Banco Santander-Chile Earnings Call

Apr 28, 2017 AM CEST
BSANTANDER.SN - Banco Santander-Chile
Banco Santander-Chile Earnings Call
Apr 28, 2017 / 02:00PM GMT 

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Corporate Participants
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   *  Raimundo Monge Zegers
      Banco Santander-Chile - Vice Chairman of Analysis & Prevention of Money Laundering Committee

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Conference Call Participants
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   *  Guilherme Domingues Costa
      Itaú Corretora de Valores S.A., Research Division - Analyst
   *  Sebastián Gallego
      CrediCorp Capital, Research Division - Associate of Andean Banks 

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Presentation
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Operator   [1]
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 Good day, ladies and gentlemen, and welcome to the Banco Santander-Chile First Quarter 2017 Earnings Conference Call. (Operator Instructions)

 I'd now like to introduce your host for today's conference, Mr. Raimundo Monge, Director of Strategic Planning. Sir, please go ahead.

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 Raimundo Monge Zegers,  Banco Santander-Chile - Vice Chairman of Analysis & Prevention of Money Laundering Committee   [2]
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 Thank you very much, and good morning, everybody. Welcome to Banco Santander-Chile’s First Quarter 2017 Results Webcast and Conference Call. My name is Raimundo Monge, Director of Strategic Planning, and I'm joined today by Emiliano Muratore, our CFO; and Robert Moreno, our Manager of Investor Relations.

 Thank you for attending today’s conference call in which we will discuss our performance in the first quarter, which is starting to reflect the thorough execution of our strategy as we see throughout the call. First of all, let us start our call with a brief update of the outlook for the Chilean economy. In the quarter, we have seen mixed signals on the macro front. The year started a little lower than expected, even though towards the end of the quarter, economic activity began to gain momentum, especially driven by the external sector. For this reason, we have not significantly modified our economic outlook for 2017. We're expecting GDP growth of around 1.8% to 2% this year, a little bit ahead of 2016. We have also included our forecast for GDP growth in 2018 at 2.7% and 3% in 2019.

 Unemployment continues to be resilient, even though job creation has not been of the highest quality. After a slow start, inflation expectations rebounded, and we are expecting a U.S. inflation rate of 2.7% in 2017, similar to the level reached in 2016. Therefore, inflation should not be -- should no longer be a negative factor on the bank margins going forward. The Central Bank has been easing its monetary policy. Rate -- rates cut have been 50- basis point in the quarter, and an additional 25- basis point in April. This also brightens the outlook for margins as liability reprise quicker than loans.

 Consumer expectations are improving, which is also another positive sign to the economy. This should -- that the economy should begin to perform slightly better going forward. The strength of the external sector driven by solid economic growth in China and the U.S. is also bolstering export demand. The recent strength in copper price may also result in upside potential to our GDP growth forecast.

 Loan growth in the banking system remained relatively stable. As of February, loans were growing at 5% year-on-year, quite in-line with our expectations for the year. The growth rate of mortgage loans has been decelerating as anticipated, but the positive growth of export sectors and the instability of employment figures fostered growth in the Middle-market and Retail segments.

 Now we will give further detail into the implementation of our strategy and how this is generating increasingly higher level of profitability and efficiency. Net income in the first quarter '17 totaled CLP 142.4 billion, increasing 13.5% year-on-year and 31.1% Q-on-Q. This result was driven by strong growth of client revenues leveraged on the lower cost of credit and improved efficiency. These sound operational trends are reflected in the 31.9% year-on-year rise in the net contribution from our business segments, a metric that resumes all client pretax revenues and costs, including provisions. This was led by a 54% increase in net contribution from our Retail Banking segment. With this result, the bank's ROE reached 19.5% in the quarter, a 140- basis points higher than the ROE seen in the first Q of '16 and ahead of our previous guidance. This was notable not only as it is starting to reflect the clean execution of our strategy, but also because this performance was achieved despite a relatively low inflation environment and a higher corporate tax rate. This was possible since the bank has been able to record double-digit revenue growth both on the lending and nonlending revenues.

 On Slide 9 of the webcast, we provide a breakdown of our client revenues. 61% of our client revenues come from nonlending sources, mainly the spread earned over deposits, especially checking accounts plus fee income and client treasury services. These revenues are expanding 10.1% year-on-year, driven by an increasing demand deposit, growth of fee income and solid client treasury income. The remaining 39% of revenue comes directly from lending spreads net of deposits -- net of provisions. These revenues are growing 23% on a year-on-year basis due to the stable client spreads and lower cost of credit. We believe this healthy revenue mix reflects a fundamental strength of our franchise and explain to a large extent how we have been able to achieve an expansion in ROE in a relatively low growth environment -- in a relatively low growth, low inflation environment. As we will see in the rest of this presentation, our strategy has been a key element behind this result.

