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VisionChina Media, Inc. (NASDAQ:VISN)

Q2 2011 Earnings Call

August 4, 2011 8:00 pm ET

Executives

Colin Wang - Director, IR

Limin Li - CEO

Stanley Wang - VP, Finance

Analysts

Dick Wei - JPMorgan

Philip Wan - Morgan Stanley

Chenyi Lu - Cowen & Company

Steve Zhang - Macquarie

Chunming Zhao - SIG

Eddie Leung - Merrill Lynch

Operator

Good evening and thank you for standing by for VisionChina Media's second quarter 2011 earnings conference call. (Operator Instructions) I now will turn the call over to your host for today's conference, Mr. Colin Wang, Investors Relations Director for VisionChina Media.

Colin Wang

(Technical Difficulty) who will take you through our financials and key operating metrics. After their prepared remarks, Mr. Li and Mr. Wang will be available for your questions.

Please note that today's discussion will contain forward-looking statements made under Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in our Annual Report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. VisionChina Media does not assume any obligation to update any forward-looking statements except as required under applicable law.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on VisionChina Media's Investor Relations website at www.visionchina.cn.

I will now turn the call over to our CEO, Mr. Li.

Limin Li

Thank you, Colin. Hello, everyone, and thank for joining us. With an expected seasonally weeks first quarter behind us, we were excited to move on into the second quarter of 2011. We were thrilled to deliver strong results this quarter, with revenues meeting the company's guidance and breaking our own record for revenue generated in a single quarter.

Total revenues in the second quarter of 2011 were $45 million, a 41.6% increase year-over-year and a 38.3% increase quarter-over-quarter. In the quarter, we realized non-GAAP profitability and we are now increasingly confident we will achieve profitability for the full year of 2011.

I would like to share some key operating data from the quarter with all of you. Utilization for the second quarter of 2011 reached 8.63 minutes per broadcast hour, an increase of 36.1% year-over-year and an increase of 22.9% quarter-over-quarter. Revenue per broadcasting hour reached $1,003, an increase of 57.7% year-over-year and an increase of 43.5% quarter-over-quarter.

Gross profit reached 29.3%, an increase of 19.5 percentage point year-over-year and an increase of 28.6 percentage points quarter-over-quarter. A total of 997 advertisers placed advertisement on our network in the second quarter, an increase of 62.4% year-over-year and an increase of 199.4% quarter-over-quarter.

In aggregate, the number of companies that have placed advertisement on our network reached 2,766 as of June 30, 2011. Advertisers composition remains stable during the quarter and incremental advertising placement were noted among returning advertisers. Revenues from the subway side of the business continues to grow in the second quarter, contributing 52.5% of total revenues, an increase of 5.3 percentage points year-over-year and an increase of 7.1 percentage points quarter-over-quarter.

In terms of our media network, we've signed an exclusive contract with the Beijing Subway company to operate subway mobile television on four new lines that became operational in the second quarter of 2011, and did so on very favorably terms, further strengthening our subway television network coverage in key metropolitan area.

Furthermore, the three new Shenzhen subway lines, for which we've signed an exclusive contract with Shenzhen subway in the first quarter, became operational in the second quarter, before the opening of with the 26th Universiade. On this newly operational subway lines in Shenzhen, the mobile television displays that have better quality screen and sound system and have been better placed for an improved audience experience.

The completion and upgradation of Shenzhen three new subway lines, line two, four and five marks the beginning of a new subway era for Shenzhen, one of the China's tier-1 cities. Already the four tier-1 cities in which 60% of advertising budget VisionChina spent have formed seamless above-ground bus and below-ground subway public transit network.

According to the 2010, mobile television effectiveness measurement report for China, on average in Tier-1 cities 50% of commuting is done on the public transport network. We believe that given the public's increasing reliance on public transportation, the public transit and mobile television market will have sustainable growth that leverages its outstanding coverage and dissemination power.

As we mentioned in the first quarter, now e-commerce operator advertisers were once again excited about the positive conversion rate and the fast positive impact on revenues seen after phasing targeted ad on our public transportation network in the second quarter. As a result, these companies are already actively contributing to our placement backlog for the remainder of 2011.

