First Pacific Company's (FPAFY) Q4 2015 Results - Earnings Call Transcript

| About: First Pacific (FPAFY)

First Pacific Company Ltd. ADR (OTCPK:FPAFY) Q4 2015 Results Earnings Conference Call March 30, 2016 5:00 AM ET

Executives

Sara Cheung - VP, Group Corporate Communications

John Ryan - EVP, Group Corporate Communications

Chris Young - CFO

Robin Nicholson - Executive Director

Joseph Ng - EVP, Group Finance

Marilyn Victorio-Aquino - Assistant Director

Analysts

Nicolas Van Broekhoven - Value Square

Phillip Whitman - HSBC

Sam Hui - CLSA

Operator

Good day everyone and welcome to the First Pacific's Full Year 2015 Results Teleconference with Investors and Analysts. Today's call is being recorded.

At this time for opening remarks, I would like to turn the conference over to your moderator today, Ms. Sara Cheung. Please go ahead.

Sara Cheung

Thank you. Good day everyone and thank you for joining us today to discuss First Pacific 2015 Full Year Financial and Operating Results. We hope you have been able to get a copy of the results presentation which is available on First Pacific's website, www.firstpacific.com.

For media on this call please note the Q&A session is open for investors and analysts only. If you would like to raise questions, please contact us when the call is finished.

For today's call, we have with us Mr. Robin Nicholson, our Executive Director; Mr. Chris Young, CFO and other senior executives.

At this point, I would like to turn to Mr. John Ryan from Group Corporate Communications for his presentation. John, please?

John Ryan

Thank you, Sara. In this presentation whenever we're mentioning dollars, please assume it's U.S. dollars unless we say specifically it's something else such as perhaps Australian dollars.

Now if you look at Page 3, this is a reminder of the main holdings that we are directly invested in at First Pacific. On Page 4 are photographs of many of the people with me around the table today. Manny and Ed are not able to join us. They are in the USA for meetings and I would guess that at this time they are listening.

Now turning to the page labeled developments in 2015, this is only some of the highlights. More details are available in our earnings report which went out earlier today. You can access it on our website and on the stock exchange website.

Clearly for us the biggest developments in 2015 was the finalization of the investment in Goodman Fielder in March a little over a year ago. PLDT the biggest phone company in the Philippians formed a joint venture with Rocket Internet at the beginning of 2015. Half way through the year, ICBP and Laurenson invested in a property business for $78 million. Going further down to this list which is only examples is not the most important ones.

MPIC invested in a road and bridge project in Vietnam about which they are very excited. And they also acquired a 10% direct stake in Meralco from Beacon Electric which is a 50-50 joint venture between PLDT and MPIC which after that transaction earns about 35% of Meralco.

And then in February last year, our joint venture with IndoAgri increased our stake in Roxas

Holdings one of the biggest sugar producers in the Philippines to just over 50%.

Now there are two charts on the right hand side of this page, show the value of our assets. We've pushed them out to the end of February when the value of the assets were invested in was just over $7.4 billion. The pie charts breaks down the proportion and the column charts shows you the change over the past 12 years or so.

Now on Page 7 there is a brief summary of the main financial results, the First Pacific in 2015. Our recurring profit was down 9% to $293.9 million. Contribution from operations was down a little bit less at just under $433 million and then profit attributable to owners of the parent that is really our net profit was up on the previous year owing to lower provisioning.

Our earnings per share was down bit less than 9% at 6.89 U.S. cents on a recurring basis. We have proposed a final dividend of 0.71 U.S. cents, that's down from 1.67 U.S. cents for 2014 earnings and it brings the full year dividend payout ratio to 25% which is our target that we have achieved in every since 2010 from 36% in 2014. And there is some gearing figures at the bottom of this page as well.

Joseph Ng, our Head of our Treasury, can speak to our balance sheet and other related topics during the Q&A portion of this conversation.

On the following page we have the highlights of our operating performance where you see a graphic illustration of the evolution of contribution from 2012 through 2015 and a perhaps more important chart underneath at a column chart showing the dividend income to First Pacific from the companies we are invested in.

As you can see it declines to $269 million from $304 million a year earlier and that is largely as a result of a lower dividend payment by PLDT.

