Q2 2021 SFL Corporation Ltd Earnings Call
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Good day, and thank you for standing by and welcome to the Q2 2021 XFL Corporation earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session. If you wish to ask a question. Please press star one on your telephone keypad.
For your information. This conference is being recorded now I would like to hand, the conference over to your speaker today, Oh, you're talking up. Please go ahead.
Thank you and welcome all to <unk> second quarter Conference call.
Start the call by briefly going through the highlights of the quarter and following that our CFO Aksel Wilson will take us through the financials and then the call will be concluded by opening up for questions.
Before we begin our presentation I would like to note that this conference call will contain forward looking statements within the meaning of the U S. Private Securities Litigation Reform Act of 90.95.
<unk>, such as expects anticipates intends estimates and similar expressions are intended to identify these forward looking statements.
Forward looking statements are not guarantees of future performance.
These statements are based on our current plans and expectations and are inherently subject to risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward looking statements.
Important factors that could cause actual results to differ include but are not limited to conditions in the shipping offshore and credit markets.
Should therefore not place undue reliance on these forward looking statements.
Please refer to our filings with the Securities and Exchange Commission for more detailed discussion of our risks and uncertainties, which may have a direct bearing on our operational results and our financial condition.
The announced dividend of <unk> 15 per share represents a dividend yield of around eight 5% based on closing price yesterday and this is our 17th quarter with dividends. So it's a bit of a celebration from that perspective.
Over the years, we have paid nearly $28 per share in dividends or $2.4 billion in total and we have had an increasing fixed rate charter backlog recently supporting continued dividend capacity going forward.
The total charter revenues was $141 million in the quarter with more than 80% of this from vessels on long term charters and less than 20% from vessels employed on short term charters and then the spot market.
EBITDA equivalent cash flow in the quarter was approximately $103 million and.
Last 12 months, the EBITDA equivalent has been approximately $424 million.
The net income came in at around $20 million in the quarter or <unk> 16 per share there were some one offs in the quarter, including a smaller impairment on a rig we are recycling and negative mark to market on interest hedging instruments.
Also our higher interest element in the quarter SPL already raised the capital to refinance the remaining $147 million convertible note in October.
Therefore around $2 million extra interest charge in the second quarter and third quarter until its paid down.
There were also around $900000 higher upgrading costs in the quarter due to additional crew rotation costs linked to COVID-19 restrictions.
Our fixed rate backlog has increased and stands at approximately $2.7 billion from owned and managed vessels after acquisitions and adjusted for the recent disposals. This is provided continued cash flow visibility going forward.
The backlog excludes revenues from 16 vessels traded in the short term market and also excludes future profit share Optionality. In addition, we have excluded charter hire relating to the drilling rigs to be conservative in light of the ongoing financial restructuring and CFO.
We are very pleased to continue to execute on our commitment to invest in assets in markets with a lower carbon footprint. We've spend a lot of time on evaluating various new technology initiatives that can improve performance of vessels, including our existing vessels on the water.
In April we agreed with the Volkswagen group to build a charter of two newbuild dual fuel car carriers, just signed to use liquefied natural gas or LNG for propulsion and today, we announced an agreement to build two more vessels in the same serious.
The charter period for all of these four vessels is 10 years from delivery in 2023, and 2024 and the transactions have added more than $400 million.
Through the fixed rate charter backlog and importantly, also added two very solid counterparties to our customer portfolio we.
We are not yet at liberty to disclose the name of the counterparty for the last two vessels, but I can we can say so much that it's a large investment gradation based shipping company.
And we really look forward to working with them more closely and hopefully over time also develop more business opportunities with that.
In addition submission to the car carriers, we have recently added two additional 14000 teu container vessels with charters with evergreen.
These are sister vessels to four vessels, we already own and delivery scheduled in just two to three weeks in.
In addition to the solid cash flow during the remaining two and a half years or so.
Evergreen a key attraction here is to re chartering position in 4047 for fuel efficient vessels, we know of very attractive assets in the market.
The purchase price is confidential, but I can confirm that it's significantly below current charter free values recorded by brokers.
We have also agreed to acquire two modern 6800 Teu vessels with long term charters to Maersk line.
One of the vessels have been delivered to us already and.
