Alltel Corp. Q1 2008 Earnings Call Transcript

May.15.08 | About: Atlantic Power (AT)

Alltel Corp. (NYSE:AT)

Q1 FY08 Earnings Call

May 15, 2008, 9:00 AM ET

Executives

Holly L. Larkin - Treasurer and Sr. VP - Corporate Governance

Scott T. Ford - President and CEO

Sharilyn Gasaway - EVP and CFO

Jeffrey H. Fox - COO

Analysts

David Sharret - Lehman Brothers

Susan S. Lee - Credit Suisse

Anthony Klarman - Deutsche Bank

Thomas Egan - JPMorgan

Operator

Good morning. My name is Beverly and I'll be your conference operator. At this time I would like to welcome everyone to the Alltel First Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. [Operator Instructions] Thank you.

Ms. Larkin, you may begin your conference.

Holly L. Larkin - Treasurer and Senior Vice President - Corporate Governance

Good morning everyone. Welcome to Alltel 2008 first quarter conference call. My name is Holly Larkin and I am the Treasurer for Alltel. Thank you for participating in this discussion of our first quarter results.

Today's conference call was preceded by our first quarter 2008 earnings release. This press release has been distributed on the newswires and is available on our website at www.alltel.com. Today's conference call should be considered together with our press release and related financial information.

Today's discussion includes, statements about expected future events and future financial results that are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to uncertainties that could cause actual future events or results to differ materially from those expressed in such statements. Other factors that could cause actual results of Alltel to differ materially, many of which are beyond the control of Alltel include but are not limited to, the items listed in the Safe Harbor statement contained in our first quarter 2008 earnings press release.

Additionally, today's discussion will include certain non-GAAP financial measures. Again, we refer you to the Investor Relations section of our website, where we have posted our earnings release and supplemental material, which contain information regarding these non-GAAP financial measures, including a reconciliation of each such measure to the most directly comparable GAAP measure.

Note that a live webcast of this call is available on our website. To access the call, go to the Investor Relations section and click on the live webcast link. Participating in our earnings discussion this morning are Scott Ford, President and Chief Executive Officer; Jeff Fox, Chief Operating Officer and Sharilyn Gasaway, Chief Financial Officer.

With that here's Scott.

Scott T. Ford - President and Chief Executive Officer

Thank you Holly. Good morning everybody. In just a minute, Sharilyn's going to go our financial and operating results. Then all three of us will be available to answer your questions for a minute. Before we do that, I would like to just offer a couple of quick highlights on the first quarter. We are obviously very pleased with our solid results across the board. Service revenues were up 11% with data revenues up 74% year-over-year. We had over million gross customers adds in the quarter, a 26% increase year-over-year. While at the same time, increasing our profitability.

Consolidated EBITDA was $847 million, up 18% year-over-year. We are clearly off to a good start for the year. One other topic of interest, relates to recently released order from the FCC on the ETC cap. As you may recall, we had already agreed to a cap as a condition of our merger with TPG and Goldman Sachs, last year. We will now operate under the new cap, established under the most recent order. It is still too early in the process for us to determine, the exact impact of this new cap. However, we do not expect it to be negative relative to the previous capitalization that we were operating on. We will work with the FCC and the regulatory bodies and will provide you with an update at the appropriate time.

With that I will turn it over to Sharilyn.

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

Thank you Scott and good morning everyone. In the first quarter of 2008, Alltel generated $2.1 billion of service revenue, an increase of $210 million or 11% year-over-year. Retail revenue, grew 12% year-over-year and was primarily driven by continued increases in data revenue which increased 74% year-over-year and by our continued focus on quality customers adds. I did want to bring to your attention, that in order to be consistent with others in the industry. We will begin to show reseller activity in our subscriber metrics starting this quarter.

Also beginning this quarter, we are changing the classification of reseller revenues from retail to wholesale. And we will show reseller customers and our gross and net customer addition. Prior period retail revenue per units statistics have been adjusted to reflect the reclassification of the retail operations and are available on our website.

