Q1 2023 Visteon Corporation Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today at this time I would like to welcome everyone to Visteon. Its first quarter 2023 results conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I'll ask a question at that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question.
Star one thank you.
My pleasure to turn today's call over to Mr. Brian Wendling, Vice President of Investor Relations and Treasurer, Sir. Please go ahead.
Good morning, I'm, Brian Wendling, Vice President of Investor Relations and Treasurer welcome to our earnings call for the first quarter 2023.
Please note that this call is being recorded and all lines have been placed in a listen only mode to prevent background noise.
Before we begin this morning's call I'd like to remind you. This presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 forward looking statements are not guarantees of future results and conditions, but rather are subject to various factors risks and uncertainties.
That could cause our actual results to differ materially from those expressed in these statements.
Please refer to the page entitled forward looking information for additional details.
Presentation materials for today's call were posted on the investors section of <unk> website. This morning. Please visit investors that visteon dot com to download the material. If you have not already done so.
Joining us today are Sachin <unk>, President and Chief Executive Officer, and Jerome <unk>.
Senior Vice President and Chief Financial Officer, we have scheduled the call for one hour and we'll open the lines for your questions. After <unk> and drums remarks. Please limit your questions to one question and one follow up.
Thank you for joining US now I will turn the call over to Sacha.
Thank you Ryan and welcome to the Visteon team good morning, everyone and thank you for joining our first quarter 2023 earnings call.
Page two provides a summary of our results for the first quarter.
The company continued to execute its growth strategy will starting the year on a strong note.
First quarter sales were $967 million, an increase of 22% year over year excluding currency.
Compared to a 6% increase in global vehicle production.
The outperformance in sales was mainly driven by the strength of our product portfolio, which continues to benefit from the industry shift to digital and connected cockpit experiences.
Our sales have now outperformed industry vehicle production for 16 consecutive quarters.
Adjusted EBITDA was $99 million or 10, 2% of sales an increase of $28 million when compared to last year.
But our global team continues to demonstrate excellent operational and commercial discipline and deliver exceptional results. Despite the challenging industry environment.
Proactive engagement with customers and suppliers helped us mitigate the impact of semiconductor shortages and was a critical factor in driving our overall performance in the quarter.
Adjusted free cash flow, followed historical patterns and as anticipated was a negative $37 million in the quarter.
On the operational front the company had a busy quarter with our products launching in 34, new vehicle models.
Which will help us to continue our sales growth in the near term.
The company also had a strong start to the year with $1 5 billion in new business wins for the first quarter.
This puts us on track to achieve our full year goal of $6 billion in new business wins.
We continued to make good progress in our electrification business in the quarter.
With the extension of our existing Vms business to support additional electric vehicle models with existing customers and signing strategic joint development agreements for new technology with key car manufacturers.
In summary, the company had a strong start to the year and it puts us in a good position to achieve the full year guidance targets that we have provided earlier this year.
Turning to page three.
Q1 industry vehicle production volume was up in all regions of the world, except in China, which was down due to a mix of demand pull ahead in Q4 of last year due to expiring incentives and weaker consumer sentiment.
Visteon customers fared better than the general industry in Q1 with vehicle production at our top customers growing 9% year over year compared to 6% for the industry.
Europe led the growth on account of a strong order backlog, coupled with improved supply of semiconductors.
Consumer demand in the U S was also robust.
Driving double digit vehicle production growth compared to prior year.
And while vehicle production was down in China. It was offset by production increases in the rest of Asia.
Semiconductor supply, which has been the primary supply constraint in recent years continues to improve gradually.
In Q1, the number of trips that were in critically short supply and impacting production was less as compared to prior quarters.
However, even with the improved supply.
There are still a number of key semiconductors that are below current demand, causing growth to be muted.
Nonetheless, the improved supply enable the industry to build more cost in Q1 than was initially anticipated.
Semiconductor pricing however remained at elevated levels in Q1, despite the improvement in supply.
Visteon sales benefited from higher customer vehicle production as well as the ramp up of recently launched products.
In addition to the improved chip supply our recent product redesigns to use alternate chips mitigated supply shortages of critical components.
Our sales also benefited from the recovery of higher supply chain related costs that we had to share with their customers.
