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Edited Transcript of MSGN earnings conference call or presentation 15-Aug-18 2:00pm GMT

Q4 2018 MSG Networks Inc Earnings Call

NEW YORK Sep 4, 2018 (Thomson StreetEvents) -- Edited Transcript of MSG Networks Inc earnings conference call or presentation Wednesday, August 15, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Levine

MSG Networks Inc. - EVP of Business Affairs

* Andrea Greenberg

MSG Networks Inc. - President & CEO

* Ari Danes

MSG Networks Inc. - SVP of IR

* Bret Richter

MSG Networks Inc. - Executive VP, Treasurer & CFO

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Conference Call Participants

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* Brandon A Ross

BTIG, LLC, Research Division - Associate Analyst

* Bryan Daniel Goldberg

BofA Merrill Lynch, Research Division - Research Analyst

* Curry Michael Baker

Guggenheim Securities, LLC, Research Division - Analyst

* David Karnovsky

JP Morgan Chase & Co, Research Division - Analyst

* John Janedis

Jefferies LLC, Research Division - MD & Equity Analyst

* Vasily Karasyov

Cannonball Research, LLC - Founder

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Presentation

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Operator [1]

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Good morning. My name is Summer, and I'll be your conference operator today. At this time, I would like to welcome everyone to the MSG Networks Fiscal 2018 Fourth Quarter Call. (Operator Instructions)

Thank you. I will now turn the conference over to Ari Danes. You may begin.

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Ari Danes, MSG Networks Inc. - SVP of IR [2]

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Thanks, Summer. Good morning, and welcome to MSG Networks Fiscal 2018 Fourth Quarter and Year-end Conference Call.

The company's President and CEO, Andrea Greenberg, will begin this morning's call with a discussion of the company's operations. This will be followed by a review of financial results of Bret Richter, the company's EVP, Chief Financial Officer and Treasurer. After their prepared remarks, we will open up the call for questions. If you do not have a copy of today's earnings release, it is available on the Investors section of the company's corporate website.

Please take note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties and that actual results, developments and events may differ materially from those in the forward-looking statements as a result of various factors. These include financial community perceptions of the company and its business, operations, financial condition and the industry in which it operates as well as the factors described in the company's filings with the Securities and Exchange Commission, including the sections entitled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations contained therein. The company disclaims any obligation to update any forward-looking statement that may be discussed during this call.

Lastly, we will discuss certain non-GAAP financial measures on today's call. On Pages 5 and 6 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income. In addition, on Page 8 of the earnings release, we provide a reconciliation of net cash provided by operating activities from continuing operations to free cash flow.

With that, I will now turn the call over to Andrea.

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Andrea Greenberg, MSG Networks Inc. - President & CEO [3]

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Thank you, Ari, and good morning. Fiscal 2018 represented a year of meaningful progress as we successfully executed against the financial and strategic priorities we set at the beginning of the year. These included delivering strong revenue, adjusted operating income and free cash flow; enhancing our content through new and innovative programming with the goal of broadening our viewership; and driving increased distribution of our networks, particularly on digital platform. In addition to these priorities, this past year, we strengthened our traditional distribution with several affiliate renewals and initiated our first share repurchase program as a stand-alone media company.

I would now like to walk you through some of the year's highlights. For fiscal 2018, we delivered revenue of approximately $697 million, a 3% increase compared to last year, and adjusted operating income of $336 million. Our results continue to underscore the unique position we hold, thanks to our exclusive live local content and a well-earned reputation for programming excellence.

This past year, our networks once again showcased approximately 500 live games featuring professional teams, including the New York Knicks, Rangers, Islanders, Liberty and Red Bulls, the New Jersey Devils and the Buffalo Sabres, providing fans of those teams with in-depth coverage, including expert pre and postgame shows and other team-related content.

We took steps to broaden our appeal, particularly among younger viewers, by experimenting with new content, formats and talent. Highlights include people talking sports and other stuff with a variety of sports guests and celebrities; KNX Gaming, which continue to follow the official New York team of the NBA 2K esports league during their inaugural season; and MSG Shorts, our short-form content block focused on unique and interesting stories in and around the world of sports. We are pleased with what we've accomplished on the programming front this past year and look forward to building on these efforts in fiscal 2019.

We also believe that our valuable content, along with ongoing growth opportunities, positions us well to increase advertising revenue over the long term. These opportunities include our branded content initiatives, where we work with a number of our partners, including Anheuser-Busch, the Hospital for Special Surgery, BMW and Squarespace, to integrate their brands with our assets. And we look forward to building on these efforts in the upcoming season.

We created another growth opportunity this past year with our street-front digital boards on 7th Avenue, which established a high-impact vehicle to showcase our brand, content and partners.

