Pershing Square Holdings, Ltd. (OTCPK:PSHZF) Q3 2022 Earnings Conference Call November 17, 2022 11:00 AM ET
Company Participants
William Ackman – Chief Executive Officer and Portfolio Manager
Ryan Israel – Partner
Charles Korn – Partner
Anthony Massaro – Partner
Feroz Qayyum – Partner
Manning Feng – Partner
Conference Call Participants
Operator
Hello. And welcome to the Third Quarter 2022 Investor Call for Pershing Square. At this time, all callers are in a listen-only mode. Today’s call is being recorded.
It is now my pleasure to turn the call over to your host, Mr. William Ackman, CEO and Portfolio Manager.
William Ackman
Thank you, Robin. So welcome to the call. And just to give you an update on, of course, we report our performance on a regular basis. But year-to-date, the funds are in a range of mid-8% to low 9% negative return, which is about a 600 basis points in excess of the S&P 500 year-to-date.
So I think we feel good about our relative performance. Obviously, we care more about absolute performance. I always would love to deliver profitable outcomes for our investors certainly over time. But we don’t promise nor do we — can we guarantee that we always generate positive performance.
But I would say, we feel quite good about the year, very challenging year in the capital markets, lots of extrinsic risks and political risk, geopolitical risk, interest rate risk, economic risks and the companies we own have just continued to report really remarkable results. We feel very good about the businesses that we have chosen to own and we feel great about the management teams that are running those companies and we are a beneficiary.
Now despite that, if you look at our results year-to-date, year-to-date we have actually lost approximately 2,700 basis points on our equity portfolio. 400 basis points of that is a permanent loss, our Netflix loss. But 22 percentage points of that is mark-to-market losses on our current portfolio.
So despite our company’s reporting excellent results, their stock prices have declined, a lot of that has to do with kind of a rerating in the market generally. But we don’t really mind mark-to-market losses in our businesses as long as we continue to believe in the long-term performance of the companies we own.
And in fact, it actually a mirrors to our benefit in companies we own that are aggressive buyers of their shares, i.e., of course, they pay a lower price when they are repurchasing shares and we will comment on some of those share repurchase programs in our specific company discussion.
The offset to the losses on our stock portfolio has been hedging gains that we have earned this year, which are in the neighborhood of 1,100 basis points to 1,300 basis points depending upon funds. So net-net, our hedges have been a very meaningful contributor to performance. And for that reason, I thought I’d talk a little bit more about our hedging program.
First of all, I’d just like to mention that hedging has always been something we have done at Pershing Square. It’s been periodically quite material. So the 2007, 2008, 2009 context, we made large profits on our hedges that we purchased to protect against our concerns about the credit markets and that we believe would be a likely deterioration in the credit markets.
And what we like about hedging is, it does, of course, buffer our mark-to-market losses for the year. But more importantly, it gives us liquidity at a time where liquidity is particularly valuable when stock prices are cheap and so really it’s not just so much the hedging benefit, but the available liquidity at a time when there’s a disruption in the market. That allows us — having a hedging program allows us to be more fully invested in the ordinary course and less sensitive to mark-to-market losses on the rest of the portfolio.
Just to give you an order of magnitude, 2020 we had $2.473 billion of hedging gains, 2021 that number was $688 million and year-to-date that number is just shy of $2 billion in terms of P&L from our hedging program.
So if you look at the last three years, $5.2 billion of our P&L has come from hedging, and if you think about our capital base, our equity capital base today is something in order of $11.5 billion, it’s a very meaningful — has been a very meaningful contributor.
So just to give you a few thoughts on how we think about hedging. So, first of all, we — other than with respect to, if we have — one of the things we generally do is for companies we own that have interest rate exposure, I am sorry, currency exposure, for example, universal large euro exposure by virtue of the scale of their business.
In Europe, we tend to hedge those kinds of currency risks in the ordinary course with forward contracts, and those are, of course, they have bilateral risk. There’s no asymmetry to them. But where we have a known exposure and we don’t have a particular view about currency being particularly strong or particularly weak. We tend to use forward contracts in the case of Restaurant Brands, Canadian exposure or Canadian CP similar.
So we don’t think — we think of that as not asymmetric hedge, but just a way for us to at least put aside any concern we have about depreciation and the currency and the effect on the company’s profitability.
The balance of our hedges are asymmetric word that we use often in our letters. What that means, of course, is we are risking a relatively small amount of capital. And if we are right or if — about the concern of being realized, those hedges should become a lot more valuable and that’s really where the bulk of our gains have come from.
So for example, total P&L this year on a forward contract, its $218 million out of a total of, I am sorry, it’s $208 million out of a total of $1 billion — almost $2 billion of hedging gains. The balance of those gains have come from principally interest rate related hedging gains, as well as in one case, commodity-related hedging gains.
In terms of categories of hedges, we look — we focus on things that we are concerned about. What events in the world, what Black Swan risks could impact the value of a business that we own. And our focus circa 2020, of course, was coronavirus and we chose to use credit default swaps to hedge that risk.
Our focus beginning late 2020, early 2021 was the very low level of interest rates and our expectation that inflation would arise by virtue of a combination of very aggressive fiscal monetary stimulus plus the stimulus associated with people being unleashed, if you will, from the virus and being able to participate in ordinary course activities and we hedge that through interest rate swaptions.
And those swaptions, if you look at the trajectory here of what we have done, it gives you a sense of how we think about asymmetries. We bought interest rate swaption for about $180 million that by Q1 of this year we are worth $1.450 billion. We sold them. We replaced them with a very similar that, if you will, we extended the maturity. We — the strike price was out of the money, whereas the ones we owned had the strike price has gone into the money.
So, again, once again, it became asymmetric, about six months later, we sold that hedge for about $1.300 billion. We repurchased another interest rate hedge that we own today and we spent a similar amount of money and today it’s worth looking at my sheet here. We have got about a $240 million investment in interest rate swaptions that are today worth about $446 million.
Had we kept on the original investment, we would have made a much larger multiple of our capital and we would have made actually probably more gross dollars that we sold at the all-time at the end of the life of that instrument. We held at the entire period.
We didn’t do so because as these investments pay off, they no longer represent asymmetric bets. In fact, the risks are to become a very large percentage of the portfolio and the opportunity to make multiples were capital basically disappears. And so our approach is to kind of roll them as they become significantly valuable.
