Global Power Equipment Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.18.14 | About: GLOBAL PWR (GLPW)

Global Power Equipment Group, Inc. (NYSE:GLPW)

Q4 2013 Results Earnings Conference Call

March 18, 2014 08:30 AM ET

Executives

Deborah Pawlowski - Investor Relations

Luis Manuel Ramírez - President and CEO

Randy Guba - Chief Financial Officer

Analysts

Chase Jacobson - William Blair

Bob Labick - CJS Securities

Joe Mondillo - Sidoti & Company

Operator

Greetings, and welcome to The Global Power Equipment Group Fourth Quarter and Full Year 2013 Financial Results. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Deborah Pawlowski, Investor Relations for Global Power. Thank you. You may begin.

Deborah Pawlowski

Thank you, Melissa, and good morning, everyone. We certainly appreciate your time today for Global Power’s fourth quarter and full year 2013 conference call. On the call with me are Luis Manuel Ramírez, President and CEO; and Randy Guba, Chief Financial Officer.

Luis and Randy will be reviewing the results for the quarter and year and will also provide an outlook for 2014 and an update on our strategy and execution plan.

If you do not have the slides that accompany our discussion, they can be found, along with the earnings release, on the company’s website at www.globalpower.com.

If you look at slide two the Safe Harbor is noted in full there. As you may be aware, we may make some forward-looking statements during this discussion, as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties, as well as other factors, which could cause actual results to differ materially from what was stated here today.

These risks and uncertainties and other factors are provided in the earnings release, as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found at the company’s website or at sec.gov.

Let me turn it over to Luis to do a review of our business performance and then Randy will go deeper into the financial results, Luis will then close with an update on a status of where we are at and what our priorities for 2014 look like.

With that, let me turn it over to Luis.

Luis Manuel Ramírez

Thanks Deb. So as we complete 2013 as you all know we talked a lot about it last year during most of our calls that it was a transition year for the company. We spent a lot of time re-implementing our strategy of moving from a product base to solution oriented organization to drive revenue opportunity. We also worked to expand margins through simplification, productivity improvements and organic and inorganic growth.

As you all know we spent a lot of time also reenergizing and building our teams. The team today is very energized and excited about the future. And we believe that we now have the team for the future to deliver value and growth for our customers and shareholders.

If you go to page five, you can see that for the fourth quarter, our orders backlog produced record orders for the Product Solutions business. Both of our product categories are performing very well and we’ve seen some improvement in the markets that we serve in 2014. The revenue is also in line with adjusted expectations, solid contribution from acquisitions and growth from our electrical solutions platform, our newest platform from 2012.

Adjusted EBITDA is also in line with adjusted expectations and flat with last year. In terms of the total year, we’ve spent a lot of time building our team, as we said earlier. And we also spent time realigning our business platforms to take better advantage of not only the capabilities that we acquired through the acquisition process, but also to make sure we have the resources lined better to deliver more growth and margin expansion.

In addition to that we also spent time investing in our business structure, so we could also reduce cost and start to go down the path to increase and improve margins over the next couple of years. So as you look forward we really are continuing to focus on an efficient growth model that starts from the cost but it also goes to productivity as we go forward.

On page six, you can see our fourth quarter results. Consolidated revenues were $141.5 million. The new platforms delivered incremental revenue in the quarter. Our Electrical Solutions continues to perform and address the midstream demand pipeline. The market dynamics in nuclear power continue to be challenging as we mentioned in our last call and we continue to see that into this year.

We recognize that this was also a transition year, and we have to make adjustments for our nuclear platform in Q4, but we're very pleased with how we're delivering our current product and Energy Services output.

On page seven you can see 2013 results. Consolidated revenues were $484.2 million, it’s a 4.6% revenue up and in-line with adjusted expectations, also as a result of our restructured portfolio we were able to start to see more organic activities to help increase our growth trajectory.

We also saw our earnings per share impacted by the product and project mix and that’s also consistent with revised expectations. 2013 EPS also included $0.33 of acquisition cost, strategic investments and realignment expenses versus $0.20 per share impacted in 2012.

Now let me hand it over to Randy to talk about the financials.

