Q3 2022 Medpace Holdings Inc Earnings Call
Good morning, and thank you for joining that piece of third quarter 2022 earnings conference call also on the call today is our CEO August Troendle, our president Jesse Geiger and our CFO, Kevin Brady before we begin I would like to remind you that our remarks and responses to your questions. During this teleconference may include forward looking statements within the meaning of the.
Securities Litigation Reform Act of 1995. These statements involve inherent assumptions with known and unknown risks and uncertainties as well as the other important factors that could cause actual results to differ materially from our current expectations. These factors, including the ongoing impact of COVID-19 on our business are discussed in our Form 10-K.
Other filings with the SEC. Please note that we assume no obligation to update forward looking statements, even if estimates change.
Accordingly, you should not rely on any of today's forward looking statements as representing our views as of any date after today.
During this call we will also be referring to certain non-GAAP financial measures.
non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of results.
Conciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and earnings call presentation slides provided in connection with today's call. The slides are available in the Investor Relations section of our website at Investor day that this dot com with that I would now like to turn the call over to August Troendle.
Good morning.
RFP metrics were reasonably strong, though down slightly on a sequential basis in Q3.
Initial award notifications, which are described in our second quarter call. This week recovered strongly and we're in it at a healthy level in the third quarter.
This was surprising outcome given the continued financial challenges faced by a large fraction of our clients.
Headwinds to revenue from delayed funding re prioritization and even bankruptcy were higher in the quarter, but not yet broad based.
Business environment is challenging and we remain concerned that a prolonged period of depressed funding flows will eventually lead to a rapid escalation and project delays.
Our initial 2023 guidance reflects this caution and we anticipate slowing growth next year.
Jesse and Kevin will now review our financial results for Q3.
Thank you Robert.
And good morning, everyone.
Revenue for the third quarter of 2022 was $383 7 million, which represents a year over year increase of 29, 8%.
Net new business awards entering backlog in the third quarter increased 15, 4% from the prior year to $479 million.
Resulting in a 1.23 net book to Bill.
Ending backlog as of September 30th was approximately $2 2 billion.
An increase of 29% from the prior year.
We projected approximately 1.17 billion of backlog will convert to revenue in the next 12 months.
Backlog conversion in the third quarter was 17, 7% of beginning backlog.
And we continue to make progress in hiring adding 11% of head count from the end of 2021 and 13, 7% from the prior year.
And with that I'll turn the call over to Kevin to review, our financial performance in more detail as well as our guidance expectations for the balance of 2022 and initial guidance for 2023.
Kevin.
Thank you Jessie and good morning to everyone listening in.
As Jesse mentioned revenue was $383 7 million in the third quarter of 2022.
This represented year over year increase of 29, 8% on a reported basis and 31, 9% on a constant currency basis.
Revenue for the nine months ended September 32022 was 1.066 billion and increased 27, 8% on a reported basis and 29, 3% on a constant currency basis for the comparable prior year period.
EBITDA of $89 $3 million increased 48, 5% compared to $60 1 million in the third quarter of 2021.
On a constant currency basis third quarter, EBITDA increased 41, 5% compared to the prior year.
Year to date EBITDA.
Was $227 7 million and increased 49% on a reported basis and 35, 7% on a constant currency basis from the comparable prior year period.
Yeah.
EBITDA margin for the third quarter was 23, 3% compared to 23% in the prior year period.
Year to date EBITDA margin was 21, 4% compared to 19, 4% in the prior year period.
The increased EBITDA margin was driven by revenue growth net foreign exchange benefits behind the strong U S dollar and slower head count growth compared to 2021.
In the third quarter of 2022 net income of 66 million increased 35, 9% compared to net income of $48 6 million in the prior year period.
Net income growth over the prior year was primarily driven by higher EBITDA.
Offset by interest expense and a higher effective tax rate.
Net income per diluted share for the quarter was $2 five compared to $1 29 in the prior year period.
Regarding customer concentration our top five and top 10 customers represent roughly 17% and 25% respectively of our year to date revenue.
In the third quarter, we generated $108 5 million in cash flow from operating activities.
Our net days sales outstanding was negative 45 days.
We did not repurchase any shares during the third quarter.
