Q1 2021 HC2 Holdings Inc Earnings Call
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Greetings and welcome to the HC Two Holdings, Inc. First quarter 2021 earnings call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
Now I'll turn the conference over to your hopes Matt Chesler with Investor Relations you may begin.
Good morning, Thank you for being with US to review the HC two first quarter of 2021 are these results. We are joined today by Wayne Bar Junior C. E O of HC, two and Mike Sena HC choose Chief Financial Officer.
As usual, we have posted our earnings release and our slide presentation on our website at HC two dot com.
He will begin our call with prepared remarks to be followed by a Q&A session. This call is also being simulcast and will be archived on our website.
Right.
Now for some brief disclaimer.
During this call management may make certain statements and assumptions, which are not historical facts will be forward looking and are being made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Any such forward looking statements involve risks assumptions and uncertainties and are subject to certain assumptions and risk factors that could pause HC choose results actual results to differ materially from these forward looking statements.
The risk factors that could cause these differences are more fully discussed in the cautionary statement that is included in earnings release.
And the slide presentation and further detailed in our 10-Q and other filings with the SEC.
In addition, the forward looking statements included in this conference call are only made as of the date of this call and as stated in our SEC reports HC two disclaims any intent or obligation to update or revise these forward looking statements except as expressly.
Required by law.
Management will also refer to certain non-GAAP financial measures such as adjusted EBITDA.
We believe that these measures provide useful supplemental data that while not a substitute for GAAP measures allow for greater transparency in the review of our financial and operating performance.
Finally results for the insurance segment, which is pending for disposition are excluded for today's discussion and analysis of our performance for the comparable periods.
At this point, it's my pleasure to turn things over to Wayne bar.
Thanks, Matt.
Good morning, and thank you all for joining us today.
First quarter was a pivotal one and what we expect to be a transformational year for HC two.
We believe the HC twos in the best position it has ever been to realize the inherent value in our underlying businesses.
Our efforts to date have provided us with additional runway to execute our strategy. We believe strongly that each of our operating segments represents unique market opportunities to grow value in this evolving new economy.
This is all coming about at a time when each of our operating segments is at a pivotal point in its respective business lifecycle.
E. B M. G is on the verge of expanding its geographic footprint at an optimal time.
Penn sends are two technologies launched its first commercial FDA cleared device and spectrum, having substantially built out the nation's largest broadcast station group is focusing on generating revenue from this unique platform.
Starting with some areas of near term focus.
We're working to close two previously announced M&A transactions.
Each of which represents an important element of our strategy.
First as <unk> previously announced acquisition of bankers steel.
E B M zone, Schuff steel bankers, one of the leading fabrication and erection companies in the country.
Known for their large urban high rise projects in the New York Metropolitan area as well as work up and down the east coast banker will add significant scale and breadth to dbm's operational footprint.
And enabled D. B M to provide fabricated steel for the entire east coast construction market without detracting. It all from its legacy markets, primarily in the western half of the country.
Banker brings with it a strong backlog and pipeline, which we believe will result in even stronger more accelerated growth for GBM.
In addition, the acquisition of banker will increase cash flow available to the holding company, which is one of the key objectives of our balance sheet enhancement strategy.
Bankers about half the size of the D B M with similar profitability.
And it is expected to substantially increase <unk> revenue and adjusted EBITDA and we anticipate the acquisition to be accretive from day one.
In anticipation of closing the D. B M and banker teams are already working together to assess which of their operational systems and processes will be chosen as best of breed to be used by the combined organization as part of their commitment to operational excellence.
The teams will continue to explore additional operational synergies that may be realized as a result of the increased scale and geographic diversity represented by the combined company.
The acquisition is cleared Hart, Scott Rodino review and will largely be financed at the DPM level within the confines of our new eight 5% note indenture.
We look forward to being able to announce the closing of this transaction in the weeks ahead and welcoming bankers steel for the HC two family.
Our second near term goal is the sale of our insurance segment at the very end of March we reached an agreement to sell our continental insurance business to Continental General Holdings LLC, an affiliate of our board member Michael Kors Shinskie for a total consideration of $90 million.
