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Engro Chemicals is an agri-based company, engaged in the business of manufacturing and marketing of fertilisers. The company was incorporated in 1965 and formerly it was called Exxon Chemical Pakistan Limited until 1991.
It is the second largest producer of urea fertiliser in Pakistan and markets under the brand name of Engro. Engro Chemicals also produces crop specific NPK fertilisers, which are marketed under the brand name of Zarkhez and imported MAP fertiliser under the brand name of Zorawar and imported DAP fertiliser. Besides, the micro nutrient zinc sulphate is marketed under the name of Zingro and Boron is branded as Zoron.
The company has received 25 times Top Companies Award in recognition of its financial performance and won consecutively 4th time Environment Excellence Award. The company is recognised as socially responsible organisation of Pakistan in recognition of its contribution in different social programmes.
Overview of the fertiliser market for Jan-Sep, 2008:
Market demand for urea, during the nine months period ended September 30, 2008 was 4 million tons, an increase of 18% over the same period last year (3.4 million tons). Increase is attributable to the three major reasons: 1) Better farm economics for rice; 2) Increase in sowing of Bt cotton (which requires greater application of fertiliser over conventional cotton varieties); and 3) Urea substitution by the farmers over costlier DAP.
Both fertilisers urea and DAP have to be used in a certain proportion but they are interchangeably used by farmers due to ever-rising prices of DAP.
Usually, the farmers prefer to use cheap urea over costly imported DAP. High DAP prices coupled with pre-buying by the dealers due to sentiments of short supply, fuelled the urea demand. This coupled with absence of subsidy notification from the government, resulted in industry wide sales volume of phosphatic fertilisers to decrease by over 60% to 0.3 million tons as compared to 0.8 million tons for the same period last year.
In June 2008, the government had announced increase in its DAP subsidy from Rs. 470/bag to Rs. 1,000/bag. The government later on announced an increase in the subsidy amount to Rs 2,200/bag and a formal notification to this effect was issued from Minfal. However, no subsidy amount was released so far even though the approval has also been given by the ECC. Industry continues to sell at Rs. 3,050/bag. September international DAP and MAP price averaged around $1085/ton. Current price is at approx. $870-$900 per ton.
Fertiliser industry continues to make significant contribution towards the agricultural economy, keeping the domestic prices substantially lower than the international prices. The industry provided a subsidy of Rs. 100 billion to the farmers for the nine months ended September 30, 2008.
The overall profitability of the fertiliser sector increased 45% to PKR11.48bn in 9M08 over PKR7.92bn in 9M07. Profitability of all listed fertiliser manufacturers increased significantly baring FFBL owing to lower DAP off-take due to higher prices coupled with uncertainty in relation to DAP subsidy.



=====================================================================================================================================================================
FFC-Highlights ENGRO-Highlihts FFBL-Highlights DAWH-Highlights Total (PKR m)
=====================================================================================================================================================================
Year end : December 9 M 08 9 M 07 Chg (%) 9 M 08 9 M 07 Chg (%) 9 M 08 9 M 07 Chg (%) 9 M 08 9 M 07 Chg (%) 9 M 08 9 M 07 Chg (%)
---------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Sales 23,379 18,233 28.2% 14,682 13,083 12.2% 9,079 7,826 16.0% 5,545 2,911 90.5% 52,685 42,054 25.3%
