Barrett Business Services Inc. Q4 2008 Earnings Call Transcript

Feb.11.09 | About: Barrett Business (BBSI)

Barrett Business Services Inc. (NASDAQ:BBSI)

Q4 2008 Earnings Call

February 11, 2009 12:00 pm ET

Executives

James D. Miller – Chief Financial Officer, Vice President, Finance

William W. Sherertz – Chairman of the Board, President, Chief Executive Officer

Michael L. Elich – Chief Operating Officer, Vice President

Gregory Vaughn – Vice President

Analysts

Timothy Brown – Roth Capital Partners

Ruthanne Roussel – The Robins Group

[Shawn Willard]

Timothy Brown – Roth Capital Partners

[Josh Vogel]

Tobey Sommer – SunTrust Robinson Humphrey

Operator

Welcome to the Barrett Business Services fourth quarter conference call. (Operator Instructions) Thank you, Mr. Sherertz you may begin your conference.

James D. Miller

Good morning. This is Jim Miller with Bill Sherertz, Mike Elich and Greg Vaughn. Today we will provide you with our comments regarding the company’s operating results for the fourth quarter ended December 31 and our outlook for the first quarter of 2009. At the conclusion of our comments, we will respond to your questions.

Our remarks during today’s conference call may include forward-looking statements. These statements, along with other information presented that are not historical facts are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by the forward-looking statements. Please refer to our recent earnings release and to our quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ.

Page one of yesterday’s earnings release reflecting our operating results summarizes the company’s revenues and cost of revenues on a net revenue basis as required by Generally Accepted Accounting Principles. Most of our comments today, however, will be based upon gross revenues and varies relationships to gross revenues because management believes such information is one, more informative as to the level of our business activity. Two, more useful in managing and analyzing our operations. And three adds more transparency to the trends within our business. Comments related to gross revenues as compared to a net revenue base of reporting have no effect on gross margin dollars, SG&A expenses or net income.

Turning now to the fourth quarter results, as reported the company earned $0.21 per diluted share in the fourth quarter as compared to $0.34 for the fourth quarter of 2007. The decline in earnings on a quarter-over-quarter basis was primarily due to a 10.4% decline in gross revenues and a $3.4 million decline in gross margin dollars.

Total revenues for the fourth quarter of $263.1 million decreased $30.7 million from the 2007 fourth quarter, excluding the benefit from the company's two acquisitions made since December of 2007. The internal growth rate for the company on a quarter-over-quarter basis represented a decline of 10.9%, which continues to reflect the difficult economic conditions in our markets.

California, which comprised approximately 77% of our overall fourth quarter gross revenues, declined 10% owing to declines in both staffing and PEO revenues. Staffing revenues for the fourth quarter of 2008 decreased 26.1% from the fourth quarter of 2007, primarily due to a significant decline in demand for our staffing services from existing customers in the majority of our markets.

We experienced a significant decline in the last several weeks in December as customers cut back hours around the holidays or, in some cases, even shutdown for a week or two. PEO gross revenues declined 7.6% on a quarter-over-quarter basis. Our new PEO business during the quarter continued to nearly cover our loss PEO business from the fourth quarter 2007. The decline was primarily due to a decrease in hours worked at existing customer work sites.

Gross margin percent on a gross revenue basis for the 2008 fourth quarter declined from 5.3% to 4.6% from the prior year. Direct payroll cost increased 56 basis points over the 2007 fourth quarter primarily due to an increase in billing markup largely related to lower worker's comp rate component of the overall markup on payroll.

Payroll taxes and benefits for the 2008 fourth quarter, as a percentage of gross revenues, remained nearly constant at 7.3% compared to the 2007 fourth quarter due to similar effective payroll tax rates in the fourth quarter of both years. Worker's compensation expense for the fourth quarter of 2008, as a percentage of gross revenues, increased slightly from 3.5% to 3.6%.

Worker's compensation expense, in terms of total dollars, decreased from the same 2007 quarter from $10.3 million to $9.6 million. The 2007 fourth quarter included an additional $2.2 million charge for increases in estimates for existing claims in states where the company is self-insured.

The 2008 fourth quarter SG&A expenses of $8.8 million declined $1.2 million or 12.2% from the 2007 fourth quarter. The decrease was primarily due to lower branch profit sharing partially offset by expenses of a non-comparable branch offices from the two acquisitions completed since December 2007.

