Evolus, Inc. (NASDAQ:EOLS) Q3 2022 Earnings Conference Call November 8, 2022 4:30 PM ET
Company Participants
David Erickson – Vice President-Investor Relations
David Moatazedi – President and Chief Executive Officer
Sandra Beaver – Chief Financial Officer
Conference Call Participants
Marc Goodman – SVB Securities
Carvey Leung – Cantor Fitzgerald
Annabel Samimy – Stifel
Douglas Tsao – H.C. Wainwright
Operator
Greetings, and welcome to the Evolus Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, David Erickson. Thank you. You may begin.
David Erickson
Thank you, operator, and welcome to everyone joining us on today’s call. With me today are David Moatazedi, President and Chief Executive Officer; and Sandra Beaver, Chief Financial Officer. Our prepared remarks today will include forward-looking statements within the meaning of United States Securities Laws, and management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management’s current assumptions and expectations of future events and trends, which may affect the company’s business, strategy, operations or financial performance. A detailed discussion of the risks and uncertainties that the company faces is contained in its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Actual results may differ materially from those expressed in or implied by the forward-looking statements. The company undertakes no obligation to update or review any estimate, projection or forward-looking statements. Additionally, today’s discussion will include non-GAAP financial measures, which should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and on our Investor Relations website at evolus.com. Lastly, following the conclusion of today’s call, a replay will be available on our website at evolus.com.
And with that, I’ll turn the call over to David.
David Moatazedi
Thank you, David. We are very pleased to share with you our results for the third quarter. But before we get into the detail, I’d like to highlight four key takeaways. First, we are reiterating the top end of revenue guidance for the year, coming off of a very strong quarter of growth, where we believe our unit market share is now approaching 10%. Second, reduction in operating losses was driven by the significant drop in royalty rates and disciplined operating expense management, clearing the path to profitability with our current cash on hand. Third, we launched in Great Britain this past quarter, and our European expansion is well underway. And lastly, we are uniquely positioned to attract commercial and development stage assets as we build out our product portfolio.
Now let’s get into the results for the quarter. As reported, revenue this quarter grew at an above market 27% rate over last year. And when taking into account, the above normal incremental deferred revenue that resulted from the success of our Switch Your Tox campaign, year-over-year growth was much stronger. Demand for Jeuveau remained strong this quarter even with anticipated seasonality and the return of summer travel and this positive momentum is continuing into the fourth quarter. We continue to expect 2022 to be another year of strong growth for Evolus and remain confident in the resilience of the aesthetic neurotoxin market. For this reason, we are reiterating the top end of our full year 2022 sales guidance range of $143 million to $150 million. This equates to a year-over-year growth rate approaching 50%, which is roughly triple the projected toxin market growth rate.
Perhaps the most significant highlight of the third quarter was a highly successful launch of our Switch Your Tox promotional campaign, which helped to generate the largest number of new purchasing accounts since our initial product launch period and drove a record 100,000 consumer redemptions in our loyalty program. We expect Switch Your Tox to result in as many as 70,000 new Jeuveau patients, which could represent additional market share. The Switch program began in September and patients will continue to redeem their initial $80 switch savings by the December 31st deadline. This will drive continued momentum into the fourth quarter, which gives us confidence in a strong finish to the year. The success of the Switch Your Tox program requires that we defer a higher than normal amount of revenue to account for the rewards that customers earned.
As reported, sales for the third quarter grew 27% over last year to $33.9 million. If you consider the additional revenue we deferred, our year-over-year growth rate would have been even stronger than our reported rate. This performance clearly demonstrates that we are continuing to gain market share. Aided by switch, in the third quarter, we added nearly 650 new accounts, the highest number of new accounts since our initial product launch period. This brings our total account base to more than 8,800 purchasing customers with a reorder rate that remained steady at above 70%. Our Evolus Rewards program grew by almost 50,000 in the quarter to nearly 450,000 members, which puts us on track to exceed 0.5 million total members by year-end. Reward redemptions among new and existing members were evenly split, which demonstrate strong loyalty to Jeuveau and illustrate the power of this program to motivate consumers.