Cost of Sales 13,426 11,053 21.5% 9,527 9,887 -3.6% 6,229 5,126 21.5% 3,252 1,805 80.2% 32,252 27,870 16.4%
Gross Profit 9,923 7,180 38.6% 5,155 3,197 61.2% 2,849 2,700 5.5% 2,293 1,100 107.3% 20,250 14,183 42.8%
Distribution Cost 1,923 1,659 15.9% 1,062 981 8.2% 1,083 721 50.2% 247 195 26.8% 4,315 3,556 21.3%
Operating Profit 8,031 5,521 45.4% 4,093 2,215 84.7% 1,616 1,890 -14.5% 2,046 912 124.4% 15,786 10,539 49.8%
Finance Cost 392 455 -13.8% 1,295 554 133.7% 1,905 454 320.0% 653 484 35.0% 4,245 1,946 118.1%
Other Income 1,172 1,070 9.5% 1,612 651 147.5% 1,084 1,062 2.0% 177 54 229.5% 4,044 2,837 42.6%
Profit before Taxation 8,119 5,594 45.1% 4,410 2,313 90.7% 770 2,356 -67.3% 3,351 1,442 132.4% 16,650 11,705 42.2%
Taxation 2,795 1,744 60.3% 1,050 720 45.9% 225 811 -72.2% 634 203 212.3% 4,705 3,478 35.3%
Profit before Tax 5,324 3,850 38.3% 3,359 1,593 110.9% 544 1,545 -64.8% 2,262 935 141.9% 11,489 7,923 45.0%
EPS (PKR) 10.79 7.80 38.3% 15.79 7.48 110.9% 0.58 1.65 -64.8% 20.68 8.55 141.9% 6.57 4,53 45.0%
Gross Margin 43% 30% 35% 24% 31% 34% 41% 38% 38% 34%
Operating Profit Margin 34% 30% 28% 17% 18% 24% 37% 31% 30% 25%
Net Profit Margin 23% 21% 23% 12% 6% 20% 41% 32% 22% 19%
Effective Tax Rate 34% 31% 24% 31% 29% 34% 19% 14% 28% 30%
=====================================================================================================================================================================
Source: Company report, IFSI Research
=====================================================================================================================================================================

RECENT FINANCIAL PERFORMANCE 9MCY08
Engro declared a profit after tax (PAT) of Rs3.36bn in 9MCY08 as compared to PAT of Rs1.59bn in the corresponding period of last year, depicting a gigantic upsurge of 110.93% on YoY basis. Cost of sales decreased by 3.63% during the period, which led to a 61.24% growth in the gross profit over the same period last year. Selling and administrative expenses rose by 8.21%, following a 16.1% YoY rise in S&A exp./ton of fertiliser sold, which was largely due to the high inflationary environment.
Major drivers for growth in earnings include a higher YoY urea and Zarkhez margins. Urea margins increased due to repetitive increases in urea selling prices over the increase in costs while Zarkhez margins improved owing to availability of raw material imported at cheaper rates.
Urea production increased by 6.9% YoY to 740k tons, with cap. utilisation improving by 657bps to 101.2%. Engro urea sales including imported urea at 806 kt, were higher than 2007 by 23% due to higher industry demand resulting in substitution effect from rising DAP prices as well as higher carryover inventory from last year. Engro urea weighted average price of Rs. 593/bag for 2008 was 11% higher vs. 2007. Overall market share in urea business increased to 20% in 9MCY08 from 19% in the SPLY.
Engro also produced 79k tons of Zarkhez during the first nine months of the current calendar year, being 14% below the production achieved during the same period last year. Decline in production was due to slow demand owing to substantial increase in raw material prices leading to similar increases in product selling prices. Moreover, NP margins have increased to 23% for 9MCY08 against 12% in 9MCY07.
In phosphates business, sales volume was 54kt in 2008 compared to 248kt for the same period last year, as a result of lower market demand due to rise in DAP prices. ECPL expects to maintain its 20% market share in this segment.
Overall gross profit margin has improved to 35% for 9M-CY08 as compared to 24% reported for the same period last year. The GPM drivers were i) greater proportion of Engro urea sales (high margin), and ii) improved margins on Zarkhez (NP+NPK) sales owing to low input costs (low cost DAP/MAP).