Wireless gross additions were $1,093,000 for the quarter, up 26% year-over-year. Post-paid net additions were $163,000, up 50% year-over-year. Pre-paid net additions were $183,000 and reseller net adds were $39,000 during the quarter. Our total net adds for the quarter were $385,000, up 63% year-over-year. Our post-paid churn was 1.34%, essentially flat year-over-year. And our total churn was 1.83%, up 6 basis points, year-over-year. Post-paid and total churn were negatively impacted by the analog [ph] shutdown during the quarter. And we continue to expect to see that for the next few quarters. Total churn was also negatively impacted by the reseller disconnects being included in this quarter's calculation.

For the quarter average revenue per unit was $53.64 and retail revenue per unit was $51, both up 2% year-over-year. Data revenue for customer was $7.50 in the quarter, that's an increase of 60% year-over-year and up 11% sequentially. Turning to our wireless, wholesale roaming business. Revenues in the first quarter increased 15% year-over-year, primarily due to growth and data roaming revenue. Total cash cost per customer on a GAAP basis were $32.53 in the first quarter flat year-over-year and down 7% sequentially.

On a sequential basis, the primary contributors to the overall decreases were the selling, marketing and retention expenses incurred during the normal holiday season in the fourth quarter and the decrease of $24 million in cost of services, related to a change in accounting treatment for our early termination fees. Beginning in the first quarter, we reported early termination fees on a net basis, the change resulted in a decrease of $24 million in retail revenues. And a corresponding decrease in cost of services.

For the quarter, consolidated EBITDA of $847 million was up 18% year-over-year for a 40.5% service margin, a 220 basis point increase from a year ago. Cash interest payments were $461 million for the quarter. And as we mentioned on our previous earnings call during the fourth quarter of '07 and the first quarter of '08, we swapped to a fixed basis a total of $9.5 billion of our floating rate exposure. At a total weighted average interest rate of 6.5%. Capital expenditures totaled $146 million for the quarter.

Now turning to our balance sheet at March 31st. We ended the quarter with $1.03 billion cash and short-term investment. Keep in mind, that this balance includes $150 million of our deposit from the FCC option that we received back in late March and it was used to repay our delayed-draw term loan on April 4th. At March 31st our long-term debt balance was $23.6 billion, our ratio of total net debt to consolidated EBITDA on a pro forma basis was 7.0 times for the 12 months ended March 31st 2008.

With that Scott, Jeff and I will now take a few of your questions. Operator please review the instructions and open the call for questions.

Question And Answer

Operator

[Operator Instructions] We will pause for just a moment to compile the Q&A roster. Your first question from the line of David Sharret of Lehman Brothers.

David Sharret - Lehman Brothers

Good morning. If I understand... first just follow up on, you mentioned just some of the cost items that you are changing the accounting around termination fees that contributed $24 million of reduction in cost. We noticed sequentially big reduction in cost of service. So I guess, if you exclude that other cost reductions in the quarter, just... this EBITDA run rate level, there is nothing else sort of one-time. That benefited here, we sort of think about, the next two quarters, at least going into the stronger roaming quarters. Seasonally, I mean this is a good run rate and if anything sets you up at a much higher trajectory this year, versus last year.

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

Sure, well first let's just make sure, we all understand the change that we had on early termination fees. It doesn't have any impact on EBITDA.

David Sharret - Lehman Brothers

Right.

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

So it's just growth in income statement down and otherwise sequentially, we talked about the fact that our sales costs were higher in the fourth quarter with the holiday season. But we have put a lot of initiatives in place to continue to run a business. And we talked about that when we were out on the road show. That we had a lot of things not focusing on integration, we are going to really work on running the business. And I think that you can see that in the numbers that have come through.

David Sharret - Lehman Brothers

Okay. And then just in terms of our overall liquidity position now, I mean very strong liquidity with the cash. And the revolver, free cash flow positive trending even better now, with these results and reductions in cash interest and CapEx. Just some of your thoughts of how you are going to use, some of this liquidity, what is sort of the minimum balance of cash, you would like to keep at all times. And anything above that, kind of how you prioritize that with regard to debt repayments or shareholder returns?