Now turning to the following page, we've got a snapshot of our balance sheet. As you can see there are no major loan repayments in 2016. Our cash interest cover which is the ratio between our dividend income to our interest bill are very important figure to us which gives us our best sense of our ability to borrow or not declined to 2.6X from 3.1X in 2014. You can see those figures are in the box on the bottom right hand of the page.

And generally when that figure dips below 3, we are not very comfortable with any major increase in our borrowings.

Now turning to the following page, we have a closer look at the operating companies beginning with PLDT, which delivers our biggest source of dividend income. As I'm sure you are aware, they had a bit of a difficult year in 2015 as they engage in their digital pivot as they are transforming their business from traditional legacy businesses like voice and texting to a greater proportion of their service revenues coming from data-intensive services such as mobile internet.

So you can see that their revenues were down by 1% at a ₱162 billion. Core income was down at just over ₱35 billion. They hit the target there. Their CapEx for 2015 was just over ₱43 billion. And they reckoned to spend a similar amount of money on CapEx this year as they build out what we frankly expect to see towards the end of 2016, the best telecommunications network in the Philippines. We are already seeing evidence of increased quality compared to that of the other major player in that market.

Now, if you look at the column chart depicting the change in service revenues in the bottom right hand of that page. You can see quite clearly the transformation from the traditional services to the newer ones. And we are beginning to see some very encouraging results there. Mobile data revenues grew in 2015 and the growth of many of our data services is accelerating quite rapidly. However, we are all aware that these newer services have lower margins than the ones they are replacing EG, SMS.

Now turning to the following page, we've got a snapshot of our investment in Goodman Fielder, one of the biggest food companies in Australia; an investment we made so that we can pivot that company towards emerging Asia, increasing its exports from its major home markets of Australia and New Zealand and increasing the international business, which is currently focused more on the Pacific rather than in the emerging part of Southeast Asia where we are repositioning it already beginning in 2015.

Stanley Yang is incharge of our corporate development, you can speak to this topic or so can Robin Nicholson, our Executive Director, they were two key leaders of that transaction and we are quite encouraged by the results.

As you can see from the illustration on this page, our rationale for buying into this company is quite clear. It's got a very strong potential in the international business, which we expect to see grow strongly under our joint management with Wilmar.

Turning to the next page, our other food company Indofood had a bit of a difficult time in 2015 owing to a great extent to a weak rupiah and weak commodity prices. Revenues managed to edge up, but core income was down particularly in U.S. dollar terms as you can see in the column chart largely because the rupiah weakness accelerated that decline when expressed as a contribution to First Pacific.

But as you can see at the historical sales chart on the bottom right-hand side of that page, it is continuing to grow quite well led of course by consumer-branded products. As consumers in Indonesia see greater purchasing power, they are laying out more money from their wallets on higher-margin food products that Indofood is gradually moving into overtime, thereby increasing their earnings. We are very encouraged by the prospects for Indofood going forward.

Now, on the following page, we've got Metro Pacific, which of course is the biggest infrastructure holding company in the Philippines with major investments in toll roads, water, electricity, and in the autumn of last year beginning in light rail and in contactless payments. All of its businesses are doing quite well.

We are encouraged by the strong earnings growth they had in 2015, a record high just over ₱10 billion. They are reluctant currently to forecast what the figure might be for 2016 owing to regulatory uncertainties and we've got some of our Manila-based executives at the table here who can speak to those topics in the Q&A if you feel the need to get some more details on that.

We do feel, however, that in 2016 and going forward to continuing economic growth in the Philippines is going to mean growing volumes of electricity consumed, water consumed and traffic on the Toll Roads as well as on the rail network; and indeed in our hospital business, which is showing very encouraging results.

Now on the following page, we address Philex Mining, our copper gold mining company, which has seen a flat toeing in its earnings in 2015. We've got much lower prices particularly for copper and to a lesser extent for gold. We are encouraged a little bit about metal prices in the beginning part of this year.

But really for Philex it is looking to the future as they work on the feasibility study, the definitive feasibility study for their Silangan Project, which is a major project down in the South of the country. And while we work towards how to deal with that over the medium term, the mine up at Padcal, which is continuing to operate about 25,000 tons a day is delivering more resources, thereby extending its mine life.

