Q3 2022 US Physical Therapy Inc Earnings Call
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Good day, everyone and welcome to the U S physical therapy third quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session in order to ask a question. During this session. Please press the star.
He followed by the number one on your telephone please be advised that today's conference is being recorded.
If you require any further assistance. Please press Star then zero I'd now like to turn the call over to Chris Reading President and CEO . Please go ahead Sir.
Thanks, Ashley good morning, and welcome everyone to our third quarter 2022 U S. Physical therapy earnings call today, I'm, calling in from Denver, where we have the largest aggregation.
Private practices.
Annual physical therapy private practice meeting this is a great place for us to see friends and colleagues and work on deal related opportunities for the future. Additionally, this year in conjunction with this P. P. S meeting we held our annual a P. T. QR Board meeting, where we continue to work on behalf of our profession.
In areas such as fair reimbursement for the Amazing life altering results, we produced for our patients excuse me one second.
We continue to push the reduction for the reduction of administrative burden.
We're working to ensure that we have an adequate supply of therapist.
To serve the growing needs of our aging population, replacing unnecessary and excessive pharmaceutical and other more expensive interventions with proven functionally restoring care.
We focus on other legislative and long term efforts.
I'm proud of the work that we're doing with thinner within a P T QR and remember company's ongoing support.
Switch to date have helped mitigate some of the significant the harmful cuts proposed by CMS. These past few years.
Yeah.
Joining me on the call.
This morning include Carey Hendrickson our CFO .
I'm really happy carry as part of our team. He arrived here two years ago as we worked their way through your one of the pandemic.
Doing great job, Eric Williams Graham Reeve, our co Ceos are also here with me they've been working extremely hard along with a regional president.
In conjunction with our partners and our local staff.
Work everyday to provide outstanding care, while we work to make ongoing adjustments during what has been a rather continuously evolving environment.
And this year to include a rather sharp and significant inflation across all cost areas, coupled with some employee scarcity, which I think we're just beginning to deal with more effectively at this point.
Finally, Rubinstein, who in addition to being our executive Vice President and General Counsel, It's my right arm in so many important areas in ways, including especially interact position related work.
Where we've tried hard recently to make sure it stays as busy as possible work is also unfortunately, a philly span. So that's the only real strikes against them at this point.
Before I continue further Alaska senior Vice President of Finance and accounting Jake Martinez to prove Koch. Please cover a brief disclosure Jacob if you would.
Thank you Chris. This presentation contains forward looking statements, which involve certain risks and uncertainties. These forward looking statements are based on the Companys current views and assumptions the company's actual results may vary materially from those anticipated.
Please see the company's filings with the Securities and Exchange Commission for more information.
Thanks, Okay. Thanks, Thanks Jay.
Going to start this morning, with some color and highlights on our third quarter performance.
And then Karen can fill in any gaps if he thoroughly reviews. Our financial results. This year, we have seen the resumption of our longstanding seasonal pattern, which seem to really be absent in 2021.
With the advent of summer school letting out we normally slowed just a little bit.
And then later, we pick up and that return as part of our normal seasonal pattern. This year.
June July with vacations, and travel slowed modestly with July coming in at $28 four visits per clinic per day, and then it started to pick up with the kickoff of fall football and the start of school. Ultimately we finished the quarter, averaging 28.8 visits per clinic per day.
In spite of a very active de novo development year, which can sometimes mute those volumes somewhat and considering we were impacted about 3500 visits at last week of September .
And into early October into the early October quarter by Hurricane in which devastated parts of Florida did considerable damage across several southern states along the South East coast overall.
Overall patient visits increased two 8% from the prior year quarter, one of the bright spots showing up this quarter from the very good work our payer contracting team has initiated around.
Around negotiating some of our payer contracts, which has been our stated focus of ours. All year. Those efforts are beginning to bear fruit, our net rate for physical therapy came in at just over 101 hundred $4.
Which was $1 eight improvement from our Q3 2021.
Performance in 83 sequential improvement from Q2 this year, our pointed out we're still in very early innings here.
I've got a lot more work to do a lot of contracts to touch before it's over.
So earlier this week.
Each each month, we have.
For each of our industrial injury prevention partnerships or partnership call or we go over detailed performance and opportunity I was on one of those calls earlier this week.
