Q1 2020 Earnings Call
First quarter 2020, <unk> earnings conference call.
This call all participants have at least in listen only mode.
<unk> will be open for your questions following the presentation.
Please note that this conference call is being recorded today may 22020.
On the call today that brands, our president and Chief Executive Officer, and easy to Horn, and Chief Financial Officer, Hershinger I would now like turn the call over to actually be symbol do you actually begin.
Thank you operator, and good afternoon, everyone by now everyone should have access to our earnings release, which can be found on our investor Relations website at <unk> IR Dot dot friends Dot com and the press release section.
Before we begin I need to remind everyone that part of our discussion today will include forward looking statements.
These forward looking statements are not guarantees of future performance and therefore undue reliance should not be placed upon them actual results may differ materially from those indicated by these forward looking statements due to a number of risks and uncertainties.
The company does not undertake to update these forward looking statements at a later date for more detailed discussion of the risks that could impact future operating results and financial condition. Please see todays earnings press release, and our recent SEC filings.
During today's call the company May discuss non-GAAP financial measures, which I believe can be useful in evaluating its performing.
The presentation of this additional information should not be considered in isolation, nor as a substitute for results prepared in accordance with GAAP.
Reconciliations to comparable GAAP measures are available in todays earnings release.
I would now like to turn the call over to Andy's meter Horn, President and Chief Executive Officer Andy.
Thank you actually good afternoon, everyone and thank you all for joining us on the call today.
I Hope you are all seen safe and healthy as we continue to navigate through the community pandemic.
On today's call I'll provide a business update discuss what we're seeing related.
Touch briefly on the first quarter numbers and highly specific actions, we have taken to further strengthen our balance sheet before opening the call for questions.
We had ended 2019 with solid momentum across most of our brands. The continued into January and February. This your March was a challenging month across the restaurant industry and we all began peeling it back to the pandemic.
Compliance with state and local orders, our franchisees closed dining rooms that were forced to rely solely on the off premise channel.
Prior to the pandemic many of our franchisees, especially in the Burger and wings brands.
I've had strong to go and delivery presidents utilizing platforms, such as you've read Postmates Grubhub. These franchisees subsequently have experienced substantial uplift as customers relied heavily on these services during the sheltering place mandates.
Overall for the week indeed, as it may 24.
Sunday bolstered by the strength of the to go in delivery channel, our Burger brands, which account for roughly half of our revenues on a normalized non cobot 19 basis have been more resilient.
Only 6.9% for fat Burger on same store sales basis, 26% for copper.
Adam Wyden differences that some of the stores like those in casinos have been completely closed so they bring down the overall average to date.
Hurricanes off, 10.4% and 16.8% respectively compared to the prior year on same store sales basis and in total sales Buffalo's is off approximately 20% through made that.
Our steak house brands have been most negatively impacted by covert 19 as those brands did not have robust to go or delivery component. As a result, many of those restaurants were temporarily closed reopening for ponderosa end Bonanza is a pretty now using a modified version that either table service or cafeteria style service.
Where restaurants dot surge the guest rather than self serve.
Across the system as is now approximately 90 372 restaurants remained temporarily closed the majority of which are in steak house brands and the fact burgers located inside.
Overall since the beginning of the pandemic only five locations have permanently closed three of those closures are not directly related to the restaurant operating performance. During the pandemic two of those restaurants were located in casinos in Nevada that as itself closed you tuxedo, whereas a third location would it likely close even without the pandemic given its.
Hi monthly rent expense.
During our call about a month ago I spoke about three primary ways, we had been helping out our franchisees to navigate these challenging times.
First we helped our franchisees to acquire personal protective equipment for their staffing and adult enhance cleaning social doesn't see procedures in the restaurants, so that franchisees could see if we continue to serve their communities through the to go model.
Second we encouraged our franchisees to shore up their own financial position pipeline for PPP loans and negotiating rent deferrals withdrew landlords.
Third we negotiated extended credit terms from the distributors in food suppliers like Us foods PSG Cisco on behalf of the franchisees.
Our senior management team has been meeting on a daily basis to collaborate regarding solutions to help our franchisees and our board of directors. This meeting all the weekly basis to stay abreast of the company's progress.
