Q3 2020 Exela Technologies Inc Earnings Call
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After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Lumena. Please go ahead.
Thank you, Jason and good morning, everyone and welcome to the XL technologies third quarter 2020 conference call.
I'm joined today by Ron Kozberg, Axcelis, Chief Executive Officer entry caught short term, our chief Financial Officer. Following the prepared remarks made by running Sri <unk> well take your questions. Today's conference call is being broadcast live via webcast, which Huvelle body Investor Relations page of Axcelis website, XL attack Dot com.
A replay of this call will be available through November 17, 2020 information to access the replays listen in yesterday's press release, which is also available on the Investor Relations page at Axcelis website.
During today's call XL will make certain statements regarding future events and financial performance that maybe characterized as forward looking under the private Securities Litigation Reform Act of 1995. These.
These forward looking statements are subject to known and unknown risks and uncertainties and are based on current expectations and assumptions we.
We undertake no obligation to update any statement to reflect the events that occur. After this call and actual results could differ materially from any forward looking statements biomarker nation. Please refer to the risk factors discussed in Axcelis. Most recent filed periodically report on form 10-K, along with the associated press release and company's other filings with the FCC.
Copies are available from the FCC or the Investor Relations page of excels web site.
During today's call, we will reference certain non-GAAP financial measures. We believe these non-GAAP measures provide additional information on how management views the operating performance of our business reconciliations between GAAP and non-GAAP results. We discuss on today's call can be found on the Investor Relations page of our website.
Please note the presentation that accompanies this conference call and Investor Factsheet Ross accessible on the Investor Relations page of our web site I'd now like to turn the call over to our CEO, Ron Cogburn, Ron over to you.
Oh, good morning, and thanks, everyone for joining us on our third quarter 2020 earnings call.
The COVID-19 pandemic has impacted everyone to some degree, including Accella and our customers also.
Well some uncertainty related to the pandemic still remains we continue to execute well against our plans for value creation in this current environment.
Sequential margin expansion, improving cash flow and rising liquidity in the third quarter is further evidence of our progress.
We're very proud of the more than 21000 members of our team who have remained committed to delivering world class service to our customers amid this challenging time their hard work perseverance and dedication during the global pandemic have been truly inspirational and motivates us all to continue pushing it.
Sure employees, we thank you for all your efforts and sacrifice.
I'd like to begin today by highlighting a couple of slides that help illustrate like selling is well positioned to weather. The current COVID-19 environment and generate increased profitable growth in the future.
Let's turn to slide number five.
Let's discuss an overview of Axcelis Digital foundation.
But I'd like everyone to take away from this page is that we are a global leader in business process automation with significant scale.
Services are focused on the automation of billings and payments by providing technology services and analytics, we serve over 4000 customers, including 60% of the fortune 100 across 50 countries.
Leveraging our 30 plus years of experience, we deliver mission critical services to very attractive markets, giving us stability in these challenging times and significant opportunity for long term profitable growth.
Drilling down a bit further into our business, let's look at slide number six well.
Well, we have included a breakout of our revenue across several key categories.
This slide gives you insight into the industry verticals, we serve and helps to illustrate the breadth and diversity of our revenue mix across geography industry customers and service offerings.
The second column, you'll see that we service in very attractive markets with the higher growth banking and financial services, and health care, and making up 26% to 24% of our revenue respectively.
Moving to the next column you can see we have low customer concentration.
80% of our revenue is generated from our top 100 customers.
These customers include some of the world's largest organizations and we have significant headroom to continue growing from our top 100 accounts.
With the remaining 40% of our revenue.
Generated over from the all the other customers, we are focusing focusing additional sales and marketing attention on accounts that have the ability to see expand significantly.
We've had success with this strategy with our top 100 customers continue to apply the same efforts to grow smaller high potential customers find.
Finally in the last column.
A split of revenue between traditional BP, a services and our digital assets and this is important in today's environment.
Because of the increased demand for these products and services.
We are focused on fostering growth at our digital asset group, which I'll discuss in greater detail shortly the.
The breadth of our services across a diverse mix of geographies industries and customers provide stability to our core business. Even during these unprecedented times is a key long term competitive advantage for us.
Now let's move to.
Just more recent strategic highlights on slide number seven.
