Q3 2021 Commercial Metals Co Earnings Call
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Hello, and welcome everyone to the third quarter of physical 2021 earnings call for commercial metals company today's call is being recorded.
After the company's remarks, we will have a question and answer session and we'll have on few instructions at that time I would like to remind all participants that during the course of this call. The company will make statements that provide information other than historical information and will include expectations regarding economic conditions. The effects of level of legislation U S steel import levels U S. Construction.
And activity demand for finished steel products, the company's future operations, the company's future results of operations financial measures and capital spending these and other similar statements are considered forward looking and may involve certain assumptions and the speculation and are subject to risks and uncertainties that could cause actual results to differ materially from these expectations.
These statements reflect the company's beliefs based on current conditions, but are subject to risks and uncertainties, including those that are described and the risk factors section of the company's latest annual report on form 10-K, and subsequent quarterly reports on form 10-Q.
These statements are based on management's current expectations and beliefs CMC offers no assurance that these expectations or beliefs will prove to be correct and actual results may vary materially.
All of these all statements are made only as of the state except as required by law of CMC does not assume any obligation to update amend or clarify these statements and connection with future events changes and assumptions the occurrence of the anticipated or unanticipated events, new information information or circumstances or otherwise some numbers presented will.
Non-GAAP financial measures and reconciliations to the steps such numbers can be found and the company's earnings release and on the company's website and.
And I stated otherwise all references made to year per quarter, and our references to the company's physical year or fiscal quarter and now for opening remarks and introductions I would now like to turn the call average chairman of the board President and Chief Executive Officer of commercial Metals Company Ms. Barbara Smith.
Good morning, everyone and thank you for joining <unk> third quarter earnings Conference call.
As we reported and the press release issued this morning, it was an outstanding quarter with.
With record consolidated and segment results.
And I would like to thank Cmc's of 11500 employees for their continued hard work and focused efforts on behalf of our customers and stakeholders I'd also like to thank our customers for their continued trust and partnership with CMC. During these unusual and rapidly changing market conditions.
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I will begin the call with brief remarks regarding our third quarter performance before offering some perspective on the current market environment and we'll all.
Also provide and update on Cmc's key strategic growth initiatives. Paul Lawrence will then cover our financial results in more detail and I will conclude the prepared remarks with the discussion of our fourth quarter fiscal 'twenty 'twenty, 1 and outlook after which we will open the call to questions.
Before starting my prepared remarks, I would like to thank the I would like to direct listeners to the supplemental slides that accompany this call. The presentation can be found on the CMC <unk> Investor Relations website.
I'm pleased to report the Cmc's third quarter fiscal 2021 financial results were the best and our company's 106 year history.
Earnings from continuing operations were $130.4 million or of $1.7 per diluted share on net sales of $1.8 billion.
Excluding the impact of the gain on the sale of the small rail reclamation business adjusted earnings from continuing operations were $127.1 million or of $1.4 per diluted share.
DMC reported core EBITDA of $230.5 million generating an annualized return on invested capital of 18%.
This level of performance underscores C&c's enhanced earnings capability, following our multi year strategic repositioning.
Third quarter volumes were exceptionally strong and North America, and Europe, and the ability of our commercial operational logistics and support teams to respond to the rise and customer demand generated our strong financial performance of.
6 of our 10 mills and the U S and pole and set monthly shipment or production records during the quarter, enabling us to capitalize on market conditions.
During the quarter. We also continued to execute on our previously discussed inflight strategic initiatives and growth projects.
We are expanding our capability to serve the merchant bar market.
Customers appreciate Cmc's expanded product range and service capabilities, and we're seeing our recent investments and handling and storage capacity payoffs and increased volumes.
We expect more growth and the future, especially once our state of the art, Arizona 2 micro mills starts up in early 2020.3.
We continue to execute on our network optimization efforts and with recent actions firmly entrenched in our financial performance CMT is roughly halfway to our longer term goal of $50 million and annual cost efficiencies.
You can see the benefit of these efforts and our controllable cost performance on a per ton basis.
Despite well publicized inflationary pressures across the global economy, we were able to reduce this metric modestly on a year over year basis.
In April.
We received the required air permit for Arizona to CMC as planned and state of the art Micro mill at our Mesa, Arizona site.
