Q1 2021 Community Health Systems Inc Earnings Call
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Good day, and thank you for standing by and welcome to community Health systems first quarter, 2020, one earnings call and.
And as a reminder to ask a question and will need to press star one on your telephone to withdraw your question press the county.
Please be advised that today's conference is being recorded and few requiring further assistance. Please press star zero and I would now looking on the conference over to your Speaker today, Mr. Ross Comeaux, Vice President of Investor Relations. Thank you. Please go ahead.
Thank you Mike Good morning, and welcome to community Health systems first quarter 2021 conference call.
Joining me on the call today are Tim mentioned, Chief Executive Officer, Dr. Lynn Simon President of clinical operations, and Chief Medical Officer, and Kevin Hammons, President and Chief Financial Officer.
Before I turn the call over to Tim I'd like to remind everyone that this conference call may contain certain forward looking statements, including all statements that do not relate solely to historical or current facts. These forward looking statements are subject to a number of known known and unknown risk, which are described in headings such as risk factors.
And our annual report on form 10-K, and other reports filed with or furnished to the securities and Exchange Commission.
As a consequence actual results may differ significantly from those expressed and any forward looking statements and today's discussion we do not intend to update any of these forward looking statements yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS for those of you listening to life.
<unk> of this conference call a supplemental slide presentation has been posted to our website, we will refer to those slides during this earnings call.
All calculate calculations, we will discuss also exclude gain or loss from early extinguishment of debt impairment expense as well as gains or losses on the sale of businesses.
From government and other legal settlements and related cost and expense from settlement and legal expenses related to cases covered by the CVR and change and tax valuation allowance with that said I'd like to turn the call over to Tim Henson Chief Executive Officer. Thank you Ross Good morning, everyone and welcome to our first.
Quarter 2021 conference call.
We achieved strong operational and financial results and the first quarter during what was a milestone period for the health care industry. As we marked the one year anniversary of the onset of the COVID-19 pandemic.
At year end to this experience, we are still managing through extraordinary circumstances and adapting to constant change.
During the first part of the quarter, especially in January and COVID-19 surge has continued to impact volume and many of our markets and February and certainly by March COVID-19 cases, subsided and other volumes began to notably improve.
We provided care for approximately 9500, inpatient and COVID-19 admissions and the first quarter. This compares to approximately $8 and COVID-19 admissions during the third quarter and another 14th and COVID-19 admissions during the fourth quarter of 2020.
We finished the first quarter with good operational momentum progress and many strategic initiatives, which I will discuss in a minute and a sense of optimism that as vaccination rates increase and COVID-19 cases decline will continue to move to a more normal operating environment.
And the first quarter on the top line same store net revenue growth increased nine 8% on a year over year basis net revenue growth was driven by higher acuity and an easier comp due to COVID-19 related government restrictions on elective procedures that started in March of 2020, which impacted volumes and net revenues last year.
This quarter admissions and surgeries were negatively impacted by the high COVID-19 case count that we experienced in January as well as severe snow storms that hit much of the south and the middle of February.
During the month of March we were very pleased with our strong volume recovery further closing the gap to our pre pandemic run rates.
We believe the rollout of the COVID-19 vaccine also impacted demand during the quarter, while some patients weighted for their turn to receive the vaccine prior to returning for elective scheduled health care services.
Throughout the pandemic period, we are and actively encouraging patients who had been reluctant to seek health care to return for any needed checkups screening postponed procedures and other deferred care.
For the full quarter year over year same store admissions were down four 9% adjusted admissions were down seven 2% and surgeries were essentially flat.
ER visits continue to lag other volume metrics with same store ER visits down 17%.
Our expense management initiatives remain on track and effective with more progress demonstrated during the first quarter.
Adjusted EBITDA was $495 million, which increased 60% compared to the prior year.
Adjusted EBITDA margin of 16 for 16, 4% improved 620 basis points year over year during.
During the quarter $82 million of pandemic relief funds were recognized.
We exclude the pandemic relief funds from the quarter's results adjusted EBITDA was $413 million with an adjusted EBIT margin of 13, 7%.
Since comparative results are affected when looking at the first quarter of 2020 because of the government restrictions on elective procedures that took effect and more helpful perspective can be found and a comparison to the first quarter of 2019 exclude.