In the third quarter, the rebound of customer volumes varied across our industry segments and geographies. However, we're pleased to see a nice sequential uptick in their health care care business from Q2.
We remain optimistic that volumes will continue to improve across our business as companies gradually return to a new normal.
From a demand standpoint, we continued to see some very encouraging signs in Q3.
Throughout the pen damage our dialogue with customers has increased as they analyze the best way to balance reopening physical office locations.
With enabling work from home solutions on a more long term basis, we estimate that going forward approximately half of our customers will remain a maintain some level of work from home environment, which we believe will drive greater need for excel services, and especially our work from anywhere or WCS.
Face solutions.
Our customers work with us to analyze multiple possible outcome comes from the pandemic. They are also seeking greater cost efficiency across their organizations through increased automation.
These demand trends are perfectly in line with excel as value proposition and help us helped us to grow our pipeline in Q3, which is in converting and some great new business wins, let me give you a few examples.
And our healthcare segment, we recently signed new business wins with large insurance providers and health care systems.
In the public sector, we added new wins across us and European markets totaling $59 million of annual contract value, which equates to $200 million of total contract value and has begun ramping this quarter.
Our digital mailroom solution exceeded 100000 users in the third quarter, we have high expectations for DMR given the strong demand we are seeing and we expect significant growth of this product next year.
Turning to our outlook for the remainder of 2020 and 2021.
First I'd like to address quickly the current appraisal litigation proceedings as we may have questions about this later Paul.
While we are continuing to pursue our appeal as you can see from yesterday's 10-Q filing.
There is no material change or update in the status to report at this time for what has been disclosed in our prior 10-Q or discussed by us in prior calls from.
From a business perspective, as I mentioned earlier, we continue to see signs of stabilization in the market even as these uncertainties caused the COVID-19 continue.
Thanks, Good expect customer demand will continue to improve in the fourth quarter, and then 2021 barring another significant outbreak or a lot.
Moving forward, we are focusing our strategic investments in the solutions and target industry segments, where we see the most potential for profitable growth once.
One such example is our digital assets, which represents approximately 7% of our year to date total revenue and includes services such as our work from anywhere solutions like digital mailroom or DMR and dry side, which is our E signature platform as well as platforms for.
Driven by billing and payments healthcare workflow automation, along with high speed scanners and other equipment.
Let's turn to slide number nine.
To help advance our digital growth strategy and more importantly to focus on the increase in demand. We recently created accelerate digital asset group or day, our digital asset group, which includes the support of our leading technologists.
What is purpose built to foster innovation and to drive growth in our digital assets. We currently serve 245 customers with our digital assets solutions, including 50 additional that were added in October alone and two thirds of our deck customers each generate over 500.
$2000 of annual digital asset revenue year.
Year to date, our digital asset group generated $71 million so Brad.
Now the focus industries for our digital asset group include banking insurance healthcare and public sector.
Our solutions less leverage digital technologies to automate business processes across our customers' human resource Department legal and finance Department and accounting functions.
Now, let's move to slide number two and let me touch on what differentiates excel digital assets in the market.
Our digital assets are supported by our strategic consulting our product management and our professional service teams with deep domain expertise and referenceable deployments across our target industries, we offer highly flexible contract all options such as.
As one to 10 year term licenses for payment processing, along with other Axcelis software platforms our.
Our customers can choose SAS or per user per month contracts for solutions, such as DMR or drive side and finally, our digital assets are designed to meet the needs of customers of all sizes from the SMB east of the large enterprises, giving us a significant addressable.
Market to go pursue.
Another critical aspect of our digital assets is our ability to sell these solutions to multiple clients with very little customer that customization or the need for professional services.
This model for these solutions supports our very healthy gross margins and the digital assets, which had been some of our largest in the past.
Our digital asset group is one key area of continuing investment for excel to increase the competitive advantages we experienced today.
To drive our topline and margin growth over the long term.
In closing we are pleased with our continued progress in the third quarter, particularly in terms of our improved profitability and liquidity.
While the environment remains challenging due to cold at night team, we remain positive that Accella, we'll emerge a much stronger company.
The services, we provide our mission critical high.
Hard to replicate or take in house and delivered significant value to our customers through our proprietary digital technology and business process automation.
