Regal Entertainment Group Q1 2007 Earnings Call Transcript

Apr.26.07 | About: Regal Entertainment (RGC)
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Regal Entertainment Group (NYSE:RGC)

Q1 2007 Earnings Call

April 26, 2007 9:30 am ET

Executives

Don De Laria - VP of IR

Mike Campbell - CEO

Amy Miles - CFO

Analysts

Scott Barry - Credit Suisse

Michael Savner - Banc of America Securities

William Kidd - Wedbush Morgan

Eric Handler - Lehman Brothers

Gordon Hodge - Thomas Weisel Partners

Aaron Watts - Deutsche Bank

Presentation

Operator

Good morning. My name is Claudia and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regal Entertainment Group's First Quarter 2007 Earnings Release Conference Call with our host Mike Campbell, Chief Executive Officer of Regal Entertainment Group and Amy Miles, Chief Financial Officer of Regal Entertainment Group.

All lines have been placed on mute to prevent any background noise. After management's remarks, there will be a question-and-answer period. (Operator Instructions).

I would now like to turn the call over to Don De Laria, Vice President of Investor Relations. Please go ahead, sir.

Don De Laria

Hi. Good morning. Before we begin today, I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts communicated during this conference call, may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company's expectations are disclosed in the risk factors contained in the company's annual report on Form 10-K, dated February 26, 2007. All forward-looking statements are expressly qualified in their entirety by such factors.

I'll now turn the call over to Mike Campbell.

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Mike Campbell

Thanks, Don. Welcome and thank you for dialing in to our first quarter conference call. Today, I will provide an overview of the industry's and Regal's first quarter results and a review of current trends in the exhibition industry including some of our expectations regarding box office trends for the summer 2007 film slate.

Following my remarks, Amy Miles will provide a summary review of our financial results, and as always, we will conclude the call with a questions-and-answers session.

Now, turning to first quarter industry results. The industry box office benefited from solid performances during the first quarter from several films; including 300, which is currently up to $205 million domestic; Wild Hogs at $156 million; our Ghost Rider, $115 million; Blades of Glory, $101 million and Norbit, $95 million.

Also follow-on success of December releases also helped first quarter industry box office with Night at the Museum contributing $170 million of its $250 million total gross during the first quarter. Additionally, The Pursuit of Happiness contributed $85 million in the first quarter; Dreamgirls contributed $80 million; Charlotte's Web contributed $42 million and The Good Shepherd contributed $36 million.

For the period that corresponds to Regal's fiscal first quarter, industry sources report an increase in aggregate box office revenues between 7% and 8%. Our aggressive commitment to maximize seat utilization and screen count for high-grossing pictures such as 300 helped Regal achieve approximately 10% box office for average screen growth in the first fiscal quarter and outperformed the industry's estimated growth per screen between 5% and 6%.

Now, turning briefly to Regal's first quarter results, we are pleased to report the following quarterly highlights. First of all, record first quarter total revenues of $625 million. Record first quarter adjusted EBITDA of $120.5 million, which was a 9% increase over the first quarter of 2006, and further was accomplished despite a modified Exhibitor Services Agreement with National CineMedia.

We were also pleased with the successful initial public offering of National CineMedia, as well as the aftermarket reaction to the NCM's long-term strategy, which benefits the market value of Regal's residual 22.6% stake in NCM.

During the first quarter, we benefited from average ticket price growth of 7.7%, driven by fourth quarter '06 price increases and a higher percentage of PG-13 and R-rated movies. In addition to growth in average ticket prices, we are also pleased to report concession for cap growth of 4.7%, also driven by price increases and concession-friendly PG-13-rated movies.

Looking to some additional first quarter highlights, we added 75 REAL D 3D systems for the release of Disney's Meet The Robinsons, bringing our total installed base of REAL D systems to 109. The success of the 3D runs for Meet The Robinsons has been consistent with our previous 3D results, with 3D screens generating two to three times the per screen revenue versus a 2D print of Meet The Robinsons. As such, we remain excited about the opportunities for future growth potential associated with 3D film product and other 3D content.

We were also pleased to report the $2 extraordinary dividend. Once again, Regal returned value to shareholders in the form of a $2 extraordinary dividend, bringing our total dividends to $16.36 per share since our IPO in 2002.

