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Wellstream Hldgs Plc (WSM)

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Tuesday 17 March, 2009

Wellstream Hldgs Plc

Final Results

RNS Number : 9566O
Wellstream Holdings PLC
17 March 2009
 



WELLSTREAM HOLDINGS PLC

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2008


Wellstream, a leading designer and manufacturer of bespoke flexible pipeline products, systems and solutions for the oil and gas industry, today announces its preliminary results for the year ended 31 December 2008.

 

Highlights

    Revenues up 39% to £369.9m 

    Operating profit up 70% to £81.0m

    Excellent customer base supported by good backlog and long term contracts

    Strong balance sheet and cash flow

    Expansion programme on target to deliver 40% increased capacity

    Final Dividend 6p per share: Full year dividend 10p


Financial Highlights 

2008 

2007 

Change

Revenue 

£369.9m

£266.8m

38.7%

Operating profit

£81.0m

£47.6m

70.3%

EPS (Diluted)(a)

52.3p

31.6p

65.5%

Backlog(b) 

£331.4m

£335.9m

-1.3%


Commenting on the results, Gordon Chapman, Chief Executive, said: 

"I am pleased to report on very strong performance from the Group during 2008. It was another record year in which we successfully increased capacity and production levels and saw further revenue and earnings growth. 

Significant highlights include the continued strong performance from the Newcastle upon Tyne operation, the rapid increase in throughput at our Niterói plant in Brazil in its first full year of operation and the award of a number of strategically significant projects, including a 4 year framework agreement with Petrobras. Our investment in world-class production facilities and R&D is focused to meet the needs of our customers as they develop ever more technically demanding deepwater operations. We are also on schedule to add 40% to our total production capacity early in 2009.

We have also made encouraging progress in our installation business through our Seastream JV. The execution of the Pyrenees project for BHP Billiton is on target and on budget. We invested in the acquisition of our own flexible pipe installation equipment which provides us with greater opportunity to control the installed cost of our products and is key to our growth strategy.

Looking ahead, market indications for 2009 are that National and International Oil Companies are generally maintaining their upstream spending levels, with a continuing emphasis on deep water projects, while smaller independent operators are deferring or curtailing major capital expenditures. Overall the fundamentals for our business remain attractive. 

The Group's order book in Brazil continues to be strong with over £150 million of orders already secured under the Petrobras Framework Agreement. For the Group as a whole, our order book represents over 70% of anticipated 2009 revenue. Our focus on cost reduction and improved efficiency has been maintained and our margins in sterling terms remain satisfactory."



For further information, please contact: 


On the day:

Thereafter:

Gordon Chapman - Chief Executive

+44 (0) 20 7353 4200

+44 (0)191 295 9000

Chris Gill - Finance Director

+44 (0) 20 7353 4200

+44 (0)191 295 9000

Jason Nunn - Investor Relations

+44 (0) 20 7353 4200

+44 (0)20 7968 8200




Peter Hewer

Tulchan Communications

+44 (0) 20 7353 4200

+44 (0) 20 7353 4200


Conference Calls

presentation for analysts and investors will be held at 9.15 (GMT) today. This presentation will have a call in facility which will be in listen only mode.  


To participate in the call, dial: +44 (0) 1452 555 566 (access code 89122935).  

A recording will also be available for 7 days after the call, dial: +44 (0) 1452 55 00 00 (access code: 89122935#).


Notes to Editors:

Wellstream

Wellstream is a leading designer and manufacturer of bespoke flexible pipeline products, systems and solutions for the oil and gas industry. Wellstream's portfolio includes established product lines for use as dynamic flexible risers and static flowlines in deep and ultra-deepwater environments. In addition, newer product lines designed for use onshore and in high temperature/high pressure drilling and well service applications have also been introduced. With over 1000 employees internationally, Wellstream has offices and facilities in the UKUSACanadaBrazil, and Australia.



Notes to Preliminary Results:

Wellstream has presented these supplemental measures because they are used by Wellstream in managing its business performance, although they are not measures of profit or operating performance recognised under IFRS.

      a)   Diluted EPS represents Profit after Tax divided by the weighted average diluted number of
            ordinary shares in issue. 

      b)   Revenue Backlog is the aggregate of revenue that has not been recognised in the accounts from
            contracts that have been entered in
to and from contracts that the directors are confident will be
            entered into
 and revenue that the directors are confident will arise in the next year from the
            Petrobras Framework Agreement. Further revenue from the Framework Agreement and orders
            from customers in the form of limited non-binding commitments are not included in revenue
            backlog.

      c)   Normalised kilometre (nkm) is based on the work centre hours required to produce a standard 8
            inch ID offshore pipe or a standard 4 inch ID onshore pipe. A relative scale factor is applied to
            other pipes to convert actual production lengths and composition into nkm.






CHAIRMAN'S STATEMENT


I am pleased to report that Wellstream has continued its strong performance in 2008; delivering another record set of financial and operating results.  This was an outstanding performance, achieved against the backdrop of continued expansion of our production capacity. Looking forward, the fundamentals of the sector remain attractive.


Financial performance

In the 12 months to 31 December 2008, Revenue increased by 38.7% to £369.9m (2007: £266.8m), operating profit increased by 70.3% to £81.0m (2007: £47.6m), and diluted earnings per share reached 52.3p against 31.6p for 2007. We maintain a strong backlog which stood at £331.4m on 31 December 2008 (2007: £335.9m).


Offshore production

Throughput in our manufacturing facilities increased by over 25% in 2008 compared with the previous year; mainly due to the fast ramp-up of production at our Niterói facility in Brazil. Records were set at both plants with throughput reaching 240 normalised km (nKm) (c)  in Newcastle upon Tyne and 128nKm(c) in Niterói. The Group's available production capacity will be increased by 40% to 570nKm(c) at the end of Q1 2009 when the current expansion plan is completed.


Contract awards

The most noteworthy award for 2008 has been the Petrobras Framework Agreement. This agreement, worth in excess of £600 million, spans 4 years and equates to approximately 700nKm of risers and flowlines.  At the year end we were awarded two major contracts under this agreement. These contracts have a value of some £90 million, and cover the supply of flexible risers and flowlines for the Cachalote and Barracuda projects.

