Alta Equipment Group Inc.

Q4 2021 Earnings Conference Call

3/31/2022

spk01: Good afternoon. Thank you for attending today's ALTA Equipment Group fourth quarter 2021 earnings conference call. My name is Tania, and I will be your moderator for today's call. Our lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Jason Danmayer with ALTA Equipment Group. Please go ahead.
spk02: Thank you, Tamia. Good afternoon, everyone, and thank you for joining us today. A press release detailing Alta's fourth quarter and full year 2021 financial results was issued this afternoon and is posted on our website along with a presentation designed to assist you in understanding the company's results. On the call with me today are Ryan Greenwald, our Chairman and CEO, and Tony Colucci, our Chief Financial Officer. For today's call, management will first provide a review of the fourth quarter and full year financial results. We will begin with some prepared remarks before we open the call for your questions. Before we get started, I'd like to remind everyone that this call may contain certain forward-looking statements, including statements about future financial results, our business strategy and financial outlook, achievements of the company, and other non-historical statements as described in our press release. These forward-looking statements are subject to both known and unknown risks, uncertainties, and assumptions, including those related to altered growth, market opportunities, and general economic and business conditions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. Although we believe these expectations are reasonable, We undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our reports filed with the SEC, including our press release that was issued today. During this call, we may present both GAAP and non-GAAP financial measures, a reconciliation of GAAP to non-GAAP measures, is included in today's press release and can be found on our website at investors.altaequipment.com. I will now turn the call over to Ryan.
spk03: Thank you, Jason. Good afternoon, everyone, and thank you for joining us today. Our strong fourth quarter capped off an outstanding year for Alta. We delivered record revenue, surpassing $1 billion in revenue, and delivered higher profitability in our first full year as a public company. We did this while navigating a challenging environment and continuing our investment strategy to scale our business for stronger growth in 2022 and beyond. On the call today, I will go through highlights from our financial results and update on the progress we made against our growth objectives before touching on M&A and our initiatives for the year ahead. I will then turn it over to Tony, who will provide a more detailed review of our financial results for the full year. The outperformance in the first nine months continued with record financial results that reflected the underlying strength of both the material handling and construction businesses, as well as the progress we made on our operations throughout the year in executing our strategic plan. Last year, we completed six acquisitions that added 152 million in revenue and 15.2 million in adjusted EBITDA. These acquisitions expanded our presence in key markets and brought our capabilities to new regions. We gained share in our new regions, particularly in our construction business in Florida, while also expanding into new geographic regions such as New York and Ohio that offer substantial growth opportunities. We added new OEM partners and expanded our relationships with existing ones, broadening our equipment portfolio and our end market diversification. We continued to grow our headcount of skilled technicians, ensuring our customers receive optimal product support and adding to our higher margin parts and service revenue streams. We expanded our presence in some of the fastest-growing end markets, like warehousing and logistics, with broadened and complementary service lines, such as warehouse automation, engineering and design services, and data management. We also strengthened our balance sheet following our successful debt restructuring in April. And lastly, and perhaps most excitingly, we entered the over-the-road vehicle market with the Nikola Agreement. We see this as a longer-term growth opportunity, that is in the very early stages and believe our proven abilities in product sales and support will drive commercial adoption of electric vehicles in our marketplace. All of this while driving organic revenue growth of nearly 10% for the year. It was a truly phenomenal year for Alta against the backdrop of a global pandemic and a historic supply chain disruption. We believe that our performance and the progress that we made in 2021 reflects the underlying strength of our business and positions us to drive meaningful scale going forward. And with that, we couldn't be more excited about the year ahead. We find ourselves in a strong operating environment and believe our key internal priorities and strategies are aligned with promising industry tailwinds. In our construction equipment segment, 2021 saw the strongest pricing gains in the company's history, an acceleration of both rental rates and rental fleet utilization reflective of continued robust customer equipment demand. We have continued to drive record sales backlog, and we are using the size and breadth of our rental fleet to support our customers in an environment of sustained