Overall, the first quarter was positive in terms of consumer demand and vehicle production. It was helped by improved semiconductor supply.
The actions, we have taken to mitigate impact of semiconductor supply have enabled us to ramp up production of new products quickly and drive faster than market sales growth in the first quarter.
Turning to page four.
Our digital cockpit products did well in Q1, continuing the strong performance from prior quarters.
When excluding the favorable year over year impact from net pricing and the unfavorable impact from foreign exchange Visteon sales in Q1 grew 20% year over year.
Our cluster sales growth was driven by the ramp up of recent digital cluster launches with GM, Volkswagen and Nissan on some of their high volume vehicle lines.
Despite the high growth it will still muted due to the constraint in supply of our key microcontroller used in several digital cluster products.
We are working on a redesign that will help mitigate the impact going forward.
Our cluster business continues to shift more towards all digital systems.
And in Q1 shipment of digital clusters exceeded that of hybrid clusters for the first time.
Overall industry penetration of digital clusters is much lower at about 25%.
Provides substantial runway for future growth.
Our smart coil products also did well in Q1 with sales growing at all customers and particularly with <unk> and Mahindra due to ramp up of recent launches on new vehicle models.
The success of smartphone in India with Mahindra is a good indication of the growing interest in high performance cockpit systems for mid segment vehicles.
While we have launched several new displays distantly with multiple car manufacturers in the near term our displays business is impacted by the roll off of our business with BMW, which was first launched in 2018.
As a result, we expect our display business revenue to be down this year before starting to grow again from 'twenty to 'twenty four onwards, all of which was factored into our full year guidance.
Lastly, sales of our infotainment and audio systems also did well in Q1 on account of improved semiconductor supply it helped us in our business with VW instead of Lantus.
Overall demand for our digital cockpit products was strong in the first quarter.
The improved semiconductor supply and the recent product Redesigns helped in narrowing the supply gap, resulting in a strong quarter of product sales for the company.
Turning to page five.
We started the year on a strong note with $1 5 billion in new business wins in the first quarter.
The combination of the strong start and our robust pipeline of opportunities across all core products positions us well to achieve our full year target of $6 billion in total Vince.
The composition of the first quarter, new business wins reflects the current focus of the industry on the electrification of the powertrain and connected and digital experience in the cockpit.
We have highlighted a few wins on the right of the beach.
We added two more vehicle models, who are smart core business with the Chinese OEM.
High performance computing in the cockpit is becoming increasingly important for market competitiveness.
Especially for electric vehicles.
These systems will launch within 12 months, which is very ambitious for systems of this level of complexity.
If you also added a new customer for our Standalone Android based infotainment business in India.
With the addition of App store and Ot capabilities.
We're very competitive in the discrete infotainment protos segment for mass market vehicles, especially in emerging markets.
Lastly, we added more electric vehicle models to our wireless BMS product line with an existing global customers North American brands for launch in 2024.
This win extends the program on several new vehicles, including electric versions of the Oem's flagship full sized Suvs and trucks.
These additional vehicles are scheduled to go into production later in 2024 and in 2025 and across multiple brands in North America.
Vince we have highlighted are a good example of the platform approach to sourcing that Oems are increasingly taking for their electronic systems.
The increased complexity in the shorter product introduction time lines make it more attractive to develop systems that can work across multiple vehicle models.
On the following slide I would like to spend a few minutes discussing the progress we've made in our electrification business and the momentum we're building in this area.
Turning to page six.
The automotive industry has seen a rapid growth in sales of electric vehicles in the past three years and in the first quarter of this year.
<unk> electric cars made up about 10% of all passenger vehicle sales for the first time.
Car manufacturers are responding to this trend by rapidly launching new electric vehicle models.
Visteon strategy in electrification is to help carmakers battery electric vehicles that offer superior range and charging performance through innovation in BMS and power electronics.
This slide summarizes the progress we've made in building momentum in our electrification business over the past couple of years.
We introduced the first wireless BMS system in the industry in 2020.
And have continued to develop advanced features to improve measurement accuracy and safety, while supporting the latest battery chemistries and sell configurations.
In total we have added three carmakers to our customer portfolio for this first generation of wireless BMS system.
