Q3 2019 Earnings Call
Good morning, and welcome to the venture Holdings third quarter 2019 earnings Conference call. Today's call is being recorded. It then we have to allocated time for prepared remarks, and keeping me.
This time I would like to turn the conference over to Cardinal Denny and Investor Relations I talk with venture. Thank you. Please go ahead.
Thank you operator, good morning, everyone. We released our earnings press release, this morning, and posted a slide presentation to the Investor Relations section of our web site at investors Dot Aquaventure Dot com, we will be referencing the slides during this call president on today's call, our Tony a bargain Chief Executive Officer.
Lee Miller, Chief Financial Officer, and Doug Brown Chairman of the board.
Before you again, let me remind everyone that this call will contain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act at 1995.
There are many risks uncertainties and other factors that could cause actual results could differ materially from those indicated or implied by such forward looking statements.
Please refer to our FCC filings for a discussion of such risks uncertainties and other factors, we do not undertake any duty to update any such forward looking statements.
In addition, during today's call, we will discuss non-GAAP measures and other key metrics, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of the non-GAAP measures to the most comparable GAAP measure can be found.
In our earnings release, I would now like to turn the call over to our Chief Executive Officer, Tony Apart when.
Good morning, and thank you for joining us on todays call I'd like to start todays call by commenting on Aquaventure is overall performance in the third quarter of 2019.
Including both financial and operating highlights Lee will then walk you through our financial results in more detail and I'll return to provide an update on our outlook for 2019, and some closing remarks, finally, Douglas and I would be happy to take your questions.
Starting on slide three Aquaventure had another excellent quarter with total revenues of $52.9 million, representing a 43.8% year over year increase this increase was comprised of 10.5% organic growth and 33.3% inorganic growth.
Affecting our continued strong organic performance and the successful integration of our strategic acquisitions over the past year.
We reported adjusted EBITDA of $20.4 million during the third quarter 2019.
60.5% increase over the prior year period, and adjusted EBITDA margin of 38.4% of 400 basis points improvement.
Adjusted EBITDA plus principal collected was 21.7 million for the third quarter, a 55.9% increase year over year.
Moving to slide four we recently announced two acquisitions on October Onest Murex Aqua pure solutions based in Houston, Texas and flow line, Canada base in Edmonton, Canada.
Directs was an early adopter of cross selling ice dispensers into current bottomless water cooler accounts and delivers high quality service at above average rental rates. It was in business for over 20 years and built up a loyal customer base on a top five U.S. Metro area.
Well line, which was a blue line dealer expands our presence in a top 10 Canadian market and once again demonstrates the value of providing our indirect dealer network with attractive exit opportunities.
Both of these acquisitions increased our customer density in important markets, enabling margin expansion and improve customer service.
We've now completed an integrated for acquisitions in 2019, including I come in at Carlin, a pure water systems, which we discussed on our last earnings call.
These four acquisitions were completed for approximately $21.3 million an aggregate consideration at approximately 5.4 times adjusted EBITDA and added approximately 7600 rental units to quenches installed base, which brings quenches total installed asset based on more than 155000 company.
Owned rental units.
Lastly, we want to highlight quenches recent announcement of quench water plus a branded electrolyte and mineral infused water produced by state of the our proprietary filtration technology to remove contaminants in bad taste, while adding alkalinity to create amazing tasting water wastewater plus is available across the U.S. in kind.
But in quench Q series water dispensers, and we believe will further differentiate our offerings from the competition.
In our seven seas water segment were pleased to report that are you see wastewater treatment lease portfolio and pipeline of signed but not building leases continues to grow according to plan.
An active lease portfolio as of September Thirtyth of 102 plants up 23% from the 83 plants at the time of the acquisition one year ago and up from 97 plants as of June 32019, we're really excited about the upside potential of this business and its leadership team's ability.
I'd to develop new business at a healthy pace.
Within our desalination business as previously announced we're happy to close a nine year extension and amendment of our agreement with the Emerald Bay development and great Zuma in the Bahamas, our relationship with is valued customer, whom we observed since 2009, well now be extended through at least 2028.
This is the second contract extension, we've completed this year.