The income tax rate for the 2008 fourth quarter was approximately 30.2% representing a decline from recent quarters as a result of additional federal employment tax credits earned by the company. Looking at the balance sheet at December 31, cash and current marketable securities totaled $60.2 million compared to $60.1 million at December 31, 2007.

The slight increase was primarily due to cash provided by operations, offset in part by $8.5 million used to repurchase 714,000 shares of the company's common stock, $3.8 million used for the first employment services acquisition, and $3.5 million used to pay quarterly cash dividends.

Trade accounts receivable at December 31 of $34.4 million decreased $2.3 million from December 31, 2007 primarily due to a decline in revenue during the fourth quarter of 2008 as the day’s sales outstanding in accounts receivable, or DSO, remain nearly unchanged at approximately 12 days.

We continue to closely monitor our customer credit terms and collections in light of the continued difficult economic environment. A decrease in stockholder's equity at December 31, 2008 compared to December 31, 2007 is primarily due to the company's share repurchases and cash dividends partially offset by net income for the year.

Turning now to our outlook for the 2009 first quarter, as reported yesterday, we are expecting gross revenues to range from $240 to $245 million for the first quarter of 2009. This projection represents a likely mid-point decline of 6.6%, $259.6 million in the first quarter of 2008. The projected decline of 2009 first quarter gross revenue is based upon a recent revenue trend and largely reflects the continued challenging economic climate.

Based upon the forgoing estimates for gross revenues, we anticipate a diluted loss per share for the 2009 first quarter to range from $0.19 to $0.22 as compared to earnings per share of $0.01 for the 2008 first quarter. This decline is due in part to projected higher payroll costs resulting from a change in mix towards PEO services from staffing services, as well as a significant increase to many of our state unemployment tax rates.

The rate of payroll taxes is frontloaded as these taxes declined over the course of the year as employees reached their statutory wage rate ceilings. We currently expect to return to profitability during the second quarter and remain profitable for the remainder of 2009.

At this time, Bill Sherertz and Mike Elich will comment further on the recently completed fourth quarter and our outlook for the first quarter of 2009. We will then open the call up for questions.

William W. Sherertz

Well I had to go back and read some of Buffett’s stuff about what makes a good company, and it's reassuring to me as a CEO to know that we're on the right path. We have good people. We have a solid business formula. We continue to sign a lot of new customers and we're riding some very difficult economic conditions as I'm sure all of you well know.

Our unemployment rate in the West Coast on average is 9.13%, and a lot of our markets were faced with 10% and 12% unemployment. If you would have told me that we would be down less than 5% and less than 10% and the unemployment rate was 9.3% in the states we're in, I would have thought you were on drugs because I've never experienced such a small downturn in what we're doing.

So, you're not going to hear a lot of woe is me out of me today. In fact, I've probably never been more positive with the people and the operations side of the business and our execution. What we need to really rock and roll is going to be a slackening in the decline more than anything else. We're not even hoping for an upturn.

All we're hoping for now is that we stop going down. And this has been going on for a couple of years and certainly you all are as much aware of it as I am. It's almost depressing when you watch CNBC and listen to the bullshit stuff that goes on with Congress and their meager attempts to try and fix things. In my opinion, all they'd have to do is get rid of the mark-to-market and we'd go a long way to solving a lot of these issues.

However, back to the company. During the quarter we signed 86 new PEO customers, which I think is very good for a fourth quarter. During that quarter we lost 57. The breakdown of ten of them were cancelled, seven for AR issues, three from non-AR, 26 of the 57 closed or were sold. This is 45.6% percent of the businesses.

Twenty-one decided to leave on their own, six due to price, eight took payroll in-house, three went through another PEO for additional services. And typically additional services means they’re willing to carry their credit. And fourth went to another PEO to cut costs, that one I don't quite understand. On a quarter-over-quarter revenue analysis, the new PEO business continues to just about cover the loss PEO business. One's up 15% the other's down 15%.

Mike and Greg just finished with a review of the branches, and I went through some of the slides and a lot of their present customers are down year-over-year 40% to 60%. What we are really facing is not necessarily a lack of, certainly not a lack of customers, but they’ve cut their hours rather significantly on the hours worked by employees. It’s what I see and really knocked up the overtime.

