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Stewart Information Services Corp. (NYSE:STC)
Q1 2020 Earnings Call
Apr 23, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and thank you for joining the Stewart Information Services Q1 2020 Earnings Call. [Operator Instructions].

It is now my pleasure to turn today's conference over to Nat Otis, Head of Investor Relations. Please go ahead.

Nat Otis -- Director of Investor Relations / Senior Vice President-Finance

Thank you, Brie. Good morning. Thank you for joining us for today's Stewart's first quarter 2020 earnings conference call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger and CFO, David Hisey. To listen online, please go to the Stewart.com website to access the link for this conference call.

I will remind participants that this conference call may contain forward-looking statements that involve a number of risks and uncertainties. Because such statements are based on an expectation of future financial, operating results and are not statements of fact, actual results may differ materially from those projected. The risks and uncertainties with forward-looking statements are subject to include but are not limited to the risks and other factors detailed in our press release published yesterday evening and in the statement regarding forward-looking information, risk factors, and other sections of the company's Form 10-K and other filings with the SEC.

Let me now turn the call over to Fred.

Frederick H. Eppinger -- Chief Executive Officer

Thanks, Nat, and thank you everybody for joining the call today. We are very pleased with the progress we made in the first quarter, but given the unique situation we find ourselves, I'll let David go through the quarter details in a little bit, and I would like to take a step back and reflect on our company as we address these challenging times.

First, I would like to acknowledge all those frontline people who are working tirelessly to keep us safe and healthy in communities across the country. Thank you. Our thoughts are also with those who may have lost a family member or friend or a coworker, or who are grappling with the challenges of COVID-19. Here at Stewart, I want to thank our employees for the tremendous effort they have undertaken over the last month in extremely uncertain times. Our team has worked tirelessly to keep our customers and coworkers safe while creating -- creatively finding ways to close transactions using a range of tools at their disposal in very uncertain and challenging conditions.

In the second week of March we transitioned to an operating approach to have roughly 70% of our employees working from home and with new social distancing and operating model approaches in place to make our customers and our employees [Indecipherable], 5,500 people working differently while leading record demand. In my view, at the highest point of uncertainty, we came together and got the job done.

Obviously, all of this requires a new operating approach where the team communicates daily to address the changes as things unfold. I am extremely proud of our team's teamwork and nimbleness as we address changing business conditions. In the end, we do not know how the situation will ultimately unfold, but our priority remains the health and safety of our employees and customers as we remain open and close transactions.

From a business standpoint, we continue to close transactions on a daily basis as we work through the pipeline of business we've built in the first quarter as well as the new business that continues to come in, albeit at a reduced volume. We continue to see remote online notarization or RON levels grow and currently 95% of our offices are now trained on and are using RON at some level. In addition, various temporary state executive orders have been issued allowing personal appearances to be replaced with video verifications and signings known as remote ink notarizations or RINs. And in the end, only a handful of states are not currently allowing either RON or RIN transactions.

Lastly in the instance of an in-person closing, we are doing everything we can to make the transaction safe, from glass dividers to drive-thru closings to [Indecipherable] closings. With respect to underwriting, given delays in [Indecipherable] closings given County Courthouse backlogs or outright courthouse and recording office closures, Stewart is providing policyholders with gap insurance with a delayed timeframe between the closing and recording in the overwhelming majority of the transactions.

The first quarter was a strong one for Stewart. We built on a strong market and a new sense of focus and alignment with our new strategic direction to create some real momentum to begin the year. However, the first quarter is almost irrelevant as we look at the remainder of 2020 and 2021. We need to understand that we are very much in unchartered waters, and while real estate is in a much stronger position entering this recession than it was during the last one, the stresses on our economy going forward may be far greater. While peak unemployment rates in the late 2000s bordered on 10%, in recent weeks we have seen multiple economists and data that would indicate that we will be well in excess of that.

In addition, tightening lending standards and capital constraints for lenders resulting from extended forbearance periods could compound the issue. I would also like to add that the prior recession did not include the variable of a global pandemic with a virus in which there are no timetable yet for a vaccine. With that in mind, we expect the next two quarters to be very challenging for both our residential and commercial businesses. However, I believe we are well positioned operationally and financially to manage through this difficult time. Stewart is in a very strong financial shape with a low 14% debt-to-equity ratio and over $400 million in cash and liquid assets over regulatory requirements, an additional $50 million available on our revolving credit facility.