One of the things that continues to set Evolus apart is our co-branded marketing, and we are continuing to use this program to strengthen partnerships with our customers while building the Jeuveau brand, through a combination of mediums, including billboard, digital and streaming television, customers can tailor their advertising program to maximize awareness of their practices and generate patient interest in Jeuveau. As we continue to expand this offering, we not only benefit from economies of scale, but we also improve the effectiveness of the program.
Looking at the overall market, during the third quarter, many of our customers reported lower procedural volumes in the summer as patients took vacation, but toxin appointments begin to ramp back up towards the end of the quarter as people returned. This suggests that we are beginning to see the return of the historical seasonal trends that are typical in the aesthetics industry. Against an uncertain economic backdrop, we are continuing to closely monitor the degree to which our customers might be impacted by changes in consumer behavior and continue to see favorable demand for neurotoxins, despite softening trends for other aesthetic procedures.
Although aesthetic toxin procedures are discretionary, we are reassured by two things. First, neurotoxins remain one of the most affordable aesthetic procedures and historical data shows that even during challenging economic times, toxin use continues to grow. Second, the toxin market is significantly underpenetrated and the key growth driver of the future is the millennial demographic, which is an audience approaching their 40s and one that Evolus is specifically targeting with our Jeuveau brand and extensive digital capabilities. Today, Evolus is in an enviable position with strong performance and a clear pathway to profitability. In seven short quarter since our relaunch, we have grown to nearly 10% of the U.S. aesthetic toxin market and started building our footprint in Europe. We believe this has uniquely positioned us to attract both commercial and development stage assets that can expand our aesthetic footprint beyond neurotoxins.
Now turning to our international business. Last month, we announced the launch of Nuceiva in Europe, beginning in Great Britain, and the team is off to a great start. Interest among clinicians is strong. We are the newest company to enter in nearly a decade and believe customers are ready to embrace our unique approach to the aesthetic market. Most recently, we had a major presence at the CCR meeting in London, which is the U.K.’s flagship event for Medical Aesthetics. Over the course of the 2-day event, we engaged with a large number of potential customers and conducted several scientific symposia and presentations. Expanding into Europe is a significant milestone for Evolus, and we look forward to broadening our overall geographic presence even further.
Before I turn the call over to Sandra, I’d like to provide a brief update on our Phase II extra-strength study. As previously reported, the last patient was enrolled at the end of the second quarter and patient follow-up is ongoing at our study site. Based on our progress, we now plan to present an interim data analysis in early 2023. An abstract has been accepted for a podium presentation at IMCAS in Paris, one of the largest aesthetic meetings in the world, which will take place at the end of January. We look forward to demonstrating the longevity of our extra strength dose within the next 90 days.
With that, I’ll hand it over to our CFO, Sandra Beaver, who as you know, joined Evolus about 10 weeks ago. With her strong operational experience, Sandra has been able to hit the ground running and quickly learn our business. She’s already become an integral part of the team and we’re thrilled to have her on Board. Sandra?
Sandra Beaver
Thank you, David. As I reflect on my decision to join the company and my experience since then, my enthusiasm for Evolus has continued to grow, whether it’s our unique cash pay business model, our digital solutions, and co-branded marketing, the quality of Jeuveau and ability to capture meaningful market share or the experience and capacity of this management team. My belief in what Evolus is building both in the U.S. and abroad is reaffirmed each day. And with our strong cash position and disciplined operating expense management, I am confident we are on track to achieving profitability and feel fortunate to have joined at such an exciting time on our growth journey.
And finally, I’ll just add that I look forward to getting to know our analysts and shareholders in the days and weeks ahead. Now, turning to the numbers. Global net revenues for the third quarter of this year were $33.9 million compared to $26.7 million a year ago, which was a growth rate of 27% and driven almost entirely by higher volumes. Included in sales this year with 0.7 million of sales to Canada, which are reflected as service revenues on the P&L. Sales integrate Britain, which included in product revenue were minimal this quarter. Overall, the pricing environment for neurotoxin products in the U.S. remains strong, and the average selling price of Jeuveau is consistent with Q2 and above 2021.