Now if we turn to the next page, we've got a snapshot of some of the goals for First Pacific head office and the operating companies. Clearly for First Pacific, guiding PLDT through its transformation is very important to First Pacific. Our newest major investment in Goodman Fielder is an item of great focus for us. And Philex has got its biggest-ever project, which we will help them begin with on the definitive feasibility study.

I won't go through all of these goals. These and more goals are in the results announcement, which we've published earlier this year. Now the remainder of this presentation is a snapshot of our contribution, net debt in gearing and so on. I suggest we move now to Q&A and that will be followed by closing remarks by our Executive Director, Robin Nicholson.

But before we get into the Q&A, I'd like to remind everyone that we will be visiting investors at the Credit Suisse conference next week. I think we've got a quite full schedule. We will be at Maybank in Singapore. I think it's the week after their conference and then the following that, we will be visiting cities in Europe and North America. Please get in touch with us if you would like to see us.

Sara Cheung

Thanks John. Operator, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Nicolas Van Broekhoven from Value Square. Please go ahead. Your line is open.

Nicolas Van Broekhoven

Hello, just a couple of questions. First one on MPI. So difficulty forecasting for this year and since they are there. I was just wondering if you could comment on the regulatory environment, elections coming up I think in about two months time. Do they expect something to be resolved after this? Because the last thing I remembered a lot of these cases were in arbitration, so maybe if we can just share some update on that?

Robin Nicholson

Well, I'll answer the preliminary matter and then Marilyn can add any other points. I think as far as the election goes, we are reasonably content with any outcome. We have working relationships with any - all of the candidates and feel that our businesses will prosper under whatever administration appears. So we are not particularly concerned about the outcome of the election.

In relation to the various disputes these are pretty much all the subjects of arbitrations, I think all of them are international arbitration. And I think it's unlikely that all the settlements before those arbitrations follow their natural course.

So towards the end of this year, beginning of next year we expect to see these dealt with. And we hope the outcomes will be favorable to us. Certainly, we believe we've got very strong cases in relation to each of the disputes.

So we are cautiously optimistic, but litigation of any sort is always risky. So you can never be entirely sure of the outcome, but we think we have a good case.

Marilyn Victorio-Aquino

On the Singapore arbitration, which is really - again filed against the Republic of the Philippines, the profits of arbitration has commenced and the expected hearing is scheduled in December of this year. In the mean time, the parties will be involved in discoveries and filing of memoranda from each site. But the expectation is based - one to two weeks hearing in December thereafter the arbitrate or affiliates issued resolution otherwise.

Nicolas Van Broekhoven

All right, thank you. On Goodman Fielder, most of it gives you 13 million contribution today. You have now the business for almost the year – or Rob are you intimately involved now. Where could this contribution be in two to three years time, I'm not looking for guidance but just maybe if you can think this could be a significant contributor to the group or where you see this?

John Ryan

Sure, I would like to take that one. So this transaction closed at the - around March of last year and so in the ensuing period there has been quite a number of changes one is the change in the senior leadership of Goodman Fielder. You know number of the executives the CEO, CFO ranks were replaced and Scott Weitemeyer, who is currently the CEO, was ex Wilmar, he was running the sugar business for Wilmar in Australia.

Paul Wallace from First Pacific was the - even CFO here is in charge of the financing and corporate function there. And so with that have come also other leadership changes and there is a lady Julie Coates, who was a Executive at Woolworths, ran BIG W, CEO and she is now incharge of the Australia Operations. And [Tim Dean] [ph] who was the Managing Director of Fonterra consumer brands has joined us ahead of New Zealand operations.

And so with that has come a significant review of the businesses and the strategy is really two-fold. One, operating is much more efficient and profitable core markets which would be the Australian and New Zealand one, as many of you know that it's a tough environment in terms of retailers and so being able to operate efficiently, drive cost out and find opportunities for growth are absolutely critical and those teams had done significant review of that.

I think the other is the pivot towards the Asian markets and driving the export strategy. Some of that is taking shape already with Wilmar being a very large player in the Chinese market. Some of the initiatives around the existing business is basically fast as well as dairy are being developed and so - really when it comes down to this, we know that last year was a transition period with the closing and the change of management, it was also a chance to review and make sure that whatever CapEx and initiatives we put in, were really the ones that we fell the right ones to grow the business.

