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Executives

Steve Krablin - President and CEO

Jay Mitchell - CFO

Analysts

Chris Glycine - Simmons & Company

Marshall Adkins - Raymond James

Bo McKenzie - Global Hunter

Joe Gibney - Capital One Southcoast

Blake Hutchinson - Howard Weil

Victor Marchon - RBC

John Tasdemir - Canaccord

T-3 Energy Services Inc. (TTES) Q1 2010 Earnings Call Transcript April 30, 2010 10:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the T-3 Energy first quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to your host, Mr. Steve Krablin President and Chief Executive Officer. Please go ahead.

Steve Krablin

Thank you, Ally. Good morning and welcome to our teleconference to review our financial results for the first quarter of 2010. I'm Steve Krablin, CEO of T-3 and with me today is, Jay Mitchell our CFO.

I would like to remind everyone that during our call, we may make certain forward-looking statements with respect to sales, earnings and other matters. These statements are based on our current assumptions and expectations and are subject to risk and uncertainties. Actual results may differ materially from the results predicted. A complete explanation of forward-looking statements as well as numerous risk factors and uncertainties are discussed in depth in our Annual Report on Form 10-K and in our other SEC filings, and I encourage each of you to refer to these disclosures. T-3 does not intend to publicly update any forward-looking statements and undertakes no obligation to do so.

Last week, we saw a major tragedy in our industry as a well blew out offshore and resulted in a loss of 11 lives. Certainly, our thoughts and prayers go out to the families of all persons involved in this incident. This accident highlights the risk in our industry associated with the exploration for oil and gas.

Safety is always a concern and my experience indicates that each of the companies with equipment and people involved were indeed focused in this area. Nevertheless, a tragedy did occur. What's going to come from this? Well, as of yet, I don't believe anyone knows the cause let alone there to fix. That said, the result could easily be that we would have increased regulations. There could be calls for additional equipment certification and testing. We could have requirements for additional equipments or different types of new equipment and certainly training could also be an issue as well in this area.

T-3 welcomes these challenges and sees them as opportunities for us as our focus is and always has been on safety and quality. We hope that we can be an annual part of solutions and improvements that prevent tragedies such as this in the future.

Looking at our first quarter results, we were very pleased with the fact that the results were very good. In fact, when you back out the roughly $9 million in revenues that we had in the fourth quarter from a large frac manifold sale that we talked about several times, our revenues and income increased sequentially. Perhaps even more important though is that bookings were up just over $50 million in the first quarter, which is the highest level that we have seen since 2008.

Our book-to-bill exceeded 1 and this caused an increase in backlog for the first time in six quarters to almost$40 million in our backlog. In the first quarter, pricing was really not much of a factor, we saw the pricing pretty much be flat throughout our group. Our margins held firm so again it was a very straight forward quarter. Not a lot of noise to really address in that regard.

We can continue to see a lot of activity around the world, our revenues in the first quarter included sales into Mexico, Brazil, Germany, Saudi Arabia, Nigeria, is a name few, I mean, again we were continuing with just a wide demand for our products, fairly there was really nothing unusually large in the quarter that are really wants highlighting, its pretty much the improvements that we saw.

When we look at the industry drivers then we see pretty much the same things that we have mentioned at our last conference call. Oil prices at $80 plus are certainly sufficient to generate demand for drilling. Gas prices around $4, well that's not so exciting but so far the EMD companies taking a longer term approach of that and it continue to move forward our plans.

In fact the rig count in particular in the U.S. has moved up much faster than I expected. And perhaps this is a major contributor to why gas processes are also lower than I expected. Nevertheless, those do correct each other and we are optimistic that the industry is still on the upturn.

Our outlook, in 2009, we experienced a steady decrease in quarterly revenues, I would like if you back out the $9 million in that revenues from the frac manifold in the fourth quarter. We believe 2010 will see the opposite trend with revenues improving each quarter.

In our business course looking to not always smooth and predictable, so we have been careful never to assume straight line growth trajectories. But we can yield and identify trends and we remain very optimistic about the remainder of 2010 and our expectations to grow throughout this time. The major basis for that is our quoting activity, it has remained robust and we continue to see a lot of interest whether it's in repairs, re-manufacturing and in the OEM products.

