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Good morning. My name is Chantal, and I'll be your conference operator today. At this time, I would like to welcome everyone to the UWM Holdings Corporation Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] Thank you. Blake Kolo, you may begin your conference.
Good morning, everyone. This is Blake Kolo, Chief Business Officer and Head of Investor Relations. Thank you for joining us and welcome to the fourth quarter and full year 2021 UWM Holdings Corporation's earnings call. Before we start, I would like to remind everyone that this conference call includes forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued this morning. I will now turn the call over to Mat Ishbia, Chairman and CEO of UWM Holdings Corporation and United Wholesale Mortgage.
Thanks Blake. Appreciate it. So let's jump into it. Appreciate you guys all joining the call today. First off, let's talk about 2021, it was an amazing year for UWM. I think it makes sense for me to focus on recapping our key achievements for the year before getting into the quarterly results and outlook for 2022. First, UWM set a new production record in 2021 with just under $227 billion in origination, up almost $44 billion from 2020. One most impressive aspects of this, is that $87 billion of production was purchase business which is most in company history in any given year. In addition, we average about $25 billion in purchase production in each of the last three quarters of 2021. My second key point is our consistent growth and profitability quarter-over-quarter and year-over-year. 2021 marked our seventh consecutive year of origination growth and our 15th consecutive year of profitability. We delivered $1.6 billion in net income, our second most profitable year ever. Our continued focus on speed, service and best-in-class technologies while we continue to deliver these results. However, our scale is now also a huge factor in our success. Our scale is what gives us increased capital and our continued ability to deliver strong and consistent results for all of our shareholders. My third point is our continued advancement in technology. In 2021, we launched many amazing technologies, but the biggest one of note is BOLT, the most advanced underwriting system in the industry. BOLT gives brokers more control brought in the loan origination process and we found that brokers more control to the process naturally becomes more efficient and lowers our cost per loan. We implemented UClose technology several years ago with the same role of making the processing closing more efficient, and that has been a huge success as well. It's technology like BOLT and UClose that help us close loans faster than anyone in the industry and at lower origination costs. Lastly, I have to express that none of these accomplishments of 2021 which were amazing across the Board would not be happening without our amazing team members, our amazing broker partners and the ideas we get from them and the partnership we've had, it's a huge part of our success. With a great partnership, I'm excited for continued success and growth together. Now let's talk about the fourth quarter. We delivered $55 billion in production, representing our best quarter of all time, beating our 2020 fourth quarter numbers. The $24.5 billion of purchase we delivered in the fourth quarter was a record for us and astounding 103% year-over-year, once again from Q4 on the purchase side. We know brokers are the dominant player in the purchase market. We are confident you'll see the number one direct funded purchase lender again in 2022. We delivered $239.8 million of net income for the quarter, with margins at 80 basis points. With these being some of the lowest margin we've seen in the quarter and history, we still remained very, very profitable. I believe these margin numbers are near the bottom and actually the first quarter of 2022 to be very similar to the fourth quarter somewhere between 75 and 85 basis points of margin with $33 billion to $42 billion of production. We'll be very profitable of these numbers and will remain so even if it were lower. Lastly, I want to focus on the most important part, which is 2022. Number one, the broker channel will continue to grow. The refi business flows, we're seeing retail also converting the wholesale channel at fastest pace in many years. We've dedicated teams helping these loan officers, with transition in making sure they're successful from day one. We're seeing the most activity since inception of our beamortgagebroker.com platform also I'm sure the broker channel is growing and at a faster pace than we've seen in years. We saw some of this happened in 2018 and '19, but this time it'll be much more dramatic, and we're seeing early signs at this point. Number two, we've achieved significant scale and remain laser focused on becoming more efficient. We believe our cost of loan will go down over the next 24 months with BOLT as it gets more adoption and we continue to enhance the technology to make it even greater, and there's other big technology in the works as well. And finally, we continue to contemplate the best time to bring servicing in-house. We have a large servicing book. We won a lowest WACs, weighted average coupon, in the country. We'll likely finish 2022 over $400 billion. We know there is a lot of opportunity with this, we are exploring financial upside of bringing servicing in-house, we'll also think there is a great opportunity to develop our own best-in-class servicing platform which have many additional benefits and present other business opportunities for UWM. I appreciate everyone on the call for spending time with us today, and look forward to seeing a lot of you on our campus for May 12 for UWM Live, which is a event where a lot of our clients will be there, a very big positive thing about the broker channel, we'd love to invite many of you guys to join us. Now I'm going to turn it over to our CFO, Tim Forrester to give a couple other details about 2021 and the fourth quarter as well.