This was an important milestone and enabling us to begin construction.
And we continue to anticipate and early 2023 startup.
As a reminder, this plant will be the first micro mill and the world capable of producing merchant bar as well as rebar.
Also the the first in North America with the capability to connect directly to an onsite renewable energy source.
These capabilities combined with the micro mills inherent low cost and low carbon footprint will define a new level of operational and environmental excellence and long products steelmaking.
In May our team and Europe began hot commissioning their plants third rolling on.
The startup process is going very well and we expect to begin commercial production.
And the fourth quarter.
This project was delivered on time and under budget of <unk>.
Estimate to our Polish team's ability to execute.
We will be ramping operations within a very strong market environment, which will help shorten the time to achieve our targeted annual run rate incremental EBITDA of $20 million.
Yeah.
I'd now like to provide and update on market conditions and the encouraging trends we discussed during our second quarter call continued and strengthened and the third quarter.
And I will detail project owners have grown more confident as the economy has recovered and states have reopened.
And they are now more willing to contract new work.
This view is supported by the strong level of New awards booked in the quarter.
The strength of new project opportunities is occurring and both the private and public sectors.
On the private side CMC of seeing work related to the hardening of supply chains as well as the trend toward investments and e-commerce infrastructure.
The ongoing global semiconductor shortage has spurred several very large investments within the cnc's core geographical markets.
At the same time public demand is solid and we are experiencing good activity for highways bridges and other infrastructure related applications.
Activity and residential markets also continues to be strong.
CMC is growing our participation in this area and our mills have capitalized on the increased demand.
The benefit to CMC of new housing investment and community formation is twofold. The first phase is underway and we are currently benefiting from direct demand from the residential sector.
We believe the next phase will include local infrastructure and commercial centers that support new communities.
Historically, the lag between new residential activity and the inflow of supporting nonresidential investment has been 9% to 24 months.
And finally domestic down from demand for merchant product continues to benefit from the ongoing recovery of industrial production as.
As well as the lean service center supply chain.
Looking further ahead at our markets we.
We see several positive long term development.
Over the last year, the population migration to southern States has accelerated with metro areas in our core sunbelt geographies being the primary beneficiaries.
The continuation of this trend could provide a long term tailwind to growth of construction and our most important states compared to the broader U S market.
Serious discussions regarding a potential long term infrastructure package are also encouraging.
Several proposals are under consideration any of which would provide a meaningful increase to annual federal infrastructure funding relative to current levels.
On our analysis, we believe the annual percentage increase to funding ranges from 30% to 60% across the various proposals.
Turning to Europe demand for CMC as long products remained robust during the third quarter.
Like the U S construction activity and Poland is healthy and supporting strong volumes of rebar the.
The residential market is an important driver of demand and the Polish market.
The new housing permits and units under construction are growing by double digits on a year over year basis.
Industrial activity continues to recover and central Europe, driving consumption of Cmc's merchant bar and wire rod products.
Germany's manufacturing PMI and May was amongst the strongest globally, while Poland is reading reached a new all time high.
Before I turn it over to Paul I'd like to briefly touch on the efforts that CMC is undertaking to expand our sustainability disclosures and reporting.
We will soon publish our latest corporate sustainability report feature.
Featuring greatly enhanced disclosures around 3 key pillars of environmental social and governance.
You will see that our CMC has improved as the operational and financial performance. We have also improved our already industry, leading environmental performance.
That's what we mean, when we say that good business and good environmental stewardship go hand in hand.
We will also be setting ambitious environmental goals in line with the science based targets and I hope that once you read our upcoming report you'll have a better understanding of the value we place and steps we've taken to serve our people customers communities and environment.
Finally as stated in our press release, the board of Directors declared a quarterly cash dividend of 12 cents per share of CMC common stock for stockholders of record on June 30th 2021.
The dividend will be paid on July 14th 2021, and this represents cmc's 227th consecutive quarterly dividend.
And without the as an overview I will now turn the discussion over to Paul Lawrence Vice President and Chief Financial Officer to provide some more comments on the results for the quarter.
Thank you Barbara and good morning to everyone on the call today.