 In terms of strategy, we have important advances this quarter in all of our 4 strategic objectives. As seen in the slide, our strategy has circled around, number one, focusing our growth on those segments with a higher risk adjusted return; two, increasing client loyalty through an improved client experience and quality of service; three, deepening our ongoing commercial transformation by expanding the bank's digital banking capabilities; and number four, optimizing our profitability and capital use to increase shareholder value in time.

 Total loans increased 0.9% Q-on-Q and 6.7% year-on-year in the first quarter of '17. Economic growth remained subdued in this period, but consumer confidence has been improving and employment figures have remained relatively stable. For this reason, lending could accelerate as the year progresses, especially in Retail Banking. We will also be expanding our new distribution and client model for different retail segments, which should also lead to a more efficient growth model. During the first quarter of '17, Retail Banking loans increased 1.3% Q-on-Q and 7.6% year-on-year. Loans to individuals increased 1.3% Q-on-Q and 7.6% year-on-year. The bank continued to prioritize growth among middle and high income individuals. Loans in this segment rose 1.5% Q-on-Q and 8.8% year-on-year.

 Loans to SMEs expanded also at a relatively high rate in the quarter, growing 1.6% Q-on-Q and 7.8% year-on-year. Loans in the Middle-market and our corporate unit GCB grew at a slower pace in the quarter. As we have stated before, these segments contribute to the bank's profit and loss segment mainly through nonlending activities, as loans are generally low yielding. For this reason, the net contribution from the Middle-market, especially GCB, were solid due to an increase in loan-lending revenues and greater customer loyalty. In any case, we expect a reactivation of loan demand in this segment for the rest of the year as export-oriented activities should be expanding well.

 Total customer funds, which are deposits plus mutual funds managed by the bank, decreased 0.5% Q-on-Q and increased 4.5% year-on-year. In the quarter, the Chilean central bank cut rate -- interest rate 50- basis point. This lowered client demand for time deposits and increased the flow of money to mutual funds, which is visible in the 9.2% Q-on-Q growth of funds brokered by the bank. This in turn had a positive impact on fee income in the quarter. Noninterest-bearing demand deposits were flat Q-on-Q and increased 4.7% year-on-year, outstripping time deposit growth, which also has improved our funding mix.

 In the first quarter of '17, net interest margin (technical difficulty) compared to 4.2% in the fourth quarter of '16 and 4.5% in the first quarter of '16. On a year-on-year basis, net interest income growth was lower than loan growth due to a low inflation rate in the first quarter of this year compared to the first quarter of the last year. The bank has more assets than liability linked to inflation, and as a result, margins go down when inflation decelerates and vice versa. On the other hand, client NIMs, which exclude the impact of inflation and the ALCO's liquidity position -- Asset and Liability Committee's liquidity position -- remained stable at 4.8% compared to the last quarter of last year. Given the evolution of high-yielding retail loans and lower funding cost due to interest rate cuts, we expect client needs to remain stable or rise slightly for the rest of the year. Going forward, quarterly NIMs should improve, and the average net interest margin for 2017 should be -- should finish at the similar level to the one achieved in 2016. This will be a combination of improved client NIMs and more support coming from higher inflation and lower rates. Total U.S. inflation in 2016 was 2.7%, and we expect a similar level of U.S. inflation this year, which compares to annualized rate of 2% in the first quarter. At the same time, the bank liabilities have a shorter duration than assets, so a 100- basis point average yearly fall in the short-term interest rate should result in a 12- basis point rise in NIMs. Therefore, deposit cost should continue to fall as the lower rate environment is absorbed.

 Asset quality remained relatively stable in the quarter. On a year-on-year basis, the nonperforming loans ratio decreased from 2.5% in the first quarter of '16 to 2.2% in the first quarter of '17, in line with the bank's loan growth strategy of focusing on those segments with the highest return, net of risk. This also has a similar effect on the cost of credit, which descends to 1.1% in the quarter compared to 1.2% in the first Q of '16 and 1.3% in the last quarter of last year. Compared to the fourth quarter of '16, the nonperforming loan ratio increased 10- basis point mainly due to seasonal factors and higher growth in Retail Banking segment compared to a reduction in wholesale lending. In addition, as mentioned in the previous earnings reports, the bank has been enforcing a strategy of lowering our exposure to the low end of the consumer loan market. This has entailed an active policy of charging-off loans in the lower income segment and restricting loan restructuring. We expect lower provision for consumer lending for the rest of 2017 given the aforementioned rise in coverage plus the change in the consumer loan mix, improvement in admission policy and more efficient recovery efforts.