The most important factor, which caused the bulge in the bottom line, was 147.54% ascent in other income. This was primarily driven by Rs1.2bn dividend income from Engro Eximp. Eximp realised inventory gains of approximately Rs1.2bn during 1QCY08 on the back of availability of DAP imported at cheaper rates. Eximp passed on this realised gain to Engro during this quarter, which as a result substantially boosted tax impact of Rs5.07/share for Engro. Additionally, Enro's share of dividend from EVTL amounted to Rs.157.5mn during the period under review.
The bitter side of the picture was 133.71% increase in the financial charges compared to the corresponding period of last year. This is expected to rise further in the backdrop of rising interest rate scenario and further accumulation of long term debt by the company in order to fund its aggressive growth strategy and investment in subsidiaries. The company also announced a second interim dividend of Rs 2 per share making it a total of Rs 4 per share in the current year.



===========================================================================
(PRs million) 9M/CY 07 9M/CY 08 Chg (%) 3Q/CY 07 3Q/CY 08 Chg (%)
===========================================================================
Sales Revenue 13,083 14,682 12% 4,964 5,858 18%
Cost of Sales 9,887 9,527 -4% 3,785 4,087 8%
Gross Profit 3,197 5,155 61% 1,179 1,771 50%
Sell & Dist. Exp 981 1,062 8% 352 366 4%
Operating Profit 2,215 4,093 85% 827 1,406 70%
Other Income 651 1,612 148% 105 1,368 1200%
Financial Charges 554 1,295 134% 194 728 275%
PBT 2,313 4,410 91% 738 2,045 177%
Tax 720 1,050 46% 248 242 -2%
PAT 1,593 3,359 111% 490 1,803 268%
EPS (PRs) 7.48 15.79 111% 2.30 8.47 268%
===========================================================================
Source: KSE Notice
===========================================================================

FINANCIAL PERFORMANCE (FY02-FY07)
In 2007, the urea production of Engro stood at 954,000 tons, 1.5% lower than FY06 as a result of power outages. The FY06 proved to be a milestone for Engro Chemicals as it achieved its highest ever production and sales level of Engro urea. The production and sales stood at 969,000 tons and 945,000 tons for the year, representing an increase of 6% over FY05 and the company managed to maintain its market share at 19%. The overall sales however declined by 4% because of a decline in Engro Zarkhez sales because of lower acreage of major crops.
Higher capacity utilisation and a capital gain on the sale of land to Engro Asahi led to a rise in gross and net profit margins for FY06. Hence net profit grew at 9.8% for FY06 compared to FY05. Higher dividend income from subsidiaries also contributed to a growth in profits.
Domestic production at 3.49 million tons was marginally lower as compared to the same period of 2006 (3.52 million tons). Urea prices remained higher than FY05, leading once again to higher profit margins. Engro has maintained higher ROA than its competitor throughout the period. However, the company's ROE fell below the industry average in FY06. This may be a result of an increase in equity due to higher retained profits for the year.
The company's historical trend of lower than average inventory turnover continued in FY07. The inventory turnover went against the increasing industry trend in FY06. The oversupply situation in the industry as a result of excessive imports by TCF led to increasing inventory levels in other companies but the level of inventory fell for Engro.
This may be attributed to a 33% decline in sales and a fall in the production of Zarkhez during the year. The company had also increased its imports of DAP in light of the increasing phosphate prices, leading to higher inventory levels in the previous year and as stocks wore out, the inventory levels decreased, leading to a decrease in inventory turnover in FY06. The same trend continued in 1H07 as well.
The DSO has been showing a positive trend for the last three years, rising above the industry average during FY05. The ratio for Engro is now much higher than the industry. The total assets turnover and sales to equity saw a decline in FY06 despite the capacity utilisation of 113% compared to 106% in FY05.
This was a combined result of lower sales, a rise in assets as a result of investment in Engro Foods and higher inventory levels. Capacity utilisation, as discussed before, declined in the first 11 months of 2007, affecting the sales/equity ratio and asset turnover ratios negatively.