Revenue for PEO customers who were with us both in fourth quarter ‘07 and fourth quarter ‘08 was down about 9%. New staffing business brought in about $1 million more than the amount of 2007 revenues lost from the revenue from status in the customers than were down in the fourth quarter of ‘07 and ’08, which was down 17%.

Further analysis suggests our PEO customers are cutting hour’s more than cutting people. Average non-overtime hours per employee was consistent between fourth quarter ‘07 and fourth quarter ‘08. However, overtime hours, as I said, were down 19% in 2008.

We had another great signing period in the first quarter. I think we signed 66 new customers for the month of January, which was really good. My hope is, again, with any kind of flattening of the economy, I think the number of lost customers will start to decrease rather dramatically, which will really step up us in terms of our headcount of customers, which is the way we certainly look at the world, and the leverage that we have on profitability is going to be very substantial.

We have no plans to do any cuts in the company. We’re well staffed. We have a lot of talented people. If we don’t get any better in revenue than we are right now, we will be profitable, looks like in March and for the rest of the year.

While it’s not back to the $1.41 that we made a couple of years ago, certainly given the economic conditions out there, to be profitable for the year, I’m going to rack up as being a big win. I’m relatively optimistic. The only thing that people ask me what keeps you up at night, used to be that anything above 7.5% unemployment would certainly make me twinge, however, we can put that one to bed, because it’s already happened.

Now, I guess, the next step is that we are trying to avoid a depression. I’m hopeful that we can do that. I think that the underlying business climates there, we need a listing of credit. We certainly see that with our customers and it wouldn’t hurt to get some optimism. I see an awful lot of pessimism being spread over the news wires every day. I can’t believe that that helps.

With that, you can throw the barbs and the tomatoes and the questions at us from here.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from [Josh Vogel].

[Josh Vogel]

My first question is really about the guidance. You guys mentioned that with the shifting mix to more PEO than staffing, but I’m just trying to get a handle on here because if I look at the mix in the first quarter of ‘07, let’s say, the PEO work was about 86% of gross revenue versus 14% for staffing.

If the mix is 100 basis points more towards PEO, it just seems like kind of a drastically low guidance. I was wondering if maybe there was something outside of just the payroll costs and the mix shift there in the revenue. Was there a worker’s comp claim that hit up in January or anything of that sort?

William W. Sherertz

No. Comp remains very benign. Remember we’ve got almost a 1% increase in unemployment and that all piles into the first quarter. So in this climate, it would not be smart to try and pass on the cost increases to your customers. So some of that we are just going to have to eat until times get a little better, and over time we’ll make that back, but I would say it’s a two-fold deal.

Staffing carries a much higher margin. Staffing, as you know, if you look at the competitors it’s just getting killed out there and the unemployment costs. If you put those two together, it makes a pretty big swing in a hurry in terms of making money. We did an analysis here, if our unemployment costs were the same as last year, even on the down revenues, we would breakeven, we would be the same earnings per share in the first quarters as we did last year.

[Josh Vogel]

So obviously, the pricing environment is not in your favor right now, but at what point in the cycle do you think you could start going back and gaining some leverage there?

William W. Sherertz

Again, I think it’s just keep the economy from going down. I would say the first uptick we get in or downtick in unemployment where it’s 7.6% now, the next number is probably 8 something and I think we could live with 7.6% if it would stay there. I’m surprised. I’ll be real frank with you. I’m surprised that we’re doing as well as we are at 7.6%. Just have it stop from going down, I think we are going to gain the upper hand.

[Josh Vogel]

Now seeing a lot of companies in this type of environment given where certain stock levels are at and the assets on the books, they are taking a closer look at the balance sheet and goodwill balances and some are taking impairment charges. I was wondering if you were working through that with your auditors right now, and if a goodwill impairment charge was likely?

James D. Miller

We’ve just gone through that with our auditors and at least through 12/31 we certainly did not have any kind of issue with any kind of goodwill impairment in our analysis. We don’t anticipate having any issues, at least currently, going forward.

William W. Sherertz

I think we’d have to turn negative for the whole year and then the goodwill impairment would be a certain one of those acquisitions that we made would have to be significantly negative.

