Q3 2020 Earnings Call
Outlived today and should not be relied upon as representing the company's views of any subsequent things.
Results could differ materially from those bored looking statement.
Additional information on factors that could cause actual results on other events to different materially from those forward looking statements is available and the company's press release and public filing.
On today's color management will also you certain nongaap financial measures, including a drop me, but that and a justice he but on margin and assessing the companies operating performance.
Reconciliation abuse non got financial measures to their most directly comparable doubt measures is also included in the company that's really.
I will now trying to call overseas overall overall. Please go ahead.
<unk> Rachel good afternoon, everyone.
Thanks for joining us we hope you and your families are safe and healthy.
It's gotten tired together at a former rather support center.
Missing social distancing, which safety in mind.
On or cold today.
I'll discuss our response to the covert 19, <unk> and how we're managing our business through the crisis.
And it's got we'll discuss our third quarter results in detail and provide an update on how we're managing or liquidity in capital during this time.
Then, we'll we'll take your questions.
First on behalf of our team here former brothers I'd like to express our deepest <unk> for those affected by code 19.
We appreciate the work being done by first responders health care workers and others on the front lawn <unk>.
Also want to take this opportunity to recognize the efforts of our team members, who were ensuring that we continue to spot coffee and other products for our customers and consumers.
This is a challenging time and we appreciate their dedication.
As the covert 19 outbreak was declared a global pandemic in March and state and local governments here in the U.S. began to issue stay at home orders amending closure not a central businesses, we move rapidly to address challenges and adaptor operation to new ways of working.
Spot to this crisis has been focused on three priorities.
Burst.
Protecting the health and safety of are employed in our customers.
Second taking actions preserve liquidity and support the long term sustainability over businesses and third managing our business through this time, which is meant supporting some of our customers who have faced unprecedented demand as well as accelerating strategies that would enable us to quickly take advantage of new sales.
Opportunities.
When there is a crisis like coven 19, the power of our team working together under the absolute pressure that we must do something trumps changes.
Management and culture.
We've had to make some tough decisions, but our team has come together as needed and I believe we will emerge stronger company wants to country fully reopened and we see our D.S.D. volumes start to return to pre covert levels.
The safety and health of our Farmer brothers team members is our top priority in operating our businesses <unk>. We have followed guidelines issued by the U.S. centers for disease control them prevention as well as state and local health authorities.
Or team members working in manufacturing distribution in other areas that require them to report to work on one side or following in here and safety guidelines.
As appropriate five facility. These guidelines included combination of facility cleaning.
Temperature checks personal protection equipment. So so this is seen staggered shift to reduce the number of associates on side at any given time.
And self quarantine, if an associate we'll find a number of sick.
In addition, we implemented remote work 14 members able to do so and suspended.
In person meetings and visitors to our headquarters in other sites.
We have now become.
Very good video conferences, and utilizing technology to communicate to all of our team members across the country.
Before I discuss the actions were taking to support the long term sustainability over business and how we are managing our business through this time.
I'd like to touch on our financial results for the third quarter.
We enter the quarter with our turnarounds strategy in five key initiatives continuing to show results.
Based on the results we have achieved through January February in early March across both D.S.D. indirect ship.
We're on track to exceed our expectations and delivered.
Adjusted even in excess of product quarters.
Demonstrating that are key initiatives are working.
This quarter would have reflected our best adjusted even performance.
Since the new leadership team and I took the helmet former brothers.
In mid March however.
19 pandemic began to significantly impact R.D.F.T. cells network as our customer base had limited.
Their operations or had close their doors entirely and compliance with various federal state and local government restrictions.
As a result, we saw the S.C. self I'm declined very quickly by the end of March.
With a single day peak down 70%.
<unk> cells run rates.
The largest declines we're from restaurants hotels and casinos channels.
Well demand from health care, and convenience stores or less impacted.
That's probably direct chip business, we experienced an increase in cells within R.E. commerce and reached out grocery channels, along with a favorable customer mix shift.
During the third quarter.
However, our direct ship sales decline in the quarter compared to the prior year period.
Due to lower coffee volume and the impact of coffee prices from cost plus customer.
Given a significant decline in sales, we took swift action to reduce expenses can preserve cash in an effort to help us navigate the current environment.
It was announced at the end of March.