In addition, we continue to see MSG Go as a compelling sponsorship platform and ahead of the 2017/'18 NBA and NHL season, strengthened our live streaming and video-on-demand offering by achieving full distribution among our major distributors.

This year, we also made our content more broadly available through digital platforms by reaching multiyear distribution agreements with 2 OTT providers while continuing to explore other distribution opportunities that appropriately value and package our networks.

At the same time, we successfully renewed several affiliate agreements with our traditional distributors, including a major partner, which we believe highlights the importance of our content in the marketplace and the strength of our long-standing relationship.

Turning to subscribers. For our fiscal fourth quarter, we had a very small year-over-year decrease in viewing subscribers. This represents a substantial improvement compared to our fiscal third quarter, which had a low single-digit percentage rate of decline. We have also now experienced an improvement in our annual rate of decline for 3 consecutive fiscal years.

In summary, fiscal 2018 marked a year of meaningful accomplishment. We delivered another year of strong financial results and further enhanced our programming while strengthening both our linear distribution and digital presence. As we look ahead to fiscal 2019, we believe that our unparalleled live sports presence in the nation's largest media market will enable us to continue to generate significant long-term value for our shareholders.

I will now turn the call over to Bret, who will take you through our financial results.

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Bret Richter, MSG Networks Inc. - Executive VP, Treasurer & CFO [4]

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Thank you, Andrea, and good morning, everyone. I would like to start today by touching on our full year fiscal 2018 financial results before turning to our results for the fourth quarter.

For fiscal 2018, total revenues were $696.7 million, an increase of 3% as compared with the prior year. This growth was primarily driven by an increase in affiliate revenue, partially offset by a decrease in advertising revenue.

Fiscal 2018 adjusted operating income was $336.5 million, which represents a slight increase as compared with fiscal 2017. We are pleased with these financial results, particularly in light of the fact that fiscal 2018 AOI was impacted by a step-up in expense related to the renewal of our rights agreement with the Buffalo Sabres and by a decline in advertising revenue, which we primarily attribute to the performance of certain of our teams this past season.

Turning to our results for the fiscal 2018 fourth quarter. Total revenues of $171.4 million increased $8.5 million or approximately 5%. This included a $9.2 million increase in affiliate revenue and a $1.2 million decline in advertising revenue. The year-over-year increase in affiliate revenue was primarily due to higher affiliate rates and to a lesser extent, the favorable impact of a $1.2 million affiliate adjustment recorded in the current year period and the absence of a $1.1 million unfavorable adjustment recorded in the prior year period. The decline in advertising revenue was primarily due to lower playoff-related advertising sales, partially offset by a higher net decrease in deferred revenue related to ratings guarantees as well as other net advertising revenue increases.

Direct operating expenses of $68.8 million increased 6% or $3.9 million as compared with the prior year quarter, due primarily to higher rights fees expense. The increase in rights fees expense mainly reflects annual contractual rate increases, the step-up in expense related to the renewal of our rights agreement with the Buffalo Sabres and league fees related to streaming rights.

Please note that fiscal 2019 first quarter direct operating expense will include a full quarter's impact from the step-up in rights fees expense related to the Sabres as compared to a partial quarter's impact for the fiscal 2018 first quarter.

SG&A expenses of $19.8 million increased approximately $700,000 or 4% as compared with the prior year quarter. This was primarily due to higher employee compensation-related benefits, partially offset by lower advertising and marketing costs and advertising sales commissions. Excluding share-based compensation, SG&A expenses were down slightly versus the prior year quarter.

Adjusted operating income of $86.2 million increased $4.8 million or 6% as compared with the prior year period. This increase was primarily due to higher affiliate and other revenue, partially offset by higher direct operating expenses and lower advertising revenue. Excluding the favorable impact of affiliate adjustments recorded in the current and prior year periods, fourth quarter adjusted operating income would have been $85 million, an increase of $2.4 million or 3% as compared with the prior year quarter.

Turning to taxes. Our 35% GAAP tax rate for the quarter primarily reflects a blended federal corporate tax rate of 28%, state and local income taxes and the impact of certain adjustments, some of which were necessary to reflect the impact of tax reform becoming effective at the midpoint of our fiscal year. Our fiscal 2019 GAAP tax rate will fully reflect the new federal tax rate of 21%.

Reported free cash flow from continuing operations for the fiscal year ending June 30, 2018, was $206.9 million.

With respect to our balance sheet. As of June 30, 2018, total cash and cash equivalents were $205.3 million. Total debt outstanding was $1.2 billion, and our $250 million revolver remained undrawn at quarter's end.