And that has, I think, a meaningful risk reduction effect. It’s unlikely that we find ourselves in a place where we have a massive loss, because we have a hedge that became enormously valuable and then the next day got lost half its value.
So we give up some potential for profit, but we mitigate the risk of loss, because when a hedge becomes very large, we think of it like a large investment. And oftentimes, when a hedge becomes very valuable, it’s usually a time where we can find a better use of that capital, perhaps, buying more of a stock we own or a new investment.
So this is — you should expect this to be part of our thinking going forward, but there’s no guarantee that in any one period of time that we will have any hedge exposure at all. We have to — again, we have to find instruments where we think the risk reward is compelling and if you look at the period from the financial crisis really until early 2020.
So we had a period of practically a decade where there was — we had no meaningful hedges in place other than forward contracts where we were concerned about some risk of moves in currencies, whereas the last several year period of time, we have been extremely active.
I will say, however, that we are dedicating more time and kind of resources internally to this area as I think we develop kind of broader competencies and in a volatile world, these kinds of opportunities tend to present themselves.
So one I call that the sort of general overview, but the categories of hedges that we have today, biggest categories remains in terms of market value, interest rate swaptions, the difference between our earlier bets we were betting the Federal Reserve and have to move aggressively today are, in terms of where the bet is, if you will, that long-term interest rates are meaningfully below where they are going to go and we think that is, of course, a risk for equities.
And part of our thesis here is that we think inflation is going to be structurally higher going forward than it has been historically. We do not believe that is likely the Federal Reserve is going to be able to get inflation back to a kind of consistent 2% level. We will have to ultimately accept a higher level of inflation that has to do with deglobalization sort of business.
We were — we had the benefit for many, many years of the sort of outsourcing of production to very low-cost labor markets and economies and sort of geopolitical considerations and actually everything, the growing middle class in China and just rising wages sort of globally and the supply chain risks that people have become extremely experienced within the last particular year or so has made really every U.S. CEO, maybe even global CEO to rethink outsourced or distant supply chains. And so we are a big believer in the thesis that a lot more of that business is going to come closer to home and it is more expensive to do business here, we are no longer going to have the same sort of subsidy going forward.
Also, the transition to alternative energy is going to be an expensive transition. So we think there are a number of structural reasons why inflation is going to be more persistent than expected and that locking in a less 4% fixed rate contract for 30 years is going to be a difficult thing to do for any kind of instrument even a U.S. treasury securities. So we think that — and there is some asymmetry available in instruments where you can make that bet.
And that — we care more about long-term rates when we are an owner of businesses, because those ultimately, when you are discounting the cash flows for a perpetual life asset or a very elongated asset that’s relevant is really the longer term rates and that’s why we think that kind of hedge is appropriate.
We have some concern also about energy prices and the impact on businesses we own. So we have some energy-related hedges in place. And then currencies, we have exposures various — we do have a very U.S. dollar-centric portfolio.
Most of our businesses earn the majority in some cases, substantially all of their profits and even revenues in U.S. dollars, but we do have meaningful exposures for some of our businesses, and we do our best to hedge earnings that are earned in currencies other than the U.S. dollar.
So let’s call that the overview, and with that, why don’t we actually update everyone on the portfolio. Why don’t we start with Ryan and Universal.
Ryan Israel
Sure. So, as Bill had mentioned, we spent a lot of time increasingly on the hedges, but we have also had a very strong investment in terms of Universal being one of our largest position by far and the company continues to do very well as the company just recently reported earnings.
And the company laid out at a Capital Markets Day earlier that they thought, over time, they could have a high single-digit revenue growth rate organically and that they would have significant margin expansion over the medium-term. And the company’s results are very consistent with that. In the most recent quarter, they continue to outperform that algorithm and are having double-digit revenue growth.
Now part of that relates to the fact that some areas of their business, such as touring and merchandising were hit very hard during COVID and have significantly rebounded and those areas are lower margin. And so as a result, the margin progression of the company has talked about over the longer term hasn’t really shown through this year. But in aggregate, the revenue has outperformed and the company’s earnings are holding true to that algorithm and doing quite well.
But I think one of the broader issues about Universal that’s really exciting to us is the pricing opportunity. Our view at Universal and structurally why we are very excited about the business, we first made the investment was we thought this is a very high quality royalty stream business where the growth of music over time would be significant in increasing their volumes as more people around the world had smartphones and use those smartphones to do digital music streaming.
But at the same time, we thought the service was very undervalued and as effectively a royalty business model, both the volume, the increase in the amount of people subscribing to Spotify and Amazon and Apple Music around the world, combined with the increase in the price of those services, Universal would proportionally benefit from both.
And we have seen a lot of the volume growth over time, but really just in the last month or two, we are now starting to see kind of the first increases from the digital service providers in terms of price. So we have had YouTube increase its price for its music subscription by some cases, nearly 20%. We have also had Apple increasing its price and in a smaller way, Amazon has increased price. And Spotify has given some indications that they are very likely to increase their price.
And we think that this kind of first round of price increases for a service that is incredibly cheap. Music is the cheapest form of high value entertainment could be less than $0.10 per hour of listening. We think that a long way to go and Universal will be a very large beneficiary.
And one of the great aspects of the business model is when Universal obtains more revenue in this format, it will increase the amount of pay to artists, but there are no additional fixed costs that Universal is to incur. And so, therefore, we think that it will be not just a strong benefit to revenue, but over time, can be strong operating profits as well.
So we think this is a really big positive that is actually something that’s happened in the relatively near-term and we think that over time makes a lot of sense to have this music service, which is very high value and incredibly low priced, be something that over time can get the value that it deserves.
And we think the company is also very attuned to this as all the competitors in the industry. We think this could be kind of a tailwind that lifts the profitability of all the companies who provide this very valuable service. So we remain very excited about Universal and are happy with the execution in the near-term and we continue to think that the business has a very strong longer term outlook as well.
William Ackman
Thank you, Ryan. Just to emphasize a point, when we speak about Universal or really any company in the portfolio, including in particular, companies where we are on the Board, we are giving Pershing Square’s view of results or prospects for the business should not think of our point of view as representing management or the company’s point of view.
Just other in the ordinary course, we will — we do receive questions from shareholders. I just — I forgot my initial introduction, which is we did receive many questions this quarter. Each member of the team with respect to particular companies in the portfolio, we are going to do our best to address the questions as they — in their kind of general commentary and if there’s time at the end, I will get to any questions that we haven’t yet covered.
