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Edited Transcript of GEVO earnings conference call or presentation 8-May-19 8:30pm GMT

Q1 2019 Gevo Inc Earnings Call

ENGLEWOOD May 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Gevo Inc earnings conference call or presentation Wednesday, May 8, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradford K. Towne

Gevo, Inc. - CAO

* Geoffrey Thomas Williams

Gevo, Inc. - General Counsel & Secretary

* Patrick R. Gruber

Gevo, Inc. - CEO & Director

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Conference Call Participants

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* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* Sameer S. Joshi

H.C. Wainwright & Co, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Hello, and welcome to the Gevo, Inc. Q1 2019 Earnings Conference Call. My name is Sheryl, and I will be your operator for today's call. (Operator Instructions) Please note that this conference call is being recorded. I will now turn the call over to Geoffrey T. Williams, Jr. Sir, you may begin.

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Geoffrey Thomas Williams, Gevo, Inc. - General Counsel & Secretary [2]

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Good afternoon, everyone, and thank you for joining Gevo's First Quarter 2019 Earnings Conference Call. I would like to start today by introducing the participants from the company. With us today is Patrick Gruber, Gevo's' Chief Executive Officer; and Bradford Towne, Gevo's Chief Accounting Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss today. A copy of this press release is available on our website at www.gevo.com.

I would like to remind our listeners that this conference call is open to the media and that we are providing a simultaneous webcast of this call to the public.

A replay of today's call will be available on Gevo's website. On the call today and on this webcast, you will hear discussions of certain non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today and which is posted on our website.

We will also make certain forward-looking statements about events and circumstances that have not yet occurred, including but not limited to, projections about Gevo's operating activities for the remainder of 2019 and beyond. These forward-looking statements are based on management's current beliefs, expectations and assumptions and are subject to significant risks and uncertainties, including those disclosed in Gevo's Form 10-K for the year ended December 31, 2018, which was filed with the U.S. Securities Exchange Commission or SEC on or about March 27, 2019, and in subsequent reports and other filings made with the SEC by Gevo, including Gevo's quarterly reports on Form 10-Q.

Investors are cautioned not to place undue reliance on any such forward-looking statements. Such forward-looking statements speak only as of today's date, and Gevo disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise.

On today's call, Pat will begin with a discussion of Gevo's business developments. Bradford will then review Gevo's financial results for the first quarter of 2019. Following the presentation, we will open up the call for questions. I'll now turn the call over to Pat.

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Patrick R. Gruber, Gevo, Inc. - CEO & Director [3]

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Thank you, Jeff, and thank you all for joining us today. I believe we are at/or near a tipping point. We finalized several agreements that I'll touch on shortly. We have turned our balance sheet around, which enabled our auditors to remove the going concern qualification in our audit report at the end of March, and we're making overall very good progress.

In terms of the balance sheet, as of today, we have approximately $33 million of cash on hand and less than $14 million of debt. The improved capitalization of the company, of course, should make a difference going forward. As of today, we don't have any current plans to raise equity. Instead, we are focused on debt, our projects and products appear to be financeable, more along the lines of project financing. We'll keep you updated as we make progress.

We are actively working on projects to decarbonize or defossilize the energy used at our Luverne Facility. The intent is to lower our carbon score or the measure of fossil greenhouse gas emissions at Luverne. Of course, it leverages into isobutanol and hydrocarbon production as well. We are working on renewable electricity and renewable natural gas. We expect that accomplishing these projects should make Luverne profitable, even just selling low carbon ethanol.

When we combined the margin uplift from defossilization with the margin uplift from the value-added feed products we're in the midst producing using the Shockwave drive fractionation technology, we expect that Gevo as a whole could possibly become profitable within the next 18 months, depending upon the overall market dynamics, how much we're spending on the commercialization of isobutanol, jet fuel and the rest.

Production of low carbon ethanol for the California market combined with animal feed is something we're doing simply to make money. Our growth in the long run is all about the isobutanol, the jet fuel and very importantly, the isooctane for gasoline. We continue to develop the enormous markets for these products.

Today, we announced that the City of Seattle's fleet vehicles began utilizing a blend of Gevo's renewable isobutanol with conventional gasoline in its pilot program to reduce the carbon intensity, the CI levels of its fuels. Additionally, Gevo will collaborate with the city to supply a renewable drop-in gasoline to further reduce the carbon intensity of the fleet.

The City of Seattle has the potential to lead the way in showing what is possible on breaking away from fossil-based fuels and related pollution. We see Pacific Northwest with its abundance of wood resources has great potential for the development and commercialization for fossil-free fuel production plans. We'll have to take a look at the opportunities for production in that region.