With their legacy.
P injury prevention partnership.
And they are getting some nice wins with respect to contracted.
Rafe renegotiation.
These legacy partners are doing a tremendous job.
Excuse me guys.
Starting with my voice this morning, Oh, what's that.
[noise] tremendous job this year in spite of the macro challenges affecting all of us.
Injury prevention revenue was at an all time high for this third quarter, just over $20 million, which was more than 92% improvement compared with our 2021 Q3, and a 27.1 same store organic growth rate in that business.
Gross profit percentage for our IP services was approximately 22%.
Overall, our gross profit for the entirety of our injury prevention business increased 64, 64, 6% year over year and excellent continued trajectory for that segment of our business.
Okay.
So shifting gears a bit our challenges at the moment centered around making adjustments to deal with the current inflationary environment.
Including in our labor cost and while we are taking steps to making progress toward mitigating some of those challenges we need more time to completely impact and it's just a number of key areas, including as we've discussed internet right.
Total salaries and related costs were 58, 6% of revenues versus 56% in the 2021 quarter.
Ill point out for US. This includes the labor necessary to bill and collect for the clinical work that we perform rent supplies contract labor and also higher than historic levels and as a percent of revenue about 200 basis points above where we were a year ago at this time.
These changes have come fairly acutely this year, starting really to appear for us in mid Q2, and we continue to work our way through a series of mitigation efforts, which will be ongoing and require additional time to more significantly address the resulting cost and margin impacts felt today.
I want to close my remarks by emphasizing two very bright spots for us in the first of those is our people starting with our partners and our clinical teams they've been through a tough few years starting in early 2020 with Covid. We're together, we were able to navigate that very early difficult time well.
Covid continued through 'twenty into 'twenty, one, which meant they were spending long days treating patients while massed up all day.
The job is very physical and the adjustments in that.
Necessitated due to Covid made that work even harder.
And the reality is even though you don't hear about it on the news anymore. Covid is still around we continue to make adjustments in order to keep our staff and patients safe.
Throughout all of this time, our teams across the country and across the company have done an exemplary job adjusting and working to do the utmost for our patients, but just want them to hear how much. We all appreciate those efforts and want them to remember they are making a huge difference in the <unk>.
Lives and then the function of our patients.
The final bright spot our highlight here has been our development in these past two years, we've on boarded some fantastic partners, who brought US a lot of joint enthusiasm to continue. This mission. We're on speaking personally have helped to make this job one where our roll out of bed every day excited and grateful despite of any.
<unk> is that we may have in.
In large part due to the wonderful people that I get to work with every day I am supremely pleased with the deals we've announced this year.
<unk>. The most recent one we announced earlier this week the people and the talent are amazing and I'm also excited about what we still have in the works yet to complete.
So that concludes my color on the quarter I will ask Cary to provide a more detailed overview of the financials before we open things up for questions. Thank you Karen.
Thank you, Chris and good morning, everyone.
As you saw on the release, we reported adjusted EBITDA for the third quarter of $17 billion in operating results per share at <unk> 58.
Like all companies, we're dealing with inflationary cost pressures on labor pressures, we expect those factors to continue to impact us in the near term, but our volumes remained strong by historic standards and our team is focused as always on finding ways to become even more efficient. So we can produce the best possible results for all of our stakeholders.
Looking at our volumes, our physical therapy patient volumes per day per clinic as Chris noted were $28 eight in the third quarter. That's the second highest per day volumes in the third quarter in the company's history by month, our average visits per clinic per day for all clinics were $28 four and July 29.0 in August and $28.
Nine in September .
This noted we had some impact from hurricane Ian We lost about 3500 visits at the end of September for that that we were.
Would've been at about 29.0 on September as well were it not for those lost visits we expect October volume to be similar to August and September which is a good place to be given some of the lingering impact of Hurricane Irma in Florida, Georgia, and South Carolina in the first couple of weeks of October .
Our net rate for our physical therapy operations was $104 <unk> for the third quarter of 2022 that compares to 102 93.
We reported for the third quarter of 'twenty, one our rate has increased each quarter. This year moving from $103 in the first quarter to $103 18 in the second quarter and then the 104.01 in in the third quarter. This is despite the pressures on Medicare rate reductions that were put in play.