tight supply. Increased fleet utilization has also driven significant demand for replacement parts and repair and maintenance services. In the material handling segment, supply chain disruptions and labor shortages are accelerating customer adoption of more sophisticated, cost-saving, and energy-efficient material handling solutions, including warehouse and logistical automation. Alta is well positioned for this growth opportunity, and we continue to look for attractive investment opportunities in this segment. The industrial truck market finished 2021 at a record level of over 300,000 unit deliveries, with over 70% of the market in electric trucks versus internal combustion engines. We are well positioned and will continue to benefit from this trend. Further, we believe our significant experience in supporting fleets of electrified industrial trucks Over the years, we'll give our customers the confidence to rely on Alta for new and emerging technologies, both in the material handling segment and in our new electric vehicle segment. The Nikola agreement puts us in an excellent position to be an EV truck market leader in the densest truck market in the country, the Northeast. To update on some of our recent progress, we have taken delivery of our first truck and have begun hosting product demonstrations. training technical support staff, and have begun working closely with Nikola on the distribution support strategy both in the Northeast, and more recently were granted Arizona, a high-growth market, and an important gateway to the West Coast for truck traffic, presenting a significant product support opportunity long-term. In looking at the current M&A landscape, we remain active and our pipeline remains robust. We have the firepower and brand awareness to continue to partner with quality companies and we're confident we will continue to hit our targets as we've done since becoming a public company a little more than two years ago. All this momentum has given us the confidence to set an adjusted EBITDA guidance range of 137 million to 142 million, which would be a 16% increase at the midpoint year over year. Lastly, I would like to quickly touch on something that I am personally very invested in, Alta's corporate citizenship. As a company, we strive every day to be the best corporate citizens that we can be, and are formalizing a plan that will outline this. Some of the key areas include our commitment to environmental sustainability, including a focused strategy to drive customer adoption and commercial viability of various electromobility solutions, our thoughtful diversity and inclusion policies, the safety of our employees and technicians, and the overall purposeful, dedicated, and inclusive culture that we have created and continue to develop with each day. These areas of the business are a top priority for ALTA, and we are excited that we will be able to share more about them in greater detail as we move forward through the year. In closing, we had a great 2021 that sets us up well for 2022 as we look to scale our business, deliver strong financial results, and drive long-term shareholder value. Thank you to the ALTA team once again for all your hard work in driving a momentous year for the company. I will now turn it over to Tony.
spk05: Thanks, Ryan. Good afternoon, everyone, and thank you for your interest in Alta Equipment Group and our fourth quarter and full year 2021 financial results. We feel strongly about how the business performed in 2021 and look forward to more growth and positive outcomes in 2022. I first want to congratulate all of my Alta teammates for their hard work and dedication to our company in 2021. I especially want to acknowledge our skilled technicians. Our customers' business is earned on job sites and on shop floors across our footprint by our technician base, and they continue to meet every challenge and embody our customers for life guiding principle each and every day. A big thank you to all of Alta's skilled technicians. Additionally, I want to welcome our new team members from Gnup Sales, Ambrose Equipment, and Midwest Mind to the Alta family. The senior leadership team is committed to carrying on the impressive legacies of each of those respective businesses, and we look forward to earning your trust. My remarks today will focus on three key areas. First, I'll be presenting our fourth quarter performance, which exceeded our expectations, as the business continues to gain ground year over year on some key metrics. Second, I thought it was an appropriate time to recap ALTA's M&A activity over the past two years, as well as provide commentary on how our capital structure and operating cash flows give the company a solid framework to continue on its M&A path. Lastly, I'll provide guidance for 2022 adjusted EBITDA and discuss the relative elements and assumptions that drive the metric. Real briefly, it should be noted that there are some slides in our presentation, which was released prior to our call today, that presents our fourth quarter and full year numbers in greater detail than what I will discuss today. I'd encourage everyone to review our presentation and our 10-K, which is available on our investor relations website at altequipment.com. For the first portion of my prepared remarks, the fourth quarter and full year performance. First, the P&L. For the quarter, the company recorded revenue of $356 million, the highest quarterly sales figure in