ended June 30, 2018, our sales were $909.9 million, up 19.3% compared with $762.9 million for the same period last year. Same-store sales for the same period were $775.3 million, compared to $748.5 million (sic) [$748.8 million] in the previous year. This 3.5% growth is in line with the same trends we saw in the quarter, with approximately 0.8 percentage points or $8.4 million of the same-store sales increase coming from same-store sales gains in the glass business.

Gross margin was 46% in Q2 2018 compared to 46.4% achieved in Q2 2017 and 45.1% in the first quarter of this year. Gross margin was impacted in the second quarter of 2018 in comparison to Q2 2017 by lower gross margins from our Assured business as a result of higher sales sourcing costs, which are more than offset by their higher capacity utilization and higher operating expense leverage. The impact of Assured on gross margin was partially offset by higher parts margins in the second quarter of 2018. For the 6 months ended June 30, 2018, gross margin was 45.5% compared to 46.1% achieved in the same period in the prior year. Once again, the 6-month gross margin was primarily impacted by the higher sales sourcing cost in the Assured business.

Operating expenses for Q2 2018 were $167.4 million or 36.7% of sales compared to $142.8 million or 37.2% in Q2 2017. The increase of expenses reflects new locations added since last year, while the decrease as a percentage of sales is the result of lower expense ratios in the Assured business, partially offset by a 30 basis point impact of the enhanced benefits for U.S. employees. You will recall that we are spending a portion of our estimated savings from tax reform on enhanced U.S. benefit program. These benefit enhancements include increasing vacation and holiday pay for commission-paid team members, including technicians, as well as doubling company contributions and shortening the vesting period for our 401(k) retirement savings plan.

Operating expenses for the 6 months ended June 30, 2018 were $329.8 million or 36.2% of sales, compared to $283.1 million or 37.1% in the same period in the prior year. The increase in expenses reflects new locations added since last year, while the decrease as a percentage of sales is primarily the result of lower expense ratios in the Assured business as well as same-store sales growth, which resulted in improved leverage of operating expenses. Adjusted EBITDA, or EBITDA adjusted for fair value adjustments to financial instruments, and costs related to acquisitions and transactions was $42.5 million compared to $35.5 million in the second quarter of 2017, a 19.8% increase. Adjusted EBITDA growth was primarily due to contributions from new locations, with same-store sales growth also contributing. Foreign exchange impact reduced adjusted EBITDA by $1.3 million in the quarter.

Adjusted EBITDA margin was 9.3% in Q2 2018 compared to 9.2% for the previous year. The slight change reflects the lower operating expense ratio associated with the Assured business as a result of their higher capacity utilization, as well as operating expense leverage on same-store sales growth, partially offset by the impact of increased benefit costs for U.S. employees.

Adjusted EBITDA for the 6 months ended June 30, 2018 was $84.6 million, up 24% when compared with $68.3 million for the same period last year. Changes in the U.S. dollar exchange rate in 2018 decreased adjusted EBITDA by $2.7 million.

Adjusted EBITDA margin was 9.3% for the 6 months ended June 30, 2018 compared to 8.9% for the previous year. The increase in adjusted EBITDA margin reflects the lower operating expense ratio associated with the Assured business as a result of their higher capacity utilization, as well as operating expense leverage from same-store sales growth.

Net earnings for Q2 2018 were $12.8 million compared to $421,000 in Q2 2017. In 2018, net earnings were impacted by $7.8 million in fair value adjustments, primarily due to the increase in unit price during the period. In Q2 2017, fair value adjustments amounted to $14.3 million. Excluding the impact of the fair value adjustments and acquisition and transaction costs, adjusted net earnings were $21.1 million in the second quarter of 2018, a 40.8% increase over $15 million the year before. Adjusted net earnings per unit for the second quarter of 2018 were $1.08 per unit compared to $0.83 per unit in the same period in 2017.

For the first half of the year, net earnings were $31.2 million compared to $15.4 million for the first 6 months of 2017. Again, net earnings in both quarters were negatively impacted by fair value adjustments to financial instruments, primarily due to the increase in unit price during the period.

