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TAL International Group, Inc. (NYSE:TAL)

Q1 2008 Earnings Call Transcript

May 7, 2008 9:00 1m ET

Executives

Jeff Casucci – VP, Treasury and IR

Brian Sondey – President and CEO

Chand Khan – VP and CFO

Analysts

Michael Halloran – Robert W. Baird

Greg Lewis – Credit Suisse

Rick Shane – Jefferies & Co.

Operator

Welcome to the TAL International Group first quarter 2008 results conference call. As a reminder all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator instructions) This conference is being recorded. At this time, I would like to turn the conference over to Jeff Casucci, Vice President, Treasury and Investor Relations. Please go ahead.

Jeff Casucci

Thank you. Good morning and thank you for joining us on today's call. We are here to discuss TAL's first quarter results which were reported yesterday evening. Joining me on this morning's call from TAL are Brian Sondey, President and Chief Executive Officer and Chand Khan, Vice President and Chief Financial Officer.

Before I turn the call over to Brian and Chand, I would like to point out that this conference call may contain forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995 regarding expectations for future financial performance. It is possible that the Company's future financial performance may differ from expectations due to a variety of factors.

Any forward-looking statements made on this call are based on certain assumptions and analysis made by the Company in light of its experience and perception of historical trends, current condition, expected future developments and other factors it believes are appropriate. Any such statements are not a guarantee of future performance and actual results or developments may differ materially from those projected.

Finally, the Company's views, estimates, plans and outlook as described within this call may change subsequent to this discussion. The Company is under no obligation to modify or update any or all of the statements that is made herein despite any subsequent changes the Company may make in its views, estimates, plans or outlook for the future.

These statements involve risks, uncertainties and are only predictions and may differ materially from actual future events or results. For a discussion of such risks and uncertainties, please see the “Risk Factors” section in the Company's annual report filed on Form 10-K filed with the Securities and Exchange Commission on May 10, 2008.

With these formalities out of the way, I would now like to turn the call over to Brian Sondey. Brian?

Brian Sondey

Thanks Jeff and welcome to TAL's first quarter 2008 earnings conference call. As indicated in our press release we're very pleased with our first quarter results. Adjusted pre-tax income increased 27% compared to the first quarter of 2007 and our annualized adjusted pre-tax or cash return on equity, increased about seven percentage points to over 27% in the first quarter of 2008.

Our excellent start to 2008 has been supported by a favorable market environment. We have so far seen strong leasing demand in 2008 despite the slow down in the US economy. Market observers continue to project a global containerized trade will grow in a 10% range in 2008 and while very little growth is expected for inbound volumes into the United States, growth in the Asia to Europe, Asia to Middle East and inter-Asia trades appears to be remaining robust.

In addition, leasing demand has been further supportive so far this year, by our customers' cautious approach to purchasing their own containers. Shipping lines orders for new containers have been low this year due to the high current cost of containers and perhaps the disruptions in the capital markets. Container prices have increased about 20% from the end of last year and in addition to reducing the portion of containers that our customers purchased directly the higher new container prices also provide support for our leasing rates and disposal prices.

We were successful in the first quarter and translating this attractive market environment into a strong operational performance. Our core utilization, excluding the impact of new units not hit on higher was roughly 94% in the first quarter despite the fact, that the first quarter typically represents the seasonal low point for dry container demand.

In addition, market rates for new container leases kept pace with the increase in container prices during the first quarter. While the high current market lease rates have not yet had a meaningful impact on our overall portfolio we should start to see an increase in our average lease rates, if container prices and market leasing rates for new container transactions remain at the current level for a sustained period.

The high price of new containers is also leading to very strong selling prices for our used containers and we achieved large gains on the disposals of our older units in the first quarter. Finally, we generated lease commitments for over 60,000 TEU of new containers and have accepted or ordered over 80,000 TEU of new containers through the end of April, to support the deals that we negotiated in the first quarter.

We're expecting that most of these containers will go on higher in the second and third quarters and we should benefit from strong on higher growth over the next few months. In fact, our pick-ups in April were quite strong. Our strong operational performance in the first quarter combined with our aggressive fleet growth over the last year to allow us to achieve our high level of top and bottom-line growth this quarter.