As David mentioned earlier, we believe our reported sales for the third quarter understate the true strength of our business, and I’d like to provide some additional detail. In the third quarter, we deferred an incremental $3.5 million of revenue compared to Q2, primarily related to the highly successful Switch Your Tox program. Including this deferral, our sequential growth rate would’ve been nearly flat and what is typically a sequential down quarter due to seasonality. You will recall that the Switch program required customers to purchase at least 30 vials of Jeuveau in the third quarter. In exchange, customers received 60 consumer reward certificates worth $80 off, two consecutive treatments for a total of $160. This reward, which our customers gave to new Jeuveau patients represents a meaningful savings, and we are confident that after two treatments, consumers will see and feel the benefits of Jeuveau and make the switch.
As outlined in the growth to net revenue adjustments note in our public filing, obligations related to our consumer loyalty programs are initially recorded as deferred revenue. Evidence of this increased deferral is reflected in a 3.5 million quarter-over-quarter change in accrued revenue contract liabilities, part of accrued expenses on our balance sheet. We expect the majority of this extraordinary amount of deferred revenue to be recognized in our Q4 results in alignment with the December 31 exploration date for the redemption of the first Switch Your Tox treatment.
Finally, it’s worth noting that customers will need to purchase additional product to treat the new consumers who will redeeming – be redeeming their rewards. All of the supports are view of a strong finish to 2022 as reflected in the reaffirmation of the top end of our full year sales guidance.
Moving down to P&L. As reported, gross margin for the third quarter was 58%, and our adjusted gross margin, which excludes the amortization of intangibles was 60.2%. Beginning in mid-September, we had a material decrease in our settlement royalty obligations with the conclusion of our royalty to AbbVie and our royalty to Medytox decreasing to a mid single digit rate calculated on global net sales. These changes will dramatically lift our fourth quarter adjusted gross margin to the range of 68% to 71% and results in a blended full year adjusted gross margin of 58% to 61%.
Reported selling, general and administrative expenses for the third quarter were $34.8 million compared to $36.9 million in the second quarter. This reduction in spending of $2.1 million related primarily to marketing and distribution expenses demonstrates our ability to manage our operating cost structure. This quarter SG&A expenses included $3 million of non-cash stock-based compensation.
Our GAAP operating expenses for the third quarter were $51.8 million compared to $58.5 million in the second quarter. Non-GAAP operating expenses for the third quarter reduced to $33.7 million from $35.4 million in the prior quarter. For the full year, we now expect our non-GAAP operating expense to come in at the lower half of our previous guidance range of $135 million to $140 million.
Our non-GAAP loss from operations in the third quarter was $13.3 million compared to $14.1 million reported in the second quarter. As a reminder, both non-GAAP operating expenses and non-GAAP loss from operations exclude product cost of sale, IPR&D expense, stock-based compensation expense, revaluation of the contingent royalty obligation and depreciation and amortization.
Turning to the balance sheet. We ended the third quarter with $65.6 million in cash compared to $84.5 million at June 30, 2022 for a difference of $19 million. The major pieces in that $19 million include $14 million of inventory payments to support growth of the business, a combined $8 million of net royalty payments and interest payments of approximately $2 million. In the third quarter, net cash used for operating activities was $17.1 million, which was $3.8 million less than the amount used in the second quarter, and a continuation of the favorable trend we’ve seen this year keeping us on the path to achieving sustainable positive cash flow.
As a reminder, we have one final $5 million settlement payment due in the first quarter of 2023, which will satisfy our settlement milestone obligation. And as we continue to expect that our existing cash balance will fund our current operations through cash flow break even.
Before I turn it back over to David, I would like to summarize our 2022 guidance. Full year sales at the top end of $143 million to $150 million, which includes a minimal contribution from international market. These assumptions are based on anticipated success of the Switch Your Tox program and reflect our confidence in the resilient aesthetic neurotoxin market.
Full year adjusted gross margin between 58% and 61%, and the fourth quarter rate of 68% to 71% to reflect the decrease in settlement royalty rates. And full year non-GAAP operating expenses in the lower half of our 135 million to 140 million range. Other modeling assumptions include quarterly interest expense of 2.6 million and full year weighted average shares outstanding of approximately 56 million. Over to you, David.
