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Edited Transcript of NH earnings conference call or presentation 28-Feb-20 9:30pm GMT

Q4 2019 NantHealth Inc Earnings Call

CULVER CITY Mar 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Nanthealth Inc earnings conference call or presentation Friday, February 28, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bob Petrou

NantHealth, Inc. - CFO

* Patrick Soon-Shiong

NantHealth, Inc. - Founder, Chairman & CEO

* Ronald Allen Louks

NantHealth, Inc. - COO & Director

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Conference Call Participants

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* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* James Auh

Cowen and Company, LLC, Research Division - Associate

* Robert Jaffe;Robert Jaffe Co.;Investor Contact

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the NantHealth 2019 Fourth Quarter and Full Year Financial Results Conference call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Robert Jaffe, Investor Relations for NantHealth. Please go ahead, sir.

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Robert Jaffe;Robert Jaffe Co.;Investor Contact, [2]

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Welcome, everyone, and thank you for joining us today to discuss NantHealth's 2019 Fourth Quarter and Full Year Financial Results. On the call today are Dr. Patrick Soon-Shiong, Chief Executive Officer; Ron Louks, Chief Operating Officer; Bob Petrou, Chief Financial Officer; and Dr. Sandeep Reddy, our Chief Medical Officer. This call is being broadcast live at www.nanthealth.com. Our playback will be available for 3 months on NantHealth's website.

I'd like to make the cautionary statement and remind everyone that all of the information discussed on today's call is covered under the safe harbor provisions of the Litigation Reform Act. The company's discussion today will include forward-looking information, reflecting management's current forecast of certain aspects of the company's future, and actual results could differ materially from those stated or implied. In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review NantHealth's press release announcing its full 2019 fourth quarter and full year financial results with the company's reasons for including those non-GAAP financial measures in its financial results announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company's earnings press release issued earlier today. In a moment, Ron will provide a brief overview of the quarter and discuss the business lines, followed by Bob, who will discuss the financial results in more detail. We will then open the call for questions. With that said, I will now turn the call over to Ron Louks. Ron?

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Ronald Allen Louks, NantHealth, Inc. - COO & Director [3]

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Thanks, Robert. Good afternoon, everyone, and welcome to NantHealth's 2019 Fourth Quarter and Full Year Financial Results Conference Call. We are very pleased with the significant improvement to our 2019 financial results. For both the 2019 full year and fourth quarter, we grew total revenue, gross profit dollars and gross margin percentage, while also lowering operating expenses. These results speak to the dedicated efforts of the entire NantHealth team who have rallied around our initiatives to grow our business and drive down expenses. Comparing the 2019 full year to the 2018 full year, total revenue was $96 million, an increase of 7% from 2018. Our SaaS revenue increased 11% to $72.8 million over the prior year.

Gross profit climbed to $57.5 million from $45.2 million and gross margin rose to 60% of total revenue from 51% of total revenue. Comparing the 2019 fourth quarter to the prior year fourth quarter, total revenue was $24.2 million, an increase of 6%. Our SaaS revenue also increased 6% to $18.4 million over the prior year fourth quarter.

Gross profit for the quarter climbed to $15.2 million, equal to 63% of total revenue from $11.5 million or 50% of total revenue for the prior year fourth quarter. Bob will further discuss our financial results in more detail shortly.

Turning briefly to our balance sheet. At December 31, our cash position was $5.2 million. This amount does not include the proceeds from the sale earlier this month of our Connected Care business for $47.25 million. I'll discuss this transaction in more detail shortly.

Turning to our Software and Services business. In our clinical decision support division, we presented new breast cancer research finding at the San Antonio Breast Cancer Symposium. The study results indicated simultaneous presentation and publication of oncology data is an effective method for relaying practice-changing clinical data, which enables oncologist to quickly address treatment patterns and regimen selections. We deployed 3 significant workflow enhancements to the Eviti platform. The first, multi-payer access is a significant time-saving tool that simplifies workflow by allowing a user with multiple payers to toggle quickly between payer dashboards.

The second, configuration for appeals, allows payers to self-configure the appeals function within their account. And the third, patient match and attach, automatically associates provider submitted medical records to the appropriate treatment plan, eliminating the manual processes and helping speed up treatment plan reviews.