Also in the second quarter, we were actively engaged in work on technological innovations and enhance the overall mobile television audio vision environment for audiences. For example, a sound system that is auto control in accordance to external noise levels has been successfully developed and submitted for national utility model patent, and the invention patent registration. The technology has been installed for trial uses on our network on buses in some cities, and the results have shown significantly improved sound quality that impacts the effectiveness of media.

Meanwhile, we are working continuously to execute cost control plans, by actively negotiating with local media network partner. During the second quarter, we again reached agreements with various radio and broadcasting bureau, and subway and bus companies to roll on our media top. Moving one step closer to our strategic goal of limiting annual media cost step up to 10% or less.

In terms of external cooperation, despite comprehensive cooperation with various leading satellite TV station in terms of programming and marketing promotions, VisionChina Media is also working across industry with online video website, such as YouTube, that play user created online video content on our mobile television platform, to make our content more attractive. VisionChina Media will continue expanding external cooperation in the future, further improving the user experience to support revenue increases.

As recently announced, according to the share purchase agreement and shareholder agreement entered into with Focus Media and other investors that closed on January 13, 2011, we were delighted to welcome Mr. Kit Leong Low, Chief Financial Officer of Focus Media to our Board of Directors, on July 20th.

Mr. Low has extensive experience in investment banking and an outstanding educational background. His appointment to our Board, without doubt prove valuable to VisionChina Media, especially in the areas of corporate finance and investment. At the same time, we're confident that his appointment to our Board will further foster the growth of a positive relationship and market cooperation between VisionChina Media and Focus Media in future.

Building on the success of our second quarter, we're confident that VisionChina Media will achieve overall profitability for the third quarter and full year of 2011. Two years of development in ever changing and evolving technological and economic environment, we have sought ways to bring vale to our shareholders. I am confident that our innovativeness and ability to execute will bring valuable long-term returns for VisionChina Media on the back of China's sustained economic growth.

I will now hand over the call to our Vice President of Finance, Mr. Stanley Wang, to discuss our financials and operating metrics in more detail.

Stanley Wang

Thank you, Mr. Li. As Mr. Li mentioned in the second quarter of 2011, we are pleased to see the anticipated strong growth of our business and operating results. Especially following the seasonal weak first quarter, we have continued to grow our advertiser base and are pleased to report a record high number of advertising customers during this quarter.

We also achieved record high revenue during this quarter with revenue growth of 38.3% quarter-over-quarter and 41.6% year-over-year. Furthermore, we achieve non-GAAP net income of $0.9 million, and it's another improved result. As Mr. Li mentioned, with strong momentum continually growing our topline, we are confident about our full year 2011 result.

Turning to our second quarter operating results. In addition to key operational highlights just mentioned by Mr. Li, our network capacity which is measured by total broadcasting hour was 44,379 hours in the second quarter of 2011, representing a slight 3% decrease compared to 45,878 hours in the first quarter of 2011.

The slight decrease in our network capacity compared to the first quarter of 2011 reflects a full quarter impact of the termination of an exclusive agency agreement in February 2011. In the second quarter of 2011, the company sold a total of approximately 383,000 advertising minutes in our network compared to 322,000 advertising minutes in the first quarter of 2011, and 304,000 advertising minutes in the second quarter of 2010. We ended the second quarter of 2011 with 562,000 personnel, representing a net increase of 14,000 personnel over the course of the second quarter.

Turning now to our second quarter financial results, total revenue were $45 million in the second quarter of 2011, within our revenue guidance range of $44.7 million to $6.2 million. This represented a quarter-over-quarter increase of 38.3% from total revenues of $32.5 million in the first quarter of 2011, and year-over-year increase of 41.6% from total revenue of $31.8 million in the second quarter of 2010.

Media cost, the most significant component of the advertising cost was $25.6 million in the first quarter of 2011, representing 80.5% of our total advertising service cost compared to our media cost of $36.3 million in the first quarter of 2011. Media cost decreased by $0.7 million in the second quarter of 2011, which was attributable to our effective execution of cost reduction measures.

Gross profit in the second quarter of 2011 was $13.2 million compared to a gross profit of $0.2 million in the first quarter of 2011, and a gross profit of $3.1 million in the second quarter of 2010. Advertising services gross margin was 29.3% in the second quarter of 2011 compared to 0.7% in the first quarter of 2011, and 9.8% in the second quarter of 2010. The results of our aforementioned revenue growth and media cost reduction strategy of execution.