David Moatazedi
Thank you, Sandra. As 2022 comes to a close, I want to acknowledge a great effort of our Evolus employees who are on track for a strong finish to an outstanding year. We are now seven quarters into the relaunch of Jeuveau and I’ll proud to say that we remain the fastest growing neurotoxin in the U.S. today and are on track to achieving nearly 50% growth this year.
Our focus on the cash pay market has enabled us to create a differentiated experience for our customers and in turn their consumers resulting in Jeuveau earning the number one or number two share position within our purchasing account.
As we look forward to 2023, we continue to forecast a growth rate of at least double the market driven by our expanding share in existing customers and continued penetration of the remaining 20,000 accounts in the U.S. that have not yet tried Jeuveau. We will also expand our footprint beyond Great Britain into new European markets and expect to receive approval in Australia.
Lastly, we expect the preliminary results from our extra strength Phase 2 study to bring clarity to the market around the relationship between dose and longevity, which could uniquely position Evolus with two dosage strengths.
With that, we’re ready to take questions.
Question-and-Answer Session
Operator
Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Marc Goodman with SVB Securities. Please proceed with your question.
Marc Goodman
Yes, hi. David, you spoke a lot about Jeuveau, and we got a lot of information on why – it did what it did in the quarter, but can you talk about the broader market in the quarter? Obviously, everybody listens to what AbbVie has to say and saw their numbers. And it just seemed a little weaker than what would have been expected. And I think there is a little bit of a concern that there’s a slowdown going on in the broader market. Talk about that a little bit, how you’re thinking about – what was the sales for the broad market in the third quarter growth or whatever? How are you expecting the year to play out? And how are you thinking about 2023? Are we going to have a market that slows into the low to mid-single digits? Or how are you expecting this to play out? Thanks.
David Moatazedi
Great. Thanks for the question, Mark. A couple of comments on the quarter. The first is, clearly, seasonality took effect this year, and we’re wrapping around on a prior year where consumers weren’t traveling. And so I think you’re seeing that effect resulting in some dampening in terms of the procedural growth rate versus prior year. And I think that was something that others have commented on as well. As it relates to the market slowing, as we mentioned in the opening comments, we’ve been looking very closely at our business. We track Evolus Reward redemptions. And as you saw in our report, the third quarter hit an all-time high in terms of Evolus Reward’s participation. We haven’t seen the slowing.
We have heard, of course, that consumers are feeling a bit of the pinch in the pocket book and maybe trading down, which, as you know, historically, Mark, you covered this category during the prior recession. Toxins are the most resilient because consumers will trade down to a neurotoxin in the $300 to $500 price range and trade off other procedures. So we may be seeing that. But of course, given the majority of our growth this year has come from market share gains versus actual market growth, it’s tough for us to get a sense for how that’s playing out in the market, but we remain very confident and continue to see very strong trends on our business.
That being said, of course, we’re hearing about the pinch, whether it’s in the grocery store, at the gas pump and we expect that, of course, in some level to impact the aesthetic market. Fortunately, we continue to benefit from the combination of share gain as well as a market that we do believe is continuing to grow. It may not be at the same clip as it was prior, but continues to grow at a healthy rate. And as we look forward, I think our best analog is to look back. And historically, this market has grown at a high-single, low double-digit growth rate. It has the potential to continue to accelerate given the favorable macro trends towards the younger generation that have an interest in entering in the aesthetic market. And of course, this market has always rebounded even when it goes through a period of slower growth. And so for those reasons, we’re really optimistic about 2023. And I think we’ve given some level of guidance and that we expect next year that our business will grow at more than 2x the market average. So that gives you a sense for our confidence in our ability to continue to expand our presence in the U.S.
Marc Goodman
Thanks.
Operator
Our next question comes from Louise Chen with Cantor Fitzgerald. Please proceed with your question.
Carvey Leung
Hi, good afternoon. This is Carvey on for Louise from Cantor. Congrats on the strong execution this quarter and thank you for taking our questions. First, can you remind us of the market opportunity for the extra-strength, and if successful, how it impact itself of the regular strength, if at all? Our second question is on the launch in Europe, can you provide a little bit more color on the uptick ramp in 2023? Thank you.
