SCORECARD
Betting on biofuels
The industry is still in its infancy but evolving
rapidly. Companies that hope to compete must devise
their entry strategy now.
Billions of dollars, euros, pounds, and reais are
pouring into biofuels. High fuel prices and generous
regulatory support have given the industry healthy
margins and relatively short investment payback
times. Meanwhile, the triumphs of the first movers and
dreams of future growth are enticing companies in
industries from petroleum and agribusiness to
biotechnology, chemicals, engineering, and financial
services. And of course, the allure of a greener future
has raised the expectations of investors and
bystanders who hope that biofuels will help meet the
world's energy needs while lowering greenhouse gas
emissions.
Continued From Last Week
Placing the right bets to manage
risk
Companies that enter the market now can
mitigate uncertainty by hedging their bets and forming
relationships that may help them reduce volatility and
influence regulation.
The argument against waiting
Understandably, some companies will wait for
technology to advance and the regulatory landscape to
evolve before entering. After all, in commodity
industries, early entrants often lose out to latecomers
using larger-scale, more modern technologies. Such
leapfrogging has occurred time and again-for
example, in the steel industry.
Nonetheless, in any complex industry, early
entrants can gain a valuable lead in understanding its
technologies, operations, and economics, as well as
through influencing local regulation. When companies
face high levels of uncertainty in variables they can
influence, taking steps to shape outcomes can make
sense.8 Some companies and investors will enter
now to capitalize on today's high prices, but market
conditions could easily change before new factories
begin operation. Prices of biofuels, unlike those of
pure commodities, are greatly influenced by the cost
of competing products, such as gasoline and diesel
fuel (see sidebar, "Modeling supply and demand in
the biofuel industry").
For companies with long-term aspirations in
biofuels, the strongest argument against waiting is
that certain vital resources are in short supply. Biofuel
companies will need partners, for instance, and the
best may soon be taken. Similarly, the cultivation of
feedstocks, like many agricultural undertakings, is
most efficient on large expanses of land. Even in the
absence of deforestation, hundreds of thousands of
hectares for growing feedstock are available, but large
swaths in the choicest areas are not. Land in Brazil's
highly developed São Paulo region, for example, is
expensive, in part because it is close to urban
demand centers. More land is available in the
country's untapped, relatively inexpensive northeast
and interior, but building an infrastructure to reach it
would be pricey.
How to play now
The way companies determine their strategy will
depend on the subsector of biofuels where they play.
Three distinct segments have emerged.
- Asset owners (including agribusinesses,
petroleum companies, chemical companies, plant
operators, and small farmers) are heavily invested in
producing and marketing biofuels. They grapple with
uncertainties in the long-term attractiveness of
geographies, as well as with technological change.
- Product and service providers (including seed
companies, engineering and equipment companies,
and biotechnology firms developing enzymes and
fermentation organisms) tailor their technologies and
processes to the needs of the biofuel industry. Their
strategies are mostly not specific to geography, and
they face technological and commercial risk.
- Market participants (including gasoline blenders,
farmers, agricultural-equipment companies, suppliers
of inputs such as fertilizers, and logistics providers)
benefit when the growth of the biofuel industry
increases demand in their core businesses.
All of these players, whatever their subsector,
need to make smart bets in a few key areas:
Betting on geographies and technologies. Asset
owners and, to a lesser degree, market participants
have increasingly entered the international biofuel
trade, mixing and matching geographies for
production and distribution to balance risk and
investment. In the United States, for example, demand
is all but guaranteed thanks to the world's most
ambitious biofuel targets, a well-developed
infrastructure, and generous subsidies, but feedstock
constraints could continue to put most of the profits in
the pockets of farmers or landowners. Undeveloped
tropical regions in Africa, Asia, and Central America-
especially those that have free-trade agreements with
the European Union or the United States-seem
appealing, but they pose political and economic risks
of their own and require significant investments in
infrastructure.
Companies can mitigate some geographic risk
(and reduce payback periods) if they acquire
producers operating under known conditions. By
acquiring older ethanol plants and introducing
modern management practices, Cosan, for example,
improves its plants' operating performance and
recovers its acquisition premiums. Many smaller,
undermanaged plants in Brazil and the United States
could also flourish under new owners-either large
multinational industrials or private-equity firms.
