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Executives

Marc Tellier – President and CEO

Ginette Maille – Chief Financial Officer

Analysts

Kurt Hoffman – Imperial

Sam Sakain – ALJ Capital

Philip Armstrong – Lorne Steinberg

Yellow Media Inc. (YLWPF.PK) Q2 2012 Results Earnings Call August 9, 2012 9:30 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to Yellow Media’s 2012 Second Quarter Earnings Results Conference Call. Please be advised that this conference call is being recorded.

I would now like to turn the meeting over to Mr. Marc Tellier, President and Chief Executive Officer. Please go ahead, Mr. Tellier.

Marc Tellier

Merci, Audrey. Good morning everyone. Welcome to the second quarter 2012 investor conference call for Yellow Media. Joining me today is Ginette Maille, our CFO.

Before we get started, we remind you that forward-looking statements are being made pursuant to Safe Harbor provisions of applicable securities regulations. This call is being recorded on August 9th and webcast, and all of the disclosure documents are available on our websites, as well as on SEDAR.

Thank you for joining us this morning. As you are aware, our industry continues to undergo transformation. Being digital has never been more important and consumers are rapidly shifting their usage patterns from tradition media to online and mobile alternatives. Canadian small to medium-sized businesses have also recognized the importance of being digital, optimizing their digital presence to generate valuable business leads.

Our customer needs have not changed and they continue to require the expertise of a trusted advisor to manage their media and marketing needs. However, these customers are now looking for knowledgeable partners, who understand the dynamics of this new digital marketplace.

Our expertise and product offering positions the company to best meet the needs of advertisers and users as they start relying more on digital sources information. Yellow Media has extensive knowledge of today’s digital local marketplace and local advertiser community.

In addition the Yellow Pages 360 degree solution offers SME’s single point of access to a comprehensive suite of products and services, including online, mobile and print media platform, managed website services, customized search engine marketing and search engine optimization, as well as the Yellow Pages Analytics.

We continue to see the progress from our Yellow Pages 360 solutions to date. For example, the advertiser penetration of YPG 360 solution defined as advertisers who subscribe to three product categories or more grew to 11.2%, compared to 2.9% of our customer base as at June 30th last year.

Over the last 12 months, the company has also sold approximately 13,000 websites for small and medium businesses, making it one of the leading website providers in Canada. Nevertheless, we do recognize challenges inherent in our transformation and recognize that our business transformation will take time.

As a result, we need to insure we properly execute and remain focused on improving our operations with increase focus on sales effectiveness, product fulfillment and customers support, investing in our digital platforms to grow traffic to our advertisers, including the development of additional content and features, and the creation of traffic and distribution partnerships with third parties to augment lead our advertisers.

Also developing and launching innovative products and services, tailored to the needs of large and high end advertisers, and supporting our teams with new sales tools and streamline processes, and finally promoting our brand, products and services affectively.

In an effort to enhance the user experience, YPG launched the redesign version of the Canpages.ca website recently. The website proposes a new user experience based on the concept of Life Around Me, which focuses on the users geographic locations in life needs within the contents of local search. Consumers will now benefit from a search by distance experience to save time and money while shopping locally.

Canpages.ca. continues to be a leading local search destination for numerous Canadian and will continue to evolve and improve over time as new features based on Life Around Me concept will be added, creating a richer personalized user experience.

The new website compliments YPG digital portfolio, further offering local advertisers opportunities to help grow their business.

Our public application programming interface, as we call it YellowAPI also continues to be popular and has enrolled over 2,000 software developers. These developers helped increase visibility and generate business lead for advertisers by creating digital applications using YPG’s database of 1.5 million business listing.

During the second quarter of 2012, YPG added Wikitude to its list of applications powered by YellowAPI. Wikitude is one of the leading innovators in mobile location-based services and augmented reality experiences for smartphones and tablets.

Mobile continues to be a strong focus for us. Our mobile applications have now been downloaded 4.3 million times, compared to 2.2 million times at the same time last year. Approximately 17,000 Canadian businesses are subscribed to mobile product, representing approximately 30,000 mobile product unit sold.

During the second quarter of 2012, we further enhanced our ShopWise mobile app, launched in December last year. ShopWise uses geo location to pinpoint deals and products and services within a given location.

