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Affirm Holdings, Inc. (AFRM) Presents at Morgan Stanley Technology, Media, and Telecom Broker Conference Call – (Transcript)

Affirm Holdings, Inc. (NASDAQ:AFRM) Morgan Stanley Technology, Media, and Telecom Conference March 9, 2022 7:45 PM ET

Company Participants

Michael Linford – CFO

Max Levchin – Founder, CEO & Chairman

Conference Call Participants

James Faucette – Morgan Stanley

James Faucette

We’ll go forward and get began right here this afternoon. Thank you very a lot to all of you for becoming a member of us right here on the Morgan Stanley TMT Conference. Very excited to have the senior administration from Affirm to speak at present. Before we get began, I’m James Faucette, senior analysis analyst for Morgan Stanley overlaying fintech. I do have an necessary disclosure to learn for necessary disclosures, please see the Morgan Stanley web site at morganstanley.com/researchdisclosures. If you’ve gotten any questions, name your consultant.

So this afternoon, excuse me, I’m very happy to have Max Levchin, CEO, thanks very a lot, and Michael Linford, CFO right here to speak. We’ve solely received about 27 minutes, and I’ve — I used to be taking a look at — that is about 2.5 hours’ price of questions, so we’ll see how we edit slightly bit. But perhaps to begin Max, simply articulate — as a result of that is — it is positive, as a result of that is the query I most likely get most frequently, is like what is the market alternative for Affirm that you are going after, and actually what is the long-term imaginative and prescient, significantly in an area the place it is crowded with numerous BNPL gamers and numerous them rising rapidly?

Question-and-Answer Session

A – Max Levchin

I have a tendency to provide these actually long-winded, extraordinarily elaborate solutions, and given the time I’m going to enter my staccato mode. So we’re constructing a cost community. That’s crucial factor to recollect. Every cost community is a credit score community. If you do not consider me, that is much less of an train for the reader, however I guarantee you it is true. Credit consumption has modified. If you have a look at Gen Z, in case you have a look at millennial, they won’t have the bullshit of late charges and deferred curiosity and all the opposite yuck that lives beneath your positive print for a bank card assertion. Good information is, they’re very enthusiastic about utilizing credit. It simply must be in a type of paying over time, easy time period loans, the place you realize precisely if you end up out of debt. That’s the brand new option to do credit score. That’s how the subsequent credit score community goes to be constructed. That’s what we’re constructing.

Last I checked, cost quantity lives within the — someplace north of $10 trillion. In the U.S., we symbolize on the order of two% of e-commerce, plus or minus kind of on a Black Friday kind second. There’s 90% of the E model of commerce to take over, after which there’s the 82% that is offline. So that is what we’re going after.

James Faucette

So Max, look, I believe the statistic I are likely to complement with what you simply described is that, in case you have a look at millennials and Gen Zs, even I used to be stunned, that is 40% of the U.S. inhabitants. It’s large that they do not have that full complement of credit score capabilities and banking companies or monetary companies, however they may in 20 years. But clearly, like as I mentioned, there’s numerous BNPL gamers within the area. What differentiates Affirm at present, and what do you assume is necessary to do — to proceed to distinguish.

Max Levchin

So I mentioned it earlier than, however I’ll say it once more, the way in which the younger client thinks of credit score has actually modified. This concept of — I do not wish to be slowed down with issues I do not perceive, is actually elementary to product design. And the mission of the corporate from day zero, like we by no means needed to invent ourselves because the sincere actor, as a result of we actually describe this concept of sincere monetary merchandise on the basis of the corporate. And so the North Star of our mission that actually has improved lives for sincere monetary merchandise, permits us to be within the bullseye of what this younger client needs. That drives numerous our product design, drives numerous our choices, drives numerous the place we see income, the place we do not attempt to search for income. And that is actually necessary. It could seem slightly superficial, however that really actually creates crucial product guardrails that basically matter.

To construct one thing that actively leaves cash on the desk that’s historically claimed by financial institution actors, deferred curiosity late charges, activation charges, reactivation charges, all of that’s precisely what drives conversion down, and that is what retailers need for us to have the ability to construct a enterprise with out all these issues, you actually should be superb at engineering, which is a foundational benefit. My background, my cofounders background, was all constructing programs — constructing cost programs particularly.

