Q3 2023 Construction Partners Inc Earnings Call
Greetings and welcome to the construction partners third quarter earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
Keypad as a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Rick Black with Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. We appreciate you joining us for the construction partners conference call to review third quarter results for fiscal 2023.
This call is also being webcast and can be accessed through the audio link on the events and presentations page, but the investor.
<unk> section of construction partners Dot net.
Information recorded on this call speaks only as of today August 2nd 'twenty 'twenty. Three so please be advised that any time sensitive information may no longer be accurate as of the time.
Any replay listening or transcript reading.
I would also like to remind you that statements made in today's discussion that are not historical facts, including statements of expectations or future events or future financial performance are considered forward looking statements made pursuant to the safe Harbor provision of the private Securities Litigation Reform Act of 1995, we will be making forward looking.
Statements as part of today's call that by their nature are uncertain and outside of the company's control actual results may differ materially. Please refer to today's earnings press release for our disclosures on forward looking statements. These factors and other risks and uncertainties are described in detail in the company's filings.
With the Securities and Exchange Commission.
Management will also refer to non-GAAP measures, including adjusted EBITDA.
Liliaceous to the nearest GAAP measures can be found at the end of our earnings release construction partners assumes no obligation to publicly update or revise any forward looking statements and now I would like to turn the call over to construction partners CEO Jule Smith jewel.
Thank you Rick and good morning, everyone.
With me on the call today are Greg Hart, our Chief Financial Officer, and Ned Fleming, our executive Chairman.
We are pleased to report an excellent quarter in fact, it was a record quarter for CPI in numerous ways.
I want to thank our over 4000 employees for their hard work and expertise in delivering this record quarter, despite battling wetter than normal conditions.
Employees are the key to our success at CPI.
Not only did they deliver a great quarter. They also continued to set the table for future growth and success by adding strong backlogs go out our six states and establishing several growth initiatives, which we will cover on the call the day before Greg reviews, our financial information.
Q3 represented the single highest revenue quarter in our history at $422 million.
As evidenced by our gross margins of more than 15% our teams throughout 67 local markets were productive and efficient.
When comparing year over year revenue. It is important not only to take into account the above normal precipitation this quarter, but also the abnormally high liquid asphalt index adjustment last year that produce $10 million of additional revenue.
C. P. I continues to produce strong organic and acquisitive growth in our revised guidance announced today reflects an anticipated annual growth of over 18% in FY2023.
As anticipated in the third quarter substantially all of our work came from post inflationary backhaul.
Additionally, the company benefited from lower energy costs.
The result of the hard work backlog conversion and some lower costs with strong gross margins net income adjusted EBITDA and cash generation.
Gross margins were 355 basis points higher than a year ago and adjusted EBITA margin was 13 point.
4%.
The highest single quarter margin in over two years.
Cash flow from operations continues to be strong as Cps model has historically generated free cash conversion of over 50%.
It's available to invest in growth initiatives and compound shareholder value.
In addition, we've made significant progress in lowering our leverage ratio during the quarter.
As we stated last quarter, our business is normalizing and we are now experiencing operational performance typical per CPR.
We continue to pursue healthy sources of recurring revenue and a much more stable and normal cost environment.
The expectation is for the business to maintain this performance trajectory.
A great indicator of future growth is our growing backlog, even though a record revenue quarter.
Historically CPI as backlog might shrink in the busy work season.
The fact that our team produced a record backlog for the 10th quarter in a row.
As evidence of growing relative market share in our local markets and continued strong demand.
In both the public and private markets.
Yeah, Jay as investment in public infrastructure is now in effect throughout our states and creating opportunities for road widening zoom resurfacing grid.
Bridge replacements airport taxi ways and many other types of bid opportunities for C. P F.
In the private markets migration to the South East United States continues.
<unk> continues to produce demand for our services and industrial <unk>.
Residential and residential projects.
Our record backlog gives us great visibility into the future and allows us to remain patient and adding high quality new work at attractive margins.
Turning now to CPI strategic growth model, we announced this week two growth initiatives.
First we acquired a hot mix asphalt plant and related operations and Myrtle Beach, South Carolina from C. R. Jackson.