I recall that in March we extended our agreement with line treat Bay terminals in the U.S. Virgin Islands by an incremental three years to 2024 and also secured a contract to increase our water production capacity by an additional million gallons per day, using both existing and new equipment and we're pleased to announce today.
Hey that we've completed that capacity expansion as of November 1st.
In addition, we also recently completed an expansion of our and we'll operations as a reminder, when we first entered into this agreement late last year. It was to supply 500000 gallons of water per day with the ability to expand up to a million gallons per day upon request with the customer. We're excited to announce that we are currently supplying water at the.
A million gallons per day rate and are happy to be an even more significant part of the water supply for the people of Angola.
Lastly, with respect to our contract and Curacao not much has changed since our last discussion.
The local press has reported that the owner of the refineries engaged with certain parties to potentially take over refinery operations from the current operator I'd have Esa.
If another party is selected we would look to engage with them as a potential water provider at this time. However, we intend to continue to deliver our customary high levels of service, where the duration of our contract and potentially beyond if requested by the refinery.
With that I'll turn it over to lead to talk about our financial highlights in more detail.
Thanks, Tony as Tony mentioned, we're pleased to report another strong quarter with significant year over year revenue and adjusted EBITDA growth in both segments.
On slide five seven seas water reported revenues of $22.2 million during the third quarter of 2019, 42.5% increase over the prior year. The increase was primarily driven by our inorganic activities, including the acquisition of the are you see operations and the commencement of our water country.
In fact in Angola.
Gross margin of 51.5% decline compared to 56.6% in the prior year period, primarily driven by the inclusion of are you see operations, which has a overall lower gross margin profile than the rest of seven seas water.
Wherever further impacting the gross margin of our waste water treatment operations in the third quarter was $700000 of additional depreciation expense on property plant and equipment related to the finalization of purchase accounting for the acquisition.
On a year to date basis, seven seas waters gross margin was 54.3%, which we believe is more indicative of the normalized margin given the timing of repairs and maintenance activities that can impact individual quarters and the previously mentioned valuation adjustment.
Adjusted EBITDA of $11.9 million for the third quarter of 2019 increased 54.7% over Q3, 2018, and adjusted EBITDA margin of 53.4% reflected an increase of 420 basis points over the prior year finally adjusted EBIT.
Plus principal collected increased 48.3% to $13.2 million in the third quarter.
Turning to quench results on slide six quench reported revenues of $30.7 million in the third quarter of 44.7% increase over Q3 2018. This increase included organic growth of 18.2% into third quarter, which was driven by strong performance in both the direct.
Rental and indirect businesses inorganic growth was 26.5% over the prior year period bolstered by the Phs site and Blue light acquisitions in December 2018, and the more recent Aquaman and Carolina pure acquisitions in 2019.
Inches gross margin of 48.9% decreased from 51% in the prior year period, largely due to elevated depreciation and amortization expense related to higher rental revenues. However, if you exclude depreciation and amortization expense from the cost of revenues our rental gross margin increased.
For Q3, 2019 compared to the prior year quarter product sales gross margin of 39.5% continues to show improvement over the prior year.
Adjusted EBITDA of $9.4 million for Q3, 2019 was 63.8% increase over the prior year and adjusted EBITDA margin of 30.6% reflected margin expansion of 360 basis points. This margin expansion is supported by the further leveraging of our platform.
As we increased customer density and grow revenues without commensurately, increasing our costs.
Further demonstration of this increased operating leverage is the 710 basis point decrease in SGN eight cost as a percentage of revenue when compared to the prior year period.
On slide seven I'd like to provide a brief update on select balance sheet and cash flow items as of September Thirtyth 2019, cash cash equivalents unrestricted cash was $113.8 million and our total debt was $317.6 million, resulting in net debt.
<unk> $3.8 billion.
This includes the net cash proceeds of approximately $75 million from the completion of our first follow on offering in July issuing 4.7 million ordinary shares, including the exercise of the underwriters option.
Our current net debt leverage ratio is now approximately 2.7 times on a trailing 12 month basis.
The first nine months of 2019, we generated operating cash flow of $20.2 million as compared to $22 million in the prior year period. This decrease is largely due to higher working capital needs to fund our substantial growth specifically that 15.3% year to date organic growth.