Wellstream's continuing innovation in technology led directly to the award of two significant projects in 2008. The first is to develop a flexible riser for the initial production from the Petrobras Sub-Salt Tupi field and the second is to supply an ultra high pressure riser for Anadarko Petroleum's Caesar Tonga development in the Gulf of Mexico. These applications each represent a step change for the industry and demonstrate our ability to provide solutions for increasingly complex deepwater developments.


Seastream JV

Seastream, our 50:50 joint venture with Sea Trucks Group, continues to be well received by customers, enhancing Wellstream's product offering to provide flexible pipeline products on an installed basis.  Seastream's first contract, worth £100 million, for the supply and installation of flexible flowlines on BHP Billiton's Pyrenees project is progressing on schedule and is set to move to its offshore installation phase in 2009. Seastream also completed a contract for Devon Energy on their Polvo project, off the coast of Brazil during 2008. 


Outlook

Market indications for 2009 are that National and International Oil Companies are generally maintaining their upstream spending levels, with a continuing emphasis on deep water projects, while smaller independent operators are deferring or curtailing major capital expenditures. Overall the fundamentals for our business remain attractive. 

The Group's order book in Brazil continues to be strong with over £150 million of orders already secured under the Petrobras Framework Agreement. For the Group as a whole, our order book represents over 70% of anticipated 2009 revenue. Our focus on cost reduction and improved efficiency has been maintained and our margins in sterling terms remain satisfactory. 

Finally, I pay tribute to the professionalism of our staff, whose hard work and dedication have helped bring about these record breaking results.


John Kennedy

Chairman

  

Chief Executive's Review

I am delighted to deliver my second Chief Executive's Review for Wellstream as a listed Public Company.


Financial Highlights 

2008 

2007 

Change

Revenue 

£369.9m

£266.8m

38.7%

Operating profit

£81.0m

£47.6m

70.3%

Backlog (a) 

£331.4m

£335.9m

-1.3%


I am pleased to report that, following a remarkable year for the Group in 2007, this year has been outstanding, with record financial and operational performance being achieved in 2008.

Significant highlights include the continued strong performance from the Newcastle upon Tyne operation, the rapid increase in throughput at our Niterói plant in Brazil in its first full year of operation and the award of a number of strategically significant projects, including a 4 year framework agreement with Petrobras. Our investment in world-class production facilities, designed to meet the needs of our customers as they develop ever more technically demanding deepwater operations has continued, and we are on schedule to add 40% to our total production capacity early in 2009.

We have also made encouraging progress in our installation business through our Seastream JV. The execution of the Pyrenees project for BHP Billiton is on target and on budget. We invested in the acquisition of our own flexible pipe installation equipment which provides us with greater opportunity to control the installed cost of our products and is key to our growth strategy.


Offshore market overview

2008 saw oil prices move from record highs in July of $145 per barrel to lows of $30 per barrel in December - a level not seen since December 2003. Despite this unprecedented fall in prices, the fundamentals of the industry have remained largely unchanged for Wellstream. Oil and Gas remains the world's dominant energy source, and accessible resources onshore and in shallow water are diminishing. Oil companies are therefore continuing to focus on exploring and developing deepwater operations utilising subsea and floating production technologies. Flexible pipelines are a critical element of the majority of these developments; connecting the wellheads on the seabed to the surface via flexible flowlines and risers. Thus, the increased and projected future dependence of these floating facilities in combination with subsea completions has been one of the drivers for rapid growth in Wellstream's business. 

Capital expenditure on the floating production systems for deepwater has increased from approximately $8bn in 2004 to $13bn in 2008.  This is forecast to reach over $20bn by 2012.  The number of floating systems being constructed, in tendering or in their design phase has also reached record levels during 2008, with approximately 200 projects under consideration - equal to the number of vessels already in service. 

This increasing use of floating production together with the fact that the subsea sector remains one of the fastest growing sub-segments of the oil and gas industry, bodes well for the future.

Despite the fall in oil prices, current indications are that national oil companies and major operators are generally maintaining spending levels in order to 'invest through the cycle' in order to offset the accelerating production decline rates in existing production fields. The recent announcement from Petrobras advising of a projected increase in Exploration & Production spending over the next 5 years from USD 65 billion to USD 105 billion indicates the confidence of our customers in the underlying potential of the sector. 


Onshore market overview

Although the onshore market in North America has been particularly impacted by the fall in oil and gas prices, the number of active rigs operating in North America during 2008 was relatively consistent, averaging 2,190. Activity levels peaked in September with 2,370 rigs working and the year ended with December averaging 2,075. This combined with our focus on commercialisation of our unique 6" onshore spoolable product has meant that the market for Wellstream's onshore products has remained robust. In addition as independent oil companies have begun to focus on reducing exploration and production costs they have become more willing to consider alternative cost effective development technologies such as Wellstream's FlexSteel product. This has enabled Wellstream to increase market share despite challenging market conditions.

The growth in the opportunity for FlexSteel in the refurbishment of existing onshore pipeline infrastructure has also continued. This is being driven by increased awareness by customers to the significant benefits that FlexSteel offers in terms of reduced installation cost.


Strategy for growth

Despite changes in global economic conditions, the fundamentals driving the demand for Wellstream's products have remained intact. Wellstream's strategy continues to be one of building a leadership position as a supplier of bespoke engineered flexible pipeline products for the hydrocarbon industry around the world. This leadership position is being built through superior customer relationships, innovation, technology, engineering, manufacturing and project delivery excellence. The business will continue to deliver growth organically and through alliances and acquisitions as opportunities arise. Currently, Wellstream is:


*    Adding capacity in Newcastle upon TyneUK to reach 300 nKm/pa in 2009 from 270 nKm in
     2008

*    Increasing capacity in NiteróiBrazil to reach 270 nKm/pa in 2009 from 150nKm in 2008

*    Continuing to grow production of onshore pipeline products

*    Developing the Seastream JV focused on the installation of flexible pipelines and risers to
     support Wellstream's strategic intent to control the installed cost of flexible pipe and by so
     doing creating the best value proposition to our end customers

   Developing and acquiring our own installation equipment to provide the differentiated
      technology in the installation process

   Focusing Research and Development effort on high temperature, high pressure
     technologies with testing programs to increase the water depth capability of the product


UK

The strong Group performance in 2008 was underpinned by the Newcastle upon Tyne operation. Capacity was increased through 2008 to 270nKm/pa by the year end and will reach 300nKm/pa by the end of Q1 2009. Once again, the UK operation achieved a new annual record with throughput for the year totalling 240nKm. The efficiency gains were hampered mid-year due to delays in return of shipping reels from customers. Mitigating actions were taken and disruption was minimised. 