At the beginning of the year and the phase out of sequestration relief, which is now complete.
As we noted we have some we have seen we've seen some nice commercial rate increases. This year. It is a hard work of our contracting team, which has resulted in our average commercial rates increasing each quarter. In 2022, we still have a lot of work to do on this front, but it's good to see some progress here our workers' comp average rate is up two 5% in the first nine.
Months of 2022, compared to 2021, and our Medicare rates they dipped in the first and the second quarters of the year, but then they increased in the third quarter due to the adoption of remote therapeutic monitoring which is new in 2022 and other hard work on the ops team side.
Our physical therapy revenues were $117 $5 million in the third quarter of 2022, which was an increase of $4 4 million or three 9% from the third quarter of 2021.
<unk> physical therapy operating costs were $95 $5 billion as compared to $86 2 million in the prior year and.
And our margin and physical therapy was $18 7%.
Looking at the revenue in our mature clinics, they were flat year over year with a one 5% decrease in visits that was offset by a one 4% increase in rate.
Our physical therapy salaries and related costs at our mature clinics increased 5% in the third quarter of 2022 compared to last year, and then contract services and rents were also higher at mature clinics.
Yes.
Revenues for our industrial injury prevention business were an all time high $20 2 million in the third quarter of 2022 that was the $9 7 million increase over the third quarter of 2021 with 92, 1%.
Our industrial injury expenses increased $7 9 million to $15 $8 million in the third quarter that gave US a margin of $4 $4 million, which was an increase of $1 7 million or 64, 6% over the prior year and.
And our same store IP revenue increased 27, 1% in the third quarter of last year versus third quarter glass.
Our gross profit was $26 8 million in the third quarter of 2022 and that compares to $29 8 million in the third quarter last year and our gross profit margin was 19, 2%.
Our corporate operating corporate office cost remain steady they were $11 9 million in the third quarter of 2022, that's actually $1 million lower than they were in the third quarter of 'twenty, one with the decrease primarily due to lower estimated bonus expense this year.
Revenue corporate costs were eight 5% of revenues in the third quarter of 2022, and Thats down from 10, 2% revenue in the third quarter of 'twenty one.
A couple of unusual things our other income line includes a $2 million gain from the elimination of our liability for potential contingency payment related to a prior acquisition.
Also includes a gain of about $785000 related to the revaluation of our put right liability associated with the potential second base purchase.
IP business that we acquired in November of 2021, both of those items that were excluded from our adjusted EBITDA and operating results.
Our interest expense increased from $268000 in the third quarter 2000, $21 million to $2 million in the third quarter of 2022 due to an increase in our debt primarily related acquisitions closed in the third quarter of last year and also higher interest rates in the third quarter of this year than last year.
Our net income attributable to Noncontrolling interest was $3 $3 million in the third quarter of 'twenty two.
That's less than the $4 1 million, we had in the third quarter of last year.
As a percent of profit our noncontrolling interests were 12, 1% in the third quarter of 2002 as compared to 13, 8% in the third quarter of 'twenty, one that reduction in Noncontrolling interest percentage is due to our proactive purchases of non controlling interest from existing partners, resulting in a greater percentage of profits being retained by <unk>.
<unk> and.
In 2021, we purchased $30 million of Noncontrolling interest from our existing partners and we purchased another $14 1 million in the first nine months of this year.
Our balance sheet remains in an excellent position.
We have $150 million.
$150 million term loan with a five year swap agreement in place that fixes. The one month term sell through rate on that $150 million at $2 81, 5%, including the applicable margin based on our leverage ratio ratio. The all in rate on that $150 million of debt is currently 466, 5%.
In our statement of comprehensive income and our financial statements you can see that our swap agreement currently has a mark to market value of almost $6 million, meaning that the current expectation is that we'll pay $6 million less in interest expense over the remaining term of our five year swap agreement that we would have paid without the swap at a variable interest rate.
In addition to the term loan we have a $175 million revolving credit facility that had nothing drawn on it at September 30, and we had cash in our balance sheet of $37 9 million at September 30.
We do now have $5 million on our revolving credit facility. After closing on the 14th clinic acquisition that we announced earlier this week.
The acquisition was primarily funded with our excess cash, but we did use the revolver to fund the remaining $5 million.