That quench higher cash interest expense related to the 150 million dollar flex of our corporate credit facility late last year and the adoption of the new lease accounting standard, which recategorized certain costs from investing activities to operating activities for new leases entered into in 2019.
Capital expenditures of $28.6 million for the nine months ended September Thirtyth 2019 were $15.7 million higher than the prior year period, which was primarily due to supporting the growth of our waste water treatment business as well as the growth related activities within the desalination business mentioned.
And earlier related to volume capacity expansions. Please keep in mind that our capital expenditures are primarily growth related which in turn are expected to generate incremental revenue adjusted EBITDA and operating cash flow for the company in future periods.
We'll now turn it over to Tony to discuss our outlook and provide closing remarks, thankfully turning to slide eight our robust organic performance and the effective integration of acquired businesses has driven consistently strong results throughout 2019, So we're increasing our guidance expectations for the full year 2019.
We now anticipate that total revenues will be in a range of $197 million to $201 million adjusted EBITDA will be $72 million to $75 million and adjusted EBITDA, plus principal collected will be $77 million to $80 million.
As a reminder, this outlook includes all completed acquisitions to date, including the two quench acquisitions announced on October Onest, but excludes the impact of any future projected acquisitions.
Closing our strong performance throughout the first three quarters of 2019 has continued to exceed expectations are strong and growing company owned water purification assets portfolio produces consistent results based on the contractually recurring nature of the revenue it generates.
We look forward to seeing this trend continue into deploying the proceeds from our follow on offering into our active pipeline of growth opportunities across both segments.
We have of our executive team and board of directors, we'd like to thank our dedicated employees across the world.
On behalf of all of them. We thank you for your continued interest and support as we remain committed to our mission of delivering solid results for our shareholders and creating clean water solutions for customers around the world.
With that operator, please open the line for questions.
Certainly sir.
Well now begin the question answer session joined the question could you you May Press Star then one on your telephone keypad.
You will hear a tolling acknowledging your request.
If you're using a speakerphone please pick up your handset before making any key draw. Your question. Please press Star then too.
We will pause for a moment as college trying to Q.
The first question comes from Andrew Kaplowitz of Citi. Please go ahead.
Hey, good morning, guys.
Good morning.
Tony Little Radisson to declare that organic growth kleinschmidt sustained double digit growth moving forward, but organic margins continue to accelerate here over the last few quarters now up high teens. It seems like your indirect international related sales and your specialty sales [laughter] sparkling ice [laughter] I've been the main driver.
Very solid core growth.
How sustainable are these drivers on are you ready to say claims could grow double digit organically and 20 point.
Yes, Great question, Andy I know, it's starting to stream credibility here.
And the gang here.
Jeremy of being.
Yeah, well listen it's a.
Here's the thing our rental business really the core business continues to be it was in the nines. This quarter. So it's growing dynamically the team is really doing a great job of.
Cross selling and upselling customers and gaining new customers out there. So we're really doing a great job, but the it's the indirect business that.
That is not as predictable it's not a contractually recurring we have great dealers out there who are killing it and doing a great job.
But we're still reluctant to call that as a consistent double digit growth. It is it is probably going to continue in the fourth quarter.
In that direction, but about for 2020 were not quite ready to do that and I still think the rental business is one that.
His best called as a.
Mid to high single digits, maybe maybe a little bit more on the higher side of that as we're seeing the market really move in our direction.
Got it that's helpful called me and then maybe just.
Building off that thinking about 20, Twond military to give guidance, we've just talked about clients, but you've got teach inside I see that's going to become organic here as you go on the 2027 seas side looks pretty stable X curious so when you think about deploying 20 at this point can you.
We'll grow EBITDA, even a few carousel contract right now.
That would be the plan that would be the plan I think we see quench continuing to look at.
That mid to maybe higher single digit number consistently eight you see as you heard has been pretty much spot on with the acquisition model in plan from a year ago, and we continue to see great opportunities. The team there is really.
Hitting on all on all cylinders.
And then a across the board at seven fees. We you know we see these opportunities here and there for smaller extensions expansions and and hope that that will continue next year, what's unpredictable courses volume and and tourism and things like that.
And the pipeline of M&A is looking good, but we can't call that either so there's a there's certainly the potential with curacao, if it does drop out for us to.