And the second vessel is expected in a weeks time. So we have good cash flow effect already this quarter.
Total acquisition costs for these vessels is around $150 million and with the rally in the secondary market. The charter free values are in fact already off 40% to 50% from the levels, we are required to mark.
Creating a nice buffer for us.
With these vessels, we will have 15 vessels on charter to Maersk. All these vessels and also the evergreen vessels under car carriers are on time charter terms, where we are responsible for technical management and vessels operation and therefore also have direct interaction with the counterparties.
Coincidentally, our customer MSC has exercised purchase options for 18 vintage feeder vessels due to the age of these vessels. The deal structure was bareboat charters with no technical risk and MSC had purchase obligations at the end of the charter period.
The vessels are now 25 years old on average and MFC has exercised purchase options with some vessels delivering at the end of this month and the remaining in September.
Net cash proceeds after repayment of associated debt is estimated to approximately $40 million and we expect a neutral to marginally positive book effect from this transaction in the third quarter.
Excluding the drilling rigs the backlog from owned and minus shipping assets.
Our $2.7 billion at the end of the quarter.
Over the years, we have changed both fleet composition and structure and we now have more than 70 shipping assets.
Portfolio and no vessels remaining from the initial fleet in 2004.
In addition to the long term chartered vessels, we have 16 vessels trading in the short term market.
We also had a significant contribution from profit share over time, both for both relating to charter rates and fuel savings.
We do not have a set mix in this portfolio focus is on evaluating deal opportunities across segments and trying to do the right transactions from a risk reward perspective over time. We believe this will balance itself out with we tried to be careful and conservative in our investments and not just invest because money is burning in our pockets.
The two drilling rigs are not included in our reported charter backlog figures and with respect to see drill and the ongoing financial restructuring we cannot give more details than what we have disclosed in our press releases or is otherwise publicly available.
We will receive approximately 75% of the lease higher under the existing charter arrangements for vast cleanness and west Hercules to exceed growth chapter 11 proceedings.
Both rigs are active and working for all companies and the charter rate is sufficient to cover our debt service relating to the rates.
And we have of course, we are of course pleased to see a strengthening harsh environment market in the north sea on the back of a firm oil price.
A few weeks ago, we entered into an amendment to the charter agreement relating to the semisubmersible drilling rig West Hercules.
Under the amendment agreement with tea drove the vast circle is contracted to be employed with all major equity nor in Norway, and Canada until the second half of 2022, and thereafter redelivered to SSL in Norway.
This agreement remains to be reconfirmed by the court in September and if so <unk> will continue to receive a bareboat hire over around $65000 per day until the real emergence from chapter 11, and thereafter, approximately $60000 per day, while the rig is employed under a contract and generating revenue proceed rail.
And approximately $40000 per day in all of the modes, including where the rig is idle and mobilized to and from Canada for the Ecuador book.
We continue to have a constructive dialogue with <unk> regarding the request leaders, which is on a sub charter to clinical Phillips and the north sea until the end of 2028.
<unk> filed a planned support agreement, which is also supported by a majority of its secured creditors.
Based on these filings are potential emerging from chapter 11 could be in early 2022, and we expect to have more clarity of investing well ahead of this.
Over the years, we have gone from a single asset class charter to one single customer to a diversified fleet and multiple counterparties.
And over time, the mix of the assets and charter backlog has varied from 100% tankers to nearly 60% offshore 10 years ago to contain a ranked car carriers know being the largest segment with 80% of the backlog.
If you look at the Counterparties. It does no mainly to end users and market theaters in their respective segments and relative few our intermediaries, where we have less visibility on the use of the assets and quality of operations.
Strategically. This also gives us access to more deal flow opportunities such as the repeat business with Maersk MSC Evergreen for example.
Our strategy is therefore being to maintain a strong technical and commercial operating platform in cooperation with our sister companies in the <unk> group.
This gives us the ability to offer a wider range of services to our customers from structured financing to full time time charters.
And with full control of a vessel maintenance and performance, including energy efficiency and emissions minimizing efforts, we can impact and improvements to our vessels through the life of the assets and not only be passed of the owning vessels employed on bareboat charters, where the customer may not always have an incentive to make such improvements.