the company's history. This milestone was driven by an unprecedented $223 million of equipment sales, and $133 million in product support and rental revenues. Embedded in the $356 million of revenue is a 19% organic growth rate, or an incremental $54 million of revenue over the fourth quarter of 2020. Quickly, focusing in on our parts and service business lines for the quarter, construction product support achieved an increase of $7.1 million in revenue versus Q4 2020 on an organic basis, representing approximately 21% year-on-year growth, while the material handling product support business achieved an increase of $4.5 million in revenue versus Q4 2020 on an organic basis, representing approximately 12% year-on-year growth. Additionally, and we've made a point to provide investors with a quarterly check-in on rental utilization, nothing but positive momentum here. As physical utilization increases, held at approximately 70% in Q4. This is notable given utilization effectively held versus Q3 2021. Historically, we've seen a fall off in utilization in Q4 given seasonality, but we didn't see that same level of fall off in Q4 of this year. Lastly, we continue to see market rental rates trend upwards as the lack of new equipment supply continues to drive rates higher. From an EBITDA perspective, we realized $37.7 million in adjusted EBITDA for the quarter. Again, a record quarterly result. Adjusted EBITDA on a pro forma basis for Q4 is also up substantially from $29.2 million in the fourth quarter of 2020 to just over $40 million for the same quarter 2021. On an annual basis for fiscal year 2021, The company recorded just over $1.2 billion in revenue and we're now pacing at over $1.3 billion of revenue on a pro forma basis. On the adjusted EBITDA line, the company achieved $120 million in adjusted EBITDA in 2021, outpacing our expectations and beating our guidance for the year. Importantly, the $120 million of adjusted EBITDA converted into $63 million of economic EBIT our version of unlevered free cash flow for a free cash conversion rate of 53%. Lastly, and as depicted on slide 19 of our investor deck, on an adjusted pro forma basis, the business is generating just above $60 million in levered free cash flow to common equity prior to growth CapEx. In our view, this metric is indicative of economic earnings associated with driving equity value for shareholders. Next, I want to give a quick update on the balance sheet and our credit profile as of year end. The record fourth quarter of EBITDA led to deleveraging of the balance sheet as total leverage declined to 3.5 times at year end from 3.7 times at the end of Q3 2021. This reduction in leverage was achieved despite our drawing down debt from our ABL facility for each of the four acquisitions we closed in Q4. Again, a reflection of how impactful Q4 performance was for the business. Touching on liquidity, as I mentioned, we used our ABL facility to fund the Q4 acquisitions, which cost approximately $60 million in cash purchase price. But given the organic cash flow generation in the quarter, the impact to liquidity was only $40 million. We ended the year with a comfortable $250 million in available liquidity. Moving on to the second area of my prepared remarks, I'd like to summarize our M&A activity over the past two years. because M&A is a major component of our growth strategy. Additionally, I'll describe how our capital structure and operating cash flows provide the foundational element of our ability to execute on our M&A pipeline. In early 2020, prior to the IPO, Ryan and I noted that we believed we could purchase approximately $15 million of EBITDA annually at reasonable valuations. Two years later, as we look back, we've done exactly that, and I would refer everyone to slide 16 of our investor presentation, as we've acquired $33 million in EBITDA since the IPO at valuations generally ranging from four to five times trailing EBITDA, all accretive deals to ALTA shareholders. The $33 million of EBITDA acquired brought with it an incremental $329 million of revenue, 19 additional branch locations, and approximately 150 skilled technicians. In addition to being valuation accretive, the 11 acquisitions also fortified existing OEM relationships or introduced us to new strategic OEMs, built out important automation and design expertise in both operating segments, and diversified our in-market exposure. While M&A is in our DNA, we are selective in our criteria and are mindful of where, when, and how much capital we allocate to a deal. We believe our M&A performance in 2020 and 2021 is proof positive in this regard. I mentioned that I touch on how we believe our capital structure and cash flow profile provide the foundational element of our ability to execute on the M&A pipeline. And I'll refer investors to slide 25 of our deck, which depicts my commentary. First, as investors may recall, the company raised a high yield bond in April 2021 that we viewed as a game changer for several reasons. It decreased our cost of debt and at the same time fixed the interest rate on a large portion of our debt. An important point as we've now seen interest rates scale up just one year later. Two, we generated an incremental $140 million of liquidity that could be accessed to deploy relatively cheap debt capital into attractive return profiles on accretive M&A deals. Three, there is no amortization or restricted financial covenants on the bond which gives us max