Borrowings on the revolver or at a variable rate, which for November will be right around 5%.
Our low leverage coupled with very sufficient capacity remaining on our credit facility provides us tremendous flexibility for the right growth opportunities as we identify them at the right price.
As we look forward our cost mitigation efforts, we put in place early in the third quarter ongoing, but we expect our cost to remain elevated due to the significant inflationary economic environment with solid volumes and rates, we expect our full year results to be within our previous guidance ranges for operating result, which was $2 65 to $2 75.
<unk> per share and EBITDA also which was in a range of $73 $5 $75 $4 million, but most likely on the low end of those ranges.
Just in closing I will say, we are all working very hard as a team to produce the best possible results for all of our stakeholders as I noted in my opening comments and with that Chris I'll.
Turn the call back to you.
Yeah, Thanks, Kevin Great job operator, let's go ahead and open it up for questions.
At this time, if you'd like to ask a question. Please press star one on your Touchtone phone.
Your question at any time by pressing the power once.
Once again that is star one and we will take our first question from Brian <unk> with Jefferies. Please go ahead. Your line is open.
Hey, good morning, guys, Hey, Brian .
Hi, nice to be back.
My first question.
Good rate growth performance. This quarter. Chris is this early signs of progress in terms of trying to negotiate better rates with payers and how should we be thinking about the remaining opportunity to drive rate growth going forward.
Yes. Good question, Yes, I do think it's early progress the teams worked really hard.
Our injury prevention team is having success there too although that doesn't show up in our net rate that you just referenced.
We've got a lot more work to do though we have some contracts that just kicked in in October .
That arent in those numbers.
But I would encourage you guys not to get too far ahead of US. This is not going to be a linear process that easy necessarily to predict.
Quarter to quarter.
So hang with us we're continuing to work on it.
As I said, we're early innings on this so more to do more to come.
I appreciate it and then Chris obviously, good acquisition announced the other day good side it looks like it's a good business but.
As we think about the environment right now for deals with rates, where they are private equity in theory kind of like a little bit maybe slowing down.
What are your conversations like now with some of the targets.
You cultivate a lot of these relationships over a year. So just curious what those discussions are today and how should we be thinking about your opportunity set going forward.
Yes.
The conversations haven't changed much in fact.
At the annual private practice meeting.
Thank the the environment as you referenced certainly has changed I think the multiples will change quite frankly, they need to and I think they will.
And so we'll see what that does over the long run I mean, these are moment to moment conversations where you pick up the phone and say, okay. The world's different but people the conversations ive been having people understand.
The marketplace is changing there are deals that have been you know.
Right at the closing point, not our deal, but others that have stopped stalled or been taken off the table, presumably because of leverage.
Bank issues and other things and so that's going to begin to seep in to this process and whether that slows deal flow or just adjust expectations. We will have to wait and see we continue to be active and we continue to know that we will be able to get things done.
We expect to make some adjustments accordingly.
And then Chris last question for me.
As I think about the broader health care space right. I mean, there is a lot of discussion about tightness in clinician labor, but I know you guys have done better than that.
Obviously the center of your business is still the therapist.
And the PTA how are you thinking about turnover and what are you seeing in terms of your ability to recruit clinicians in this supposedly tight labor market.
Yes, I think our.
It's feeling to me like the recruiting side, we've made some adjustments we've invested in some new tools.
We've been able to.
Through the summer with the graduating classes to pick up a number of key people moving some people.
Competitors in some cases.
It's not easy, but it feels better than it did maybe five or six months ago.
And its feeling better for us as well on the injury prevention side again, I wouldn't consider normal at our <unk> meeting yesterday, one of our members present that.
In an analysis.
Have it in front of me at the moment actually might be able to pull up on my phone but.
<unk> indicated that there were 21000 physical therapist that fell out of the workplace.
<unk> and 'twenty actually 22000 that fell out of the workforce in 2021, 300000 total healthcare providers out of the workforce 22000 <unk>.
To give you some perspective, the average graduating class.
Aggregates all of the PT clinics in the country produced 11000 graduates a year approximately so thats two years' worth of new work force that evaporated at some point last year and as you remember last year was.
Blow and go year for US we had we had record earnings last year and record volumes, So we're making adjustments.
