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Oil-Dri Corp of America (NYSE:ODC)
Q3 2020 Earnings Call
Jun 10, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the third-quarter Oil-Dri corporation of america earnings conference call. [Operator instructions] I would now like to hand the call over to Jan -- to Dan Jaffee, president and chief executive officer. Please go ahead.

Dan Jaffee -- President and Chief Executive Officer

Thank you. Welcome everybody, to our Oil-Dri third-quarter investor teleconference. Joining me both physically and virtually, so we're in this COVID reality, is Susan Kreh, our chief financial officer; Molly VandenHeuvel, our chief operating officer; Jessica Moskowitz, vice president and general manager of the consumer products division; Flemming Mahs, president of Amlan International; Laura Scheland, general counsel; and Leslie Garber, manager of investor relations. Leslie, will you walk us through the safe harbor?

Leslie Garber -- Manager of Investor Relations

Thank you Dan. Welcome everyone. On today's call, comments may contain forward-looking statements regarding the company's performance in future periods. Actual results in those periods may materially differ.

In our press release and our SEC filings, we highlight a number of important risk factors, trends and uncertainties that may affect our future performance. We ask that you review and consider those factors in evaluating the company's comments and in evaluating any investment in Oil-Dri stock. Thank you for joining us. Dan?

Dan Jaffee -- President and Chief Executive Officer

Great. And before I turn it over to Susan to walk us through the financial results, just some high-level comments which are very proud of the Oil-Dri team. This is a very, very challenging environment. We had to go virtual.

We had to figure out what essential meant. And we had people pantry loading cat litter, so we had to meet incredible demand. And our entire Oil-Dri team did a fantastic job staying healthy both physically and financially and were -- enabled us to deliver an incredible quarter in an incredibly challenging time reflecting -- I will tell you those investors who've been with us two years or longer had to live through the go-live pain of our ERP system when we launched that in August of year and a half ago and almost two years ago now, and we would not have made it without that system. If we were on the old system, we would not have made it.

We would have been worse than a Lucille Ball skit. And so just feel very fortunate. Timing is everything. When this hit, we had the right team in place.

We had the right systems in place. We have been far enough and along on the implementation of our S&OP process so that we could get out in front of the demand and more than meet it. We had 99% and 100% fill rates from really all of our major customers and received a lot of kudos from them. So just recognize that your Oil-Dri team really delivered during this quarter.

Susan, I'll let you go through the specifics from a financial standpoint.

Susan Kreh -- Chief Financial Officer

Thanks Dan. And although I usually jump right into the numbers, I want to reiterate a few things that you just said. I mean this was truly an unprecedented quarter. And I just want to thank all our team members who enabled us to achieve such good financial results, and we're going to talk about those shortly.

As Dan said, in mid-March, our teammates were asked to work from home, and they pivoted very quickly. They embraced new technologies practically overnight in order to deliver the results required to support our business and our customers and not just at ordinary levels but at all-time record levels of net sales. I particularly want to thank our frontline workers who maintain safe practices to keep each other healthy and who put in a lot of extra effort to keep our customers' shelves stocked. And with that, now I'll shift to our financial results.

Consolidated net sales for our fiscal third quarter of 2020 were, as I just mentioned a minute ago, an all-time record of $76.3 million, an 8% increase compared to net sales in the same quarter of fiscal 2019. We saw strength during the quarter in both of the products, where we're focusing our growth investments in those products or cat litter which is in our retail and wholesale products group and animal health in our business to business products group. In our B2B group, net sales for the third quarter of fiscal year 2020 were $26.7 million, an increase of 2% over the prior year. And within that, there were some ups and downs by product line, but we were pleased to see that our increased focus on our animal health products is paying off.

Net sales of our animal health and nutrition products increased 25% year over year during the third quarter driven by increases in many of our markets for animal feed additives, particularly in Latin America, Mexico, Africa, the Middle East and Asia outside of China. Additionally, net sales within B2B of our agricultural and horticultural chemical carrier products increased 11%. And offsetting this growth was year-over-year decrease of 8% for our fluids purification products, where sales were impacted in part due to decreases in edible oil sales resulting from closures of restaurants and schools due to the outbreak of COVID-19. Sales were also unfavorably impacted by the closure of one of our customers' biodiesel processing plant.