As we previously announced Mike presented us with a non binding indication of interest in December 2020.
Subsequent to our announcement, we received and the disinterested members of our board evaluated additional proposals with the assistance and advice of outside counsel and an independent financial adviser.
The disinterested board members ultimately selected Continental General Holdings proposal and we entered into a stock purchase agreement on March 29 2021.
We now await regulator approval.
In addition to sharpening our strategic focus the sales expected to bolster our liquidity position, including through receiving gross cash proceeds of $65 million.
Extending the maturity by five years of approximately $16 million of our series, a and series H preferred stock and returning other HC two affiliate securities to HC two.
With the refinancing of our balance sheet, we completed in February and the closing of these two pending transactions in the weeks and months to come we have made and continue to make significant progress towards improving our capital structure and increasing our financial flexibility while positioning the company to execute on a more focused strategy.
In each of our three remaining operating segments.
Managing our businesses now becomes even more front and center and each of these three operating segments had important developments in the first quarter.
Let's walk through the details.
And infrastructure. In addition to the pending banker steel acquisition D. B M. C E O rescue Roche and his team are actively working to take advantage of the expected recovery in commercial industrial services and public sector projects.
The backlog has returned to growth and we're seeing an uptick in the number of larger project opportunities in the market.
We expect this return market momentum to continue.
Regarding the backlog in.
In the first quarter <unk> backlog increased by over $100 million to levels not seen since well before the pandemic.
In particular schuff steel was awarded a nine figure fabrication and erection contract to supply steel for a global technology company, establishing a manufacturing plant in the Western U S. As part of a mega site that will be constructed in multiple phases.
It's another tombstone project that continues a string of successful builds by D. B M protect companies on the West coast.
These tech company builds have included apples corporate headquarters in Cupertino, and an expansion of Facebooks headquarters in Menlo Park as well as projects for Tesla, Google and Intel.
It is also a fast track project, which means a good portion of the backlog for this project should burn off into revenue in 2021.
The market for commercial opportunities has been characterized lately by predominantly small to medium sized jobs up to $50 million to $60 million on the high end.
This tech company project as well as some additional large commercial projects in our pipeline increases our optimism that the market is now starting to open up for bigger projects.
We're feeling increasingly comfortable with the outlook in fabrication and erection. However, as we've said in the past our industrial services business has yet to see such increased activity and is still feeling the impacts of the pandemic.
We are also optimistic that we will actively participate in public sector capital spending that may be fuelled by substantial infrastructure, Bill, which will provide incremental tailwind to our performance.
The addition of bankers steel to the D. B M. Arsenal is expected to further bolster dbm's ability to participate in infrastructure capital projects.
As well as growth in the commercial and industrial construction markets.
In life Sciences, we are excited about the commercial launch in the U S of our choose first product the FDA cleared glacial Rx device.
As we have discussed pants and portfolio company <unk> technologies is a dermatological technology company.
Led by a world class team and guided by David present, and shrink Comaker RQ has been able to bring to market a new device using new technology and launching commercially during the pandemic, which is a monumental accomplishment.
I'd like to acknowledge David insuring, and especially our two CEO, Tim hope and his entire team for their hard work and deserved credit.
The preorder process for glacial Rx was a success and the early demand from aesthetic providers in the first months of commercialization is in line with our expectations.
With deliveries of the new devices underway are two held its national sales team kickoff.
Hired a seasoned manufacturing executive out it's L. Pic and is moving towards commercial quantity manufacturing.
Additionally, glacial Rx one of packaging design award from Gd USA magazine for its in treatment kit and topical at the 58th annual American package design Awards in April.
<unk> is designed with selected for thousands of entries produced by the best design firms and departments representing leaders in every major consumer and beat the B category and further demonstrates the strength of this team and how well positioned they are to market the product effectively coming out of the pandemic.
Except for our twos, the commercial launch of our second product <unk> Spa, which is scheduled for this summer in China.
Meanwhile, our two continues to build out its portfolio of products, which also includes an autonomous cooling spray treatment that delivers whole body skin lightening delivered robotically using AI technology.
All told with these developments are two is now a revenue generating assets within the Penn Sands portfolio.