In addition, we can retain more of the residual value in the assets when we charter out some time charter basis, and then the current environment with rising raw material costs driving replacement cost for vessels. This value is for the benefit of SSL under stakeholders, while for bareboat charter deals.
As usual, we retained by the charterers through fixed price purchase option.
And with that I will leave the word over to our CFO <unk> <unk>, who will take us through the financial highlights of the quarter.
Thank you Mr FERC.
<unk>.
On this slide we have shown a pro forma illustration of cash flows for second quarter.
Note that this is still a guideline to assess the company's performance.
Not in accordance with U S GAAP and ultimate of extraordinary and noncash items.
The company generated gross charter hire of approximately $142 million in the second quarter with more than 80% of the revenue coming from our fixed charter rate backlog, which currently stands at $2.7 billion, providing us with strongly stability in our cash flow going forward.
In the second quarter, the liner fleet generated gross charter hire of approximately 75 million, including approximately $2.4 million and profit split contribution related to fuel savings on some of the large container vessels.
Of this amount approximately a 95% will derive from our vessels on long term charters.
Following the Companys recent acquisitions.
It's not in the backlog currently stands at approximately $2.2 billion with an average remaining charter term for approximately $4 seven years.
This seven and a half years, you've wasted the charter hire.
Our tanker fleet generated approximately $15 million gross charter hire of.
Of this amount more than 80% was derived from our vessels on long term charters to among others.
<unk> in frontline.
The net charter hire from the company's two suezmax tankers employees in each local market with approximately $1.8 million compared to $2.5 million.
In the previous quarter.
Our Drybulk fleet of 22 vessels generated approximately $39 million in gross charter hire income.
Losing approximately $1.2 million in profit share contribution from our Capesize vessels with charter to go most of them.
Of this amount approximately half was throughout 12 vessels with long term charters to Golden Ocean final transfer and that drove it.
While the other half throughout 10 Super Max and handsets that folks employed in the short term market.
This vessel generated approximately $14.9 million in net chunk of higher compared to $9.8 million in the previous quarter.
It's below two drilling rigs, which have been chartered out to subsidiaries of <unk> on favorable terms in the second chapter received charter hire of approximately $12.2 million from the rigs.
This summarizes to adjusted EBITDA of approximately $103 million for second quarter compared to $98 million inventory quarter.
We then move on to the profit and loss statement as reported under U S. GAAP.
As we have described in previous earnings calls our accounting statements are different from those of a traditional shipping company.
And Thats our business strategy focuses on long term charter contracts.
A large part of our activities are classified as capital leasing.
As a result, a significant portion of our charter revenues are excluded from U S. GAAP operating revenues and instead booked as revenues classified as repayment of investment in finance leases.
<unk> loans.
This filter in associates and long term investments and interest income from associates.
For our second quarter report total operating revenues. According to U S. GAAP of approximately $117 million, which is less than the approximately $142 million of charter hire actually received for the reasons just mentioned.
During the quarter. The company recorded profit split income of $3.6 million, mainly related to fuel savings and some of the large container vessels.
On the Drybulk vessels long term charters to Golden Ocean.
Furthermore, the net result was impacted by a noncash impairment of $1 <unk>.
9 million, reflecting the net proceeds from the recycling of this tourist during the third quarter.
Listen to approximately $1 million in additional opex related to challenging crew change logistics.
Smith at $2 million in additional interest cost.
Sustainability linked bond in April.
Sure.
Bond in October.
So overall and according to GAAP the company reported a net profit of $19.5 million.
<unk> per share.
Yes.
Moving on to the balance sheet at quarter end, <unk> had approximately $372 million of cash and cash equivalents.
Excluding approximately $8 million of cash held in wholly owned non consolidated rig owning subsidiaries.
Furthermore, the content marketable securities of approximately $23 million based on market prices at the end of the quarter.
In April the company successfully placed a 160 minutes he knew secured sustainability linked bond during 2026.
The boom in a coupon of seven in the quarter around them and the net proceeds will be used to refinance existing debt, including our convertible bond maturity in October which is included in the short term debt with approximately $147 million outstanding at quarter end.
The company Thats remaining capex of approximately $670 million relating to recent acquisitions.
During the second quarter the company issued approximately 10 million new shares with the ATM and drip programs.