 Let it be said that the coverage of nonperforming loans -- nonperforming consumer loans was 280% in March 2017. For the rest of the year, we expect nonperforming loans to rise moderately due to sluggish economic growth and a weakening job market, but the loans entering nonperforming loan status already have a high coverage ratio. Therefore, the bank's expected loss ratio, measured as loss-loan allowances over total loans, will remain relatively stable and the cost of credit should not deviate from our initial guidance of 1.1%, 1.2% for loans for the whole year. Therefore, with a stable or lowering cost of credit on a year-on-year basis and a stable or rising client NIM, client contribution should continue to rise, bolstering overall profitability.

 Regarding our second strategic objective, the bank continued to increase customer loyalty and improve customer satisfaction, which are key strategic goals, as they create sustainable and long-term value to our shareholders. Loyalty individual customers, defined as client with more than 4 products plus minimum usage and profitability levels, have been rising at a high pace, especially in our target segments.

 Santander-Chile also has been continuously innovating the market, which is also generating greater customer awareness and loyalty, fueling client and revenue growth. We continued to expand our WorkCafé branch format, which is attracting 50% more new clients than regular branches. We also launched a new version of our Santander LATAM Pass credit card, which has the best benefit of any credit card in the market.

 Finally, innovative digital products, such as our 1-2-3 Click consumer loan is benefiting loan growth and fee income. This product allows clients to obtain via our website or app a consumer loan in 3 clicks and directly deposit -- and the money is directly deposited in an account. For the rest of the year, we anticipate further launches and innovations to continue generating positive goodwill with our clients.

 As a result of these initiatives, fee income increased 15.6% year-on-year in the first quarter of '17. Retail Banking fees increased 14.2%, mainly driven by rising client loyalty and cross-selling, as mentioned before. Fees in GCB, our wholesale unit, grew 50.2% year-on-year. The strength of the bank in providing value-added non-lending services, such as cash management and financial advisory services, continues to boost fees in this segment.

 In the quarter, the bank also continued to transform the distribution network in line with our third strategic objective. As we have stated in previous calls, Santander-Chile has been engrossed in an ambitious project of redesigning and testing new distribution models and formats. The bank is transforming its branch network by adapting a multisegment approach with smaller branches that are multisegment with dedicated spaces for the different business segments. These new branches are more productive and client-friendly and, therefore, we do not expect this will impact our business volumes. Today, we have remodeled more than 60 branches to our new multisegment format. In 2017, we expect this trend to continue while closing and consolidating less efficient branches.

 In addition, in the first quarter of '17, we continued to open our mostly digital advanced branches called WorkCafé. These branches are high-tech, high-touch branches, with no human tellers or back offices. These branches have 3 front office persons for every back office collaborator compared to 1:1 ratio in a standard branch. 17% of the spaces in these branches are dedicated to sales compared to just between 30% and 40% in a traditional branch. The direct cost-income level of the WorkCafé is 14% compared to 24% cost-income ratio for a normal office. These branches also lead all client satisfaction indicators. In 2017, we expect to open a total of 20 WorkCafés.

 In internet banking, our market share, excluding the state-owned bank, surpassed 42%. This implies that more and more customers are performing transactional operations through our web and/or mobile, and this reduces the need not only for branches, but for ATMs as well. The strength of our payment service via web or app has allowed us to eliminate 36% of our ATMs in the last 4 years. In 2017, our priority will be to further develop our mobile banking capabilities and usage by our clients. The bank's digital transformation and new branch format allows it to accelerate its branch closure plan in the quarter. In the last 12 months, we have closed 12% of our branches. This transformation is boosting productivity. In the same period, total volumes per branch has grown 16.5%, and volumes per employee has increased 7.2%. As a result of all the above, operating expenses increased 1.7% year-on-year in the first Q of '17, and efficiency ratio reached 40% in the period, below our initial guidance.

 Going forward, we expect the growth rate of cost to remain at a relatively low level as a result of this productivity enhancing and cost-cutting measures. It is important to point out, as we stated in our financial report, that in the second quarter of '17, another wave of management changes will be executed and, as a result, the bank will recognize a onetime charge of up to CLP 11 billion either in April or May in the line item, other operating expenses. With these and other measures, the bank expect to maintain a low single-digit cost growth throughout this year and the next.

