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Edited Transcript of CL1.AX earnings conference call or presentation 17-Feb-20 10:30pm GMT

Half Year 2020 Class Ltd Earnings Call

SYDNEY Mar 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Class Ltd earnings conference call or presentation Monday, February 17, 2020 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Russell

Class Limited - MD, CEO & Director

* Glenn Day

Class Limited - CFO & Company Secretary

* Glenn Poynton

Class Limited - Chief Strategy Officer

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Conference Call Participants

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* Andrew Swaffer;Taylor Collison;Analyst

* Cameron Halkett

Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst

* Ivor Ries

Morgans Financial Limited, Research Division - Senior Analyst

* Joshua Goodwill

Ord Minnett Limited, Research Division - Research Associate

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Presentation

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Operator [1]

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Thank you for standing by. And welcome to the Class Limited First Half 2020 Results Teleconference. (Operator Instructions)

I would now like to hand the conference over to Mr. Andrew Russell, CEO. Please go ahead.

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Andrew J. Russell, Class Limited - MD, CEO & Director [2]

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Good morning. Thank you for joining us for the presentation of Class Limited half year results for 2020. My name is Andrew Russell, and I'm the CEO of Class. I'm joined today by CFO, Glenn Day; Chief Strategy Officer, Glenn Poynton; and our Investor Relations Manager and Assistant Company Secretary, Ebby Carson.

Today, I'll present the following agenda: firstly, recapping on our Reimagination strategy; a summary of our half year results and strategy progress to date; some key takeaways; and then followed with some questions and answers.

Firstly, turning to recapping on our Reimagination strategy. Simply put, our Reimagination strategy is to deliver the repositioning of Class Limited as a world-class technology solutions business by focusing on 3 key areas: firstly, to ensure we keep the focus on the core with the ongoing faster feature improvement and development to ensure market share growth; secondly, grow our marketplace outside of self-managed superfunds through new products and new markets; and thirdly, to actively explore both strategic acquisitions and partnering opportunities to build our product suite and expand our marketplace.

For Class to deliver to the strategy in FY '20, we are focusing on building momentum. As announced at our FY '19 results, we are investing $12 million over the full year in new people, product and technology development. We are targeting an EBITDA margin in the underlying business at 40%, excluding acquisition and corporate advisory costs. We are also challenging ourselves to a revenue growth target of 10% for the full year. We forecast that the Reimagination investment in the business is building capability momentum in FY '20 to then reposition Class well for accelerated growth in FY '21 and beyond.

It is pleasing to note that we are already delivering on our Reimagination strategy since announcing to the business and the market in August 2019. This delivery is evidenced by, a growing market share in our existing products, Super and Portfolio. Our Class market share growth has been 1.8x system growth. The Trust MVP is currently in pilot and to be ready for full launch in FY '21. We have now acquired NowInfinity to further extend our product set around the professional services ecosystem and grow our marketplace. And we've completed our executive recruitment and have also successfully attracted new talent right across the business, in product, technology, sales, marketing and operations.

Turning to our results. In summary, the underlying business is very solid as we invest in Class this financial year. Our operating revenue is $20.5 million for the first half. Our revenue is up 8%. Partner revenue is up 19%. Our market share growth is strong at 1.8x system growth. Our market share has grown by 3.1% annualized. The EBITDA is $8.1 million for the first half. This is down 7% on the prior corresponding year. This includes the following items: $509,000 in acquisition and corporate advisory costs associated with the NowInfinity acquisition and exploring other acquisition opportunities. We would like to note as a matter of transparency, the prior corresponding period has not been restated for the impact of the new leasing standard AASB 16. Consequently, on a like-for-like basis, first half '20 EBITDA is higher to the tune of $373,000, which is now treated as depreciation.

Our investment in products is $5.51 million, which is up 25% on the prior period as we invest to deliver our Reimagination strategy. Consequently, and of course expectingly, our net PAT result is down to $3.1 million. The Board has declared a fully franked dividend of $0.025 and will be paid on March 27, 2020.