In October our board of directors authorized the company to repurchase up to $500 million of the company's common stock.
During the quarter, we paid 110 million against the credit facility and our net debt position at the end of the quarter was $108 7 million.
Which was composed of debt of $139 7 million in cash of $31 million.
Our net leverage ratio is approximately 0.4 times last 12 months EBITDA.
Moving now to our updated guidance for 2022.
Full year 2022 total revenue is now expected in the range of $1 44 billion to one force 6 billion representing growth of 26, 1% to 27, 8% over 2021 total revenue of 114 2 billion.
Our 2022 EBITDA is now expected in the range of $302 million to $310 million representing.
Representing growth of 35, 4% to 39% compared to EBITDA of $223 1 million in 2021.
Guidance is based on foreign exchange rates as of September 30th.
This guidance assumes a full year 2022 effective tax rate of 16% to 17%.
And $33 7 million diluted weighted average shares outstanding for 2022.
There are no additional share repurchases in our guidance.
We forecast 2022 net income in the range of $232 million to $236 million, which includes $3 3 million of interest expense on our outstanding debt.
Earnings per diluted share is now expected to be in the range of $6 88 to $7.
As Jesse mentioned, we're providing initial 2023 guidance for revenue and EBITDA.
For the full year 2023, we expect revenue in the range of $1 68 billion to $1 74 billion and EBITDA to be in the range of 325 million to.
$350 million.
We plan to provide additional detailed full year 2023 guidance on our fourth quarter earnings call in February .
With that I will turn the call back over to the operator, so we can take your questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press star one one.
One key pad.
Again, if you have a question or comment at this time. Please press star one one on your telephone keypad. Please.
Please standby, while we compile the Q&A roster.
Our first question or comment comes from the line of Dave Windley from Jefferies. Your line is open.
Hi, good morning, Thanks for taking my questions.
August you mentioned in your remarks.
Some of the financial headwinds and even I think you mentioned, even some bankruptcies.
But those weren't that broad I guess.
That mentioned themes, I guess, new or maybe somewhat intensified so it would seem sequentially like a little bit of a headwind I'm looking at some of the metrics like.
Your revenue burn rate actually accelerating by quite a bit.
And those those things seem to be at odds. So maybe you could help us to understand like what helped the backlog burn rate.
To accelerate in the quarter and and how the margin jumped.
<unk> so much sequentially was there any pull forward of revenue in the third quarter.
No and no.
I don't think theres any pull forward, but projects did progress.
I think you've got two things going on with a little bit concerned about.
Yes.
New project starts, but we haven't really seen broad based delays there, but ongoing projects are going very well and.
That's what's driving conversion is the ongoing projects and.
I think that we made good progress on them.
The pass throughs are even higher than.
Service fees.
Gross.
But projects are progressing very nicely.
Due to a better extent than we expected and.
The amount of.
What.
Estimated for delays and slowdowns and cancellations were less than will be expected. So I think we had a very good conversion.
The other thing to consider.
On margin sorry, Dave the other thing to consider on margin in addition to revenue.
Just the FX impact that we saw in the quarter.
The dollars you know significantly strengthened again in the third quarter.
For us it was about a $6 $5 million impact when you also factor in.
The FX gain from the revaluation of our balance sheet.
And that that last part that you mentioned is the is the other income and that's right component.
Yes, that's right.
Yes.
So that kind of addresses the margin question I guess on that.
Obviously, you've talked about how.
Either contracts or are solidified sometimes.
Yes, some amount of time, probably less in your case then.
Than others, perhaps in terms of.
The lead time before your study start.
But then you have multiple years.
<unk>.
Kind of living with those contracts and certain price escalators baked into those contracts that that may not be able to be renegotiated I guess, if anything one would one would expect that that those would be headwinds to your margin FX, maybe is overwhelming that but.
Have you been able to negotiate.
Labor inflation up some two to protect yourself there.
We haven't really addressed labor inflation on existing contracts to any extent.
Yes, obviously, we do.
Annually and sometimes even.
Small tweaks.
In between in terms of pricing on new projects, but they're not reflected in our current work.
Things that we're bidding in the last.
Nine months or not.
Really burning so.
Pretty much this reflects.