Randy Guba

Thank you Luis and good morning everyone. I'll start with Slide 9 where you can see Product Solutions’ fourth quarter results.

Revenue was down modestly, but almost flat in the fourth quarter as strong demand for our Electrical Solutions was offset by weakness in auxiliary products, which was anticipated given market conditions.

The pie chart depicts our revenues breakout by market for the full year. And as you can see the power generation market dominates this segment and aftermarket is just over 10%. Gross profit and margin were down modestly, impacted by the slightly lower volume in the mix of products sold.

Turning to slide 10, Energy Services realized over 20% higher revenue in this year’s quarter driven by the addition of Hetsco which is acquired in April.

Revenue for the year by markets served is depicted in the pie chart with fossil driving two thirds of the segment. However, I would like to point out, the slide is showing gas processing in industrial gas markets representing a diversification that we achieved by purchasing Hetsco.

Gross profit and margin both improved over last year's fourth quarter again primarily due to Hetsco's acquisition contribution to sales which were at a higher margin than the traditional Energy Services business.

Slide 11 shows results of Nuclear Services. Lower revenue was due to continued softness in the domestic nuclear markets. The 2013 project -- next pie shows our mix of services performed in the quarter. Compared with the fourth quarter of 2012, we had a greater proportion of MMR work as compared to the project work this quarter and as a result, our gross profit was lower as a percentage of sales. I want to mention however that at 15.2% of sales, gross margin was still above our traditional levels for the Nuclear Services business.

On slide 12, we have a summary of our consolidated results for the fourth quarter compared to the prior year. Gross profit was down by about $2 million, primarily due to lower revenue. Gross margin was up by 10 basis points as we recorded the favorable prior period adjustment to gross profit of about $1.3 million which more than offset the impact of lower revenue.

In the upper right quadrant, you can see the operating expenses increased over the prior year’s fourth quarter as the acquired businesses added nearly $1 million of incremental expenses. Additionally, we incurred about $1.7 million of unusual expenses for strategic investments, realignment expenses and acquisition costs. Excluding these unusual items, core operating expenses were reduced which is the result of disciplined cost containment and productivity improvements.

Adjusted EBITDA as shown on the slide excludes the unusual items I just spoke of as well as the aforementioned $1.3 million gross profit adjustment. The 2013 results were impacted by lower sales volume and product mix.

Slide 13, summarizes the full year results. Gross profit improved on over $21 million of higher revenue and the favorable prior period adjustment. However, gross margin came in about 3 basis points lower than in 2012 due to product mix. As you can see, operating expenses were up this year as the incremental OpEx from the acquired businesses along with unusual charges which includes strategic investments, realignment expenses and acquisition costs increased operating expenses as a percentage of sales. Isolating those unusual charges in both periods, we achieved a $4 million reduction in our core operating expenses due to disciplined cost containment and productivity.

Adjusted EBITDA and margin as shown on lower left side of the chart excluding the unusual charges, the fourth quarter gross profit adjustment previously referenced was down by $900,000 or about 40 basis points on margin as the effects of a less favorable product mix more than offset the benefits of higher revenue.

Turning to slide 14, you can see several metrics demonstrating the strength of our balance sheet. I just want to point out that we have been steadily growing our shareholders’ equity, amounting to almost $280 million at year end while consistently paying a dividend. Also you can see we put some of our cash to work for acquisitions in 2013, we utilized about $44 million for those strategic investments, finishing the year with about $14 million of cash on hand.

To remind you, we utilized about $49 million in 2012 for strategic acquisitions. Our long-term debt was very modest at $23 million, representing 7.6% of total capitalization at the end of 2013. Capital expenditures were $5.2 million in 2013 and for 2014 we are expecting that to almost double to approximately $10 million for investments to drive growth and expand our margins.

That concludes my prepared remarks. And with that I will turn it back to Luis.

Luis Manuel Ramírez

Thanks, Randy. If you go to page 16, you can see that as we move to 2014, we expect growth from our Product Solutions and Energy Services platforms that should also be bolstered by record Q4 orders of $80.5 million. We continue to invest in commercial resources and to expand our services offerings in the nuclear space to offset declines in outages.

