Hayward Holdings Inc. Q1 2023 Earnings Call
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I will now turn the call over to Kevin Nash, Vice President Investor Relations.
Mr. Moskow. Please go ahead.
Thank you and good morning, everyone. We issued our first quarter 2023 earnings press release. This morning, which has been posted to the Investor Relations section of our website at Investor <unk> Dot com there.
There you can also find an earnings slide presentation that we will reference during this call.
I'm joined today by Kevin Holleran, President and Chief Executive Officer, and IV, and Jones, Senior Vice President and Chief Financial Officer.
Before we begin I would like to remind everyone that during this call. The company may make certain statements that are considered forward looking in nature, including management's outlook for 2023 and future periods such statements are subject to a variety of risks and uncertainties, including those discussed in our most recent Form 10-K and Form 10-Q.
Fillings with the Securities and Exchange Commission that could cause actual results to differ materially.
The company does not undertake any duty to update such forward looking statements.
Additionally, during today's call the company will discuss non-GAAP measures reconciliations of historical non-GAAP measures discussed on this call to the comparable GAAP measures can be found in our earnings release and the appendix to the slide presentation I would now like to turn the call over to Kevin Howard.
Thank you Kevin and good morning, everyone. It's my pleasure to welcome all of you to Hayward's first quarter earnings call I will start on slide four of our earnings presentation with today's key messages I am pleased to report first quarter results in line with expectations, reflecting strong execution in a challenging operating environment, including adverse weather conditions in certain key markets.
That we successfully offset with market share gains sales out of the channel were stronger than sales into the channel as our partners made further progress recalibrating the level of inventory on hand.
We maintained disciplined cost control by reducing production levels to align with current market conditions and delivering on our previously communicated commitment to reduce SG&A cost price realization remained favorable offsetting inflation. These efforts resulted in robust profitability as we delivered excellent structural margins at lower volumes.
Especially pleased with sequential gross margin expansion of over 400 basis points. Despite lower net sales as we proactively manage costs, we continue to invest in the business to support customers with innovative new solutions and superior service and drive future growth to that end, we continue to launch exciting new products and I'll highlight some examples in a mall.
We also hosted two significant customer events, our first ever partner summit in Nashville, and a large builder event in Phoenix. These events showcased our technology leadership and provided value added training opportunities. The dealer response was exceptional and we expect these unique customer engagements to drive brand loyalty and increased demand for Hayward products in <unk>.
Services going forward overall I'm proud of our performance during the quarter. Finally, we are maintaining full year guidance for the full year 2023, we continue to expect net sales to reduce approximately 18% to 22% and adjusted EBITDA of $265 million to $285 million looking out beyond 2023.
We have every expectation of resuming a solid historical growth trajectory of mid to high single digits.
Turning now to slide five highlighting the results for the quarter net sales in the first quarter reduced 49% year over year to $210 million largely due to channel inventory movements and softer market conditions related to global economic uncertainty. This compares to a period of extremely strong growth of 23% in the first quarter of 2022.
And 96% in the first quarter 2021, we are seeing a return to more normal seasonality with Q1 expected to be the low point for total net sales.
We are encouraged by continued positive price realization to offset inflation and the success of our innovative new solutions as I mentioned, the gross margin performance in the quarter was exceptional despite reduced net sales gross profit margins expanded 20 basis points year over year, and 430 basis points sequentially to a robust <unk>.
36, 6% our operations teams have done an outstanding job to start the year with a right sized manufacturing cost base and we are encouraged by this ability to maintain gross strong gross margins at much lower production volumes.
Adjusted EBITDA in the first quarter was $45 million with a margin of 21, 4%, we realize the expected SG&A savings under our cost reduction program adjusted EPS in the quarter was seven.
Turning now to slide six for a business update we estimate that Hayward captured significant market share over the last three years. This was most notable in the strategically important U S sunbelt and in critical products like Iot controls variable speed pumps water standardization and led lighting are Iot digital leadership position.
It's clear the market is responding favorably to the connected products within our omni automation ecosystem and we continue to gain traction with dealer additions and are totally Hayward loyalty program underlying end consumer demand trends continue to moderate in North America with the Sunbelt an area of relative strength, whether it was historically.