To deal with technological risk, asset owners
should invest in a number of options. BP, for example,
founded the Energy Biosciences Institute (EBI), in
California, which hosts leading industry research
groups and gave it $500 million in sponsorship funds.
In return, the company gains early knowledge of-and
the right of first refusal for-much of the intellectual
property developed there. Shell, by contrast, has
invested in companies researching both
lignocellulosic and gasification processes (including
BTL) for biomass conversion. While BP's approach
gives it broader exposure to breakthroughs in
fundamental science and technology, Shell's offers a
more intimate relationship with companies closer to
the commercial application of technologies.
For product and service providers, mitigating
technological risk means commercializing intellectual
property. They can partner with major (future) asset
owners for access to a sizable captive market (as
DuPont did in a joint venture with BP to develop
biobutanol) or collaborate with other product and
service providers. One biotechnology company,
Novozymes, is working with Broin, a leading
engineering firm that will use the Novozymes enzymes
technology in every new ethanol plant it constructs.
Building relationships. The establishment of
young industries often calls for coordinated efforts all
along the value chain. Building a biofuel industry in a
new geography, for example, requires the
simultaneous application of skills in agronomics,
feedstock and fuel procurement, storage, distribution,
refinery operations, commodities trading, and the
influencing of local regulation. No asset owner can
claim all these skills, so most companies would
benefit from true or virtual integration (for example,
through partnerships) along the value chain.
Even in more developed markets, integrating
along the value chain can diminish risk and volatility.
In the United States from January 2005 to November
2006, for example, changes in some state regulations
of fuel-the shift from MTBE (methyl tert-butyl ether) to
ethanol as an antiknocking additive-and the increase
in prices of gasoline and gasoline components
created substantial fluctuations in the demand for and
price of corn ethanol. Simultaneously, a shortage of
corn and the resulting high prices triggered large
swings in the allocation of profits between farmers
and asset owners (exhibit). Integrating the cultivation
and production of feedstocks removes the latter
source of uncertainty.
Biofuel companies must also build relationships
with the government agencies that regulate biofuels
and the nongovernmental organizations that influence
public opinion. Proponents of biofuels can identify
potential areas of cooperation and conflict by
analyzing these players' concerns (including
consumer advocacy, environmental protection, and
fair trade) as well as the economic interests of groups
such as farmers, petroleum companies, auto
manufacturers, and food companies.9
Biofuels have a tremendous potential to give the
world efficient and sustainable energy, but much
about the industry remains uncertain. Those who
enter it today must bet carefully on geographies and
technologies and establish the right relationships at
critical points along the value chain.
Modeling supply and demand in the biofuel
industry
McKinsey recently brought a fact-based
perspective to the future of the global biofuel industry.
After interviewing more than 80 current and potential
industry participants and leading academics, we
created a database on the availability and cost of
feedstocks, as well as a bioethanol supply-demand
model that incorporates the impact of crude oil prices,
government regulation, and new technologies.
We make three important assumptions: only land
that does not have to be deforested will be available
for feedstock production, cellulosic technology and
high-density ranching practices will be used
extensively, and agricultural products will be devoted
to biofuels only after demand for food and animal feed
is met. Our model suggests that there is sufficient
land to cultivate almost four billion tons (that is, one
thousand million tons) of feedstock a year-in theory,
enough to produce bioethanol providing more than 50
percent of total transportation fuels by 2020.
The availability of feedstock is critical, but the
economic viability of bioethanol also depends on its
cost effectiveness vis-à-vis gasoline. The higher the
price of crude oil, the wider the gap between gasoline
prices and bioethanol production costs. Crude oil at
$40 a barrel (our base-case scenario) would provide
for the economical production of 70 billion gallons of
bioethanol a year by 2020-about seven times current
production and 10 percent of the total demand for
transportation fuel. At up to $50 a barrel, bioethanol
could replace as much as 30 percent of all
transportation fuel economically (exhibit). At $70 to
$80 a barrel, the replacement of up to 50 percent of all
transportation fuel would in theory be economically
viable, and the availability of feedstock would limit the
industry's further growth. Subsidies, which were not
considered in this model, could also trigger higher
penetration rates.