We eliminated reduced all discretionary expenses possible, including marketing traveling entertainment supplies materials.
We've reduced our workforce by 44% or over 600 positions across the organizations do a combination.
Of a furlough program and the elimination of certain rose.
We temporarily reduce the base salary management team members and suspended are four one k. matching cash contributions.
Executive leadership team members and I have taken a 15% reduction in base salary and the board will for go it's cash compensation for the quarter.
In addition, we're closely managing inventory and have reduced capital expenditures.
Scott, we'll discuss this in more detail later.
On a combined basis, we expect all of our cost saving Jackson tools reduce our monthly expenses.
Approximately 6.5 million per month.
Starting in April and beyond.
Of course, we will continue to closely monitored or are expensive structure and ourselves levels going forward and make adjustments as needed.
At the same time, we are working to preserve cash. It also taken bold steps to accelerate strategies that when able loves to quickly take advantage of new sales opportunities presented in this crosses while position farmer brothers to emerge as a better and stronger business.
We've been able to pivot extremely quickly, making decisions and executing in days and weeks that would normally take 12 to 18 months.
Clearly.
This has been amazing to witness and something I've not seen in my 33 years in business and.
Importantly, we have accelerated R.E. commerce initiative and expanded our registry direct services be a new digital platforms.
As online and grossly sellers are prospering.
We are exploring ways to offer our products do more consumer facing retail methods were actively working on systems to allow it calmer cells. Both directed from farmer brothers and through marketplace sites, and we are marketing and messaging more directly to consumers to build this.
<unk>.
We will be enhancing are offering and capabilities with these newly acquired consumers given the reality of the current unexpected post covert environments.
We're also leveraging our coffee brewing equipment capabilities.
Operate the largest coffee and tea equipment service business in the country.
Continue to improve our service capability and build upon our competitive advantage and we are focus on stepping up capabilities in our branches and service Center <unk>.
We're also planning to test Nonbranded trucks in order to service equipment for all businesses, regardless of whether they purchase our coffee and allied products.
Another area, where focus on his augmenting the presell and tell still approach in or D.S.D. business.
We have enhance our business development strategy to build new customers to presell and to call ahead to establish ordering the beach through tell so.
This new approach allows us for rehiring of a dedicated selling team hourly delivery drivers and related warehouse important that we anticipate being a higher selling and less costly structure than today.
As a country reopens and as we see sales opportunities, we look forward to bringing back team members, who are furloughed or those former positions were eliminated to fill these roles.
Further we're testing ways to serve consumers directly that are giving us insides and potential new cells channels, once where beyond the pandemic.
Example, we have established sells capability for branches and route pop up direct sales to consumers.
Through last week, we have a generated over 330000 in cells Central again, the project and continue to see cells ride each week as we have all the model.
It is clear that we are tapping into consumers that have never known our brand and are excited to purchase are great selection of quality coffee tea spices and other calling their products.
In addition to these ways that we have pivoted our business.
We're continuing our efforts to execute the key initiatives I've outlined on pass or any calls.
Let me walk through a couple of our major initiatives.
For example.
We continue to D. risk Houston by rebalancing volume to cross our manufacturing network with the goal of optimizing our production capability and assets.
During the pandemic, we have fully operationalized, a new retail packaging line and will soon have an additional three lines up and running and D.F.W. when an additional 13 million pounds packaging capability.
We have also utilize the time to begin the installation I'm, an additional roaster and three lines to further enhance to build out other D.F.W. roasting facility.
We've also completed the full analysis of opening of a west coast distribution facility.
And so we have previously reported 40% of all of our customers are located in the Western U.S. and we believe major transportation and distribution savings can be obtained by opening a west coast distribution facility.
We also remained focused on enhancing our demand planning himself forecasting with the goal of improving our elementary level and scrap expense.
Branch recording tool has been developed as a result of the project.
These initiatives as discussed before it will allow us to enhance our operational efficiency and cost structure of the business on an ongoing basis.
We look forward to telling him more about them and savings we believe can be achieved in the coming quarters.
While it is difficult to forecast for future given the uncertainty presented by covert 19.
And we're not in a position to provide guidance.
I like to provide some color on what we've seen in our business to date in the fourth quarter.
As I mentioned the man deteriorated in D.C. in March two points that was 70% below precaution level.