New enhancements include coupons and freebies, reviews and ratings, and the ability to create shopping list. In addition, ShopWise is now offered in French to the residence of Quebec.

As we continue to meet the needs of Canadian SMEs, we need to be aware of the differentiation of products and services demanded by our various advertisers be it low, medium and high spend advertisers.

During the second quarter of 2012, we continue to focus on account profiling to better prepare and strategically manage our largest customer account across the country through the high priority accounts management process.

This profiling includes the review of the Yellow analytic results, website audit and competitive ranking, search engine marketing estimate, social media and Google places review. We have also started to expanding our product and service offering to better meet the needs of these large higher spend advertisers.

Now I turning quickly to our capital structure strengthening our capital structure has been a key objective of ours over the course of the last year, recognizing the importance of aligning our capital structure with our operational strategy. We did announced in February this year that we had begin evaluating alternatives to refinance our maturities in 2012 and beyond, with the objective of competing any transaction during the current fiscal year.

After a thorough review of all available option, the company has entered into recapitalization plan, aimed at significantly reducing the company’s debt and improving it maturity profile, with debt first coming due in 2018. The recapitalization will also allow the company to pursue it business transformation.

The recapitalization will not impact customers, suppliers and other business partners of Yellow Media and our obligations to employees including our pension and benefit plan obligations are also unaffected by the recap.

Before Ginette goes over the recapitalization in more detail and review the second quarter results, I’ll also like to address the recently announced changes to Yellow Media’s Board of Director.

In connection with a recapitalization, the company and the Ad Hoc Committee of noteholders have established a search committee mandated to nominate candidates for the new Board of Directors of Yellow Media, Inc.

The committee is comprised of two directors of Yellow Media one of whom is myself and two members designed by the initial consenting noteholders. The new Board of Directors will consist of nine members, it will be part of the new Board -- I will be part of the new Board of Directors along with a minimum of two members from the existing Board, and we anticipate communicating all selections made by the committee prior to this schedule debt holder and shareholder meeting on September 6 of this year.

Ginette, will now go over the second quarter results. Ginette?

Ginette Maille

Thanks, Marc. For the quarter ended June 30, 2012, net earnings were $67.7 million, compared to a net loss from continuing operation of $20.7 million for the same period in 2011.

Adjusted earnings per share for the quarter were $0.18 versus last years $0.20 due to lower EBITDA, partially offset by lower cash taxes.

Revenues were $286.5 million, compared to $342.7 million for the second quarter in 2011. The 16.4% decrease is due principally to lower print revenues, the discontinuation of books published at Canpages, the divestiture of LesPAC on November 14, 2011, and lower revenues associated with the company’s U.S. operation.

Online revenues were $89.7 million, compared to $85.9 million last year, representing growth of 4.4%.

On a comparable basis, excluding the impact of the changes to the Canpages business and the LesPAC divestiture, the revenues decrease was 13.5% due to a print revenue pressure of 21.7%, partly offset by online revenue growth of 11%.

Online revenues now represents, approximately 31% of total revenues, compared to 25% last year.

As we mentioned last quarter, our revenues continue to be impacted by secular pressure, particularly in large urban markets. Revenue pressure associated with our larger advertisers who are reducing their spend as we need to better adapt our product portfolio to their specific needs and revenue pressure coming from the process of migrating the advertisers, which were under the legacy directory plus product to the new 360 solution.

EBITDA for the quarter declined from $176 million last year to $145 million and the EBITDA margin was 50.7% this quarter, compared to 51.5% last year. The decrease in EBITDA is mainly attributable to print revenue pressure.

Cash flow from operations for the quarter rose to $104.8 million, compared to $87.9 million last year, due to lower cash taxes and better working capital, slightly offset by lower EBITDA.

So the capital structure at quarter end, YPG had approximately $1.6 billion of net debt, including convertible instruments, representing a leverage ratio of 2.7 times, compared to 2.5 times at the end of 2011.

On July 2nd, the company made its third quarterly mandatory repayment of $25 million on its non-revolving credit facility. On July 23rd, Yellow Media announced a re-capitalization to reduce total debt, improving its maturity profile and allowing the company to pursue its business transformation. The transaction is anticipated to close by the end of September of 2012.