flexibility to route cash flows as we see fit. In the end, the bond acts as semi-permanent capital at the back end of our capital structure. The second element of the capital structure to note is our $350 million ABL revolver, which is collateralized by the company's rental fleet, parts inventory, and accounts receivable. The undrawn portion of the revolver provides our cash liquidity, or dry powder, for growth initiatives. including M&A. Given that we are typically acquiring tangible assets in our deals, the advance rate on those assets effectively provides for a notable portion of the capital needed to execute on a deal without having a dollar-for-dollar impact on liquidity. The second major piece of the M&A financing framework is ALTA's positive cash flow profile, as evidenced by our economic EBIT in 2021 of $63 million. These cash flows are used to sweep down against the revolver, thereby naturally deleveraging the business and generating more dry powder organically. And on slide 25 of our deck, we saw this play out in real time in 2021. You can see that the liquidity generated by the tangible assets associated with target companies in addition to our rental fleet helped to offset the liquidity needed for growth initiatives. Meanwhile, the business generated positive cash flows throughout the year, which acted as a positive influencer on leverage and liquidity. In summary, we believe this structure provides the perfect capital base for us to execute on our M&A strategy and drive accretive returns for Altus shareholders. Finally, and for the last part of my prepared remarks, I'd like to discuss the 2022 adjusted EBITDA guidance, which was included in today's earnings release. First, we've again chosen to provide guidance on annual adjusted EBITDA for 2022, as we believe this metric is most indicative of the cash flow generation of the business and is a familiar and comparable metric for investors. Additionally, we believe an annual EBITDA outlook versus quarterly reflects our longer term approach to decision making, as well as solves for seasonality and the ebbs and flows in equipment sales month to month and quarter to quarter. which are both typical of our business and our industry. Second, in terms of the guidance range itself, we expect to report $137 million to $142 million of adjusted EBITDA for the full year 2022. A few observations and assumptions on the guide. One, we feel great about how we ended the year in Q4, and we believe the tailwinds that positively impacted the business in 2021 will continue in 2022. Second, we had a strong year of rental utilization in 2021 and expect to be at similar or slightly higher utilization levels in 2022. Third, while we have guided to the adjusted EBIT job metric only, we do expect to continue to drive profitability metrics higher as our CE segment continues to realize operating leverage and our material handling business benefits from our investments in automation and system integration. Fourth, in terms of assumptions, our bullishness on the demand factors that will impact our business in 2022 are slightly tempered by two macro supply factors affecting the landscape. First, the variability associated with OEM supply chains in the delivery and deployment of new equipment and rental fleet, could act as a governor on growth in sales and rental revenue in 2022. Second, the ever-increasing challenge on attracting and growing our skilled technician base. Certainly, ALTA is not alone when navigating the tight labor market. For us, in the end, our ability to drive organic product support revenue is directly correlated to our skilled technician headcount. Now, having said that, historically, we have an excellent track record of attracting and retaining skilled labor and continue to put important resources towards this effort, as our people are our most valuable asset. Lastly, and given the calendar, as it relates to where we are tracking on the annual guidance so far in 2022, what I can say is that what we have seen in Q1 2022 is continued strength across all of our business lines and end markets, which provides us real-time confidence and solid support for the annual guidance. Similar to last year, to the extent any of the underlying assumptions or macro factors related to the guidance change, we will update investors accordingly. In closing, I want to thank all of my teammates at Alta for your commitment to the business and to each other throughout 2021. To our investors, we appreciate your support and confidence in 2021, and we look forward to continuing on our growth path and driving shareholder value in 2022. Thank you for your time, And I will turn it back over to the operator for Q&A.
spk01: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Alex Riesel with B. Riley. Your line is open.
spk04: Thank you, Ryan and Tony. Fantastic quarter and excellent year. Congratulations.
spk03: Thanks, Alex.
spk04: A couple quick questions here. First, Tony, as it relates to the guidance, you mentioned that the relationship with Nikola and the expectation for revenue from that relationship implied in your guidance is minimal. Can you expand upon that a little bit? You know, I understand that Nikola is expected to or hoping to deliver something in the order of 300 to 500 trucks this year. How should we think about that contribution to ALTA? I suspect, obviously, it would be, you know, second half weighted. But why not start to include it in your guidance yet?