Meanwhile, met a beacon, which is revolutionizing kidney health with the first of its kind novel technology that allows for real time monitoring of kidney function is on track to perform a U S. Pivotal study in the second half of 2021.
At the conclusion of the pivotal study that will pursue the final process to a potential FDA approval.
As a reminder, <unk> was granted a breakthrough device designation by the FDA, which indicates that it may experience an accelerated process with the FDA, but we can't say precisely what that will translate into.
Additionally, meta beacons platform technology may have applications in other large clinical markets such as inflammatory bowel disease.
The company is currently conducting the clinical study in patients with Crohn's disease, and we look forward to updating you as more developments for meta beacon warrant.
And spectrum, we own and operate the nation's largest network of L. P. TV and class eight television stations, which represents a unique national distribution platform to reach households that received their television signals over the air.
We're capitalizing on these over the air opportunities, which we can make available to over 60% of the nation's population by selling access to this audience to third party providers of digital content through leasing digital channels on our spectrum or entering into revenue sharing agreements for advertising sales.
As an example, bein sports is a relationship that began two years ago and we are now expanding market coverage for bein sports extra to more than 40 stations.
And on May 1st we launched a new Spanish version of Bein sports extra on more than 35 channels.
We recently completed a carriage deal with <unk> as a launch partner for twist, there new multi cast network for women.
Twist is currently carried on over 30, HC two broadcasting stations and represents yet. Another example of a major broadcast network utilizing HC choose large otas platform to reach audiences in markets in which they do not have coverage.
There are now more than 80 networks, taking advantage of the HC two distribution platform.
We are also experiencing an increase in the number of discussions with additional networks and content providers interested in our platform for.
Further demonstrating the attractiveness of the broadcast footprint we provide.
From a plant standpoint, we've taken some additional steps to bolster our robust national platform.
We recently relocated the media gateway from little rock to Miami.
And now have 207 of our 228 stations managed out of a tier three certified data center.
The media Gateway enables us to control and monitor all of our stations for in one central location.
We are able to be responsive to content providers monitor broadcast signal quality and identifying correct outages with carrier class precision, making the station group a compelling distribution platform for a variety of content providers.
In addition to our efforts to optimize our protest quality. We have identified 17, new stations that we plan to build during 2021.
We are in the beginning stages of these station builds.
Pending and potential station sales and after the build out of the 17 construction permits we will have approximately 240 stations in our network.
The average build out cost based on our historical experience is approximately $180000 per station.
We were able to monetize a million dollars worth of our construction permanent portfolio through the sale of 61 construction permits that are scheduled to expire in July.
Working with the various buyers of these permits we have filed construction deadline extension applications, thereby giving our buyers additional time to construct the permits that they're purchasing from us.
We will be using the proceeds from the construction permit sales to help the freight construction costs associated with the 17 new stations, we plan to build.
As you can see in our first quarter numbers perspective segment was adjusted EBITDA positive for the second quarter in a row demonstrating that the business can be profitable in its current form.
There was strong operating leverage in the model given the fixed cost nature of the operating structure and we are pleased to see that our increased efforts to utilize capacity represented by the station group are producing positive results.
We are also starting to have discussions with colleagues in and outside of the industry. As we continue to evaluate opportunities that take advantage of next generation technology, such as a T. A C. Three dot O that offers expanded capability and uses of our spectrum, which we believe should translate into additional revenue opportunities.
So to recap we believe the new HC two holdings is increasingly coming into focus with the successful refinancing of our balance sheet in February we put HC chew on a stronger financial footing, which allows us to better support our assets and drive their organic and inorganic ambitions during.
During the first quarter, we exited our clean energy business and reached an agreement to sell our insurance segment.
What remains our best in class assets and infrastructure life Sciences and spectrum.
These are exactly the assets, we want to own in the new economy.
All three of our businesses have recently reached important milestones in their growth and we believe each is well positioned to deliver meaningful growth and value creation in the years ahead.
With that I'll turn it over to Mike for a review of our financials and capital structure.
First let me review our financial performance and then I'll walk you through key changes to our capital structure to help bridge the quarter from the key transactions that have taken place so far in early 2020 one.