With those three elements in place over this past month or focus has been on preparations for reopening our operations team have been assessing each individual market to understand local requirements reopening developed best practices areas, such as sanitation of workstations food and beverage preparation or is it customer diners employee safety.
He and training and restaurant Reconfigurations will allow for adequate social distances.
Wow, our operations and supply chain teams have been focused on assisting our franchisees with the reopening plans our development construction and training teams have been focused on a robust pipeline of new stores, which we anticipate will fuel the organic growth through the company.
During the first quarter of 2020 franchisees opened seven new stores worldwide and as of today franchisees opened an additional three locations, including it goes kitchen in Chicago, bringing our 2020 year to date total to 10 locations. There are still another 22 domestic scores source scheduled to open by 2020.
By comparison in 2019.
Franchisees opened a total of 24 new locations. So we're well ahead of that number by the time, we get to the entity or.
So despite the effects of the pandemic our development pipeline has remained strong and a primary limitation in opening new stores has been the ability of the training teams to travel pretty elements of training that need to be done in person.
Like many of us across many industries dependent AAC has meant that dream to virtual operations and our teams have conducted virtual training sessions to the extent that that's possible.
Turning now to the first quarter total revenue decreased 9.2% to $4.4 million and our system wide sales decreased 10%.
From the first quarter of 29, <unk>, primarily due to the to the beginning of the negative impact of Cobot 19 at the end of March as well as the preferred.
Application that they see six so six in the fourth quarter of 2019, which the store opening fees are amortized over the life the franchise agreement.
Cost and expenses were $5 million in the quarter, an increase of roughly $800000 from the first quarter of 29.
The increase in cost due to increases in our public company expenses depreciation and amortization expenses related to the contribution of elevation Burger, which we did not only in the prior period and nominal increase in compensation expense due to some hires that were made throughout 2019.
The combined effect of the lower revenues and higher cost resulted in adjusted EBITDA in the first quarter of 2020 of $283000 compared to $1.5 million in the first quarter last year.
Shifting from our operating performance to our liquidity in capital reserves, we ended the quarter with $5.7 million in cash and cash equivalents.
Early March we announced our $40 million hope is the securitization transaction, which significantly lowered our cost of capital.
The proceeds were used primarily to repay our extensive term loan decreasing our annual interest expense by approximately $2 million year.
The closing of the securitization resulted in net proceeds of the company of over $10 million after deal fees at the repayment of the term loan and accrued interest. In addition to the significant reduction quarterly cash interest payments given the lower cost capital the excess proceeds added working capital to our balance sheet structure includes an accordion feature that keep it can be accessed in the future.
To grow our brand portfolio, while we're currently working through a challenging time in our industry. We are stronger company today due to the securitization and we're well positioned to drive our growth for both organically and through opportunistic acquisitions in the months ahead with several transactions in mind.
Well the duration severity of the ultimate impact from Cowen Nineteenone industry remains uncertain, we are excited and optimistic about the future.
Before we open the call for questions I'd like to once again to extend my heartfelt. Thank you to all team members franchise partners and their employees.
They've done an outstanding job. During these unprecedented times is adapting and rising to meet the challenges our industry faces.
Proud of 14 or partners and remain excited for the opportunity in front of us, especially as we see the industry recovery.
With that operator, please open the line for questions.
Thank you at this time, we will be conducting a question and answer session. If you would like that's question. Please press star one on your telephone keypad well confirmation. So indicate your line is and the question Q.
Me per starts you feel like sort of move your question with an acute.
For participants using speaker equipment and may be necessary to keep your handset before person Sarkies. One movie accuses me poll for questions.
Our first question comes on line of Joe Gomes with no capital. Please proceed with your question.
Good afternoon, and thanks for taking the questions.
Hi, Jeff.
The first one just on the on the franchisees.
You know how how are they.
Or whether they're experiencing with the you know hiring as they as they.
Our reopening I saw a university of Chicago study the other day that suggested that.
68% of the unemployed or bringing home more and unemployment hey.
Then they would they went back to work and that is causing some issues. Obviously with firms that are trying to reopen so just trying to get a handle on how that is how the franchise. What the franchisees are experiencing how there are dealing with that.
It's a good question, it's often talked about questions in the last 60 days, obviously because of that the unemployment claims in the P. Peabody et cetera.