We are pleased at the successful IPO of National CineMedia provided sufficient after-tax proceeds to both pay the extraordinary dividend as well as allow us to reserve funds for potential acquisition opportunities.

Now, turning briefly to our outlook for the balance of the second quarter and the summer film slate. During the first three and a half weeks of the second quarter of this year, the industry box office has decreased approximately 2% versus the prior comparable period in 2006. However, the success of the quarter will be driven by the May and June film slate and we remain extremely optimistic about the prospects for strong box office results in the coming months.

Three of the strongest franchises over the past decade will bow early in the summer season. May, should open very strong with the May 4th release of Spiderman III, followed by Shrek the Third on May 18th, followed one week later by Pirates of the Caribbean on May 25th.

In June, our enthusiasm continues with the June 8th release of Surf's Up and Ocean's Thirteen; followed on June 15th by Fantastic Four, Rise of the Silver Surfer; then June 22, the release of Evan Almighty; June 27th release of Live Free or Die Hard, and the June 29th release of Pixar's Ratatouille.

Then looking forward to July and August film slate; in July, we are expecting healthy box office receipts from Transformers, which bows on July 4th; Harry Potter and the Order of the Phoenix on July 13th; The Simpsons on July 27th; The Bourne Ultimatum on August 3rd, and Rush Hour 3 on August 10th.

So in summary, we are pleased with the fiscal year-to-date box office environment and looking forward to a continued box office success during 2007. And I'd now like to turn over the presentation to Amy Miles, our CFO, to discuss the company's financial performance.

Amy Miles

Good morning. Today, I would like to provide additional detail on Regal's fiscal first quarter results and update with respect to our balance sheet and CapEx, as well as the discussion of the impact of the National CineMedia results for the quarter.

The company reported record total revenues of $625 million, consisting a $426.7 million from box office revenues, a $168.3 million from concessions and $30 million of other operating revenues.

Our total revenues increased this quarter approximately 6.8% over the prior year Q1 period, primarily as a result of attendance and per cap increases, partially offset by a fewer average screens, as well as our modified National CineMedia Exhibitor Services Agreement for the second half of the quarter.

Our admissions revenue this quarter increased approximately 8.9%, primarily as a result of an increase in our average ticket prices of 7.7% and a 1.1% increase in attendance. Concession revenues increased 6.1% as a result of the previously mentioned increase in attendance, coupled with a 4.7% increase in concession per cap.

Other revenues during the fiscal first quarter of 2007 decreased approximately 13% over the comparable quarter of 2006. As previously stated, the decrease in other revenues is related to our modified NCM Exhibitor Services Agreement for the second half of the quarter. I will provide additional information with respect to the impact of NCM later in my remarks.

Looking briefly at the expense line items for the fiscal period, film and advertising expense as a percentage of box office for the current quarter represented 51.1% of admissions revenue. Film rental and advertising expense increased by 80 basis points over the prior Q1 period, primarily as a result of the mix of film product during the quarter.

The top-ten pictures represented approximately 48% of our box office revenues versus 36% in the Q1 2006 period.

We are pleased to report that concession margins, before factoring in our vendor marketing programs, increased 30 basis points over the comparable period of 2007, resulting in a margin of 85.1%. Total rent expense increased $3.4 million or 4.4% due to normal inflationary increases and newer, more productive screens replacing older, less productive screens.

Our other operating expenses has increased approximately $6.3 million or 4% for the quarter, primarily as a result of increases in labor and other non-rent occupancy costs. The increase in labor cost is the result of state minimum wage increases coupled with normal inflationary increases and the non-rent occupancy cost increases related primarily to the newer screen base.

Also, please note that G&A expense includes approximately $2.1 million of share-based compensation expense in the Q1 2007 period. Excluding the increase in G&A related to the FAS 123R charge, all other G&A expenses were flat at approximately $13.9 million.

The first quarter produced adjusted EBITDA of $125 million versus $110 million for the same quarter last year and resulted in an adjusted EBITDA margin of 19.3%. We were also pleased with the growth in free cash flow during the quarter. Obviously, the net cash flow from operations of $710 million for the quarter includes the benefit of the NCM transaction.