Let me finish by noting three things. We will continue to put the safety of our employees, our customers and our communities first. We will be transparent in our assessment of the challenges we face today, tomorrow, and next week. And lastly, when it is over, Stewart will be there positioned to be the leader in this industry and support the continuity of our real estate.

So with that, thank you for your time, and David will now go through this quarter's financials.

David Hisey -- Chief Financial Officer

Thank you, Fred, and good morning. Let me also thank healthcare, other frontline professionals, and our associates for their tireless and inspirational service during these challenging times. The quarter started strong due to low rates and high real estate demand. As the quarter progressed, rates dropped due to unprecedented government stimulus actions causing an increase in refinance activity, while purchase activity began to decline as national stay-at-home orders were implemented. These conditions continue at this stage of the second quarter with normally strong spring real estate activity reduced as we await the reopening of our country.

Moving to the Q1 results. Yesterday Stewart reported total operating revenues of $446 million and net income of $5 million for the first quarter 2020, which was the strongest first quarter in Stewart history. As laid out in Appendix A of the press release, adjusted net income was $13 million with adjusted diluted earnings per share of $0.56 compared to an adjusted net loss of $7 million and adjusted diluted loss per share of $0.28 in last year's quarter. The $11 million in mark-to-market losses on equity securities in the first quarter of 2020 accounted for the difference in diluted and adjusted diluted earnings per share.

Our total revenues for the quarter improved to $440 million or 17% from last year on solid performance in all areas of our Title business. The Title segment generated pre-tax income of $15 million or 3% -- 3.4% pre-tax margin. Excluding the mark-to-market adjustments, the segment's first quarter pre-tax income would have been $26 million or a 5.8% pre-tax margin.

With respect to our direct title business, direct residential revenues improved $25 million or 24% on increased orders. Residential fee per file was approximately $2,000 or approximately 11% lower than last year, primarily due to a higher refinance-to-purchase transaction mix. Domestic commercial revenues also increased $8 million or 23% resulting from more transactions and an 18% higher commercial fee per file of approximately $11,400.

Total international revenues improved $4 million or 20% primarily driven by increased volumes from our Canada and UK operations. Total open and closed orders for the quarter grew 49% and 36%, respectively, compared to the prior year quarter. Our agency business increased revenue due to market trends and the continued turn of agents post-merger termination.

Regarding title losses, total title loss expense increased 19% consistent with increased title revenues. As percentage of total revenues, our title loss expense was 4.2%, which was comparable to the prior year quarter. Our ancillary services in corporate segment continued to see lower volumes in our capital market search business as that business tends to move counter to loan originations.

Turning to operating expenses, which consists of employee and other operating costs. Total operating expenses were relatively flat to the prior year quarter as employee costs rose modestly with higher revenues and other operating expenses declined due to continued management focus. The combination of these items caused employee cost as a percentage of revenue to decline from 33% to 30% and other operating expenses to decline from 20% to 16%.

On other matters. As Fred noted earlier, our financial position remains strong. Our total cash and investments on the balance sheet are $400 million over regulatory requirements, which along with our $50 million available line of credit, provide a solid foundation to support our customers, employees, and real estate markets. Stockholders' equity attributable to Stewart was $732 million at the end of the first quarter with a book value per share of $30.90.

I'll now turn the call back over to the operator to take questions.

Questions and Answers:

Operator

[Operator Instructions] And we will go first to Bose George with KBW. Please go ahead.

Bose George -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah, good morning. I just wanted to first...

Frederick H. Eppinger -- Chief Executive Officer

Good morning.

David Hisey -- Chief Financial Officer

Yeah, good morning.

Bose George -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks. I just wanted to first ask about your ability to control costs as we enter what is likely to be a pretty challenging environment just in all the channels. Can you just talk about how much of your expenses are sort of more variable, both on the residential side and then on the commercial as well?