Selling and marketing expenses were $9 million in the second quarter of 2011, a decrease of 9.4% from $9.9 million in the first quarter of 2011, and an increase of 27.8% from $7 million in the first quarter of 2010. The year-over-year increase of selling and marketing expenses was primarily due to an increase in marketing efforts that result in strong revenue growth. As a result of our cost control measure, selling and marketing expense was 20% of the total revenue in the second quarter of 2011 compared to 30.5% in the first quarter of 2011, and 22.2% in the second quarter of 2010.

General and administrative expenses were $3.6 million in the second quarter of 2011, an increase of 52.1% from $2.38 million in the first quarter of 2011, and an increase of 53.8% from $2.35 million in the second quarter of 2010. The quarter-over-quarter increase in general and administrative expenses was primarily due to a provision of certain doubtful accounts receivable and so has been the increase in legal fee in connection to the pending litigation with the selling shareholders of Digital Media Group Company Limited.

Income for equity method investment accounted to approximately $200,000 in the second quarter of 2011 compared to a loss of $100,000 in the first quarter of 2011, and a loss of $100 in the second quarter of 2010. Operating profit was $0.7 million in the second quarter of 2011, compared to an operating loss of $14.3 million in the first quarter of 2011, and an operating loss of $95.5 million in second quarter of 2010.

The Company recorded a net interest expense of $0.6 million in the second quarter of 2011 compared to a net interest expense of $800,000 in the first quarter of 2011, and a net interest expense of $700,000 in the second quarter of 2010. Net loss attributable to VisionChina Media shareholders was $0.4 million in the second quarter of 2011. Basic and diluted net loss per share attributable to VisionChina's shareholders in the second quarter were (inaudible).

Net income attributable to VisionChina Media shareholder excluding share-based compensation expenses, amortization of intangible assets, impairment loss, and income tax credits in connection to the impairment loss, referred to as non-GAAP in the second quarter of 2011 was $0.9 million compared to a non-GAAP net loss of $10.9 million in the first quarter of 2011. And also a non-GAAP net loss of $2.3 million U.S. in the second quarter of 2010.

The company had cash and cash equivalents of $123.6 million as of June 30 of 2011. Our net cash provided by operating activities during the second quarter of 2011 was $3.9 million. Depreciation and amortization was $2.3 million and the capital expenditure was $2.5 million in the second quarter of 2011.

Turning now to our guidance. The company estimated the total revenue, which consist of advertising revenue, service revenue only, in the third quarter of 2011 to be between $50 million to $53 million. Third quarter of 2011 net income attributable to VisionChina shareholders, excluding share-based compensation expenses and amortization of intangible assets is estimated to be between $3.7 million and $5.7 million. These estimates are based on an exchange rate of RMB6.4630 per US$1.

The company noted that its guidance is based on its current network of 21 cities. That as of the date of this press release, which have already been secured by contracts and based on management's current assessments of the possible outcome of pending litigation with the selling shareholder of Digital Media Group Company Limited. If the number of cities in the company's network expand of contracts or if there was any progress in the pending litigation that affects management's assessment of the possible outcome, management's forecast could be affected.

Thank you again for joining us today. And I will now open the calls for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line Dick Wei with JPMorgan.

Dick Wei - JPMorgan

My first question is on the industry breakdown. I think in your prepared remark on managements was that the internet have been pretty strong. I want to know how much is it as a percentage of revenue and also the other segment as well?

Stanley Wang

I would just introduce the allocation of major verticals of our revenue in Q2. Actually the largest vertical is due of FMCG, is the fast moving consumer goods. It account for 30% of our total revenue. And this actually represent a 5% increase, as compared to Q1 a 3% increase of the as compared to Q4 of 2010.

And also the second largest vertical is the household products, which as they amounted to 12% of our total revenue. And internet is also the third largest vertical of our industrial mix, and it's also amounted to 12% of our total revenue. It is quite consistent with the percentage in Q1 of 2011.