I have to work a little bit harder to get back to positive, but but that's our expectation that the momentum again, we wouldn't give guidance until.
Our Q4 call, but but I think it's reasonable to assume that that's what we're shooting for.
Thanks, Clay and then just one more on AMC. It seems like you're making good progress as you just talk about you know you act on leases are up.
You gave guidance I think earlier this year that 13 to 15 million adjusted EBITDA and then mid teens growth in 2020 off that EBITDA is that there's still on track for that.
Randy It's Doug.
That guidance is still we're still sticking with it.
[noise] easy enough thanks, guys.
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Okay. Thanks.
The next question comes from Deane Dray of RBC capital markets. Please go ahead.
Thank you good morning, everyone.
Good morning.
Hey.
I'm not sure you disclosed the terms of the Bahamas extension, but anytime we have seen needs in the past few typically have a modest price concession for increase in volume it ends up being a win win for everyone.
Is that pattern here evident and the Bahamas expansion too.
Yeah small price concessions.
But it doesn't really have a meaningful impact for us, but we've got the extra nine years.
Good and just remind us what and order of near term, where there are extensions coming up.
Oh.
Probably the nearest.
As in 2024 as long true.
2025.
And Steve Martin those are the two on the short term horizon, our expectation in lime tree for sure is that.
They only wanted to sign of 0.5 year contract.
But that plans is gonna stay there there's no transfer of equipment at the end of that contract. So are we have a full expectation and after that that gets rolled over five years, and we have a history of getting extensions and see Martin.
Volumes increase so.
We're pretty confident that we'll be able to roll that too.
Good to hear and then on Dee Ann will extension.
It was an uncertain at the time, what the natural demand would be for water since they had been ration for so long. So I'd add a million gallons are you at that level. Yet do you think the natural demand is higher and what can they capacity be at that plant.
Yeah.
So that plant that a million gallons today is at its pretty much design Max we still believe there's additional demand on the island or there are additional conversations that we're having to find ways to meet the additional demand.
Got it and then just last one for me on eight you see yes, the stay great to see that continued lease growth there.
Still watching for any signs that there might be so product extensions of using membranes.
And that would be for the waste water side or is there a is that being looked at any pilot programs what might the timeframe Bay.
But we already have not through as you see but through our own seven seas business, we have a waste water plants that incorporates membrane bio reactors.
We obviously are working with what you see looking at more membrane intensive.
Applications were opportunities.
And.
And so we've got a number that are out there there were working on but we haven't.
Screw or you see we havent signed any yet so it's more conventional waste water treatment, but we're looking at that opportunity.
Certainly when you get into at least one whose.
When you get into waste water reuse Dean Ah theres more probable higher probability that membranes will be required.
Absolutely and congrats on the quarter. Thank you.
Thanks, Steve.
The next question comes from Rob Brown of Lake Street Capital markets. Please go ahead.
Good morning.
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So with that you see Rob.
Sticking with that you see could you maybe give.
Some color on some of the growth drivers and what's really driving that market and how you see that playing out over the next few years is that.
Should that continue.
Yeah the.
The residential market in and around Houston has been the core historically for the growth of eight you see that continues to be the primary driver and housing starts continue to be strong in that area.
As sort of an indicator of continued potential growth.
Into 2020 and beyond.
But we've increasingly turned attention and focus to other markets in Texas as well as other markets that I've comparable economic and housing growth potential in circumstances in the southwest and southeast.
We have also the the bypass service a modular temporary bypass solution built using the same fundamental technology that we use for our modular wastewater treatment plants and and that's been quite popular as well.
And is also great way of diversifying the revenue there so.
Generally speaking that has the drivers have been consistent and predictable and we don't see anything on the horizon right now that will interrupt that going forward.
I'd add Rob that the concept.
Urban sprawl is the thing that really leads you to decentralize wastewater plans because as these developments get farther and farther away from city centers, it's harder and harder to pipe the sewage to a centralized.
Water wastewater treatment plant.
And that encourages the use of these to decentralize plants and so I think that there is a in general if you look at the market as a whole de centralized plants is.
Becoming taking a bigger and bigger percentage of the wastewater treatment.