We're not getting any material noise from our franchisees that they're having problems getting their employees get back to work.
I think that there you know this concept of.
Oh, it's you're making more money on unemployment that you're making working you know it is it's a little bit more of the talking point than it is reality because if you have now 30 something million Americans out of work I think the restaurant boys are concerned that they may somebody else may get their job if they go back to work with restaurants open it's not.
Oh wise move to sit at home collect your check for a few weeks and assume that job will still be there. So you know there's gonna be some of that is gonna be some shifty, but we're not hearing a other big problem now we haven't we still have a california to reopen right. The other states like Georgia, Florida, Texas.
You don't have open back up and we haven't really gotten that feedback, but unless something different in California.
That's that's the color we have on it.
Okay, Thanks for that and [laughter].
[laughter], maybe you could talk a little bit 2019, you.
Announced number of development deals in the taxes Shanghai.
Have anybody the new stores that were old and.
As you said in the first quarter and subsequent earning a part of these new development deals or what's the status of those deals that you you announced last year. Yeah. Good question. We have so Oh, we do you have to large development deals. We did open source in India. We did we're about to open store in Texas. It's we have seven stores right now we're ready to open.
Right now fully built but that's they really completed their construction and training period between the time that pandemic kicked in.
And everyone was ordered to shelter in place and now and so we have some pent up demand in our training and opening teams are scrambling to get all these restaurants opened over the next 30 days.
And some of those are in Texas as you suggest and India had already open but.
We have we have additional development deals going on I mean, we're we're in negotiations for a number of new restaurants right now in Asia.
International development deals we've got it very strong U.S. pipeline. So growth is is there for us.
In the deals that we made already and deals that you haven't heard about yet.
Okay, great and [noise].
This comes up every once in awhile here, but maybe you could just speak a little bit.
About the [laughter] Faade cotter merger or remind US you know, how that's going to benefit.
Brad shareholders, if I recall correctly, there was a big and all well dozens of intercompany receivable out there you could just kind of go over so all that how that's going to benefit the fat brands shareholders understood. So I. Appreciate you asking a question something I want to talk about there we have a number of initiatives.
To complete before the ended the year <unk>.
Got brands has had an outstanding preferred stock offering in the market since the fall as last year, we've we've now withdrawn that.
Preferred stock offering because we're going to file a new preferred stock offerings, it's gonna be tradable preferred it'll be filed shortly the next few days.
That will raise the company some additional capital to complete some acquisitions, we anticipate a.
Coming into the system here over Q.
Over Q2, Q3 really Q3.
The.
Significance of that is we when we buy.
The company will pay some cash and usually some sort of seller note or some preferred stock we can't issue common stock today because.
It would.
Mess up the ownership structure, where fog cutter owns 80.
A bit over 80% of fat brands, so that the fog cutter and a well could be utilized to shelter that brands taxable income we issued more content that could have a drop below 80 not creates a problem.
You can you had a well the merger will make that issue go away.
Because the other well will come into the top brands entity structure and the 80% requirement will go away. So that's it's very important because it will allow us to make acquisitions using common stock issue more common stock to raise capital.
Et cetera, and we still get the full benefit at the end well. So all those things are good we are actively working on the merger today, we've been working on it for a while that we've we've really figured out the last few few details to.
Try to put that forward over the summer for the respective boards and faster speeds and all things you have to get.
It has not been negotiated yet we're not ready to announce it but I think it's something that happened shareholders will be very happy about.
<unk> children.
Looking forward to that but that's a big initiative to get done over the summer.
So that we're well positioned for.
Great just one more for me then I'll get back in Q.
You talked about the accordion.
Feature other securitization how much is that.
Yeah. So the accordion feature allows the weight of securitization structure today I hope is the securitization. We can do two things we could issue a subordinate bonds right. Now we have 40 million of bonds 20 million that are senior rated double b and 20 million better subordinate rated single B.
And we could issue and unrated bonds subordinate to the too.
Senior bonds or we could expand the size of the existing bonds and make each been greater than 20 million.
By dropping to new acquisition into the transaction. If we were to do that we'd have to get the bonds rerated as part of the issuance or the expansion of a or B bond a C. Bond doesn't have to be rated so it's a little bit different but we have the ability to go either direction and the securitization vehicle is is perfect for growing the business we.