Frederick H. Eppinger -- Chief Executive Officer

Yeah, thanks. The objective we've had, I've been here seven months, and obviously we've been very focused on improving our margins and we'll continue to be focused on that to position this company for profitable growth for a long time. So we've done a lot of targeted actions in the fourth quarter. In the first quarter we took additional targeted actions, and I fully expect as we look forward, given the situation, that we'll continue to take targeted actions to improve our position.

This is extraordinary times, right. And so my job isn't to manage expenses. My job is to create shareholder value. So our goal will be to do what we need to do to manage our place through this, while keeping our team together focused and excited about improving and growing. That's what we'll do.

So I don't -- we will do things, we'll manage ourselves appropriately through this and position ourselves to be quite strong as we come out of it. So I think we're a more nimble company and a company ready to adjust and that will be our focus, so.

Bose George -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, that's helpful. Thanks. And then actually just switching over to the commercial market. It was strong this quarter, but can you just talk about the pipeline, what you're seeing there, and also just given your concentration in Texas, can you just talk about it? Is commercial for you guys a little more concentrated there or is that pretty dispersed nationally?

Frederick H. Eppinger -- Chief Executive Officer

It is relatively dispersed. We have a strong presence in both coasts as well. So the -- as you can imagine, commercial is going to be a little bit challenged given the economy and kind of the freezing up of a lot of those industries, whether it's [Indecipherable] hospitality or energy. So we believe that commercial will be a challenged segment for a while for everybody. I mean I think it's just the way the market is. David, is there something you want to add on that? I want to make sure...

David Hisey -- Chief Financial Officer

No, Fred. I think you covered it pretty well. I mean obviously the commercial markets vary by asset class with retail and energy and hospitality, consistent with the declines in those primary businesses I think being a little more challenged. But I think in general, you covered it. Expect it to be maybe a little bit longer turnaround in that business just due to the nature of it.

Bose George -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, thanks. Okay maybe just one little one also on the gap insurance product you mentioned. Can you just explain how that works and is that going to be a material number or is that just a pretty modest piece?

Frederick H. Eppinger -- Chief Executive Officer

It's modest, but David, is there anything else you want to add on that one?

David Hisey -- Chief Financial Officer

No. And I think just to expand on what you said in your comments, Fred. In the gap insurance, I think it's way the market has moved generally just because of what's happening with county recorder's offices and the like. And so I think our practices are pretty consistent with the way other underwriters are doing it and also working in conjunctions with lenders and the GSEs on what they require from the title policy.

Bose George -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, great. Thanks.

Frederick H. Eppinger -- Chief Executive Officer

Thank you. Appreciate it.

Operator

And we will go next to Mackenzie Aron with Zelman & Associates. Please go ahead.

Frederick H. Eppinger -- Chief Executive Officer

Good morning.

Mackenzie Aron -- Zelman & Associates -- Analyst

Thanks. Good morning. First question on the investment income, can you help us think about the sensitivity to the lower rate environment that we're now in?

Frederick H. Eppinger -- Chief Executive Officer

Sure. So David, why don't you take that?

David Hisey -- Chief Financial Officer

Yeah. Mackenzie, thanks for the question there. I think we're a little bit different maybe than some of our other competitors. We have been a little more liquid and so that piece of the portfolio will move pretty significantly with what we've seen with short-term rates coming down pretty significantly in the last month for us. But the vast majority -- but other than that, liquid piece of the portfolio, the rest of our portfolio is in -- I think average duration is four-plus on the bond portfolio side, and we don't have a lot of near-term maturity. So I wouldn't expect the base coupon rate to change that much. The variability will be on the shorter-term portion.

Mackenzie Aron -- Zelman & Associates -- Analyst

Okay. That's helpful. Thank you. And then is there any color that you can give us on this, what you've seen so far in April on the order flows?

Frederick H. Eppinger -- Chief Executive Officer

Yeah. David, why don't you take that?