Plants.
Okay, great and maybe on the Capex expectations for that for this year in a kind of growth.
It's sort of what are your capex expectations.
Yes, so so.
We are remember most of our Capex if not all of our Capex is growth related and we've had a lot of gross capex spent this year our expectation is around too just to finish the year at around 30 million of Capex, maybe a little bit higher.
Maybe a little bit higher like around 30 537 million up capex spend.
Okay, great. Thank you ill turn it over and typically.
We typically 80% of that or so is.
New growth assets right. So these are new.
Hey, you see wastewater plants or new quench watercolors that are put in.
Or now this year and a couple of cases, new seven seas plant capacity. So that's good capex that will drive revenue and EBITDA in future years.
And then the balance tends to be more on the maintenance side.
The next question comes from Chip Moore of Canaccord Genuity. Please go ahead.
Good morning, Hey, guys congrats on a strong results.
Thanks.
I think of drilling.
Tony a bit on quench some some phenomenal DNA leveraged maybe can talk about.
Anything specific.
You're doing are learning, there and how you're thinking about a trajectory.
Leverage for that.
Yes, thanks, no that that was.
Always the plan and a this happened to be one of those quarters, where given the dynamic growth.
Both organic and the acquisitions, we were able to start to see some of that a trickle all the way through.
That does that should continue that is the operating leverage that we've always loved about this business between the sticky contractual revenue and the fact that.
You know we've invested in buildings scaling this business for the better part of the last decade to be able to be the one consistent fully integrated national provider of the services, but that has required significant build out of a centralized and de centralized support infrastructure.
There are still opportunities for us to get even more leverage as we look forward right now we're in the middle of putting in place a revamp of our national distribution infrastructure.
But on the corporate back office on the Jna side in particular.
Given the implementation of some new cloud based I T systems over the past several years, we're starting to see that really come through so I would say.
You know we at the beginning of the at the end of last year were running in the mid Twentys and EBITDA margins now this quarter were at 30.
And that might you know float a little bit quarter to quarter into the high 20, nines low low thirtys, but we would expect that to continue to grow.
As the topline growth.
That's great.
You talked about some of the newer products. The quench water plots can you just talked about early receptivity and thoughts on Asps over time as you roll out some of this.
No products.
Yeah that that is the key that will be the measure its little bit early we just we just launched it but met with great enthusiasm. It is a differentiator we're starting to.
Having now established the national footprint and a gain access to more and more larger national accounts are starting to leverage branding.
John Whalen, our head of sales Lisa Gill head of marketing and have done a great job starting to get creative and innovate. So that we're not just the next to me to cooler provider and being able to provide consistent water around the country that we know has an incredible taste and isn't.
Really clean alkaline ph balance water or something the whole team is very excited about and early reception has been very strong.
Ultimately the measure will be the ASV as you said and yes, we would expect that we'll be able to get a very high return for a small incremental cost in the filtration equipment.
We'll be getting rents that will be significantly higher than units without this kind of filtration.
Great and maybe one last one for me.
You know maybe you can expand on the pipeline across the portfolio here at 2.7 times, maybe into next year or whether that's quench.
Bolt ons from your dealer network or or or assets for seven seas. Thanks, guys.
Yeah, I'll cover quench and then maybe Doug can comment a little bit on the seven seas pipeline. The the quench pipeline continues to be strong for deals. So far this year, we have a pretty steady drumbeat. This is no different than you would've heard me say in any prior quarter at any point in time, there are a handful.
Of entrepreneurs, who are considering.
The possibility of or doing something else are joining our team or taking some chips off the table.
We as you know are quite opportunistic about this we certainly have targeted strategic conversations with certain of our dealers and others.
Participate as competitors in the market, but we're also Oh, we welcome doing this on their timetable.
We're at over 275 dealers now and so at any point in time, there's always a series of conversations happening that gives us great confidence that we can continue at least at the pace that were on if not a but a bit faster as we go forward so more to come on that I think.
On the seven seas side, we still we've been expanding our pipeline we feel like it's.
It's in.
Better shape than it's been.
In the past, though these deals do take longer they're bigger.
And you know there typically.
You know talking about five to 10 million of EBITDA for an acquisition. So they do take a bit longer and when we get into markets that are outside the U.S. with a lot of these are.