I am pleased to review with you of the outstanding third quarter results as Barbara noted, we reported record earnings from continuing operations of $130.4 million or of $1.7 per diluted share roughly double the prior year levels of $64.2 million and <unk>.
53 per diluted share.
The results. This quarter include a net after tax benefit of $3.3 million related to the sale of a small rail reclamation business. Excluding the impact of this adjusted earnings from continuing operations were $127.1 million or $1.4 port diluted share.
Core EBITDA from continuing operations was 235 million from the third quarter of 2021 up 49% from the year ago period, and 35% on a sequential basis.
Slide 7 of the supplemental presentation illustrates the strength of Cmc's quarterly results, both our North America, and Europe segments contributed significantly to year over year earnings growth, while core EBITDA per ton of finished steel reached a record level of $144 per ton.
The third quarter marked the ninth consecutive quarter, and which CMC generated an annualized return on invested capital at or above, 10%, which is well above our cost of capital.
This translates into meaningful value created for our shareholders.
Now I will review the results of our third quarter of fiscal 2021.
The North America segment recorded adjusted EBITDA of $207.3 million for the quarter and all time high compared to adjusted EBITDA of $159.4 million and the same period last year.
The largest drivers of this 30% improvement were.
The significant increase in margins on steel products.
Strong volume growth.
And expanded margins on sales of raw materials.
And the continued management of controllable costs also allowed us to fully capitalize on the robust market conditions during the quarter.
These factors more than offset the impact of lower margin over scrap on downstream products.
Selling prices for steel products from our mills increased by $170 per ton on a year over year basis, and $99 per ton and sequentially.
Since the bottom bottoming in August 2020, our average monthly selling price has rebounded roughly $220 per ton.
Margin over scrap on steel products increased $40 per ton from a year ago and $74 per ton and sequentially.
The average selling price of downstream products of $963 per ton shipped was essentially flat compared to a prior year third quarter.
Selling price coupled with higher underlying scrap costs resulted in lower margins on downstream products.
And a period of elevated ferrous and nonferrous price of scrap pricing, we realized higher margins on sales of raw materials, which as a result of our vertically integrated network of operations helps provide earnings stability to our consolidated results.
Shipments of finished product and the third quarter increased 9% from a year ago, both rebar and merchant bar volumes out of our mills reached record levels, increasing 8% and 28% respectively compared to the third quarter of fiscal 2020.
And as Barbara noted, we experienced good activity and both public and private construction.
CMC also continued growing its president presence and residential construction, which added meaningfully to the year over year increase and rebar shipments.
Downstream product shipments were impacted by a reduced backlog and weather challenges in certain geographies, resulting in a 4% reduction and year over year volume decline.
The recent trend and North American margins volumes and cost performance can be seen on slide 8.
Our continued focus on operational performance allowed us to achieve record North America and financial results. Our team was able to generate a modest reduction and controllable costs per ton of finished steel shipped compared to a year ago, despite inflationary pressures and freight and certain other costs.
A quick glance at recent producer price index for manufacturing ASM reports should underscore the strength of this accomplishment.
The most significant benefit came from volume driven efficiencies at our steel mills and recycling yards as well as the impact of closing the former steel, California Rolling operations.
Turning to slide 9 our Europe segment generated adjusted EBITDA of $50 million and for the third quarter of 2021 compared to adjusted EBITDA of $14.3 million and the same period of the prior year.
The improvement was driven by expanded margins over scrap and strong volumes across the all ranges of products.
Margins over scrap increased $90 per ton on a year over year basis and were up $84 per ton from the prior quarter.
Tight market conditions provided the backdrop to achieve the segment's higher highest.
Average selling price of 9 years, reaching $664 per ton during the third quarter.
This level of represented an increase of $227 per ton compared to a year ago and of $132 per ton sequentially.
Europe volumes increased 8% compared to the prior year and reached their highest third quarter total and a decade.
The strength was driven primarily from the market for rebar volumes of merchant and other products also grew on a year over year basis supported by good demand from industrial customers and central Europe as well as some opportunistic billet sales.
And as Barbara mentioned, the demand environment during the quarter was robust with indications that conditions should remain favorable and the near term.
