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Edited Transcript of CACC earnings conference call or presentation 30-Jul-19 9:00pm GMT

Q2 2019 Credit Acceptance Corp Earnings Call

SOUTHFIELD Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Credit Acceptance Corp earnings conference call or presentation Tuesday, July 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brett A. Roberts

Credit Acceptance Corporation - CEO & Director

* Douglas W. Busk

Credit Acceptance Corporation - Senior VP & Treasurer

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Conference Call Participants

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* David Michael Scharf

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Dominick Joseph Gabriele

Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst

* Giuliano Jude Anderes-Bologna

BTIG, LLC, Research Division - Director & Financials Analyst

* Hugh Michael Miller

The Buckingham Research Group Incorporated - Director

* Moshe Ari Orenbuch

Crédit Suisse AG, Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Credit Acceptance Corporation's Second Quarter 2019 Earnings Call. Today's call is being recorded. A webcast and transcript of today's earnings call will be made available on the Credit Acceptance's website.

 

 At this time, I would like to turn the call over to Credit Acceptance's Senior Vice President and Treasurer, Doug Busk.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [2]

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Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation's Second Quarter 2019 Earnings Call.

 

 As you read our news release posted on the Investor Relations section of our website at creditacceptance.com and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of federal securities law. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in the cautionary statement regarding forward-looking information included in the news release. Consider all forward-looking statements in light of those and other risks and uncertainties.

 

 Additionally, I should mention that to comply with the SEC's Regulation G, please refer to the financial results section of our news release, which provides tables showing how non-GAAP measures reconcile to GAAP measures.

 

 At this time, Brett Roberts, our Chief Executive Officer; Ken Booth, our Chief Financial Officer; and I will take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Moshe Orenbuch of Crédit Suisse.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [2]

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So Doug, we noticed that you added some expanded discussion of CECL in here, and you talked about -- that you're going to elect CECL as opposed to fair value. Could you talk a little bit about the thought process that went into that?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [3]

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Basically, we were faced with 2 accounting alternatives that, in our opinion, did a poor job reflecting the underlying economics of our loans that our current method does. We elected CECL for a few different reasons. One of which is because we wanted to minimize the volatility in our financial results that would occur under fair value in a period of changing interest rates. That volatility could have a material impact on our financial results and financial conditions. So CECL has less volatility relative to market-based interest rates, so that was one consideration. Additionally, we've modified our revolving credit facilities, so that the amount we're going to be able to borrow and our ability to comply with the covenants is going to be unaffected. We expect to be able to do the same with our term ABS financing. And then the final thing is, as we said in the Q, we believe we're going to be able to explain to shareholders how CECL diverges from economic reality. So really, that was the thought process.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [4]

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So I guess, I mean, if you've done that work, can you share with us what -- that your results, I assume that means you're probably running in parallel. Can you share with us what the results would look like under CECL?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [5]

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We're not prepared to quantify the impact of CECL at this point. We expect to provide incremental disclosure in Q3 of this year.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [6]

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Got you. And I mean we noted that you hadn't done securitizations since back in February. Is -- was that the -- you mentioned that you'll be able to in the future kind of restructure them. Is that -- what should we expect from a funding standpoint?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [7]

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I mean the reason we didn't do a securitization this quarter really doesn't have anything to do with CECL. We have already done a securitization in the senior note issuance this year, so we've accomplished quite a bit from a capital-raising perspective. We don't think that the adoption of CECL is going to have a material impact on the structure of the securitizations.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [8]

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Okay. Then just lastly, the commitment's footnote does mention a New York State AG subpoena. That was issued, I guess, what, 2.5 months ago. I mean is there anything that you can kind of add to what's in there?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [9]

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Nothing really other than what's disclosed in the Q.

