Wells Fargo & Company (NYSE:WFC) Q3 2023 Earnings Call Transcript

Wells Fargo & Company (NYSE:WFC) Q3 2023 Earnings Call Transcript October 13, 2023

Wells Fargo & Company beats earnings expectations. Reported EPS is $1.39, expectations were $1.25.

Operator: Welcome and thank you for joining the Wells Fargo Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

John Campbell: Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss third quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our third quarter earnings materials, including the release, financial supplement and presentation deck, are available on our website at wellsfargo.com. I’d also like to caution you that we may make forward-looking statements during today’s call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials.

Information about any non-GAAP financials referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Charles Scharf: Thanks very much, John. I’ll make some brief comments about our third quarter results and update you on our priorities. I’ll then turn the call over to Mike to review third quarter results in more detail before we take your questions. Let me start with some third quarter highlights. Our results reflected the progress we’re making to improve our financial performance. Revenue, pretax provision profit, net income, diluted earnings per common share and ROTCE were all higher than a year ago. Our revenue reflected strong net interest income growth as well as higher noninterest income as we benefited from higher rates and the investments we’re making in our businesses. Our expenses declined from a year ago due to lower operating losses.

As expected, net charge-offs have continued to increase from historical low levels, and we increased our allowance for credit losses primarily driven by our office portfolio as well as growth in our credit card portfolio. Average commercial and consumer loans were both down from the second quarter as higher rates and a slowing economy have weakened loan demand, and we’ve continued to take some credit tightening actions. Average deposits also declined from the second quarter and a year ago driven by consumer spending as well as customers migrating to higher-yielding alternatives. Consumer spending remains strong with third quarter year-over-year growth rates for both credit and debit card spending increasing from the second quarter. Now let me update you on the progress we’re making on our strategic priorities, starting with risk and control work, which remains our top priority.

As time goes on, we continue to make the progress necessary to complete our work. I’ve said that we have detailed project plans which track interim deliverables, not just the date the work is to be finalized and turned over to the regulators for validation. The work is not finalized all at once. It’s not as if there’s a big bang conversion at the conclusion of a big body of work. It’s just the opposite. Building our risk and control framework is a continuous ongoing effort. We are implementing changes throughout the life of the project, and we track effectiveness along the way. The numerous internal metrics we track show that the work is clearly improving our control environment, but we will not be satisfied until all of our work is complete.

We remain focused on the work ahead even as we are making progress. But I will repeat what I’ve said in the past: regulatory pressure on banks with long-standing issues such as ours continues to grow. And until we complete our work and until it is validated by our regulators, we remain at risk of further regulatory actions. Additionally, until our work is complete, we could find new issues that need to be remediated, and these may result in additional regulatory actions. We also continued to take steps to advance our business strategy, which includes focusing on our core business and customers. We sold approximately $2 billion of private equity investments in certain Norwest Equity Partners and Norwest Mezzanine Partners funds. We are also making a number of investments to better serve our customers.

As a leader in U.S. middle-market and asset-based lending, we’re focused on finding ways to support our clients with the recently announced strategic relationship with Centerbridge Partners. Our middle-market clients will have greater access to alternative sources of capital that can be used to pursue a broader set of growth and value-creation initiatives across a variety of market conditions. Branches continue to play an important role in the way we serve our customers, and we continue to optimize our network, but we also look at targeted expansions in markets where we see opportunities for our franchise. Last week, we announced we are expanding our branch network in Chicago, where we only have 7 branches today. We also continue to make enhancements to our mobile app.

And in the third quarter, we launched Stock Fractions, giving Wells trade clients the ability to buy fractions of company’s stocks to help build a diversified portfolio regardless of stock price. Just yesterday, we announced the expanded availability of LifeSync to all consumer customers. Available on the mobile app, LifeSync is our personalized digital approach to aligning customers’ goals with their money and was launched to all Wealth and Investment Management clients earlier this year. Customers’ goals entered in LifeSync will be visible to bankers to enhance need-based conversations. We also expanded the capabilities of Fargo, our AI-powered virtual assistant and recently added the ability for customers to communicate with Fargo in Spanish.