As previously announced, we signed an agreement with Wexford Health Services, one of the nation's largest correctional health care companies. We completed the implementation early in the first quarter of 2020. Also, in January, we expanded 2 Eviti Connect programs. For the first one, a leading U.S. health insurance company extended a successfully 2-State pilot program to 13 States, after seeing a significant improvement in the use of evidence-based medicine for member oncology care. And for the other, one of the largest non-profit rural health plans in the country, we signed a 3-year renewal agreement to continue providing high-quality, high-value care for its members.

Turning to our NaviNet payer engagement solution. NaviNet's direct-to-provider revenues in the fourth quarter of 2019 increased 25% compared with Q4 2018. In January 2020, we signed an agreement with a health plan, a large managed care organization, where NaviNet Open will help decrease administrative costs and improved provider-network communication and collaboration for the plant in West Virginia and Ohio. We implemented several enhancements to the NaviNet open platform. These include claims appeal, a new application that allows payers to offer an electronic channel for appeal submission, which enables stronger collaboration with the payer for claim resolution and streamlines the manual analog process for both the provider and payer.

The second enhancement is now well within our claim investigation workflow. It provides users the ability to easily submit the required documentation through our portal to payer partners. This eliminates the need to send supporting documentation through manual processes and saves time when reviewing and resolving inquiries. And third, we have introduced new open authorization enhancements that enable payers and providers to manage complex prior authorization requests through electronic submissions. This reduces manual workflows based on fax or phone submissions.

And for our Connected Care product line, as I mentioned earlier, we completed the sale of our Connected Care assets to Masimo, a global leader in noninvasive monitoring technologies, for $47.25 million. Included in this sale were assets related to our DCX, device connectivity software product, formerly known as DeviceConX; DCX patients vitals' software, formerly known as VitalsConX; HBox connectivity hub and Shuttle interface cable.

I'm pleased to report that as part of the transaction the NantHealth team and employees associated with the Connected Care business joined Masimo.

Turning to our Sequencing and Molecular Analysis business. We announced FDA 510(k) clearance for Omics Core, the nation's first tumor-normal mutation profiling of overall tumor mutational burden, or TMB, from whole exome sequencing in solid tumors. TMB is an emerging biomarker that predicts response to checkpoint therapy and identifies tumors that may benefit from immunotherapy.

In January 2020, we presented GPS Cancer platform data at the 2020 Gastrointestinal Cancer Symposium sponsored by the American Society of Clinical Oncology, ASCO. The data not only revealed increased opportunities for HER2-directed therapy in colorectal cancer patients, but also show that up to 40% more patients may be eligible for HER2-directed therapies, which has implications for drug development and clinical trials.

Also in January, NantHealth and NantOmics presented a novel artificial intelligence platform for aiding pathologists in image-based lung cancer subtyping at the Society for Imaging Science and Technology's International Symposium on Electronic Imaging 2020. This novel machine vision software platform accurately subtypes lung cancer pathology and achieves high concordance with analysis performed by trained medical pathologists.

And in February 2020, NantHealth and NantOmics announced the publication of peer-reviewed study in Breast Cancer Research, a Springer Nature journal, on a novel AI technique in breast cancer. The study reports on a novel deep-learning system of digital pathology images and omics data used together to more precisely identify mechanisms of therapy resistance.

To sum up, we reported strong fourth quarter and full year financial results, largely due to growth of our high-margin SaaS business. Last month, we completed the sale of assets related to our Connected Care business for $47.25 million. The transaction has improved our capital position and financial flexibility and allows us to explore growth opportunities. We continue to enhance our product offering, add new customers and expand our existing customer agreements. We received FDA marketing authorization for Omics Core, and our team continues to present at important medical and scientific conferences around the world. With that overview of our business, I will turn the call over to Bob to discuss our financial results in more detail. Bob?

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Bob Petrou, NantHealth, Inc. - CFO [4]

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Thank you, Ron. As Ron mentioned earlier, for the fourth quarter of 2019, revenue increased to $24.2 million from $22.9 million in the same quarter of the prior year. As a reminder, we divested our home health business at the end of 2019 second quarter. Consequently, we did not record any revenues for this business in the current year fourth quarter. On an apples-to-apples comparison, which excludes revenues from the home health business from last year's fourth quarter, revenues grew 14% from $21.2 million in the fourth quarter of 2018.