David Hisey -- Chief Financial Officer

Yeah. I think if you -- Mackenzie, if you were to look at what we saw at March there where it started to have a little pickup in the refinance percentage. I think that sort of carried forward on a percentage basis. But in general, open orders have been trending down with less market activity. We'll have to see approximately where that ends up, but if you think about new home listings and some of the information that's been coming out on that, you could see a 20%-plus, depending on how the month ends up, decline on opens. Close could still end up pretty consistent with March because there is a good carryover pipeline, but lot of it's really going to depend on what happens with the mix of refinances because rates are still pretty low, although credits tightening, as Fred mentioned, and then sort of where we end up with primary real estate activity picking back up.

Mackenzie Aron -- Zelman & Associates -- Analyst

Okay, great. And then on the loss provision rate, is it realistic to think that that can trend higher and maybe what should we be thinking about in terms of the potential for higher [Indecipherable] in this type of an environment as well?

Frederick H. Eppinger -- Chief Executive Officer

Yeah, it's great question. And Dave, why don't you run and go take it and I can follow up?

David Hisey -- Chief Financial Officer

Yeah, I would just start maybe with some general context on that, Mackenzie, I think and Fred alluded to this a little bit in his script. If you think about where the real estate market is today maybe versus '07, '08, it's in a much better place. You have -- just sort of lending standards have been much better going into this environment, first of all. And second of all, you have a much better supply demand balance where there is actually still excess demand for real estate. And so that will have the effective price support, the big thing that caused losses back during the great recession was the fact that you had significant peak-to-trough declines in home prices.

So I think we go in, in a much better place. What the losses will ultimately be, that anybody can guess on that. I would just also note another thing is that we also have much better government programs to deal with this situation. And so even though we're on sort of a national forbearance right now, there's [Indecipherable] FHFA announcement of the GSEs buying loans out early from the pools, right, that will have the effect of sort of stabilizing that part of the market.

And then how the losses ultimately come in will depend on is there an increase in fraud, first of all. Second of all, at what pace do foreclosures occur, and then the foreclosure element is going to be highly dependent on what happens with the employment picture and how quickly most people get back to work. And so it's hard to predict exactly what the numbers are going to be, but I think maybe some context to think about the dimension of losses, potential losses [Indecipherable] back versus during the crisis.

Frederick H. Eppinger -- Chief Executive Officer

Yeah. And I would agree with David. And we're in a much better place going in and I think our risk profile is a lot better going in. So I agree with all David said.

Mackenzie Aron -- Zelman & Associates -- Analyst

Okay, that's helpful. Thank you, and best wishes, and hope you all stay healthy.

Frederick H. Eppinger -- Chief Executive Officer

Yes, thank you so much.

Operator

And we will go next to John Campbell with Stephens Inc. Please go ahead.

David Hisey -- Chief Financial Officer

Morning.

Frederick H. Eppinger -- Chief Executive Officer

Morning, John,

John Campbell -- Stephens, Inc. -- Analyst

Hey, guys. Good morning. Congrats on a fantastic quarter. Very, very good results.

Frederick H. Eppinger -- Chief Executive Officer

Thank you.

John Campbell -- Stephens, Inc. -- Analyst

On the -- I just want to touch back on the color -- the order color a little bit for April. I'm mainly curious about commercial. I was thinking that maybe that would be somewhat of a standstill kind of [Indecipherable]. So you guys, I think your open orders for commercial were down 8% in March. I'm just curious about how that kind of phased throughout the month and then any kind of color around just commercial orders thus far into April.

Frederick H. Eppinger -- Chief Executive Officer

Okay. David, why don't you take that?

David Hisey -- Chief Financial Officer

Yeah, John, thanks for the question. The commentary I was giving was sort of more general with a direction more to the residential stuff. I think with respect to commercial, I think it is fair to assume that that activity has dropped off a bit more. We still are seeing orders but for some of the reasons I mentioned in terms of certain of the mark -- certain of the segments of commercial being more stressed than others, and then also thinking about the parts of the country that have been hit the hardest, right, with New York being in the lead there where there is a lot of commercial activity, the orders have definitely been off a little bit more in commercial than they have in residential.