Turning to our balance sheet and liquidity as of May 31, 2021, cash and cash equivalents totaled $443 million. In addition, we had approximately $639 million of availability under our credit and accounts receivable programs.
In March we Upsized, our revolving credit facility to 400 million from $350 million and extended the maturity until 2026.
During the quarter, we generated $94 million of cash from operating activities despite of $79 million increase and working capital.
The rise and working capital was driven by the significant increase in both the scrap input costs and average selling prices.
We expect working capital balances to increase modestly heading into the end of the fiscal year.
Our leverage metrics remain attractive and we have improved significantly over the last 2 fiscal years as can be seen on slide 12, our net debt to EBITDA ratio now sits at 1.0 times, while our net debt to capitalization is just 20%.
We believe our robust balance sheet and overall financial strength provides us the flexibility to fund our strategic growth projects navigate economic uncertainties and pursue the opportunistic M&A.
<unk> effective tax rate for the quarter was 22, 6%, which was both below our full year effective rate forecast to be around 25%.
Lastly, I would like to provide that our current outlook for capital expenditures in fiscal 2021 remains between 200, and 225 million of which roughly of $100 million will be used for the new micro mill.
For comparison purposes, we have previously stated that our typical capital spend average is around $150 million annually.
This.
<unk> My remarks, and I'll turn it back to Barbara for the outlook.
Thank you Paul.
We expect a strong finish to fiscal 2021 the <unk>.
Summer construction season is underway and demand is robust across each of our major product lines in both North America and Europe.
We anticipate margins over scrap on the steel products and those segments to be consistent or up modestly compared to the third quarter.
Our internal indicators, such as bidding activity and backlog levels support continued strength.
The recent recovery of leading national construction indicators, such as the architectural billing index Dodge momentum Index, and Portland Cement Association forecast each mirror our view the.
These external measures also point to good conditions into calendar year 2022.
Once again I'd like to thank all of the CMC employees for delivering an outstanding quarter of performance.
Thank you and at this time, we will now open the call to questions.
And we will now begin the question and answer session to ask a question and you May Press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2.
We kindly ask that you please limit yourself to 1 question and 1 follow up and at the.
And we will pause momentarily to assemble the roster.
And the first question will come from South East Cross enough and with Deutsche Bank. Please go ahead.
Yeah, Hi, good morning, Thanks for taking my questions. My first question is on scrap.
The reported scrap costs are for the North American segment.
And I'll be able to be a bit lower than what we had modeled based on what we see on slides I'll show you how are you.
And so are you seeing any more than normal and bag.
But at the cost and when do you think this will normalize.
Good morning of fatigue I. Appreciate you are asking the question.
With respect to our scrap inventory, we turned on our scrap very quickly and so theres not a lot of of lag and.
And in our and our scrap expenses and comparison to the indexes I think the key driver of the difference between what we consume and many of the indexes is really our vertical of integrated network of of operations and the benefit that we have from 2 areas 1 is of our own.
Crap captive assets and the second is the the grades of obsolete and scrap that we used to to produce rebar and comparison to more of the volatility of that has been seen on the prime grades of scrap.
Oh, Okay. Thanks for the color of my My second question is on capital allocation can you talk about your priorities, particularly the potential for additional investments and Europe.
As well as your updated view on buybacks, given and what we are seeing with some of your peers.
Yeah, and maybe I'll I'll address this and if Paul wants to add any additional color.
I think on our view on capital allocation is remains consistent we have as you know and as we've indicated a number of very attractively returning investment projects and.
And you mentioned the Daniele the 3 line, which is coming on line, we have the investment and AZ to the well.
Prioritize some of our capital allocation, but the strong balance sheet that Paul outlined gives us enormous flexibility.
For organic growth and organic growth we we.
We continue to evaluate the dividend and share repurchase.
At this time on the share repurchase side, while it remains an option and.
And our.
Our organic and inorganic investments are yielding a very attractive return.
But again, we remain open to to all forms of capital allocation.
Okay. Thank you congrats on a good quarter.
Thank you so much.
And our next question will come from Seth Rosenfeld with Exane. Please go ahead.
Good afternoon.
Congrats on the very good quarter and also congrats on lots of weeks sustainability report, we look forward to seeing your new science based targets and so it's a very good development.