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

Sure, I mean they are definitely lots of options and we will work with our Board of Directors to consider all those options, which could include making optional prepayments on amount of debt or reinvesting in the business. So we will give you more information on that, if we make further decisions.

David Sharret - Lehman Brothers

And then just a last question. A lot of your peers have announced their 4G strategies over the last few months, with regard to LTE or WiMAX. Just kind of update on what your thoughts are on that path and kind of where you are leaning on the timing. And potential, cash outlay for that?

Jeffrey H. Fox - Chief Operating Officer

Yes, this is Jeff. Hey David. So we are working to our planning phase and we will be talking to our Board about all that over the next two quarters. Certainly there is no money for 4G evolution anytime in our near term plans. And so I think from a cash flow respectively, you should not expect to see us talking about 4G any time, at least in '08.

Scott T. Ford - President and Chief Executive Officer

One thing, we will to say to that is. We do currently plan to move towards LTE in the three to five year timeframe, versus WiMAX. But we are still very early in that. And we think, that the forecast that we put out, when we went on our road show, our debt road show last winter. Had a CapEx run rate and it did allowed for that transition.

David Sharret - Lehman Brothers

Okay. Alright, thank you.

Scott T. Ford - President and Chief Executive Officer

You bet.

Operator

Your next question comes from the line of Susan Lee of Credit Suisse. Ms. Lee your line is open.

Scott T. Ford - President and Chief Executive Officer

Hello.

Susan S. Lee - Credit Suisse

I am sorry about that.

Scott T. Ford - President and Chief Executive Officer

No problem.

Susan S. Lee - Credit Suisse

Technical difficulties here. Just a few questions. The first one pertaining to your sub, your net customer adds. Can you just provide some more detail in terms of... how your numbers came out this quarter on post-paid and pre-paid, versus the prior quarter? It looks like pre-paid net adds were potentially higher and then also if you can provide any detail, in terms of kind of breaking out ARPU for the different customer basis. And then secondly, just on the balance sheet, I know in this quarter you guys were attempting to refinance some of the bridge facilities. Just kind of your thoughts there and with respect to timing in terms of coming out again...

Jeffrey H. Fox - Chief Operating Officer

Yes, I think. This is Jeff job. We do provide a breakout on pre-paid, versus post-paid, I may have to look for it, I don't have that rate in front of me. But as it relates to ARPU while the team is getting lined up. We don't break our prepaid ARPU, it all just rolls together in an aggregated order.

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

Yes, so I will give you details on this in the earnings release. Our post-paid net adds were $163,000 and the reseller 100, I am sorry, pre-paid were $183,000 and the reseller were $39,000.

Jeffrey H. Fox - Chief Operating Officer

And from a... just to refresh your memory. There is a bit of seasonal spike in Q1. On prepaid, normally across the industry. So we were glad that we got our share of that.

Scott T. Ford - President and Chief Executive Officer

Susan could you help us again with your third question on the balance sheet. I don't think we caught it. I am sorry.

Susan S. Lee - Credit Suisse

Yes, I mean just again. But I guess in terms of the pre-paid and post-paid net adds What was it in fourth quarter?

Scott T. Ford - President and Chief Executive Officer

I will get that well, they answered your second question.

Susan S. Lee - Credit Suisse

Yes, okay thanks. And then just in terms of the balance sheet, in terms of refinancing the $5.2 billion of senior bridge facilities and the remaining $1.5 million on the... if take in others to your note. What are your thoughts in terms of going back to market and to refinance from there, I mean...

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

Sure, I know you have seen some of that in the press that the banks are maybe anxious to get back out in the market. And that obviously requires some coordination between the banks and sponsors us. We have been and will be accommodating to them, as we can. Can't really give you any specifics on timing though.

Jeffrey H. Fox - Chief Operating Officer

And your fourth quarter post-paid was 218, it was actually rounded to 219 and post and pre-paid would have been $124,000 that's both thousands of net. So obviously very strong pre-paid quarter, and frankly very is strong post-paid quarter.

Susan S. Lee - Credit Suisse

Okay, can I just ask or just a follow up to refinancing, so then can we just assume that you are going to response for, especially bought back from that, the paper dye I guess was on the road, that you guys were trying to sell in the last quarter?