Excluding pandemic relief funds first quarter 2021, adjusted EBITDA of $413 million increased 6% compared to the first quarter of 2019, Despite operating 21 fewer hospitals as a result of our portfolio rationalization program.
We believe this clearly demonstrates our progress so far and the underlying strength and growth potential of our go forward portfolio.
We continue to fuel the portfolio with attractive capital investment based upon defined growth strategies and of course through the determination and hard work of our hospital leadership teams across the country.
The results for the quarter demonstrate that the transformation of the company that started a few years ago is progressing and we are excited about all of the opportunities in front of us as we look towards the future.
And the medium term, we continue to target, 15% plus adjusted EBIT margin positive annual free cash flow generation and reducing our leverage below six times.
During the last quarter, we did lower our leverage and we made a number of other improvements across our capital structure, which Kevin will highlight later.
Now I'd like to spend a minute on strategic initiatives and the opportunities in front of us, especially as our divestitures have been completed and we are completely focused on our core portfolio.
We have been making investments in these markets over time to enhance our competitive position and to drive long term growth. Our company's growth objective is to advance opportunities for both inpatient and outpatient care development based upon each market's unique characteristics and opportunities.
And on the and patient side, we've recently opened two new hospitals, and Indiana, and Arizona and both are performing quite well another new hospital will open and Fort Wayne later, this year and one additional de Novo campus and Tucson early next year.
And over the past three years, we've added nearly 300, new beds to the core portfolio, along with more than 50, new surgical and procedural suites to meet increased demand and to drive higher acuity. We have also added several new service lines and hospitals throughout our portfolio.
On the outpatient side, we recently completed a comprehensive study of several key market to identify our best investment opportunities and ambulatory access and services and putting more primary care specialty care and urgent care locations as well as freestanding <unk> and ambulatory surgery centers.
In terms of progress we opened our for our 14th freestanding ER during the first quarter with two more locations scheduled to open. This year. We have also added two additional <unk> to the portfolio. So far this year and we will add a de Novo center and our Knoxville market. This summer.
Adding all of US together and we continue to manage a very robust development pipeline of opportunities that we believe align well with our inpatient services expands our outpatient access more broadly across our markets and then improves our overall market position. We continue to think strategically about capital investments and how they can drive high impact hydro.
Both returns and we deliberately build out and advance our networks.
We are also investing and what we call connected care strategies, we have been record and sharing progress updates on our proprietary transfer center operations. Since 2017, we continue to see impressive results from this initiative and we are leveraging the visibility it provides into areas for facility expansion physician recruitment for our service.
Client enhancements will enable us to provide care for even more patients within a region.
We are also implementing price proprietary patient access centers, which initially provide centralized scheduling services for our primary care practices. We're seeing good initial results, including volume improvement with nearly 600 providers not being served by these centralized scheduling centers.
Over time, our goal is to use these scheduling hub to enable outbound patient outreach to close gaps in care and to provide other services to ensure that patients can more easily navigate the health care system and received the services they need.
We believe all of their investments are generating the intended results and positioning us for greater success and the long run.
I'm extremely proud of the progress we've made and so many areas. Thanks for the strong leadership of our local market executives to <unk>.
Part of our corporate team and most importantly, the incredible care provided by the physicians nurses and other clinicians who continue to put their patients first and providing safe high quality care and their community. They continue to earn our respect and admiration every single day.
With that let me turn the call over to Kevin.
Thank you and good morning, everyone as.
As Tim just mentioned it was a strong start to the year. We delivered good financial performance continued meaningful improvements across our capital structure and made additional strategic progress during the first quarter net.
Net operating revenues came in at $3.013 billion on a consolidated basis down 4% from the prior year due to divestitures on a same store basis net revenues increased nine 8%.
This was the net result of a seven 2% decrease and adjusted admissions and and 18, 3% increase and net revenue per adjusted admission similar.
Similar to the back half of 2020, our net revenue per adjusted admission and benefited from increased acuity higher rates and better payer mix.
Adjusted EBITDA was $495 million up 62%. This included $82 million of pandemic relief funds.
Adjusted EBITDA, excluding the pandemic relief funds was $413 million and improvement of 34% over the prior year and and improvement of 6% over the first quarter of 2019.