As of June 30, 2018, net debt was $991 million, and our net leverage ratio declined to 2.9x trailing 12 months adjusted operating income. Our average interest rate for the quarter was approximately 3.4%.

During the fiscal fourth quarter, we made a mandatory principal payment of $18.75 million in accordance with the terms of our credit agreement. Our credit facility provides for a total of $75 million in mandatory principal payments over the next 12 months.

In terms of the company's stock repurchase program. During the fourth quarter, we repurchased approximately 713,000 shares for $13.8 million at an average price of $19.39. This amount represented approximately 1% of Class A shares outstanding. We currently have $136 million remaining under our authorization and plan to remain disciplined and opportunistic with our share repurchases. We'll continue to update you on our progress on a quarterly basis.

I will now turn the call back over to Ari.

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Ari Danes, MSG Networks Inc. - SVP of IR [5]

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Thanks, Bret. Summer, can we open up the call for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Bryan Goldberg of Bank of America.

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Bryan Daniel Goldberg, BofA Merrill Lynch, Research Division - Research Analyst [2]

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I have a question on subscriber trends. It sounds like you had a nice improvement there relative to the low single-digit loss rate you've been reporting over the last handful of years or so. And I was hoping maybe you could provide a little color as to what the drivers of the improvement were. How much is coming from new distribution relationships versus any notable shifts in activity at your traditional distributors? And then if it's possible, would you be able to provide us with your year-end viewing sub number? I believe that's usually in the 10-K.

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Andrea Greenberg, MSG Networks Inc. - President & CEO [3]

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Sure. Well, there were a variety of factors that drove the year-over-year improvement, as we said. We saw a very small decline in viewing subs in our fiscal fourth quarter. The factors included both of the items you mentioned, the impact of our new OTT agreement and stronger performance by some of our traditional affiliates. So both factors contributed to the improvement. That said, as you know, there are ebbs and flows with respect to our viewing subscribers. And to this point, I've noticed that -- I would note that from our most recent available months of data, we saw an uptick in the percentage rate of decline from the fourth quarter, resulting in a combined average of MSG and MSG+ subscribers of about 7 million, which is down about 1.2% versus the same month in the prior year. Even given that, still we've seen an improvement in the rate of viewing subscriber decline now for 3 consecutive years. And if you go back to the subs that we reported in our fiscal 2015 10-K, we had seen a minus 3.5% decline; in the subsequent year, a minus 3.2% decline; then a minus 2.5% decline; and for the same period this year, we've seen a minus 1.2% decline. So I hope that gives you some additional color.

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Operator [4]

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Your next question comes from Brandon Ross of BTIG.

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Brandon A Ross, BTIG, LLC, Research Division - Associate Analyst [5]

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I actually have 2. First, the Fox RSNs are now in the marketplace. If something piecemeal became available, especially the YES Network, would you guys be interested in taking a look at that? And in general, do you think it makes sense for somebody to consolidate the RSNs in the New York market? And then I have a follow-up.

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Andrea Greenberg, MSG Networks Inc. - President & CEO [6]

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Okay. Well, first, let me say that we're quite pleased with what we've been able to accomplish in the last 3 years as a stand-alone company, and we feel that we're positioned for long-term success here as a stand-alone company. That said, as you might expect, we're closely monitoring the changes in the RSN landscape, and we would always consider opportunities that -- if we feel they make strategic and financial sense for us. Beyond that...

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Brandon A Ross, BTIG, LLC, Research Division - Associate Analyst [7]

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As buyers and sellers?

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Andrea Greenberg, MSG Networks Inc. - President & CEO [8]

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We're not going to comment on hypotheticals, but we'd certainly look at all opportunities that make sense for our business and our shareholders.

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Brandon A Ross, BTIG, LLC, Research Division - Associate Analyst [9]

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Okay. And just to confirm, the sub trends you report are viewing subscribers, so there's no help from minimum guarantees at wired MVPDs or DIRECTV NOW, correct?

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Adam Levine, MSG Networks Inc. - EVP of Business Affairs [10]

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I guess I'll jump in there, Brandon. This is Adam. I think what -- I'm not sure what you mean by no help, but I think what we said is that the OTT deals that we had contributed and that the protections that we have in our contracts are part of what the -- contributed the viewing numbers that we report in general. So the viewing subs are the viewing subs, and they reflect the sub numbers as reported to us by our affiliates.

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Operator [11]

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Your next question comes from John Janedis of Jefferies.

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John Janedis, Jefferies LLC, Research Division - MD & Equity Analyst [12]

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I just had one. I was wondering, have you begun to see any incremental advertising by either eSports or gambling houses ahead of the upcoming NBA and NHL seasons? And how significant of a bucket could this be? Or is it too early to tell until, I guess, sports betting is legalized in New York?