Favorable in Western markets, and we were pleased to offset this with further market share gains in the west and the southeast overall, Europe and rest of world exceeded our expectations in the quarter and I am very pleased with the performance of our team, particularly in targeted new Asian markets, where we have realized growth year over year.
Our channel partners continue to recalibrate the level of inventory to be appropriately positioned relative to a softer global economic outlook normalized lead times and higher cost of carrying inventory. This played out generally as expected in the first quarter as we continue to believe the channel will trend towards the low end of historical ranges.
Inventory days on hand over the course of the year turning to the price versus cost dynamic we implemented a price increase of 4% to 5% at the beginning of January to maintain price cost neutrality and we are realizing this pricing as expected as you know we took a number of proactive actions in recent quarters to streamline the organization.
<unk> optimized the cost structure and support margins. This included a reduction of variable cost in our manufacturing cost base and supply chain as well as structural SG&A savings of $25 million to $30 million on a full year basis. These actions are intended to maintain a healthy margin profile with full year gross margins in the mid to high.
<unk> <unk> and adjusted EBITDA in the high <unk>, we are delivering on these commitments.
Finally, we continue to make great progress on our ESG journey I am pleased to report that Hayward received the 2023 regional top rated award for ESG performance by Morningstar sustained <unk>, a leading ESG research ratings and data firm, while still very early in our journey. We are proud to be recognized with one of the best ESG.
Ratings for all companies in the U S and Canada, turning now to slide seven last quarter I detailed our new product development strategy and shared some of the recent innovations driving our technology leadership in the industry today I would like to highlight two new product launches smart power is the first to market technology, which revolutionize mulch.
<unk> zone lighting in the backyard encompassing the pool spa water features and landscape lighting this dramatically reduces component and labor costs, while increasing reliability and ease of use for the homeowner next the trackback suction cleaner this new cleaner outperforms, its peers and superior pool surface coverage speed of cleaning and ability to handle.
Any obstacles it encounters we continue to prioritize investments in the development of new products like these to further strengthen our competitive positioning and support customers with industry, leading products and technologies, turning now to slide eight I'd like to reemphasize the attractive long term fundamentals of the oil industry and Heyward.
23 is a Europe normalization softer market conditions related to global economic uncertainty channel inventory reductions and comparisons to periods of strong growth are impacting near term results. We view this as a temporary dynamic in a resilient industry characterized by consistent growth driven by an ever growing aftermarket.
I would like to revisit the solid long term fundamentals and growth outlook, a number of secular tailwind, including the appeal of outdoor living sunbelt migration connected smart home technologies and environmentally sustainable products are here to stay and the pool industry is a beneficiary of each of them more.
<unk> to the industry the large installed base of over $5 million in ground pools in the U S and 25 million pools globally increases each and every year as new pools are built and the average age is highest on record. This provides significant opportunity for aftermarket sales as pool owners maintain and modernize their pools with new Iot enabled.
Technology to enhance enjoyment ease of use and cost of ownership as we've discussed in the past Hayward enjoys deep rooted competitive advantages that strengthen our market position and drive compelling long term growth for our shareholders. We have an incredibly strong and trusted brand nearly a century in the making and one of the largest installed base of that comes from having a.
<unk> product line across all pool types proven technology leadership operational excellence and multichannel strength are meaningful differentiators for Hayward to summarize we are proactively managing through this year of normalization controlling what we can control to best position the company for robust growth and profitability.
Over the long term as a leader in this very attractive industry I'm optimistic about hayward's long term growth outlook with that I'd like to turn the call over to IBM Jones, who will discuss our financial results in more detail.
Thank you, Kevin and good morning, I'll pick up on slide nine all comparisons I will make will be made on a year over year basis. We are pleased with our first quarter financial results net sales were in line with expectations and reflected a return to normal seasonality coupled with a progressive right sizing of the channel inventory, we delivered exceptional sequential gross margin.
Back into the high <unk> and we're realizing our SG&A cost reductions in line with plan our balance sheet is strong with first quarter seasonal use of our revolving credit facility now fully repaid as of today with expected strong cash flow for the balance of the year.
Specifically, our net sales for the first quarter decreased 49% to $210 million. This was in line with our expectations and driven by a 54% reduction in volume, partially offset by positive price realization of 5%. It is important to understand that the volume decline during the quarter was primarily driven by dish.