Those adjustments take some time, it's beginning to feel a little bit better and I think for US. The important thing is that the clinicians are partners understand the importance of their work they're connected to.
So the difference they make there given the support that they need which we're working hard to do.
We'll work our way through it from there.
Awesome. Thanks.
Thank you welcome back.
Yes.
And we will take our next question from Matt Larew with William Blair. Please go ahead. Your line is open.
Hi, This is FC Madeleine woman on for Matt Larew.
I know you mentioned last quarter that you are engaging in some cost control efforts, including switching suppliers and I was wondering if you could sort of quantify the impact that you've seen from that this quarter and what you see going forward into 2023, and then also I know that contract labor, ladies a big headwind last quarter and it was the impact on the take out of your guidance.
I was wondering if you could talk about whether you think the contract labor costs are going to be more transitory or if you see those continuing into 2023.
Well it definitely fee contract labor, continuing we're never without contract labor and I think this environment would be crazy to think that we're going to be without it.
I would tell you that the guidance change was not particularly impacted by the amount of contract labor certainly slightly but that was.
A minor part of our guidance suggest.
Much more significant.
The cost of capital side and on the general inflationary side.
So we continue to work.
Look we're we're working our way through this.
Rolling out.
As you mentioned.
Some vendor changes through a GPO rollout.
It's early stages.
We continue to make.
Careful adjustments with respect to our staffing.
We're rolling out some.
Improvements in our in our Onboarding for our patients and our front desk.
Areas that will hopefully as we get into further into 2023 will allow us to make some further adjustments in our front office staff, but this is going to be kind of a slow steady process. This isn't a one and done kind of opportunity, it's going to take us a little bit more time.
Great. Thank you and then just as you think about acquisitions I know you mentioned that you drew down on your Dot keys on the most recent acquisition. This week is there a leverage ratio that you want to stay below is are you focusing more on acquisitions you can pay for in cash in order to not draw down on the debt just wondering how you're thinking about that.
Yes, well I mean, certainly we have we have covenants in.
Understandings with the with our bank.
Those ratios right now we get credit for prospective EBITDA that gets annualized in these deals, but our leverage ratio, including that prospective credit would be at three times and will stay under that.
Sure.
Just to be clear thats the debt covenant this making sure that it's clear. We're currently at about one six times. So around that so go ahead I'm sorry, Chris go ahead.
I mean, the point is we're well within those ranges that keep us comfortable.
Well, we use cash look we always have cash available 20% to $25 million.
The ongoing needs of our business.
We will actually pay down.
That credit facility that $5 million that we borrowed as were April and then re borrow as we need to and so that'll be rather fluid process that occurs each and every week in fact.
Depending upon cash availability in outflow.
Great. Thank you so much that's all from me.
Okay. Thank you.
And once again as a reminder to ask a question that is star one.
We'll go next.
Mike <unk> with Barrington Research. Please go ahead your line is open.
Hey, Mike Hey, Mike Hi.
So I guess I wanted to ask just on the on the and I understand it's early but on the GPA.
P O rollout I mean, what kind of buy in or pushback are you getting from your therapist partners I mean are they sort of.
Sort of getting on board or resistant or somewhere in between.
Yes. This is Graham so far it's been well received I mean, we're working through partner by partner, but so far we've had a good.
Adoption on it and we're working to move it out to more people.
Yes, Mike I think like anything else will it be 100% uniform and sensitivities around that would be 100% one way or the other now, but I think our partners understand where they are and where we are and where the world is right now on buying the same stuff and paying more for <unk>.
This doesn't make a lot of sense and we have a new opportunity.
It'll be change, but we're working our way through it.
And Chris I guess, given that Youre in a meeting.
Extra curious what the what the current view is.
And the industry yourself as far as reimbursement sort of.
A more rational reimbursement approach, including specifically for 2023 any thoughts.
Yeah. So we had our <unk> meeting again thats the vehicle that we used to do a lobbying our congressional work.
All of the.
The important work that we're doing to elevate.
The fact that.
Physical therapy. There are few good studies out right now that indicate that not only this physical therapy.
<unk> bend, the cost curve for somebody who completes.