Now imagine replacing the whole gallon of gasoline with a low carbon renewable gasoline that has high performance, yet it really does reduce pollution. The potential use of low carbon and clean fuels to get off of fossil-based fuels and all their pollution, including the particulates and to establish new business systems that creates jobs. And in that region, it would cut across sectors from forestry to bioprocessing, to refining.

In April, we signed a binding definitive construction license agreement with Praj Industries, to commercialize the production of renewable isobutanol with sugary-based feedstock, such as juice, syrup, molasses made from sugarcane or sugar beets. And this is important for a couple reasons. First, that we could actually complete a complicated set of license agreements. That's a big deal in and of itself, even though it doesn't seem like it. And second, this agreement is set up, so we are truly licensors rather than being capital providers. It's other people's money, putting our technology to work, that's the intent. As the market demand takes off, we need to be in a position where the licensing is fully baked and ready to go. This was a great first step in getting that done.

In addition to the construction license agreement, we also signed a memorandum of understanding with Praj to commercialize our renewable hydrocarbon technology and products in India, including our renewable alcohol-to-jet fuel and renewable isooctane derived from renewable isobutanol. Now this is a potentially big deal in that rice straw residues are a problem in India, the straw is simply burned to get rid of it and creates a lot of smog and pollution, it's a problem. A better use would be to convert it into fuels. Praj reports that they have 4 rice straw-to-ethanol plants under construction in India. Praj is undertaking the effort to adapt the rice straw to fermentable sugar conversion technology for the production of isobutanol and jet fuel and isooctane. I think it's going to be a good opportunity in India for these hydrocarbons.

The isooctane and gasoline markets are continuing to develop. We have expanded our capacity at Silsbee to produce more isooctane and jet fuel. Haltermann Carless and Avfuel are purchasing the product produced at Silsbee. We have a project on the table to expand the hydrocarbon capacity in order of magnitude to about 1 million gallons per year. This will be up at Luverne, Minnesota. We already have contracts in place that would make this a profitable exercise. We expect to line up debt financing to get this capacity built.

We also have roughly 50% of our planned Luverne expansion for the isobutanol jet fuel and isooctane committed to customers who are under contract. Tim Cesarek, our Chief Commercial Officer is making progress. We still need to work out the balancing act of how much jet fuel to produce compared to isooctane. Isooctane, of course, is expected to carry more margin that is -- be more valuable in the marketplace than jet fuel.

Now we're in the midst to sorting through the opportunities in our contract terms, are confident we'll get them finished. And they'll be good enough so that we can use them to do project financing for the full build-out.

Now speaking of that, we have modified our plans. I've mentioned it before, but it's worth restating. We plan on making the Luverne Facility profitable with low carbon ethanol and value-added animal feed. In the future, assuming the plant isn't that profitable, as we expect, we would keep running it. We wouldn't shut off the ethanol and the animal feed. That would make no sense. It would be at that point a cash cow. And we'd want to add additional capacity, additional grind, so that we can produce isobutanol and hydrocarbons. We'd do this in 2 steps: first, we'd add some equipment for isobutanol and hydrocarbons at Luverne, so that we could produce hydrocarbons at Luverne; and two, build out a large capacity for isobutanol and hydrocarbons at Luverne, about 18 million gallons of isobutanol and 8 million to 10 million gallons of hydrocarbons.

The isobutanol expansions are expected to be done side by side, in other words, I don't plan on shutting down that low carbon ethanol plant, it would be making money we expect. I want the ethanol to Southern California and other places where the defossilization is valuable. And I want that ethanol as a raw material to make other products in the future because our chemistry translates across alcohols.

So here's what a summary of what to expect going forth in the rest of 2019. Expect more announcements for customers in marketplace development of isobutanol, isooctane and jet fuel. Expect us to announce more commercial agreements. So it's again, it's going to be about jet fuel, isooctane and isobutanol. We would announce the progress of milestones of the other projects beyond the Luverne Facility. Currently, we have 6 licensing development projects in discussion, [2 of them are] I'll use in place, with diligence and planning underway. We would be announcing the details of our wind to renewable natural gas products as we get those going and we can speak publicly about it.

And then of course, I do expect to be announcing the various financing for our projects, and I expect them to be debt-oriented. We are on a crusade to defossilize liquid transportation fuels, we know that our technologies work. We're keen to enter the market correctly with the right customer mix and financing structures. I expect us to continue to make a lot of progress throughout this year. Now I'll turn the call over to Bradford, who will take us through the financials Bradford?

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Bradford K. Towne, Gevo, Inc. - CAO [4]

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Thank you, Pat. Gevo reported revenue in the first quarter of 2019 of $6.4 million as compared to $8.2 million in the same period in 2018.

Cost of goods sold was $9.0 million in the first quarter of 2019 versus $10.6 million in the same period in 2018. Cost of goods sold included approximately $7.4 million associated with the production of ethanol, isobutanol and related products, and approximately $1.6 million in depreciation expense.