Adjusted net earnings for the 6 months ended June 30, 2018, were $42 million compared to $28.9 million for the first 6 months of 2017. On a per unit basis, adjusted net earnings were $2.14 per unit, a 33.4% increase over $1.60 per unit for the first 6 months of 2017. The increase in adjusted net earnings year-over-year was primarily due to contributions from new locations, as well as the lower operating expense ratio. Decreased income tax expense as a result of U.S. tax reform has also had an impact.

Fair value adjustments are now having less of an impact on our earnings in 2018 due to the settling of the 2014 convertible debentures in November of 2017. Fair value adjustments associated with unit option liabilities also will continue to diminish in impact as unit options vest and are exercised. In this regard, some unit options are vesting and are expected to be exercised in the second half of this year. This exercise of unit options may also result in some insider unit sales following exercise, as option holders may need to fund exercise cost and related tax liabilities or for general estate planning purposes.

Although our capital expenditures during the first half of 2018 were low at approximately 1% of sales, relative to our expected annual spend as we have previously stated, we do expect to make capital expenditures for the full year 2018 within the range of 1.6% to 1.8% of sales. Emerging vehicle technologies requiring new specialized repair equipment, as well as evolving information technology requirements, have resulted in this current need for this higher level of expenditure. Making proactive investments will position us to meet anticipated market needs, whereas we expect that many other collision repairers will not be making these investments.

In Q2 2018, we generated $57.4 million in adjusted distributable cash compared with $31.7 million generated in the same period of 2017. We paid distributions and dividends of $2.6 million, resulting in a payout ratio of 4.6% compared to a payout ratio of 7.5% in Q2 2017. Contributing to our strong adjusted distributable cash was the fact that in Q2 2018, we made significantly less U.S. tax installment payments than we did in Q2 2017 as a result of the U.S. tax reform.

For the 6 months ended June 30, 2018, we generated $87.4 million in adjusted distributable cash compared with $47.1 million generated in the same period of 2017. We paid distributions and dividends of $5.2 million, resulting in a payout ratio of 6% compared to a payout ratio of 10% in the same period of 2017. On a trailing 4-quarter basis, the payout ratio was 7.5%. Our approach to distributions continues to be to maintain a conservative payout ratio to provide returns for unitholders, while preserving capacity to act on growth opportunities.

At the end of the quarter, we had total debt net of cash of $174.9 million compared to $214.9 million at the end of Q1 2018 and $219.1 million at December 31, 2017. We continue to have a very strong balance sheet, with very conservative leverage of approximately 1.1x adjusted EBITDA. When considering our cash resources, combined with our credit facility, we continue to have over $400 million of dry powder available to execute on our growth strategy.

As you've heard this morning, the first half of 2018 demonstrated our ability to achieve meaningful growth in the face of challenges in the market. Looking into the rest of the year, constraints on technician capacity will continue to be an issue. The initial response to our enhanced benefit program has been positive, and we expect that this, along with our other recruitment and retention efforts, will have a positive impact on our technician capacity over time. While it's early in Q3, the challenges of technician capacity constraints, compounded by the vacation season, continue to have a meaningful impact on our sales performance. With tight labor markets, combined with a prolonged period of a strong collision market, we continue to experience a shortage of technicians. As a result, while demand for our services continues to be strong and our backlog of unprocessed repair work has grown, our third quarter same-store sales growth is likely to be lower than we achieved in the second quarter. While we have implemented many recruitment and retention programs that we believe over time will enable us to overcome this challenge, these programs will take time to mature.

I'd now like to make a comment on tariffs. While the trade dispute continues to develop and setting aside any broad impact on the economy, based on currently available information and announced tariffs, there should be minimal direct impact, if any, on our business. Not many of our parts and materials requirements are subject to tariffs announced thus far. Also, should the parts that we use in collision repair be subject to new tariffs announced in the future, for the most part, we are protected with pass-through pricing to our customers on parts.

In closing, despite our technician capacity challenges, we continue to be very well-positioned to take advantage of the growth and market share gains opportunities in our industry. Industry dynamics continue to drive industry consolidation that is favorable to our business model. Acquisition opportunities continue to be strong throughout our network, and we expect to continue to convert these opportunities into new locations. As noted earlier, our corporate development team continues to have a healthy pipeline of targets, and we remain confident that we will achieve our long-term growth goal. And as always, operational excellence remains central to our business model, and with our WOW Operating Way, we will continue to work to drive excellence in customer satisfaction and repair cycle times to ensure the continued support of our insurance partners.

