Q4 2020 Target Hospitality Corp Earnings Call
Good day, and welcome to the target hospitality fourth quarter and full year 'twenty 'twenty earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportune.
To ask questions to ask you. A question you May Press Star then one on your Touchtone phone to withdraw your question Press Star then two please note. This event is being recorded I would now like to turn the conference over to Mark Shuck. Please go ahead.
Good morning, everyone and welcome to target hospitality fourth quarter and full year 2020 earnings call.
The press release, we issued this morning outlining our fourth quarter and full year results can be found in the investors section of our website. In addition, a replay of this call will be archived on our website for a limited time.
Please note the cautionary language regarding forward looking statements contained in the press release.
This same language applies to statements made on today's conference call.
This call will contain time sensitive information as well as forward looking statements, which are only accurate as of today March 30th 2021.
Target hospitality expressly disclaims any obligation to update or amend the information contained in this conference call to reflect events or circumstances that may arise after today's date, except as required by applicable law.
For a complete list of risks and uncertainties that may affect future performance. Please refer to target hospitality is periodic filings with the SEC.
We will discuss non-GAAP financial measures on today's call. Please refer to the table on our earnings release posted on the investors section of our website to find a reconciliation of non-GAAP financial measures referenced in today's call and their corresponding GAAP measures.
Finally on March 29, 2021, the board of directors of target hospitality and its special Committee comprised of independent directors received a notice from Arrow Holdings, an affiliate of T. D. Our capital withdrawing its previously announced proposal to acquire all of the outstanding shares of common stock of <unk>.
Target hospitality, it or affiliates do not already in.
Consequently, the special committee and its own outside legal counsel and financial adviser have ceased their evaluation of the proposal.
Leading the call today will be Brad Archer, President and Chief Executive Officer, followed by Eric T Calomiris Executive Vice President and Chief Financial Officer.
After their prepared remarks, we will be joined by Troy Schrenk, Chief commercial officer and open the call for questions.
I'll now turn the call over to our Chief Executive Officer, Brad Archer.
Thanks, Mark and good morning, everyone and thank you for joining us on the call. Today. In addition to discussing our 2020 performance I will touch on the fourth quarter operational trends as well as our continued priorities entering 2021 two.
<unk> 2020 was a challenging year the global pandemic created on an unprecedented operating environment for target and companies around the world.
Economic outlook became increasingly uncertain target took aggressive actions to appropriately position the company to navigate this uncertain environment.
We quickly align that business to match customer demand, while maintaining a heightened focused on preserving our financial strength. These steps created a leaner and more efficient operating structure and appropriately position the business to take advantage of a more balanced market.
Our commitment to cost containment initiatives and disciplined capital allocation provided the backdrop for producing strong 2020 financial results.
We delivered adjusted EBITDA of $79 million and reduced our outstanding borrowings by $32 million during the year.
All of which significantly enhanced our liquidity position and increased targets operational flexibility.
In addition, as the global pandemic quickly spread we implemented a strict operational response plan as COVID-19 cases continued to rise throughout the year. We remained focused on adhering to this plan.
This focus resulted in no community spread across our network and no cases of COVID-19 impacting our business on.
Our plan was instrumental in keeping our employees and customers safe healthy and ready for work.
Going to the fourth quarter operational trends.
We continue to see positive momentum and customer demand, which contributed to increases in occupancy and utilization during the quarter. The efficient operating structure. We have created allowed us to meet increasing customer demand with little incremental cost further supporting strong margins and continued cash generation.
Our network scale combined with our premium service offerings is unmatched.
These attributes enabled us to effectively increase our market share as customers continued to find added value and allocating labor to our premium network.
Looking into 2021, we are encouraged with continued signs of economic recovery anchored by global stimulus and increasing distribution of COVID-19 vaccines.
We have continued to see improvements in end market customer demand in 2021, and anticipate additional gradual increases in customer activity throughout the year.
With the termination of <unk> proposal to take target private we look forward to continuing executing on target business strategy.
Additionally, we are excited about the new partnership we announced yesterday with a leading national nonprofit organizations supporting the U S government.
This strategic partnership illustrates our consistent strategy of diversifying our cash flows with high quality contracts that provides significant revenue visibility.