Turning to Class Super. Our data-driven approach to sales is to target areas where we are underweight in comparable market share and firms that are aligned to benefit from our current and future product strategy. As mentioned in the opening, the business -- Super business is growing 1.8x system growth, and our market share is up 3.1% on the prior comparison period. We continue to win business from both desktop and cloud-based providers. We've strategically ensured we have grown market share as well as holding our ARPU to $216. However, our CAC has increased to $213 from $176 driven by the lower gross additions given the limited growth runway in the self-managed superfund segment.

Turning to Class Portfolio and Class Trust. In Class Portfolio, we've achieved product clarity and functionality requirements in the product and sales road map. The overall growth in the period was 16% across all entity types. The uplift in account growth is due to the increased demand from existing adviser and planning firms.

In regard to our new Trust product, we are pleased with the results of both the independent external and our internal research supporting the Class Trust opportunity. We have seen positive progress on the pilot. We have as of today 935 trusts to the pilot. We expect this to grow over the next pilot period.

Our customers are enthusiastic about the product vision and the potential positive impact on automation it will deliver to their back offices. We are on track for a product launch in FY '21. We will be speaking more about the Trust product vision at our Investor Day on the 13th of March.

Turning to partner and strategic alliances. As you can see from this slide, Class is now at the center of its own ecosystem given the commercial opportunities for our partners from the Class technology platform. Class has continued its success in exploring opportunities to build our partner and alliances program to align with our Reimagination strategy. We've been particularly successful in delivering value to our partners and customers in the actuarial certificates space, and we have recently launched our partnership with Cloudoffis to provide market-leading audit and work paper solutions.

Our Philo Capital investment is meeting our expectations and we believe an innovative solution in the growing market, MDA marketplace.

A key pillar of our strategy revolves around partnering and acquiring capability. Our acquisition of NowInfinity is an example of the potential value to Class by partnering then acquiring.

Turning to NowInfinity. It was an exciting milestone for the Class Reimagination strategy to announce the acquisition of NowInfinity. This is the first acquisition by Class Limited. NowInfinity was acquired for an enterprise value of $25 million, partly funded by $10 million issued Class shares and a new $10 million debt facility. There is a staged cash payment of up to $5 million based on successful integration hurdles.

The NowInfinity business was launched in 2012 to help reduce back-office pain points for accountants by technology automation. They are now the market leader in their marketplace. The NowInfinity suite of products includes documents, Corporate Messenger, Trust Register and Super Comply. We would like to provide guidance that the NowInfinity product revenue for FY '20 will be circa $7 million. We believe the NowInfinity acquisition will be highly complementary to the Class offering. It presents us with great strategic optionality with their impressive fintech platform. We will now realize the opportunity to leverage Class capability, to grow revenue and accelerate the business to scale.

I'd like to leave you now with some key takeaways. I'd like to conclude with a number of key takeaways to summarize the first 6 months' results following embarking on our Reimagination strategy.

The first half results are solid in line with our guidance, and as importantly, we are showing results that we are delivering through our Reimagination strategy. The Trust product opportunity is being well received and validated as an exciting opportunity to progress. The Trust MVP is currently in pilot to be ready for full launch in FY '21.

Our investment in core product development and technical capabilities increased by 25% PCP to $5.5 million in the first half. The setting of the Class platform for growth is well underway and the continuing investment in capability to drive accelerated results in FY '21 and beyond.

We will continue to target a 40% EBITDA margin in the underlying Class business, excluding acquisition and corporate advisory costs. We are now targeting 14% revenue growth for FY '20 including NowInfinity. And of course, we will continue to execute to our Reimagination strategy through a combination of build, acquire and partner.

Thank you for your ongoing support and interest in Class. The future looks very exciting as our Reimagination vision comes alive and delivers results. I will now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Cameron Halkett with Wilsons Advisory.