<unk> channel inventory movements. In addition to moderating demand trends in discretionary elements of the markets, namely new construction and larger models.
Despite the reduction in sales in the quarter, we've delivered a three year CAGR of 7% when compared to the first quarter of 2020, the last pre COVID-19 quarter. After three year stack growth of approximately 24% gross profit in the first quarter was $98 million gross profit margin increased 20 basis points year over year and 430.
The basis points sequentially to a strong 46, 6% disciplined manufacturing cost control continued price realization are moderating input cost inflation more than offset the impact of reduced production volumes. We have worked hard to achieve price cost and travelocity and recalibrate, our manufacturing cost base to deliver this.
<unk> gross margin performance has set the business up well to deliver robust profitability for the remainder of the year and beyond selling general and administrative expenses declined 20% year over year to $55 million in the first quarter. As a reminder, we took proactive actions during the fourth quarter of last year to streamline the.
<unk> organization and optimize the SG&A cost structure, and we're delivering on the targeted run rate savings of $25 million to $30 million annually adjust.
Adjusted EBITDA was $45 million in the first quarter and adjusted EBITDA margin was 21, 4%. We're pleased to maintain adjusted EBITDA margin north of 21% of these reduced volume levels and we're positioned to drive solid margin expansion as volume growth returns. Despite the year over year reduction in the quarter we delivered.
Full year net sales and adjusted EBITDA, CAGR, 7%, 8%, respectively, when compared to the first quarter of 2020.
Our effective tax rate was 9% in the first quarter compared to 24% in the prior year period. The year over year change was primarily due to the timing of a discrete tax benefit adjusted EPS in the quarter of <unk>.
On a fully diluted share count of approximately 221 million shares diluted share count decreased approximately 23 million shares or 9% year over year as a consequence of share repurchase activity in the prior year, Let's turn now to slide 10 for a review of our reportable segment results North America net sales for the first.
Water declined 53% to $163 million, driven by 59% lower volumes, partially offset by a favorable 5% price impact the reduction in volume again was largely due to anticipated right sizing of channel inventories and a moderation in market trends.
Gross profit margin was 48, 6% a sequential improvement of 560 basis points and adjusted segment income margin was 24, 1% again, we are pleased with the margin performance in the quarter and frankly very proud of the operations team in that success Recalibrating our manufacturing cost.
Space a tremendous achievement.
Turning now to Europe , and rest of World net sales for the first quarter decreased 26% to $47 million net sales benefited from a favorable pricing increase of approximately 5%, but we were adversely impacted by a 28% decline in volumes due to channel inventory reductions and the impact of the geopolitical circumstances and more.
Both in Europe , as well as a 2% headwind from unfavorable foreign currency translation.
Gross profit margin was 39, 8% and adjusted segment income margin was 21, 2%.
Turning to slide 11 for a review of our balance sheet and cash flow highlights total liquidity at the end of the first quarter was $263 million, including a cash and cash equivalent balance of $41 million and availability under our credit facilities of $222 million net.
Net debt to adjusted EBITDA was four one times compared to two nine times at year end 2022, the increase reflects reduced EBITDA in a seasonally soft period for cash collections in the first quarter, a large part of our accounts receivable at the end of Q1. These early buy business sold on extended terms to be collected in Q2, we expect.
Net leverage to be closer to three times by the end of the year as of today. Our ABL is undrawn. Additionally, we will not make any excess cash flow payments in 2023, given our credit agreements permit deductions for capex share repurchases and M&A.
We plan to complete the transition from LIBOR to soap on some loan borrowings during the second quarter. This change will not materially impact our financial position our borrowing rate continues to benefit from the 600 million of debt currently tied to fixed interest rate swap agreements cash flow from operations was a use of $91 million in the first quarter.
Reflecting the increase in accounts receivable driven by early by award incentives inventory declined sequentially in the quarter after peaking in the third quarter of 2022 and is down $39 million since that capex of $6 million in the first quarter was consistent with the prior year period, and consequently free cash flow was a use of 97 million.
We have strong free cash flow generation characteristics, driven by high quality earnings, but cash flows are seasonal with a return to normal seasonality of the company will typically use cash in the first quarter and generate cash in the balance of the year, we expect free cash flow conversion of greater than 100% of net income with free.