If you exclude the NCM transaction from the cash flow from operations, the company generated approximately $64 million of cash from operations. And if you back out net CapEx, we generated just under $47 million of free cash flow versus the $4.9 million in the Q1 2006 period.

Regal reported adjusted diluted earnings per share of $0.13 for the quarter, which was obviously well ahead of the Wall Street's consensus estimates. Obviously, the $0.13 does exclude the $350 million pre-tax gain on the NCM IPO transactions.

If you look briefly at our balance sheet and asset base, we ended the quarter with just under $808 million in cash and a total debt balance of just under $2 billion. Approximately $302 million of our quarter-end cash balance was used to fund the $2 extraordinary dividend paid on April 13, 2007. The cash balance also includes approximately $185 million of current taxes associated with the NCM transaction. The cash tax payments will be made in subsequent quarters.

Our pro forma leverage excluding the dividends and the current tax liability from the cash balance remains conservative as compared to our peers, which continues to provide financial flexibility and supports our focus on free cash flow and returning value to shareholders.

Looking briefly at CapEx for the quarter, capital expenditures totaled $19.9 million. During the quarter, the company also recorded proceeds from asset sales of approximately $3.1 million as such our net CapEx was $16.8 million. During the first quarter of '07, we opened one theatre with 15 screens and closed 11 theaters with 79 screens, bringing our totals to 529 theatres, 6,340 screens.

Based on our development schedule for 2007, we continue to expect full year net CapEx to be in the range of $115 million to $130 million and that is inclusive of $5 million to $10 million of asset sales.

For 2007, we expect to open eight to ten theatres with 125 to 145 screens and close approximately 20 to 25 theatres with 155 to 175 screens resulting in an ending theatre count of approximately 525 theaters and an ending screen count of approximately 6,375.

Now briefly with respect to the National CineMedia impacts for the quarter, the net revenues related to NCM reported in our other revenues lines totaled $7.7 million in Q1 of '07 versus $11.9 million in Q1 of 2006. The $7.7 million of net revenues related to National CineMedia includes our pre-IPO and post-IPO advertising and other revenues from National CineMedia, as increases to revenues, as well as the reduction to our other revenues for the pass through of our beverage payment in the post-IPO period. The net of the revenues and the beverage payment is the $7.7 million contribution to other revenues.

Going forward, Regal will recognize revenue associated with NCM in the other revenue line on our financial statement. The NCM portion of the other revenue lines will consist of the exhibitor service payments of $0.07 per 10 day and the $800 per digital screen per year, plus other ancillary revenues, which will be offset by Regal's purchase of advertising time from National CineMedia to satisfy its beverage agreement.

Each quarter, Regal will record our share which is 22.6% as the National CineMedia's net income to the extent we receive it as a quarterly cash distribution. To clarify, we will record our LLC distributions on the cash versus the accrual basis.

As we look forward to the balance of the 2007 fiscal year, we are optimistic regarding the strong lineup of films for the 2007 year. Wall Street currently forecasted an approximate 2% growth for 2007. As we stated in February, based on that growth rate, we would expect adjusted EBITDA of approximately $520 million to $535 million. This range includes the effects of the NCM IPO and the resulting modified Exhibitor Services Agreement.

Please note that this range includes an estimate of $500 million to $510 million with a [theater level] EBITDA with the remaining $20 million to $25 million from the expected cash basis NCM LLC distributions.

Based on the strong film lineup, we would not, however, be surprised with upsides of the Street's estimates for top line industry growth.

In closing, we are pleased with our first quarter result and look forward to continued success in 2007.

This concludes our remarks and we will now open up the lines for any questions.

Question-and-Answer Session

Operator

Thank you. Ladies and Gentlemen, at this time, we will be conducting the question-and-answer session. (Operator Instructions). Our first question is from Scott Barry with Credit Suisse. Please state your question.

Scott Barry - Credit Suisse

Thanks. Just a couple of questions. Amy, could you just talk a little bit more about cash versus accrual basis? As I understand it, you are going pick up NCM's first quarter contribution on a lag basis in the 2Q?