Through the recapitalization plan, the company will eliminate $1.8 billion of outstanding credit facilities and medium-term notes. In exchange, existing credit facility lenders and noteholders will receive a $750 million, 9% senior secured notes maturing in 2018, a $100 million subordinated unsecured exchangeable debentures maturing in 2022, with interest payable in cash at 8% or in additional debentures at 12%, 82.5% of new common shares and $250 million of cash.

Holders of existing convertible debentures, preferred shares and common shares will receive 17.5% of the new common shares and warrants representing in the aggregate 10% of the new common shares.

Upon completion of the recapitalization, the company will have reduce its balance of debt and retractable preferred shares by $1.5 billion to approximately $850 million consisting of $750 million of senior secured notes, plus $100 million of subordinated unsecured exchangeable debentures. Annual interest expense will also be reduced by approximately $45 million.

Noteholders holding 33.5% of the company’s outstanding medium-term notes have currently executed support agreements whereby they have agreed to vote in favor of and support the recapitalization.

Details of the recapitalization were provided in a Management Proxy Circular, which is being distributed to credit facility lenders, noteholders, convertible debenture holders and shareholders. Yellow Media will hold debt holder and shareholder meeting on September 6, 2012 in Montreal.

Now here’s Marc with his wrap-up.

Marc Tellier

Merci, Ginnette. Despite challenges inherent in our transformation, we are confident that we have the right tools to meet the needs of Canadian businesses. As consumers turn to online and mobile devices to fulfill their shopping needs, advertisers are in search of media advisors, savvy enough to help them navigate through this digital marketplace.

Yellow Media does have extensive knowledge of this local digital marketplace and in addition, we can offer advertisers a full and comprehensive suite of products and services to help them better manage and grow their business. In short, we remain committed to creating an industry leading digital media company.

As we further advanced our digital transformation and based on current revenue trend, we expect our revenues from digital sources to represent more than 50% of total revenue by the end of 2014.

We also expect EBITDA margin to stabilize at approximately 40% post-transformation, while continuing to generate sufficient cash flow to reinvest in our business and pay down debt.

We look forward to communicating the progress of the refinancing and of our business transformation to investors and we will continue to offer visibility on recent and expected trends in key operating and financial metrics.

We thank you for joining us today and Audrey, I’ll turn it over back to you to start the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We have a question from Kurt Hoffman from Imperial. Please go ahead.

Kurt Hoffman – Imperial

Hi. First, the question on CBCA process, what flexibly does the court have to implement the recap in the event if two thirds threshold isn’t satisfied?

Marc Tellier

It’s not for me to speculate relative to what the court might or might not do, so let me just take a step back.

Kurt Hoffman – Imperial

Sure. I’m just more curious on what their flexibility is. I mean this --I’m in the U.S., I don’t fully understand if this is a hard and fast requirement that you get two thirds or what type of discretion the court might have?

Marc Tellier

The judge has certain amount of discretion, but clearly it would be irresponsible for me to speculate in terms of what that could represent.

Kurt Hoffman – Imperial

Do they have the flexibility to go down to 50%, I mean, is there a number that…

Marc Tellier

No.

Kurt Hoffman – Imperial

… has to be met? No.

Marc Tellier

No.

Kurt Hoffman – Imperial

So theoretically 50% or even below the recap could still be implemented.

Marc Tellier

Theoretically, it could be, yes.

Kurt Hoffman – Imperial

Okay. And in the event, the CBCA process is unsuccessful, will the company initiate a CCAA proceeding part of the bank debt maturing in 2013?

Marc Tellier

That clearly has not been determined. Should it not go forward and it continues to be our belief, management’s beliefs, the Board’s beliefs, as well as our advisor’s beliefs that this is the best plan and interest of all stakeholders, and should in the unlikely circumstance that does not go through, at that point in time we will look at our options and determine accordingly.

Kurt Hoffman – Imperial

Okay. And on your longer-term outlook, those comments you gave with respect to the online revenues and EBITDA margins. Is that 40% margin is something you think would be sustainable going forward or would you still be worried about continue deterioration?

Marc Tellier

I mean, it’s a great question. I mean clearly in the environment we’re in and where we’re coming from, and what we’ve seen circular pressure in our industry globally. It’s difficult for us to be particularly bullish in this environment, nor do we pretend to have a crystal ball.