And have won over $5 billion in business across 24, new vehicle models that are just starting to launch.
As Vince will keep our team busy with upcoming launches and will generate significant revenue for the company for the rest of the decade.
Why is the first generation electric vehicles are using 400 volt battery systems.
Last two years has seen an increased interest in the use of high voltage battery systems to reduce charge time and for other benefits.
In addition to updating on BMS technology to support 800 volt batteries.
Also added power electronics part of store portfolio, focusing on bi directional crypto sales charging and power conversion for high voltage systems.
Our goal is to facilitate the shift of the industry to 800 volt and higher battery systems, which we believe will help accelerate the shift to electric vehicles with a broader set of consumers.
Earlier this year at the consumer electronics show in Las Vegas, we showcased our latest BMS system and new power electronics technologies with support for both 408 hundred volt configurations.
Since then we've signed a joint development agreement with the high volume Carmaker in Asia to co develop the next generation Vms solution.
Credit for launch in 2025.
We have also signed an agreement with the luxury carmaker in Europe to develop a prototype of a highly integrated onboard charger and multiple DC to DC converters to power their next generation of electric vehicles.
These joint development programs validate visteon technology capabilities in electrification and positions the company well to win future business.
In addition to these advanced technology development initiatives, we are in discussions with multiple carmakers to develop 800 volt version of BMS systems for market introduction in the 2025 26 timeframe.
I expect the company to announce additional customers and business for electrification through the rest of the year.
I'm very pleased by what the team has been able to accomplish in electrification.
I'm excited for what is to come.
Turning to page seven.
The first quarter was busy for Visteon from an operational viewpoint.
The company launched its products in 34, new vehicle models across the world in the first quarter, which is an incredible achievement for the team.
Every new launch requires customization of the product to fit the unique requirements of each vehicle end market. In addition to ensuring sufficient supply of critical components like semiconductors to support customers' dynamic production plants.
As more of our business is becoming platform based and across multiple vehicle models. We have decided to highlight the number of product launches across all vehicle models. Instead of just the initial launch.
Which provides a more complete correlation to revenue contribution from the program and demonstrates our operational execution and the delivery of the products.
We have highlighted a few key product launches to demonstrate extension of programs that contribute to the growth of our sales.
We launched our 12 inch digital clusters, and heavy duty versions of Chevy Silverado and GMC Sierra trucks with GM.
These vehicles, followed the other Suvs and trucks that we have already launched our 12 inch cluster in previously.
Our digital cluster business has grown rapidly over the past two years with GM and these launches will continue this performance in 2023.
We launched our digital cluster and audio system for the 2023 Ford Ranger for Latin America.
As a mid sized drug thats popular in the region.
In China, we launched a smart core cockpit domain controller under seeker electric vehicle from Julie in partnership with <unk> and the digital cluster on the Honda ENB. One also an electric vehicle.
About 20% of our new launches what on electric vehicles, reflecting the increased focus on EV model launches at carmakers.
Turning to page eight.
Our outlook for full year vehicle production at our customers remains unchanged with production volumes growing at low single digit level.
We expect semiconductor supply will continue to improve although some chips will remain tight throughout the year.
As mentioned previously our goal is to redesign and use alternate chips when necessary in a row.
Objective is to not be limited by chip supply in the second half of the year.
Consumer demand in U S and Europe has been encouraging thus far and we expect that this demand will remain strong in the near term.
With the economy, improving in China, we expect consumer demand to also improve in that region.
At the same time, the potential risk to consumer demand arising from higher financing rates, coupled with higher vehicle prices that we incorporated in our 2023 guidance remains.
Our solid Q1 results and the robust near term demand, we're seeing from customers.
This confidence in our outlook for the rest of the year and we are reaffirming our full year 2023 guidance.
Turning to page nine.
In summary, the company executed well in the first quarter to deliver a 16th consecutive quarter of sales growing faster than vehicle production.
Our disciplined execution of the company's operational and commercial plans resulted in strong sales growth of 22%, excluding currency and adjusted EBITDA margin of 10, 2%.
New product launches and new business wins in the first quarter were in line with our expectations and puts us on track to achieve our goals for the full year.
And lastly, we made good progress in our electrification business in the first quarter by adding more vehicle models to existing programs and engaging with new customers for future business.