As Chand, will describe in more detail our revenue earning assets increased 23% compared to the first quarter of last year. Our adjusted EBITDA including principal payments on finance leases increased to 19% and our adjusted pre-tax income increased 27% compared to the first quarter of last year.

While our major business drivers such as fleet growth, high utilization and high selling prices for used containers were responsible for most of our profitability growth, we also benefited in the first quarter of 2008 from very large third party trading gains and higher than usual ancillary items such as FX gains in our pay revenue. These items added a few cents per share more or this quarter than we typically expect.

As reported in our 8-K filing, on March 27th 2008, we closed on $125 million of new bank financing. We believe that this facility together with the $75 million increased to our previous warehouse facility at the end of last year should provide sufficient financing to cover our plant-level of capital spending for 2008. We are currently seeking in addition of $100 million to $150 million of financing to cover our anticipated capital spending into the middle of 2009.

As indicated in our press release, we continue to generate substantial equity cash flow and we are pleased to be able to increase our dividend by 10% this quarter to $41.25 per share to an annualized rate of $1.65 per share. Our dividends will continue to be, our primary way to return our excess cash flow to our shareholders. We also repurchased 362,000 shares in the first quarter at an average price of about $22 per share.

I'll now hand the call over to Chand Khan, our CFO.

Chand Khan

Thank you, Brian. Good morning and thank you for joining us. It is my pleasure to review the results of our first quarter ended March 31, 2008. As we've said in the past, our EBITDA, pre-tax and net income were affected by unrealized losses on interest rate swaps, which we consider non-operational.

During this call, we will only review our EBITDA, adjusted pre-tax and adjusted net income, since we believe these financial measures more accurately reflects the Company's operational performance. For a full reconciliation between our reported financial results and our adjusted financial results, please see our press release.

Before I review our results, let me remind our investors that we've believe that our adjusted pre-tax results are the best measure of our business. Since, we pay valuable income taxes, due to our excess tax depreciation over book depreciation. Adjusted pre-tax income in the first quarter of 2008 increased $5.4 million or 27% to $25.9 million versus Q1 2007. Adjusted pre-tax earnings per fully diluted share was $0.79 in the first quarter of 2008 versus $0.61 in Q1 2007.

Adjusted net income for the first quarter of 2008 increased $3.6 million or 27% to $16.7 million, while EPS increased approximately 31% to $0.51 per fully diluted common share. During the quarter, we repurchased 362,000 of our outstanding shares, which cause a higher percentage increase in EPS versus the percentage increase in adjusted net income.

Let me review some of the factors that contributed to an excellent first quarter. In 2007, we invested over $400 million in revenue earnings assets. As expected this investment is providing a solid base toward the growth of our business. In Q1 2008 our leasing revenue increased $9.2 million or 13% versus Q1 2007, as a result of our fleet growth. It should be noted that while our leasing revenue grew 13% or adjusted pre-tax result grew to 27%.

Our adjusted pre-tax results grew more rapidly then all revenue growth. Since our depreciation expense grew more slowly than our fleet size and also we had higher trading and disposal gains than we experienced in Q1 2007. Our end utilization excluding new units in the factory was 94% in Q1, 2008 versus 93.9% in Q1, 2007. Gain on sale of our used equipment remains strong in the first quarter of 2008 increasing $1.9 million to $4.3 million versus the first quarter of 2007. During Q1 2008, we benefit from very strong selling prices on our for sale equipment.

We continue to sell our equipment at an older age than our competitors. This gives us two benefits; added revenue from longer on hire time and lower book values which should translate into higher gains when these units are eventually sold. Our compensating margin which consist our equipment trading revenue as equipment trading expenses increased $1.2 million in the first quarter 2008 versus Q1, 2007, due to a significant increase in then number of units sold.

Our depreciation expense in the first quarter of 2008, increased $2.3 million versus Q1, 2007 while the net book value of our revenue earning assets increased 23% from the end of Q1, 2007, our depreciation expense grew only 9% in the first quarter, due to the increasing number of fully depreciated units in our fleet. We have been very successful at extending the leasing life of our fleet.