Jeffrey H. Fox - Chief Operating Officer

You have to remember that, the bank debt or the bonds or the credit that might be available is not held by us. The banks, when we closed our deal took that upon, their balance sheet. And what their plans are with it and how they are wanting to through it, we are not in control of.

Susan S. Lee - Credit Suisse

Okay.

Operator

Your next question comes from the line Anthony Klarman of Deutsche Bank.

Anthony Klarman - Deutsche Bank

Hi. Thank you, a few questions. First I was hoping you could talk a little bit about your experience with respect to Sprint during the quarter. They obviously had a pretty challenging quarter and I was wondering if you had like a, sense of how your ports ran with them during the quarter. And then also maybe as a contra item to that. Have you seen any change in the roaming revenue that you typically get from Sprint in the quarter given their loss, their losses that they had on the subscriber side for the past two to three quarters?

Scott T. Ford - President and Chief Executive Officer

Yes, we are not going to comment on that...

Anthony Klarman - Deutsche Bank

I was just saying the same thing.

Scott T. Ford - President and Chief Executive Officer

As it relates to roaming, I think, you saw in the aggregate. We had a good quarter and so certainly Sprint is the major partner. And so I think, we're still feeling like they are getting value add of our relationship, as we are there on the roaming side. So our roaming revenue was solid in the quarter.

Anthony Klarman - Deutsche Bank

Okay. And then on the plans that I guess you talked about over the next three to five years. Eventually having some migration toward the 3G. Do you have all the spectrum that you need for those plans in most of the markets where you are or do you believe that you will need some point, pick up spectrum over time?

Jeffrey H. Fox - Chief Operating Officer

Let me take that in two parts. I mean, so our view our 4G as I said and as Scott reiterated. We definitely feel like the way the world is turning LTE is a great option. And we were very clear of the road show. And we will continue to be clear that we have an excellent retail business plan and spectrum we can use for LTE, within our current portfolio. Strategically, you will note, we went to the auction and look to see, if there was some complimentary 700 megahertz and as everybody in this industry, we will continue to look strategically to see a good spectrum to compliment our current position is available. But no near term needs.

Anthony Klarman - Deutsche Bank

Okay. And then finally on the capital structure maybe just a follow on to an earlier question. Given how strong the liquidity is at this point, the numbers have been very strong as well. Do you have plans, with respect to the toggle, will you be paying cash on that for the foreseeable future or picking that toggle option in the capital structure?

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

Well... certainly we are required to pay the first coupon in June in cash and after that we have the option. Now what we said on the road show, back in November, that we anticipated paying cash on that debt and so...

Jeffrey H. Fox - Chief Operating Officer

That hasn't changed?

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

That hasn't changed.

Anthony Klarman - Deutsche Bank

Okay. Thank you.

Operator

Your next question comes from the line of Thomas Egan of JPMorgan.

Thomas Egan - JPMorgan

Good morning. Thank you. I just wanted to follow up a little bit again on the subscriber results. Your first quarter, gross customer additions almost look like a fourth quarter, it was so strong. And that sort of flowed down into net adds. I wondered, first question is I wonder, if you could give us a little bit more color Scott on and what you saw going on this quarter that cause things to be quite that good?

And then the second question is, you talked a little bit the seasonality of pre-paid. And last year, pre-paid almost sell off to net adds at least sell off to almost zero, literally in the second and third quarter. Should we think about it, that same way again, this year that pre-paid really falls off in the second quarter and third quarter or will you be emphasizing pre-paid differently this year than last year?

Jeffrey H. Fox - Chief Operating Officer

Yes. I think just like everybody else, we have that experience in the last several years, less of the fourth quarters spike and more, more of a continuous selling pattern throughout the year. And so I think you will just continue to see that they will always be a gifting in a seasonal spike in the fourth quarter. But I think, that we came out of the box, strong and had. Our sales and marketing team had some good plans were effective in the quarter in terms of some device strategies, and some promo strategies and frankly our visibility in the markets.