Amy Miles

Yes. That's correct. I don't want to go into it too detailed, but because NCM carries a negative equity balance that impacts the accounting for the recognition of our equity income. So to the extent that we receive distributions in cash, we will record equity and income. And so, you are exactly right. That means in the second quarter that will include the distributions that NCM owes us for the first quarter.

Scott Barry - Credit Suisse

Okay. And than obviously the fourth quarter, as we look to the first quarter of next year.

Amy Miles

Right. Yes, some slippage of that in the 2007 fiscal year, but as we move into 2008 forward, obviously you will always have four quarters.

Scott Barry - Credit Suisse

Okay, great. One other question, could you talk about the timing of the payment of the tax liability on the NCM transaction?

Amy Miles

Right now, it's a $185 million and it will be paid over the next three quarters. And Scott I believe, it's 50%, 25%, 25%. So, 50% in the second, 25% in third, 25% in the fourth.

Scott Barry - Credit Suisse

Okay, great. Thanks very much.

Amy Miles

Sure.

Operator

Our next question is coming from Michael Savner with Banc of America Securities.

Michael Savner - Banc of America Securities

Hi. Good morning. Thanks. I just have eight questions, just kidding, just three. First on the ticket price increases very strong during the quarter, was there any impact there from the 3D Meet the Robinsons show and does that contribute to that growth? And overall within ticket prices, it seems strong and I'm wondering if you think the ticket price increases across the industry were similar. Because we are trying to back into an attendance growth number and would have thought, you would have had a little bit more attendance growth relative to the ticket prices. So, wondering what your expectation in the industry did?

Second question, your leverage is quite low, about a full term below where you normally like to have it and even when you account for the tax payment due over the next few quarters. You are talking about $300 million or $400 million acquisition that would likely need to bring you back up to the 3.5 times leverage that you like to carry. So, just your thought on raising the regular dividend or how to capitalize on an under leveraged balance sheet, which you usually do that pretty quickly. And then I have one last follow up on the accounting of rent. That's it.

Amy Miles

Okay. I think Michael, with respect to the ticket prices, just one thing to note is when you look at film mix through the quarter, pictures that were rated R and PG-13 were 77% at the box office. Or if you look at that same category of rating last year, it was 71%. So, with strong performances from the lead picture of the quarter being 300, which was obviously R-rated. Then a lot of that increased now. A substantial piece of that increase during the quarter would be related to film mix. And yes, I would expect that to be the same across, maybe not quite as possibly, we will take our own approach to ticket price increases, but to be film mix related.

And also another piece for Regal is the IMAX run for 300 performed really well and there is obviously a premium to that. With respect to Meet The Robinsons, we also had premium there. But since that was so late, actually it runs more into the second quarter with respect to what quarter we will see the benefit of that pricing. I think if you look at our leverage ratio for the quarter, it is lower. But part of that is again, I have kind of looked at it back, obviously the dividend and the tax liability and some of that excess cash is more of what we would like to use that from an acquisition strategy perspective. And again I think we've stated that it would be hard to predict the timing of those opportunities. But we would like to be able to execute on an acquisition strategy and that is somewhat how we sought about earmarking the additional cash that's in that calculation.

Michael Savner - Banc of America Securities

Fair enough. Thanks. And then lastly just so we can be comparing apples to apples with the other two comps in the market now Cinemark and AMC. My understanding is that for rent, you typically account for that on a straight line basis. But the actual cash payment can vary and it can often be less cash payment relative to what's being amortized. So, can you just tell us what that apples to apples number would be, so we make sure that we are actually looking at a true cash contribution that's equal to the peers?

Amy Miles

Yeah. Sure. The rules required as you enter into a lease and the lease has subsequent escalations that you will book that rent expense on a straight line basis. So a piece of that is cash and a piece of that is obviously non-cash. The non-cash piece of our rent, which we don't add back to adjusted EBITDA, totaled about $11 million in the 2006 period. And we would expect non-cash rent to be about $8 million in the fiscal 2007 period. And we will break that out separately on our cash flow statement, so that can be tracked in our financial statements.

Michael Savner - Banc of America Securities

As you are closing most theater screens and you are adding, will that continue to narrow or not necessarily?