Net proceeds of approximately $8.7 million to part finance these acquisitions.
Investment capacity going forward.
The remaining investment amounts are expected to be some of the new debt and there are no immediate plans to risk more new acreage.
As of today obtained approximately $300 million of senior debt.
International banks at attractive terms addressing the funding of the vessels to be delivered during the third quarter.
It's in the Q2 numbers the continent, the book equity ratio of approximately 28%.
And to summarize.
The board has declared a cash dividend of <unk> 10 per share for the quarter. This represents a dividend yield of approximately eight 5% based on <unk> share price yesterday.
This is the 17th consecutive quarterly dividend and since inception of the company in 2004, approximately $28 per share or approximately $2.4 billion in aggregate has been returned to shareholders through dividends.
It doesn't have successfully committed close to 700 million Polish accretive investment so far this year.
And in the process, we have expanded our relationship with some of our key clients by investing in modern eco design container ships and at the same time disposed of older less efficient vessels, demonstrating our commitment to further improve our carbon footprint pursuant to our ESG strategy.
Following the recent investments our backlog from a shipping assets now stands at $2.7 billion, while strongly stability and future cash flow debt service and continued distribution capacity.
And the $372 million of cash at quarter end as opposed to <unk>.
Q2, new accretive investments.
Telecom.
And with that I give the word back to the operator, who will open the line for questions.
Thank you.
Wish to ask a question. Please press star one and wait for your name to be.
If you wish to cancel your request. Please press the husky once again, please press star one if you wish to ask a question.
Taking the first question from the line of Randy Given said Jefferies. Please go ahead.
Howdy gentlemen, how's it going.
Hi, there.
So I guess the first couple of questions are around the new container ship acquisition.
114000 Teu vessels.
Can you give the age of the ships had a scrubber equipped some more details I know youre not going to give the purchase price, but just trying to get some of the details around that and then looking at kind of residual upside after the current charters and in 'twenty, three and 'twenty four.
Yes, absolutely.
The vessels are sister vessels to 414000 Teu vessels that we have today.
Chartered to evergreen.
These are very fuel efficient vessels ESR.
One of our vessels was the first vessel with 51 meter beam E. The very biggest you can take through the Panama Canal. So our vessel was the first of that size to go through the P&L and actually use that corridor to serve the U S East coast market. So we know there are these are very versatile vessels.
With very good deadweight capacity and fuel efficient.
And 2013 and into 2000.2014.
They don't have scrubbers.
This is something we discussed with the current charterer evergreen.
Indiana.
When you charter out the vessel HDR customer who pays for the fuel. So if we were to make such investment. It would of course be if we got either a compensation for that investment through linked to their fuel savings or a profit share like we've done with <unk>.
Several vessels, where we have a base increase of 4% for the investment and then we get the cost of the profit that comes out of that.
<unk>.
We have not made such agreements with.
The evergreen and of course, therefore, we cannot justify making that investment now.
Of course, when we look at the new charter position.
This is something we would obviously discuss with.
Call it a new potential charters for these vessels.
If it makes commercial sense for us.
Right now we know that the shipyards are all sold out for vessels of this size and category from quality shipyards well.
<unk> four is basically sold out and we hear that even 25 may be challenging certainly for a series of vessels.
So and we've also seen other operators out there forward fixing already vessels with charter and positions are similar to ours. So.
We see that the results are good demand on the.
On potential on the customer side, but exact timing of this is something we we would have to look at.
And again, it's all about trying to.
Create the best.
Call it economic outcome for us from a from a risk reward perspective, obviously.
Got it okay.
And then looking at your Drybulk assets clearly those are outperforming most of the others now profit sharing.
Fully getting from Golden Ocean.
The convertible maturities handle see drills, mostly in the past now so all of those things together, how do you view the dividend.
At 15.
Chances you re up that back to the 25 it was before the recent cut.
And then how do you view your Drybulk fleet from here as well.
Yes, thanks, very very valid questions of course on the <unk>.
Dry bulk side, we are of course very excited to see the drybulk market being.
Very robust and has been increasing over the last few months.
Of course, if you look at the if you look at the economic side of that and certainly from a from a reporting side because of the of the new new call. It.