I held on a couple of times just mentioning in the call about backing out the revenues of the frac manifold, want to emphasize if that's not because I don't think we are going to sell of that one and think it should be back out for that reason but because it was so large in the fourth quarter that it makes the sequential comparison difficult to look at without looking at that.

The equipment is still operating above most peoples expectations in all location, it's not over [250 per stages] so far and we continue to take customers to see this and make presentations and to make quotations on this. I mentioned in the past that I expect to get new orders for this equipment in 2010 and I still believe that.

Lastly, everyone is probably aware that next week is OTC. We do have a booth at the show, and we will be highlighting some new equipment. One of the new equipment for us is an [18-inch 15,000 Psi BOP] and we certainly encourage everybody to come by that. It has new parts of that that we would like to explain to people. We have other, many other new products at OTC as well. So, we would love to visit with anyone that has time to come by and see us at the show.

With that, Jay, let me give it over to you to give more detail on the quarter.

Jay Mitchell

Thank you very much, Steve. As you already seen the press release at T-3 earned $0.15 per diluted share for the quarter and Steve talked about the backlog as increased for the first time in six quarters and bookings improved to the third consecutive quarter up 10% to just over $50 million.

The book-to-bill is now 1.1 for the entire company which brings us to take a look at the revenues here for the company. Consolidated revenues for the company were $45 million. The mix of the revenues shifted slightly toward services which were up to 19% of revenues from 15% in the last quarter, which is what you would anticipate in a normal recovery.

Overall, revenues for the entire company remain relatively balanced from the geographic standpoint about 50% of total revenues came from the United States and 50% internationally. As you know, we have one segment but we report with three separate business units and I would like to give you a little bit of detail on some of the information from those business units now.

At the PCG, the Pressure Control Group, this is the group of BOPs the control systems, manifolds and such, the revenues were 32 million, which is flat sequentially with the fourth quarter. Revenues for this particular business continue to be well balanced as well with approximately 40%, 46% of the revenues destined for offshore use compared with land use and that's with the number that was just under 50% in the fourth quarter of last year.

Q1 revenues for pressure control were 60% non-North American, which again a good balance here. I think an important thing, an important note to point out is 25% of the revenues were from domestic land. That's up about 15% from what it was in the fourth quarter as we see the domestic land activity begin to increase here, and we begin to benefit from that.

Quarterly, as Steve pointed out and as you expect on flat revenues, the pricing was relatively flat as well. The real story here at pressure control is the bookings for Q1 were 33.7 million, up 17% from where they were in the fourth quarter, and backlog for this business unit was 31.3 million with a book-to-bill ratio of 1.1.

Moving on to our well head business unit, in this business unit, the revenues were 10.8 million or 24% of total company revenues. That's down 7 million sequentially primarily due to the one order that we had in the fourth quarter that Steve talked about earlier. However, if you compare this with the first quarter of 2009 revenues were actually up 2.2 million and again pricing was relatively flat.

At the Wellhead Group, our bookings for Q1 were up again. They were 13.5 million, and the book-to-bill here was 1.3. In our third business unit, the pipeline valve group, revenues were 2.2 million, which is 5% for the total company. Overall, book-to-bill ratio in this business unit was 1.4.

Moving down the income statement, the gross profit margin was flat at 35% for the quarter compared with the fourth quarter. The gross profit margins on service revenues actually decreased slightly to 38% from 44% in the prior quarter with the shift in mix.

Product gross margins did increase to 34% from 33% and a lot of this was at our pressure control group, where we had 40% margins in Q1 compared to the 38% in the fourth quarter. In the pressure control group, we've had very good success with our low cost country sourcing. In particular, we have a location in Houston, our Creekmont location, which is taking good leadership in developing sourcing with our 100% owned company in India related to valve body, drilling chokes, manifold components. These are not huge dollar items, but it has been very focused in very important shift in our manufacturing, and I think we should continue to see move improvement, as we continue to expand India in the future. These improvements in pressure control group were offset at well head, where we had lower margins on lower volumes.

Moving on to the total SG&A line. Total expenses were $13.0 million, which is down $0.8 million from the fourth quarter. This reflects a more normalized rate and where we expect to be going forward.