Our adjusted EBITDA margin was 13, 7% versus 10, 2% and the prior year and 11, 6% and the first quarter of 2019, we continue to make progress toward improving adjusted EBITDA margins.
During COVID-19, we experienced various waves of new COVID-19 cases for month to month, which.
Which has impacted our volumes and increased our operating expenses. Our hospital leadership teams have continued to adjust extremely well to the changing business environment and.
And that was evident again this quarter.
And while effectively executing our cost reduction programs, we have seen increased expense related to certain supply cost contract labor and other expenses related to COVID-19.
With COVID-19 cases declining we expect these additional costs to decrease.
Switching to cash flow cash flows provided by operations for $101 million for the first quarter of 2021.
This compares to cash flows from operations of $57 million during the first quarter of 2020.
Looking at the quarter over quarter increase cash interest payments were approximately $60 million lower and the first quarter of 2021.
The company repaid approximately $18 million during the quarter related to Medicare accelerated payments due to divestitures and.
And other increases and decreases including improved EBITDA and working capital changes were offset.
As we looked at the rest of the year.
We expect our cash flow from operations to improve.
During the first quarter. In addition to the first quarter being a historically lighter cash flow quarter due largely to the resetting of Copays and deductibles and the timing of certain payments.
Cash flow from operations was also negatively impacted by the COVID-19 peak in January and the weather related disruptions during February.
As such our strongest net revenue months during the quarter was March and as a result, we expect our cash collections to improve moving forward into the second quarter.
Turning to Capex for the quarter, our capex was $105 million compared to $99 million and the prior year.
Keeping in mind that we are operating fewer hospitals and a year ago.
We continue to invest capital into our core portfolio to strengthen our existing markets and we are excited about a number of our recent investments along with a number of future opportunities that are and the pipeline.
We are pleased to have completed our formal divestiture plan and we continue to receive inbound interest regarding potential transactions and we will continue to assess the benefits of any future deals, but as we move forward we are focused.
For most focused on driving growth across our stronger portfolio, which we believe will continue to benefit from our targeted investment focused strategies and improving economic and population demographics within our markets.
In terms of liquidity at the end of the first quarter. The company had $1 3 billion of cash on the balance sheet at.
And at March 31, the company had no outstanding borrowings and approximately $633 million of borrowing base capacity under its ABL with the ability for that to increase up to $1 billion.
Switching to the cares act and the pandemic relief funds it.
At the end of 2020, we had $104 million of unrecognized pandemic relief funds of which we recognized approximately $82 million during the first quarter of 2021.
As a reminder, we have not included the pandemic relief funds and our full year 2021 guidance.
Moving to the balance sheet and capital structure.
We've made significant improvements at the end of the first quarter, we had approximately $11 9 billion of total debt, which was approximately $300 million lower compared to the prior quarter.
On the capital structure side as a reminder, through 2020 and the first quarter of 2021, we lowered our debt by over $1 3 billion.
Reduced our leverage ratio by over two turns down to six times levered compared to over eight times last year and lowered our annual cash interest by approximately $190 million.
And the first quarter, we completed a number of capital market transactions that further lowered annual cash interest and removed near term maturities.
And January we extended $1 8 billion.
Second lien notes to 2029, and $1 1 billion first lien notes to 2031.
Following these transactions, we called the remaining $126 million of 2022 unsecured notes paying debt with cash on hand.
On slide 13 of our supplemental slide presentation. We have included our debt maturity profile at the end of 2019 compared to the end of the first quarter of 2021.
During the past few quarters, we have significantly extended debt maturities and paid down debt and lowered our annual cash interest.
Our next maturity is now not due until June of 2024.
Now I'd like to quickly comment on our full year 2021 guidance net.
Net operating revenues are anticipated to be $11 7 billion to $12 5 billion unchanged from our previous guidance.
And adjusted EBITDA is anticipated to be 165 for $1 8 billion.
Which does not include pandemic relief funds.
Overall, the first quarter was a good start for the year and as a result, we have tightened our adjusted EBITDA range by raising the low end of our EBITDA guidance.
As we look forward, we continue to expect our expense savings from our strategic margin program to build throughout the year with more significant cost reduction and the back half of 2021.
We also expect this program to drive incremental savings into 2022 and beyond.