These enhanced capabilities are just the latest of our ongoing investments to deliver seamless and consistent experiences across all our channels. We are seeing more mobile adoption momentum, adding over 520,000 mobile active users in the third quarter, our best quarterly growth since first quarter of 2021. We’ve also continued to make important hires who bring expertise to Wells Fargo and businesses we’re looking to grow. Before I highlight some of our new leaders, I’d like to take this opportunity to thank Bill Daley, Vice Chairman of Public Affairs, who’s retiring at the end of this year for all he has accomplished since he joined the company in 2019. Bill has been an invaluable asset to the company, and we benefited from his long experience in both the public and private sectors.

During this time at Wells Fargo, he helped strengthen our relationships with communities we serve, established new programs in housing and small business, and worked to rebuild our reputation both locally and nationally. I’m pleased to have announced that Tom Nides joined Wells Fargo as Vice Chairman earlier this month. Tom will be a close adviser to the senior management team on a range of issues, and we will work alongside our business leaders as we continue to expand our relationships with clients. The breadth of Tom’s experience across the public and private sectors will be an important asset to us as we continue to move the company ahead. We continue to invest in our Corporate Investment Banking business with new co-heads of equity capital markets.

These new hires complement the other important hires we’ve been making over the past year. We also hired a new Head of Trust Services and Chief Fiduciary Officer in our Wealth and Investment Management segment and a new Head of Affluent and Premier Banking in consumer, small and business banking. We also continue to focus on better serving our communities. During the third quarter, we published 3 reports that provided overview of the work we are doing to build a sustainable, inclusive future in communities we serve; outline our strategic approach to managing the risks associated with climate change in deploying capital to support the transition to a low-carbon economy; and describe our methodology for aligning our financial portfolios with pathways to net-zero greenhouse gas emissions by 2050 and presenting interim emissions-based targets to track that alignment.

We continue to make progress on our special-purpose credit program initiative we announced last year to help drive economic growth, sustainable homeownership and neighborhood stability in minority communities. We recently expanded our special-purpose refinance offers to prequalified Hispanic customers with Wells Fargo mortgages to refinance at a lower than market rate. The program launched last year for Black or African American customers has seen strong results, and the Hispanic offer has shown similar levels of customer engagement. We also announced that we’re offering a $10,000 homebuyer access grant that will be applied towards down payment for eligible homebuyers who currently live and work purchasing homes in certain underserved communities in 8 metropolitan areas.

And we now have 14 HOPE Inside centers of Wells Fargo branches, including the first focusing on serving the Navajo community. The centers help engage and empower communities to achieve their financial goals through financial education workshops and free one-on-one coaching. Looking ahead, the U.S. economy has continued to be resilient with key support from the labor and strength — from the labor market and strength in consumer spending. Delinquencies have continued to deteriorate at a relatively slow consistent rate without signs of acceleration across our portfolios. Our base case remains a continued slowing of the economy, but we remain prepared for a wide range of scenarios given there is still significant uncertainty ahead. Regarding capital, the Basel III Endgame proposal included higher capital requirements as we expected.

It’s a complicated set of rules. But at this point, if nothing changed and we didn’t take actions, we estimate that our RWA would increase by approximately 20%. There are some items that increased our capital requirements that we are hopeful will be adjusted, and we will be participating and sharing our perspectives on the proposed rules during the 120-day comment period. Additionally, we are evaluating changes we may make based on the proposed rules. Fortunately, we come into this from a strong position as our current capital levels are above the estimated regulatory minimum plus buffers. However, we still need to decide how much of an additional buffer we want to maintain and what mitigating actions we may want to take to reduce the impact of the new rules.

At this point, we still see a path to concurrently increasing our level of CET1 as appropriate, increasing our dividend and repurchasing common stock. Levels of each will be influenced by CCAR, the finalization of the proposed rules and economic conditions. I’ll now turn the call over to Mike.