Going to page 17, we can see our guidance for this year as we expect consolidated revenues between $525 million and $550 million. We also see moderate improvement in gross profit as a percentage of revenue, 20 to 30 basis points. And operating expenses are expected to moderately decline as a percent of revenue, 30 to 40 basis points on operating expenses.

On page 18, you can see our priorities continue to be culture change, as well as simplification. We are spending a lot of time in the business, working on stabilizing operations as a result of the realignments, making sure that we have streamlined and efficient processes and then we’re creating the value-added solutions for our customers.

In terms of other priorities, we continue to focus on execution, making sure that we can deepen our relationship with customers to increase our customer base and also driving productivity to greater efficiencies to deliver earnings growth. If you go to the next stage, I just wanted to point out that we have an Investor Day scheduled in June, you should have all received our invitation, if you not please contact key advisors.

Thank you. And now, we will open for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Chase Jacobson with William Blair. Please proceed with your question.

Chase Jacobson - William Blair

Hi, good morning. Can you hear me okay?

Luis Manuel Ramírez

Good morning, Chase. Yes.

Chase Jacobson - William Blair

Okay. So Luis, I was hoping you could maybe talk about the longer term plan to double revenue and operating margin. I believe you initially introduced it in I think the second half of 2012, we’re about a year and half in. Can you just give us an update as to how is it playing out in your mind, is it faster or slower than you thought? Do you think you’re going to be closer to the 3 or 5 year mark from when you started? Any color on that that plan would be great.

Luis Manuel Ramírez

Great, Chase. No, it’s a great question. As you know, we spent the first part of the last year and the latter part of 2012 doing acquisitions that we did for. And so by the time we got to the middle of last year and completed the IBI acquisition, one of the things that I wanted to do was to make sure we could realign the organization and take those acquisitions and those capabilities that we acquired and put them together in a different commercial offering. So that’s a process that we spent the last six months of the year working on as we also built the team around the new structure.

This year, what we’d like to do is we’d like to continue to run the play that we started last year to grow the business. We’re spending a lot of time in the first part of this year on delivering organic growth opportunities. As you know last year we talked about investments in NPI. Randy mentioned that we’re also doubling our capital expenditures for 2014. So, some of the growth that we’re trying to do for 2014 and ‘15 will be based on some of the organic activities that we started last year. But we still have an acquisition strategy that we’re going to continue to execute on. I see us starting to reengage that strategy towards the second half of this year and into next year. So we’d still see acquisitions playing a large role in our ability to meet our growth goals for three to five years.

I think the markets are kind of doing what they’re doing, Chase. I see the markets in some of our spaces are still very strong; as we talked about, our Electrical Solutions platform. So we continue to see nice growth rates there, the double-digits even into next year. So I think that’s going to help us as well.

I’d say we’re still probably three to four years out from our target, which is still in line with what we started to say back in 2012. But I think it’s going to continue to be a mix of both market organic opportunities that we create from our products and services and also a very strong acquisition pipeline which we continue to focus on.

Chase Jacobson - William Blair

Okay, great. You kind of touched them in your answer, but with the decision to exercise the accordion feature on the revolver, should we read anything into that. I guess as it relates to cash [flow] [ph] in 2014 or is that just more flexibility given your increased CapEx and potential for acquisitions in the later part of the year?

Randy Guba

Yes. We just thought that it was an opportune time to exercise that feature. We don’t have any immediate plans to utilize that, but believe that it’s appropriate to be able to have liquidity available to us when the time comes to utilize it.

Chase Jacobson - William Blair

Okay. And that’s helpful. Just last question on Hetsco, the revenue from Hetsco continued to be a little bit weaker. Is that still timing; are there actual projects that are getting pushed out compared to what [inaudible]?

Randy Guba

I would say that Hetsco’s acquisition and integration is going pretty much as expected. As you know, when you do an acquisition like this there is a process to go through to get the integration and the results of the business that you have expected. We are proceeding down the plan course and believe that we are going to be able to achieve all of the goals we expected when we bought the business.

So I’d say we are pretty much on track. Still have a little bit of work to do to complete the integration. We are making some investments to be able to expand the capacity of the business. And that’s going along as planned. And we believe that we are going to see the benefits of the business that we anticipated.

