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Edited Transcript of SWTF earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q3 2019 SilverBow Resources Inc Earnings Call

Houston Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of SilverBow Resources Inc earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gerald Gleeson Van Riet;Executive VP and CFO

* Jeff Magids

SilverBow Resources, Inc. - Senior Manager of Finance & IR

* Sean C. Woolverton

SilverBow Resources, Inc. - CEO & Director

* Steven W. Adam

SilverBow Resources, Inc. - Executive VP & COO

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Conference Call Participants

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* Duncan Scott McIntosh

Johnson Rice & Company, L.L.C., Research Division - Research Analyst

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

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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 SilverBow Resources third quarter earnings 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, Jeff Magids. Thank you. Please go ahead.

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Jeff Magids, SilverBow Resources, Inc. - Senior Manager of Finance & IR [2]

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Thank you, Christi, and good morning, everyone. Thank you very much for joining us for our third quarter 2019 conference call. With me on the call today are Sean Woolverton, our CEO; Steve Adam, our COO; and Gleeson Van Riet, our CFO. We posted a new corporate presentation onto our website and will occasionally refer to it during this call. We encourage investors to review it.

Please note that we may make references to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure in the earnings press release. Our discussion today will include forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. These risks and uncertainties are described more fully in our documents on file with the SEC, which are also available on the SilverBow's website.

And with that, I'll turn the call over to Sean.

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Sean C. Woolverton, SilverBow Resources, Inc. - CEO & Director [3]

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Thank you, Jeff, and thank you, everyone, for joining our call this morning.

Last quarter, we stated our focus on growing our liquids production, increasing operational efficiency and expanding a balanced portfolio between oil and gas inventory as a roadmap to free cash flow.

Yesterday, we released our third quarter results, along with our 2020 preliminary budget, which demonstrates continued execution of our business plan, along with a number of key positive catalysts that I'm excited to share with you today.

For the third quarter, oil production grew 24% over the second quarter, and exceeded the high end of our guidance. Oil volumes comprised 14% of our production and 40% of our overall revenue. NGL volumes increased 18% and were also above guidance. The strong execution on our liquids growth strategy to date has results in a 50/50 mix of revenue contribution between liquids and gas, impressive, considering liquids comprised only 1/3 of our revenue a year ago.

For operating expenses, we again delivered per unit cost in line or below our guidance. Our operating expenses, including cash G&A declined further to $0.94 per Mcfe. The growth in liquids and beat on cost drove adjusted EBITDA up $63 million, 8% higher than the second quarter. Additionally, by taking our adjusted EBITDA, less interest expense, cash taxes and capital expenditures, you will see that we generated approximately $4 million of free cash flow for the third quarter.

Throughout the year, we have discussed how we are attacking every opportunity to expand our high return inventory at attractive prices, whether those transaction are large or small in scale. Yesterday, we disclosed the new 16,000 net acre position in Dimmit County. This prospect has significant oil in place and more than doubled our oily inventory locations at a very favorable entry cost.

We have already drilled and completed 2 wells in the block, and are seeing encouraging results. We are in the early phase of delineation, and we plan to take a measured approach towards optimizing future developments to maximize a return on capital. Steve will provide more color on our plans in his remarks.

Our organic leasing strategy of identifying high return inventory at attractive entry prices has been very successful, and we retained flexibility in our land budget to continue this ground game approach. Our view of SilverBow's market position is simple; continue building a best-in-class operating platform, highlighted by peer-leading cost structure and top-tier capital efficiency metrics such as ROIC, recycle ratio and debt-adjusted production growth. From there, we can assess external opportunities for expansion. I encourage listeners to review our latest corporate presentation to see how well SilverBow stacks up against our competition.

Moving on to our preliminary 2020 budget, our plan is to continue with a one-rig development program, which targets free cash flow generation. We expect to increase oil production by over 25% and reduce capital spending by approximately 30% when compared to 2019. Our focus remains on enhancing our balance sheet and liquidity position, and opportunistically expanding our high return inventory portfolio.