The EPS rose in FY07. This was a result of an increase in profit margins overshadowing the increase in the number of shares issued. The book value, however, declined for the year despite an increase in total equity. The DPS declined to 7in FY07 from 11 in FY05
The liquidity position of Engro has fluctuated over the last few years, all the while remaining below the industry average. In FY06, the current ratio registered a decline; however, it was in FY07 that Engro managed to catch up with its rivals. From FY05 onwards, Engro has consistently posted a decline in its current ratio, which still stood above 1.
It, however, improved its liquidity position tremendously in FY07 owing to a drastic increase in inventory in the wake of an excessive supply condition faced by the whole industry. This glut is expected to get absorbed in the forthcoming Rabi season which will have a positive impact on the next annual results.
The lower than average debt to asset and debt to equity ratios indicate a lower level of debt financing at Engro compared to its major rivals. However, despite its lower level of gearing, Engro has historically lagged behind the industry average in terms of TIE; however, it managed to outdo the industry even as an increase in financial charges caused a decline in the TIE.
The long-term debt to equity has also remained below the average throughout the five-year period under review. Debt financing, mainly the long term debt financing has, however, taken an upturn as evident from FY07 figures.
FUTURE OUTLOOK
Fertiliser industry is an ally of agriculture sector. The profitability of fertiliser sector solely depends upon the domestic agri product and internationally dictated prices of essential inputs. In the last couple of years, there has been a constant rise in prices of fertilisers, which are adversely affecting the domestic demand. Measures have been taken to increase domestic fertiliser demand by government like increased disbursements to farmers to enhance their purchasing power, better support prices of wheat, water availability and reduction of GST on imported Urea from 5 percent to zero-percent and duty on agricultural tractors has also been brought down from 20 percent to 15 percent. Furthermore, subsidies absorb the final impact of sky high prices.
With projected domestic production, availability would be comfortable up to October 2008. Additional imports of about 450k tons would be needed in order to improve the situation during Nov'08 to Jan'09 to guard against any shortages during the second applications of urea on wheat crop. Currently, government is importing Urea from Saudi Arabia. These measures will absorb the most of the impact of uninterrupted price surge of fertilizers in international market thus stimulating the domestic demand. Going forward, the urea prices are expected to continue its increasing trend in future on the back of higher demand and shortage of availability.
As far as phosphatic fertilisers are concerned, the projected off-take of the DAP is 850k tons as against the 985k tons of availability, thus the availability appears to be satisfactory. With DAP subsidy now fixed at PKR 2,200/bag and international prices easing out to $900/MT in September, demand is likely to pick up during Rabi sowing season in Q4'08. DAP prices are expected to prevail at current levels with manufacturers being the major beneficiary from volumetric growth in the medium term.
Despite the falling KSE indices, the share price of Engro hovered at an average of Rs.272.65 in the first 9 months of FY08, which shows the stability and the investor's confidence on Engro.
Engro has planned an expansion project that will cost an approximate USD 1,000,000 and will have a capacity of 1.3 million tons of urea per annum. If this project gets operational on time then a very profitable future awaits for Engro. In the long run two new fertilizers plants will be on line by the year 2010 which will suffice the domestic need and may affect existing player's profitability.
Considering the recent devaluation of Pak rupee against the US dollar (rupee depreciated by 32% during the 9MCY08), the company's management believes that the fertiliser expansion cost would escalate by $50mn. The project was initially estimated to $1bn. Management maintains that its euro to dollar exposure (the plant installation payments will be made in euro) is completely hedged while major portion of its Rupee to Dollar portion is also hedged. However there is some Rupee to Dollar exposure unhedged which could result in cost increases going forward. On the flip side, strong pricing power in urea business should enable the company to mitigate these risks, along with USD-based income of Engro Energy and Engro Vopak.