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Operator [10]

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Our next question comes from David Scharf of JMP Securities.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [11]

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First question, Doug, focusing on leverage. And I actually could just as well have been asking this question every quarter, but given the pullback in rates and reduced funding costs, I figured it comes more and more topical. Obviously, your ROEs are quite high. You're certainly under no pressure to expand them. But at 2x debt-to-equity, certainly in comparison to some other public auto lenders and subprime lenders, you're comparatively undervalued. Is there any thought to levering up beyond sort of the current range that we've been seeing recently of about 2x?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [12]

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I mean the range over the last 5 years or so has been between 2 and 2.5:1. So we're at the low end of the historical range. I mean the reason we operate with the leverage that we do is we want to be able to produce strong results and originate a reasonable amount of business if the capital markets are unavailable to us for an extended period of time. So that's the rationale behind employing the leverage that we do.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [13]

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Yes. Okay. So we should interpret that as you're certainly not seeing anything materially different in the business fundamentals that would lead you to lever up further. One question, just on pricing directionally. When I just do a simple average calculation, we just take average beginning and ending balances for the quarter, divided into the finance charges, come up with an average yield, I think, 21.8, which is the same as Q1. Obviously, a lot goes into that IRR calculation, forecasted losses as well. But at a high level, is it fair to assume that your average pricing on new originations hasn't changed materially over the last 3 months?

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Unidentified Company Representative, [14]

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Yes, nothing's changed from our pricing perspective.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [15]

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Okay. Got it. And then last question, following up on Moshe. This is not meant to be a got-you question. I think it may just be pure coincidence. In the disclosure, the New York State subpoena is May 7, and the New York State DFS actually dropped their investigation just 2 weeks before that. CFPB had another CID just a day -- a couple of days before that. Mississippi decided to pursue a suit. Looked like there were 4 actions within just 15 days. Is that pure coincidence? Or is there a sense that there is maybe an acceleration of the activity in other states that may come to the surface?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [16]

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No. We don't have any insight into when and why those things get started. It's coincidence or it's not, we don't have any insight into that.

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Operator [17]

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Our next question comes from Hugh Miller of Buckingham.

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Hugh Michael Miller, The Buckingham Research Group Incorporated - Director [18]

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So was taking a look just obviously at the loan volume per dealer being down maybe about at 9% year-over-year. Seems like you guys were kind of increasing the advance rates from being a little bit -- or getting more evident status of your business. What's the feedback that you're hearing from dealers just about kind of their sensitivity around advance rates and what they may need to see to maybe do a bit more business?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [19]

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I don't think we get much insight from dealers on the pricing. The change in volume per dealer, it's big for us. But for an individual dealer, it's not enough that they would notice. We've had periods before where volume per dealer has come back down, and we're in one of those periods where it's tough right now. The positive for the quarter was we were able to grow the active dealer base. So as long as we can continue to do that, volume per dealer at some point will level out.

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Hugh Michael Miller, The Buckingham Research Group Incorporated - Director [20]

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And is there a strategy -- I know you guys have done some hiring activity just to kind of incentivize the sales force to try and drum up more business with the dealers, or is that just -- is that not as much of a focus?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [21]

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We've expanded the sales force there. They have lots of incentives to grow the business in their markets. Many of them are having success. We were flat for the quarter, so we had -- and as you might expect, roughly half the markets were growing, and half the markets were doing the opposite. And the net effect was not much growth for the quarter, but I don't think it has anything to do with sales force incentives.

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Hugh Michael Miller, The Buckingham Research Group Incorporated - Director [22]

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Got it. That's helpful. And then just as we look at the allowance for credit losses, we track that relative to the gross loan portfolio. It has been trending a bit lower. But as we think about that in the context of seeing a mix shift towards more purchased loans, which don't offer some of the dealer participation protection. How should we think about that ratio and the relationship there? And at some point, is there kind of a minimum threshold on that allowance relative to the loans that we should consider? Or how should that trend, I guess?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [23]

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The way we think about it, and I guess the way we would recommend that others think about it is the focus on the adjusted results. And then you don't have to worry about the allowance ratios or why the provision went up this quarter. You can adjust the results, really simplify the financials in light of focus on what's important.

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Hugh Michael Miller, The Buckingham Research Group Incorporated - Director [24]

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Got you. Okay. And then just last from me, as we think about just the trend in the purchased loans and the yields kind of maybe dipping below the 20% threshold, can you just talk a bit about how you think about issuing or putting capital to work in purchased loans relative to maybe considering more of a stock buyback given how strong your ROE is?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [25]

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I mean we think that -- I mean as we've said many times, we prefer the portfolio program because of the alignment of interest and the way it shares the risk on the loans with the dealers. Having said that, we're generally in a position where we have more capital that we can vest in the portfolio program or returns that we're happy with. So we think investing in purchased loans at returns that we're happy with is a better use of our capital than buybacks.