With that, I would now like to open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Steve Hansen from Raymond James.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [2]

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Do you guys have a sense for how the rest of the industry is reacting to the technician shortage? My question really stems from how your newer enhanced plan might compare to other plans that are also being implemented in the industry and whether that's -- you're seeing any direct competitive response?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [3]

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We haven't had the intelligence of any direct competitive response, but intuitively, we would believe that our competitors are having to deal with this issue as desperately and as challenged circumstances as we are. I think, Steve, I think your firm recently did a study in the collision repair industry that I think confirmed that about 35% of respondents believe that the technician issue was more pronounced this year than it was a year ago, if I'm not mistaken. So I think everybody's feeling the same pain. As we've indicated, early response to our enhanced benefits has been positive, but it is going to take time to have that translate into both increased recruitment opportunities, translating it into a technician count growth as well as sustainable improved retention in performance.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [4]

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Okay, fair enough. Maybe just a quick one on the M&A side. You described the M&A pipeline as being healthy with the corp dev team. Maybe just give us a bit of a -- more context if you could and perhaps describe the importance of adding some new entry into Wisconsin and Alabama.

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [5]

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The -- I'd say that the entries or the entrances into Wisconsin and Alabama are really an expansion of existing -- some of our existing markets, namely the -- in the case of Wisconsin, the Chicagoland market. In the case of Alabama, the -- are Atlanta, Georgia and surrounding area markets. Those -- the Wisconsin market will be managed by our regional and market management teams out of the Chicagoland area, and our entrance into Alabama will be -- the oversight for that new -- those new businesses will be out of our Atlanta, Georgia operations. They do give us an extra 2 states so and additional markets from which we believe that we can continue to grow and expand and build critical mass around. But they were -- I guess they made sense, even with single or small acquisitions to enter new markets because of the adjacent regional concentration that we had in those adjacent centers.

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Operator [6]

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Our next question comes from the line of Chris Murray from AltaCorp Capital.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research & Senior Analyst [7]

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Just looking at the cost side of things and just maybe wanting to make sure I'm not misinterpreting this. I mean, margins, sequentially, sort of flattish, but just wondering how you see operating costs evolving further as we move through the year. Do you feel that you might be seeing some additional pressure on cost? Just -- I'm looking at -- because we're trying to -- I guess what I'm trying to figure out is sort of the shift between operating expenses and some of your other cost of sales metrics. Because you have had Assured in the mix for a while, but it seems to be twisting a little bit more than it has been for the last few quarters. I'm just trying to get a feel for how this is going to play out.

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [8]

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Yes, I would I guess start by saying that in Q2, we -- although the overall consolidated EBITDA margins are, I think you used the word flattish, although they are not that much changed, we do have the added expense burden of the employee -- the enhanced employee benefit that, as you may recall, we called out in last quarterly call was having an impact of about 30 basis points and we again called it out this year in our call script as well as in our MD&A. So we have had that additional expense burden. And the opportunity to enhance margins is really dependent upon how -- what our same-store sales growth is. If we have -- the lower the same-store sales growth, the less opportunity we have to absorb what our normal typical year-over-year expense increase is. We granted wage increases to our employees. We got expense increases in our rent and occupancy cost as well as many of our other expenses, and the only way we covered those incremental expenses is with same-store sales growth. And the more same-store sales growth we get, not only do we get to cover those increased year-over-year expenses, but we get additional operating leverage on them. So I would say that the guidance or the outlook for the OpEx ratio is mostly related to same-store sales growth performance.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research & Senior Analyst [9]

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Okay. And I mean, are you seeing in -- I mean you talked a little bit about parts and the fact that parts are generally protected on the inflation side, but I mean, are you seeing other inflationary pressures that make you think that you may not be able to offset them because of the same-store sales slowdown?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [10]

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Again, it depends on -- I would say that in our operating expenses, other than the enhanced employee benefits cost, which we've talked about, most of the other expense increases are typical year-over-year increases that would be typical and normally, irrespective of collision industry conditions and irrespective of labor force conditions. I think we probably maybe have a little more wage pressure on our indirect labor than we -- given the tight labor market, but our rent increases in 2018 are not any different than we would've experienced in 2017 and in prior years.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research & Senior Analyst [11]