Michael Santomassimo: Thank you, Charlie, and good morning, everyone. Net income for the third quarter was $5.8 billion or $1.48 per diluted common share, both up from the second quarter and a year ago. Our third quarter results included $349 million or $0.09 per share of discrete tax benefits related to the resolution of prior period tax matters. Turning to capital and liquidity on Slide 3. Our CET1 ratio increased to 11% in the third quarter, 2.1 percentage points above our new regulatory minimum plus buffers effective on October 1. This was up from 10.7% in the second quarter as higher earnings, the approximately 14 basis point benefit from the sale of certain private equity investments and lower risk-weighted assets were only partially offset by share repurchases and dividends.

During the third quarter, we repurchased $1.5 billion in common stock. Our strong capital levels position us well for the anticipated increases related to the Basel III Endgame proposal released in the third quarter. Based on where we ended the quarter, we estimate that our CET1 ratio would be 50 basis points above the fully phased-in required minimum if the proposed rules were implemented as written after factoring the growth in RWAs and the resulting decline in our stress capital buffer as well as the impact of the new G-SIB buffer calculation changes. Importantly, this is an early estimate, subject to change and is before any actions we may take to mitigate the impact of the new rules. Looking forward, we expect to continue to have capacity to increase our CET1 ratio, while we plan to continue to repurchase shares as we wait for the capital rules to be finalized.

Turning to credit quality on Slide 5. As we expected, net loan charge-offs continue to increase, up 4 basis points from the second quarter to 36 basis points of average loans. Commercial net loan charge-offs declined modestly from the second quarter to 13 basis points of average loans as lower losses in our commercial and industrial portfolio were partially offset by $14 million of higher losses in commercial real estate. We had $32.2 billion of office loans, down 3% from the second quarter, which represented 3% of our total loans outstanding. Vacancy rates continue to be high and the office market remains weak. Our CRE teams continue to focus on monitoring and derisking the portfolio, which includes reducing exposures. As we highlighted in the past, each property situation is different and there are many variables that could determine performance, which is why we regularly review this portfolio.

As expected, consumer net loan charge-offs continued to increase and were up $98 million from the second quarter to 67 basis points of average loans. Residential mortgage loans continued to have net recoveries, while our other consumer portfolios all had higher losses with the largest increase in our auto portfolio, which was up from the second quarter seasonal lows. Nonperforming assets increased 17% from the second quarter as growth in commercial real estate nonaccrual loans more than offset the decline in commercial and industrial as well as modest declines across all consumer portfolios. The decline in commercial industrial nonaccrual loans was primarily due to payoffs and paydowns, which is a good reminder that the resolution of nonperforming assets doesn’t always result in charge-offs.

The increase in commercial real estate nonaccrual loans was driven by a $1.3 billion increase in the office nonaccrual loan. Moving to Slide 6. Our allowance for credit losses increased $333 million in the third quarter primarily for commercial real estate office loans as well as for higher credit card loan balances, which was partially offset by a lower allowance for auto loans. Since the composition of our office portfolio is relatively consistent with what we shared with you in the past few quarters, we did not include a separate commercial real estate slide this quarter. However, we did update the table showing the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. We’ve not seen significant increases in charge-offs in our commercial real estate office portfolio yet.

However, we do expect higher losses over time, and we continue to increase the coverage ratio in our commercial and — in our CIB commercial real estate office portfolio from 8.8% at the end of the second quarter to 10.8% at the end of the third quarter. On Slide 7, we highlight loans and deposits. Average loans were down modestly from both the second quarter and a year ago. While we continue to have good growth in credit card loans from the second quarter, most other portfolios declined. I’ll highlight specific drivers when discussing our operating segment results. Average loan yields increased 195 basis points from a year ago and 24 basis points from the second quarter due to the higher interest rate environment. Average deposits declined 5% from a year ago predominantly driven by deposit outflows in our consumer and wealth businesses, reflecting continued consumer spending and customers reallocating cash into higher-yielding alternatives.

Average deposits also declined in Commercial Banking, while they stabilized in Corporate and Investment Banking. As expected, our average deposit costs continued to increase, up 23 basis points from the second quarter of 236 basis points with higher deposit costs across all operating segments in response to rising interest rates. However, the pace of the increase has slowed, and our percentage of average noninterest-bearing deposits decreased modestly from the second quarter to 29% but remained above prepandemic levels. Turning to net interest income on Slide 8. Third quarter net interest income was $13.1 billion, up 8% from a year ago, as we continued to benefit from the impact of higher rates. The $58 million decline from the second quarter was due to lower average deposit balances, partially offset by 1 additional day in the quarter and the impact of higher interest rates.