Full session of physical therapy, but when they complete that full session. They don't disconnect early makes it even more meaningful difference in the total quality of their life and their health care spend and so the congressional champions that we're speaking to they understand that many of them have had physical therapy.
Themselves.
Collectively the age where where people will have things that are beginning to happen all of us do our kids do.
Certainly and they recognize it so CMS does not the rational.
Arbiter now at this point of where rate should be in.
We hope and expect that we will get some relief here at the end of the year was through and with some congressional action that is uncertain at this point, we won't be certain until it happens.
But we are making progress and we expect to be the longer term look I think we're going to we're going to begin to see a shift in commercial payers and this is just my view. This is not based on anything else, but I think I think.
Payers are beginning to see.
They can't eliminate physical therapy, and they can cut their way to improving their total cost dynamic because if people don't have access to <unk>, which is what's going to happen I mean, we're in the process right now quite honestly looking at contracts no longer makes sense to us.
To take it at a certain reimbursement rate.
We've actually begun to drop some of those contracts.
So.
With anything I think there is consolidation in our PT world, we have larger companies with more resources better ability to negotiate some of this low hanging fruit for these payers, we're making mint on Medicare advantage and in booking record earnings is going to have to flow to provide.
<unk>.
Certainly going to fight for our fair share.
I'm tired of taking low rates frankly.
This was more of a housekeeping, but does anybody there.
The payer mix for the quarter.
Sure I haven't yeah, Yeah got it so for commercial insurance. It was 45, 7% Medicare was 34, 4% Medicaid was $4 one.
Workers comp was nine 5% and then everything else together was six three.
Percent.
Okay.
A quick follow up related to that.
Overtime Medicare.
Medicare and Medicaid is sort of.
It moved up a bit as a percentage workers' comp looks like.
Move down over time, I mean is there any way for you.
Guidance is sort of intentionally.
To take steps that can sort of shift.
Towards the $130 $40 reimbursement versus.
Whatever it is $95.
Whenever that might be.
Government pay.
Right, Yeah, a few months ago, I think effective beginning July .
We brought back a key exact who had actually been the driving force behind a lot of our comp based activities a number of years ago, which helped us meaningfully grow our comp rate.
Obviously at the beginning of the pandemic, our comp and from my perspective.
Lot of our competitors comp business fell and we've yet to get that back as you pointed out but we've added resources in this area rolling out new programs, we've updated our training we've updated our web presence and our marketing and our sales efforts.
Yes.
Yet to see meaningful change, but we're beginning to feel like we're moving back in the right direction.
And we hope to make some progress there we're obviously early.
But we're focused on it.
Okay can I sneak one more quick one just on the on the on the recent acquisition the one from earlier this week.
Yes.
The press release with sort of vague sort of sort of seem to say that the 14 facilities. Maybe we're in a single state, but maybe that could could could get bigger can you just talk about what the possibility.
Either geographically, if youre willing to talk about that or.
From a facility standpoint, how much that particular <unk>.
Practice could grow.
Yes, best practice is primarily in one state although it does technically covered two states.
That.
Let me tell you Mike These guys are as capable as any group that we've.
Ever worked with.
<unk> opened new clinics, which get the profitability.
Zinc is record time.
We have a number of new clinics slated to open with them.
And we have some activities that are beyond the two states that they are in currently again, primarily one technically too.
That would take them in some other areas and they have relationships that go beyond those two states. So I think this is a group that can that can.
Grow very very significantly over the next few years.
Beyond that so very excited about it.
Happy to have them part of the team and the family and looking forward to helping them.
Recognize that revision.
Are you willing to share that geography.
Not right now and it sounds funny, but the reason is.
We have so much in development with them. They wanted to jump on the market before the word gets out so that people don't shore up their defenses and so as crazy as it seems we're going to keep that quiet as long as we can it's a good market though.
Fair enough it sounds like you're excited very good congrats thanks.
Thanks Helane.
And once again as a reminder to ask a question that is star one.
And there appears to be no further questions at this time I'll turn the call back over to the speakers for any closing remarks.
Okay. Ashley. Thank you. Thanks, everyone. We appreciate your time this morning, I'm going to be tied up a little bit of a SaaS dunoon with activity slated at this private practice conference I think carry is expected to be available and certainly I'll be available once I get back. So thank you for your time and have a great day.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect at any time.
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