David Moatazedi
Great. Let me start with the extra-strength. Clearly, there is a lot of interest in the market around the role of dosing as it relates to longevity in the market. In the research that we’ve done with existing Evolus customers, 86% of customers have said they’re very interested in understanding the role of an extra-strength product. When you dig a layer deeper beyond just the interest level and understand where the utility of the product might be, it still represents a minority of the use, meaning as we think further out over time, the continued dominance in use in this market is going to be the regular strength of the product. And so we continue to believe it’s important to understand the relationship between dose and longevity. And as I mentioned in my earlier comments, we’ll get a chance to share some of those results early in the year next year when we reveal that data in January at the IMCAS meeting.
Moving on to the uptake ramp in Europe, this year, we said, it was an investment year. We invested high single-digit millions, and we expected a nominal contribution from international. Clearly, international’s contribution next year will continue to rise, not just from the investment we’ve made in the U.K. but also as we expand into other markets. As you know, U.K. is the single largest market in Europe, followed by Germany, and we expect to be in both of those markets next year, and we’ll provide more color in the New Year around our expansion beyond those two key markets. So we’ll provide some more color as we enter the New Year, but we feel very good about Europe being a contributor to growth next year. And of course, over time presents a significant opportunity for us as Europe is the second largest market in the world after the U.S. for neurotoxin.
Carvey Leung
Great. Thank you so much and congrats on the progress.
Operator
Our next question comes from Annabel Samimy with Stifel. Please proceed with your question.
Annabel Samimy
Hi. Thanks for taking my question. I had a couple here. So just to go back to your other response when it comes to the higher dose for the extra-strength dose, when you say, yes, there’s a lot of interest in the high dose, but when you dig a little deeper, still a minority who might use it. How do you tease that out? And what pushback do you get when you ask, I guess, a little bit more of a detailed question. So I guess I want to understand that because most of the surveys we do show a high level of interest in a higher dose, therefore, longer duration. So that’s the first question. The second is maybe you can help us understand the mechanics of the switch to tox in deferred revenues. So they buy 30 units during the quarter, they get 60 reward coupons. Is there a time line as to when those consumers need to use that? And so just if you can help us with the confidence level you have in recognizing the $3.5 million in deferred revenues? Thanks.
David Moatazedi
Okay, great. Let me start with the extra-strength data. So what we did in our survey was we asked existing customers what their interest level was in an extra-strength neurotoxin that provides greater longevity. And as I’ve mentioned earlier, 86% expressed a lot of interest in understanding how that works.
As the next layer you dig in, which is you want to understand, well how often would you use this higher dose and what areas of the face would you use the higher dose? That’s where the complexity enters. The reality is if you pick areas that are outside of the approved label which is a glabellar area, you go into areas like the forehead today in the U.S. toxins are underdosed relative to the label in the forehead. And so the idea of increasing dose in an area that’s known for adverse events becomes challenging for customers to think through how they could potentially do that, meaning the trade off of longevity versus the look they receive or potentially the adverse event profile that may result from it.
So I think there’s – it’s fair to say there’s a big learning curve. But what’s important is we’re uniquely positioned. We have a 20 unit dose, which is the flagship use of a 900 kilo adult molecule, which is what’s enabled us as a fourth entrant in the market now to command a 10% share of this category, which is meaningful given we’ve only been on the market less than two years since we settled. But then adding onto that with an extra strength dose with a company that’s uniquely positioned to capitalize on the pricing dynamics of this category, we think gives us an opportunity to potentially explore both options of the original as well as the extra strength dose. But ultimately I think it’s fair to say anytime you’re introducing a new language to a category like an extra strength or doubling the dose, there’s going to be a learning curve associated with that. And there’s a lot that we don’t know today and we’ll have to learn that over time.
On the second question as it relates to the Evolus rewards program, the timeline for consumers to redeem their rewards ends December 31. So if a consumer hasn’t redeemed their initial $80 reward, then those coupons will expire, meaning we don’t carry any further liability if the initial coupon hasn’t been redeemed. So we’ll have a great sense for the number of consumers that switched as a result of the Switcher Talk program by the time we come around to the end of the year, which is what gave us the confidence to make the comment that the majority of that revenue deferral will be realized in the fourth quarter.