Last quarter, we increased our expectations for full year 2023 net interest income growth to approximately 14% compared with 2022, which was up from our expectation of 10% growth at the beginning of the year. We now expect full year 2023 net interest income growth to grow by approximately 16% compared with 2022 with the fourth quarter 2023 net interest income expected to be approximately $12.7 billion. The expected decline in interest income in the fourth quarter was primarily driven by our assumptions for additional deposit outflows and migration from noninterest-bearing to interest-bearing deposits as well as continued deposit repricing, including continued competitive pricing on commercial deposits. Turning to expenses on Slide 9. Noninterest expense declined from a year ago driven by lower operating losses and increased 1% from the second quarter driven by higher operating losses, severance expense and revenue-related comp.

Last quarter, we updated our expectations for full year 2023 noninterest expense excluding operating losses to approximately $51 billion. We now expect it to be approximately $51.5 billion or approximately $12.6 billion in the fourth quarter. The increase reflects additional severance and other onetime costs, revenue-related compensation and some lags in realizing efficiency saves. We’ve reduced head count every quarter since the third quarter of 2020, and it was down 3% in the second quarter and 5% from a year ago. We believe we still have additional opportunities to reduce head count and attrition has remained low, which will likely result in additional severance expense for actions in 2024. We are working through our efficiency plans now as part of the budget process.

Additionally, if the FDIC deposit special assessment related to the events from earlier in the year was finalized in the fourth quarter, it would increase our expected fourth quarter expenses. And finally, as a reminder, we have outstanding litigation, regulatory and customer remediation matters that could impact operating results. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 10. Consumer, small and business banking revenue increased 7% from a year ago as higher net interest income driven by the impact of higher interest rates was partially offset by lower deposit-related fees driven by the overdraft policy changes we rolled out last year. Charlie highlighted the investments we were making in our Chicago branch network, and we’re also making investments in refurbishing branches across our existing network.

Additionally, we are bringing our digital onboarding experience to our branches, creating a fast and easy experience for our customers. At the same time, we’ve reduced our total number of branches by 6% from a year ago. Home lending revenue declined 14% from a year ago due to a decline in mortgage banking income driven by lower originations in servicing income, which included the impact of sales of mortgage servicing rights. We continue to reduce head count in home lending in the third quarter, down 37% from a year ago, and we expect staffing levels will continue to decline. Credit card revenue increased 2% from a year ago due to higher loan balances, partially offset by introductory promotional rates and higher credit card rewards expense.

Payment rates have been relatively stable over the past year and remained above prepandemic levels. New account growth continued to be strong, up 22% from a year ago, reflecting the continued success of our new products and increased marketing. Importantly, the quality of the new accounts continue to be better than what we were booking historically. While the majority of new cards were to existing Wells Fargo customers, we’re increasingly attracting more customers that are new to Wells Fargo. Auto revenue declined 15% from a year ago driven by continued loan spread compression and lower loan balances. Personal lending revenue is up 14% from a year ago due to higher loan balances. Turning to some key business drivers on Slide 11. Mortgage originations declined 70% from a year ago and 18% in the second quarter.

We continue to make progress on the strategic plans we announced earlier this year, including focusing on serving Wells Fargo Bank customers as well as borrowers in minority communities. We did not originate or fund any correspondent mortgages in the third quarter. The size of our auto portfolio has declined for 6 consecutive quarters, and balances were down 9% at the end of the third quarter compared to a year ago. Origination volumes declined 24% from a year ago, reflecting credit tightening actions as well as continued price competition. Our origination mix continue to shift towards higher FICO scores, reflecting the credit tightening actions we’ve taken over the past year. Debit card spend increased 2% from a year ago with growth in most categories offsetting declines in fuel, home improvement and travel.