And so in terms of the interim budget there was a 9-year sub period. The management did deliver and needed its budget. What I would say for this year is in the first couple of months it's slightly ahead in terms of the EBITDA, in terms of what they have been able to deliver.

We expect this year to be an up year and really where the step change will be I think our expectation is in the next two year thereafter in '17 and '18 where after the capital some of the plans that are being initiated by the management would then at that point be executed. And so we will see significant upside and expect that in those next couple of years.

Robin Nicholson

The company has pretty much emerged from our 12-months in the form that we expected. So we haven't had any surprises. And we have had some of the opportunities to confirm. So in terms of how we see the performance going, the profitability will more than double over the next three years at that time cautiously optimistic. So we expect a very significant turnaround.

Nicolas Van Broekhoven

All right. Then on PLDT now then the news is out that Telstra will not go in a joint venture with San Miguel. Is there a chance for PLDT to cut some of the CapEx those doing or spread it out over more years so the hit to the bottom line would be less or would you continue to go ahead with the CapEx regardless and basically then just look for I guess – '17, '18 two-fold earnings to pick up again.

Chris Young

No, I think the plan is to push ahead with the elevated level of CapEx, but was included in the guidance at the PLDT invested 43 billion level.

So I think what we are seeing is just the growth in data in general, but also - but in particular, the growth of mobile data because the price of the smartphones is coming down to the level where it's affordable to the prepaid user. We are expecting that growth just to continue to be very - to be very high over the next two to three years.

So I think Telstra not coming in with San Miguel obviously is a positive, but it hasn't changed the general strategy.

Nicolas Van Broekhoven

Will San Miguel go by itself, is that correct when I read - is that what they have been saying?

Robin Nicholson

They said that they will go by themselves if necessary. They are in the process of building out a smallish network. But in the latest interview of [indiscernible] he did say that they are still looking for partners as well.

Nicolas Van Broekhoven

Okay.

Robin Nicholson

But with or without partners, he says San Miguel will launch sometime in the third quarter of this year.

Nicolas Van Broekhoven

Okay. But the guidance of the core income to go drop from about 35 billion to 28 billion is still - is still intact, right? I mean you stick to that.

John Ryan

Yes. There has been no change through the guidance. In fact we had to reset at that lower level. And then without giving any far more guidance use that really as the base to grow as we - the company moves into 2017 and 2018.

Nicolas Van Broekhoven

Okay. All right. And then on the power plant, basically you look for businesses that contribute the earnings and not negatively add or subtract from the contributions, so this one has been doing this for two years. Is there any way you could basically look for solution or is there improvement inside? I know the negative contribution has declined a bit from about 12 to 10 points something million, so basically any progress to making this at least break even or profitable?

Robin Nicholson

Well, the generating plant itself is up and running and operates very efficiently. And the marketing team has been quite successfully gaining market share. And I think we are going something like 9% market share with somewhere in the region of 450 retail contract.

So business has got a pretty solid base. The challenge, of course, is - are feedstock is LNG. And under the pricing arrangements in place for LNG that is a more expensive feedstock run if we were using pipe natural gas PNG.

So what the management has been doing is they have been trying to adjust the contracts with BG, who is the feedstock supplier to give us a little bit of headroom to buy spot, which is of course cheaper at the moment.

And I think the next year they have re-profiled a significant portion of the gas supply. And I think we are expecting the company to do at least the break even. But that's on the assumption that oil prices don't rise. The pricing arrangements associated with these feedstock benefit LNG users as the price of oil goes up.

So if oil was to recover then the current disadvantage that we suffer would in due course be eliminated. But on the assumption that we don't see any significant up-tick in oil prices and will therefore continue to operate at a slight price, disadvantage relative to those who are generating electricity with PNG. And I think the changes that the management put in place with the cooperation of BG next year also allow us to the very minimum go to breakeven.

Nicolas Van Broekhoven

And so what oil price would make your - basically able to compete better with LNG would be 50, 60 or is it going to be higher on oil price?

Robin Nicholson

Once we get to about 60 then things are looking a lot easier. I think that was sort of budget that we would hope for.

Nicolas Van Broekhoven

Okay. And so how long are you locked in with BG on this contract in LNG?

Robin Nicholson

It's a long-term contract. It's several years certainly.

Nicolas Van Broekhoven

Okay. All right, thank you.