So with that, let’s go to Lowe’s. Charles, why don’t you — they just announced results yesterday and had a great quarter. Go ahead and tell us.
Charles Korn
Sure. Thanks, Bill. So maybe first, I’d like to at least provide some context on the current macro environment, which is obviously very tangential to our Lowe’s investment and is kind of at the heart of the debate on the stock to some extent.
But 2022 has obviously been a very volatile year from a macroeconomic standpoint, which Bill has alluded to with the confluence of challenging variables coming together, including over consumption or pull forward in certain consumer retail categories, which happened during COVID-19, high inpersistent inflation, a hawkish Federal Reserve, which has contributed to a rapid rise in mortgage rates to approximately 7%, pressuring new home affordability. This has kind of created a sharp deceleration in housing turnover and a deceleration in new home construction.
So these variables have exerted significant share price pressure on everything from REITs to homebuilders, public brokerages, mortgage originators, et cetera. And yet, as we look at it from an operational standpoint, home improvement industry as a whole has been comparatively insulated despite these negative externalities.
On yesterday’s earnings call, Lowe’s addressed this head on and kind of details what they view as the 3 most important variables they believe most highly correlate with home improvement engagement and all of which they believe continue to be supportive of the medium-term outlook.
These include strong home price appreciation and high home equity values. Now even if sequentially cooling month-over-month, which we are beginning to see in the data, home equity values are still very high relative to 2019.
Two, historically old housing stock, so the average home in the United States is older than 40 years old and there’s a large cohort of homes that were built in the run up to the great financial crisis, which are turning 20 in the coming few years, that becomes a notable inflection point for big ticket repair activity. For instance, a roof has to be replaced roughly every 20 years. So this cohort is aging into kind of a prime spending block.
And then three, is high disposable income and strong consumer balance sheet. So that fiscal and monetary stimulus that Bill alluded to and the force high savings rate during COVID-19 contributed to a run-up in strong consumer balance sheets of homeowners in particular, who are sitting on both high cash balances and high home equity values.
So these kind of variables combined to manifest themselves in positive same-store sales growth for the industry and what they are seeing in the data is that DIY, the do-it-yourself consumers are actually trading up in their purchase behavior right now, which is kind of the opposite of what one would expect if you are about to enter a recession and strong Pro-related project backlogs, which continue to work through projects, which maybe were put off or were the desire to start that project originated in COVID-19 and that backlog will persist for a number of quarters. And so based on all the data available to them, Lowe’s continues to believe that demand is likely to remain resilient over the medium-term.
Turning specifically to their Q3 results, which they reported yesterday. They reported positive same-store sales growth of 3%, which was led by 19% growth in the Pro customer base. Notably, same-store sales growth accelerated throughout the quarter, rising from 34% on a three-year stack basis to an exit growth rate of 42% on a stock basis. As the Pro consumer remains strong and the DIY customer accelerated their engagement with the category after Labor Day.
William Ackman
Yeah.
Charles Korn
Sure. So when we reference and we will do this for many of our retail or consumer companies, stack, same-store sales, it’s looking at the index level of sales on the current basis relative to a historical period that could be a few years ago.
Here, our references are generally to 2019 or the pre-COVID period. And particularly, when you see companies that are growing at a fast rate, it’s the multiplicative impact becomes pretty compelling over time, because it compounds upon itself. So our references are usually to the compounded multiyear stacks.
William Ackman
Thank you.
Charles Korn
No problem. So the positive same-store sales growth that I referenced was also met for Lowe’s with rising gross profit margin and strong SG&A leverage, which reflected broad-based expense control, but also very significant labor productivity initiative.
So taken together, they had 3% same-store sales growth, which contributed to 7% unit growth and earnings per share actually grew 20% this quarter, which was aided by a 10% reduction in their share count.
Lowe’s once again bought back $4 billion of stock this quarter and is trending towards in excess of $13 billion of buybacks for the year, which is really quite impressive. And so for the full year for 2022, the company is poised to achieve roughly 14% to 15% earnings per share growth, which is essentially all driven by margin expansion and share buybacks and as we look to 2023, our belief that Lowe’s will once again achieve strong positive earnings per share growth.
And as such, as we look at it, the stock is currently trading at 14 times roughly forward earnings, which is a historically low multiple and a discount to its direct competitor. And so while the stock is down meaningfully this year, 18% to be precise, and again, this relates to some of the variables I described at the start of my remarks, this is entirely due to Lowe’s earnings multiple compression with earnings expectations actually sequentially rising over the course of the year.
Longer term, the only thing I’d add to is, we obviously continue to see line of sight for them to grow earnings off the current base as an accelerated rate as they close our revenue productivity and margin gap with their closest competitor.
And we note that the company is hosting an Analyst Day in a few weeks and we anticipate they will describe there are many ongoing productivity initiatives and establish new medium-term targets at that event, which more appropriately reflect Lowe’s long-term structural potential.
William Ackman
Thank you, Charles. Just like to say here, Lowe’s is a really incredible example of the difference new leadership and great leadership can bring to a company. I mean Lowe’s was a consistent underperformer relative to Home Depot up until Marvin Ellison became CEO of the company, recruited a new senior team.
The vast majority of the employees didn’t change and the business has performed incredibly well through obviously very challenging, volatile and difficult times, and they have made really dramatic progress in catching up to a competitor that was really far ahead of them.
And what’s interesting is the stock is still — the market hasn’t yet given recognition to the progress that he and Lowe’s have made by rewarding it with a meaningfully lower multiple. Now for us, it’s actually beneficial because if you are a long-term holder, one of the most aggressive share repurchase programs that we have seen is happening at 14p instead of a 17p or 18p and that is ultimately quite valuable to us. And so we are happy to sacrifice short-term mark-to-market performance for long-term intrinsic value performance.
So, with that, let’s go to Anthony. Chipotle, we are going, obviously, in order of size of investments. But go ahead.
Anthony Massaro
Great. Thanks, Bill. It’s actually a great segue, because Chipotle like Lowe’s had a new CEO arrives in early 2018 and similar to Lowe’s, the track record of excellence under the new leadership team here just continues every quarter.
William Ackman
And actually, just fairly remarkable, the stock, I remember the day was $265 a share when he joined and today is…
Anthony Massaro
Right.
William Ackman
…around $100…
Anthony Massaro
$1,800. Yeah.
William Ackman
Okay.