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Operator [26]

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Our next question comes from Giuliano Bologna of BTIG.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [27]

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What I was trying to figure out back into some of the numbers is that it looks like the average loan size on the purchase program seems to increase significantly kind of in the high teens sequentially. Is there any change there? Or is it -- or is the term higher on some of the purchased loans in the quarter that's maybe driving that? Just trying to figure out what the driver might be there.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [28]

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You see a correlation between term and sizable loan, so that's probably the case. Just the change in mix. We're not writing any loans that we haven't written before. We're just writing the different mix than we did in the prior period.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [29]

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And is it -- do you know if there's any sense of the duration or the duration extended more so on the purchased loan side? Because that may explain it if you're -- if you increased a few months on the purchase side versus the dealer program.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [30]

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I don't think there's been a material difference.

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Operator [31]

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(Operator Instructions) Our next question comes from Dominick Gabriele of Oppenheimer.

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Dominick Joseph Gabriele, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [32]

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When we just think about the year-over-year average gross loan receivables and the movement there, can you just walk us, everybody, through again how your unit volume and the active dealer growth all translate eventually to the gross loan receivables?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [33]

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Over a long period of time, the gross receivable will grow at the same rate as your origination growth. But obviously, there's a big lag between one and the other. So we were flat this quarter from a unit respective. We had some growth from a dollar perspective. If that growth is consistent, over the next 2 years, your loan receivable growth will decelerate until it reaches that point. So we're -- the balance sheet is growing based on prior periods' origination growth. And because the origination growth was slower this quarter and last quarter, we would expect the balance sheet growth to decelerate.

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Dominick Joseph Gabriele, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [34]

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And then when we think about the G&A expense, they seem a little picky. I'm just looking at the G&A expense, and it's a bit elevated from what we've seen in the last few quarters. Is there something going on there? Or should we think about a higher elevated run rate going forward than what we've seen in the last few quarters? Or is this kind of just a one-off, something was in there?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [35]

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I think it's impossible to tell. I mean we disclosed the reasons for the elevated level of G&A in the press release and the 10-Q. But I'm not going to make a prediction as to what level that expense will be at in future periods.

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Dominick Joseph Gabriele, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [36]

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Okay. Great. And then you have seen the collections, actually, on both dealer and purchased loans for the 2018, '19 vintages come in better this quarter than your initial estimates. Can you just talk about what you're seeing and why your expectations have risen for collections in those 2 vintages in particular?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [37]

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I think if you look at it over a long period of time, the forecasts have been pretty accurate over, I think, a 21-year period. Now we've published forecast results. You got roughly an even split between years where we've been optimistic and years we've been pessimistic. We think that we got a few more favorable results than unfavorable, but there's going to be a variance from period to period. This quarter, in total, if you look at the variance, the best number to focus on is the dollar amount of the change in the forecast during the quarter, $13 million, pretty small number. So I think a fair conclusion to draw as the forecast was pretty stable this period.

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Dominick Joseph Gabriele, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [38]

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Okay. Got it. And then can you just talk about what is -- I think this was asked slightly before. Can you just talk about what may be driving your price per unit paid, in particular, that's helping the dollar volumes over the unit volumes in a little more detail?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [39]

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You mean the dollar amount of the advance -- or the amount paid to the dealer at origination?

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Dominick Joseph Gabriele, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [40]

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Yes. Exactly.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [41]

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Again, just a mix issue, so we're not doing any loans we haven't done before. It's just the different mix we saw this quarter than last quarter.

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Operator [42]

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With no further questions in queue, I would like to turn the conference back over to Mr. Busk for any additional or closing remarks.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [43]

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We'd like to thank everyone for their support and for joining us on our conference call today. If you have any additional follow-up questions, please direct them to our Investor Relations mailbox at ir@creditacceptance.com. We look forward to talking to you again next quarter. Thank you.

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Operator [44]

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Once again, this does conclude today's conference. We thank you for your participation.