Since we entered this market a year ago, we've been very impressed with the dynamic growth opportunity.
The opportunities in the second fastest growing metro area.
South Carolina.
This acquisition gives our local team additional resources to capitalize on those opportunities and grow our relative market share.
Second as we continue to focus on organic growth, we announced this week, a new hot mix asphalt Greenfield in Waycross, Georgia.
Our strategic location adjacent to our current South Georgia markets.
This greenfield will allow us to extend our reach eastward toward the rapid growth emanating from the large port and Brunswick, Georgia.
And finally, one of our key levers of margin expansion. This vertical integration and I am pleased to announce our new liquid asphalt terminal in North Alabama is now operational.
This terminal will capture the margin dollars between wholesale and retail.
Servicing over 12, asphalt plants, and Alabama and Tennessee.
Just as we have been successfully executing for four years with our Gulf Coast terminal and the Panhandle of Florida.
Before I turn the call over to Greg wont conclude I read or reiterating how pleased we are with the quarter.
And the outlook for the remainder of FY2023 as demonstrated by our raising of net income and adjusted EBITDA ranges.
As we look to FY 'twenty four and beyond.
Great to see the resilience.
And quick recovery of the CPI model operating effectively.
The company is ready for and benefiting from opportunities afforded by a generational investment in infrastructure.
Booming economy in the southeast.
And numerous growth opportunities as we consolidate and strengthen our industry.
We are indeed inside for the road ahead.
I'd now like to turn the call over to Greg.
Thank you Jill and good morning, everyone I'll.
I'll begin with a review of our key performance metrics in the third quarter of fiscal 2023 before discussing our raised outlook ranges.
Q3 revenue was 421 $9 million, an increase of 10, 5% compared to the same quarter last year.
Excluding $10 million of additional revenue from liquid asphalt index reimbursements in the third quarter last year due to the large increase in asphalt prices.
Growth was 14%.
Gross profit was $64 $1 million, an increase of approximately 45% compared to the same quarter last year.
As a percentage of total revenues gross profit was 15, 2% in the quarter compared to 11, 6%.
Same quarter last year.
General and administrative expenses as a percentage of total revenue in the quarter were seven 6%.
Compared to seven points, 7% in the same quarter last year.
In Q3, net income was $21 $7 million, an increase of 78% compared to $12 $2 million in the same quarter last year.
Adjusted EBITDA was $56 $4 million, an increase of 50% compared to the same quarter last year.
The adjusted EBITDA margin for the quarter increased to 13, 4% compared to nine 9% in the same quarter last year.
Find GAAP to non-GAAP reconciliations of net income and adjusted EBITDA financial measures at the end of today's earnings release.
In addition, as Joe mentioned, we are reporting a record project backlog of $1.59 billion at June 32023.
Turning now to the balance sheet, we had $55 million of cash and cash equivalents and $182 million available under the credit facility.
A a reduction for outstanding letters of credit.
We have $277 5 million principal outstanding under the term loan and $143 $1 million outstanding under the revolving credit facility.
This is unchanged from March 31.
Separate term debt payments of $3 $1 million.
The availability on our credit facility and cash generation will continue to provide flexibility and capacity to allow for potential near term acquisitions and high value growth opportunities.
As a reminder, the company entered into an interest rate swap agreement that fixed the sofa at 185% which was.
<unk> and an interest rate on $300 billion of term debt of 3.35%.
This is a reduction from three 6% in prior quarters.
Due to the decrease in our leverage ratio, which improved our super spread.
Sure. The date of this swap is June 32027.
As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 2.27.
Our expectation is the leverage ratio will continue to trend downward.
The fiscal year end.
Cash provided by operating activities was $48 $8 million for the quarter.
Compared to the use of $13 million of cash in Q3, FY 'twenty two.
For the first three quarters of fiscal 2023, we have generated $94 $5 million of cash flow from operating activities.
Capital expenditures were $18 $6 million for the quarter we.
We continue to expect capital expenditures in fiscal 2023 to be an age of $80 million to $90 million.
This includes maintenance capex of approximately $3 two 5% of revenue with the remaining amount invested in high return growth initiatives.