We were very pleased to celebrate 10 years of association with the city of Newcastle upon Tyne in July when a large number of staff and friends gathered at the Sage concert building in the centre of the city.


Brazil

2008 saw the first full year of operation of the new plant in Niterói which had been commissioned in May 2007. As a result, throughput in Brazil increased from 52nKm in 2007 to 127nKm in 2008.The plant ramped up to 24/7 working, operating on a four shift system and significantly outperforming against our original plan. We expect to build on this progress in 2009 as the expansion programme is completed and the capacity of the plant is increased further from 150nKm pa to 270nKm pa.

Also worthy of note is the load-out and base operational support given to Devon Energy's Polvo Project which was the first installation contract performed by Seastream in Brazil. Operations and logistics support was also provided from Niteroi to the Chevron Corporation during installation of the Frade project.

With two offshore plants now in operation, opportunities to optimise production scheduling between the plants have been maximised in order to offer significant benefits to customers in terms of product designs, contracting arrangements and delivery times.


Major projects

Twenty two projects were being worked on in 2008 including seven major projects for Petrobras. The Brazil projects ranged in value from circa £10m to £40m with manufacturing undertaken both in Brazil and in the UK

Also significant in 2008 was the pipe manufacturing element of the BHP Billiton Pyrenees project (Australia) and the Addax Okwori project (West Africa). 

The last delivery of pipe for the Chevron Frade project in Brazil was made in July 2008. In all some 138km of pipes were delivered.


Capacity expansion

In November 2007 we announced capacity expansions in both Niterói and Newcastle upon Tyne with a total planned capital investment of £35 million. This will take total production capacity to 570nKm pa. At the end of 2008 the project was over 85% complete and on track for Q1 2009 completion. 


Supplier Relations and supply chain management

The supply chain remains a critical component of Wellstream's operations. The supply chain strategy has undergone further development and now takes into account the potential implications resulting from the global economic downturn. There is greater emphasis on vendor risk, advanced planning and scheduling, management of stock turns, constant monitoring and evaluation of vendor performance, the development of commercial risk and reward arrangements and where appropriate, the establishment of long term vendor frame agreements. All suppliers are qualified to Wellstream standards and continuously evaluated through an audit based approved vendor rating system, managed and administered independently by our HSEQ function. Carbon steels, alloy steels, high grade polymers, end fittings and ancillaries are sourced globally for Wellstream's three major operations. There have been no major interruptions to the supply chain throughout 2008 and Wellstream continues to extend material solutions and the vendor base. 2008 has seen the continued development of Brazilian local content supply to support the Niterói facility. This has led to reduction in shipping needs and added value by reducing risk and cost.

The Group recognises that our corporate social responsibility extends to how we behave towards our suppliers, and this is recognised in our systems of work. The Supply Chain and HSEQ functions work closely with suppliers to assess and monitor their HSE competencies and to share learning for mutual benefit.

Strategically, we continue to minimise and ultimately eliminate any single source aspects of our supply base. As with all supply chains, inherent risks remain but these are identified and managed by the Wellstream supply chain team.

Customers

Wellstream continues to promote strong, collaborative relationships with its customers and this has resulted in a number of significant project awards during the year. The most noteworthy of these has been the Petrobras Framework Agreement. This agreement, worth in excess of £600 million, spans 4 years and equates to approximately 700nKm of risers and flowlines. Towards the end of 2008, the Group was awarded two major contracts under this agreement. These contracts have a value of some £90million, and cover the supply of flexible risers and flowlines for the Cachalote and Barracuda projects. These awards will contribute significantly to production in Niterói during 2009 and are a tangible demonstration of the collaborative relationship Wellstream enjoys with its largest customer.

Wellstream's continuing innovation in technology led directly to the award of two significant projects in 2008. The first, to develop a flexible riser for the initial production from the Petrobras Sub-Salt Tupi field and the second, to supply an ultra high pressure riser for Anadarko Petroleum's Caesar Tonga development in the Gulf of Mexico. These applications each represent a step change for the industry and demonstrate our ability to provide solutions for increasingly complex deepwater developments.

Other major awards during the year included the flowlines and risers for the Maersk Oil Dumbarton project for the North Sea.

The Group achieved awards which translated into a closing backlog at 31 December 2008 of £331.4m (31 December 2007 - £335.9m).

Wellstream has a clearly defined Quality Policy which was re-issued in 2008 to all employees. The Policy is aligned with best practice in quality management and with the management system standard ISO 9001:2000 and API Spec Q1 which provides the framework and arrangements for attaining excellent business performance and ultimately achieving high levels of customer service and quality.

Customer satisfaction is measured though a comprehensive feedback questionnaire issued at the end of individual projects. The feedback received is collated and actions implemented to address any issues raised, by means of the Quality Management System. The Group's operations are regularly audited by Lloyds as part of ISO 9001:2000 accreditation and by customers as part of normal business activities.

Seastream and the Pyrenees project

Seastream, our 50:50 joint venture with Sea Trucks Group, continues to be well received by customers, enhancing Wellstream's product offering by providing flexible pipeline products on an installed basis.  Seastream won its first contract, worth £100 million, with BHP Billiton in July 2007.  This contract, for the supply and installation of flexible flowlines to the Pyrenees FPSO, is progressing on schedule with engineering complete and all major sub-contracts in place. Attention is now substantially focused on the mobilisation of the construction vessel Jascon 25 in Singapore

The vessel has completed successful sea trials and loading out of the major equipment for the project. The recently completed flexible pipelay equipment owned by Wellstream will be installed onboard the Jascon 25 later in the installation campaign. On arrival Seastream will commence work with the mooring and turret installation followed by the manifolds and installation of the Wellstream flowlines and risers.

Early 2008 also saw the successful completion of the flexible pipe installation campaign offshore Brazil for Devon Energy's Polvo field. The work was performed using a vessel mobilised from the North Sea and underscored Wellstream's concept of providing low cost solutions by selecting the appropriate vessel from the available market.

Seastream is currently tendering several major projects in BrazilWest Africa and Asia Pacific Region. 