[Josh Vogel]

Do you know off hand what part of the goodwill’s attributable to the strategic acquisition?

James D. Miller

Probably about close to $14 million.

[Josh Vogel]

Just lastly, Jim. Do you happen to have the cash flow from operation numbers and CapEx for the full year?

James D. Miller

Yes. For the full year, cash flow from operations was approximately $14 million and CapEx was approximately $830,000.

Operator

Your next question comes from Tobey Sommer – SunTrust Robinson Humphrey.

[Frank] for Tobey Sommer – SunTrust Robinson Humphrey

Hi, this is Frank in for Tobey. Couple of quick questions. Could we get the cash flow and the CapEx for the quarter as well as your thoughts going into 2009?

James D. Miller

Cash flow for the quarter was approximately $2.6 million and CapEx for the quarter was just a couple hundred thousand.

William W. Sherertz

We’re not spending a lot of money.

[Frank] for Tobey Sommer – SunTrust Robinson Humphrey

Do you expect the year levels to be fairly stable going into 2009 or any color you can provide there would be helpful.

William W. Sherertz

In terms of CapEx or just general?

[Frank] for Tobey Sommer – SunTrust Robinson Humphrey

Mainly CapEx.

William W. Sherertz

We don’t have any pressing needs unless we were to make an acquisition, and to be real frank about acquisitions at this point, until I see some stabilization in the economy, I’d be hard pressed to, unless it was a giveaway deal, to make an acquisition.

[Frank] for Tobey Sommer – SunTrust Robinson Humphrey

As far as looking out there, are you seeing some valuations come down in terms of multiples, and what are you looking for in terms of stock repurchases and shoring up that balance sheet going into 2009.

William W. Sherertz

I think our balance sheet is pretty solid and we dearly love to buy our stock. We don’t really have any need to raise capital for any reasons that I foresee, at least at the moment. The valuations of the companies out there, they never really change. It’s always been a four to six times EBITDA and really good companies won’t come off that number and really bad companies you don’t want to buy anyway. It’s just too much work. We've got a lot of stuff that we can do internally to augment our growth. So that's what we're focused on at the moment.

[Frank] for Tobey Sommer – SunTrust Robinson Humphrey

And last question is a little bit about the captive business. Could you talk about trends there and what you see going into the first quarter?

William W. Sherertz

Really, we have not had any kind of catastrophic claims that would tap into the captive since we formed it. So, it's been a nice adjunct and saved us some pretty good tax dollars. It's doing what it's supposed to do and now we have the new insurance company in Arizona and we picked up another state on self-insurance. So, no the Captive is, which I want it to remain, is a non-issue. It doesn't do anything. That's the good news.

Operator

Your next question comes from Ruthanne Roussel – The Robins Group.

Ruthanne Roussel – The Robins Group

Bill, I’m glad to hear you sounding so well. I wanted to ask a few questions about the stock buyback in the quarter. Now if you spent just a couple hundred thousand dollars on it I'm going to draw the conclusion that you didn't buy back a whole lot of stock, but could you give us the numbers for it?

James D. Miller

Well, the couple hundred thousand that we were talking about, that was purely CapEx and that was more related to a software upgrade that we're currently in the midst of here. As far as the buyback activity for the fourth quarter, first of all for the year it was about $8.5 million spent for the entire year and for the quarter we came in at about $1.5 million.

Ruthanne Roussel – The Robins Group

I'm sorry, is that dollars or shares?

James D. Miller

Dollars.

William W. Sherertz

I'd love to get 1.5 million shares.

Ruthanne Roussel – The Robins Group

I also was thinking, at the time of the strategic acquisition there was some talk about possibly leveraging those offices so that they would eventually begin to offer PEO services as well. I just thought I'd ask if there'd been any progress on that or any evolution of that.

William W. Sherertz

Yes. We started down that road and we've had some limited success. Although, given the economic climate, they're fighting to hang on to their staffing business, but we're down that road. Colorado is starting to do better with the PEO world and we've got one person here from corporate dedicated almost full time to teaching and help develop and train our people over in the mountain states for PEO.

Operator

Your next question comes from Timothy Brown – Roth Capital Partners.

