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Operator: Good afternoon and welcome to OppFi’s Fourth Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. As a reminder, this conference call is being recorded. And it is now my pleasure to introduce your host, Shaun Smolarz, Head of Investor Relations. Thank you, sir. You may begin.

Shaun Smolarz: Thank you, operator. Good afternoon. On today’s call are Todd Schwartz, Chief Executive Officer and Executive Chairman, and Pam Johnson, Chief Financial Officer. Our fourth quarter 2022 earnings press release and supplemental presentation can be found at investors.oppfi.com. During this call, OppFi will discuss certain forward-looking information. These forward-looking statements are based on assumptions and assessments made by OppFi’s management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today and OppFi undertakes no duty to update or revise any such statement, whether as a result of new information, future events or otherwise.

Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company’s filings with the Securities and Exchange Commission, including the sections entitled Risk Factors. In today’s remarks by management, the company will discuss certain non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in the earnings press release issued earlier this afternoon. This call is being webcast live and will be available for replay on our website. I would now like to turn the call over to Todd Schwartz.

Todd Schwartz: Thanks, Shaun and good afternoon everyone. We’re excited to begin 2023, and we believe our business continues to stabilize and strengthen. As founder of OppFi, I returned as CEO a year ago and immediately took steps to enhance our leadership team as well as talent in key roles throughout the company. While the macro environment in 2022 was challenging in many ways, we persevered with resiliency, focus, and a relentless emphasis on improvement. As a result, despite significant economic headwinds, including a 40-year peak in inflation, we delivered record net originations, total revenue, and ending receivables for the full year. As a result, we achieved our eighth consecutive year of profitability, exceeding our profitability guidance for 2022.

Although, challenging at the time, we embraced the learnings from 2022 as they provide a distinctive competitive advantage. We believe that embedding these learnings into our operating processes going forward enhance our ability to deliver a stable, profitable platform across economic cycles. We are optimistic about 2023, while remaining mindful of the continuation of an uncertain macroeconomic environment. The experiences of 2022, coupled with our 10-year business history, give us the confidence that we can control our success by balancing originations growth, overall risk, and expenses. Pam will review our fourth quarter and full year results in detail, as well as discuss guidance for Q1 and full year 2023. Before she does, I will cover four topics.

One, some highlights from our Q4 and full year 2022 financial performance; two, an update on strategic business initiatives for 2023; three, our macroeconomic outlook and quarter to date business trends; and four, our long-term growth strategy. Our fourth quarter results were driven by credit performance and operational leverage through expense reductions. This enabled us to beat the top end of our full year guidance for adjusted net income. The key highlights for the full year compared to the previous year included 27% growth in net originations to $758 million, 19% growth in ending receivables to $403 million, 29% growth in total revenue to $453 million, net income of $3.3 million and adjusted net income of $5 million. We also successfully improved our marketing and operating cost efficiencies in 2022 as demonstrated by the 20% decrease in marketing cost per new funded loan and a 13% improvement in operating expenses as a percentage of total revenue, excluding interest expense, add-backs, and one-times.

In addition, our net promoter score, or NPS, was 82 for 2022. We believe that maintaining an 80 plus NPS score demonstrates the value and quality of OppFi’s platform in different operating environments, and even more so, when there are elevated charge-offs and challenging macro conditions. Turning to our fourth quarter summary. On a year over year basis, total revenue increased by 25% to $120 million. Net loss was $5.2 million and adjusted net loss was $2.8 million. Our improved efficiency trends continued in the fourth quarter with a 25% decrease in marketing cost per new funded loan and a 23% improvement in operating expenses as a percentage of total revenue, excluding interest expense, add-backs, and one-times. One of the other highlights in the fourth quarter was the closing of $150 million credit facility with Castlelake.

The addition of Castlelake to our existing stable of funding sources has already helped fuel profitable growth and demonstrates that OppFi can continue to attract funding even in challenging market conditions. We’re excited to have a new financial partner and look forward to continuing to grow with them. Now, I’d like to provide progress updates on some of our core strategic initiatives that we expect to drive our 2023 financial performance. Last year, the most significant adjustments to credit models were made in the company’s history. In the fourth quarter, the first payment default rate continued to improve, which we think bodes well for performance later in 2023. The vintage level metric is generally a leading indicator for the net charge-off rate.