Within that benefit, is the chance administration, which is a type of engineering, no less than the way in which we interpret it, and that’s all about taking the suitable quantity of threat, each on the approval aspect, on the credit score spectrum, programs threat, data safety, antifraud effort, all these issues are very elementary to who we’re, and this can sound slightly bizarre, however would possibly funnel out a query or two, I’m reasonably excited in regards to the probability of oncoming recession, as a result of if I hear yet another, when will — what is going to it appear like if you get examined, you will see. We’ll get examined and be okay. I can not say the identical factor about our opponents, however we’re very comfy with our capacity to handle threat, and that is essentially what funds and credit score enterprise is all about.

And then to construct an actual scalable community that’s full stack, totally built-in, you need to be good at capital markets. Like in the end, in case you’re a nonbank lender and inevitably anybody who’s constructing the credit score system has to have capital to drive the expansion, you’ve gotten to have the ability to execute it at scale, and we scaled our capital markets program actually from, let’s borrow some cash from our founders, and see if we will stability sheet loans that means, all the way in which out to doing securitizations each different quarter or extra. And that talent set and the sort of group that we have been in a position to assemble, has allowed us to take out some actually, actually advanced challenges. And we serve Amazon, Walmart, Target, Shopify, all of those retailers drive monumental quantity of quantity and require each scalability, which suggests engineering, distinctive threat administration, which is one other taste of engineering and a capital program that may truly tackle the kind of scale they’ve to supply. And so these are the — that is the checklist of issues, however I believe essentially, all of it comes again to the way in which we do enterprise, which is kind of the demand.

James Faucette

And so do you assume your method to that, or the place have you ever seen your method to that be totally different than a few of the different BNPL gamers which are out there? I’m attempting to isolate the nuance, if you’ll?

Max Levchin

Look for one, we do not prefer to set massive piles of money on fireplace to — once we attempt to win offers. We are likely to win offers on the energy of our capacity to ship a product that tightly integrates with the service provider, the place we will truly present incremental carry by actually tight EB testing, the place we will present — we ship incremental quantity that’s distinct and totally different from bank card quantity. Lots of that must be correctly instrumented. There’s various engineering work and you may pave your inadequacies on the engineering aspect over with money, nevertheless it does not actually work for giant enterprise prospects, as a result of they in the end don’t need firms that can in the end exit of enterprise, as a result of they do, in reality, prefer to set massive modifiers of money up.

And in order that string is actually necessary, once we cope with our very massive companions and the chance administration aspect of issues, it isn’t simply sufficient to have the chance administration energy that is sort of an inside pacing factor. You truly has to have the ability to articulate it to the companions, if you come and say, look, listed below are the approvals and this is the way you worth, how you concentrate on the incremental quantity we will ship to you, based mostly on the chance we’re prepared to take, and have the ability to flip it round and take that dialog to our regulators, which, by the way in which, is the opposite actually necessary motion within the area, the place you say, look, we’re prepared to be completely clear.

One of my favourite current issues to do was, to fill out the CFPB questionnaire, the place it was the large spreadsheet of zeroes, easy methods to say, oh reactivation charges, nope! Deferred curiosity, nope! Late charges, nope! And we constructed a really good extraordinarily worthwhile enterprise, with none of these issues. And if you come to a — particularly millennial and Gen-Z centered service provider, one of many query is, properly, are you going to tarnish my model when the shoppers are available in and so they say, ‘oh, I’ve been slapped with a reactivation price,’ our reply is like, no, there is a massive web page of zeroes. So I believe numerous that provides as much as being very totally different.

James Faucette

So Michael, Max talked about like improved conversion for the retailers, et cetera. What are the up to date metrics that your retailers see from — and the profit they’ve from Affirm to — for them, and what — particularly, we get a lot of questions on what kinds of gross sales uplift, repeat utilization, advertising and marketing price discount, effectivity, et cetera. So like what are the important thing issues that you simply guys are centered on delivering to the retailers?

Michael Linford

Yes. I imply, firstly, we’ve got a fairly lengthy observe report of driving a lot greater baskets, and that is measured within the common order worth, and Max has shared this advert nauseam, the historical past of our firm, you possibly can see that impression if you activate Affirm in a short time, and it is fairly apparent in case you supply a option to pay for issues over time, you possibly can promote greater baskets that is upselling for increased high quality, but in addition extra amount on the service provider. And there we see common order values, lifting on the order of 85%, and there are only a few issues that retailers can do, that may drive a change in common order worth wherever close to that quantum.