Now I will turn the presentation over to Jerome to review the financial results.
Thank you Sachin and good morning, everyone <unk> first quarter financial results came in strong with our focus on commercial and operational discipline continuing to drive results.
Excluding ex change Q1 sales grew 22% versus prior year benefiting from an increase in customer volumes have double digit market outperformance and higher customer recoveries.
Compared to customer vehicle production volumes growth of our market net of pricing was 11%, representing our 16th consecutive quarter of growth over market.
Semiconductor supply continued to improve in the quarter with a number of parts in critical shortage decreasing significantly from the fourth quarter of last year.
As a result, the amount of semiconductors purchased through the broker and distributor spot market channels decreased.
However, we continue to see elevated prices from our tier two suppliers, which we are sharing with our customers.
Compared to prior year, we were able to finalize more customer negotiations in Q1 of this year, which increased sales, while reducing the impact to adjusted EBITDA.
Although this was a large year over year improvement the net leakage in the quarter still negatively impacted adjusted EBITDA by a few million dollars.
Adjusted EBITDA was 19 9 million, representing a 10, 2% margin.
Compared to prior year EBITDA benefited from higher sales and a favorable timing of customer recoveries secured in Q1, partially offset by increases in net engineering and SG&A expenses supporting our growth.
Adjusted free cash flow was negative $37 million in line with our cash outflow with experienced in Q1 of last year, partially driven by the increased 2022 incentive compensation paid out in Q1 as well as the cash timing of customer recoveries negotiations that settled late in the quarter.
We ended Q1 with total cash of $487 million, representing a net cash position of $135 million and a net leverage ratio of negative <unk> four times.
In total our Q1 results provide a strong foundation for the rest of the year and keep us on track to achieve our full year guidance of sales growth margin expansion and cash flow generation.
Turning to page 12.
Page 12 provides more detail on our sales increase and margin expansion for the quarter.
Q1 sales were 967 million when excluding the impact from customer recoveries based sales came just under $900 million, representing an increase of $126 million year over year.
Compared to prior year customer vehicle production volumes increased 9% driven by improved semiconductor supply as well as strong customer demand in both North America, and Europe , which more than offset the slow start of the year in China.
Foreign exchange was a modest headwind to sales of 4%.
The remainder of the growth in base sales was driven by high demand for our digital cockpit products are.
Our strong new business wins in the past few years continued to convert into product launches, which will continue to drive increased sales.
These programs are typically launch on OEM platforms across multiple vehicle lines and continue to grow our sales as follow on model launches are brought into production on new vehicles and in additional markets.
Customer recoveries, which are illustrated by the dotted boxes increased on a year over year basis.
Despite the improving supply dynamic we're still confronted with increased costs from our tier two suppliers impacting semiconductor and non semiconductor purchases with.
We continue to actively work with our customers to share of these higher cost, which are leading to higher recoveries on a year over year basis. In addition, we also benefited this year from favorable timing as we were able to close out more customer negotiations earlier in the year finally spot purchase recoveries.
Second half of <unk>.
And we believe it can be a business stages.
Is shaping up to be for us so very excited about it a little.
Your next question is from the line of Dan Levy with Barclays. Your line is open.
And this year.
<unk> is a bit more on microcontrollers, if I recall correctly. So just wondering how.
Recoveries and if thats still broadly the case that it's.
It's a great indication of the volatility Thats Felix is when it comes to semiconductor supply the specific microcontroller that I mentioned was not an issue last year.
We have here.
Impact of any.
Have a material impact on our ability to recover of any of the extraordinary costs from.
They understand the situation and appreciate us being nimble and come up with alternatives.
Minimize the impact to their vehicle production. So I think it's going to be more.
<unk>.
Okay, great. So the mix doesn't really impact the pace of recovery. Thank you.
GM noted.
On their on their call the other day that.
One of their plans on simplification.
The number of inputs.
Infotainment screen configurations by 60%.
I'm just wondering generally speaking just how wide the number of Skus you have.
Within.
Digital clusters and displays.
And generally speaking it's fewer <unk>.
Good for you or is it net neutral if you can just talk about sort of proliferation and simplification. Thank you.
Yes.
Good question and I think it is a reflection of how the industry has.