Dick Wei - JPMorgan

And then, also can you discuss why there was a pretty big increase in terms of advertisers maybe on a year-over-year basis as well? And are you going to some smaller size in other places?

Stanley Wang

Actually, we can see that the major growth of the number of customers, which had placement with us in Q2, naturally from the national customers. And this is basically in Q1 it is a traditionally low season. And then it is quite natural with the number of customers appears to be low. And on a year-over-year basis, our sales team has continued some efforts in the customer base expansion efforts. And we believe this increase is actually a reward from their continuous efforts. So we can see that the growth of the numbers actually mainly come from the national customers.

Dick Wei - JPMorgan

And lastly, can I ask about the advertising market? I want to know the debt management fees currently? I mean has it turned better or turned worse compare to maybe a couple of months ago?

Limin Li

We are very confident of VisonChina Media's future revenue growth and Chinese advertising industry as a whole, with the sustained China economic growth in the future. Because through years of continuous efforts by our sales force and education to the customers, we have actually being widely accepted by the majority of the clients, both national and multinational companies, as one of their media regular choices.

And we have seen a lot of returning customers making incremental advertising placements this quarter. So we were very confidence with the growth of our revenue in the future. This is primarily because of the dissemination power of media networks actually provide the advertising clients with targeted ad words, together with the stickiness given the attractive real-time TV programming that we broadcast on the public transit system.

So a lot of the advertising clients have actually received positive feedbacks on advertising. And that also greatly improved the value of the advertisements that the clients placed with us. So we feel increasingly optimistic of the remaining 2011.

Operator

And your next question comes from the line of Philip Wan with Morgan Stanley.

Philip Wan - Morgan Stanley

I have a couple of questions, let me start with the backlog. Could you please share with us your unrecognized backlog for the rest of this year? And if possible, could you also comment on, if there's any guidance for your full year sales and net profit?

Stanley Wang

As for the constant backlog currency, we have around US$45 million in unrecognized backlog. And this means the amount we have already continued with advertisers and we have a definitive placement. And then as you talk about our expectations on this two-year revenue and the profitability, and currently we are still very confident with the growth of our previous goals to target on a topline. And then we're also starting for the two-year profitability.

Philip Wan - Morgan Stanley

It wasn't clear on the line, was that a $45 million backlog?

Stanley Wang

Yes, $45 million unrecognized backlog, in the U.S. dollars.

Philip Wan - Morgan Stanley

My next question is actually related to your customer acquisition? Obviously, in the second quarter we have seen a huge improvement. And I wonder how much was driven by your financials at Focus Media? And also, should we expect a closer relationship on operating level with Focus Media, given that the CFO becoming a Board of Director?

Limin Li

Often the deals got closed with Focus Media in the beginning of this year. VisionChina Media actually established closer relationship and more direct and regular communication with Focus Media. I personally attended a lot of the industrial conferences together with the CEO of Focus Media, Jason Jiang.

Through the joint efforts by VisionChina Media and Focus Media, not only the traditional advertisers, but also these new types of e-commerce operators, they have become increasingly accepting the concept by combining VisionChina and Focus Media's platform and to form a out-of-home giant media platform that covers people's daily lives.

Given the cooperation base that we have established, we're confident that in the future the closer relationship we are building would provide a better solution for advertisers to reach the outdoor audiences more effectively.

Philip Wan - Morgan Stanley

You mentioned about the enriching your TV content by partnering with YouTube and some satellite TV stations. Should we expect VisionChina to enter any additional content cost with the addition to those partnerships?

Stanley Wang

We have a contractual arrangement with YouTube. In this partnership, YouTube would provide VisionChina certain content and certain video clips. Some of them actually are original and cut by YouTube. Some of them are actually user-generated. And YouTube will provide us content what we can broadcast and broadcast this (inaudible) Vision's media network.

And this is actually a double win deal. First of all, there is cutting cost for Vision. For YouTube, it actually can promote its brand and image on the mass transportation systems, media networks and expose its brands to the mass audiences.

And for Vision, we have a more attractive content, which is provided by YouTube, the leading online media operator, and individual content base. And for this deal, Vision will not incur any additional content costs. And also, I would like to highlight that this content we exchange from YouTube will not occupy any of our advertising slot.