We additionally drive increased ranges of repeats, generally as a lot as 20% or 30%. We can also actually stem the variety of deserted baskets, deserted carts, which has develop into an actual factor. Think about all of the promoting prices going up and every part occurring and far mentioned with the pressures within the promoting ecosystem. Once the patron has received the cart, it turns into an especially helpful transaction to shut. There’s an actual deal with, are you able to keep away from deserted carts, and once more, we will see numbers as excessive as 20% or 30% of deserted cart fee discount, which simply implies that these promoting {dollars} to the service provider go a lot additional, which on this setting, with Apple having executed what they’ve executed, actually is a crucial factor for retailers to have the ability to get probably the most out of the {dollars} they’ve spent.

James Faucette

So as a lot as you possibly can and recognizing the apparent potential sensitivity, however discuss to us slightly bit about these engagements with Amazon and Shopify and sort of what you talked about. I imply was it simply the fundamental metrics that Michael reeled off, when it comes to like, ‘oh, that is the uplift we see,’ when it comes to cart dimension and these sorts of issues? Or what — like I believe for lots of people, they had been stunned that both firm, not to mention each firms, would select to go along with Affirm, no less than out of the gate for his or her preliminary BNPL companions.

Max Levchin

I’ll skip the…

James Faucette

Yeah, you are fairly superior, proper?

Max Levchin

Yeah we’re superior. We do say it ourselves. So the — I imply it helps and it is necessary to be best-in-class, once we present as much as an enterprise buyer, it would not be okay if we are saying, you realize what we’re like second finest, however that is okay, it is best to work with us. And I believe that — it helps to have the sort of stats that Michael rattled off, and we’re actually on the very high of the business. In explicit, our expertise in enchancment of the AOV is actually stand out. It’s only a very totally different — relative to competitors. Ultimately although, the dialog flips to, will you make my model look higher or worse, and there within the unique RFP from Shopify was kind of this impact of a small hand grenade within the business, the place they mentioned, by the way in which, no late charges. And the one firms that is cool, was us, as a result of everybody else was like, wait, that is like a 20% to 30% of my revenue. Sorry about that. And so properly, that is one thing that we take as a right, one thing we do not want and don’t need. We need our model to be pristine.

Once you kind of clear by the — sure, we truly are usually not simply accretive to your quantity, however make your prospects really feel nice about utilizing the actual cost instrument. The query is, properly, are you able to scale with us. And not simply kind of can your companies maintain up the sort of site visitors that Walmart or Amazon skilled on Black Friday. But along with it, are you able to construct the sort of APIs? Can you preserve the service degree agreements, are you able to reply within the kind of subsecond occasions for any kind of neutrality. And I believe most firms in our area are specialists in advertising and marketing, not engineering.

And I believe in the end, if you’re sitting down with somebody as subtle as Amazon or Shopify, nonetheless very a lot an engineering-driven firm, you find yourself connecting not simply on the degree of, hey, we’ll make some huge cash collectively. But hey, that is going to be actually cool, and we’ll construct it the suitable means and it should scale, we’re going to have the ability to provide you with all kinds of long-ranging plans about, what this seems to be like in a yr, 2 years, 5 years.

So that is in the end how each a kind of offers got here collectively. And clearly, an enormous a part of — you implied maybe the businesses are opponents. They’re very a lot enthusiastic about consuming one another’s lunch, and never solely do we’ve got to be respectful of that, we’ve got to take care of purity of separation of knowledge and supply the identical high quality of care to each one among our companions, in a means that makes them very comfy with the concept, no matter their secrets and techniques are, are by no means going to leak over, and people will be direct or oblique. And so we take distinctive care round knowledge safety, even implied knowledge safety, issues that we simply do not assume ought to be seen. And knock on no matter — we have by no means had a single dialog round, properly, cling on a second, too shut and never accidentally, that is by design. We’ve constructed the corporate across the concept, that our prospects could compete, and we’ve got to be very, superb to every of them, with out compromise on the sideways.