Yes.
Jumped onto these displays into various configurations and unknown experiencing a little bit of that.
Fragmentation.
That does not helping supply and management of the various skus. So it clearly is something that is.
Beneficial to us we've been trying to drive standardization within the displays and try to bring.
The burner.
Benefit of higher volume on a fewer number of skus. So we believe that the industry fundamentally can separately down on maybe three or four different configurations.
The benefit from this.
Standardization into high volume that can be.
Following.
This approach and our approach to that has been also to come up with more favorable we would refer to as a platform solution for these products. So that we can share more of the components across a greater number of customers. So the short answer to your question.
Very helpful to us and the industry to reduce the number of operations that we have today in skus.
Their input on design, even if there.
Limiting the number of FTE that theres probably.
Little impact here I mean, it's still you would still be fully responsible for design even if.
There is a more limited number of Skus out there.
That is correct. So nothing changes other than just it makes simplifies the management of the video experience.
Great. Thank you.
Your next question comes from the line of James Picariello with BNP Paribas. Your line is open.
Hi, everyone.
Just on the recovery you guided to the $300 million for the full year, you realized $73 million this quarter, which I believe came in better than expected with respect to your progress in negotiations with certain customers. If I, if I heard that correctly. So.
Should we be expecting a relatively smooth $75 million per quarter type recovery rate and did any open market purchases take place. This quarter my apologies if I if I had missed that.
Yes, no problem. Good morning, James absolutely, Yes, I think at this point it can be a bit lumpy, but we are we're seeing something.
To the tune of 75 per quarter, we did.
Incur some spot buys in Q1 $25 million with recovered which was in line with Q1 of last year, but much lower than what we have seen towards the.
At the end of last year, we were at over $1 billion in Q4 of last year.
Spot buys are coming down and then surcharge.
A fairly large number of we negotiated and closed a large number of deals in Q1. So there's still a few open but it will be up.
Offset by the stock price.
That we expect will be declining going forward.
Great.
If the surcharge recovery is happening faster and at a bed.
Right.
That doesn't alter the full year view in any material way that in terms of recoveries, so fast faster, yes at a better rate.
It doesn't change essentially the EBITDA impact.
For the full year close to $20 million. So it's.
It's again just timing between I would say Q1 and Q2, we even had some deals last year that were closed in Q3, So I had indicated in.
In Q4 that our earnings profile in Q in 2023 will be similar would be similar to what we had seen in 2022, it probably will be a little bit more flatter and it will be more a function of.
Sales in the function of engineering recoveries, which are kind of the two big.
Variable for our profit.
Got it.
Just on the latest BMS add on award and relative to your electrification revenue target of $600 million by 2026.
This latest award alter that view in any way.
Not really no.
Did anticipate that we would see extensions, but this particular OEM.
Had the initial award with them on a couple of vehicle models and more ore to follow. So this is more of a validation of our.
Expectations.
In terms of the growth with this OEM.
BMS spin.
Got it and if I could just squeeze one more share buybacks should we expect any any execution of that authorization. This year or is that more of a 'twenty 'twenty four and beyond dynamic.
We've.
We announced the authorization in March so our intent is definitely if need to be active in the market and it will.
Depending on a variety of factors.
So we will expect to see some some share repurchases each year.
Got it thank you.
Thank you.
Your next question is from the line of Luke junk with Baird. Your line is open.
Good morning, Thanks for taking the questions.
<unk> session. Just wondering if you can give us any more background and then the follow on award for wireless BMS. This quarter on the outside looking in it seems like in part. This is a customer that youre, helping to scale more quickly and easy am I reading that right and if I am if I look at other customers you're engaged with is there a similar basis, they're asking.
Based on you know clearly there is some pressure on Oems right now given the proposed cafe standards in the U S. I'm, just wondering how that might impact your business in wireless BMS. Thank you.
Yes, yes.
Extension win that we talked about this quarter is really that.
Our global OEM that has such a strong presence in North America and our.
As I mentioned on the prepared remarks earlier or some of their higher end.
Large suvs and trucks.
Also.
This is <unk>.
See first look a great example of the platform strategy of <unk>.
Towards that we have.
I've discussed previously.