This is an example of target ability to leverage its existing core competencies to diversify its end markets.
We believe this positions target to further develop strategic long term partnerships with government and nonprofit organizations targa.
Target has a unique set of core competencies that translate across a variety of end markets. Our suite of Premier service offerings strategically positions target to evaluate other potential value enhancing opportunities that will further diversify our target end markets.
As we have said the principles of any evaluation will center around identifying scalable opportunities, while increasing revenue visibility.
As we continue to evaluate other potential growth vectors, we will stay focused on these tenants and maintain our strong financial position.
We have created a structurally sound business. Our 2020 results are a testament to target ability to successfully navigate through a variety of business cycles target premium network significant scale and operating structure sets us apart and provides the ability to match customer demand and.
<unk> enhanced our financial strength.
I'll now turn the call over to Eric to discuss our fourth quarter and full year results in more detail.
Thank you Brad and good morning.
On the fourth quarter, we experienced continued improvements in our operating metrics and realized sequential quarterly improvements in utilization from the lows experienced during the second quarter.
We maintained a heightened focus on cost containment and capital discipline, providing the foundation to deliver strong fourth quarter and full year 2020 financial results.
Full year 2020, total revenue was $225 million adjusted EBITDA was approximately $79 million.
And discretionary cash flow was $46 million.
Turning to our segment performance.
Our energy segment delivered fourth quarter revenue of $24 million compared to $57 million on the same period last year.
This decrease was driven by lower utilization as a result of the pandemic, which created a meaningful reduction in customer demand.
Our government segment produced quarterly revenue of approximately $14 million compared to $17 million in the same period last year.
Now as a reminder, we successfully executed a renewal and extension of our government services contract.
September 15 2020.
This five year extension will add approximately $265 million in committed revenue.
Into 2026.
As a result of this contract extension there was a decrease in non cash deferred revenue amortization.
For our construction cost reimbursement that was embedded in the ADR.
The cost of services and the ADR remained unchanged and the ADR will remain flat going forward.
Our other segment, which primarily includes TCP on Keystone projects had revenue approximately $14 million for the fourth quarter compared to $1 million in the same period last year.
As a result of the executive order revoking the Keystone XL presidential permit.
We anticipate significantly lower revenue associated with the TCP on project in 2021.
Recurring corporate expenses for the quarter and full year were approximately $6 million and $29 million respectively.
We have created an efficient operating structure that will allow us to continue meeting customer demand and support additional growth with minimal incremental cost.
We anticipate recurring corporate expenses to remain around $7 million to $8 million per quarter through 2021.
Total capital expenditures for 2020 were approximately $8 million.
Target has established a premium network with substantial scale within its core operating regions.
This scale allows target to service increasing demand for its hospitality combination services with minimal additional capital spending.
Coupled with strong margins this combination creates meaningful cash flow generation.
We generated cash flow from operations of approximately $18 million and $47 million for fourth quarter and full year respectively.
Since our network requires nominal maintenance capital.
Translates directly to discretionary cash flow.
As we experienced gradual utilization improvements each dollar of revenue creates exponentially more cash flow. This is evident in the fourth quarter with our discretionary cash flow yield to revenue of approximately 35% compared to a 20% yield for full year 2020.
Moving on to the balance sheet, we ended the year with $380 million total long term debt.
Including $48 million drawn our revolving credit facility and.
And consolidated net leverage of five times.
We continue to focus on debt reduction and utilized 32 million borrowings further enhancing target liquidity position.
As a reminder, our long term debt consists of $340 million in senior secured notes due 2024 and $125 million ABL credit facility.
Which have no near term maturities or immediate financial covenants, providing significant flexibility and liquidity within our capital structure.
Turning to our full year 2021 financial outlook.
The recent announcement of the new government services contract provides a meaningful increase in 2021 revenue.
Contract is fully committed and backed by the U S government, providing $118 million of minimum revenue commitments over its initial one year term.
The economics of this contract from an ADR on cost of services perspective materially aligned with our existing government services contracts.
Further this contract utilized target existing assets, which requires minimal capital spending.
Target's core business remains strong and continues to benefit from its premium service offerings network scale and efficient operating structure with.
We continued to see modest improvements in end market customer demand and anticipate gradual increases throughout the balance of the year.