Our conservative planning at $52.50 for oil and $2.50 for gas means the returns of our program could quickly accelerate with only a modest price increase in either commodity. Given our recent inventory additions in Webb and Dimmit counties and our ability to operate profitably with one-rig over the next several years, we plan to remain patient as we look for further acquisition opportunities.

We believe consolidation of the Eagle Ford will play out over time and see compelling synergies from such consolidation. Any acquisition or merger, albeit small or large, must deliver full cycle returns that are accretive to our existing portfolio and to our shareholders.

For 2020, we plan to run one-rig with a capital program of $175 million to $195 million. Our focus is on generating free cash flow by leveraging our low cost structure and capital efficiencies. With the balance portfolio we have assembled, we have the unique optionality within our asset base to quickly reallocate capital towards the highest return, oil or gas wells, all within our single basin model.

I'm excited about the continued success and strategic optionality that SilverBow has as it moves into 2020 and beyond. Steve will provide more insight into our operational performance and guidance, followed by Gleeson's review of the quarter's financial takeaways.

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Steven W. Adam, SilverBow Resources, Inc. - Executive VP & COO [4]

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Thank you, Sean. Third quarter results continue to reinforce our team's drive to achieve excellence in every aspect of our business. As we work to persevere through this challenging price environment, our commitment to deliver the best wells for the lowest cost has been prevalent as we achieve efficiency gains and cost savings across our portfolio.

During the third quarter, our primary focus was the McMullen Oil and Webb County gas areas. The company drilled and completed 5 net wells and brought online 7 net wells. For full year 2019, we expect to drill 26 to 27 net wells and complete 30 to 31 net wells.

In our McMullen Oil area, the company brought online a 2-well pad early in the third quarter that produced a 30-day average per well of 1,200 Boe per day, comprised of 90% liquids. Both wells were completed utilizing over 3,000 pounds of profit and 50 barrels of fluid per lateral foot. This latest generation of wells are demonstrating a 25% to 30% uplift in EUR.

In our La Salle Condensate area, the company completed a single-well pad, which was brought on line in mid-August and also produced a 30-day average of 1,200 Boe per day comprised of 73% liquids.

As Sean previously mentioned, we have delivered strong growth in our liquids production and we're above third quarter guidance for oil and NGLs. Total production of 239 MMcfe per day came in at the high end of guidance. This beat was largely driven by wells outperforming expectation in the La Salle Condensate and McMullen Oil areas. Our operations team continues to deliver consistent efficiency gains, which we have reduced cycle times from rig release to first frac stage by 27% compared to 2018.

Looking ahead, we have tightened our full year 2019 capital budget and production guidance to $255 million to $260 million, and 228 MMcfe to 232 MMcfe per day respectively. For the fourth quarter, we are guiding for production of 225 MMcfe to 234 MMcfe per day.

This guidance is largely dependent upon the timing of first production of our 6-well Webb County super pad, the first of its kind in SilverBow's history. One of the reasons this project is so compelling is the opportunity to acquire direct, offset acreage to our prolific Fasken Field. Because we expect initial production rates from this super pad to be in the range of 75 MMcf to 100 MMcf per day of gross production, the variance of just a few weeks from our targeted first production date in early December will have an impact on total fourth quarter production. Thus, the completion in initial production of this pad will be our primary focus through year-end.

This goal calls for an all-in completion cycle time of 24 days for all 6 10,000-foot laterals, targeting over 20 stages and 12 million pounds of sand pump per day. By utilizing dual frac crews, de-bundled sand logistics and newer, more effective consumable conveyance and deployment systems, we are setting record efficiency goalposts.

Overall, from first lease to first production, we expect to have completed this project in just 5 months. Capital efficiency and well-designed optimization continue to be our primary focus as we strive to improve our planning and logistical efforts to reduce overall cycle times.

We've also established a new acreage position in Dimmit County, or what we were referring to is DVO for Dimmit Volatile Oil. Currently, we are in the delineation phase of this 16,000 acre prospect. We were able to build this position at a low cost entry point and had started delineation through 2 wells in the lesser tested was western, more shallower area of the block.