Thanks Mat. The fourth quarter was successful for the company in an even more challenging environment. Our volume in the quarter contributed solidly to a record year and was rooted in our strength in originating purchase loans. Originating purchase transaction is more challenging endeavor and our efficient execution is critical to process, underwrite and close a purchase transaction. Our operations are built for the purchase market to enable broker clients to provide a differentiated solution to American consumers. The competitive environment push margins lower as compared to record margins we saw in the fourth quarter of 2020 and dropped a bit from the prior quarter. Even with the increased competition, our financial performance remained strong and our return on equity for the quarter was impressive. Another item that is important to consider is the composition of our gain margin. Our production volume was lower in Q4 over Q3. Our on-balance sheet loan balances were up, this is primarily a result of the new loan limits and our retention of those loans until we sold them under the new limits into 2022. To give some context, we sold around $5.8 billion more in loans in the first week of January than we originated and around $9.5 billion more for the month because we incurred the hedging cost in our gain margin, yet the economic benefits in our interest line items, it further pushed down the margins from an already competitive environment. Overall, the economics made sense for us to hold the loans. It just shows up in different line items; hedge cost and the gain margin, interest income and expense both higher or in the case of interest expense higher than it would have otherwise been. While we did consummate our first MSR sale in 18 months at the end of Q3, our servicing portfolio has still increased and delivered additional substantive revenue for the quarter. While our servicing costs increased along with the larger portfolio, the servicing revenue dollar increase was significantly larger than the incremental servicing cost. As we continue to grow the portfolio, we will increase this benefit. This is important from an earnings perspective as well as cash flows. As noted, we held a large balance of loans in Q4 to more efficiently deliver into agency MBS. While interest income increased, expense actually declined and majority of that intra-period -- and majority of that was intra-period self-warehousing of loans where we self-fund to use our available liquidity more effectively, which then holds down the interest expense. Given that our overall warehouse balances were increasing due to the retention of loans, the performance on interest expense was quite positive. The MSR portfolio was just under $320 billion at December 31 with a weighted average coupon or WAC of 2.94%. The portfolio was $285 billion at September 30 with a weighted average interest rate of 2.95%. So up a decent amount in size and slightly down on rate which positions us well. Our forbearance rate is roughly 57 basis points down from 83 basis points at prior-quarter end. So forbearance has not impacted us as much as others in the industry and we expect that to continue to be the case. Our severe [technical difficulty] in overall delinquency continue to be under 1%. So we are continuing to observe better asset quality than the industry overall. Now that the Fed has indicated not only tapering but a fairly clear path of rate increases to be expected, our MSR book is well positioned to generate cash. The WAC is already well below the market and further upward movement makes it that much more attractive. We issued a balanced tenure of unsecured debt in the quarter to support our MSR growth in line with our increased capital, while maintaining an appropriate WAC ratio between the features, each feature. We believe our operational performance and credit discipline will continue to provide further unsecured debt opportunity if market conditions align with need. Cost per loan was again solid in the quarter, we experienced cost per loan of 1,557 for Q4 which continued our performance from prior periods in maintaining discipline, efficiency and making necessary investments in our people and processes. For the year, we continue to perform well on cost per loan and the relationship between fixed and variable costs. Beyond our immediate cost to produce a loan wholesale model has considerably less fixed cost to spread in lower volume environments. As we continue to invest in technology and innovation, we seek to improve such cost performance long-term. As a reminder, when we discuss cost per loan, ours is a fully loaded cost without exclusions. We do not exclude allocations, corporate costs or measured costs on an incremental or direct basis. Our Board executed their responsibilities, engaged management in substantive discussion on the merit of a dividend, and believe it was prudent to provide to the public shareholders. As noted in the press release, our Board again authorized a regular dividend to be paid to our public shareholders consistent with our track record as a publicly traded company. We are comfortable with the amount and timing and believe it is appropriate to reward our stockholders. Okay, now I will turn things back over to our Chairman and CEO, Mat Ishbia for some closing remarks.