Now switching to our retail and wholesale products group. Net sales for the third quarter were $49.6 million, an increase of 11% over the same quarter in the prior year. This increase was driven by 20% year-over-year growth in net sales of cat litter in both private label and branded litters. In addition to the organic growth that we've been experiencing throughout the previous quarters here in fiscal 2020, as Dan mentioned, we had incremental increases in cat litter sales during the third quarter as customers purchased more cat litter and related products in anticipation of future potential shortages or store closures caused by COVID-19.

Also included in our retail and wholesale product group's results were lower sales of our industrial and sports products compared to the third quarter of fiscal year 2019. Sales of industrial and sports products decreased 22% or $2.2 million primarily driven by the impact of businesses and sports fields shutting down, beginning in March, due to COVID-19. If we take a look at our consolidated gross profit for the three months ended April 30. It was $21.4 million which was an increase of 27% over the third quarter of fiscal 2019.

This improvement had two primary drivers, being a decrease in the costs of freight and natural gas which on a per-ton basis which is the way we look at it, declined 20% and 32% year over year, respectively. So it's 20% for freight on a per-ton basis and 32% for the natural gas on a per-ton basis year over year. During the quarter, we did incur some additional employee compensation costs to meet increased customer demand, as well as some incremental cleaning and sanitation costs due to COVID-19. However, these costs didn't have a significant impact on our consolidated gross profit and in fact were basically offset by the reductions we saw in travel and -- expense in our SG&A expenses for the quarter.

Our third-quarter income from operations of $5.7 million is more than double our income from operations of $2.3 million during the same period in fiscal 2019 driven by the stronger sales and the improved gross profit resulting from lower freight and natural gas. The third-quarter net income attributable to Oil-Dri of $4.6 million compares to $5.6 million during the third quarter of fiscal '19. And that result included a material onetime benefit of proceeds under a confidential agreement resolving legal proceedings that was included in other income during that period. Net income per diluted common share for the third quarter of fiscal 2020 was $0.61 compared to 74% -- $0.74 in the third quarter of fiscal 2019 which again included the onetime material legal settlement.

If we look at it on a nine month year-to-date basis, net income per diluted common share of $1.69 for 2020 year-to-date compares to $1.17 for the same fiscal year-to-date period in fiscal 2019. That's a 44% increase year over year, so that is really good news. And shifting from that good news, I would like to highlight two subsequent events that have substantially improved our liquidity during these uncertain times. Because our final debt payment of $3.1 million is coming due on August 1 of this year, we opportunistically amended our note agreement with Prudential, details of which you can find in our 10-Q that was filed with the SEC this past Monday.

Under the amended agreement, Oil-Dri issued $10 million in new notes that are -- have a 10-year tenor, and that cash is on hand today. Another event that occurred subsequent to the end of the quarter was that Oil-Dri entered into a confidential agreement to grant a nonexclusive perpetual license for $13 million. This amount has been received by Oil-Dri. Both of the aforementioned items will be included in our fourth-quarter financial results which we expect to release on October 13.

So all in all, a really strong quarter and a really good liquidity position. And with that, Dan, I'll turn it back over to you.

Dan Jaffee -- President and Chief Executive Officer

Great. Thank you Susan. Obviously great quarter, great year-to-date results. So we're going to open it up for questions.

As always ask your most important question first and then go back to the end of the queue and so forth and so on. This allows everybody a chance to at least get one question in and maybe two or three. So let's please open it up.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Ethan Star. Your line is open.

Unknown speaker

Good morning. Nice quarter considering all the challenges.

Dan Jaffee -- President and Chief Executive Officer

Yeah. Thank you.

Unknown speaker

I understand from a recent article that Oil-Dri has improved results in customer service, leading to significant improvements in cost reduction. Could you please explain this in more detail and give some idea of maybe how much money has been saved, please?

Dan Jaffee -- President and Chief Executive Officer

Sure. I'm going to let Molly answer the question.

Molly VandenHeuvel -- Chief Operating Officer

Sure. Thanks, Dan. So as the article said, we really focused on customer service first. And once we get our customer service levels at benchmark levels, we focused on cost reduction.