Cash flow exceeding $150 million in 2023.
Turning now to capital allocation on slide 12, as we've highlighted before we maintain a disciplined financial policy and take a balanced approach emphasizing strategic growth investments and shareholder returns, while maintaining prudent financial leverage we continue to consider tuck in acquisition opportunities to complement our product offering geographic footprint <unk>.
Relationships and opportunistic share repurchases however in the near term.
Advertising organic growth investments in reducing that leverage within our targeted range of two to three times, turning now to slide 13 for our outlook. We remain very positive about the long term health and growth profile of the industry, particularly the strength of the aftermarket our outlook for 2023 is unchanged as we continue to anticipate a decrease.
<unk> consolidated net sales of 18% to 22%. This outlook reflects resiliency in the north American non discretionary aftermarket and reductions in new construction and discretionary remodeling upright in Europe and rest of world, We expect reductions of approximately 25% as geopolitical circumstances negatively.
Consumer sentiment in that region, although we are seeing green shoots in this segment.
These decreases will be partially offset by a 4% to 5% of net sales contribution from price increases initiated at the beginning of the year.
Unchanged guidance contemplates additional reduction of channel inventory in 2023, as a consequence of the reduced consumer demand a reversion to normal supply chain and a higher cost of tangible channel partners are adopting a lean inventory position given these dynamics and then moving to the lower end of that design days of August .
We expect gross profit margins continue to increase over the balance of 2023, we're holding our anticipated full year 2023, adjusted EBITDA in the range of $265 million to $285 million as discussed we also expect a strong improvement in free cash flow in 2023, as we reduce our own inventory levels with free.
Cash flow exceeding $150 million interest expense expectation remains unchanged at approximately $78 million, reflecting the current interest rate environment, our borrowing levels. The effective tax rate forecast remains approximately 25% for the remainder of the year on our Capex spending forecast also remains.
Is unchanged at $25 million to $30 million.
I'll close on the same point that I started I am proud of the Haywood team's ability to rapidly recalibrate delivering net sales in line with expectations and a significant improvement in gross margin back into the high forties, realizing SG&A cost savings in line with the plan and managing cash flow in line with normal seasonality.
And with that I'll now turn the call back to Kevin.
Thanks, <unk> I'll pick back up on slide 14, before we close let me reiterate the key takeaways from today's presentation, we delivered first quarter results consistent with expectations and reaffirmed our outlook for the year, our team executed well in a challenging environment, maintaining disciplined cost control demonstrating our agile manufacturing capabilities and.
Offsetting weather related headwinds with share gains, we're very pleased with the strong gross margin performance in the quarter. We continued to invest in our business to drive future growth and believe the actions. We are taking today are strengthening our position as a premier company in the attractive pool industry.
Finally, I am confident we have the right strategy and talent in place to drive compelling financial results and shareholder value creation with that were now ready to open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Yeah.
Please pickup your handset before pressing the clean.
To withdraw your question Chris.
Bill.
At this time, we will pause momentarily to assemble our off there.
Our first question comes from Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, everyone.
Good morning Jud.
Really just wanted to dig in on this gross margin I mean really impressive sequential improvement here given the sales drop and maybe just unpack the moving pieces to really drive that and then it sounds sustainable maybe just talk about whats to come on the gross margin line. Thanks.
Yes, great.
Yes.
I would say that we saw great execution from our operations and supply chain teams.
To see over 400.
Basis point improvement sequentially, and a more modest improvement year over year, obviously volumes were significantly different first quarter last year versus this year is a great accomplishment.
I would say the price increase that took effect first of January again delivered price cost neutrality.
We're seeing a moderation in inflation by no means deflation, but a moderation.
As supply chains by and large are back to normal on no longer requiring us to venture into the spot buy market or air freighting or working over time. So all of those are obviously headwinds that we no longer face from a gross margin standpoint. So.
I would just close Jeff by saying as we've shown over the last two years, we have installed capacity that can fuel future growth with very modest to no capex. So I think we're well positioned as volumes.
Improve that we can continue driving higher gross margins through the business.
Okay, Great and then.
Just kind of on that and then North America business, maybe just.