So, the end of the first quarter we had approximately 150,000 TEU of fully depreciated equipment predominantly on hire. Our interest expense in the first quarter of 2008 increased $2.8 million versus Q1, 2007 mainly due to the result of the increase in debt required to support the growth of our revenue earning assets. Our EBITDA for the first quarter of 2008 increased $10.6 million or 19% to $67.4 million versus quarter 1, 2007.

Our EBITDA including principal payment on finance lease for the first quarter of 2008 increased $11.9 million or 19% to $73.9 million versus Q1, 2007. Our revenue earning assets, which consist of the leasing equipment net investment and finance leases on equipment held for sale grew approximately $100 million in the first quarter of 2008 to $1.6 billion.

At the end of April, we purchased or have commitments to purchase approximately $228 million in revenue earning assets. I will now return it to Brian for some additional comments.

Brian Sondey

Thank you, Chand. I will now finish the prepared part of the call with some thoughts on our current outlook. As you look forward into the second quarter, we expect that our major business drivers, our utilization, average lease rates, operating expense ratios and used container selling prices will be steady to slightly better from the first quarter level.

Assuming at the market environment remains favorable. Accordingly, we expected that our results will continue to track well ahead from our results from 2007. However, we may see a slight decrease from the first to the second quarter of 2008. If our third party trading margins and the ancillary items I discussed earlier, return to normal levels. Overall, we are starting 2008 in very good shape. Our first quarter results provide us for the big head start over our result to last year. We continue to benefit from a favorable market environment and we have solid operating momentum due to our strong core utilization and large volume of containers pre committed to leases.

In summary, we are very pleased our performance and results in the first quarter of 2008 and believe that we are off to a great start to the year. I would now like to open the discussion for any questions.

Question-and-Answer Session

Operator

(Operator instructions) The first question comes from Michael Halloran of Robert W. Baird. Please go ahead.

Michael Halloran – Robert W. Baird

Good morning gentlemen.

Brian Sondey

Good morning.

Michael Halloran – Robert W. Baird

Hey Bryan, quick clarification on the last comments you making there, I noticed you did not mention specifically the use truck sales and you kept the commentary more specifically to the third party transactions as well as the ancillary items can you just talk a little bit about what you think for a trend line stand point the used market looks like in kind of generally what the outlook looks like?

Brian Sondey

Sure the used container selling market, really has been quite strong now for 12 month or longer and we have continued to see, on a to quarter-to-quarter basis used container selling prices, holding firm to moving upwards and our sort of thought going forward is that, as long the environment the same with new container prices being quite strong and with utilizations shipping line and leasing company containers also being very strong that used container selling prices should remain quite high and that we should show in a good gains on a sale of our own units going forward. In a comment I made about our third party margins, wasn't really to say that we are expecting the used container sale markets to weaken, it was more that we just did a very large volume of units in the first quarter and while we continue to have lot of a third party business in the pipeline its just the volume in the first quarter was higher then it has been for us usually.

Michael Halloran – Robert W. Baird

That absolutely make sense and then just to make sure we are thinking about this correctly. On the used side then looking at the first quarter might be little bit high for run rate, but I mean to that sort of the sustainable level you looking in the near term here?

Brian Sondey

For the near term, assuming the environment remains the same, we think that that's, by the way we don't really give any forecast on particular line items, on the income statement but the drivers behind that in terms of the, the used container selling prices and the volumes of our containers that we are going to be selling, we don't see any major changes there in the near term.

Michael Halloran – Robert W. Baird

Well so far its good and then another point clarification from your prepared remarks, could you just clarify the amount of lease commitments that you had is thought as well as ordered containers, are those two separate things I know you said there was 60,000 lease commitments that you put on in the first quarter. How does that relate to the 80,000 ordered containers are those related to other or are those separate?

Brian Sondey

Well they are generally, they are certainly related but as generally its two different equations I think we probably discussed in the past and I always think of us like the McDonalds where we build to the shelf, so that we have inventory available when our customers walk in the door because one of the main things we give our customer as the immediate service that they can pick up containers on short notice and so we typically don't place container orders for specific leases but to these extent we are getting a lot of customers showing up and pulling containers up or so that we make a lot orders to replace those containers and rebuild ourselves and so and really I think at central April, we had committed with our customers, or our customers have committed to pick up 60,000 TEU on leases and lot of those are our future commitments that we expect to go on higher from early in the second quarter and because of those customer orders we're restocking ourselves and so we have ordered in total 8,000 TEU were let me phrase that we've either had deliver this year and that will plays new orders for 80,000 TEU. Now the containers again not really or the main containers forced us to take leases, but the high lease volume has certainly lead to the high volume of orders.