Please note that our insurance segment's operating results have been reclassified to discontinued operations and are therefore excluded from our discussion of the company's results from continuing operations.
Consolidated total revenue for the first quarter of 2021 was $171 8 million a decrease of seven 9% compared to $186 6 million in the prior year period the day.
Increase was driven by our infrastructure segment, which had lower revenues and structural steel fabrication and erection due to the timing of project work under execution and changes in backlog mix as well as a decrease in power and industrial maintenance and repair work performed.
Net income attributable to common and participating preferred stockholders for the first quarter of 2021 was $12 2 million or <unk> 15 per share compared to a net loss of $83 5 million or a dollar weighted to per share in the prior year period.
Total adjusted EBITDA, which excludes discontinued operations was $1 million in the first quarter 2021.
From an adjusted EBITDA loss of $2 9 million in the prior year period, we saw improvement in infrastructure as well as spectrum, partially offset by life Sciences.
Now on to some color for each of our three segments and infrastructure revenue decreased eight 6% to $161 3 million from $176 5 million in the prior year quarter.
As discussed earlier this decline was due to lower revenues from our structural steel fabrication and erection business.
Increase in power and industrial maintenance and repair work performed.
Infrastructure adjusted EBITDA for the first quarter of 2021 increase from 9 million in low prior year periods for $11 3 million.
The EBITDA improvements were achieved through optimization of execution strategies more favorable timing and mix of fabrication and erection projects work and contribution from DBM book on Pbms construction modeling detailing and digital engineering company.
The infrastructure segment continued to experience additional costs of $3 9 million during the quarter related to certain measures to comply with COVID-19 protocols and consistent with prior periods, we have excluded them from our adjusted EBITDA we.
We expect these costs to continue to trend down over the first half for 2021, as we burn off the remaining pre pandemic backlog.
As of March 31, 2021.
<unk> backlog was $523 million up from $395 million at the end of the fourth quarter 2020 <unk>.
Adjusted backlog, which takes into consideration awarded but not yet signed contracts was $768 million up from $608 million at the end of last year.
Backlog is still has a larger mix of smaller to medium sized projects than we have had historically.
We continue to see larger project opportunities starting to materialize in the market.
This prospect combined with a robust backlog of the business are providing greater visibility as we look into the future.
At life Sciences, the increase in adjusted EBITDA losses was primarily driven by the scaling of operations at our two technologies ahead of the commercial launch of the glacial Rx and spa products as well as continued development of its product platform.
April art to commence the official launch of wasteful Rx, It's FDA approved device utilizing patented cryo aesthetic technology.
And we expect to see revenue generation for March this year.
At spectrum revenue increased 4% to $10 5 million driven by an increase in the number of Otas stations in operation and digital content networks on the distribution platform.
Partially offset by lower revenues from the Azteca network, which experienced a reduction in local market advertising spending driven by on repeated political campaign expenditures.
In U S census, advertising campaigns in the comparable period.
Spectrum delivered adjusted EBITDA of <unk> 8 million in the first quarter compared to an adjusted EBITDA loss of 1 million in the prior year quarter.
Results reflect continued efforts to improve operations and cost reductions, which have led to the second quarter of positive adjusted EBITDA.
Recurring corporate expenses were $4 million for the first quarter of 2021 down from the first quarter of 2020. The reduction was the result of decreased bonus expense and savings across our other overhead categories from prior year cost saving initiatives.
At the end of the first quarter. The company had $54 2 million of cash and cash equivalents compared to $43 8 million at the end of December 31 2020.
On a standalone basis as of March 31, 2021, the corporate segment had cash and cash equivalents of $36 4 million compared to $27 5 million at the end of 2020.
As of March 31, 2021, HC two at total principal outstanding indebtedness of $549 4 million.
Down $27 2 million for where it stood at the end of 2020, driven primarily by the February refinancing of our 11, 5% senior secured notes.
During the quarter, we sold our clean energy segment and refinance the holding company debt.
The sale of beyond six in January generated $70 million in net proceeds to HC to.
Reflecting our 61% economic share on a fully dilutive basis of $169 million gross transaction price less outstanding debt customary closing cost adjustments and transaction fees.