We increased speed, we reduce risk we drive greater efficiency.
All critical business imperatives for today's market.
Lastly, please note that we plan to host an innovation day in the very near future, where our broader management team will provide an update on our business as well as greater detail into our solutions and services.
Our growth strategies, we look forward to providing you with more detail on that in the next few weeks.
Now I'll turn the call over to strip out searcher to discuss our third quarter results and our guidance SREC caught over to you.
Thanks, Ron Good morning, and thank you all for joining US we're pleased with our third quarter execution importantly, the strong progress we have made improving of profitability metrics for the second quarter.
In my discussion today will refer to both GAAP and non-GAAP results.
A reminder, recompletions to these metrics are available in our earnings material anyway.
And he lost rent growth funding periods of fiscal 2019 include our restated results for the interim period of 2019.
For the past few quarters, we are shared the core area of focus and impact, namely one managing the adverse effects of global 19 on customer volumes and our financial results.
Q expected impact of the transition revenue.
We get past the cost control management with the goal of achieving normalized gross margin performance and for our capital allocation policy focused on improving liquidity and cash flow.
Mike the challenging macro and business environment, we focused on the matters within our control and Delaware strong performance across each of these four area.
Our team managed to overcome the negative impact of COVID-19, and transition to revenue and Delaware sequential gross margin and adjusted EBITDA margin expansion.
The met our Q3 revenue guidance range, we provided on our Q2 earnings call.
Let's start on slide 12, the review of our third quarter 2020 result.
Revenue for the quarter totaled 5.3 million a decline of 18.3% year over year.
Constant currency basis, Q3 revenue was 2.9 million person thing a decline of meeting 0.9%.
Moving to our segment revenue for our <unk> segment was 234.4 million a decrease of 19.9% year over year from 292.6 million in the third quarter of 2019.
Our healthcare solutions segment revenue totaled 54.2 million a decrease of 12.7% year over year from 62.1 billion in the year ago period, but up a strong 10.2% from the second quarter driven by increased well.
Our legal and loss prevention segment revenue was 16.7 million a decrease of 11%.
However year over year revenue performance, mainly reflect negative volume impact due to the COVID-19 pandemic and our exit from certain customer contracts and statements of work between not a strategic fit to collect mission, which we refer to as transition revenue right.
Roughly 30% of our year over year revenue decline was attributable to reduced volume from couldn't 19, but the balance of the decline from roll off of transition revenue.
We remain on track to eliminate the transition revenue by the end of quarter of 2021 and remove the stranded costs associated with the transition revenue by the end of 2021.
<unk> will continue to deliver positive impact on our gross margins from declining transition revenue of caustic a bit more time to exit the business.
When excluding pass through postage and pull through timely revenue either zero or nominal margin. Our total revenue was 254.4 million in Q3 up approximately 1% sequentially from 252.5 million in Q2 of two any trend.
Our gross profit margin for the third quarter was up 237 basis points year over year, and 190 basis points sequentially to 23.3%, primarily due to better cost and capacity management as well as the reduction of stranded costs associated with transmission revenue.
As for Q3 totaled 42.8 million down 11.4 million year over year and represented 14% of sales driven primarily by lower professional fees traveling and other costs.
We recorded a gain on the sale of our physical record storage business 9.8 million in the third quarter of two any training and its reflected under foundry or other income.
Operating income for the third quarter of 2020 was 4.8 million compared with operating loss of 93.9 million in Q3 of 29 keep the.
The year over year increase in our operating income was attributable to our gross margin improvement lower to see any expense and lower depreciation and amortization amortization expense versus the year ago period.
Additionally, there was no impairment of goodwill and other intangible assets costs in Q3 of 2020 compared with the 97.2 million in the third quarter of 2019.
Turning to India, and the stupid deal in Q3 2020 be generated EBITDA of 37.7 million compared to a loss of <unk>.
Compared to 69.4 million in the prior year period, adjusted EBITDA for the third quarter was 48.7 million up 13% quarter over quarter.
Just to be a margin for the third quarter of 2020, with 16% up 200 basis points sequentially from 14% in Q2, reflecting strong execution of our cost saving initiatives and essentially flat year over to you.