Operator

And your next question comes from the line of Chenyi Lu with Cowen & Company.

Chenyi Lu - Cowen & Company

I have a couple of questions. The first question I have is regarding the media cost. I know in your prepared remarks, you guys said you maintained a 10% growth this year. Can you give us also the deal in terms of the next year in 2012 the media costs?

Stanley Wang

For the 2012, our target on the media cost is we will still control the media cost to increase no more than 10% 2012 on a year-over-year basis.

Chenyi Lu - Cowen & Company

I know also during prepared remarks, the management said it's going to be profitable this year. Are you going to be profitable in terms of GAAP or you're profitable in terms of non-GAAP numbers?

Stanley Wang

On a GAAP basis.

Chenyi Lu - Cowen & Company

So total year positive on a GAAP basis, right?

Stanley Wang

Right.

Chenyi Lu - Cowen & Company

Can you also talk about in terms of network expansion at the end of second half of this year and also next year and then also in terms of what has been growth rate?

Stanley Wang

In terms of the network expansion, as Mr. Li mentioned in the prepared remarks, actually in the Q2 and coming Q3, we have three new subway lines in Shenzhen, and also we have secured four new additional subway lines in Beijing, which would be free to use. So that actually indicates that Vision has not stopped and actually continues to locate and secure those premium media assets. We have already paid out certain effort to control video costs.

So in the second half, currently we do not anticipate that we will enter into any other new cities, and we are actually looking for opportunities with those media assets with potential good price and performance ratio. And in 2012, we may continue to secure more additional subway lines, which will be opened in the next year. The premise is to help the company to be disciplined and the new media assets can be profitable in the threshold period.

Chenyi Lu - Cowen & Company

So next year, you would probably (inaudible) to go to new city, right?

Stanley Wang

It is possible, but it depends on what the prices and the whether the company can make these headbumps profitable in the threshold period of time.

Chenyi Lu - Cowen & Company

I know you have higher SG&A expense this quarter. Can you give us a breakdown in terms of how much you see allowance for doubtful expense and also how much is the legal expenses for the quarter?

Stanley Wang

Basically the legal fee quarter-over-quarter is around US$0.5 million, and the increase in the provision for doubtful accounts is US$0.7 million on a quarter-over-quarter basis.

Chenyi Lu - Cowen & Company

Do you still expect more allowance for doubtful accounts? I know the legal fee is going to increase, but are you going to continue to do more provisioning for the allowance for doubtful accounts?

Stanley Wang

We do not anticipate an increased amount of provision for doubtful accounts. Actually for this quarter, we have made partial provisions for certain doubtful debts we wish management consider as credit risk. The credit risk appears to be higher that normal. So that does not mean that management has exhausted all means of collection. But for prudent basis and in the current standard, we decided to make allowance to reflect actual credit risk.

Chenyi Lu - Cowen & Company

Going forward also the next two or three quarters, probably there is no more allowance for doubtful accounts, right?

Stanley Wang

We believe the amount is very low.

Operator

Your next question comes from the Steve Zhang with Macquarie.

Steve Zhang - Macquarie

I'm wondering if you can comment a little more on your lawsuit with DMG shareholders and whether you will be willing to settle that lawsuit anytime soon or what the timeline for the whole process would be.

Stanley Wang

For the second question, for the timeline, the New York Supreme Court actually has a hearing on several motions of the case on May 24. And the justice has heard the presentation of the both sides' lawyers during the court session. Until now, the date of this conference call, no update on the progress we've had from the court's side.

So it is quite difficult to estimate a timeline, because it appears that the Justice will need some to analyze the case and to come up with the final judgment.

And for the settlement of the case, because we do not have any prediction on the result of the justice judgment, we now still have no plan or have an intension to take initiative to settle this case at this moment. But we will not preclude any possibility in the future.

Steve Zhang - Macquarie

My next question is regards to any other concession reductions that you have in the pipeline. Can you describe maybe what major contracts you're considering that you are terminating exclusive contracts for and going to a minute-by-minute basis?...

Stanley Wang

Currently, we're still trying to keep our current network size. So, if there is no extreme situation, we will not further keep any Media platforms at this moment.

Steve Zhang - Macquarie

Okay, so that imply that you Media cost will largely stable at this point?