The development of the product and of course across multiple vehicle models at the Oems.
So we were anticipating to grow in terms of the number of vehicles, we would have with this.
And the number of vehicle models that we have with GM, which is also.
I would say that temperatures.
Progressing as we had.
This strong position to help these Oems achieved there.
Near term and midterm targets in terms of the <unk>.
Number of vehicle models that they have scheduled for launch.
I think that goes.
As you know they have.
Deliveries happening later, so we entered the year with a very strong order backlog with most of our customers.
Europe and with the.
Filling.
We will continue to see pretty strong demand there.
And so that should should remain produce.
We have a different dynamic with the customer production mix that is more favorable nonetheless, our new launches there have been helping us in terms of revenue growth. So now the concern if any which is what we've tried to answer.
Yes.
And Sheridan discussion.
Continue to.
Think of the full year in terms of the guidance that we've provided earlier and stay consistent with it.
Okay. Thanks, I'll leave it there.
Your next question is from the line of Emmanuel Rosner with Deutsche Bank. Your line is open.
Hi, Thanks and good.
Good morning.
So all the good color on the.
Wireless BMS.
The win follow on when you may be remind us when I look at this slide six in the various wins and milestones accomplished can you just remind us we expected sequence of startup production.
Some of these announcements so far.
Sure so with respect to <unk>.
We have already obtained and production with them since last year.
We will continue.
Some of the launches that they have scheduled this year.
<unk> has also been public about their expectations of the volume.
They have discussed on therefore, so you probably have a directly from them and we will be supporting those volumes into beer term.
Respect to this extension.
The second OEM that we talked about on this call are those launches are happening in the middle of 2024 and early 2025.
And that's we've talked about a couple of vehicle models previously.
This win adds as or more vehicle models off so that's that's going to be.
Addition to our 2020 for 2025 launches.
And so again I would not want to suggest that this was something new we were anticipating this but it's always good to.
B.
Booking this business in.
All of that up advanced flat. So that's how this this new.
Near term 2023 24.
Launch schedule is looking like as we mentioned we have about 24 vehicle models that we wont be launching one with BMS in this timeframe.
But you will probably take us to the middle of 2025 before most of these are launched.
And then premium brands of the German OEM in terms of timing.
That's also 2024.
Okay understood.
And I guess as a follow up I think.
And the early part of the presentation I think you suggested that the second quarter performance can be similar too.
To the first quarter could you just help us out with.
Sort of like high level bridge of the puts and takes.
Yes, no thats a.
Good question so.
There are three factors impacting Q2 first we and you saw <unk> being slightly up in Q2 versus Q1. So we think that volumes could be slightly higher but I think IHS is up by one 8%. So nothing dramatic so we still expect sales to be.
Slightly a $1 billion for Q2.
In terms of recovery, which is the second driver of profitability, we do expect to see similar a similar level of leakage in in the second quarter versus what we've seen in Q1 with some customer deals as I said.
And do you see that earlier, but all the deals are essentially retro first upjohn, so it doesn't really change.
The dynamic so much and then the third item is the fact that our engineering costs will go up a little bit in.
In Q2, and as you see.
Throughout the last few quarters, we've been seeing some uptake on the on crossing generating we are expecting as well as some level of offset on the engineering recovery side, but <unk> still be a slight negative. So in summary, maybe a little bit higher volumes offset by a little bit more engineering cost and then flat on neutral.
Our recoveries from an EBITDA leakage points quarter over quarter.
So that should give us a an EBITDA in that 10% Mark similar to what we've seen in the in the first quarter.
That's super helpful and I guess just for the for the year overall in terms of cadence.
Do you see any specific pronounced cadence for the growth of our market I guess on a year over year basis.
So in terms of go to a market, which by the way is dependent obviously on.
The prior year's performance year over year calculation.
We do expect that.
The balance of the vehicle production being speculative maybe.
In terms of year over year comparison, the growth over market in the second half.
Should be.
This concludes our earnings call for the first quarter 2023 results. Thank you everyone for participating in today's call and your ongoing interest in Visteon do you have any follow up questions. Please contract contact me directly thank you.
This concludes vis John's first quarter 2023 results earnings call you may now disconnect.
Please wait the conference will begin shortly.
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Yes.
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