Luis Manuel Ramírez

The other thing I would add to that is that’s one of the -- also reasons why we restructured the energy services platform to really give that business a better focus going forward from a commercial offering perspective. There’s always projects that are coming in and out of every year, but I think part of the acquisition integration challenge was always to build a strong commercial front-end of that business and that’s what we have been working on.

So we feel pretty good about it. If you remember back in the day when we were talking about our KW business, we started out in the same fashion; it took us about six months or so to get the structure and the commercial structure in the right position. So we are going to continue to do that, we [followed] [ph] that play with KW and then we got pretty good results that’s what we have done with Hetsco as well and we are pretty excited about that business still.

Chase Jacobson - William Blair

Okay. Thanks a lot guys.

Luis Manuel Ramírez

Thank you.

Operator

Thank you. Our next question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.

Bob Labick - CJS Securities

Good morning.

Luis Manuel Ramírez

Good morning.

Bob Labick - CJS Securities

I want to start with your outlook for the Products Division, and obviously a strong outlook for growth there next year. I was wondering if you could give us some color on the breakout between Auxiliary Products and the Electrical Solutions and the drivers for each and where you see those growing next year and beyond?

Randy Guba

We're not actually splitting out the individual segments or categories within the segments beyond the direction that we’ve given. We do believe that in the products solutions business that we are going to see some good growth within those two businesses there. But we do think that overall the direction that we're giving is going to be in the growth, in the revenues from the 525 to 550 direction we gave.

Bob Labick - CJS Securities

Okay, great. And maybe some color in terms of just the, I guess cycle for [each] [ph] as it relates to gas turbines or pipelines and the drivers in that regard?

Luis Manuel Ramírez

Yes. We continue to see the natural gas infrastructure investment that continues to be a growth area here in North America for sure and we're starting to see more of that also happen in other places. But in our business that’s a big leading indicator for how we're going to do in that side of the business.

In the power projects we continue to see the same thing we saw last year. More projects outside North America and we continue to win and follow those customers as they go around the world. And we also see a lot more focus here in North America on building infrastructure and as we build infrastructure there is also new demands for energy that are creating some opportunities that you read about from the OEMs themselves.

But I think overall, the growth that we're seeing that we're capturing is in conjunction with a lot of the infrastructure build out that’s occurring. And as I said earlier, in terms of that we continue to see that going fairly strong into the next couple of years that doesn't seem to be slowing down at any point here.

Bob Labick - CJS Securities

Okay, great. And then just on the CapEx side obviously you said you are going to be investing some CapEx for organic growth. Could you give us some examples of some of the spending in the areas that you might focus on?

Randy Guba

Yes. We're actually investing -- the Hetsco is one of the big investments that we're making. And we're creating capacity; we're investing in capacity to be able to widen the product mix there. We're spending some money in just kind of maintenance CapEx, but we're investing in growth to be able to try to achieve the top-line growth and the productivity that we run the business.

Bob Labick - CJS Securities

Okay, great. Thanks very much.

Luis Manuel Ramírez

Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Joe Mondillo - Sidoti & Company

Hi guys, good morning.

Luis Manuel Ramírez

Good morning Joe.

Randy Guba

Good morning Joe.

Joe Mondillo - Sidoti & Company

First question I have is regarding the SG&A, sort of outlook that you have. Just wondering the midpoint of the top-line guidance is about I think 11% growth, I'm just wondering why you are expecting such a small amount of improvement, just modest improvement especially with all the sort of lean manufacturing and cost savings what you're doing there, so not only the operating leverage, but also on top of that any cost savings that you're seeing?

Luis Manuel Ramírez

Yes. There is a probably two directional improvements there. The lean investments that we're making, we're going to see mostly in the cost of sales not in the kind of the SG&A line. And so as we make those investments, our gross profits will improve. And as we indicated, we're expecting that to increase or improve about 10 to 20 basis points.

The other piece of the acquisitions, sorry, of the operating cost is the fact that we’re getting a full year of operating cost from acquisitions, which obviously adds cost to the cost structure there.