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Okay, fair enough. And then 1 additional question for me. Just -- and this is more of a conceptual question. But thinking about -- you talked about some of the volatility in your earnings related to just currency and translation of currencies. I guess, if -- just looking at where the spot rate is today, I mean we're probably going to go into Q3, Q4. You spent the first part of the year driving revenue year-over-year down with FX changes and the back half will probably reverse a lot of that. Any thoughts, given your relative exposure to the U.S., to start reporting in U.S. dollars just to take some of that volatility out?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [12]

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We -- as I think, we've had this question asked in the past and I guess our response today would be similar. Yes, we continue to evaluate it. We certainly see some advantages of reducing the volatility of currency. I guess the challenge for us and for any business is evaluating the relative merits of investing time, energy and resources in making that kind of change, relative to the inherent benefits that we might achieve. So yes, it -- I would say that it continues to be under consideration.

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Operator [13]

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Our next question comes from the line of Maggie MacDougall from Cormark Securities.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [14]

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So I noticed you guys had a really big working capital inflow in the quarter, which really boosted your free cash flow number and that, that's partially due to lower tax installment payments in the U.S. following tax reform. Was the tax reform portion a significant portion of the change in working capital? And also, is that sort of a one-time occurrence or is it something we should think about repeating again in the future?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [15]

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Yes, the tax, the lower tax installments were, in this quarter, were a combination of both lower required installments but also some timing of installments as well. So -- and I can't recall whether it was split from Q2 into Q1 last year or Q2 into Q3. Pat, could it -- do you recall?

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Narendra M. Pathipati, Boyd Group Income Fund - CFO, Executive VP, Secretary & Treasurer [16]

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Q1 to Q2.

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [17]

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Q1 to Q2.

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Narendra M. Pathipati, Boyd Group Income Fund - CFO, Executive VP, Secretary & Treasurer [18]

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So we benefited from that, yes. So part of it has increased, going to continue, but a part that, as Brock commented, that won't.

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [19]

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There is another significant contributing factor to the positive working capital change this quarter, and that relates to our payroll accrual. And I think we have spoken about this in past calls. We can have, I think, upwards of $10 million swing in our payroll accrual quarter-to-quarter, depending upon whether quarter-end falls close to a payroll date or whether -- how many days accrual we have at the end of the quarter. In this particular quarter, I think we had 10 days accrual at the end of the quarter, so which means we increased our payables and that's provided a benefit to the working capital number.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [20]

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Okay, great. The other question I was wanting to know was just your pricing mechanism with regards to passing through any inflation in raw material costs. What are those like? Are they different between your insurance company payees and regular paying customers? Or is there a corridor in terms of number days lag formula? Or is it just at market?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [21]

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So first of all, let me distinguish between materials and parts, and I'll deal with materials first. We have a -- and materials are a lesser component of our overall supply requirements, but materials, we do not have pass-through pricing on. And these would be materials that we use in the body and paint repair procedures. So they would be sandpapers and body fillers and adhesives and all of the things that are used by our body and paint technicians in order to fix the car. Those materials -- generally, we charge insurance companies based upon market rates of reimbursement, and those market rates of reimbursement adjust like our labor rates periodically but not lockstep with price increases in the marketplace. So on materials, we do not have pass-through pricing. With respect to collision parts, that would include salvage parts, aftermarket parts as well as OE parts, the model today is that we generally buy those parts at a discount to list or selling price and then sell them to the insurance companies at list or selling price. Similar -- in some cases, we buy them and are allowed a margin mark-up on them but again, that translates into the same pass-through pricing capabilities. So that's the model today with respect to how virtually all insurance companies pay for parts and collision repairs. As to the component of your question related to insurance companies versus other payers, the vast, vast majority of our business, well over 90%, is paid for by insurance companies. So there's not any -- really non- -- any material or meaningful component of other payers that would have a different model. And quite honestly, if we do customer pay work today, we have that same pass-through pricing policy in place. So really applies to all of our sales.