Timothy Brown – Roth Capital Partners

The one thing that stuck out was the signings in January of 66, and I'm just curious what's driving the new signing in particular in this environment?

William W. Sherertz

I think we're good at what we do. I mean, I know that's kind of a cliché, but it's been so many quarters, Tim, that's we've been doing it, I don't think it's external influences. I think it's just that we get out in the market and we see people and it's a value proposition and you got to remember that we're pretty strict on the credit side of the world and on the safety.

So, I think to get the 66 we probably could have signed 156. That would by my guess, that we see a lot more than we sign. And it's a well received product out there. I mean, in service and word of mouth is still extremely strong and all we need's a little help out of the economy to really kind of rock and roll.

Timothy Brown – Roth Capital Partners

Then in terms of the number of clients that you lost so far in the year, is that still trending where it was in the fourth quarter or is that lightening up at all?

William W. Sherertz

Well, we haven't seen the same kind of numbers in the first four weeks of January, but until I see a couple quarters of that slackening, I'm not going to make any predictions about it because if the economy continues to decline, then you're probably going to see some continuation of that kind of decline in our customer list. They're like the cat hanging on. They're hanging on by their claws, anything that they can do to try and survive.

Timothy Brown – Roth Capital Partners

Yes. It's tough to predict.

William W. Sherertz

Well, I'm sure you see it down around there. Just read the newspapers. What is your guys’ unemployment? It's got to be in the 9.5 range, isn't it?

Timothy Brown – Roth Capital Partners

Yes. I think it's getting there. I just wonder when it's going to stop.

William W. Sherertz

Yes. You and me both. I've been through four, five of these recessions and in the past all it took was the lowering of the interest rates. Well, you got interest rates at zero so we can throw that one out. So I'm in a little uncharted waters here about the macroeconomics and what's going to drag us out of this.

Timothy Brown – Roth Capital Partners

I actually had a question for Jim, and I don't know if you did this analysis, but it's sort of like Q1's always been the lowest EPS quarter because of the unemployment taxes. Do you expect a good $0.27, $0.28 jump from Q1 to Q2? Or would that even be more given the higher unemployment cost this quarter, this year?

William W. Sherertz

Well, it won't be all of it, Jim, but there will be a big chunk that goes to profitability in the second quarter, Tim, unless our revenues decline significantly.

James D. Miller

Yes, and certainly that's the biggest piece of turning from a loss back into being profitable.

Timothy Brown – Roth Capital Partners

I’m just wondering in '07 in Q1 to Q2 you were up $0.27, in '08 you were up $0.28. So, all things being equal on the revenue side, should we expect the $0.27 to $0.28 jump from Q1 to Q2?

William W. Sherertz

Tim, you've got a couple things going on. Our seasonal business, which is staffing at higher margin, picks up in that quarter. And then all the unemployment drops off. So, given all things equal, I would anticipate that we certainly would do that.

James D. Brown

Yes, we should see a similar trend.

William W. Sherertz

Yes, I don't see anything standing in the way of it. If the staffing picks up and we know that the unemployment will drop off, then there will be no reason why it wouldn't do the similar things that we've done in the past.

Timothy Brown – Roth Capital Partners

Just on the staffing, Bill, histrionically, I kind of find your staffing business as a little bit more immune than like a Kelly type services, but what's the status of that in this environment?

William W. Sherertz

Well, our customers have just simply cut back. I mean, they just are not using. We haven't lost a lot of customers, but a lot of the big stuff that we do, excluding the cannery business. The cannery business and the wine packaging and those things that we do should remain relatively similar. So I don't see staffing going to zero.

But I'm not so sure about some of my competitors. I happen to own a couple of my competitors in terms of their stock, and I'm not positive they couldn't go to zero. It's pretty rough out there. So, we've done some of the right things. We're a little bit entoleted from – I would hate to be in the high tech staffing arena right now. That's a very difficult proposition.

Operator

(Operator Instructions) We do have another question from [Shawn Willard].

[Shawn Willard]

The first question is from me, yes. One thing you and I sort of talked about once before and it's somewhat more timely given that they're passing or trying to pass this stimulus mess, what would happen, or in your opinion you said lowering interest rates to zero, you can't do anything more there.