Michael Halloran – Robert W. Baird

Okay that makes sense. I was wondering if the 80K was 80,000 with on top of the 50,000?

Brian Sondey

No, no it does not, no.

Michael Halloran – Robert W. Baird

Okay that makes as good sense and then, giving the strength in the market there, if your asset growth targets with your change at all as you walked away through the year here?

Brian Sondey

Certainly spending a good start, last year we had a huge investment here when we spent I think a little bit over 400 million on our own container fleet and, just because the market was right for us last year. this year we are actually, already doing a little bit better than we had last year at this time that that much at this point project that we are going to hit $400 million again and it really just depends on what happens over the summer again we've build again the shop I was just talking about and ultimately we don't necessarily try to manage towards a goal we just response of what happens in the marketplace and so all these containers get booked on to lease we have replacement so, while, certainly our expectations for the year influence the size of our shelf really at the end of the day how much we invest just depends on how many transactions we do and so, we will be looking to our activity in the second and third quarter as to ultimately see where we end up for the year.

Michael Halloran – Robert W. Baird

So, the target I'd call somewhere in the mid teen range and then and that's – they're above where it is?

Brian Sondey

I think we said usually is that our market is growing at about 10% in terms of the volume containerized trade and than we expect to be somewhere I would say over the long-term, somewhere around market despite the better than market and the equation for us is that we – and we think given this size of our company and the quality of our relationships in the extended infrastructure and now we should be able to get slightly more than our per share of new business and so, that buys up would remain – would be probably a little over 10% in terms of fee growth. That said our fleet is a little bit of older average and so we expect to be selling more containers in average, over the next few years and that probably not has a little bit below 10% all loss being equal. The third equation than is that we also add a few new product lines, and add incremental growth and so when you put all of those three pieces together, we expect to be over the long-term or target is at least is in the sort of low double-digit range for asset growth.

Michael Halloran – Robert W. Baird

All right…

Brian Sondey

Little bit above that recently.

Michael Halloran – Robert W. Baird

No absolutely and then on the core leasing side on the rate, there is obviously some pressure here in the past and its seems like those rates are coming off to drop I mean could you just talk a little bit about how much of that is the environment and the Ocean liners are being a little bit, the higher used sales prices. The Ocean liners maybe switching a little bit more towards leasing, but then also talk about the context of, are some of those competitive pressures that you have seen from the small, newer entrance in the market. Are those starting to obey a little bit?

Brian Sondey

Well we seen this year that, and I think I mentioned in our remarks that our container prices are up about 20% from the fourth quarter of '07 to the end of the first quarter in 2008 and we've seen leasing rates keep pace of that increase, that leasing deals that we have done are, as in the range of 20% higher than rate the deals that we're done in the fourth quarter of 2007. I think the main reason for that increase, isn't where were the supply and demand as containers driven by the shipping lines buying assets, enjoys the price of containers. That is always a pretty tight connection between container prices and lease rates and so the main reason is just steel prices are high so, container prices are high, which drives leasing rate upwards, when you transaction. But I think the recent element of, perhaps a slightly better competitive environment, this year the last year. In last year we talk a lot about the influence, that some smaller and newer players we're having on market lease rates. That perhaps in 2007, reduced the rate or the ratio I should say, and for our lease revenue compared to our new container costs. We are seeing a little bit less of that pressure this year. When we lost deals this year, generally we spend other big players. More so than the smaller guys and we are not sure exactly why that is, but certainly one of our guess is just the – a tighter capital markets or reducing the amount of capital available to some of these newer players and that said if we still remain in a very competitive industry and it still guys that they want the Japanese industry just giving the results of some of the bigger players are getting.

Michael Halloran – Robert W. Baird

Okay, and then last one here could you just talk about a little bit in the current mark place just through standpoint of what the consolidation looks like currently and then how much of an appetite you guys have for acquisitions at this point?