spk05: You know, Alex, thanks for the question. First of all, just to be clear, the guidance is really just embedded or the foundation of it is the two core segments without any sort of impact from the EV segment. And we wanted to be conservative there, just given, you know, the startup nature with Nikola. We're cognizant of the numbers in terms of truck deliveries. that you mentioned there. But we also have some, you know, some startup costs, probably that may offset any gross profit that we were able to make, maybe on some on some truck sales. So for all those reasons, and again, kind of the back half waiting, we chose to just just guide really with the two core business segments.
spk04: That's helpful. And then also as it relates to guidance, Guidance appears to be somewhat tempered by timing and delivery of new equipment by OEM partners. Can you talk about, you know, clearly, I suspect that they've had some delivery timing challenges for the better part of the last 12 months or so. Are those starting to ease yet? Or is there any visibility as to when it might?
spk03: Alex, this is Ryan. I'll take that one. You know, it's hard to generalize because of the breadth of our portfolio, but I think it's most accurate to say that it is tempered off, but at a historically high level. You know, we have record lead times on most of our products. You know, things that we deliver this year were sold last year, and orders that we're taking this year for the most part will be delivered in 2023. So it's stabilized, but it's still, it's a very tight market, historically tight and remains elevated.
spk04: And one last question, and I'll get back in the queue. Clearly, because of that tight market, your rental business is very strong, and it's obviously a very high margin business, as well as parts and services. Is there any... capital or are you looking to invest more capital into that rental business to sort of keep up with that high demand given the long lead times for new products?
spk05: Yeah, Alex, this is Tony. I'll take that one. You know, in terms of the size of the rental fleet, you know, what I would first kind of mention is our rent-to-sell business model, and you saw kind of in today's numbers, again, another large quarter relative to rental equipment sales. And so, you know, our business is not to buy and hold significant amounts of rental fleet, but to turn them and generate field population, generate the parts and service business thereafter. So when we think about the size of the rental fleet this year, we don't have any significant plans to grow the fleet. And probably even if we did, it would be difficult given the supply chain constraints. So it's going to be a little bit of kind of see where the market takes us, see where the inventories and the deliveries from OEMs take us. But you know, overall we don't expect to significantly grow the fleet by any means this year. Thank you very much.
spk01: Thank you, Mr. Rigel. The next question is from the line of Brian Fast with Raymond James. Your line is open.
spk07: Yeah, thanks. Good afternoon. We saw a strong, I guess, rental utilization in the year end. I think you provided some color. But could we get some more color on what you have seen more recently in the last few months in 2022?
spk05: Yeah, I'll take that one, Brian. What I would say is I mentioned in my prepared remarks is we have typically, specifically in the north, saw a dip in physical utilization going from Q3 to Q4. And October and November stayed really hot in terms of just utilization, physical utilization. And we really didn't see much of a dip at all until the very end of December. And that dip was probably more muted than it has been in years past. What I would also mention is we're in Florida. A large chunk of our fleet is in Florida, which obviously is not impacted. by the weather. And we have held physical utilization kind of right throughout the year down in Florida at a really high level. And that continues into Q1 down in Florida. So what I would say up north here is in Q1, we certainly see a dip. There's frost laws that prevent us from shipping large equipment in the wintertime in the north. So we definitely see a dip like we have in the past. But what I would say is it's probably been more muted than it has historically utilization wise.
spk07: Okay, thanks. That's very helpful. And then just on Nikola, as that relationship, I guess, continues to solidify with the new dealer territory in Arizona, could you provide some thoughts on what we should look for in terms of milestones or next steps?
spk03: Sure, I'll take that. This is Ryan. I think the first milestone for us would be announcing a large order. So we're working closely with Nikola on their indications of interest. There are demos that are happening. And our anticipation is that at some point this year we're able to broadcast, you know, customer number one for Alta equipment.
spk07: Okay, thanks.
spk03: That's it for me.