James Faucette

So Michael, for all of the congratulatory feedback round like profitable Shopify and Amazon and having Walmart and the stuff that you simply’re doing, the affords which are given to prospects by these totally different checkouts can differ. And one of many points that traders are having, is like modeling that and forecasting that could be very problematic for us, significantly as we’re attempting to distill like, okay, is Affirm doing what we thought they’d do, et cetera. So perhaps simply very mainly stroll us by the timing and economics of a few of the fundamental kinds of transactions, et cetera. I believe that might be helpful, no less than for me.

Michael Linford

Okay. So let’s begin by simply framing what merchandise can be found by associate at present, with a very massive caveat that that is going to vary over time. And I do respect how onerous it’s to mannequin. Believe me, we’ve got a group filled with sensible enterprise college graduates who’re engaged on it on our personal inside knowledge, and it is actually onerous. But it is onerous as a result of it is rising actually quick, and that is the nice a part of the issue.

James Faucette

It’s rising actually quick. So the combination of kinds of transactions can differ…

Michael Linford

That’s proper. If this enterprise had been flat and steady and boring, then none of you’ll wish to personal it. So the merchandise can be found throughout the three companions at present. So at Walmart at present, it is an interest-bearing product solely. At Amazon at present, and Amazon up till a couple of minutes in the past, it was an interest-bearing product solely. At Shopify, our built-in product with Shop Pay Installments, is a cut up pay product solely. In all 3 of these instances, we anticipate to supply the big selection of merchandise. At Walmart, and I suppose I’ve put it myself, we do have a long-term 0% program there, too, the place the manufacturers have sponsored the loans. And at Amazon, we’ve got aspirations of rolling out 0% packages actually proper now. And on Shopify, we all know within the roadmap, is the migration of interest-bearing and long-term zeroes to the broader procuring installments ecosystem, the place we have already got numerous Shopify retailers, utilizing that product immediately with the agency at present, and we wish to combine these experiences over time.

So what do these merchandise appear like? Interest-bearing might be crucial one for folk to get their heads round, as a result of we had numerous development in interest-bearing in our second fiscal quarter. Interest-bearing loans, once they’re placed on the stability sheet, take the supply upfront and earn income over time within the type of curiosity revenue. And what which means is, the margin profile on any given interval, tends to look slightly bit means down and it contributes over the lifetime of the mortgage. When we promote it, we get a lot of the income and achieve on sale. Occasionally, a few of that will get put into servicing revenue, however there is not any provision impression. And so the way in which to consider it’s, for the combination that we promote, it simply tends to be slightly bit extra quick time period than the combination that we maintain on the stability sheet, both in one among our warehouses, or once we put it on the consolidated securitizations, these are usually contributing over time.

I believe, although, the necessary query for traders is not a lot, what is going on to hit in month 2 of This fall. The extra necessary query is, what is the margin profile of these companies over time. And I believe one of many issues that numerous of us perhaps aren’t listening to the suitable means, is our interest-bearing product is a really robust margin product. Our APRs vary between 25% and 30% on common, and that is loads. And if you concentrate on the margin content material of the product, even with 3%, 4% or 5% of funding prices, and even with 5%, 6% or 7% of credit score price, there’s nonetheless left fairly a little bit of margin in that product, and it is truly our strongest and most worthwhile phase at Affirm at present. It does have some timing impression, however very, very worthwhile, and we really feel superb about that.

In explicit, our direct-to-consumer product, we name that Affirm Anywhere internally, which permits the patron to take out an interest-bearing mortgage in our app, could be very worthwhile. And that is a product that we frankly, generate numerous lifetime worth of shoppers out of, as they reengage on it.

Now that is the longer-term enterprise. You should sort of go to the opposite finish of the spectrum and occupied with Split Pay. Split Pay is a enterprise the place the whole development is on the order of 4% to five%. It’s increased with Shopify, though we do should pay Shopify they’re lower. And it is decrease off-Shopify, however we preserve all of the economics. There, we have given a sign to the market, like 3% to 4% is an efficient quantity, with respect to what we name income much less transaction prices, as a share of GMV, you clearly aren’t going to make 4% internet on a 4% gross product. So the margin construction is decrease on a share of GMV for that product.