You really can see that in the operating income. So I think the amount becomes evident in our cost of goods sold. We focused on a lot of the basics, making things more efficient, making sure we have the right pricing and contracts in place and just overall operational effectiveness.

Dan Jaffee -- President and Chief Executive Officer

Yeah. And I'll add because she doesn't want to toot her own horn, but Molly has led our team, and increased quality leads to lower costs. It always does because you have less rework. You have greater customer satisfaction which leads to more sales which also can lower your costs because you get to spread your fixed costs over a greater base.

So the results you're seeing, you're seeing the top-line growth led by our general managers. And then you're seeing the bottom-line growth led by our supply chain, who is just functioning very, very well. So it's been a win-win, but thank you for your question.

Unknown speaker

OK. I'll get back in the queue. Thanks.

Dan Jaffee -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from John Bair of Ascend health -- Wealth Advisors. Your line is open.

John Bair -- Ascend Wealth Advisors, LLC -- Analyst

Thank you. Yes, I will echo nice quarter. I also appreciate more detailed information in the press release and commend you for the aspect of helping the frontline workers. So I'm wondering.

To what sense -- or to what degree do you have a sense that those extra orders and so forth in March and April may have pulled forward orders? And kind of parallel to that is, did you see an increase in orders through online vendors like a Chewy or somewhere like that that you think might continue on in the future?

Dan Jaffee -- President and Chief Executive Officer

All right. Well, John, thank you. And Jessica, who runs our consumer products division, she'll answer that question.

Jessica Moskowitz -- Vice President and General Manager, Consumer Products division

Hi. Good morning.

John Bair -- Ascend Wealth Advisors, LLC -- Analyst

Good morning.

Jessica Moskowitz -- Vice President and General Manager, Consumer Products division

So in terms of the shift from Q3 -- into Q3 from Q4. If we look at kind of the first half, I'd say we were benchmarked up 10%, and then Q3 was up around closer to 19%. So I would say that 9% to 10% difference is likely what shifted up into Q3 from Q4 and year-to-date. We still -- we've had strong sales year-to-date, so we could expect that to continue, but again the shift would likely be 9% to 10%.

In terms of Chewy and Amazon, we continue to focus on e-commerce. We've seen strong sales in e-commerce as a result of COVID, and we do expect it to continue going forward. To what extent, I don't think we can disclose that at this point, but it is something we're investing in. And obviously have seen the consumer momentum into those channels, so intend to continue to focus on it.

John Bair -- Ascend Wealth Advisors, LLC -- Analyst

Well, I would think that, sometimes when you're forced into a habit changed you weren't expecting to do, like this pandemic has caused a lot of people, whether it's work or shopping or whatever -- that you might have a sense of whether those trends are continuing. In other words, it's online ordering, as opposed to going into a store to pick it up. And just curious whether you're seeing some momentum continue in that area.

Jessica Moskowitz -- Vice President and General Manager, Consumer Products division

Yes. I think we -- the macro level trends would suggest that consumers are shifting into those channels. And our results would continue to support that kind of ongoing shift into e-com.

John Bair -- Ascend Wealth Advisors, LLC -- Analyst

All right. Great. Thank you. I'll get back in the queue.

Dan Jaffee -- President and Chief Executive Officer

Thank you John.

Operator

Our next question comes from Robert Smith of Center for Performance. Your line is open.

Robert Smith -- Unknown Analyst

Hi. Good morning and congratulations on a good quarter and also on the dividend increase. My question focuses on animal health. It's a two-part question.

First part, Dan, if animal health were a stand-alone unit, at what revenue level would it become profitable? Well, kind of a ballpark number.

Dan Jaffee -- President and Chief Executive Officer

OK. I mean I'll take that and I can tell you I don't know. So I have no idea. I don't look at it that way.

I mean everything is so commingled. I mean, if it was a stand-alone, we -- it couldn't be. I mean the products are co-generated, and we make money by being in all aspects of our business. I once used this analogy to Clorox.

We've been supplying them Fresh Step for over 40 years now. And I said we can't just sell the fillet to make money. We got to sell the lips, the hubs, the tail, the whole thing. And then the fillet becomes very profitable, but if all you did was sell the fillet, you wouldn't make any money in the steak business in Oil-Dri.