Credit card spending continued to be strong and was up 15% from a year ago. All categories grew from a year ago, including fuel, which rebounded after declining in the second quarter. Turning to Commercial Banking results on Slide 12. Middle Market Banking revenue increased 23% from a year ago due to the impact of higher interest rates and higher loan balances. Asset-based lending and leasing revenue increased 3% year-over-year due to higher loan balances as well as higher revenue from renewable energy investments. Loan balances were up 7% in the third quarter compared to a year ago driven by growth in Asset-Based Lending and Leasing. Average loans were down 1% in the second quarter due to declines in Middle Market Banking. After increasing the first half of the year, revolver utilization rates declined in the third quarter to levels similar to a year ago.

Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 20% from a year ago driven by higher lending revenue, stronger treasury management results reflecting the impact of higher interest rates, and higher investment banking revenue reflecting increased activity across all products. As Charlie highlighted, we’ve continued to hire experienced bankers, helping us deliver for our clients and positioning us well when markets improve. Commercial real estate revenue grew 14% from a year ago, reflecting the impact of higher interest rates and higher revenue in our low-income housing business, partially offset by lower loan and deposit balances. Markets revenue increased 33% from a year ago driven by higher revenue in structured products, equities, credit products and foreign exchange.

We’ve had strong trading results for 3 consecutive quarters as we benefited from market volatility and the investments we’ve made in technology and talent to grow this business. Average loans were down 5% from a year ago driven by banking, reflecting a combination of slower demand payoffs and modestly lower line utilization. Average loan balances were stable with the second quarter. On Slide 14, Wealth and Investment Management revenue increased 1% compared to a year ago driven by higher asset-based fees due to the increased market valuations. Net interest income declined from a year ago driven by lower deposit balances as customers continue to reallocate cash into higher-yielding alternatives as well as lower loan balances. While average deposits were down compared to both the second quarter and a year ago, the pace of the decline slowed in the third quarter.

As a reminder, the majority of WIM, Wealth and Investment Management advisory assets were priced at the beginning of the quarter, so third quarter results reflected market valuations as of July 1, which were higher from a year ago. Asset-based fees in the fourth quarter will reflect market valuations as of October 1, which were also higher from a year ago but were lower from the third quarter pricing date. Average loans were down 4% from a year ago primarily due to a decline in securities-based lending. Slide 15 highlights our corporate results. This segment includes venture capital and private equity investments, including the investments and funds that we sold in the third quarter. The sale had a nominal impact on third quarter net income.

Revenue declined $345 million from a year ago, reflecting assumption changes related to the valuation of our Visa B common stock exposure as well as lower venture capital revenue. In summary, our results in the third quarter reflect a continued improvement in our financial performance. During the first 9 months of this year, we had strong growth in revenue, pretax provision profit and diluted earnings per share compared to a year ago. As expected, our net charge-offs have continued to slowly increase from historical lows, and we increased our allowance for credit losses by over $1.9 billion this year primarily for CRE office loans and higher credit card loan balances. We are closely monitoring our portfolios and taking credit tightening actions where we believe appropriate.

Our capital levels have increased, and we expect to continue to return excess capital to shareholders. We will now take your questions.

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Q&A Session

Operator: [Operator Instructions]. And we will take our first question from John McDonald of Autonomous Research.

John McDonald: I wanted to ask about the expenses, Mike. Obviously, improving efficiency has been a big goal of yours. You made progress even while investing in regulatory. What are the additional opportunities to improve efficiency from here as you head into 2024? I know you’re probably not ready to give guidance for ’24 yet, but are you going into the budget planning with a mindset that they should be roughly flattish? Any comments you can give on that would be helpful.

Michael Santomassimo: Yes. Sure. Thanks, John. First off, let’s just make sure we keep it all in context, right? We set out a program almost 3 years ago now to cut roughly $10 billion. And I think that’s all still on track. We’ve brought head count down 40,000 from — or closer to 50,000 from the peak back in . So sort of very good progress to date. And I think as Charlie and I have both said over the last couple of quarters, we still have more to do to make it more efficient. And I would say there are very few parts of the company that we would say are optimized at this point. Now some have more opportunity than others, some require investment in terms of automation and technology, some don’t. But I do think that we go into the budget process and even just how we operate every quarter with a very disciplined approach to every single area of the company saying, what are we going to do to continue to drive more efficiency there while we make investments as well.