We expect approximately 96% and our anticipated 2021 revenue being under contract and approximately 69% of revenue having minimum revenue commitments.
As a result, we announced our full year 2021 financial outlook, which consists of revenue between $235 million and $245 million.
Adjusted EBITDA to be in the range of <unk> $88 million to $95 million.
And discretionary cash flow between $55 million to $60 million with $12 million to $17 million in capital spending.
We anticipate our discretionary cash flow.
<unk> largely be directed towards further debt reduction and are targeting a net leverage ratio below four times by year end 2021 with continued improvements in 2022.
We believe target is well positioned to continue benefiting from improved global demand and normalizing market trends.
The structural advantages of our business model provides for significant cash generation, while allowing us to be prudent with our capital allocation.
Our disciplined approach aligns with target objectives of identifying and execute on value enhancing initiatives, while continuing to create value for our shareholders.
With that I will turn the call back over to Brad for closing comments.
Thanks, Eric as the 2020 economic outlook became increasingly uncertain, we took decisive action to appropriately position. The business target strong 2020 results are a testament to the team's ability to quickly react to an uncertain operating environment, while maintaining focus on preserving.
Moving our financial strength.
The recent contract addition to our government segment illustrates targets ability to quickly execute on opportunities that increase the value of the business and simultaneously provide valuable services and solutions for our customers.
We have created an expansive network with premium hospitality service offerings and solutions, while partnering with high quality best in class customers.
Attributes underpin our ability to continue producing strong financial results and ensuring the long term success of the business.
I appreciate everyone joining us on the call today and thank you again for your interest in target hospitality customer.
Customers the business performed as we had forecasted.
Okay.
We will now begin the question and answer session.
Ask a question press Star then one on your Touchtone zone.
If youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
And the first question comes from Stephen <unk> with Stifel. Please go ahead.
Thanks, Good morning, gentlemen.
Good morning.
A couple of things that I'd like to start with.
Energy front.
Clearly oil prices have been.
Rising and much more solid the environment looks better what are you guys hearing from customers because we hear mixed.
We hear mixed about the potential for different types of customers to maybe maybe boost activity above current budgets versus.
Maybe being stickier with a focus on cash flow from E&P side. What are you guys seeing some from your customer base on how do you think things evolve this year.
Hey, Stephen this Brad How're you doing.
Alright, good luck to you.
Look.
I would tell you having meetings weekly monthly, especially throughout the past year looking into 2021 getting somewhat through the first quarter now.
Compared to the days of the past, we especially see the larger operators sticking to their budgets maintaining focus we think that's going to be the theme for these guys.
Going through the year from what from what we're seeing with that said, we're continuing to see increases in our utilization on occupancy and we expect that continued through through 2021 on that but.
Maybe to answer your question on we think they maintained focus throughout this year.
And stay within the budgets that they put out.
Yes.
Great. Thank you and then.
You, obviously announced a pretty significant addition to your to your.
Contracted revenue yesterday.
Within the context of what you can comment on the day.
Eurasia, the contract and sort of given the type of contract. It is how do you how do you think about it.
Yes.
That contract other options for renewal do you sense Youll get.
Extensions on it.
How should we think about that contract going forward.
Yeah look I think it's very similar to our other government contract.
Every government contract is based on on one year annual appropriations. So that's nothing new.
We all had to get our heads around five years ago. When we when we signed signed the daily contract Greg everybody had the same questions I would tell you today, we are much stronger in the government sector, we've positioned ourselves to be one of the leaders in that and it's why we've gotten.
The partnership with a nonprofit.
On this new new facility. So I think we're set up very well as this ago goes forward not only on this project, but I think.
The opportunity to put more wins on the board and the government sector are definitely out there as well.
Thanks, and then just can you it seems like.
The capital costs.
To prepare or already facilities for.
But this contract are minimal and I was just curious is it is the.
When I think about that Capex requirement and I know your maintenance Capex is very low is there anything when we think about 2020 one capex.
There's nothing significant there.
Imagine these facilities are not being mobilized are being used at their current locations.
Yes, I'm going to speak to the project itself and then I'll, let Eric give comment on overview of the Capex for 2021 on the project itself. The great thing about this is very minimal capex.