Onshore

Wellstream's 6" FlexSteel product has quickly become the pipeline of choice for a growing number of operators. Although designed to fill a void in the pipeline market for a larger diameter spoolable product, acceptance in the market has been more rapid than anticipated. This product provides a reliable, high quality, cost effective and commercially attractive alternative to the steel line pipe which has historically dominated the market.

The feedback from our customers has been very positive and this has confirmed the belief that the larger diameter spoolable product provides an attractive alternative solution to the labour and equipment intensive rigid steel pipeline installation. 

The sales product mix for 6" pipe has grown from 33% for the first six months of 2008 to 52% for the last six months of the year. It is expected that the demand for this product will continue to grow and contribute in excess of 60% of onshore sales in 2009. 

The customer user list for 2008 includes onshore industry leaders Chevron, Encana, ExxonMobil as well as Williams, XTO, Husky, Penn West, Penn Growth and Penn Virginia. PEMEX and PVDSA have also become key customers particularly for pipeline refurbishment applications. 

Risks and Uncertainties

Given the economic challenges in the latter half of 2008, evaluation of risks and uncertainties has taken on even greater prominence across our business. Our focus ranges from high and low level suppliers to our internal operations and interfaces with customers in both the acquisition and execution arenas.

At an operational level there are strict processes in place to review risks and uncertainties during the bidding process and during engineering, procurement, manufacturing, testing and post-delivery project phases. Risk assessments are performed on a project-by-project basis and the operations are reviewed monthly through formal processes. 

At the corporate level, Wellstream's executive team regularly perform a risk mapping exercise which is reviewed with the Board and the Audit Committee. This includes an assessment of operational, financial, strategic, compliance and environmental risks and mitigating actions. Key risks highlighted at 2008 year-end include:

Petrobras is a key customer of Wellstream

Petrobras commands a significant proportion of Wellstream's business. The Framework Agreement gives the Group a level of certainty of demand. Through close dialogue with Petrobras at all levels a plan of future projects is maintained with a typical look ahead of 12 months; this plan is regularly updated as Petrobras' requirements firm up.

Wellstream continues its drive to diversify the customer base both in Brazil and internationally with renewed focus on Asia Pacific and West Africa in particular.

Supply chain and increased volatility 

Risk in the supply chain has taken on an increased significance as the economic downturn took hold in 2008 and lines of credit have become less accessible for suppliers of all tiers. We have engaged all of our key suppliers on the subject of their changing environment and continue to closely monitor the situation. Wellstream's supply chain is critical to the operation and for certain material types there are sole source vendors for which the risk is elevated. Wellstream has adopted a very open approach with vendors to anticipate any challenges and mitigate them at the earliest opportunity. These challenges are mitigated by having a clear and flexible supply chain strategy in place, which continually monitors material levels, vendor performance and their financial status. The continual development of commercial risk and reward arrangements and, where appropriate, the establishment of effective long term vendor frame agreements remain an integral part of the supply chain strategy.

Customer concentration

Wellstream's business is founded on a relatively small number of high value customers including Petrobras. If requested project lead times from these customers change significantly, revenue and margin performance could be put at risk. In order to mitigate this, Wellstream continues to broaden its customer base, develop new relationships in selected regions and apply the principle of focused account management to its strategically targeted customer base.

Volatility of the oil and gas industry

The price of oil and gas and levels of business confidence across oil and gas markets are key drivers for Wellstream's business. The trends towards the use of deepwater, floating production and subsea technologies are also important. A sustained and significant reduction in oil and gas prices and/or a reduction in business confidence or continued volatility as seen over recent months could have an adverse impact on the level of customer spending. To mitigate this exposure Wellstream strives to maintain in-depth market intelligence, to gather and use client feedback and to plan capacity, throughput and its cost base so that any downturn can be weathered effectively.

Liquidity Risk

The Group's Offshore business necessitates it trading with a limited number of customers and acceptance of the credit risk arising from a number of large contracts with these customers. The Group contracts its business in such a way that it receives regular stage payments from its customers that are appropriate to the stage of completion of the contract. This payment profile is approved by senior management in advance of accepting a contract and is monitored subsequently to acceptance at regular intervals. This approach, the Group's banking arrangements discussed in the Financial Review and its customer profile which consists largely of national and international oil companies with well established and substantial credit histories, significantly mitigates both credit and liquidity risk. 


Gordon Chapman

Chief Executive Officer


Financial Review

Overview

Revenue for the year ended 31 December 2008 increased by 38.7% to £369.9m (2007: £266.8m). Resulting Operating Profit increased by 70.3% to £81.0m (2007: £47.6m) which generated Profit before Taxation of £77.5m (2007: £41.7m) and diluted earnings per share of 52.3p (2007: 31.6p).

Revenue 

Revenue for the year ended 31 December 2008 totalled £369.9m (2007: £266.8m).

The offshore business, which represented 96.3% of the Group revenue in the year, grew by 39.3% to £356.2m (2007: £255.6m). The effect of the first full year's operation in our facility in Brazil, a 7% increase in average revenue per nKm of pipe and initial installation revenues from our Seastream JV were the most significant factors behind this growth.

The Onshore business grew by 22.7% in the period largely driven by successful new product introductions. 

Gross Margin

During 2008 there was significant volatility in raw material pricing which resulted in a much increased cost base over the year, the impact of this on gross margin was alleviated by increased pricing in the period. Other direct costs increased by 47% in the period reflecting increased activity, a full year's operating activity in Brazil and recognised costs from the Seastream JV. Overall, gross margin in the year increased by 2% to 31.8% (2007: 29.8%).

Operating Profit

Other operating and administration costs incurred during the year of £37.8m (2007: £33.0m) also reflect a full year's operation in our facility in Brazil. Resulting Operating Profit for the year was £81.0m (2007: £47.6m) an increase of 70.3%.

Financing Costs

Net financing costs incurred during this year totalled £3.5m (2007: £5.8m). Reduced net debt during the first half of the year and lower interest rates in the second half, when the demand from working capital and capital expenditure increased, contributed to the year on year reduction. The 2007 comparative was influenced by the pre-IPO financial structure and currency fluctuations thereon.

Profit before Taxation

Profit before taxation increased 85.6% to £77.5m (2007: £41.7m) though it is worth noting that the corresponding figure for 2007 included a net £3.1m of one-off cost arising from the IPO.