And we highlighted some of those that we’ve been making on in the prepared remarks. But I think it’s the same mindset we’ve been bringing to it now for the last few years, and I think we’re going to continue to do that. Where that ultimately ends up, we’ll share for next year. We’ll share with you in January, like we always do.

John McDonald: Okay. Fair enough. And then on the net interest income outlook for the fourth quarter, are you building in assumptions — you mentioned deposit outflows and mix shift assumptions? Are they assuming that things accelerate from here or similar to what you’ve seen this quarter? It seems like a pretty big sequential decline. Just kind of wondering what some of the assumptions are there.

Michael Santomassimo: Yes. No, look, I think as you can — as we’ve talked about over the last — it feels like forever, but certainly last 4, 5, 6 quarters now, there’s still a lot of uncertainty out there in terms of how the path of both the deposits and pricing will shape up. Whether it’s all the quantitative tightening, all of the — any competitive reactions we may see from others. And so I think we continue to think that we’re going to see these trends appear at some point. Now we’ve been pleasantly surprised this — to date this year that hasn’t progressed as fast as we thought it would, but at some point, it will. And so hopefully, we’ll find ourselves in a position where it doesn’t move as maybe fast as we’ve modeled in terms of pricing.

But we still — all those trends are going to happen and are happening as you look at shifts between noninterest-bearing and interest-bearing, you’re seeing deposit costs continue to increase. And on the consumer side, you see people spending their money. And so exactly at what pace those things are all going to keep going as we certainly modeled it, but we try to give you a base case forecast that we can hit under a bunch of different scenarios, and this is the same.

Operator: The next question will come from Steven Chubak of Wolfe Research.

Steven Chubak: So wanted to start, Charlie, because you had made some comments about capital targets and those potentially evolving. The inflation RWA from Basel III Endgame that you guided to does bring your CET1 minimum to 8.5%. You alluded subtly, mind you, to the possibility of managing to a lower target. Since 150 bps management cushion does feel excessive, what are some of the factors that would compel you to maintain a larger cushion than peers and maybe continue to run at or above 10%?

Charles Scharf: Well, let me just — I’ll start and then I’ll hand it over to Mike. We were not trying to — or I was not trying to give any direction about where we thought the appropriate buffer would be. We’re just trying to be very factual about where we are. And once everything is finalized, we’ll determine what the right buffers are and we’ll communicate those. So please don’t try and read any more into what I said other than just that.

Michael Santomassimo: Yes. And I think, Steve, I know your estimate might be 150 basis points. But I think what we’ve talked about over time is that at least at this point, we’ve been saying our buffer is probably closer to 100% — 100 basis points over wherever the right minimum might be. And that may evolve, as Charlie said. I think as you look at Basel III, the increase in RWA is driven by the things that are probably pretty obvious, whether it’s operational risk plus the — some of the other factors. But operational risk is certainly going to be one of the bigger pieces of it. And so I really do think that we have to see how the final rule shakes out next year. We’re hopeful that there’ll be some changes to areas that we think just makes sense from aligning sort of the capital requirements to the risk while also maybe moderating some of the operational risk increases as well.

And so we’re going to engage as we go there. But one of the factors that we’ve talked about now for a while in terms of how big our buffer should be is that we needed the rules to be finalized and so could that lead you to having a slightly smaller buffer than what we would have had in the past? Potentially. But I think we have to get there and get these finalized, and then we’ll also take actions once we have good clarity on what’s going to change or not change as we go over the next year. So I mean, we’re probably 9 months to 12 months away from getting a final rule, and so we still have a little bit of time for this to play out.

Steven Chubak: And for a follow-up, just on the trading business. It continues to surprise positively versus expectations. You cited some of the investments that you’ve made, the benefits of volatility. But with revenues running multiples above what we’ve seen in prior years and that $1 billion-plus bogey being reached for 3 consecutive quarters, I was hoping you could just speak to whether we should be underwriting $1 billion-plus as a new normal or if there were any cyclical benefits or anomalous benefits that maybe we shouldn’t be underwriting go forward. Just trying to think about what the normalized level of trading revenue should be given some of the investments you’ve made scaling of that business.