Thanks Tim. Before turning it over to your questions, I want to summarize a few key points. UWM remains steadfast in our commitment to the wholesale channel. The channel continues to grow its share in the industry and we'll see more retail loan officers migrate to the channel as rate rise. Even as our market share stay the same at 33%, there is a big opportunity for UWM, and I believe our market share will continue to decline. Our cost structure and scale enable us to have highly profitable at these margins, and our dividend accelerated share repurchase demonstrate our commitment to our shareholders. We're really excited about 2022. It's going to be another great year at UWM. And now, I'm looking forward to turning it over and taking some questions from you. Thank you.
[Operator Instructions] Your first question comes from the line of Doug Harter with Credit Suisse. Your line is open.
Thanks. Hoping we could get more into the cost side, kind of as industry volumes come down in 2022, can you just talk about the mix, how much is fixed cost and in the short- to intermediate-term we should expect the cost per loan to trend?
Doug, it's Tim. Yes, I would expect that just like anything, when you have a smaller denominator, the cost will increase a slight amount, but what we projected and what our goal and target for 2022 is still going to remain at $1,500 per loan of cost per loan. In the first quarter, normally you'll see a little bit higher cost per loan for a couple of reasons, you'll have a higher cost load for various expenses in January, February, March as some of the limits get hit into a threshold, but also because of some of the lighter volume you expect in the first quarter, so we do expect first quarter to have a little bit of higher cost, but that will be made up in Q2 and Q3 as volume comes through the seasonal process. As far as the proportions, typically you see somewhere between 70% and 80%, 82% being a fixed cost relative to our portion of how to produce alone. If you do that on a comparative basis to the retail channel, our share of variable cost is much higher and that there is more variability in the cost to produce a loan through the wholesale channel than there is retail. So while we would expect 80% of our cost per loan at $1,500 or $1,550 to be a fixed cost, on the overall scale, including both broker compensation, it's a highly -- it's more highly variable as far as cost structure.
Great. Very much appreciate that. Thank you.
Your next question comes from Kevin Barker with Piper Sandler. Your line is open.
Thanks for taking my questions. I just wanted to follow up on the guidance for the first quarter, it seems like your guidance would indicate nearly a 30% quarter-over-quarter decline in originations, that seems more in line with the refi expectations for the quarter on a quarter-over-quarter basis. But it would seem like the brokers are more focused on the purchase side, which has seen a little bit less decline. Is there some dynamic going on a quarter-to-quarter trends that would cause it to be more refi heavy versus purchase heavy, and therefore the decline quarter-over-quarter?
Yes, this is Mat. Thanks for the question. No, I think you're looking at a little bit differently than I think of it, part of the purchase growth which January, February, March, always disclose purchase months of the year besides in northern stages in general, school and a lot of different aspects. But then the piece that we're not taking account is inventory throughout the market and so although applications are strong and purchase movement of houses, and the lack of inventory does make the purchase not as vibrant in the first quarter as it would have been in the fourth quarter or third quarter. So our perspective is that the market will be stronger in the second quarter from a purchase perspective, but we're going to have a great quarter in the first quarter volume wise, and I think if you look at our Q1 2021 versus our Q1 2022, the decline at UWM will be substantially less than all the other refi shops you're speaking about, but not as small of a decline as we'd hope if purchase inventory stronger. Same thing, if you look at Q4 2020 -- Q4 2021 where almost everyone went down in volume, we did not. We actually grew our mortgage volume. So I think you'll start to see that trend difference with UWM and the strength of our business going forward, as you already saw in the fourth quarter with volume numbers.
Okay. And then is your revenue recognition on fallout adjusted locks or is it on origination volume as that would -- and then is your fallout adjusted locks going to be above or below your origination volume in the first quarter?
Yes, our revenue recognition is upon the origination of the loan. We don't recognize revenue when we receive an application, so there is a difference between that. So the fallout adjusted that you see in some of the other companies that report, it doesn't have a direct implication on immediate income or revenue. It's more of a forecast into the future periods.
Okay. And then a quick follow-up on Doug's questions around expenses, what order of magnitude do you expect the expenses to decline in the first quarter just given the decline in production volume. I know you addressed some of it as being variable expenses, but I was hoping maybe you can give a little bit more detail on some of the expense decline that could occur, just given seasonality and the movement in production volume?