But if you concentrate on the frequency, it greater than makes up for it. So that is decrease on a share of GMV, however they have an inclination to repeat 15 occasions a yr versus, say, a product that is interest-bearing, which perhaps hits 2 to 4 occasions a yr. And so the latter generates slightly bit extra per transaction. The former generates, clearly, loads over the course of time. And in each instances, we love each, as a result of what we’re attempting to do is, ensure we construct merchandise which have excessive ranges of engagement, and over the lifetime worth of that client, generates numerous worth for Affirm.

James Faucette

So Michael, repair slightly bit my like clumsy summarization that I used, which is like, if I’m Affirm or an Affirm investor, within the fullness of time when these loans receives a commission again, I ought to be fairly detached, adjusted for length and the impression of length between what sort of mortgage it’s, proper? Is that — I imply, is that — is it — and look, adjusting for length is artwork, and it is onerous to do if you’re attempting to calculate that out, however that is in the end like what this could appear like.

Michael Linford

Yes, that is precisely proper. So if you concentrate on margin that is twice as excessive on frequency that is half as a lot, what you are saying there, is the length or frequency, one other option to phrase length, is increased, when you’ve gotten increased frequency, you will get much less margin per transaction. And the factor about us, is that we’re not restricted to doing a kind of issues. Max sort of glossed over this, however one of many causes we received with Amazon, wasn’t simply because we cannot screw their client. It’s additionally as a result of we will supply an interest-bearing mortgage, a long-term zero mortgage and a pay-in-4, and the complexity of doing all of that’s actually, actually onerous for different individuals to catch as much as. Lots of of us can divide by 4. It’s rather more tough to construct within the threat administration programs to deal with 24 months of length threat. These issues are onerous. And our view is, hey, look, if we will serve up and imply one thing to each transaction, we’ll be extra viable ultimately.

James Faucette

So Max, leaping to a different matter. And like I mentioned, I’ve received — I most likely have extra like 3 hours of query right here. But — so that you talked about filling out a questionnaire. And what’s your perspective on the CFPB’s questionnaire motivations for asking questions and searching on the NPL and particularly specializing in their views on knowledge harvesting and disclosure requirement. Kind of what is your view there, however extra importantly, how is the agency getting ready for extra BNPL regulation sooner or later?

Max Levchin

I believe it is positively not for me to take a position kind of — my job is to be compliant, and we actually are and we tried very onerous to be as shut, and see ourselves as not the one, however one of many good guys within the area, and we’re frankly delighted to supply our data and kind of present as a lot as we probably can, simply so the regulators can see what’s actually taking place. There’s a large market demand for this class of merchandise. There’s loads of individuals sadly popping out of the woodwork saying, oh, what a cool option to make an additional buck, all we’d like is a reactivation price, simply free margin. And certain, however that’s, in reality, client dangerous and likewise must be disclosed accurately, if that is what we’ll do. And I believe there’s various work that CFPB has lower out for them, the place they will begin on the very least explaining, this is what disclosure set must appear like. And by the way in which, numerous utilization of BNPL goes unreported, which is each unhealthy for shoppers as a result of they are not constructing credit score historical past, and unhealthy for the business as a result of they are not in a position to see people who find themselves abusing…

James Faucette

So particularly, unreported to credit score reporting supporting companies?

Max Levchin

Yes. Exactly. Yes. And so the excellent news is that we have been partaking with the CRA, the credit score reporting companies and the regulators for a really very long time, properly earlier than the examine got here out. And so — or when it got here in, and we each had numerous opinions and ideas, and we’re excited to become involved. And so I believe in the end, a leveling of the enjoying subject, rationalization of what is not reportable and ought to be reported, et cetera, all of that I see as a optimistic for the business. My basic substantive regulation, it is good as long as it is considerate. If it is kind of a — let’s put everybody down after which see who ought to act afterwards, I do not assume that is what is going on on in any respect. I believe what’s actually taking place is, the regulators are saying, look, there’s most likely numerous worth right here, let’s simply ensure shoppers are usually not run over by mistake or by malice. And we do not make too many errors fortuitously, and malice is the precise reverse of what we do. I believe the business wants slightly bit extra of rationalization of what that’s, and I’m wanting ahead to what they should say.

James Faucette

So talking of issues we do sooner or later, you have already introduced the Debit Plus product. When it — how are we progressing when it comes to basic availability, I suppose, there? And what are you planning on for this yr?