Source: McKinsey & Co. 2007
Retail or Roof Tops:
The bell has sounded for another round in the
ongoing fight between Taubman Centers and its
opponents--including Simon Property Group--over the
Bloomfield Hills, Mich-based developer's proposed
750,000-square-foot Mall at Oyster Bay in Syosset,
Long Island.
Taubman has been pushing the project now for
13
years, spending $122 million in the process, only to
be countered at every turn by local officials and the
Cerro Wire Coalition, which includes Simon along
with Roseland Development, the Lennar Corp.,
Marriott Hotels and New York City-based architectural
firm, SMWM. (The Coalition instead has pushed for a
residential-heavy mixed-use development on the site
of the former Cerro Wire and Cable Company factory,
rather than a project dominated by retail.)
In the most recent development in the fight, on
Monday
New York State Supreme Court Justice Jeffrey Spinner
told the Town of Oyster Bay it had 90 days to
take "proper action" on the proposal to build an
upscale regional mall--a decision that Taubman
hailed.
Source: Retail Traffic Online, 2007
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Greetings!
- Betting on Biofuels - Final
- Taubman - Retail or Roof Tops
- Economic notes
- Where is the Job Growth and What Kind of Jobs
are they
- Eating out leads II
Bob Springmeyer
Bonneville Research
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Utah Economic Snapshot - Where and What Kind of New Jobs |
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Utah Labor Market Indicators - May 2007 (Apr
07)
- Employment Growth: 4.5% (4.5%)
- Employment Increase: 54,000 (52,400)
- Unemployment Rate: 2.5 %(2.7%)
United States Labor Market Indicators - May
2007 (Apr 07)
- Employment Growth: 1.4% (1.6%)
- Unemployment Rate: 4.5%(4.6%)
Source: Utah Dept of Workforce Services, 6/12/07
________________________________________
Where the Jobs Are - May
2007
- Salt Lake County - 24,907 +4.3%
- Utah County - 9,363 +5.4%
- Davis County - 4,310 +4.2%
- Washington County - 2,735 +5.3%
- Weber County - 2,693 +2.9%
What kinds of Jobs - May 2007
- Specialty Trade Contractors - 10,400 +63.8%
- Professional, Scientific, and Technical Services -
6,000 +9.9%
- Health Services and Social Assistance - 3,900
+3.8%
- Construction of Buildings - 3,000 +14.3%
- Accommodation and Food Services - 2,800 +3.0%
Source: Utah Dept of Workforce Services, 6/12/07
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Economic Notes: |
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- International Trade (FT900)
- The nominal U.S. trade deficit in goods and
services narrowed by 6.2% in April. The U.S. trade
deficit came in at $58.5 billion, $3.9 billion less than
March's $62.4 billion, according to the Bureau of
Economic Analysis. In April, exports increased and
imports decreased. The goods deficit with China,
however, widened 12.3% to $19.4 billion. Crude oil
prices increased in April, which in return increased the
nation's total import bill for energy-related petroleum
products to $24.2 billion.
- Import and Export Prices
- The U.S. Import Price Index increased 0.9% in
May. The increase followed (a revised) 1.4% rise in
April and was led by a 2.7% increase in petroleum
prices. Export prices rose 0.1% in May, after
increasing by 0.3% in the previous month.
- Consumer Comfort Index
- After falling for four consecutive weeks, consumer
confidence took a break this week. The ABC
News/Washington Post consumer comfort index rose
two points to -13 in the week ending June 10. The
details were decent with a four-point gain in the
economic component leading the overall charge
higher.
- Treasury Budget
- The unified deficit for May was $67.7 billion,
slightly below the CBO's preliminary estimate of a $71
billion deficit. The federal government has run a deficit
of $148.5 billion through the first eight months of
FY2007; this is 35% smaller than the deficit at the
same point in FY2006. The federal government
continues to see strong revenue growth, which is
reducing the deficit.