I think the expenses will actually go up on an overall basis both on a nominal basis because some of the tax implications of how people are compensated. So number one, I think the overall expenses are a little bit higher, but where we will offset that is our staffing levels and some of how we address some costs and what we do on the ongoing management of the business will be a little bit shorter in the first quarter. So overall, the expense on a per loan basis maybe a little bit higher on the fixed side because the overall volumes were also a small amount of pickup in the overall expense because of some of those tax features and other relevant items.
And just to add to that, Kevin. So you understand we're going to be highly profitable in the first quarter. So we're -- just like we were in fourth quarter. So you're thinking of expenses as lower volume that expenses are going to become an issue, they're not because of our technology and our cost to originate is so much better than the industry. You're going to see that in the first quarter numbers.
Your next question comes from the line of James Faucette with Morgan Stanley. Your line is open.
Thank you very much. I'm wondering if you think about the kind of the change in obviously the interest rate environment et cetera and the impact that that's having on refi's generally. But I'm wondering where does cash out refi fit in and can you talk a little bit about the traction that you may have had within cash out refi and is that impacting your business planning at all for 2022?
Yes. Thanks for the question. So interest rates are moving up, which we all very aware of. Once I begin I've talked about it for over a year now is a positive sign for the broker channel, a positive sign for UWM from a market share perspective. Cash out's one way that a lot of lenders are going to try to wrap up their business. And we'll do cash out refinance because there's a lot of opportunity out there in that world. But purchase business is the determinator of success in a rising rate environment and there's a lot of different gimmicks and a lot different ways to try to do a lot of refi business which we'll do refi and we'll do cash-outs and we'll do as much business as we can. However, you'll start to see the signs of business based on purchase volume, and at the same time, it'll be year-over-year and see who is dependent on refi and who is not as dependent on refi. So cash-out will be a bigger part of the business in 2022, however, with equity in-house -- however, it's not the saving grace that's going to keep people's volumes that what they were in 2021. And so when you see our first quarter volume, you'll feel really confident with where we're at compared to our competition and that will drive our market share up and that ties to the broker channel as well. Loan officers are joining the broker channel and the biggest push that we've seen since 2018 and it's going be much bigger than '18. And so we're excited about that opportunity as UWM only plays in 20% of the market, the broker channel. As that market goes to 30%, we're going to grow even though the market share or the overall market will decline.
Thanks. And wanted to ask a quick follow-up question on expenses and I think you touched on this earlier, but just looking for a little more color here with volumes down and compensation expenses down similarly but production costs up around a third quarter-over-quarter. Can you describe again for me what's happening there? And I guess the bigger question I have is how can we think about the room for future and efficiencies in mortgage servicing overall and how expenses in UWM, so you can achieve more efficiency in the overall process?
Yes. So if you're talking about servicing, which or are you seeing mortgage loans. I couldn't follow-up you're asking about the servicing or origination.
Yes, so I was just trying to refer, sorry, I was trying to refer primarily to origination?
Great. So I mean I mentioned it in my remarks earlier about a lot of different technology and efficiencies we put in place, BOLT is the main one that's done a lot of different things. And as that adoption continues, that will be a major springboard for lower cost and more efficiencies. UWM is already the most efficient lender in the country closing loans faster than the market by a wide margin even in the purchase market which is a major competitive advantage. But also our cost to originate is lower, as Tim mentioned already, and that's why even in low margin scenarios as the fourth quarter was, we are highly profitable that will continue going forward and our efficiencies will only grow and be more successful as BOLT becomes a bigger part of it. So BOLT along with UClose which are closing technology are both proprietary and highly effective ways to reduce costs, improve efficiencies and it's a great service for our clients.
[Operator Instructions] Your next question comes from Bose George with KBW. Your line is open.
I just wanted to ask about gain on sale margin sort of outlook after the first quarter, just curious biggest seasonality gets better, but just curious your thoughts on competition, will that -- you think that intensifies really and just outlook for later in the year would be great?