Anthony Massaro
But they just reported earnings a few weeks ago. They delivered same-store sales of about 7.5%, which represents three-year stacked or a three-year cumulative growth since before the pandemic began of 34% and that’s the best result that they delivered this year. Every quarter this year has been above 30%. And then the guidance for this quarter, Q4 is similar to Q3 for mid-to-high single-digit increase, which implies that the cumulative growth will continue around that 30% level.
And there’s really four drivers of this amazing topline momentum that I’d call out. The first is price increases to cover inflation that Chipotle is seeing, especially in commodities this year, but also in labor. There’s really been limited customer resistance to that to-date. So the Q3 comp of 7.6% was driven by 13% price, a 1% transaction decline and a 4.5% headwind from mix, which is basically a shift from digital group orders back to individual in-person orders as people resume their work in school routines.
And Chipotle’s management has taken several nationwide price increases this year, but they recently shifted to a more targeted approach. So in October, they took a 2% to 3% price increase in 700 stores, about 23% of the store base to cover outsized wage inflation that those locations we are seeing. So I believe that we will see a little bit more of that going forward and a little bit less of the big price increases, but we will see and I will come back to the topic of pricing in a bit.
The second driver of topline that I’d call out is the return of in-restaurant sales. So as I mentioned, people are coming back to the office, back to school. So in-restaurant sales were up 22% in Q3 and digital sales where the company made tremendous inroads during the pandemic only declined 1%. So you see the digital business is really a new layer of business that the company has earned and has largely kept even as the in-store business comes back.
The third lever is successful menu innovation. So this quarter, we have Garlic Guajillo Steak, which if you haven’t tried it, I’d encourage you to go out there and try it before it runs out at the end of the year. This will be a comp tailwind in the second half of this quarter since last year’s limited time offering, Brisket ran out actually around this time mid-November.
And then the fourth lever, oh, I am sorry, and on menu innovation, it’s important to note they have a spicy chicken, Chicken Al Pastor that’s currently in test. I am personally very excited about that one. I think the millennial and Gen Z preference for spicy foods is quite robust and you see it across the food industry.
William Ackman
And you are speaking from the perspective of millennial, Gen Z?
Anthony Massaro
That’s right. The millennial is not — definitely not Gen Z, for sure. But yeah, no, look, I think, spicy food innovations have resonated tremendously over recent years and I expect this one will be no different. So that looks like it’s on deck for next year.
The fourth lever of topline, I will call out is on the new store side. So they are on track to deliver net new unit growth of about 8%, both this year and next year, and management believes they can get that up to 10% once current headwinds around permitting and construction and equipment availability delays that are kind of still with us coming out of COVID once those abate.
Chipotle is one of the few businesses that we have seen in any sector that’s still delivering robust margin expansion even in the current environment. So margins in Q3 were up 2.7 percentage points on an operating profit level and that allowed operating profits to grow 37%, while revenue growth grew at 14%, so that’s tremendous, tremendous operating leverage.
And then for Q4, impressively, management is guiding for restaurant margins and operating profit margins to remain largely consistent with Q3, which is impressive, because Q4 is typically a seasonally slower quarter. And the guidance for Q4 implies that both of those margins will expand by 5 percentage points from 2021 levels, which is just showcases the tremendous power of Chipotle’s economic model.
Two key focus areas I’d call out going forward. One is consumer resistance to pricing. That’s really the biggest debate on the stock right now. We believe that, that resistance will continue to be limited as there are many indications that Chipotle’s value proposition remains really strong.
The most popular menu item, the Chicken Burrito or Bowl that accounts for about 50% of orders and that still costs less than $9 on average across the country. And we think that’s tremendous value when you compare it to other food offerings and kind of not their quality and portion size. Chipotle’s pricing is still kind of 10% to 30% below their fast casual competitors. So still a big pricing gap to be sort of core competitive set, putting aside QSR.
The grocery store inflation this year remains above in-restaurant inflation. So the relative value of grocery is not as compelling as it typically is in these times, although clearly, it can be cheaper to cook at home, so it’s something we are watching.
The new unit openings remain really strong. So they are opening at about 80% to 85% of the volumes of existing restaurants. So we are not seeing any evidence of kind of a slowdown there. And Chipotle also gets great data through their loyalty program and they can look at things for individual customers and to assess trade down, for example, as someone who used to order block, are they skipping the block or they skipping extra meat and they are not seeing any of that right now, which is quite encouraging.
The lower income consumer has pulled back a bit, which accounts for that 1% transaction decline I mentioned earlier. But it’s important to note that Chipotle’s business really skews towards a higher income consumer and we are talking about on a national basis, that means $75,000 or more in income annually and they are seeing actually higher frequency amongst those consumers, which is a great thing.
Another focus area for management is improving throughput and operational execution. This is something that’s a focus across the restaurant industry, given the level of turnover that’s happened during COVID. Restaurants performed much better when general managers in particular in their position for a long period of time and are able to create a culture of excellence within the restaurant and the culture of stability and management at Chipotle is really focused on that.
So a tangible metric they are measuring is, how fast can they process transactions when they are busy. So a number of transactions per busy as 15 minutes each day. That metric is currently in the low 20s and management has line of sight to get that up to the high 20s, which is currently being achieved by the highest volume locations which have long tenured managers that I mentioned.
They rolled out an updated training program at the end of the quarter called Project Square One and we believe that will start to bear fruit in the coming quarters. And improving staff retention is really kind of the biggest lever to make progress on this operational execution side of things. So it continues to perform really well and we have confidence that management will continue to deliver what they have done since over the last close to four years going forward.
William Ackman
And maybe you could just comment on where we are in terms of U.S. penetration of stores. They have changed over time their view where they can build stores, the results of rural locations, et cetera?
Anthony Massaro
Yeah. Definitely. So we are at around just under 3,100 stores nationally now and management believes they can grow that number to 7,000, so less than 50% penetrated. And that number used to be closer to 5,000 years ago, but what they found is, with new formats, they are able to expand into trade areas that they didn’t think were viable before, small towns, rural locations.
There’s less competition there, which is interesting and Chipotle’s offering is — there’s a lot of newness in those locations versus Manhattan, for example, where that type of using has gotten really competitive.
And they also — the current management team has invented the Chipotlean [ph] drive-through format, which is a digital drive-through. So you kind of place the order for order ahead, pick up, you go to the drive-through window, you just pick it up, which is different from a traditional drive-through where you actually order at the window of wait, so it’s much faster and that’s in 500 stores today and that has certainly also expanded the addressable market nationally.