So honestly, it's an unanswerable question, so I don't know.

Robert Smith -- Unknown Analyst

Second part of the question is, with COVID entering the southern hemisphere more vigorously now, how do you see the animal health possibilities in the remaining quarter of the year?

Dan Jaffee -- President and Chief Executive Officer

Great. And Flemming, who is the president of that division, will field that question.

Flemming Mahs -- President, Amlan International

Yes. Great question. Thank you. Yes, so right now, we are continuing to see good support for our products globally in all the regions.

The COVID-19 is of course with the shutdown affecting more of the industrial kitchens. The schools are starting to come back. So at this point, we are not anticipating any huge impact to the business.

Robert Smith -- Unknown Analyst

Well, I meant in particular in animal health. I think Brazil was an important market. So they're having quite a bit of difficulty down there.

Flemming Mahs -- President, Amlan International

Yes. I mean they are seeing challenges, but they're also seeing additional improved exports into China. So there are different resources and sources pulling in different directions that we would normally see.

Robert Smith -- Unknown Analyst

OK. Thank you. I'll get back in the queue.

Dan Jaffee -- President and Chief Executive Officer

And before we go for the next question , I'll just -- I think we're all recognizing that there is a new world now. We used to divide equities into large caps and small cap and micro cap and growth versus value and all these different cuts. I think what we're going to be seeing forever more now is essential versus nonessential. No one ever thought about this before COVID, but boy, am I -- better to be lucky than good.

I feel very sorry for fellow CEOs and businesses who were run every bit as well as Oil-Dri but they're nonessential businesses, and there was nothing they can do about it. And so most of our sales are essential, either tied to food production or animal, care of pets. And so we got very lucky there. So all I can tell you, Bob, is that, yes, there is COVID going on throughout the world, but -- you may or may not die from COVID.

You will die if you don't eat. So food is absolutely essential, and we feel very lucky and fortunate that our core businesses are tied to things that will -- we're not and really won't be impacted too much by global pandemics. Next question.

Operator

Our next question is a follow-up from Ethan Star. Your line is open.

Unknown speaker

Yes. First, the quick question is the license fee. Is that related to cat litter?

Laura Scheland -- General Counsel

We can't...

Dan Jaffee -- President and Chief Executive Officer

Laura, you answer.

Laura Scheland -- General Counsel

I'm sorry. We can't provide any details.

Unknown speaker

OK, that's fine. My real question is this. What are your biggest challenges in getting more consumers to purchase lightweight scoopable litter or the lowest-cost litter which is Cat's Pride, among the major brands? And how do you plan to address those challenges?

Dan Jaffee -- President and Chief Executive Officer

I mean, Jessica, I'm happy to -- you may answer it. I'm happy to jump in, all right? Give me a thumbs up or a thumbs down. She's on our screen. If you want to take it, give me a thumbs up.

OK, Jessica is going to field that one.

Jessica Moskowitz -- Vice President and General Manager, Consumer Products division

Yeah, I can take it Dan and feel free to build on it as you'd like. I think I wouldn't really view it as a challenge. I think it's an opportunity. Lightweight cat litter continues to -- we continue to improve quality while lowering the price.

And I think that our brands and our private label and branded is well positioned in a -- as a value player, to really continue to dominate the market. So I feel optimistic. And our goal is to continue to delight our consumers, and that's through offering them great products at a great price. And as we kind of increase the quality and are able to lower prices or offer at the same value, that value equation continues to delight consumers even more.

Dan Jaffee -- President and Chief Executive Officer

Well said. And I think the only thing I would add is we all -- we're in a recession. They've announced that. And actually they think now it started before COVID even hit and then COVID put it into hyper gear.

But clearly, when you're in that position, people will be more incentivized to save money in their weekly or monthly grocery bill. And so competing in the value segment, whether it's through private label or through OPP, opening price point, quality brands is a good place to be. So having Cat's Pride scoopable at $5.98 at Walmart is a good place to be. Being the OPP -- well, Lehman market is a bad example because they went bankrupt, but you get the idea.