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Cameron Halkett, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [2]

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If I can quickly dig into the revised guidance that now includes NowInfinity. The 14%, if I can clarify that. The incremental uplift, is that largely your expected contribution from NowInfinity? Are you still targeting the 10% in the core and then the incremental being NowInfinity?

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Glenn Day, Class Limited - CFO & Company Secretary [3]

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So as we provided guidance, you've got an uplift there from the NowInfinity business, it's expected to be around $7 million for the financial year. We have made -- this business, we've made the decision to prioritize our NowInfinity opportunity ahead of other partner opportunities, so that is a big factor in contributing to the result.

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Cameron Halkett, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [4]

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Okay, sure. So if it's going to be $7 million in revenues on a pro forma basis, is there any particular seasonality of NowInfinity? Is it more one half weighted than second half?

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Andrew J. Russell, Class Limited - MD, CEO & Director [5]

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We don't really have any real guidance on that. It's pretty steady throughout the full 12 months throughout from what I've seen so far.

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Cameron Halkett, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [6]

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Okay, sure. And then finally, next one will be on EBITDA. So 40% target for the underlying excluding acquisition. Is the underlying, just effectively, the broader Class business? Or is that specific to a single segment being SMSF and Portfolio? Can you just provide details on that?

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Andrew J. Russell, Class Limited - MD, CEO & Director [7]

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It's the core Class business.

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Operator [8]

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Our next question will come from Ivor Ries with Morgans Financial Limited.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [9]

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I just want to just get some clarity again just on that EBITDA guidance. When you say you're targeting the 40% margin in the core business, we should expect, including NowInfinity, the EBITDA margin on that will be lower. So at the group level, consolidating NowInfinity, the full year EBITDA margin won't get to 40%?

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Andrew J. Russell, Class Limited - MD, CEO & Director [10]

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That's correct. Including the acquisition advisory costs, and NowInfinity will be lower than 40%.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [11]

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Yes. And at a statutory level run, you're incorporating 6 months of NowInfinity, so about $3.5 million of revenues?

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Andrew J. Russell, Class Limited - MD, CEO & Director [12]

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5 months.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [13]

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Sorry?

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Andrew J. Russell, Class Limited - MD, CEO & Director [14]

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5, 5 months.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [15]

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Just 5 months? Okay.

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Andrew J. Russell, Class Limited - MD, CEO & Director [16]

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5 months.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [17]

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All right. Okay. And just in the partner revenues, it's good growth there. I just wondered if you could give us some color on which parts of the partner universe are delivering most of the growth.

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Andrew J. Russell, Class Limited - MD, CEO & Director [18]

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It's been in the actuarial certificate revenue that's getting most of the growth at this point. And as Glenn alluded to before, we've had to be ruthless in terms of our prioritization given the size of the business. So some of the initiatives that we did have on the runway for this first half had to be delayed so the team could focus on the NowInfinity acquisition.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [19]

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Yes. Yes, absolutely. But just given where we are with actuarial certificates, that's -- seeing that's the faster-growing area, would -- given -- I would assume that the level of penetration of your existing SMSF client base is quite low in this space. There's still a long runway in the certificates partner revenue space?

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Andrew J. Russell, Class Limited - MD, CEO & Director [20]

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I think that the revenue line looks good from our perspective, but we've also introduced, as I've alluded to, the Cloudoffis in the work paper audit space. So we're expecting that, that will start to contribute a healthy revenue line over the next year or so.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [21]

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Right. Right. And -- okay. And if I can just ask one more question just relating to the Class Super business. Looks like -- I'm just extrapolating there. It looks like the AMP runoff is now almost complete.

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Andrew J. Russell, Class Limited - MD, CEO & Director [22]

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I think it's -- what, we've got 4,000 funds on Class, thereabouts.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [23]

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So there's still 4,000 left?

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Andrew J. Russell, Class Limited - MD, CEO & Director [24]

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Yes, that's right. I think there's a note on the presentation on Page 6 in regards to the hold of the AMP in the slowing runoff.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [25]

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Right. They're running off very slowly now. I mean, only 400 in the last quarter. Is there any reason why the runoff has slowed down?