Awards that were in place a few years back and there is no real way to address inflation to other than the contractual terms, which generally have a <unk>.
Set fixed amount to increase each year.
Okay.
I'll leave it at that and maybe come back later and let other people ask questions. Thank you.
Thank you.
Our next question or comment.
I see.
Comes from the line of Sandy Draper from Guggenheim Partners.
Your line is open.
Thanks very much.
A little bit of a follow up today's question, but thinking about your 23 guidance, which is admittedly pretty strong I was surprised August you commented that feels.
Feels like it baked in some conservatism and so.
I know youre not going to give complete granular, but when I think about.
The inputs are going to drive the revenue growth you've got what's your bookings and implied book to Bill shake out to be what the.
Backlog burn adds and some of that is trials, but also the mix of service revenue et cetera.
And so I'm just trying to think about.
And then maybe cancellations in your guidance can you give us sort of a.
Some thoughts about are you expecting bookings levels. Our book to Bill is that these types of levels implied or is it a deceleration and generally for 'twenty. Three do you have an expectation of the backlog burn sort of stabling at this level because it sounds like it picked up or is it can you stay up I'm, just trying to triangulate what sort of built into the guidance.
Because again I was a little bit surprised when you position to saying on the conservative side, because that's pretty darn healthy guidance. Thanks.
Yes, I think we expect book to bills to be in the similar kind of range that has been.
This year.
We actually think <unk> be stronger if we didn't expect to slowdown.
<unk>.
It gives a lot of factors that go into that so.
Note that we did.
Look at the <unk>.
Tire pipeline and what.
Prior what things we have forward decision and what decisions have been made kind of arch.
Initial awards, and how theyre going to flow through and model that and we then said well we do still expect we're kind of looking for Jamie Diamond.
<unk>.
Financial Hurricane.
Expecting that there's going to be a.
Pretty broad based.
Slowdown in starts and.
And also seek some cancellations uptick in cancellations that are meaningful.
Given the funding environment and given the feedback we've gotten from clients.
But we've been able to work around it.
Largely to date, we do expect that to.
Yet hit us at some point if it doesn't there is upside in our guidance.
If it if it does.
<unk>, we're not below where we've.
Come out on our guidance.
You can't.
And there's nothing we can do about very broad based substantial cancellations.
Situations, we don't anticipate that but I do think we've put enough conservatism into the guidance.
The slowdown we're kind of expecting will allow us to achieve within our guidance range.
Great. That's really helpful. Thanks, and then my next question and then I'll yield the floor, probably for Kevin or maybe Jesse when I look at the EBITDA guidance for next year.
We see growing slower than revenue so just thinking through the margin as there is some of that mostly coming through the gross margin side and thinking maybe it's the mix of service revenue to pass throughs that may be higher pass throughs or is that sort of inflation just trying to think what is pushing on the expenses as margin gross.
In line is driven by general inflation, our service revenue mix or is that more on the SG&A line. Thanks, Yes.
Yes Sandy.
Yes, the answer to your question. There's a couple of things that are going on one is the FX gain that you see in miscellaneous income that's just driven by the revaluation of.
Of the balance sheet, and so to the extent that.
That rates stay consistent we don't expect to see a positive or negative influence from that.
In 2023, and there are $7 8 million year to date.
And foreign currency gains right.
Right now the other component is just on in terms of building in some level of continued inflation or retention efforts at.
And hiring.
It's to make sure that we can support.
The anticipated growth in 'twenty three.
Great. That's really helpful. Thanks, Kevin and I'll yield the floor.
Thank you.
Our next question or comment comes from the line of just a second.
Mr. Max Smock from William Blair Mr. Mark Your line is open.
Alright, thanks for taking our questions just wanted to ask a quick one here on revenue by customer tier.
Based on the deck it seems like the midsize and large pharma both really strong in the quarter I think each increased by 1% based on year to date revenue in small biopharma. It seems like obviously very impressive but as a percent of revenue year to date dropped off a couple percent. So just wanted to see if you had any detail you could provide around whether or not there are any notable wins in the mid to large pharma space.
<unk> that we should be aware of and then.
Any cause for concern on the drop off in small biopharma as a percent of revenue beyond what you've already talked about in terms of some of the near term headwinds from the.