For the full year 2019, revenue from all categories, excluding home health and sequencing, was up over $11 million or 14% from 2018. SaaS revenues increased 6% to $18.4 million from $17.3 million in last year's fourth quarter. The primary drivers for the improved performance were the addition of key contracts and partners as mentioned in previous quarters. For the full year 2019, SaaS revenues grew 11% from 2018.

Q4 Sequencing and Molecular Analysis revenue was approximately $152,000, down from $622,000 in the same quarter of the prior year. Although we received FDA clearance, as we have referenced in the past, we expect to continue to see a decline in Sequencing revenue until we receive a positive coverage determination from CMS.

Q4 revenue from our Connected Care products increased 75% to $5.6 million from $3.2 million in the fourth quarter of 2018. As previously noted, we sold this business line in early 2020 and will have limited revenue of Connected Care after the sale finalized in early February.

Q4 gross profit grew to $15.2 million or 63% of revenue, which was a substantial increase compared with $11.5 million or 50% of revenue in the same quarter a year ago. The gross margin improvement was primarily due to the changes in product mix, specifically the continued growth of our software-related businesses. For the full year 2019, gross profit grew to $57.5 million or 60% of revenue compared with $45.2 million or 50.5% of total revenue in 2018.

Q4 total operating expenses decreased 4% to $19.8 million from $20.7 million in the prior year fourth quarter, reflecting our continued cost management efforts. For the full year 2019, total operating expenses decreased by $7.6 million, representing an 8% improvement year-on-year.

For the fourth quarter, net loss from continuing operations was $11.7 million or $0.11 per share, a significant improvement from $49.2 million or $0.45 per share in the prior year fourth quarter. For the full year 2019, net loss was $62.8 million versus $192.2 million in 2018, representing a 65% improvement year-on-year. On a non-GAAP basis, net loss from continuing operations was $4.9 million or $0.04 per share, down from $9 million or $0.08 per share for the fourth quarter last year. For the full year, non-GAAP net loss was $0.25 per share, down from $0.41 per share in 2018, equal to a 39% improvement year-on-year.

Finally, cash and cash equivalents were $5.2 million at December 31, 2019, compared with $9.3 million at the end of our third quarter, representing a net use of cash of $4 million in Q4. The $4 million was primarily used for various semiannual interest payments. Excluding those interest payments, net use of cash in the quarter would have been less than $1 million.

We remain focused on prudently managing our cash, and we have not drawn on our $100 million line of credit. And with the proceeds from the sale of Connected Care, we do not foresee having to use this in the near term. With that, I will now turn the call back over to Robert.

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Robert Jaffe;Robert Jaffe Co.;Investor Contact, [5]

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Thanks, Bob. Operator, we've completed the prepared remarks. We're now open to 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 Charles Rhyee with Cowen.

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James Auh, Cowen and Company, LLC, Research Division - Associate [2]

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It's actually James on for Charles. Can you give us an update on the FDA's review of GPS Cancer? Maybe anything you could tell us regarding your dialogue with the FDA? And any updates regarding timing?

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Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [3]

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This is Patrick, James. Yes, I think we've announced -- I don't know how long ago, we announced the FDA 510(k) approval, and what we're going through now is -- how long ago was that? About 2 quarters, a quarter ago?

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Bob Petrou, NantHealth, Inc. - CFO [4]

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November.

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Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [5]

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November. So that's been authorized. What we're going through now is getting our CPT code and working on our reimbursement. And that's where we are. So -- go ahead, sorry, James.

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James Auh, Cowen and Company, LLC, Research Division - Associate [6]

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Oh, no, no. Go ahead.

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Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [7]

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So the process of applying for the reimbursement is applying for the code. And our code is the comprehensive test rather than a targeted therapy test.

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James Auh, Cowen and Company, LLC, Research Division - Associate [8]

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Okay. And is there anything you could tell us regarding that process and your expectations on timing on that reimbursement code?

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Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [9]

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Yes. So we personally -- I personally went to meet and present ourselves to the authorizing organizations, and we submitted the entire application and that's going through the review. They have very set committee meeting dates. We've met those dates and I think we're up for the next meeting, which I don't have the exact date of that next meeting, but I anticipate this to be whatever the time frame, but they've communicated back to us with regard to our application and it looks like we are all set for the next meeting.

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James Auh, Cowen and Company, LLC, Research Division - Associate [10]

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Okay. And can we maybe talk about the sales pipeline across Eviti and NaviNet and what that looks like currently?