So based on the current trends and based on what we’ve observed in similar jurisdiction if you look at the current trajectory of print declines and if you look at current flows of the online portfolio, and the current mix of products, because as you know the digital products, the margins vary greatly from our SEM product, which is relatively low margin to our replacement products whether it’d be web or mobile replacements, which are reasonably high margin. Our best information at this stage based on the current trends is we do believe that the EBITDA margins should be sustainable at around 40% mark.

Kurt Hoffman – Imperial

It is going to past 2014.

Marc Tellier

Based on what we know today, yeah.

Kurt Hoffman – Imperial

Okay. Perfect.

Marc Tellier

Yeah.

Kurt Hoffman – Imperial

And in the past you have some given some guidance with respect to your cash taxes and I think in the supplement you put out today, you’re kind of keeping that guidance with respect to $125 million and $140 million in 2012 and 2013?

Ginette Maille

Yeah. We are keeping it for now.

Kurt Hoffman – Imperial

Yeah. How do I understand that, because given the deterioration in the company’s performance, since you originally gave those numbers? The numbers really haven’t changed or what drives those and when would be significantly lower to reflect some of the operating performance?

Ginette Maille

Well, actually overtime it has changed. Cash taxes have reduced. So in the last couple of quarters, we’ve seen a reduction in cash taxes.

Kurt Hoffman – Imperial

What kind of magnitude?

Ginette Maille

Oh my god! I can’t remember. And we had shift, because we had -- what we call the double dip. We used to be non-taxable, we suddenly became taxable. So there was some timing continuations, but we need to go back and tell you when and how much, but it has gone down.

Kurt Hoffman – Imperial

Okay. And then on the $125 million for 2012, how much of you funded of that through the second quarter?

Ginette Maille

It’s approximately year-to-date $45 million, plus $26 million of sales tax assessments that we have received covering prior years.

Kurt Hoffman – Imperial

So, 45 is apples-to-apples, you paid $45 million of the $125 million?

Ginette Maille

Of the $125 million, $45 million plus $26 million.

Kurt Hoffman – Imperial

Okay. So, you’ve funded more than half back.

Ginette Maille

That’s right.

Kurt Hoffman – Imperial

Okay. And you’d also given some guidance on pension contributions in 2012, I think $40 million of cash contributions. What have you done with respect to that year-to-date?

Ginette Maille

So far -- we need to check. We have it in the cash flow statement.

Kurt Hoffman – Imperial

I think I saw something like $15 million. Does that sound right?

Ginette Maille

Yeah. That sounds right. It was $13 million is coverage of the deficit and then we have the current service cost.

Kurt Hoffman – Imperial

Right. Okay. Great. Well, thanks for the responses.

Marc Tellier

Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from [Sam Sakain] from ALJ Capital. Please go ahead.

Sam Sakain – ALJ Capital

Yeah. Just a couple of questions for you guys. Just going to that guidance you gave about the 2014 and then 50% internet. So are you guys going to continue growing internet at the 11% rate that you kind of guided through last quarter, is there where we should you see guys kind of by 2014?

Marc Tellier

Look, I’ll be very transparent. We had a very long debate as to whether or not we would provide any guidance with all on the call today. Historically, we have provided some guidance on the back of the second quarter results.

We understand given the situation and given the lack of self side interest given where equity has been trading, but it’s very difficult to have data points to model the situation. We felt it would be helpful to all of the stakeholders, if we gave you a data point out the outer years, especially in the context to the recapitalization plan, but we won’t go into the specifics other than to say that based on the current trends, based on what we know today. We feel that the business should be at about 50-50 by that time. And we’ll let you to draw your own conclusion from the modeling purposes.

Sam Sakain – ALJ Capital

Okay. And if you can kind of talk about mobile revenues of the digital revenues and what percentage that at now, are those at higher growth rates. Do you expect than kind of SEM or the other research?

Marc Tellier

Well, we haven’t disclosed the split. It’s a much, much higher growth rate, but given the fact that it’s not a much smaller base. So, as I said in my prepared remarks, I mean we had to take up about 17,000 customers since we introduce the product, which is above our expectation.