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Andrea Greenberg, MSG Networks Inc. - President & CEO [13]

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Well, it is still very early. But we are already seeing strong demand from the segment of the marketplace, not just for traditional media buys but also for more creative integrations. So there's lots of activity in this space, and we're pretty excited about it. We believe that it'll serve as a catalyst to drive increased ad revenue from both casinos and sports books. And those 2 categories have historically represented a fairly small percentage of our advertising on our network, so more to come. I mean, we do operate New Jersey so that, I think, makes us appealing to sports books in advance of legalization in New York or Connecticut.

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Operator [14]

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Your next question comes from Michael Morris of Guggenheim Securities.

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Curry Michael Baker, Guggenheim Securities, LLC, Research Division - Analyst [15]

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This is Curry Baker on for Mike. On the OTT front, you're currently on DIRECTV NOW and FuboTV, and there's obviously additional opportunity if you can get other large OTT platforms, carriage on YouTube, Hulu, Sling, et cetera. What's the biggest obstacle that you're encountering on getting additional carriage on the other OTT platforms? Is it price MFNs, tiering? And can you say if you're in active conversations with any of the other players?

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Adam Levine, MSG Networks Inc. - EVP of Business Affairs [16]

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So I would say we're pleased with the progress we made in digital distribution this past fiscal year, the first full year where we've had digital rights to all of our professional games. We're pleased to launch on the 2 platforms that you mentioned. Andrea noted they contributed to the year-over-year improvement in our subscribers for the fourth quarter. As far as incremental opportunities, we're focused on all those opportunities to increase distribution for our networks and our content. In the ordinary course of business, we're talking to everyone. I'm not going to get into details about where those conversations are. I think on the last call, somebody asked about whether there were obstacles. I wouldn't describe anything in particular as an obstacle. These are conversations we're having and exploring, and we're always open to new distribution that properly value our networks.

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Operator [17]

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Your next question comes from Vasily Karasyov of Cannonball Research.

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Vasily Karasyov, Cannonball Research, LLC - Founder [18]

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My question is about the capital structure going forward now that you are sort of done deleveraging from when you became a stand-alone company. Given the business model and sort of the steady growth, not a ton of volatility where the tax rate is. Can you tell us the puts and takes that go into your thinking about, a, free cash flow generation going forward; b, the use of that free cash flow; and c, the comfort level with net or gross leverage, whatever is more convenient for you?

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Bret Richter, MSG Networks Inc. - Executive VP, Treasurer & CFO [19]

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Sure, Vasily. I'll take that. I think even the nature of your question highlights the fact that this is a complex equation that we're constantly evaluating as a management team on an ongoing basis. I think the last part of your question is probably the easiest to answer. I mean, we're comfortable with the level of leverage that we have. It doesn't mean that at any point in time we might not take a view to ratchet that up or ratchet that down based on the liquidity of the business and the needs in the market and almost innumerable other factors. This is a constant evaluation process for us. And we look at all the elements that you spoke to, particularly the free cash flow, the expectations of that free cash flow from the business and external factors like interest rates and the tax rate. The free cash flow of the business is really strong. Producing over $200 million of cash this year, I think that's notable. And it's only been 2 quarters since we put in place the additional tool in our toolbox with the ability to buy stock back in the marketplace, and we executed on that program in the fourth quarter. So I think we take a broad view. We're going to be opportunistic over time with regards to the use of our authorization. We intend to use it. There may be -- there will be additional capital dedicated to paying down our debt. We have $75 million of mandatory prepayments due in the next 12 months. So I'm not sure how much more detail I can lay out the equation other than the fact that we're actively managing it.

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Operator [20]

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Your final question comes from Alexia Quadrani of JPMorgan.

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David Karnovsky, JP Morgan Chase & Co, Research Division - Analyst [21]

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This is David on for Alexia. Just with regards to your distribution on virtual MVPDs, can you maybe talk about any impact to churn you're seeing on those platforms now that the NBA and NHL seasons have ended? And in DIRECTV NOW specifically, are you seeing any subs move to lower tiers given we're in the off-season?

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Adam Levine, MSG Networks Inc. - EVP of Business Affairs [22]

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So it's early with regard to our OTT distribution, but it's not something I can really get into too specifically. And it's not something I'd say we have a lot of visibility into with our OTT distributors. But we're pleased with the agreements we have in the OTT space. They contributed to our year-over-year improvement in subscribers for the quarter, and we look forward to participating in the expected growth in the sector.

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Operator [23]

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And I'll now turn the call back to Ari Danes.

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Ari Danes, MSG Networks Inc. - SVP of IR [24]

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Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a great day.

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Operator [25]

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