Slowdown in funding that we've seen over the last couple of quarters here.
Yes, Max nothing really to point out there other than when we do have activity in the mid and large it tends to be a little bit lumpier.
And then how revenue spread across the population of small biotech customers, but nothing really that I would point out there in terms of.
Any any therapeutic concentration or specific customer concentration that really drove activity in the quarter.
Okay got it thank you and then.
Wanted to go back to 2023 guide again I appreciate the conservatism that you've built in there, but in terms of funding and whether or not we see it pick back up here in near term if we do actually see it pick back up again near term do you think there could actually be some upside to 2023 guide or given the lag between bookings and revenue with this actually.
Demos.
And impact for 2024, and then assuming funding does kind of pick back up in the next couple of quarters is it fair to think about revenue growth reaccelerate and back into that 20% range in 2024 and beyond.
And then sorry from lump and a few in here, but relatedly on the other hand, if we don't see funding pick back up where do you think about 2024 may be dropping off.
The projected year over year growth.
So youre guiding to in 2023.
Yes sure Max.
The longer the <unk>.
Slowdown in.
Biotech funding I think the the greater the headwind for us. So I do think it is cumulative so 2024 would be impacted by it.
Very prolonged dip.
Depression.
Revenues. Thanks, Snapback, yes, there is upside to the <unk>.
2023.
We've kind of baked into.
Some disruption both in terms of starting with programs delays as well as some kind of cancellation expectations.
To get to where we are in the guidance.
Again, not a not a.
Disastrous.
Kind of scenario that.
Could be below but.
We have had we have tried to be more conservative than usual in terms of anticipating that slowdown.
But there certainly is upside if funding rebounded or we don't have to slow down that we expected.
And we would.
Yes.
Look at the.
Last few years in two.
20, plus percent revenue growth should be quite possible.
If things don't.
Deteriorate or.
Funding snaps back.
Does that answer your question.
Yes.
Very helpful. Thank you.
And I'll leave it there thanks.
Thank you.
Our next question or comment comes from the line of John Sour beer from UBS.
Mr. <unk> your line is open.
Hi, Thanks for taking my question and congrats on the quarter and the impressive guidance.
I was wondering is there any additional color you can provide on that recovery on the initial award notifications that you saw in <unk> versus <unk> and do you think that recovery is sustainable as we head into 2023.
Yes.
It's sustainable.
We didn't really understand why it dropped we thought it was at the beginning of.
Broad based slowdown and we have not seen that yet.
Did come back and the numbers were consistent with prior quarters.
We've substantially up from Q2.
So we haven't seen any more.
We thought at the beginning of <unk>.
Broad based slowdown.
It was a false signal I guess, we could say.
At least to date, we still anticipate there to be some slowing but.
We just haven't seen a great deal of it to date there is anecdotal and we do have we have had.
Hi.
Additional projects that have been delayed and.
As I've mentioned, even bankruptcy, which is pretty uncommon.
In an ongoing meaningful project.
But we haven't seen it very broad based to affect our growth to a large extent.
So again, we just have to leave it at that so far things look pretty good.
Got it and then just on the cash burn and the increase Q over Q and year over year and <unk> just any additional color there and then just thoughts.
Given some of the hiring over the last year on just what that trajectory looks like in 2023.
Okay.
You said the cash burn.
Yes.
And in the context of.
Generating.
Cash conversion, maybe being a little bit okay.
Yes, the cash conversion it is pretty volatile for us we had another good quarter of free cash flow generation.
Youre really just driven by earnings and positive working capital.
We had a little bit of a blip in the first quarter. If you recall, but things have recovered nicely since then.
Got it and then.
Yes, John I was just going to comment on the hiring and the and the head count growth.
We did pause a little bit or slow things down a little bit enough.
The third quarter, just given the uncertainty in the environment, we are ramping that back up and do you expect.
Healthy healthy hiring expectations in 2023.
It does continue to be a challenging environment.
So we're really focused on hiring or focused on retention.
Because of the labor market is still is a tough one.
Got it and then just just last one on me and I think that maybe Dave touched on it on existing contracts.
Just on pricing for new contracts any thoughts there are.
Are you seeing any pressure or just repricing for some of that wage increasing.