Op income for the first quarter decreased $1.9 million, and the quarter's sequential decrimentals margins were 25% we realize that's a little bit below what you would expect which is favorable for us and reflects some of the successes we've had with the low cost country sourcing and a little bit of shift in the mix as well.

Turning to income tax expense, our effective rate for the quarter was 27% compared with 28% sequentially. This rate is a little lower than we had expected and benefited from the conclusion of a tax audit that we had underway. We anticipate for the remainder of the year or going forward our tax rate will be approximately 33%.

On the balance sheet, our accounts receivable increased $4.2 million and that had to do with really sales picking up little bit toward the end of the quarter. Our DSO on a look back method actually remains below 60.

Inventory increased as well by about $3.9 million, as we had an up tick in inventory items associated with some low cost country sourcing. I think some items arrived maybe a little bit more quickly than we had anticipated in our inventory turns are lower than we would expect right now.

With the build in working capital this did hurt our cash flow in the first quarter or we had operating cash flow of negative $4. 8 million as can happen sometimes in a recovery. We did, however, maintain tight CapEx. We had CapEx of $1.0 million and that compares with DNA of 2.2 million. We anticipate inventory term should improve in the future and cash flow should improve as well.

With that, I would conclude the management portion of the call, and turn in back over to Ally and we can open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Chris Glycine] of Simmons & Company. Please go ahead.

Chris Glycine - Simmons & Company

Thanks, good morning.

Steve Krablin

Good morning.

Chris Glycine - Simmons & Company

First question is looking at 2010 and then into 2011 we expect a steady progression of revenue improvement throughout the year, mostly reflective of the surge in rig count that we have seen and improving international activity. If the rig counts were to flatten out here on out say plus or minus call it a hundred rigs for the balance of the year, walk us through, thinking about the late second half and into 2011, what your revenue generation opportunities are in the flattest rig count environment?

Steve Krablin

If you look at, so if you assume things are going to be flat, which would be the first time, I have been in that environment in the oil patch, but if you look at the bookings that we had during the quarter, the $15 million that came in at a time when the rig count is where it is right now.

Now, I do believe there is still some inventory out there on the ground related to BOPs and other items on the capital goods side. I don't know that we supplied, but we would have actually been out there trying to pinpoint that down exactly as to where it would be. But it would be a little bit tough to view but it would be somewhere north of $50 million per quarter number is what comes to mind going forward.

And plus, I think, we are still making a lot of end roads into international sales and things of that type into other areas. There is a fair amount of larger and lumpier bids that come out of the national oil companies and into various areas that could be a strong wild card to the upside on that as well.

And the frac manifold does remain potential upside as well, not in the immediate near-term, but sometime certainly intermediate near-term you would expect to see something in that as well. Giving you a lot of variables and maybe not a lot of guidance, but something you can use.

Chris Glycine - Simmons & Company

No, that's absolutely helpful. Second line of questioning with regard to the margins and the services, can you elaborate more on the makeshift and the implications going forward?

Jay Mitchell

I think we had an unusually low margin in the services this quarter. And I think that happened with just frankly, I would expect those numbers to be where they historically have been which is in the 40 to low-40ish percent number. It is just as we saw some of the land guys start coming back, some of the particular types of orders we did were slightly lower margin. And there was a little bit of competition from other people would be hungry for awhile waiting for that was to come back that maybe hurt pricing slightly that caused the margins to be incrementally lower than we would expected. Not expected, but incrementally lower than they would expect that would be going forward.

Chris Glycine - Simmons & Company

Okay, great. Thanks a lot.

Operator

Our next question comes from Marshall Adkins of Raymond James. Please go ahead.

Marshall Adkins - Raymond James

Morning, guys. Obviously, you had a pretty good, I would say contra seasonal pick up in orders here. Talk to me about the pricing you are seeing on the bidding activity right now and as well as how does the overall bidding activity look , both U.S. and international.

Jay Mitchell

I guess on the pricing side, we indicated flat, and I think if you go across the products, you're going to see there could be a percent or two one way or the other up or down in the various products, but it really is pretty flat. There is no new noticeable pressure from any other competitors that we haven't been seeing for some period of time. So, I guess, we do think that that has flattened and to the extent, a trend is anticipated. I think pricing may continue to be improving. It has improved perhaps token amounts over 6, 8 months ago in the wellhead group and in some of those areas.