Her last week, we saw improvements for the first time in daily and weekly self results.
<unk> again.
The first two days of this week, we have seen a G.S.C. system sales decline of 59% and 57% with markets and adjust recently open only experiencing if it's percent decline.
These are the best numbers, we obscene since the peak of condemning.
He fully expect these numbers to dramatically improved as a country reopens into coming mouse.
Additionally, direct ship for E. Commerce is seven to eight times normal volume with retail brush retrieving four to five times normal volume.
The yet to see the return of Dover wines for convenience stores and quick service restaurants to pre covered levels.
I look forward to being able to provide updates on our performance and continued progress in our initiatives on future earning calls.
What's that all now turn to call over to Scott for a more detailed review of financial results.
As you know Scott join Farmer brothers as Chief Financial Officer on March 23rd.
He has hit the ground running as we have addressed the covert not team related challenges.
We are pleased to have him join farmer brothers and bring his financial expertise and knowledge of the food and beverage and retail industries.
He's already making strong contribution chart team in business Scott.
<unk> I'm pleased to be joining the farmer brothers family.
The rural acknowledged this is a very difficult time for the company and for the country as a whole.
That being said I'm extremely encouraged by the prospects for farmer brothers and the talented team here the dedication and strength that I've seen in the face of this unprecedented crisis is inspiring and I'm confident we will navigate this trying time and emerge stronger organization that will excel at meeting the needs of our existing and new customers in many.
Proved ways.
Now, let me walk through our third quarter results.
Beginning with coffee volumes.
Volumes in the quarter decreased by 2.2 million to 25.7 million pounds, a 7.9% decrease over the prior year period, I will talk more in a moment on the driver's for this decline.
The mix of coffee volumes process, then sold during the quarter was approximately 8.4 million pounds or 32.5% up the total volume through our D.S.D. network, while direct ship customers represented approximately 17.1 million pounds of green coffee processed and sold or 66.4%.
Total volume.
Approximately 300000 pounds or 1% of the total volume was through distributors.
Turning to the income statement.
Net sales for the quarter were $129.1 million, which is a decrease of $17.5 million or 12 per cent from 146.7 million reported in the same period one year ago.
The decline in net sales was driven primarily by lower sales of coffee beverage an allied products sold through I.D.S.D. network due to the coping 19 pandemic as well as the sale of our office coffee business in July 2019, and net customary attrition.
As the rural mentioned the impact of the pandemic on D.S.D. revenues by the end of March 2020 was the decline of approximately 65% compared to pre coven sales run rates, which picked a few points higher during April and are now showing signs of recovery.
The largest D.S.D. revenue declines where from restaurants hotels and casino channels, while demand from health care and convenience store channels were less impacted.
Direct ship sales decline compared to the prior year period, due to lower coffee volume and the impact of coffee prices for our costs plus customers, partially offset by favorable customer mix shift.
At the same time volume from our retail business and keep grocery stores under their private labels as well as third party E. commerce platforms have seen significant increases at the Perl mentioned earlier as a general public has self quarantine during the pandemic.
Gross profit in a third quarter, a fiscal 2020 was $37.9 million, a decrease of $2 million or 4.9% from the prior year period.
The fact that gross profit declined at a lower rate than our sales speaks to the efficiency improvements in our business and is the reason the gross margin increase 29.4% from 27.2%.
The increase in gross margin was primarily driven by lower reserves for slow moving inventories lower freight costs.
Over coffee brewing equipment costs and improve production variances.
Turning to operating expenses.
Operating expenses in the third quarter, a fiscal 2020, where $83.1 million or 64.4% of sales.
Imperative $46 million or 31.4% of sales in the prior year period.
Operating expenses and the third quarter. This year reflect impairments of goodwill and intangible assets, a $42 million, which were associated with our annual impairment tests as of January 31 2020.
Adjust it further by the impact of covert 19, which reduce the fair value of certain intangible assets.
Outside of these impairment charges are cost structure demonstrated declines in spending as compared to the prior year period.
Selling expenses decreased by $2.5 million, primarily driven by efficiencies realized from D.S.D. route optimization, lower D.S.D. sales commissions and travel expenses.
General and administrative expenses also decreased by $2.5 million due to reductions in third party cost.
Lower headcount.