One of the things that's been bandied about is actually putting in a reduction of the payroll taxes so it goes directly through to the employees. One, do you think that would be beneficial and maybe be something that could kick start things. And, two, from an accounting perspective, how would that impact you? And you and I did start a conversation on this once long ago, but we never finished it.

William W. Sherertz

Well, if it's passed through to the employee it would have no affect on us whatsoever. And if it was a company, like the $3,000 tax credit they once proposed, we wouldn't pay any taxes for a couple years probably. I personally don't think that it's meaningful to put money in the hands of employees at such a low level, $300, $500, or $600. I think that helps Wal-Mart and McDonald’s, but I don’t think it’s going to help in the overall economy.

Loosening bank credit is going to be and, as you and I have talked about this whole market-to-market stuff, really we see a lot of our customers are suffering as a result of the inability to get loans to continue to operate their businesses. So as you go down the scale of credit worthiness, whereas somebody might have been at 70% and could get money before, they’re out. And, if your business is not liquid enough that you’ve got enough net assets to carry it by itself, what are you going to do? I mean, you’re screwed. You’re out of business.

[Shawn Willard]

Especially with them calling credit lines lately, it’s been the big thing that’s really hurt businesses.

William W. Sherertz

Well, what’s going to help us, as we have already heard about it, is our competitors, a lot of them, are going to go out of business. I have a theory that, in general, recessions are a result of too many of everything. Too much competition, too many cars, too many houses, too many of whatever you want to name, and what recessions do, it eliminates a lot of the too manys. And so, when these too manys build up, the margins decrease, the pie stays the same and everybody gets a smaller piece.

When recessions hit, a lot of competitors go away. We had somebody just today who wanted to know if we’d PEO their temporary services and the answer was no. So I think over this next year, assuming a non-rapid recovery, that we’re going to get some benefit just out of people going out of business, a lot of competitors, particularly locals and maybe some nationals.

[Shawn Willard]

The second question, I know that you, obviously, have most of your business on the West Coast, but you do have Maryland operations and a few other specialty areas. The past couple of recessions have tended to start in California and end first in California. Do you think that might be the case this go-around as well or just no visibility at all what might bring it around at this time?

William W. Sherertz

I thought, back in November, that we may have leveled it out some and I think the country did. But, the last two weeks of December were like somebody through water on a fire. It just went out. Most of the midst in the quarter came in the last two weeks of December and that’s how bad it was. I went shopping for Christmas and you could have shot a bullet through a store and never hit anybody. I think there were a lot of companies that simply shutdown and significantly cut back because there just wasn’t any reason for them to stay open.

I’ll let Mike speak to it. Mike and Greg just finished with the Round Robin in Southern California and in Northern. Did you guys do Northern yet?

Michael L. Elich

Yes.

William W. Sherertz

Maybe they can speak a little more because those are the people that are right at ground level. Mike?

Michael L. Elich

Yes. I think that, again, we kind of thought things were firming up and even at October or November and felt that, overall, that we were holding our own pretty well. And then after Thanksgiving everybody just slowed everything down and then, as you got closer to Christmas and New Year’s, basically companies shutdown.

They basically said we’ll pay you half wages and take two weeks off. And then as we came into January, it was a slow go. In fact, the first couple weeks in January it looked a little bit like the last couple of weeks in December. And then as we’ve continued now into February, things are firming up.

As far as California leading the charge, California still seems to have, and is still suffering with some of the highest unemployment in the country. So, again, I think it’s where you could before in our business look out a month or two months and have some visibility, today it’s week to week.

In our markets, our management strength continues to mature in strengthen our process by which we acquire new business is maturing very well and we’re building width, but everybody that we’re talking to is anywhere from a half to a third as big as they were two or three years ago.

Operator

There are no further questions at this time.

William W. Sherertz

Well, we thank you for your interest and, for those who continue to own stock, rest assured that we’re running a well run company here where there’s no slack. We’re running tight. We’ve got a great business model and hopeful that over the next several months that we’ll see this economic malaise back off and I think you’ll see some really good numbers come out of us.

I mean, I can see where the leverage is and I’m not just blowing smoke about it. I’m really proud of the company and I think that our opportunities, assuming we do not enter a depression, are going to be great. So we’ll talk to you all next quarter. Thank you very much.

Operator

This does conclude today’s conference call. You may now disconnect.

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