Robin Nicholson

Thank you, Nick.

Operator

[Operator Instructions] Our next question comes from Phillip Whitman from HSBC. Please go ahead. Your line is open.

Phillip Whitman

Well, it's very much I'm going to speak, okay. Anyway thanks for the time for the questions. I have two quick ones, first is one, what was your capitalized interest expense for last year. And two, is your FX hedging strategy still only to hedge the dividend bringing upstream from your operations in various countries in Asian?

And my third one is, what's your initial thoughts right now on your strategy to repay the 2017 debt maturities that are coming due at the holding company level? Thanks.

Joseph Ng

It's Joseph here from the [territory] [ph] department. Maybe I respond on the foreign exchange strategy first. At headquarters level, you mean you're aiming basically the focus is more on hedging the cash inflow to the headquarter, maybe the dividend income from the unit from PLDT, from Indofood, that has always been the path as we normally do not hedge the underlying investment to say, so that's the policy.

For 2016 we are clearly monitoring the exchange rate, the peso exchange rate and rupiah exchange rate activity in particular the peso has strengthened quite a bit in the past couple of week, same for rupiah.

So, we are monitoring the exposure there. And for the full year I think 2016, I think we pretty hedge roughly half of our exposure so far, even though we are only in the first quarter. So, we have hedged half of our peso exposure for 2016. So, the remaining half we continue to monitor that closely in particular in relation to peso and rupiah. So, that's on the hedging strategy at headquarters level.

On the 2017 bonds that will be due in July 2017. And clearly that's the most expensive bond and we are paying 7.375% coupon on that. And we have received quite a lot actually enquiries or proposals from a bank as to how to help us to refinance that. And based on the proposals that we receive in particular months to raise fairly attractive bonds and clearly there would be substantial savings, we were to refinance the 2017 bonds say, we've syndicated banking facility in 2017.

So, it's not yet there and there's no repayment or prepayment option under that bond, so we just need to weigh them out until early part of 2017 and put the refinancing facility in place.

Robin Nicholson

Yes. I think it's fair to say that it is more than a year, so we have to refinance that bond or not. And certainly one of the objectives of the head office is to bring out that level down. So, if the opportunity arises over the next 12 months and I think our preference would be to try and reduce our debt.

So it's not – certainly not the case that we would refinance whole lot from it. Our objective would be to use the opportunity of repayment bonds to a greater or lesser extent to reduce our debt.

Chris Young

The first question was on the capitalization of interest. I think I said, at the First Pacific level is no capitalization of interest. We're basic expensing everything and in fact across the group as a whole there is relatively little capitalized interest except in the case of Philex where the financing relates to the Silangan project. But for the major companies in the group and including First Pacific itself is relatively little capitalized interest.

Robin Nicholson

Philip that was Chris Young our CFO.

Phillip Whitman

Okay. Thank you, Young.

Operator

[Operator Instructions] Our next question comes from Sam Hui from CLSA. Please go ahead. Your line is open.

Sam Hui

Hi. Thank you. Just a quick one, what's management thinking at the moment in terms of the potential options in terms reducing head office net debt? And any color on the magnitude that you're looking to reduce net debt? Thanks.

Robin Nicholson

We're always looking at opportunities to realize cash and although I didn't think there was any plan to sell any of our major assets over the next 12 months, it's not beyond the possibility that we might sell something down if we could get an attractive price. So that's certainly one possible source of cash that we could use.

We do have cash flow some of that I think we'll probably try and reserve to reduce the level of our debt next year. Certainly at the moment it’s a little bit consolidation, so we're not anticipating major M&A activity at the head office. That's not to say that our operating companies don't have their own plan. They do. But their head office is definitely Europe consolidation.

So as the cash comes in current thinking is the first preference would be to hold that back so that we can reduce the debt a bit. As to the quantum, well, and $100 million would be sort of minimum amount we look at, but if we could reduce debt a bit more I think we probably would. Again, it's something very attractive came along and we felt that the conditions were right and as first we might look for the acquisition, but at the moment preference is definitely debt reduction.

Sam Hui

Great. Thank you.

Operator

Our next question comes from [indiscernible] from JPMorgan. Please go ahead. Your line is open.