In February we completed a $330 million offering of eight 5% senior secured notes due 2026, which was used to retire our existing 11, 5% senior secured notes due 2021 and to repay the $15 million outstanding under our revolving credit agreement.
We also entered into exchange agreements with certain holders of 51 point. It by end of the outstanding 75% convertible senior notes extending the maturity date to August 2026 three.
$3 2 million of the old converts for named due in 2022.
Separately, we remember we amended our revolving credit facility extending the maturity from September 2021 to February 2020 for increasing the maximum credit commitment from 15 million to $20 million and lowering our current borrowing rate under the agreement by 100 basis points, we have no curve.
Borrowings on the line.
In conclusion, the actions, we have taken including the rights offering last fall the asset sales over the past year and the refinancing in February have all contributed to sharpening our strategic focus and enhancing our capital structure.
The next near term piece is the sale of the insurance segment, which when completed is expected to put the company in an even stronger position.
Combined we are confident that the new HC, two setup to deliver attractive growth and build long term stakeholder value.
We remain focused in the intermediate term on the three business segments to support their growth and unlock value.
With that operator, we'd now like to open up the call for questions.
And at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
Price starting to if you would like to remove your question for me queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Yeah.
And our first question is from Kevin O'brien with Imperial capital.
Please proceed with your question.
Good morning, gentlemen.
Wondering if we could focus a little bit more about the pending acquisition of <unk>.
<unk> steel specifically.
Out of that $145 million purchase price I'm sure you're currently looking at a couple of different financing.
Options, but given the scenarios is there a range of cash that might be needed to be contributed to get this over the goal line from the HC two level and if thats. The case is there a range of cash needs that that you might expect to utilize.
Hey, Kevin it's Mike Thanks for thanks for the question.
You know what I would say is that we're still working through the financing.
It's largely going to be financed down at D. B M and we're still working through the final throws of that as soon as we do have.
More clarity on that as we.
As we as we.
Go through the final negotiations there with potential lenders, we will certainly disclose that.
Understood. Thanks.
I guess post close assuming a successful close can you maybe talk about a little bit more about banker steel and how its east coast based sort of what the growth prospects, you are expecting or and maybe specifically addressing sort of the backlog perspective that they currently have is it a similar profile to what you have where backlog.
<unk> has kind of shifted to a small and medium.
Size business or are there larger product projects and they're currently that can sort of offset the mix and how does the mix change going forward.
Yeah sure Kevin This is Wayne good to talk to you again.
So.
It's a very similar business to schuff steel, except for kind of the geographic diversity that they bring to the table. They are focused very heavily in the metropolitan New York area. So as a consequence, our you know some of their projects are a high rises and large residential as well as office.
Spaces that necessarily are just very very big projects and so from not only the existing projects, they're working on but the backlog you know they tend to have larger projects in the backlog as well as the current things that they're working on so you know I don't see that changing.
Much they.
They are experiencing a similar uptick as I understand it in the number of inquiries and projects that are that are out there and you know I would assume that the the nature of the projects I just going to kind of stay very similar.
Similar to what they've been doing.
Already there.
A couple of very large mark key.
Projects that they just finished up including one over at Hudson yards as well as one Vanderbilt and those are the types of projects that are you know I would expect them to continue to bid on and win.
Great. Thank you I guess one last question for me is switching to spectrum.
What I understand I understood. The dynamic correctly. The plan is for 17, new stations and if we use sort of the historical cost per cent per station at about 180000 per that's about a $3 million price tag, but offsetting some of that is actually the sale of.
Some of the licenses you've had does that is that correct for that might offset some of that cost for the tune of about $1 million is that what I understood from the comments yeah. Yes. The offset is is definitely correct. We have a very large portfolio of construction permits.
That enable us to petition the FCC use those construction permits and convert those into stations.
I mean, we got some.
Some press.
The sales of those construction permits they werent really built out stations, we were selling the construction permits we raised about $1 million to do that by doing that and we're going to be using that million dollars to defray the expensive building out we're converting 17 construction permits to ask.
On air stations.
Great I understand and maybe just one last quick one I think your nearest term maturity is actually in spectrum correct for about $60 million of term loans leftover.