In the fourth quarter, the first payment default rate for new customers continued to move closer to pre-pandemic levels, having been down 29% from the second quarter before credit adjustments were made. For existing customers on refinanced loans, the first payment default rate was down 11% from the second quarter. In the fourth quarter, delinquency rates across the portfolio began to improve. The total past-due rate decreased 7% from the end of the third quarter, and we have experienced further improvement so far in the first quarter. These improvements provide us with the confidence that the net charge-off rate will improve later this year as better performing new and refinanced loans comprise a larger mix of the portfolio and older non-performing loans cycle out.

Focus remains on continuous improvement to credit models, specifically by utilizing technology, data sources, and additional attributes to enhance the accuracy and manage risk for the underwriting platform. This year, we are also very focused on enhancing our platform differentiation. Key marketing initiatives include exploring new partners and channels, improving search engine optimization, as well as making direct mail and email more compelling and efficient. We’re also working towards building upon our 66% increase in referrals that we experienced last year. From a product perspective, we are continuing to introduce and communicate to customers new features such as same-day funding in collaboration with our bank partners as well as enhancements to our self-service payment portal.

Our renewed values-based collection strategy continues to be accretive to our business, yielding increased payments and lowering our net charge-off rate. Additionally, recoveries of previously charged-off loan balances grew by 26% year over year. We expect this area to further contribute to our earnings rebound this year. 2022 was a strong year from an expense leverage perspective as revenue growth substantially outpaced operating expenses. This year, we remain focused on realizing more expense efficiencies by focusing on technology and operational initiatives. I’d now like to spend a couple of minutes discussing our current macroeconomic view as well as some current business trends for the first quarter. We’re encouraged by recent economic reports indicating that inflation is decelerating and that for some categories such as used vehicles, prices are falling.

The employment market continues to be strong as the overall unemployment rate remains low at 3.6%. These trends are helpful for middle class consumers, which is our addressable market. Pam will detail our Q1 and full year 2023 guidance; however, I will say that we are encouraged by our quarter-to-date trends, which we think set us up nicely for a significant rebound in full year adjusted net income. With that said, we expect profitability to be skewed to the second half of the year as Q2 will be partially impacted by loan vintages from last year before credit adjustments were made. Now, I’d like to take a step back and provide an update on our long-term growth strategy to accelerate profitable growth. In addition to our plans to drive core product volume growth and expand our partnerships to serve more consumers, we are expanding our focus on corporate development.

In our view, this is the best way for us to diversify the business. During our 10-year history, OppFi has generated significant brand equity across a core set of attributes, credit access and choice, transparency, value, and market leading customer experience driven by technological innovation. We believe these same attributes would have significant synergy and create incremental value with platforms or assets in adjacent customer or product categories. We think by bringing such platforms or assets under the OppFi umbrella, we could drive scale and diversification in a manner that strategically leverages our core competencies. For investors, our long term goal is to deliver sustainable earnings per share growth that is consistently among the highest in our industry.

We are confident that we are on the right path to achieving this vision. Before I turn it over to Pam, I want to reiterate that we are optimistic about 2023, given continued strong origination demand and improved credit performance. With our positive outlook and confidence in the business, my family and I purchased OppFi’s shares in the open market during the fourth quarter open trading window. We intend to continue purchasing shares in the open trading windows when we believe the market price does not reflect its long-term intrinsic value. With that, I will turn the call over to Pam.

Pam Johnson: Thanks Todd and good afternoon everyone. We are very pleased to have achieved our eighth consecutive year of profitability with record net originations, total revenue, and ending receivables. In addition, we exceeded all of our full year 2022 guidance metrics that we reiterated in our third quarter earnings release: total revenue, operating expenses as a percentage of total revenue, excluding interest expense, add-backs and one-time items; and adjusted profitability. For 2022, adjusted net income was $5 million, resulting in adjusted earnings per share of $0.06. Total revenue increased 29% to $453 million, while net originations were up 27% year over year to $758 million, driving a 19% increase in ending receivables to $403 million.