Unidentified Analyst

Thank you. Two quick questions. First, what's your projection for the total dividend from subsidiaries, cash dividends for 2016, can you give us the total number and major breakdown from the major subsidiaries?

And the second question is your 2020 brands which expect by PLDT shares probably you're subject to some top-up because the decline of PLDT's stock price. Just wondering if that top-up is down so far? Thanks.

Joseph Ng

It's Joseph here. On the first one, 2016 dividend I think is the bit sense, if you see that the 2015 dividend down by about 12% to just below 270 million level. I couldn't comment on 2016, but probably give you a little sense that of the 270 million dividend income that we receive in 2015 above two-third of that actually from PLDT.

So that's about 180 that sort of level. And then you heard from the PLDT guidance that kind of guidance for 2016 our co-earning was down 20% from there then you can do some estimate yourself.

So that's the kind of trend for our dividend income for 2016. I mean, there would some threat, but the extent of that we're still working on it.

On the top-up, yes, I mean, the PLDT share price kind of weakened a little bit a few weeks ago and then that actually trigger a top-up requirement and we actually deliver and top-up with the necessary additional PLDT shares to ensure that a fully cover and then we're all okay under the secured PLDT bonds due in 2020. All right.

Operator

[Operator Instructions] There are no further questions at this time. I'd like to turn the call back to your host for any additional or closing remarks.

Sara Cheung

Thank you. As there are no questions may I invite Mr. Nicholson to give his closing remarks.

Robin Nicholson

Well, first of all thank you very much for attending. We appreciate your interest in the company. As you will have gathered from our announcement and from some of the comments that we made during this call, 2016 is a little bit of a year of consolidation. PLDT our biggest asset and we need to assist it with its digital pivot, that's a very important component in restoring that company to growth.

That Indofood I think prospect look pretty good, because some prospect particularly in both foreign exchange and commodity prices indeed are more price are up a bit over the last few weeks.

Goodman Fielder as I mentioned is now safely in the hands of new management group. There aren't any surprises there. When we bought the company we hope there would be opportunities both in the export side and in terms of bringing cost base down and I think now having had the company under our stewardship for a year or so, we are reasonably confident that we can deliver on both of those points. So Goodman Fielder is looking reasonably good.

MPIC of course is very, very active in the Philippines. All of its projects are doing pretty well. And we are quite pleased with progress on everything. There are a number of new projects coming up that will bid for so I can we can expect to see MPIC being quite active over the next 12 months.

Meralco has also had pretty good year and it continues to be committed to developing it generation activity. So I think we expect to see further progress in terms of building out or moving forward with this generation project.

Philex the last of our principal subsidiaries. We're looking forward to the bank of feasibility study at the end of the year. Of course whether we can do it immediately to construct the new mine largely depends on sentiment generally to the mining sector.

So it's question really waiting and seeing how things pan-out but certainly during the first couple of months of this year, gold prices have been up and that's given us some encouragement. So I think Philex looking stable with some upside prospects.

We've reset the dividend at head office to reflect the fact of our cash flows down a little bit. I think we are very anxious that we are predictable so that we try to set the dividend at the level with few week and replicate over the next few years. That's not a dividend forecast, who knows what actually going to happen but certainly when setting dividends at the $5.05 final dividend, we had in mind a desire to ensure that we are consistent over the next few years.

As I mentioned earlier on, capital management side there is a strong desire to bring out debt not that it is at the moment particularly high but we are mindful of that but interest rates eventually will go up and will probably would be more comfortable with the slightly lower level of debt.

So we certainly anticipate applying funds that they come in towards which we will have available to produce debt when the debt comes due.

Generally although there are challenges ahead this year particularly with PLDT which has a very significant reorganization implement, we are quite optimistic for the year and we think all of our operating companies have a pretty good chance of doing well. So generally quite optimistic.

And as John said, there is an extensive road show investor briefing program outlined for the next few weeks. We'd be very keen to see any of you and if you contact John or Sara they will make arrangement to meet you pretty much wherever you are because John, Directors will be in North America, Europe and of course the Asian cities.

So thank you again for your attendance and we hope to see you soon.

Sara Cheung

Thanks Mr. Nicholson. Thanks again for joining today. Operator can you please provide the replay information.

Operator

Thank you. That will conclude today's conference call. Thank you for participation ladies and gentlemen. You may now disconnect.

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