Any thoughts on how you might address.
That maturity there.
I guess, specifically with you you obviously found earlier in the year for non core.
Assets that you were likely to sell are you pretty satisfied that what you have.
Going forward or is there some additional asset sales that could be.
You utilize to chip away at that $60 million of debt.
Yes, so the near term maturity of the broadcasting that is obviously a high priority.
We are in the initial stages of putting together a presentation to go out and obtain refinancing of that really.
Really like the momentum that spectrum is showing.
As we've indicated the last couple of quarters, we've got the the station group built and we've been focusing on generating revenue and I think we're going to be able to.
Going to be able to enter the market for.
For refinancing from from a very good position.
We do have we do have approximately $4 million of additional noncore asset sales that are in the pipeline.
And we Havent, we havent made any further decisions on selling additional non core assets at spectrum, but.
To the extent that we do and we have something to come back to you all we certainly will flow.
Alright, Thanks, that's all I had they'll jump back in the queue. Thanks, great. Thank you.
And our next question is from Brian Charles with RW Crespi. Please.
Please proceed with your question.
Okay.
Hi, Thanks, just one a couple of follow up questions.
Some things you touched on before regarding the acquisition of banker steel and timing.
In terms of potential cash needs to complete that acquisition, what's the timing relative to the insurance sale are you expecting to close it before the insurance segment is sold or afterward, and maybe use some of the proceeds from that sale.
So.
The banker deal.
Has gotten through Hart, Scott Rodino review and I think right now we're working through just the remaining.
Requirements are on both sides, including the financing contingency.
We haven't really thrown out an estimated closing date, but.
I think I'm thinking about it in terms of weeks the.
For the insurance transaction.
Has progressed very nicely.
With the regulator right now and we just have not.
Felt comfortable making any kind of concrete closing date estimate for that just given the fact that the regulated regulator has to go through its process.
Okay, that's fair enough so its talent.
If I can venture.
Thanks for it so that you don't need the proceeds from the insurance segment two to close this transaction at least that's not what you're counting on.
It sounds like you've got things circled around enough too.
Particularly say the banker steel by itself.
With our current thinking about how the financing is going to work at DBM.
As well as just kind of our focus on the liquidity position at the holding company I think I think we're fairly comfortable right now and that's the way the timing could lineup.
The banker was to go before insurance I think we'd be in a position to handle it from a liquidity perspective.
Okay. Good enough and then one other general question I've had a few questions for me about this volume of life Sciences segment, I know, it's still generating negative EBITDA, but share if youre comfortable you don't need to put anymore.
Investment cash into those businesses and over time, they will certainly generating value.
Is there a timing of what you might think about monetizing terms I don't know if you've discussed this before but is this kind of a couple of years down the road or who is a long term holdings.
So you know what.
I'll talk a little bit about our two just because.
They did initiate the commercial launch and.
We'll be generally generating revenue this year.
It is a it's a startup company the team Tim Holt has done a great job. Its an experienced management team that has brought a device and technology to the market before and typically are.
We point people to this management.
Prior experience with <unk> and if you take a look at kind of the history of Zelle peak with it being sold and then going with it going public and then being sold.
We're thinking about our.
Liquidity event for our two and very much the same way.
Okay. Good enough. Thanks.
Sure.
Let's say actually that's all I've got for now thank you.
Okay. Thank you.
And just as a reminder, if you have any questions you May press star one on your telephone keypad. Our next question is from Richard for centuries. Please proceed with your question.
Well my question has already been answered.
And I want to thank you guys for being very open and transparent.
With this focus direction.
I look forward to.
Hearing better quarters in the future.
And keep at it.
Great really appreciate it Richard Thank you for your support.
And we have reached the end of the question and answer session I'll now turn the call over to Wayne bar for closing remarks.
Thank you so much. So we really appreciate everybody are waking up this Friday morning to join US for this quarterly earnings call. We look forward to coming back to you all at the appropriate time, when we're able to close these two exciting M&A opportunities and available to answer any further.
Questions, if you'd need to get and try to get in touch with the math.
Through our IR. Please go ahead and do so hope everybody has a great weekend.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
Okay.
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Okay.
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