Canada, the management believes they can have a few hundred stores there and they only have a few dozen today that’s another growth opportunity for the brand.
And then finally, internationally, they haven’t even started that yet. They have just a handful of stores in Europe and we think this brand can have tremendous international residential in years to come. So that’s a longer term growth opportunity that we think is exciting.
William Ackman
Thank you, Anthony. And one of the reasons why we like restaurant companies and we have been a big beneficiary of some very successful investments in restaurants over time is once you get the model right and the economics of the box are attractive and you built a real brand, as long as management maintains focus and consistency and you mitigate the traditional risks of that business, it’s sort of a compounding exercise, the opening of stores, the progression of sales over time.
And as long as the economics of store opening is compelling and the returns here are 50%, 60%, 70% on new store openings. It’s really a remarkable business that you can lay out over time and actually global consumption of — there’s a lot of consistency in the kind of food people like globally and that presents very large long-term opportunities, which is a good segue to Feroz, if you could speak to Restaurant Brands. We had an interesting announcement yesterday, which I am sure you will touch on. But let’s go first to how the business is doing and then to yesterday’s announcement.
Feroz Qayyum
Sure. So on the business front, the recent results showcased another increasing quarter momentum. So the importance in Canada, same-store sales improved to about 500 basis points above pre-COVID levels, driven by really improvement in all day parts and store types. In particular, we are seeing the results of the company’s initiatives under its back to basics plan with extensions and its beverage program, as well as extending its afternoon foods program.
Despite this, some of the super urban locations, so think downtown Toronto stores, those are still below pre-COVID levels and so there’s plenty of opportunity in terms of a tailwind from reopening. So we believe the company will actually deliver same-store sales for the full year that are actually above the guidance they gave a couple of months ago at their Analyst Day.
At Burger King in the U.S., the company recently unveiled its reclaimed the flame program to reinvigorate growth. The plan includes about $400 million from the company to invest in its advertising, as well as refreshing its store base. And while it’s still early days, we believe the franchisees themselves are actually very excited to refresh their stores and we think there’s no reason Burger King can’t grow in line with its peers.
And the two proof points for that are really Burger King U.S. performance prior to COVID and the best-in-class performance really in its international business. Burger King’s International business actually presents — represents the majority of their profits today and they reported same-store sales relative to pre-COVID levels above 20%, and that is, again, as I mentioned, best-in-class when you look at large restaurant companies.
Elsewhere, Popeyes is continuing to grow well and we are very excited for their long-term prospects. And then what’s really interesting about Restaurant Brands in Pacific in this particular uncertain macro environment is that, we think they are really well positioned both for sustained inflationary period, as well as potentially a recession.
So as input costs and wages have increased, really all restaurant companies have been increasing menu prices at a fairly robust pace. And so that the franchisor in this equation, Restaurant Brands benefit from these price increases, while its cost structure isn’t nearly subject to the same inflationary pressures.
Importantly, as Anthony alluded to, despite these price increases, food away-from-home inflation is still below food at-home inflation, making restaurant meals, in particular, in the quick service restaurant category, a better relative deal. So in a recession, we think each of the brands would also benefit from consumers trading down.
And then as you alluded to, Bill, we just heard from two of our portfolio companies that Anthony and Charles spoke about, but a single change agent in the leadership team can do, not to be left behind, Restaurant Brands announced the recent appointment of Patrick Doyle as its Executive Chairman.
For those of who I know Patrick was the legendary CEO of Domino’s for about eight years, where under his tenure, the company doubled system-wide sales, doubled franchisee profitability and really became the number one pizza company. As a result, the share price increased over 23 times under his tenure. And so we think Patrick can help me do some of the same at Restaurant Brands, help it accelerate its digital journey and also help achieve its full potential.
William Ackman
So over the next eight years, we can expect 23-fold, I’d take 10. I’d be okay with that.
Feroz Qayyum
Anything like that would be very impressive. What’s also impressive is that Patrick and a vote of confidence is purposing $30 million worth of shares and the entirety of this compensation is tied to the performance of Restaurant Branded share price.
And look, this is just another step in the company’s efforts over the last few years to bring in experienced restaurant executives from other successful restaurant companies. So we are very excited about this development.
And as is the market, frankly, so given the inflecting performance, some of the excitement about this new recent executive appointment, it has actually now become one of our best-performing stocks for the year, while obviously, the market — broader market is down.
We are equally excited about the future prospects and shares actually now trade at a high-teens multiple of its earnings power for next year, which, again, we think is very cheap in light of its business model and its future business prospects.
William Ackman
Great. Thank you, Feroz. So, Ryan, why don’t you update us on Hilton and if I can ask you to be a little…
Ryan Israel
Sure.
William Ackman
… louder in your, or perhaps, even higher energy possible in remarks.
Ryan Israel
Thank you. So, Hilton…
William Ackman
There’s a lot of excitement about Hilton…
Ryan Israel
I — we are very excited about…
William Ackman
It’s reflected in your…
Ryan Israel
…. many of our other companies including Universal. So I will try to make it come through clear for Hilton. Hilton reported results a couple of weeks ago. And I think the key takeaway was that they were able to get their RevPAR, which is the industry metric for their same-store sales back to pre-COVID levels.
And it’s pretty impressive because while it’s taken two and a half years during the pandemic for the business that was really kind of in the eye of the storm, people thought it may take four years or five years and people were question that would ever happen and they have passed the mark this quarter, I think, which is an important proof point, the importance of business travel.
But maybe even more importantly than that, one statistic, I think, is very impressive is, their profits were up about 25% relative to the pre-COVID levels, even though they are just recovering on a same-store sales basis. And that’s really reflective of a couple of factors of the quality of the business model and the strength of the management team.
In terms of the revenue growth, one of the reasons why Hilton has been able to grow its revenue substantially, even though it’s just recovering in terms of same-store sales as they have an industry-leading pipeline.
So Hilton offers a very strong customer value proposition, which in turn is very attractive for its franchisees and its franchisees are the ones who build the hotels around the world, and their pipeline of new hotels is about 40% of their existing units. And so really over the last two and a half years, three years, the company has been adding hotel rooms at about a mid single-digit rate, which have added up and allowed the company to grow its revenues at an impressive rate, while it’s been recovering from COVID.