Brian Sondey

All right, well we spend a lot of transactions in our industry over the last couple of years, where probably over half of the established leasing companies have had some form of ownership change or there selling that to private equity firms are going public or going private. But there hasn't been an a tremendous amount of consolidation yet, there's been a few transactions that we done through management deals, which is were one leasing company takes over the management fleet of another company and Textainers [ph] has done a few of those deals. But in general there has not yet been a lot of consolidation. We continue to believe that there will be consolidation over the next few years, just really it's just driven by the economics that we already service as do all the major ship leasing companies, we all cover all the major shipping lines, we all operate either all of the major port locations this allows you to grow your fleet size. We don't really need to add a lot of infrastructure cost, and so the cost savings of a combination are great almost dollar-for-dollar, and that provides a big advantage obviously and there haven't been a lot of deals in the past and I think one reason why just a lot of the companies where owned by the founding or second generation entrepreneurial and so, we are locked into to entering to any kind of consolidating transaction that, that might result in significant cost of their businesses. Our view is giving your expectation that happen the changes for consolidation have gone up that's anymore and so, we are interested and we think the consolidation makes sense, we think we are pretty good out and well positioned to participate in consolidation, but we're always going to be mindful the price for pay that, we don't want to do a deal, if we want to pay a 100% of the cost benefits to the person that selling, and so we do all of the work and you really get none of the upside, as we looked in and we will be involved and be hopefully opportunistic, but we're also going to be cautious.

Michael Halloran – Robert W. Baird

Great, I appreciate the time gentlemen.

Brian Sondey

Thank you for your questions.

Operator

The next question comes from Greg Lewis, of Credit Suisse. Please go ahead.

Greg Lewis – Credit Suisse

Good morning. You've mentioned your customer demand for container has been somewhat stronger is that correct more recently?

Brian Sondey

What we say customer demand for doing leases has been and very high this year. We are well ahead of in terms of doing lease deals, so the 60,000 TEUs we've done so far, as well ahead and where we're at this time last year. Pick ups over the first four months, have also have been stronger than they were last year. In particular, we are seeing an increase so far in the second quarter although first quarter was better than.

Greg Lewis – Credit Suisse

Okay, but because we're adding into as a seasonally stronger period for container demand from one another company, so it sounds like…

Brian Sondey

Correct.

Greg Lewis – Credit Suisse

You're expecting this if the sort of the out pace potentially last year.

Brian Sondey

Well, in last year we had a very good summer time and finished the year and our start is as better so far this year, and we want to project that, its going to continue with this pace although we are so far, so good, and we have- we had a very strong April and, we're hopeful that giving the containers we've committed to leases that we want to have a pretty good May and June as well.

Greg Lewis – Credit Suisse

Okay and then just I mean you mention the rise in container prices right now. going forward, I mean we sort of expect to continue – I mean at this point can we expect your container prices to continue to rise or do you think we're sort of add point we're it doesn't make economic sense that sort of air containers deal, do you like more than say $2500.

Brian Sondey

Well, we always hesitate too much to project container prices, primarily because the main determine container prices is where steel prices are going and we certainly don't think that we know more than people out there that are trading in the, in steel features and things like that and so we – I can't say that we've got great insight to our container prices are going, they have been quite strong right now, 20 foot dry containers, which typically at the benchmark that we use are somewhere between $2,200 and $2,300, a 20 foot container, which again is up about 20% from last year, but that's not really I wouldn't say it's because that the margins gotten bigger or supplying and demand factors that's just the inputs have gotten more expensive and so, really what your view is on steel prices to some extent influences just where you think container prices are going and we try not to take huge views and again we order containers primarily would recover deals that we see we might get in the short-term and try not to, make debts on where container prices or steel prices are going.

Greg Lewis – Credit Suisse

Okay, okay and then just a follow-up on, the equipment trading segment, clearly that the, increased in container prices has translate in the higher residual values for your containers. But, it all just sounds like your volumes were up pretty sharply in Q1 versus say previous quarters. So should we expect, you sort of been it to taking try to capitalize on this high residual rate environment over the next two quarters to sort of, you mentioned that you have a lot of order containers in the fleet sort of use this is an opportunity to do, potentially sell – try to sell off a lot more of your order containers?