Excluding pass through revenue, our Q3 2020, adjusted EBITDA margin was 19.1% up 200 basis points quarter over quarter.
Moving to slide 13.
This slide illustrates the strong progress to be made the third quarter improving our margins.
During the stage for continued upward trajectory.
As we discussed with you on our last call our gross profit and adjusted EBITDA margins reached a low point in the fourth quarter of two any trend.
In Q2, we delivered 140 basis point sequential gross margin improvement and 190 basis points of adjusted EBITDA improvement. Despite a sequential 58 million reduction in our revenues.
In Q3, we generated an incremental I don't know 90 basis points sequential gross margin expansion and 200 basis points of adjusted EBITDA margin lift.
Furthermore, despite the 68 million year over year revenue decline, we delivered 237 basis points of gross margin expansion and kept our adjusted EBITDA margins people versus Q3 of 2019.
This positive result on a margin since are direct result of our continued leave the focus on our ongoing cost saving initiative.
As we mentioned previously we also have additional cost saving initiatives that are currently under examination puts us work from home policies that will extend beyond the COVID-19 pandemic driving reduction in our facility costs as an example.
Now lets move more into slide number 14 to discuss the strategic teachers and our liquidity.
As discussed in the past the company had originally targeted 150 to 200 million a feel proceeds from certain non core assets.
Since then we have completed divestitures of 50 million to date as part of the unknowns flat Bill.
We will continue to explore and implement additional actions to improve our liquidity. This includes our plan to complete additional asset sales as targeted accelerating the alignment of our businesses to our traditionally working capital like model and executing against our plan cost initiative, including cutting travel expenses associated with our transition revenue.
We have a plan in place to achieve our near term liquidity target of 150 million.
Our total liquidity for now it's 2020 with 77 million and our total net debt was 1.477 billion.
I would now like to close by discussing our fourth quarter and who you have 22 in your revenue guidance.
For the fourth quarter of 2020, we expect total revenue to be in the range of 300 to 310 million.
On a sequential basis, our fourth quarter revenue guidance reflects higher volumes from Q3, 2020 offset by reduction of transition revenue elimination on.
On a year over year basis, our Q4 revenue was expected to be negatively impacted by lower volume.
The fourth quarter of 2019, primarily as a result of over 19, and approximately 9 million of decline attributable to the revenue contribution from the non core assets.
That's one of the aforementioned exit of print transition revenue.
For the full year 20, Twond, we expect total revenue to be in the range of 1.28 billion to 1.29 billion.
I'd like to thank you very much for your time today with that operator, please open the call for questions.
Thank you we will now begin the question and answer session Todd.
Okay question, you mean for Star then one on your Touchtone phone.
You use any speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
First question is from Alan can you two from Beach point capital. Please go ahead.
Hi, Thanks for taking my question first.
Firstly I look at the Fourq guidance and the year over year decline rate in that quarter versus threeq. It looks like it's a little bit lower could you just explain some of the drivers behind that seasonality or maybe just kind of like the lumpiness that transition revenue that'd be helpful.
Sure I mean does this rig count there let me take that.
One I I would set off but there's still the uncertain people to cover them environment Q4, usually we see an uptick with the higher health care volumes.
We need to wait to see how that will unfold for Q4.
That is being factored in for the uncertainty that is and then the transmission revenue through rightly said and it was there in my prepared remarks, we are actually expecting higher volumes, including the ramp that we.
We discuss briefly in Ron's presentation that is going to be potentially offset by the transition revenue decline for Q4 asphalt. So we kept at a fairly steady with Q3.
Got it.
Thank you the Q on the cash flow statement I noticed there was I think a $9 million payment this quarter for the acquisitions made in early 2019 can you just go into a bit more detail on what those were and if theres any similar pending potential payments outstanding.
That that particular transaction was related to the software that that'd be purchased back in the day.
Well staggered payout and in Q3, the next installment, let's do and be settled at this point in time, there's nothing that we are all better off in a similar nature from a cash flow perspective.
Got it.
It's two more from me I guess first can you talk about any progress on stranded cost removals in the quarter and any you know actions or particular lines of service you might have exited or started to rationalize in third quarter.