- PPI
- Producer prices for finished goods rose
somewhat faster than expected in May, rising sharply
(0.9%) for the fourth consecutive month. Inflation
among finished goods was primarily due to large
price increases among energy products. Prices for
energy products rose sharply at all levels of
processing. Excluding food and energy, prices for
finished goods rose by 0.2%. Core inflation remained
stronger among intermediate goods, with prices
rising by 0.4% on the month.
- Business Inventories (MTIS)
- Total business inventories increased by 0.4%, in
line with expectations. Inventories at retailers were up
0.3% for the month. Total business sales increased
by 0.7%. The total I/S ratio dropped to 1.27.
- Manpower Employment Outlook
Survey
- According to the Manpower Employment Outlook
Survey, employers in all of the 27 countries surveyed
expect to add staff in the third quarter of 2007. Hiring
intentions remain solid in the U.S., with the net
employment outlook indicating that 22% (not
seasonally adjusted) of employers expect to increase
hiring, compared to 21% in the previous quarter.
Positive hiring activity is also anticipated in the euro
area, with Germany and Norway reporting their most
optimistic employment outlooks since the survey
began. In the Asia Pacific, hiring activity will ease
across the region, except in India where job prospects
are expected to improve.
- Job Openings and Labor Turnover
Survey
- Both hires and separations fell in April; 4.79
million workers were hired, while 4.58 million left their
jobs for a variety of reasons. The number of job
openings decreased as well, to 4.14 million from 4.18
million. The hire rate remained unchanged, at 3.5%,
while the separation rate fell to 3.3% from 3.4%.
- MBA Delinquency Rates
- The delinquency rate of first mortgages
decreased 11 basis points to 4.84% on a quarter-to-
quarter basis in the first quarter of 2007, while
foreclosures increased nine basis points to 1.28%.
The decline in delinquency rates may reflect a
concerted effort from the owners of mortgages to cure
loans and avoid the total costs associated with
foreclosure sales.
- MBA Mortgage Applications Survey
- Mortgage demand increased 6.6% in the week
ending June 8. Purchase applications increased 7.2%
and refinance applications increased 5.6%. Purchase
applications are up even from four weeks ago, but
recent industry trends could increase the number of
mortgage applications per sale filed with MBA
members.
- Retail Sales (MARTS)
- Total retail sales soared 1.4% in May, lifted again
by strong growth at gasoline stations. Non-auto sales
grew 1.3% as auto sales also grew strongly. Growth
was strong nearly across the board especially among
apparel, building supply and sporting goods stores.
Growth in April was revised up to -0.1% from -0.2%.
Year-over-year growth jumped to 5.0% in total and
4.6% excluding autos.
- Chain Store Sales
- Chain store sales rose 1.0% in the week ending
June 9, the largest gain since the start of February.
However, comparisons were difficult so year-over-year
growth eased to 2.1%.
- Oil and Gas Inventories
- Crude oil inventories rose by 0.1 million barrels
for the week ending June 8, according to the Energy
Information Administration, above expectations of a
0.5 million barrel draw. Gasoline stocks were
unchanged; they were expected to rise by 1.7 million
barrels. Refinery runs came in well below
expectations. Distillate inventories rose 0.3 million
barrels, well below expectations. This release is very
bullish for oil and gasoline prices.
Source: Economy.com, ICSC SmartBrief &
Financial Times
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This Weeks Leads: |
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Food Leads II:
- Dee's Family Restaurant
- Dee's Family Restaurant operates 12 locations
throughout UT.
- The restaurants occupy
spaces of 5,000 sq.ft. in freestanding locations.
- Expansion opportunities are sought throughout UT.
- For more information contact
- Mike Olsen,
- Dee's Family Restaurant,
- 777 East 2100
Street,
- Salt Lake City, UT 84106-1829;
- 801-
487-4201;
- Fax 801-487-4207.
- Applebee's
- The Rose Group trades as Applebee's at 30
locations in DE, MD, NJ and PA.
- The restaurants
occupy spaces of 5,000 sq.ft. in regional centers and
freestanding locations.
- Expansion opportunities
are sought in MD, NJ and PA. The company needs 1.5
acres of land for freestanding locations.