The absence avoid coffee integration costs, and one time credit for employee incentive costs due to the reversal of the fiscal 2020 management incentive compensation of cruel.
These cost reductions were partially offset by covert 19 related severance costs.
Interest expense and the third quarter, a fiscal 2020 decreased $500000 to $2.5 million compared to $3 million in the prior year period, largely due to lower pension interest expense and less borrowings on our credit facility during the quarter.
Better working capital management match with the sale of some owned real estate has led to a decline in our borrowings compared to a year ago as of March 31st.
Continuing with items recorded in other income.
March 2020, we announced the termination of our Postretirement medical benefit plan effective January 1st 2021.
The announcement triggered a re measurement and resulted in a curtailment gain a $5.8 million in the current color.
Other net in the third quarter, a fiscal 2020 increase $600000 to $1.1 million in the quarter compared to $500000 in the prior year period, primarily due to the lower mark to market net losses on coffee related derivative instruments not designated as accounting hedges.
Turning to income taxes.
We reported in income tax benefit of $1 million and the third quarter, a fiscal 2020 compared to an income tax expense $43.2 million in the prior year period.
The tax benefit is primarily due to the previously recorded valuation allowance and change in our estimated deferred tax liability. During the three months ended March 31, 2020 compared to the prior year period, which reflected the impact of the re assessment of our deferred tax evaluation allowance.
Net loss was $39.8 million and the third quarter, a fiscal 2020 compared to the net loss of $51.7 million in the prior year period.
Net loss available to common stockholders was $39.9 million or $2 in 32 cents per common share on a diluted basis in the third quarter of fiscal 2020.
Compared to a net loss available to common stock holders $51.9 million or $3 in five cents per common share on a diluted basis in the prior year period.
Yeah.
Adjusted EBITDA with $6.6 million compared to $4.5 million in the prior year period.
Are adjusted even margin increase to 5.1% for the quarter compared to 3.1% for the third quarter last year, which again speaks to progress that was being made in the business before the impacts of Coke at 19.
Now turning to the balance sheet.
Overall, we've continued to strengthen our financial flexibility by reducing our net debt levels and managing are working capital more efficiently over the last 12 months.
At the end up the quarter, we had $26.4 million in cash and $80 million borrowed on a revolving credit facility or $53.6 million in debt net of cash.
This compares favorably to debt net of cache of $110.8 million at March 30th 2019.
Our debt net of cash continues to decline quarter over a quarter and is the lowest it's been in the last several years due to.
Asset sales better operating performance and better working capital management.
[noise] during April we took two draws on our credit facility to borrow an additional $42 million on our 125 million dollar revolver, which brings the total amount outstanding on a revolver to $122 million.
This was done in order to preserve financial flexibility in these uncertain times.
Subsequent to the draw we now feel well equipped with over $65 million of cash and cash equivalent to best support our customers and improve our business model for the long term in the face of the current challenges to cope with 19 presents to us and our customers nationwide.
During the quarter are accounts receivable balance decreased $9.5 million 250.9 million compared to 60.4 million at the end up the second quarter and was down 14.9 million from $65.8 million at the end of the prior year period.
Overall are aged receivables have improved causing are bad debt reserve to decline since June 30th 2019.
Are inventory levels increased slightly during the quarter by $800000 to 85.9 million compared to $85.1 million at the end of the second quarter.
And our down $14.5 million from 100 and point $4 million for the prior year period.
Accounts payable decreased during the quarter to $59.6 million compared to $59.8 million at the end up a second quarter and is down $3.2 million from the prior your balance of $62.8 million.
Turning to capital expenditures.
Cutbacks for the third quarter was $4.1 million of which $3.2 million related to maintenance spending.
Or maintenance cap X. has declined $1.2 million from $4.4 million a year ago, primarily due to lower plan spending on new coffee brewing equipment and an increase in our use of refurbished coffee brewing equipment, which has a lower costs per unit.
Depreciation and amortization expense was $7.3 million and the third quarter versus $7.6 million in the same period of the prior year.
We expect cap x. for the remainder of the year to be $4 million to $6 million, which will be predominantly spent on impactful near term initiatives as deferral mentioned around d. risking or Houston production facility and technology that enables us to better serve our customers online and their locations and in our branches.