We are going to see some benefits of non-recurring acquisition expenses. We had about $4.9 million of that in 2013, which we would not expect to see in 2014 assuming we don’t do any acquisitions. However, we are continuing to make strategic investments within the business to be able to help drive the growth and the productivity overall that we expect to make.

So we continue to take cost out on the one hand, but we continue to make strategic investments to be able to support the business that in a couple of years would be double in the top and the bottom-line.

Joe Mondillo - Sidoti & Company

So, just a follow-up with that; first off, how much I guess SG&A related to the acquisitions that you didn’t see last year are you seeing this year?

Randy Guba

$1.2 million of the SG&A relate to the acquisitions.

Joe Mondillo - Sidoti & Company

Okay. So, $1.2 million is related to IBI that you didn’t see in January through June.

Randy Guba

Correct.

Joe Mondillo - Sidoti & Company

Okay. Is that guidance related to the GAAP $73 million of SG&A that you saw in 2013? In other words are you not, are you -- so you’re not excluding the $9 million of one-time type items?

Randy Guba

Again the $9 million is a one-time item includes $4.9 million of acquisition non-recurring related costs, as well as the other strategic investments that we’ve made. So…

Joe Mondillo - Sidoti & Company

Right. I guess what I’m saying is with respect to your SG&A as a percent of sales sort of guidance that you’re giving.

Randy Guba

Yes.

Joe Mondillo - Sidoti & Company

You’re including those one-time type items in 2013 in terms of that guidance -- you are excluding, I am sorry?

Randy Guba

As a percentage of revenue we are looking full in costs in 2013 compared to full in costs 2014 and we are saying that as a percentage of revenue the costs will decline by 30 to 40 basis points.

Joe Mondillo - Sidoti & Company

Okay. Good enough. Just wanted to clarify that, thanks. The other thing that I wanted to ask was how is the pricing trending in terms of the products in those orders, how are the margins in those orders that you are receiving?

Luis Manuel Ramírez

I would say depending on the services; obviously our nuclear business tends to be a cost plus business. And so the pressure that we see in the marketplace is more related to the amount of maintenance that they are doing, but the pricing we actually can recover because it’s a cost plus basis.

I would say the balance of the pricing is relatively flat, we are not seeing a significant change year-over-year. And we do expect that as the market picks up on some of the natural gas power plants that we expect the pricing will probably be flat, but we’ll hopefully pick up some orders by the year end.

Joe Mondillo - Sidoti & Company

Okay. So even given the huge intake of orders the market hasn’t sort of started to trend upward at all yet, in terms of products?

Luis Manuel Ramírez

Yes. We have seen ups and downs, but on average it’s relatively flat.

Joe Mondillo - Sidoti & Company

Okay. And I guess so you have seen three quarters or so of I guess on average about 23.5%, 24% gross margins at the product side of the business. How do you, I mean that’s a pretty good improvement from what you’ve seen in the past, how do we look at that going forward, is that sort of a run-rate that 23.5% to 24? It doesn’t seem like it, because your guidance is sort of implying that you may see a tick down a quarter or two; how do we think about that, is it just a lumpiness of products of shipments and a product mix issue or…?

Luis Manuel Ramírez

It’s mostly a product mix issue. And as we look at the business going forward, again we’re making the investments in LEAN and trying to add some productivity out of the business. So we’re hoping to get some or expecting to get some pick up there, but I wouldn’t expect a dramatic change.

Joe Mondillo - Sidoti & Company

Okay. And these investments in LEAN, is this -- are we only going to see these sort of investments in 2014 and then they fall off, and what kind of sort of benefits are we going to see from this, anything you can quantify there?

Luis Manuel Ramírez

For instance, Joe, the LEAN events that we’re having and the LEAN is really about process efficiency and process redesign and they are tied directly to the operating team. So, it’s one of the cultural change items that we want to work on. We implemented it last year in a couple of our businesses. And from that we started to see some real productivity opportunities. And so this year, we’ve taken it to the rest of the business. So, what we’re going to do in 2014 is that we’ll be working on LEAN projects throughout the year at all of the sites and they are all going to be tied to process or productivity improvements.