On the quoting activity, there still is a fair amount of large orders that are going through. We are working pretty hard on some of the international orders for areas that we see as a particular opportunity areas outside of the U.S. and Canada. We certainly have Mexico, Kuwait has a lot of potential. There is some fair amount of work that's being bid through Europe right now that could have some potential.

We still haven't seen anything really breakout of the Russian markets yet, but we are, I guess optimistic that that will happen at some point in time, even though it may not be in the next few quarters. But, it is really a strong, global command for us. Our mix in offshore and in onshore in global U.S. is still just right around those 50/50-type ranges, so we are pleased with that.

Marshall Adkins - Raymond James

But it sounds like going forward, I mean if we look out a year from now, leading to inline, you would expect international maybe to pick up some share, is that fair?

Jay Mitchell

Perhaps. Something, I actually think the U.S. market has been pretty depressed as well over the last 12 months. So, I see a rebound there as well. So, I'm not sure how to slice that right now with the depressed U.S. market that we've seen.

Marshall Adkins - Raymond James

Okay, alright. And the last question here, I think, we saw a lot of remanufactured equipment recently. Do you see a shift towards more new equipment and elaborate on your comments earlier given the situation in the gulf. Probably more regulations, probably more safety equipment, maybe elaborate more on possibilities of types of equipment that may be needed. And does that stir more new equipment as well?

Jay Mitchell

Well, it certainly could. It would be very speculative as to what would come out. But clearly this is a major focus. If you are speculating on things that could come from this, I mean, there could be requirements for additional equipments. There is already redundancy in the industry, but that doesn't mean there can't be more redundancy when you become very cautious about the affects of a tragedy like this.

You know, there has been at least some speculation that you could windup not only with sub-sea BOPs, but redundant requirements that are on the rig itself which could require different types of heavier risers, other types of equipment. There is a number of, we are not particularly in the control side of these types of movement, but the industry could windup with additional redundancies, although there are already a number of those in the control side.

So, one of the big opportunities for us that might come out of this, or that you can speculate could come from this would be , more formal time periods for the certification of equipment, for servicing of equipment which would all be positive to our revenues as we, you know, anything that comes like that, and requirements in Canada for much more specific re-certifications for BOPs in the U.S. and I would assume that you could even get legs on regulations that would carry into the land side as well as just the offshore side. For us, most of the things that you could speculate that could come from this would have the result of increasing our revenues not decreasing it.

Marshall Adkins - Raymond James

That's helpful. Thank you.

Operator

Our next question comes from Bo McKenzie of Global Hunter. Please go ahead.

Bo McKenzie - Global Hunter

Hi, guys. With the big pick up in the share price we have seen this cycle, a lot of people are talking about greater revenue per rig. Can you guys notice any difference in what the after market opportunities are in the BOPs with the shield plays? Is the drill putting a greater screen on them? And I guess for this neediness, you had a nice rebound from the loads last year, and service the side of the businesses, since you got sustainable or growing or how would you characterize that from here?

Steve Krablin

I think on the shell plates, I am not sure that we have noticed any noticeable difference in the well on the BOPs, it is possible, it is likely if you are going in a shell play you are typically drilling for gas, you are typically using higher pressure BOPs, that except you are using longer strings or telescoping strings. You might need more BOPs in the stack. You might not, but I'm not sure there's, I'm not sure that there is any difference in the -- in our revenues from a difference of where on the BOPs themselves. I'm sorry but what was your second question?

Bo McKenzie - Global Hunter

If you look and you guys picked up from the low last year, $6.5 million on the servicing side to just under 8.5 million this quarter, I assume part of that pick up is the growth and activations and repairs in the BOPs, and if you look at what we are seeing right now, is that sustainable here or has there been a wait going through associated with the rig reactivations?

Steve Krablin

I actually believe that the low point we hit was more of an unsustainable number than where we are moving up to right now. In the past, when people were laying down rigs very quickly, rather than service equipment if they had some equipment that didn't yet need servicing, people would prefer to go ahead and use the equipment they already had that didn't need servicing which meant they were servicing fewer pieces of equipment than you would do for the number, the rate of service was lower than you would expect for the number rigs actually drilling. So, I think, where we are right now should be sustainable. In fact, there may still be a little bit more to come from there.