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Operator [22]

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Our next question comes from the line of Mark Petrie from CIBC.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [23]

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So I just wanted to come back to the same-store sales just for a second, and outside of the constraint of technician availability and vacation scheduling, wonder if you could just walk us through some of the other drivers of same-store sales, particularly in the context of some of the factors that depressed same-store sales in Q3 last year> So any impact from weather, impact from any customer losses or gains. And I'm assuming we're going to have the same number of business days in the quarter for Q3 and Q4 as well, I guess?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [24]

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Yes, there is the same number of days in Q3. I think there's an additional day this year in Q4. Tim is just checking right now, but Q3 of 2018 will have the same number of production days as Q3 2017 and when we're making statements like that, we're really making statements relative to the U.S. collision business where the majority of our business is. Sometimes in Canada, we have a change in production days because of the greater number of vacations but we sort of revert to the vast majority of our collision business, which is in the U.S. You're correct. In Q3 of last year, we had the driver -- a negative influence on our same-store sales growth were the storms, the hurricanes that primarily impacted us in some -- to some degree in August but to a larger degree in September. We do not have those -- we don't anticipate -- I guess, the storm season isn't yet upon us or even at the heart of it, but we don't anticipate having those same negative drivers on same-store sales growth this year. The reason for our guidance, and I might as well address this head-on, is that we had a disappointing July where, notwithstanding some positive outcomes of our recruitment and retention efforts, we just didn't get the throughput in productivity, likely because in part due to vacations that maybe in a tighter market that we had last year, are having more of an influence this year. So we had a disappointing July that essentially neutralized some of the advantage that we might have saw going into the quarter as a result of the weak comps from the storm. So that was -- that's essentially the reason for the guidance that we made.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [25]

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Okay, I appreciate that color. And I guess related to that, my other question was just around sort of the operational efficiency of the shops. And I know the WOW Operating Way is fully embedded into your network now and part of the culture and all that kind of thing, but any comment on the success of that program? And then, I guess, any material opportunities or programs ahead of you to sort of accelerate efficiency?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [26]

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Certainly. I'll deal with the WOW Operating Way first. We continue to see improvement in our execution of the WOW Operating Way. And that is primarily translating into improved customer satisfaction scores and improved length of rental relative to the market. It's difficult to measure the impact of the WOW Operating Way on our production efficiency because we don't have the opportunity to truly know where we would be without the WOW Operating Way, operating in light of the current challenges and constraints in the marketplace. So said another way, without the benefits of the WOW Operating Way, we might be -- would likely be in much worse position than we are today relative to the productive throughput of our business. Continued -- second part of your question, continued efficiency gains, I mean, it depends on how one defines efficiency. In terms of being able to increase the productive capacity of our technical workforce and our locations, the key to that is really to add to our technician count and we're working diligently every day with extreme level of focus, a heightened level of focus with our entire operating leadership on doing so. So the way we're going to take advantage of the great opportunity that we have, as commented in our call script, our level of unprocessed work has increased because we aren't able to process the work due to a technician constraint. So we just have an abundance of opportunity to the extent that we can add technician capacity to our business.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [27]

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Okay. And then, I guess, just my last question just on the whole topic of consolidation. I know you said that the pipeline is healthy. But wonder if you could just sort of give us a relative position of the market today in terms of competition for deals versus maybe a year ago. And are you seeing any different dynamic in terms of availability or multiple for single locations versus multi-location businesses?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [28]

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I would say -- as to the first part of your question, I would say no real difference in terms of the competitive marketplace versus last year. Of our -- maybe a slightly heightened competitiveness, as last year, one of the other big four really wasn't pursuing growth. They now seem to be getting back into the growth mode. So I would say maybe a slightly more competitive but I -- at the same time, I would say that our pipeline and our opportunities has not lessened because of that. And maybe that's because there is more of availability of sellers in the marketplace. I think the most meaningful thing that I might suggest we can comment on relative to that pipeline is that we do see a lot of growing MSOs, regional MSOs, in the marketplace that have a growing number of locations. And we think that, that represents an opportunity for some not Assured-sized acquisitions, but certainly larger than a 5 to -- a 5-location acquisition. There are a lot of regional players out there that now have 10 to 15 locations and some 15 to 20 locations. So that might be maybe one of the more significant differences in the composition of the pipeline for acquisition candidates.

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Operator [29]

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Our next question comes from the line of Michael Glen from Macquarie.