We are encouraged by the early well results with IP-30 rates from each well of 550 Boe per day comprised of more than 80% liquids. Today, we are now seeing shallow decline rates and have been favorably surprised by higher gas rates than originally expected.

Furthermore, we expect even higher reservoir pressures as we step out to the deeper Eastern areas of DVO. The potential of this area is driven by some of the richest organic compound levels in the basin. And we estimate over 750 million barrels of oil in place across our net position.

We strongly believe that applying our capital efficient, low cost structure to this area will unlock a significant inventory of higher return location. As Sean mentioned, we plan to drill and complete additional DVO wells in 2020 through a thoughtful and major development approach.

Additionally, our asset development team continues to be successful at identifying new inventory locations that strategically grow our portfolio and enhance our returns. Since the beginning of 2018, we have added more than 160 wells to our inventory through bolt-on acreage acquisitions and new leasehold positions.

This activity has significantly enhanced the inventory of our portfolio, especially with a one-rig drilling program. We remain optimistic in acquiring smaller sized positions at attractive valuations to expand a more balanced asset base across the Western Eagle Ford. The diversified commodity mix within our Eagle Ford position gives us a sustainable advantage that requires experienced operating personnel along with an in-depth knowledge of the underlying geology.

With that, I'll hand it over to Gleeson.

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Gerald Gleeson Van Riet;Executive VP and CFO, [5]

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Thanks, Steve. In my comments this morning, I'll highlight our third quarter financial results, as well as our hedging programs and capital structure. Third quarter revenue with $72 million with natural gas representing 72% of production and 52% of revenue.

During the quarter, realized pricing was 101% of NYMEX WTI, 104% of NYMEX HENRY HUB, and 21% of NYMEX WTI for NGLs. While gas prices retained a positive differential, the premium decreased from July to September.

NGL prices retreated from second quarter levels on the back of lower ethane and propane prices. We continue to forecast NGL pricing softness in the near term. But based on some recent price recovery in ethane and propane, we're guiding for an NGL price realization of 25% of WTI for the fourth quarter.

Our hedging gain on contracts covering production for the quarter was approximately $11.4 million. Based on the midpoint of our guidance, our total estimated production is 67% hedged for the remainder of 2019. Our gas production is approximately 73% hedge, with a weighted average price of $2.89 per MMBtu. Our oil production is approximate 66% hedged with the weighted average price of $59.57 per barrel of oil and our NGL production is approximately 40% hedged with a weighted average price of $27.93 per barrel of NGL.

For 2020, we have 86 MMcf per day of gas production hedged at a weighted average price of $2.66 per MMBtu and 3,700 barrels per day of oil production hedged at a weighted average price of $56.06 per barrel. Note, that the 2020 figures are inclusive head is entered into the subsequent to quarter end.

In addition, we also use oil and gas basis swaps to manage our exposure to differentials. In the remainder of 2019, we have gas basis hedges on 159 MMcf per day, with a weighted average differential of negative $0.02 and oil basis hedges on 650 barrels per day at a weighted average differential of positive $4.58.

For 2020, we have gas basis hedges on 129 MMcf per day with a weighted average differential of negative $0.04. As new pipeline capacity towards the Gulf comes online, we anticipate slightly lower basis premiums going forward. With that said, there's no doubt that the Eagle Ford's location provides a competitive advantage as we realize premium Gulf Coast pricing for both oil and gas.

Turning the cost, lease operating expenses were $0.25 per Mcfe in line with guidance. Transportation and processing costs for the quarter were $0.31 per Mcfe, while production taxes for quarter were 5.2% of oil and gas revenue, both coming in below the midpoint of our guidance range. Adding our LOE, T&P and production taxes together, we achieved total production expenses of $0.73 per Mcfe, which we believe stands out amongst our peers.

Cash G&A of $4.5 million was below guidance is $5.1 million. For fourth quarter, we're guiding for cash G&A of $4.8 million to $5.2 million. Our cash operating expenses, including G&A, totaled $0.94 per Mcfe in the quarter compared to $0.95 a year ago. We remain on track to achieve our 2019 all-in cash offering sense target of $1 per Mcfe. Our ability to continue to drive our cost structure lower is a defining attribute of SilverBow.