Stanley Wang

Right.

Operator

And your next question comes from the line of Chunming Zhao with SIG.

Chunming Zhao - SIG

I have a follow-up question to Dick's question on the number of advertisers. So if we look at second quarter your number of advertisers is almost to 1000. There is a big increase quarter-over-quarter and year-over-year. I just want to understand why your customer acquisition is so big, so significant in the quarter. What are those customers coming, what kind of industries are those customers coming from? Are they mostly internet of e-commerce companies? So that's my first question.

Stanley Wang

I would like to share with you a number of figures in the 993 advertisers, which have placed one with us, a more than 270 new advertisers in this quarter. And the remaining 730 advertisers are actually intending customers. So basically that means that indicate that the advertisers on increased by condition with the Vision's network. And the new advertisers as I just mentioned lastly of them are national customers and local customers, and among them only a small percentage from internet business.

There is lots of (inaudible) from internet and basically largely coming actually from those traditional verticals, especially FMCG.

Chunming Zhao - SIG

Okay, then if we change another angle to look at to the average of revenue per advertiser. It seems like this quarter the average is about $45,000, and this would be the lowest in the last six quarters. So you add a lot of advertisers, because some of them are not spending on a full quarter basis. Or is this because you reduced your add rates to track more advertisers. So any color would be helpful.

Stanley Wang

I would say. It's a mathematic issue that. We are increasing the numbers of local customers, but actually the individual advertising spending from these local customers are not really enough. And so on a weighted average basis, it would be down a lot on the average revenue per advertiser.

If we analyze, stratify the customer groups, actually we see that per advertiser revenue output from the national and international customers has a slight increase. We do not decrease our rate on any of our platform in the last quarter.

Chunming Zhao - SIG

So it seems like the interpretation is you added a lot of local customers that will be the, would you say that that's a biggest change in this quarter versus the operations in the past year.

Stanley Wang

Local advertisers, actually they are also a very important group of customer for the company. And then the actually our sales team also put a lot of efforts to maintain and develop this market. Although we shortened these spending may not be large enough as compare to those national and international customers, but they still actually have us to accumulate a class customer base and the revenue base.

Operator

And your next comes from the line of Eddie Leung with Merrill Lynch.

Eddie Leung - Merrill Lynch

Just a couple of questions, the first one is regarding your Media platform, could you remind us what are the subway of bus contracts that need to be renewed in second half of 2011?

Stanley Wang

In the second half of 2011, we have only one contract, one consumer contract to be renewed which is the Shenzhen bus and Vision contract. And actually this contract would have already expiring on 31st of July this year. But this contract for the new contract was still under negotiation and both party have a mutual understanding will extend this contract for another couple of months to at the original price.

So that we can come up with the price issues susceptible for the two parties, and on the company side, we will stick to the position that we can not accept a reasonable price increase. And we would still like to keep the concession cost at the current level and all with a very percentage of increase that means less that 10%.

So we have to negotiating and this contract with the local operating partners. And for sure if that in a future couple of months even if the negotiation is continue, the placement and the business on Shenzhen bus platform will not be affected.

Eddie Leung - Merrill Lynch

And then also a follow-up question to Chunming's questions on the move-up of advertisers. When we look into the second half of 2011, should we expect the revenue growth driven more from increase in ARPU or continuously driven by expansion into perhaps smaller local advertisers.

Stanley Wang

I would say that actually for the customer base expansion it will be equally that national and international customers is our advertise that I don't believe that our major revenue growth would largely come from the local customers, as I just mentioned, I will be a lower customers actually a strong force. Although there are numbers individual spending are not very large, but still accumulate a very important base for our revenue.

Actually, we have seen that in our top 10 customers. We see that a quarter-over-quarter and year-over-year growth from the top 10 customers and actually have a very strong growth and the portfolio is very stable. And so that makes us believe that our majority of revenue growth is still to come from the international and national customers.

Operator

And that concludes the Q&A session. I would like to hand the call back to Colin Wang for closing remarks.

Colin Wang

Thank you all for joining us today. If you have any questions, please do not hesitate to contact us at ir@visionchina.cn.

Operator

Ladies and gentlemen, that concludes your conference. You may now disconnect. Have a wonderful day.

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