spk01: Thank you, Mr. Fast. Again, to ask a question, press star 1. The next question is from the line of Matt Somerville with DA Davidson. Your line is open.
spk06: Yeah, thanks. A couple questions. I know it's tough to have visibility from a top line standpoint when you think about equipment sales, so I want to focus on product support. As we think about 22 and based on what you've seen now for the better part of the first three months of the year, What do you feel is a realistic organic growth rate or range we should expect to see on product support for ALTA in 2022?
spk05: Matt, good to hear from you, and thanks for the question. This is Tony. We always have to kind of think about the segments bifurcated from one another as the construction segment has realized organic growth numbers into double digits for quite some time now as we take share for our OEMs, drive field population, hire mechanics, and kind of run the ALTA playbook in the territories that we're at. As I mentioned on my prepared remarks, the bottleneck can be tech headcount, which is always difficult. We're good at it, as I mentioned, but that can act as a bit of a governor. Having said that, we expect product support in the construction business to continue to run very strong, especially in some of the newer geographies that we've entered through M&A, upstate New York being one of the newest kind of territories that we've entered, and Florida as well. So I would expect, you know, something in the double digits would be the expectations there. on product support in the construction segment. The material handling segment, you know, a more mature business, kind of, as we think about organic growth rates year on year in that business, recall that it was more impacted with COVID in 2020, probably than our construction business was. And historically, the growth rates there have been 5 or 10% And I would expect probably kind of a return to that norm overall, especially as we're able to kind of pass along pricing increases on parts and labor. So hopefully that gives you some idea of the expectation there. I appreciate that.
spk06: In terms of pricing, can you talk about what rent-to-rent pricing looked like in 21 versus 20? and then what you anticipate to realize on top of that in 22 over 21. And if you're able to give the same color on product support, that would be helpful as well. Thank you.
spk05: You know, that's a difficult question, Matt. I'll take the product support piece first. The product support piece, certainly with the – I mean, similar to the equipment markets, when there's a dearth of supply, you can – rates tend to go higher. What I would say, though, is every market is different. The competitive landscape is different. And so rates are different kind of across the board, just given – you know, when you compare and contrast the geographies. But in general, I mean, certainly something along the lines of 3% to 5% in terms of, you know, rates on product support, just pricing, I guess I would say. And on the rental piece, which, by the way, we would expect to continue into 22 here. On the rental piece, you know, I think, again – Factors that are very specific to different regions can vary. But we saw multiple, you know, single-digit kind of increases in the markets that we're in and for the equipment categories that we're in in 2022 – or, I'm sorry, in 2021, and kind of remains to be seen in 2022. But, you know, everything suggests that the trends may continue here.
spk06: Got it. And then I'll go ahead and ask one more. I'm going to call your warehouse solutions business, which is not the lift trucks, like the automation stuff. How big is that business for Alta as of year end 21? And what can you scale that to this year? I feel like you've referenced backlog statistics just pertaining to that piece of the business in the past. I could be wrong. But if you guys could do a deeper dive on kind of the automation piece embedded in the material handling, that's great.
spk05: Sure, Matt. I'll take that one. I want to say that, you know, the material handling business was somewhere along the lines of – and we produced some data last quarter on peak logic specifically, and the you know, of course, on top of that, we have the investment in Scott Tech. So combined, that business, you know, Matt, I may have to get back, I don't have it top of mind, but I want to say that that business was about $50 million combined when we bought it. So between 2022 and 2021 for Scott Tech, and we would have saw, you know, something along the lines of 25% growth on that metric in 2021 here. The question then becomes, what does it look like for 2022? So let's just say we did $65 million, $70 million maybe this year, and a lot of the same types of issues impact that business, supply chain being one of them, And skilled labor being the other little bit different skilled labor in terms of having an appropriate amount of project engineers and design engineers in that space, which are also kind of in high demand here. So anyway, hopefully that helps, Matt, answer your question. Yeah, thank you.
spk06: Yeah, I appreciate it. Thanks, Tony.
spk01: Thank you, Mr. Somerville. There are no additional questions at this time. Thank you for attending today's ALTA Equipment Group Fourth Quarter 2021 Earnings Conference Call. You may now disconnect your line.
Disclaimer

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