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Michael W. Glen, Macquarie Research - Analyst [30]

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Thanks for the clarification on the same-store sales growth outlook. Can you guys further maybe just give some commentary surrounding the trends that you're seeing in Canada versus the U.S.? I know you don't break out same-store sales growth between either market anymore, but maybe just -- is there any significant differences you're seeing in the 2 markets?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [31]

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I would say that in the Canadian marketplace today, and I'll maybe just offer this generally, we see very strong conditions in the East. We have seen some weaker conditions in the West this year that are likely related to weather. But we also, as we've shared with you in the past, if we look at the 24 states that we now operate in, we do see variability in demand across those states as well. There are no structural differences between Canada and the U.S. In the Eastern market, in the Assured markets, we have an abundance of -- we have a high level of demand for our services and opportunity for sales. We -- we're bouncing up against technician capacity constraints there as well.

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Michael W. Glen, Macquarie Research - Analyst [32]

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Okay, and then just M&A. Can you give an update? A few months ago, you entered the Texas market. You bought a -- what appeared to be a nice 3-store chain in and around the Dallas market. Are you seeing any more opportunities in Texas? Is that a market that you want to put some more capital towards?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [33]

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It is a market that we want to put more capital towards, and yes, the pipeline that we spoke of would have opportunities that are located in the Texas market.

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Michael W. Glen, Macquarie Research - Analyst [34]

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Is it a more competitive market than other markets that you work in? Or is it equivalent?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [35]

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I'd say that we're seeing it to be about the same in terms of our ability to put candidates in our pipeline. As you pointed out, we haven't, other than the initial acquisition, we haven't completed any others yet. So time will tell but certainly, we have a good amount of candidates in the pipeline in that marketplace, and we would hope to be able to expand in that marketplace in the not-too-distant future.

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Operator [36]

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Our next question comes from the line of Jonathan Lamers from BMO Capital Markets.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [37]

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Brock, in your prepared remarks, you highlighted that you were starting to see some initial signs of progress from the enhanced benefit programs. Could you -- is there any -- are there any metrics you can point to? Or can you elaborate on maybe how that success is improving your labor capacity?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [38]

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Yes, I can elaborate. We talked about the initial reaction, I think, to our enhanced benefits has been positive. We actually conducted a study of -- we did a study, a survey, of our operating leadership asking them for their reactions. So this would be our market managers and general managers and the response -- and we believe that those -- the sentiments of that group is very important because they're the ones that are ultimately going to be driving the hiring process to a large degree. So the response from that survey was very, very positive in terms of their reaction to the changes. We also get regular reports from our recruiting team, who also can provide insight into the reaction of candidates that they're talking to in the marketplace. So it's not translating yet into increases -- in a significant increase in our hiring hit rate or a meaningful reduction in our turnover. But we believe that it will over time. So the comments that we made in the script were more related to the reaction and sentiments of the people that are key to the process and not necessarily a results-based statement.

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Narendra M. Pathipati, Boyd Group Income Fund - CFO, Executive VP, Secretary & Treasurer [39]

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So Jonathan, initiatives like these, as you know, take time to bear fruit so that's why we are optimistic about what we have done.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [40]

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Okay. And your comment about seeing an increase in unprocessed work. Would that be versus this time last year? And just a related question, are you seeing a net outflow or a net inflow of labor, like on a same-store sales basis?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [41]

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We have a net inflow of labor. We've increased our same-store technician count. It's more difficult to measure the productivity of the technician count change and if you -- as we may have discussed in past calls, the productivity range of technicians in our industry ranges quite considerably. And so you actually could lose a technician and have to hire 2 to make up for that technician's productivity. It's -- we're working on trying to put metrics in place that will help better enable us to measure technician capacity versus technician body count. But from a body count perspective, we have increased our technician count on a same-store basis over this time last year and over the beginning of the year.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [42]

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Okay. And on the operating expenses, I believe on the last call, you provided some guidance that the enhanced benefit programs would impact operating expenses by about 30 basis points of sales for the full year, but then in Q2, the impact should be a bit more muted as the sign up rates were just getting going. And we saw a 30 basis point impact this quarter, so I -- like my question is, would you revise that guidance for the full year at all? And like what happened in Q2 that -- like were the expenses a little higher than you were expecting?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [43]

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Yes, I reviewed last quarter's call script, so I was anticipating this question. We didn't think we would have a full 30 basis point hit in Q2 because of the time that it takes to mature the 401(k) enrollment and because of the timing of certain vacation and holiday pay. We misread that -- how quickly that, that impact came. We would not change our guidance as to the 30 basis points. It still could change, but we have no information today that would suggest it will be different than the 30 basis points but it came faster than we had anticipated, when we made the remarks that we thought there would be a ramp-up in Q2, back in May.