Due to this program along with the net revenue initiatives that Tim mentioned, we expect to achieve our medium term financial goals over the next several years, which will benefit all of our stakeholders and.
And Ross with that I'll turn return the call back to you.
Thank you Kevin and.
At this point, Mike we're ready to open the call for questions. We'll limit everyone to one question. This morning, but as always you can reach us at 615 for 65 7000.
And at this time I would like to remind everyone that in order to ask a question.
And one on your telephone to withdraw your question.
And.
And as for women to compile the Q&A roster.
Our first question comes from Josh Raskin from that from research.
Hi, Thanks. Good morning appreciate taking the question so.
I guess my question is around.
And the operations for rural Hospital operators, and if youre seeing any changes and the competitive nature I'm thinking about sort of this proliferation of urgent care and.
And some new hub and spoke models, even telehealth, so I'd be curious to get your perspectives on how sort of rural and EBIT and suburban care as your hospitals are located are being impacted.
Sure. Josh This is Jim I'll go ahead and kick it off and obviously welcome anyone else to chime in here and.
In terms of changes to the operations from a competitive standpoint again don't see much influence from other operators entering those markets I think it's partly because we were well positioned for some of this migration to be able to ambulatory care settings through our own investments historically, even predating the pandemic as well as our <unk>.
<unk> investment so I think in general the consumers and whats remaining of our non urban portfolio, which as you know is much smaller than it was even three or four years ago, and we're not seeing entrance as being a major competitive threat and the.
Suburban markets again, not seeing a tremendous amount of expansion and the ambulatory space again, I think largely because we have really good growth strategies and and positioned ourselves to make those investments to not crowd out others, but to make sure that we're well positioned across our networks at creating better and broader access.
Perfect. Thanks.
Thank you.
Your next question comes from Frank Morgan from RBC capital markets.
Good morning.
Appreciate the color around guidance, but I was hoping you might be able to.
Give us a little more.
Granularity in terms of just sort of the cadence over the balance of the year and some of your assumptions.
And the recovery.
And particularly we should call out on the second quarter and I know.
You have to vary and you mentioned that some of the cost saving initiatives will kick in later, but maybe just any color that you can provide about kind of the sequencing and timing there across the year and.
I think you called out COVID-19 is just one other factors as well so.
And if you had to prioritize.
Between those different elements, which which would be the most impactful to help driving those margins higher and and getting to that 15% target level. Thanks.
Thanks, Frank and I'll take this question so as we think about the cadence of the.
Adjusted EBITDA throughout the year, we believe that we will sequentially improve each quarter.
Certainly with <unk>.
COVID-19 cases, subsiding and some of the recovery is still early in the year and Theres still some uncertainties, but we're seeing the effectiveness and and the deliveries of vaccines continue to grow and and COVID-19 cases, coming down and moderating at a much lower level than they have.
And hit their peak, so with that and we expect to continue to recover a lot of the differ.
Deferred procedures that have been out there, particularly around some of the deferred higher acuity elective procedures that have not yet come back and we believe those will start to come back.
And as well so.
With that I think revenue continue to grow throughout the year and then as I mentioned some of the margin improvement program initiatives that we're working on of course, we've been very successful throughout 2020 and with those initiatives, but as we looked at the initiatives that are in effect for 2021 and <unk>.
And we believe that some of those will deliver more savings and the back half of the year, which will allow us to continue as I mentioned kind of sequentially grow each quarter.
Your next question comes from Brian <unk> from Jefferies.
Hi, Good morning. Thanks, This is Jack slab and on for Brian.
And to turn on to margins you all have put out that that 15 plus percent EBITDA long term target for margins there.
And obviously ex COVID-19 for ex <unk> ex excuse me.
A little bit below 14% and the quarter just wanted any color. If you could walk us through kind of the steps you see to get there and particularly how you're thinking about navigating this year with.
The lower acuity procedures, probably coming back online throughout the year and possibly some payer mix headwinds.
Great. Jack This is Tim I'll start us off and.
As always we try and have a balanced approach as to how we we saw most of our problems. So I'll cover the net revenue and top line of work that's underway and as Kevin to cover more of the expense management and so again with good balance that's where we see the for long term prospects for margin expansion and the company.
And that's starting at a higher level and maybe pulling together some of the comments we made earlier on more concisely to answer. This question, we definitely believe and the strength of the stronger portfolio.