In total, strong liquids production and efficient operations resulted in adjusted EBITDA of $62.9 million. At $2.85 per Mcfe, our adjusted EBITDA per unit continues to benefit from a higher liquids production mix and increase from second quarter levels of $2.73, despite a decline in commodity prices as our hedge position provided some stability.

As Sean noted earlier, we generated $4 million of free cash flow for the quarter. I will add that we achieved this while spending approximately $5 million on our organic leasing programs.

Finally, turning to our balance sheet, we had $282 million outstanding under our revolving credit facility at the end of the quarter, and our liquidity position was approximately $131 million. Subsequent to quarter end, our borrowing base was re-determined at $400 million. We'd like to thank our banking syndicates for their continued support. At the end of the third quarter, we are in full compliance with all our financial covenants and have significant headroom.

And with that, I will turn it over to Sean to wrap up our prepared remarks.

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Sean C. Woolverton, SilverBow Resources, Inc. - CEO & Director [6]

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Thanks, Gleeson. To summarize, the third quarter illustrated the company's track record of execution. We generated positive cash flow, more than doubled our oily inventory, increased oil production and further reduced our per unit costs. Our borrowing base provides us the liquidity to continue assembling our balance commodity mix portfolio and to pursue our low cost development program. Our fourth quarter operations are focused on delivering SilverBow's largest and most complex pad in the company's history, which should coincide with seasonal highs in gas prices.

Heading into 2020, we are more encouraged than ever. We're controlling what we can control. Commodity prices clearly is not within our control. However, optimizing well performance, balancing our production mix, adding accretive inventory, further reducing costs and allocating capital to our highest return projects are within our control. And on that front, we have consistently executed on our stated objectives.

We're proud of our progress, but by no means complacent. Our preliminary 2020 plan sets us up for more than 25% growth in oil production, a 30% reduction in capital spending year-over-year and a self-funding development program targeting positive free cash flow. SilverBow's best-in-class operations is generating peer leading returns across ROIC, recycle ratio, debt-adjusted production growth and cash operating margins.

Today, we stand out amongst our peers given the transformational change from where this organization was just 3 years ago. We are afforded the unique optionality to remain disciplined and self-funded, which we leverage to our advantage as we continue our organic growth and optimization strategy and evaluate potential asset packages and partners of choice to accelerate the size and scale of SilverBow's in-basin leadership. We look forward to updating our shareholders next quarter.

And with that, I'll turn the call back to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from Dun McIntosh of Johnson Rice.

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Duncan Scott McIntosh, Johnson Rice & Company, L.L.C., Research Division - Research Analyst [2]

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Impressive quarter, particularly on the free cash generation, and a little bit earlier than you're expected. I think fourth quarter was originally the target. What were some of the drivers on getting you to that free cash flow inflection point? Was it more outperformance on the well side or more cost efficiency or combination of both? Just some color there would be appreciated?

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Sean C. Woolverton, SilverBow Resources, Inc. - CEO & Director [3]

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Yes. It is a combination of both improved performance on the liquids side, the production there continuing to increase our product mix towards more favorable revenue streams, specifically on oil. I think our operating margins for the quarter were nearly 75%, so definitely peer leading there. And so the product mix helped us as well as lower costs. We continue to drive our costs down coming in at $0.94 Mcfe, really helps us take advantage of our low cost structure. And again, I think Gleeson mentioned it, but the $4 million of free cash flow included $5 million on land spend. So we're actually living within cash flow and growing our inventory at the same time, so we're very pleased with where we're at.

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Duncan Scott McIntosh, Johnson Rice & Company, L.L.C., Research Division - Research Analyst [4]

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And then maybe for Steve, congrats on putting together the Dimmit County position. I guess what was it about that acreage, maybe why was it available for the organic leasing and what was it that it attracted you all? And then maybe a little further, what are some of the things that you all expect to achieve there that maybe others were not able to?