If I could ask 2 questions. Please just with regards to your downstream operations you started out please.
On downstream margins you'd noted some compression and your fiscal third quarter, what should we expect for that as we look forward into Q4, I think you'd noted that for the order intake you are achieving good price appreciation.
How should we expect that to compare versus scrap input costs into Q4.
And then separate question.
So for downturn can you just touch on the backlogs there I.
And I think you commented the stable sequentially.
In Q3, how would that compare to pre COVID-19 levels. Please.
Yeah, Let me make a remark and then Paul can be a bit more specific.
With regard to downstream margins, we manage the business through the entire value chain and.
And as you know Seth we went through the segment changed as a result of that and so I think overall you will see our margins in our North America and our European segment remain quite quite stable and on a go forward basis, and that's the strength of that.
Integrated model and it is designed to absorb changes in raw material pricing.
And so I think you can see some.
Nice stability through the value chain.
In terms of the backlog while it while it is stable I think that they're just lots of positive signs relative to a year ago. You know bidding activity is good and all of the indicators that we highlighted in our and our remarks are.
Continuing to improve and and gain momentum the of the reopening and the and the U S has had.
It has been stronger candidly and the second half of our fiscal year than we might have anticipated a year ago.
The reopening in Europe as you experienced firsthand Seth is.
Lagged the U S. The bid, but that seems to be gaining momentum and certainly we're seeing those positive signs and in our business. So.
Yes.
Okay. Thank you very much.
And I guess 1 last question. Please can you talk on the the.
Downstream rolling capacity with and Poland.
Touched on earlier that you've already because of the ramp up process. There can you just remind us please of the timeline to full capacity and full EBITDA contribution is expected.
Yeah. So I think we indicated it's roughly 200000 tons of.
Additional capacity, taking advantage of excess milk capability that we have and we're in the early stages of the commissioning, but we have such a strong team in Poland and at the execute so well on them.
I'm very very encouraged by.
On the early the early days of the commissioning nearly all of the product coming off of the line is and saleable product. So we anticipate a strong.
Ramp up to that 200000, and certainly the market is supporting the.
And then the need for that additional capacity.
At this stage since were literally just a few weeks into it I don't want to make some specific commitment because you're talking about a lot of complex equipment and and debugging of software and other things that that needs to occur over the next couple of months, but.
Knowing how well the team and in Poland executes I I would expect to.
To see of very strong ramp up and and.
Be able to get to the the targeted levels early into our fiscal 2022.
Okay. Thank you very much.
And our next question will come from Timna Tanners with Bank of America.
Yeah, Hey, good morning, everyone.
And the morning, Tim.
I wanted to ask a follow up on capital allocation, and then hone and a little bit more on Europe.
So on the capital allocation side I noticed you've commented on the opportunistic M&A and I'm. Just wondering if you could characterize the opportunities if they're more downstream or upstream or how theyre looking relative to the past or any color. There. Just you know how are you looking at that and light of you know current very strong conditions are there a lot of opportunities.
Thank you Timna. This is always the challenging 1 because we can't really talk specifics but.
We are open and looking across the the.
The value chain I would say, we would prioritize and.
Okay.
The prioritize upstream where we have you know needs to build that additional capability of of recycling and collection to support our mills, where and a great position, but with our broader footprint. There, there's some areas that might be attractive to us.
And we we will look across our full geography.
Probably not going to see us and.
Build our rebar fabrication and any to any great extent, unless we were to you know expand on.
And our mill capability and that area, but there are other.
Possibilities, we now have wire rod as part of our capabilities. So there could be some interesting assets.
And now steelmaking or downstream that could be something worth considering but.
I wouldn't say that the the market is you know.
Got a lot of assets that are that are coming to market. The lead we stay very close to the situation and we have the balance balance sheet to stand.
Ready if something interesting comes along.
Okay. Thanks for that that's helpful and and then on that Europe on market conditions that you could I know on the ninth slide of your presentations. It looks like a massive step change in terms of margins for Europe. So just wanted to understand if that's the new normal or how you think about that I'm, just being sustained and certainly.
And it looks like Turkey is offering tons and Europe, it's talking about you know some protection and C.
T I S tons were hearing and wobble a bit so just trying to get a flavor for how to think about that market's margins going forward.