And as we start to get those benefits what we anticipate is that those benefits start coming in more towards the latter half of the year and then you start to see them go forward into 2015 as well. So, they are the gift that keeps on giving, but you have to keep doing it every year. And so it’s a cultural of change for us that we -- the cultures that I’ve worked in, in the past, every year you came into the year with a 5% productivity target for improvement…

Joe Mondillo - Sidoti & Company

Okay. And so…

Luis Manuel Ramírez

So overall, the goal that we’re setting for our teams.

Joe Mondillo - Sidoti & Company

Okay. And so there is an upfront cost related to that and then…

Luis Manuel Ramírez

Most of it is related to the -- what happens is you have the events and then you come up with improvements. Sometimes those improvements are done by the team without a lot of cost and sometimes those improvements require system changes or some kind of re-engineering of a software. So some of those costs are better than that in that investment.

Joe Mondillo - Sidoti & Company

Okay, got you. And then Luis, in terms of -- I mean you’ve talked a little bit about going through this reorganization procedure. Can you update us on how beneficial and what kind of synergies we’re going to see within maybe each of the three segments? And also, I believe there were some sort of maybe cost savings as a result of the restructuring and such. Could you quantify that or are we going to see any additional savings in ‘14, or any color there?

Luis Manuel Ramírez

Let me answer the first part of your question, which I spent a lot of time with customers last year and also with employees as we went through this process. And one of the things that I got from a lot of our customers, in particular the larger utilities is that they really need help, their costs are going up 5% a year and their revenues are not going up 5% a year. In fact in some cases, their revenues are flat or down, if they can’t increase the rates. So, they really came to us and said we really need for you guys to start thinking about how you could help us deliver more efficiency and a lower cost basis operation.

So, we spent a lot of time looking across the organization and one of the commercial activities as we realigned the business was around how can we build solutions around the different capabilities that we now have as a result of the acquisitions, as well as the ones we had before that.

So, we have recently won a couple of orders related to that. There was one pipeline project where we had input from three of our businesses; Energy, the products team, Energy Services and the old Williams Industrial Services’ teams got together and were able to put together a package to deliver that to the customer.

So we see value in that process. And I would say, I wouldn’t quantify it today with any real number other than to tell you that that part of the organic activities that we’re doing this year are to promote that in the business, as well as to deliver a new aftermarket services offering from the products business.

So, we took -- one of our structure changes that we did was to take as you saw at the CFI and the TOG business and aligned them to the product business so that they can really put together an aftermarket portfolio of solutions for customers and that’s starting to yield some nice results as well.

So, our emphasis on that is really to create more organic opportunities through that, but we’re also meeting the customers and the customers are responding well to that as well. So we feel good about those activities.

Joe Mondillo - Sidoti & Company

Okay. And then in terms of the cost savings, you said your core SG&A went down $4 million in 2013. Is there any additional savings related to whatever you’re doing to get that down in 2014?

Randy Guba

I would say that we are looking at our infrastructure to be able to identify opportunities to be able to reduce cost overall through consolidations and shared services and so forth over the span of the next couple of years. We’re not including in the budget for the capital expenditures this year, any costs for significant infrastructure changes. It’s investments for growth and investments to be able to drive the top-line that we are committing to.

We do think that over time there is going to be opportunities on the infrastructure to be able to take some cost out. We don’t believe it’s going to be a quick benefit or a quick hit that we can take in 2014 to be able to take some significant cost out. We do think that we’ll be able to get some out over time.

Joe Mondillo - Sidoti & Company

Okay. Thanks a lot guys. I will hop back in queue.

Luis Manuel Ramírez

Thanks Joe.

Operator

Thank you. Mr. Ramírez, there are no further questions at this time, would you like to make any closing comments?

Luis Manuel Ramírez

Sure. Well first of all, thanks everybody for joining us on this call and also on this journey that we started back in 2012. We are really excited about this year and about what we can do for our business and are most excited -- most of the excitement is also coming from our leadership team that’s very energized to deliver what we said we were going to do, which is double the revenue and expand the margins in the next three to five years. So we are very excited about that. And we hope to see you soon and look forward to meeting you as we go through the rest of the quarter. Thank you.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Have a wonderful day.

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