I think it's kind of.
We have.
As we as each year, we do evaluate our rates and in the current environment. It is a little bit larger bump.
The last several years, but no I haven't seen.
Much pushback I think it's obviously, it's a competitive environment.
Everyone is looking particularly in our clients in this current environment.
Where.
Their funding is down there looking for saving dollars and we have that conversation about.
The inflationary environment is going to determine our rates, but as long as we're competitive.
We've just not seen.
Unusual pushback at all notes.
Got it thanks for taking the questions.
Sure.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad. Our next question or comment comes from the line of Eric Coldwell from RW Baird. Mr. Colwell. Your line is open.
Thank you good morning.
The there was a question earlier on the business mix in the quarter and.
Jumping off of that do you.
Possibly intend to or consider increasing your business development focus on larger clients in this environment to you.
Maybe get a bit more aggressive on larger biotech or a little more open to working with big pharma just to provide some additional avenues for growth in bookings. If you. If you are worried about the smaller client trajectory.
Yes, Eric This is August .
No.
That's just not really our focus and not where we.
Where the model really matches well.
We just.
It's not.
Such a bad situation that we think we have to kind of jump out into.
New adjacency so it really is largely different market there we do.
Pay a lot more focus on the funding of the client and so we might move up in terms of size of the biotech clients.
To some extent there may be some movements there, but I don't think we're really moving to mid mid size or large pharma companies.
Yeah.
With any kind of focus.
Theres opportunities occasionally come to us, but we don't go ahead soliciting in that group.
Okay. Good.
Bankruptcies.
I'm curious could you share how many total active clients you have this year and how many bankruptcies.
Across that whatever that number that cohort is how many bankruptcies in total did you experience in <unk>.
To date.
Yes.
And I don't even know that.
Number because you know how much work you're doing is what matters. We had one client that had a meaningful amount of work ongoing and was ahead.
We actually had some loss because of it.
A few million dollars in.
And lost opportunity in a.
Bankruptcy that was meaningful sized project and that doesn't come up very often I mean, usually it's.
Very late on and we have very little revenue left or something we're very early on and there's just not much impact. So it was it was it was more than usual in terms of just the dollar value, but I don't have a good metric on total number of clients over time.
Declared bankruptcy and of course again you'd have to.
Look at the impact of that how bigger with.
The backlog was with them when it happened and how much.
Unpaid revenue did we have.
All the rest of it but I just don't have that.
Okay, and then I know you don't specifically quantify cancellation rates most of the time, but.
Could you I apologize if I missed this did you did you give a cancellation rate or quantify whether it was.
At above below normal this period.
I did not but our cancellation rate was actually a very good range now what we do is talked about in terms of cancellation.
I should step back a second and say we've talked variably.
We have a formal cancellation rate.
But we don't give it so.
Generally.
We talked about it being in the kind of 3% to 5% range and Thats a backlog. So that's the actual ongoing backlog that's $3 to 5%.
Sometimes we talk about total cancellation of projects and we expand to that too.
Anything thats been awarded to us, even though it hasnt started and things just.
And at times of <unk>.
Slow down sometimes thats what happens is you get.
Clients.
Initially delay the startup they say wait a minute, we're still waiting to close on funding and so we're holding off and we're not putting in backlog and we're not starting and then eventually they.
Can't start it may cancel it and so sometimes we talk about that in the broader scheme, we have not seen a very broad based flipped and cancellations in our formal cancellation rate was well within that range of 3% to 5%.
For backlog projects, so from those kind of metrics things look pretty good on the quarter I mean, they actually look better.
Kind of metrics in Q3 were better than Q2.
So.
It's hard to see where things are going.
Can I when you say the metrics it sounds like a broad based comment when you say metrics looked better would that translate also to win rate and pipeline I'm curious if you can give me your win rate.
Great win rate ticked up.
Rfps as I mentioned were slightly down but.
When rates came back.
We mentioned last quarter, it was down a little bit, but not a lot but.
Word notifications were strong.
Across the.
Across the <unk>.
It looks very like a very strong environment, but we've got a lot of clients that are also in financial distress and we had more sort of <unk>.
<unk>.
And things unusual over the last.
A quarter or two so.
I don't know.
It is.