- Leases
running ten years with a five-year option are typical.
- Preferred demographics include a population of
12,000 residing in a one-mile radius earning an
average annual household income of $35,000.
- For more information contact
- Hank
Lieberman,
- The Rose Group,
- 826 Newtown
Yardley Road,
- Newtown, PA 18940;
- 215-579-
9220;
- Fax 215-579-9226.
- Steak-Out
- Steak-Out Franchising, Inc. trades as Steak-Out at
91 locations nationwide.
- The take-out/delivery
restaurants occupy spaces of 1,500 sq.ft. to 1,800
sq.ft. in strip centers and freestanding locations.
- Plans call for 30 openings in the coming 18
months and expansion opportunities are sought in the
west, southeast and the midstates.
- Leases
running five to 10 years with options are typical.
- A
vanilla shell and tenant improvement allowances are
required.
- The company is franchising as well as
expanding through company-owned stores.
- Preferred demographics include a population of
40,000 residing in a three-mile radius earning an
average annual household income of $42,000.
- For more information contact
- Joe McCord,
- Steak-Out Franchising, Inc.,
- 6801 Govenors
Lake Parkway, Suite 100,
- Norcross, GA 30071;
- 678-533-6000;
- Fax 678-291-0222.
- Candy Cafe
- Bayliss Company Inc. trades as Candy Cafe at two
locations in MA.
- The restaurants occupy spaces of
1,000 sq.ft. to 2,000 sq.ft. in regional, strip, specialty
and outlet centers and freestanding locations.
- Plans call for two openings in the coming 18
months and expansion opportunities are sought in
CT, MA, ME, NH, RI and VT.
- For more information contact
- Steven
Tenofsky,
- Bayliss Company,
- 1000 Boston
Turnpike,
- Shrewsbury, MA 01545;
- 508-845-
5000;
- Fax 508-842-6100.
- Arby's
- Sybra Inc. trades as Arby's at 220 locations in CT,
FL, MD, MI, NJ, PA, TX, VA and WV.
- The restaurants
occupy spaces of 3,000 sq.ft. in freestanding
locations.
- Plans call for 12 openings in the coming
18 months and expansion opportunities are sought in
New Haven, Fairfield, Middlesex and New London
Counties in CT.
- The company prefers Wal*Mart
and grocery stores as cotenants.
- Leases running
15 years are typical and the company prefers a turn-
key rent structure.
- Preferred demographics include
a population of 20,000 residing in a two-mile radius
earning an average annual household income of
$60,000.
- The company cites McDonald's, Burger
King and Wendy's as competition.
- For more information contact
- Steve Patton,
- The Proto Group,
- 116 Washington Avenue,
North Haven, CT 06473;
- 203-234-6371;
- Fax
203-234-6372.
- The Coffee Bean & Tea Leaf
- The Coffee Bean & Tea Leaf operates 137
locations in CA, AZ and NV.
- The restaurants
occupy spaces of 1,000 sq.ft. to 1,475 sq.ft. in regional
and strip centers and freestanding locations.
- Expansion opportunities are sought in the existing
markets.
- For more information contact
- Paul
Goldman,
- The Coffee Bean & Tea Leaf,
- 1945
South La Cienega Boulevard,
- Los Angeles, CA
90034;
- 310-237-2378;
- E-mail:
pgoldman@coffeebean.com.
- Wendy's
- Wendy's International, Inc. trades as Wendy's at
6,500 locations nationwide and internationally.
- The fast food restaurants occupy spaces of 2,800
sq.ft. to 3,300 sq.ft. in freestanding locations, malls,
entertainment, lifestyle, specialty, strip, tourist and
value centers in addition to urban/downtown areas.
- Growth opportunities are sought nationwide
during the coming 18 months.
- Typical leases run
15 years with 15-year options.
- Preferred
demographics include a population of 20,000 within
two miles.
- A land area of one acre is required.
- For more information, contact
- Kris
Kaffenbarger,
- Wendy's International, Inc.,
- 4288
West Dublin-Granville Road,
- Dublin, OH 43017.