Yes, thanks for the question. So being in the wholesale channel, our margins are already lower in general than the retail channel, where you're going to see a lot of compression is out of these retail lenders and other lenders are going to be bringing their margins down, like I said in my remarks, I think we're basically at the bottom levels, that's why I guided to 75 to 85 which is 80 bps which what we did this quarter was right in the middle of that number. So do I think that the margins are going to go up in the second, third and fourth quarter? Yes or flat, they will not go down is my perspective. And it's really not as much competitive pressures as opportunity to move loan officers from the retail channel to the wholesale channel. It's a business development strategy, it's working fantastically and we feel great about where we're going with that. And so we'll decide on how long that will continue and how it will go going forward. But the reality is it's -- I don't see it going lower than the 75 to 85 basis point number I gave earlier today.
Okay, great. That's helpful. Thanks and then actually, just in terms of the decision to move servicing or potentially move servicing in-house, is it purely a cost thing or are there other benefits to doing that?
Yes. So there's a lot of different benefits of potentially doing that, we look at a lot of different things from cost potentially, but also service to our consumers and to brokers which help -- as we continue -- our servicing book continues to grow, it's a bigger part of our business overall. And so we look at all things and that's why I mentioned that something that we are going to look at doing, and we've bet it, but at the same time, we have great servicing -- sub-servicing partners right now that are doing a very good job for us and we feel confident in the process we have today.
Your next question comes from the line of Henry Coffey with Wedbush. Your line is open.
There's been a lot of talk about technology. How -- if I were to open up a brokerage firm tomorrow, how comprehensive would the United Wholesale offering be. I mean can -- would I need other resources to be able to originate loans or with what you offer sort of create a total in-house platform for me?
Yes, Henry, so good question. We have the platform. And so I like to call it turnkey, we call broker in a box, however, we want to think about it, but we can get someone up and running the longest pole and the tent is usually the state licensing or the state recognizing a new broker shop. And so there some states are 30 days, some states are 90 days whatever it may be. But we put that ability, and so loan officers that are calling are getting hundreds and hundreds and hundreds and hundreds are reaching out to us saying, let me start by shop, let me go through that process or let me leave the retail channel and join the broker channel. We first find out whether they want to join the channel and work for a loan originated or at a broker shop and we can always refer them or connect them to other ones in the neighborhood or in the area or if they want to start their own shop if they're leading a retail company, it's -- like I said, it's broker to box, we can walk them through soup to nuts, start to finish, they can use our technology to originate loans, they can use our technology to close loans, they can use our technology to stay in front of their past client, they can use our technology that's all been built proprietary all the way from start to finish, where it will make easy, they don't have to go out and get 18 different vendors just become a mortgage brokers. So it's a huge competitive advantage, that's why everyone calls us, obviously we're the leader in the industry and a lot of people just start using that technology and that's what they use going forward.
So I don't need to go use Ellie Mae as long as I'm or someone or some other vendor as long as I content with being just in the broker channel?
Absolutely.
You talked a lot about the growth of the broker channel and we've seen a little bit of that statistically in the historical numbers, but can you give us some comments on why you think it's going to grow to 30% and over what timeframe?
Yes. So it's going to grow to 33% by 2025, 2026, that's what we projected. You'll see a big part of that leap in the second, third and fourth quarter of this year because the loan officers are all migrating right now. You've heard about multiple retail lenders whether they're cutting compensation for a loan officer or losing money or struggling, we're not in that position. We're here to help guide those loan officers to be successful in the broker channel and help them win. And so it's a very strong position that we're in and those loans officers are going to move and migrate. With that being said, the big thing that I don't think people realize is the mega retail lenders. I won't name names, but you know who they are, are very reliant on churning their class servicing book to get all their volumes. So when they say they retain all their business, that's a big part of their origination volume, that's not our origination volume, that's not the brokers origination volume. So just by the fact that these large retail lenders that have refinance ensuring their servicing book for the last two years and that's where 60%, 70% of their volume came from, that coming out of the market is a big part of the decline in the overall origination space, brokers don't have that at that scale. And so therefore the broker channel will naturally grow because the retail channel is going to go down faster, loan officers are going to migrate over, it's going to be a win-win for brokers and once again the pie for UWM will grow or will not shrink like the retail channel and that's why you'll see our market share in 2022 be the largest it's ever been.