Adjusted EBITDA was $54 million. For the fourth quarter, total revenue increased 25.1% to $120 million, despite our net originations of $187 million, which was the same as the year ago period. This reflects the credit adjustments made in the third quarter. From a mix perspective, in the fourth quarter, approximately 54% of originations were to existing customers for refinanced loans. On an absolute basis, new customer loan originations for the quarter decreased by 10% year over year due in part to the credit adjustments implemented in the third quarter, while existing customer loan originations increased by 10%. We are very pleased that new originations for the lowest credit risk tier increased by 328% year over year. We accomplished this with strategic marketing initiatives, including adjusted our filter criteria with key digital marketing partners, as well as moving upmarket with our direct mail campaign.

Our annualized net charge-off rate as percentage of average receivables was 71% for the fourth quarter of 2022, compared to 53.2% for the prior year quarter. As a percentage of revenue, the annualized net charge-off rate was 59.8%, compared to 43.2% last year. Given the steadily improving early delinquency rate performance at the vintage and portfolio levels, we believe that the net charge-off rate peaked in the fourth quarter and will begin to improve with our first quarter results this year. Turning to expenses, operating expenses for the fourth quarter, excluding interest expense, add-backs, and one-time items, totaled $42.2 million or 35.1% of total revenue, compared to $43.9 million or 45.8% of revenue for the fourth quarter of 2021. The year over year decrease was primarily driven by lower direct marketing spend due to lower cost per funded loan and increased efficiencies through headcount reduction.

Adjusted EBITDA totaled $9.9 million for the fourth quarter, compared to $20.4 million in the prior year quarter, as higher revenues and relatively lower expenses were more than offset by increased net charge-offs. Interest expense for the fourth quarter totaled $10.7 million or 8.9% of total revenue, compared to $6.9 million or 7.1% of total revenue in the same period a year ago. The year over year increase was due to higher interest rates on our credit facilities utilized to fund originations growth. Adjusted net loss was $2.8 million for the fourth quarter, compared to adjusted net income of $11.4 million for the comparable period last year. This loss was smaller than anticipated by our full year guidance due to the credit performance. For the three months ended December 31, 2022, OppFi had 14.6 million weighted average diluted shares outstanding.

Since this period resulted in an adjusted loss, the basic and diluted share counts were the same as they both exclude dilutive securities. Adjusted net loss for the fourth quarter was $0.19 per share. As a reminder, our shares of Class B common stock that are exchangeable into shares of Class A common stock as a result of our Up-C structure are excluded from the diluted shares calculation in any period in which OppFi reports a loss because the inclusion would be anti-dilutive. Our balance sheet remains healthy with cash, cash equivalents, and restricted cash of $49.6 million, total debt of $347.1 million, gross receivables of $457.3 million, and equity of $159.1 million as of quarter end. We believe we have ample liquidity available to support our future growth plans with $532.2 million in total funding capacity at the end of 2022.

During the fourth quarter, OppFi did not have any activity under its share repurchase authorization. For the year, the company repurchased approximately 704,000 shares for $2.4 million at an average price of $3.47 per share. Turning now to our outlook. For full year 2023, we are providing guidance for total revenue of $500 million to $520 million, which implies growth of 10% to 15% year over year. We expect adjusted net income of $22 million to $28 million. Based on an anticipated diluted weighted average share count of 84.3 million, adjusted diluted earnings per share would be between $0.26 and $0.33. For the first quarter, we expect to be approximately breakeven on an adjusted basis. Quarter to date, we have managed the business to tighter balance of growth and risk.

In addition, we expect our net charge-off rate to improve sequentially from the fourth quarter, while remaining elevated. The net charge-off rate remains elevated due to the dynamic of poor performing loans cycling out of the portfolio and our conservative approach to growth at the beginning of the year. Beginning in the second quarter, we expect to return to quarterly profitability with a gradual acceleration during the remainder of the year as credit continues to strengthen based on adjustments made last year and a customer mix that is shifting to our lowest risk tiers. The improvements in the first payment default rate and total portfolio delinquency rate provide us confidence that the net charge-off rate will decrease as the year progresses.

With that, we would now like to turn the call over to the operator for Q&A. Operator?