We fully intend on expanding it with.
Some of the acquisitions that were looking at and Ah Theres no limit on how big it can get it's a function of the right amount of capital at five brands and the right amount of leveraging debt service coverage inside the securitization to meet the covenants and make the rating agencies comfortable.
But the rating will be equally as strong as it has now or improve.
Great. Thank you very much like Egypt.
Ladies and gentlemen, once again, if you like desk question. Please press star 100 telephone keypad once again, ladies and gentlemen, you would like that's question <unk> Star one on each other so keep that one moment. Please as we pull for questions.
We do have a follow up question on the line to show goes from Noble capital. Please proceed with the question.
Well, if nobody else is going to ask any questions asked a couple of more if that's okay.
[noise] Bonanza and ponderosa.
Just trying to kind of wrap my head around.
Well, what you guys are looking at here, it's into the future of those two brands I.
And again as you you mentioned they don't have but they did not have a robust you know to go or delivery, so that really hurt them oversight over this past six weeks or two months.
And.
That was a all brands that you know I think the store count had been modestly declining over time anyway. So.
Just trying to get a better feel or what your thoughts are on the future of those brands and what we can do around them sure. So I wonder if bonanza represent less than 20% of our revenues.
We acquired those brands as part of the IPO and it gave us scale to get public.
The <unk> steak house business within all you can eat a salad bar buffet has cobot 19 issues in terms of the service style, we were able to pivot quickly and go to either table service. So you can tell us what you want to buffets. Many times. If you want it will get you know salad or more bus or whatever.
The order your your stake.
And and pay for that or a switch to a little bit more the cafeteria style, where we have independent middle to serve up the dishes under the fair that you'd like instead of each person touchy this builds in Serbia themselves or whatever.
Really hasn't been that difficult to pivot to will.
And those brands, we've implemented what we've taken the opportunity to try to help the franchisees improve their food cost at the fate food cost has been higher than we'd like to see it and that's because the franchisees historically have allowed a lot of proteins to beyond the salad bar. So.
You have the dilemma when we bought the brand the marketing wasn't really rightsize. They were they were offering that Oh you can eat.
Salad bar buffet for 95 at $4 for steak wants to pay $4 for stake you wonder what kind of stickiness.
Should be 13, 95, all you can eat steak and salad bar, so that that marketing, we pivoted to we've got the franchisees to agree to start marketing their business. They have in two years since we've owned it they don't know marketing and now they just agreed to finally after falling into successes at hurricane and Buffalo's of turning those brands around after we acquired them.
Great marketing efforts by our team or brand, but that.
We expect the same thing to happen upon resin Bonanza, So rightsizing demand you're getting the proteins off the bar will improve their their margin extending that savings on marketing.
Makes sense, we don't want a situation where people come in to eat all the proteins on the salad bar like chicken wings meet love him whatever and then they take the stake homes at the sort of getting two meals for the price of one so it's something that needed to be done the franchisees are taking advantage of.
This opportunity for closing to reposition some of whom have remodeled the little bit painted and spruced up there the restaurants and so that's really the plan.
Today start marketing Rightside the food cost.
Okay and how many.
I think you had mentioned previously that you were thought about about 10 locations already get remodeled and 2020.
Prior to the whole Cove. It is that still a good number you think there's got to be more than that I think it's still a good number you know I do think that look you know <unk>, we expect that we're going to lose.
10 to 15 restaurants over the course of the year because if cover 90, that's not a terrible number 370.
Could've been a lot worse, but we expect that there'll be something I think the majority of those will be the ponderous of Bonanza category, but I also think that those guys that remain.
Are going to do really well with repositioning the brand as we've been talking about and started the marketing usually when you. We've always had as much as 5% closures, 4% closures in the year knows but that 4% closures are not 4% of your revenue goes away the ones that close are usually the ones, having very low sales doing 2% of yourself.
4%, but you can count so I'm not.
Not really concerned about I think were pretty good shape. There you never want to see a store close but you know something they're very old location.
It was interesting to see in Nevada.
Stations casinos, where we have a number of stores in different stations casino properties.
They closed two can see that's because he does entirely.
Shut them down and they're not reopening maybe they're going to remodel in an open later, but we lost a couple of operators in that situation strictly attributed to the covenant <unk> shut down of those cuts either because they were planned to be shut down before that we know.