It's not only due diligence and negotiation if your purchase agreements, but then we have to deal with I FRS restatement of accounts to fit with our accounting and reporting requirements and that just serves to drag things out a little bit longer.
But we're very confident we're getting very close and looking forward to a.
The new year.
Alright, great will stay too thanks.
Thanks, Jeff.
The next question comes from Pavel Molchanov of Raymond James. Please go ahead.
Thanks for taking my question odd just a bit of a housekeeping on on the guidance if I plug in the updated.
Revenue.
EBITDA range is it looks like Q4 will be down from Q3 on both revenue and EBITDA is that is that an accurate statement.
That is an accurate statement is correct yeah.
And you know is this.
Some parts of our business has some variability Q4 can be a softer.
And.
And so.
We.
Not these would be a a fair update to the ranges that we had provided previously and obviously it would be our hope and expectation to.
Exceed them by the time, it's all said and done.
Understood. That's good to hear let me ask kind of a broader question on.
On de Sal.
We've talked a lot over the past year and earlier about M&A opportunities for you to by.
Existing detailed plans I'm curious.
Are you seeing any new build.
Opportunities, which no years ago before the company was even public I think was was a pretty central part of your.
Of the seven seas growth strategy, creating new build detailed plans, but we haven't really seen that in recent years.
Are there are still newbuilds, we refer them as greenfields.
In our pipeline.
I'll be honest if you look at our pipeline is probably 25% to 30% Greenfield.
70% to 75% brownfield acquisitions.
And that's just because the population of existing VSOE plants far exceeds the number of open an RFP is outstanding for Greenfield projects. So.
There's just a bigger universe to pick from on the brownfield side.
And but we still do have greenfields that we look at and and pursue.
Although we think our strategic advantage and our competitive advantage is greater in the brownfield site.
Got it Okay. That's helpful. I appreciate it.
Thanks, Paul.
The next question comes from Jeff Van Sinderen of B. Riley. Please go ahead.
Yeah.
Good morning, just a follow up on on the pipeline I understand it's tough to kind of predict acquisitions, but relative to the acquisition pipeline.
You know understanding over deals to try and you should be pretty much crushing yet on the ocwen decide just looking on the seven seas side, putting aside Guyana does it seem to be getting generally easier or tougher to find a consummate attractive deals or would you say, it's pretty much status quo.
If I looked at the type one and the development of the pipeline.
We're seeing more opportunities Oh, we closed the are you see acquisition in November of last year, we feel like we're very close on a couple of items, which we haven't.
Can't talk about until they're done.
I think it's historically, we've said probably on the seven seas side, it's better to think of maybe a one significant deal every 12 to 18 months and then maybe one smaller deal every 12 to 18 months.
Whereas whereas quench has.
A much more active pipeline with all of their dealer networks.
There you have network so.
I wouldn't say, it's getting any easier I don't think it's getting harder I'd say, we're just we're we've got more resources focused on it and so we're able to process more opportunities.
Okay, and then that's fair enough and then I hate to see business, just wonder I mean that business has been trending really well for you.
Any thoughts on the gross margin outlook. There are you seeing opportunities or do you think it's pretty much steady state.
Yes.
As a lease portfolio increases the gross margin should be increasing because the lease portfolio as a.
Oh, almost 100% margin there is some.
Billing and collection cost associated with those leases, but that's a.
Ah Theres no operating cost associated with them so.
As that lease portfolio increases the margins should continue to increase.
And that generally is our plan right that that lease portfolio should should grow the.
We certainly are responding to and still deliver on planned sales.
If and when that is the best solution for our developer customer.
But that business tends to grow a little bit slower than we would expect police business to grow so yes, you'll you'll see that gross margin go up.
Okay, great. Thanks and continued success.
Thank you Jeff.
This concludes the question answer session I would now like to turn the conference back over to Mr., Tony bargain for any closing remarks.
Thank you thanks, everyone for your time and attention. This morning again, we're really thrilled with.
The results that were able to deliver for our shareholders and once again want to thank all of our great employees and partners around the world without whom we could not deliver these results. So thanks, and we'll talk to you next quarter.
This concludes todays conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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