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Operator: Thank you. And the first question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Mike Grondahl: Hey, thanks, guys. The first question, could you just talk about the yield environment that you’re seeing? And are you seeing any compression there? And then secondly, just what’s the one or two main attributes that you’re seeing that gives you some comfort that charge-offs peaked in 4Q?

Todd Schwartz: Yes, good question. Just to clarify, though, when you say yield compression, can you be more specific. So I answer your question correctly.

Mike Grondahl: Yes, I mean, I guess, I’m just saying what are the yields you’re offering in the market? And have you had to lower those or are those compressing at all? I mean, I don’t know that they are, but that’s what I’m asking.

Todd Schwartz: Yes, pricing. So the answer is no. There is been some favorability there. I think Pam had mentioned this that we are we are currently, on behalf of the bank partners, originating the highest percentage of low-risk customers that we’ve seen. Part of this is macroeconomic situation that’s going on in the country, where we’re seeing significant tightening still going on above us. Then obviously, with the banks right now, that’s going to exacerbate it. But also due to our marketing team and our funneling, we’ve been able to find new pockets and be able to go after growth in those areas. So it’s a little €“ it’s a attribution of it, it’s a little bit of both.

Mike Grondahl: Got it. And then I guess, the one or two attributes you’re seeing, that make you believe net charge-offs have peaked.

Todd Schwartz: Well, listen, I think there is uncertainty in the macroeconomic environment for different swaths of customers, in particular, it’s our customer. I said it many a times last year, spike high inflation is probably the most painful for our customers, which peaked in in last year, and we think it peaked in Q4. We usually kind of €“ the way we look at things is when loans are originated, usually 6 months after is kind of when we would see the spike in charge-offs. But for our customers specifically, we’ve seen significant improvement. Customers that we lend to, the middle-income consumers, they have changed their behaviors. We’re pretty sure of it. They have been able to adapt to the high price environment. And when things changed, they were kind of in shock and people had to adjust their lifestyles.

But what’s happened now is, people have done that, and we’ve been able to see significant improvement in our FPD rates and total DQ rate. Also, the other thing I’ll say is unemployment, right? So unemployment remaining low has been very beneficial for our customers. Our customers are gainfully employed. And then that has been something that we kind of forecasted to tick up. And I think everyone is surprised with how unemployment has stayed so low.

Mike Grondahl: Got it. And maybe I’ll just ask one more. But historically, I thought your collection strategy was pretty hands off, and it sounds like you’re kind of leaning into collections a little bit. You said something about recoveries were being up 26% year-over-year. One, could you just kind of describe that collection strategy and two, what’s the dollar amount associated with up 26% like, what were recoveries last year and this year?

Todd Schwartz: Yes, I will. I can pull the number for you while I’m talking, but we’re going to pull for you. But it’s interesting you say that. So OppFi has never been an aggressive collector of debt. We have always been a humanistic, value-based recovery strategy where we treat people with dignity and respect, and we’ve continued to do that. But that doesn’t mean that product features like a portal, a self-service payment portal, for settlement offers, for collecting on people’s loans, and making it easier for customers to pay with more debit card integrations and abilities to pay, is really where we’re seeing a lot of the pickup, right? And so how we treat our customers and our thoughts around that, they are never going to be aggressive. And €“ but we do make sure that we give customers options and we’re prudent on follow-ups and settlement offers to make sure that we’re successful.

Mike Grondahl: Got it. Thank you.

Todd Schwartz: And Pam has pulled the numbers. I think you had a question on the increase. Go ahead.

Pam Johnson: Sure. Mike, we had about $12 million in recoveries in 2021, and we had over $15 million in 2022.

Mike Grondahl: Got it. Okay. Great. Thank you.

Operator: Our next question comes from the line of David Scharf with JMP Securities. Please proceed with your question.

David Scharf: Hi, good afternoon. Thanks for taking my questions. I had a few I wanted to touch on. One is somewhat guidance related. But we obviously got good color from you directionally on the expected pace of losses, given the credit tightening mid-year, last year, and how those run off. Can you give us a sense for how to frame what you think of is a normalized loss rate? Obviously, 2021 was depressed based on stimulus. Late 2022 is elevated based on some of those vintages that were originated with neobanks and other sources. Where should we be ending this year if we should think of the end of €˜23 as a more normalized level?