===================================================================================================================
ENGRO CHEMICALS PAKISTAN LIMITED
===================================================================================================================
INCOME STATEMENT FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
(Rs in '000)
-------------------------------------------------------------------------------------------------------------------
Net Sales 10,893,319 12,173,006 12,797,662 18,276,277 17,601,783 23,183,222
-------------------------------------------------------------------------------------------------------------------
ENGRO CHEMICALS PAKISTAN LIMITED
-------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
(Rs in '000)
-------------------------------------------------------------------------------------------------------------------
Net Sales 10,893,319 12,173,006 12,797,662 18,276,277 17,601,783 23,183,222
Cost of Sales (7,343,132) (8,309,937) (9,528,215) (14,364,288) (13,364,524)(18,262,793)
Gross Profit 3,550,187 3,863,069 3,269,447 3,911,989 4,237,259 4,920,429
Selling & Dist expenses 1,233,089 1,328,731 (1,036,509) (1,270,703) (1,481,730) (1,641,724)
Other income 231,398 392,093 558,154 1,144,987 1,338,854 1,831,260
Financial and other charges (575,510) (371,810) (285,711) (280,070) (362,551) (535,023)
Taxation (702,562) (766,468) (704,478) (900,469) (897,330) 1,080,929)
Profit after tax 1,133,163 1,556,783 1,610,575 2,319,082 2,547,326 3,154,583
-------------------------------------------------------------------------------------------------------------------
BALANCE SHEET FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
(Rs in '000)
-------------------------------------------------------------------------------------------------------------------
Share Capital 1,390,364 1,529,400 1,529,400 1,529,400 1,682,340 3,000,000
Reserves-revenue 3,794,240 4,129,240 4,429,240 4,429,240 4,429,240 4,429,240
Total Equity 5,330,276 6,198,829 6,585,884 7,375,566 9,370,097 15,481,917
Non Current Liabilities 4,368,340 4,272,111 3,614,324 3,935,970 2,968,304 17,410,060
Current Liabilities 4,585,096 2,394,057 2,985,149 2,800,094 3,642,415 5,264,674
Total Liabilities 8,953,436 6,666,168 6,599,473 6,736,064 6,610,719 22,674,734
Fixed Assets 7,194,577 7,175,581 7,106,268 6,861,676 6,575,665 13,811,683
Long Term Investments 1,340,000 1,424,557 1,424,557 2,172,757 3,657,596 7,764,482
Current Assets 5,408,306 4,189,636 4,602,604 5,011,555 5,684,446 16,397,198
Total Assets 14,283,712 12,864,997 13,185,357 14,111,630 15,980,816 38,156,651
-------------------------------------------------------------------------------------------------------------------
ASSET MANAGEMENT FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
Days Sales Outstanding 17 19 15 11 19 22
Inventory Turnover Days 45 28 30 51 99 53
Operating Cycle 63 47 45 62 119 75
Total Assets Turnover 1 1 1 1 1 61%
Sales/Equity 2 2 2 2 2 150%
-------------------------------------------------------------------------------------------------------------------
DEBT MANAGEMENT FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
Total Debt to Total Assets 0.6 0.5 0.5 0.5 0.5 0.6
Total Debt to Total Equity 1.7 1.1 1.0 0.9 0.9 1.5
Times-Interest-Earned (TIE) 4.4 5.2 6.6 9.3 8.0 6.9
Long term Debt to Equity 0.8 0.7 0.5 0.5 0.4 1.1
-------------------------------------------------------------------------------------------------------------------
PROFITABILITY FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
Net Profit Margin 10% 13% 13% 13% 14% 14%
Gross Profit Margin 33% 32% 26% 21% 27% 21%
Return on Assets 8% 12% 12% 16% 11% 8%
Return on Equity 21% 25% 24% 31% 22% 20%
-------------------------------------------------------------------------------------------------------------------
LIQUIDITY FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
Current 1.2 1.8 1.5 1.8 1.6 3.1