John Campbell -- Stephens, Inc. -- Analyst

Okay, that's helpful. And then back on the foreclosures, obviously the forbearance issues, who knows where we go from here, but it does seem like that wherever we're sitting now, it's going to be maybe a little bit higher coming out of this. But you kind of talked to the title reserves and why that might not be so adversely impacted relative to last go around. But could you talk about maybe the ancillary services segment? I know at one point you guys had I think one large contract with a large lender, and that business at one point during the default period was materially higher than where it is today. So I'm just curious, assuming a step-up in foreclosures, how the ancillary services business is impacted. And then maybe also on the title side, if you could talk to the default orders and how that could pick up as well.

Frederick H. Eppinger -- Chief Executive Officer

David, go ahead. I'll [Indecipherable].

David Hisey -- Chief Financial Officer

Yeah, sure. No, it's a great question. And I think just -- so our ancillary services business has two principal elements-it well actually has three. It also does some of the default stuff that you mentioned that that's been sort of negligible of late. But it's mainly capital markets kind of transactions default and then valuation services. And all of those actually benefit from that type of a market. If you think about the capital markets piece, that tends to be sort of bulk transaction. So whether those are delinquent loans that are being packaged and resold, other kinds of loan packages with a non-QM market effectively being shut down, right, you could see a scenario where you're going to have sort of delinquent loan pools and the like being sold there.

So that business would definitely benefit. We do still have, as you noted, the foreclosure search capability and that -- should that return, we've kept the capability and can also shift resources from some of our centralized search over to that area. And then valuations are also needed when loans go into foreclosure. So that business does tend to be somewhat countercyclical to origination and could definitely be help if we were to go into that environment.

John Campbell -- Stephens, Inc. -- Analyst

Okay, that's helpful. And then one other thing kind of related to that broader segment. On the corporate side, what is the run rate now? Is it $5 million, maybe $6 million a quarter? Is that right?

David Hisey -- Chief Financial Officer

That's correct.

John Campbell -- Stephens, Inc. -- Analyst

Okay. Excellent. Thank you, guys.

Frederick H. Eppinger -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And we'll go next to Geoffrey Dunn with Dowling & Partners. Please go ahead.

Geoffrey Dunn -- Dowling & Partners Securities LLC -- Analyst

Thanks.

Frederick H. Eppinger -- Chief Executive Officer

Good morning, Geoff.

David Hisey -- Chief Financial Officer

Good morning.

Geoffrey Dunn -- Dowling & Partners Securities LLC -- Analyst

Fred, I wanted to start off by following up on your comments that your focus isn't necessarily on expense management but creating shareholder value. Periods of disruption can also be periods of opportunity. So with the company in solid financial position, how are you thinking about this disruption has an opportunity to maybe look for additional talent, additional product offerings or platforms or [Indecipherable] agency acquisitions. Are those considerations over the next couple months, or is it too uncertain to try to pursue that type of thing?

Frederick H. Eppinger -- Chief Executive Officer

Yeah. So I think it's a great question. As you just said, I mean what's interesting when you got through things like this is that if you stay focused and you are strong and well -- a good brand, you can take advantage of some situations to build your capabilities. And we obviously have been focused on that in the last few months and we will be focused on it in the future as well.

I do think right now it's a little early in this current kind of four-week window here of really getting a picture of what exactly is happening, but my goal every day is to make us better. And whether that's managing our resources more appropriately and aligning them better or it's finding ways for us to improve our position. And we're going to continue to do that. And one of the reasons you try to be careful and manage our resources appropriately, to your point, is to give yourself the flexibility to act when there is an opportunity.

And again, our focus, as I said earlier, right now is on really the safety of our employees and closing the business, but as we look forward and this becomes clearer and there's a little bit more stability, I fully expect that we'll continue to focus on doing what we're all about, which is creating the premier company in the industry. And again, I do think, what we showed in the first quarter, which again is just one quarter, is that we come together pretty well, and we're working well together and we're pretty nimble and we're very focused, and we will create some additional opportunities.

I would also say there's more for us to do, right. We all know where we are comparatively, and this couple of quarters is going to be a little bit challenging to understand that completely. But we have more work to do as well, and so we are continuing to be focused on being better. But ultimately, the goal is to profitably grow the company and I think we can do that and that's what we're going to be focused on. So it's a good observation, because again we're still in business. We're still focused on trying to build the best Stewart, and we've got our eyes wide open on doing it.