- Dunn Bros. Coffee
- Dunn Bros. Coffee Franchising, Inc. trades as
Dunn Bros. Coffee at 86 locations throughout IA, IL,
KS, MN, MO, ND, SD, TN, TX and WI.
- The specialty
coffee shops occupy spaces of 1,200 sq.ft. to 1,400
sq.ft. in freestanding locations and malls in addition to
entertainment, specialty, strip and tourist centers as
well as in urban/downtown areas.
- Plans call for
25 openings throughout the existing markets during
the coming 18 months.
- Typical leases run 10
years.
- Specific improvements are required.
- Competition is cited as It's A Grind and Starbucks.
- For more information, contact
- Chris
Eilers,
- Dunn Bros. Coffee Franchising, Inc.,
- 111 3rd Avenue South, Suite 220,
- Minneapolis,
MN 55401;
- Web site: www.dunnbros.com.
- Fox Sports Grill & Il Fornaio
- Sequoia Restaurant & Entertainment Group trades
as Fox Sports Grill at seven locations throughout AZ,
CA, NY, TX and WA.
- The restaurants occupy
spaces of 10,000 sq.ft. to 12,000 sq.ft. in
entertainment and lifestyle centers and
urban/downtown areas.
- Plans call for four
openings nationwide during the coming 18 months.
- Preferred cotenants include hotels, offices, movie
theaters and retail shops.
- The company also
trades as Il Fornaio at 26 locations throughout CA and
NV.
- The restaurants occupy spaces of 8,000 sq.ft.
in lifestyle centers.
- Plans call for one to two
openings nationwide during the coming 18 months.
- For more information, contact
- Brian Kjos,
- Sequoia Restaurant & Entertainment Group,
- 610 Newport Center Drive, Suite 500,
- Newport
Beach, CA 92660;
- Web site:
www.sequoiacompany.com.
- Bob Evans Restaurants
- Bob Evans Farms, Inc. trades as Bob Evans
Restaurants at 591 locations throughout DE, FL, IL,
IN, KS, KY, MD, MI, MO, NC, NJ, NY, OH, PA, SC, TN,
VA and WV.
- The family-style restaurants occupy
spaces of 5,300 sq.ft. in freestanding locations, malls,
power and strip centers.
- Plans call for 10
openings throughout the eastern coast and in FL
during the coming 18 months.
- Preferred
cotenants include Home Depot, Kohl's, Lowe's Home
Improvement, Wal*MartSupercenters and Target.
- Preferred demographics include a population of
50,000 within five miles earning $50,000 as the
average household income.
- Competition is cited
as Cracker Barrel, Denny's, IHOP and Perkins.
- A
land area of 1.5 acres is required.
- For more
information, contact
- Stephen Warehime,
- Bob Evans Farms, Inc.,
- 3776 South High
Street,
- Columbus, OH 43207;
- Web site:
www.bobevans.com.
- Manchu Wok
- Manchu Wok, Inc. trades as Manchu Wok at 206
locations nationwide and in Canada and
internationally.
- The Chinese restaurants occupy
spaces of 500 sq.ft. in food courts.
- Growth
opportunities are sought nationwide during the
coming 18 months.
- Typical leases run 10 years.
- The company is franchising.
- For more
information, contact
- Joycelyn Wiley,
- Manchu Wok, Inc.,
- 85 Citizen Court, Unit 9,
Markham,
- Ontario, CN L6G 1A8;
- Web site:
www.manchuwok.com.
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BONNEVILLE RESEARCH - People, Passion & Pride |
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Successful client work requires a superior team of
outstanding people working fluidly together.
Bonneville Research is committed to excellence.
We work to help clients achieve enduring results
and improve the communities in which we live.
BONNEVILLE RESEARCH
Bonneville Research is a Utah-based consulting
firm providing economic, financial, market and policy
research to public and private sector clients
throughout the intermountain west.
Our services include:
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Analysis and Budgets
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Each of our studies is tailored to address the
unique needs of our clients and their communities.
If we can help, please call or email us at
- Bob
- 801-364-5300
- BobSpring@BonnevilleResearch.com
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- 801-746-5706
-
JonSpring@BonnevilleResearch.com
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