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Narendra M. Pathipati, Boyd Group Income Fund - CFO, Executive VP, Secretary & Treasurer [44]

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So Jonathan, that 30 basis points is going to be affecting 3 quarters because we made that effective April 1, not the whole year. So certainly, it affected the second quarter. Going forward, certainly Q3 and Q4.

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [45]

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And on a full year basis going forward, we expect it to be expect 30 basis points. It won't -- it shouldn't be 30 basis points when you consider that we didn't have it in Q1 of this year. But it certainly was a full 30 basis points in Q2, which was -- which came faster than we had expected.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [46]

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Right. So just to be clear, 30 basis points on a full annualized run-rate basis, not 30 basis points for calendar 2018?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [47]

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Correct.

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Narendra M. Pathipati, Boyd Group Income Fund - CFO, Executive VP, Secretary & Treasurer [48]

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Correct.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [49]

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Yes. Okay, and was there anything else unusual in the operating expenses this quarter?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [50]

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Not really, no.

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Operator [51]

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And our next question comes from the line of Bret Jordan from Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [52]

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On the backlog, could you maybe quantify the backlog so we can get a feeling for year-over-year change? And I guess, if you can put it in perspective, how is the current backlog relative to historic levels? Are we at an all-time high?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [53]

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We won't quantify it because we believe that to be competitive. The backlog is absolutely higher than it was a year ago. It is close to an all-time high. We may occasionally in the heart of winter -- the heart of a winter that is a severe winter, we may have hit the level of unprocessed work in process that we ended the quarter and then the month of July with, but it is certainly at consistent, sustainable, elevated levels that really we haven't seen in our business, looking back several years.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [54]

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And when we think about the labor shortage, is this in -- from an industry-wide standpoint, is this just a lack of participation in the collision industry? Are people moving to other careers? Or is the demand just increasing at a point with which you can't bring an -- the existing population is not enough to meet it?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [55]

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I think it's a combination of industry-specific issues combined -- industry-specific labor challenges combined with a multiyear period of a strong collision market. Everybody has work and everybody is being very competitive and aggressive with their labor, but I also think that it is now being compounded by the fact that the U.S. labor markets are so extremely tight. So we probably have -- it's probably translating into some leakage out of the industry. There are just lots of -- there are lots of -- plentiful opportunities for labor to make choices. And when things don't go exactly their way, they're apt to make those choices. So I think it's a combination of both industry-specific matters combined with the broader economy-related labor matters.

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Operator [56]

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And our last question comes from the line of Ben Jekic from GMP Securities.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [57]

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Just 1 question, most of them obviously have been asked and answered. On gross margin, you mentioned, Brock, that Assured had higher sourcing -- sales sourcing costs and there was an offsetting impact of I think higher utilization. Can you elaborate on the trends in those 2 factors and what can we expect going forward?

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [58]

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Those aren't really trends. Those are structural in the way the Assured business has grown over the last several years, and we actually talked about that when we made the acquisition. They have done an extremely good job of generating demand for their services and, in part, the way they've done that is through sales sourcing cost. What -- we don't plan to get into what the elements of those are but we know that they use a dealer service center intake center. We know that they have very strong relationships with their insurance clients that include various elements, performance pricing. So they've got lower gross margins but the resultant high level of sales and capacity utilization of their footprints is leveraging their operating expenses to a greater degree than the rest of our business would be on an aggregated basis. So they're getting better leverage on their rent. They're getting better leverage on some of their utility costs and all of the other operating -- many of the other operating expenses associated with the collision repair business.

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Operator [59]

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And there are no further questions at this time. I will turn the call back over to the presenters for final remarks.

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Brock W. Bulbuck, Boyd Group Income Fund - CEO & Non-Independent Trustee [60]

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Thank you, operator, and thank you all once again for joining our call today. And we look forward to reporting our Q3 results in November. Thanks again. Have a great day.

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Narendra M. Pathipati, Boyd Group Income Fund - CFO, Executive VP, Secretary & Treasurer [61]

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Thanks, everyone.

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Operator [62]

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This concludes today's conference call. You may now disconnect.