You don't want to be the cheap guy if it's -- in a premium retailer, but clearly when it's price related -- and we're leaning heavily into, and Jessica's team is doing a phenomenal job, on Walmart, Target, Albertsons, Safeway, Dollar General, Family Dollar, the e-commerce, all these areas where people can shop and compare on price. We believe we're well positioned to supply them with high-quality products at affordable prices.

Unknown speaker

OK, but are you taking share?

Dan Jaffee -- President and Chief Executive Officer

Well, you can see our growth. I mean we are growing faster than the category, so by definition, we're taking share.

Unknown speaker

OK. I'll get back in the queue.

Operator

Our next question is a follow-up from John Bair. Your line is open.

John Bair -- Ascend Wealth Advisors, LLC -- Analyst

Thank you. Kind of a simple question. What is the most exciting part of your business that -- the part of the business that you're most excited about and offers what you think will be best opportunities going forward? And conversely, where do you see the biggest challenges right now? Thanks.

Dan Jaffee -- President and Chief Executive Officer

But that's like you asked me which of my children do I love the best. I mean that's a tough one, but OK...

John Bair -- Ascend Wealth Advisors, LLC -- Analyst

Right. It's a simple question but tough, yeah.

Dan Jaffee -- President and Chief Executive Officer

I love our businesses that are around creating value from sorbent minerals. How about that one? No -- I mean I'm excited about all of our businesses. We've got great people in place. We've got great strategies, and we play various ones.

I mean, you said which ones are we targeting for the highest growth? Well, that's clearly on the cat litter side. It's with our high-quality lightweight litters. And then it's on the animal health side, where as you well know there's a global push away from antibiotics in the human food chain. So they're pulling them out of raising the animals, and so now they have a real unmet need.

They need to figure out how to maximize production, and we have a fantastic antibiotic-free solution. So we're very excited about those in terms of the growth potential but, I will tell you, very excited and thankful for our Oil-Dri floor absorbent, industrial absorbents business; our agricultural business; our fluids purification business. These are all solid businesses where we have a real reason to be and a real reason to compete and are doing well. So excited about all of them.

Biggest challenge is staying disciplined. I would say we all -- when you start doing really well -- and we've done really well for a long time, but you can see the momentum is gaining -- is staying disciplined, not just chasing every hand but knowing when to fold, for those of you who play poker. So we are going to stay disciplined. We are going to focus our resources on the businesses we think can grow the most rapidly and those are the consumer products and the animal health.

And we will support the other divisions, but they're fighting a different war. And so I would say that's our challenge. It's just, as a team, to stay as hungry as you are when things are going poorly as you need to be when things are going well.

John Bair -- Ascend Wealth Advisors, LLC -- Analyst

OK. I'll get back in the queue.

Dan Jaffee -- President and Chief Executive Officer

OK.

Operator

Our next question is a follow-up from Robert Smith. Your line is open.

Robert Smith -- Unknown Analyst

Hi Dan. Can you give us some additional color on your approach to digital advertising and within the context of the advertising and promotion budget?

Dan Jaffee -- President and Chief Executive Officer

Sure. And Jessica will take that one.

Jessica Moskowitz -- Vice President and General Manager, Consumer Products division

Sure. So our approach is definitely to be hyper targeted. I think digital offers us an opportunity to do that and to really understand who our consumer is and reaching our consumer where she already is. We're testing -- we continue to do kind of the main digital advertising, social, search, kind of typical digital tactics but then also testing new tactics like video.

Robert Smith -- Unknown Analyst

Here's an idea for you. Carry on. Carry less.

Jessica Moskowitz -- Vice President and General Manager, Consumer Products division

Got it.

Operator

Our next question comes from Ethan Star. Your line is open.

Unknown speaker

Yes. I'm wondering. I guess my impression is that Oil-Dri saved much more money, due to COVID, on like things like lower energy prices and travel expenses, then you actually spent extra for COVID. And I'm just -- if you can just maybe expand on that and maybe go into some numbers if possible.

And also to what extent, when energy prices drop, does that benefit Oil-Dri or does it benefit your customers or how does that -- where does that -- when do you need to shift prices and stuff to reflect that? Thank you.

Dan Jaffee -- President and Chief Executive Officer

Yes. And Molly, just so that I can earn my keep, I'll do the play by play. You can do the color if I leave anything out.