We anticipate or depreciation and amortization expense will be approximately $7.2 million to $7.4 million for the final quarter, a fiscal 2020 based on our existing fixed asset commitments and they useful eyes of our intangible assets.
We expect minimal accrued income tax expense and cash payments in fiscal 2020.
We believe the steps we are taking will enable us to whether these turbulent times.
And with that I'd like to turn to call back over to the operator for any questions.
Thank you as a reminder to ask the question you will need to press star than one on your touched on telephone to withdraw your question pressing the pound key.
Oh, you <unk> roster.
My first question comes on Jerry Sweeney with Rock capital. Your line is now open.
It could have several Scott I forgot.
I appreciate my call.
Obviously gave a lot of detail there and they and the <unk> want it to discuss direct ship a little bit.
Obviously, you know it.
<unk>, yes, T.V., but on direct ship.
Yeah.
I don't know how much detail you would like to get into but it just trying to figure out how much he's commerce and retail or maybe prior to the pandemic and trying to get a better h. on how some of these national accounts for doing you know I'm in Philadelphia Dunkin Donuts.
Mcdonald's or close to other fashions restaurants close except for drive-thrus, yeah. The convenience stores shops are good coffee or.
<unk>, yeah, the high kind of counter and yet the ads for so just trying to figure out how much are account.
I'm sorry.
Sure. Thanks, Sherry between Scotland, I will try to give me as much color on this is possible here's what I would say.
When you look at E. Commerce, and you look at retail grocery.
Hurt in our comments that we had.
You know pretty substantial increase in the commerce, you know seven to eight times, what the normal run right was praying and you heard his talk about retail grocery fortified what's that actually did is is made up the difference.
For all the other elements of direction. So when you talk about two s. ours and you talk about convenience.
Convenience was plugging along pretty well at the beginning of the pandemic and then we saw it decline when they realize that they needed to serve behind.
The counter at some moved to that some just cut off.
Their their coffee and tea out in the convenience area. So.
Obviously had to follow component on the actual volume for convenience stores. However, any place that we service and we have some direct sure ship customers or you know.
Service the industry on.
E extract beverage component and we roasted coffee and shit.
And was also a lot.
Net of all of it we saw at times, you know, 10% to 20% overall gain.
Then we had the offset from the others as we're seeing in combat we're still seeing.
Got a lot orders backed up.
Part of the retail line that we put in and the reason we rush to get that line.
The operational and literally inside a few weeks, we've been producing on that line.
Any for myself and so what's good is we have that capability that line that was basically a completed we just need to operationalize it and that sounds. So we've we've had a nice balance out.
To get to your direct question on overall direct shift.
<unk> levels is you know, we we're recording direct shift volumes anywhere from 1% to 2%.
Overpriced here.
So.
We're going to continue to watch this this area well and I'll part of Scot free other comments that he may want to make as it relates to to that specific question.
Yeah sure I think several than a nice job covering you know the gives and takes that are within the space I think the only real thing that I would add is that our direct ship customers. Yeah. The majority of those customers are on a cost plus type of arrangement on their pricing. So when you look at the pricing in the revenues for that segment I kind of go back and look at the coffee.
<unk> movement over the period as well and if you look at you know the end of the calendar year. The coffee market pricing was you know quite a bit higher than at the end of the quarter and the decline of just coffee markets were about 8% to 11%. So that's another factor on just when you look at the price signals to factor across you know that segment as a whole those costs plus customers.
Got it and then shifting to margins Yeah. I think if you you mentioned about six and a half million the call take out on a monthly basis, which is quite substantial.
Trying to figure out how much of that.
You're hitting a lot of different components.
I I I suspect some of that's not cos it gets old versus you know S.G.N.A. and.
I'm, just trying to figure out what happens to margin.
<unk>.
With the lower absorption of overheads.
Than the positive is the cost outside you know.
But.
Yeah.
Yeah, you see I, obviously, the the product margins expand it a little bit due to you know the lower reserves on slower moving inventories the frame the C.B. and some of the product variances that we had but.
Follow that through the P.N.L. and get to the full margins you're right. The saving some of those savings are impacting margin because it doesn't come through and costs of goods. Some of the efficiencies from the plants a distribution, but it. It really is marked down the entire P.N.L., where these savings are a couple of things I would point out is that you know the the majority of any pay.