Todd Schwartz: Yes. It’s a good question. And I’ll take the first question of the target of . So historically, OppFi has been around 10 years now. We’ve achieved mid to €“ mid-30s percentage of revenue, that has historically been where the business operates very efficiently and where we’ve had it. I think that obviously spiked this year, but our goal is to get that back down into the mid-30s in a normalized environment. I think this year, we still have a little bit flowing through in the first quarter. Obviously, we’re optimistic on what we’re seeing on that front and feel really, really good. But we are still dealing with some of that but feel like we’re going to make significant progress if things continued the way they are looking as far as our early indicators.

David Scharf: Got it. Understood. Todd, I also wanted to just dig a little more into some of the strategic initiatives you were talking about, and specifically, you made reference to sort of product and asset adjacencies. And I guess, I’ll just play devil’s advocate for a moment. Historically, the equity markets haven’t been very kind to consumer lenders that have branched out very often expanding their products in €“ under the guise of, there is a lot of different ways to serve our existing customer. Even if well-founded, very often sticking to the knitting strategy has been rewarded mostly. Can you talk about, just given where your market share is now, the opportunity in front of you with just your core lending business, maybe what the thought process is about expanding corporate development activities as opposed to just staying focused on the core product?

Todd Schwartz: Yes. So to be clear, be focused is the core business. That is the focus. And we think there is a lot of growth and opportunity in €“ just in our core business and we can do that. I do think though, as we look to the future, like the current environment is actually starting to get more active. Whereas, like two years ago, everything was so overvalued and there was no €“ there was really no value in our ability to really find value. There are some specific verticals we’ve identified that are pretty sizable addressable markets, that there is real profitable growth that we think matched up with our consumer business and our brand equity and our skillset, could not only drive future net income growth for the business but also, it’s a diversification away from our core business, which gives people comfort that there is new revenue and profit streams.

And we feel like in this environment, maybe with €“ it’s a little premature now. But we feel like coming, there is going to be accretive acquisitions out there, and that can definitely help us with our long-term vision and story. And so we’re starting to €“ last year was all getting the business stabilized. We focused on balance sheet. We focused on really targeting those high-risk customers, and we’re going to continue to do that. That is the priority this year, to make it really clear. But we think that there is going to be some opportunity coming in this economy with some of the dislocation that we’re seeing today. And listen, I €“ and yes, that’s what I’ll say on that.

David Scharf: Okay. No, understood. And then maybe just lastly, I guess in today’s environment, particularly the news flow in the last couple of weeks, kind of be remiss if I didn’t ask, just the relative stability of deposits and otherwise, your bank partners, particularly your leading partner. Anything you can comment there?

Pam Johnson: Yes, I’ll take that one, David. We’re not exposed to any losses from Silicon Valley Bank or Signature. We have really good strong relationships with some very strong banks and really have concentrated our deposits and our banking relationships with those two strong players.

David Scharf: Got it. Got it. And actually €“ and also, Pam, I guess what I was really referring to is just the relative €“ FinWise and the banks that you partner with to be the lender of the actual originator, whether there is anything they have been impacted at all? I’m not aware of anything, but I just wanted to ask.

Todd Schwartz: Yes, I don’t €“ yes, I don’t have a crystal ball and what’s going to happen to the whole regional and small banks in this environment. It’s €“ I think we’re all waiting and seeing there. I do feel that the guaranteeing of deposits by the Fed in the FDIC was the right move to prevent run on regionals from just a overall standpoint, that’s how I feel about it. However, we have no knowledge. And we’ve checked in with all our bank partners and all our partners and have no exposure to SVB or Signature.

David Scharf: Got it. Great. Thank you very much.

Operator: And our next question comes from the line of Chris Brendler with D.A. Davidson. Please proceed with your question.