And almost double that not quite about 30,000 units that were sold. So obviously, some customers are buying more than one mobile unit and that is also ahead of our expectation. So, mobile is growing faster than our internal business planning and we certainly hope that will continue to be the case.

Sam Sakain – ALJ Capital

But is that like -- is that a really small portion, I mean is there any kind…

Marc Tellier

Yeah. At this stage, it’s still a very small portion.

Sam Sakain – ALJ Capital

Okay. And just -- do you guys do bundling? Is that -- I mean, is that how you guys are selling your products now or when you guys lose print business, what’s the capture rate that goes into digital?

Marc Tellier

We do not do bundling. So, if I go back to 2010 or might be ‘09, late ‘09 early 2010, we moved away from what was our Directory Plus product which was just add bundle, few standards. If you buy a certain product and print for ex-percent premium over that, you would get a placement product or you will get present on YellowPages.ca.

We changed that to standalone pricing à la carte pricing. So in the last two years, we have grown our product category from two to eight. So two years ago, our two product categories would have been print directories and YellowPages.ca online not in this order chronologically, but we have been added YellowPages.ca mobiles, your questions, website SEO, SEM, video and so on.

So, as we look to the substitution part of your question, obviously we’re still in a negative growth environment. So we are not completely capable yet replacing all of the print declines with the online product. We think that there is still a fair amount of upside in the online products we are offering and the team is actively working on continue to grow the product portfolio about the digital space continues to offer more opportunities to these smaller and local small evidence and medium size businesses or local advertisers.

And a great example of that is we have a social product that we make available to our very large advertiser, CR media tip division. But we have a social product to the local marketplace. Yeah, so that could be an example of the kind of product we could rollout more potentially email marketing or those kinds of things to hopefully as part of our transformation here to be able to at some point in time hopefully more than offset the print declines with our digital product portfolio.

Sam Sakain – ALJ Capital

Did you have any way of tracking that. So if you guys are losing 20% in the print business. I mean how much of that actually the advertiser decision to just move from print to digital. Or in other way I am thinking is, of the 11% growth in digital. How much of that is organic or how much that is new customers versus kind of existing?

Marc Tellier

One we track it very, very, very closely and given the fact that we’re unfortunately still in a net advertiser loss for modeling purpose. You can assume that the great, great, great majority of that is the existing customer base.

Sam Sakain – ALJ Capital

And just on the cost side, you guys noted that bad debt expense was down significantly or that was the main reason for lot of the phase in G&A. Can you just quantify how much that was?

Ginette Maille

The bad debt amount.

Sam Sakain – ALJ Capital

Yeah. And what rates do you guys see just going forward?

Ginette Maille

Well actually going forward, we will not disclose it, but you could assume that the rates would remain the same. We just had it in the MD&A. So we could go back to you.

Sam Sakain – ALJ Capital

Okay. That’s fine. And just lastly…

Ginette Maille

We have the data specifically.

Sam Sakain – ALJ Capital

And the last question I have is just -- I saw a headline about you guys told that Deal of the Day business, can you say how much you guys done for that?

Marc Tellier

We haven’t disclosed it. It was a reasonably small amount and it is partly behind it. When the Deal of the Day business started, we had some hypothesis in terms of can we roll out the Deal of the Day business to make it very, very local, essentially turn it into an additional product into our local sales force, and now that we’ve been in the Deal of the Day business for almost two years now.

It’s a very good business, but not one that we could necessarily bring to a local marketplace effectively, given the fact that on a -- because it’s a business that is email driven, its very different -- its very difficult story to localize that business because you would need very targeted local email list and that wouldn’t be in a market like Canada other than a couple of the large urban markets.

There wouldn’t be enough critical mass to have a viable business in the local marketplace, by localizing the current offering. So that’s the business logic in terms of why we exited the Deal of the Day business.

We never had aspiration clearly to compete against the groupons of the world. But we thought we could potentially work that business into something pretty unique from the local market place and our conclusion that is -- that the market dynamics in Canada will make it very difficult to have a highly localized Deal of the Day and that’s why we exist.

Sam Sakain – ALJ Capital

Thanks.

Marc Tellier

Thank you.

Operator

Thank you. Our next question is from Philip Armstrong from Lorne Steinberg. Please go ahead.