Stork Lee we have converted retained cash flow in the range of 50% to 60% of adjusted EBITDA After subtracting interest expense and taxes.
And we are on target to generate that amount in 2023.
Retained cash flow has been invested in attractive long term investments generated 22% adjusted EBITDA growth in the last fiscal year, despite a challenging macro environment.
And this year is on track to generate 45% to 50% growth in adjusted EBITDA.
These investments include the Alabama liquid asphalt terminal.
Spanning into Waycross, Georgia, and acquiring and HMA plant in Myrtle Beach, South Carolina that Joe mentioned earlier as.
As we continue to utilize this retain cash for high value growth investments, we expect margins to increase organic growth to continue and shareholder value to come out.
Today, we are tightening our revenue range and raising our net income and adjusted EBITDA ranges for our fiscal year 2023 outlook and we now expect.
Revenue in the range of 1.535 billion to 1.555 billion.
Net income in the range of 41 million to $46 million and adjusted EBITDA in the range of $161 million from $169 million.
And with that we are now ready to take your questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is another question queue. You May press star two if he would like to remove your question from the queue.
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Your first question comes from Tyler Brown with Raymond James. Please go ahead.
Hey, good morning, guys.
Good morning, John .
Hey, good morning, Tom Congrats on the Yeah, Hey, congrats on the quarter you know Joel is there any way you could quantify just how much weather did cost you in the corner I mean, I don't normally ask because I get it that what is the part of the business.
But it just seemed like it was awfully wet this quarter, particularly in April I think it maybe highlights just how strong the underlying businesses.
Yes Tyler.
You know there was a report that said that in our local markets.
When measuring around on each of our asphalt plants at the precipitation was 30% higher than normal 130% of normal and so I think that's pretty accurate and.
We can't quantify exactly how much that is but I would just say you know it was significant but the good news is our crews and our people bought through it and delivered.
<unk> delivered a great quarter with record revenue.
The revenue would have been higher if we had had typical weather, but I was really impressed to see the margins come through and I think that's what we anticipated and even with the precipitation we had debt.
That was a great result.
Interesting okay, great, we're gonna get to Washington, just a SEC, but real quick Greg do you I may have missed it but did you have what the or did you state what the M&A contribution was in the quarter to revenue.
News of roughly 3%, but that's right.
Oh, Qwizdom, sorry, 10% I'm, sorry, I thought you were asking organic 10% acquisitive.
Okay, 10% perfect and then maybe on that going back to the asphalt adjustments. So I get it that there was a $10 million contribution last year was there actually a negative adjustment. This year does it seem like to get to that 3% drag you needed that there's probably a negative this year.
No actually in the earnings release, we had a revenue reconciliation for both this year and last year, it's about a $1.5 million pick up for this year, so $8 5 million delta year over year.
Okay, all right I'll take a look at that and just maybe lastly here I kind of do you want to come back to margin. So.
I know this may be hard, but you mentioned 350 basis points of improvement year over year, but can you kind of unpack what drove that I mean, if we think about our margin bridge I mean, I know that there was lower zero margin index revenue adjustments, maybe that was a help.
Prices will help but I surmise that even with those tailwind for margins for roads.
Yes Tyler.
We did say energy costs as they trend down it's a little bit of a tailwind and but I would say overall, it's just CPI getting back to normal and be enabled to build work, where we were able to bid the cost the way. The world was you know for over.
Over a year now we've just been finishing that pre inflationary backlogs that are there.
The calls just we didn't have the access to know it and so as we build work where we knew the input costs and we're able to bid that way youre starting to see that just come through and so in a sense. It's really just returning to what we've always done and so I would say most of the margin improvement was that.
It is just the building work, we see that jobs are finishing higher than you.
You know the bid margins or which is typical so that to me would be most of it.
Hum.
As far as a bridge I don't know, but that's I would say, it's really just getting back to building.
Typical backlog.
Okay perfect. Thank you got so much for the time.
Alright, thank you.
Your next question comes from Kathryn Thompson with Thompson Research Group. Please go ahead.
Hey, Good morning. This is actually Brian Biros on for Catherine. Thank you for taking my question, Brian Good morning.
Good morning, everyone.
To start I guess I think in the press release, you guys mentioned Iga is fully implemented.