Taxation

The effective rate of taxation for the Group was 30.5% (2007: 30.5%). Increased profits in Brazil, which are taxed at 34%, a reduced UK corporation tax rate and a favourable tax regime in the UK for research and development, underlie the 2008 rate. 

An additional one-off deferred taxation charge of £1.1m has been taken in the year to reflect the abolition of capital allowances on Industrial buildings. 

EPS

Earnings per share for the year ended 31 December 2008 was 52.9p (2007: 31.8p) and diluted earnings per share was 52.3p (2007: 31.6p). The one-off deferred taxation charge discussed above adversely impacted 2008 earnings per share by 1.1p, similarly one-off costs arising from the IPO adversely impacted the corresponding figure by 3.1p.

Dividend

The Company announced a maiden interim dividend of 4p in August and propose a final dividend of 6p per share. If approved, the final dividend will be payable on 12 June 2009 to shareholders on the register at close of business on 22 May 2009.

Operating Cash Flow

Cash flow from operations was £49.5m (2007: £32.7m). Working capital requirement increased by £41.1m (2007: £24.6m) driven by activity, additional inventory carried in Brazil to facilitate the capacity expansion, an increase in the value of construction contracts in progress and an increase in customer debtor days to 76 days (2007: 68 days). After income tax payments in the year of £10.0m (2007: £4.5m) and net interest costs of £3.2m (2007: £3.1m) resultant net cash increase from operating activities was £36.3m (2007: £25.1m). 

Capital Expenditure

Expenditure on capital projects during the year totalled £54.2m (2007: £16.7m). Significant spends included the expansion plan in both Brazil and the UK which when completed in Q1 2009, will have cost some £38m, additional reels required to support increased volume post expansion and expenditure on Lay Spread equipment required for the Group's installation activities.

Financing Activities

During the year the Group has utilised an additional £13.0m of its bank facilities and a further £5.9m has been drawn under an ICMS (sales tax) loan programme with the Rio State Government. The Company paid its maiden interim dividend of £4.0m in 2008. 

Net Debt

Net debt at 31 December 2008 was £65.8m (2007: £46.7m).  Total debt available to the Group is £107.2m, which, after allowing for performance bonds, guarantees, cash balances held overseas and the Group's share of cash held in JV's, leaves the Group with £17.1m (2007: £26.0m) of available headroom.

Treasury & Financial Risk

The Group's day-to-day cash requirements and its capital investment programme are financed through a £96.9m revolving credit facility that was increased by £15m during the year. Short term fixed interest rate loans, normally over a period of less than 3 months, form the significant part of the drawn down facility with the balance being carried at variable interest rates. This facility reduces at the end of each six month period, the first of which occurred in November 2008, until its expiry in May 2013. The Group also has a facility to draw down up to £22.5m with the Rio state government, to date £10.3m has been utilised.

Although a substantial part of the Group's revenue and profit is earned outside the UK, subsidiaries generally trade in either local currency or Sterling. As a result, the Group is not normally exposed to significant foreign exchange transactional risk. Occasionally the Group does generate revenue in a third party currency and, where this occurs, the potential risk is assessed against any natural hedges that exist within the Group before any financial hedges are considered. The Group also has an exposure to foreign currency that arises upon the translation of overseas results into Sterling.

The Group did not hold any financial instruments to hedge either currency or interest rates at the year end or the date of the report, though it is anticipated that increased activity in Brazil will necessitate the hedging of consequent currency exposures that may arise.

The nature of the Group's offshore business necessitates it trading with a limited number of customers and acceptance of the credit risk arising from a number of large contracts with these customers. The Group contracts its business in such a way that it receives regular stage payments from its customers that are appropriate to the stage of completion of the contract. This payment profile is approved by senior management in advance of accepting a contract and is monitored subsequent to acceptance at regular intervals. This approach and the Group's customer profile which consists largely of national and international oil companies with well established and substantial credit histories, significantly mitigates the risk of financial loss from default. 

Going Concern

The directors have considered current business conditions, internal planning and control procedures, financial risks summarised above and identified in the Chief Executives' Reviewin particular the Group's exposure to Brazil and a small number of significant customers and, whilst acknowledging each carries with it some uncertainty, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the directors continue to adopt the going concern basis in preparing the accounts.

 

Chris Gill

Finance Director

  

Income Statement



For the year ended 31 December 2008





Notes

2008

2007




£000

£000






Revenue


2, 3

369,935

266,810

Cost of sales



(252,137)

(187,382)

 

 

 

 

 






Gross profit



117,798

79,428






Administrative expenses



(37,795)

(32,963)

Other operating income



1,001

1,096

 

 

 

 

 






Operating profit 


4, 5

81,004

47,561






Foreign exchange (losses) / gains on financing


6

(96)

2,755

Finance income


7

1,150

1,115

Finance expenses


8

(4,582)

(9,691)

 

 

 

 

 






Profit before tax



77,476

41,740






Income tax expense


9

(24,748)

(12,727)

 

 

 

 

 






Profit for the year (all attributable to equity holders of the parent)



52,728

29,013

 

 

 

 

 

Basic earnings per ordinary share 


11

  52.9 

31.8

Diluted earnings per ordinary share 


11

  52.3 

31.6











All results are derived from continuing operations.










Statement of Recognised Income and Expense

For the year ended 31 December 2008










2008

2007




£000

£000






Exchange differences on translation of foreign operations



8,603

7,578




 

 

Net income recognised directly in equity



8,603

7,578






Profit for the year



52,728

29,013

 

 

 

 

 

Total recognised income (all attributable to equity holders of the parent)



61,331

36,591

 

 

 

 

 









Balance sheet




As at 31 December 2008









Notes




2008

2007


£000

£000





Non-current assets




Investments


  -  

  -  

Goodwill


39,107

  39,107 

Property, plant and equipment

12

107,332

  59,350 

 

 

 

 







146,439

98,457

 

 

 

 





Current assets




Inventories

13

50,082

  29,247 

Trade and other receivables

14

180,652

  136,307 

Cash and cash equivalents


7,407

  5,904 

 

 

 

 







238,141

  171,458 

 

 

 

 





Total assets


384,580

  269,915 

 

 

 

 





Current liabilities




Trade and other payables

15

(128,200)

(106,728)

Current tax liabilities


(12,438)