 Finally, our client-driven strategy is optimizing profitability and capital and increasing shareholder value. The bank concluded the quarter with strong capital ratios, as we have been implementing a series of initiatives to control the growth of nonproductive risk-weighted assets. The growth of total risk-weighted assets was 3.3% year-on-year in the first quarter compared to 6.5% growth for loans. This has allowed the bank to continue paying out attractive dividends. Shareholders just approved the distribution of 70% of 2016 profits, which was at the high-end of our estimates. Given the good dividend the bank has been paying plus the share price appreciation, since the end of 2014 the ADR price of Santander-Chile has outperformed several of our main LatAm peers, reflecting the positive results our strategy is bringing to shareholders, especially in the long-term despite being operating in a relatively challenging economic environment.

 In summary, first Q '17 performance is reflecting that our strategy is delivering on the promises we have been hinting to the market. In a relatively unexciting macro environment, with low inflation and rising taxes, we have been able to produce double-digit earnings growth and sustain ROEs that are close to double our cost of equity. The bank has been steady improving its competitive position in the market, increasing its loyal customer base and transforming its business models and distribution capabilities to face both the more demand in business environment and the digital challenge most companies are facing. As recently reported by the banking regulator, Santander-Chile was the most profitable bank in Chile this first quarter. For the rest of the year, we should see similar trends, and we have slightly adjusted upwards our ROE target to levels between 18% at 18.5% ROE.

 At this time, we will gladly answer any questions you might have.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Our first question comes from the line of Guilherme Costa with Itaú.

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 Guilherme Domingues Costa,  Itaú Corretora de Valores S.A., Research Division - Analyst   [2]
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 Guilherme Costa from Itaú BBA. My first question is about your coverage ratio. I'd like to ask you how comfortable you are with your current coverage ratio. I remember from the last conference call you mentioned that we were probably going to see a contraction in the coverage ratio throughout 2017. But given this contraction we have already seen in the first Q, do you expect to see further contractions on the coverage ratio going forward? And then I have my second question.

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 Raimundo Monge Zegers,  Banco Santander-Chile - Vice Chairman of Analysis & Prevention of Money Laundering Committee   [3]
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 Okay. Well, in terms of coverage ratio, as we have been saying, the rise we saw in the last 2 years or so was a combination of more demanding provision and guidelines set by the Superintendency of Banks, our regulator. And secondly, that we were trying to get rid of our exposure to the very low-end by provisioning and trying to get rid of that exposure from our profit and losses point of view. What we have seen to some extent this quarter in part is because -- to seasonality given that the first quarter in the southern hemisphere is a holiday period, people tend to be a little bit less update in terms of the payments, but also that, according to our predictions, clients that were expected to have problems -- effectively has -- have faced problems and, as a consequence, the nonperforming loans have risen, but that was already taken care by the excess provision or the anticipated provisioning that we have done last year and the year -- last year especially and the year before to some extent as well. So we foresee that our coverage ratio should be moving between 130% and 140% basically because we already anticipate part of that deterioration in the low end. But should it be coming much lower than that, given that some of the provisions that we have, have nothing to do with the nonperforming levels are more concerned about future provisioning or future regulations that is moving in line of Basel III, which allows internal models to predict the falls in provisioning levels. So the level should be higher than historically, but probably has already peaked.

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 Guilherme Domingues Costa,  Itaú Corretora de Valores S.A., Research Division - Analyst   [4]
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 Okay, perfect. And regarding the cost of risk, I just remember you said that you expect the cost of risk between 1.1% and 1.2% for 2017. I'm asking this because when we see your provisions, we can say that provisions declined a lot quarter-over-quarter, but the provisions for the Consumer segment has increased somewhat. Do you expect that possible deterioration in the consumer loans could lead to a upward revision in your cost of risk guidance? Or are you comfortable with the provisions you have right now?