Amy Miles

Overtime, that should narrow as you get later in your lease loss. But in fact all set by the fact that you continue to add new theaters and as the theaters age, you close those down.

Michael Savner - Banc of America Securities

Thanks very much.

Amy Miles

Sure.

Operator

Our next question is coming from William Kidd with Wedbush Morgan

William Kidd - Wedbush Morgan

Good morning and congratulations on the results. I guess my question really relates to the fact that some of your peers have went public. I guess, do you expect them to get a little bit more incrementally aggressive on the consolidation front? And relatively, do you expect the fact that they are now public entities to somehow manifest themselves and being a little bit more competitive in general?

Mike Campbell

I don't think being public necessarily makes them more competitive. And we are happy to see the universe of public theatre exhibitors broaden out there. I think, it's good for the sector as a whole.

Regarding their consolidation strategies, I can't really speak to what their strategies might be going forward. I mean, clearly our strategy is to continue to look for quality assets at reasonable multiples. And clearly, I think the other public companies as they come into the market, we will certainly have the advantage of having a currency as well as cash in which to attempt to do transactions. But overall, I consider it a positive to have a broader public universe out there.

William Kidd - Wedbush Morgan

Likewise and one more thing, I guess with respect to the dramatic growth that you are showing and expected to show in digital screens and digital 3D screens. I guess, can you talk a little bit about, I guess, how those are being financed. And I guess everyone had long been expecting that a lot of those costs to be covered by virtual print costing.

Can you just confirm that that is, in fact, what's going on? And just kind of put a little bit more meat on the bones as to how the industry and studios, particularly, are going to work with the exhibitors like yourself to make that a fairly painless process?

Mike Campbell

Well, we are continuing to develop our digital rollout strategy through our new venture, which still includes AMC and Cinemark. And currently, we expect to begin probably the fourth quarter of this year after sufficient testing of theater management systems, as well as projectors, we expect in the fourth quarter to begin equipping our new theatres that we open with primarily, if not totally, digital equipment. And then beginning in the first quarter of 2008, we would expect to accelerate our rollout and begin installing or reinstalling in existing theatres.

The financing model remains the same. I thinks it's a virtual prints fee model, which would be studios making payments to an independent third-party intermediary. And we have invested some of own resources, obviously, in the 3D rollout and going forward we expect to continue tweaking the business models as it relates to 3D.

William Kidd - Wedbush Morgan

Thank you so much.

Operator

Our next question is coming from Eric Handler with Lehman Brothers.

Eric Handler - Lehman Brothers

Thank you very much. Two questions. Can you talk, one, how would you view the state of the acquisition market? I know that the box office has picked up in '06 and is doing in well in '07. Are you seeing more properties come online? And typically, what you look for in an acquisition in terms of a circuit, be it, I mean what percent of stadium's seating?

And then also can you talk about, at what point does your net screen count stabilize flat to may be even seeing some growth?

Mike Campbell

Yeah. The acquisition environment, I think there has to be a change over time, but it has always been our theory that when you have the cyclical downturns in the industry, like we witnessed in '04 and '05, that unless you're a distressed seller, you are probably going to wait until the environment and the cycle improves a bit. And clearly with an increase in attendance in '06 and what we hope to see by the end of '07, there is a further increase in attendance.

Just intuitively, I would think that sellers would start coming out, and coming back into the marketplace. As Amy said earlier, we can't really, define for you when that point in time is, but it's something that we believe to be a factor.

As far as the quality of the assets, clearly we are not interested, in today's environment in acquiring smaller slope floor theatres. Obviously most acquisition targets might have a sampling of these older theatres. But we prefer to acquire stadium assets, larger theatres, not a specific percentage I can give you.

But if you look at our last few transactions, the percentage of stadium theatres and those transactions has been probably 80%, approaching 100% in some cases. And clearly, we are willing to pay a fair price. But we have always been very disciplined in what we are willing to pay and it has to be an accretive transaction or we won't do it.

Amy Miles

And Eric, with respect to our screen base, we would expect it particularly for the next couple of years that what I am going to just characterize is a flat growth model, from a screen count perspective. We have a closure list that would extend that far. That would go into the fiscal '08 and fiscal '09. But also we have a development schedule that would support new theatre growth during that same time period to keep the screen base more on a flat basis.