Just provide some more context around what that means in the context for today.
Are you actually seeing.
On the grounds.
Projects new projects being worked on that is funded from J, a or is it more of the money is still going to design and engineering are kind of just funding projects that are already in process. I guess, just what does that look like now and going forward for you.
Yeah, Brian .
Good question, a J a clearly is a big deal, it's a generational investment in infrastructure for our industry.
So five year plan as we all know it started later.
Later than expected and so it's really the lettings in our states really just started happening last fall and this past winter.
You know.
On a regular basis. So I would just say that we're seeing it come through in the Lettings. It is funding projects.
I don't think it's going to be as impactful. This year that will be next year, I think you're going to continue to see it ramp up.
And this can provide five years of really good demand.
And it's not just roads airports railroads.
<unk>.
<unk> stations all of that infrastructure CPI is going to be able to participate in.
Understood.
And I think building off of the the question from before you guys had mentioned that's just return to kind of a historical norm in terms of the price cost volatility going forward.
Headwind in the past year or two I guess has all of that.
Work that was bid pre inflationary environment has that rolled off and now we're kind of in this new cadence to return to basically the number of performance going forward is there anything else to consider as we finish up the year here in the next few quarters.
No Brian I really think our updated guidance reflects we feel really good about the fourth quarter. You know our model is it you know, we're estimating and bidding jobs every day in our jobs have a typical duration of nine months to a year and so we were able to burn through that pre inflationary.
Backlog that we got surprised when inflation hit it took us about a year and we're through that for the most part.
With very minimal left and so we're really just seeing now are the results of just getting back to our normal model, which is being able to bid jobs and the costs reflect the world as it is.
Yes.
Got it thank you.
Okay, Brian Thank you.
Your next question, Andy Wittman with Robert W. Baird. Please go ahead.
Hey, guys. Thanks.
Hey, good morning, Hey, so I just.
I guess I would wonder here, she will talk a little bit about labor in particular, so obviously, it's been a big factor over the last couple of years, you mentioned energy is a benefit.
But just can you just talk about your ability to find the labor and how the the the wages are comparing to the prior year.
Hey, Andy.
Labor continues to be a big topic. So that's a great question.
Feel like the labor market in a sense is normalized its still in our industry. We have to compete for work force.
And in the long term as you know we're gonna have to put Pete is our workforce.
Ages outlet tires, we see that at CPI is an advantage, we're going to do what it takes to attract and retain a workforce.
So that we can continue to grow and so we're doing a lot of things on that but in the short term I would say the labor market is really not.
Any impediment now.
To find the workers, we need in our local markets are doing a great job attracting labor.
Got it.
I was also also if you could comment on.
You your view on the the mix between the private sector and the public sector work that you do.
Or do you expect that.
Your company is going to be doing more work in the public sector as the impact of higher rates takes hold this year and next year.
So maybe address it that way or also just talk about kind of what youre seeing from your private sector customers today in terms of the bidding environment in terms of the number of bids that are out there.
Yeah.
Yeah, Andy I'm, Greg and I, when we were closing the quarter when we look at those numbers and we were.
Really surprising just how steady that 60 40 split is and you know you think that maybe it's going to trend up with a J a but it's really continued to remain right near that 60 40 split between public and private.
And we really see that's just an indication that the the southeast private market continues to be steady.
And I would just tell you know we.
We really haven't seen any drop off significantly in the amount of private opportunities you've got businesses come into the southeast and.
So I'm gonna, let Nick speak to a little bit more on the big picture, but I would say the split Andy is really just held very constant and we see that really remaining pretty close to that.
Andy I think one of the things we've done well for 20 plus years is where we are in growing markets. I mean, if you come to Greenville, or you go to the markets that we're in they're all growing and there's a housing shortage. So there's a supply issue with houses it's not.
And interest issue, it's a supply issue there are more people that want to buy houses, even though the interest rates are up and there are homes today and we see that in.
Market after market that we participate in so I think the private markets and the commercial markets for us are going to continue to stay really strong because the demographic growth of the areas that we're in is growing it's actually accelerating since COVID-19.
So we feel really good about the fact that.
We continue to be able to pick projects that we want to do or both sides of that curve.