Gross loss was $2.6 million for the first quarter of 2019 versus $2.3 million for the first quarter of 2018.

Research and development expense increased by $0.2 million during the first quarter of 2019 compared with the same period in 2018 due primarily to consulting expenses. Selling, general and administrative expense increased by $0.2 million during the first quarter of 2019 compared with the same period in 2018 due primarily to an increase in employee-related expenses and consulting expenses. Within total operating expenses for the first quarter of 2019, we reported approximately $0.2 million for noncash stock-based compensation.

For the first quarter of 2019, we reported a loss from operations of $5.6 million compared to $5.0 million for the same period in 2018. In the first quarter of 2019, cash EBITDA loss, a non-GAAP measure, which is calculated by adding back depreciation and noncash stock-based compensation to GAAP loss from operations was $3.8 million compared with $3.3 million in the same quarter of 2018.

Interest expense for the first quarter of 2019 was $0.8 million, a slight decrease compared to the same period in 2018.

For the first quarter of 2019, we reported a net loss of $6.2 million or a loss of $0.60 a share based on a weighted average shares outstanding of 10,153,873. This compares to a loss of $2.5 million in the first quarter of 2018 or a loss of $2.22 per share.

In the first quarter of 2019, Gevo recognized net noncash gains totaling $0.2 million due to changes in the fair value of certain of our financial instruments, such as warrants and embedded derivatives. Adding back these noncash gains resulted in a non-GAAP adjusted net loss of $6.4 million in the first quarter of 2019 or a non-GAAP adjusted net loss per share of $0.63. This compares to a non-GAAP adjusted net loss of $5.8 million in the first quarter of 2018 or a non-GAAP adjusted net loss per share of $5.16.

Having a stronger balance sheet is important to moving our business forward, developing our business and growing our business.

With that, I would like to thank all of our shareholders for their continued interest and support in Gevo. Let's open up the call for 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 Amit Dayal from H.C. Wainwright.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [2]

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In regards to the Praj agreements and milestones, are there any specific sort of events that could translate into revenues for the company in the next few quarters? Or is this a little bit more longer term?

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Patrick R. Gruber, Gevo, Inc. - CEO & Director [3]

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It's -- to get anything organized, where it translates to revenue, something would have to get built. And so that of course translates to a little bit longer time. What I do expect to have, have happen, and I think I alluded to or I said it in my comments is that we have several of these discussions underway for licensing. We now are up to a half dozen of them. They used feedstocks of different types from various places around the world, and we have to progress those and make them happen. I think we've seen a shift of how people think about where we are and what's being done. So where Praj is very interesting is because of the molasses of course. And some of the work that they've done on straw. I think the straw thing is quite interesting, and they also have done the gas. So it's those types of things, I think, will lead to meaningful milestones, and we're in the midst of figuring out economically what makes sense in what location because each place is quite different, each location is quite different.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [4]

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And then in -- with respect to the Seattle announcement today, are you delivering to that municipality? Or is this going to come in the next few quarters?

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Patrick R. Gruber, Gevo, Inc. - CEO & Director [5]

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No. It's already been done. So it's already underway. And it's a -- one of the things that's interesting is that there is a very -- let's say, accelerated interest in the last months where people have been talking about greenhouse gases and the importance, and a lot of folk are tired of waiting around for the federal government to do something. And so they're figuring it out -- figuring out how to lower their carbon scores by themselves. And so as you see here is an effort by Seattle to put in higher performing fuels and move to -- get on a trajectory to lower the carbon index. Starts off with isobutanol, but eventually, we'll get it to the whole gallon of gasoline. And so when you think about that model, it's kind of interesting because these are municipalities basically thinking -- proving it out, so that they can say, well, this is the direction we're going to go in the long run and move to larger volumes. And I expect this will probably translate to other municipalities as well.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [6]

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Understood. And just maybe one final one from me. On the cash burn front, how are we situated over the next 12 months? I know you're talking about potentially hitting profitability in the next 18 months. How will this play out in terms of your progress towards that goal?

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Patrick R. Gruber, Gevo, Inc. - CEO & Director [7]

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Well, I think, we'll -- our burn is going to be relatively modest in long -- over this course of this year, we'll spend some millions on capital but not huge amounts. And because even if we're doing the biogas and the wind, these are things that will be using -- other people's money will be put up for that. And we become a customer, at least, of the wind -- and well, of the biogas, too. So I don't want to give exact numbers because things can change, but our burn was -- our burn should be relatively in line to what we've talked about before.

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Operator [8]

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Our next question comes from Sameer Joshi from H.C. Wain (sic) [Wainwright].