On these facilities, we're adding a few structures if you will.
To the facility on a lease basis, but.
Most of our all of the facilities are already in place. We are turning on the lights were getting them claim some of these were.
If you will Mark Bob Deere in Covid that we are opening back up.
On housing some of the workforce for this project.
Very minimal capital on on that side.
I'll, let Eric speak to the other piece sure so Stephen good morning.
Things. So when we originally were thinking about 2020, we had intimated a spend rate of about $10 million and so I think when you think about that coming into 2021, we would've expected.
A similar type of number I think when you add them. This additional capital from the government service contract. That's how we get to our range of $12 million to $17 million. When we think about the maintenance capital, which is which is probably kind of next on your part B of your question, which is what does that look like.
I think if I were you I would stick with something in the neighborhood of $3 million to $4 million of that $12 million to $17 million total capital allocation as maintenance, which again is fairly consistent with what we've indicated in the past.
Very good thank you gentlemen.
Thank you.
The next question comes from Scott Schneeberger with Oppenheimer. Please go ahead.
Thanks, Good morning, guys.
I guess I was on slow up on the.
On the new contract on I'm curious, if you could just share a little bit more it seems like you eliminate U.
You didn't name and non profit but.
Curious if you could tell us a little bit about the nature of the work and the type of it sounds like workers will be will be placed.
There, but it's also mentioned displaced persons.
Can you comment is it men women and children.
Will there be co location with.
The energy industry workers or would these be just exclusive to this project and non.
Co mingling of zone.
B.
The the people and the communities. Thanks.
Sure Hey, Scott this is Brad.
Talk to you today I'm going to let Troy speak to some of this he has been really involved in a lot of this on the ground.
And I'll, let him speak to some of this and then I'll.
Ill, maybe jump in as well.
Scott Good morning, good to talk to you again.
Our solution is centered around our clients' needs right like any client.
And in this project and are clearly focused on delivering on housing.
Central food services and logistics right. So I think I think it's important to understand we're not going to discuss who will be.
However, like daily and our contract.
Under that agreement, we remain agnostic on who specifically in house there.
More importantly, we.
Our leasing our facilities to our clients with a leading non profit.
That has been delivering essential services for over five decades.
To various populations.
So we're proud of the work in a partnership that we're going to be delivering with this leading non profit again, who has tremendous experience.
In delivering this type of service.
In addition to that as you look at the 4000 beds that we're providing on the housing side. It's obviously composed of majority of customer employees and staff that will be delivering those essential services for the project. So to answer your question more specifically I think you had a question regarding the <unk>.
<unk> and where it how it is.
As a standalone facility I want to be clear on that so the leading nonprofit organization will deliver those essential services to the population in a standalone facility.
And we will utilize our existing housing network to take care of the majority of all of their customers staff and employees that will provide the services.
On that facility. So again very similar to the government contract that we have in place already.
And we're excited about that partnership, especially as we think it is going to be.
Daily the best in the category in the country.
Thanks to appreciate them.
Just curious.
Should we think about modeling the others segment in 2021, obviously.
Significant change 2021 versus 2020 on the main project there. So just just balance in that category. Thanks.
Sure Scott.
I think <unk>.
<unk> 2021 will be very similar and modeling in terms of 2020, which was we had said we were not projecting anything in the way of the TCP on project. If we if we got something out of it that was great, but we werent going to allocate anything towards it from a budget perspective, or certainly from an outlet perspective.
Given the changes that we've seen at the administration level with the termination of the presidential permit I think you have to make the same inclusion for 2020, one as well we don't expect anything material for 2021 on that project, which really comprises a substantial part of the other segment.
I appreciate that and lastly.
Brad Congratulations.
At the top of the comments about.
How are you all have managed well with me on.
Pandemic and non had any any.
Major issues.
Just curious if you could speak a little bit conceptual too.
That continues right.
Given given you know on isolated nature of the communities.
Uh huh.
Give us some feel for whats the contingency plans how you handle on the situation, obviously preventatives had been to plastics, but any.
Any thoughts on line it's a.
Where to begin on search engines index.
Scott you kind of broke up a little bit, but I think your question was kind of around Covid and what we're doing in.