-------------------------------------------------------------------------------------------------------------------
MARKET VALUE FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
Earnings per Share 8 10 11 15 15 17
Price/Earnings(P/E) 8 8 9 9 12 14
Book Value/Share 38 41 43 48 56 52
Dividend Per Share 8 8 9 11 9 7
Cost of Sales (7,343,132) (8,309,937) (9,528,215) (14,364,288) (13,364,524)(18,262,793)
Gross Profit 3,550,187 3,863,069 3,269,447 3,911,989 4,237,259 4,920,429
Selling & Dist expenses 1,233,089 1,328,731 (1,036,509) (1,270,703) (1,481,730) (1,641,724)
Other income 231,398 392,093 558,154 1,144,987 1,338,854 1,831,260
Financial and other charges (575,510) (371,810) (285,711) (280,070) (362,551) (535,023)
Taxation (702,562) (766,468) (704,478) (900,469) (897,330) (1,080,929)
Profit after tax 1,133,163 1,556,783 1,610,575 2,319,082 2,547,326 3,154,583
-------------------------------------------------------------------------------------------------------------------
BALANCE SHEET FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
(Rs in '000)
-------------------------------------------------------------------------------------------------------------------
Share Capital 1,390,364 1,529,400 1,529,400 1,529,400 1,682,340 3,000,000
Reserves-revenue 3,794,240 4,129,240 4,429,240 4,429,240 4,429,240 4,429,240
Total Equity 5,330,276 6,198,829 6,585,884 7,375,566 9,370,097 15,481,917
Non Current Liabilities 4,368,340 4,272,111 3,614,324 3,935,970 2,968,304 17,410,060
Current Liabilities 4,585,096 2,394,057 2,985,149 2,800,094 3,642,415 5,264,674
Total Liabilities 8,953,436 6,666,168 6,599,473 6,736,064 6,610,719 22,674,734
Fixed Assets 7,194,577 7,175,581 7,106,268 6,861,676 6,575,665 13,811,683
Long Term Investments 1,340,000 1,424,557 1,424,557 2,172,757 3,657,596 7,764,482
Current Assets 5,408,306 4,189,636 4,602,604 5,011,555 5,684,446 16,397,198
Total Assets 14,283,712 12,864,997 13,185,357 14,111,630 15,980,816 38,156,651
-------------------------------------------------------------------------------------------------------------------
ASSET MANAGEMENT FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
Days Sales Outstanding 17 19 15 11 19 22
Inventory Turnover Days 45 28 30 51 99 53
Operating Cycle 63 47 45 62 119 75
Total Assets Turnover 1 1 1 1 1 61%
Sales/Equity 2 2 2 2 2 150%
-------------------------------------------------------------------------------------------------------------------
DEBT MANAGEMENT FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
Total Debt to Total Assets 0.6 0.5 0.5 0.5 0.5 0.6
Total Debt to Total Equity 1.7 1.1 1.0 0.9 0.9 1.5
Times-Interest-Earned (TIE) 4.4 5.2 6.6 9.3 8.0 6.9
Long term Debt to Equity 0.8 0.7 0.5 0.5 0.4 1.1
-------------------------------------------------------------------------------------------------------------------
PROFITABILITY FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
Net Profit Margin 10% 13% 13% 13% 14% 14%
Gross Profit Margin 33% 32% 26% 21% 27% 21%
Return on Assets 8% 12% 12% 16% 11% 8%
Return on Equity 21% 25% 24% 31% 22% 20%
-------------------------------------------------------------------------------------------------------------------
LIQUIDITY FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
Current 1.2 1.8 1.5 1.8 1.6 3.1
-------------------------------------------------------------------------------------------------------------------
MARKET VALUE FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
-------------------------------------------------------------------------------------------------------------------
Earnings per Share 8 10 11 15 15 17
Price/Earnings(P/E) 8 8 9 9 12 14
Book Value/Share 38 41 43 48 56 52
Dividend Per Share 8 8 9 11 9 7
===================================================================================================================

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
Copyright Business Recorder, 2008

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