Oh sure HM we continue to go down the path of identifying eliminating whether its transmission revenue or stranded costs, but you know to be fair enough Fair. You also told I don't spend around continued.
Continued focus on or DMR and all.
All of the other positive thing that's happening in the business.
Coming back in big cushion a.
B.
The transition revenue is that the run rate that we expect it to be related to the stranded costs, yes, you're seeing the cost coming off that's one of the.
Driver for the quarterly increase in gross margins, obviously like I said, we do tend to see offsets to some of these coffee, but but coming back to the trying to transition its kind of cost once again.
Yes, we are its fluent study the transition the stranded costs are coming out of the system.
Got it sorry did you say that the strength of the transmission revenues at the kind of ultimate run rate or did I. Miss hear you. There that is correct that is correct ultimate run rate. Okay. So few.
Few quarters going forward, there should be a minimal impact on the year over year comparison.
Five transition revenue going away.
Correct I wouldn't wouldn't you look at it from a sequential perspective from a minimal but think about it 2019 worsens 20 trending.
There is going to be a bigger impact related to transmission revenue right.
Q3 versus Q4 not asked pronounced.
Right right I guess my point is by my second quarter first quarter second quarter 21, it'll be gone, but the impact doing year over year impact should be sequentially less each quarter now for <unk> yeah.
Like for.
For Q1, Q the transition revenue.
Something like every year will be less impact revenue.
And last question I saw in the queue I think Theres 77 million of liquidity also in your presentation. So.
One how is that facility availability split up between D.A.R. facility in the Rcs.
And then I have one question after that.
Sure I think it's done in our 10-Q two if.
If you noticed that 47 or so million up approximately available to be.
Borrowing capacity on on all for a global.
I'll be a little would be okay for me an opt out of them, but they are at this point in time I hope that particular deal.
Yeah.
Right.
Dog at Liberty.
Yeah, I think I saw there's letters of credit on the revolver. So.
D., we are yeah, yeah, no nothing that out you're not factoring in any availability on the revolver.
Okay. So if you know the 37 minus four is not available on the art facility, that's not available on the cash flow revolver, where is it coming from.
We have availability on our global customers.
Outside of the air we have other over them.
Got it so just quickly what facilities are those or is there any one that accounts for the majority of that.
You sound like 40 in or some.
Some other kind of like equipment that we have available to you know international facility.
Okay.
Yeah.
Just quickly on the debt footnote, where would I see that as I've just in other.
And you will not see the break up that's why I'm hesitant to give the exact little but you will not see if it's available at the it's not on the debt, but no you will see do you see them the or the going concern about footnote.
That's total.
Okay, guys trying to tie it back where that is the financial statements.
30.5 million is the right number pretty.
Pretty soon.
Okay, but it's still not going to show up in the definite it'll just be kind of off balance sheet basically right.
Right.
Okay, the off balance sheet availability.
Okay. So then starting from $77 million of liquidity.
So as an early November I know there is disclosure about the minimum liquidity covenant. So could you just kind of roll us forward on.
Getting the necessary liquidity hurdle to pay the January coupon will also you know being in good standing with those minimum liquidity covenants.
Do you anticipate that all just being kind of like operating improvement maybe some additional liquidity sources externally or maybe like an asset sale or so just kind of rolling it forward to that.
And in time would be helpful.
Sure.
Given given the probably important to the question. Let me let me probably you know let me give you a more detailed answer here right.
Let me pivot back to our original plan our focus has been on improving liquidity and cash flows we have covered that in multiple prior earnings call. Good told what the plans are really focused on one we have a plan in place to achieve near term liquidity target of 150 million or so right. The focus is also on gross margin.
In expansion that comes in multiple forms profitable revenue growth controlling us unit cost when it comes to EBITDA EBITDA margin gross margins obviously.
And that focus has not changed and don't will be a question around next bond payment.
One thing that I can say is we are certainly operating at a very heightened awareness as we've discussed many times the fastbreak v., we manage the business almost on a weekly basis.
Including having a button to liquidity.
No. We believe we're meeting our ability to execute number one we have a diverse asphalt pool.
But that's another important thing that I want to kind of covered.
Talbot right you know.
We we need to see the margin dollars to come through there's transition revenue. That's like setting we can take out just trying to cut cost improve your cash flows of you're scaling profitable revenue.