Larger hospitals on larger markets with good growth potential a greater percentage of these hospitals and the Sunbelt States, which we all know paths and just a more favorable population growth and job prospects. So again thats. The number one I think some some looking forward some opportunity for us, particularly as COVID-19 cases, subside and and more on.
Routine operating environment is restored them all.
Also the transformation of the company in terms of our focus on driving higher acuity and this better portfolio on leveraging our investments and the transfer centers building out access points and recruiting the right providers to provide necessary services and reduce out migration or to steal our volumes from competition is well underway I also.
I want to point out that I believe we did a really really good job of demonstrating margin expansion, even before COVID-19 and we exited 2019, what's going on really some good strength and headed into the first quarter of 2020 with some really strong margin numbers up until the pandemic hit in March of 2020, So we believe and even predating. The pandemic, we were showing strong.
Lines of margin strengthening across the organization and as I said on a macro level with the normalization of volume post COVID-19 and as Kevin just mentioned and stay more of the higher acuity elective business like orthopedic procedures really get restored to their pre COVID-19 levels. We believe that really will drive further revenue and margin expansion.
In terms of some other top line revenue growth items on.
And our growth objective is really targeted on both inpatient and outpatient and I don't think we can emphasize that enough we see great visibility through our transfer center model as to where we can add new capital New services, new providers to really retain more patients within our networks of care, but also to attract more patients.
From smaller non urban hospitals within a region. So we have a really clear line of sight and throughout the first quarter. Dr. Simon Who's with me here today on the spent an incredible amount of time with our regional leaders and our hospital Ceos really getting into the granularity of that data to see where we go and access to really leverage the experience we gained throughout COVID-19 hits.
Meaning higher acuity on primary respiratory illnesses and are critical care units, we don't want to see frankly that higher acuity business slip away and we believe there's opportunities for us to strengthen our foothold on as to what we demonstrated within the regions we serve.
And also with the investments and debt and and procedural suites that I called out earlier, obviously as we add new capacity and fill it up we're getting better fixed leverage and coverage and we're expanding our margins just by not adding a lot of.
The fixed costs out when we have incremental variable volume coming into our network. So we think that will be a key driver of margin for us going forward and then as we pointed out day noble asset access points on the acute care, adding all of these new sites of care will drive incremental revenues and drive margins for the company. So again, a lot of things going on and that Hasnt really bullish on our <unk>.
Prospects for not just a revenue growth and margin expansion for the company I'll, let Kevin cover some of the expense items share and maybe if I just give a little more color on the expense items and how we're thinking about that and getting to two or a 15% plus margins certainly as we come out of COVID-19.
We've had some additional cost pressures because of COVID-19 with higher salaries and wages contract labor and supply cost that we expect those pressures to also subside.
As COVID-19 cases come down a bit.
As we look back at even the margin improvement program and certainly we were targeting some of our corporate office costs.
Shared service cost and efficiency opportunities and.
And primarily non patient facing hospital expenses that we got a really good start to and got traction on in 2020, and we believe that a number of these initiatives are really multi year initiatives.
That will continue to drive savings as we.
Move forward and continue to dig deeper into these individual initiatives.
And also moving forward, we believe there's more opportunity on the supply expense side with how we're negotiating with vendors and negotiating more contracts on a national basis, taking advantage of our scale.
And our position now with our refined portfolio of hospitals gives.
It gives us some leverage on many types of purchase services and some of our supply spending as well.
Well as contract labor, which we again expect to be able to move lower and so.
The other thing I'd point out is.
We have numerous.
Active initiatives, but because we look at this as more of a continuous improvement process as initiatives get completed are removed for the list for adding additional initiatives to that list, we expect us to again be a multi year process.
Okay.
Your next question comes from Ralph Giacobbe from Citi.
Good morning.
I guess first just given the upside in the quarter and the sequestration and benefit the guidance doesn't seem to fully reflect those updates so maybe hoping to reconcile there and then.
And so interest and your comments that EBITDA grew 6% over the first quarter of 2019. Despite 21 fewer hospitals certainly impressive I was hoping maybe to get same facility revenue and EBITDA growth.
Facility sort of hospital base using that 1019 as the base and if you had it thanks.