Chris Brendler: Hi. Thanks. Good afternoon, guys. Just wanted to drill in a little bit more on the credit picture, just because given the fair value accounting it’s a little more difficult to see from the trends you’re talking about. Can you just give us a little more color, if possible, on your delinquency trends into the first quarter that’s given you the confidence? And it sounds like, from the fair value marks €“ slides that maybe the back-book was causing some of the elevated charge-offs in the fourth quarter, and therefore €“ that’s why, things don’t get better because the back-back is wondering off. Anymore color there would be great? Thanks.

Todd Schwartz: Yes. Specifically, we’re looking at early indicators. Like, we have a lot of history from the 10 years of operating that €“ our level of confidence in our early indicators. And similarly in July, when we made one of the largest credit adjustments in the company history, we kind of used early indicators to determine future forecast and profitability and gross charge-offs. So our early indicators are very favorable. Obviously, we do realize the environment right now is a little €“ there is a little volatility out there in the economy. But we feel really good that the credit adjustments that we’ve tested into, made and now, fully deployed, and continue to refine and improve, were the right ones. And our level of confidence is growing as the year goes on.

Chris Brendler: Okay, great. That’s helpful. I just wanted to ask also on the front end of the business, the competitive environment sort of when you guys first came public, it was a very strange macroenvironment where demand was artificially low. And I assume that’s changed dramatically in the last 18 months. But I think as you look into €˜23, it feels like you’re OppFi should be a good spot from a competition perspective, like probably more loan volume they can handle. But just given the offset of what’s happening on the credit front, how do you balance those two? And what does that mean from a net basis on the origination growth outlook? Thanks.

Todd Schwartz: Yes. I mane, we’re not €“ by no means, we are not loosening credit. That’s pretty certain. What we have found, though, is with predictive attribute sets, you can make customers look low risk and we’ve tested into that. And that is looking accurate. On the growth side, though, we see less competition. There is been a couple of players non-public, one public player, I won’t mention any names, that’s gone private. And then there is been some more regional players that are not showing up as frequently and maybe dealing with some balance sheet issues as well. So we feel like we’re in a really strong position. We are the leader in our space, in our credit bands, and we feel really confident. And also, I mentioned this couple of times, but seeing the largest percentage of low-risk customers that we’ve seen historically.

Chris Brendler: Okay. And one more as I have you is just new Castlelake facility was disclosed in December, any color around the terms of pricing? Sort of how you came to close that deal? Obviously, a pretty impressive transaction in this macroenvironment. And I hope it speaks to the confidence that not only you, but they have in your credit performance, would be great to hear.

Todd Schwartz: Yes, it’s on the same terms as our other facility. Obviously, interest rate increases are real, and it’s something we’re watching closely. But that’s on all facilities with floating rate based off SOFR. But as far as the terms go, LTV terms and flexibility, it’s substantially the exact same.

Chris Brendler: Great. Thanks, Todd.

Operator: There are no further questions in the queue. And now, management will answer your questions submitted via the webcast.

Shaun Smolarz: Why was the corporate share repurchase program not utilized in the fourth quarter?

Todd Schwartz: Okay. Yes, I mean, first of all, I’d like to start by saying, I personally purchased shares, my family personally purchased shares. But when you’re looking at some of the €“ first of all, the opportunity set, there is a €“ we feel really strong right now and our confidence level just on credits is getting higher and our ability to find very profitable transactions for growth is first and foremost. I think right now though, coming out of this, we see some competition around us where there is some balance sheet issues. And we’ve come out of this with a really strong balance sheet, with a really strong cash position €“ unrestricted cash position and feel that we want to see a couple more cards before we just start investing in spaces and being very thoughtful and strategic about where we want to allocate that capital.

And I think right now €“ I forget who said it, but cash is king in this environment. And then having a strong balance sheet is definitely something that we’ve prioritized and have worked through and feel really good about. So it’s not to say that the company is not going to purchase coming up here. We still think the stock price is disconnected from its long-term intrinsic value. And so personally, the family is purchasing. Just the company we decided, we’re going to wait for the time being.

Operator: And as there are no more questions from the webcast, I’d like to pass it back to management for any closing remarks.

Todd Schwartz: I want to thank everyone for joining us today. We’re excited by our start to 2023 with improved credit performance and a higher mix of origination to the lowest credit risk tiers. We look forward to updating you again on our progress in May. And we expect to report our Q1 results then. Thanks, everyone.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.