And the second point is that expenses are down at about a low-teens rate from where they were prior to COVID. And that just really highlights again how, in a franchise business model, the overhead cost structure of the business can be somewhat independent of how business grows over time, which is very attractive.
But the management team here and the quality of the management team really shined through because they have been very focused on using COVID as an opportunity to make themselves more efficient, as well as making sort of the operating model for the franchisees more efficient.
So the combination of continued revenue growth due to the pipeline, as well as strong management of the cost structure has allowed the company to increase its profit significantly, while it’s just getting to catch up.
And I think as we sort of step back and think about the business over time and you put it in context with some of the things people are worried about today, inflation, as well as the economy and whether we are going to have a slowdown or recession, we think Hilton is very well positioned on both those metrics.
For inflation, the royalty business model, they are able to grow without capital. They have a product where they can re-price the rooms on a daily basis to make sure that they are being compensated for kind of the growing value they are providing in an inflationary world and their cost structure doesn’t suffer from some of the same inflationary trends. And so the inflation in a way, can actually be beneficial to the business model, it’s very well protected for inflation.
And while an economic slowdown may impact business travel to some degree, like, it would impact a lot of areas of the economy, we think that there’s a lot of pent-up demand. So Hilton is still in the business segment, which is a lot of it’s the primary substantial majority of the business, it’s still recovering. A lot of people have not been out visiting their customers or making their sales calls over the last couple of years.
So we think even if things slow down in the economy, there’s still a very large pent-up demand for people to be able to visit customers and so both personal travel from people not traveling as much, as well as business travel could have a lot more resiliency in this market if things were to slow down.
And then lastly, there’s still another 40% of rooms that we expect Hilton will add over time. And so all those things, we think, really buffer the business and in the case of inflation or slowdown, and we continue to be very impressed with the way that the management team has very definitely navigated a series of challenges over the last several years.
And they continue to buy back increasing amounts of stock. They actually just last week, increased the size of their buyback program and so we think that kind of at every level of the business, they are doing a great job, and we think the outlook for the business remains very bright.
William Ackman
Thank you, Ryan, and you can hear a kind of a consistent theme here. We love asset-light royalty like businesses where there’s a very long horizon of embedded growth. And we like those businesses to be run by best-in-class management teams and we like them to have best-in-class capital allocation programs. And the nature of businesses like that is it generally frees up a lot of capital that can be used for shareholder return and Restaurant Brands and Hilton are two sort of great examples.
Now we also — Canadian Pacific is not an asset-light business, but it does have economic characteristics that we like. And Manning, why don’t you tell us why do we like Canadian Pacific kind of high level and then update us on the quarter? Why do we like this super capital-intensive railroad thing? Why?
Manning Feng
Sure. Thanks, Bill. So in terms of the business model, we have always been a fan of railroads for several reasons. I think the first one is just extremely high barriers to entry in this industry and the resulting kind of oligopolistic nature of the business.
If you really think about the North American railroad industry today, there are only seven soon to be six large Class I railroads. And that’s because just think about the amount of capital, the amount of time that it took to build these impressive really large rail networks and that’s just a network that is practically impossible to replicate today.
So when you have a business like the railroading industry where the barriers to entry are super high, that gives these businesses stability. It also gives them a lot of pricing power to price their kind of service product. So…
William Ackman
Now when you say it’s oligopolistic, obviously, still very competitive trucking, et cetera. Why do we think they — what are the factors that we think drive their long-term competitive advantage versus other forms of transportation?
Manning Feng
Yeah. Definitely. So I think there are actually certain types of commodities that are generally heavy and a large quantity that can only be transported by railroads. For the commodities that compete with trucking, we think rail has several advantages. The first one is that rail is just purely cheaper than trucking, very especially over longer distances. And there’s also a substantial environmental benefit to using rail transportation as well.
So rail actually emits 3 times to 4 times less emissions compared to trucking. So I think especially as shippers reevaluate their options as they care more about their environmental impacts, we think rail will continue to gain share.
William Ackman
Great. So what happened during the quarter and what’s the status of the Kansas City Southern?
Manning Feng
Yeah. Definitely. So CP has actually been one of the bright spots in our portfolio this year, outperforming both the market and other rail stocks. The company reported another strong set of results in Q3 that really reinforced our conviction in the company’s resilient inflation protected business model, as well as their superb management team.
So revenue in the third quarter grew 19%, comprised of 6% volume growth and 13% of price and mix, fuel surcharge pass-throughs and FX. Growth was really driven by CP’s large bulk business, which represents approximately 40% of total revenue and actually helps insulate the company from economic fluctuations.
The Russia-Ukraine war and the resulting supply chain disruptions have really increased demand for the Canadian exports that CP carries. Think about grain, think about coal, fertilizers, all of which are non-discretionary consumables and we believe demand for these commodities will remain resilient as the work continues. And also call out grain as an exciting growth opportunity.
So after a smaller than typical Canadian grain harvest last year, the current harvest is expected to be one of the top five largest cross of all time. And we started seeing grain volumes ramp really quickly at the end of Q3, which we believe sets CP up for strong momentum in the following quarters.
So in terms of the business model, I touched on a lot of the points that we like about the business. But we believe CP is actually especially attractive in inflationary environments. The company provides a mission-critical low-cost transportation product that does not come with many alternatives, which really gives CP pricing power to offset cost inflation. CP is now renewing their contracts with high single-digit pricing increases, which is much higher than historical levels.
And then also in addition to pricing, the company’s contracts also feature fuel surcharges that pass-through increases in fuel expense, which is CP’s second largest cost item directly to customers.
So as a result, revenue growth directly benefits the bottomline and you could really see that in the third quarter where CP managed to increase their operating margin by almost 100 basis points adjusted for transaction costs and landfills.
And lastly, we believe Kansas City Southern represents a transformative acquisition for CP that will generate substantial synergies and create value for all stakeholders.
So as a quick recap, CP currently owns KCS through voting trust structure, which entitles CP to economic ownership but not operational control as we wait for regulatory approval from The Surface Transportation Board. The Board actually held a series of public hearings in September about the merger, which we believe was really constructive in highlighting the many public benefits of the transaction.
So we expect that the combination of CP and KCS to unlock many idiosyncratic growth opportunities regardless of the macroeconomic environment once the transaction receives regulatory approval, which the company expects to happen in Q1 of next year.