And so that the trend of the fourth quarter spike being less, less of high bar over Q1 and rest of the quarters. And I think you saw replicated this year, that with good execution. On the pre-paid, your observation is right about the history of that falling off to virtually zero growth. We are not going in to get in the forecast business. We are just very pleased with where we were in the fourth quarter. And then again in the first quarter, in terms of our share of those opportunities, I think they are seasonal pattern of pre-paid, that is something that we don't want to get into the prediction business.

Thomas Egan - JPMorgan

Fair enough. But would it be... would you, at least say a comment on whether or not there was a different emphasis on pre-paid and that maybe, we will stronger pre-paid carry through into other quarters. And then maybe to your other comment, since you said the seasonality is sort of smooth out a little bit. And it has for everybody over the last few years. Are you thinking about... can we think about at least maybe seeing some of the strength of what we saw on 1Q carried out into the quarters or do we expect the normal seasonality? I guess is what I am thinking of?

Jeffrey H. Fox - Chief Operating Officer

I feel there is seasonality in the business. There are... there clearly is, I want to make sure, we made a lot of change. Alltel is a company was very focused on post-paid and merger integration as high priorities. And we spent a ton of time over the last couple of years getting our pre-paid offering restructured new platforms, new strategies and I think you are just seeing that payoff in terms of us getting a reasonable share of pre-paid.

But we didn't have any particular granular emphasis in Q1. I think our team is executing the plan that they have been building towards for a several quarters.

Unidentified Company Representative

Moves in better over the last three or four quarters, running on that business. Sometime it shows up in the numbers, sometimes it doesn't, it's shown up right now the business has good momentum across.

Jeffrey H. Fox - Chief Operating Officer

Yes and so that... I know we are... we are not giving you a specific answer. But we still see...

Thomas Egan - JPMorgan

I keep trying up.

Jeffrey H. Fox - Chief Operating Officer

And you are doing a great Job. At the end of the day. There is a lot of month to month pattern in this business around promotional periods for everybody. And so we still will see those patterns emerge month in and month out or with this Christmas spike.

Thomas Egan - JPMorgan

Got it. Thank you.

Scott T. Ford - President and Chief Executive Officer

Thanks Thomas.

Operator

[Operator Instructions]. Your next question comes from the line of Doug Kline [ph] of Royal Bank of Scotland.

Unidentified Analyst

Hello, can you hear me?

Scott T. Ford - President and Chief Executive Officer

Yes.

Unidentified Analyst

Yes, it's actually, its actually Royal Bank of Scotland. Thanks for taking the call. There are three quick questions. Yes thank you very much. Three quick questions. One is just a housekeeping item, on the press release, in the cash flow from operations, you have a line item for other current liabilities, which showed a pretty big swing year-over-year. Could you just discuss what's in that and why there was such a big swig there.

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

Sure, it's really related to the liability for interest rate swap that we entered into. And so the interest continued to decline throughout the quarter from where were locked in. So, you will see that line item just fluctuate as there are changes in the market, they are also made through OCR.

Unidentified Analyst

Okay. Great thanks. And then next question is on data services. I am not sure, if you are willing to disclose, what your margin is on data, these days. But I guess what I am trying get at is, you had a very strong EBITDA number with a very strong margin no matter how you slice it, whether it's adjusted or unadjusted. So I am just wondering, how we can sort of catch the benefit to EBITDA from the margins on data?

Jeffrey H. Fox - Chief Operating Officer

Two things I want to... A) we are not going to disclose specific margins on data. But I will reference you back to what we said on our road show, which was that we completed our merger integration activity and some major operational changes in the fourth quarter. And so the ability to blame the revenue growth for the bottom-line, it felt good... we felt good when we were on the road show and what I would tell you is as we converted a substantial amount of retail revenue growth into EBITDA. And that was our plan and so that's what we see going on in our business. It's... we have got focus that we've never had the opportunity to have right now with no integration work in the pipeline.

Scott T. Ford - President and Chief Executive Officer

Yes, what he is referring to there closely he didn't sit through the road shows. Historically, we have been, we mentioned that earlier focus on post-paid and focus on rolling up, the roll wireless industry, which meant, we were always working on someone else's issues, somebody else's platform. And the integration process of trying to take, I don't know, 25 different acquisitions over the last five years or so into an operating platform. And we are just getting there in '07 and '08 and that's starting to show up in our numbers, which we were long and loud on that on the road show, now I just looked at us a little bit askant [ph] because we had to deliver it first. Before you could see it, but I think the last couple of quarters that's coming through.