However, over the past couple of years, we've been very aggressive with respect to closing underperforming screens. And I can't say that the EBITDA contribution over the past couple of years associated with those screens has been immaterial. And we'd expect, it's just not all screens are created equal. So, as we close these screens each fiscal year, it's not negatively impacting our EBITDA. On a certain circumstances, it's enhancing our EBITDA, because they are cash flow negative.

Eric Handler - Lehman Brothers

Thank you.

Amy Miles

Sure.

Operator

Our next question is coming from Gordon Hodge with Thomas Weisel Partners.

Gordon Hodge - Thomas Weisel Partners

Yeah. Good morning. Just a couple of questions. Back on NCM and the impact there financially, so just to be clear, it sounds like there was no income from NCM equity or there was no cash from NCM LLC?

Amy Miles

That's right. It did see recording of the joint venture equity that was all pre-IPO.

Gordon Hodge - Thomas Weisel Partners

Got it. Okay.

Amy Miles

Okay. So post-IPO, there was not and you are right, Gordon. It's because we did not receive the cash distribution.

Gordon Hodge - Thomas Weisel Partners

Okay, terrific. And then in terms of other revenue going forward as it relates to NCM LLC distributions, so you get a tax benefit sharing you have, I think a share of the lowest payments. Will any of that show up in your other revenue or is that something --?

Amy Miles

Now, what shows up in our other revenue going forward will be our $0.07 per attendee.

Gordon Hodge - Thomas Weisel Partners

So, just the ESA?

Amy Miles

Just the ESA. You got it. That's the other revenue component.

Gordon Hodge - Thomas Weisel Partners

Okay. And then the other items, where do those show up?

Amy Miles

Those show up below the lines.

Gordon Hodge - Thomas Weisel Partners

Got it.

Amy Miles

Yes.

Gordon Hodge - Thomas Weisel Partners

Great. And then just on CapEx, could you give us a sense for what maintenance CapEx is likely to be as a component of the --?

Amy Miles

For this fiscal year, maintenance CapEx target is approximately $55 million. So, out of the aggregate, $115 million to $130 million, $55 million of that is maintenance.

Gordon Hodge - Thomas Weisel Partners

Terrific. Thanks very much.

Operator

Our next question is coming from Aaron Watts with Deutsche Bank.

Aaron Watts - Deutsche Bank

Good morning.

Mike Campbell

Good morning.

Aaron Watts - Deutsche Bank

I had a little bit more of a big picture question. But, there is no question as you highlighted that this summer is fully loaded in terms of the release slate. I had two questions of that, I guess one, is there any concern on your part that these films will cannibalize each other? Just that there are so many temple-type features this summer that their window of opportunity is shortened.

And then also, how do you see the end of the year shaping up? It seems, again, like we have a ton in the summer and then I was curious how you see the winter season, sort of, looking at this point?

Mike Campbell

Well, regarding the cannibalization issue, I think clearly, and this is just a personal statement. If I were putting the release schedule together from an exhibitor's point of view, I might do a little bit different as far as sequencing those films. Now that being said, I think clearly there might be some cannibalization of some of these key titles. But, at least from an exhibitor's point of view, I think it's still a win-win for us.

We are still going to have a huge summer and the studios, obviously, have to make the decisions and live with the decisions that they make on when they release the films. But, there is plenty of product and one of the reasons that these films are scheduled closely together is it is such a dense release schedule certainly for the next few months.

Regarding the end of the year, we don't have total visibility, obviously, at the end of the year. But, it's starting to shape up. We have some films, some other high-profile films, like another installment of National Treasure has been put on the release schedule and several other titles as well. So, we are still a little bit in the dark about everything that's going to be available in the fourth quarter. But, we have no reason to believe that it's going to be a letdown.

Aaron Watts - Deutsche Bank

Okay. Thank you.

Operator

We have reached the allotted time for the Q&A session. I would now like to turn the floor back to Mike Campbell for any closing remarks.

Mike Campbell

Well, we certainly appreciate everybody dialing in for the first quarter call and we look forward to doing it again in a few months and thank you very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.

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