Okay, Great. That's all the questions I had for today I Hope you all have a nice day.
Alright, Andy Thanks, Andy.
Your next question comes from Adam Thalheimer with Thompson Davis <unk> Company. Please go ahead.
Hey, good morning, guys nice quarter.
Yeah good morning.
And can you comment on them.
Bid margins our margins in backlog I'm, just I'm curious because you had a nice sequential.
Backlog growth and you called that out just give us a little color on on the type of work that you're putting in backlog right now.
Yeah, Adam the backlog we added this quarter.
Really good margins tried to margins, which tells us that people are busy and the demand out there is.
Strong and so we're continuing to see healthy margins there continue to grow.
In our backlog and so.
Thats, what gives us confidence to.
Raise our guidance for the fourth quarter, but also really just is going to really.
Help FY 'twenty four and beyond.
Well, that's where I was going Jill I was curious.
Maybe it's a little early but just curious if you.
Thank you might get back to historical EBITDA margins, which I think were more like 11, 12% on an annual basis.
Yeah.
Yeah.
Well FY 'twenty force coming so it's probably a good question to in time to talk about you know as we've said Adam and we still feel this way, we'd like to get back to 12%.
EBITDA margins in 'twenty four at least take a big step toward that we wanted to get back to double digit margins in 'twenty three and you can see now with our updated guidance.
We're really.
Our expectations have grown since the beginning of the year. So we're excited about the next year.
Okay. Good to hear and then just a last one on.
On the M&A outlook, what what's the attitude among sellers right now.
Well I've been on the road a lot lately, Adam So our M&A activity continues to be strong, we're having a lot of good conversations with potential sellers.
I'd say it really hasnt changed a lot most of the people that we're talking to about selling their busy also they have good backlogs, but.
Our sellers are really thinking more about their long term family planning and generational issues and that really hasn't changed.
So we're excited about the conversations we're having in future acquisitions and so it's.
It's a big part of our growth strategy, both organic growth and acquisitive, So where you are.
Going to continue to see us do acquisitions at a steady rate.
Great.
I'll turn it over thanks.
Alright, thank you.
Next question Stanley Elliott with Stifel. Please go ahead.
Hey, good morning, everyone. Thank you for the question.
Quick question on tobacco.
Quick question on the backlog for you guys increasing sequentially was that weather was it.
Maybe a little bit slower on the organic side and then curious too in the competition, we've talked a lot about the price cost you guys have in there.
Are you won't bidding larger sized jobs I'm, just curious kind of how that how old is shaken out.
Well I'll answer a sequentially and then I'll, let Greg answer as far as the makeup of the jobs in it.
I would say Stanley that weather was not a big factor in our backlog growth.
We grew to a record backlog and as you know historically CPI as backlog.
Has shrunk.
<unk> in the busy work season, when we're burning off a lot of revenue. So the fact that we grew at over $70 million.
As evidence of growing relative market share in just a strong demand so.
I'll, let Greg speak to sort of the makeup of the jobs that we're seeing in the backlog, but I would say our guys did a really good job of growing the backlog.
Yes Stanley. So yeah, we track that we want to know what how our job stratify and we look back to earlier than when we went public but if you go back to one of our earlier years 18 19, it hasnt changed.
Hardly at all even though from the 19 10-K, we've doubled our revenue will double our revenue in terms of what our guidance is showing for this fiscal year, but that makeup has not changed at all.
That's great news and then two.
You mentioned kind of healthy sources of recurring revenue could you kind of flush that out a little bit more I mean is it kind of more talking about just the resurfacing nature of the work that you got that you all do or was there something else besides that.
Yes, good question.
The big parts of CPI strategy is recurring revenue in local markets right and so for US what that means is the city of Huntsville is going to let a resurfacing contract every year developers in Pensacola going to do a certain amount of work every year and so we have repeat customers.
We know are going to spend a certain amount of money and so we build our local teams and our 67 markets just build those relationships and we have that's why we have a very steady.
You know revenue.
That's why we can keep crews busy and build a local workforces. They know theyre going to do a certain amount of work every year. So that's what we mean by recurring revenues both on the public and the private is just we know there's going to be a certain amount of demand in each of our markets.