Jeffrey H. Fox - Chief Operating Officer

Data is clearly helping?

Scott T. Ford - President and Chief Executive Officer

Absolutely.

Jeffrey H. Fox - Chief Operating Officer

Data is adding revenue, Okay.

Unidentified Analyst

Okay, so should we imply then that this type of margin. Now that you are in this more of a steady state, we can look for this type of margin going forward or should we still see seasonal fluctuations or other items that might come up that will push us down a little bit going forward.

Scott T. Ford - President and Chief Executive Officer

We're not going to give a forecast, there is seasonality to the business.

Unidentified Analyst

Yes, okay. Alright, just a quick question on the recently ended FCC auctions. We noticed that you have chose more or less early on in the auction process. Not to participate anymore, would you not there off, they are over? Would you care to comment at all on what you saw and why you chose not to be participant at some time.

Unidentified Company Representative

Sure, no problem. We said on the road show, just going back, that we were very comfortable with the spectrum position that we have. We are always looking to supplement it, when we get the opportunity on the right... in the right fit, where we don't have to buy a lot of spectrum, that we can't use or at the right price. We went to the 700 auctions really to loiter about, to see if it was going to go cheap. Because then that would have been a great place for us to pickup some spectrum that fit, at a reasonable price. What was clear within the first week was that wasn't going to be case. And we expanded the team and send them back to other things, that they were doing, watch the auction play out like everybody else.

Unidentified Analyst

Okay. And then the last question. Just to give up the mic to someone else. Everybody these days in all other industries is talking about the state of the economy out there. So I guess two questions for you, are you seeing any regional types of weakness in your business. And has your view on your... not asking for projections. But your view on what '08 looks like, is it... have you tempered it at all given what projections are out there for the U.S economy this year?

Unidentified Company Representative

Well, the thing that we have watched this very closely. Because when you are a highly levered company. And you, if you make a mistake around not watching your credit issues when everybody is talking about them. That's a good way, that's good way to have a sponsors meeting, that you don't want to have. All right, so we have watched that very closely. And we have not seen a material turn in that to the negative and we will continue to watch it. I think the key thing, over-writing issue in our business.

The credit expansion, credit contraction of the U.S economy takes place and there is not a lot we can do about it. But the thing that far surpasses that, is the wireline to wireless substitution effect that has taken place. There is another report out this morning. Almost 30% of the households in America now only use their wireless phone. Even if they have a wireline phone in the house, it's they have it for data and video and other things.

But they moved to voice which actually picked up, when the economy got tight onto wireless networks, we have been a really beneficiary of that. When you get tight and you have to make a decision of which phone you are going to keep on, It's easier to get junior and sister a 999 adder and turn the home phone off, than it is to not put your kids in contact. And keep a home phone bill going. So I actually think that the credit impact, that we saw go through the economy, that we are seeing go through the economy, made in some oxymoronic way have been a benefit to the wireless business.

Unidentified Analyst

Okay. Thank you very much for taking the questions.

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

Yes and let me follow a backup on that first one that I answered just real quick. Because I answered the change in non current liability and so if you are looking at current liabilities that are flowing through there. There were some transaction cost that got paid in 1Q and that's really what that is and so you won't see that kind of going forward.

Unidentified Analyst

Right, so those were one time...

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

That's correct. I just want to make sure I didn't miss the comment.

Unidentified Analyst

Okay. That explains it. Thanks a lot.

Sharilyn Gasaway - Executive Vice President and Chief Financial Officer

Thank you.

Holly L. Larkin - Treasurer and Senior Vice President - Corporate Governance

Beverlyn that's all the time we have this morning. Thank you everyone for joining us. We appreciate your interest in support. If you have any additional questions. Please contact Tim Hick, our Assistant Treasurer at 501-905-8991. Thanks.

Operator

This concludes today's conference call. You may now disconnect.

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