So, in summary, we are really pleased with CP’s performance this year in the face of high inflation and macro uncertainty and then we remain even more excited for the company’s growth prospects in 2023 including KCS.
William Ackman
Great. That’s a great summary, Manning. And what’s interesting, just looking at our portfolio and looking at the leadership, Keith Creel is clearly the number one executive in the rail industry. Lucian Grainge is clearly the number one executive music industry. Marvin, in our view, has just done absolutely spectacular job.
And really, each of these cases, we have the benefit of companies that are run by outstanding leaders. And so we have a great business run by outstanding leader and you add to that appropriate capital allocation policies, you can drive enormous, enormous, well above market expectations for shareholders.
So we are not going to comment on Howard Hughes this quarter, because we have an ongoing tender offer that comes due, if you will, expires on November 28th. If you like more information on Howard Hughes, I direct you to the Q3 conference call took place on November 3rd and the earnings and 10-Q releases. Anthony, do you want to speak to Fannie Freddie?
Anthony Massaro
Sure. No real material updates there. The status of those companies. They remain in conservatorship and the dividend payments to treasury remains suspended. So these entities are just building up more and more capital every quarter, which we, as shareholders, welcome and is a long overdue development.
So they currently hold GAAP capital of about $94 billion. Remember, a few years ago, they had nothing, tremendous, tremendous progress, about $76 billion of that counts towards regulatory capital, because they are not allowed to count their deferred tax assets in that number.
And they need incremental capital under the new rule of about $225 billion to be fully capitalized, which will take about eight years or nine years depending on how kind of earnings evolve going forward. But they remain in a good place and building capital and becoming more valuable.
Actually, the other interesting thing is, we are not so far away from the next Presidential election. And if there is a — the next leader takes a different view of the importance of this being an independent enterprise, these could become very interesting investments once again.
And maybe that’s sort of an opportunity to just kind of speak about how we invest versus a typical investor. There are many cases, including examples in our portfolio where we continue to own a stock, even though we think it’s highly likely the stock is going to go down or, quote-unquote, going be dead money for some extended period of time where a normal hedge fund or a typical investor would sell a stock in that circumstance.
And why do we hold it through a period that will contribute to negative performance is because we have a view that even at the price before the decline, this is going to be attractive investment over a long period of time.
Number two, we tend to own large percentage interest in companies and we don’t have the same for us to repurchase the Fannie Freddie investment or it would take a considerable period of time. That’s true for other less liquid investments in the portfolio.
And for example, in a rising interest rate environment with 7% mortgage rates, one of the questions we got was, can you address the bear case against Howard Hughes and the whole list of horribles to be concerned about in real estate, when you are a liquid holder of a company and you are a long-term holder and you are a holder with the hedges, you can sort of look through a period of — with significant headwinds.
And I can think of numerous examples over time where the three-year to five-year return has been extremely attractive, but we had to accept a meaningful amount of negative mark-to-market performance in the short-term. If you are a small liquid investor, you can take advantage of that liquidity, sell, wait for the bad news to recover and hopefully repurchase in time before the market figures out that the stock is going back up. But that’s sort of a game we don’t play.
Another reason for that is, we really partner with companies when we buy a stake. We want to be a helpful long-term holder and if we are constantly trading in and out of a position. It’s not — it’s hard for us to have credibility. We have to kind of benefit alongside management. We have to suffer the pain, if you will, in the short-term.
But one of the big benefits we have versus other investors is the fact that, 90% of our capital is effectively perpetual, 29% of the capital we manage is employee or affiliate capital and so we care enormously about the long-term outcome and we are prepared to suffer, if you will, some degree of underperformance in a particular position where we would have been economically better off selling it and then repurchasing in a few months or six months or a year, if we can get the timing right.
That also is true for acquiring a stake. The time for us to buy a stake in a business is a time where other investors believe probably correctly that short-term performance is going to — that stock is going to be negative. That’s our chance to own a big stake. And if we are right on the long-term view in three years or four years or five years, we would be very happy with the outcome.
And the way we mitigate the kind of macro risks through hedges and that’s — this year is kind of a perfect example of where our hedging profits didn’t — haven’t quite offset the entire mark-to-market losses on our equities.
But I do think we are very well positioned over the next several years were very happy with our decision to retain ownership, and in some cases, increase ownership in businesses we own today, even if those stocks prospects over the next six months or 12 months, if we enter a recession or mortgage rates continue to rise, et cetera, we are still willing to be people will suffer the short-term pain for the long-term gain and we are privileged to have that opportunity.
Spark, we have a number of questions about Pershing Square Spark Holdings. Just to review Pershing Square Tontine Holdings with the SPAC, we launched that had a number of very differentiated attributes.
Unfortunately, we are not able to close the Universal Music transaction in Spark, because of really technical considerations and issues raised by the SEC. I would call Tontine SPAC 2.0 addressing a lot of the fairly egregious elements of the typical spec, including founder stock and misaligned incentives and enormous transaction costs.
But Pershing Square Spark Holdings is kind of 3.0. And we think we have largely addressed perhaps all of the concerns about SPACs, including transaction costs. There are no underwriting fees here. Founder stock, there’s no founder stock. It’s a pure common stock. Capital structure, there are no shareholder warrants.
One of the big problems with SPAC today is when investors redeem, they get their cash back, the company raises less capital, but the warrants that were issued at the time of the IPO remains outstanding. And so you a company that’s merged with a conventional SPAC, 90% of the investors redeem, they raised 10% of the expected capital once the offset transaction costs, they now issued a ton of warrants at — and they have raised very little money and that really accounts for the negative performance of SPACs.
Spark is in the process of we are seeking to get a registration statement declared effective. If you followed our trajectory here, I think we have made, I guess, now three, three or four filings with the SEC. Each time we make a filing, if you were to do a compare function on word. You can see the changes that are being made and those changes are being made in response to comments raised by the SEC.
And if you compare the last draft or the current draft, you will see very few changes and we are about to make another revised filing, and you will see even fewer changes versus the previous draft, and that is suggestive of the fact that we are addressing. We have addressed most of and hopefully, eventually, all of the SEC’s comments. We can’t give precision on when this thing ultimately goes effective. But I would say we are getting to the shorter strokes and we are excited about Pershing Square Spark Holdings.