Philip Armstrong – Lorne Steinberg

Hi. Just -- could you give us some more color, the renewal rate at 87%, I think it stay pretty remarkable stable. Could you give us some more color there, for example, the average revenue for client is down, but it is not down huge, but given the 87%, have you kind a had to cut prices in order to keep that 87% or just for example, the renewal rates that being pretty stable, your revenues are declining. Does that mean that clients that you’re losing tend to be larger?

Marc Tellier

Just to have -- you put your finger on in the last point, just a small precision, the renewal rate number is actually a customer renewal rate and not a revenue renewal rate. So the customer renewal rate remains stable. So I guess it’s a not a great analogy and I hesitate to use it. I’ll use it anyway. It can be adding, but it’s not a great analogy, but it’s a little bit like a long distance.

I thank that the people are still making long distance call, but they haven’t stop making call, which is in that business there was a re-price. In this business, there isn’t a reprice. People continue to do business with us and largely people continue to do business with us even in the print directory is that they are taking smaller advertisers in the print directory and our challenge is to substitute that downsell with an upsell in the digital portfolio as I’ve underscored earlier.

But it is the -- where we are losing the most revenue is with our larger advertisers, said differently if you look at our product portfolio, if you look at our digital product portfolio, our placement product, our website products, our SEM, our initial product roll-out was probably more for the center of the bell curve for your average customer.

If you went to the right of the bell curve, the very, very right of the bell curve, they are very large customers, that’s where our meditative offerings come in. And just left of that, just below kind of the very large local super regional sort of advertisers, that’s where our current product offering is probably not as compelling as it should be and we are very focused.

And that’s really sort of the crux of our current product development efforts is growing the -- what we are calling sort of the high-end website offerings, for example, our product name for it is web prestige and offering kind of bigger SEM programs then what we offer to the lower spend; lower ARPA customers.

Philip Armstrong – Lorne Steinberg

This is encouraging. You are maintaining most of your customers. I mean through the years of transition, most of the customers are staying with you. I guess your business is just going to transition to more smaller customers’ or your average size customers should be smaller over time. Is that fair?

Marc Tellier

I hope not. I mean that’s the current trend in our -- if I’ll take -- I’ll impose on your good nature here and take advantage of your question a little bit and give you kind of broader update on 360.

If we look at 360 penetration which really goes to your question, right, as we had more revenue concentration in print. There isn’t a silver bullet in digital where we can magically transfer all of that revenue to one digital product.

So we need to transfer that revenue hopefully, transfer that revenue to multiple digital products, which is why we are tracking as one of our transformation indicator 360 customers which is three products and more. So within our entire customer base, customers have bought three products or more and now 11.2% of the customer base, which you just underscore has been stable or reasonably stable compared to 2.9% last year.

If you look at the ARPA of those customers, the ARPA now recognize it’s a small base. It’s 11.2% of the total base of customer. The ARPA of those customers is about three times higher than our --- than our overall ARPA. So where we are successful at selling three products or more, we were doing meaningfully better than the average spends.

And then back to the point on the website and so on. So I mean look the transformation is not going to happen overnight. I appreciate which is probably why I’m taking advantage of your question little bit. I appreciate the fact that you’ve underscored that it’s not necessarily all of doom and gloom for the franchise, but there is still lot of with the drop here as we continue to transform the business.

Philip Armstrong – Lorne Steinberg

I appreciate the answers. Thanks.

Marc Tellier

Thank you.

Operator

(Operator Instructions) We have a question from -- actually have no further questions at this time, Mr. Tellier.

Marc Tellier

Merci, Audrey. So thank you all for participating. Clearly, Yellow Media is focused on extending its current knowledge base and continuing to grow our local digital offerings in the market place. We feel that we have a very compelling value proposition to offer our advertisers a full and comprehensive suite of products and services to help them better manage and grow their business.

We do remain committed to creating a history of leading digital media company. We look forward to communicating the progress of the refinancing of our business transformation to investors. And we will continue to offer the visibility on recent and expected trends and key operating financial metrics.

And as you’ve heard me say for several quarters now, this transformation will not happen overnight. The good news is our customers need haven’t changed and we are seeing within our digital product portfolio some encouraging signs recognizing that it continues to be a long road ahead. So thank you for participating.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time and we thank you for your participation.

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