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Bob Petrou, NantHealth, Inc. - CFO [11]

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It's Bob here. Yes, the sales pipeline is pretty strong. We've got significant opportunities that we are working towards through this fiscal year with the view that the sales cycle for the SaaS business is considerably longer than some of the other sales cycles that we have in some of the past product lines. So ultimately, our pipeline is significant, as you've seen from the announcements we made with respect to deals that we've just recently closed as well as other deals through late last year, and we expect to continue that progress through this year. And like I said, ultimately, the pipeline is large. It's just the sales cycle for closing those deals is considerable, and therefore, we just need to manage accordingly.

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Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [12]

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I think the number of covered lives we now had at the Eviti level has now hit --

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Bob Petrou, NantHealth, Inc. - CFO [13]

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It's growing. What we expect to get to through this year is in the $30 million range from where we are now of mid- to high 20s. So again, our covered lives on the Eviti platform continues to grow, and with all these contracts that we continue to sign through late last year and into this year.

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James Auh, Cowen and Company, LLC, Research Division - Associate [14]

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Okay. And can you give us some color on maybe, what you intend to do with the proceeds from the sale of the Connected Care business?

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Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [15]

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Go ahead, Ron.

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Ronald Allen Louks, NantHealth, Inc. - COO & Director [16]

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Sorry, it's Ron, Jason (sic) [James]. So I think right now, what we're doing is we're looking at exploring different growth opportunities, both internally and externally.

So whether we organically do some things on the software to help grow the SaaS business or we look at partnering or external.

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James Auh, Cowen and Company, LLC, Research Division - Associate [17]

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And just one last question. Can you give us some details on some financial metrics of Connected Care, just so we could adjust our model for the divestiture?

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Bob Petrou, NantHealth, Inc. - CFO [18]

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Well, the 8-K was filed early February. So all the information that is available, is available through that filing several weeks ago. So I think you can use that as a leverage to what the business as much as we could because we have one reporting segment it is able to -- what it looks like.

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Operator [19]

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Our next question comes from Brandon Couillard with Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [20]

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First, I'll just say, rest in peace, Kobe. I know you, Patrick, and he were somewhat close. Bob, just in terms of -- as we think about how we stand in terms of setting our models for '20. Any color you can share with us as far as kind of OpEx, expectations, post the divestiture? How you sort of foresee those progressing over the balance of the year?

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Bob Petrou, NantHealth, Inc. - CFO [21]

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Well, I think in the short term, we're still driving opportunities where we can to reduce those costs. But again, I think we also need to be cognizant that we need to invest in the right areas and right opportunities to ensure that we continue to grow the top line. So in the very near term, I think we'll still have a bit of a tailwind from the Connected Care business. Some incremental costs that -- not amortized over the broader organization. But I would give it somewhat of a flat to up marginally in the short term. And again, obviously, in the long term, as we stabilize and drive efficiencies, we will continue to drive improvements and reductions. But right now, I would I would ultimately go flat to up slightly.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [22]

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Okay. Any chance you might be able to split out how much OpEx is consumed for the GPS business?

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Bob Petrou, NantHealth, Inc. - CFO [23]

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Again, I think we spoke about this previously where we purposely slowed down the GPS activity until we get the appropriate coverage. And so in the current state, the GPS business isn't consuming a significant amount of cost through late last year into the beginning of this year. But as we move forward with our ourselves modeling and the whole activity that Dr. Patrick and Bobby referenced with respect to codes and those things, that cost will ramp up. But in the current state where we sit with Q4 and early part of 2020, those costs are minimal, less than $1 million.

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Patrick Soon-Shiong, NantHealth, Inc. - Founder, Chairman & CEO [24]

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So Brandon, this is Patrick. First of all, thank you for those comments about Kobe. But with regard to the GPS, I think we've now committed ourselves and until we get this reimbursement in place and make it a sustainable growth business, we're not going to be continuing the pace that we had before with regard to the tests that we were doing.

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Operator [25]

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And I'm not showing any further questions at this time. I would now like to turn the call back over to management for any further remarks.

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Robert Jaffe;Robert Jaffe Co.;Investor Contact, [26]

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This is Robert. I just want to say to everyone, thanks for joining the call today and sharing -- we look forward to sharing our progress on the next scheduled call. Thank you again for joining us today.

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Operator [27]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.