We keep waiting for the.
The real impact to hit and I haven't seen it.
I don't know instead it will hit.
But the longer funding.
Deficiency.
Proceeds for our clients.
I think the greater the risk.
The last slowdown.
It was.
Pretty rapid and we saw.
Substantial broad based slowing of starts and we saw cancellations.
And we did a lot to try to invest in business development and.
Broadening their view, we get of clients and be able to adapt hopefully.
Rapidly to slowdown among a subset of our clients and I think we've.
So far we've done that outstandingly.
How much you can do that.
There is a limit to it and eventually we get hit.
So I do think it depends on the duration.
The down draft in funding with substantial we've seen it in our clients. So far we've been able to avoid that affecting our bookings and.
Progression of <unk>.
Overall number of projects.
Although there is a subset of our clients that are impaired and so those have been delayed and we've been able to pivot to others.
Along that can go on I just don't know.
Got it okay.
Thank you very much for the for the answers.
Yes.
Thank you. Our next question or comment is a follow up from Mr.
Dave Windley from Jefferies.
Jefferies.
Mr. Windley your line is open.
Thank you.
August you introduced this initial project awards metric.
Last quarter end.
We're all probably trying to understand how to think about it within the context of your.
Sales pipeline progression to two Rfps to initial project awards to bookings.
And I'm going to guess that.
Initial project awards moving to bookings does not lock step theyre not its not every everything moves it two months or three months or four months or whatever but.
Yes.
If we have a full quarters worth of initial project awards that were down 45% year over year from what you described.
Last quarter.
You apply that negative 45% to <unk>.
<unk> of last year's bookings <unk> of last year's bookings <unk> of this year.
Suggests.
Well below one <unk> book to Bill.
And everything you are saying today suggest.
Suggest that.
Youre going to Youre going to sidestep that youre going to be able to do the Ole on auto really bad book to bill or or Am I misinterpreting, maybe I'm, just giving you the opportunity to help us understand better.
How that initial project award flow.
Proceeds to bookings and backlog.
And how how you are able to smooth that over without having a book to bill that would that would really make an 18% growth rate next year look pretty challenging.
Yes.
I mean, I see where youre trying to go and say this glitch in the pipeline and that has to show up late in the pipeline.
Later.
Yes.
Down flow.
And I guess, there's just a lot of factors that it isn't just.
Liquid flowing through a pipe.
We.
Things fall out of there the duration in which which are certainly affected by the environment the duration in which they take before they get to backlog is influenced.
And our win rate is a big factor.
In.
Changing that.
Yes.
You can have a much lower flow and the win rate comes up.
And can completely eliminate.
Deficiency down the line.
So I guess.
I don't know.
Is there are there are a lot of moving parts. We had a we had a decreased amount of.
But you have to put in the context of several quarters of very strong initial award notifications, we had a very low quarter.
Don't know why they snapped back.
And we have an all changing.
Win rate and duration of.
Weights on projects and.
Projects.
Fallout.
Sure.
Just because their award notifications does it ever make it to backlog.
That's part of the broader context of cancellations that are not in our cancellation metrics.
So if you have a reduced number of projects in initial award notifications, but you have somewhat lower attrition.
Attrition of those heading toward RFP, the same number may make it into RFP.
And especially if you've got a changing win rate. So there are lots of ways to work around a low.
Initial awards in a quarter and I don't know if there ever visible.
If they'd be seen it would be a couple of quarters down the line on average.
That's what I said, I think last quarter, but on average and average doesn't mean anything and other factors Ken.
<unk> changed change it there'll be nothing.
Got it.
The other day the other driver of revenue right is just what your burn rate is and so it's a combination of.
Bernhard not just book to Bill, but you burn rates.
And so that's something to be considered as well.
Yes, yes.
Thank you I appreciate the follow up.
Thanks, Dan.
Thank you I'm showing no additional questions or comments in the queue. At this time I would like to turn the conference back over to management for any closing remarks.
Yes. Thank you for joining us on today's call and for your interest in Med pace. We look forward to speaking with you again on our fourth quarter 2022 earnings call.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day speakers standby.
The conference will begin shortly to raise Johan during Q&A, you can dial star one one.
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Okay.
Okay.
Yes.
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