The accounting principles for shipping assets with with load to discharge principle, you have effectively a delay in revenue recognition when the market is strengthening and then the corresponding call. It the tale if the market is softening so the 125 million.
Speed growth in profit share from from gold notion on top of the base rate. So this is just icing on the cake as we like to say it.
We would of course like to see more icing on the cake.
And based on the forward market it could be significantly more than what's reported this quarter.
But it has a delay effect as I mentioned and of course, the profit share is India and actual.
<unk> for the vessels also.
If you look at our acquisitions recently, we've done several deals that are delivering in the third quarter. Some vessels are already delivered several are to be delivered over the next very few weeks.
So we will see more we will see cash flow production from these assets already in the quarter. So I'd say I think.
No.
As we.
We come to the.
The finalization of the third quarter.
And we look at the numbers at that time that would be more prudent time to look at also.
The distribution at the time and needless to say we.
We're focused as always on distribution per share long term distributable capacity per share. So so of course, it's an objective to build dividend going forward, but exact timing and amounts et cetera, It's something the board is always reserved.
The rights, we never I've never in the history of SSL given specific forward guidance on dividends, but typically we've been.
Correct geographic dividend down very very seldom and usually its been stable and increasing so let's hope we can get back to our good old.
Pattern also on on that thought.
Yes.
That's good that's it for me I'll turn out.
Thank you.
We are now taking our next question from the line of Greg Lewis said BTG. Please go ahead.
Hey, Thank you and good afternoon all.
<unk> and team and I hope your Delaware.
I guess, all I would like to ask.
Randy.
Is right a big question around the dividend I guess I'll ask it a different way.
If we were to kind of rewind the clock a little bit.
The first dividend.
Move down was from the <unk>.
Looked like it was driven by the ongoing issues around soon drill.
And then the second the second markdown of the dividend was really around Covid.
And so.
Realizing that there is a lot more than just drilling COVID-19 that drive the decision around dividend.
Are those two things kind of like.
Hurdles or events, we should be thinking about as we try to think about when we could see.
Tom.
Our return and growth to the dividend or is it more hey, those two things happened more moved on and it's more just about.
Doing some more of these transactions, which we announced today around the clock carriers to boost the cash flow.
Yes.
It's difficult to be very specific on that I mean of course, when we when we made the adjustments one was due to general huge market uncertainties surrounding the whole COVID-19, which had much wider sort of impact than just on the <unk>.
On the drilling side.
And then you had the the.
The meltdown on the on the rate side, where were seed will wash sand.
Process of.
<unk>.
Filing for chapter 11, when we felt that it would be it was very prudent to take down the dividend given the heightened uncertainty around that.
We have some more some more visibility now with <unk> thrilled with.
Given the given what we noted in the report with with with one rig where we have an agreement that will run through next year, but it's not we're not.
Entirely out of the woods hopefully over the next.
A couple of months now.
We will have more clarity there as well, but at the same time, we also see very good performance in some of the other asset classes like the drybulk vessels that puts mentioned.
And we've been doing more business.
With these new transactions.
Of course hope to execute on additional deal opportunities going forward.
So I think the best way to phrase it is probably that the board will is.
Assessing call it the dividend with the perspective of what they believe is long term sustainable.
In a more normalized world.
And.
This quarter the dividend was kept stable next quarter.
Management can hope that there is good performance continued good performance and also better visibility and also cash flow coming in from these new assets that will build that long term distribution capacity, but again.
It's a comments on what the dividend could be because again this is.
Is there is a rise to board reserves.
Have the appropriate flexibility.
100%.
Also realizing that you are limited.
And what you how you can talk about.
The relationship with sea drill and drill rigs bought them.
I guess I guess I guess I'll ask it this way.
It's Alan it's it's been reported in the news that a couple other drilling companies are potentially looking at acquiring.
Cedric.
Is it is it is it right to think that if company a acquire sea drill they buy the fall even those ship finance is the owner of those drugs.
Of those rigs or is that is that something where then ship finance.
You're really just looking for color around.
The relationship contract or agreement.
Like how would something like that work at sea drill were in fact to be acquired.
Yes.
Just to clarify your question.
Question.
So kind of.
Our rigs or domestically are a part of the sale it seems as if required.