What I would like to say between now and the bond payment rehab, we have some sufficient runway that we think will make to get the additional liquidity.
The next question comes from David for uplift from who know please go ahead.
Thanks, Thanks for the color guys, Hey, just just to follow up on that to get to the sufficient liquidity is that can you maybe just give us color on I know this is a non coupon payment quarter better kind of any color on expectations for free cash flow.
Here in the near term.
You can you can you know I think the best indicator as we look at our adjusted EBITDA Backout when our that gives you a good indicator of free cash flows.
In the non cash and other charges. There. So there's an element of a cash be out, but but it's not 100% maybe something like severance as part of that.
But I just didnt, even deal less oil and all I can give you a good indicator of the.
The free cash flow for the quarter. So the open are that the prior guide was 40 to 45 million for the year I think here about 36 year to date. So is that still is that still the best way to think about it.
Correct, yes.
Okay.
So.
Moving on to the divestitures I think about a year ago, you guys talked about this to your strategy.
You've done too I guess, you kind of break out I get 150 to 200 million of proceeds.
I guess your 50 million there thus far is that timeline in light of you.
No the pandemic backdrop, we're in here inside she has that timeline <unk>, which gives you. Another year is that still intact here or are there any is that going to be pushed out a little bit.
No it's at.
At least again be have talked about it enough, but but giving a very specific answer at this point in time, you see no reason for the timeline to be pushed out. We are on target you are seeing on track. So we're going to be have more more details will certainly provide but be feel confident about wherever you are right now okay.
Okay and then another question on on the transition routes that you talked about <unk> did you say that was going to say that the run off is complete in Q2 or Q1 of next year Q1, Yeah Q1 of next year, 20, Twond and and and did you quantify how much I mean, I know you do.
This quarter, but how much they hit will be and then that how much you have left to run off there.
We are looking at an annual run rate of 150 million raid wouldn't even be stopped the write up.
The Q1 run off was lower than what it was in Q2 and Q3.
You can do the math you will see you have you said they should show yeah, yeah shortfall of whatever some.
You have to understand that anymore, yeah, yeah, Okay, that's gotten back into it there okay.
Okay, and traditionally Q4 has been on a kind of a heavy if I remember correctly heavy software license quarter is that going to be the case. This year that that kind of expect where that could that I know you kind of said margins are going to be a little bit better is that I wanted to tell in there.
Yeah, you know.
The margin being better is obviously been talking about near term not specifically to Q4 and come back to that in a minute, but but you're right. David Q4, traditionally is a strong quarter for us we see the software sales come through have you see out there there's a seasonality associated with Q4, we'd love to have that back. This this this quarter Q4 as well.
But given that we live in interesting an uncertain time, we are unsure as to how it will play out but there are things in the pipeline that we are hopeful that will convert in Q4.
At it with that with the uptick that we've seen in Kobe cases have you seen any commensurate hit to your the uptick in volumes that youve seen since the April may was.
Not yet interestingly not yet I think with with health care a few so there was a quarter over quarter pickup in our revenue is right. It's all fueled by additional volume.
What is what we'd again you know.
Very uncertain, what we read we don't want to put something out there that lets the Q4 traditionally higher health care volumes people are trying to run off of <unk> all up your claims get done with the automobile and procedures. We don't know how that'll panel. This year right. So that's where it's wait and watch but coming back health care in Q3 pretty good in Q3.
Health care beaman processing and DMR, our area there'll be definitely saw a much higher up tick in volumes if anything it would be pretty.
Print volumes that were potentially down, but then you're going to eat with them and and then on site customer on site, but rather the search of you're seeing still seeing softness, but then that's dependent on customer strategy versus a bit something beyond our control.
All right I'll jump back in the queue here. Thanks for the color I appreciate it yeah no problem. Thanks to.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Ron Cogburn for any closing remarks.
Thanks, operator.
Thank you everybody for participating today.
The quarterly call and look forward to seeing you are on the next call but in between now and then.
Look for an invitation from us for innovation day product service today and.
And.
Look forward to talking with everybody then we'll be showcasing all of our solutions and services was a big emphasis on our digital asset group.
Oh, thanks, everyone and we look forward to see you next quarter.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
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