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Steven W. Adam, SilverBow Resources, Inc. - Executive VP & COO [5]

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Just kind of succinctly. We had done some regional work throughout the basin and had come across different areas based on hydrocarbon content, as well as where there had been some underdeveloped opportunities. That's what attracted us to this area. And then we wanted to see what we could do with all of our in-depth basin knowledge, what could we do to further extend some opportunities there and exploit the property and the play.

And so what we did is we elected to take a kind of a low cost entry position on a massive number of acres, and then applied some of our science to these first 2 wells, science being some deep petrophysical knowledge as well as some core knowledge. That then allowed us to take to what the peripheral area work had been done and combine it with our analysis to improve the targeting. And then to also come up with a late generation completion design of which we tested a couple of different scenarios on both wells. And that, therefore, gives us a path forward on how we can not only achieve the results that we already have, but how we can continue to work those results and to continue to prosecute the acreage as we see where better development opportunities exist.

So that's a little bit of a ground play coming forward on how we looked at it from the beginning, as to kind of where we are now. And then how we continue to want to look at delineating the acreage as it relates to the opportunities we've already seen in the first 2 wells.

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Operator [6]

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And your next question is from Neal Dingmann of SunTrust

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [7]

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Sticking with the Dimmit play for a second. Can you talk just a little bit more on that what's the existing infrastructure in that play. As well as Sean any just chatter you can give or overall comments you can give as to the type of capital you'll allocate in that area in the coming quarters.

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Sean C. Woolverton, SilverBow Resources, Inc. - CEO & Director [8]

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I will let Steve answer that one.

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Steven W. Adam, SilverBow Resources, Inc. - Executive VP & COO [9]

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So in terms of the infrastructure, Neal, it's relatively skinny. It's one of those new areas. There's less infrastructure as you go out to the western flanks and there's a little bit more as you come towards the east. And we'll just have to collectively put that together as we continue to see the development unfold, first of all, the delineation and then the latter part of the development.

From a capital plan, we plan to drill maybe to 2, 2-plus wells next year. We have a strong line of sight after we took out the science costs of the first 2 wells. We're already there at $4 million to sub $4 million well costs. So we feel very comfortable that we can be in the sub $4 million and continue our delineation. And then once we get an opportunity to see when we want to pull the trigger on the manufacturing process, we should be able to exploit that at -- numbers that are well within our reach, below the $4 million. But more importantly, we can do it on a mass scale and should be able to have strong execution ability there.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [10]

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Could you just talk -- and asked in a while, just how do you view the total inventory in your oily or condensate plays such as La Salle and McMullen. Just wondering sort of what the totals are these days and how you view the running room? Thank you

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Sean C. Woolverton, SilverBow Resources, Inc. - CEO & Director [11]

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Yes. So when we think about our inventory, we bucket it into liquids and gas. Right now we're sitting north of 700 locations identified on our acreage position. Probably 35%, 40% of that location counts associated with liquids and the other components are associated with more of a dry gas acreage set.

In terms of where we've been executing in the La Salle and McMullen area, we still have several years of inventory opportunity set there. And we've been very pleased with is we've been able to get in there and either pick up little bolt-on acreage blocks that allow us to drill longer laterals. In fact, in the coming quarters, we're looking at drilling a number of 10,000 foot laterals that historically we had those flagged at about 5,000 to 6,000 foot laterals. So we're getting longer laterals in those areas to improve the economics and commerciality of our position.

And then we're finding opportunities to bolt-on blocks that are nearby that has given us the opportunity to take advantage of our presence already in this area. So we think we can continue to find opportunities to keep that inventory loaded. And you look at where we stand from our overview -- viewpoint and we have 15 years of opportunities in front of us. So we like our inventory and look to expand it further.

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Operator [12]

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(Operator Instructions) There are no additional responses at this time

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Sean C. Woolverton, SilverBow Resources, Inc. - CEO & Director [13]

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Thank you, everyone, for joining us this morning and look forward to updating you on fourth quarter and year-end next year. Thanks

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Operator [14]

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