(1,030)

Interest bearing loans and borrowings


(6,803)

(5,148)

 

 

 

 







(147,441)

(112,906)

 

 

 

 





Net current assets 


90,700

  58,552 

 

 

 

 





Non-current liabilities




Interest bearing loans and borrowings


(66,417)

(47,439)

Deferred tax liabilities


(8,925)

(6,782)

 

 

 

 





Total liabilities


(222,783)

(167,127)

 

 

 

 





Net assets 


161,797

  102,788 

 

 

 

 





Shareholders' equity




Share capital

16

  996 

  996 

Share premium account

16

  66,697 

  66,697 

Translation reserve

16

  15,954 

  7,351 

Capital redemption reserve

16

  30 

  30 

Share based payment reserve

16

  -  

  -  

Retained earnings

16

  78,120 

  27,714 

 

 

 

 





Total equity 

16

161,797

  102,788 

 

 

 

 







Cash flow statement




For the year ended 31 December 2008









2008

2007



£000

£000





Profit for the year


52,728

29,013

Share based payments


2,126

4,467

Depreciation of property, plant and equipment


8,134

5,275

Gain on disposal of property, plant and equipment


(636)

(29)

Finance income


(1,150)

(1,115)

Finance expenses


4,582

9,691

Tax


24,748

12,727

Foreign exchange losses / (gains) on financing


96

(2,755)

Increase in inventories


(17,981)

(13,246)

Increase in receivables


(41,713)

(65,696)

Increase in payables


18,545

  54,332 

 

 

 

 





Cash from operations


49,479

32,664

 

 

 

 





Income taxes paid


(9,997)

(4,464)

Interest received


1,150

1,115

Interest paid


(4,375)

(4,229)

 

 

 

 





Net cash increase from operating activities

36,257

25,086

 

 

 

 





Investing activities




Purchases of property, plant and equipment


(51,865)

(16,744)

Proceeds on disposal of property, plant and equipment


752

38

 

 

 

 





Net cash used in investing activities


(51,113)

(16,706)

 

 

 

 





Financing activities 




Gross proceeds of new debt


60,936

62,526

Repayments of debt

 

(42,000)

(115,304)

Net proceeds / (repayment) on new financing


18,936

(52,778)

Proceeds on issue of share capital


  -  

75,063

Redemption of own shares


  -  

(30)

Costs of issuing equity


  -  

(8,304)

Debt refinancing costs


(150)

(1,088)

Dividends paid


(3,986)

  -  

 

 

 

 





Net cash increase from financing activities

14,800

12,863

 

 

 

 





Net (decrease) / increase in cash and cash equivalents

(56)

21,243

Foreign exchange movements on translation of cash balances

(96)

374

Cash and cash equivalents at beginning of year

756

(20,861)

 

 

 

 





Cash and cash equivalents at end of year

604

756

 

 

 

 





Cash and cash equivalents and bank overdrafts at end of year comprise:


Cash and cash equivalents


7,407

5904

Bank overdrafts


(6,803)

(5,148)

 

 

 

 







604

756



Notes to the Accounts








1 Accounting Policies








 The announcement is prepared on the basis of the accounting policies as stated in the previous year's

 financial statements.


 Whilst the financial information included in this preliminary announcement has been computed in 

 accordance with IFRSs, this announcement does not in itself contain sufficient information to comply

 with IFRSs. The Company expects to publish full financial statements that comply with IFRSs in

 April 2009.








2 Revenue








An analysis of the Group's revenue is as follows:










2008

2007



£000

£000





Revenue from construction contracts 


  356,223 

255,637

Revenue from sale of other products


  13,712 

11,173



 

 



  369,935 

  266,810 





Other operating income


  1,001 

  1,096 

Finance income (see note 7)


  1,150 

  1,115 



 

 



372,086

269,021



 

 





3 Operating segments








The Group's reportable segments remain unchanged and are as follows: 

Offshore - The design, production and installation of flexible unbonded pipelines for use in the offshore oil and gas industry.


Onshore - The design and production of flexible unbonded pipelines for use in the onshore oil and gas industry.





Segment revenues and results








The following is an analysis of the Group's revenue and results by reportable segment in 2008:


Onshore

Offshore

Consolidated    year ended  



2008

2008

2008 


£000

£000

£000 

Revenue




External sales

  13,712

  356,223 

   369,935 





Result




EBITDA

(2,035)

  91,173 

  89,138 





Depreciation 



(8,134)





Operating profit



  81,004 












The following is an analysis of the Group's revenue and results by reportable segment in 2007:



Onshore

Offshore

Consolidated year ended




2007

2007

2007



£000

£000

£000

Revenue





External sales


  11,173 

  255,637 

  266,810 



 

 

 






Result





EBITDA


(217)

  53,053 

  52,836 






Depreciation 




(5,275)






Operating profit




  47,561 











The accounting policies of the reportable segments are the same as the Group's accounting policies. 

Figures reported to the Board, as presented above, are based on the financial information used to

produce the entity's financial statements.









Segment assets 








2008

2007




£000

£000






Onshore 



  19,285 

  10,689 

Offshore 



  365,295 

  259,226 




 

 

Segment assets



  384,580 

  269,915 






Unallocated assets  



-  

  -  




 

 

Consolidated assets



  384,580 

  269,915 

 

For the purposes of monitoring segment performance and allocating resources between segments,

the Board monitors the tangible, intangible and financial assets attributable to each segment.

Inter-segmental funding has been excluded from the segment asset disclosure.  


Goodwill has been allocated entirely to the Offshore segment. Assets used jointly by reportable 

segments are allocated on the basis of the revenues earned by individual reportable segments.



Segment liabilities



2008

2007




£000

£000






Onshore 



  2,773 

  1,704 

Offshore



  211,085 

  158,641 




 

 

Segment liabilities



  213,858 

  160,345 






Deferred tax liabilities



  8,925 

  6,782 




 

 

Consolidated liabilities



222,783

  167,127 




 

 







For the purposes of monitoring segment performance and allocating resources between segments,

the Board monitors the external liabilities attributable to each segment, and therefore inter-segmental

funding is excluded from the segment liabilities disclosure.