If that's at all I'll touch on that because I get that right and is it okay.
Yes, yes.
Even before Covid, 19% really more than 90% of what we were doing at our facilities.
For if you will for Covid right now we were already doing them before we are in the hospitality business. So the cleaning the daily feeding of people.
People, we had to increase some of that.
So that was a fairly.
Easy leap for us.
We put some more things in place as well we've got some outside people. If you will doctors and folks telling us some other things to do and we put those in place as well, we're continuing on with them.
We've had very little positive COVID-19 cases throughout all of our lodges, where Thats North Dakota, Texas.
Et cetera.
So we're staying focused on it even though we see a big drop in this day to Texas in the in the rates of Covid.
We're going to stay vigilant and we will continue to do that.
And.
For the foreseeable future.
We're not relaxing that will continue on we've been very successful at it hasnt affected the business.
We will continue to push that daily.
<unk>.
I'll tell you our numbers internally continue to get better.
As we move forward and as we've increased our occupancy we've actually seen less.
The infection rate in our facilities than there ever has been so it's getting better.
As we move forward with all the vaccines that are coming on line.
Yes.
Yeah.
Okay.
As a reminder, if you have a question press Star then one to be joined into the queue.
The next question comes from Ashish <unk> with Deutsche Bank. Please go ahead.
Hi, Thanks for taking my question good results and congrats on the government win.
I was just wondering can you just talk about are there.
Things other potential contracts.
Pipeline that you're pursuing.
Clearly on the government side, but also outside of the government vertical.
Color on the pipeline.
Joining me picked up sure good morning.
Great question.
When you think about the government contract.
You're back on gone on seven years now.
We've become a trusted provider of essential services and a real solutions provider solving some some real challenges for the federal government through great partnerships.
Based on that proven track record, we've really put ourselves in a position.
To continue to do that in the future.
I'll be Frank.
The need is great.
And given given our experience in delivering solutions to partners and the government, we fully expect us to continue to provide those solutions.
In the near term not going to predict when that's going to happen, but I can tell you. The need is great and we are prepared to deliver so look.
We.
We feel very good about that on a go forward basis.
Yes, and maybe just a little bit on on our on our energy side look.
We're pleased with the recovery that we've seen so far in our energy business.
With that said, we're more excited for what the future holds.
We believe we're in a great place to capitalize on a on a stronger recovery.
As the economy recovers more people come back to work, we are definitely going to be a beneficiary of that and with our customer base our contracts we're already seeing that's.
So as more folks get back in the workplace, we think that translates into into more business, that's more profitable business as.
As we have we were already the most profitable in this industry. If you look at our numbers over the years, we were the most efficient operator, we're even more efficient today. So as the utilization continues to rise the profit will rise along with them. So I think we're setting in a very good spot.
As we get into the back of 2021 and into 2022.
That's very helpful color and maybe if I can ask a follow up question on the comment that you made.
Particularly on the energy vertical so on the Permian.
In addition to the economic recovery I think the rig count has been on the <unk>.
Number of rigs that are coming up are getting drilled has been an important leading indicator are important.
Driver for the.
For the utilization and then the other aspect has been just the capacity in the market. So last year do you see more capacity being pulled out on it.
Any color on on the capacity in the market and also any thoughts around or any conversations that youre having.
Good day energy companies, which give.
Give you more visibility on on on there.
The improvement around usage and utilization.
Okay.
Okay.
Sure.
We look at many indicators as the analysis on that.
Aside from just rigs, but I'll look at it and looking at the capital spending as we talked about earlier looking at rigs returning to work looking at the number total horsepower coming in the marketplace and you look at this there's so many factors from a data perspective that we're looking at so what I can tell you right now is when we look at the data some of those key kind.
Leading indicators certainly more favorable than they were last year kind of mid year through COVID-19 right. So we've seen a progressive steady March back up both in terms of rigs and Frac fleets returning to work.
Still what I would tell you is as we have said before.
The Permian Basin, where you want to be right. So year on year end, where on the right basin with the largest network with the right contracts with exclusivity and doing business with the right people.
Yeah.
And those folks that the customers that we have we've seen a nice progression of work and activity increase here to the fourth quarter end of the first so.
Customer conversations as Brad said earlier.