Perfect and then lastly for me you know.
It seems like some of the Oems are talking about the supply chain getting a little bit better are you all getting the equipment that you need.
Help us with kind of lead times and availability and then also kind of maybe speak to some of the technologies that you guys are implementing to help with the overall productivity.
Yeah.
Stanley I would say that the lead times have improved from a year ago quite a bit and while they might still be longer than what you. Historically have we just adapted you know our ordering and our business model our relationships with the equipment manufacturers certainly help so it's really we are getting the equip.
We need you see this year, we've sold some equipment.
That maybe we held onto a year longer because of lead times. So that's been a really good development.
As far as the technology that is an ever constant keeping up with the technology.
It would be the equipment the telematics the equipment, telling us when it needs to be repaired and keeping up with that too.
Fleet fleet tracking systems, where it can really tell you in real time, how your trucks are doing going to and from the asphalt plant to the road is just things that five or 10 years ago. You wouldn't have wouldn't have dreamed up but that's really helping us run our business is going to help us be able to grow our margins in the <unk>.
Futures as we can operate more efficiently and so it's something we really try to stay ahead of the curve bone.
Perfect guys. Thanks, so much and congratulations.
Thank you Stanley.
Your next question comes from Brian Russo with Sidoti <unk> Company. Please go ahead.
Yeah, Hi, good morning, I'm, sorry, if I missed this.
Was the year over year organic growth.
Year over year.
So if you adjust for the liquid asphalt adjustment, Brian that we talked about 3%.
Okay and you mentioned this.
So you mentioned this last quarter how.
How does that triangulate with volumes of asphalt tons or maybe equipment hours year over year.
Yes, Brian I would just say when we look at our volumes year over year year to date.
We're up.
Pretty substantially in our equipment hours and we're up in our asphalt tons.
We've had a wetter first quarter than last year, and we've had a weather third quarter than last year. So that two there are two biggest quarters of the three we've had so far been wetter than typical but we are experiencing a reel of volume increases were growing as a business and when you look at our revised revenue outlook.
It's 18% to 20% up and you know last year's growth of 40% to 42% that's not the typical CPI year. This is growing 18% to 20%.
And it's going to end up being about half acquisitive and half organic which is what we have.
Historically have done.
Okay, Great and is there any difference in the margins on the private side versus the public side.
No, they're pretty comparable Brian with the margin profile really.
Changes more by market some markets have a higher margin profile than others, but when you look at public versus private.
They're pretty comparable.
Okay, and I suppose that you're actively involved in all of this re shoring and.
Electric vehicle battery facilities being built down in the southeast.
I assume.
Absolutely.
Do re shoring.
We're working on several manufacturing facilities right now where businesses are moving to the south east.
And then on the electric battery facility right here in North Carolina, we have Toyota building a huge battery facility.
Just a few miles up the road from one of our asphalt plants. That's provided good work and then you have been fast which has been a huge electric car facility in.
In Sanford so that we're participating in working around so, yes, and you see that throughout the southeast its a.
Just a lot of businesses are moving and as well as people and so that creates a lot of.
Real opportunities for us to work on those sites.
Great and then lastly, just to follow up on the the IHA a spending are.
Obviously.
The the first funding rate would go to roadways and resurfacing.
For the <unk> to put it to work quickly and get the matching of funds are you seeing funds now flow into more complex projects, you referenced bridges, and maybe airports that might be big.
Bigger or more complex that might allow some higher margins.
Yes, Brian .
Brian J, a is a lot of different types of infrastructure.
And right now throughout the southeast we're working on a number of airports and so those are really good jobs for us and you're going to see you're going to see bigger projects, where even though we don't pursue the mega projects. We we think those that theyre better projects with a lower risk and higher.
<unk>.
But you'll see us participate as an asphalt subcontract or a grading subcontractor on those projects. So.
Jay is going to produce revenue for us and a lot of different ways.
Okay, great. Thanks, a lot.
Thank you Brian .
Thank you I would like to turn the floor over to management for closing remarks.
Thank you everyone for your time. This morning, we're looking forward to a good fourth quarter and talking to you again have a good day.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Yeah.
Yeah.
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