A level set us on where you think the progress is in the destock versus maybe how you thought it would be exiting <unk> and then.
The weaker kind of guide for North America is that just a function of kind of the early weather or is there something more more broad than that.
I'll take the I'll take the channel side.
Say that Q1, we expected and called for channel Destock in Q1, it was reflected in our guidance and it largely played out to our to our expectations.
<unk>.
Our retail and channel partners.
Data coming back to us would reflect sort of mid teen to high teen.
Sell out or decrease year over year, which I think is.
As consistent really industry wide and then the balance is really channel destock. So we made great progress we would call for the channel to be back to normalized levels.
By the end of the season latest if not sooner.
Yes, so we feel that good progress was accomplished here in the first in the first quarter Jeff.
Jeff it's out of it in terms of the guidance for North America, we adopt new construction.
Decrement up a little bit less seeing declines in the in the first quarter here. It has leveled off a little bit as we exit Q1 into Q2, but we have taken the current new construction demand and is an indicator that maybe we need to move up to minus 30%.
In terms of new construction decrement year over year, I would say we have some balancing attributes.
The other parts of the business and that's enabled us to keep guy.
Guidance for behavioral totality in that 18% to 22% range.
And that sales level.
Okay. Good color guys. Thanks.
Sure.
Our next question comes.
Ryan Merkel with William Blair. Please go ahead.
Hey, guys two questions for me.
First off you mentioned the weather I'm just curious if you could quantify the impact in the quarter as your sales were better than I was thinking and then in areas, where you saw better weather in the quarter.
See better sell through.
Yeah.
I would say weather probably impacted a couple of points.
I think probably.
It had an impact on what could have occurred in the first quarter.
As I think you've heard from some others before us.
The West coast, both both very wet and very cold.
Rely on on some sell out in that California, Arizona region, which was certainly impacted in the first quarter I think the impact there on US is is is maybe to sell out is a little less than that it could have been in those regions and that may impact the timing of some reorder.
<unk>.
Back into those regions of the country Conversely.
If you really look sort of sort of Texas east and particularly in the southeast.
We had strong.
Weather patterns, both from a precipitation and temperature standpoint, and we saw really strong performance in those regions, particularly Florida.
Southeast where.
Q1 was was very warm and in the case of Florida.
Had very minimal precipitation and more normal precipitation in the southeast U S. So, yes, we would say that where where weather was not a headwind.
And that the performance was was much more in line to maybe even better than we initially expected.
Got it that's helpful. Kevin and then I wanted to follow up.
Question on the non discretionary part of your business.
There is some theories out there that that might not hold up as well people might repair equipment versus replacement there could be some trade down I know, it's the first quarter. It's a small part of the season, but are you seeing any fears there that that could be worse or that part of the business tracking as expected.
Yes, I mean, as I've said I think we ticked down.
The range, maybe five points from our initial guide specifically around new construction and some of the renovation or the upgrade activity. So I would say, it's generally playing out the way we.
<unk> guided.
Certainly.
Our input from from our builders that are large renovators is that theyre.
They're not quite as busy as they were in the past few years, but again. This is this is an industry that is known for 50 plus percent very resilient very non discretionary aftermarket that's holding up extremely well and.
We're just keeping close close tabs on call at that 40% 40 plus percent of the business that's more discretionary in nature, whether thats the decision to build a new pool or to take a pool offline in and renovate it.
We're keeping close tabs on that here in 2023 as certainly monetary policy is is having an effect on some of that consumer discretion right now right.
Perfect I'll pass it on thanks.
Thanks, Ron.
Our next question will come from.
Sorry.
With Jefferies. Please go ahead.
Good morning.
Just following up on that question you have a few updates Alex for new construction and Remodels that you went through that could you quantify how youre thinking about that more resilient aftermarket demand piece of the business.
Yes, hi, <unk> and timing of impairment.
The aftermarket where basically calling it flat year on year.
<unk>.
We are beginning to see some positive momentum in markets that we've targeted for market share gains.
We've seen some good results coming out of the West coast, even though that had.
Some weather impacts in that region, we still performed very well comparably against expectations.
Tons of the southeast and the Florida markets in the U S. We saw some great momentum that in those markets as the warm weather enabled.