Molly VandenHeuvel -- Chief Operating Officer

All right.

Dan Jaffee -- President and Chief Executive Officer

But I'm proud of the fact that yeah, we saved some money on travel and entertainment, as Susan said. OK. Thank you. Well, during the peak of the demand, when we were pushing our people really hard, we gave the equivalent of a $2 an hour shift premium to all of our frontline workers.

And that more than eclipsed the savings. Now when things started to dial down, we then went to a $1 an hour shift premium, and that was a breakeven to a slight benefit. None of this was material to the bottom line, so I'm not really going to give you the dollars, but I'm just telling you we took the money away that we were saving and gave it to those people that were -- what I called heavy combat pay. And so proud that we did that.

I don't remember the second part of your question.

Unknown speaker

Well, just to what extent does -- when energy prices drop, how much does that benefit Oil-Dri? And to what extent does that shift -- do you at some point share that with the customers?

Dan Jaffee -- President and Chief Executive Officer

OK, Molly will take this one. Although, I can take the pricing part because I was telling to the Board yesterday, look, we're in a rational industry. And when gas prices go crazy one way or the other, if our competition all moves, we move with them, and vice versa. So we're in a rational business, but Molly, I'll let you put some more flavor on it.

Molly VandenHeuvel -- Chief Operating Officer

Right. And it's not a straight answer for energy and fuel prices. For transportation, we do see immediate savings where we pay for freight as part of our product costs, as part of our fuel surcharge, as part of our contracts typically that's aligned with the fuel index. And sometimes, we get that when we pay for it, but we have a lot of customers who pay for freight and then they would see the benefit of that.

For natural gas, we have seen some benefit in the third quarter, so that was pretty immediate. And then for other material cost savings, there is a bit of a lag just really due to commodity -- just commodity usage and lagged timing. So it's not really a straightforward answer. Some is immediate.

Some is -- and some is longer term. And the savings that we saw in the third quarter are more than just commodity. We really have built good processes in place to drive sustainable savings within the operations.

Unknown speaker

OK. Great. Thanks. Appreciate that.

And I'm assuming that the lag is probably mostly in the resin price -- plastic packaging package -- prices.

Molly VandenHeuvel -- Chief Operating Officer

Yeah. That would be one.

Unknown speaker

Yeah. Thanks for the dividend increase also, Dan.

Dan Jaffee -- President and Chief Executive Officer

Great. And I hope you also spotted the share repurchase which again was a way of trying to deliver value back to our shareholders. And we -- rightly so. We're opportunistic, saw that we had a chance to buy back shares, with higher dividend.

And our cash is earning 0.2%. So -- and we have plenty of opportunities that we can deploy that cash on, but we're going to still stay opportunistic on the share repurchase program. So hopefully, you spotted that in the Q as well. Thank you, guys.

It's been half an hour. And we look forward to talking to you. It will be our end of the year. It will be our fourth quarter and fiscal year-end.

I will tell you, on one of our major metrics which is we look at pre-tax, pre-bonus income -- and then we divvy up that income between the shareholders and then the teammates. We already, through nine months, have made more than we've ever made in any fiscal year we've ever had. So as I joke, we're playing with the house's money at this point, but we're having a record year. It feels really good.

It feels really good that all the investments we've made in the last two and a half years on people and infrastructure are why this is happening. And it's just it's -- it feels good. It's predictable and we're out in front of our businesses. And we just -- we've always taken a long-term approach.

And the seeds we planted years ago are sprouting now, and seeds we plant today will spout in a few years. So thank you, for the longtime holders. And we're happy to reward you with what I think was our 17th year in a row of dividend increases which is fantastic. So thanks everybody.

We'll talk to you again in a quarter.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Dan Jaffee -- President and Chief Executive Officer

Leslie Garber -- Manager of Investor Relations

Susan Kreh -- Chief Financial Officer

Unknown speaker

Molly VandenHeuvel -- Chief Operating Officer

John Bair -- Ascend Wealth Advisors, LLC -- Analyst

Jessica Moskowitz -- Vice President and General Manager, Consumer Products division

Robert Smith -- Unknown Analyst

Flemming Mahs -- President, Amlan International

Laura Scheland -- General Counsel

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