Geoffrey Dunn -- Dowling & Partners Securities LLC -- Analyst

Okay. And then before the disruption started impacting the business in I guess second week of March for you, can you talk about some of the more material actions you took during the first quarter? I mean it's by far the best margins Stewart's put up in a long time for Q1. Obviously you did benefit from an inflated resi refi market. But what are some of the more material actions you can point to that have maybe kind of improved your Q1 prospects going forward and margins in general?

Frederick H. Eppinger -- Chief Executive Officer

Yeah. So if you remember, it's a combination kind of some of the fourth quarter and first quarter actions. I mean one of the biggest issues I mentioned right at the get-go is that one of our challenges as a company is we weren't very strategic on where we invested our resources. So we were an inch deep and a mile wide. And so when you have fluctuations in volume or whatever, we were susceptible more than others because it's harder to adjust when you don't have scale in places. And so what you saw us begin to do is consolidate locations, shift capital from one business to another, and double down in some markets as far as investment, and again, be a little bit more disciplined, if you will, about some investments that we made and make sure we're investing those kind of not just in the short term but in the future. We've got lot of technology initiatives that I think are starting to play out.

So this was about a lot of reallocation of resources and again we mentioned I think at the last quarter, we ended up -- there was about 25 places of locations we closed and rolled off the leases to get ourselves focused. So this is about investing in strength and building scale in a number of businesses, and we've made some progress and it shows up, right, I mean kind of when we get a little bit of momentum with growth, better utilization of those resources to show.

So we're not all the way there. We're going to continue to get better as a company, and as we grow, it's going to show, but we're on a good path. And again, this next two quarters will be a little challenging. As I said, I think when I first started these journeys to kind of be where we want to be isn't always a straight line. And I think the next two quarters may show that it is a straight line in some ways, but I think a lot of the things, to your observation, that we did positions us to have the flexibility to continue to improve. And we'll continue to take the right actions to get us -- to make us better. But I feel like we're in a good position to be strong coming out of this. So we're going to keep focused.

Geoffrey Dunn -- Dowling & Partners Securities LLC -- Analyst

And then last question is on commercial, highest margin product typically. [Indecipherable] on the resi side but I'm assuming the talent there tends to be more specialized and valuable. So can you talk about the ability to manage expenses on the commercial business? I assume there's more of a variable component on commissions, but maybe not as much flexibility on headcount. How do you think about managing the expense base of that business specifically?

Frederick H. Eppinger -- Chief Executive Officer

Yeah. David?

David Hisey -- Chief Financial Officer

Okay. We have a wonderful set of talented people in our commercial business and the most important thing for us is making sure we keep that core of talented people focused and together that organization, too, but obviously given what we're going through, we need to make sure that we're targeting our investment in those resources that matter.

And so it's more of -- it's targeted everywhere. It's kind of you want to be laser-like in commercial and make sure you're supporting your talent in a certain way. But for us, that's a business we want to double over time, but we need to make sure we're managing it carefully because it is going to be under duress for a while I think as far as [Indecipherable].

But again, I think it's a good observation. That is a place that we have to be very thoughtful of. I've got a lot of faith in my leadership there, and we will make sure we're focused on the future as we kind of take actions that are appropriate to make sure that our resources are at the right level.

Geoffrey Dunn -- Dowling & Partners Securities LLC -- Analyst

Okay, thank you.

Operator

And there appear to be no further questions at this time. I'll turn it back to the speakers for any closing remarks.

Nat Otis -- Director of Investor Relations / Senior Vice President-Finance

Thank you, Brea. That concludes this quarter's conference call. I want to appreciate everyone for joining us today and your interest in Stewart. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Nat Otis -- Director of Investor Relations / Senior Vice President-Finance

Frederick H. Eppinger -- Chief Executive Officer

David Hisey -- Chief Financial Officer

Bose George -- Keefe, Bruyette & Woods, Inc. -- Analyst

Mackenzie Aron -- Zelman & Associates -- Analyst

John Campbell -- Stephens, Inc. -- Analyst

Geoffrey Dunn -- Dowling & Partners Securities LLC -- Analyst

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