Yes, that's exactly right.
Yes so.
It's really up to the board.
The acquired to make us FERC proposal two.
As it fell in that respect and up to the board to validate it.
That proposal.
In.
If there should be a potential bid on the table. So theres no kind of automatic consequence debt offering digital also relates to those assets because those are assets of SSL.
Operated separately.
Also note and then the.
Said that.
Yes.
We have two two attractive harsh environment assets, which also seems to be the most besides.
Asset class if you look at see this asset. So we will just have to see how things develop.
Okay, and then as I think about that.
Are we interested in mcconico contract with the Jackup I mean.
Is there any change of control, where you know what.
You mean like is that something where conoco as as these I guess customer of that rig is there any approval process for <unk> or is that something where I'm.
I'm just kind of curious do they have any input into.
The potential.
Whatever.
Okay, and potentially where that rig goes in the event that <unk> besides too.
Habits.
Sold.
I cannot talk for divesting <unk>.
Is this just rigorously in this regard.
This all through working with chemical but.
The concept on our rig.
Our relation with Tia drill clinically.
Under the terms of treatment at the cell has.
As Betsy.
Right.
That contract not to be unreasonably withheld from chemical.
And I think if you look at.
The operations of the rig is going to.
It's more a part of the infrastructure of the ecosystem field with us.
So there's still a long lifetime so.
We believe there is interest from home of course to keep that rig that will have to be addressed.
If and when.
Situation of course.
Okay. Thank you very much for that and have a great day.
Thank you. Thank you.
And we're taking our next question from the line of Liam Burke Bradley.
Yes. Thank you.
On the press release, you have a capital requirement of 670 million on the acquired vessels plus new builds.
Understanding you're taking delivery on the third quarter on the existing vessel and then the Newbuild.
Delivery is 2024 could you give us a sense of timing of how that outlay of $670 million would go.
Yes, absolutely I mean.
We have.
I mean, the new building sort of new billings for you with that.
Thanks, I mean, there's some premium refunding.
The both maturity on delivery on.
On kind of the five vessels.
Some have been delivered.
The process of being delivered I mean.
Financing has been secured.
Yeah.
Basic vehicle munitions.
Cash at hand.
The senior bank financing at very attractive terms.
Because of that.
That's all secured.
Experienced.
Our tremendous interest.
From financing institution based on let's say the high quality of assets that also.
With discount the parties on build the side. So that's of course of course very encouraging to see.
Basically.
The address the pool.
Okay and.
So you mentioned you've got additional deals that youre looking at would that be primarily in the container space or are you looking across the board to your entire fleet.
Now we are segment agnostic. So if we look at opportunities across the board in several shipping call it sectors.
Sectors.
This is a really important distinction.
From many other maritime companies, who are focused on one single segment that therefore is locked into investing there.
What we have seen over time missed that.
Typically it's at the peak of the markets that the equity market is open and when banks will lend you. The most money and therefore, if you are in one single segment Youre almost program to invest the bulk of your capital maybe.
So at the sub optimal time, so what we try to look at we look at multiple segment at the time.
Risk rewards.
And market dynamics within the segments and we compare them to each other so so you can say, it's acquaint incidence we've done we've done mainly over the last couple of months, we've done mainly container ships and car carriers, which both liner type assets, but still very different sort of market dynamics.
We're one segment.
Boom, the last and the other has strengthened but not not.
Differently than the container side at the same time, we also see many opportunities in other sectors, where there has been less activity. So.
And what can we say we are optimistic.
And our mindset is that we look at diversified in both asset types and counterparties.
Sure.
And therefore, we are not therefore, we're not only focused on the container side.
Great. Thank you very much.
Thank you.
Thank you there are no further questions from the line. Please continue.
Thank you then I would like to thank everyone.
<unk> in our second quarter conference call and also thank the SFO team on board the vessels and onshore for their continued efforts in a time with continued operational disruption caused by the COVID-19 situation.
If you have any follow up questions. There are contact details in the press release or you can get in touch with us through the contact pages on our webpage www Dot <unk> dot com. Thank you.
That concludes our conference for today. Thank you for participating you may all disconnect.
Okay.
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Thanks.
Yes.
Sure.
Sure.
Okay.
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Okay.
Sure.
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