Geographic information









Revenue from external customers:



2008

2007




£000

£000






UK



  5,790 

  3,894 

Rest of world



  364,145 

  262,916 




 

 




  369,935 

  266,810 




 

 







Included in revenue from external customers derived from outside of the UK is £239,340,000

(2007 - £216,692,000) derived from customers in Brazil, £71,379,000 (2007 - £12,585,000) from

customers in Australia, £32,884,000 (2007 - £1,684,000) from customers in Nigeria and £7,138,000

(2007 - £24,671,000) from customers in the USA.











Non-current assets by location (excluding goodwill)



2008

2007




£000

£000






UK



  53,110 

  36,522 

Rest of world



  54,222 

  22,828 




 

 




  107,332 

  59,350 




 

 






Included in non-current assets located outside of the UK is £48,970,000 (2007 - £19,950,000)

of assets located in Brazil.







Information about major customers










Included in offshore revenue is an amount of £202,309,000 (2007 - £136,999,000) arising from sales to 

the Group's largest customer and £47,089,000 (2007 - £72,521,000) to the Group's second largest 

customer. The Groups next three largest customers each contributed between £22,000,000 and

£33,000,000 to revenue.






4 Operating profit 










Operating profit for the year has been arrived at after charging / (crediting):





2008

2007




£000

£000






Net foreign exchange gains



(2,293)

(2,257)

Research and development



4,006

3,187

Depreciation of property, plant and equipment



8,134

5,275

Gain on disposal of property, plant and equipment



(636)

(29)

Movement in provisions for trade receivables impairment



833

(102)

Movement in provisions for inventory impairment



(953)

505






Write back of credit balances



  -  

(261)

Cost of inventories (raw materials)



175,740

137,898

Staff costs (all)



49,791

39,978




 

 











Net foreign exchange gains on trading items represent the effect of movements in exchange rates of 

foreign currency denominated working capital and other trading items during the year.






The write back of credit balances represents a reduction of £nil (2007 - £261,000) in accruals against 

warranty and other claims which in the view of the directors are no longer required.






An analysis of amounts payable by the Group to the Company's auditors, Deloitte LLP, and 

their associates is provided below:












2008

2007




£000

£000







Fees payable to the company's auditor for the audit of the 



Company's annual accounts


  55 

65







Fees payable to the Company's auditor and their associates for other services:



The audit of the Company's subsidiaries, pursuant to legislation

  121 

70


Other services pursuant to legislation


  41 

37




 

 


Total audit and audit related fees


217

172












Tax advisory


  10 

22


Tax compliance


  163 

136


Remuneration services


  112 

170


Corporate finance services


  -  

1,050




 

 


Total non-audit fees


285

1,378




 

 




502

1,550




 

 







Fees payable to Deloitte LLP and their associates for non-audit services to the Company are 

not required to be disclosed because the consolidated financial statements are required to 

disclose such fees on a consolidated basis.










5 Staff costs  







2008

2007




£000

£000


Staff costs during the year (including directors)





Wages and salaries


  40,447 

  30,867 


Social security costs


  5,829 

  3,870 


Other pension costs


  1,389 

  774 


Share based payments


  2,126 

  4,467 




 

 




49,791

39,978




 

 







The 2008 share based payment expense of £2,126,000 (2007 - £4,467,000) includes £nil (2007 

- £3,624,000) relating to the granting of share options to Sir Graham Hearne on 19 March 2007, 


and £nil (2007 - £50,000) in relation to the exercise of warrants.







Social security costs include National insurance payable in relation to share based payment 


expenses in addition to Employers' National Insurance contributions on wages and salaries.









2008

2007




No.

No.


Average number of persons employed





Administration


249

235


Sales


25

21


Manufacturing


802

562




 

 




1076

818




 

 









6 Foreign exchange (losses)/gains on financing




2008

2007



£000

£000





Foreign exchange (losses) / gains on financial liabilities held at amortised cost

(96)

  2,755 


Exchange movements on financing arise on the retranslation of the Group's foreign currency bank 

accounts. The prior period gain reflected the change in value of US dollar denominated bank debt 

and deep discount bonds.








7  Finance Income






2008

2007



£000

£000

Interest income on loans and receivables




Interest on bank deposits


  1,150 

  1,115 





8 Finance expenses






2008

2007



£000

£000

Interest expense on financial liabilities held at amortised cost




Interest on bank overdrafts and loans


4,045

4,650

Accretion of discount of deep discount bonds


  -  

1,783

Amortisation of arrangement fees


224

344



 

 







4,269

6,777





Write off of arrangement fees on extinguishing of related debt


  -  

2,718

Bank charges


313

224

Fair value gains on interest rate swaps


  -  

(28)







4,582

9,691



 

 





During the year the Group made net losses of £4,365,000 (2007 - £6,740,000 loss) on financial 

liabilities held at amortised cost.








9 Income tax expense






2008

2007



£000

£000

Current tax




Current tax charge


22,734

5,273

Adjustments in respect of prior years


333

198



 

 



23,067

5,471





Deferred tax




Origination and reversal of temporary differences


384

7,441

One off charge arising from the abolition of IBAs


1,087

  -  

Adjustments in respect of prior years


210

(185)







1,681

7,256



 

 

Total income tax in the income statement


24,748

12,727



 

 





UK corporation tax is calculated at 28.5% of the estimated assessable profit / (loss) for the year 

reflecting the decrease in the rate of corporation tax from 30% to 28% on 1 April 2008. Taxation for 

other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.



10 Dividends on equity shares








2008

2007

Amounts recognised as distributions to equity holders in the year:


£000

£000






Interim dividend paid for the year ended 31 December 2008 of 4p per share (2007 - nil)

  3,986 

  -  




 

 






Proposed final dividend for the year ended 31 December 2008 of 6p per share (2007 - nil)

  5,979 

  -  











The proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 12 May 2009 and, in accordance with IAS 10, has not been recorded as a liability in these financial statements.






11 Earnings per share










Basic earnings per ordinary share is calculated by dividing earnings by the weighted average number of ordinary shares in issue during the year.  






Diluted earnings per ordinary share uses the same figure as the basic calculation except that the weighted average number of shares has been adjusted to reflect the dilutive effect of the outstanding share options allocated under employee share schemes where the market value exceeds the option price. It is assumed that all dilutive potential ordinary shares are converted at the beginning of the accounting period. Diluted earnings per ordinary share is calculated by dividing earnings by the diluted average number of ordinary shares. Reconciliations of the earnings and weighted average number of shares used in the calculations are outlined below:







Basic and diluted earnings per share










The calculation of the basic and diluted earnings per share is based on the following data:






Earnings

Weighted average number of ordinary shares

Earnings

Weighted average number of ordinary shares






2008

2008

2007

2007


£000

No.