You know, we're going to we're going to see.
10 to 15 restaurants, probably go away, but we're we're building.
32, new ones this year, so it's okay.
Right good <unk> and one last one do you have a I knew what a fully diluted share count is.
I don't have it in front of me, but we can get back to you with that.
That would be appreciated. Thank you very much again for taking the question.
And where are hopefully we're <unk> pass the worst of that's in and we can start showing some of that growth you're talking about I think it's all it's all you think you'll get Joe I think it's all about consumer behavior, we just need to get through to the vaccine stage here for consumer behavior to level out I think we're going to see different cuts.
Humor behavior by different brand you know the fast casual brands.
There's a lot of to go and delivery and even in that fast casual restaurants. If you came in to eat into restaurants. Today. We're serving you your food in a bag you could walk out with it you can't find a table that socially distance. So it just gives the customer more comfort to know that Haiti employees are worried P and when I get my food, if I can't find if I'm not comfortable fees in the restaurant for what.
Ever reason I'm not married to that choice I can just take my bag and go somewhere else in either get to my car or whatever so that's important on the casual dining brands.
Fast casual brand on the casualty brands, we Fortunately, it's this summer and those stores have big presence in south.
Florida, and Georgia, Texas, and also a New York and they also have screen porches, there's outdoor seating itself. So we've been able to move the bars to the.
Outside of the restaurant instead of instead of inside so we don't have to social distance the problem and we're really seeing strong bounce back in sales at her acute buffalos.
And strong bounced back and alcohol strong comping numbers, they've been very resilient I think.
We'll have to see how consumer behavior settles out, but so far the resulted in very very positive. So.
Let's hope that we get to a point where consumers have comfort on thank goodness, rather the travel business right now.
I've been in hospitality businesses restaurant business hard enough, but really feel fortunate that we're not in fine dining we don't have exposure, where operator can't make money.
If you can't have 100% seating for a turn to dinner or turn a lunch you know here or operators can make money. They they only go back to 80% of sales or 85% sales or 9% so sort of 100 for the balance of the year.
They're gonna be fine and they'll be repositioned and ready to go as consumer behavior settles down so we're very often.
One more thing I just one of these days.
Then if we can ask one last question. If anyone has it is that I think the opportunity to make acquisitions right now.
It's very.
Important and and available to US there are a we're seeing a chains come to us constantly looking for deals and I think.
We have to be thoughtful of how to integrate those shoes, which chains are sustainable and.
Well not presented cobot 19 problem, but.
Valuations are down.
There we know what changes have been resilient here and where we should continue to add to our portfolio. So I think it's a really good time to go shopping for the right kind of brands not nothing crazy, but the right kind of brands that will help us grow the platform because we built this platform. It is geared up it has no. There's a cost him in a public company as a cost having the platform and as we add more revenue.
To the platform most of it falls to the bottom line, we have increasing EBITDA percentage just from the economies of scale of it how did the platform. So this is really going to be an active next 12 months from now having the securitization in place was that the first thing we had to do get our financing Rightsized and now it is so I think.
<unk>.
Operator to check or any other questions.
Absolutely if you like that's a question. Please press star one on your telephone that once again if you like that's question. Please press star one on your telephone keypad. Our next question comes on line of Greg <unk> Private Investor. Please proceed with your question.
Hey, Andy how are you I agree take a couple of questions first of all what's the run rate now as far as cash burn like Oh.
Are you burning now are you back to where your.
Positive what are what should we expect from that well the companies. So.
<unk>.
It's it's a little bit hard to answer that question Uh huh.
In terms of the fact that restaurants are reopening like crazy right now so that the burn is declining when if you think about the bounce back of revenue we could be Bernie.
$1 million to $2 million a quarter. If if we were to stay shot were not shut anymore. We have you know 75 to the restaurants are back open or or or open with the live real me. So I were seen that decline rapidly I think we have to wait another.
Three or four weeks to see how when all the restaurants are the dining rooms are opened like in California, and then I think love a better measurement of.
What's it look like now, but we have ample liquidity for for the time.
So if it stays at this rate, let you talked about as of May actually when you said may 24, its or something well be.
I wanted to will be.
Well as well at this rate it'll be on the lower end to that not the higher.