Maybe an earlier start of the season that which was great to see and Thats predominantly aftermarket and then as I mentioned in my in my prepared remarks are beginning to see some green shoots in the aftermarket in Europe , which is kind of hunker down for the last year, we're beginning to see some positivity coming out of northern Europe and again in new markets that we're targeting on the export.
Syed.
Particularly in Asia, So I would say right now we're feeling positive about the aftermarket as Kevin said is resilient and we're seeing that resiliency.
Come through in our Q.
One results.
Clearly if you go back a year ago, there was probably some more heat being sold into the channel than there is currently but generally speaking as we see today, it's a full complement of products going into the channel.
So thats very positive.
It reinforces the.
The new product programs that we've put into place.
We mentioned, our new product introduction program vitality index in Q1 was 20% which is sequentially up from Q4, but at this time, it's a full complement with maybe a little bit less heat that we saw a year ago.
Theres still a high demand for Iot and controls.
We see that as a positive driver labor a little bit.
<unk> bullish about Europe coming into the year, that's actually calculating a bit more positively than we expected and elsewhere and rest of world as well, we need the seasonal markets in North America that start opening up and our guidance reflects a.
A robust sequential improvement in sales from Q1 to Q2 as well as channel destock.
In Q2, I would just add Josh that there are some some products I just mentioned a few more think of the electric electronic products, whether it's solved chlorine led lights or automation and controls where we were much more hand to mouth up until very recently, so we just.
And in a position to really overstock.
Where the channel wasn't in a position to really overstock.
There so more of the products that we caught up on sooner would be the product categories that we collectively are working hard to get down to more normal days.
On hand.
Got it that's all.
And then just on the destock side, we've covered a lot of ground, but I'm just wondering.
Higher interest rates and kind of the sensitivity around seasonal working capital lines of credit is maybe causing distributors to throw the switch a little harder than usual on inventory and I guess, what I mean is when we get through this we'll will they potentially be far too low just because the carrying cost is high.
I, certainly think that the interest rate the carrying costs are impacting some channel partners.
Decisions on inventory I think I think that decision is perhaps made a little easier given the fact that lead times from the Oems are back to normal.
So yes.
Yes, I mean, we're keeping close tabs on on understanding what the service levels are what the inventory levels are as we really open.
All markets heading into the pool season here and while we've resized our factories based upon the demand environment.
We will do everything possible to be able to respond.
If by chance we have.
We lowered inventory at some air to some regions or some product categories lower than that and also the channel want.
That's helpful color forecast.
Thanks, Josh.
Our next question comes from Brian Lee with Goldman Sachs. Please go ahead.
Hey, everyone. This is miguel on for Brian I think all or most of our questions have been asked but I just had one if I could you guys talked about.
Green shoots in the rest of World and then in the slides you've called out rest of world is exceeding expectations. So just wondering could you maybe give more color on that what markets, what's driving those regions and whether that's market share gain or just better underlying demand or anything notable.
So the short answer is yes, and yes, we targeted markets and rest of world. We put some sales teams into those regions will call the new regions.
We service them buy bonds, but now we've got personnel, particularly in the Asia market and we've seen great. Great response to the Hayward brand in that region that has been very positive in Q1 in terms of Australia, which is another big pool market.
It's also better than expectations.
That's good to see the middle East is a little bit a little bit off.
But more than compensated by the other regions and when we get into Continental Europe , Northern Europe again, we've started to see some green shoots, particularly in the key German market, where they have a high attachments controls and technology, we're beginning to see some calculation that I would add domestically the commercial market.
<unk> pool market.
Has been has been strong that's been an area of relative strength.
In the U S. Obviously that was more impacted in the early days of Covid.
Performed extremely well since.
Gil.
Great. Thanks, everyone I'll pass it on.
This concludes our question and answer session I would like to turn the conference back over to Kevin for closing remarks.
Thank you Jordan in closing I'd like to thank everyone for their interest in Hayward, our business is very well positioned to navigate the near term challenges and deliver value for all stakeholders. In the years ahead. This would not be possible without the hard work dedication and resilience of our employees and partners around the world.
Please contact our team if you have any follow up questions. We look forward to talking to you again on our second quarter earnings call. Thanks, Jordan, you've been out when the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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