Bo McKenzie - Global Hunter

Alright. And then, finally, I guess it may be a little too early to be asking, but I have been watching a number of the companies talking about some European share plays, and if you peruse through European rig fleet there is lot to be proud of, because noticed anything that might indicate there is a rig that could be coming, some of the, (inaudible)?

Steve Krablin

We are seeing a fair amount of quoting activity through those areas, so I think that is a trend in those areas just as it is in the U.S. There is pretty much, I think, a global need for relatively smaller, relatively more powerful, higher horsepower rigs, and typically when you windup with new rigs you windup with new BOPs and that type of equipment as well. So, we do see that as a positive, and we are quoting into a number of possibilities in those areas.

Bo McKenzie - Global Hunter

Thanks, guys.

Operator

(Operator Instructions) Our next question comes from Joe Gibney of Capital One Southcoast. Please go ahead.

Joe Gibney - Capital One Southcoast

Thanks, good morning, guys. Just wanted to touch on the, can you give us update on the rental certification process how that is going and how the [Azlon JV] are fairing just some expectations and looking ahead next couple of quarters?

Jay Mitchell

On the Azlon JV, total equity in earnings for the quarter for Mexico and Azlon JV were $100,000 that's a little below what we get expected I think we had some, -- that's a fairly small operation for us and does tend to be a little bit lumpy. We would expect that to pick back up from here. I think our sales guys and the JV guys have made some good end roads with some of the national oil companies over there and we would expect that to pick up later on as we go forward.

And on the Alaska side, we are still making progress on that. We have completed the testing on two or three of the sides of that and have others that will be coming out that during the year. So, it certainly hasn't made a big impact on revenues yet, but everything is going well, and we are still progressing along that pretty much on track.

Joe Gibney - Capital One Southcoast

Okay, helpful. And Steve, just to get your sense with lower heads, lower margin and lower volumes in the quarter, how did that fold into your outlook here, the bottom recovery process and stabilized process and more on the PCG side, how do we think about wellhead and North America here the next couple quarters and is that part of the gradual up lift as well? What do you think specifically in that particular marketing business?

Steve Krablin

We are somewhat in a transitional mode there. You know T-3 has historically worked with many of the smaller independents, and we are moving up the ladder into the more larger independents, the mid-sized independents, the larger independents and certainly have good relationships that we are working with a number of companies such as the Chesapeake ranges that we are talking about. So, we are moving much of our focus more toward that type of business. Much of this is being directed by the moves toward the Marcellus and into those areas.

But the other focus for us in the wellhead group is to try to compete more effectively on international orders. Most of our business in the past has been in North America. We have now been hiring people and been moving people that are really focused on the international markets and see that as an opportunity. Certainly over the next year or two, you know, if international business for that could be 20%, 25% of our business in wellhead, I think that's where we see that going.

Joe Gibney - Capital One Southcoast

Okay. I appreciate it. I will turn it back.

Operator

Our next question comes from Blake Hutchinson of Howard Weil. Please go ahead.

Blake Hutchinson - Howard Weil

Morning, guys. I apologize if you had touched on this, but just a couple of quick questions here for Jay. As we come out of the trough here, what do you think wins in terms of you have given an incremental margin range of 35% to 45%, do you feel like pricing wins and you are probably on the lower end initially or are you guys so lean right now that it pushes kind of to the higher end or is it too difficult to tell, so we should kind of stick with the range? Just a little color on that, if you have any?

Jay Mitchell

As we are coming out, you saw what happened at the bottom end, where revenues went down and our decrimentals that we had in the fourth quarter were a little outside of that range. Now incremental, decrimentals work over fairly large chunks of increase and decrease and sometimes can look a little bit funny when you have smaller numbers.

Right now pricing is lower than you would expect, lower than you expect throughout the cycle. That tells me that you would be toward the lower end of that range, but I'm not sure, there is a good reason why we would be outside of that range. And depending on mix, frankly we could be anywhere within that range. So, I'm not sure that I'm willing to pick a point, and I'm going to stick with the range we threw out there in the first place, but if I had to pick a point, I would pick right down the middle.