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [9]

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Just following up on Amit's questions. In terms of -- I know you mentioned that you will continue to operate the ethanol, but what level of revenues or what level of capacity do you expect to utilize over the next 8, 9 months?

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Patrick R. Gruber, Gevo, Inc. - CEO & Director [10]

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We have -- the run rate to that plant's about 20 million gallons a year. It's actually -- can be a little bit higher. When ethanol margins are low, we tend to run the plan slightly slower.

And then we did shut down for a couple weeks, while we tied in the Shockwave dry frac technologies. So it'd be something less than 20 million gallons at -- by the time we're at the end of the year, but it won't be too far off of that. The revenue numbers, we'd still -- we'd give the same kind of guidance that we gave before is just that -- into that and bit's in our slide deck on our website.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [11]

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Right, right. And then, the other thing I noticed is that the R&D has come down nicely. So should we expect it to remain at this sub-$1 million level going forward? Or you expect to invest more as you have agreements with Praj and other things catching steam?

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Patrick R. Gruber, Gevo, Inc. - CEO & Director [12]

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Nothing major. We may see it go up a little bit here and there as we might do -- we do projects certainly externally sometimes and depending upon what we do and how we structure it, but generally, I would expect us to see a relatively low level. I don't have anything that would cause us to increase millions of dollars or anything like that or even $1 million. I don't have anything like that. Our bugs are come along nicely in terms of optimization. We do have some external contracts that we're utilizing. But lot of those are milestone payment-type things. If people are successfully hit where we want, then we would have to pay them as we commercialize. So I think that should be pretty stable. So going forward, so if you look at the revenue that we've talked about, where we have the $34 million or $35 million-ish kind of a range, that seems to feel about right. Our burn levels should be relatively consistent with what we've talked about. I think this quarter is -- would be relatively typical. And then we'll have to deploy some capital, small -- relatively small amounts for doing the wind and the biogas as we do our equity portions of the project financing. So I think we're pretty good shape.

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Operator [13]

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(Operator Instructions) Next question comes from [Andrew Markese].

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Unidentified Analyst, [14]

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So first of all, congratulations on the recent announcement regarding the development of the rubber product, obviously. Just curious, Patrick, just one small question, is there any potential to develop that out? Or where is that going? Or is there -- can you comment on anything regarding that?

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Patrick R. Gruber, Gevo, Inc. - CEO & Director [15]

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Sure. For everybody's benefit, what Andrew is asking about is the isoprene. This is interesting. So one of the things that Gevo has done is developed a (inaudible) technology around the conversion of alcohols and hydrocarbon products. We talk a lot about jet fuel and isooctane from isobutanol, but we've also developed technology to convert ethanol into hydrocarbon products as well that can go on into the diesel fuel or can go into jet fuel or we can make intermediates for plastics and polymers. This was a development effort that we've already -- is well along the way. And the thing that Andrew is asking about specifically is we have developed the technology. It's very highly related to what we did for isobutanol and ethanol. It's to convert fusel oils into isoprene, which is a key constituent of synthetic rubber. The fusel oils are made as a byproduct of fermentation from the ethanol industry. And there's quite a large amount of them available. So I think as there are several -- there's a couple different things we can do related to that. We have -- we can take that chemistry and it really makes isoprene in high yield. I think it's the -- from what I've seen it's in the realm of, if not the best, economic system from what we can tell and what our projections are. And it's a proprietary catalyst that we use that we've developed and owned. And I think we'll see progress on that over the next couple quarters from what I've told. The other thing that is possible to do with a variant of that chemistry is to convert some of those kinds of things into flavors and fragrances. And so this would be into various -- really is going for that really fine chemical specialty niche is where that potential lies. We're not trying to be become the -- we're not going to build out those business, per se, in terms of we aren't going to become the marketers and things like that. So now we're in the midst of lining up the partnerships. What I'd rather be is a supplier of alcohols, raw materials, catalytic -- catalyst, licensing the technology is how we approach it. So we just haven't talked about much of this publicly, but that's how we're thinking about it. And I think over the next probably 2 quarters, I'll know which way it's headed, how positive or if it's going to take longer or what's going on. I hope I have some material in that time frame.

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Unidentified Analyst, [16]

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Okay. Well, Patrick, I just want to say I'm looking forward to these additional announcements forthcoming and the definite successes that you will be having soon. Congratulations.

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Patrick R. Gruber, Gevo, Inc. - CEO & Director [17]

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You bet, thanks.

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Operator [18]

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And speakers, at this time, I show no further questions in queue.

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Patrick R. Gruber, Gevo, Inc. - CEO & Director [19]

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All right, then, I wish everyone a great day. Thanks for joining us today. And thank you for your interest in Gevo and your support. Bye now.

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Operator [20]

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And thank you, ladies and gentlemen. That concludes today's conference call. Thank you for your participation. You may now disconnect.