Brian Sondey

Well for the gains we're getting on our own container disposals, the gain is large but, actually their volume there isn't so large. The main reason why the gain is very large in the first quarter, is just a high selling prices and in fact you're seeing our in our Q we are going to release probably end of the week and I think our first quarter disposal volume is flat even down from the first quarter of 2007 and so, the story on the – our own gain no sale as really a price store in that volume. The third party trading margin as were really that was the volume story that we sold a lot of third party containers in the first quarter of 2008. I'm not sure, how much that was belayed into the high selling prices for containers. I think it was really just driven by the fact that we did a large number of deals toward third party containers, but, I think no doubt there it helps to have, generally, good backdrop for the third party business and so obviously, high front selling prices, really drive our own sale results as well.

Greg Lewis – Credit Suisse

Okay, great and then, so just – and then just a follow-up on that, so when we sort of looking Q2 right now – and have you seen that sort of spillover a strong third party container sales in Q2 robust for?

Brian Sondey

Yeah. Again we don't really want to, forecast particular line item, but I would say, our pipeline for because, deals that we do with our customers tend to be for big blocks of containers that come back overtime. The changes to be a bit of a tail on, when we do these big transactions and so, we do expect, pretty decent volume for the second quarter as well. But, I think we wanted to be a little cautious I'm just saying, first quarter of 2008 was pretty exceptional for our trading margins and while the market so good and we still have some spillover. It would – not necessary we don't you guys to draw on the straight line for the next four quarters.

Greg Lewis – Credit Suisse

Sure, absolute. Well, okay. Great, thank you very much.

Operator

The next question comes from Rick Shane of Jefferies. Please go ahead.

Rick Shane – Jefferies & Co.

Hi guys, a couple of questions. Thanks for taken our call. With fuel cost arising this substantially is they are – are you seeing any impact on repositioning costs and how you are handling that and what should we expect going forward?

Brian Sondey

We haven't really seen any impact for us, but we have been very focused on the last probably five or six or seven years. On making sure that when our containers come off higher, they come off higher back in Asia, if the containers are less than sail age and so, we tend that very small volumes have repositioning for example right now, I think less than its like one half or 1% of our leasing fleet are in North America and Europe and so, we have sale units there but in terms of, units available for at least very little and so, we do quite a little bit of positioning, as we haven't we see much of an affect.

Rick Shane – Jefferies & Co.

Great that's helpful. Second thing is unit totally we have – one of the things that we have heard is that the shipping lines is away to save money on fuel or slowing ships down, and adding additional ships to their strings. Is that something you are seeing, is that one of the things that actually driving higher utilization in greater demand for containers?

Brian Sondey

At certainly, something I have heard about it and speaking with the number of our especially a big customers, a lot of them seem to be doing that and it seems to – I think it's working to the benefit of a lot of folks in the industry, for the shipping lines themselves at – it sounds like the equation works for them that they cost of the extra ship, is less than the cost of the extra fuel they would burn to run them faster and so, it just a better equation for them. In addition it takes capacity out of the market for them and also help support their freight rates especially the time when, lot of ships are being build and coming into the market and for us I think we have discussed in the past that, anything really that slows the velocity of containers helps our demand and so, to the extent that it taking longer per containers to create that to come over on the trips, and then they need more containers per goods that's being moved from Asia to the U.S. or Europe and that's beneficial for us and, they trying to say how much of that – when how much of our strong utilization is due to that affects, but it certainly a positive one.

Rick Shane – Jefferies & Co.

And it totally, I mean is this marginal behavior or is this prevalent behavior at this point you think?

Brian Sondey

I'm not sure, if I want to say – I can say a lot of our customers are talking about it and so, you are based on that it sounds like, it's fairly prevalent, but I couldn't tell you for example how many extra ships have been added because of – or ships essentially been taken out of service just by having more ships for string because of the affect. I don't know, but a lot of people are talking about it.

Rick Shane – Jefferies & Co.

Great, thank you guys very much.

Brian Sondey

Thanks Rick.

Operator

(Operator instructions) There are no more questions at this time. At this time I will turn the call over to Brian Sondey, President and CEO for closing comments.

Brian Sondey

Well, thank you everyone for your time for the call and your continued interest in TAL and we're looking forward to speaking with you as the year progress. Thanks very much.

Operator

Thank you all very much for participating in the TAL results conference call. This concludes today's events. You may now disconnect your line.

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