Yeah. Thank you Timna.
Oh.
And as you know the safeguards and.
And Europe were.
Initially designed and similar to $2.32, and they were modified and change to a quota basis and then there have been.
Modifications and enhancements to that based on issues that arise and the implementation of all of those strategies. So I think.
From the existing safeguard measures and.
I think where we're seeing the effective and effectiveness of that and effectiveness of.
Some of the modifications that have made have been made over time I think the second thing is just the demand profile is quite strong.
Which has also helped to support.
The volumes and the margins.
And in Europe, and candidly, the margins and needed to heal and recover and.
Following.
And some of the challenges.
Challenges said that were brought about by the ineffectiveness of the safeguard measures and.
As you May have also read there's there's news that the EU has recommended that the safeguards to be extended the.
The vote is tomorrow, so we'll be watching that carefully but it's a it's a good indicator that the.
The the they are recommending that the safeguards extend.
I think the strong market conditions are having us as much and more to do with this as as the safeguard can save cars have been in place for some period of time now.
Yeah, I would just add that you know different from the U S. Europe was was struggling economically going into the pandemic and obviously the pandemic has is as Barbara said had a greater impact on our on.
And on Europe, and then it has on the U S and so really for quite a period of time now of the European margins were were at historical low levels and are a part.
Part of this is the recovery back to normal and slightly above at this stage, but it's not that far above the historical through the cycle levels.
Okay. Thank you both very much.
Thanks Timna.
And once again, if you would like to ask the question. Please press Star then 1 of our next question will come from Emily Chang with Goldman Sachs. Please go ahead.
Hi, Good morning, Barbara and Paul Thanks for taking the time here on my first question last question is just around what Youre seeing and and Europe around demand from your customers around finding and buying low carbon products, particularly as you have.
The very attractive carbon profile of that relative to some of your peers.
Well I think the results somewhat speak for themselves.
We'd.
We're very proud of our you know low.
Low carbon and.
The business model and we're very proud of our customer service and quality and we have been.
Working on a number of projects in Europe to improve all of those things we have a great team that executes well and as Paul indicated the market conditions are.
Improving and the economies are healing from the pandemic so and.
We see a nice demand profile going forward.
Which is a result of the combination of all of those things.
That's helpful and my second question is just around sort of production expectations.
And I know you mentioned production records during the quarter. The how long can you sort of continue to operate at such high utilization rate. So is there some level of maintenance, we should expect over the next couple of quarters that thank you.
Yeah, and Emily Lee and we conduct on maintenance on an ongoing basis and our equipment is maintained incredibly well and Lee.
So you know we'll comment on specifics as we move forward and the various quarters, but and the coming couple of quarters, There's nothing outstanding to highlight.
That's really helpful. Thank you.
Thank you.
And our next question will come from John Tumazos, with John Tumazos, very and independent. Please go ahead.
Thank you very much.
And I have a couple of questions related to pricing.
And to whatever extent you can describe it.
What are current.
Spot rebar prices.
Why the bar products diverge so much.
CME group Hot rolled futures. This morning of 17.20.
Per ton.
And how much would it be reasonable to us.
Expect.
August quarter realizations improved from 794.
And the U S.
Europe.
The 664.
Thank you.
John and thank you very much for your question. Unfortunately, we don't make comments about specific comments around pricing and I think supply and demand and I tend to work really really well and.
So unfortunately, I can't get more specific on that.
What are the sure invoice price for a quoted price for rebar of somebody who wanted to buy ourselves and tonnes per day.
They day could inquire on our customer service line and and.
And.
Each 1 of our sales folks and.
I'm, sorry, I'm not going to comment on specific prices.
Thank you.
And there appears to be no further questions at this time I'd like to turn the conference back over to MS. Smith for any closing remarks.
Thank you Cole and thank you everyone for joining us today on our conference call and thank you again to the CMC team for an outstanding quarter of performance. We look forward to speaking with many of you during our investor calls and the coming days and weeks. Thank you again.
And this concludes today's commercial metals Company Conference call you may now disconnect.
And.
Okay.
Okay.
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On the floor.
And growth.
And the dividend.
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And then.
Thanks.
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Thanks.
Yeah.
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