Okay. So be it will be to lower and I mean, it's really a function of it's just an unfair measurement today, because California is still shot in California, we have all the fat Berger restaurants, California. They have no in in restaurant down either at drones only delivery to go and all the casinos are close that's all going to bounce back seals into that and that's going to bounce back to quickly. So.
Well no it another month or so I think people to have much better information, but is there an estimate of when California can open has that been discussed it. It's it has not I mean.
The problem is yet to state the county, the cities and all give any different dates.
Like I said July 4th, but but cities are saying two weeks still.
Okay. So along the same lines of the.
And not at all if you how you count the wants a 2 million does that include interest or is that just overhead.
That's just know that that's that's all that's okay. It's everything all together, okay. I know this doesn't really matter because it is what it is but prior to the cold that.
Where the numbers trending where you thought.
Or higher or.
So so things are really good I mean January and February were really good and and ponderous in Bonanza, We're we're baking in cash to begin in advertising marketing campaign.
Because we finally got the franchisees to agree to contribute to marketing program that would.
Follow along the lines of what we did a hurricane so I'm things were things, we're fine with a very active pipeline with a couple of big development deals, we have not announced yet out out for signature so.
I think that.
Business is finding the numbers.
Were very positive like it's just going to be a function of consumer behavior here between now and.
The next the next six months.
And I think really you know, we're not giving guidance, we're not going to make a financial forecasts of course, because there's just no way to be accurate with it but pretty soon you know as a group we're all going to focus on 2021 and not focus in 2020, because the numbers of just because the hard to.
To to nail.
In advance.
And we feel we have a very active pipeline for 2021 also a number of new stores planned.
And with these acquisitions that were looking at every I'm going to call.
Hi, I'm sorry.
Okay, Andy sorry about that rather just two more questions on I'll, let you go.
As far as.
Deals go can you give us an idea of you know size and scale any of that I mean do you have any ideas.
I know you must have idea what you're looking at but are they just tuck ins or things like ER.
A significant size deals relative to where we are now.
I would say that they're both there are there are several deals that were looking at a one or two or kind of easy add ons like elevation Berger size and there are a couple that are significantly larger that would move the needle for us or.
If we can come to definitive terms, I think they'll spend and they would fit in the securitization beautifully and.
<unk>.
Whether we got three deals done two deals done one deal done you know we've got some stuff done here.
Term and I think we'll see a lot of additional opportunities I mean, if you read some of the forecast people forecast between types of the restaurants really are going to close a lot of that will be dependent of course, but right. There's gonna be a lotta opportunity.
Either for brands, coming and saying, Hey, I need some liquidity and either way out or it's going to be a lot of locations available that will be interesting conversions for us.
Particular that hopefully will be reasonable real estate prices. So.
Okay.
Last question limited <unk> London.
I'll play on the spot for second so I've been I've been buying the stock I've bought some lower it a little higher and at these levels just curious about what you're in the Boris thinking about you know.
Insider buying or you'd been restrict it for a while based on earnings a lot, but now that's out of the way you have I think you probably have a little bit of a runway here.
Any discussions amongst the board members about.
Well, it's always been.
Everyone's been very supportive of buying stock and the board has taken all of their their payments in for for ever since the IPO in other fees in the form of shares so they're heavily heavily invested in shares the everyone's been restricted since December 15th issue December 14th So.
This is the first time that people want restricted as we come out.
You come out of this but you know everybody's got to look at their own their own portfolio their own cash position to figure out what makes sense. Given you know how how things have changed a little bit but everyone.
It is taking their there.
The annual fees.
Stock noncash, which is very helpful.
Okay, well listen I Hope you know a lot of the restaurant companies have have.
Rallied back quite a bit I hope that people start to you know as you do some acquisitions and get a little bigger people realize that.
You are in that space and.
I appreciate the brand that your belt and ER and also it all works out so hopefully because we've got better open up and I'm, just keep doing or keep keep up the work. Thank you. Thank you very much Greg okay.
<unk>.
Just are no further questions left at this time I would like to turn the floor back over to management for any closing remarks.
Everyone. Thank you very much for taking time to participate in our earnings call today, hopefully all of you in your families.
Oh safe and look forward to given you further updates as.
We progressed.
You too.
Thank you very much.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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