Max Levchin

I received one — I’ve been exhibiting it off to traders in all of our conferences. I’ll offer you a vignette, which can be too lengthy and probably self-damaging, however transparency, thy is our center title. So issues we launch, don’t must be excellent. Perfection is the enemy of fine sufficient for launch, and we’re firmly conscious of that. But it must be good. It must be the primary X hundred thousand individuals which are going to come across the cardboard, should have methods for a knockout superb expertise, so that they inform their associates. So it begins gaining its personal viral momentum.

We’re actually shut. It’s not fairly to the extent that I believe I require, and I get to be the last word arbiter of fine style right here. And it’s dangerously near us. I’m very, very enthusiastic about it. We’re seeing properly north of an order of magnitude improve of engagement for the shoppers which are utilizing the cardboard. So what we actually are attempting to get to, is high of pockets. This is the one piece of plastic — it is truly some bizarre compound supplies, it isn’t even plastic. But we’re solely piece of compound materials in your pockets that we would like you to have. It helps each manageable transaction kind, and also you do not need to revolve and there is a profoundly new means of transacting, it is means higher than debit. It works together with your current checking account, you possibly can borrow cash with or with out curiosity bearing, relying on what’s acceptable and there is a complete host extra.

It’s actually easy. Just this aspect of — wants one other few revs of the onboarding expertise. For the avoidance of doubt although, I’ve been working very, very onerous on it, and Michael requested me yesterday, what model are we on and the present construct is 156, that of the present model, which is model 119. So there’s numerous work that went into it. Therefore, we’ll carry it out, give me a pair extra variations, nevertheless it’s positively coming this yr. And I’ll chunk my tongue, as a result of Michael will yell at me and other people will begin modeling it, and we do not need that.

James Faucette

It’s solely March, first week of March or second week of March. So we’re in fairly fine condition.

Max Levchin

The proper joke is, our fiscal yr is in July.

James Faucette

Okay. Right, proper. Okay. But I mentioned calendar yr, if [indiscernible].

Max Levchin

That mentioned.

James Faucette

Just ensuring. All proper. So we have a minute 10 for the metaphorical grenade so that you can put the pin again in, Michael. Can you stroll us by how rates of interest have an effect on Affirm’s enterprise? And rising delinquencies, how that is affecting your — utilizing the credit score field?

Michael Linford

So let’s begin with the latter first. Credit outcomes are a selection for us. And the query that we ask ourselves every single day and are monitoring, once we have a look at credit score outcomes is, are the credit score outcomes we’re seeing, per what the mannequin predicted once we made an underwriting choice. We get that signaled 34 days after we originate a mortgage. So every single day, we glance again 34 days and say, okay, we anticipated this a lot loss, are we in line? If we’re, we [indiscernible], we accumulate 200, we’re nice. We proceed to function the enterprise. But if we ever see that deviating, we’ve got to react. That’s the character of our product life, so helpful, as each transaction is underwritten and the length is so quick, we sit right here with our hand on the [indiscernible].

The excellent news is, that credit score outcomes at present are nice, and that may change very quick, which is why we’ve got world-class monitoring. But for now, what we see, our consequence could be very per what we would like, and if you have a look at the rise in delinquencies, it is per what we wished to have occur. We did this on goal — the credit score capital markets can face up to that degree of loss, we’ll take it and we’ll drive actually nice outcomes for the retailers, and that is what we have been doing. And you will see us behave very in a different way, if the outcomes begin to deviate from the fashions, and we’re in full management of that.

With respect to the charges and the remainder of the enterprise, I believe crucial factor is, we take all the present fee expectations and run our enterprise to this. Further fee setting — additional fee will increase would impression us, and we laid out on the decision precisely what to anticipate. But even with any substantial improve above the present fee expectations, greater than 200 foundation factors, will nonetheless be inside the vary that we have given the market of three% to 4% long-term margins. So we really feel like, we’ve got it very a lot in hand and that has loads to do with the very fact, that we’ve got such a various set of funding companions, who all do not have direct fee publicity, and we do a very good job of executing in any setting throughout all our funding varieties.

James Faucette

Great. Fantastic. Well, we’re out of time. Lots extra we may discuss, however thanks very a lot, Max, Michael, for becoming a member of us at present. Thank you to all people.

Max Levchin

Thank you.

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