Blake Hutchinson - Howard Weil

Okay, excellent. And then, in terms of, is it proper to think, right now with nothing unusual, I'm taking it in terms of gestation period that a booking level of 50 is kind of a good way to think about what is proxy for a revenue run rate for the second quarter?

Jay Mitchell

I'm not sure, if I want to give revenue guidance for the second quarter. I think you can go back historically and look at our bookings and see that sometimes was helpful, sometimes was not helpful to see where the revenues actually went for the next quarter. Directionally, we would expect things to be improving somewhat in the second quarter, but I'm going to shy a little away from making a point estimate.

Blake Hutchinson - Howard Weil

Well, I guess then, maybe just a little kind of qualitative thoughts on what you have booked and it should be very short gestation period given there is a low level work in house or is there anything unusual extended in terms of gestation period.

Jay Mitchell

Nothing usual or extended in the turn around period.

Blake Hutchinson - Howard Weil

Okay, excellent. Thank you, guys.

Operator

Our next question comes from Victor Marchon of RBC. Please go ahead.

Victor Marchon - RBC

First question, I think you may have touched on this on the international side, but want to get your sense what you are seeing on the BOP side OEM in the U.S. Are you guys see a order flow picking up there with some of the new billed announcements and what are your expectations as you make your way through the year?

Jay Mitchell

On the BOP side, that actually has lagged a little bit behind sort of the rest of our business, as you would expect it would right now. You know, we have picked up on a lot of the other areas right now, and that's something that we think, we are seeing the quoting activity beginning to come back right now, but haven't really seen the orders pick back up significantly yet. No reason to think that it won't. Just this is just sort of par for the course or par for where we are in the cycle right now. We are about where we expect it to be.

Victor Marchon - RBC

And second one, this is really sticking with the U.S., with gas prices where they are, you know, you guys have touched on the bookings and the backlog. Has there been any change in tone talking with customers and going domestic business over the last month or so relative to where it was when you guys had your fourth quarter conference call?

Jay Mitchell

I don't think there has been that much change in that area. You know, gas prices are still on people's minds, but there really doesn't seem to be any huge concern. I think people are being driven by more of the cycle or the mid-term approach on pricing as opposed to spot prices that we tend to see and focus on a daily basis.

Victor Marchon - RBC

And the last one if I may, just as it relates to M&A opportunities, you guys have a very clean balance sheet and just want to get your sense how you see the opportunities there going forward. Are the spreads starting widening out now that we are back into the recovery phase and any color you can provide on that?

Jay Mitchell

I don't think there is really any real change in the bid ask type of issues. We have been kind of focused on a lot of yearend activity and haven't had a lot of pursuit in that area, at least in the last 30 to 60 days. But it is something that is of interest to us. And we intend to continue to take a look at that and see that as a major way to try to grow the capital.

Victor Marchon - RBC

Thank you, guys. That's all I have.

Operator

And I am showing our last question comes from John Tasdemir, sorry if I miss pronounce, from Canaccord. Please go ahead.

John Tasdemir - Canaccord

Hi, guys. The only thing, I've got left, I know it is early in the cycle on the capital equipment side, but wondering if you have any sense of kind of how market share is doing for you guys on the BOP side, kind of those in general?

Jay Mitchell

You know, I don't know that we have a particular, any data on that. We've had a great deal of success, over the past, I suspect that we are still getting our share over the last two, three years which has been in the, you know, kind of low to mid-teens type period, type percent on the business and certainly on non-sub-sea BOPs. So, I feel like we are in that same basic area. I have not heard anything from within our company or within our group that indicates that we are missing that by any snap.

John Tasdemir - Canaccord

Yeah, I know it is a bit tricky to figure that one out. But I asked. That's all I have. Good quarter. Thanks.

Operator

And I am showing no further questions, gentlemen.

Steve Krablin

Alright, well thanks. We certainly feel like the quarter turned out good for us, and we see a remaining optimism for 2010, and we appreciate everyone is taking the time to call in for us today, and we look forward to visiting with you on our conference call in another 90 days. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today's conference. You may now disconnect and have a wonderful day.

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