All related in some way I'm not the vast majority, but it is certainly a majority and that comes through with you know the head count, let's see there been terminated or furloughed also just you have the natural decline in some conditions in bonus programs that come with that and then the specific actions we took to reduce salaries to spend four one k. matches et cetera.
There's been a lot of other actions, reducing you know temporary labor and that goes for the home office here you know the score support center as well as out in our different branches in production facility.
As you go through there's a lot of also direct costs you know that I look at that are related to volume declines to kind of volume metric.
So if you go through that you know you get into all the different the production costs. The freight the fleet, obviously with the coffee brewing equipment, you know the C.B.E. segment, we're slowing down on service costs and parts and accessories, there as well as the marking the t. need those controllable so.
Part of the difficulty in getting to what that real March is really gonna fallout that is that as you take these actions you know employees are a good example, you know a lot of employees are still using and we're you know we're supporting them on medical costs and they're also now I'm going through their vacation pay so that vacation pay is going to continue to show in our P.N.L. until they exhaust your.
Patient balances and then that'll change these metrics a little bit as well, but I think overall, it's just tough to overcome that that top line hit and the sheer dollars you're going to have that we should certainly see improvements within the margins both product margin and our costs margins.
Got it a couple.
And then.
I Miss I think you you went through some metrics you know.
Obviously working on the working capital Friday, I didn't hear what you said on the inventory side just pick up much notes.
But I'm, assuming inventory with down and what is sort of it.
Number for you guys have as you work through the pen.
Change as we come out of this but.
What is sort of an appropriate numbered.
I think that you know underground may have some some thoughts on the number longer term as well, but actually the when you look at inventory versus last quarter I think there's a micro store in inventory and a macro store in inventory to last quarter was actually up slightly because that's just a few hundred thousand dollars. You know, it's kind of the micro story and as we you know had the the pandemic starts.
Impact the inventories that they flew through our system, but on a macro level you know it was over $100 million last year. This time. So it's come down you know about 15% you're over here.
You know my thoughts on the long term or you know you're also as you as you you know the rescue stay and then you get your production facilities, you know, where you want them and you get them optimize I think that'll help inventories in the long term, but I also think it's just hard in these times as we walk through the different customer you know types that we have an channels we have.
The different behaviors, you know summer up substantially some are pretty flat you know others are down substantially.
That's a tough environment, you know to really dial your inventories right you just want to make sure you can be there for people with the products. They need so I think that's the focus near term, but I think it should continue to improve.
Oh, the other comments I'd add to that Jerry is we there's a pandemic you know we got a pretty quick view after the first two days and then the first week.
Immediately cut off supply of all inbound goods, we started assessing how much inventory we had.
And more importantly, we've taken this opportunity to where we we went to full make to stop make the order only versus make the stock. So we could work that down.
Hurt his talk about the 330000 as of last week in regards to.
Selling on inventory both that was distress. So we we first started those programs for pop ups and branches from a distress perspective.
And then we started moving into.
New inventory versus <unk>.
And also servicing all customers with product coming out of the warehouses.
That were.
Enabling us to bring down inventories and not ordering anything else.
I don't think long term.
I think long Carmen <unk>, we still see it as an opportunity.
If you go back to.
Chris is a time here he started an inventory program.
I've continued that work with the team we believe there's a lot opportunity, we're gonna get better visibility on R.W.M.S. that we're implementing.
And continue to drive down.
Ral branch and D.C. and of course.
[laughter].
Got it I appreciate it I'll jump back in line.
<unk>.
I guess.
Thank you and as reminders ask the question you will need to press star than one on your touch tone telephone to enjoy your question press the pound key they sent Bible <unk> when a roster.
[noise] here.
The speakers I am showing no further questions in the queue at this time.
I'd like to turn to call back to the speakers printing closing remarks.
Thank you.
As we navigate through the uncertain period.
We will continue to <unk>, the health and safety of or team members and customers as well to take action should support the long term sustainability of our business.
We're thankful to our dedicated team members have demonstrated a remarkable commitment encourage during this global condemning.
Stronger believe the strategic actions were taking his company well positioned us for success when the nation begins to emerge from the state of crisis.
We appreciate you calling in today and thank you for your continued interest improper rollers.
[noise], ladies and gentlemen, thank you for your participation on today's conference. This sounds conclude you're programming you may now disconnect.
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