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 Raimundo Monge Zegers,  Banco Santander-Chile - Vice Chairman of Analysis & Prevention of Money Laundering Committee   [5]
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 When we talk about provisions, we are actually combining 3 lines: one is provision, the other is charge-off and the other is recoveries. So the figure is a net figure. That rise in provision is a combination of the 3 elements moving and is linked to elements such as the fact that this -- especially low-end consumers will start facing difficulties, but you have already taken care of that. So you finance, to some extent, the charge-off release in provisions previously set. And then the other element is seasonality, which is, the lower you go, the more kind of -- the more there'll be chances of not being paid on time. That is -- usually happens in the first quarter, happens to the rest of the market as well. So we foresee that in the second quarter, the situation should normalize. All-in, as long as the job market, especially the people that work under a salary, under a contract, doesn't deteriorate going further, we don't foresee a greater deterioration in asset quality conditions, because remember that we have been moving to the upper third of the working population, which shouldn't have big difficulties, especially because the macro conditions should be similar to 2016 or slightly better this year. So it's -- of course, it's a concern, and we being a retail bank, of course, you have more risk when the macro conditions deteriorate. But today, the kind of the central scenario that most economies give us is that the macro conditions will be similar or a little bit better than what we saw last year.

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Operator   [6]
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 (Operator Instructions) Our next question comes from the line of Sebastián Gallego with CrediCorp Capital.

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 Sebastián Gallego,  CrediCorp Capital, Research Division - Associate of Andean Banks    [7]
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 I have 2 questions. Could you comment on the management changes that you're expecting and, as a result, you will be recording some severance expenses? And the second question is regarding fees. We're seeing a very good performance on fees, and I was just wondering if that is sustainable and if that kind of growth should be seen during the rest of 2017.

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 Raimundo Monge Zegers,  Banco Santander-Chile - Vice Chairman of Analysis & Prevention of Money Laundering Committee   [8]
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 In terms of the management changes, they are very much in the line of what we did last year. There have been some very profound changes both in the regulation and in the consumer behavior and in the way the banks are run and people are expecting the banks to be behaving. That means that you have to do every once in a while restructurations to take into account that situation. Last year, we did it, and very rapidly our year-on-year growth rate slowed down very quickly as you get rid of redundant positions, et cetera. This year, we foresee something in the same line, and that's why we -- as we claim in our report, the idea is to do it once and then sustain cost growth that could be even lower than our previous forecast that we were talking about, cost growth of between 4% to 5%, could be lower than that, 3%, 4% or even lower, so in line of inflation, a little bit ahead of inflation. So it's simply a way to reflect that with changing business conditions, we need to act and that's it. In terms of fees, this first quarter probably overstayed our year-on-year growth rate in part because we had very good results in our wholesale unit, which not necessarily you can repeat it every single quarter. In Retail, it's more recurrent because -- relative to use. Going forward, as we have stated in previous calls, the best kind of correlation is between loyal customers and fee growth. The fact that we are growing between 8% and 9% more or less in the most relevant segment make us believe that fees in a kind of moving average basis should be growing around that line.

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 Sebastián Gallego,  CrediCorp Capital, Research Division - Associate of Andean Banks    [9]
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 All right. And if you allow me, just one additional question on branches and WorkCafé. Could you provide us a guidance on what you expect to close the regular or standard branches? And how you expect to increase the WorkCafés?

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 Raimundo Monge Zegers,  Banco Santander-Chile - Vice Chairman of Analysis & Prevention of Money Laundering Committee   [10]
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 The WorkCafés are expected to close in around 20 by the end of the year. In terms of absolute number of branches to be closed, it's a little bit tricky because what you try to do is on a case-by-case basis try to see whether you have enough surface to merge 2 branches that are close by and the like. So it's a little bit more difficult. There's no specific target to close. But of course, the process of changing format and the process of kind of eliminating of what our clients are expecting is what drives that. So the more transactions that are done outside the branches, the more clients prefer to do things through applications in the website or mobile, there's more room to close branches. So it's a little bit of the other way around, where the clients are requesting what we're providing branches is what leads the process. So it's difficult to give a hard figure. But the thing that is easier to evaluate is that the average [surface] and, therefore, the average cost of running the branch network definitely will come down given that more and more of the space in the branch is dedicated to commercial activities and, as a consequence, where you are getting REIT is basically back office, tellers and sales and all the supporting areas that operate in a branch. So the extreme case is the WorkCafé branches where they simply have no back office, no human tellers and, as a consequence, 70% of the surface is dedicated to sales and after-sales activity. So we think that we will be streamlining our branch network, especially in terms of cost going forward. But I don't feel that we have an accurate number of how many points will be closed.

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Operator   [11]
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 I'm not showing any further questions at this time.

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 Raimundo Monge Zegers,  Banco Santander-Chile - Vice Chairman of Analysis & Prevention of Money Laundering Committee   [12]
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 Okay. Thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon. Have a good day.

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Operator   [13]
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 Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.




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