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Andrew J. Russell, Class Limited - MD, CEO & Director [26]

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I don't have any insight apart from there's a lot of things going with AMP, obviously.

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Operator [27]

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Our next question will come from Jules Cooper with Ord.

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Joshua Goodwill, Ord Minnett Limited, Research Division - Research Associate [28]

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It's actually Josh Goodwill here on for Jules. Just one question for me. With the Class Trust product due to become available in FY '21, is it possible to get some commentary around what revenue contribution we could expect from the product?

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Andrew J. Russell, Class Limited - MD, CEO & Director [29]

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We are not -- we don't have that commentary as yet. We'll certainly disclose a fair bit more at the Investor Day on the 13th.

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Glenn Day, Class Limited - CFO & Company Secretary [30]

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Not expecting a major contribution towards this financial year. There is a disclosure in the account that if you're looking at that revenue breakup, only a minor amount.

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Operator [31]

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(Operator Instructions) Our next question is a follow-up from Cameron Halkett with Wilsons Advisory.

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Cameron Halkett, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [32]

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Just a quick follow-up actually on the sales team. You mentioned a couple of hires that's been made on the management teams. If I can check, where are you on repositioning the sales team currently? And what's also happening to the level of marketing spend? I can see year-on-year, that was a bit lower than we had initially expected.

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Andrew J. Russell, Class Limited - MD, CEO & Director [33]

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So we've hired James Panaretos. He's joined the business this year, and he's well underway of getting his feet under the desk and will be setting the business up effectively, moving from a 2-product line to a multiproduct business with the launch of Class and now the purchase of NowInfinity. In terms of the marketing, in investment over the year, Jason Wilson now has been on deck for 7-or-so months, so a completely different approach to the way that we look at our marketing spend and how we leverage our brand. We've got a number of initiatives in place. It's a timing difference in the first half relative to second half.

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Cameron Halkett, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [34]

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Okay. Excellent. And do you mind just clarifying what role would James fill in?

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Andrew J. Russell, Class Limited - MD, CEO & Director [35]

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What role? Sorry, you break up there. In terms of the Chief of Sales role, James already started with us in January.

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Operator [36]

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Our next question will come from Andrew Swaffer with Taylor Collison.

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Andrew Swaffer;Taylor Collison;Analyst, [37]

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Your comment in the slide on partner and strategic alliances program that Philo Capital is meeting expectations, you haven't commented on Philo for the last couple of quarterly releases. I was just wondering if you could tell us a bit more about things there. And you've got a payment that's potentially due soon, if you can comment on that as well.

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Glenn Poynton, Class Limited - Chief Strategy Officer [38]

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Andrew, Glenn Poynton here, happy to field that. So the Philo business continues to build out and meet our expectations. We think it produces a lot of optionality for us at the moment, then should be aware of the structure that investment does give us some options as to how and when we participate. And so we're happy with how that's tracking along at the moment.

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Andrew Swaffer;Taylor Collison;Analyst, [39]

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So I presume from that, you're saying that your expectations going forward haven't changed either.

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Glenn Poynton, Class Limited - Chief Strategy Officer [40]

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Correct. Correct. We still think that part of the market is quite attractive and undergoing a good bit of growth, and so we're still happy with the investment at the moment.

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Operator [41]

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This concludes our question-and-answer session. I would like to turn it over to Mr. Russell for closing remarks.

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Andrew J. Russell, Class Limited - MD, CEO & Director [42]

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I appreciate your interest in Class. Thank you for your questions. I look forward to catching up with many of you over the road show over the next couple of weeks. Otherwise, I hope you can join us for our Investor Day where the full executive leadership team will be on deck, and we'll present a short presentation of 45 minutes to 1 hour, followed by some questions and answers. Thank you, everybody.

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Operator [43]

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That does conclude our conference for today. Thank you for participating, and you may now disconnect.