Annabel Samimy
Okay, great. Thank you.
Operator
Our next question comes on the line of Douglas Tsao with H.C. Wainwright. Please proceed with your question.
Douglas Tsao
Good afternoon. Thanks for taking the questions. And I guess, David, you’re just, to your point, consumers are perhaps feeling the pinch. Have you thought about ways to sort of provide some relief or to sort of incentivize patients to continue to move ahead with aesthetic procedures? I know you obviously don’t want to sort of disrupt your pricing strategy as it affects your core customers. So are there sort of consumer oriented promotions that you might think about pursuing if we do see sort of a little bit longer period with inflationary pressures?
David Moatazedi
Doug, thanks for the question and I know this category well because you covered it during the last recession. And consumer behaviors do change at a time when they feel the pocketbook pinch and you see that reflected in product choices on all consumer goods and certainly aesthetic products are no different than other consumer retail items. As matter of fact, we think we’re very well positioned in the event that the market were to slow down. Our product of course improves the profitability profile of the number one procedure for practices and aesthetics, which makes us an attractive option to consider. As we pointed out, we’re only in about a third of accounts across the U.S. today and have plenty of opportunity to open new accounts and engage with customers.
The second is because we’re a cash pay business, we’re able to engage with customers in a way that’s unique co-branded media. When we enter practices and we offer co-branded media, whether that’s digital television or billboards that replaces some of their own marketing spend and during a time where they’re feeling the pinch on the bottom line, our investment in marketing and media is a way for us to help fuel their growth while they pull back on that spend. And we’ve heard that consistently from some of our top customers that see the benefits of that. Of course their competitors that are down the Street see the benefits of our advertising as well and that’s helped fuel the growth you’ve seen in the new accounts.
And then lastly, the Evolus rewards program was designed specifically for us to be able to address some of the price elements related to what the consumer’s paying out of pocket. The Switch Your Tox program was deliberate. It was an opportunity for us to make an investment at a time where we felt that we could gain not only market share in the category, but help offset some of the cost to consumers.
As you know, right around the time we launched this in the middle of the year, we said the summer season was going to be unique for this market this year because of the wraparound effects and we think we made the investment at the right time. We’re seeing it reflected in the unit share gains and we believe those share gains will continue into next year and we’re going to continue to deploy the types of consumer reward benefits to keep these patients coming back more often with the preference towards Jeuveau. We’ve seen some early signs that we can move the needle and because of our digital platform, we can provide customized rewards to consumers depending on where they are in their treatment and how far out it’s been since our last one.
So we feel we’re well suited and positioned overall to continue to capitalize on the market, whether it continues to be at healthy growth, which we do believe it is a healthy market or ultimately if the market does slow down a bit, we think that we have some very favorable positioning in this category to benefit from that.
Douglas Tsao
And maybe just as a quick follow-up, I mean David, have you seen sort of the increase in any accounts that might be sort of now thinking about just given your economic profile and what you offer them an interest in? You sort of who maybe in the past has said, not sure happy with the toxins that I’m having now, but sort of reconsidering that in light of macro conditions? Thank you.
David Moatazedi
Yes, I think you look at the third quarter here we are in the third year since we originally launched this product and we’re hitting an all time high in terms of new accounts purchasing since that initial launch phase. So I think we are seeing that the programs that we’re deploying are helping bring that to life. And we do believe that that’s a sustainable trend in the sense that the market continues to see us as a favorable option to other neurotoxins that have continued to raise price and put pressure on the profitability of the procedure. And we deliver a very high quality outcome with a 900 kilodalton molecule that they’re very used to using. That is the gold standard in this category. And these doctors know how to inject the 900 kilodalton toxin and that makes that transition for an account as well as a consumer much easier because they understand how these products perform.
Douglas Tsao
Great. Thank you.
Operator
[Operator Instructions] There are no questions at this time. I’d like to turn the call back over to management for closing comments.
David Moatazedi
Thank you, operator. If you missed any portion of this call, a replay will be posted to our website later today. Thanks to everyone for joining us. We appreciate your interest in Evolus and will be available if you have additional questions.
Operator
This concludes today’s conference. You may disconnect your lines at this time and we thank you for your participation.
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