Sure. So as we think about the tightening of the range. We started the year with a little wider range of our guidance for EBITDA and $200 million.
It is the raise on the low and as a combination of our beat for the first quarter as well as we expect the sequestration.
Moratorium to add approximately $40 million to.
Two the remaining nine months of the year.
And so really just a tightening of the range. It is still early in the year. So, but we just feel much more confident and certainly confident enough to raise that low end of the guidance and more confidence to where we can and up.
Within that range.
And so thats, a low business thinking and we'll continue to watch our guidance and adjust accordingly throughout the year.
In terms of the <unk>.
Comparing back to 2019, our net revenue on a same store basis I have that it was about five 5%.
Net revenue growth over the first quarter of 19.
I don't have an exact.
EBITDA lift, but it was significant EBITDA lift over the first quarter on a same store basis as well.
And our last question will be from Kevin Fischbeck from Bank of America.
Great. Thanks.
I wanted to see if it makes it a couple of times on the call that you have had some kind of onetime costs related to supply and temporary labor from COVID-19, but I wondering if you could actually kind of give us some sort of.
Ballpark for that number and then secondly, I think you referred to.
Our view that there was pent up demand and that can come back into the system are you are you thinking about it and the context of getting back to normal or are you thinking that because of the pent up demand, we could see volumes the above normal.
Some point and the end of the year.
Sure.
Some of the the cost and it's hard to Dubai define and exact.
Cost pressure because.
For instance, with salaries and wages.
Not only was there some wage pressures some of that moved to contract labor and we know that the rates for contract labor Raul.
Much higher.
But because of COVID-19 you also had.
Some of your own staff that was out of six that you're.
Needing to replace or backfill and as we get beyond COVID-19 will have fewer of our own staff that will be out on leave for on sick sick time.
Which will also help relieve some of those pressures and.
And then on the you also had the impact of.
The deferral of procedures and just the interruption of business.
And it gets a little harder too.
So the actual cost impact.
Those as we move beyond.
And <unk>.
Beyond COVID-19 and start to recover a lot of this business will be able to leverage some of these fixed costs.
And and recapture and lot of the revenue without necessarily the same level of expense recapture that Kevin and <unk>, Tim. Thanks for the question in terms of our prospects on deferred care and volume recovery just to give you. The thought process that we're deploying here, we do most of our comparisons.
Which makes sense for the first quarter are playing out for second quarter of 2019 on a same store basis because of the shifts and the portfolio that we've covered and as we pointed out and as you've heard I think for most of our peers on really a strong march on somewhat benefited from some deferred care and likely from the winter event in February and some of the <unk>.
<unk> co.
COVID-19 volumes and the quarter and <unk> and.
In addition to and extra business day, so really a strong March we really saw strong lines and March but more and more encouraging we do see that continuing and building momentum into April.
And one thing about COVID-19, it's taught us all to be very resilient and focused and determined on how we we track our patients and get them and for the care they need and the way we've been able to bounce back even more quickly and effectively and with every wave of COVID-19 and then the winter weather event now with vaccinations and patients filling more competent of coming back into this.
System for again, what we call the higher acuity elective business like total joints or spine care and things that really can be put off and we are starting to see that business come back on the admissions can get a little choppy to analyze on that book of business because as you know on much of that here in 2019 was listed as an inpatient only procedure.
For Medicare patients now it has migrated to outpatient so we obviously do some adjustments to make sure that we're tracking on the across the both inpatient and outpatient assets are very important and high acuity orthopedic service lines, but we've got a really clear line of sight on this and adding new doctors and new services leveraging the transfer center.
And we believe there are some strong growth prospects and the quarters to come.
I will now turn the call back over to Mr. Hanson for closing comments.
Great. Thanks, Mike and thanks to you all for spending time with us today and closing I would like to mention again, just how grateful we are to all of our employees across the organization are positioned providers regional presidents and hospital leadership teams, who continue to demonstrate our true purpose of helping people get well and live healthier but.
Providing safe high quality care for their communities I also want to thank our company's leadership team for their important role in supporting our markets and for their continued focus on successful execution. We are pleased with our strong start to the year and we look forward to updating you on our progress throughout 2021. Once again, if you have any questions you can always.
Reach us at 615 for 657, and thanks, again and have a great day.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
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