On the overhead by comparison, can you give me some sense of what origination -- the cost to originate a loan was either in the third quarter of the year-ago period and what it's likely to look like in 2022? And then just related to that and I'll get off the phone and listen, you did say that your overhead was going to be higher in the first quarter but that sounds like that's more sort of seasonal stuff, is that correct?
Yes. That's more in the first quarter, it's a seasonal function off. First of all, the expenses tend to be a little bit higher in the first couple of months and secondly, the volumes are little bit lower. So the overall costs, the fixed costs portion is going to be a little up during Q1. When we look back at prior years, again the number comes in around $1,500 we might have been around $1,400 in a peak volume point, and I look at it monthly, we look at it monthly together. And so those can go down to those levels. It can and has in Q1 for instance, there was one month this year that was as high as $2,000 per loan because of some costs that happened in a specific month. So still a profitable period for us, still a profitable venture. I wouldn't say that the costs should go up to that level during 2022 for any quarter. But even at those levels, we're still in a good position and when I compare it to the overall retail cost structure, still with that added on to the overall fully comprehensive amount to originate a loan, we're still well inside the overall retail production costs.
Our final question comes from Kevin Barker with Piper Sandler. Your line is open.
Sorry to follow-up with the expenses again, but when I look at your guidance for production income, the gain on sale and originations and then Tim servicing continues and you back out the fair value of the MSR, we have about a 20% decline in revenue and you're saying the expenses are going to be flat to maybe up that would indicate a pretty strong decline in being profitable. I mean you may imagine that you're going to be very fair -- I don't know large enough, but fairly profitable in the first quarter. What is your definition of being very profitable or your comments around how profitable you're going to be relative to some of the guidance that's out there? Again how would you have seen that profitability?
So depending on how you look at things. I guess my perspective real quick is, I don't think your model is correct and there was some other analysis you're putting together there. We will be highly profitable even if you think originations decline as we talked about, as I guided. If we hit our guidance, we'll be highly profitable is how I think about it. What's highly? I mean everyone has a different definition, but I guess you will see in the first quarter a lot of success and from our business model on a per loan basis, we make money not counting MSR values which will rise up because we have very low WAC, weighted average coupon, which makes our MSR's extremely profitable as well. But just running the business which where I focus on, we are highly profitable just like we were in the fourth quarter and we were in the third quarter and we have been I think for every quarter forward. Go head, Tim.
And then one other piece that we mentioned earlier that our staffing levels have naturally migrated a little bit lower. So on an overall expense basis, I may have misspoken a little bit, our cost per loan will go up, some of our expenses will go up, but because we've managed our headcount and how we -- our hiring rates, our overall headcount is a little bit lower or we expect it to be a little bit lower in the first quarter. So it doesn't match with a lower extent, we tend to look at things very granularly, as Mat said, we're looking at it on a per loan basis and how that works together with the volume. So overall expenses, there tends to be a little bit more load per team member in the first quarter and with lower volume that will seem to be higher, but overall, our expenses -- because most of our expenses are driven by the number of people we have because we have fewer people at this point than we did in Q3 or Q2 that overall cost will be a little bit lower as well.
Okay. And then your employee count has increased consistently for the last, I would say, nearly four years maybe longer, we don't have disclosures back-end. But are you making a conscious effort to adjust for the industry and demand that's in the market today?
Thanks for the question. I make it a conscious effort to run the business as successful as possible. So no, we're not cutting people, we're not like everybody else. And so you can get confidence that we'll run the business, we'll be highly profitable, you'll see the numbers across the Board. And so our people we hired, we hired a lot so far this year, we'll continue to hire and we'll continue to grow and succeed and excel in our business platform and the numbers will continue to come through very strong. Besides, in the earnings also and the dividend, that is very strong as well. So we feel really great about the business and we're not -- we don't lay off like other companies and we don't have a need to because of our cost to originate, our technology is superior to our competition and you'll see that in the numbers once again as you've seen for the last year and you will continue to see going forward.
That will wrap up the Q&A portion. I would like to turn the call back over to Mat Ishbia for closing remarks.
Yes. Well, thank you guys all for the questions and the feedback. We appreciate you, and we're looking forward to have another great quarter in 2022, first quarter and actually hopefully have one of our best years ever once again. Thanks for the time and look forward to talking you guys next quarterly call.
This concludes today's conference call. You may now disconnect.