Which I tend to agree with us that they're going to stay within their capital budget at the same time, we're seeing steady activity in the Permian both at both based on the Delaware and the Midland Basin.
That's very helpful color.
That's very helpful color, Thanks, again and congrats on the go.
Makes sense. Thank you thank.
Thank you.
The next question comes from Doug Becker with Northland Capital markets. Please go ahead.
Thanks.
Wanted to dig in a little bit more about the opportunity for other government and nonprofit contracts are fully appreciate you don't want to talk about the timing, but can you help frame the opportunity in terms of just the number of opportunities you are pursuing or just the size of potential opportunities should they be similar to what we've seen in the past.
Yeah.
Yes look.
Again I appreciate the question and certainly as.
As we look at the need.
The need is significant right and I think we've proven now over time that we've been able to solve some really difficult challenges for the government and the partners that we've established over that time period.
And those are the leaders in solving those issues along with us.
It's clear it's been articulated to us that the need is great. We stand in a very good position with <unk>.
Our existing assets to be able to deliver solutions on the housing side and on the logistics side. So.
Again, not going to predict even timing I think it would be inappropriate even size. It at this point.
Thank you can you can read the headlines.
Across the across the newspapers and determine just how great that need is and then look at the size and scale on our competencies in and see where there's a real match.
Sure Fair enough.
Maybe another way of.
Addressing it is.
Do any of these opportunities require capex would you expect them to require any meaningful capex.
If you were able to secure them.
Well this is Brad Doug So first and foremost we're going to try to use our existing equipment. That's out there right and we have some.
So that would be the push a lot of this they want quickly and even though it's a long term use they want to be able to get on it and use it for whatever that use as quickly so having that set up and ready.
<unk> is a key in winning some of this work.
We would we build.
And it's been some capex absolutely it's part of our business.
But there would have to be the contract and the guarantees on those types of things would have to we'd have to match that as well what we would expect but we definitely wouldn't run away from it if we were going to spend some capex, but the first question would be to utilize our existing equipment.
Makes sense and then just a nuance question here with the contract announced yesterday you mentioned a minimum revenue commitment is there anything specifically that could drive meaningful upside that we should be keeping an eye out for.
So I think on this contract and Eric you can jump in here, but this is pretty set will there be some additions there could be.
To this contract some change orders different tanks.
I think the.
The upside is that where we're well positioned we look at this as a long term facility.
And we continue on with us for multiple years, that's the goal that's the upside.
But as far as the project itself.
I'm not sure it's going to get much bigger than it is today for the year yes.
Yes, I think that's right I mean, I think when you think about that.
When we price the contracts with the government, it's done on such a way, where it's effectively a guaranteed revenue type structure right. So.
So I wouldn't expect any additional revenue creep at least on that portion of the contract.
I think were becomes it can come on upon US then is to hopefully we can we can do what we need to do to continue to reduce our cost to capture margin that increases over time from from the underwriting. So that's kind of how I would think about that.
Okay. Thank you very much.
Okay.
Again, if you have a question press Star then one to be joined into the queue. The next question is a follow up from Stephen <unk> with Stifel. Please go ahead.
Thank you just just one one quick one.
On the oil and gas side.
Or are you guys seeing any change in in terms of number of people at the well side I mean, I think we've heard some of that but it seems like it's probably probably pretty small as it pertains to your business, but I was just curious if you had seen any of that.
So Stephen we're not seeing that one when Troy and his team.
Look at the crew counts whether thats.
Our frac or it seemed that crude or whatever we're just not seeing it.
Any changes.
At that level right now Detroit Youre welcome to opine on that but look on it.
How is that initiative for greater efficiency as you know from oilfield services and producers at the end of the day, we haven't seen any meaningful reductions or changes in terms of total manpower at the wellhead, which would translate then to occupancy for us so.
<unk>.
There's a lot of moving parts and pieces as you know Stephen in the supply chain from sand and sand hauling.
It's really frankly been unchanged.
Okay, great. Thank you both.
Net.
Okay.
This concludes our question and answer session I would now like to turn the conference back over to Brad Archer for any closing remarks.
Thanks for participating in our call today and thanks for your interest in target hospitality.
We look forward to speaking with you again on our next quarterly call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
Okay.
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