What’s going to be particularly interesting, assuming we are effective in getting this through the process, and I expect we will, and hopefully, by the end of the year, we will have really the only viable acquisition company at a time when the IPO market is effectively shut, the traditional SPAC market is effectively shut and we will have the ability to enter into a transaction with someone beginning, hopefully, just around the turn of the year with the most efficient capital structure for someone to go public.
Pure common stock capital structure, the only dilutive security is a 20% out of the money, 5% warrant that is held by us as a sponsor, and I might say, as I am referring to the Pershing Square Funds and some — and the directors of the entity, we will be able to commit capital and effectively guarantee that someone goes public, the guarantee they will raise a minimum amount of capital at a negotiated fixed price. And if there — we can’t guarantee that all of the warrants will be exercised although good reason to believe they will be, we can walk you through it at an appropriate time.
The there won’t be — if someone doesn’t issue, doesn’t exercise, a warrant goes on exercised, there won’t be any dilution associated with that, a bit like an IPO where the underwriter, says, look, I think, you will raise $500 million, I can’t guarantee that, but you could raise $800 million. Turns out the only raise $500 million. They don’t have the problem of issuing $100 million worth of warrants and we will have that sort of same benefit.
So in a world where capital formation has become extremely difficult with the credit markets gotten difficult and where there are a large number of private companies, we are going public would be a meaningful competitive advantage versus their competition, we will be in a really, I think, a pretty unique position to facilitate IPOs and the structure itself offers a lot of flexibility. The minimum sized transaction would be $1.5 billion equity raise and we can scale up to effectively almost any level if the counterparty wants to raise a large amount of capital.
So we are excited about Spark. The owner of Spark, the warrant holders will be the shareholders of Pershing Square Tontine Holdings that own their shares at the time of the redemption. They have what’s called an escrow CUSIP on their brokerage statement as a result and we will look at delivering warrants to those holders.
The warrants will not be traded initially. One of our — the innovation, I think, that enabled us to make meaningful progress with the SEC was the fact that warrants will not trade until such time as we have identified a target, negotiated the deal done our due diligence, signed an agreement. The Board has voted in favor of the deal. We, of course, is the 100% shareholder voted in favor. We have obtained regulatory approvals and we have an effective registration statement.
At that point, the warrants go live for 20 business days. People have really even more information than you get in a typical IPO and a lot of time to think about it at which point and you got to see where the warrants trade before you decide whether you want to exercise them or not. So we think it’s a very innovative and hopefully helpful structure at a time where capital, it’s very challenging to go public or to raise equity capital.
I just want to quickly take a look at the — any questions that we haven’t answered. Just one quick thing on hedging. One thing I failed to mention is that the existing hedges have about $740 million market value of about 6.5% of our portfolio and a cost basis is around $480 million, about $260 million of unrealized profit.
On Universal, Ryan, do you want to just comment on competitive dynamics versus the likes of hypnosis and whether artists, we have seen some examples of artists rerecording their work as a competitive advantage of the Universal gotten worse in light of some of the activity we have seen in catalog acquisitions and some of these closed-end funds buying assets.
Ryan Israel
Sure. So we think that Universal’s competitive position is very strong and is actually getting stronger over time. I would separate out the questions into perhaps two different issues. When it comes to sort of some of the top artists who have attempted to rerecord their masters, I would say that is a very unique situation.
And in fact, actually, that is enduring to Universal’s benefit right now. But I would not expect to see a situation like that happen again and I think that, that situation is only likely to ever have happened if you are one of the top couple of artists on the planet.
And I think based on the positive relationships that Universal has with its top artists and in general, I would say the entire record label industry has with their key artists, I think, it’s unlikely you would have somebody at the top level who would be rerecording their masters in that way.
In terms of the competitive dynamics and relative to hypnosis, I think that it’s important to step back and really analyze the differences in the business models. Universal is really about trying to find artists talent that will become the next big Taylor Swift, for example, and then helping that artist succeed. And so there’s a real core competency in being able to identify, develop, grow and market artists all around the world.
When you are looking at whether it’s hypnosis or other labels, what they are primarily trying to do is trying to buy existing assets. And I believe a lot of that activity was driven by potentially may be in hindsight, record low interest rates that we don’t ever see again. And that really reduced the cost of capital, it allowed a lot of players with attractive financing terms to come in and really bid up these assets.
But it’s my belief and our belief that a lot of those companies do not have the same level of competency in being able to really help monetize the value in the brand of these artists and a lot of these companies really don’t even try. I mean they have been very upfront that they are financial plays.
And so I think going forward with at higher level and a more normalized level of interest rates, perhaps, you are going to see a lot less activity from fringe players and I think the value of the business models of kind of the large labels and we think that UMG is the best, and certainly, it’s the largest. We think that’s going to show through even more. So we are very pleased with our competitive position.
William Ackman
Yeah. I think it really just speaks to the embedded underlying value in their catalog. And one of the benefits I have had being on the Board of Directors is I have seen the company pass on a large number of acquisitions and really be selective about the assets that they purchase.
And if you think from the artist perspective and a lot of our — these are — they are now monetizing their assets before they die. They actually care who’s — it’s a bit like — it’s a life’s work. Do you want it owned by a closed-end fund that’s for financial players or do you want to put those assets where they are going to be properly cared for and maximized over time for your legacy.
And I just think Universal is not going to buy assets at a massive discount, because they offer those benefits, but they will likely to get clearly the first look. And on the margin, it’s a bit like Buffett tries to create, I think, very successfully created a world where people were prepared to transact with Berkshire Hathaway in terms that were more favorable than they would private equity, because they knew that it was a permanent owner and the same thing is really true for Universal.
On the question on the buyback tax, on the margin on buyback tax will marginally make it less attractive for companies to buy back shares. 1%, I think, it won’t have a huge impact. But of course, people have a concern about these kind of taxes, because usually they start at a very low level and they go to higher levels.
We do think the company’s ability to return capital to shareholders in a fairly friction free way is good for capital generally and for economy so that capital gets allocated to the highest and best resource. I mean there’s a lot of political stuff about buybacks being negative for the world. But if a company doesn’t have a good use, return the capital to shareholders and then we will get invested in the company that can deploy the capital more effectively.
I think we covered most of the hedging programs, we have covered Spark. Yeah, I think, we have really covered everything. So if you have further questions, feel free to contact the IR team and look forward to seeing you at our upcoming Analyst Day in Q1. Thank you for joining the call.
Question-and-Answer Session
Q –
Operator
Thank you, everyone. This concludes your conference call for today. You may now disconnect.
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