£000

No.






For basic earnings per ordinary share

  52,728 

  99,621,531 

29,013

  91,291,391 






Options and awards

  -  

  1,267,985 

  -  

  538,546 






For diluted earnings per ordinary share

  52,728 

  100,889,516 

  29,013 

  91,829,937 






Basic earnings per share (p)


52.9


31.8






Diluted earnings per share (p)


  52.3 


31.6


 

 

 

 











There are no adjustments to earnings in 2008 for the purposes of earnings per share. The adjusted diluted earnings per share of 34.7p presented in 2007 was based on adjusted earnings of £31,828,000.

The adjustments to earnings in 2007 relate to one off costs arising from the IPO.

The difference between the weighted average number of ordinary shares for the purposes of basic and diluted earnings per share is due to the dilutive effect of the Company's Performance Share Plan, Save As You Earn scheme and Chairman's award




12 Property, plant and equipment






Assets in the course of construction

Leasehold improvements

Freehold land and buildings

Plant and equipment

Total




£000

£000

£000

£000

£000

Cost 












At 1 January 2007

  12,319 

  131 

  15,747 

  31,095 

59,292

Additions

  2,225 

  232 

  191 

  14,096 

16,744

Transfers

(12,319)

  -  

  -  

  12,319 

  -  

Exchange differences

  -  

20

  -  

  2,684 

2,704

Disposals

  -  

(26)

  -  

(25)

(51)


 

 

 

 

 

At 1 January 2008

  2,225 

  357 

  15,938 

  60,169 

  78,689 

Additions

  26,305 

  87 

  400 

  27,399 

  54,191 

Transfers

(16,568)

  -  

  6,783 

  9,785 

  -  

Exchange differences

852

48

  -  

  2,210 

  3,110 

Disposals

  -  

  -  

  -  

(408)

(408)


 

 

 

 

 







At 31 December 2008

12,814

492

23,121

99,155

135,582


 

 

 

 

 

Depreciation












At 1 January 2007

  -  

  52 

  2,308 

  11,634 

  13,994 

Charge for year

  -  

  48 

  623 

  4,604 

  5,275 

Exchange differences

  -  

  2 

  -  

  110 

  112 

Eliminated on disposals

  -  

(21)

  -  

(21)

(42)


 

 

 

 

 

At 1 January 2008

  -  

  81 

  2,931 

  16,327 

  19,339 

Charge for year

  -  

  69 

  816 

  7,249 

  8,134 

Exchange differences

  -  

  30 

  -  

  1,039 

  1,069 

Eliminated on disposals

  -  

  -  

  -  

(292)

(292)


 

 

 

 

 







At 31 December 2008

  -  

180

3,747

24,323

28,250


 

 

 

 

 

Net book value






At 31 December 2008

12,814

312

19,374

74,832

107,332


 

 

 

 

 







At 31 December 2007

  2,225 

  276 

  13,007 

  43,842 

  59,350 


 

 

 

 

 


The amount of land included in freehold land and buildings that is not depreciated is £570,000 

(2007 - £570,000).



13 Inventories







2008

2007


£000

£000







Raw materials


  38,826 

  22,049 


Work in progress


  6,829 

  4,449 


Finished goods


  4,427 

  2,749 




 

 




50,082

29,247




 

 


14 Trade and other receivables












2008

2007




£000

£000







Trade receivables


  78,304 

  81,970 


Impairment provision


(833)

  -  




77,471

81,970







Amounts due from contract customers 


  70,656 

32,600


Prepayments


  9,308 

5,804


Other receivables


  23,217 

15,933




 

 




180,652

136,307




 

 




The directors consider that the carrying amount of trade and other receivables approximates their 


fair value.










15 Trade and other payables










2008

2007



£000

£000







Trade payables


  33,067 

  16,778 


Accruals and deferred income


  32,212 

  25,704 


Amounts due to contract customers


  52,467 

  57,314 


Other tax and social security


  863 

  764 


Other payables


  9,591 

  6,168 




 

 




  128,200 

106,728




 

 







Trade creditors and accruals principally comprise amounts outstanding for trade purchases 

and ongoing costs.










The average credit period taken for credit purchases is 61 days (2007 - 45 days)








The directors consider that the carrying amount of trade and other payables approximates their fair value.








16 Statement of changes in equity

















Share capital

Share premium

Translation reserve

Capital redemption reserve

Retained earnings

Total




£000

£000

£000

£000

£000

£000









At 1 January 2007

21

943

(227)

-

(6,210)

(5,473)

Profit for the year


-

-

-

-

29,013

29,013

Bonus issues


737

(737)

-

-

-

0

Issue of share capital


264

74,766

-

-

-

75,030

Write off of expenses on new issue

-

(8,304)

-

-

-

(8,304)

Redemption of own shares


(30)

-

-

30

(30)

(30)

Share options exercised


2

29

-

-

3,624

3,655

Exercise of warrants


2


-

-

50

52

Exchange difference on translation of overseas operations

-

-

7,578

-

-

7,578

Charge in relation to share options and tax thereon

-

-

-

-

1,267

1,267




 

 

 

 

 

 










At 1 January 2008


996

66,697

7,351

30

27,714

102,788

Profit for the year


-

-

-

-

52,728

52,728

Dividends paid

-

-

-

-

(3,986)

(3,986)

Exchange difference on translation of overseas operations

-

-

8,603

-

-

8,603

Charge in relation to share options and tax thereon

-

-

-

-

1,664

1,664










At 31 December 2008


996

66,697

15,954

30

78,120

161,797











1The financial information set out above does not constitute the Company's statutory accounts for 

the year ended 31 December 2008, but is derived from those accounts. Statutory accounts for 2007 

have been delivered to the Registrar of Companies and those for 2008 will be delivered following the 

Company's Annual General Meeting.


The Auditors have reported on those accounts; their reports were unqualified, did not draw attention to 

any matters by way of emphasis and did not contain statements under section 237 (2) or (3) of the

Companies Act 1985.



This information is provided by RNS
The company news service from the London Stock Exchange
 
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